Debt ceiling debacle ends sale of state and local securities


The US Treasury Department announced yesterday evening that it will stop the sale of state and local securities or “slugs.” The securities are used by states to comply with local tax rules. Ending the sale of slugs is the last measure the Treasury Department can take to avoid amassing any further public debt and stave off the debt ceiling while congress continues its budget dysfunction.

The suspension will go into effect on May 17. This will allow the Treasury to continue paying all of the governments bills until early September. In January, lawmakers agreed to suspend the borrowing limit until May 18 while budget negotiations were going on. However, no deal has been reached, leaving Treasury to react to the possibility of default.

On May 19, the day following the budget deal deadline, the debt limit will be raised to its previous level with the additional debt incurred since the beginning of this year. If Congress passes a deal to raise the debt limit, state and local governments will be able to resume using slugs.

The Treasury department is now well-practiced at implementing what used to be extraordinary measures to avoid default, as members of Congress are no longer sufficiently concerned about the damage to the creditworthiness of the United States. The last time slugs were suspended was December 28, adding cyclical if not structural uncertainty around state and local government spending and tax compliance.

Other measures that will follow include halting investment in government employee retiree accounts. Should Congress fail to pass a deal, Treasury will have to pay bills with cash on hand. In that instance, payments to earned benefits such as social security, and medicare would be endangered as would military payments. State and local governments would likely also see a significant drop in federal aid which is already at low levels.


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