Here’s What the US Debt Ceiling Deal Means for Counties

After several rounds of negotiations, the White House and House Republican Leadership agreed to address the debt limit and cap spending.

The agreement comes less than a week before the deadline, after which the federal government would no longer be able to pay its obligations. As previously reported on Conduit Street, Maryland is particularly vulnerable to a US government debt default and federal austerity measures.

The Fiscal Responsibility Act of 2023 (FRA) (H.R. 3746) would suspend the debt ceiling through January 1, 2025, effectively increasing the amount of money the federal government can borrow to fund federal programs.

The US House of Representatives passed the bill by a vote of 314-117. The legislation now must clear the US Senate and become law before Monday, June 5, the day the government would default on its debt.

Of particular note to counties, the bill does not rescind any State and Local Fiscal Recovery Fund (SLFRF), including the $65.1 billion provided directly to counties. As such, counties can continue to invest SLFRF funds to strengthen their communities.

The nonpartisan Congressional Budget Office (CBO) estimated that if the legislation were enacted, federal budget deficits would be reduced by about $1.5 trillion over the next decade, and interest on the public debt would be reduced by an estimated $188 billion.

While this is a significant move that will provide much-needed certainty to counties, there are a handful of provisions of relevance to local leaders, including spending cuts, permitting reform, implementing new work requirements for specified federal public assistance programs, and reinstating federal student loan payments.

The National Association of Counties has a comprehensive analysis available on its website.

Debt Limit Deal: County Highlights

  • DOES NOT rescind State and Local Fiscal Recovery Fund (SLFRF) dollars, including the $65.1 billion provided directly to counties
  • Caps non-defense discretionary spending for fiscal 2024 at roughly $704 billion, followed by a 1 percent increase in discretionary spending in fiscal 2025
  • Includes new administrative requirements and eligibility restrictions while also expanding exemptions for homeless individuals, veterans, and youth aging out of foster care to federal food assistance and cash benefit programs
  • Reforms the permitting process for federally funded infrastructure projects, including shortened review timelines and limited page numbers for environmental review documents
  • Clawbacks for unobligated federal funding appropriated in response to the COVID-19 pandemic
  • Cuts to the Internal Revenue Service (IRS) budget increases enacted in the Inflation Reduction Act (IRA)
  • Reinstates federal student loan payments on defaulted loans by August 29, 2023

As previously reported on Conduit Street, since the debt ceiling reached $31.381 trillion, the US government has not been able to issue any new debt. As a result, the government has been forced to meet its obligations in the short term by combining cash on hand with “extraordinary measures” to prevent the United States from defaulting on its obligations as negotiators worked on striking a deal to increase the debt limit.

What Happens if the United States Defaults on Its Debt?

While the United States has hit the debt limit before, it has never run out of resources and failed to meet its financial obligations.

Because the United States has never defaulted on its obligations, the scope of the negative repercussions of not satisfying all federal commitments due to the debt limit is unknown. But most economists agree that failing to increase or suspend the debt limit would likely have disastrous economic consequences in the United States and global financial markets.

According to Moody’s Analytics, a protracted default would result in a “cataclysmic” blow to the economy. “The economic downturn that would ensue would be comparable to that suffered during the global financial crisis. That means real GDP would decline during the second half of this year and into 2024, falling 4.6 percent from peak to trough, costing the economy more than 7.8 million jobs, and pushing the unemployment rate to 8 percent. In addition, stock prices would fall by almost a fifth at the worst of the selloff, wiping out $10 trillion in household wealth.”

Furthermore, the ability of households and businesses to borrow through the private sector to offset this economic pain would also be compromised. As a result, interest rates would likely soar, including those on the financial instruments households and businesses use most — Treasury bonds, mortgages, and credit card interest rates.

In 2020, Maryland was fourth in the nation for employment within the federal government, though it ranked first for federal jobs per capita, at 242 jobs per 10,000 residents. In addition, Maryland is home to many federal contractors who rely on federal contracts to stay in business. Because a default would force the US Treasury to slash government spending, many of those jobs could be in jeopardy, resulting in disastrous consequences for Maryland’s economy.

Stay tuned to Conduit Street for more information.

Useful Links

Previous Conduit Street Coverage: Federal Debt Limit Dilemma: What’s At Stake for States and County Governments?

NACo Legislative Analysis: The Fiscal Responsibility Act of 2023

Conduit Street Podcast: Debt Limit: Deal or No Deal?