As most of my readers know, the government will hit the current debt limit extension tomorrow (December 8) – unless Congress votes to expand the limit today or tomorrow, which is looking increasingly unlikely. Republican members of Congress are laser-focused on passing tax reform, and they know the government won’t actually shut down on December 9.
That’s because the Treasury Department is authorized to employ so-called “extraordinary measures” to be able to continue paying the government’s bills for some period of time. While many Americans have heard the term extraordinary measures, most have no idea what’s involved in this process. I think it’s worth explaining.
To begin this discussion, I should point out that the Treasury will continue to receive revenues daily, and it can use those revenues to pay government obligations. But normal revenues are not sufficient to pay all the government’s bills, so extraordinary measures can be used to make up the shortfall when we’ve exceeded the debt limit.
One of the first extraordinary measures used involves the Treasury borrowing money from the so-called “G Fund” inside the government’s enormous Thrift Savings Plan (TSP). The TSP is a retirement savings and investment plan for federal employees and members of the uniformed services.
When the debt ceiling is hit, the Treasury suspends reinvestments in the G Fund and borrows from it as needed to pay Uncle Sam’s bills. Once the debt ceiling is raised, the Treasury repays the loans with interest. The TSP has a “make-whole” provision which stipulates that participants invested in the G Fund will not lose anything when this occurs.
Another extraordinary measure involves the Civil Service Retirement and Disability Fund (CSRDF) and the Postal Service Retiree Health Benefits Fund (PSRHBF). The CSRDF provides defined benefits to retired and disabled federal employees covered by the Civil Service Retirement System.
When the debt ceiling is reached, the Treasury Department can suspend issuance of new securities for both funds which frees-up about $3 billion per month. It can also suspend semiannual interest payments for the funds, which are expected to total $15 billion on December 29, 2017.
There are other government savings and retirement funds the Treasury can borrow from, but I think you get the picture. I should mention that the process is a bit more complicated than that discussed above, but I’ll spare you the details.
I should also mention that there are limits on how much the Treasury can borrow under extraordinary measures, and those limits and calculations vary at different times of the year. If you want more details on the limitations, go here.
Back in November, Treasury Secretary Steve Mnuchin said he expected the current extraordinary measures to be exhausted by late January. The Congressional Budget Office, on the other hand, said recently that extraordinary measures plus cash flow could last until late March. The Bipartisan Policy Center (BPC), a think tank in Washington, also estimates late March as the so-called “X-Date” when the government actually runs out of money.
But notice in the chart above, the BPC illustrates that the X-Date could hit anytime from early March to early April, again depending on cash flows.
I read an article earlier this week which pointed out that most income tax filers in January and February are those who owe no taxes, including many who are due to get tax refunds from the Treasury. If so, the Treasury could run out of money sooner rather than later, as Treasury Secretary Mnuchin warned last month. Plus, if the Republicans actually pass tax reform just ahead (and I’m still not convinced they will), that means even less revenue for the Treasury starting, presumably, January 1.
As I warned on November 28, raising the debt limit this time around is more complicated than in the past. While the stock markets are clearly gaga over tax cuts, there could be a nasty downward correction if fears of a government shutdown arise in January.
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