Friday, July 29, 2011

Lessons From the States on the Debt Ceiling Crisis

Guest Blogger

David Super

One point that I find curiously missing from this discourse is that constricting debt limits are not at all unusual features in American public law. Many state and local governments have them, and many of those are as unrealistically low as the federal one. Many of these first arose in the late nineteenth century as a Jacksonian reaction to businesses (mostly railroads) taking over governments and then assuming vast amounts of debt to provide sweetheart loans to the businesses (e.g., paying the cost of connecting their town to this or that emerging railway). With balanced budgets seeming to be the sole of fiscal probity in the public's imagination, explaining why debt limits should rise has not been easy. As a result, many of these debt limits have been stuck at unrealistically low levels, as the federal debt limit is today.

This has given rise to considerable creativity, and considerable litigation, about the legality of various kinds of "non-debt debt." Although this is largely in state courts (and some of it is made possible by states' more liberal standing rules or authorization of judicial advisory opinions), it is still a species of constitutional law that could have some influence. One approach, not wildly different from the option you describe, is the sale-and-lease-back, under which a state might sell one of its office buildings in a transaction giving it the right to lease it back; the numbers can easily be designed to be identical to what the state would get from selling a bond and pay to service the debt on that bond, but most courts recognize this is not debt. The public might not like selling the contents of Fort Knox to the French, but selling government assets to the Fed, with delivery postponed and an option to abort the sale by repaying the principle and some amount of interest, would not seem particularly scary. Because the U.S. Government would not be obligated to do the repurchase, 31 USC 3101 would not be implicated.

Another common approach is borrowing that does not put the Full Faith and Credit of the state or local government at issue. These can be revenue bonds, giving lenders claims on the proceeds of particular taxes, tolls, etc. They can be bonds backed by particular assets as security. (With non-governmental borrowers, we recognize a huge difference between secured and unsecured credit; how odd that, with the government, we assume that all credit it receives must be unsecured.) They can be "moral obligation" bonds, in which the government acknowledges a moral obligation to pay but does not pledge its full faith and credit. They also can be bonds issued by independent agencies set up by the government, such as transit authorities, highway commissions, or housing finance corporations. Here again, most courts have found these devices do not offend state and local debt limits. "Moral obligation bonds" issued by the Greek government likely would not sell, but the U.S. government clearly has the capacity to repay them, and once they were issued I have trouble seeing any major political faction wanting to ignore them. In addition, because section 3101 applies only to debt on which the U.S. government guarantees both principal and interest, it could issue bonds with the principal guaranteed and only the interest subject to "moral obligation" only. Indeed, by selling such bonds at a discount (in the manner of "zero coupon" municipal bonds), the transaction could be designed to build in some return to investors within the guaranteed amount, with the "moral obligation" interest relatively small. (Subsection (a) has a special rule for valuing discounted bonds that are subject to subsection (b), but absent an interest guarantee, the bonds would not be subject to subsection (b) and hence would not need to be valued at all.) I do not know the statutes governing the Fed and other independent entities well enough to have a sense of how readily they could issue debt that is not guaranteed by the U.S. Government; if they could raise money in this way, surely they could loan it to the Treasury without requiring a guarantee of the U.S. government that would bring it within section 3101.

As a side point, a conflict between the President's duty to spend money and the debt limit can be found in the Congressional Budget and Impoundment Control Act, passed initially in response to President Nixon's impoundments of appropriations for things he did not like. How well the Act’s mechanisms work is open to debate (and must be considered in the context of the Supreme Court’s decision in Clinton v. New York), but at a minimum the President could argue that some of what he would seem obligated to do once the debt limit is reached cannot be done consistent with that statute's procedures. But I actually do not think one needs to get into appropriations to get a conflict as most of the federal government's spending is through mandatory programs -- Social Security, Medicare, Medicaid, and many smaller ones -- whose statutes do explicitly require funds to be spent and give clear causes of action to identifiable individual or governmental beneficiaries for specified amounts. These, along with interest on the national debt, are easily enough to account for more than the amount of the funds coming in the door each month.

Of course, if the President were to invoke one of these statutory responses to the debt limit, the House could include an amendment to section 3101 in its appropriations bills for Federal Fiscal Year 2012. (That would violate House rules prohibiting amendments to permanent laws on appropriations bills, but I am sure the majority would have no qualms about overriding that rule.) This would mean a government shutdown October 1 if the President and the Senate did not agree to surrendering this means around the debt ceiling. But surely playing out this drama in the context of a government shutdown would be far better than doing it in the shadow of default (especially with developments in Europe already threatening the world financial system). Better to padlock a few Washington tourist attractions.

David Super is Professor of Law at the University of Maryland School of Law and also teaches at Georgetown University Law Center. You can reach him by e-mail at das62 at

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