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Originally published September 19, 2013 at 5:23 PM | Page modified September 20, 2013 at 9:02 AM

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Don't worry about federal shutdown, worry about a default

A far bigger budget danger lurks: In late October or early November, the government could run out of cash. The U.S. would be unable to pay all of its bills in full and on time for the first time in history if it couldn’t borrow more money.

The Associated Press

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WASHINGTON —

Here’s the truth about a government “shutdown.” The government doesn’t shut down.

So the world won’t end if a dysfunctional Washington can’t find a way to pass a funding bill before the new budget year begins Oct. 1.

Social Security checks will go out. Troops will remain at their posts. Doctors and hospitals will get their Medicare and Medicaid reimbursements. Virtually every essential government agency, such as the FBI, the Border Patrol and the Coast Guard, will remain open. Transportation Security Administration officers would continue to staff airport checkpoints.

Furloughed federal workers probably would get paid, eventually.

A far bigger danger lurks: In late October or early November, the government could run out of cash. The United States would be unable to pay all its bills in full and on time for the first time in history if it couldn’t borrow more money.

The Treasury Department probably would make interest payments to bondholders to prevent a catastrophic default on the debt, but it wouldn’t be able to make other payments on time, which would mean delays in Social Security benefits and in paychecks for federal workers and troops in the field.

Americans would feel the pain.

To prevent a “shutdown,” Congress must pass a temporary spending bill before Oct. 1. To prevent a default, it must raise the $16.7 trillion cap on government borrowing.

Averting a shutdown is supposed to be easy. There hasn’t been one since the 1995-96 battle in which President Clinton bested House Speaker Newt Gingrich and his band of budget-slashing conservatives.

This time, the conservatives want to hold government funding hostage to derail the implementation of President Obama’s health-care law. The House is expected to vote on the spending measure Friday.

Raising the debt limit is typically more difficult. But it has always been done because the possible consequences of default are so dire: upheaval in financial markets, a spike in U.S. borrowing costs and a variety of delayed payments to individual Americans and businesses.

Under current estimates, the “X date” by which the government can’t meet all its payments would come in the latter half of October or early November. So Congress needs to act by mid-October to be safe.

In the separate case of a shutdown, fewer than half the 2.1 million federal workers subject to it would be forced off the job if the Obama administration follows the rules adhered to by previous presidents: Ronald Reagan, George H.W. Bush and Clinton. That’s not counting about 500,000 Postal Service employees or 1.4 million uniformed military personnel who would be exempt.

The rules for who works and who doesn’t date back to the early 1980s and haven’t been significantly changed. The Obama administration reissued the guidance Wednesday.

The air traffic control system, food inspection, Medicare, veterans’ health care and many other essential government programs would run as usual. The Social Security Administration would not send out benefits and continue to take applications.

The Postal Service, which is self-funded, would keep delivering the mail. The Federal Emergency Management Agency could continue to respond to disasters.

Museums along the National Mall would close. National parks would be closed to visitors, a loss often emphasized in shutdown discussions.

The Capitol would remain open, however. Congress is deemed essential, despite its abysmal poll ratings.

From a practical perspective, shutdowns usually aren’t that big a deal. They happened every year when Jimmy Carter was president, averaging 11 days each. During President Reagan’s two terms, there were six shutdowns, typically just one or two days apiece. Deals got cut. Everybody moved on.

In 1995-96, however, shutdowns morphed into political warfare, to the dismay of Republicans who thought they could use them to drag Clinton to the negotiating table on a balanced-budget plan.

Republicans took a big political hit, but most Americans suffered relatively minor inconveniences, such as closed parks and delays in processing passport applications. Some 2,400 workers cleaning up toxic-waste sites were sent home, and there were short delays in processing veterans’ claims.

Under a precedent-setting memorandum by Reagan budget chief David Stockman, federal workers are exempt from furloughs if their jobs are national security-related or if they perform essential activities that “protect life and property.”

In 1995, that meant 571,000 Defense Department civilian employees, some 69 percent, remained at post, while 258,000 other Pentagon workers were furloughed. Eighty-five percent of Veterans Administration employees went to work as did 70 percent of Transportation Department workers.

The TSA didn’t exist then, but agency officials have given assurances that TSA officers will screen airline passengers, though administrative workers will stay home.

Then there’s Social Security. Current beneficiaries need not worry; their payments wouldn’t be affected. Given the most recent precedent from the Clinton administration, those eligible to apply for benefits would be able to do so.

During the first shutdown in 1995, the Social Security Administration initially furloughed 93 percent of its workers and stopped enrolling new beneficiaries. But it reversed course in the second shutdown and kept 50,000 additional workers on the job.

A funding lapse, or shutdown, involves the authority to spend new money. A default involves the ability to pay obligations already incurred.

A default would occur if the government is no longer able to borrow and has run out of cash to pay all the bills coming due. Then, the government has to rely on cash coming in to pay whatever bills it can.

Since the government has never defaulted, it’s impossible to know for sure how it would behave. But it’s commonly assumed that the Treasury would make sure that it would meet interest payments so as to not alarm financial markets and prompt U.S. creditors to stop “rolling over” debt by reinvesting bonds when they mature.

“If the federal government actually were to default on its debt obligations, the full faith and credit of the U.S. government is in question and it can have devastating effects on Treasury’s ability to borrow and on the stability of financial markets in general,” said Keith Hennessey, former director of the National Economic Council in the George W. Bush White House.

This year the GOP-controlled House passed legislation requiring the Treasury to “prioritize” its obligations to pay interest payments and Social Security benefits first if there’s not enough cash to pay all the bills.

But while it’s relatively easy to prioritize interest payments, the Treasury Department’s computer systems aren’t programmed in a way that it would be easy to pick and choose what payments to make.

In an internal review after the 2011 debt crisis, Treasury officials told an agency inspector general the best option in a cash crunch would be to delay payments. In other words, the Treasury Department would figure out how much a particular day’s bills cost and then pay those bills when enough cash came in. That would mean the government would quickly fall behind on payments.

Let’s say the government runs out of cash Oct. 18, the earliest date at which default might occur, according to the Bipartisan Policy center, a Washington think tank.

Were the impasse to continue into November, major payments due Nov. 1 — including $25 billion in Social Security benefits — would be delayed almost two weeks.

Oh, and the people who get their Social Security at the beginning of the month are those in the system since before May 1997, which means most are older than 80.

Ironically, in a default, more federal employees could report to work than if there’s a funding lapse. They just couldn’t get paid on time.

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