debt limit slides 2013 usa out of cash in 4 weeks

Debt Limit Analysis

JANUARY 2013

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THREE QUESTIONS 2

1. What is the first date on which Treasury will not

have sufficient cash to pay all of its bills in full and

on time (the “X Date”)?

If we reach the X Date, and Treasury is forced to

"prioritize” its payments to avoid a debt default:

2. What would be the effects on government

operations?

3. What would be the market risks?

Methodology &

Assumptions

BPC METHODOLOGY 4

• Reviewed financial data from the Treasury Department ‒ Daily + Monthly Treasury Statements

‒ Monthly Statement of the Public Debt

• Projected monthly operating cash flow using: ‒ Historical financial data

‒ CBO estimates of revenue/spending growth

‒ Adjustments for anticipated issues (e.g., expiration of payroll tax holiday, increased FEMA and flood insurance spending due to Sandy)

• Closely analyzed cash flows during February and March to generate daily projections

FISCAL CLIFF DEAL 5

• Fiscal Cliff deal has little impact on debt limit timing

‒ BPC made a series of assumptions in developing its November estimate

‒ Most assumptions turned out to be accurate

‒ Those that were superseded by events are not of sufficient magnitude to significantly affect the estimates

INITIAL BPC ASSUMPTIONS / FISCAL CLIFF DEAL OUTCOME 6

• Congress will patch the Alternative Minimum Tax as it has in the past

• Income tax withholding tables will not change (small changes)

• Sequestration will not go into effect

• Medicare payments to physicians will not be cut 27%

• Extended unemployment insurance benefits will be allowed to expire (Benefits were extended, but very small impact on debt limit timing)

• The payroll tax holiday will be allowed to expire

• Miscellaneous tax provisions (e.g., R&D credit) will be extended

Extraordinary Measures

EXTRAORDINARY MEASURES 8

• The U.S. hit its debt limit on December 31.

• The Treasury Secretary then began tapping into ~$200 b of

emergency borrowing authority – referred to as “extraordinary

measures” – to allow for an additional period of fully-funded

government operations.

• Extraordinary Measures are legal financial maneuvers that allow the Treasury Department to raise additional cash to meet

government obligations.


• Example: Federal Employees’ Retirement System

G-Fund

‒ Federal employees invest some retirement assets in

government bonds.

‒ Treasury may temporarily reduce the amount of debt held by this fund, thereby freeing up room under the debt limit.

‒ This allows Treasury to issue additional securities to the public and raise cash to pay federal obligations.

‒ After the debt limit is increased, Treasury must fully reimburse the retirement fund for the principal and interest.


EXTRAORDINARY MEASURES AVAILABLE

BPC ESTIMATE

Do not reinvest the Federal Employees’ Retirement System G-Fund $159 billion

Do not reinvest the Exchange Stabilization Fund $23 billion

Do not reinvest interest payments and cash receipts to Civil Service Fund and Postal Fund $20 billion

Do not reinvest maturing securities in the Civil Service Fund and Postal Fund

Not Available During This Period

Total $201 billion Note: The totals indicate available measures. Treasury may not employ all available measures. Treasury also has measures available (not listed) that assist with cash flow and debt management, but do not extend the date on which Treasury would begin to default on federal obligations absent an increase in the debt limit (the “X Date”). Column does not add due to rounding.

Sources: Government Accountability Office; Congressional Research Service; December 26, 2012 letter from Treasury Secretary Geithner to Congress; Treasury Direct Government Account Statements

EXTRAORDINARY MEASURES WON’T LAST AS LONG 11

• In 2011, Extraordinary Measures extended the

federal government’s ability to pay its obligations

from May 15 until August 2.

• They won’t buy as much time as they did last

summer

• February is a “bad” month for the federal government’s finances

• Fewer measures available


• Once Treasury has utilized all of its emergency

borrowing authority, only two sources will remain

from which to continue funding government

operations:

‒ Remaining cash on hand (including any leftover funds from the emergency $201 b)

‒ Daily cash inflows (federal revenues received each day)

REACHING THE DEBT LIMIT – WHAT IT MEANS 13

Layers of Defense Against Default The Treasury Department has multiple means that can be used to pay the

nation’s bills. If the debt limit is reached and Congress does not act in time, however, all of these layers of defense will be breached and the nation will default on its obligations.

ISSUE NEW DEBT TO THE PUBLIC IN TRADITIONAL MANNER

EXTRAORDINARY MEASURES

DAILY REVENUE AND CASH ON HAND

DEFAULT ON FINANCIAL OBLIGATIONS

Debt Limit Reached

EM Exhausted

The X Date

The “X Date”

WHAT IS THE X DATE? 15

• X Date: The first day on which Treasury has exhausted its

borrowing authority and no longer has sufficient funds to pay

all of its bills in full and on time

– In other words, if the debt limit has not been raised by the X Date, the federal government will begin defaulting on some of its obligations.

– After the X Date, bills must be paid solely out of incoming cash flows, which will not be able to cover all government spending.

• BPC estimates that the X Date will occur

between February 15 and March 1.

‒ BPC will update its projection as additional information becomes available.

WHEN IS THE X DATE? 16

Cas

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(in

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Projected Range – February 15 to March 1

Note: The projections above are subject to substantial uncertainty and volatility resulting from economic performance, cash flow fluctuations, and other factors

Source: Bipartisan Policy Center Projections based off of Treasury’s Daily, Monthly, and Direct Government Account Statements

$-

$50

$100

$150

$200

$250

$300

REMAINING “WILD CARDS” 17

• Tax Filing Season

‒ Particularly given the last-minute fiscal cliff deal, there is potential for a delayed filing season and/or processing of refunds.

• Strengthening/weakening economy

‒ Revenues have been coming in stronger than CBO projections. The BPC model accounts for this, but its impossible to know if such trends will strengthen or weaken.

• Monthly fluctuations in spending and revenues

Prioritization

• President Obama has stated that the 14th Amendment

does not provide a reasonable basis for challenging

the constitutionality of the debt ceiling: – “My lawyers…are not persuaded that [the 14th Amendment] is a

winning argument.”

– Press Secretary Jay Carney: “The 14th Amendment [does not give] the president the power to ignore the debt ceiling – period.”

• Treasury has stated that it has no secret bag of tricks

to finance government operations past the X Date – Treasury will not attempt to “firesale” assets during a crisis

– Other ideas are deemed impractical, illegal, and/or inappropriate (platinum coins, IOUs)

NO “SILVER BULLETS” TO EXTEND DATE 19

20

• There is no precedent; all other debt limit impasses

have been resolved without reaching the X Date. – Treasury has never failed during a debt limit impasse to meet

a payment obligation.

• Chairman Bernanke:

"[Going past the X Date] would no doubt have a very adverse

effect very quickly on the recovery. I'm quite certain of that.”

BEYOND THE X DATE

HOW MIGHT TREASURY MAKE PAYMENTS AFTER THE X DATE? 21

• If we reach the X Date, Treasury might either prioritize

payments or make full days’ worth of payments once they

receive sufficient revenues to cover all of a day’s obligations.

‒ Interest on the federal debt would likely be prioritized in either scenario.

• Scenario # 1: Pay some bills, but not others

‒ Treasury might attempt to prioritize some types of payments over others. Prioritized payments would be made on time, others would not.

‒ Uncertain legality (no precedent)

‒ Unclear if it is feasible, given the design of Treasury’s computer systems

HOW MIGHT TREASURY MAKE PAYMENTS AFTER THE X DATE? 22

• Scenario # 2: Make all of each day’s payments together once

enough cash is available

‒ Treasury might wait until enough revenue is deposited to cover an entire day’s payments, and then make all of those payments at once.

(For example, upon reaching the X date, it might take two days of revenue collections to raise enough cash to make all of the payments due on day one. Thus, the first day’s payments would be made one day late. This, of course, would delay the second day’s payments to a later day.)

PRIORITIZATION 23

Under Scenario # 1:

• Treasury would find itself attempting to sort and choose from well over 100 million monthly payments.

• Roughly 40% of the funds owed for the month would go

unpaid.

– Inflows and outflows do not match up well and are quite “lumpy,” as BPC’s daily analysis shows.

• The reality would be chaotic:

– Unfair results, unanswered questions

– Treasury picking winners and losers

– Public uproar

– Intense global media focus

PRIORITIZATION: MONTHLY TOTALS 24

February 15 – March 15

* BPC Projections (in millions of dollars)

Year Inflows Outflows Deficit Business Days

2011 238,150 439,241 201,091 20

2012 273,296 452,595 179,299 21

2013* 277,107 451,883 174,776 20

ILLUSTRATIVE SCENARIO #1: PROTECT SELECTED BIG TICKET PROGRAMS 25

If you choose to pay…

For a total of $276.5 billion

Program Cost

Interest on Treasury Securities $38.1 b

IRS Tax Refunds for Individuals $85.5 b

Medicare / Medicaid $72.5 b

Social Security Benefits $61.1 b

Military Pay and Retirement $13.2 b

Unemployment Insurance Benefits $6.2 b

ILLUSTRATIVE SCENARIO #1: PROTECT SELECTED BIG TICKET PROGRAMS 26

Then you can’t fund these programs, worth $175 billion…

Program Cost

Defense Vendor Payments $28.8 b

Veterans Benefits $4.2 b

Federal Salaries + Benefits $19.9 b

Dep. of Education (e.g., Pell grants, special ed. programs) $16.8 b

Food/Nutrition Services + TANF $10.1 b

Civil Service Retirement $5.0 b

Health and Human Services Grants $8.0 b

Supplemental Security Income $3.4 b

Other Spending, including: - Department of Justice (FBI, federal courts) - Department of Energy - Federal Highway Administration (road construction) - Federal Aviation Administration (air traffic control) - Environmental Protection Agency - FEMA and National Flood Insurance Program

$68.5 b

ILLUSTRATIVE SCENARIO #2: NO TAX REFUNDS FOR YOU 27

If you choose to pay…

For a total of $275.8 billion

Program Cost

Interest on Treasury Securities $38.1 b

Medicare / Medicaid $72.5 b

Social Security Benefits $61.1 b

Military Pay and Retirement $13.2 b

Veterans Benefits $4.2 b

Defense Vendor Payments $28.8 b

Federal Salaries and Benefits $19.9 b

Unemployment Insurance Benefits $6.2 b

Civil Service Retirement $5.0 b

Food and Nutrition/TANF $10.1 b

Dept. of Education (Pell Grants, Special Education) $16.8 b

ILLUSTRATIVE SCENARIO #2: NO TAX REFUNDS FOR YOU 28

Then you can’t fund these programs, worth $176 b…

Program Cost

IRS Tax Refunds to Individuals $85.5 b

Health and Human Services Grants $8.0 b

Supplemental Security Income $3.4 b

Other Spending, including: - Department of Justice (FBI, federal courts) - Department of Energy - Federal Highway Administration (road construction) - Federal Aviation Administration (air traffic control) - Environmental Protection Agency - FEMA and National Flood Insurance Program

$68.5 b

Daily Analysis:

February 15 – March 1, 2013

DAILY CASH FLOW ANALYSIS 30

Daily Inflow Daily Outflow

Treasury Cash Flow: Friday February 15, 2013

• $9 Billion in revenues

• $52 Billion in committed spending: • 30 b Interest on the Debt • 6.8 b IRS Refunds to Individuals • 3.5 b Federal Salaries/Benefits • 2.7 b Military Active Pay • 2.3 b Medicare and Medicaid • 1.5 b Defense Vendors • 1.1 b Food/HUD/Welfare/Unemp. • 4.4 b Other Spending

Scale ($)

0 b

45 b

90 b

Running Cash Deficit: $43 b

Note: All daily figures assume zero cash balance on Feb 15; numbers may be off slightly due to rounding

Source: Bipartisan Policy Center projections based off of Daily and Monthly Treasury Statements



Treasury Cash Flow: Tuesday February 19, 2013


• $16 Billion in committed spending: • 4 b IRS Refunds to Individuals • 3.4 b Medicaid/Medicare • 1.9 b Federal Salaries/Benefits • 6.6 b Other Spending

Running Cash Deficit: $44 b Scale ($)



0 b

45 b

90 b



Treasury Cash Flow: Wednesday February 20, 2013


• $30 Billion in committed spending: • 11 b Social Security Payments • 8 b IRS Refunds to Individuals • 3.2 b Medicaid/Medicare • 1.6 b Defense Vendors • 910 m Dep. of Education • 5.2 b Other Spending




0 b

45 b

90 b



Treasury Cash Flow: Thursday February 21, 2013


• $19 Billion in committed spending: • 7 b IRS Refunds to Individuals

• 2.7 b Medicaid/Medicare • 1.5 b Defense Vendors • 1.5 b Food/HUD/Welfare/Unemp. • 5.7 b Other Spending




0 b

45 b

90 b



Treasury Cash Flow: Friday February 22, 2013


• $16 Billion in committed spending: • 4.7 b IRS Refunds to Individuals • 3.5 b Medicaid/Medicare • 1.9 b Defense Vendors • 6.4 b Other Spending




0 b

45 b

90 b



Treasury Cash Flow: Monday February 25, 2013


• $24 Billion in committed spending: • 12 b IRS Refunds to Individuals • 3.5 b Medicaid/Medicare • 1.4 b Defense Vendors • 1 b Dep. of Education • 6 b Other Spending




0 b

45 b

90 b



Treasury Cash Flow: Tuesday February 26, 2013


• $15 Billion in committed spending: • 4.2 b IRS Refunds to Individuals • 3 b Medicaid/Medicare • 2.2 b Defense Vendors • 5.5 b Other Spending




0 b

45 b

90 b



Treasury Cash Flow: Wednesday February 27, 2013


• $29 Billion in committed spending: • 12 b Social Security Payments • 7 b IRS Refunds to Individuals • 2.2 b Medicaid/Medicare • 1.4 b Defense Vendors • 1.2 b Dep. of Education • 7.8 b Other Spending




0 b

45 b

90 b



Treasury Cash Flow: Thursday February 28, 2013


• $18 Billion in committed spending: • 6.6 b Interest Payment on Debt • 2.7 b Medicaid/Medicare • 1.7 b Defense Vendors • 6.4 b Other Spending




0 b

45 b

90 b



Treasury Cash Flow: Friday March 1, 2013


• $83 Billion in committed spending: • 25 b Social Security Payments • 20 b Medicare/Medicaid • 5 b Civil Service Retirement • 4.2 b Veterans Benefits • 4.1 b Federal Emp. Salaries/Benefits • 3.8 b Military Active Pay • 3.8 b Military Retirement • 3.4 b Supplemental Sec. Income • 3.1 b Food/HUD/Welfare/Unemp • 1.8 b IRS Refunds to Individuals • 1.6 b Defense Vendors • 7.8 b Other Spending 0




0 b

45 b

90 b

CONSEQUENCES 40

• Handling all payments for important and popular programs

(e.g., Social Security, Medicare, Medicaid, Defense, military active duty pay) will quickly become impossible.

• Economic disruption:

– Immediate 39% cut in federal spending would affect broader economy

– Many service providers unpaid

• Medicare and Medicaid providers

• Defense vendors

– Individuals not receiving government checks

– Widespread uncertainty as decisions are made day by day

Market Risk

ONE-YEAR COST OF 2011 DEBT LIMIT EVENT 42

• The Government Accountability Office (GAO) issued a report

detailing additional costs to taxpayers as a result of the

delayed 2011 debt limit increase.

‒ A substantial cost to taxpayers stemmed from elevated interest rates on U.S. securities issued in 2011 prior to when the debt limit was increased in August.

‒ GAO conducted an economic analysis to estimate the resulting change in interest rates.

‒ For Fiscal Year 2011, GAO estimated additional interest costs to taxpayers of $1.3 billion.

TEN-YEAR COST OF 2011 DEBT LIMIT EVENT 43

• The cost of the event to the federal government, however,

continues to accrue because many of the bonds issued during

that period remain outstanding.

‒ BPC extended GAO’s methodology to analyze the long-term cost to taxpayers stemming from the elevated interest rates.

‒ Estimate of the ten-year cost to taxpayers of the 2011 debt limit standoff = $18.9 billion

‒ To put this in perspective, the Congressional Budget Office (CBO) estimates that the “Doc Fix” to prevent the scheduled 27% cut to Medicare physician payments for 2012 cost $18 billion over ten years.

PRIORITIZATION: MARKET RISK 44

• Treasury must “roll over” roughly $500 b in debt that matures

this year during the Feb 15 – Mar 15 period.

– When a Treasury security matures, Treasury must pay back the principal plus interest due. Under normal circumstances, Treasury would simply “roll over” the security.

– As one security matures, the principal and interest for that security would be paid for with cash from the issuance of a new security.

• In a post-X Date environment, this operation may not run as

smoothly.

– Two elements of market risk:

• Treasury will have to pay higher interest rates to attract new buyers.

• It is possible, if unlikely, that not enough bidders would appear.

THE RISKS ARE REAL 45

• Additional borrowing costs for the federal government from delay in

increasing the debt limit

• Additional rating agency downgrades are possible

‒ S&P downgraded last summer and reaction was not severe

‒ But there is uncertainty about effects of another downgrade since many funds are prohibited from holding non-AAA securities

• Market risks beyond the X Date:

‒ Treasury market, interest rates

‒ Potential for serious equity market reaction (401(k)s, IRAs, other pensions)

‒ Our economy

‒ The global financial system

No guarantee of the outcome; risks are risks

SIZE OF A DEBT LIMIT INCREASE 46

Roughly how much would the debt limit need to be

increased to get through 2013 or 2014*?

*The estimates in the chart above assume that the full sequester is waived, war spending declines as scheduled, Medicare physician payments are frozen at 2013 levels (the “Doc Fix”), and the “tax extenders” in the American Taxpayer Relief Act of 2012 are extended permanently. Alternatively, if current law continued except that war spending declines as scheduled and a permanent “Doc Fix” is enacted, the necessary increases to get through 2013 and 2014, respectively, would be $1 trillion and $1.9 trillion.

$0

$500

$1,000

$1,500

$2,000

$2,500

End of 2013 End of 2014

Bill

ion

s o

f D

olla

rs

$1.1 Trillion

$2.1 Trillion

Source: Congressional Budget Office, Bipartisan Policy Center projections

Authors

STEVE BELL SENIOR DIRECTOR OF THE ECONOMIC POLICY PROJECT

SHAI AKABAS SENIOR POLICY ANALYST

LOREN ADLER SENIOR POLICY ANALYST

BRIAN COLLINS POLICY ANALYST

MEDIA CONTACT:

ASHLEY BERRANG

DIRECTOR OF COMMUNICATIONS

(202) 637-1456

debt limit slides 2013 usa out of cash in 4 weeks

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