Treasury Dept. Takes 'Extraordinary Measures' Ahead of Debt Limit Deadline - What Are They?

What’s the story?

• The Treasury Dept. announced Sunday that it has begun using the “extraordinary measures” at its disposal to fulfill the federal government’s financial obligations and prevent a default after it reached the end of the debt limit suspension on Sunday, August 1st. 
• Treasury Secretary Janet Yellen wrote a letter to congressional leadership warning that failing to raise the debt limit by the time the extraordinary measures are exhausted in the next few months “would cause irreparable harm to the U.S. economy and the livelihoods of all Americans.” She also noted:

“The period of time that extraordinary measures may last is subject to considerable uncertainty due to a variety of factors, including the challenges of forecasting the payments and receipts of the U.S. government months into the future, exacerbated by the heightened uncertainty in payments and receipts related to the economic impact of the pandemic.  Given this, Treasury is not able to currently provide a specific estimate of how long extraordinary measures will last.  However, there are scenarios in which cash and extraordinary measures could be exhausted soon after Congress returns from recess.” 

• The Congressional Budget Office (CBO) projects that the Treasury’s extraordinary measures will likely prevent the federal government from running out of cash until October or November. However, it also noted that the cash flows of inbound federal tax revenue and outgoing spending could alter that timeline if they “differ noticeably from CBO’s projections” and that:

“Therefore, the extraordinary measures could be exhausted, and the Treasury could run out of cash, either earlier or later than CBO projects.”

What are the extraordinary measures the Treasury uses?

• The Treasury has used all four of the extraordinary measures at its disposal to avoid defaulting on the U.S. government’s obligations when Congress has debated increasing the debt limit in recent years. Here’s a look at accounting tools available to the Treasury:
• Suspending sales of state and local securities: Under normal circumstances, the Treasury issues government securities (things like bonds that give the gov't cash that must be repaid with interest at a later date) which count against the debt limit to state and local governments so that they can properly invest the proceeds of tax exempt bonds. The federal government is under no obligation to issue those securities, and by not doing so it slows down the rate at which it accumulates debt, usually by $4 to $17 billion monthly.
• G Fund: This government account is invested entirely in securities that mature in one day before being reinvested as part of the Federal Employees’ Retirement System Thrift Savings Plan. Congress has given the Treasury the ability to stop reinvesting if doing so would exceed the debt limit. This doesn’t actually impact federal employee’s investments, which are protected because the G Fund is made whole plus interest once the debt limit impasse ends. The G Fund’s balance is around $150 billion.
• Exchange Stabilization Fund: Much like the G Fund, the Exchange Stabilization Fund (ESF) account is invested entirely in one-day securities in order to allow the Treasury to buy or sell foreign currencies. The Treasury isn’t required to invest the ESF, so it can stop investing its balance of U.S. dollars — about $22 billion — at its discretion.
• Civil Service Retirement and Disability Fund: This is one of the largest federal pension funds, and by declaring a "debt issuance suspension period," the Treasury is able to redeem existing investments in the fund and stop making new investments. That can only occur once the Treasury has determined that continuing normal operations would cause the debt limit to be exceeded. Benefit payments would continue to go out as normal as long as extraordinary measures haven’t been exhausted, and once the debt limit is raised the CSRDF is required to be made whole with all money being returned with interest.

How will Congress raise the debt limit?

• It’s unclear how Congress will go about raising the debt limit on this occasion. The most recent debt limit suspension occurred with the adoption of the Bipartisan Budget Act in 2019 and ran through July 31, 2021. 
• Democrats could attach an increase of the debt limit to the upcoming budget resolution with reconciliation instructions for their $3.5 trillion infrastructure package, enabling them to pass it along party-lines. 
• Alternatively, they may pursue a debt limit hike in a standalone package, which could set up a showdown with Republicans who would have to provide at least 10 votes in the Senate to allow its passage. 
• Senate Republicans have said they don’t intend to support Democrats in a standalone debt limit increase, and encouraged them to include the debt limit hike in their budget resolution for reconciliation that will be enacted ahead of Democrats’ $3.5 trillion infrastructure package.
• Another possible path to the enactment of a debt limit increase could come when Congress confronts the prospect of a government shutdown at the end of September. None of the 12 annual appropriations bills to fund the government in fiscal year 2022, which begins October 1st, have been enacted and with Congress focused on the two-track infrastructure process it’s likely that lawmakers will need to turn to yet another continuing resolution (CR) to avert a shutdown. A CR would also require bipartisan buy-in in the Senate to avoid a shutdown.
• The debt limit has been raised by Congress 79 times since 1960, in which time the national debt has grown from $286 billion to more than $28 trillion today.
• The U.S. ran the largest budget deficit in history in FY2020 at more than $3.1 trillion amid increased spending due to the coronavirus (COVID-19) pandemic, which the CBO has projected may be equaled or exceeded in FY2021 based on spending trends.

— Eric Revell

(Photo Credit: iStock.com / Douglas Rissing)