Debt Ceiling Stalemate: End Date for Washington’s Pay Ability May Arrive Sooner

The so-called ‘X-date’ could come in June instead of August, say studies by Goldman Sachs and Wrightson ICAP, based on lower-than-estimated federal tax receipts.

The economy’s big “Uh-oh” moment may arrive sooner than projected, according to new assessments by Goldman Sachs and Wrightson ICAP. The consensus for the so-called X-date, when the U.S. Treasury cannot operate without a debt-ceiling increase, has been August.

But smaller-than-expected tax receipts thus far have advanced that fateful moment to as early as June. Goldman’s economics research unit warned in a note that “if the Treasury announces in May that the deadline is only a few weeks away, there would be little time to negotiate a deal” on Capitol Hill over the debt ceiling.

Research firm Wrightson added in a commentary that “if Treasury cash flows over the coming two weeks are just a little weaker than we anticipate, a June X-date might start to look like a significant risk.”

If Washington runs out of money, it could lead to defaults on Treasury bonds and delays on federal payments for such things as military salaries. That, in turn, could destabilize the world’s economy and financial system.

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The stock market does not appear to be too worried about that prospect. At the moment, the S&P 500 is up 8.6% in 2023. But there is worry in another corner of the financial markets: Credit default swaps on federal debt, effectively insurance for bonds against default, have gotten more expensive this year, rising almost 50%.

The federal government ran out of borrowing authority in January, when the national debt hit its current $31.4 trillion limit. To paper over the problem for the moment, the Treasury has turned to what it calls “extraordinary measures,” including delaying payments into federal worker retirement plans and temporarily transferring un-spent funds among government agencies.

Although earlier projections indicated those measures could stretch things out to August, slowing economic growth—in particular a decline in capital gains—has led to a shortfall in projected federal tax receipts. Goldman estimated that receipts through early April are down 35% to 40% from the prior year, more than the original prediction of 28%, potentially draining government coffers two months earlier.

The crux of the debt-limit problems is a standoff in Congress between Republicans, who want to curb federal spending, and Democrats, who decry the GOP’s stance as economically risky blackmail. President Joe Biden’s administration has thus far been reluctant to negotiate on the issue and insists that talks on the debt limit should be separate from those on government outlays.

But it appears a denouement may be soon at hand.

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Tags: capital gains tax, Congress, credit default swaps, deadline, debt ceiling, extraordinary measures, Goldman Sachs, S&P 500, tax receipts, U.S. Treasury, Wrightson ICAP

The funded ratio of the 100 largest U.S. public pension plans increased to 74.5% as of the end of March, from 73.6% at the end of February, improving the plans’ funded status by $54 billion, according to consulting firm Milliman’s Public Pension Funding Index.

The increase was attributed to market performance, as the plans earned an estimated 1.8% in aggregate for the month, with individual plans’ estimated returns ranging from 0.7% to 2.8%.

Milliman said that despite a “a significant amount of market activity during March,” including yet another interest rate hike by the Federal Reserve and notable banking failures, the effect on the largest 100 pension plans was relatively small.

“Although March was a volatile month in the financial markets with another Fed rate hike and turmoil in the banking industry, investment performance for the country’s largest public pension plans was modestly positive for the period,” Becky Sielman, co-author of Milliman’s PPFI, said in a release.

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According to the firm, the deficit between the estimated assets and liabilities narrowed modestly during the month to $1.534 trillion from $1.588 trillion. The plans’ aggregate asset value increased to $4.492 trillion as of March 31, from $4.423 trillion as of February 28. The plans also increased their market value by approximately $78 billion, which was partially offset by a net negative cash flow of $9 billion.

The total pension liability grew during the month to an estimated $6.026 trillion from $6.011 trillion. Like pension assets, the total pension liability grows over time with investment income and shrinks as benefits are paid; it also grows as active members accrue pension benefits.

The market performance was small enough during the month that it did not change the number of plans below 60% funded or above 90% funded. Milliman said that 24 plans remain less than 60% funded, and 17 remain more than 90% funded.