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United States General Accounting Office: 
GAO: 

Report to the Secretary of the Treasury: 

December 2002: 

Debt Ceiling: 

Analysis of Actions During the 2002 Debt Issuance Suspension Periods: 

GAO-03-134: 

Contents: 

Letter: 

Background: 

Results in Brief: 

Objectives, Scope, and Methodology: 

Chronology of Events: 

Actions Related to the Civil Service Fund: 

Actions Related to the G-Fund: 

Civil Service Fund and G-Fund Losses Were Restored: 

Documented Policies and Procedures Needed during a Debt Issuance 
Suspension Period: 

Conclusions: 

Recommendation for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix: 

Appendix I: Comments From the Department of Treasury: 

Related GAO Products: 

Tables: 

Table 1: Chronology of Events Relating to the 2002 Debt Ceiling 
Increase: 

Table 2: Early Redemption of Civil Service Fund Investments Funded with 
Current-Year Securities: 

Table 3: Early Redemption of Civil Service Fund Investments Funded with 
Long-Term Securities: 

Table 4: How Including Accrued Interest Affects the Amount of 
Securities Redeemed: 

[End of section] 

United States General Accounting Office: 
Washington, D.C. 20548: 

December 13, 2002: 

The Honorable Paul H. O’Neill: 
The Secretary of the Treasury: 

Dear Mr. Secretary: 

The Congress has traditionally imposed a limit on the size of the 
federal government’s public debt by establishing limits, known as debt 
ceilings, on the amount of Treasury securities that can be outstanding. 
On various occasions over the years, normal government financing has 
been disrupted because Treasury had borrowed up to, or near, the debt 
ceiling and legislation to increase the debt ceiling had not been 
enacted. As you are aware, in April, May, and June 2002, before the 
current debt ceiling was raised to $6.4 trillion, Treasury used its 
statutory authority to invoke two debt issuance suspension periods. 
[Footnote 1] Accordingly, during these periods, Treasury took several 
actions to raise funds to meet federal obligations without exceeding 
the debt ceiling. 

In connection with fulfilling our requirement to audit the financial 
statements of the U.S. government, we audit the Schedules of Federal 
Debt Managed by the Bureau of the Public Debt, [Footnote 2] which 
includes testing compliance with the debt ceiling. To assist us in this 
testing and because of the nature of and sensitivity toward actions 
taken during a debt issuance suspension period, we (1) developed a 
chronology of significant events, (2) analyzed the financial aspects of 
Treasury’s actions taken during the debt issuance suspension periods 
and assessed the legal basis of these actions, and (3) analyzed the 
impact of the policies and procedures used by Treasury to manage the 
debt during the debt issuance suspension periods. This report presents 
the results of our review of the actions taken and the policies and 
procedures implemented by Treasury during the 2002 debt issuance 
suspension periods. 

Background: 

The federal government began with a public debt of about $78 million in 
1789. Since then, the Congress has attempted to control the size of the 
debt by imposing ceilings on the amount of Treasury securities that can 
be outstanding. In February 1941, an overall ceiling of $65 billion was 
set on all types of Treasury securities that could be outstanding at 
any one time. 

The debt ceiling was raised several times between February 1941 and 
June 1946, when a ceiling of $275 billion was set that remained in 
effect until August 1954. At that time, the first temporary debt 
ceiling, which added $6 billion to the $275 billion permanent ceiling, 
was imposed. Since then, numerous temporary and permanent increases in 
the debt ceiling have been enacted. Total debt subject to the debt 
ceiling, as of June 30, 2002, was about $6.1 trillion. About 44 
percent, or $2.7 trillion, was held by federal trust funds, such as the 
Social Security trust funds and the Civil Service Retirement and 
Disability Trust Fund (Civil Service fund), and by the Government 
Securities Investment Fund of the Federal Employees’ Retirement System 
(G-Fund), [Footnote 3] hereafter collectively referred to as Funds. 

The Secretary of the Treasury has several responsibilities related to 
the federal government’s financial management operations. These include 
paying the government’s obligations and investing Funds’ receipts not 
needed for current benefits and expenses. The Secretary has generally 
been provided with the ability to issue the necessary securities to the 
Funds for investment purposes and to borrow the necessary funds from 
the public to pay government obligations. 

Under normal circumstances, the debt ceiling is not an impediment to 
carrying out these responsibilities. Treasury is notified by the 
appropriate agency (such as the Office of Personnel Management for the 
Civil Service fund) of the amount that should be invested (or 
reinvested), and Treasury makes the investment. In some cases, the 
agency may also specify the security that Treasury should purchase. 
These securities count against the debt ceiling. Consequently, if 
Funds’ receipts are not invested, an increase in the debt subject to 
the debt ceiling does not occur. 

When Treasury is unable to borrow because the debt ceiling has been 
reached, the Secretary is unable to fully discharge his financial 
management responsibilities using the normal methods. In 1985, the 
government experienced a debt ceiling crisis from September 3 through 
December 11. During that period, Treasury took several actions that 
were similar to those discussed in this report. For example, Treasury 
redeemed Treasury securities held by the Civil Service fund earlier 
than normal in order to borrow sufficient cash from the public to meet 
the fund’s benefit payments and did not invest some trust fund 
receipts. [Footnote 4] In 1986 and 1987, after Treasury’s experiences 
during prior debt ceiling crises, the following statutory authorities 
were provided to the Secretary of the Treasury to use the Civil Service 
fund and the G-Fund to assist Treasury in managing its financial 
operations during a debt ceiling crisis: 

1. Redemption of securities held by the Civil Service fund. Subsection 
(k) of 5 U.S.C. 8348 provides authority to the Secretary of the 
Treasury to redeem securities or other invested assets of the Civil 
Service fund before maturity to prevent the amount of public debt from 
exceeding the debt ceiling. 

Subsection (k) of 5 U.S.C. 8348 also provides that, before exercising 
the authority to redeem securities of the Civil Service fund, the 
Secretary must first determine that a “debt issuance suspension period” 
exists. Subsection (j) of 5 U.S.C. 8348 defines a debt issuance 
suspension period as any period for which the Secretary has determined 
that obligations of the United States may not be issued without 
exceeding the debt ceiling. 

The statute authorizing the debt issuance suspension period and its 
legislative history are silent as to how the Secretary should determine 
the length of a debt issuance suspension period. Specifically, 
subsection (j) (5) of 5 U.S.C. 8348 states that “the term ‘debt 
issuance suspension period’ means any period for which the Secretary of 
the Treasury determines for purposes of this subsection that the 
issuance of obligations of the United States may not be made without 
exceeding the public debt limit.” 

2. Suspension of Civil Service fund investments. Subsection (j) of 5 
U.S.C. 8348 provides authority to the Secretary of the Treasury to 
suspend additional investment of amounts in the Civil Service fund if 
the investment cannot be made without causing the amount of public debt 
to exceed the debt ceiling. This subsection of the statute also 
authorizes the Secretary to make the Civil Service fund whole after the 
debt issuance suspension period has ended. 

3. Suspension of G-Fund investments. Subsection (g) of 5 U.S.C. 8438 
provides authority to the Secretary of the Treasury to suspend the 
issuance of additional amounts of obligations of the United States to 
the G-Fund if issuance cannot occur without causing the amount of 
public debt to exceed the debt ceiling. The subsection authorizes the 
Secretary to make the G-Fund whole after the debt issuance suspension 
period has ended. 

We have previously reported on aspects of Treasury’s actions during the 
1995/1996 debt issuance suspension period [Footnote 5] and earlier debt 
ceiling crises (see Related GAO Products). 

Results in Brief: 

In April and May 2002, Treasury announced two debt issuance suspension 
periods because certain receipts could not be invested without 
exceeding the statutory debt ceiling of $5.95 trillion. The first debt 
issuance suspension period occurred from April 4 to April 16, 2002, and 
involved use of the G-Fund. The second debt issuance suspension period 
occurred from May 16 to June 28, 2002, and involved use of the Civil 
Service fund and the G-Fund. Treasury also took other actions to avoid 
exceeding the debt ceiling, such as suspending the sales of State and 
Local Government Series (SLGS) Treasury securities6 and recalling 
noninterest-bearing deposits held by commercial banks as compensation 
for banking services provided to Treasury (commonly referred to as 
compensating balances). 

During both debt issuance suspension periods, Treasury suspended some 
investments and reinvestments of the G-Fund’s receipts and maturing 
securities. During the second debt issuance suspension period, Treasury 
also took the following actions related to the Civil Service fund: 

* It redeemed about $4 billion in Treasury securities held by the Civil 
Service fund before they were needed to pay benefits and expenses. 

* It suspended the investment of about $2 billion of trust fund 
receipts. 

These actions were consistent with legal authorities provided to the 
Secretary of the Treasury. In addition, while these actions to prevent 
the debt ceiling from being exceeded initially resulted in interest 
losses of $167.3 million to the G-Fund and principal and interest 
losses of $15.4 million to the Civil Service fund, Treasury has fully 
restored these losses in accordance with 5 U.S.C. 8438(g) and 5 U.S.C. 
8348(j), respectively. 

Although the actions that are allowed during a debt issuance suspension 
period are well defined in law (e.g., suspending Civil Service fund and 
G-Fund investments and redeeming Civil Service fund securities earlier 
than normal to pay fund benefits and expenses), the policies and 
procedures needed to implement such actions are not documented. Our 
review disclosed some cases where the lack of documented policies and 
procedures contributed to confusion and errors that had to be 
corrected. 

Properly documenting the policies and procedures will (1) allow 
Treasury management to better ascertain the impacts of these policies 
and procedures on Treasury’s ability to manage the outstanding debt 
during a debt issuance suspension period and (2) if effectively 
implemented, reduce the chance for confusion and risk of errors should 
Treasury need to use the policies and procedures in the future. Such 
documentation is a prudent management action consistent with federal 
internal control standards and is a necessary hedge against the 
inevitable event of turnover of key personnel. Accordingly, we are 
recommending that the Secretary of the Treasury direct the Under 
Secretary for Domestic Finance to document policies and procedures to 
guide the department’s actions during future debt issuance suspension 
periods. 

Treasury officials agreed that accurate documentation of policies and 
procedures is a valuable objective, but stated that they were reluctant 
to develop policies and procedures that would limit the Secretary’s 
flexibility to manage the debt during a debt issuance suspension 
period. In subsequent conversations with Treasury officials, we noted 
that our recommendation did not call for documenting the circumstances 
under which the Secretary should invoke specific actions, but rather 
envisioned documenting the policies and procedures needed to implement 
the Secretary’s selected actions. Taken from this perspective, Treasury 
was in general agreement with our recommendation. 

Regarding three instances where the lack of documented policies and 
procedures contributed to what we characterized as some confusion and 
errors, Treasury did not agree that there were any errors. As discussed 
in this report, Treasury’s new financial management system clearly 
shows that errors had occurred and we continue to believe that the lack 
of documented policies and procedures contributed to them. 

Objectives, Scope, and Methodology: 

Our objectives were to: 

* develop a chronology of significant events related to the debt 
issuance suspension periods during April 2002 and May/June 2002; 

* analyze the financial aspects of Treasury’s actions taken during the 
2002 debt issuance suspension periods and assess the legal basis of 
these actions, and; 

* analyze the impact of the policies and procedures used by Treasury to 
manage the debt during the 2002 debt issuance suspension periods. 

To develop a chronology of the significant events related to the 2002 
debt issuance suspension periods, we obtained and reviewed applicable 
documents. We also discussed Treasury’s actions during the debt 
issuance suspension periods with senior Treasury officials. 

To analyze the financial aspects of Treasury’s actions taken, we (1) 
reviewed the methodologies Treasury developed to minimize the impact of 
such departures on the Civil Service fund and the G-Fund, (2) 
quantified the impact of the departures, (3) assessed whether any 
principal and interest losses were fully restored, and (4) assessed 
whether any losses were incurred that could not be restored under 
Treasury’s current statutory authority. 

To assess the legal basis of Treasury’s departures from its normal 
policies and procedures, we identified the applicable legal authorities 
and determined how Treasury applied them during the 2002 debt issuance 
suspension periods. Our evaluation included those authorities related 
to issuing and redeeming Treasury securities during a debt issuance 
suspension period and restoring losses after such a period has ended. 

To analyze the impact of the policies and procedures used by Treasury 
to manage the debt during debt issuance suspension periods, we reviewed 
the actions taken and the stated policies and procedures used during 
debt issuance suspension periods. To determine the stated policies and 
procedures used during the 2002 debt issuance suspension periods, we 
discussed with Treasury officials and examined the support for actions 
taken during these periods. We also compiled and analyzed source 
documents relating to previous debt issuance suspension periods, 
including executive branch legal opinions, memorandums, and 
correspondence. 

We performed our work from April 4 through July 31, 2002, in accordance 
with U.S. generally accepted government auditing standards. We 
requested comments on a draft of this report from the Secretary of the 
Treasury or his designee. The written response from the Fiscal 
Assistant Secretary of Treasury is reprinted in appendix I. 

Chronology of Events: 

In December 2001, Treasury analysts concluded that the debt ceiling of 
$5.95 trillion might be reached in February 2002. Table 1 shows the 
significant actions the Congress and the executive branch took from 
December 2001 through June 2002 to address the debt ceiling. 

Table 1: Chronology of Events Relating to the 2002 Debt Ceiling 
Increase: 

Date: December 11, 2001: 
Action: The Secretary of the Treasury wrote to the congressional 
leadership requesting that the statutory debt ceiling be raised to $6.7 
trillion. 

Date: February 13, 2002: 
Action: The Secretary of the Treasury reiterated the need for an 
increase of $750 billion in the statutory debt ceiling. 

Date: April 1-2, 2002: 
Action: Treasury called back about $7 billion in Treasury cash balances 
from three banks. According to Treasury officials, these funds were 
returned on April 4, 2002. 

Date: April 2, 2002: 
Action: The Secretary of the Treasury announced his intent to suspend G-
Fund investments beginning on April 4, 2002, and ending on or about 
April 18, 2002. 

Date: April 17, 2002: 
Action: Treasury ended the first debt issuance suspension period 
primarily because of April tax receipts. Treasury fully restored the G-
Fund. 

Date: April 17, 2002: 
Action: The Secretary of the Treasury again urged that the debt ceiling 
be increased. 

Date: May 14, 2002: 
Action: The Secretary of the Treasury declared a debt issuance 
suspension period beginning no later than May 16, 2002, and lasting 
until June 28, 2002. This allowed Treasury to redeem Treasury 
securities held by the Civil Service fund earlier than normal and to 
suspend investments of Civil Service fund and G-Fund receipts. 

Date: May 15, 2002: 
Action: Treasury suspended the sales of SLGS Treasury securities. 
Treasury authorized the resumption of SLGS issuances effective July 8, 
2002, as a result of the increase in the debt ceiling. 

Date: June 3, 2002: 
Action: Treasury called back about $20 billion in Treasury cash 
balances from five banks. According to Treasury officials, these funds 
were returned on June 17, 2002. 

Date: June 18, 2002: 
Action: The Secretary of the Treasury announced that by June 28, 2002, 
the U.S. government would not have sufficient money to pay its bills 
unless the debt ceiling was increased. 

Date: June 26, 2002: 
Action: Treasury postponed the auction of the 2-year note.June 27, 
2002Treasury postponed the announcement of its weekly 13- and 26-week 
bill auctions. 

Date: June 28-30, 2002: 
Action: On June 28, 2002, Public Law No. 107-199 was enacted, which 
raised the debt ceiling to $6.4 trillion. Treasury restored the losses 
incurred by the Civil Service fund and G-Fund. 

Source: Department of the Treasury and GAO.  

[End of table] 

Actions Related to the Civil Service Fund: 

During the second 2002 debt issuance suspension period, the Secretary 
of the Treasury redeemed Treasury securities held by the Civil Service 
fund earlier than normal and suspended the investment of Civil Service 
fund receipts. 

Statutory Authority Exercised to Redeem Treasury Securities before 
Needed to Pay Civil Service Fund Benefits and Expenses: 

Subsection (k) of 5 U.S.C. 8348 authorizes the Secretary of the 
Treasury to redeem securities or other invested assets of the Civil 
Service fund before maturity to prevent the amount of public debt from 
exceeding the debt ceiling. The statute does not require that early 
redemptions be made only for the purpose of making Civil Service fund 
payments. Further, the statute permits early redemptions even if the 
Civil Service fund has adequate cash balances to cover such payments. 

Before redeeming Civil Service fund securities earlier than normal, the 
Secretary must determine that a debt issuance suspension period exists. 
The statute authorizing the debt issuance suspension period and its 
legislative history are silent as to how to determine the length of a 
debt issuance suspension period. On May 14, 2002, the Secretary of the 
Treasury declared that a debt issuance suspension period would begin no 
later than May 16 and would last until June 28, 2002. 

On May 16, 2002, Treasury redeemed about $4 billion of the Civil 
Service fund’s Treasury securities using this authority. The $4 billion 
of redemptions was determined based on (1) the length of the debt 
issuance suspension period (May 16 through June 28, 2002) and (2) the 
estimated monthly Civil Service fund benefit payments that would occur 
during that period. [Footnote 7] These were appropriate factors to use 
in determining the amount of Treasury securities to redeem early. 

Since Treasury had redeemed the securities associated with the June 3, 
2002, payments in May, it redeemed only the difference between the 
amount that had been redeemed early (less any reinvestments) [Footnote 
8] and the actual amount of benefit payments made on June 3. In this 
case, Treasury redeemed about $728 million associated with 
reinvestments and about $8 million that represented the difference 
between the estimated payments and the actual payments made on June 3, 
2002. 

Statutory Authority Used to Suspend Investment of Receipts: 

Subsection (j) of 5 U.S.C. 8348 authorizes the Secretary of the 
Treasury to suspend additional investment of amounts in the Civil 
Service fund if the investment cannot be made without causing the 
amount of public debt to exceed the debt ceiling. From May 17 to June 
28, 2002, the Civil Service fund had about $2 billion in receipts that 
were not invested. On June 28, 2002, after the debt ceiling was raised, 
these receipts were invested. 

Actions Related to the G-Fund: 

Subsection (g) of 5 U.S.C. 8438 authorizes the Secretary of the 
Treasury to suspend the issuance of additional amounts of obligations 
of the United States to the G-Fund if the issuance cannot be made 
without causing the amount of public debt to exceed the debt ceiling. 
Each day from April 4 to April 16, 2002, and from May 16 to June 28, 
2002, Treasury determined the amount of funds that the G-Fund would be 
allowed to invest in Treasury securities and, when necessary, suspended 
some investments and reinvestments of the G-Fund receipts and maturing 
securities that would have caused the debt ceiling to be exceeded. 

On April 4, 2002, when the Secretary determined that the first debt 
issuance suspension period had begun, the G-Fund held about $41 billion 
of Treasury securities that would mature that day. To ensure that it 
did not exceed the statutory debt limit, Treasury did not reinvest 
about $13.7 billion of these securities on this date. On April 16, 
2002, the debt issuance suspension period ended, and Treasury fully 
invested the G-Fund and compensated the G-Fund for its interest losses. 
The G-Fund remained fully invested until the start of the second debt 
issuance suspension period on May 16, 2002. On that date, the G-Fund 
held about $41 billion of maturing Treasury securities. To ensure that 
it did not exceed the statutory debt limit, Treasury did not reinvest 
about $9.2 billion of these securities. 

During both debt issuance suspension periods, the amount of the G-
Fund’s receipts that Treasury invested changed daily, depending on the 
amount of the government’s outstanding debt. Although Treasury can 
accurately predict the outcome of some events that affect the 
outstanding debt, it cannot precisely determine the outcome of others 
until they occur. For example, the amount of securities that Treasury 
will issue to the public from an auction can be determined some days in 
advance because Treasury can control the amount that will be issued. On 
the other hand, the amount of savings bonds that will be issued and 
redeemed and of securities that will be issued to, or redeemed by, 
various government Funds is difficult to precisely predict. Because of 
these difficulties, Treasury needed a way to ensure that the 
government’s Funds activities did not cause the debt ceiling to be 
exceeded and also to maintain normal investment and redemption policies 
for the majority of the government Funds. To do this, each day during a 
debt issuance suspension period, Treasury: 

* calculated the amount of public debt subject to the debt ceiling, 
excluding the receipts that the G-Fund would normally invest; 

* determined the amount of G-Fund receipts that could safely be 
invested without exceeding the debt ceiling and invested this amount in 
Treasury securities; and; 

* suspended investment, when necessary, of the G-Fund’s remaining 
receipts. 

For example, on May 23, 2002, excluding G-Fund transactions, Treasury 
issued about $32.2 billion and redeemed about $29.1 billion of other 
Funds’ securities that counted against the debt ceiling. Treasury also 
issued about $66.4 billion and redeemed about $56.1 billion of other 
securities. Since Treasury had been at the debt ceiling the previous 
day, Treasury could not invest the entire amount that the G-Fund had 
requested ($41 billion) without exceeding the debt ceiling. As a 
result, the $13.4 billion difference between the $98.6 billion of 
securities issued and the $85.2 billion of securities redeemed was 
added to the amount of uninvested G-Fund receipts. This raised the 
amount of uninvested funds for the G-Fund from about $900 million to 
about $14 billion on that date. Interest on the uninvested funds was 
not paid until the debt issuance suspension period ended. Treasury used 
the same policies and procedures for calculating the interest losses 
for both the 1995/1996 and 2002 debt issuance suspension periods. 

Civil Service Fund and G-Fund Losses Were Restored: 

On June 28, 2002, the statutory debt limit was raised to $6.4 trillion. 
By June 30, 2002, Treasury restored all losses to the Civil Service 
fund and the G-Fund. 

Restoring Civil Service Fund Losses: 

The Civil Service fund incurred about $15.4 million in principal and 
interest losses during the second 2002 debt issuance suspension period. 
When 5 U.S.C. 8348 was amended to expressly authorize the Secretary of 
the Treasury to redeem securities earlier than normal or to refrain 
from promptly investing Civil Service fund receipts because of debt 
ceiling limitations, it was also amended to ensure that such actions 
would not result in long-term losses to the Civil Service fund. Thus, 
the Secretary of the Treasury was authorized to immediately restore, to 
the maximum extent practicable, the Civil Service fund’s security 
holdings to the proper balances when a debt issuance suspension period 
ends and to restore lost interest on the subsequent first normal 
interest payment date. 

Under this statute, Treasury took the following actions once the debt 
issuance suspension period had ended: 

* Treasury invested about $2 billion of uninvested receipts on June 28, 
2002. 

* Treasury paid the Civil Service fund about $15.4 million as 
compensation for losses incurred because of the actions it had taken. 
Treasury made payment on June 30, 2002, because this was the next 
semiannual interest payment date. 

We verified that after these transactions the Civil Service fund’s 
security holdings were, in effect, the same as they would have been had 
the debt issuance suspension period not occurred. 

Restoring G-Fund Losses: 

For the two periods from April 4 to April 16, 2002, and from May 16 to 
June 28, 2002, the G-Fund lost about $27.7 million and $139.6 million 
in interest, respectively, because its excess funds were not fully 
invested. As discussed above, the amount of funds invested for the G-
Fund fluctuated daily during the debt issuance suspension period, with 
the investment of some funds being suspended. 

When 5 U.S.C. 8438 was amended to expressly authorize the Secretary of 
the Treasury to suspend G-Fund investments because of debt ceiling 
limitations, it was also amended to ensure that such actions would not 
result in long-term losses to the G-Fund. Thus, the Secretary of the 
Treasury was authorized to make the G-Fund whole by restoring any 
losses once the debt issuance suspension period ended. 

On April 16, 2002, when the first debt issuance suspension period was 
terminated by the Secretary of the Treasury, and on June 28, 2002, when 
the debt ceiling was raised, Treasury restored the lost interest on the 
G-Fund’s uninvested funds. Consequently, the G-Fund was fully 
compensated for its interest losses during the 2002 debt issuance 
suspension periods. 

Documented Policies and Procedures Needed during a Debt Issuance 
Suspension Period: 

The basic actions taken during the 2002 and the 1995/1996 debt issuance 
suspension periods were similar [Footnote 9]–-G-Fund and Civil Service 
fund receipts were not invested and Civil Service fund securities were 
redeemed earlier than needed to pay fund benefits and expenses. 
However, Treasury had not documented the policies and procedures that 
should be used to implement these actions. Further, the stated policies 
and procedures used to implement the actions taken on the Civil Service 
fund between the 2002 and the 1995/1996 debt issuance suspension 
periods were different. Accordingly, some confusion existed about how 
to implement these actions and some errors were made that had to be 
corrected. More importantly, documented policies and procedures would 
allow Treasury to better determine the potential impacts associated 
with the policies and procedures it implements in managing the amount 
of debt subject to the limit. 

Impact of Using Different Stated Policies and Procedures to Implement 
Actions Related to the Civil Service Fund: 

The stated policies and procedures Treasury used to implement its 
actions related to the Civil Service fund during the second 2002 debt 
issuance suspension period differed from those used in the 1995/1996 
debt issuance suspension period. These differences were as follows: 

* Current-year securities were redeemed earlier than normal during the 
second 2002 debt issuance suspension period, while long-term securities 
were redeemed earlier than normal during the 1995/1996 debt issuance 
suspension period. 

* Accrued interest was used in the calculation of the securities that 
were eligible to be redeemed earlier than normal during the second 2002 
debt issuance suspension period, while accrued interest was not 
considered in the calculation of securities redeemed during the 
1995/1996 debt issuance suspension period. 

As discussed below, the policies and procedures used in 2002 and 
1995/1996 have different impacts on Treasury’s flexibility to manage 
the amount of debt subject to the statutory debt limit. 

Redeeming Securities Earlier Than Normal: 

Two basic policies and procedures can be used to redeem Civil Service 
fund securities earlier than normal. The normal redemption policy, 
which involves redeeming current-year securities first, [Footnote 10] 
was used during the second 2002 debt issuance suspension period. For 
example, when Treasury redeemed about $4 billion earlier than normal on 
May 16, 2002, the securities selected were those that matured on June 
30, 2002. During the 1995/1996 debt issuance suspension period, the 
early redemptions were made from long-term securities that matured 
about 14 years later. The impact between the two approaches on 
Treasury’s ability to manage the amount of outstanding debt during a 
debt issuance suspension period can be significant when a debt issuance 
suspension period also includes the date when securities mature. This 
could have occurred during the second 2002 debt issuance suspension 
period as the Civil Service fund had more than $45 billion of Treasury 
securities scheduled to mature on June 30, 2002. [Footnote 11] 

Should a debt issuance suspension period cover a June 30 rollover date, 
the securities selected for early redemption can have a significant 
impact on the amount of maturing securities, as shown in tables 2 and 
3. 

Table 2: Early Redemption of Civil Service Fund Investments Funded with 
Current-Year Securities: 

Action: Balance on April 30, 2002; 
Securities maturing on June 30, 2002: $53 billion. 

Action: Redeem $4 billion of current-year securities to fund early 
Securities maturing on June 30, 2002: redemption authorization ($4 
billion). 

Action: Normal redemption transactions less investments made from May 1 
to June 30; 
Securities maturing on June 30, 2002: ($1 billion). 

Action: Balance to be reinvested on June 30, 2002: 
Securities maturing on June 30, 2002: $48 billion. 

Source: Bureau of the Public Debt. 

[End of table] 

Table 3: Early Redemption of Civil Service Fund Investments Funded with 
Long-Term Securities: 

Action: Balance on April 30, 2002: 
Securities maturing on June 30, 2002: $53 billion; 
Securities maturing after June 30, 2002: $474 billion. 

Action: Redeem $4 billion of long-term securities to fund early 
redemption authorization: 
Securities maturing on June 30, 2002: 0; 
Securities maturing after June 30, 2002: ($4 billion). 

Action: Normal redemption transactions less investments made from May 1 
to June 30: 
Securities maturing on June 30, 2002: ($1 billion); 
Securities maturing after June 30, 2002: 0. 

Action: Balance to be reinvested on June 30, 2002: 
Securities maturing on June 30, 2002: $52 billion; 
Securities maturing after June 30, 2002: Not applicable. 

Source: Bureau of the Public Debt. 

[End of table] 

The amount of maturing securities to be reinvested is important 
because, as in the case of the G-Fund, Treasury does not have to 
reinvest the maturing Civil Service fund securities during a debt 
issuance suspension period. [Footnote 12] This, in turn, allows 
Treasury to take other actions, such as investing other Funds’ receipts 
or issuing securities to the public to raise cash. As illustrated in 
tables 2 and 3, the amount of maturing securities to be reinvested can 
have a significant impact on Treasury’s debt management options. For 
example, (1) if the Civil Service fund had $48 billion of maturing 
Treasury securities and (2) Treasury needed to invest $52 billion of 
other Funds’ receipts that could not remain legally uninvested on June 
30, by not reinvesting the maturing Civil Service fund’s current-year 
securities Treasury could invest all but $4 billion of these receipts 
(see table 2). Treasury would then need to find some other method of 
generating room under the debt ceiling in order to invest the remaining 
$4 billion. On the other hand, if Treasury had redeemed long-term 
securities, then the $52 billion of other Funds’ receipts could have 
been invested by simply not reinvesting any of the Civil Service fund’s 
maturing securities (see table 3). 

During the second 2002 debt issuance suspension period, Treasury 
expected to make about $50 billion in interest payments to the Funds, 
excluding the Civil Service fund and the G-Fund, on June 30, 2002. Had 
Treasury redeemed the long-term securities rather than the current-year 
securities, the resulting $52 billion of maturing Civil Service fund 
securities would have been adequate to fully invest the $50 billion of 
interest payments. This assumes that Treasury would have decided to 
suspend the reinvestment of these maturing securities and use the 
resulting room under the debt ceiling provided by this suspension to 
invest the interest payments to the other Funds. On the other hand, by 
redeeming short-term securities, the $48 billion of maturing Civil 
Service fund securities available would not have been adequate to fully 
invest the interest payments, and Treasury would have had to obtain $2 
billion of debt limit from other sources, such as the G-Fund. 

Accrued Interest Used in Redemption Calculations during Second 2002 
Debt Issuance Suspension Period: 

Treasury’s normal redemption policy is to include the accrued interest 
on the security that is being redeemed when determining the amount of 
principal that should be redeemed. For example, if Treasury needed to 
redeem securities to make a $4 billion payment and $3,950 million of 
securities had earned $50 million of interest, then Treasury would need 
to redeem only $3,950 million of securities because the accrued 
interest would make up the difference between the payments to be made 
and the securities redeemed. 

During the second 2002 debt issuance suspension period, Treasury used 
the accrued interest when it redeemed Civil Service fund securities 
early and when it redeemed funds associated with one of the early 
redemptions that had been reinvested. The interest payments associated 
with these redemptions totaled about $84 million. However, during the 
1995/1996 debt issuance suspension period, which had a 14-month debt 
issuance suspension period, Treasury did not use the accrued interest 
in determining the amount of securities that should be redeemed. 
Including accrued interest in the calculation, as noted below, can have 
a significant impact on the amount of securities that are redeemed. 
This in turn affects the amount of securities Treasury can issue to the 
public for cash or issue to other Funds that have receipts that need to 
be invested. 

Table 4 provides a hypothetical example showing that the reduction in 
outstanding debt can be significantly lower when accrued interest is 
used in the computation of securities redemptions. For purposes of this 
table, we assumed a 14-month debt issuance suspension period. 

Table 4: How Including Accrued Interest Affects the Amount of 
Securities Redeemed: 

Action: Treasury declares debt issuance suspension period of 14 months 
and decides to redeem the full amount of securities associated with the 
Civil Service fund benefit payments for that time period. 
Effect on outstanding debt if accrued interest is included: Amount of 
outstanding debt is decreased by $54.6 billion.[A] 
Effect on outstanding debt if accrued interest is not included: Amount 
of outstanding debt is decreased by $56 billion.[A] 

Action: Treasury reinvests $10 billion of early redemptions. 
Effect on outstanding debt if accrued interest is included: Amount of 
outstanding debt is increased by $10 billion. 
Effect on outstanding debt if accrued interest is not included: Amount 
of outstanding debt is increased by $10 billion. 

Action: Treasury redeems the $10 billion of reinvested funds associated 
with the early redemptions. 
Effect on outstanding debt if accrued interest is included: Amount of 
outstanding debt is reduced by $9.7 billion.[B] 
Effect on outstanding debt if accrued interest is not included: Amount 
of outstanding debt is reduced by $10 billion. 

Action: [Empty]; 
Effect on outstanding debt if accrued interest is included: Net effect 
on outstanding debt after all transactions would be that the amount of 
outstanding debt is reduced by $54.3 billion. 
Effect on outstanding debt if accrued interest is not included: Net 
effect on outstanding debt after all transactions would be that the 
amount of outstanding debt is reduced by $56 billion. 

Source: GAO. 

[A] For purposes of this example, it is assumed that the monthly Civil 
Service fund benefit payments are $4 billion per month, or $56 billion 
for the 14-month period. It is also assumed that the securities 
redeemed would have accrued $1.4 billion of interest. 

[B] The example assumes that the redeemed securities would have accrued 
about $300 million of interest. 

[End of table] 

A number of factors affect the amount of interest that is associated 
with a given redemption. For example, the length of the debt issuance 
suspension period affects the amount of funds subject to early 
withdrawal—the more funds withdrawn, the greater the interest 
calculation. Another important factor is the time of year that the 
redemption is made. Since December 31 and June 30 are semiannual 
interest payment dates, securities redeemed in January and July will 
have significantly less interest associated with them than similar 
securities redeemed in May and November.  

Policies and Procedures Are Not Documented: 

Treasury has not documented the policies and procedures it used to 
implement the actions that it takes during a debt issuance suspension 
period. Although the actions that are allowed are well defined in law 
(e.g., suspending Civil Service fund and G-Fund investments and 
redeeming Civil Service fund securities earlier than normal), the 
policies and procedures needed to implement them are not documented. 
Our review disclosed some cases in which the lack of documented 
policies and procedures contributed to some confusion and errors that 
had to be corrected, as necessary. As stated in Standards for Internal 
Control in the Federal Government, [Footnote 13] all transactions and 
other significant events need to be clearly documented, and 
documentation should be readily available. The limited number of people 
involved in and the complex nature of managing the debt during a debt 
issuance suspension period are factors that further support the need to 
document policies and procedures to be implemented. As noted above, 
policies and procedures can have an impact on managing the debt during 
a debt issuance suspension period. Furthermore, the policies and 
procedures developed should identify which office is authorized to 
approve any modifications to the policies and procedures. 

Treasury officials noted that the changes to the stated policies and 
procedures used during the 2002 debt issuance suspension periods made 
the operations more consistent with those that it uses during its 
normal operations. They also noted that since the 1995/1996 debt 
issuance suspension period, Treasury has implemented a new financial 
management system that allows Treasury to use a more sophisticated 
approach to ensuring that the Civil Service fund is adequately 
compensated for any losses incurred. Therefore, the Treasury officials 
believe that the current stated policies and procedures are an 
improvement over those used in the 1995/1996 debt issuance suspension 
period. 

As discussed earlier in this report, the approaches used during the 
2002 debt issuance suspension periods allowed Treasury to restore the 
fund balances. At the same time, due to the limited number of people 
involved and the complex nature of managing debt during a debt issuance 
suspension period, Treasury would benefit from documenting the 
necessary policies and procedures to be used in such situations. 

We noted that the lack of documented policies and procedures 
contributed to some confusion and some errors that were subsequently 
corrected, as necessary. The following errors occurred during the 
second 2002 debt issuance suspension period: 

* When Treasury decided to redeem Civil Service fund securities earlier 
than normal, it initially redeemed long-term securities. It 
subsequently reversed this transaction and redeemed current-year 
securities. 

* When Treasury decided to reinvest funds associated with some of the 
early Civil Service fund redemptions, it did not include the accrued 
interest associated with those funds when they were subsequently 
redeemed to pay the June 3, 2002, Civil Service fund benefit payments. 
This was inconsistent with a similar reinvestment made on May 17, 2002, 
that was redeemed on May 20, 2002, in which Treasury included the 
accrued interest in its calculations. 

* When Treasury restored the losses incurred by the Civil Service fund, 
it misclassified about $1.2 million of principal losses as interest 
losses. Treasury’s practice of keeping a dual set of accounts in its 
new financial management system—one to track actual debt issuance 
suspension period transactions and one to track transactions that would 
have occurred had there not been a debt issuance suspension period—is a 
good first step toward ensuring that losses caused by Treasury’s 
actions can be restored. However, as a result of the restoration 
policies and procedures Treasury used during the 2002 debt issuance 
suspension period, according to Treasury’s new financial management 
system, the amount of the Civil Service fund’s security holdings was 
about $1.2 million less on June 28, 2002, than it would have been had 
the debt issuance suspension period not occurred. Nevertheless, as 
previously noted, the restoration made on June 30, 2002, fully 
compensated the Civil Service fund for all losses. 

Although these errors were not significant and were subsequently 
corrected as necessary, we believe that had Treasury established 
documented policies and procedures and effectively implemented them, 
the likelihood of these errors would have been greatly reduced. 

Conclusions: 

During the 2002 debt issuance suspension periods, Treasury acted in 
accordance with its statutory authorities when it (1) suspended some 
investments of the Civil Service fund and G-Fund and (2) redeemed 
securities earlier than normal from the Civil Service fund. These and 
other actions discussed in this report allowed the government to avoid 
default on its obligations and to stay within the debt ceiling. 

Although some of the stated policies and procedures Treasury used to 
implement the actions it took on the Civil Service fund during the 
second 2002 debt issuance suspension period differed from those used in 
the 1995/1996 debt issuance suspension period, they were adequate to 
ensure that the Civil Service fund did not incur any losses after the 
debt issuance suspension period had ended and Treasury was able to take 
the necessary restoration actions. However, Treasury’s stated policies 
and procedures to be used for the Civil Service fund and G-Fund during 
a debt issuance suspension period have not been documented. Properly 
documenting the policies and procedures will (1) allow Treasury 
management to ascertain the impacts of these policies and procedures on 
Treasury’s ability to manage the outstanding debt during a debt 
issuance suspension period and (2) if effectively implemented, reduce 
the chance for confusion and risk of errors should Treasury need to use 
the policies and procedures in the future. 

Recommendation for Executive Action: 

We recommend that the Secretary of the Treasury direct the Under 
Secretary for Domestic Finance to document the necessary policies and 
procedures that should be used during any future debt issuance 
suspension period. Further, the document developed should clearly state 
which office is responsible for approving any modifications to the 
documented policies and procedures. 

Agency Comments and Our Evaluation: 

In written comments on a draft of this report, Treasury agreed that 
accurate documentation of its policies and procedures is a valuable 
objective and said that it believed it was desirable to maintain the 
preexisting policies and procedures for the redemption of securities 
and crediting of interest to the maximum extent possible. Treasury said 
that maintaining these standards makes the operations transparent and 
reduces confusion to the stakeholders of the funds affected by early 
redemption activities. Because it was unclear whether Treasury’s 
proposed development and documentation of guidelines for debt issuance 
suspension periods would address our recommendation to document the 
necessary policies and procedures that should be used during any future 
debt issuance suspension period, we held subsequent discussions with 
Treasury officials to clarify the department’s intentions. 

Treasury officials were concerned that developing detailed policies and 
procedures would limit their flexibility to manage the debt during debt 
issuance suspension periods because they believed such situations may 
have unique characteristics with distinct circumstances that need to be 
addressed. We explained that our recommendation did not call for 
documenting the circumstances under which the Secretary should invoke 
specific actions. For example, we did not call for stipulating (1) how 
to determine the length of a debt issuance suspension period, (2) which 
funds should be used by Treasury to help manage its operations, (3) 
when to exchange securities held by the Federal Financing Bank for 
securities held by the Civil Service fund, (4) when to recall 
compensating balances, or (5) when to suspend fund investments. On the 
other hand, we did envision that such policies and procedures would 
document how to implement the actions directed by the Secretary, 
including (1) how to implement a given course of action, such as 
redeeming Civil Service fund securities earlier than normal, and (2) 
how to fully compensate a fund for its losses. 

Taken from this perspective, Treasury officials generally agreed with 
the need to document the necessary policies and procedures relating to 
implementing actions determined by the Secretary. They did note, 
however, that such procedures might need to contain options in order to 
maintain the flexibility needed. For example, the policies and 
procedures might have two or more options on how to handle the 
redemption of Civil Service fund securities earlier than normal. 
Documenting policies and procedures that contain options would meet the 
intent of our recommendation. As we noted in our report, properly 
documenting the policies and procedures will (1) allow Treasury 
management to better ascertain the impact of these policies and 
procedures on Treasury’s ability to manage the outstanding debt during 
a debt issuance suspension period and (2) if effectively implemented, 
reduce the chance for confusion and risk of errors should Treasury need 
to use the policies and procedures in the future. 

Regarding three instances where the lack of documented policies and 
procedures contributed to what we characterized as some confusion and 
errors, Treasury did not agree that these instances were errors. As 
discussed below, we continue to believe that errors occurred. 

As a backdrop for this discussion, the recurring theme of our report is 
that Treasury did not have documented policies and procedures that 
should be used during a debt issuance suspension period. Based on 
discussions with cognizant Treasury officials, it was our understanding 
that Treasury intended to apply what it referred to as its standard 
redemption policies and procedures—those used in normal daily 
operations. In commenting on this report, however, Treasury stated that 
it initially modeled its actions during the 2002 debt issuance 
suspension period on actions it had taken during the 1995/1996 debt 
issuance suspension period but that after further analysis it decided 
to instead use its standard redemption policies and procedures. The 
1995/1996 procedures for redeeming securities earlier than normal used 
long-term securities and did not consider accrued interest in 
determining the amount to be redeemed. In contrast, Treasury’s standard 
redemption policies and procedures use current-year securities and 
consider accrued interest. 

Regardless of which approach Treasury opted to follow for the debt 
issuance suspension period transactions discussed in our report, 
Treasury did not consistently adhere to either approach and 
consequently made the following errors: 

* When Treasury first redeemed securities earlier than normal, it 
redeemed long-term securities and included the accrued interest on the 
securities when determining the amount of principal that should be 
redeemed. Although the choice of long-term securities for early 
redemption was consistent with the practices used during the 1995/1996 
debt issuance suspension period, including accrued interest in 
calculating the amount of principal to be redeemed was a departure from 
Treasury’s 1995/1996 practices. 

* For subsequent redemptions of securities reinvested, although 
Treasury used current-year securities, it was inconsistent in 
considering accrued interest in determining the amount of principal 
that should be redeemed. When Treasury redeemed the May 17, 2002, 
reinvestment on May 20, 2002, it redeemed current-year securities and 
included accrued interest in this calculation. This was consistent with 
its standard redemption policies and procedures. However, on June 3, 
2002, when Treasury redeemed 10 reinvestments, it did not consider 
accrued interest. Instead, the June 3, 2002, redemption followed the 
practices used in the 1995/1996 debt issuance suspension period. 

Regarding the third instance, the classification of $1.2 million of 
losses incurred, Treasury did not agree that its classification of this 
amount as interest losses was in error. As discussed in our report, the 
dual set of accounts maintained by Treasury’s new financial management 
system—one that tracks actual debt issuance suspension period 
transactions and one that tracks transactions that would have occurred 
had there not been a debt issuance suspension period—clearly showed 
that the principal balances in the Civil Service fund differed by $1.2 
million on June 28, 2002. 

As such, we concluded that when Treasury restored the losses incurred 
by the Civil Service fund, it misclassified about $1.2 million of 
principal losses as interest losses. As stated in our report, these 
errors were not significant and were subsequently corrected as 
necessary; however, we believe that had Treasury established documented 
policies and procedures and effectively implemented them, the 
likelihood of these errors would have been greatly reduced. 

Specific technical comments provided orally by Treasury were 
incorporated in this report as appropriate. 

We are sending copies of this report to the chairmen and ranking 
minority members of the Senate Committee on Appropriations; the Senate 
Committee on Governmental Affairs; the Senate Committee on the Budget; 
the Subcommittee on Treasury and General Government, Senate Committee 
on Appropriations; the Senate Committee on Finance; the House Committee 
on Appropriations; the House Committee on Government Reform; the House 
Committee on the Budget; the House Committee on Ways and Means; and the 
Subcommittee on Treasury, Postal Service, and General Government, House 
Committee on Appropriations. We are also sending copies of this report 
to the Under Secretary for Domestic Finance, the Inspector General of 
the Department of the Treasury, the Director of the Office of 
Management and Budget, and other agency officials. In addition, the 
report will be available at no charge on the GAO Web site at 
[hyperlink, http://www.gao.gov]. 

The head of a federal agency is required by 31 U.S.C. 720 to submit a 
written statement on actions taken on this recommendation to the Senate 
Committee on Governmental Affairs and the House Committee on Government 
Reform not later than 60 days after the date of this report. A written 
statement must also be sent to the House and Senate Committees on 
Appropriations with the agency’s first request for appropriations made 
more than 60 days after the date of this report.If I can be of further 
assistance, please call me at (202) 512-3406. Should you or members of 
your staff have any questions concerning this report, please contact 
Mr. Chris Martin, Senior Level Technologist, at (202) 512-9481 or Ms. 
Louise DiBenedetto, Assistant Director, at (202) 512-6921. 

Sincerely yours, 

Signed by: 

Gary T. Engel: 
Director: 
Financial Management and Assurance: 

[End of section] 

Appendix I: Comments From the Department of Treasury: 

Assistant Secretary: 
Department Of The Treasury: 
Washington, D.C. 

November 4, 2002: 

Mr. Gary T. Engel: 
Director: 
Financial Management and Assurance: 
General Accounting Office: 
Washington, DC 20548: 

Dear Mr. Engel: 

Thank you for the opportunity to comment on the draft report entitled 
Debt Ceiling: Analysis of Actions During the 2002 Debt Issuance 
Suspension Periods (GAO-03-134). First of all, we would like to express 
our appreciation for the cooperation and consideration provided by your 
office both during and following the debt issuance suspension periods 
of 2002. Over the years, our offices have developed a cooperative and 
productive working relationship and we look forward to continuing this 
valuable and effective association. 

We are also pleased that you concluded that Treasury's actions were 
"consistent with legal authorities provided to the Secretary of the 
Treasury" and that the Government Securities Investment Fund of the 
Federal Employees' Retirement System and Civil Service Retirement and 
Disability Fund were fully restored in accordance with the
applicable statutory authorities. 

We are in agreement that the accurate documentation of policies and 
procedures is a valuable objective. We feel it is desirable to maintain 
the pre-existing policies and procedures for the redemption of 
securities and crediting of interest, to the maximum extent possible. 
Maintaining these standards makes the operations transparent and 
reduces confusion of the stakeholders of the funds affected by early 
redemption activities. 

However, as you will appreciate, each debt limit situation is unique 
with distinct circumstances that need to be addressed. There is a limit 
to the extent that Treasury can anticipate the actions necessary to 
address individual circumstances. Therefore, it is necessary for 
Treasury to preserve some level of flexibility. Balancing the 
desirability to maintain pre-established procedures with the need to 
preserve flexibility is a strong rationale for not developing an 
inflexible set of policies or procedures to address inherently dynamic 
and unique debt limit situations. We propose to document guidelines for 
the redemption of securities and crediting of interest where practical 
and to develop operational guidelines for debt issuance suspension 
periods that can be adapted for the unique circumstances of a specific 
debt limit occurrence. We suggest that the sentence on page 29 of the 
draft report stating that Treasury officials agree on the need for 
documentation be modified accordingly. 

Specific editorial and other technical comments were provided orally to 
your office. However, we wish to take this opportunity to respond to 
several specific points made in the draft report. 

1. In response to your recommendation to identify the office 
responsible for the policies and procedures relating to activities in 
debt limit situations and for any modification that may be required, 
the Office of the Under Secretary for Domestic Finance is that office. 

2. We do not agree that the three "errors" listed are in fact errors. 
As the circumstances of each debt limit situation change, so does the 
government's ability to address these situations. Many of the benchmark 
practices used during the debt limit suspension period of 1995/1996, 
and advocated in the report, were developed to deal with the largely 
manual financial system in place at the time. Since that time, Treasury 
has implemented a new financial management system that allows for a 
greater degree of sophistication and precision. In fact, the first two 
circumstances classified as errors on page 28 of the draft report are 
examples of these changes. The initial actions in both situations were 
executed using the actions of the 1995/1996 debt limit suspension 
period as the model. Upon further analysis, it was determined that the 
new automated financial management system would allow the Treasury to 
maintain a high degree of control and accuracy over outstanding debt 
balances and still comply with its standard redemption policies and 
procedures. Treasury feels that in both these circumstances, the 
changes made were improvements over the practices used in the 1995/1996 
period. 

It is our view that the $1.2 million referenced as the third error in 
the draft report was not misclassified. This amount reflects lost 
interest on early redeemed securities and not univested principal. 
Therefore, the most appropriate source to use to credit this lost 
interest to the Civil Service Retirement and Disability Fund, and the 
only source available to Treasury, was the Restitution of Forgone 
Interest Account. These funds did not become available for use until 
the next interest payment date following the end of the debt issuance 
suspension period (i.e. June 30, 2002). 

Again, thank you for the opportunity to comment on this draft report. 
If you have any questions, please do not hesitate to call me or Carl 
Maryott, of my staff, on (202) 622-1795. 

Signed by: 

Donald V. Hammond: 
Fiscal Assistant Secretary: 

End of section] 

Related GAO Products: 

We have previously reported on aspects of Treasury’s actions during the 
1995/1996 debt issuance suspension period and earlier debt ceiling 
crises in the following reports: 

Debt Ceiling: Analysis of Actions during the 1995-1996 Crisis. GAO/AIMD-
96-130. Washington, D.C.: August 30, 1996. 

Information on Debt Ceiling Limitations and Increases. GAO/AIMD-96-49R. 
Washington, D.C.: February 23, 1996. 

Debt Ceiling Limitations and Treasury Actions. GAO/AIMD-96-38R. 
Washington, D.C.: January 26, 1996. 

Social Security Trust Funds. GAO/AIMD-96-30R. Washington, D.C.: 
December 12, 1995. 

Debt Ceiling Options. GAO/AIMD-96-20R. Washington, D.C.: December 7, 
1995. 

Civil Service Fund: Improved Controls Needed over Investments. GAO/AFMD-
87-17. Washington, D.C.: May 7, 1987. 

Opinion on the legality of the plan of the Secretary of the Treasury to 
disinvest the Social Security and other trust funds on November 1, 
1985, to permit payments to beneficiaries of these funds. B-221077.2. 
Washington, D.C.: December 5, 1985. 

A New Approach to the Public Debt Legislation Should Be Considered. 
FGMSD-79-58. Washington, D.C.: September 7, 1979. 

[End of section] 

Footnotes: 

[1] Subsection (j) of 5 U.S.C. 8348 defines a debt issuance suspension 
period as any period for which the Secretary has determined that 
obligations of the United States may not be issued without exceeding 
the debt ceiling. 

[2] U.S. General Accounting Office, Financial Audit: Bureau of the 
Public Debt's Fiscal Years 2002 and 2001 Schedules of Federal Debt, GAO-
03-199 (Washington, D.C.: Nov. 1, 2002). 

[3] The G-Fund consists of nonmarketable Treasury securities held in 
trust by the federal government as custodian on behalf of individual 
federal employee participants. Treasury securities held by the G-Fund 
are considered debt held by the public. 

[4] U.S. General Accounting Office, Civil Service Fund: Improved 
Controls Needed over Investments, GAO/AFMD-87-17 (Washington, D.C.: May 
7, 1987), and Opinion on the legality of the plan of the Secretary of 
the Treasury to disinvest the Social Security and other trust funds on 
Nov. 1, 1985, to permit payments to beneficiaries of these funds, B-
221077.2 (Washington, D.C.: Dec. 5, 1985). 

[5] U.S. General Accounting Office, Debt Ceiling: Analysis of Actions 
during the 1995-1996 Crisis, GAO/AIMD-96-130 (Washington, D.C.: Aug. 
30, 1996). 

[6] The SLGS securities program was established in 1972, following 
federal legislation enacted in 1969 restricting state and local 
governments from earning arbitrage profits by investing bond proceeds 
in higher-yielding investments. 

[7] According to Treasury officials, they use the amount of expected 
benefit payments that will be issued on the first business day of a 
month in this calculation. Securities are redeemed on the payment date 
to cover any other benefit payments and expenses incurred during the 
month by the Civil Service fund. 

[8] From May 17 to May 31, 2002, Treasury was able to reinvest a 
portion of the May 16, 2002, advance redemption. In one case, the 
department redeemed a security later, while in the other cases it did 
not redeem the securities until the benefit payment date. Specifically, 
on May 17, 2002, Treasury reinvested about $445 million in the Civil 
Service fund, because sufficient room was available under the statutory 
debt limit and the G-Fund was fully invested, excluding interest to be 
restored at the end of the debt issuance suspension period. However, on 
the next business day (May 20), Treasury redeemed this security again, 
since Treasury was once again at the statutory debt limit. Other 
reinvestments made during May were not redeemed until the June benefit 
payments were made. 

[9] Although the actions taken during the 2002 debt issuance suspension 
periods were similar to those taken during the 1995/1996 debt issuance 
suspension period, Treasury did not have to use all the options that 
were used during the 1995/1996 debt issuance suspension period. For 
example, although Treasury noted that one option available during the 
second 2002 debt issuance suspension period was to exchange securities 
held by the Federal Financing Bank (which do not count against the debt 
ceiling) for Treasury securities held by the Civil Service fund, this 
option was not exercised. During the 1995/1996 debt issuance suspension 
period, Treasury did exchange securities held by the Civil Service fund 
for securities held by the Federal Financing Bank. 

[10] Treasury’s stated policy is to redeem the securities with the 
shortest maturity first. For a group of securities with the same 
maturity but differing interest rates, the securities with the lowest 
interest rate would be redeemed first. 

[11] Treasury invests Civil Service fund receipts in nonmarketable 
Treasury securities commonly referred to as par value specials. These 
securities can be redeemed any time at their face value, or “par.” The 
interest rate on these securities is based on the average rate for 
comparable marketable securities, as defined by Treasury, with 4 or 
more years to maturity. This rate is established on a monthly basis, 
and all investments for a given month must bear the same rate. When 
Treasury is notified by the Office of Personnel Management to invest 
Civil Service fund receipts, such investments are normally made in par 
value specials that mature on the following June 30, which is 
considered the end of the fund's investment year. On June 30, the 
maturing securities are converted into long-term par value specials 
with maturities of 1 to 15 years. Once this calculation has been made 
and the funds invested, the Civil Service fund's security holdings 
balances are equally divided among the 15-year period. 

[12] During a debt issuance suspension period, Treasury is also not 
required to invest the interest payments associated with Civil Service 
fund and G-Fund investments. 

[13] U.S. General Accounting Office, Standards for Internal Control in 
the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 
1999). 

[End of section] 

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