Bill averting default crisis heads to Biden's desk

A bill that would avoid the nation's first default is headed to President Joe Biden's desk after a speedy approval through the Senate Thursday night.

The measure lifts the $34.1 trillion debt limit until Jan. 1, 2025, just days ahead of the June 5 date that Treasury Secretary Janet Yellen warned the U.S. would run out of money to pay its bills. The Fiscal Responsibility Act of 2023 caps federal spending for two years, claws back some pandemic aid and enforcement funding for the Internal Revenue Service, and streamlines energy infrastructure permitting.

For the municipal bond market, the passage of the Fiscal Responsibility Act will calm default jitters, stabilizing bond prices and ensuring issuers feel more confident about heading into the market.

It spares the direct pandemic funds that cities and states had feared would be cut under negotiations. With the threat of a debt limit breach off the table, Treasury is expected to reopen the State and Local Government Securities series window. Issuers no longer need to worry about defaults on their pre-refunded bonds held in escrow or Treasury investment holdings. The legislation also lessens the threat of a downgrade on the nation's credit, which would have rippled throughout the municipal credit universe.

But because the bill holds federal funding relatively flat over the next two years, cities and states will likely receive less federal aid over that time.  

Bloomberg News

The House passed the bill Wednesday, leaving some muni advocates optimistic it will lead to more bipartisan actions favorable to the market.

The Senate on Thursday fast-tracked the bill, considering and then rejecting 11 amendments and passing it by a vote of 63-36.

"Democrats are feeling very good tonight," Senate Majority Leader Chuck Schumer, D., N.Y., said after the vote. "We've saved the country from the scourge of default."

Biden is scheduled to address the nation from the White House Friday night and sign the bill this weekend.

"No one gets everything they want in a negotiation, but make no mistake: This bipartisan agreement is a big win for our economy and the American people," the president said.

The Securities Industry and Financial Markets Association "applauds the President and Congress for working together to resolve the threat of the U.S. defaulting on its debt," said SIFMA president and CEO Kenneth E. Bentsen, Jr. in a statement. "The President signing the bill into law will ensure that the confidence in the creditworthiness of the United States will be preserved."

While sparing the state and local pandemic aid that key to issuers, the legislation rescinds $27.1 billion of stimulus aid from 87 accounts created from 2020 through 2022 under six different pandemic bills, according to the Congressional Budget Office.

The pandemic programs that will see money clawed back include: $1 billion from the State Unemployment Insurance and Employment Service Operations, $2.2 billion from Highway Infrastructure Program – a rescission that does not impact Bipartisan Infrastructure Law money – as well as $10.4 billion from the Public Health and Social Services Emergency Fund and roughly $2.2 billion from the Disaster Loans Programs account.

The Department of Transportation Transit Grants, which had been on the chopping block because much of the money has not technically been obligated, will be protected from claw backs, as will $3.5 billion of Tenant Based Rental Assistance.

The move to rescind roughly $20 billion from the Internal Revenue Service would "result in fewer enforcement actions over the next decade and in a reduction in revenue collections," the CBO predicts. The bill would reduce IRS-related outlays by $1.4 billion and decrease revenues by $2.3 billion over the 2023–2033 period, the CBO said.

The bill caps spending for the next fiscal six years, using a sequester mechanism for fiscal 2024 and 2025.

For the four years after that, spending would be reduced by 1% from the fiscal 2023 levels if Congress fails to pass 12 full-year appropriations bills by Jan. 1 following the Sept. 30 federal fiscal year end.

The last time Congress passed all its annual spending bills before Sept. 30 was in 1997, according to Congressional Quarterly.

Spending for fiscal 2024 would be capped at roughly $704 billion, with a 1% increase set for 2025.

The National Association of Counties noted that the bill reinstates disaster funding cap adjustment formula that was in place from 2012 through 2021, a move that allows for adjustments to discretionary spending caps to account for disaster relief spending by 5% of the total appropriations for major disasters.

"NACo applauds our federal partners for reaching a bipartisan agreement to raise the federal debt ceiling," the association said in a statement, while noting the "handful of provisions of relevance to local leaders" including the spending cuts, permitting reform, new work requirements for some federal public assistance programs and reinstatement of federal student loan payments.

Looking forward, the bill "marks an important inflection point in federal fiscal policy," said Wells Fargo analysts in a May 31 commentary. "The past several years has been marked by highly accommodative federal fiscal policy. This era may be coming to an end as federal fiscal policy is shifting to a more neutral stance."

Assuming Congress passes appropriations bills and continues to fund the government, "the debt ceiling and budget drama should subside until after the 2024 election," Wells Fargo said. "However, the next president and Congress will face a long list of fiscal policy items to address in 2025. These include another debt ceiling increase, setting new discretionary spending levels, the expiration of major parts of the 2017 Tax Cuts and Jobs Act, and the expiration of more generous subsidies for purchasing health insurance under the Affordable Care Act."