Debt ceiling talks: What failure would mean for you

By STEPHEN LOSEY

Congress' potential failure to raise the debt ceiling by Aug. 2 would set off a mad scramble as agencies struggle to prioritize payments and try to avoid defaulting on the United States' debt.
Nobody knows exactly what might happen, since the federal government has always raised the debt ceiling in the past. But federal employees and retirees are almost certain to be losers.
If no deal is struck by then, some agencies may be shut down, at least partially. Federal employees and military service members would not receive their paychecks, even if they had to stay on the job.
And President Obama said in an interview last week that he could not guarantee Social Security checks would go out if the debt limit is reached. Social Security checks are paid on successive Wednesdays of each month.
After the Aug. 2 debt ceiling deadline, the first wave of 25 million Social Security and disability checks — with a combined value of $23 billion — is scheduled to go out on Aug. 3.
If Social Security checks don't go out, federal retirees' pension checks probably wouldn't go out either. But those would be affected only if the crisis continues through Sept. 1, when those annuity checks are scheduled to go out.
"The choices would not be pretty," said Jay Powell, who was former President George H.W. Bush's undersecretary of Treasury for finance and a visiting scholar at the Bipartisan Policy Center.
The center said June 28 that if the $14.3 trillion debt ceiling isn't raised, the government would have to slash spending on the government's 80 million monthly bills by up to 44 percent to stay under the limit.
But the results would be chaotic. The pace of incoming money — about $172 billion in taxes, fees and other revenues in the remainder of August — doesn't match up well with the nearly $307 billion in capital outflows for the rest of August, and the results would be "lumpy," the center said in its analysis.
The government could choose to pay interest on Treasury securities, Social Security, Medicare and Medicaid, unemployment insurance and defense contractors, BPC said. But that would leave no money to fund the Education, Labor, Justice and Energy departments, Federal Highway Administration, Environmental Protection Agency, the Small Business Administration, tax refunds and veterans programs.
Under another scenario laid out by the Bipartisan Policy Center, the government could try to protect the so-called social safety net by leaving defense contractors unpaid and instead spend on food stamps, housing assistance, veterans programs, special education grants and tuition assistance. But that would still leave large portions of the government — including the FBI, Interior, and Centers for Disease Control and Prevention — shuttered.
Federal salaries and benefits? Forget about it. In the center's list of priorities, feds don't come close to getting paid in either scenario.
Deputy Defense Secretary William Lynn said last week that if the government doesn't raise the ceiling, Treasury would call the shots on how agencies — even Defense — would spend what money is left.
"DoD wouldn't be given an allocation, and decide how to spend it," Lynn said in a July 13 interview with Defense News, a sister publication of Federal Times. "Treasury makes the decisions on how to deal with this on a governmentwide basis."
Lynn said Defense has had no discussions with Treasury on how to prioritize payments if the debt ceiling isn't raised. He said the government must find some way to raise the ceiling and avoid a default.
"The default is inconceivable," Lynn said. "It's unprecedented, and I think the results would be catastrophic."
The Congressional Research Service said in a June 3 report, "Reaching the Debt Limit: Background and Potential Effects on Government Operations," that the government would incur interest penalties by delaying contractor payments and tax refunds.
James Horney, vice president for federal fiscal policy at the Center on Budget and Policy Priorities, said the prospect of the government reaching its debt limit and risking default is unimaginable, and it is impossible to predict exactly what would happen.
"It's so out of touch with what has happened in the past and what should happen, I don't know how you would think rationally about it," Horney said. "If the government is not able to meet half of the payments it's meant to be making, it's hard to imagine how disruptive it would be, and how it would play out."
Horney said the government might not have to shut down agencies right away, since a failure to reach the debt ceiling is different from a lapse in appropriations, like the one narrowly averted this spring that would have forced a government shutdown.
Agencies could conceivably choose to stay open and just not pay their bills, Horney said. But some may instead furlough employees and close up shop to avoid that. If the debt ceiling isn't raised, the likelihood of agency shutdowns would greatly increase, he said.
"No one knows, because we've not been in this situation before," Horney said.

Welcoming a showdown

Although Obama and many congressional leaders insisted the government must find some way to agree on a debt ceiling increase, some lawmakers downplayed the effect of the government reaching the debt limit — and appeared to welcome it.
Rep. Dennis Ross, R-Fla., chairman of the House federal workforce subcommittee, said in a column in the Ledger newspaper in Lakeland, Fla., that the government wouldn't suffer by not raising the debt ceiling, and turning the duties of many shuttered agencies over to the states.
"Granted, the departments of Education, Labor, Commerce and other bureaucracies that have enjoyed double-digit budget increases the past 10 years will have to shut down," Ross wrote. "But this is where our differences truly materialize. I believe that states such as Florida can educate our kids, ensure a safe workplace, promote our products and are closest to the people. What our debt ceiling crisis demonstrates is that there are people, like me, who believe the federal government is limited in scope and ability."
Horney called Ross' suggestion a terrible idea, and one that misstates the problem the government is facing.
"What this is about is if we pay for the things we've already obligated," Horney said. "It's not just shutting down an agency. It's that we can't make payments for things that agencies have purchased and promised to pay for."
This would have a devastating impact on the U.S. image around the world as a stable nation that can pay its debts — one that would take decades to recover from, Horney said.
And Horney said federal agencies such as Education can't simply be shuttered without hurting states that often rely on their grants and assistance.

Crumbling negotiations

Negotiations over the debt ceiling further crumbled last week. Republican lawmakers insisted that a $2.5 trillion increase in the debt ceiling — which would last until early 2013 — must be offset by spending reductions.
Obama floated a $4 trillion, 10-year deficit-reduction package that contained almost $1 trillion in tax increases. Republican lawmakers — primarily Rep. Eric Cantor of Virginia, struck a hard line rejecting any revenue increases.
In a July 15 press conference, Obama said that Republican proposals to cut the deficit by $2.4 trillion through spending cuts alone would be burdensome, and would hurt federal workers and military veterans.
"If you're trying to get to $2.4 trillion without any revenue, then you are effectively gutting a bunch of domestic spending," Obama said. "You're then at that point taking a big bite out of programs that are important to ordinary folks. Students are accumulating thousands of dollars more in student loan debt. Federal workers and veterans are potentially having to pay more in terms of their health benefits."
Obama said he's willing to make more than $1 trillion in cuts to defense and domestic spending, which would require a decade of frozen spending for many programs. Those programs would not get inflationary increases, which would effectively mean a 10 percent cut in domestic spending over 10 years, Obama said.
"If we're serious about this, we can fix it for a decade or more," Obama said.
Senate Minority Leader Mitch McConnell, R-Ky., proposed a complicated plan to raise the debt ceiling in stages without requiring Republicans to vote for it. Under this plan, Obama would request an increase, and Congress would pass a bill disapproving it. Obama would then veto the bill, and if the veto cannot be overturned by Congress, the debt ceiling would be automatically raised.
Democratic leaders expressed interest in McConnell's plan, but rank-and-file Republicans denounced anything that allows a debt ceiling increase without significant spending cuts.