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Under Threat: Impact of US Debt Ceiling Default | Keenan

As Memorial Day weekend approaches, the Biden administration and leaders in Congress are in the midst of negotiations regarding raising the debt ceiling, which is the statutory limit on what the U.S. government may borrow to cover its existing payment obligations. The current limit is $31.4 trillion. Without an increase in the limit, the federal government will begin to default on these financial obligations. That could begin as soon as June 1, 2023.

Below are some of the ways a default may be felt by California schools, municipalities, and health care systems.

Health Care

The most immediate impact of a default could be felt in health care systems nationwide. The Medicare program alone accounts for about a quarter of national hospital spending. If a debt ceiling breach caused the federal government to stop making payments to providers through the Medicare and Medicaid programs, hospitals could experience the squeeze almost immediately.

Some California hospitals are already in a precarious position. A California Health Care Foundation study released earlier this week noted that while significant public subsidies and strong financial market returns helped many hospitals get through the worst of the COVID-19 pandemic, data for 2022 shows larger financial challenges for California hospitals. Many general acute care hospitals may be particularly vulnerable to further economic shocks, especially those serving rural or underserved communities.

Affordable Care Act (ACA) marketplaces could also be affected if the federal government no longer subsidizes individual coverage purchased through an exchange. As of 2022, there were 14.5 million Americans enrolled in coverage through ACA marketplaces, and 89% of those covered received premium subsidies.

Schools

The timing of this standoff over the debt ceiling is especially problematic for K-12 schools. The federal government could default on its payments to states for Title I, Title III, the Individuals with Disabilities Education Act (IDEA), and other programs. Districts nationwide have already set their 2023-2024 budgets based on assumed funding levels for those programs. While states can step in and make up the shortfall, a state’s ability to aid educational funding will depend greatly on its fiscal shape.

Colleges and universities also depend on federal funding for programs, and students rely on federal student aid. Students reliant on aid over the summer months might be particularly affected.

Municipalities

A U.S. default could raise borrowing costs for local governments, but even the threat of default could limit a city’s ability to borrow by creating enough uncertainty to dry up liquidity in the debt market. Additionally, cities could see federal funding for housing and infrastructure delayed or cut entirely.

California

Meanwhile, in Sacramento, California lawmakers are grappling with a $31.5 billion budget deficit. Due to severe storms across the Golden State recently, the federal and state governments pushed tax filing deadlines back for most Californians until October. In light of the budget deficit and this year’s lag in tax receipts, a federal delay in funding for health care, housing, schools, and colleges would be especially poorly timed if the debt ceiling was not raised this year.

About Amy Donovan
Amy is Keenan's Vice President of Legislative and Regulatory Affairs, authoring the firm's Briefings and position papers on legislation, regulation and litigation that have an impact on the firm and its clients.