An interest payment of over $30 billion is due on November 16, a day on which BPC only projects $27 billion of receipts to the federal government.

Transcription

1 OCTOBER 27, 2015

2 Treasury Secretary Jack Lew has estimated that extraordinary measures will be exhausted on or about November 3, At that point, he projects that the federal government will have less than $30 billion of cash on hand to make required payments. This cash estimate is roughly consistent with BPC s latest projection, which is that if policymakers do not act on the debt limit, Treasury will deplete its reserves and have insufficient cash to meet all financial obligations sometime between November 10 and November 16. Due to the unpredictability of cash flows and thus, all of these projections policymakers would need to act well in advance of November 10 if they intend to ensure that all obligations of the U.S. government are able to be met in full and on time. 2

3 In the period after running out of cash, Treasury would be unable to meet roughly 37 percent of all obligations due. How Treasury would operate in such an environment is unclear. Prioritization and delayed payments are two possibilities, but there is substantial uncertainty about operationalizing them. An interest payment of over $30 billion is due on November 16, a day on which BPC only projects $27 billion of receipts to the federal government. Financial and economic risks grow as the debt limit impasse extends. Already, interest rates on short-term Treasury securities have risen and Treasury has postponed a scheduled auction of 2- year notes. Well over $200 billion of debt is scheduled to be rolled over in November. The unpredictability of daily cash flows creates an inherent uncertainty in all of these projections. 3

4 The debt limit was reinstated from its latest suspension on March 16, Since then, the Treasury Secretary has used emergency borrowing authority known as extraordinary measures to allow for an additional period of fully-funded government operations. 4

5 The debt limit is: the maximum amount that Treasury is allowed to borrow; set by statute (i.e., Congress must act to change it); and covers most debt issued, whether held by the public (such as Treasury bills and savings bonds) or intragovernmental (such as debt held by the Social Security trust funds). The debt limit was temporarily suspended from February 18, 2014, until March 16, 2015, when it was reinstated at a higher level than before. Total public debt subject to limit is now approximately $18.1 trillion. In comparison, the U.S. gross domestic product (GDP) was $17.4 trillion at the end of

6 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 policymakers do not act, 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 Debt Limit Reached EXTRAORDINARY MEASURES EM Exhausted DAILY REVENUE AND CASH ON HAND The X Date DEFAULT ON FINANCIAL OBLIGATIONS 6

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8 1. The G-Fund of the Thrift Savings Plan Treasury may temporarily reduce the amount of debt held by this fund, which holds government bonds for federal employee retirement accounts. 2. The Civil Service Retirement and Disability Fund (CSRDF) Treasury may postpone new investments in this pension fund. The CSRDF measure is most useful in June, September, and December, when major interest credits and reinvestments of maturing securities occur. 3. The Exchange Stabilization Fund (ESF) Treasury may temporarily reduce the amount of debt held by this fund, which is used to facilitate foreign exchange transactions. 8

9 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. 9

10 As of mid-october, only $32 billion in extraordinary measures remained (compared to $337 billion that have been used since March of this year). They won t buy much more time: September was a good month for the federal government s finances, as quarterly tax payments were due and there were no irregular, large payments. September had a cash flow surplus of about $65 billion. October, in contrast, is a bad month for the federal government s finances, largely due to two factors: a very large accrual in the Military Retirement Fund, which reduces room under the debt limit; and a large projected cash-flow deficit. November is expected to have a large cash-flow deficit as well. 10

11 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 Daily cash inflows (federal revenues received each day) 11

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13 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 be insufficient to cover all government spending. 13

14 Cash on hand + available extraordinary measures (in billions) $140 BPC s Projected Range November 10 to 16 $120 $100 $80 $60 $40 $20 $- 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 upon Treasury s daily and direct government account statements 14

15 Strengthening/weakening economy Revenues have been stronger this year than last, reflecting increased employment and a stronger economy. This trend could either accelerate or reverse. Volatility in the timing of revenue Revenue is the most volatile part of the federal government s cash flows. It varies from month to month and from day to day, making the prediction of an exact X Date impossible. Certain types of revenue, such as the quarterly tax payments due in April, June, September, and December are especially volatile. 15

16 $150,000 U.S. Treasury - Monthly Net Operating Cash Flow (in millions) $100,000 $50,000 $- $(50,000) $(100,000) $(150,000) $(200,000) $(250,000) $(300,000) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Daily Treasury Statements 16

17 October Social Security $13.7b Marketplace Payments $3.7b Military Pay $2.8b Federal Salaries $3.2b Federal Salaries $1.4b Social Security $14b Medicare $25.8b Interest $6.4b Veterans $5.4b SSI $4.2b Military Pay + Benefits $7.6b 17

18 November Treasury Projects Exhaustion of Borrowing Authority Federal Salaries $3.1b 7 Social Security $25.1b Civil Service Retirement $5.3b HUD Programs $2.7b 8 9 Federal Salaries $1.6b 10 Social Security $14b BPC X-Date Range Interest $33.2b Military Pay $2.7b Social Security $13.8b Federal Salaries $3.2b Federal Salaries $1.5b Social Security $14b

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20 President Obama has stated that the 14 th Amendment does not provide a reasonable basis for challenging the constitutionality of the debt ceiling: My lawyers are not persuaded that [the 14 th Amendment] is a winning argument. Press Secretary Jay Carney: The 14 th 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). 20

21 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. Former Federal Reserve Chairman Ben 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. 21

22 If we reach the X Date, Treasury might attempt to 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 it is paid on a separate computer system (FedWire). 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. This option may not be possible to implement using Treasury s current financial systems. It would involve sorting and choosing from nearly 100 million monthly payments. 22

23 If the X Date arrives on Nov. 10 (the beginning of the BPC range): Treasury would be about $81 billion short of paying all bills owed between November 10 and 30 (13 business days). Approximately 37 percent of the funds owed for the period would go unpaid. The reality would be chaotic: Unfair results, unanswered questions Treasury picking winners and losers Public uproar Intense global media focus 23

24 If you choose to pay Interest on Treasury Securities Medicare / Medicaid Social Security Benefits Military Pay and Retirement Health and Human Services Grants Food Stamps / HUD / TANF / Unemployment $33 b $45 b $42 b $3 b $6 b $7 b For a total of $137 billion Note: Total does not add due to rounding. 24

25 Then you can t fund these programs, costing $82 billion. IRS Tax Refunds Education Programs Federal Salaries + Benefits Defense Vendors 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 $3 b $7 b $12 b $17 b $43 b Note: This scenario is presented purely for illustrative purposes and simplifies the situation. There are a number of caveats to its feasibility (some of which are mentioned elsewhere in this presentation), including the fact that revenues and obligations are lumpy, such that even if all of the payments on the previous slide could be afforded from the vantage point of aggregate figures for the covered period, the specific cash situation on particular days would make certain payments unaffordable. 25

26 On a day-to-day basis, 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 37% cut in federal spending would affect broader economy Many service providers unpaid Individuals not receiving government checks Widespread uncertainty as decisions are made day-by-day 26

27 The Treasury Department s Office of Inspector General (OIG) released a report in 2012 on post-x Date strategies that Treasury was considering in the summer of Some senior Treasury officials were skeptical of the prioritization scenario for two reasons: 1. Choosing to pay certain obligations before others would be of questionable legality 2. Given the sheer number of daily payments and Treasury s computerized payment system, prioritization would require a massive overhaul and reprogramming of these operations that may be impossible One other mechanical possibility for the prioritization scenario is that Treasury (via the Office of Management and Budget) would instruct agencies to withhold processing of certain groups or types of bills so as to prevent them from entering Treasury s system. BPC does not know the feasibility of this approach. 27

28 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, two days of revenue collections might be needed 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.) In the 2012 OIG report, some senior Treasury officials stated that they believed this to be the most plausible and least harmful course of action. Since debt operations are handled by a separate computer system, these payments could likely still be prioritized under this scenario. 28

29 Illustrative Potential Payment Delays (assuming a Nov. 10 X Date) Social Security Benefits November 10 November 18 Military Active Duty Pay November 16 November 27 Social Security Benefits November 18 December 1 Federal Salaries November 20 December 1 Marketplace Payments November 20 December 1 Federal Salaries November 23 December 1 Social Security Benefits November 25 December 7 Note: These projections incorporate a set of assumptions, including (for illustrative purposes): that the X Date occurs at the beginning of the BPC estimated window (November 10); that interest payments are prioritized and paid on time; and that federal trust fund operations continue as normal. Source: Bipartisan Policy Center projections off of Daily Treasury Statements 29

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31 The following slides project daily revenue and expenditures, by category, from November 10 through the end of the month. Projections are estimates and subject to change. Revenue flows and tax refunds are particularly volatile. Note: This analysis is for illustrative purposes and omits intragovernmental debt fluctuations, which are implicitly reflected in the Prioritization section above and would impact available revenue to pay obligations. 31

32 Running Cash Deficit: $17 b Treasury Cash Flow: Tuesday November 10, 2015 Daily Inflow Scale $50 b Daily Outflow $25 b $6.4 Billion in revenues $0 b $23.1 Billion in committed spending: 14.0 b Social Security Benefits 1.3 b Medicaid Payments 1.2 b Medicare & Other CMS Payments 1.1 b Defense Vendor Payments 5.5 b Other Spending Note: All daily figures assume zero cash balance on Nov. 10; numbers may be off slightly due to rounding. Source: Bipartisan Policy Center projections based off of Daily and Monthly Treasury Statements 32

33 Running Cash Deficit: $23 b Treasury Cash Flow: Thursday November 12, 2015 Daily Inflow Scale $50 b Daily Outflow $25 b $6.2 Billion in revenues $0 b $12.9 Billion in committed spending: 2.4 b 2.2 b 1.6 b 6.7 b Medicaid Payments Medicare & Other CMS Payments Defense Vendor Payments Other Spending Note: All daily figures assume zero cash balance on Nov. 10; numbers may be off slightly due to rounding. Source: Bipartisan Policy Center projections based off of Daily and Monthly Treasury Statements 33

34 Running Cash Deficit: $24 b Treasury Cash Flow: Friday November 13, 2015 Daily Inflow Scale $50 b Daily Outflow $25 b $10.1 Billion in revenues $0 b $10.4 Billion in committed spending: 2.1 b 1.9 b 6.4 b Medicaid Payments Medicare & Other CMS Payments Other Spending Note: All daily figures assume zero cash balance on Nov. 10; numbers may be off slightly due to rounding. Source: Bipartisan Policy Center projections based off of Daily and Monthly Treasury Statements 34

35 Running Cash Deficit: $45 b Treasury Cash Flow: Monday November 16, 2015 Daily Inflow Scale $50 b Daily Outflow $26.7 Billion in revenues $25 b $47.8 Billion in committed spending: 33.2 b Interest on Treasury Securities 2.7 b Military Active Pay 2.4 b Medicaid Payments 1.7 b Medicare & Other CMS Payments 1.3 b Defense Vendor Payments 6.5 b Other Spending $0 b Note: All daily figures assume zero cash balance on Nov. 10; numbers may be off slightly due to rounding. Source: Bipartisan Policy Center projections based off of Daily and Monthly Treasury Statements 35

36 Running Cash Deficit: $48 b Treasury Cash Flow: Tuesday November 17, 2015 Daily Inflow Scale $50 b Daily Outflow $25 b $6.4 Billion in revenues $0 b $8.7 Billion in committed spending: 1.6 b 1.2 b 5.9 b Medicare & Other CMS Payments Defense Vendor Payments Other Spending Note: All daily figures assume zero cash balance on Nov. 10; numbers may be off slightly due to rounding. Source: Bipartisan Policy Center projections based off of Daily and Monthly Treasury Statements 36

37 Running Cash Deficit: $58 b Treasury Cash Flow: Wednesday November 18, 2015 Daily Inflow Scale $50 b Daily Outflow $25 b $12.6 Billion in revenues $0 b $23.3 Billion in committed spending: 13.8 b Social Security Benefits 1.6 b Medicaid Payments 1.6 b Defense Vendor Payments 1.5 b Medicare & Other CMS Payments 4.8 b Other Spending Note: All daily figures assume zero cash balance on Nov. 10; numbers may be off slightly due to rounding. Source: Bipartisan Policy Center projections based off of Daily and Monthly Treasury Statements 37

38 Running Cash Deficit: $61 b Treasury Cash Flow: Thursday November 19, 2015 Daily Inflow Scale $50 b Daily Outflow $25 b $6.2 Billion in revenues $0 b $9.0 Billion in committed spending: 2.1 b 1.5 b 5.4 b Medicare & Other CMS Payments Medicaid Payments Other Spending Note: All daily figures assume zero cash balance on Nov. 10; numbers may be off slightly due to rounding. Source: Bipartisan Policy Center projections based off of Daily and Monthly Treasury Statements 38

39 Running Cash Deficit: $67 b Treasury Cash Flow: Friday November 20, 2015 Daily Inflow Scale $50 b Daily Outflow $25 b $10.1 Billion in revenues $0 b $16.2 Billion in committed spending: 3.8 b 3.2 b 1.9 b 1.8 b 1.7 b 3.8 b Marketplace Payments Federal Salaries Medicare & Other CMS Payments Medicaid Payments Defense Vendor Payments Other Spending Note: All daily figures assume zero cash balance on Nov. 10; numbers may be off slightly due to rounding. Source: Bipartisan Policy Center projections based off of Daily and Monthly Treasury Statements 39

40 Running Cash Deficit: $59 b Treasury Cash Flow: Monday November 23, 2015 Daily Inflow Scale $50 b Daily Outflow $25 b $17.1 Billion in revenues $0 b $9.3 Billion in committed spending: 1.8 b 1.5 b 6.0 b Medicare & Other CMS Payments Federal Salaries Other Spending Note: All daily figures assume zero cash balance on Nov. 10; numbers may be off slightly due to rounding. Source: Bipartisan Policy Center projections based off of Daily and Monthly Treasury Statements 40

41 Running Cash Deficit: $61 b Treasury Cash Flow: Tuesday November 24, 2015 Daily Inflow Scale $50 b Daily Outflow $25 b $6.4 Billion in revenues $0 b $8.3 Billion in committed spending: 2.4 b 1.3 b 4.6 b Medicare & Other CMS Payments Defense Vendor Payments Other Spending Note: All daily figures assume zero cash balance on Nov. 10; numbers may be off slightly due to rounding. Source: Bipartisan Policy Center projections based off of Daily and Monthly Treasury Statements 41

42 Running Cash Deficit: $75 b Treasury Cash Flow: Wednesday November 25, 2015 Daily Inflow Scale $50 b Daily Outflow $12.6 Billion in revenues $25 b $0 b $26.3 Billion in committed spending: 14.0 b Social Security Benefits 2.2 b Medicare & Other CMS Payments 1.9 b Defense Vendor Payments 1.6 b Medicaid Payments 6.6 b Other Spending Note: All daily figures assume zero cash balance on Nov. 10; numbers may be off slightly due to rounding. Source: Bipartisan Policy Center projections based off of Daily and Monthly Treasury Statements 42

43 Running Cash Deficit: $76 b Treasury Cash Flow: Friday November 27, 2015 Daily Inflow Scale $50 b Daily Outflow $25 b $10.1 Billion in revenues $0 b $11.4 Billion in committed spending: 1.8 b 1.1 b 1.0 b 7.5 b Medicare & Other CMS Payments Medicaid Payments Defense Vendor Payments Other Spending Note: All daily figures assume zero cash balance on Nov. 10; numbers may be off slightly due to rounding. Source: Bipartisan Policy Center projections based off of Daily and Monthly Treasury Statements 43

44 Running Cash Deficit: $71 b Treasury Cash Flow: Monday November 30, 2015 Daily Inflow Scale $50 b Daily Outflow $25 b $17.1 Billion in revenues $0 b $11.6 Billion in committed spending: 2.8 b 2.0 b 1.4 b 5.4 b Medicaid Payments Medicare & Other CMS Payments Defense Vendor Payments Other Spending Note: All daily figures assume zero cash balance on Nov. 10; numbers may be off slightly due to rounding. Source: Bipartisan Policy Center projections based off of Daily and Monthly Treasury Statements 44

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46 Treasury must roll over roughly $450 b in debt that matures this year during the Oct. 15 Nov. 30 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. 46

47 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, forcing Treasury to either use cash on hand to pay off securities that came due or, in a worst-case scenario default on the debt. The 2012 Office of Inspector General s report found that there was substantial concern about this issue among Treasury officials during the 2011 debt limit event. 47

48 Debt Maturing After October 15 October 15 October 22 October 29 November 5 November 12 November 19 November 27 $93 billion $63 billion $48 billion $48 billion $73 billion $48 billion $48 billion Note: Does not include estimates of four-week maturities auctioned after September 30. Source: TreasuryDirect 48

49 Treasury securities are normally considered safe and liquid. They are treated as the foundation of the global financial system because of the perception that the risk of default is negligible. During the 2013 debt limit standoff, major financial institutions stopped accepting Treasury securities maturing around the X Date as collateral in short-term transactions. These concerns created illiquidity in the markets and substantially raised the cost of short-term borrowing. A worst-case scenario would be the failure of a Treasury auction to attract enough buyers to roll over maturing U.S. government debt. This would force Treasury to either use cash on hand to pay off securities that came due or, in a worst-case scenario, default on the debt. Source: Government Accountability Office (GAO) Market Response to Recent Impasses Underscores Need to Consider Alternative Approaches (2015) 49

50 Impacts are already materializing: Yields on short-term Treasury securities that are scheduled to mature in November have risen in recent days as the debt limit impasse has extended. Treasury postponed an auction of 2-year notes over concerns about cash and debt management related to the debt limit. Major financial institutions have been asked for contingency plans in the event of financial market turmoil. 50

51 The Government Accountability Office (GAO) reported several other consequences of the 2013 debt limit standoff: Treasury s operations were constrained: A requirement exists that upon reinstatement of the debt limit, Treasury match the amount of cash on hand from when the limit was suspended. This necessitated sharp reductions to the amount of Treasury bills outstanding, which disturbed the Department s ability to conduct normal market operations and also disrupted the market transacting in those securities. Treasury s cash balance was reduced to a risky level: This removed a critical cushion against an unexpected disruption in the financial markets that obstructs the ability to borrow for a period of time. Source: Government Accountability Office (GAO) Market Response to Recent Impasses Underscores Need to Consider Alternative Approaches (2015) 51

52 The GAO report also found real costs to taxpayers during the 2013 standoff: Yields for targeted securities in secondary markets rose from 1 basis point in mid-september of 2013 to over 50 basis points just prior to the resolution of the standoff in October. The mere suggestion that the federal government might miss a payment caused Standard and Poor s to downgrade the rating on U.S. Treasury bonds, from AAA to AA+, after the debt limit standoff of GAO estimates that the 2013 impasse cost the federal government somewhere between $38 million and $70 million in added interest payments to service the debt. Source: Government Accountability Office (GAO) Market Response to Recent Impasses Underscores Need to Consider Alternative Approaches (2015) 52

53 Additional rating agency downgrades are possible. Fitch: Arrears on [various federal government] obligations would not constitute a default event from a sovereign rating perspective but very likely prompt a downgrade even as debt obligations continued to be met. Translation: If we go past the X Date without a debt limit increase, prepare for another downgrade. The impacts of S&P s downgrade in 2011 were limited, but uncertainty exists about effects of another downgrade since many funds are prohibited from holding non-aaa securities. 53

54 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 54

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56 Analyze financial data from the Treasury Department: Daily Treasury Statements Government Account Statements Project monthly operating cash flow and change in intragovernmental debt using: Historical financial data Congressional Budget Office analysis of spending growth Adjustments for anticipated issues (e.g., extraordinary measures that become available on certain dates) Assumptions: Fiscal Year 2016 budget is funded at sequestration levels. No major shocks (e.g., recession, natural disaster, new overseas conflict) that could materially affect government finances. 56

57 SHAI AKABAS ASSOCIATE DIRECTOR OF ECONOMIC POLICY BRIAN COLLINS SENIOR POLICY ANALYST BEN RITZ POLICY ANALYST