What would happen to contractors in case of a debt default?

Debt default would seem, in some ways, like a government shutdown. But it’s not. The government is fully appropriated for the rest of fiscal 2023. It is the money to roll over Treasury bills coming due that the government would not have. None of this is to say things would be hunky dory for contractors. For an assessment, Federal Drive with Tom Temin spoke to David Berteau, the President and CEO of the Professional Services Council.

Interview Transcript:

Tom Temin So what happened with contractors? I mean, the government wouldn’t be able to pay bills is what we’re hearing from the Treasury, from Mrs. Yellen.

David Berteau That’s right, Tom. And you point out at the beginning of your commentary there, we have an abundance of appropriations, right? I mean, we’ve got a huge appropriation in FY 23. Most of those funds are not yet obligated. Actually, the Constitution is quite clear on this point. And the Supreme Court even ruled about 50 years ago in support of this. The Constitution, Article one, Section nine, clause seven, says essentially no funds shall be disbursed from the Treasury except upon appropriations. What happened under Richard Nixon, because you remember, he actually tried to rescind those funds and not spend them. And the Supreme Court ruled that the reverse is also true. If Congress appropriates it, you have to spend it. And so the Constitution is clear and the history and the courts have ruled very clearly in this regard. If we were to have a default, it would not be a lapse in appropriations. And therefore, the procedures that the government has in place governing a government shutdown would not only be irrelevant, they might even be counterproductive. But what we see already is that agencies are thinking about it and talking about it as if it’s a shutdown. We’re hearing conversations of who’s essential and who’s not. Well, that’s not a choice that the government has to make. In fact, it goes even further. The Antideficiency Act says you can’t donate time to the federal government. You have to be paid for it. Right. Well, okay, how do you require somebody to work if you’re not paying them, even if the contracts are already in place? It’s potentially a real mess here. And we need to see some clear guidance pretty quickly to sort this out.

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Tom Temin Right. Because agencies then could go in the wrong direction by either asking for contractors to keep working and we’ll pay you later, wrongly, assuming that they can’t pay the contractors or just shut things down that are any contract that may not be directly related to just operating and keeping the agency going.

David Berteau Right. So what’s the first question in the shutdown you ask yourself? What’s my source of funds? And is my work under the contract affected by the lapse in appropriations? If it’s prior year appropriations, if its current year appropriations have already been obligated, then there’s no effect. There could be an effect for other reasons. The building is not open, you can’t get to the job. There’s nobody there to approve your invoice or your task order, etc.. But none of that is driven by the kinds of factors that will come into place in default. What’s instructive, Tom, is look back and see what the plans have been the last few times we’ve come close to this. 2011 and 2013 are instructive in that regard. We can look at some of the plans that were in place, even though they were never actually promulgated.

Tom Temin Right. So what you’re saying now then, is that the Office of Management and Budget, the White House ought to start issuing some detailed guidance in the eventuality that sometime in the next who knows, week, two weeks, three weeks, this happens.

David Berteau Right. I mean, the secretary of the Treasury has said June 1st could be X-date, the date at which Treasury wakes up and doesn’t have enough money. That doesn’t mean they have no money. It means they got whatever came in last night and they have whatever bills are due that day. So the question is, if you don’t have enough, which ones do you pay? This is a real tough challenge. What Treasury did in the past, in 2011 and again 2013, was plan to pay, first and foremost the principal and interest on those T-bills because you can’t have a global economy collapse and everything’s based on Treasury bills. But what does that mean not only for contractor invoices, what does it mean for government payroll, for civilian employees and uniformed personnel? What’s it mean for Social Security recipients? What does it mean for Medicare and Medicaid recipients? What does it mean for food stamp recipients? Who comes first? Who gets paid first? That’s the question we don’t know the answer to. How can you plan without knowing the answer to that question?

Tom Temin We’re speaking with David Berteau, president and CEO of the Professional Services Council. And switching gears to something a little bit more immediate, the emergency or the health crisis has passed in an official way. I love it when they say we’re planning for the end of the crisis. I wish they could name the hour and date of every crisis to end. We could pronounce them over. But along with that, the vaccine mandate went away in a quiet, sort of pitiful death, and that included contractors. So what are the lessons learned here?

David Berteau First of all, the federal health emergency that you referred to did expire midnight, May 11. So last week. And it was kind of an interesting thing, Tom, because the emergency had to be renewed every 90 days and it had been being renewed ever since, you know, early 2020. When it came time to renew again, the president decided and actually signed a bill from Congress that helped his decision, we’re not going to renew it anymore. So you did have a specific date and time. From a contractors point of view, there were a host of changes in regulation and procedure that were predicated upon that national health emergency. We saw just a couple of weeks ago, the Defense Department went back to 80% progress payments for its major weapons systems, cutting back from 90%, all predicated upon the national health emergency. The vaccine mandates, two executive orders, 14042 and 14043 were both rescinded last week. One applied to federal civilian employees, the other applied to contractors. And so those are now OBE, there are still court cases out there. Whether those fall apart or not, I don’t know, because some of those cases were predicated upon something other than the health emergency, so we’ll have to see how the courts play out.

Tom Temin Right. So in many ways then it was a mandate that had not that much health effect that we can see, but it had a whole lot of legal and administrative effect.

David Berteau It did. And there’s one particular effect that I think has had very little attention paid to it, and that was the fundamental process by which the acquisition regulation was promulgated. So there was a clause inserted in the Federal Acquisition Regulation that basically said comply with the vaccine mandate. But the clause itself did not specify what that mandate was. Instead, it referred you to a website of the Safer Federal Workforce Task Force.  And that website was unaccounted for. It had no letterhead, it had no authority anywhere. It had no designation of who was responsible, agent or official. And it could change at a moment’s notice without any notification whatsoever and affect millions of contracts. You know, this is the kind of thing that seems to me to have set a very bad precedent, not that the FAR doesn’t refer to websites elsewhere, because there’s plenty of government regulations that are not part of the FAR. For instance, the NIST standards that govern cybersecurity is controlled by NIST. But you know who owns it. You know what process they follow to modify it. You have the chance to comment on it. It may not be under the Administrative Procedure Act, but there’s plenty of public input to that. None of that was visible and present in this vaccine mandate. That’s something I think that merits view going forward, because this may not be the last time we face this.

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Tom Temin All right. And a final question has to do with something the court did to intervene in the whole procurement contractor system, and that was say that the GSA was not legally entitled to allow unpriced bids for spots on some of the big GWACs that GSA has been trying to push out the door. And GSA’s idea is that the prices would be negotiated at the task quarter level? That’s kind of what the new era of flexibility and less friction in contracting. The court said no. And so what’s your take on what this all means? And there’s a couple of issues here that weren’t directly addressed in that case.

David Berteau That’s correct. There’s at least four separate kinds of issues here. One is the statutory basis for that GSA approach, which was a section that was in the fiscal year 18 National Defense Authorization Act that GSA read would permit them to do the unpriced orders at the GWAC level. And it makes sense, Tom, that you can’t really predict what your price is until you know what the work is that you’re going to be doing. And that comes with the task force. But it’s the statutory basis is under question. Then point number one is what do you do to change the statutory basis? And that’s something that we at PSC in looking at and see and whether we can get something done in this fiscal year in the legislation. The second is it immediately affects the Polaris contract and bids were submitted on that time last November and people have been waiting already six months and now the whole thing is thrown into turvy. Right. And also the OASIS-Plus contract. The third thing is what’s the nature of joint ventures in the federal government? And that’s something that really is all over the place. It needs to be clarified. And the Small Business Administration, particularly for small business joint ventures, SBA will need to step up here. And then the fourth, I think, comes into play, which is how do you actually keep competition going and keep companies in business when protests like this and court cases like this can make you take forever and then you can’t even use the bid that you submitted to all of that needs to be sorted out.

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