Could the X Date be delayed by extending the Debt Issuance Suspension Period?

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Wednesday, October 9, 2013
Doubts about the legality of the approach, not to mention its timing, could cause negative market reaction

The Bipartisan Policy Center (BPC) has received numerous inquiries about whether Treasury could delay the X Date – the date on which the United States will be unable to meet all of its financial obligations in full and on time – by extending the Debt Issuance Suspension Period (DISP) beyond October 17, when it is now set to end. This question raises very complicated issues, but the short answer is that the proposed approach is questionable on legal grounds and would buy very limited time.

Our analysis shows that, in order to delay the X Date to November 15, Treasury would need to declare a DISP through March of 2015, one and a half years from now. Whether this is a legal action or not, it could send a message of desperation to investors, who might react by avoiding U.S. Treasury securities (especially if there were doubts about the validity of the debt issued in the wake of this approach), pushing up interest rates, and increasing the cost to current and future taxpayers of servicing the debt. Finally, this would all be for a relatively short delay in the X Date. What follows is an analysis of the DISP, the related extraordinary measure, and this proposed approach.

The Wonky Details

What is a Debt Issuance Suspension Period (DISP)?
The statute (5 USC Sec. 8348) that governs the Civil Service Retirement and Disability Fund (CSRDF) allows the Secretary of the Treasury to declare a DISP, which enables the use of certain extraordinary measures, giving Treasury limited additional borrowing authority when the government is operating at the debt limit. The law defines a DISP as: “any period for which Secretary of the Treasury determines for purposes of this subsection that the issuance of obligations of the United States may not be made without exceeding the public debt limit.”

The statute does not provide guidance for how the length of the period is determined. In the past, when the debt ceiling was reached, Treasury issued DISPs for a month or two and extended them if Congress had not addressed the debt limit and extraordinary measures were still available. For example, in May of this year, when the U.S. last hit the debt limit and the use of extraordinary measures commenced, Treasury declared a DISP until August 2. This was extended three more times, and now the DISP is set to end on October 17.

How does the length of a DISP affect extraordinary measures?
There are several ways that Treasury can use the CSRDF to create a limited amount of room under the debt limit during a DISP. Most of these uses have nothing to do with the length of the DISP. For instance, in June, Treasury did not roll over maturing securities or credit interest owed to the CSRDF, as normally would be done. This had the effect of reducing intragovernmental debt (which counts towards the debt limit) relative to what it otherwise would have been, allowing for additional borrowing from the public to raise cash. These uses are only available on dates when securities in the fund are maturing or when interest is due. Additionally, during the DISP, Treasury does not have to credit the fund with contributions for the retirement benefits earned by existing employees, which adds a small amount of headroom each month. When the DISP ends, Treasury is required to restore these contributions, along with any interest that would have been due under normal operations.

There is one additional CSRDF maneuver that Treasury can use during the DISP. Under normal circumstances (i.e., not during a DISP), in each month, Treasury redeems securities from the CSRDF at the same time that benefits are paid to federal retirees. During a DISP, however, Treasury may redeem these securities early (before the associated pension payments are made) – thereby reducing intragovernmental debt and allowing for additional borrowing – but only in the amount of the benefits scheduled to be paid during the length of the DISP.

Benefits to federal retirees that are related to the CSRDF amount to about $6.4 billion per month. As the current DISP has lasted five months (May through October), Treasury has generated roughly $32 billion in additional room under the debt limit using this part of the measure. Although this has been useful in managing debt and generating cash during tight periods before the X Date, this “room” did not affect the X Date because the CSRDF redemptions related to benefit payments would have happened during the DISP and prior to the X Date anyway. Conclusion: the duration of the DISP and its extension have not affected BPC’s X-Date forecast.

Could the Treasury Secretary delay the X Date by extending the DISP again?
The idea is this: Suppose Treasury declares a DISP that goes beyond the current X Date, redeems securities from the CSRDF early based on the DISP extension, and uses the additional temporary headroom to continue to make payments in full and on time without action to increase or suspend the debt limit. Secretary Robert Rubin employed this idea in November of 1995, when he declared a DISP that lasted 12 months, well beyond when the X Date would have occurred absent the passage of legislation.

The practical implication of this idea is that Treasury would have to declare a very long DISP in order to delay the X Date by any measurable amount of time. For example, suppose the X Date were to occur on the first day of BPC’s updated X Date window, October 22. To get to November 15 without missing a payment, Treasury would need about $108 billion in additional borrowing authority. Under this proposed approach, Treasury would need to redeem over $114 billion from the CSRDF (one month’s worth would be redeemed anyway when benefits are paid), which would require a DISP of 18 months – through the end of March 2015. 

The legality of declaring a DISP of this length could be questioned, since it seems illogical to conclude that any issuance of additional debt for the next year and a half would cause a violation of the debt limit statute. The Government Accountability Office (GAO), however, did an analysis of Secretary Rubin’s actions in 1995 and found that they “were not unreasonable.” Rubin defended his decision by pointing to the fact that, at the time, there was no resolution to the debt limit issue in sight and a new Congress may have been needed (via the 1996 national elections) to settle the matter.

Additionally, this approach risks a possible negative market reaction. Declaring a DISP of such a long period at this late point in time could be perceived as a desperate action; that, in combination with doubts about the legality of the approach, could cause investors to question whether the debt issued in its wake would be valid. These reactions could lead to a drop in demand for Treasury debt, an increase in interest rates, and potentially even difficulty in attracting enough buyers to roll over maturing Treasury securities. 

Given these potential legal and market response problems, this seems to be a dubious strategy to delay the X Date. Furthermore, it would possibly only push back our current X Date estimate by a matter of weeks.