What Happens to BIL Programs If We Don’t Address the Debt Limit?
When the Bipartisan Infrastructure Law (BIL) passed in November 2021, it represented a historic investment in America’s infrastructure. It promised more than $1 trillion in transportation, energy, water, and broadband projects over the next few years. While funds are flowing as expected, the current debate over raising the debt limit is causing infrastructure stakeholders to wonder how long that will continue.
By way of background, the debt limit is a statutory cap on the amount of debt the U.S. Treasury can issue to generate the cash needed to pay the government’s bills. Currently, the limit is $31.4 trillion. The debt limit covers both debt issued to the public and debt held in other government accounts. When Treasury gets close to the debt limit, it can delay payments to the government accounts in order to continue issuing debt to the public, in a step known as “extraordinary measures.” Treasury began using extraordinary measures on January 19.
The debt limit has regularly been raised over the years, though at times the debate on increasing it got uncomfortably close to the X date, i.e. the date at which Treasury exhausts its ability to use extraordinary measures to continue paying the bills. BPC currently projects the X date will fall sometime this summer or early fall. If we reach that point without an increase in the debt limit, Treasury would no longer be able to raise enough cash to fully cover its daily needs. What would happen next is the subject of much speculation and little certainty, as the U.S. has never crossed the X date before. One potential, though untested, possibility is that Treasury could prioritize payments by choosing to make some payments before others, or by waiting until it has enough cash for a full day of payments before making that day’s payments, thereby delaying payments for the following days. Taking such steps could create significant challenges for those who rely on federal payments, from individuals to businesses to state and local governments, with adverse ripple effects throughout the economy.
Impacts on Infrastructure Programs from Crossing the X Date
Most BIL programs provide grants to states, localities, tribal governments, and other recipients, paid for with general revenues of the U.S. Treasury. If the X date is crossed, these programs would likely be subject to the same negative impacts as other government programs, whether that is some form of prioritization or another approach, leading to the possibility that federal payments to BIL grant recipients could be delayed.
The impact on infrastructure projects currently underway could range from minor to significant, depending on the duration of the delays, other resources available to project sponsors, and related economic disruptions. Most federal grants are reimbursable, which means that project sponsors spend their own money first and are reimbursed by the federal government. In the case of federal funding delays, project sponsors could choose to stop work until federal funding became more certain, though they would incur the additional costs that come with ramping projects up and down. Project sponsors may also choose to continue projects, covering costs with their own funds until federal reimbursement becomes available. State and local governments already utilize multiple strategies to handle short-term disruptions in federal funding, including project scope adjustments and utilizing cash reserves. However, use of these strategies is not cost free. They require significant staff time to manage and can increase the overall cost of projects. Eventually, project sponsors may have to make difficult decisions about which projects to continue given that local resources are not unlimited.
Beyond existing projects, state and local governments may delay the start of new projects if federal funding is not certain to arrive as scheduled. Moreover, disruptions in the broader economy could be significant, in which case the impacts on infrastructure projects could multiply. Contractors may refuse to take on work where the timing of payments is uncertain or charge higher prices to account for that risk. Supply chain disruptions resulting from turbulence in global markets could also affect project schedules and costs. Another potential adverse impact involves the municipal bond market, where concerns about volatility could lead to higher borrowing costs for state and local governments. All of these factors could increase the cost of projects and thereby reduce the number and size of projects supported by the BIL.
Some BIL programs have funding sources other than general funds. The largest of these is the federal-aid highway program, which receives funding from the Highway Trust Fund (HTF). The HTF receives federal fuel taxes as well as funds from Treasury’s general fund. Since the HTF has its own stream of cash coming in, the point at which it would no longer be able to cover daily payments may differ from the X date affecting most government programs. It would depend on how much cash the HTF has on hand once the X date is reached, how much fuel tax revenue flows in following that date, and the pace of requests for reimbursement. Even if enough fuel taxes continued to be collected to cover the HTF’s obligations, however, crossing the X date would create unprecedented operational, legal, and economic challenges affecting the entire federal government, and there is no way to know with any certainty how payments from the HTF would be handled or delayed in that context.
According to the White House, more than $195 billion in BIL funding has been announced or awarded to grant recipients, leaving about $1 trillion still to come. If the X date were crossed, federal agencies may hold off on releasing new Notices of Funding Opportunity for BIL programs. But even funding that has already been announced is not immune to delays due to the debt limit issue. Much of that funding is still in government accounts, waiting for grant recipients to draw it down. In other words, the vast majority of BIL funding remains susceptible to the consequences of crossing the X date.
Impacts Ahead of the X Date
In 2011, S&P downgraded the U.S. from AAA+ to AAA even though Congress raised the debt limit hours before the deadline. If similar actions are taken by credit rating agencies this year, borrowing costs could begin to go up even ahead of the X date. In fact, interest rates on short-term Treasury securities that mature later this summer are already starting to rise. Infrastructure financing programs like TIFIA and WIFIA, which provide loans tied to Treasury rates, could see higher interest rates for borrowers as a result. Similarly, state and local bonds issued against the promise of future federal funding, such as GARVEEs, could see higher rates if investors begin to fear a future federal default. These effects could lead state and local agencies to defer taking loans or issuing bonds, which would reduce resources available for infrastructure projects even if the X date is ultimately avoided.
Another aspect of the debt limit debate that could impact infrastructure is the connection congressional Republicans are making between raising the debt limit and reducing federal spending. While there is currently no consensus on how to reduce spending, it is certainly possible that infrastructure programs might be on the chopping block, whether through rescission of specific BIL programs or across-the-board cuts in annual appropriations. Of course, any reduction in infrastructure programs would delay projects even further.
Crossing the X date would be terra incognita for the U.S., so the scope and scale of the impacts are impossible to predict with certainty. It seems clear, however, that the potential outcomes for infrastructure would be negative in almost any scenario. These consequences can be avoided if Congress acts expeditiously to raise the debt limit and adopts policies, such as BPC’s proposal to reform the debt limit to prevent similar situations from occurring in the future.
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