House Democrats Switch Focus to Short-Term Debt Extension

House Democrats have scuttled plans to include a $1.8 trillion boost to the national debt limit in the upcoming defense appropriations bill, and instead plan to propose separate legislation that would raise the limit by $200 billion and allow the Treasury Department to continue issuing debt for two more months.

But if Congress does not pass legislation boosting the federal debt limit by the end of the year, the Treasury would likely hit its current $12.1 trillion ceiling and close the window for state and local government series securities, or SLGS, which municipal issuers purchase for refunding escrows to avoid earning arbitrage.

House Majority Leader Rep. Steny Hoyer, D-Md., told reporters Monday night that lawmakers are now focusing on a short-term debt extension, which reportedly would raise the cap by $200 billion — a move that would buy the Treasury two more months until Congress would be forced to consider another increase.

As of Dec. 11, the federal government had $12.08 trillion of public debt outstanding.

That debt limit affects the muni market because when the Treasury comes close to reaching it, one of the first things it does is close the SLGS window to state and local governments.

SLGS issuance in 2009 was about the same as in 2008, but fell below prior years, according to market sources. Municipal Market Advisors said a total of $63 billion of SLGS had been issued this year, a 0.2% decrease from the $63.11 billion issued in 2008.

Several key lawmakers in the House had been pushing for legislation that would boost the limit enough to fund government borrowing through 2010, so the issue would not reemerge during next year's election cycle.

But conservative Democrats in both chambers, including Senate Budget Committee chairman Sen. Kent Conrad, D-N.D., dug in their heels against expanding the debt limit, insisting that it only be proposed if a provision that would implement pay-as-you-go budget rules was included. And Republicans were staunchly opposed to the expansion of federal spending.

Congress last increased the debt limit in January, after analysts from the Congressional Budget Office warned at the time that the limit, then $11.315 trillion, would be exceeded by the spring.

The House and Senate earlier this year approved a budget resolution to raise the debt cap to $13.2 trillion in fiscal 2010, then increase it by about $100 billion per year until it reaches $17 trillion in fiscal 2014. However, the resolution was not binding and Congress must enact legislation to raise the limit.

The Treasury last closed the SLGS window in September 2007, before Congress raised the debt limit to $9.8 trillion.

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