WASHINGTON — The federal government will limp to a near halt in one month if Congress doesn’t agree to a plan to raise the nation’s borrowing limit, policy experts warn.
The federal government has already reached its legal debt capacity. As soon as mid-February, U.S. Treasury officials will have to rely on only money coming in from taxes and fees to pay for the government’s day-by-day operations, according to one recent projection.
Because federal revenue fluctuates from week to week, it’s hard to determine precisely when the U.S. government will run out of money to pay its obligations, including interest on its debt and the full gamut of federal programs such as Social Security, Medicare and highway construction, said Shai Akabas, senior policy analyst at the Bipartisan Policy Center, a centrist Washington advocacy group.
But Akabas has simple advice for people dependent on federal support: Don’t count on receiving a check from Uncle Sam after Feb. 15.
“It’s very uncertain whether people will get paid on time, or certainly, whether they get paid at all” after that point, he said.
The uncertainty has Arkansas officials wringing their hands.
The debate over the debt ceiling is “political theater that puts our country at risk,” said Richard Weiss, director of the Arkansas Department of Finance and Administration.
If the government defaults on its interest payments, experts warn, credit-rating agencies have warned they will downgrade U.S. debt ratings, which would raise the cost of borrowing in the future.
Weiss said he is concerned that the spigot of federal funds to Arkansas, which has dispensed $2.8 billion in the fiscal year that began in July, will be turned off if Congress fails to raise the debt ceiling.
The effect, Weiss said, would be felt immediately in Arkansas. State agencies would be unable to complete a multitude of tasks, as federal grants for children’s nutrition programs, police departments, highway projects and other state services would be put on hold.
Weiss said most Arkansas agencies that use federal grant money make payments to vendors and then “draw down” a federal account daily for reimbursement.
“There’s a constant flow of funds going back and forth,” Weiss said. “You’re drawing it down as you spend it. Anything that puts a hiccup in that is a huge risk.”
Cissy Rucker, director of the state Department of Veterans Affairs, said she is watching the debt-ceiling debate closely. She said she’s worried that if a federal government shutdown occurs, veterans who receive direct assistance from the U.S. Department of Veterans Affairs will go without assistance, other services could be cut, and that a planned expansion of the Arkansas State Veterans Cemetery in North Little Rock would be stuck in limbo.
HITTING THE LIMIT
On Dec. 31, the federal government hit its congressionally mandated borrowing limit of $16.4 trillion.
To free up more cash and keep the federal government from needing to borrow more,, Treasury Secretary Tim Geithner took what are known as“extraordinary measures” and temporarily tapped funds intended for federal employee retirement system bonds. Geithner’s actions gave the Treasury $200 billion more to spend.
Once that runs out, the federal government will operate on a hand-to-mouth basis, and pay for federal programs and interest on the debt with the money it receives each day from tax revenue and fees.
Akabas said the financial sleight of hand won’t last as long as it did in 2011, when Geithner managed to avoid hitting the debt ceiling for three months using a similar maneuver.
That’s because a large amount of tax refunds are typically sent out in February, Akabas said, making it a particularly dry month for the federal government’s cash flow.
The Bipartisan Policy Center projects that the federal government will only be able to pay 40 percent of its tab when the cash redirected by Geithner runs out.
One option in such a situation, Akabas said, would be to prioritize the nation’s spending and pay for only the items that are deemed most important. However, Akabas said it is uncertain whether the Treasury Department has the legal authority to make such a determination.
Another course of action would be to make federal payments only as the cash becomes available. For instance, the government would not begin paying off March’s obligations until all of February’s bills had been paid.
The waiting list for government money - and the delay in payments - would grow and grow.
“They’ll get further and further behind,” Akabas said.
Some have suggested that the government pay its most important obligations first, but that’s harder than it sounds.
Akabas questioned whether the Treasury Department is even capable of making partial payments or altering its payment schedules. The department’s computer systems, which Akabas said make 100 million separate payments each month, are largely automated. Treasury employees do not monitor each payment or tap a button on a keyboard to send a payment out. In order to prioritize payments, “there would have to be an overhaul of the system,” Akabas said.
In a recent report, the Bipartisan Policy Center outlined the difficult choices that would be faced if the credit limit weren’t raised.
Paying for six federal priorities - interest on the debt; Social Security; Medicare and Medicaid; individual tax refunds; military pay and retirement benefits; and unemployment insurance benefits - would cost $276.5 billion between Feb. 15 and March 15. Doing so would use up all of the incoming federal revenue and leave a multitude of federal payments, such as to defense vendors, farmers, veterans and federal emergency response initiatives, unremitted.
‘FISCAL ARMAGEDDON’
Dan Adcock, director of government relations for the National Committee to Preserve Social Security and Medicare, said that, unlike government shutdowns in the past where Congress and the president have failed to reach a deal to fund federal programs, Social Security Administration workers will not be deemed “essential employees” if the government reaches its credit limit and decides to cut benefit payments.
The result, he warned, would be a “fiscal Armageddon” for both recipients of government checks and the broader economy, which would be starved of consumer spending as a result of the stopped payments.
But others say the national debt poses a greater threat than missing payments on existing government programs.
Congress should use the debt-ceiling deadline as an opportunity to reduce federal spending and whittle away at debt before interest rates start rising and elbow out federal priorities even more, said Barney Keller, a spokesman for the Club For Growth, a conservative Washington advocacy group.
“There will be pain, but the pain of a government shutdown will pale in comparison to what will happen if we have a debt crisis,” he said.
Keller did not specify the magnitude of necessary cuts.
Rep. Tim Griffin, a Republican from Little Rock, said he’d be happy with a freeze on current spending levels.
“All of these cliffhangers could be avoided if the president would just admit we have a spending problem,” Griffin said.
Sen. John Boozman, a Republican from Arkansas, agreed, saying he is confident that congressional Republicans will be able to extract significant budget cuts in exchange for raising the debt ceiling.
“We hear a lot of consequences about shutting the government down,” he said. “We need to hear more about the consequences of continuing to have a trillion-dollar deficit.”
Even as they called for spending cuts as a condition for raising the debt ceiling, both Republicans said an increase in the nation’s borrowing authority was necessary.
Sen. Mark Pryor, a Democrat, agreed. While he said the federal budget must be cut, he said cutting too aggressively could hurt the economy.
He criticized Republicans for “holding the debt ceiling hostage” by demanding more spending cuts.
If the debt ceiling isn’t raised, federal cuts would harm the private sector. For instance, he said cuts to the Food and Drug Administration’s food inspection service would “lock up” the state’s poultry and livestock business.
He said he had informal conversations with executives from Tyson Foods Inc., the Springdale poultry giant, who expressed that concern.
“People are going to get sick and die” if the inspection service is cut, Pryor said.
Front Section, Pages 1 on 01/14/2013