National Conference on Public Employee Retirement Systems

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Beyond the X Date: Options for the U.S. Treasury

While drama has surrounded some previous debt limit debates, experts point to the unpredictability of today's House Republican majority as the new dynamic that could lead to a default this year, which would be an unprecedented event in American history.

By Tony Roda, Williams & Jensen

U.S. Treasury Secretary Janet Yellin has notified Congress that the Treasury Department will be unable to make payments on its obligations sometime in early June, possibly as soon as June 1. This “X Date” as it is now known is the date on which Treasury will have exhausted its borrowing authority as well as the extraordinary measures it has taken to delay default.
X Dates have been approached before, but each time Congress has met the deadline and increased the debt limit. While drama has surrounded some previous debt limit debates, experts point to the unpredictability of today's House Republican majority as the new dynamic that could lead to a default this year, which would be an unprecedented event in American history.
The Bipartisan Policy Center (BPC), a think tank established by former Republican and Democratic lawmakers, recently released a paper entitled, Debt Limit Analysis, which discusses options Treasury may have if the X Date is reached. The paper says that, upon default, the Treasury might be forced to either (1) prioritize payments or (2) make full days' worth of payments once it receives sufficient revenue to cover all of a days' obligations. Neither approach forestalls default. The U.S. government would be in default for the first time. The options simply allow the Treasury to pay some of the nation's bills, while a more permanent solution is negotiated. Also, no one is suggesting the options are responsible alternatives to increasing the overall borrowing authority.
Regarding prioritization, the paper says that the Treasury Department and the New York Federal Reserve likely have the technological capability to prioritize principal and interest payments on Treasury securities while delaying other payments. However, prioritizing among the hundreds of millions of other payments would quickly become chaotic, raising questions of fairness, and leading to market uncertainty and litigation. Is it even possible to prioritize payments other than principal and interest? Most experts say it would require a massive overhaul and reprogramming of Treasury's computerized payment operations, which may not be possible in the near term.
Under the second approach described in the BPC's paper (full days' option), Treasury would wait until enough revenue is deposited to cover an entire day's payments, and then make all those payments at once. In a 2012 report by the Office of Inspector General, some senior Treasury officials said this would be the most plausible and least harmful approach. Among the hundreds of millions of payments due on June 1 are major payments for Medicare ($47 billion), military and civil service retirement ($12 billion), and veterans' benefits ($12 billion). On June 2, among other payments, Treasury is due to pay $25 billion to Social Security and $2 billion to Medicaid.
Until Treasury reaches the X Date, we are not yet in uncharted waters. In recent days, there appears to be more room for optimism. President Biden and Congressional Republicans are negotiating on the key spending areas, such as imposing new overall spending caps, and rescinding unspent COVID funds. They are also discussing key policy areas, such as expediting the process for energy project permitting, and enhancing work requirements for federal benefit programs.
While President Biden said he would not allow legislation to raise the debt limit to be held hostage to unrelated federal spending and policy matters, it now appears that the two sets of negotiations are proceeding on a parallel track. The next few days will determine whether enough progress can be made in the negotiations for Congress and the President to enact both a debt limit increase and a package of spending and policy changes prior to the X Date or whether a short-term suspension of the debt limit will be necessary.
Tony Roda is a partner at the Washington, D.C. law and lobbying firm Williams & Jensen, where he specializes in legislative, regulatory, and fiduciary matters affecting state and local pension plans. He represents the National Conference on Public Employee Retirement Systems and state-wide, county, and municipal pension plans in California, Colorado, Georgia, Kentucky, Ohio, Tennessee, and Texas. He has an undergraduate degree in government and politics from the University of Maryland, J.D. from the Catholic University of America, and LL.M (tax law) from the Georgetown University Law Center.


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