“Geithner is not kidding,” said former U.S. Senator Alan Simpson at the NACUBO Annual Meeting in Tampa, Florida on Tuesday, July 12. Simpson was referring to Secretary of the Treasury Timothy Geithner’s repeated statements that on August 2, the United States will reach the legal limit of its $14.3 debt ceiling. At that time, the U.S. Treasury will have exhausted all of its options and will need to rely on daily tax revenue to pay bills if the debt limit is not raised. Revenues alone will not be enough to cover debts and without an increase to ceiling, interest rates are likely to rise, credit will be frozen and the United States could possibly slip back into recession.
Simpson, one of the co-chairs of the National Commission on Fiscal Responsibility and Reform, laid out some of the details of the Commission’s plan, and in between one-liners and homespun jokes, described the seriousness of the economic situation we are confronting and stated simply, “the time for fun and games is over.”
President Obama has been meeting regularly with negotiators, and in one press conference told America that it is time to “eat our peas” and to come to an agreement. Remember the spending deal cut back in April in order to avert a government shutdown? That clash was over a comparatively paltry $40 billion. Obama had been hoping negotiators would come to an agreement on a deficit reductions agreement totaling $4 trillion over the next ten years. At this time, Washington observers believe any agreement is likely to save at most $2 trillion.
Few members of Congress have come fully on board with any of the plans, especially the $4 trillion proposal, as it would necessarily include cuts to entitlement programs such as Medicare and Social Security (facing objection from liberal Democrats) and increases in tax revenue (which are staunchly opposed by House Republicans). Complicating the negotiations are differing views within the Republican Party on the risk the nation faces should legislators fail to avoid default.
No Stone Unturned
If the debt ceiling is breached, the federal government would need to immediately cut spending and make critical decisions about prioritizing obligations. In a scenario outlined by the Bipartisan Policy Center, mandatory obligations might be met such as Social Security, Medicare, Medicaid, and payments to bond holders, but in order to pay those bills, spending on Pell grants, pay for veterans and civil servants, and law enforcement would necessarily halt.
In April, when a government shutdown was looming, many federal agencies crafted contingency plans, including the Department of Education. However, hitting the debt ceiling is vastly different than a government shutdown over a spending stalemate; there is no precedent for the looming default scenario. The federal government would necessarily squeeze almost all discretionary programs.
Moody’s Places U.S. Bonds on Review
On July 13, 2011, Moody’s placed the U.S. Government bond ratings on review for possible downgrade. Such a downgrade would have a rippling effect on all U.S. bond holders, including colleges and universities, many of which are currently highly rated. As reported by the Chronicle of Higher Education, due to their diverse sources of funding, a handful of elite institution may have the capacity to withstand a short-term default scenario, but almost all would immediately be burdened by the delay or halt of research funding, student aid, and other payments by the federal government.