Update on Government Fiscal Issues Impacting Government Contractors

Government Contracts Newsletter

Client Alert

With the threat of a government shutdown avoided by Congress’ passage of a short- term Continuing Resolution on September 30, Congressional focus has turned to the debt ceiling, the spending caps imposed by the Budget Control Act of 2011, and enacting appropriations for the remainder of FY2016. There is good news on two of the three fronts.

The Budget Control Act (BCA) set caps on discretionary spending for 2012 through 2021 and established sequestration as an enforcement mechanism for deficit reduction. Since the 2011 enactment of the BCA, Congress has taken numerous steps to avoid the harsh impact of the spending caps and sequestration. On October 28, the U.S. House of Representatives passed the Bipartisan Budget Agreement of 2015, which increases discretionary funding caps by $50 billion for FY2016 and $30 billion for FY2017, with the amounts divided between defense and non-defense spending. The Senate approved the budget agreement on October 30, and President Obama signed the Bipartisan Budget Act of 2015 in early November.

Another key provision of the Bipartisan Budget Act addresses the debt limit. On October 13, 2015, the Secretary of the Treasury notified Congress that the government’s borrowing capacity (the debt limit) would be reached by November 3. The Bipartisan Budget Agreement enacted by Congress suspends the federal debt ceiling until March 2017. The President signed the legislation increasing the debt limit on November 2, one day before the Treasury Department’s November 3 deadline.

While Congress has never failed to increase (or suspend) the debt limit as needed, in recent years, Congressional approval has often occurred just days before the limit is reached. If the debt ceiling is reached, Treasury’s borrowing authority ends, so the Department cannot issue new debt to manage cash flow, and, as a result, the government would not be able to pay all of its bills. If the debt ceiling is not raised (or suspended) and default occurs, the Department of the Treasury would be forced to prioritize and decide which outstanding financial obligations are paid and in what order. The Treasury Department has no legal requirement to pay obligations in the order in which they were received and may make payments in any order it finds will best serve the interests of the United States. Most experts believe that in this event, Treasury would use available funds to first pay interest on outstanding debt and entitlement obligations, and government contractors would be at the end of the line for payment.

A government default on financial obligations resulting from a failure to suspend or raise the debt ceiling is different from a government shutdown that results from the failure of Congress to pass appropriations legislation. A shutdown occurs because the government may not incur new financial obligations in the absence of appropriations without violating the Anti-Deficiency Act. A default means that the government cannot pay financial obligations that have already been incurred. Raising or suspending the debt ceiling is not about the availability of funds; it is about managing cash flow.

With two prongs of the fiscal trifecta in hand, Congress has turned to the next fiscal hurdle—the December 11 expiration of the Continuing Resolution which funds operation of the federal government through that date. If Congress is unable to enact permanent appropriations or extend the Continuing Resolution, we are headed toward another government shutdown. Some of the wrangling in the past has been attributed to differences on topline budget levels. In light of the bipartisan agreement reached in October, many hoped that Congress would quickly pass spending bills for FY2016. Unfortunately, debate (and filibustering) continues in Congress on various spending bills, making it unclear whether accord (either on individual spending bills or an omnibus appropriations bill) can be reached by the December 11 deadline. And, as shown in the past, efforts to reach agreement on appropriations can get bogged down in debate over policy riders. To complicate the chances of a spending resolution by December 11, President Obama has said that he will not sign another short-term continuing resolution, and has urged Congress to fund the government for the remainder of FY2016.

If efforts to pass appropriations legislation by December 11 fail, there will be a lapse in appropriations. Under the Anti-Deficiency Act, federal agencies are prohibited from incurring obligations in advance of appropriations unless authorized to do so by law. Thus, during a funding gap, federal agencies are generally prohibited from obligating funds to contracts or operating as usual, and are forced to furlough employees and completely or partially shut down. However, there is one significant exception -- federal agencies are authorized to incur obligations in advance of appropriations where necessary to protect life and property. Therefore, if necessary for these purposes, agencies may award new contracts, obligate additional funds to existing contracts, and exempt government personnel from furlough.

There is still sufficient time for Congress to enact appropriations legislation for the remainder of FY2016 or to enact another stop-gap Continuing Resolution. If Congress does not succeed, contractors will once again be forced to cope with disruptions due to the furlough of government employees and shuttering of some government facilities.