The U.S. Congress passed, and President Biden signed legislation to avoid defaulting on the U.S. government’s loans. Congress nearly failed to raise the debt limit, which is the amount of money the government can borrow. The U.S. actually reached the debt limit in March; however, the U.S. Treasury had been doing some fiscal juggling to avoid defaulting on the U.S. debt. If the U.S. were to have defaulted on its debt (not pay its bills), it could have had a devastating impact on both the U.S. and the world economy.
The debt ceiling deal, called the Fiscal Responsibility Act, raises the debt limit until January 2025. This effectively avoids another debt ceiling battle until after the 2024 presidential elections.
The Biggest Concerns About the Debt Ceiling Deal
The battle in the U.S. Congress to pass a debt ceiling deal raised significant concerns in other areas. Even though the U.S. didn’t default on its debt, because breaching the debt limit was used as a bargaining tool to push political priorities, organizations that issue credit ratings for governments may lower the U.S. Government credit rating. This is because they don’t feel that threatening the global economy for political purposes is a wise course of action.
Included in the deal that avoided a U.S. default were other provisions affecting government funding and measures intended to help reduce government spending. The measures to reduce spending in the deal include rescinding (taking back) $391 million in American Rescue Plan education funding that the U.S. Department of Education (USED) didn’t give to States, districts, or institutes of higher education. No education agency saw their ARP funds reduced so there will be no impact on the remaining funds States and districts have received. The funds being rescinded were funds that were never given out.
Future Spending Caps on Education Funding
The deal that avoided a U.S. default included other provisions affecting government education funding for the next couple of years. Spending caps for the next two years will freeze education funding at current levels for funding for the 2024-2025 school year (fiscal year 2024 or FY24), with a 1% increase in FY25 for the 2025-2026 school year. In addition, if the U.S. Congress fails to pass all required appropriations by January 1st of the FY 2024 fiscal year, there would be automatic spending cuts of 1% across all programs. The 1% cuts would mean that all States and districts would see 1% less funding for all their ESSA Title programs. For example, if your district receives $1 million in Title I funds, a 1% cut would reduce that by $10,000.
Given the difficulty in reaching a debt limit deal, it is very possible that we’ll see a fight to pass FY24 appropriations, which could result in a breach of the January 1st deadline and automatic cuts of 1%. Districts should be planning now by looking at their ESSA federal funds budgets and considering how they might make adjustments if there is a 1% cut.
