Debt Defaults are Not Shutdowns, But Both Raise Money Fears
Question number one that companies in the government market want answered is how payments for their work on contracts will, or will not, happen in a debt default situation. No one knows for sure.
The temptation is strong to look at a potential U.S. debt default through the same lens as a government shutdown because both scenarios share a common trait: a shorter supply of money.
But the largest trade association representing government services companies is telling both its members and their members' customers that a default situation is very different, therefore the contingency planning and execution must be different than that of a shutdown.
The Professional Services Council's May 19 letter to the White House's Office of Management and Budget says as much: have the framework in place for the next time a default looms. That framework also means keeping the federal government open in all missions and functions.
We should note the political situation as it stood when hitting "publish" on this article. According to Reuters, President Joe Biden and House Speaker Kevin McCarthy (R-CA) are "edging close to a deal" with a few top-line numbers versus a full bill for lawmakers to work through. That's all we can say at this juncture.
Also at this juncture: companies asking themselves, their agency customers and even PSC many questions about what to do now.
During a media conference Thursday, PSC's president and CEO David Berteau said the organization is telling companies to keep their invoices for payment on contracts current and ready for approval without too many questions from customers.
Staying on that theme of money: Berteau said PSC is hearing anecdotes from member companies that banks are further tightening up access to credit and lending, which means contractors will have to pay extra attention to their cash situations.
Those action items are all things companies in the government market should do all the time and are repeatedly advised to by more groups than just PSC.
But as Berteau pointed out, a debt default is likely to result in prioritization of some sort as the Treasury's cash balance runs dry. That scenario makes those evergreen recommended action items more critical.
"We have agencies that have told us 'we think we can pay all our bills' -- they sort of forget that they don't write the checks, the Treasury Department writes the checks," Berteau said. "In the event that there is a prioritization process, there's at least an assumption that if your invoices aren't in, you're not going to be in line."
No one knows for sure where contractors will fall in that line of where the money will go first and who has to wait for it. This is where the most uncertainty for the industry exists because while shutdowns are a norm, a default on debt is a first-in-history event.
The main difference between both situations is that shutdowns result from a lapse in federal appropriations, while the default takes place in an environment with budgets in place. Berteau said that during the partial shutdown in December 2018 and January 2019, agency priorities changed on a week-to-week basis depending on sources of obligations.
"It's very very different in a default situation, where there is no boundary between prior year appropriations that are obligated and current year appropriations that are not available," Berteau said. "We believe, and this is why we made this point to OMB, that in fact the differences between a shutdown and default are significant enough, that kind of thing should not apply."
Unfortunately for companies and even their customers at the program and contract level, no central guidance from OMB exists yet (to our knowledge) on how agencies should operate in a debt default situation.
"They're probably not going to get guidance from on high, at least not right away," Berteau said, adding this piece of advice on dialogue and conversation with customers:
"Raise your concerns with them, tell them what you're worried about, ask them what they're thinking about, ask them what they need from you to be able to make the case internally to be able to have the decisions that they need to make in order to keep the programs operating."