Analysts Skeptical Harvey Hastens Debt Limit Drop Dead Date

Federal Contracts Report™ delivers concise, authoritative reports covering the complete spectrum of issues affecting the federal acquisition of goods and services, to keep you abreast of policies...

By Jonathan Nicholson

Recovery efforts for Hurricane Harvey will be expensive, but they will not have any significant impact on when the federal government will run out of borrowing room under the debt limit, veteran federal debt watchers said.

The possibility Harvey’s expense could pull forward the “drop dead” date by which Treasury will be unable to pay the government’s bills has been cited by Treasury Secretary Steven Mnuchin and Senate Majority Leader Mitch McConnell (R-Ky.) as a reason for immediate action on the debt limit. Mnuchin in a letter in July had previously said it was “critical” Congress act on the limit by Sept. 29.

But the government won’t run out of money on Sept. 29 absent a debt limit increase and it won’t be within $7.85 billion—the initial amount of Harvey aid requested by the White House—of doing so before then either, according to analysts who track the debt for Wall Street and one who does the same for a Washington think tank. While relatively small by government standards, $7.85 billion is big enough to be hard for the government to spend quickly, they said, even in a disaster area.

“They don’t just go fly over and drop cash on the ground,” Nancy Vanden Houten, senior research analyst with Stone & McCarthy Research Associates in New York City told Bloomberg BNA. “I don’t see a situation where the drop dead date is in September.”

‘Drop Dead’ Still October

The amount of money the federal government has on hand on any given day is what economists call “lumpy,” swinging by large amounts as some bills are paid and tax payments and other receipts come in. This lumpiness is illustrated by federal borrowing, which swells in the early spring as tax refunds are paid out, and then shrinks after the April tax payment dates for individuals and companies occur.

By Vanden Houten’s calculations, the government just passed the point when its cash cushion will be narrowest before it actually hits the drop dead date. On Sept. 1, the government had just $32.1 billion on hand, according to the Treasury Department. Vanden Houten said that will be the low point until early October, when the drop dead date hits.

“I see it as one day and one day only and that’s Oct. 2 or Oct. 3,” she said.

No Shift in Window

Vanden Houten’s forecast is narrower, and in one case more pessimistic, than some others. Lou Crandall, chief economist with financial analytics firm Wrightson ICAP in Jersey City, N.J., has kept his forecast of a drop dead date in the second week of October.

“The administration has asked Congress for an upfront infusion of $7.9 billion to cover near-term disaster relief operations, but relatively little of that cash will actually go out the door this month. There may be a slightly larger impact from the fact that Houston-area taxpayers (both individual and corporate) have been given an extension until January for quarterly tax payments that would otherwise have been due on September 15,” Crandall wrote in a weekly note for firm clients.

Shai Akabas, director of economic policy for the Bipartisan Policy Center in Washington, said his team is keeping its estimate of borrowing capacity running out in early- to mid-October, with the front end of the range being Oct. 2.

“We don’t expect Harvey to shift that window,” Akabas told Bloomberg BNA, though he added it does make it “a little less clear where in that window it will fall.” In a blog post Sept. 5, the BPC said Homeland Security Department disaster spending totaled $6.8 billion and $4.5 billion respectively for Hurricanes Katrina and Sandy—two months after each storm hit.

Mnuchin: ‘Not Comfortable’

Mnuchin on Sept. 3 raised the prospect that efforts to assist Harvey victims will be hurt if the debt ceiling isn’t lifted soon. In advocating tying the debt limit to the relief bill, Mnuchin on “Fox News Sunday” said, “Prior to Harvey, you know, I’ve said we have enough funding to go through the end of September and had urged Congress to focus on this before that period of time. But with Harvey, it’s moved the situation up earlier, and without raising the debt limit, I’m not comfortable that we will get the money that we need this month to Texas to rebuild.”

McConnell echoed that idea on the Senate floor Sept. 5. “As Treasury Secretary Mnuchin explained, our first priority is to make sure the state gets money. It is critical and to do that we need to make sure we raise the debt limit. So, if Congress appropriates the money but I don’t have the ability to borrow more money and pay for it, we’re not going to be able to get that money to the state,” McConnell said.

Vanden Houten, who called it “pretty cut and dry” Treasury has enough resources to make it into October, said of Mnuchin’s remarks, “I think it might just be some posturing on Mnuchin’s part.”

Akabas said even if Harvey hasn’t changed the date on which Treasury runs out of borrowing room, there was still an argument to deal with the debt limit sooner rather than later: it’s cheaper. With debt markets showing signs of nervousness, borrowing costs for some debt have started to rise, he said. “We know there are added interest costs to taxpayers,” Akabas said.

To contact the reporter on this story: Jonathan Nicholson in Washington at jnicholson@bna.com

To contact the editor responsible for this story: Paul Hendrie at pHendrie@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Federal Contracts Report