Wednesday, January 30, 2013

More on H.R. 325 and Determining the Debt Limit on May 19

As I mentioned in my previous post on H.R. 325, it is not precisely clear how the new level of debt limit would be determined, and by whom, on May 19, assuming no intervening legislation and assuming H.R. 325 is enacted into law as passed by the House.  The language of the bill on this point reads:

“Effective May 19, 2013, the limitation in section 3101(b) of title 31, United States Code, as increased by section 3101A of such title, is increased 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.”
Given fluctuating cash balances due to the mismatch in the timing of federal government receipts and expenditures, one possible way to determine the debt limit on May 19 is to take the net of the receipts and expenditures during the period beginning on the effective date of the legislation and ending on May 18 and adding that to the debt subject to limit at the beginning of the period. 

That may end up being what is done, if no new debt limit legislation is enacted before that date.  Another complication, though, has to do with trust fund transactions, such as Social Security. 

When Social Security payments are made at the beginning of each month, non-marketable Treasury securities in the appropriate trust fund are redeemed.  Those securities are subject to the debt limit, and the redemption lowers the amount of debt subject to limit. While Treasury does not match its security issuances to match particular expenditures, Treasury issuance of securities to the public is increased by the need to make Social Security payments. This increases the debt subject to limit. In addition, as Social Security tax receipts are received and invested in new non-marketable Treasury securities, the debt subject to limit also increases.   

It would seem that the most reasonable interpretation of H.R. 325 is that the redemption of Social Security trust fund securities would be offset by Treasury’s need to issue new debt to fund Social Security payments. The issuance of new securities to the Social Security trust funds as tax receipts and interest are reinvested would not count for purposes of determining the new debt limit, since these securities would not be issued to “fund a commitment…that required payment before May 19.”  

Since the trust funds in total are increasing the amount of Treasury securities that they hold, it would seem that the issuance of securities to all the trust funds during the period from the enactment of H.R. 325 and May 18 will be greater than redemptions.  In other words, this factor would contribute to Treasury exceeding the statutory debt limit on May 19 before Treasury takes “extraordinary measures” lowering the debt subject to limit. Treasury would need to take extraordinary measures to rollover existing debt as it matures and to raise new funds.

There would seem to be a more straightforward way to accomplish the apparent goals of H.R. 325. If the intent is to prevent Treasury from excessive borrowing during the period prior to May 19, it might have been simpler for H.R. 325 to state that Treasury could only borrow funds necessary to meet existing expenditures and to maintain a prudent cash balance. Then the new debt limit could be determined on May 19 by reference to the debt subject to limit but for the suspension on May 18.  One way to enforce the prudent cash balance requirement would be to subtract from the debt subject to limit on May 18 the amount Treasury cash exceeded a certain amount on that date for purposes of determining the new debt limit on May 19.  If Congress wants to net out the effect of the extraordinary measures in effect prior to the enactment of the law, they could add a provision to do that. The only reason for that, though, would be to lessen the amount of time Congress would have to raise the debt limit after May 19.

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