Friday, September 27, 2013

The Prompt Payment Act, the Meaning of Obligations and Debts, and Default

-- Posted by Neil H. Buchanan

Given the strong possibility that Republicans will not increase the debt ceiling before the October 17 date when the government will be unable to pay all of its bills, many people have been trying to figure out just what the Treasury Department will do if the President decides not to issue additional debt at that point.  If Treasury cannot make good on some obligations, what are its choices?  Republicans claim that there is only a "default" if Treasury fails to pay interest on outstanding Treasury securities, and they say that there is more than enough tax revenue coming in to cover those obligations.  Apparently, those Republicans believe that nothing else would count as a default.  They are, of course, wrong.
 As Professor Dorf and I argued in our first Columbia Law Review article last October, the argument that the government's debt includes only principal and interest on Treasuries does not take its own logic seriously.  If "debt" only means money that the government currently owes, then only the principal -- but not the interest -- on Treasuries counts as debt.  That is because interest payments are, like all other government obligations, due at certain points in time, whereas the principal is an existing, ongoing debt until it is paid in full.

So, even though a given Treasury security carries with it a promise to pay $x in interest on a given future date (or set of dates), the Treasury's current debt does not include such future interest payments.  An interest payment is simply another future obligation to which the government has committed itself, when it carried out Congress's statutory order to issue interest-bearing Treasuries.  Similarly, when Treasury commits the government to pay, say, a contractor $y for services rendered on a date certain in the future, it also does so under statutory authority approved by Congress.  When the date comes on which the law says that such a payment must be made, that obligation becomes part of the debt of the United States.  On that date, we owe that money.

Given that no one has written a serious scholarly response to our article, it should come as no surprise that there has been no counter-argument to the argument that I just outlined above.  Even so, some people apparently find it "unpersuasive," or something.  As it turns out, however, there is further support for the idea that all government obligations are properly called "debts" when they come due.

Part of the reason that Treasury has rejected the broad suggestion that they can prioritize all spending, when faced with a trilemma, is that they are required by law to make payments on a day-to-day basis.  That is, even if they wanted to hold off on paying a lower-priority obligation that is due today, in anticipation of a higher-priority obligation that will be due tomorrow, they are required by law to pay for every obligation for which money is available, every day.  The relevant statute is the Prompt Payment Act, 31 U.S.C. 3901 et seq.

The main reason to worry about the Prompt Payment Act, as I noted above, is that it says that Treasury cannot prioritize.  But what if Treasury were to fail to make a payment on an obligation on the due date?  The Act specifies that interest on the unpaid obligation begins to accrue immediately, so that the would-be recipient of the money will be paid more than if she were to be paid on time.  Is that a big deal?

Note that the non-payment of an obligation is treated the same as the nonpayment of even the most narrow definition of "debt."  That is, when the government borrows money on the financial markets by issuing Treasuries, it commits itself to paying interest that accrues from the date that the money is borrowed.  In exactly the same way, failing to pay a contractor on time also commits the government to pay interest on the unpaid balance from the moment that it was due.  Effectively, Treasury has borrowed money from the obligee, and interest begins to accrue.

Even more tellingly, the statute actually uses the word "debt" to describe the unpaid obligations on which interest must be paid.  Section 3902(e) states: "An amount of an interest penalty unpaid after any 30-day period shall be added to the principal amount of the debt, and a penalty accrues thereafter on the added amount" (emphasis added).  That is, as soon as the obligation is unpaid, it becomes a debt upon which interest is owed; and if the interest is unpaid for thirty days, that interest becomes part of the debt, too.  Federal law, therefore, not only treats obligations as the equivalent of debts on the date that they are due, but it even calls them debts.

Interestingly, this analysis is not only relevant to the question of whether the government will be in default if the President fails to borrow money in order to pay obligations as they come due.  It also informs the analysis of the so-called Fourteenth Amendment Option.  Section 4 of that amendment states that "The validity of the public debt of the United States, authorized by law, ... shall not be questioned."  In our October 2012 article (and in prior blog posts), we argued that "debt" in that context had to mean more than simply the principal and interest on Treasuries.

In particular, we quoted language from a four-justice opinion in United States v. Perry (1935): "Nor can we perceive any reason for not considering the expression 'the validity of the public debt' as embracing whatever concerns the integrity of the public obligations."  Those who disagree with this interpretation of Section 4 have insisted that "debt" has a narrow meaning, limited only to Treasury securities.  The analysis above regarding the Prompt Payment Act, therefore, not only demonstrates that any non-payment of an obligation would be a default, but it also strengthens the case for rejecting the debt ceiling as Constitutionally defective.

As it happens, the Obama Administration unilaterally rejected the Fourteenth Amendment Option quite some time ago.  And Professor Dorf and I have gone to some pains to emphasize that the Buchanan/Dorf "least unconstitutional option" analysis, which pertains when a President faces a trilemma, is wholly independent of the Fourteenth Amendment option.

I continue to believe that the Buchanan/Dorf argument is stronger than the Fourteenth Amendment option, but it is nonetheless important to note that the latter argument is strengthened by the language from the Prompt Payment Act.  After all, if the Fourteenth Amendment Option is correct, there is not even an "impeachment trap" for the President.  He would not be choosing the least unconstitutional option by issuing debt in excess of the debt ceiling, because the debt ceiling is void as unconstitutional.  The President could then obey Congress's spending and taxing laws, as he should in any case, without even thinking about the debt ceiling statute.

In any event, if Congress passes a continuing resolution that stretches beyond October 17, but then fails to increase the debt ceiling as necessary, the President would cause a default on the debt of the United States by failing to pay what the spending laws require.  It is still true the "[a]n obligation is a debt that must be paid."


Hashim said...

Even assuming that "debt" in the 14A has the broad meaning that you suggest, and further assuming that simply running out of funds constitutes "questioning the validity" of the debt under the 14A, I still don't understand why you think it follows that the debt-celling statute is necessarily unconstitutional.

The debt-ceiling statute's limitation on the authorization to incur enough debt isn't the cause of the Govt's running out of funds any more than the statute(s) that limit(s) the authorization to raise enough revenue or the statute(s) that authorize(s) too much spending.

In other words, isn't this still just your trilemma? One can interpret the 14A as broadly as you suggest, and then conclude that the way to avoid the supposed 14A violation is by raising unauthorized taxes or by cutting authorized spending that's not even arguably "debt." Nothing in the 14A compels, or even suggests, that the debt-ceiling statute is the only statute that can be ignored to avoid the 14A violation.

And thus, to the extent that one disagrees with you as to the appropriate solution to the trilemma, they'd presumably also disagree with you about the 14A.

Simply put, is there a 14A argument that exists even if you're wrong about the trilemma?

Michael C. Dorf said...

Hash raises a good question that gets to a point on which Neil and I have had some internal disagreement: Neil thinks the 14A.4stand-alone argument is stronger than I think it is. The point Hash makes here is the same one Larry Tribe made in the summer of 2011 and it's what led us to develop the trilemma argument in the first place.

But even though I think that the stand-alone 14A.4 argument is weaker than Neil thinks it is, I don't think it's utterly toothless. The core of the argument is that 14A.4 itself prioritizes payment of debts over adherence to other obligations--such as following Congress's wishes with respect to taxing and spending levels. It does so both because 14A.4 is later in time than Article I.8 and because it's an explicit text.

Again, I still think the trilemma is the better argument, but I think there is at least something to the stand-alone 14A.4 argument.

Hashim said...

Mike, I don't get it.

Even assuming that the 14A prioritizes the payment of debts, it doesn't specify *anything* about where the funds for that payment should come from.

So the 14A can be satisfied, while also adhering to the debt-ceiling statute, by, e.g., raising more unauthorized taxes, cutting more authorized non-debt spending, selling govt assets with or without authorization, soliciting gifts in violation of federal statute, etc.

And, btw, some of those things might be authorized (selling govt assets) or at least violate less important fed statutes (soliciting gifts). Whereas the debt-ceiling statute reflects the express text of article I that no money can be drawn from the treasury without congressional approval.

This seems to be a problem for your trilemma as well, but for present purposes the point is that I still don't see how there can be a stand-alone 14A that doesn't implicitly rely on your trilemma theory.

Michael C. Dorf said...

Ah, sorry, I misunderstood. I agree that the conclusion that 14A.4 prioritizes spending does not by itself entail congressionally unauthorized borrowing as opposed to congressionally unauthorized taxing or congressionally unauthorized selling property. Some of the analysis assumes that the crisis only hits when other mechanisms have been exhausted, but it's true that the President won't have exhausted unauthorized taxation or, w/r/t some properties, sale. E.g., he could sell Yellowstone to real estate developers, etc.

So yes, some other argument is necessary for saying that violating the debt ceiling is the preferred option. I took the main thrust of Neil's claim to be that what 14A.4 does, if read as he proposes, is to rule out certain spending cuts.

Neil does go further, however, and say that 14A.4 means the debt ceiling statute is THE unconstitutional culprit. This gets to the heart of our intra-authorial disagreement. I disagree on that point.

However, I do think there is SOMETHING to Neil's argument. The best case for it might rely on an analogy I want to build based on a line of reasoning in Justice Thomas's dissent in Grutter v. Bollinger. Suppose a state enacts law L1 creating and funding a veterinary school. Suppose that ten years later, the state enacts law L2, which provides that "any state-run veterinary school must enroll no less than twenty percent African American students." A rejected white applicant argues that he is entitled to get into the state vet school. Even though it's the combination of L1 and L2 that worked the violation of the applicant's equal protection rights--because absent L1 there could be no violation--the courts would sensibly treat L2 as the real culprit. It is in some sense the proximate cause of the EP violation. I take Neil and others who make the stand-alone 14A.4 argument to be saying the same sort of thing: The debt ceiling statute is the proximate cause of the violation. I'm not entirely persuaded by this argument (because, with Cardozo, I find proximate cause to be mysterious), but as I say, I do think there is SOMETHING to it.

Neil H. Buchanan said...

Mike correctly describes my arguments. We both continue to believe that the Buchanan/Dorf "least unconstitutional option" analysis is correct, and we both think that the 14th Amendment argument is weaker (with a mild difference of opinion about how much weaker it is). This post was designed to say two things: (1) (Completely separate from any 14A argument) Not paying bills when due is a default, and (2) the PPA strengthens the 14A argument (but obviously not to the point where it is the better constitutional argument).