B-138524, OCT 30, 1985

B-138524: Oct 30, 1985

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WAS ABLE TO OBTAIN $5 BILLION WITHOUT DIRECTLY EXCEEDING THE STATUTORY LIMIT ON THE PUBLIC DEBT. WERE LEGAL. THEREFORE BANK ISSUING OF ITS OWN SECURITIES TO CIVIL SERVICE RETIREMENT AND DISABILITY TRUST FUND IN EXCHANGE FOR TREASURY DEPARTMENT SECURITIES WAS PROPER. WAS ABLE TO OBTAIN $5 BILLION WITHOUT DIRECTLY EXCEEDING THE STATUTORY LIMIT ON THE PUBLIC DEBT. WERE LEGAL. TREASURY WAS THEREFORE ABLE TO BORROW AN ADDITIONAL $5 BILLION FROM THE PUBLIC. WAS ABLE TO OBTAIN $5 BILLION WITHOUT DIRECTLY EXCEEDING THE STATUTORY LIMIT ON THE PUBLIC DEBT. WAS LEGAL. PUBLIC BORROWING BY THE BANK IS NOT COUNTED TOWARD THE DEBT LIMIT. FINANCE AND URBAN AFFAIRS HOUSE OF REPRESENTATIVES YOU HAVE REQUESTED OUR OPINION ON THE LEGALITY OF THE TRANSACTIONS ON OCTOBER 9.

B-138524, OCT 30, 1985

TREASURY DEPARTMENT - SECRETARY OF TREASURY - AUTHORITY - PAYMENT OF OBLIGATIONS DIGEST: 1. THE TRANSACTIONS ON OCTOBER 9, 1985, WHEREBY THE TREASURY DEPARTMENT, THROUGH THE USE OF THE BORROWING AUTHORITY OF THE FEDERAL FINANCING BANK, WAS ABLE TO OBTAIN $5 BILLION WITHOUT DIRECTLY EXCEEDING THE STATUTORY LIMIT ON THE PUBLIC DEBT, WERE LEGAL. UNDER ITS AUTHORIZING LEGISLATION THE BANK MAY BORROW FROM FEDERAL TRUST FUNDS. THEREFORE BANK ISSUING OF ITS OWN SECURITIES TO CIVIL SERVICE RETIREMENT AND DISABILITY TRUST FUND IN EXCHANGE FOR TREASURY DEPARTMENT SECURITIES WAS PROPER. TREASURY DEPARTMENT - SECRETARY OF TREASURY - AUTHORITY - PAYMENT OF OBLIGATIONS 2. THE TRANSACTIONS ON OCTOBER 9, 1985, WHEREBY THE TREASURY DEPARTMENT, THROUGH THE USE OF THE BORROWING AUTHORITY OF THE FEDERAL FINANCING BANK, WAS ABLE TO OBTAIN $5 BILLION WITHOUT DIRECTLY EXCEEDING THE STATUTORY LIMIT ON THE PUBLIC DEBT, WERE LEGAL. WHEN THE BANK PREPAID PART OF ITS OUTSTANDING DEBT TO THE TREASURY WITH $5 BILLION OF TREASURY SECURITIES IT REDUCED TREASURY'S OUTSTANDING DEBT BY $5 BILLION. TREASURY WAS THEREFORE ABLE TO BORROW AN ADDITIONAL $5 BILLION FROM THE PUBLIC. TREASURY DEPARTMENT - SECRETARY OF TREASURY - AUTHORITY - PAYMENT OF OBLIGATIONS 3. THE TRANSACTIONS ON OCTOBER 9, 1985, WHEREBY THE TREASURY DEPARTMENT, THROUGH THE USE OF THE BORROWING AUTHORITY OF THE FEDERAL FINANCING BANK, WAS ABLE TO OBTAIN $5 BILLION WITHOUT DIRECTLY EXCEEDING THE STATUTORY LIMIT ON THE PUBLIC DEBT, WAS LEGAL. PUBLIC BORROWING BY THE BANK IS NOT COUNTED TOWARD THE DEBT LIMIT. THEREFORE THE TRANSACTIONS DID NOT INCREASE THE PUBLIC DEBT BEYOND THE STATUTORY LIMIT.

THE HONORABLE JOHN J. LAFALCE, CHAIRMAN:

SUBCOMMITTEE ON ECONOMIC STABILIZATION

COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS

HOUSE OF REPRESENTATIVES

YOU HAVE REQUESTED OUR OPINION ON THE LEGALITY OF THE TRANSACTIONS ON OCTOBER 9, 1985, BY WHICH THE DEPARTMENT OF THE TREASURY, THROUGH USE OF THE BORROWING AUTHORITY OF THE FEDERAL FINANCING BANK, WAS ABLE TO OBTAIN $5 BILLION WITHOUT EXCEEDING THE STATUTORY LIMIT ON THE PUBLIC DEBT. BECAUSE OF THE URGENCY OF YOUR REQUEST, WE WERE UNABLE TO SEEK THE FORMAL VIEWS OF EITHER TREASURY OR THE BANK. FOR REASONS WE SHALL EXPLAIN BELOW, WE CONCLUDE THAT THE TRANSACTIONS IN QUESTION WERE LEGAL.

THE FACTS

ON OCTOBER 9, 1985, THE DEPARTMENT OF THE TREASURY HAD BORROWED THE MAXIMUM AMOUNT PERMITTED BY 31 U.S.C. SEC. 3101 (FORMERLY THE SECOND LIBERTY BOND ACT). TREASURY THUS FACED THE PROSPECT OF DEFAULTING ON OBLIGATIONS OF THE UNITED STATES BECAUSE REVENUES WERE INSUFFICIENT TO MEET ALL OBLIGATIONS FALLING DUE. TO AVOID DEFAULT, THE SECRETARY OF THE TREASURY, ACTING BOTH AS SECRETARY AND AS CHAIRMAN OF THE BOARD OF DIRECTORS OF THE BANK EFFECTED THE FOLLOWING TRANSACTIONS:

1. THE BANK ISSUED $5 BILLION IN ITS SECURITIES TO THE CIVIL SERVICE RETIREMENT AND DISABILITY FUND.

2. IN PAYMENT FOR ITS SECURITIES, THE BANK ACCEPTED $5 BILLION IN TREASURY OBLIGATIONS FROM THE RETIREMENT FUND.

3. THE BANK USED THE TREASURY SECURITIES TO PREPAY $5 BILLION OF ITS OUTSTANDING DEBT TO THE TREASURY.

4.TREASURY ISSUED AND SOLD TO THE PUBLIC $5 BILLION IN SHORT TERM OBLIGATIONS.

THE RESULT OF THESE TRANSACTIONS WAS THAT TREASURY OBTAINED $5 BILLION WITH WHICH TO MEET THE OBLIGATIONS OF THE UNITED STATES.

DISCUSSION

THE FEDERAL FINANCING BANK WAS CREATED IN 1973 AS AN INSTRUMENTALITY OF THE UNITED STATES, OPERATING UNDER THE GENERAL SUPERVISION AND DIRECTION OF THE SECRETARY OF THE TREASURY. SEE 12 U.S.C. SEC. 2283. THE BANK'S MAJOR FUNCTION IS TO LOAN MONEY TO FEDERAL AGENCIES, BY PURCHASING OBLIGATIONS ISSUED, SOLD OR GUARANTEED BY THOSE AGENCIES. 12 U.S.C. SEC. 2285. THE BANK MAY OBTAIN FUNDS FOR THESE PURPOSES EITHER BY BORROWING FROM THE PUBLIC OR FROM TREASURY. 12 U.S.C. SEC. 2288. THE BANK'S ACTIVITIES ARE NOT INCLUDED IN THE ANNUAL BUDGET OF THE UNITED STATES. U.S.C. SEC. 2290(C).

THE FIRST TWO OF THE TRANSACTIONS ON OCTOBER 9, IN EFFECT, AMOUNTED TO THE BANK EXCHANGING ITS OWN SECURITIES FOR TREASURY OBLIGATIONS HELD BY THE RETIREMENT FUND. THE NET RESULT WAS THAT THE BANK WAS BORROWING $5 BILLION FROM THE RETIREMENT FUND.

WE FIND NOTHING IMPROPER IN THE BANK BORROWING FROM THE RETIREMENT FUND. SUBSECTION 9(A) OF THE FEDERAL FINANCING BANK ACT OF 1973, 12 U.S.C. SEC. 2288(B), AUTHORIZES THE BANK TO ISSUE UP TO $15 BILLION OF OBLIGATIONS "PUBLICLY," AND SUBSECTION 9(D), 12 U.S.C. SEC. 2288(D), PROVIDES THAT THE BANK'S OBLIGATIONS "SHALL BE LAWFUL INVESTMENTS, AND MAY BE ACCEPTED AS SECURITY FOR ALL FIDUCIARY, TRUST, AND PUBLIC FUNDS, THE INVESTMENT OF WHICH SHALL BE UNDER THE AUTHORITY OR CONTROL OF THE UNITED STATES ***."

WITH RESPECT TO THE THIRD AND FOURTH TRANSACTIONS, WHEN THE BANK PREPAID $5 BILLION OF ITS DEBT WITH TREASURY'S OWN OBLIGATIONS, TREASURY'S OUTSTANDING DEBT WAS REDUCED BY $5 BILLION. THEREFORE, TREASURY WAS ABLE TO BORROW AN ADDITIONAL $5 BILLION FROM THE PUBLIC.

IN OUR OPINION THE LEGALITY OF THE SECRETARY'S ACTIONS ON OCTOBER 9 DEPENDS SOLELY ON WHETHER THE BANK'S BORROWING FROM THE RETIREMENT FUND COUNTS AGAINST THE STATUTORY LIMIT ON THE PUBLIC DEBT. THE LIMIT IS CONTAINED IN 31 U.S.C. SEC. 3101(B), WHICH PROVIDES:

"THE FACE AMOUNT OF OBLIGATIONS ISSUED UNDER THIS CHAPTER (31 U.S.C., CHAPTER 31) AND THE FACE AMOUNT OF OBLIGATIONS WHOSE PRINCIPAL AND INTEREST ARE GUARANTEED BY THE UNITED STATES GOVERNMENT (EXCEPT GUARANTEED OBLIGATIONS HELD BY THE SECRETARY OF THE TREASURY) MAY NOT BE MORE THAN $1,575,700,000,000 OR $1,823,800,000,000 ON AND AFTER OCTOBER 1, 1984, OUTSTANDING AT ANY ONE TIME ***."

SINCE BANK OBLIGATIONS ARE NOT ISSUED UNDER CHAPTER 31 OF TITLE 31, THEY WOULD COUNT AGAINST THE DEBT LIMIT ONLY IF THEY ARE GUARANTEED BY THE UNITED STATES BOTH AS TO PRINCIPAL AND INTEREST.

THE FEDERAL FINANCING BANK ACT OF 1973 DOES NOT SPECIFICALLY PROVIDE THAT OBLIGATIONS ISSUED TO THE PUBLIC BY THE BANK ARE GUARANTEED BY THE UNITED STATES. SECTION 9(A) OF THE ACT, 12 U.S.C. SEC. 2288(A), UNDER WHICH THE BANK BORROWS FROM THE PUBLIC, AND IN THIS CASE THE AUTHORITY FOR ITS BORROWING FROM THE RETIREMENT FUND, MERELY STATES:

"THE BANK IS AUTHORIZED, WITH THE APPROVAL OF THE SECRETARY OF THE TREASURY, TO ISSUE PUBLICLY AND HAVE OUTSTANDING AT ANY ONE TIME NOT IN EXCESS OF $15,000,000,000 *** OF OBLIGATIONS HAVING SUCH MATURITIES AND BEARING SUCH RATE OR RATES OF INTEREST AS MAY BE DETERMINED BY THE BANK."

WE HAVE EXAMINED THE LEGISLATIVE HISTORY OF THE ACT AND HAVE FOUND NO INDICATION THAT THE CONGRESS INTENDED THAT THE PRINCIPAL AND INTEREST OF BANK OBLIGATIONS ISSUED UNDER SECTION 9(A) WERE TO BE GUARANTEED BY THE UNITED STATES.

BASED ON THE LANGUAGE OF THE FEDERAL FINANCING BANK ACT OF 1973 AND ITS LEGISLATIVE HISTORY, WE CONCLUDE THAT BANK BORROWING FROM THE PUBLIC UNDER SUBSECTION 9(A) IS NOT SUBJECT TO THE STATUTORY LIMIT ON THE PUBLIC DEBT.

OUR CONCLUSION IS CONSISTENT WITH THE VIEWS WE EXPRESSED IN THE REPORT OF OUR AUDIT OF THE BANK'S OPERATIONS FOR FISCAL YEAR 1975 AND 1976. ALTHOUGH WRITTEN IN THE CONTEXT OF THE BANK BORROWING TO FINANCE ITS OWN OPERATIONS, WE STATED:

"HOWEVER, IF THE DEBT CEILING WERE IN DANGER OF BEING REACHED THE BANK COULD SELL ITS OWN SECURITIES, WHICH ARE NOT SUBJECT TO THE DEBT CEILING." GAO, AUDIT OF FINANCIAL STATEMENTS OF THE FEDERAL FINANCING BANK-- FISCAL YEARS 1975 AND 1976 AT 5 (GGD-77-36, B-174958, APRIL 27, 1977).

WE MADE A SIMILAR STATEMENT ON PAGE 10 OF THE SAME REPORT.

WE TRUST THAT THIS OPINION IS RESPONSIVE TO YOUR NEEDS. UNLESS IT IS RELEASED EARLIER, OR YOU INFORM US OTHERWISE, THIS OPINION WILL BE AVAILABLE TO THE PUBLIC 30 DAYS FROM TODAY.

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