Factbox: Treasury's tools to delay hitting debt limit
WASHINGTON | Tue May 10, 2011 3:12pm EDT
(Reuters) - The U.S. Treasury is expected to start dipping into federal pension funds on May 16 to give Congress more time to raise the $14.3 trillion debt limit, which caps the amount the country is legally allowed to borrow.
On Friday, Treasury Secretary Timothy Geithner was forced to start employing the first of the department's extraordinary measures to give the government room to borrow funds to meet its obligations. As of that date, the total U.S. public debt was just $23 billion below the ceiling.
The United States has until August 2 before it will start defaulting on its obligations, such as interest payments.
Following is a rundown of some of the measures the Treasury has employed and plans to use in May as well as other steps it could take to stave off the day the current debt limit becomes binding.
The Treasury has already drawn down a $200 billion Federal Reserve emergency lending account to $5 billion to free up borrowing capacity.
SUSPEND STATE, LOCAL GOVERNMENT SECURITIES
The Treasury on May 6 suspended sales of State and Local Government Series securities -- known as "slugs" -- which are special low-interest Treasury securities offered to state and local governments to temporarily invest proceeds from municipal bond sales. Slugs, which count against the debt limit, have been suspended six times in the past 20 years to avoid hitting the debt ceiling. The last time they were halted was in September 2007. So far in fiscal 2011, which began on October 1, the Treasury has sold $47.4 billion in slugs to muni bond issuers.
CIVIL SERVICE RETIREMENT AND DISABILITY FUND
The Treasury on May 16 will suspend investments in the Civil Service Retirement and Disability Fund, a government employee pension fund, and redeem certain investments.
Initially the Treasury can claw back $12 billion in borrowing headroom by declaring a two-month "debt issuance suspension period," a legal determination specific to this fund. Geithner could also declare a one-year suspension that would free up $72 billion in borrowing ability -- an amount equal to about one year's worth of benefit payments.
On June 30, the Treasury has another option to halt reinvestment of $67 billion of the fund's securities that mature on that date. However, the Treasury points out that it also has a bond interest payment of $12 billion due on June 30, diminishing the effect of that maneuver. It also must replace any missed contributions and lost earnings to the fund once the borrowing limit is raised.
GOVERNMENT SECURITIES INVESTMENT FUND
On May 16 the Treasury will suspend the reinvestments in another federal employee pension fund known as the G-Fund, which has a balance of about $130 billion. Normally the money market-like fund reinvests its entire balance daily into special-issue Treasury securities that count against the debt limit. Halting reinvestments would instantly claw back $130 billion in borrowing capacity, but the Treasury must make the fund whole any lost earnings once the debt limit impasse ends.
EXCHANGE STABILIZATION FUND
The Treasury could dip into this seldom-used $50 billion fund earmarked to stabilize currency rates and access the dollar balance -- currently about $23 billion -- to avoid debt issuance. Created during the Great Depression of the 1930s, the fund was last used as a backstop to guarantee money market mutual funds during the financial crisis from September 2008 to September 2009. The Treasury would not have to restore lost interest earnings to the fund.
ISSUE MORE CASH MANAGEMENT BILLS
The Treasury could cut issuance of longer-term government debt and rely more heavily on short-term cash management bills to gain more day-to-day control over debt outstanding. Cash management bills are typically issued for days instead of normal Treasury bill maturities of four weeks to one year. However, this is unlikely to buy much time and officials are wary of making any major shifts in the Treasury's debt issuance calendar, which could upset markets.
SUSPEND SAVINGS BONDS
Treasury secretaries in the past have halted sales of U.S. savings bonds to the public during debt limit impasses, but Geithner argues that this would be of little or no use. It would not free up borrowing authority and it would only prevent small amounts of new debt from being issued. Savings bond sales increase the debt by less than $220 million per month on average, giving this measure little potency during a time of trillion-dollar deficits.
SWAP FEDERAL FINANCING BANK DEBT
The Federal Financing Bank can issue up to $15 billion in debt on behalf of other government agencies that is not subject to the debt limit. So the Treasury could exchange FFB debt for other debt to reduce the total amount subject to the limit. However, the Treasury says this measure is also of little use because of the very small amounts of obligations available for exchange. The Government Accountability Office has estimated that based on data from last August 31, this measure offered just $4.8 billion in borrowing headroom at that time.
ASSET SALES
The government could raise money by selling off chunks of companies it bailed out under its $700 billion Troubled Asset Relief Program. However, Geithner has said this was not a viable option because taxpayers could end up suffering losses from a "fire sale" of financial assets.
He also said selling U.S. gold holdings could undermine confidence in the United States. A recently announced plan to sell down the Treasury's mortgage-backed securities portfolio at a rate of $10 billion per month is not expected to make a material difference on the debt limit.
Still, the Treasury is planning a stock offering in insurer American International Group Inc this spring that had been expected to top $15 billion. The government's 1.66 billion AIG common shares, however, have taken a hit in recent weeks from market turmoil caused by the Libyan conflict and worries about insured losses from Japan's earthquake. They are now worth about $49.27 billion, compared with $87.4 billion at their peak in January.
All net proceeds would go to the government.
The Treasury also anticipates initial public offerings this year in automaker Chrysler Holdings and lender Ally Financial Inc, formerly GMAC. It can resume selling General Motors shares after a lock-up agreement expires late May.
HOPE FOR HIGHER TAX RECEIPTS
The Treasury was able to stave off its debt limit reckoning by about a month because the April tax filing season produced higher-than-expected receipts. In the first six months of fiscal 2011 they were up about 7 percent, or about $66 billion, from a year earlier, but they fell $2 billion in March, as new cuts in payroll taxes and business tax credits ate into revenue.
Job growth is picking up, arguing for higher income tax withholding, but many economists have expressed concern that rising fuel and food costs, coupled with lower government spending, may slow economic growth.
WASHINGTON | Tue May 10, 2011 3:12pm EDT
(Reuters) - The U.S. Treasury is expected to start dipping into federal pension funds on May 16 to give Congress more time to raise the $14.3 trillion debt limit, which caps the amount the country is legally allowed to borrow.
On Friday, Treasury Secretary Timothy Geithner was forced to start employing the first of the department's extraordinary measures to give the government room to borrow funds to meet its obligations. As of that date, the total U.S. public debt was just $23 billion below the ceiling.
The United States has until August 2 before it will start defaulting on its obligations, such as interest payments.
Following is a rundown of some of the measures the Treasury has employed and plans to use in May as well as other steps it could take to stave off the day the current debt limit becomes binding.
The Treasury has already drawn down a $200 billion Federal Reserve emergency lending account to $5 billion to free up borrowing capacity.
SUSPEND STATE, LOCAL GOVERNMENT SECURITIES
The Treasury on May 6 suspended sales of State and Local Government Series securities -- known as "slugs" -- which are special low-interest Treasury securities offered to state and local governments to temporarily invest proceeds from municipal bond sales. Slugs, which count against the debt limit, have been suspended six times in the past 20 years to avoid hitting the debt ceiling. The last time they were halted was in September 2007. So far in fiscal 2011, which began on October 1, the Treasury has sold $47.4 billion in slugs to muni bond issuers.
CIVIL SERVICE RETIREMENT AND DISABILITY FUND
The Treasury on May 16 will suspend investments in the Civil Service Retirement and Disability Fund, a government employee pension fund, and redeem certain investments.
Initially the Treasury can claw back $12 billion in borrowing headroom by declaring a two-month "debt issuance suspension period," a legal determination specific to this fund. Geithner could also declare a one-year suspension that would free up $72 billion in borrowing ability -- an amount equal to about one year's worth of benefit payments.
On June 30, the Treasury has another option to halt reinvestment of $67 billion of the fund's securities that mature on that date. However, the Treasury points out that it also has a bond interest payment of $12 billion due on June 30, diminishing the effect of that maneuver. It also must replace any missed contributions and lost earnings to the fund once the borrowing limit is raised.
GOVERNMENT SECURITIES INVESTMENT FUND
On May 16 the Treasury will suspend the reinvestments in another federal employee pension fund known as the G-Fund, which has a balance of about $130 billion. Normally the money market-like fund reinvests its entire balance daily into special-issue Treasury securities that count against the debt limit. Halting reinvestments would instantly claw back $130 billion in borrowing capacity, but the Treasury must make the fund whole any lost earnings once the debt limit impasse ends.
EXCHANGE STABILIZATION FUND
The Treasury could dip into this seldom-used $50 billion fund earmarked to stabilize currency rates and access the dollar balance -- currently about $23 billion -- to avoid debt issuance. Created during the Great Depression of the 1930s, the fund was last used as a backstop to guarantee money market mutual funds during the financial crisis from September 2008 to September 2009. The Treasury would not have to restore lost interest earnings to the fund.
ISSUE MORE CASH MANAGEMENT BILLS
The Treasury could cut issuance of longer-term government debt and rely more heavily on short-term cash management bills to gain more day-to-day control over debt outstanding. Cash management bills are typically issued for days instead of normal Treasury bill maturities of four weeks to one year. However, this is unlikely to buy much time and officials are wary of making any major shifts in the Treasury's debt issuance calendar, which could upset markets.
SUSPEND SAVINGS BONDS
Treasury secretaries in the past have halted sales of U.S. savings bonds to the public during debt limit impasses, but Geithner argues that this would be of little or no use. It would not free up borrowing authority and it would only prevent small amounts of new debt from being issued. Savings bond sales increase the debt by less than $220 million per month on average, giving this measure little potency during a time of trillion-dollar deficits.
SWAP FEDERAL FINANCING BANK DEBT
The Federal Financing Bank can issue up to $15 billion in debt on behalf of other government agencies that is not subject to the debt limit. So the Treasury could exchange FFB debt for other debt to reduce the total amount subject to the limit. However, the Treasury says this measure is also of little use because of the very small amounts of obligations available for exchange. The Government Accountability Office has estimated that based on data from last August 31, this measure offered just $4.8 billion in borrowing headroom at that time.
ASSET SALES
The government could raise money by selling off chunks of companies it bailed out under its $700 billion Troubled Asset Relief Program. However, Geithner has said this was not a viable option because taxpayers could end up suffering losses from a "fire sale" of financial assets.
He also said selling U.S. gold holdings could undermine confidence in the United States. A recently announced plan to sell down the Treasury's mortgage-backed securities portfolio at a rate of $10 billion per month is not expected to make a material difference on the debt limit.
Still, the Treasury is planning a stock offering in insurer American International Group Inc this spring that had been expected to top $15 billion. The government's 1.66 billion AIG common shares, however, have taken a hit in recent weeks from market turmoil caused by the Libyan conflict and worries about insured losses from Japan's earthquake. They are now worth about $49.27 billion, compared with $87.4 billion at their peak in January.
All net proceeds would go to the government.
The Treasury also anticipates initial public offerings this year in automaker Chrysler Holdings and lender Ally Financial Inc, formerly GMAC. It can resume selling General Motors shares after a lock-up agreement expires late May.
HOPE FOR HIGHER TAX RECEIPTS
The Treasury was able to stave off its debt limit reckoning by about a month because the April tax filing season produced higher-than-expected receipts. In the first six months of fiscal 2011 they were up about 7 percent, or about $66 billion, from a year earlier, but they fell $2 billion in March, as new cuts in payroll taxes and business tax credits ate into revenue.
Job growth is picking up, arguing for higher income tax withholding, but many economists have expressed concern that rising fuel and food costs, coupled with lower government spending, may slow economic growth.
