Debt Ceiling:

Analysis of Actions Taken During the 2003 Debt Issuance Suspension Period

GAO-04-526: Published: May 20, 2004. Publicly Released: May 20, 2004.

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GAO is required to review the steps taken by the Department of the Treasury (Treasury) to avoid exceeding the debt ceiling during the 2003 debt issuance suspension period. The committee also directed GAO to determine whether all major accounts that were used for debt ceiling relief have been properly credited or reimbursed. Accordingly, GAO determined whether Treasury followed its normal investment and redemption policies and procedures for the major federal government accounts with investment authority, analyzed the financial aspects of actions Treasury took during this period, and analyzed the impact of policies and procedures Treasury used to manage the debt during the period.

On February 20, 2003, Treasury determined that a debt issuance suspension period was in effect. A debt issuance suspension period is any period for which the Secretary of the Treasury has determined that obligations of the United States may not be issued without exceeding the debt ceiling. During this period, which lasted until May 27, 2003, the Secretary took actions related to the Government Securities Investment Fund of the Federal Employees' Retirement System (the G-Fund), the Civil Service Retirement and Disability Fund (the Civil Service fund), and the Exchange Stabilization Fund (ESF) to avoid exceeding the debt ceiling. Also, during fiscal year 2003, the Secretary initiated several actions involving the Civil Service Fund, FFB, and the Treasury general fund that related to Treasury's efforts to manage the amount of debt subject to the debt ceiling. The Secretary took other actions to avoid exceeding the debt ceiling, such as suspending the sales of State and Local Government Series Treasury obligations and recalling noninterest- bearing deposits held by commercial banks as compensation for banking services provided to Treasury. The actions taken, which were consistent with legal authorities provided to the Secretary and related to the G-Fund, the Civil Service fund, and ESF, initially resulted in interest losses to the G-Fund and ESF and principal and interest losses to the Civil Service fund. When the debt ceiling was increased to $7.4 trillion on May 27, 2003, the Secretary fully invested the G-Fund's investments and on May 28, 2003, fully restored the interest losses, as required by law. On June 30, 2003, the Secretary fully compensated the Civil Service fund for principal and interest losses, as required by law. The losses related to ESF could not be restored without special legislation. As a result, related ESF losses of $3.6 million were not restored. The actions initiated by Treasury in fiscal year 2003 that involved the early redemption of FFB debt obligations held by the Civil Service fund and exchanges of obligations among the Civil Service fund, FFB, and the Treasury general fund resulted in all three parties realizing gains or incurring losses. In some cases, GAO has been able to quantify the gains or losses that occurred as a result of these transactions. For example, according to FFB estimates, the Civil Service fund lost more than $1 billion in interest because of FFB's redemption of FFB obligations held by the Civil Service fund before their maturity date and unforeseen interest rate changes. In other cases, however, information needed to understand the potential consequences of these actions will not be available for a number of years. The Secretary currently lacks the statutory authority to restore such losses and has not developed documented policies and procedures that can be used to minimize such losses in future actions that may be taken by Treasury that involve FFB and an account with investment authority such as the Civil Service fund.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: The Secretary of the Treasury should seek the statutory authority to restore the losses associated with the October 2002 early redemption of FFB 9(a) obligations. The amount of the restoration should be computed in a manner that maintains equity between the Civil Service fund and Treasury.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: Treasury drafted a bill entitled "Federal Trust Funds and Other Federal Entities Restoration Act of 2006" and forwarded it to OMB in July 2006. In accord with our recommendation, the bill sought statutory authority to restore losses associated with the October 2002 early redemption of FFB obligations, computed in a manner that would maintain equity between the Civil Service Retirement and Disability Fund and the Treasury general fund. Based on the Secretary of the Treasury's action to seek legislative authority in accord with our recommendation, we consider this recommendation implemented.

    Recommendation: The Secretary of the Treasury should direct the Under Secretary for Domestic Finance to document the necessary policies and procedures that should be used for exchange transactions between FFB and a federal government account with investment authority during a debt issuance suspension period and seek any statutory authority necessary to implement the policies and procedures.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: In the 60-day letter dated July 19, 2004, Treasury stated that the Inspector General for Treasury, who oversees the audits of the Federal Financing Bank (FFB), has agreed to include a prior review of significant FFB exchange transactions in its annual audit contract. Treasury stated that it is working to draft other policies and procedures to be used for future exchange transactions between FFB and a federal government account. Treasury expects to have internally approved policies and procedures within 180 days. On November 28, 2006, FFB officials forwarded us final approved debt limit procedures relative to the FFB and the recommendation was closed accordingly.

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