WASHINGTON - A Government Accountability Office report suggests three approaches to avoid the disruption in financial markets caused by impasses over the debt ceiling.
The report focuses on Treasury bonds, but mentions state and local government series securities, SLGS, which are often purchased for advance refunding escrows in the municipal market.
"To avoid disruptions to the Treasury market and to help inform fiscal policy debate in a timely way, Congress should consider alternative approaches that better link decisions about the debt limit with decisions about spending and revenue at the time those decisions are made," GAO said.
The federal debt limit restricts the amount of Treasury debt obligations that can be outstanding. Under current law, the decisions Congress makes that create the need for federal borrowing are made separately from, and generally earlier than, decisions about the debt limit, according to the report.
There have been several impasses over the debt limit in Congress in recent years. When the federal government reaches the debt limit and Congress delays raising or suspending it, as is the case now, the Treasury Department often has to depart from normal cash and debt management operations to avoid exceeding it. The steps Treasury takes to meet obligations when it hits the limit are called "extraordinary measures."
Typically the first of these measures taken is to halt SLGS Treasury typically suspends SLGS sales during a debt limit impasse because "it is the largest source of volatility among non-marketable borrowing from the public," the report said.
Treasury began to take extraordinary measures in March of this year. It also took such measures from May to October of 2013. Each time SLGS sales were halted.
Recent debt-limit impasses have disrupted financial markets. Investors would try to avoid buying or holding Treasuries that matured around the dates when the extraordinary measures were expected to be exhausted. As a result, the interest rates on those Treasuries would rise, liquidity for them would decline and the Treasury's borrowing costs would increase. Other short-term markets, including the commercial paper market, have also likely been affected by the impasses, GAO said.
The report does not go into detail about how debt-limit impasses affect the municipal bond market. However, it mentions that suspending new sales of SLGS "eliminates a flexible, low-cost option that state and local government issuers have frequently used when refinancing their existing debt before maturity."
When the SLGS window is closed, issuers can buy open market Treasuries for their refunding escrows, but this sometimes poses a challenge for issuers.
"The inability of issuers to invest in SLGS, particularly in the current interest rate environment, creates difficulties for existing and new refunding transactions and has real financial impacts on state and local governments," said Mike Nicholas, chief executive officer of the Bond Dealers of America.
One option GAO suggested to avoid the need for extraordinary measures would be for Congress to link action on the debt limit to the budget resolution.
Doing so "would better align decisions about fiscal policy with decisions about debt and would integrate debt limit decisions into the congressional budget process," it said. This approach also would minimize potential disruptions to the Treasury market by shifting the timing of the debt limit debate to before the ceiling is reached.
In previous Congresses, House rules provided that the passage of a budget resolution would automatically generate a joint resolution passed in the House that would change the debt limit by the amount specified in the resolution. Congress has passed debt limit increases through this rule seven times in the last 30 years, according to GAO.
GAO suggested that this procedure to change the debt limit could be used in both the House and the Senate. The office also suggested that when each chamber passes a budget resolution, legislation to raise the debt limit could be generated. That legislation would be subject to a separate vote, which would be subject to expedited procedures.
A second would be for Congress to allow the President to propose debt limit increases that would take effect unless Congress passes a motion to disapprove. This is similar to the approach to increasing the debt limit that was provided under the Budget Control Act of 2011.
"Experts who favored such an approach noted that this would reduce the likelihood of market disruption and damage to the U.S. or world economy in part by changing the results of a lack of direct congressional action from a potential default to a debt limit increase," the report said. "At the same time, it would preserve Congress' ability to debate fiscal policy decisions and the current trajectory of federal debt."
The third option GAO suggested would be for Congress to delegate to the executive branch the authority to borrow money as necessary to fund implementation of enacted laws.
This approach, which is similar to suspensions of the debt limit and has been used in other countries, "would minimize disruptions in Treasury's debt and cash management and would remove the dangers that accompany fear of default by the U.S. government," GAO said. Congress would still have control over federal borrowing because laws that create the need for debt would still have to be passed by the legislative branch, the report said.
Bill Daly, director of governmental affairs for the National Association of Bond Lawyers, said that each of these options would be better than Congress having to take separate votes on the debt limit, as it does now.
If Congress implements any of these approaches and Treasury doesn't have to use extraordinary measures, "that would be very good," Daly said. He noted that the current closure of the SLGS window could last almost a year.
Sam Gruer, managing director of Cityview Capital Solutions, said GAO officials "make some reasonable recommendations."
However, it's unclear that any changes other than eliminating the debt limit would prevent the SLGS window from being closed when the ceiling is eliminated or reached, he said.
"SLGS subscriptions are volatile and unpredictable," he added.
