Unlike a federal government shutdown, a default would not halt fiscal 2023 appropriations, and large defense contractors’ cash reserves could help tide those companies over, yet downstream effects of a short or long-term default on U.S. businesses could be significant, if a default calls into question the full faith and credit of the United States.
“There are enormous financial pressures for publicly traded companies, and, for that matter, privately held companies on what you do with those cash reserves,” David Berteau, the president of the Professional Services Council (PSC), told reporters on May 25 during a virtual forum. “Government contracting has been one of the safe places for investment, not because the returns are so great, but because of stability. Fundamentally, a government invoice has been seen in the marketplace for a long time as good as cash. Undermining that would affect everybody–large, medium, or small.”
“Whether or not they [the defense prime contractors] have the cash reserves to keep their subcontractors in business [is questionable],” he said. “Keep in mind that, for many of these primes, only 30 percent of the dollars are actually going to them. An awful lot of the rest of the money is going to subcontractors, and that’s a ratio that’s much higher now than it was in the [19]70s and 80s. I don’t know what that situation would be. I would certainly not presume to think that they could escape scot-free. More importantly, they have raised a lot of questions with us from a specific execution and program implementation point of view. We’re in a situation right now where, to support Ukraine, we are disbursing product at a rate that Ukrainians are using in one month what we could produce in one year, and that’s not a good process to be in, and there are some real complicating factors that arise with that. Would the government freeze new contracts? The Army’s issued four major contracts in the last month and a half on the munitions side.”
The PSC sent a letter to White House Office of Management and Budget (OMB) Director Shalanda Young on May 19 asking OMB to send guidance to government agencies on actions to take in preparation for a federal default. PSC represents hundreds of federal government contractors.
“For the 11th time in just over 13 years, a debt limit crisis threatens the ability of the U.S. Treasury to meet its financial obligations and to maintain the full faith and credit of the U.S. government,” the letter said. “Comments in the news media by current and former government officials indicate that many consider default to be similar to a government shutdown, but PSC notes that it is very different in key ways.”
“A shutdown occurs when there is a lapse in appropriations,” the council said. “That is not the case if this crisis leads to default. Fiscal Year 2023 (FY23) appropriations have been provided for all federal agencies. Under default, however, the government would lack the cash to meet its obligations (e.g., maturing Treasury debt instruments, payroll and Social Security checks, other obligations ranging from rent and utility bills to contractor invoices, etc.). Therefore, OMB guidance for responding to default must be different than guidance for a lapse in appropriations. PSC believes that agencies should be directed to avoid shutdown actions such as issuing contract stop work orders, furloughs, office closures, designations of essential vs. non-essential personnel, or any other actions unrelated to outlays or payments.”
Many contractor questions on a possible federal default have related to the 1982 Prompt Payment Act (PPA), said Stephanie Kostro, PSC’s executive vice president for policy. The PPA requires the federal government to pay interest, if the government does not settle up within 30 days of the government receiving a contractor invoice.
“People are taking a very practical, pragmatic approach to some of the questions, but in the absence of guidance, it’s hard to target your questions effectively,” she said.