Federal Budget Deal Enacted, Preventing Federal Default and Reopening SLGS Window

Thursday, November 5, 2015

On November 2, 2015, the president signed into law a two-year budget agreement that raises spending caps by $80 billion above the levels agreed to under federal sequestration in 2011. The cap increases – $50 billion in FY 2016 and $30 billion in FY 2017 – were split evenly between defense and non-defense accounts. Congressional appropriators will now begin work over the coming weeks to determine how they will allocate the increases across federal spending accounts as they assemble an omnibus spending bill to fund all federal programs for the remainder of the fiscal 2016, which began on October 1. Congress has until December 11, 2015, to pass the omnibus measure or face a total or partial federal government shutdown.

The newly enacted legislation suspends the $18.1 trillion federal debt limit until March 15, 2017, when the borrowing ceiling would reset at the level of debt at that time. The debt limit suspension enables the U.S. Treasury Department to resume sales of state and local government series securities (SLGS) – the Treasury had suspended sales of SLGS in March as part of a series of extraordinary measures to keep the government from defaulting on its debt amidst partisan congressional and White House battles over increasing the debt ceiling. SLGS are securities sold by the U.S. Treasury to state and local government debt issuers to help issuers comply with IRS laws related to bond proceeds. Under IRS law, an issuer cannot earn arbitrage profits by issuing bonds and investing the bond proceeds in a higher yield investment. SLGS help issuers comply with the law, as these securities maintain interest rates and maturities that comply with IRS arbitrage rules.