After a meeting earlier this week between President Joe Biden and House Speaker Kevin McCarthy, White House, and House Republican negotiators have met to resolve the debt ceiling standoff, when the government will no longer be able to pay its bills, on or about June 1. While published reports indicate a deal may be near, there are other factors that take time to resolve. These include drafting the legislation, voting on it in both chambers, preparing it for transmission to the president, and the signature by the president.
According to the National League of Cities (NLC), the League’s federal partner, the potential clawback of State and Local Fiscal Recovery Funds (SLFRF) are not on the table in these negotiations. While it is imperative to obligate these funds before the 2024 statutory deadline, there is no reason to make rushed obligations because of incomplete information. According to the Government Accountability Office, the definition of obligation has occurred when Treasury distributed the money for SLFRF from the agency to the grantees.
NLC has a helpful blog on what impact a default on the debt would have on municipalities and steps to prepare, including:
- A municipality should be positioned with cash on hand to make up for any shortfall that might come from missing principal and interest payments of U.S. government-issued securities. If the federal government is not able to pay its obligations, there is no clear mechanism for who or what will be paid and when. Municipalities should have a cash reserve on hand just in case.
- Any breach of the debt ceiling could substantially drive up the cost of short-term debt. Many municipalities use short-term debt for immediate bills, including those around infrastructure and capital improvements. In turn, this would likely lead a municipality to have to either delay or cancel capital projects until the issue got resolved and interest rates return to more normal levels. This comes as the U.S. is rolling out Bipartisan Infrastructure Law projects across America.
- A breach of the debt ceiling would depress equity markets. Moody’s Analytics predicts that $10 trillion in household wealth could be lost. This would in turn hurt sales tax receipts, as residents pull back spending.
- Much like when COVID first hit, there is a possibility that credit markets could seize up as the unknown of what is next and what will happen takes hold. This could mean lower-rated issuers will have a harder time issuing debt in the market.
The League will continue to monitor this situation and report back accordingly.
Contact: Paul Penna, Senior Legislative Analyst, firstname.lastname@example.org, 609-695-3481, x110.