Congressman Richard Nugent

Representing the 11th District of Florida

SITREP - October 15th, 2013 - Debt Ceiling Mechanics Explained

Oct 15, 2013

With everything going on this week, I want to take a moment to give you the background you need on two things:  First, I want to try to explain exactly what the debt ceiling is, what the deadline of October 17th means, and what the practical implications are – for better or worse.  Second, I want to give you the best insight I can as to where things stand in the negotiations.

First, the debt ceiling.  Here’s what you need to know…

When people talk about the government’s finances, it’s almost always on an annualized basis – how much will we spend this year versus how much will we take in?  When we get close to the debt ceiling date though, it stops being an annualized discussion and turns into a daily question:  How much cash will we bring in on Thursday and how much are we scheduled to pay out on Thursday.  There’s no cushion because we have no savings to fall back on.

It works almost exactly same way as any normal checking account does (with a couple of important differences).

It’s similar in that most people don’t get paid their yearly salary all on one day and then have all of their bills for the year due on one day.  Most individuals get paid on a specific day every month and their bills fall on a specific day every month.  The cable bill might be due on the 17th and the water bill on the 12th and so on.

That’s more or less how it works for the federal government as well.

Revenue comes into the federal government each month and the bills are paid each month.  Social Security checks, for instance, go out on the second, third, and fourth Wednesdays of each month.

Where the federal government’s “checking account” gets a little more complicated is that neither the monthly income nor the monthly bills stays steady from month-to-month.  In May, for instance, when most people have just paid their taxes, the government’s monthly cash income shoots up to about $400 billion or so for that particular month.  Then, after filing season, the monthly cash income drops back to somewhere in the $100 to $200 billion range (which is more or less where it is during most months of the year).

October is typically a relatively slow month for incoming revenue.  Last year, November was the only month in which less cash was deposited in the federal treasury.  That’s the income side getting deposited into the federal checking account. It changes daily.

The monthly bills also fluctuate pretty wildly.  The total amount of Social Security checks going out each month remains pretty steady throughout the year, but the interest we pay on the debt, for instance, tends to fluctuate all over the place.  It depends hugely on when certain bonds mature and things like that. 

Some months (like Oct, 2012) we owed $13 billion in interest and the next month, (Nov, 2012) we owed $25 billion. In December 2012, the monthly interest outlays shot up to $95 billion and then dropped back down again in January.  It all depends on how the bills fall.

The point of all of this (in terms of cash in a checking account) is that when the government cannot legally borrow another nickel, all it has to work with is the cash in its checking account.  The wild fluctuations in income and outlays makes that complicated

As of today, the federal checking account has about $30 billion left in its checking account.  On Wednesday, Social Security checks are scheduled to go out.  On Thursday, the government won’t have much, if any, borrowing authority left and will be running very low on cash.  It will then have to manage the daily account balances to keep from bouncing checks.  The way it works is that if the government happens to come up short on a Monday, it may need to wait until more cash comes in on Tuesday or Wednesday before it can pay Monday’s bills.  That will be the new situation.

Based on the best estimates we have, the federal government should take in enough cash this month to pay for about 70% of our bills.  Next month, because revenue and expenses vary, maybe it can cover 69% and the following month maybe 71%.  I’m just throwing those numbers out there - it all depends on how the month’s revenue and bills fall.

In either case, after Thursday, the Treasury will not be able to cover any of the government’s bills with credit.  On the surface, that sounds like a great thing – no more debt.  That’s fantastic.  To people on the other side, not raising the debt ceiling sounds like it will usher in Armageddon.  The truth is almost certainly somewhere in the middle – the debt will stop growing (that’s great), but not all of our bills (even the ones we all really like) will necessarily get paid on time (and roughly a third, not at all)

For the year, Medicare & Medicaid plus Social Security (and other pension obligations), plus defense, plus VA, plus interest adds up to more than 75% of our budget.  Absent a resolution on the debt ceiling, we can’t cover all of those payments (never mind anything else).  So setting aside the question of [completely] shutting down the FBI, the Department of Transportation, food stamps, and so on, we’ll have to make some decisions about what to pay (and not pay) to get us down from 75% to the 70% number which we can cover with cash this month. That’s the math on month-to-month basis.

Going forward, we will have enough revenue coming in to pay the interest on the debt. Technically (and this matters a lot), we won’t default on our debt.  We will also have enough cash coming in to pay Social Security and the troops and Medicare and so on, it just may not be on time.

And that’s where things get hairy - trying to make sure that the checks can go out on the day they are supposed to go out.  I’m not going to lie to you about that.  Without an agreement, the Treasury Department’s ability to get the October 23rd Social Security checks out on schedule will depend entirely on how much cash they have in their checking account on that particular day.  According to the cash estimates, next Wednesday’s Social Security checks should be fine.  Same with the next scheduled bond payment on October 31st.  We should be ok, but those are huge single-day bills to pay.  The experts’ best guess is that the government will be OK in terms of cash on hand until around November 1st.  After that, the Wednesday checks might go out on Wednesday as scheduled.  Then again, they might not.  That’s the nature of a post-debt ceiling world.

It’s hard to predict what exactly will happen or how bad (or not) it will be.  In our country’s history, the debt ceiling has never actually been breached.  We simply don’t know and frankly, it’s not something I think we really want to find out.  Uncertainty is never, ever good for the economy.

So, what’s the bottom line in all of this?  The bottom line is that Congress and the President are going to have to get serious about our annual deficits.  We can’t keep borrowing hundreds and hundreds of billions of dollars every year with no end in sight. But the likelihood that we figure that out before Thursday is pretty slim.  Nobody is budging.

My personal belief is that this country needs a Balanced Budget Amendment to the Constitution to force the same annual discipline that states, businesses, and families must live by.  I personally brought such a measure to the House floor.  And with a Balanced Budget Amendment, we need to be planning annually to make sure we meet that target. That’s my personal belief.  But for those who see the debt ceiling as a de facto Balanced Budget Amendment, it’s important to understand mechanically what that means.

My objective here is not to tell you what you should think.  My objective is to give you the facts that the media doesn’t have time to report so that you can make an informed opinion.

For me personally, I think the country is best served by responsible forward planning and proactive measures to control the debt.  I do not think the country is well-served by chaos, brinksmanship, and last minute deals and failures.  But that’s where we are now and what we decide to do with that matters a great deal.

The House has sent reasonable offers to the Democrats.  Last week, for instance, the House leadership offered to extend the deadline by 6 weeks to provide an opportunity to reach a proactive budget solution.  That offer was rejected (Senate Democrats want a year extension, no reforms and President Obama said he would ask for tax increases on top of what he got last year).  Also over the weekend, Senator Susan Collins (very moderate Republican from Maine) tried to broker a compromise in the Senate that would carry the country till January.  Despite pulling Democrat support, Harry Reid rejected that too. The biggest negotiations right now are between Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell.  They didn’t have a agreement yesterday and they’re back at it today.

As I write this, I have no idea how things will shake out by Thursday.  If we wake up Friday morning with no resolution, the sun will still rise in the East, but we will be in decidedly uncharted territory.  It will get messy to be sure, especially if it drags on for another couple of weeks.  Congress’ inability to set long term fiscal policy will have devolved into managing the governments finances on a day-to-day basis.  That uncertainty will cost jobs (and money).  It’s important that we’re honest about that.

To be clear, I don’t think we should be running these massive deficits.  It is a threat to national security.  I believe we should have a balanced budget.  I couldn’t be more adamant about that. But the reality is that whenever Congress and the President fail to deliver a balanced budget, it means we run deficits.  And when we run deficits, it means the Treasury Department has to go out and borrow cash to cover the monthly deficits. We can’t run the government a few weeks or a few days at a time.  No family or business could function like that.

Beyond that, it’s a question of what Congress is going to do to fix the problem.  I don’t care whose fault it is, what Congress and the President are doing now simply isn’t a responsible way to manage the people’s money.  So my job is to keep doing everything I can in the meantime to convince my colleagues to find a solution that everybody can agree on.  My hope is that of the reasonable options that have been presented, one of them will be able to pass.  I just can’t promise that’s the case.

It is a sad time for this country and the sorriest part of it all is that with a little leadership from both sides, it could’ve been just the opposite.  The Democrats and Republicans have been close to a long-term agreement on a number of occasions.  The House has passed budget plans that will lead to a balanced budget.  I’m sure with a little effort, the Democrats could do the same.  The point is, there are ways to solve this problem.  With the economy slowly recovering, I think the country (and its finances) would be in a dramatically better place if the two sides could reach a long-term budget solution that would end this unsustainable spending and put the country on a path to long term success.  Unfortunately, we’re stuck simply trying to figure out how to get the country on a path to next week.  It’s a far cry between the two. 

As we move through the next few days, I will keep you posted as things develop.  Please stay engaged during this period.  All of your leaders in Washington need to be hearing from you – the President, your senators, and myself included.