Federal budget uncertainty continues

The federal government last month reached its debt limit, meaning the U.S. Treasury was no longer authorized to make payments on the nation’s debts.

This limit was also reached earlier in the year, and at that time Congress authorized a temporary suspension – which expired on May 19 – to allow time for the negotiation of new spending and taxation policies. Congress was unable to negotiate a plan, however, prior to the expiration of the temporary suspension.

In order for the government to remain operational, the federal Treasury stopped issuing State and Local Government Series securities, which are bought by state and local governments that are restructuring municipal bond deals. The Treasury’s action is part of a financial process termed “extraordinary cash management measures,” which will allow the Treasury to continue making debt payments until September or later, depending upon the level of incoming federal revenues.

Come fall, however, the federal government will once again contend with raising the debt limit. If Congress does not raise the debt limit and exhausts all extraordinary measures, the Treasury risks defaulting on the nation’s debt and obligations, including Social Security payments and military salaries. This could create the need for a temporary government shutdown.

Earlier in the month, the House passed the Full Faith and Credit Act, which would empower the Treasury to pay down all interest payments on the national debt in the event of another impasse over raising the debt ceiling. The bill would also ensure that the Social Security Administration could access its own trust fund to pay Social Security benefits and disability payments on time. The Obama administration contends, however, that the nation would be in default if it fails to pay any of its bills.

As the debt limit was reached, members of Congress continued to debate the federal budget impasse, the potential for a tax reform package this session, and the sequestration process.

A bipartisan bill was filed in the Senate that would give federal agency heads more flexibility in how they implement the budget cuts mandated by sequestration, the across-the-board reductions required under the 2011 Budget Control Act that took effect at the beginning of March. Several bills have been filed that would exempt or mitigate the effects of sequestration on specific agencies, programs or industries; so far, two have passed and been enacted, relative to the Federal Aviation Administration and food safety inspectors.

Federal agencies continue to implement the sequestration on independent timelines, and cuts will total $85 billion during the current fiscal year.