Where do you land on the federal funding priorities list?
Lots of retirees, students, doctors, business owners, investors and others who get federal money are asking themselves that question as Aug. 2 approaches. That’s the day Uncle Sam will have to decide who doesn’t get paid if the government’s debt ceiling isn’t raised.
Though most expect a crisis to be averted, at least some are beginning to develop contingency plans in case the checks don’t come.
Washington remained in deadlock over the weekend on efforts to raise the debt ceiling that prevents the federal government from borrowing more money. The U.S. Treasury has said without clearance to borrow more by next Tuesday, it won’t be able to meet all of its obligations.
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President Barack Obama has warned Social Security recipients that missing the Aug. 2 deadline would mean he can’t guarantee their checks will go out the next day because “there may not be enough money in the coffers to do it.”
Jerry Younger, deputy secretary of the Kansas Department of Transportation, wonders whether the state will continue to be reimbursed on the weekly invoices it sends the Federal Highway Administration for the road work it does.
“We don’t really know whether that process would change any or not. Just to be smart, we have to figure that’s a possibility,” Younger said.
Money managers argue that the U.S. Treasury has to make good on the government securities that mutual funds, foreign governments and other investors worldwide hold. To default on the debt would risk not only the creditworthiness of the federal government but also potentially dramatic economic disruptions.
“Missing a scheduled debt service payment, full faith and credit, general obligation of the United States of America, in God We Trust, you know, is different than an outstanding bill that the U.S. government owes you,” said Dave McEwen, chief financial officer for fixed income investments at Kansas City-based American Century Investments.
Tax receipts should bring in enough cash to cover 60 percent of federal obligations, leaving the other 40 percent unpaid.
Practically everyone expecting federal money is scrambling, because the Treasury hasn’t said where its limited cash will go if the debt ceiling remains in place next Tuesday.
“It’s going to be a matter of choices and squeaky wheels,” said Kansas City economist Chris Kuehl of Armada Corporate Intelligence.
Kuehl already knows he’s on the don’t-pay list.
Scheduled next month to teach sessions on economics under a Department of Defense program, he’s been notified that his pay isn’t guaranteed.
“If I decide not to do them, they’ll understand,” Kuehl said.
The doubt has many businesses bracing for impact, according to a mid-July survey of corporate treasurers and finance executives by the Association for Financial Professionals.
More than half said they would make a defensive move if the debt ceiling wasn’t raised — freeze hiring, cut jobs, reduce their business investment, delay payments to vendors or some other action, the association said.
“If anyone is wondering whether there is real world impact to the budget impasse, U.S. corporations are telling us that they will have to take defensive action that will only have a negative impact on the job market and the economy,” the association’s president, Jim Kaitz, said in an announcement.
UMB bankers in Kansas City are advising clients who do a lot of work for the federal government to be sure their own cash positions or access to credit would carry them through a possible disruption in federal payments.
“What steps would you take to make sure you can make payroll?” said Mariner Kemper, chief executive officer of UMB Financial Corp.
Younger said KDOT had the resources to complete its projects under way but would have to re-evaluate starting new work should the flow of federal funds stop for an extended time.
A disruption to Medicare payments of only a few weeks would hit many doctors hard, said Bridget McCandless, a physician and president of the Metropolitan Medical Society of Greater Kansas City.
“We already dealt with this once,” McCandless said. “Medicare quit processing claims for a period of two weeks, which put a number of practices on the edge of closure.”
She was referring to last summer when Congress failed to act in time to defer mandated cuts in Medicare reimbursement rates for doctors. These restrictions from 1997 had been waived repeatedly to preserve access to care, but division in Congress last year meant payments stopped for a while.
McCandless said some doctors stopped taking salaries from their practices and went to their banks for quick loans to keep the doors open until Medicare funding resumed.
Congress’s deadlock over the debt ceiling comes as college students are beginning to pack for the new school year – and just before many will need to tap federal loans and grants to pay their way.
Course work at the University of Missouri-Kansas City doesn’t begin until Aug. 22, giving Congress plenty of time to get its work done, said Nancy Merz, director of financial aid and scholarships at UMKC.
But she recalls 1995 when the federal government shut down over Congressional debate about the debt ceiling.
“If it goes on for 21 days like 1995 then it becomes a different issue,” Merz said.
One word of caution for students: There are reports that July’s tax receipts have been larger than expected. That could effectively move the Treasury’s deadline to mid-August, even closer to the start of classes. On Wednesday, however, a U.S. Treasury official reaffirmed the Aug. 2 deadline, according to CBS News.