The Debt Limit Deal: What to Watch for This Year

by David Berteau, President and CEO, PSC

This past January, Congress and the White House began to wrestle with the debt limit crisis, beginning when Treasury Secretary Janet Yellen notified Congress that the U.S. would reach the statutory debt limit of $31.4 trillion on January 19.

This set off the latest debt limit crisis, one in which the government came perilously close to national default but in the end avoided it. On June 3, just two days before likely default, the president signed into law the Fiscal Responsibility Act of 2023 (the FRA), ending this episode of the crisis.

Along the way, the Professional Services Council was active in urging Congress and the White House to reach an agreement. Even more importantly, PSC pushed for the Office of Management and Budget to develop plans and issue guidance to agencies on how to manage contracts and invoice payments in the event of default.

This article, however, focuses on the impact of that agreement on the world of government services contracting. We look at what the FRA might mean for government funding for next year. Facing considerably uncertainty, we suggest a few key events and outcomes that readers should watch.

Defense Funding

Past debt limit deals have sometimes been based on Congress and the administration agreeing on caps on future spending, and the FRA does that. For Fiscal Year 2024 (FY24), the law caps defense funding at $886 billion, the level of the President’s Budget Request (the PBR). This level is 3.3 per cent above FY23’s level and assumes an annual 2.4 per cent inflation rate (which is likely to be less than actual inflation for the fiscal year).

At the time of this writing, Congress is sticking with those caps for authorization and appropriations bills in both the House and the Senate. Senate Republicans have argued publicly that defense needs to be funded at a higher level. There is also talk of a supplemental for Ukraine spending and possibly for support for Taiwan as well, though House Speaker Kevin McCarthy, who controls such things, said he would not bring a supplemental bill to the House floor for a vote.

What to watch for

Contractors should monitor defense bills for changes in the programs that matter to them and for amendments to these bills as they go through the legislative processes of floor votes and conference-like actions between the House and Senate.

Contractors should also watch for action on a Ukraine supplemental, which could become a vehicle for more defense spending, including funds to cover inflation above the 2.4 per cent level in the president’s request.

Non-defense Funding

Beginning with the 2011 Budget Control Act, Congress linked defense funding levels to the aggregate funding levels of the nondefense agencies. That link is severed by the FRA, which essentially capped non-defense spending at levels near last year, FY23.

In the House of Representatives, however, those caps have already been violated. The FY24 funding targets, the allocations, for each of the 12 appropriations subcommittees are set in the aggregate not at the FY23 levels but equal to FY22, some 15 per cent lower. The cuts are not evenly distributed, however, so for some of these subcommittees and the agencies whose funds they appropriate, these cuts are massive.

The Senate has hewed more closely to the FRA cap but has also distributed its allocations unevenly across subcommittees.

Table 1 shows the percentage change from FY23 for each House and Senate appropriations subcommittee.

The table, however, does not show how these subcommittees will divide funds among specific agencies. For example, the steep cuts allocated to the subcommittees for Commerce, Justice, and Science (CJS) must be allocated to the Departments of Commerce and Justice, including the FBI, and NASA, along with other smaller agencies. For one or more of those agencies to be funded at or near their current level (FY23), others will be cut even more deeply.

What to watch for

Contractors should study appropriations bills to see how funding reductions are distributed among the agencies and how those reductions affect specific programs and contracts. Pay particular attention to areas on which the two houses of Congress differ. Those are the places for discussion and compromise and will help determine whether Congress and the White House can agree on a final FY24 spending bill.

Continuing Resolutions

What if the two sides of Congress fail to reach agreement on funding for each agency? Republicans hold the majority in the House of Representatives, and Democrats in the Senate, though both majorities are quite small, meaning that a tiny handful of members can change the outcomes of key votes.

FY24 starts in less than three months. If Congress does not agree on a final FY24 appropriations, it either passes a temporary spending bill, known as a continuing resolution or CR, or the federal government shuts down.

This table compares FY23 enacted appropriations with House and Senate allocations by subcommittee

CRs happen nearly every year, usually at the funding level of the prior year, FY23 in this case.

In addition, the first CR historically extends into November or December, buying time to negotiate a full-year appropriation. Short CRs of a week or less may follow, but if Congress does not reach agreement, an additional CR would go into the calendar year 2024.

There is a new angle this year. Under the FRA, if a CR is still in effect on January 1, all agencies will face a one per cent across-the-board funding reduction, effectively a sequestration of roughly $16 billion.

What to watch for

Contractors should prepare for a CR this October and monitor progress in Congress toward a deal on a full-year appropriations bill. Absent such a deal, watch for additional CRs, perhaps extending into calendar year 2024.

Along the way, federal agencies may defer obligating funds even at the CR level, pending the one per cent sequester in January. When agencies are uncertain about future funding, they often husband current funds. Contractors should watch agency actions to see if they hold back in case of further reductions.

Conclusion

The debt limit deal seemed to stabilize FY24 spending levels for defense and non-defense agencies, but that agreement has weakened, and many agencies face potential cuts well below last year’s spending level.

The impacts of CRs, particularly if Congress were to pass sequential CRs extending into next January and beyond, are uneven. For defense, a CR at FY23 levels means foregoing the 3.3 per cent increase currently being pursued by Congress. For many non-defense agencies that face deep cuts below last year’s level, CRs at the FY23 level might provide higher funding levels than a full-year FY24 appropriation would.

This would create a challenge for both Congress and the White House. Under CRs, defense could lose while nondefense agencies gain. Under a full-year FY24 appropriation, defense could gain while many non-defense agencies lose.

How this dilemma plays out might be complicated by next year’s presidential race. It’s possible that Congress will pass CRs that last the entire year or longer. Agency actions from past CRs ae inadequate for CRs that last for a year or more. In preparation, PSC has urged agencies to develop different guidance for contracts in a long-term CR.

Along the way, contractors should prepare for uncertain impacts on federal agencies and current and future contracts. PSC will continue to work for outcomes that help our government customers improve their ability to achieve their missions.