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Set-Aside Alert exclusive analysis:US debt default could delay or halt payments for contractorsAttorneys & analysts warn of severe consequencesGovernment contracting attorneys and analysts are warning of likely late or canceled payments to federal contractors and possibly other major disruptions to federal programs in the coming months if the U.S. defaults on its debt. The potentially negative impacts on contractors would be compounded by very harsh effects on the U.S. and global economy, according to many U.S. economists and policy makers. The US government reached the limit of what it could borrow on Jan. 19, 2023. Since then, it has been funded by “extraordinary” measures that will run dry on or around June 1, US Treasury Secretary Janet Yellen said. Congress determines government spending, and for many decades lawmakers raised the debt limit to cover funds already spent. Not so this year. House Speaker Kevin McCarthy, R-CA, is demanding massive spending cuts in Social Security and Medicare, among other programs, in exchange for raising the debt limit. President Biden has said that Congress threatening a debt default is extremely risky for the economy. At press time, negotiations were continuing. Here is what contractors need to know: What happens if Congress does not approve an increase in the debt ceiling before emergency measures end? Would agencies still be able to spend 2023 appropriations? “If a timely Congressional agreement is not reached, agencies may seek to quickly reapportion their funds based on projected needs and priorities. To ensure sufficient funds to pay for the most vital and immediate expenditures, including those for salaries of military personnel, agencies are likely to rebalance their Treasury Appropriation Fund Symbols (TAFS) accounts. If agencies shift unobligated funds out of procurement-related TAFS, then, despite adequate congressional appropriations, the Anti-deficiency Act would prohibit agencies from issuing new obligations (such as awarding new contracts or orders) in excess of the amount remaining in the appropriate TAFS account.”--Kevin P. Mullen, partner, and Markus Speidel, associate, Morrison & Foerster (https://bit.ly/3NDjwlrhttps://bit.ly/3orfOkM). How severe would the impact of debt default be for contractors? “Complete breach of the debt limit and all emergency measures by the Treasury Department would be unprecedented, and precise impacts are hard to quantify. Their severity will depend on how agencies manage cash flows, how agencies prioritize financial obligations, how long the breach lasts, and how credit and currency markets react, along with other financial and legal impacts. “Even if government operations don’t come to a screeching halt, contractors will be particularly vulnerable. Immediate problems could include stop work orders, canceled contracts, and frozen, delayed, or reduced contract payments. Depending on the length of the breach, agencies may resort to something akin to rolling blackouts—scheduling payments on an intermittent basis as cash on hand permits. “As a result, vendors, particularly those with low cash reserves, would see dwindling bank accounts and be forced to take immediate action to stanch losses.”--Paul Murphy, analyst Bloomberg Law (https://bit.ly/3NDjwlrhttps://bit.ly/3OvVl8U) Would a debt default result in a government shutdown? “Congress has already appropriated funds for fiscal year (FY) 2023, and a debt limit breach would not revoke or alter those appropriations. Thus, under likely interpretations of the Anti-Deficiency Act, the Administration would not lose its authority to incur obligations to operate the government, allowing the Administration to avoid a shutdown even if the Treasury could not pay all of its bills. "As noted above, however, this circumstance is unprecedented and the federal government’s response cannot be fully known at this time. "If relevant government operations are shut down, existing contracts and funding already committed to them are not automatically altered, even though the government may be unable to make timely contractual payments. Contractors could, however, experience lapses in funding on incrementally funded contracts, delays resulting from contracting officer directions to stop work, and other delays and disruptions caused by an inability to obtain necessary government direction or inability to access federal sites.”--Alexandra Barbee-Garrett, associate, Crowell & Moring (https://bit.ly/3NDjwlrhttps://bit.ly/41UsBtr). What should federal contractors do to prepare for default? From Eric S. Crusius and Robert K. Tompkins, partners, Holland & Knight (https://bit.ly/3NDjwlrhttps://shorturl.at/rxAJP):
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