A Binding Debt Limit: Background and Possible Consequences

A Binding Debt Limit: Background and Possible Consequences

October 4, 2024

Congressional Research Service

https://crsreports.congress.gov

R48209

Congressional Research Service

SUMMARY

A Binding Debt Limit: Background and Possible Consequences

In September 2024, gross federal debt was about $35.3 trillion. Debt limit episodes have been a recurring feature of federal fiscal policy since 2001, when federal budget deficits returned after four years of surpluses. The main statutory debt limit covers nearly all—99.9%—of federal debt. Persistent federal deficits imply that federal debt and its statutory limit will remain a recurrent issue for Congress. The Fiscal Responsibility Act (P.L. 118-5) suspended the debt limit through January 1, 2025. The following day, the limit will be reset.

When the Treasury Secretary cannot issue special Treasury securities to certain federal retirement accounts, she may invoke statutory authorities to use extraordinary measures. The U.S. Treasury’s headroom under the debt limit—meaning remaining borrowing capacity, extraordinary measures, and cash balances—has usually allowed it to meet federal obligations for several months after the invocation of those authorities. Extraordinary measures essentially convert debt subject to the statutory limit into implicit IOUs that are not subject to the limit. After the 1985 debt limit episode, a 1986 law formalized those authorities.

During the 1995-1996, 2011, and 2013 episodes, the prospect that Treasury’s headroom could be exhausted—resulting in a binding debt limit—and that Treasury would be left unable to pay all of its obligations on time caused serious concerns in financial markets. This report analyzes possible consequences of a binding debt limit and possible policy options. A binding debt limit is distinct from an appropriations lapse that would leave federal agencies without the legal authority to commit funds to carry out their operations. If cash balances and funds available through extraordinary measures were exhausted, then the debt limit would bind. Treasury could then no longer issue new federal debt nor pay all federal obligations on time. Some state governments have delayed payments when under extreme fiscal pressure. Payment delays impose involuntary borrowing upon creditors, contractors, grantees, and others. Past Treasury officials expressed doubt that federal financial operations could transition to a regime of payment delays.

During the 2011 and 2013 debt limit episodes, Treasury, Federal Reserve, and other federal financial regulatory officials engaged in contingency planning exercises to simulate operations and decisionmaking during a binding debt limit event. Federal Reserve officials also developed draft circulars and draft communications that might have been deployed. Some communications from Treasury officials stressed that principal and interest payments on federal securities would be paid. CRS, however, is not aware of evidence that Treasury or White House officials have approved contingency plans or the official issuance of action plans to prioritize certain payments. Financial organizations have also explored such scenarios.

An Administration may possess some fiscal tools to delay or prioritize federal outlays during times of extreme fiscal stress, such as a binding debt limit. The Impoundment Control Act of 1974 (ICA; P.L. 93-344) authorizes the President, the Office of Management and Budget (OMB), or an agency head to impound—that is, to preclude obligation or expenditure of budget authority in some circumstances. For instance, deferral—the temporary withholding or delaying of the obligation or expenditure of budget authority—is one form of impoundment that might slow the pace of federal outlays. The ICA, among other restrictions, generally bars the use of discretion to effect “policy” impoundments. OMB’s process of apportionment— the release of budget authority to federal agencies—also might help delay or prioritize spending. During the 1995 debt limit episode, the Clinton Administration reviewed legal authorities to use these budgetary tools, but reached no firm conclusions.

A binding debt limit that led to federal payment delays or failures to pay principal and interest on Treasury securities could disrupt financial markets, which in turn could affect economic activity more broadly. Treasury securities play a central role in repo lending, which major financial institutions use to reallocate liquidity. Repo—short for repurchase agreements—was a key transmission channel of financial stress during the 2007-2009 financial crisis. Some economists estimate that payment delays caused by a binding debt limit would seriously damage the financial markets and the U.S. economy.

The definition of a federal default has become contentious. Some have suggested that Treasury could avoid default by prioritizing some payments and delaying others. Others contended that such a strategy would raise serious legal and operational difficulties. Members have introduced several bills over the past decade to prioritize some categories of federal spending during a binding debt limit event. Other proposals would change the structure of the debt limit or eliminate it completely. Some would allow the President to raise the debt limit, subject to a resolution of disapproval. In any case, Article I of the Constitution, which establishes the legislative power of the purse, places the ultimate responsibility for maintaining the federal government’s creditworthiness in Congress’s hands.

R48209

October 4, 2024

D. Andrew Austin Analyst in Economic Policy

A Binding Debt Limit: Background and Possible Consequences

Congressional Research Service

Contents

Introduction ..................................................................................................................................... 1

Some Definitions ....................................................................................................................... 1

The Structure of Federal Debt ................................................................................................... 2

Intragovernmental Debt ...................................................................................................... 6 Debt Held by the Public ...................................................................................................... 6

Trust Fund Programs that Run Surpluses Lend to the Treasury ......................................... 6

Debt and Cash Management ..................................................................................................... 7

Day-to-Day Treasury Operations ........................................................................................ 7

Structuring Federal Debt to Minimize Debt Service Costs ................................................. 7

Fluctuations in Federal Revenues and Outlays ................................................................... 8 How Much Cash Does Treasury Need? .............................................................................. 8 Suspensions and Limits on Treasury Cash Balances ........................................................ 10

Debt Management During Debt Limit Episodes ............................................................................ 11

Treasury Secretary’s Power to Use Extraordinary Measures .................................................. 12

Federal Retirement Funds Comprise Bulk of Extraordinary Measures ............................ 12 Other Extraordinary Measures .......................................................................................... 12

Debt Limit Could Hinder Treasury Operations ....................................................................... 13

Debt Limit Could Present Treasury with Conflicting Mandates ............................................. 14

Treasury Actions in Select Debt Limit Episodes ........................................................................... 14

Actions in 1985 ....................................................................................................................... 15 Actions in 1995-1996 .............................................................................................................. 16

Actions in 2011 ....................................................................................................................... 17 Actions in 2013 ....................................................................................................................... 18 Actions in 2021 and 2023 ....................................................................................................... 19 Observations from Past Actions .............................................................................................. 19

Government Operations and a Binding Debt Limit....................................................................... 20

Debt Limit Episodes and Lapses in Appropriations Are Distinct ........................................... 22 Could Treasury Prioritize Payments? ...................................................................................... 22

Federal Reserve System and Treasury Responsibilities Differ ......................................... 23 No Overdrafts at the Federal Reserve for Treasury .......................................................... 23 Does Treasury Have Authority to Prioritize? .................................................................... 25

Could Treasury Prioritize Payments If It Had Authority? ................................................. 26

Treasury and Federal Reserve Contingency Planning ............................................................. 28

Contingency Planning at the Federal Reserve Open Market Committee ......................... 29 Emergency FOMC Meeting in August 2011..................................................................... 30 Joint Treasury and Federal Reserve Exercises .................................................................. 31

Treasury and Federal Reserve Communications During 2013 ......................................... 31 Extending Maturities Seen As Most Likely Option If Debt Limit Binds ......................... 32

Administrative Measures ........................................................................................................ 33

Impoundment and Prioritization ....................................................................................... 33 Could OMB Use Apportionment to Prioritize Payments? ................................................ 34

Potential Effect on Federal Operations and Costs Borne by Others ....................................... 35

Payment Delays Are a Form of Borrowing from Creditors and Beneficiaries ................. 35 Potential Effects on Programs Linked to Trust Funds ...................................................... 36

The Definition of Federal Default Is Contested ............................................................................ 37

What Is Default? ..................................................................................................................... 37

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Congressional Research Service

Credit Rating Agencies Have Their Own Definitions of Default ............................................ 38

Treasury Securities Carry No Contractual Definition of Default ............................................ 38

Views on Prioritization and Default ........................................................................................ 39

Debt Policy Debates in 2011 ............................................................................................. 39

Divergent Views on Default in 2015 Markup of Prioritization Legislation ...................... 40

Potential Economic and Financial Effects ..................................................................................... 40

The Debt Limit and Possible Financial Contagion ................................................................. 41

Treasury Market Turmoil and Structural Changes ............................................................ 42

Credit Ratings for the U.S. Government ................................................................................. 43 Credit Default Swap Prices As a Default Probability Indicator .............................................. 44

CDS Prices Rose During the 2011 Debt Limit Episode.................................................... 45

Repo Lending and Shadow Banking ....................................................................................... 47

Repo Lending and the Debt Limit .................................................................................... 47 Possible Federal Reserve and Treasury Responses ........................................................... 48

Have Debt Limit Episodes Raised Federal Borrowing Costs? ................................................ 49

Debt Limit Episodes and Prices of Treasury Securities .................................................... 50

Debt Limit Policy Discussions ...................................................................................................... 51

Past Concerns over Need to Act on Debt Limit ...................................................................... 51 Threat to Financial Stability or Fundamental Power of the Purse? ......................................... 52

Checks and Balances and the Public Credit ...................................................................... 53

Debt Limit, Appropriations, and Fiscal Policies Often Bundled ...................................... 54 Debt Limit Harder to Fine-Tune Than Other Fiscal Policy Measures .............................. 55

Legislative Proposals Regarding the Debt Limit .................................................................... 55

Is the Debt Limit Redundant? ........................................................................................... 55 Debt Policy Proposals in 2011 .......................................................................................... 55 House Approved Prioritization Bill in 113th Congress ...................................................... 56

Debt Limit Bills Referred to Committees in 117th Congress ............................................ 56 Debt Limit Bills in the 118th Congress .............................................................................. 57

Figures

Figure 1. Federal Debt, 2006-2024, in $Billions ............................................................................. 3

Figure 2. Federal Debt Linked to Extraordinary Measures, December 2022 .................................. 4

Figure 3. Treasury Cash Balances, October 2008-June 2024 ........................................................ 10

Figure 4. Value of Treasuries Held by Funds Used for Extraordinary Measures .......................... 20 Figure 5. U.S. Credit Default Swap Price and Volume Trends in the 2008 Financial Crisis

and 2011 Debt Limit Episode ..................................................................................................... 46

Figure 6. CDS Prices for Selected Major Economies ................................................................... 47 Figure 7. Yields on Selected Treasury Bills, 2011 and 2013 ......................................................... 50

Appendixes

Appendix. Social Security Trust Fund Cash and Investment Management Practices ................... 58

A Binding Debt Limit: Background and Possible Consequences

Congressional Research Service

Contacts

Author Information ........................................................................................................................ 59

A Binding Debt Limit: Background and Possible Consequences

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Introduction

Over the past few decades, when federal debt has approached its statutory limit and Congress has indicated reluctance to modify, concerns have arisen that the debt limit might hinder the U.S. government’s ability to meet its financial obligations. This report examines the consequences of federal debt reaching its statutory limit.

First, the report explains the federal government’s debt structure, federal debt management, and administrative measures available to policymakers. The report then reviews historical events in which the prospect of a binding debt limit became salient. The report also describes financial tools available to the U.S. Treasury when federal debt is near its limit and what could happen if Treasury exhausted its capacity to issue debt, its cash balances, and resources available through extraordinary measures. The U.S. Treasury would then have to rely on incoming receipts or other sources of funds to meet federal obligations, while delaying at least some payments.1 Payment delays or disruptions of markets in Treasury securities could adversely affect government operations as well as the functioning of financial markets and the economy. Finally, this report briefly considers the future relationship between fiscal policy and the debt limit. An appendix describes interactions of the Social Security trust funds and the Treasury.

The Bipartisan Budget Act of 2019 (BBA 2019; P.L. 116-37; H.R. 3877), enacted on August 2, 2019, suspended the debt limit until July 31, 2021. The limit was raised by $480 billion on October 14, 2021 (P.L. 117-50) and raised again in December 2021 by $2.5 trillion (P.L. 117-73) to its current level of just under $31.4 trillion. The Fiscal Responsibility Act (FRA; P.L. 118-5) suspended the debt limit through January 1, 2025. On the following day, the limit will be reinstated and raised to a level that accommodates the net increase in Treasury debt since enactment of the FRA.2 Following past practice, the Treasury Secretary would then invoke authorities to use extraordinary measures to meet federal obligations.

Some Definitions

Defining terms related to the debt limit in a consistent way can help avoid ambiguity. Key terms are defined below:

• The statutory debt limit (31 U.S.C. §3101) requires that the total face value of debt obligations backed by the U.S. government not exceed an amount set by law. The statutory debt covers about 99.9% of federal debt.3 Debts of a few other

1 U.S. General Accounting Office (now the Government Accountability Office and hereinafter GAO), Debt Ceiling: Analysis of Actions During the 2003 Debt Issuance Suspension Periods, GAO-04-526, May 2004.

2 FRA, §401(b). Also see discussion on the interpretation of this clause in the section below on “Suspensions and Limits on Treasury Cash Balances.”

3 Treasury currently defines “Total Public Debt Subject to Limit” as “the Total Public Debt Outstanding less Unamortized Discount on Treasury Bills and Zero-Coupon Treasury Bonds, old debt issued prior to 1917, and old currency called United States Notes, as well as Debt held by the Federal Financing Bank and Guaranteed Debt.” Approximately 0.1% of total federal debt is not subject to the debt limit. See Office of Management and Budget (OMB), FY2020 Budget, Analytical Perspectives, ch. 4, pp. 36-41. Treasury bills, which have a maturity of a year or less, are sold on a discount basis. When a Treasury bill is issued and sold, the purchase price differs from the face value, that is, the amount redeemed upon maturity. The difference between the purchase price and the face value—the discount—serves as an interest payment to the purchaser. How the debt limit statute accounts for those discounts depends on whether the purchaser can redeem the bill before its maturity.

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federal agencies, such as the Tennessee Valley Authority (TVA) and the Federal Financing Bank (FFB), are subject to separate limits.4

• The debt limit has been suspended several times since 2013. In those cases, a law specifies that the statutory debt will not apply until a given date, when the limit will be reinstated at a level to accommodate borrowing during the suspension.

• The Treasury Secretary can declare a debt issuance suspension period (DISP) by notifying Congress that she has invoked authorities to use extraordinary measures when the debt limit begins to hinder Treasury’s ability to issue debt securities to the Civil Service Retirement and Disability Fund (CSRDF) or the Postal Service Retiree Health Benefit Fund (PSRHBF).5

• The declaration of a DISP is here considered to start a debt limit episode.

• Extraordinary measures give Treasury access to financial resources that add to its headroom under the debt ceiling—defined as unused borrowing capacity, cash balances, and amounts made available through extraordinary measures.6 Extraordinary measures can keep the debt limit from binding for several months.

• The Treasury Secretary has other authorities, such as suspending the issuance of State and Local Government Series securities, using U.S. dollar balances of the Exchange Stabilization Fund (ESF), and exchanging securities with the Federal Financing Bank.

• If Treasury’s headroom were to shrink to zero, it would face a binding debt limit.

The Structure of Federal Debt

In September 2024, gross federal debt was about $35.3 trillion. The structure of federal debt affects how Treasury manages federal debt and can affect the timing of critical points in debt limit episodes. Federal debt can be divided into debt held by the public and intragovernmental debt.

Figure 1 shows trends in both debt categories since 2006. Figure 2 shows the structure of federal debt at the end of December 2022 and highlights funds linked to extraordinary measures.

4 FFB debt is limited to $15 billion, and TVA debt is limited to $30 billion. See OMB, FY2025 Budget, Analytical Perspectives, ch. 21, pp. 262-263.

5 5 U.S.C. §8348(j). Related extraordinary measures are described below. Treasury is able to create the most headroom through use of CSRDF-related extraordinary measures.

6 The frequency of debt limit episodes in the past two decades has led some to suggest that the word “extraordinary” in the term extraordinary measures is less than fully descriptive.

CRS-3

Figure 1. Federal Debt, 2006-2024, in $Billions

Source: CRS calculations based on Daily Treasury Statement data. Notes: During the 2007-2009 financial crisis, the debt limit was raised five times. The Budget Control Act of 2011 was used to raise the debt limit three times. The start dates of debt limit suspensions are indicated with vertical dashed lines.

CRS-4

Figure 2. Federal Debt Linked to Extraordinary Measures, December 2022

Source: Areas are proportionate to amounts of debt outstanding. Blue/green areas have increased since December 2019; tan/brown areas have decreased. Treasury bills mature in one year or less. Notes have maturities of 1 to 10 years. Bonds have maturities over 10 years. Savings Bonds item includes other savings securities.

CRS-5

Notes: CRS calculations based on U.S. Treasury data available at https://fiscaldata.treasury.gov/static-data/published-reports/mspd- entire/MonthlyStatementPublicDebt_Entire_202212.pdf.

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Intragovernmental Debt

Treasury also issues special Treasury securities to various federal trust funds and other accounts that are subject to the debt limit. Debt held in government accounts, known as intragovernmental debt, totaled $7.2 trillion in July 2024.7 Federal debt issued to trust funds accounts for the bulk of that debt. Those trust funds include those associated with Social Security, Medicare, Unemployment Compensation, federal retirement, and many smaller trust funds. Other government accounts not classified as trust funds also hold smaller amounts of federal debt.8 Nearly all—over 99.9%—of intragovernmental debt is nonmarketable and thus cannot be sold or traded.

Trust funds’ special Treasury securities accrue interest, which is paid at set intervals in the form of additional special securities. Interest payments for large trust funds, such as the Social Security trust funds, can present challenges to Treasury’s debt management operations during debt limit episodes, as those special securities are subject to the debt limit.

Debt Held by the Public

Treasury sells debt securities to obtain cash to fund annual deficits and expansions of the government’s portfolio of loans, such as those provided to farmers and students, as well as to roll over old debt—that is, to retire old debt using proceeds of new debt issues.9 The total of debt sold outside of the federal government is known as debt held by the public. In September 2024, that amounted to $28.2 trillion, including about $4.4 trillion in Treasury securities purchased by the Federal Reserve on secondary markets.10 Over 97% of debt held by the public is issued by Treasury through auctions run with the help of the Federal Reserve Bank of New York, which acts as the federal government’s fiscal agent.11

Trust Fund Programs that Run Surpluses Lend to the Treasury

When a trust fund or similar account collects more in payroll taxes, contributions, and other revenues than it pays out in benefit payments and other outlays, that surplus is invested in special Treasury securities.12 When a trust fund surplus is exchanged for a Treasury security, that fund effectively lends money to the rest of the government.13 That implicit lending reduces what the federal government must borrow from the public.

7 U.S. Treasury, Daily Treasury Statement, September 17, 2024, https://fiscaldata.treasury.gov/static-data/published- reports/dts/DailyTreasuryStatement_20240917.pdf.

8 OMB, FY2025 Budget, Analytical Perspectives, Table 21-5, https://www.whitehouse.gov/wp-content/uploads/2024/ 03/ap_21_tables_fy2025.xlsx.

9 For details, see OMB, FY2025 Budget, Analytical Perspectives, Table 21-2, https://www.whitehouse.gov/wp-content/ uploads/2024/03/ap_21_borrowing_fy2025.pdf.

10 Board of Governors of the Federal Reserve System, “Assets: Securities Held Outright: U.S. Treasury Securities: (TREAST),” https://fred.stlouisfed.org/series/TREAST. Also see U.S. Treasury, Daily Treasury Statement, https://fiscaldata.treasury.gov/datasets/daily-treasury-statement/operating-cash-balance.

11 U.S. Treasury, Monthly Statement of the Public Debt, June 2024, https://fiscaldata.treasury.gov/static-data/published- reports/mspd-entire/MonthlyStatementPublicDebt_Entire_202406.pdf.

12 GAO, Federal Trust and Other Earmarked Funds Answers to Frequently Asked Questions, GAO-01-199SP, January 2001, pp. 17-18. Most trust funds and special funds receive interest payments, although exceptions exist. A few funds can invest in marketable Treasuries and private-sector securities, although those holdings are relatively small.

13 More precisely, revenues are collected by the Treasury General Fund and the relevant trust fund is credited with a special Treasury security of equivalent value. OMB, FY2024 Budget, Analytical Perspectives, pp. 259, (continued...)

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When benefit payments exceed payroll and other revenues, a trust fund runs a deficit and the process outlined above is reversed. Fund holdings of Treasury securities are exchanged for cash to pay outlays, which reduces the stock of federal debt. To supply a fund with cash to pay outlays, however, Treasury must obtain funds through borrowing from the public or from a surplus of revenues over outlays. The Appendix details how Treasury debt operations interact with Social Security trust funds.

Debt and Cash Management

Treasury manages the issuance and redemption of bills, notes, and other securities to ensure that federal obligations can be met in a timely and efficient manner.

Day-to-Day Treasury Operations

At the start of each business day, Treasury officials find receipts in Treasury’s Federal Reserve accounts and have a set of scheduled payments to make.14 Payroll taxes and other earmarked receipts are credited to federal trust funds through issuance of special Treasury securities. Social Security beneficiaries, federal salaries, and military contractor payments are typically paid on a set monthly routine. The Treasury auctions securities when it needs to increase its cash balances. Maturing securities or scheduled interest (coupon) payments to bondholders are financed using cash balances or by rolling over maturing debt into new Treasury securities.15

Structuring Federal Debt to Minimize Debt Service Costs

Modern debt management aims to pay obligations on time while minimizing borrowing costs and mitigating various risks.16 Short-term debt securities, such as Treasury bills, are generally cheaper to issue and provide greater flexibility. Longer-term debt securities, such as Treasury notes, generally carry higher yields, but help ensure that future debt service costs remain stable.17 Cash management bills, which can be issued on less than a week’s notice, provide the Treasury with a more flexible, albeit more expensive, debt instrument to buffer short-term fluctuations.18

https://www.whitehouse.gov/wp-content/uploads/2023/03/ap_22_funds_fy2024.pdf. Trust fund assets are generally held in the form of special Treasury securities. The National Railroad Retirement Investment Fund, which holds some equity securities, is an exception.

14 The Daily Treasury Statement provides a summary of Treasury cash balances, receipts, payments, and debt totals every business day. U.S. Treasury, Daily Treasury Statement, https://fiscaldata.treasury.gov/datasets/daily-treasury- statement/operating-cash-balance. Click on “Published Reports” link to download most current Statement.

15 Agencies other than the U.S. Treasury have issued a relatively small amount of federal debt.

16 See International Monetary Fund and the World Bank, Guidelines for Public Debt Management, March 21, 2001, http://www.imf.org/external/np/mae/pdebt/2000/eng/. Some economists have argued that Treasury debt management objectives should include macroeconomic aims, so that Treasury debt policy decisions would not offset Federal Reserve debt portfolio strategies intended to aid economic recovery. Treasury officials have declined to embrace that approach. See Robin Greenwood et al., Government Debt Management at the Zero Lower Bound, Brookings Institution working paper, September 30, 2014, https://www.brookings.edu/wp-content/uploads/2016/06/ 30_government_debt_management_zlb.pdf.

17 Treasury bills typically have maturities of less than one year. Treasury notes have maturities that range from 2 years to 10 years. When short-term Treasuries carry higher yields than longer-term debt, the yield curve (which plots yields against maturities of various Treasuries) is said to have inverted, which many macroeconomists regard as a harbinger of an economic downturn.

18 GAO, Treasury Has Refined Its Use of Cash Management Bills but Should Explore Options That May Reduce Cost Further, GAO-06-269, March 30, 2006, https://www.gao.gov/products/GAO-06-269.

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Treasury’s choice of debt structure also reflects demand-side preferences.19 Investors are willing to pay more for a mix of short- and long-term securities that matches their own financial needs. Higher prices at federal debt auctions imply lower yields and debt servicing costs.

Uncertainties that might unsettle financial markets reduce bidders’ willingness to pay for securities. Treasury has therefore sought to issue Treasury bills and notes on a “regular and predictable” schedule to reduce uncertainty about the supply of securities and their terms.20 During debt limit episodes, however, maintaining a regular and predictable schedule of debt issuance, particularly for short-term bills, becomes more challenging.21 Treasury then typically relies more heavily on cash management bills, which are not issued on a set auction schedule.

Fluctuations in Federal Revenues and Outlays

Federal debt levels fluctuate throughout the year, reflecting the separate timing of revenues and outlays, whether or not the government has an annual surplus or deficit. On some days revenues that Treasury collects exceed outlays, particularly near dates when taxes are due. Given substantial federal deficits, however, outlays more often exceed revenues. The timing of tax collections, outlays, and interest payments to large federal trust funds affects the timing of debt limit episodes.

Treasury personnel use predictions of outlay and revenue flows, debt instruments, and cash management strategies to ensure that financial resources are sufficient to meet obligations and possible contingencies, while minimizing borrowing costs.22 While payroll and benefit payments are largely predictable, other flows, such as tax payments, are harder to estimate in advance.

How Much Cash Does Treasury Need?

Aside from seasonal fluctuations in outlays and receipts, Treasury’s debt and cash management strategies also must plan for emergencies. Carrying higher cash balances gives Treasury greater capacity to operate normally in the face of emergencies, but requires issuing additional debt and higher debt service costs. The U.S. Government Accountability Office (GAO) and the Treasury’s outside advisors have noted the benefits of preparing for severe adverse events. The possibility exists that during a debt limit episode Treasury’s typical cash and debt management tools could be restricted, narrowing its ability to respond to contingencies.23

19 Extreme market conditions may also affect Treasury’s cash management strategies. See Paul J. Santoro, “The Evolution of Treasury Cash Management during the Financial Crisis,” Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 18, no. 3 (2012), https://www.newyorkfed.org/medialibrary/media/research/ current_issues/ci18-3.pdf.

20 Kenneth D. Garbade, “The Emergence of ‘Regular and Predictable’ As a Treasury Debt Management Strategy,” Economic Policy Review, Federal Reserve Bank of New York, vol. 13, no. 1 (March 2007), https://www.newyorkfed.org/medialibrary/media/research/epr/07v13n1/0703garb.pdf.

21 For example, GAO found that the reduction of Treasury cash balances ahead of the end of debt limit suspensions disrupted markets in short-term Treasury securities. See GAO, Market Response to Recent Impasses Underscores Need to Consider Alternative Approaches, GAO-15-476, July 2015, http://www.gao.gov/products/GAO-15-476.

22 See U.S. Treasury, Office of Inspector General, Response by the Chair of the Council of Inspectors General on Financial Oversight and Inspector General of the Department of the Treasury, OIG-CA-12-006, August 24, 2012, https://oig.treasury.gov/sites/oig/files/Audit_Reports_and_Testimonies/Debt%20Limit%20Response%20(Final%20wit h%20Signature).pdf. The report stated that, according to the Treasury, “the margin of error in these estimates at a 98% confidence level is plus or minus $18 billion for 1 week into the future and plus or minus $30 billion for 2 weeks into the future.”

23 The following section, which discusses a 2021 legal opinion, treats those concerns in more detail.

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A 2006 GAO report, noting disruptions caused by the attacks of September 11, 2001, recommended that Treasury consider implementing two levels of emergency financing facilities. A line of credit with “appropriate financial institutions” and the ability to make private sales of cash management bills would provide a first level of funding. New statutory authority to authorize the Federal Reserve to lend directly to the Treasury during a wide-scale disruption would serve as a backup funding facility and a second level of emergency funding.24

In May 2015, following recommendations of the Treasury Borrowing Advisory Committee, Treasury chose to maintain higher cash balances.25 That prudential measure was intended to ensure that Treasury could meet federal obligations even if its market access were disrupted for a week or so. Then-Treasury Secretary Jacob Lew noted that an event of the scale of “Hurricane Sandy, September 11, or a potential cyber-attack disruption” might cause a lapse in market access.26 If Treasury’s cash balances during the later stages of a debt limit episode were at minimal levels, unforeseen contingencies might present challenges to federal financial operations. After 2015, outside of debt limit episodes, cash balances often remained in the $300 billion to $400 billion range, as shown in Figure 3.27

Just after the March 2020 COVID-19 pandemic declaration, then-Treasury Secretary Steven Mnuchin raised cash balances to unprecedented levels to allow rapid disbursement of CARES Act (P.L. 116-136) payments. Cash balances later fell, but have since mostly remained above pre- pandemic levels, apart from debt limit episodes. In the late stages of a debt limit episode, Treasury’s cash balances can fall to relatively low levels. On Friday, June 2, 2023—the day before enactment of the Fiscal Responsibility Act (P.L. 118-5), which closed that debt limit episode—Treasury’s cash balances stood at $23 billion.28

This cash management policy of maintaining higher cash balances does not by itself affect the date when a fixed debt limit might constrain Treasury’s ability to meet federal obligations because a $1 increase in cash balances is counterbalanced by a $1 decrease in remaining borrowing capacity under the debt limit.

24 GAO, Debt Management: Backup Funding Options Would Enhance Treasury’s Resilience to a Financial Market Disruption, GAO-06-1007, September 26, 2006, http://www.gao.gov/cgi-bin/getrpt?GAO-06-1007. A World War II- era authority that allowed the Federal Reserve to make limited emergency loans to the Treasury expired in 1981.

25 U.S. Treasury, “Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association,” May 6, 2015, https://home.treasury.gov/news/press-releases/jl10043.

26 Treasury Secretary Jacob Lew, letter to House Speaker John A. Boehner and other Members of Congress, September 10, 2015, https://home.treasury.gov/system/files/276/Treasury-Letter-to-Congress-091015.pdf.

27 The rebuilding of Treasury’s cash balances following a debt limit episode presents another policy issue. After the 2019 debt limit episode concluded, the replenishment of Treasury’s cash balances, in combination with other events, arguably contributed to strains in financial market liquidity. In late September 2019, rates for overnight repo borrowing, a key liquidity channel for major financial institutions, briefly rose from just over 2% to 10%, before the Federal Reserve acted to restore normal levels of liquidity. Treasury’s replenishment of cash balances after a mid- December 2021 debt limit increase (P.L. 117-73), however, had no apparent effect on overnight borrowing rates. See Cale Tilford et al., “Repo: How the Financial Markets’ Plumbing Got Blocked,” Financial Times, November 26, 2019, https://ig.ft.com/repo-rate/.

28 U.S. Treasury, Daily Treasury Statement, June 2, 2023, https://fiscaldata.treasury.gov/static-data/published-reports/ dts/DailyTreasuryStatement_20230602.pdf.

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Figure 3. Treasury Cash Balances, October 2008-June 2024

$Billions of current dollars

Source: CRS calculations based on Daily Treasury Statement data: https://fiscal.treasury.gov/reports-statements/ dts/index.html. Data formats changed after April 15, 2022 (blue line). Notes: Earlier data exclude certain other smaller cash assets, such as Tax and Loan accounts.

Suspensions and Limits on Treasury Cash Balances

If cash balances were elevated while a debt limit suspension were in effect, however, that could extend the time that Treasury could continue to meet federal obligations after the lapse of the suspension and the subsequent reset of the debt limit. For that reason, since Congress began using the debt-limit-suspension approach in 2013, several debt limit suspensions have included provisions designed to limit Treasury’s cash balances.29 For instance, the Fiscal Responsibility Act of 2023 (P.L. 118-5, §401(c)) stated that

[t]he Secretary of the Treasury shall not issue obligations during the [suspension] period … for the purpose of increasing the cash balance above normal operating balances in anticipation of the expiration of such period.

That provision is paired with a requirement that

An obligation shall not be taken into account [in determining the new debt limit after the suspension lapses] unless the issuance of such obligation was necessary to fund a commitment incurred pursuant to law by the Federal Government that required payment before January 2, 2025 [i.e., the day after the debt limit suspension lapses].

Those provisions might have two aims. First, a large cash balance that accrued when the debt limit was suspended might postpone the critical date on which Treasury would no longer be able

29 CRS Insight IN11829, Debt Limit Suspensions, by D. Andrew Austin.

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to meet all federal obligations on time after the limit is reinstated. Such a postponement might affect negotiations among Members of Congress and the executive branch over terms of resolving a debt limit episode. Second, a larger cash balance held at the end of a debt limit suspension could lead to a higher debt limit when the limit is reset. Carrying a minimal cash balance, as noted above, could leave Treasury with limited means to respond to emergencies and uncertainties.

A 2021 Department of Justice Office of Legal Counsel (OLC) memorandum considered similar debt limit suspension provisions in the Bipartisan Budget Act of 2019 (BBA 2019; P.L. 116-37).30 The memorandum noted that Treasury had “reduced its cash balances considerably” near the end of debt limit suspension periods. That reduction, in Treasury’s view, was

not based on any formal understanding that a statute required this result, but rather on an ‘informal view’ that a higher cash balance might be ‘construed to suggest that Treasury had issued …. securities that were not necessary to fund commitments that required payment before the debt limit was reimposed.31

Treasury, however, was concerned that reducing cash balances in 2021 would “would carry significant and unprecedented risks” related to the COVID-19 pandemic. OLC concluded that “Treasury may fairly anticipate uncertainty and commit a prudential buffer of funds to meet the government’s future obligations. We thus agree with [Treasury’s] view that issuing debt pursuant to Treasury’s prudential cash practices is a funding of ‘commitments.’”32 Moreover, the OLC held that the BBA 2019 debt limit provisions did not “prevent Treasury from applying to the forthcoming debt limit the debt it plans to issue to provide a prudential buffer of funds.”33

Debt Management During Debt Limit Episodes

When the level of federal debt nears its legal limit, Treasury faces constraints that complicate federal financial operations. During debt limit episodes, the end-of-day federal debt totals are typically held $25 million below the statutory limit—a narrow margin relative to the trillions in outstanding federal debt or the tens of billions in outlays disbursed in a typical day—until the debt limit episode is resolved.34

A debt limit episode heightens risks facing Treasury debt managers.35 Preserving Treasury’s ability to respond to unforeseen contingencies requires adaptations in the structure of federal debt. Treasury typically shifts debt operations toward flexible short-term instruments, such as cash management bills during debt limit episodes.36 Debt limit episodes, according to GAO, increase demands on Treasury staffers’ time and divert resources from other priorities.37

30 U.S. Department of Justice, Office of Legal Counsel, Treasury’s Cash Balance and the August 1, 2021 Debt Limit, Memorandum Opinion for the Acting General Counsel Department of the Treasury, slip opinion, July 8, 2021, https://www.justice.gov/olc/media/1346916/dl?inline.

31 Ibid., pp. 2, 9.

32 Ibid., pp. 12-13.

33 Ibid., p. 2.

34 See Table IIIC in Daily Treasury Statements issued during debt limit episodes, such as for May 4, 2023, https://fsapps.fiscal.treasury.gov/dts/files/23050400.pdf.

35 Various GAO reports discussed below highlight increased operational and financial risks during debt limit episodes.

36 GAO, Treasury Has Refined Its Use of Cash Management Bills but Should Explore Options That May Reduce Cost Further, GAO-06-269, March 30, 2006, https://www.gao.gov/products/GAO-06-269.

37 GAO, Analysis of 2011-2012 Actions Taken and Effect of Delayed Increase on Borrowing Costs, GAO-12-701, July 2012, https://www.gao.gov/assets/files.gao.gov/assets/gao-12-701.pdf.

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Treasury Secretary’s Power to Use Extraordinary Measures

When Treasury cannot invest payroll deductions from federal civil service and postal service employees in Treasury securities without breaching the debt limit, the Treasury Secretary may declare a debt issuance suspension period to invoke authorities to use extraordinary measures.38 Once the Treasury Secretary does so, resources of the trust funds for civil service and postal service retirement and disability benefits can be used to meet federal obligations, within certain limits. Extraordinary measures essentially convert debt subject to the statutory limit into implicit IOUs that are not subject to the limit.

Federal Retirement Funds Comprise Bulk of Extraordinary Measures

After declaring a DISP, the Treasury Secretary can use payroll deductions that would normally be invested in the CSRDF or the PSRHBF.39 In addition, when securities held by those funds mature, funds are not rolled over into new securities, but those funds can also be used to meet other federal obligations. During a DISP, the Treasury Secretary can also redeem or sell securities held by those funds before their maturity dates, though that amount is limited to what would be needed to pay civil service benefit payments during the DISP.40 Additional provisions enable the use of federal employees’ Thrift Savings Plan (TSP) investments in Treasury securities, known as the G Fund.41

Underinvesting or disinvesting certain government funds provides headroom under the debt limit. By freezing or reducing CSRDF, PSRHBF, and TSP holdings of government securities—which count as intragovernmental debt subject to the debt limit—Treasury can sell more debt to the public, providing cash to pay federal obligations. Federal debt totals do not reflect what is owed to those funds, which must be paid back when a debt limit episode concludes.

Other Extraordinary Measures

The Treasury Secretary also can use some other resources to meet federal obligations during debt limit episodes, although these are much smaller in scale. The Treasury Secretary has broad authority to use dollar holdings within the Exchange Stabilization Fund42 to pay other federal

38 The DISP is defined in clause (j) of 5 U.S.C. §8348, which governs the CSRDF. 5 U.S.C. §8909a(c) requires that investments in the Postal Service Retiree Health Benefit Fund be administered “in the same manner.”

39 The Treasury Secretary must specify a time period for the DISP, which sets limits on the amount of funds that can be used. The DISP can be extended. See 5 U.S.C. §8348(k)(2).

40 In a March 2019 FAQ, Treasury stated that the “PSRHBF does not have daily receipts or investments.” The FAQ also estimated that the redemption of CSRDF securities for the DISP from March 4, 2019, through June 5, 2019, would generate $22 billion in headroom. U.S. Treasury, “Frequently Asked Questions on the Civil Service Retirement and Disability Fund,” March 5, 2019, https://home.treasury.gov/system/files/136/CSRDF-PSRHBF-FAQs-03_05_19.pdf. CBO has estimated that suspending CSRDF investments yields about $3 billion per month. Suspending interest payments, normally paid as additional Treasury securities at the end of June and at the end of December, would yield about $13 billion in each instance. Congressional Budget Office (CBO), Federal Debt and the Statutory Limit, February 2019, https://www.cbo.gov/system/files/2019-02/54987-debt-limit.pdf.

41 5 U.S.C. §8348(h). At the end of June 2019, the G Fund had $237 billion in assets, held in short-term Treasury securities. Federal Retirement Thrift Investment Board, “June 2019 Performance Review,” July 12, 2019, available as a ZIP file at https://minutes.frtib.gov/.

42 The Gold Reserve Act (P.L. 73-87) established the Exchange Stabilization Fund and gave the Treasury Secretary broad authority over its use. See Gary Richardson, Alejandro Komai, and Michael Gou, “Gold Reserve Act of 1934,” Federal Reserve History website, November 22, 2013, https://www.federalreservehistory.org/essays/gold_reserve_act.

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obligations.43 Treasury securities held by the Federal Financing Bank can be exchanged for non- Treasury securities to free up headroom under the debt limit.44 The FFB, however, has its own debt limit of $15 billion. Given the FFB’s existing debt holdings, however, this strategy in recent years could provide about $5 billion or less in headroom.45

Treasury Secretaries typically suspend sales of state and local government series securities (SLGs) shortly before declaring a DISP. This does not create immediate headroom under the debt limit, but avoids debt issuance that would reduce it. As outstanding SLGs mature, though, Treasury gains headroom. Recent restrictions on municipal finance have reduced the attractiveness of SLGs to state and local governments, which has reduced issuances of SLGs.46

After resolution of a debt episode, the Treasury Secretary must repay lost interest income to each of those funds and report to Congress and GAO on the use of extraordinary measures. GAO typically issues a report assessing Treasury’s actions during the debt limit episode.47 Those reports have noted that debt limit constraints have hindered Treasury fiscal operations and appear to have increased federal borrowing costs.48

Debt Limit Could Hinder Treasury Operations

When the level of federal debt nears its statutory limit, Treasury’s debt management operations become subject to constraints that complicate the process of ensuring federal obligations are paid on time. GAO has found that debt limit episodes have put considerable strain on Treasury offices responsible for debt and cash management.49 As headroom under the debt ceiling diminishes, those strains increase.

The debt limit constrains Treasury debt operations in two ways. First, the debt limit constrains issues of new debt used to manage short-term cash flows or to finance gaps between receipts and outlays. If Treasury’s capacity to borrow were thus exhausted and if cash balances eroded, then the government would soon lack the cash needed to pay its bills on time. Second, the debt limit could also prevent the government from investing surpluses of designated government accounts, such as the Social Security trust funds.

When Treasury’s headroom under the debt limit falls to low levels, the federal government’s ability to pay its bills on time could be put at risk—as reflected in financial market reactions during some recent debt episodes.50 As noted above, a serious external disruption in financial

43 The ESF held $15.3 billion in Treasury debt at the end of August 2024. U.S. Treasury, Monthly Statement of the Public Debt, August 2024, https://fiscaldata.treasury.gov/static-data/published-reports/mspd-entire/ MonthlyStatementPublicDebt_Entire_202408.pdf.

44 GAO, letter to Rep. John J. LaFalce, October 30, 1985, https://www.gao.gov/products/438925. Note that the same GAO code (B-138524) also refers to an opinion sent to Sen. Packwood referenced elsewhere.

45 The August 2019 Monthly Statement of the Public Debt reported FFB holdings of almost $9 billion. During a debt limit episode, that level of debt could provide about $6 billion in debt limit headroom through exchanges of debt with the CSRDF.

46 CRS Report R41811, State and Local Government Series (SLGS) Treasury Debt: A Description, by Grant A. Driessen and Jeffrey M. Stupak.

47 For details, see 5 U.S.C. §8348(l) and GAO, Market Response to Recent Impasses Underscores Need to Consider Alternative Approaches, GAO-15-476, July 9, 2015, https://www.gao.gov/products/GAO-15-476.

48 For example, GAO, Market Response to Recent Impasses Underscores Need to Consider Alternative Approaches, GAO-15-476, July 2015, https://www.gao.gov/assets/680/671286.pdf.

49 GAO, Debt Limit: Delays Create Debt Management Challenges and Increase Uncertainty in the Treasury Market, GAO-11-203, February 22, 2011.

50 These are discussed in detail below; see “Potential Economic and Financial Effects.”

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markets—such as Hurricane Sandy in 2012 or the attacks of September 11, 2001—could diminish Treasury’s fiscal capacity for a time. How Treasury officials would respond to disruptions during a debt limit episode is unclear.

Treasury officials have typically informed Congress, sometimes in general and at other times in more specific terms, when the debt limit might cause payment delays or disruptions.51

Debt Limit Could Present Treasury with Conflicting Mandates

During a debt limit episode, Treasury can deploy its cash balances and resources available through extraordinary measures to meet federal obligations when daily outlays run ahead of receipts. If the debt limit became binding—as would happen if cash balances and extraordinary measures were exhausted—then two potentially inconsistent requirements would confront Treasury. First, Treasury must pay the government’s legal obligations and invest trust fund surpluses. Second, the statutory debt limit would then prevent Treasury from issuing the debt to raise cash to pay obligations or making trust fund investments.52 While no Treasury Secretary has faced that scenario, the near prospect of such a scenario has unsettled financial markets at times.53 The following section of this report reviews some of those episodes.

Treasury Actions in Select Debt Limit Episodes

To date, the modern debt limit has not yet prevented Treasury from paying all federal obligations. During debt limit episodes in 1985, 1995-1996, 2002, 2003, 2011, 2013, 2014, 2015, 2017, 2019, 2021, and 2023, however, Treasury took extraordinary measures to avoid reaching the debt limit and to meet the federal government’s other obligations. During some episodes, bond market prices signaled concerns that the Treasury might not pay obligations on time.

In 2011 and 2013, components of the Federal Reserve System considered possible responses to a binding debt limit. The distinction between the roles of the Federal Reserve and Treasury is discussed in a later section.

This section outlines the 1985, 1995-1996, 2011, and 2013 episodes, in which significant new strategies were employed or when financial markets viewed federal payment disruptions as possible. The section also includes a brief summary of the 2021 and 2023 debt limit episodes. Some note that particularly contentious debt limit episodes have taken place when partisan control of the presidency and Congress was divided and after large increases in federal debt levels, as was the case in 1996, 2011, and 2013.54 Other CRS products describe these debt limit episodes in more detail.55

51 See CRS Report R43389, The Debt Limit Since 2011, by D. Andrew Austin.

52 See generally 31 U.S.C. §§3321 et seq. for the Treasury Secretary’s duty to pay obligations. Regarding trust fund investments, see, for example, 42 U.S.C. §401 (Social Security Trust Funds), 5 U.S.C. §8348 (Civil Service Retirement and Disability Trust Fund), and 5 U.S.C. §8909 (Postal Service Retiree Health Benefit Fund).

53 See JP Morgan Chase, “The Domino Effect of a US Treasury Technical Default,” U.S. Fixed Income Strategy Group Brief, April 19, 2011. Also see Fitch Ratings, “Thinking the Unthinkable—What if the Debt Ceiling Was Not Increased and the US Defaulted?,” June 8, 2011.

54 Alec Phillips and Tim Krupa, “Raising the Debt Limit: Probably Not Soon, Probably Not Easy,” Goldman Sachs US Economic Analyst brief, December 5, 2022.

55 See CRS Report RL31967, The Debt Limit: History and Recent Increases, by D. Andrew Austin. For a discussion of earlier debt limit increases, see out-of-print CRS Report 98-805 E, Public Debt Limit Legislation: A Brief History and Controversies in the 1980s and 1990s, by Philip D. Winters (available to congressional clients upon request).

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Actions in 1985

Sharply rising deficits that followed tax cuts and defense-spending increases pushed federal debt close to its statutory limit in 1985. In addition, after Greenspan Commission recommendations to modify Social Security were adopted in 1983, holdings of the two Social Security trust funds of special Treasury securities—which are subject to the debt limit—grew.56 That trend pushed federal debt toward its limit even when the federal government ran on-budget surpluses.

A debt limit episode began in September 1985 when Treasury informed Congress that federal debt had nearly reached its statutory debt limit and that the Treasury Secretary would use extraordinary measures to meet the government’s cash requirements. This debt limit episode led to the formalization of some of these extraordinary measures. Treasury delayed public debt auctions and used various internal transactions involving the Federal Financing Bank.57 The debt limit constrained Treasury from issuing new government securities to the CSRDF, the Social Security trust funds, and several smaller trust funds. Treasury also redeemed some Social Security trust funds’ assets ahead of their scheduled maturity dates.58 Premature redemption of these securities created room under the debt ceiling for Treasury to borrow enough to pay other obligations, including November 1985 Social Security benefits.59 The debt limit was temporarily increased on November 14, 1985 (P.L. 99-155), and permanently increased on December 12, 1985 (P.L. 99-177), from $1,824 billion to $2,079 billion.

The Balanced Budget and Emergency Deficit Control Act of 1985 (P.L. 99-177), often known as the Gramm-Rudman-Hollings Act (GRH), changed congressional budget enforcement mechanisms. In particular, GRH set targets for deficit reduction that were to be enforced by sequestration provisions.60

Following the 1985 debt limit crisis, Congress subsequently authorized Treasury to alter its normal investment and redemption procedures for civil service and postal service retirement and disability trust funds during a debt limit episode, but barred use of Social Security trust fund

56 The National Commission on Social Security Reform was appointed in September 1981 and issued a report in January 1983 (see Social Security Administration, Report of the National Commission on Social Security Reform, January 1983, https://www.ssa.gov/history/reports/gspan.html). Commission Chairman Greenspan had led the Ford Administration’s Council of Economic Advisers and later served as the chair of the Federal Reserve. Commission recommendations were incorporated into the Social Security Amendments of 1983 (P.L. 98-21; see Social Security, “Summary of P.L. 98-21,” https://www.ssa.gov/history/1983amend.html).

57 The U.S. Department of Justice (DOJ) opined that those transactions were legal. DOJ, “Transactions Between the Federal Financing Bank and the Department of the Treasury,” Memorandum Opinion, February 13, 1996, https://www.justice.gov/file/20096/download. See also GAO, Opinion B-138524, October 30, 1985, https://www.gao.gov/products/438925. GAO concluded that “although some of the Secretary’s actions appear in retrospect to have been in violation of the requirements of the Social Security Act, we cannot say that the Secretary acted unreasonably given the extraordinary situation in which he was operating.”

58 New York Times, “How U.S. Manipulated Social Security Funds,” November 4, 1985, https://www.nytimes.com/ 1985/11/04/us/how-us-manipulated-social-security-funds.html. For details, see GAO, Treasury’s Management of Social Security Trust Funds During the Debt Ceiling Crises, GAO/HRD-86-45, December 5, 1985, https://www.gao.gov/assets/hrd-86-45.pdf.

59 Treasury also redeemed some of the Social Security trust funds’ holdings of long-term securities to reimburse the General Fund for cash payments of benefits in September through November 1985. During this period, Treasury was unable to follow its normal procedure of issuing short-term securities to the trust funds and then redeeming short-term securities to reimburse the General Fund when it paid Social Security benefits.

60 The main sponsors of the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA) were Senator Phil Gramm, Senator Warren Rudman, and Senator Ernest Hollings.

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resources.61 Both P.L. 99-155 and P.L. 99-177 required Treasury to restore any interest income lost to the trust funds as a result of delayed investments and early redemptions.

Actions in 1995-1996

During 1995, President Bill Clinton and House Speaker Newt Gingrich set out sharply divergent fiscal policy goals. Speaker Gingrich, in a September 1995 speech, “threatened today to send the United States into default on its debt … to force the Clinton Administration to balance the budget on Republican terms,” according to media reports.62 He vowed not to schedule a vote on increasing the debt limit unless an agreement to balance the budget were reached that included, among other terms, steep decreases in federal health program spending. In anticipation of debt limit constraints, Treasury officials in spring 1995 began to plan debt management strategies, including disinvestment of various trust funds.63

As federal debt neared its statutory limit in late 1995, Treasury once again used nontraditional methods of financing, some of which were used during the 1985 episode, including drawing from resources of federal civilian retirement funds and the Exchange Stabilization Fund (ESF).64 In December 1995, the House passed a bill (H.R. 2621; 104th Congress) to restrict the Treasury Secretary’s authority to use extraordinary measures, although the Senate declined to act on the measure.

In early 1996, Treasury announced its cash reserves would not cover Social Security benefit payments in March 1996 because it was unable to issue new public debt.65 In March 1996, Congress then authorized Treasury to borrow enough to enable March 1996 benefit payments and exempted those securities from the debt limit for a limited time (P.L. 104-103 and P.L. 104-115).

In 1996, Congress passed P.L. 104-121 to increase the debt limit and, among other provisions, reaffirm Congress’s understanding that the Secretary of the Treasury and other federal officials are not authorized to use Social Security and Medicare funds to manage federal debt, except as necessary to provide for the payment of benefits or the programs’ administrative expenses.

61 §6002 of the Omnibus Budget Reconciliation Act of 1986 (OBRA 1986; P.L. 99-509).

62 David Sanger, “Gingrich Threatens U.S. Default If Clinton Won't Bend on Budget,” New York Times, September 22, 1995, https://www.nytimes.com/1995/09/22/business/gingrich-threatens-us-default-if-clinton-won-t-bend-on- budget.html. Also see Clay Chandler, “Gingrich Vows No Retreat on Debt Ceiling Increase,” Washington Post, September 22, 1995, https://www.washingtonpost.com/archive/politics/1995/09/22/gingrich-vows-no-retreat-on-debt- ceiling-increase/9f7c9620-e6aa-489e-8ace-3ebb27e349bc.

63 Joint Economic Committee Republicans, “Planned Gridlock: The Clinton Administration Plan to Block Debt Limit and Balanced Budget Legislation,” October 1996, https://www.jec.senate.gov/public/_cache/files/3f828d0c-d519-475b- 8857-b94bce1aa4d4/planned-gridlock—october-1996.pdf.

64 Treasury’s Exchange Stabilization Fund (ESF) was created to promote exchange rate stability and counter disorderly conditions in the foreign exchange market, although it has been used for other purposes at times. See archived CRS Report RL30125, The Exchange Stabilization Fund of the U.S. Treasury Department: Purpose, History, and Legislative Activity, by Arlene E. Wilson (available to congressional clients upon request).

65 Under normal procedures, Treasury pays Social Security benefits from the General Fund and offsets this by redeeming an equivalent amount of the trust funds’ holdings of government debt. To pay Social Security benefits, and depending on the government’s cash position at the time, Treasury may need to issue new public debt to raise the cash needed to pay benefits. Treasury may be unable to issue new public debt, however, because of the debt limit. If the Treasury lacks cash on hand, Social Security benefit payments may be delayed or jeopardized. See CRS Report RL33028, Social Security: The Trust Funds, by Barry F. Huston.

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Actions in 2011

The 2007-2008 financial crisis and the subsequent Great Recession of 2007-2009 led to a sharp increase in federal debt, as falling incomes depressed federal tax revenues and increased the number of households eligible for social insurance benefits. The American Recovery and Reinvestment Act (ARRA; P.L. 111-5) and other measures enacted to stimulate economic activity increased federal outlays and cut taxes, resulting in further increases in federal debt levels.

As the economy began to recover in 2010, some Members of Congress, among others, expressed concerns about the federal government’s fiscal situation and showed interest in reaching a wide- ranging agreement to put government finances on a more sustainable basis.66 Others argued that imposing austerity measures could endanger a fragile economic recovery. Negotiations between President Barack Obama and congressional leaders ran from early 2011 until a legislative package that capped discretionary spending and raised the debt limit was enacted in early August 2011.67 In January 2011 then-Treasury Secretary Geithner notified Congress that Treasury would take actions used during past episodes to avoid reaching the debt limit.68 In another letter to Congress on May 2, 2011, he reiterated that the debt limit would be reached no later than May 16, 2011, but that the use of extraordinary measures would extend Treasury’s ability to meet commitments through August 2, 2011.69

On May 16, 2011, Secretary Geithner notified Congress that he had declared a DISP and would use extraordinary measures to create additional room under the debt ceiling to allow Treasury to continue funding government operations.70 Between May 16, 2011, and August 2, 2011, Treasury prematurely redeemed securities of the CSRDF and did not invest receipts of the CSRDF and the PSRHBF. Treasury also suspended investments in the Exchange Stabilization Fund and the Government Securities Investment Fund (G Fund) of the federal TSP.

The debt limit was increased on August 2, 2011, as part of the Budget Control Act of 2011 (BCA; P.L. 112-25), from $14,294 billion to $14,694 billion. The BCA provided for two additional debt limit increases. After the initial increase on August 2, 2011, the debt limit was increased again on September 21, 2011, from $14,694 billion to $15,194 billion, and again on January 27, 2012, from $15,194 billion to $16,394 billion.71 Federal retirement funds used during extraordinary

66 Gail Russell Chaddock, “House GOP Wants $74 Billion in Budget Cuts: Draconian or Only a Start?,” Christian Science Monitor, February 3, 2011, https://www.csmonitor.com/USA/Politics/2011/0203/House-GOP-wants-74- billion-in-budget-cuts-Draconian-or-only-a-start.

67 For two versions of those negotiations, see Peter Wallsten et al., “Obama’s Evolution: Behind the Failed ‘Grand Bargain’ on the Debt,” Washington Post, March 17, 2012, p. A1, http://www.washingtonpost.com/politics/obamas- evolution-behind-the-failed-grand-bargain-on-the-debt/2012/03/15/gIQAHyyfJS_story.html; and Matthew Bai, “Obama vs. Boehner: Who Killed the Debt Deal?,” New York Times Magazine, March 28, 2012, p. MM22, http://www.nytimes.com/2012/04/01/magazine/obama-vs-boehner-who-killed-the-debt-deal.html.

68 Letter from Timothy F. Geithner, Secretary of the Treasury, to the Hon. Harry Reid, Senate Majority Leader, January 6, 2011, https://home.treasury.gov/secretary-geithner-sends-debt-limit-letter-to-congress-2.

69 Letter from Timothy F. Geithner, Secretary of the Treasury, to the Hon. John A. Boehner, Speaker of the House, May 2, 2011, https://home.treasury.gov/secretary-geithner-sends-debt-limit-letter-to-congress.

70 Letter from Timothy F. Geithner, Secretary of the Treasury, to the Hon. Harry Reid, Senate Majority Leader, May 16, 2011, https://web.archive.org/web/20110626130646/http://www.treasury.gov/connect/blog/Documents/ 20110516Letter%20to%20Congress.pdf.

71 CRS Report R43389, The Debt Limit Since 2011, by D. Andrew Austin. Prior to the third debt limit increase, investments in the Government Securities Investment Fund (G Fund) of the Federal Thrift Savings Plan were suspended from January 17 to January 27, 2012. The G Fund was made whole on January 27, 2012. Letter from Timothy F. Geithner, Secretary of the Treasury, to the Hon. Harry Reid, Senate Majority Leader, January 17, 2012, https://home.treasury.gov/system/files/276/011712TFGLettertoReid.pdf.

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measures were made whole as required by law.72 The BCA also reestablished statutory caps on discretionary spending for the period FY2012-FY2021.

Actions in 2013

In late 2012 and 2013, continued differences in fiscal policy views and opposition to the implementation of the 2010 Patient Protection and Affordable Care Act (PPACA; P.L. 111-148) led to two debt limit episodes.73 The first episode was resolved in May 2013, while the second episode—entwined with a 17-day appropriations lapse and government shutdown—was resolved in mid-October 2013. Debt limit constraints and appropriations lapses are distinct issues, although when a debt limit episode extends to the last few months of a fiscal year, those issues can arise together in fiscal negotiations, as in October 2013.

On December 26, 2012, then-Secretary Geithner declared that a DISP would begin on December 31, 2012, and Treasury employed extraordinary measures to meet federal payments.74 On February 4, 2013, the No Budget, No Pay Act of 2013 (P.L. 113-3) suspended the debt limit through May 18, 2013, marking the first time that Congress used the suspension approach to resolve a debt limit episode.75 On May 19, 2013, the debt limit was reinstated and raised to $16,699 billion, a level that accommodated borrowing incurred during the suspension period.76 A DISP was declared on May 20, 2013, allowing Treasury to employ a refreshed set of extraordinary measures.77

On October 1, 2013, the first day of FY2014, an appropriations lapse began, in part resulting from disagreements over funding for Patient Protection and Affordable Care Act programs (PPACA; P.L. 111-148) and broader fiscal policies.78 On the same date, Treasury notified Congress that, according to its estimates, extraordinary measures would be exhausted “no later than October 17,

72 Letter from Richard L. Gregg, Fiscal Assistant Secretary, Department of the Treasury, to the Hon. John A. Boehner, Speaker of the House, August 24, 2011, https://home.treasury.gov/system/files/276/G-Fund-Letters.pdf; and Letter to the Hon. Harry Reid, Senate Majority Leader, January 27, 2012, https://home.treasury.gov/system/files/276/Debt- Limit-CSRDF-Report-to-Reid.pdf.

73 Jonathan Weisman and Ashley Parker, “Republicans Back Down, Ending Crisis Over Shutdown and Debt Limit,” New York Times, October 16, 2013, https://www.nytimes.com/2013/10/17/us/congress-budget-debate.html.

74 Letter from Timothy F. Geithner, Secretary of the Treasury, to the Hon. Harry Reid, Senate Majority Leader, December 31, 2012, https://home.treasury.gov/system/files/276/Sec-Geithner-Letter-to-Congress-12-31-2012.pdf. Also see Letter from Timothy F. Geithner, Secretary of the Treasury, to the Hon. John A. Boehner, Speaker of the House, January 15, 2013, https://home.treasury.gov/system/files/276/1-15-2013-G-Fund-Debt-Limit-Letter.pdf.

75 CRS Insight IN11829, Debt Limit Suspensions, by D. Andrew Austin.

76 P.L. 113-3 provided for the debt limit to be increased on May 19, 2013, “to the extent that—(1) the face amount of obligations issued under chapter 31 of such title and the face amount of obligations whose principal and interest are guaranteed by the United States Government (except guaranteed obligations held by the Secretary of the Treasury) outstanding on May 19, 2013, exceeds (2) the face amount of such obligations outstanding on the date of the enactment of this Act. An obligation shall not be taken into account under paragraph (1) unless the issuance of such obligation was necessary to fund a commitment incurred by the Federal Government that required payment before May 19, 2013.”

77 Letter from Jacob J. Lew, Secretary of the Treasury, to the Hon. John A. Boehner, Speaker of the House, May 20, 2013, https://home.treasury.gov/system/files/276/Debt-Limit-Letter-2-Boehner-May-20-2013.pdf.

78 Jonathan Weisman and Ashley Parker, “Republicans Back Down, Ending Crisis Over Shutdown and Debt Limit,” New York Times, October 16, 2013, https://www.nytimes.com/2013/10/17/us/congress-budget-debate.html. Also see Eric Krupke, “How We Got Here: A Shutdown Timeline,” NPR, October 17, 2013, https://www.npr.org/sections/ itsallpolitics/2013/10/16/235442199/how-we-got-here-a-shutdown-timeline.

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2013.”79 On that date, the debt limit was suspended through February 7, 2014, as part of the Continuing Appropriations Act, 2014 (P.L. 113-46).

Economists from the Federal Reserve Bank of Boston (Boston Fed) noted falling demand for Treasury bills maturing near the projected mid-October 2013 exhaustion of extraordinary measures, which had secondary effects on commercial paper rates and money market funds. Those effects dissipated soon after the end of the debt limit episode.80

Actions in 2021 and 2023

The 2021 episode, which led to two increases in the debt limit in October and December 2021, had less dramatic effects on financial markets than the 2013 episode.81 During a panel discussion, former Federal Reserve officials and senior financial executives suggested that perceived risks affected some Treasury bills, but had little effect on other market segments, due to the assessment that a last-minute deal would be reached to resolve that debt limit episode.82 The discussion also described more recent understandings of how Treasury, the Federal Reserve System, and major financial institutions would handle a binding debt limit.

During the 2023 debt limit episode, some Treasury bill yields and credit default swap (CDS) prices on U.S. debt rose, but volatility across financial markets did not rise as in some previous episodes.83 The 2023 episode was resolved on June 3, 2023, with enactment of the Fiscal Responsibility Act (P.L. 118-5), which suspended the debt limit through January 1, 2025.

Observations from Past Actions

During these debt limit episodes, Treasury Secretaries used extraordinary measures to meet federal obligations and avoid major financial disruptions. The magnitude of the extraordinary measures used in the 2011, 2013, and 2015 debt limit episodes was markedly larger than that of the measures used in episodes in the preceding decade, as Figure 4 indicates.84

Benefit payments and other outlays occurred largely on schedule and trust funds were made whole once these episodes ended.85 No federal retirement payments were delayed or reduced as a result of debt limit operations.

The episodes elevated stresses on Treasury operations and heightened concerns in financial markets that Treasury securities might not be risk-free assets. A 2015 GAO report found that

79 Letter from Jacob J. Lew, Secretary of the Treasury, to the Hon. John A. Boehner, Speaker of the House, October 1, 2013, https://home.treasury.gov/system/files/276/Treasury-Letter-to-Congress_100113.pdf.

80 Ali Ozdagli and Joe Peek, Cliff Notes: The Effects of the 2013 Debt-Ceiling Crisis, Federal Reserve Bank of Boston, Public Policy Briefs, no. 13-9, November 2013, https://www.bostonfed.org/-/media/Documents/Workingpapers/PDF/ economic/ppb/2013/ppb139.pdf. Also see discussion preceding Figure 1 in CRS Report R43389, The Debt Limit Since 2011, by D. Andrew Austin. Yields for Treasury bills maturing in fall 2013 rose sharply before that debt limit episode was resolved, but fell to more normal levels afterward.

81 CRS Insight IN11702, The Debt Limit in 2021, by D. Andrew Austin.

82 Brookings Institution, “The Debt Limit: What If…,” webinar transcript, October 5, 2021, https://www.brookings.edu/wp-content/uploads/2021/10/es_20211005_debt_limit_transcript.pdf.

83 David Mericle, “A Retrospective on 10 Questions for 2023,” Goldman Sachs US Daily, December 22, 2023.

84 Ivan Vidangos, “The Federal Debt-Limit Standoff of 2013 in the Financial Accounts of the United States,” Federal Reserve Board of Governors, FEDS Notes, April 21, 2014, https://doi.org/10.17016/2380-7172.0016. Debt limit episodes between 1996 and 2011 drew less upon extraordinary measures.

85 For a discussion of how debt limit episodes affected Treasury’s cash management practices and borrowing costs, see GAO, Delays Create Debt Management Challenges and Increase Uncertainty in the Treasury Market, GAO-11-203, February 2011, pp. 10-18.

A Binding Debt Limit: Background and Possible Consequences

Congressional Research Service 20

some investors avoided holding certain Treasury securities during the 2013 episode and estimated that debt limit concerns raised federal borrowing costs by tens of millions of dollars. A later section in this report discusses debt limit episodes and federal borrowing costs. That GAO report also noted that financial market participants worried that future debt limit episodes could lead to “more severe” consequences.86 The following section analyzes possible consequences of a binding debt limit.

Figure 4. Value of Treasuries Held by Funds Used for Extraordinary Measures

$Billions, 2001-2024

Source: CRS calculations based on Monthly Statement of the Public Debt data. Notes: Changes in values during debt limit episodes mainly reflect use of extraordinary authorities, although other factors may play minor roles. Vertical green lines indicate start of debt issuance suspension periods for the Thrift Savings Program G-Fund. The Postal Service Retiree Health Benefits Fund was established in December 2006 by P.L. 109-435. Extraordinary measures were not used before debt limit increases in 2007, 2008, 2009, and 2010. See GAO, Debt Limit: Delays Create Debt Management Challenges and Increase Uncertainty in the Treasury Market, GAO-11-203, February 2011, https://www.gao.gov/assets/gao-11-203.pdf.

Government Operations and a Binding Debt Limit

If the federal government were to reach the debt limit and Treasury were to exhaust its alternative strategies for remaining under the debt limit, so that its capacity to borrow and its cash reserves

86 GAO, Market Response to Recent Impasses Underscores Need to Consider Alternative Approaches, GAO-15-476, July 9, 2015, https://www.gao.gov/assets/680/671286.pdf.