[Updated October 2013] A short term deal has been reached and the government shutdown is over. The debt ceiling has also been raised, which will allow the nation to pay its bills and service new debt/payment obligations. But the deal legislation includes a few interesting provisions which are summarized below
- The latest deal would finance the federal government until Jan. 15, keeping existing “sequester” spending levels. The borrowing limit, or debt ceiling, would be raised until Feb. 7.
- A bipartisan congressional committee would be setup and required by Dec. 13 to hammer out a long-term budget plan. This committee would be led by Sen. Patty Murray, a Washington Democrat, and Ryan, a Wisconsin Republican. The two chair their chambers’ respective budget committees.
- Pay for members of Congress ($174,000 per year) will be frozen through October 2014, the current government fiscal year. This is the sixth year in a row lawmakers have opted not to get the annual cost-of-living pay increase they are legally allowed to receive.
[Updated September 2013] It’s like the same horror movie keeps playing again and again as we face the prospect of another government shutdown at the end of the 2013 fiscal year and sit on the edge of yet another fiscal cliff as the government reaches its mandated borrowing limit. Stock markets are already getting spooked with the prospect of a national default on our debt payments with the mainstream media fueling the conflict between the House Republicans and the President. But unlike the past 2 years (whose events are detailed in the updates below) this time it looks like a near certainty that a default will occur as the high stakes political standoff looks like it is going to fully play out as both sides feel they are more aligned to public sentiment.
As an investor I am nervous about the impacts to the stock market and a still fragile economy. As a citizen I am annoyed at our dysfunctional government and its seeming inability to work together on anything of substance. The only good thing about this whole mess is that we will forced to enact some level of change.
Here’s how various groups could be hit with the impending shutdown:
- Federal workers – About 800,000 federal workers (50% of workforce) would be furloughed because there would be insufficient funds to pay them. Current GS Pay scales may also be reduced or continue to remain frozen at current levels for an indefinite period.
- Social security, Medicare and disability recipients – Social Security, Medicare and Medicaid are a top priority for the current administration and would be amongst the last groups to have their benefits cut. However new recipients may not be able to enroll in and start receiving benefits from these programs. Further SSA offices will likely be closed for inquiries since they are staffed by federal employees who would be furloughed if government funding is not available.
- Government Departments - According to the Bipartisan Policy Center, by the end of August there will be no funding left for major departments like the Departments of Veterans Affairs, Education, and Housing and Urban Development. Only essential workers and mandatory programs will continue until additional funding is made available. Further the Internal Revenue Service will stop issuing business or personal refunds (you still have to pay taxes though!).
- Military personnel payments would likely continue for at least a few more months since national defense is always a top priority. In fact the house and senate unanimously passed a bill guaranteeing military and defense contractor payments for the foreseeable future. While the nation could survive by not paying some groups thereby giving the Congress more time to resolve the budget impasse, it is highly unlikely that they would let military funding ever stop.
- Congress (Representatives and Senators) - Many have argued that if our nations politicians cannot resolve the current issues they should be the first to stop getting paid. However this is unlikely since Congress and the President’s administration are considered an essential, top priority function so would be amongst the last groups to stop receiving payments
- Unemployment recipients - Unemployment insurance will also stop being paid out to over 10 million Americans who are currently looking for a job. Also newly unemployed eligible Americans will not be able to file for benefits.
[Update September 2012 -No Government Shutdown in 2012-2013 But Tax Hikes and Spending Cuts Likely As Fiscal Cliff Looms]
Congress is set to extend government funding through the presidential election to avoid last year’s fiasco (see update below), but is unlikely to reach a deal to address spending cuts and the expiration of Bush era tax cuts. Off course both parties blamed it on each other and the lack of leadership from the administration. The fiscal cliff refers to $1.2 trillion in automatic spending cuts and the expiration of tax cuts that would take effect in January 2013 if no government action is taken. No talks to avoid the fiscal cliff are under way in Congress, and lawmakers in both parties have said they don’t expect negotiations to begin in earnest until after the Nov. 6 election.
Congress did agree in principle to keep the government functioning though 2012 and into early 2013. House Majority Leader Eric Cantor said the House is scheduled to vote Sept. 13 on a continuing resolution to keep the federal government operating past the Oct. 1 start of the fiscal year. Obama and congressional leaders have tentatively agreed to a six-month stopgap.
[Update August 2011] The Debt Ceiling debate has been resolved following a last minute bipartisan compromise which will raise the debt ceiling $2.1 trillion and cut the federal deficit by as much as $2.5 trillion over a decade. There will be no tax increases or entitlement programs cuts in the near term. However there are still a number of strings attached to the deal and it is more likely than not we could be in a similar situation next year.
Will a failure to raise the national debt ceiling mean millions of Americans miss out on benefits and paychecks? As discussed in this article covering the debt ceiling increase debate, a number of parties will be adversely affected if Congress cannot agree on a bill that raises the allowable national debt ceiling. The main sticking point is how the raise in the debt ceiling will be offset – cutting spending (entitlements) and/or raising taxes (increase revenue). Here’s how key groups could be affected if the government cannot fund itself or its obligations: (see above for latest impacts).
The government faces a $125 billion deficit (revenue – expected payments) in early August if the debt ceiling is not raised. This will mean some hard choices will have to be made around who gets paid and who doesn’t. Hopefully Congress can reach a resolution before it comes to this.
[May 2011] A final budget bill has now been passed to keep the government functioning. Lawmakers from both parties reached a last minute $38 billion deal to cut spending this year while jettisoning a number of proposals to defund things like Planned Parenthood and the EPA. The deal came together after days of negotiations led by Boehner (Republicans), Reid (Democrats) and Obama over how much spending to cut and from which programs, as well as over so-called policy riders Republicans proposed to direct how federal money could be used. The final compromise slashes about $38 billion in spending – about $23 billion less than Republicans had initially sought, yet tens of billions more than Democrats originally said they could accept
It’s been a grueling process. We didn’t do it at this late hour for drama; we did it because it’s been very hard to arrive at this point,” Senate Majority Leader Harry Reid, a Nevada Democrat, said on the Senate floor with less than an hour to go before the midnight deadline for a shutdown. “Both sides have had to make tough choices.”
House Speaker John Boehner, said he was “pleased” with the outcome of what he called a “long fight” over the 2011 budget. “We fought to keep government spending down, because it really will affect and help create a better environment for job creators in our country.”
“Like any worthwhile compromise, both sides had to make tough decisions,” President Obama said. “Some of the cuts we agreed to will be painful. I’m pleased to announce that the Washington Monument, as well as the entire federal government, will be open for business.”
The accord clears the way for potentially even tougher battles over the government’s finances. A spending plan for the 2012 fiscal year prepared by House Budget Committee Chairman Paul Ryan, a Wisconsin Republican, and scheduled for a vote in the chamber next week would phase out the traditional Medicare program — a proposal Democrats have denounced. It also would cut spending by $6 trillion over a decade and reduce the top tax rate to 25 percent.
Also looming is a fight over raising the government’s $14.3 trillion debt limit, expected to be breached by May 16. Many Republicans are demanding that the Obama administration commit to deep spending cuts as the price for their votes to raise the limit. (source : Bloomberg)
Will Social Security Benefits, Veteran, Military, Contractor, and Federal Employee Pay Checks Stop if the government shuts down?
Not initially for current recipients, though there maybe some delays in payments being made. Non-essential federal workers may be furloughed (i.e a few days off work without pay), and Congress won’t be able to pass any new appropriations bills. Salaried employees will likely see no interruption in their payments, though hourly or contract workers may see temporary pay freezes since they will not be working.
During the mid-90′s shutdown Federal employees didn’t get paid,though they did get their back-pay checks later. The first shutdown, from Nov. 13-19, 1995, resulted in the furlough of about 800,000 employees (which is a similar number to today). During the second, from Dec. 15, 1995-Jan. 6, 1996, about 759,000 were either furloughed or worked without pay, according to the Congressional Research Service. If a shutdown occurred it would probably only affect 40% of federal employees, who are funded by the appropriations legislation that Congress is trying to renew.
Social Security benefits would remain largely unaffected as they are held in a separate trust fund called GAS (Government Account Series) which is funded by FICA payroll taxes. New retirees applying for social security or those applying for disability might not get benefits, because federal agency employees won’t be working during a government shutdown.
A shutdown would close veterans’ benefits offices, including claims processing, and could lead to delays in non-emergency or new appointments. Since disability and pension checks and GI Bill benefits are paid at the beginning of the month, no impacts would for recipients would be felt till May.
For the most part, military personnel remain on the job and continue to be paid. Civilian, contract and consulting workers would have to stop working and hence would not be paid
Contractors – Your employment and pay depends on which agency you are working for. Some agencies have told contractors that they could be locked out of their offices or forced to cut short any government-funded travel or RFPs. If contract jobs are suspended, contracting firms may ask employees to complete overdue training programs, take vacations (paid/unpaid). Worst case, some firms may need to furlough employees.
Excepted or essential workers would also continue working and receive their paychecks. This includes federal employees involved in national security as well as the military, FBI officials, and border and coastal protection personnel.
Interestingly, Congress and the President are also exempt from the funding cuts and will continue to be paid despite the fact that other services are suspended
Other government and military services potentially impacted by the shutdown: (source CBS news)
- Social Security administration: Checks for seniors, those with disabilities, and survivors would go out as usual. But Social Security Administration employees could face furloughs, but the agency is still finalizing its plan.
- Homeland Security: Critical functions, like border control, would continue.
- Mail delivery: The U.S. Postal Service is owned by the government but self-funded – so operations would continue uninterrupted.
- Air traffic control: As a function of maintaining public safety, Air traffic control would be exempt from a shutdown.
- National parks and monuments: As the New York Times puts it, “The National Zoo would close, but the lions and tigers would get fed.” National parks and museums, including those on the National Mall, like the Smithsonian, would shut down – just in time for spring break.
- Passport operations: All operations would be likely suspended, except for in cases of emergency.
- International Revenue Services (IRS): The IRs would close, but the April tax deadline would stay in place – so Americans would still have to pay their taxes on time. But according to the senior administration official, the processing of paper tax returns (which accounts for about 30 percent of all returns) would be suspended – as would refunds associated with those returns.
- The U.S. Small Business Administration (SBA): The SBA, which is dedicated to supporting small businesses, would suspend approval of applications for business loan guarantees, as well as direct loans to small businesses.
The Federal Housing Association (FHA): The FHA would be forced to suspend approvals for new loan guarantees during peak home-buying season, according to the administration official.
Medicare: According to the administration official, Medicare is funded for the short-term – and would likely remain unaffected unless the government were to remain closed for a period of months or more. NIH, however, will not be able to accept new patients or begin new clinical trials.
Uniformed military personnel would continue to serve, but they would not get paid for their work until the government reopened. (Troops would get one week, not two weeks, pay in their next check, as the shutdown would go into effect in the middle of a pay cycle.) And a number of Pentagon civilians, State Department officials and USAID staff would likely be furloughed.
Veterans Administration receives its yearly appropriation in advance and thus has the money to fund services for the rest of the year.
[Updated - Mar 2011] The Republican controlled housed passed a stop-gap bill in the house that will extend government funding for three more weeks (following the earlier 2 week extension) until early April. This temporary bill will continue provisions that cut federal spending by $2 billion per week and is expected to be approved by the Senate and President shortly. This temporary extension does not resolve the issues discussed below and a permanent resolution is still not clear as new Republican members from the tea party push for deeper cuts that Democrats are unwilling to support.
“Our expectation is we should be able to get this [funding issue] completed,” President Obama said. “I think neither Democrats nor Republicans were in the mood to compromise until their 100% maximal position was voted down in the Senate, we have probably lost some time….which means that there may be potentially one more short-term extension.”
While Obama appeared willing to compromise in support of another short-term measure, he drew a few lines in the sand on the longer-term funding bill. He called some of the proposed Republican cuts — such as those to Pell grants and Head Start — non-starters. And he warned, once again, that House Speaker John Boehner (R-Ohio) should remove controversial policy riders, some of which would defund Planned Parenthood and the president’s signature health care law, from the legislative language. House Republicans and Democrats in the Senate and White House find themselves with little common ground beyond a chunk of cuts that the Obama administration has already conceded. House Republicans have set themselves what seems to be a goal that is either mathematically impossible or political suicide, as Democrats see it: They must cut the budget deficit in the near term without taking significant amounts from defense or entitlements and without increasing government revenue through higher taxes.
[Previous Update - Feb 2011] House Republicans passed legislation that would slash over $60 billion in government spending between now and the end of September, setting up a showdown with President Barack Obama and the Democratic controlled Senate who oppose many of the cuts. After more than 90 hours of debate and many round-the-clock sessions, the House decided 235-189 to send the measure to the Senate. No democrats voted for the bill. The bill contains spending cuts and also the funds required to keep the government funded. If a bill (continuing resolution) is not approved by Congress and the President by
March 4th March 18th (see update above), the government’s non-essential services will lose their funding and be forced to shut-down.
Republicans argue that they will not approve government funding unless the proposed spending cuts are approved. The cuts (more than 100 in total) are aimed at cutting entitlement programs but also at big government agencies like the Environmental Protection Agency($3.08 billion in cuts), the Securities and Exchange Commission ($131 million), the Consumer Financial Protection Bureau and the Commodity Futures Trading Commission. It also contains provisions to de-fund health care. Senate Democrats already have said they won’t accept the cuts in the $1.2 trillion spending bill, and Obama’s budget office has threatened a presidential veto.
Notable quotes from key players:
“I am not going to move any kind of short term CR at current levels. Read my lips: We’re going to cut spending,” House Speaker John Boehner, told reporters this past week when announcing he won’t accept a short-term extension without some spending reductions.
“Now that House Republicans have gotten this vote out of their system, I hope they will drop the threats of shutting down the government and work with the Senate on responsible cuts that allow our nation’s economic recovery to continue,” (Senate Majority Leader Harry Reid)
House Minority Leader Nancy Pelosi, a California Democrat, said a shutdown would halt military pay, veterans’ benefits, Social Security checks and government functions such as food- safety inspections. Last night she introduced a temporary spending measure to keep government agencies running through March 31 and buy time for talks