"Failing to raise the debt ceiling would not bring the government to a screeching halt the way that not passing appropriations bills would," stated a February report from the Congressional Research Service, quoting a 1995 report from the Congressional Budget Office. "Employees would not be sent home, and checks would continue to be issued."
This differs from a government shutdown, which occurs when there is a lapse in appropriations, causing a funding gap. In that situation -- narrowly averted literally at the 11th hour earlier this month -- certain government operations cease until funding is restored, and by law employees deemed nonessential cannot work. Employees who are furloughed during a shutdown are not guaranteed retroactive pay, though in previous instances, Congress has provided it to them.
"Shutting down the government is a far more serious matter," wrote Bruce Yandle, distinguished adjunct professor of economics for the Mercatus Center's Capitol Hill Campus program, in a Feb. 22 blog post.
It's still unclear what exactly will happen if the government hits its congressionally mandated debt limit of $14.3 trillion sometime between April 15 and May 31.
When the federal government's spending outstrips its revenue, the Treasury Department can borrow money by selling bonds to the public; these bonds comprise the public debt of the United States. But when that debt increases toward the maximum allowed by current law, Congress either must reduce the debt -- either by cutting spending or raising revenue -- or raise the ceiling. Previously, Treasury has used nontraditional methods of financing its obligations to avoid exceeding the limit; the Treasury secretary can also authorize a debt issuance suspension period.
The Treasury secretary is authorized to temporarily suspend investment of amounts in the Civil Service Retirement and Disability Fund, and in the Thrift Savings Plan's government securities (G) fund, the most stable offering in the Thrift Savings Plan's portfolio of retirement investments. The G Fund is invested in interest-bearing Treasury securities -- bonds -- that comprise the public debt. The Civil Service Retirement Fund finances benefit payments under the Civil Service Retirement System and the basic retirement annuity of the Federal Employees' Retirement System, and those investments are made up of securities also considered part of the public debt.
Federal law (Sections 8348 and 8438 of U.S. Code Title 5) requires the Treasury secretary to refill the coffers of the G Fund and the CSRF once the issue of the debt ceiling is resolved, and to make up, in addition, for any interest lost on those investments during the suspension. This is what happened during the 1995-96 debt ceiling crisis.
"No one who has invested TSP contributions in the G Fund can suffer any reduction in assets or loss of interest income as a result of the actions taken by the secretary of the Treasury," stated a 2002 memo from the Congressional Research Service on federal employee retirement funds and the public debt limit.
But if the government's alternative financing options are exhausted and Treasury runs low on cash before a new debt limit is agreed upon, "there could be delays in honoring checks and disruptions in the normal flow of government services," the 1995 CBO report stated. That would have serious economic consequences and affect the federal government's ability to borrow in the future.
Congress is likely to raise the debt ceiling some time before the July 4 recess, but probably lacks the votes to do so in either chamber unless the legislation also includes a commitment to spending cuts, National Journal reported on Monday.