Federal Manager's Daily Report

Federal managers and supervisors generally do not have to

worry about federal debt issues, something typically left

up to politicians and other regulators. However, they do

have to live with the effects of periodic budget crises

influencing their budgets.


For that reason managers and supervisors would benefit from

an understanding of federal debt ceilings, especially

considering the current debt crises as it strains day-to-day

operations and becomes part of the reconciliation bill wending

its way through Congress.


The national debt reached $7.078 trillion a week or two ago,

according to AABPA’s George Krumbhaar and Scott Cox, close to

the current statutory limit of $7.4 trillion. They say

something is going to give and it is unclear just what.


The Debt Limit: Questions and Answers

By George Krumbhaar and Scott Cox

(Krumbhaar and Cox are editors of USBudget.com. USBudget.com

is a division of GalleryWatch, Inc. The article was submitted

to Federal Managers Daily Report by the American Association

for Budget & Program Analysis.)


Last spring, the President signed a joint resolution passed

by Congress increasing the Public Debt statutory limit by

$984 billion to a record total of $7.4 trillion. Last week,

the national debt reached $7.078 trillion.


CBO projected in January (and Secretary of the Treasury

confirmed during Budget release hearings earlier this month)

that the current statutory debt limit will be reached later

this year. An increase to that ceiling later this year would

be the second consecutive year that the debt ceiling has been

raised.


The Debt Limit

Congress sets the statutory debt limit by law (set out in law,

31 U.S.C 3101). The government cannot borrow more than the

statutory limit (currently $7.4 trillion) without new

legislation from Congress establishing the new ceiling. The

idea, more theory than fact, is that it enables Congress to

maintain its oversight of federal finances.


Types of Public Debt

There are two types of public debt holdings:


Debt held by the public: Debt held by individuals, corporations,

state or local governments, and foreign governments, essentially

all units outside of the United States government. Savings

bonds and treasury bills are examples of vehicles for such

debt. Treasury bills are generally purchased at weekly auctions.

Bills that have already been sold at auction can get re-sold in

the securities markets just the way stocks are.


Intragovernmental Holdings: This includes trust fund balances

like Social Security or Medicare, revolving funds, and special

funds; also Federal Financing Bank securities. When a trust

fund, such as the Social Security trust fund, operates in

surplus, its surplus balances much be invested – those excess

balances are invested in federal securities. The securities

are not as visible in business circles like Treasury securities

and savings bonds are in business publications. Instead, they

normally appear as bookkeeping entries at the Treasury

Department and with the fund managers at the Social Security

Administration.


Federal Debt Increases – Good or Bad?

It depends. Imagine a situation where the on-budget deficit is

at zero – i.e., all accounts, excluding Social Security, offset

each other and the Social Security trust funds run a surplus.

When Social Security parks this surplus in Treasury

securities, it increases the amount of federal debt, even

though the rest of the budget may be in perfect balance. Just

because the amount that Treasury owes the Social Security

Trust Funds increases from one year to the next, therefore,

does not mean that the government is “raiding” the Trust

Funds. “Raiding” takes place under different circumstances:

When on-budget accounts show a deficit, thus causing the

government to balance the budget with trust fund surpluses.

In other words, don’t mix the language and concepts of budget

balance with the language and concepts of public debt management.


Another way the public debt can increase, however, is when

the budget runs a deficit, other factors being the same.

Such an increase is merely the consequence of the deficit.

If the deficit is “bad” for other reasons – e.g., it shows no

signs of abating over time – then policymakers should worry;

the worry, however, does not stem from the increase in the

public debt per se but rather from the reasons for the increase.


When Might the Debt Be Too Much?

As a practical matter, “too much” federal debt occurs when the

government can’t find people to buy its securities at a

reasonable price. To use an analogy: If you were a bad credit

risk, lenders might charge you very high interest rates or

even refuse to lend, causing you to stop borrowing and/or to

declare bankruptcy. Governments get into this fix from time

to time – think Mexico in 1998.


If we don’t have to worry about the government having too

much debt, then what’s the point of the statutory debt

limit?


Bumping up against the statutory debt ceiling is more a

legal and political event than it is an economic or financial

one. If there were no statutory ceiling, the government

would still be able to sell its securities to the public

without difficulty. The ceiling, however, is written into

law, and it gives Members of Congress an opportunity to

position themselves whenever it comes up for renewal.


Bottom Line: Look for this politically sensitive issue to

be brought to the forefront in the coming months. Don’t be

surprised if a debt limit increase provision is included in

a reconciliation bill – which cannot be filibustered in

the Senate – as opposed to a standalone bill (such as the

one passed last year).


(Editor