H.R. 325, The Debt Limit, and Extraordinary Measures: A Technical Note (Warning: Wonky)

Last week, the House of Representatives approved H.R. 325, a bill that would temporarily suspend the debt limit until May 19, at which point it would be reinstated at a higher level. Today, the Senate passed the bill by a vote 64-34. The Bipartisan Policy Center (BPC) released an initial analysis of how H.R. 325 would work last week.

Based on BPC’s interpretation of the bill, the key point – which will be described in more depth below – is that the new debt ceiling on May 19 would be set slightly lower than the actual amount of debt subject to the limit that is outstanding on May 19. As a result, Treasury would need to either use Extraordinary Measures or cash on hand to redeem debt held by the public immediately on Monday, May 20 to stay under the statutory ceiling.

Some have developed alternative interpretations of the legislation. Although a definitive conclusion at this point is not possible, BPC believes that a straightforward reading of the text produces the following interpretation:

What the Statute Says

BPC’s interpretation, which led to its projection that the new X Date would most likely arrive in August, is based on the provisions of the proposed statute that articulate how the new debt limit would be calculated. H.R. 325 states that on May 19, the debt limit “is increased to the extent that–”

1. “the face amount of obligations …outstanding on May 19, 2013, exceeds”
2. “the face amount of such obligations outstanding on the date of enactment of this Act.” [emphasis added]

Henceforth, we will refer to (1) as “paragraph (1)” and (2) as “paragraph (2).”

The statute also includes a provision that constrains the debt limit increase to the amount of debt that is necessary to fund federal financial commitments that are due before May 19. This effectively prevents Treasury from issuing excess debt before May 19 in order to stockpile cash and pay for commitments that are due after May 19 because the debt limit would not be commensurately increased.

BPC’s Interpretation

As quoted above, the amount of the debt limit increase on May 19 is, essentially, a mathematical formula: the value indicated by paragraph (2) should be subtracted from the value indicated by paragraph (1). Paragraph (1) is straightforward: It equals whatever debt subject to limit is outstanding on May 19 (unless Treasury “runs up the debt,” but the aforementioned provision makes it unlikely that Treasury would do so). Paragraph (2) is not as clear. Some have assumed that it refers to the current statutory debt limit of $16.394 trillion. BPC believes, however, that assuming historical precedent, the most plausible interpretation of this provision results in a moderately-higher value.

The amount of obligations “outstanding on the date of enactment” would likely exceed $16.394 trillion due to the unwinding of Extraordinary Measures. For example, the statute (Title 5 USC § 8438) that governs the investment of the Thrift Savings Plan G-Fund indicates that G-Fund securities that have been disinvested as part of Extraordinary Measures must be “immediately” reinvested upon expiration of the Debt Issuance Suspension Period (DISP).

“(3) Upon expiration of the debt issuance suspension period, the Secretary of the Treasury shall immediately issue to the Government Securities Investment Fund obligations under chapter 31 of title 31”

If the DISP expires on the day that H.R. 325 is signed by the president (as has historically been the case), then the G-Fund must be fully reinvested on that day. Those reinvested securities would seemingly count as “obligations” under paragraph (2), and thus increase outstanding debt subject to limit on the date of enactment above $16.394 trillion.

For this reason, BPC’s interpretation is that paragraph (2) would be equal to $16.394 trillion plus whatever Extraordinary Measures are outstanding on the date of enactment. Therefore, on May 19, the debt limit would increase to the level of outstanding debt subject to limit on that day minus outstanding Extraordinary Measures on the date of enactment. This would effectively modestly reduce the benefit of Extraordinary Measures after May 19, because Treasury would have to use some measures right away to stay under the debt limit (or use cash to buy down debt held by the public, which would have the same effect of hastening the next X Date).

What Other Potential Interpretations Are There?

The approach to the debt limit contained in H.R. 325 is novel and thus, BPC’s interpretation is uncertain.

The most likely alternative interpretation stems from the fact that the relevant statutes are silent on when a Debt Issuance Suspension Period must end. The consistent historical precedent, however, has been for Treasury to end a DISP immediately upon a debt limit increase.

But this situation, being new and different, may call for different procedures. The Treasury Secretary may have the authority to wait a day or two before ending the DISP, in which case Extraordinary Measures may not be unwound on the date of enactment. This means that the securities held by the trust funds that were tapped for Extraordinary Measures would not be reinstated on the date of enactment and would thus be excluded from the amount specified by paragraph (2). Under this scenario, the debt limit would increase precisely to the outstanding debt subject to limit on May 19 (as long as the new debt subject to limit was “necessary to fund commitment[s] incurred by the Federal Government that required payment before May 19, 2013”). At that point, Treasury would have the full array of Extraordinary Measures at its disposal (over $200 billion), creating more room to borrow and pay obligations.

How Much of a Difference Are We Talking About?

The difference between the most likely alternative interpretation spelled out above, if H.R. 325 is quickly signed into law, and BPC’s interpretation should be relatively small because only approximately $25 billion of Extraordinary Measures have been used.

As more information becomes available over the coming days, weeks, and months, BPC will continue to update its analysis.

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