Debt limit suspension: More questions than answersAdvantageVoice® Blog—
Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist
The U.S. House of Representatives passed the “No Budget, No Pay” Act, which suspends the debt limit until May 19 and withholds congressional pay for any chamber that doesn’t pass a budget resolution by April 15. The White House has indicated it wouldn’t stand in the way of the Act and the Senate appears set to pass it as well.
Suspending the debt limit does not mean that the Treasury can load-up on debt to avoid any future debt limits. The Act is written such that only debt issued to satisfy commitments coming due before May 19 will be added to the limit. The debt limit will then be set at its current level, plus the debt issued until the deadline.
However, a more controversial provision of the Act mandates that if a budget resolution isn’t passed by April 15, congressional pay will be withheld until a budget resolution is passed. This would apply to both the House of Representatives and the Senate. Thus, if the Senate passes a budget resolution—which it hasn’t done in over three years—by April 15, but the House of Representatives doesn’t pass a budget resolution, then Senators will get paid, but Representatives won’t. The resolutions they pass don’t even have to agree, so this doesn’t guarantee an actual budget will be passed. Their pay is to be held in “escrow” and disbursed when a budget resolution is passed, or on the last day of the meeting of the current session of Congress.
Here’s the rub: in my opinion, the pay provision is probably unconstitutional. The 27th Amendment states that the compensation of Senators and Representatives cannot vary until the next session of Congress, at the earliest. James Madison actually proposed this Amendment in 1789, but it seemed to disappear until 1992. The original rationale for the Amendment was that elected representatives shouldn’t be able to just vote pay increases for themselves.
The 27th Amendment probably cuts both ways: Not only can they not vote themselves pay increases, they probably can’t vote to cut their pay either. They could cut their pay in future sessions of Congress (e.g., beginning in 2015), but probably not in the current session. Even putting the pay in escrow isn’t likely to pass judicial muster since changing the timing of compensation probably also constitutes “varying the compensation.”
While the “No Budget, No Pay” concept might be conceptually sound, I don’t know if it will stand. Any representative who didn’t vote for the bill could look to the courts to invalidate the bill.
The views expressed are as of 1-23-13 and are those of Chief Portfolio Strategist Brian Jacobsen, Ph.D., CFA, CFP®, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.