How Did We Arrive at the Debt Ceiling Standoff, and Where Do Government Contractors Go From Here?

The United States is facing yet another standoff over its congressionally set debt limit. In addition to causing widespread economic harm, Congress’s failure to raise the debt limit, also known as the debt ceiling, could directly impact government contractors. To understand how, it’s important to know how we arrived here, and how the government might or might not respond when it can no longer borrow to meet its financial obligations.

Background on the Debt Limit

The Constitution grants Congress the sole authority to borrow on behalf of the United States.^[1] The U.S. government has been relying on this borrowing power to fund its financial commitments since early in the twentieth century and has not run a surplus, meaning that it has not funded its commitments without going further into debt, for over 20 years.^[2] The debt limit is the congressionally set maximum that the Department of Treasury (DOT) can borrow to satisfy the government’s existing financial obligations when federal revenues alone are not sufficient.^[3] These financial obligations include Social Security, Medicare, payments to contractors, and interest on the national debt.^[4] If Congress fails to increase the debt limit, it puts all of these payments in jeopardy.

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Congress last increased the debt limit in December 2021 to just below $31.4 trillion.^[5] In January 2023, Secretary of Treasury Janet Yellen notified Kevin McCarthy, speaker of the U.S. House of Representatives, that the United States had reached its debt limit and would begin using extraordinary measures to avoid defaulting on the government’s loans.^[6] The secretary explained that she expected the extraordinary measures to continue until June of 2023.^[7]

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In urging Congress to act in January of this year, Secretary Yellen explained that “[t]he period of time that extraordinary measures may last is subject to considerable uncertainty, including the challenges of forecasting the payments and receipts of the U.S. Government months into the future.”^[8] Experts have been projecting that without action from Congress, the United States could default as early as June or July of this year.^[9]

Secretary Yellen concurred in an update to Congress on May 1, 2023, reiterating the uncertainty, but explaining that “[a]fter reviewing recent federal tax receipts, [DOT’s] best estimate is that [DOT] will be unable to continue to satisfy all of the government’s obligations by early June, and potentially as early as June 1.”^[10] She further explained in an interview on May 7, 2023 that “we’ve been using extraordinary measures for several months now and our ability to do that is running out, and we will start to run down our cash[.] Our current projection is that in early June a day will come when we are unable to pay our bills unless Congress raises the debt ceiling.”^[11]

The Biden administration has signaled that it believes the only option is to raise the debt limit, and that it is unwilling to negotiate spending cuts, or other efforts, as part of the increase.^[12]

What Happens When the United States Hits Its Debt Limit?

The consequences of the United States hitting its debt limit differ from the consequences of Congress’s failure to pass its annual appropriations bill. Unlike when Congress fails to pass appropriations, which we have witnessed in recent years, the government does not shut down, nor do agencies need to determine which employees should continue coming to work.^[13] Instead, when the United States reaches its debt limit, Congress has authorized DOT to take extraordinary measures to continue paying the debts of the United States until such time that DOT runs out of funding.^[14] DOT can use extraordinary measures for only so long—until it can no longer shift funds around to stay under the debt limit while still paying the government’s debts.^[15]

If DOT exhausts these extraordinary measures, the government would need to decide what bills to pay. Even getting close to reaching the debt limit “can cause serious harm to business and consumer confidence, raise short term borrowing costs for taxpayers, and negatively impact the credit rating of the United States.”^[16] While delayed payments to Social Security, Medicare, and contractors are certainly an issue, the United States’ actual failure to pay interest on the national debt is seen as the most economically damaging to the U.S. economy, as it could trigger a national—if not global—recession.^[17] DOT in fact outlined a plan in 2011 that focused on making timely interest payments to avoid such an outcome, while holding back on all other obligations, in the event that Congress did not raise the debt limit before DOT exhausted its extraordinary measures.^[18]

How Will This Impact Contractors?

Because the government would likely focus on paying interest and put its other obligations on hold, contractors are among those who may see a delay in payment.^[19] The government sees a short-term nonpayment to contractors as having few devastating long-term effects, and it may have few to no immediate effects.^[20]

While withholding payments to contractors may not be catastrophic or immediately damaging to the economy at large, it could be to individual businesses. Understanding this impact, some legal scholars have suggested solutions that would allow the president, the secretary of treasury, and the Federal Reserve to take action to continue paying the United States’ obligations during a debt limit standoff.

One such example involves Secretary Yellen using her authority to mint a $1 trillion coin, deposit it in the federal reserve, and continue paying the debts of the United States until Congress raises the limit or circumstances force her to mint another.^[21] Another involves the Federal Reserve, the U.S. central bank, making interest-free loans to contractors so that they can be paid.^[22] The idea here is that the contractor could use the loan as if it were a direct payment from DOT, and DOT would pay the loan back on behalf of the contractor after Congress raises or suspends the debt limit.^[23] And still others suggest that, despite violating the Constitution, the president’s duty is to take the least unconstitutional action—which would be to borrow beyond the congressionally set debt limit to pay congressionally set obligations.^[24]

But while these are creative options, officials have either rejected them outright, or signaled that they believe the only viable option is for Congress to raise the debt limit.^[25] When asked whether there were other constitutional options DOT or the president could take to avert a crisis, Secretary Yellen explained that “there are simply no good options.”^[26] “There is no action that President Biden and the U.S. Treasury can take to prevent [the financial] catastrophe” that would occur if Congress fails to raise the debt limit.^[27] Based on the Biden administration’s adamance that it will not negotiate regarding raising the debt limit, we are unlikely to know what actions the government will endorse until DOT can no longer pay the debts of the United States, and should therefore not expect the government to take actions to continue paying contractors.

Key Takeaways

Contractors cannot predict what DOT, the president, or the Federal Reserve will do if Congress fails to increase the debt limit before DOT runs out of funding. Contractors should therefore ensure that they are up to date on their invoicing and consider what impacts an indefinite delay in funding could have on their businesses. In particular, contractors should:

consider what their obligations to employees, subcontractors, and the government will be if the United States defaults;
examine ways to preserve if not increase cash reserves, including opening a new dialogue with their banks and lenders to ensure that their line of credit and other short-term lending options are available if necessary; and
speak to counsel about any concerns or questions they may have.

[1] U.S. Const. art. I, § 8, cl. 2.

[2] Federal Debt and the Statutory Limit, Congressional Budget Office (Feb. 2023), https://www.cbo.gov/publication/58945#:~:text=On%20December%2016%2C%202021%2C%20lawmakers,extraordinary%20measures%E2%80%9D%20to%20borrow%20additional; Federal Surplus or Deficit, FRED Economic Data (Last Updated Mar. 15, 2023), https://fred.stlouisfed.org/series/FYFSD.

[3] Federal Debt and the Statutory Limit, Congressional Budget Office (Feb. 2023), https://www.cbo.gov/publication/58945#:~:text=On%20December%2016%2C%202021%2C%20lawmakers,extraordinary%20measures%E2%80%9D%20to%20borrow%20additional; The Debt Ceiling: An Explainer, The White House (Oct. 6, 2021), https://www.whitehouse.gov/cea/written-materials/2021/10/06/the-debt-ceiling-an-explainer/; see 31 U.S. Code § 3101.

[4] The Debt Ceiling: An Explainer, The White House (Oct. 6, 2021), https://www.whitehouse.gov/cea/written-materials/2021/10/06/the-debt-ceiling-an-explainer/; Letter from Janet Yellen, Sec’y, Dep’t of the Treasury, to Kevin McCarthy, Speaker of the U.S. House of Representatives 1 (Jan. 13, 2023) https://home.treasury.gov/system/files/136/Debt-Limit-Letter-to-Congress-McCarthy-20230113.pdf (hereinafter “Jan. 13 DOT Letter”).

[5] Jan. 13, DOT Letter, supra note 4, at 1; Pub. L. No. 117–73, 135 Stat. 1514.

[6] Letter from Janet Yellen, Sec’y, Dep’t of the Treasury, to Kevin McCarthy, Speaker of the U.S. House Representatives 1 (Jan. 19, 2023) https://home.treasury.gov/system/files/136/Debt-Limit-Letter-to-Congress-20230119-McCarthy.pdf (hereinafter “Jan. 19 DOT letter”).

[7] Id.; Jan. 13 DOT Letter, supra note 4, at 1.

[8] Jan. 19 DOT Letter, supra note 6, at 1.

[9] Wendy Edelberg and Louise Sheiner, How Worried Should We Be if the Debt Ceiling Isn’t Lifted? Brookings (April 24, 2023), https://www.brookings.edu/2023/04/24/how-worried-should-we-be-if-the-debt-ceiling-isnt-lifted/.

[10] Letter from Janet Yellen, Sec’y, Dep’t of the Treasury, to Kevin McCarthy, Speaker of the U.S. House of Representatives 1 (May 1, 2023) https://home.treasury.gov/system/files/136/Debt_Limit_Letter_Congress_Members_05012023.pdf (hereinafter “May 1 DOT letter”).

[11] George Stephanopoulos, Interview with Janet Yellen, Sec’y, Dep’t of the Treasury, ABC News (May 7, 2023), https://abcnews.go.com/ThisWeek/video/debt-ceiling-raised-avoid-economic-calamity-janet-yellen-99150402.

[12] Alan Rappeport, Jim Tankersley, and Jeanna Smialek, The U.S. Hit the Debt Ceiling. What Does That Mean and What Happens Now? New York Times (Jan. 19, 2023), https://www.nytimes.com/2023/01/11/us/politics/debt-ceiling-economy-congress.html; Jim Tankersley, Biden Faces His First Big Choice on Debt Limit, New York Times (April 27, 2023), https://www.nytimes.com/2023/04/27/us/politics/biden-debt-ceiling.html.

[13] David Wessel, What’s the Difference Between a Government Shutdown and a Failure to Raise the Debt Ceiling? Brookings (Apr. 24, 2023), https://www.brookings.edu/2023/04/24/whats-the-difference-between-a-government-shutdown-and-a-failure-to-raise-the-debt-ceiling/#:~:text=In%20contrast%20to%20government%20shutdowns,Medicare%2C%20and%20other%20government%20benefits.

[14] See 5 U.S.C. § 8348(j), (k); Federal Debt and the Statutory Limit, Congressional Budget Office (Feb. 2023), https://www.cbo.gov/publication/58945#:~:text=On%20December%2016%2C%202021%2C%20lawmakers,extraordinary%20measures%E2%80%9D%20to%20borrow%20additional.

[15] See id.; Alan Rappeport, How ‘Extraordinary Measures’ Can Postpone a Debt Limit Disaster, New York Times (Jan. 24, 2023), https://www.nytimes.com/2023/01/18/business/economy/us-debt-limit-extraordinary-measures.html.

[16] May 1 DOT Letter, supra note 10 at 1; see also Interview with Janet Yellen, supra note 11.

[17] Charles Tiefer, Confronting Chaos: The Fiscal Constitution Faces Federal Shutdowns and (Almost) Debt Defaults, 43 Hofstra L. Rev. 511, 528 (2014); Edelberg and Sheiner, supra note 9.

[18] Edelberg and Sheiner, supra note 9 (citing Conference Call of the Federal Open Market Committee, Board of Governors of the Federal Reserve 11 (August 1, 2011)). https://www.federalreserve.gov/monetarypolicy/files/FOMC20110801confcall.pdf).

[19] Id.; Tiefer, supra note 17 at 532-33 (citing Letter from Eric M. Thorson, Chair, Council of the Inspectors Gen. on Fin. Oversight, to Orrin G. Hatch, Ranking Member, Senate Comm. on Fin. (Aug. 24, 2012)).

[20] Id.

[21] Alan Rappeport, The Trillion-Dollar Question: Could a Coin Save the Day? New York Times (Feb. 2, 2023), https://www.nytimes.com/2023/02/02/business/trillion-dollar-coin-debt-ceiling.html; see also Tiefer, supra note 17 at 513.

[22] See Tiefer, supra note 17 at 546-47.

[23] See id.

[24] Neil H. Buchanan & Michael C. Dorf, Justice Delayed: Government Officials’ Authority to Wind Down Constitutional Violations, Cornell L. Sch. Res. Paper No. 23-09, 36-37 (2023) (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4400537) (citing Clinton v. New York, 524 U.S. 417, 445-47 (1998)).

[25] See Rappeport, supra note 21; Andrew Duehren, Janet Yellen Dismisses Minting $1 Trillion Coin to Avoid Default, Wall Street Journal (Jan. 22, 2023), https://www.wsj.com/articles/janet-yellen-dismisses-minting-1-trillion-coin-to-avoid-default-11674417541.

[26] Interview with Janet Yellen, supra note 11.

[27] Id.

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