Government Debt Default: How Would it Affect You?
We've been getting a lot of questions from clients and industry about how a government debt default would affect marketing communications firms with federal contracts.
It's no secret that the current deadlock in Congress over raising the debt ceiling is causing some government contractors to get jittery about payment uncertainty. Although the government officially hit its debt limit on January 19, 2023, it's been chugging along like business as usual. This is because of a healthy stack of cash reserves and some fancy footwork like not paying into trust funds. However, the day might come when the cash reserves start drying up and the government will have to make some tough calls. That day could be as soon as June 1, 2023.
If the debt ceiling isn't raised by then, the government may need to decide who gets paid and who doesn't. This could place government contractors at the back of the queue, behind priority payments like U.S. bond interest, military salaries, social security checks, and more. So, firms need to start thinking about how they'll deal with potential cash flow issues.
In the past, like during the 2011 debt limit crisis, the Federal Reserve and Treasury came up with a backup plan to prioritize payments if the government couldn't meet all its obligations. This plan was never used, but it could be dusted off and put into action if the current situation doesn't improve. However, it's also possible that agencies might tighten their belts and limit unnecessary spending if no compromise is reached.
As government contractors, be ready for two possibilities.
The agency tries to save cash by not awarding new contracts or even issuing stop-work orders
The agency plows ahead, even without enough funds to cover all its contracts
In the first scenario, be proactive. Seek guidance from the contracts departments of each agency where you have active contracts or pending proposals. You might also want to identify contracts that could be affected by these potential actions and make plans accordingly.
In the second scenario, it's a little more sticky. If the agency decides to continue operations despite not having enough cash, you may have to choose between halting work or continuing at your own risk.
No matter what happens, keep a detailed record of any disruptions you encounter. This will make it easier to ask for reimbursement for any extra costs once everything goes back to normal. It's also a good idea to have enough cash on hand to keep the business running and to have credit lines set up just in case. And finally, by teaming up with industry groups and stressing the importance of a timely resolution, we might just persuade Congress to find a solution and dodge the bullet.