Richard Neal's debt limit warning

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WASHINGTON — A top House Democrat sent a letter to Treasury Secretary Steve Mnuchin on Tuesday warning the Trump administration not to engage in debt limit brinksmanship that could result in a halt to trading in state and local government securities.

House Ways and Means Committee Chairman Richard Neal, D-Mass. sent the letter, which was released publicly. Trading in SLGS will be halted after March 1 unless Congress votes to raise or suspend the nation’s debt limit past that date.


Neal noted that the nonpartisan Congressional Budget Office recently estimated that the recent partial government shutdown reduced gross domestic product by two-tenths of a percentage point.

“If the president chooses to engage in brinksmanship on the debt limit, as he did on the shutdown, the market reaction and the cost to our economy would likely be far larger,” Neal wrote.

Neal pointed out in his letter that the shutdown also “disrupted Internal Revenue Service (IRS) operations, which may result in revenue falling even lower than projected.”

One Republican senator told CNN Tuesday that he has suggested to the president that raising the debt limit could be part of negotiations on keeping the government open past Feb. 15.

Sen. Lindsey Graham, R-S.C., told CNN he is "hopeful we can solve more than one problem."

"I think the president understands we need to raise the debt ceiling," Graham said to CNN.

Neal’s letter said that the Republican tax legislation enacted in December 2017 “caused a significant drop in revenue from 17.2% of GDP [gross domestic product] to 16.4% of GDP in 2018, and the Congressional Budget Office (CBO) projects that, as a share of GDP, revenue will remain well below the 2017 levels for several years.”

Neal requested Mnuchin for the Trump administration’s plans on how to address that deadline and its timing for requesting congressional action.

After March 1, “Treasury will need to meet our nation’s financial obligations using cash on hand and ‘extraordinary measures’ previously authorized by Congress,” Neal said.

Among the first actions taken by Treasury to conserve cash is the suspension of trading in SLGS which are purchased by issuers with proceeds subject to yield restrictions and arbitrage rebate requirements under the Internal Revenue Code.

The issuers typically are state and local governments and other entities that issue state or local government bonds.

Treasury halts the trading of SLGS only when the national debt limit has been reached.

The last closing of the Treasury window for SLGS purchases was between Dec. 8, 2017 and Feb. 12, 2018.

During that closure the biggest use for SLGS – for an advance refunding – was terminated by Congress. The termination came on Jan. 1, 2018 as part of the Tax Cuts and Jobs Act.

Since that change in the tax law, the amount of SLGS outstanding has declined by $22.4 billion.

As of Dec. 31, 2018 there were 15,684 SLGS bonds and notes with a combined value of $66.2 billion, according to the Treasury.

Earlier this month the House approved a package of changes to its internal rules that includes restoration of the so-called Gephardt rule that links passage of the annual budget resolution to a debt ceiling increase.

The rule is named after former Rep. Richard Gephardt, D-Mo., and was first applied in calendar year 1980 but has been repealed and reinstated several times since then, according to the nonpartisan Congressional Research Service.

However, the deadline for passage of a budget resolution is not until mid-April and it is often missed.

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Debt limit State and local finance Refunding bonds Government finance Treasury Department Washington DC
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