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System Makes It Hard To Prioritize U.S. Bill Payments

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System Makes It Hard To Prioritize U.S. Bill Payments


System Makes It Hard To Prioritize U.S. Bill Payments

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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MICHELE NORRIS, host: If Treasury does tap out its credit, and must pick and choose who to pay, it's not clear that it has the ability to do so.

NPR's Yuki Noguchi has that story.

YUKI NOGUCHI: It's tempting to use a household analogy here. As in, if I maxed out on my credit card and had limited cash, I might pay the mortgage but not the car loan, or cut back on food, but not gas.

Jay Powell says the government doesn't have flexibility like that.

JAY POWELL: What the United States government spends its money on is the safety net, which is largely health care and Social Security, plus an army. That's what it is. That's not like a household, you know. A household may be able to stop, you know, going out to meals or movies, things like that. You can't really do that at the federal level.

NOGUCHI: Powell is a former Treasury undersecretary under the first President Bush and a fellow at the Bipartisan Policy Center. He says it's also different because it just might not be possible to prioritize which bills to pay.

POWELL: I mean, it's an awful lot of payments. It's way more than you can array on the Secretary of the Treasury's floor and pick this pile and that pile. And you got to consider that this is legacy government software, this isn't the latest product from Apple.

NOGUCHI: Treasury Secretary Timothy Geithner put it this way on Fox News Sunday.

Secretary TIMOTHY GEITHNER DEPARTMENT OF TREASURY: We will do everything we can to mitigate the damage. But I want to be very clear: Congress will be putting 80 million checks, payments at risk of delay.

NOGUCHI: Those payments are issued in a two-step process. Each federal agency has its own separate account within the Treasury Department. When it needs to pay its bills, the agency first verifies it has enough funds in the account, then sends a request for money through a division of Treasury called the Financial Management Service. At the agency's direction, the FMS in turn transfers that money electronically to individuals or vendors, or it cuts them a check.

Across all the government agencies, Treasury processes a billion payments every year, worth well over $2 trillion.

Kent Smetters is a professor at the Wharton School and also a former Treasury official under the second President Bush. He says Treasury has never had to tinker with the system to prioritize payments and it has limited ability to do so.

KENT SMETTERS: Treasury can always rank the categories that they can pay. And so they can always say bondholders come first.

NOGUCHI: Which they will, he says, in order to avoid outright default, which would prompt huge interest rate spikes. But beyond that, deciding who comes next gets trickier.

Take Medicare, for instance. Treasury doesn't have the capability to select which hospital or which doctor gets to be first in line, if it comes to that. Those smaller choices about who gets paid first would fall to each agency and the particulars of their bill pay systems.

And Smetters says it's unlikely most of them have an easy way to pick and choose, either.

SMETTERS: It's not elegant or efficient. I mean, it's still going to be very costly to go through that manual approach.

NOGUCHI: Experts say it's not even clear the government has the legal authority to selectively pay its bills; doing so will almost certainly raise fairness complaints. On the other hand, Smetters says, the alternative is also ugly. Treasury could just keep processing payments. But then when the money runs out, there's no certainty the Federal Reserve, which is Treasury's bank, would give it overdraft protection.

SMETTERS: So the big question there will become, does the Federal Reserve essentially bounce the checks?

NOGUCHI: The Treasury Department says it will soon provide some guidance about how it plans to function if the debt ceiling does not get raised.

Yuki Noguchi, NPR News, Washington.

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