ANALYSIS — Lawmakers were set to return to Washington in September staring down the twin barrels of a potential debt ceiling breach and government shutdown, while various external crises — including devastating hurricanes — buffeted a first-year president with sagging approval ratings.
The year was 2017.
At this time four years ago, unless Congress gave the Treasury Department more borrowing authority, it wouldn’t be able to pay all of Uncle Sam’s bills past Sept. 29. And on Oct. 1, without a stopgap appropriations bill, all but the most essential government functions, to protect human life and property, would cease.
But conservative Republicans were itching for a fight over spending, and then-minority Democrats weren’t about to bail out GOP leaders and clear the decks for then-President Donald Trump’s tax cuts. At least not for free: Democrats were willing to talk about the debt ceiling and a continuing resolution if paired with legislation to protect undocumented immigrants brought to the U.S. as children, known as “Dreamers,” from deportation.
Then Hurricane Harvey battered Houston — the first of three massive storms in quick succession, including Irma and later Maria. Trump soon cut a deal with Democratic leaders to package a stopgap funding bill and debt ceiling suspension through Dec. 8 with initial Harvey and Irma relief.
Trump’s imprimatur helped tamp down a revolt on the right, and Harvey hit home for top GOP lawmakers like John Cornyn, then the Senate’s No. 2 Republican. Even Sen. Ted Cruz, R-Texas, who opposed Superstorm Sandy relief five years earlier and in 2013 led his party into a two-week government shutdown, backed the 2017 package. The measure sailed through with broad bipartisan support, including 133 Republicans in the House and 33 in the Senate.
Democratic leaders now in the majority just need 10 Senate Republicans to get out of their current debt limit jam, and Hurricane Ida might be the ticket. Louisiana's mostly GOP congressional delegation has been clamoring for supplemental appropriations since hurricanes Laura, Delta and Zeta hit their state last fall, for example, and Ida’s toll could be greater.
Louisiana lawmakers and Democratic Gov. John Bel Edwards have been particularly intent on securing community development block grants for disaster relief, or CDBG-DR. The Department of Housing and Urban Development program received cash infusions in the September 2017 and other hurricane aid packages.
"Without substantial and robust emergency appropriations from Congress to critical unmet needs accounts like the CDBG-DR program, Louisiana families will continue to languish as a result of these devastating storms," the delegation wrote to President Joe Biden on Thursday in advance of his trip to their state to survey the damage on Friday. They sent a copy to former Rep. Cedric Richmond, D-La., now an assistant to the president.
The Federal Emergency Management Agency, the first responders in most disasters, likely won't need cash immediately. The agency’s latest financial report shows $35.5 billion left after accounting for expected needs as of July 31. Assuming Congress can pass a CR, the usual “anomaly” freeing up a year’s worth of disaster relief funds should add $17 billion more on Oct. 1. Altogether that’s nearly as much as FEMA allocated for Maria, Irma and Harvey combined.
Still, the agency's getting stretched thin. Days later Ida’s impact was still being felt as far north as New York and New Jersey, on top of California wildfires, Tennessee flooding and other recent disasters as well as the ongoing COVID-19 response.
Federally backed flood insurance is another issue. Claims totaled $18.8 billion for Harvey, Irma and Maria, according to the Insurance Information Institute. Along with existing reserves and $9.9 billion in remaining borrowing authority, the program has $17.1 billion left for new claims, according to FEMA.
But unless Congress extends the national flood insurance program’s authorization beyond Sept. 30, its borrowing authority drops to $1 billion. And Democrats say more debt relief is needed on top of the $16 billion Congress forgave in October 2017.
Meanwhile, additional funds for agricultural assistance, small business loans, coastal restoration, social services and more could be warranted based on prior disaster recovery efforts.
Turning up the heat
If the administration and Democratic leaders go cheap on emergency disaster aid at the same time they’re taking up a $3.5 trillion expansion of social programs sought by progressives for decades, the optics won’t look good. Especially after Biden's Louisiana visit, where he promised state and local officials he'd "have your backs until this gets done."
And Democrats could turn up the heat on Republicans like Louisiana Sen. Bill Cassidy, one of 46 Senate Republicans who signed a letter last month pledging to vote against a debt limit increase, by adding disaster relief to debt ceiling and stopgap funding legislation.
Other signatories included Mississippi’s Cindy Hyde-Smith, Arkansas’ John Boozman and North Dakota’s John Hoeven. All three touted more than $7 billion in aid for crop and livestock producers with losses from flooding, drought, wildfires and other recent disasters added to the Senate’s fiscal 2022 Agriculture appropriations bill in committee last month. Senate appropriators on a bipartisan basis added another $450 million for Western drought relief in the Energy-Water bill.
Republicans won’t be happy if Democrats try to “jam” them by loading up contentious legislation with goodies they’ve supported. But how would it look back home if the Treasury can’t finance disaster recovery efforts, let alone Social Security checks or salaries and benefits for service members coming back from Afghanistan?
A government shutdown, while debilitating, isn’t as bad as breaching the debt ceiling. That's known as a “technical default,” as some government obligations won’t be met on time depending on how long the stalemate lasts. Treasury would have to rely on whatever cash is left on hand and daily revenue inflows.
The first day of each month — when big payments go out for Medicare reimbursements, military salaries, veterans’ benefits, pensions for military and civilian federal employees and more — is particularly bad. The third day of each month and Wednesdays, when Social Security benefits go out, aren’t great either. Interest payments to Treasury's creditors go out on the 15th and at the end of each month of beginning of the next.
Treasury gets some relief when quarterly estimated tax payments come in on Sept. 15, and on Sept. 30 Treasury gets $48 billion in additional “headroom” under the debt ceiling by forgoing federal workers' pension and disability fund investments.
But on Oct. 1, some $100 billion in required military retirement and health care fund investments are due, on top of the usual benefit payments. Treasury Secretary Janet Yellen wrote to lawmakers July 23 that the combined result that day would be a roughly $150 billion decline in cash and “extraordinary measures” that Treasury typically employs to stay under the debt ceiling.
Setting a date
Yellen wrote that there are "scenarios" in which action may be needed "soon after Congress returns from recess." But she hasn’t set a firm deadline, and the Congressional Budget Office and private forecasters have said the moment of truth might not come until October or early November.
In July 2017, then-Treasury Secretary Steven Mnuchin was more blunt, telling lawmakers they had until Sept. 29 or the money runs out. Treasury built up such a large cash balance during the pandemic that the runway may be a little longer this time, but neither chamber currently has votes scheduled the week of Oct. 11.
When the Treasury secretary puts out a date, investors tend to fixate on it, which can lead to volatility, disruptions in the Treasury debt market and higher borrowing costs as the deadline approaches. A prolonged standoff could also put scheduled Treasury auctions at risk, leaving the government unable to raise cash to meet its obligations.
Already, Treasury bills maturing in October and November have been trading at higher yields, and analysts warn that holders of longer-dated debt maturing around that time could pull their money rather than reinvest it. At the same time, a general lack of short-term bill supply as Treasury conserves debt ceiling headroom is impacting money market funds, where investors have parked about $4.5 trillion in cash, as high demand drives down yields.
If Democrats want to really turn the screws on Republicans, many of whom listen to the financial markets, Yellen would set a date. At that point, there wouldn’t be any mistaking the consequences of not acting, and Republicans could face a choice: Do they vote for a market meltdown and against money for the troops, veterans, farmers and hurricane-stricken constituents?
If both sides agree, it would buy time to negotiate a compromise on fiscal 2022 spending caps acceptable to Republicans, whose votes are ultimately needed to pass appropriations bills since they don’t enjoy the same protection from filibuster that reconciliation bills do. Deals on appropriations caps were attached to debt ceiling legislation in 2015, 2018 and 2019.
But past isn’t always prologue, and Congress is more evenly split than perhaps at any time in the past century. A messy fiscal cliff this fall could upend Democrats’ plans for the biggest social safety net expansion and tax increases since the 1960s. For Republicans, that could be a fight worth having.
Peter Cohn is CQ Roll Call’s fiscal policy editor.