In government default, even military pay would be a casualty
October 16, 2013
WASHINGTON — U.S. military pay would be deferred in the event of a federal default in a scenario that could play out again in February, even if a default is averted this week and despite the recently passed Pay Our Military Act, congressional sources have told Stars and Stripes.
If Congress cannot agree to a long-term political resolution, servicemembers would fall into the same category as all other federal employees whose pay has been affected by the ongoing government shutdown. Pay would not be denied, but delayed until Congress and President Barack Obama can work out a deal.
“Military pay will be affected in the same way as everything else,” said one Senate Armed Services Committee staffer. “We can’t pay our bills if we don’t have the money. That doesn’t mean it won’t ever be paid, but there are likely to be delays.”
A member of the House Armed Services Committee staff confirmed that scenario.
Former Defense Secretary Leon Panetta, in Washington on Wednesday, said even the possibility of deferred pay has already hurt the Defense Department.
“What we’ve been through has had a real impact not only on troop morale, but obviously on people in the department,” Panetta told Stars and Stripes. “What they have to know is that there’s a certain stability here, that their problems are not going to be kicked down the road in order to face this tragedy again.”
Under a deal being crafted on Capitol Hill, Republicans would agree to reopen the government, which has been partially closed since Oct. 1, and raise the federal debt ceiling to avoid a federal default. Both measures would be temporary, with the shutdown lifted only until January 15, and the debt ceiling increase only lasting until Feb. 7, under the Senate version of the deal.
At the White House on Wednesday, President Obama was asked if he would direct the Treasury Department to prioritize payments to military servicemembers or another category of payees in the event of a default. Obama said he continues to hope that Congress will not force such a scenario.
“There have been some who have said that if we just pay bondholders, if we just pay people who have bought Treasury bills that we really won’t be in default because those interest payments will be made. And to them, what I have to remind them is we’ve got a lot of other obligations, not just people who pay Treasury bills,” Obama said. “We’ve got senior citizens who are counting on their Social Security check arriving on time. We have veterans who are disabled who are counting on their benefits. We have companies who are doing business for our government and for our military that have payrolls that they have to meet, and if they do not get paid on time, they may have to lay off workers. All those folks are potentially affected if we are not able to pay all of our bills on time.”
Members of the military dodged a pay deferral two weeks ago with passage of the Pay Our Military Act on a quick and overwhelming basis on Sept. 30, just before the shutdown began. But POMA would not preserve timely military pay in the event of a default, both House and Senate staffers said.
Because there is no precedent for a federal default, officials say they aren’t certain exactly what the financial effects would be, or when they would take effect. But financial experts have warned of a variety of possible effects including a renewed recession, a credit market freeze, a sudden jump in interest rates and a stock market plunge.
Military officials say the Defense Department would continue paying its bills as long as it could, but that many of the factors in play were out of its hands. Pentagon leaders suspect, but can’t know for sure, that if Congress reaches a deal within a few days of the Thursday deadline, DOD would not be fundamentally impaired, a military official speaking on the condition of anonymity said.
But an expert in congressional budgets said that if Congress blows past the debt ceiling deadline, it’s nearly impossible to predict when bills would begin going unpaid because of a lack of borrowing power.
“This is what is known in the business as a ‘black swan event’ — one that’s outside the experience of anyone now alive,” said Steve Bell, economic policy project director for the Bipartisan Policy Center, a Washington think tank. “No one knows how long payments can continue.”
Treasury computer systems automatically pays 3 million to 5 million bills from around the government daily as they arrive, Bell said. Some of those bills would begin to go unpaid within days as Treasury cash on hand dwindles, Bell said — and it’s nearly impossible to predict which would not be paid because the system currently does not allow bills to be sorted and prioritized. (According to estimates, it would take up to a month of intense work to add such a feature, Bell said.)
Under one scenario released last month by the Bipartisan Policy Center, if the Treasury begins running out of money Oct. 18 and follows a strategy of paying all the bills received in a single day before moving on to the next day’s bills, military and veterans’ Nov. 1 checks would be delayed until Nov. 13. The center didn’t attempt to predict when the next payments would come if default continued.
The government might also simply pay as many checks as it could each day, and essentially issue IOUs for the rest of the bills that come in — and repeat the process the next day.
“In that case there would be a little bit of luck to it,” said Todd Harrison, a senior fellow for defense budget studies at the Center for Strategic and Budgetary Assessments. “In the first few days, you’ll be rolling the dice to see whose bills don’t get paid.”
The situation would grow more dire as days passed and more bills piled up, Harrison said. Military members would be required to continue to serve regardless of whether paychecks were arriving on time, but the Pentagon could face complicated decisions when it comes to civilians, and especially defense contractors, he said.
“Sequestration was bad, the government shutdown was worse, and a breach of the debt ceiling is just unthinkable,” Harrison said. “To be put in a situation where the government is promising people money for doing work, and they do the work, and then you don’t have the resources to pay them — it’s unimaginable.”