Prioritization Of Payments: Would They? Could They?
One of the most frequent questions related to the debt limit is whether the Treasury could prioritize payments in order to remain below the debt limit while continuing to make what it deems to be essential payments. As Goldman explains below, technical complexities and legal uncertainties might prevent a full prioritization of all payments, but they do believe (trillion-dollar-coin idiocy aside) that the Treasury could ensure that enough cash is available to make interest payments on Treasury securities.
Via Goldman Sachs,
There are two sources of uncertainty about the Treasury’s ability to prioritize spending:
Legal authority: Some have argued that the Treasury’s authority to prioritize payments is unclear. This is obviously a complex legal question that we cannot answer. We can, however, point to past precedents. Ahead of the 1985 debt limit increase, the GAO advised the Senate Finance Committee that the Treasury had the authority to choose the order in which to pay obligations. Whether this opinion still holds today is uncertain, since the legal justification at the time was not specified and the effect of legislation enacted since then is unclear.
Prioritization did occur previously, following expiration of a temporary increase in the debt limit on July 1, 1957. As the federal government began to run a budget deficit that year, the Treasury was forced to delay payments to federal contractors in order to avoid breaching the limit.4 More recently, as the debt limit approached in early 1996, the Treasury indicated that failure to raise the debt limit would result in failure to make Social Security payments. The result was that Congress provided authority specifically to issue debt to fund Social Security payments, as an interim step prior to passage of the debt limit hike.
Technical considerations. The Treasury’s position on prioritization is that its systems are designed to pay all obligations as they are due, and do not allow the Treasury to set a priority of payments to pay some obligations and not others. Considering that the Treasury makes around 4 million payments per day,
this is not hard to believe. Even if full prioritization across all
payments were possible, it seems unlikely to work smoothly in practice.
While these challenges might prevent prioritization of each Treasury payment - i.e., it might be impossible to pay entitlement benefits before defense contractors - we would expect that if it became necessary, the Treasury would still find a way to separate principal and interest payments from the rest. It is worth noting that those principal and interest payments, unlike other Treasury payments, are made through the Fedwire system, which could allow easier segregation from other outlays.
Other Creative Ideas Might Be Considered
In the event that the Treasury deems prioritization of interest payments impossible or illegal, a few other options might be considered.
Make payments in arrears. According to a 2012 Treasury Inspector General report, the Treasury considered in 2011 whether to cease making all payments for a given day until enough tax revenue had been received to cover a full day’s worth of payments. At that point, the Treasury would make that particular day’s worth of payments, and then cease payments again until adequate cash had arrived for the following day. While this plan might work in theory, the practical problem is that on November 1, the payments the Treasury must make are so large that the Treasury would already be nearly a week in arrears after the first day it has depleted its cash (Exhibit 4). So while this sort of strategy might be employed, the practical effect in early November would probably be indistinguishable from a decision to cease payments entirely.
Extend the “Debt Issuance Suspension Period.” One source of potential additional headroom under the debt limit would be for the Treasury to declare a longer “debt issuance suspension period” (DISP). Following ad hoc actions taken during the 1980s debt limit debates, Congress established specific rules around what sort of “extraordinary measures” the Treasury could take to conserve headroom under the debt limit. This particular provision of law allows the Treasury to disinvest intragovernmental debt - this is counted toward the debt limit—from the Civil Service Retirement and Disability Fund (CSRDF) in an amount equal to the expected benefit payments from that fund over the course of the DISP. The upshot is that with each additional month of DISP that the Treasury declares, more benefits would be estimated to be payable during that period, meaning more intragovernmental debt could be disinvested, which would result in more headroom under the limit. However, the law is not very prescriptive regarding how the duration of the DISP should be estimated. The Treasury under the Obama administration has interpreted this authority conservatively, and the current DISP runs only through October 17, 2013. However, if the Treasury had no other options, it is possible that it could opt to extend the DISP for a longer period. For example, the Treasury in late 1995 announced a 12-month DISP. Monthly benefits run at about $6.4bn per month, so if this were done again it could provide as much as $75bn to $80bn in additional headroom under the limit. Of course, the Treasury is unlikely to want to provide Congress with any additional motivation to delay the increase in the debt limit, so in our view the Treasury might only consider such an approach in the event that an interest or principal payment on a Treasury security were at risk.
In addition, there are several less plausible theoretical ways in which Treasury could raise more cash than it “costs” them in terms of room under the debt limit. For one, Treasury could issue very high coupon debt would be auctioned at a premium to face value. (In contrast, Treasury normally auctions coupon securities at a very slight discount to face value.) Under this scenario, Treasury would essentially be swapping an out-sized up-front cash flow for a promise to pay above-market coupons in the future.
Alternatively, given that some debt auctioned in recent years is now trading at a discount to par (in light of the rise in interest rates since early May), it is possible that Treasury could raise cash to buy back debt trading at a discount, retiring a greater amount of par value than the amount raised. However, the amount of money that could be raised under this scenario is limited.
Some readers may notice that other oft-discussed ideas such as invoking the 14th amendment, minting a platinum coin, or selling government assets are absent from our list. Our view is that while one cannot rule out any particular approach if a crisis develops, the Treasury has ruled these out on numerous occasions and there is little reason to expect that the Treasury would pursue them any further. They also come with serious risks. There are legal questions surrounding the constitutional and platinum coin strategy. For example, if the 14th amendment strategy were challenged, holders of Treasury securities would ultimately depend on the courts to ensure their validity.
The platinum coin strategy and asset sales face practical constraints. The platinum coin strategy, while intriguing, would have significant implications for the Fed’s balance sheet and could call into question the independence of the Federal Reserve, which would have to accept it in order for the strategy to work (the Fed and the Treasury have both publicly rejected the approach).9 The Treasury could potentially sell assets like gold reserves or the student loans it holds, but as a practical matter this is also unworkable. Not only would such sales send a troubling message to the markets and the public, but they would take quite a bit of lead time to arrange. By contrast, asset sales would presumably only be considered in exigent circumstances when there would be little time to structure a transaction.
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