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Debt Limit Versus Shutdown: Federal Agencies Face Different Kind of Budget Crisis

There's little to guide the government, from Medicare to the military, through a debt default.

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Federal agencies have learned to cope with the drama of Congress and the White House fighting over spending: Last-minute negotiations, strings of stopgap funding measures and even the occasional government shutdown. 

But there is no roadmap for them if the United States is unable to pay its bills, former federal officials and budget experts said. That could happen as early as June 1 if Republicans in Congress and the Biden administration cannot arrive at a deal to raise the $31.4 trillion debt ceiling. 

The U.S. has technically defaulted on debts before, most recently in 1979 due to short-lived computer problems. But none of those earlier examples compares to the size of the looming debt default, nor its potential to cause chaos at home and abroad.

“This is literally unprecedented,” said Jennifer Zeitzer, director of public affairs at the Federation of American Societies for Experimental Biology, which represents academic scientists and organizations who rely on funding from the National Science Foundation, the National Institutes of Health, and other federal bodies. “The agencies are probably in the same position as everybody else, kind of waiting to see what happens, because they've never been confronted with this.”

During a shutdown, agencies stop all but the most essential functions. National parks close, for example, but air-traffic controllers and weather forecasters stay on the job. Agencies develop plans for what offices and personnel stay on the job, following a decades-old law called the Anti-Deficiency Act. There have been three major shutdowns since 1995, with the most recent spanning 35 days in late 2018 and early 2019.

No such law guides a debt default, nor is it clear whether the government can prioritize which bills it pays. 

“They are fundamentally different,” said Barry Anderson, who served as assistant director for budget in the Office of Management and Budget through four presidential administrations starting in the early 1980s, and later was the deputy director at the Congressional Budget Office. 

No exceptions

One major difference is what percentage of the government is affected. Shutdowns, which happen when Congress fails to enact spending bills, apply only to the portion of the government budget that is subject to Congressional approval each year – what budget wonks call “discretionary spending.” Major spending categories like Social Security and Medicare fall into a different bucket – “mandatory spending” – and continue unaffected. 


If the debt ceiling is breached, money is simply not available to any part of government.

“Every bill the government pays — and I think that's tens of billions of dollars a day, hundreds of billions of dollars a month, and trillions of dollars a year,” Anderson said. 

At agencies ranging from the Department of Transportation to the Pentagon, the effects would be dire. And the effects would quickly ripple out into the private sector – such as the nation’s healthcare system, which relies heavily on payments from Medicare and Medicaid.

“Some agencies will be hit, at minimum, with inability to pay their people, [and] at maximum with not only the inability to pay the people, but the inability to put funds that they have committed for services on the street to vendors or small business folks or anybody like that,” said James Dwyer, a senior advisor with law firm Baker Donelson who served as staff director for the House Appropriations Committee for ten years. “The consequences of not making a deal are really horrific.”

The Biden administration is reportedly looking for ways to stretch its cash on hand. The Treasury Department recently sent a memo to federal agencies asking whether they can delay any upcoming payments, the Washington Post reported Tuesday. With quarterly tax payments due on June 15, avoiding default until then could keep the government running into July, even without a deal to raise the debt ceiling. 

“Other than that, I don't know what they can do,” Anderson said.

Questionable contingency plans

For now, the agencies’ shutdown contingency plans may be the best guide to navigating the consequences of default – even if only by reminding officials what functions have been considered essential during past funding lapses.

During some extended government shutdowns, as cash on hand dwindled, officials were forced to pare down even those initial lists. During a 16-day shutdown in October 2013, the National Science Foundation ran out of money to keep operating its trio of Antarctic research bases – which had been classified as essential for safety reasons – and evacuated most scientists and other personnel. 

And Anderson recalled from a 1995-1996 shutdown during his time at OMB a daily meeting where officials would determine which bits of government required attention even while most activity stopped — such as when the National Zoo, part of the Smithsonian Institution, came close to running out of food for the animals.

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