Clean Water Current

As Federal Debt Crisis Looms, Governmental Entities Cautioned to Prepare for Impacts to U.S. Treasuries

May 24, 2023

NACWA is closely monitoring the ongoing negotiations surrounding raising the federal debt ceiling. As has been widely reported, the U.S. Treasury has indicated that without a deal to raise the debt limit, a default could occur as soon as June 1 with potentially severe implications to the U.S. and global economy.

The debt ceiling has been frequently raised in the past, and President Biden and House Speaker McCarthy are continuing to work toward finding common ground in a fraught political climate.

The debt limit must be raised for the U.S. to meet its already-approved spending – it does not directly relate to new spending. Cuts to previously approved spending are unlikely. However, a final compromise is likely to involve a freeze in discretionary spending to meet the demands of House Republicans. Such a freeze could make it more difficult for Congress to support any increases in water investment this coming fiscal year.

Of more immediate impact, if a deal is not reached by June 1st, entities that invest in treasuries and use them for short-term investment or cash management purposes will need to be prepared. Many public entities are in this position.

The Government Finance Officers Association, GFOA, shared the following alert this week with partner associations like NACWA to build awareness among the governmental finance community:

If the federal debt ceiling agreement is not resolved by June 1, the United States federal government could miss or delay payment on their obligations. This would constitute a technical default which means that debts (including interest and principal on U.S. Treasuries, as well as other payments) will likely be paid, however the timing of the payments could be delayed.

Due to the nature and timing of this circumstance, GFOA recommends specific immediate action:

  • Governments should review their investment portfolio, and confirm investment holdings in US Treasuries, including other products that may be invested in Treasuries, such as Local Government Investment Pools (LGIPs), and the date these investments mature.
  • Governments should also know if those investments are needed for certain obligations (such as a debt service payment).
  • Governments should be positioned to have cash on hand to meet obligations in the event that their entity does not receive principal or interest payments from their treasury investments as scheduled.

Governments should also be aware that if they have escrows coming due for refunded bonds and those funds are backed by US Treasuries and/or State and Local Government Series (SLGS) they should discuss this situation with their escrow agent, municipal advisor, and financing team. Governments should be aware that the SLGS window is closed and will remain so until the debt ceiling debate is resolved.

As of this writing, negotiators appear to be making progress toward a compromise. But with June 1 and the Memorial Day weekend looming, key issues have yet to be resolved. NACWA will continue monitoring and sharing pertinent updates with the membership. Contact Kristina Surfus, NACWA’s Managing Director of Government Affairs, to discuss.

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