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Overview

For the past few weeks much of the television and print news has been focused on the standoff in Washington, D.C. over two separate issues: funding the government and raising the nation’s debt ceiling. Given the significance of these two issues and the widespread confusion surrounding them, we put together the following primer to help make sense of the current situation.

In a shutdown, Congress withholds from some federal agencies some of the monies they need to fund their operations. A default, on the other hand, prevents the Treasury from issuing notes to pay for the debt incurred as a result of government services already authorized by Congress. In 2011, we faced a shutdown in April and later a default in August. In both cases, the calamity was averted at the last second when parties came together. This year, however, we are already a week into a government shutdown and the potential for a debt default now looms as early as next week.

Federal Shutdown

Causes: Every year Congress must pass into law, by September 30th, 12 separate appropriations bills that fund the activities of various federal departments and agencies. This part of the budget is called discretionary spending because it can be substantially changed from year to year to address changing priorities and needs. When Congress is at an impasse on any or all of the 12 appropriations bills, it will frequently agree to a continuing resolution, or CR, to buy itself more time to find a long-term agreement. If it cannot pass a CR, a “funding gap” occurs, and all federal accounts without appropriated funds must generally stop their operations. Since 1977, there have been 17 funding gaps—also know as government shutdowns. However, those instances were usually short in duration and/or limited to only a few agencies. This one, though, applies to almost all federal agencies and has no end in sight.

Recent past: In recent years, policy disagreements between the parties have made passing the 12 individual appropriations bills a difficult prospect. Disagreements over funding levels for implementing healthcare reforms, new stock market rules, and environmental protection are some notable examples where differences are so great that merely “splitting the difference” seems unacceptable to both sides. As a result, last fiscal year, Congress came to an agreement on only five of the 12 appropriations bills, those being the least controversial. The others were funded by a CR.

Current shutdown: For several months now, virtually all experts on congressional affairs were certain a CR would be needed to provide more time for Congress to negotiate spending agreements. As Congress faced the September 30th deadline, Republican hardliners in Congress felt the looming shutdown could be a leveraged opportunity to compel Democrats to defund or delay the new healthcare law. This began a game of legislative “ping pong” in which the House and Senate volleyed the different versions of a CR between their chambers with the hope they would not be the ones holding the ball on September 30th. On September 20th, only 10 days away from a shutdown, the House of Representatives passed a CR that prohibited any funds to be used to implement the Affordable Care Act (more commonly known as Obamacare). On September 27th, the Senate passed a CR that removed any restrictions on Affordable Care Act spending. On the 29th, the House sent the bill back to the Senate, and on the 30th, the Senate sent it back to the House. Unable to find agreement, the shutdown began at midnight.

Practical implications: The Anti-Deficiency Act describes what services will be continued or discontinued during a shutdown. Accordingly, the Office of Management and Budget at the White House directs each department to issue a plan on staffing and operations during a funding gap and provides a great deal of discretion to agency principals to define those roles. Agencies whose primary role is related to protection of life and property typically are exempt from closing their doors. But services related to science, education, commerce, and others discontinue their services and furlough upwards of 80 percent of their staff. A furlough is mandatory, unpaid leave of an employee. On the other hand, “exempted” employees are required to attend and perform work without the guarantee that their labor will be compensated. To retroactively provide back-pay to any or all federal workers during a funding gap requires an explicit act of law.

Not cut during a funding gap, however, are services outside discretionary spending like Social Security, Medicare, veteran’s benefits, unemployment checks, and food stamps. Notable though, many of those programs will not be able to process new benefits or correct errors in one’s benefits. Meanwhile, government-owned corporations like the U.S. Postal Service and Amtrak will continue to operate because they are funded by direct user fees.

Federal Default

Causes: Every dollar the federal government has borrowed has been paid in full and on time. The full faith and credit of the United States government has been the most reliable investment in the world for the past century. In 1917, Congress enacted a statute that limits how much debt the Treasury can incur, called the “debt ceiling”. It simply sets a dollar figure above which the government cannot borrow money. Since 1962, it has been raised 70 times.

The debt ceiling is somewhat counterintuitive. It does not increase spending. Rather, it allows the Treasury to issue bonds and notes to pay the bills Congress already has authorized by law. Because it is publicly perceived to be approving of bigger deficits, it is quite unpopular. However, as routine business in Congress in recent decades, it is often attached to a larger and more popular measure to provide cover to those supporting it.

Recent past: The federal government encountered a similar situation in 2011. At that time, Republicans in the House instituted what has become known as the Boehner Rule. This rule stipulates that for every dollar increase in the debt ceiling, there must be at least a dollar in deficit reduction included in the legislation. After weeks of negotiations in 2011, Congress and the President approved the Budget Control Act. This bill cut $900 billion in spending, as well as created a “Super Committee” of sorts, to cut an additional $1.5 trillion from the deficit. When the Super Committee failed to find agreement on how to reduce the deficit, it triggered automatic, across-the-board spending cuts, referred to as “sequestration”.

Current default scare: In the Budget Control Act and the subsequent No Budget, No Pay Act, the debt limit was increased to provide funding through May 19, 2013. Since that deadline, the Treasury has been using “extraordinary measures” to delay obligations which put off actual default. Those measures will be exhausted by October 17th, though some outside analysts believe it may occur as late as the 31st. President Obama and Speaker Boehner acknowledge the magnitude of a default and claim they will not let it happen. Speaker Boehner has again urged spending cuts as part of any agreement to raise the debt ceiling and House Republicans generally have indicated they will not support a debt ceiling increase without spending cuts. Democrats oppose putting any conditions on raising the debt ceiling. They feel a responsible deficit reduction plan cannot be hashed out during such outside uncertainty.

Practical implications: Because it has never happened before, the implications of a default are unknown. Most economists fear it will be severely harmful to our economy, both on a national and household scale. For certain, Treasury interest rates will increase and markets will face great financial uncertainty. During the 2011 default scare, the Dow Jones dropped 2000 points and our bond ratings were downgraded. Default could lead to a run on the international monetary markets. For individual households, likely results will be increased interest rates on mortgages, student loans, and cars. Retirement savings will also likely suffer significant losses.

The End Game

The shutdown and looming default have occurred so close together that they have politically merged. These twin crises, now being faced at one time, make any potential way out of this mess even more complicated. Policy makers must calculate how addressing one problem may affect the other (if at all) within the political realities of the government. There is growing consensus that the two will in fact be solved jointly.

 

 Steven C. LaTourette, President | 202.559.2600

McDonald Hopkins Government Strategies LLC
101 Constitution Avenue NW, Suite 600 East, Washington, D.C. 20001 

www.mcdonaldhopkinsgs.com

IMPORTANT NOTICE:

Although McDonald Hopkins Government Strategies LLC is owned by the law firm McDonald Hopkins LLC, McDonald Hopkins Government Strategies is not a law firm and does not provide legal services. Accordingly, the retention of McDonald Hopkins Government Strategies does not create a client-lawyer relationship and the protections of the client-lawyer relationship, such as attorney-client privilege and the ethics rules pertaining to conduct by lawyers, do not apply.

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