Debt Ceiling: Analysis of Actions During the 1995-1996 Crisis (Chapter
Report, 08/30/96, GAO/AIMD-96-130).
Congress has traditionally limited the size of the federal debt by
establishing ceilings on the amount of Treasury securities than can be
outstanding. During the past 50 years, Congress has enacted about 60
temporary and permanent increases in the debt ceiling. On August 10,
1993, Congress raised the debt ceiling to $4.9 trillion. This limit was
reached in the fall of 1995, but was not raised until the following
March, when it was set at $5.5 trillion. The intervening period, when
the Secretary of the Treasury announced a debt issuance suspension
period, became known as the 1995-1996 debt ceiling crisis. Treasury took
several measures during the period to raise funds to meet federal
obligations without exceeding the debt ceiling. This report (1)
discusses the chronology of these actions and (2) provides a financial
and legal analysis of them.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: AIMD-96-130
TITLE: Debt Ceiling: Analysis of Actions During the 1995-1996
Crisis
DATE: 08/30/96
SUBJECT: Trust funds
Investments
Authority to borrow from public
Debt subject to statutory limitation
Funds management
US Treasury securities
Public debt
Losses
Budget obligations
Deficit financing
IDENTIFIER: Civil Service Retirement and Disability Fund
Government Securities Investment Fund
Exchange Stabilization Fund
Old Age and Survivors Insurance Trust Fund
Hospital Insurance Trust Fund
Military Retirement Fund
Unemployment Insurance Trust Fund
Social Security Disability Insurance Trust Fund
Employees Life Insurance Fund
Supplementary Medical Insurance Trust Fund
National Service Life Insurance Fund
Railroad Retirement Trust Fund
Airport and Airway Trust Fund
Highway Trust Fund
Bank Insurance Fund
BIF
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Cover
================================================================ COVER
Report to Congressional Requesters
August 1996
DEBT CEILING - ANALYSIS OF ACTIONS
DURING THE 1995-1996 CRISIS
GAO/AIMD-96-130
Debt Ceiling
(901686)
Abbreviations
=============================================================== ABBREV
FFB - Federal Financing Bank
rose -
Letter
=============================================================== LETTER
B-270619
August 30, 1996
The Honorable William V. Roth, Jr.
Chairman
Committee on Finance
United States Senate
The Honorable Bill Archer
Chairman
Committee on Ways and Means
House of Representatives
Your November 9, 1995, and April 25, 1996, letters asked us to review
the Executive Branch's actions when Treasury reached the statutory
debt limit of $4.9 trillion established in 1993. This report
discusses our analysis of Treasury's actions during the 1995-1996
debt ceiling crisis related to investments and redemptions in federal
trust funds and the restoration of losses incurred. As agreed, we
separately provided to the Committees' staffs a compilation of
requested source documents.
We are sending copies of this report to the Ranking Minority Members
of the Senate Committee on Finance and the House Committee on Ways
and Means and the Chairmen and Ranking Minority Members of the Senate
and House Appropriations and Budget Committees. We also are sending
copies to the Secretary of the Treasury and the Director of the
Office of Management and Budget. Copies will be made available to
others upon request.
This report was prepared under the direction of Gregory M. Holloway,
Director, Governmentwide Audits who can be reached at (202) 512-9510.
Other major contributors are listed in appendix I.
Gene L. Dodaro
Assistant Comptroller General
EXECUTIVE SUMMARY
============================================================ Chapter 0
PURPOSE
---------------------------------------------------------- Chapter 0:1
The Congress has traditionally imposed a limit on the size of the
federal government's public debt by establishing ceilings (debt
ceiling) on the amount of Treasury securities that can be
outstanding. In the past 50 years, the Congress has enacted about 60
temporary and permanent increases in the debt ceiling. On August 10,
1993, the Congress raised the debt ceiling to $4.9 trillion. This
debt ceiling was reached in the fall of 1995, but was not raised
until March 29, 1996, when it was set at $5.5 trillion.
The intervening period, beginning on November 15, 1995, when the
Secretary of the Treasury declared a debt issuance suspension period,
became known as the 1995-1996 debt ceiling crisis. Treasury took
several actions during this period to raise funds to meet federal
obligations without exceeding the debt ceiling. GAO was asked to (1)
determine the chronology of these actions and (2) provide financial
and legal analyses of them.
BACKGROUND
---------------------------------------------------------- Chapter 0:2
The public debt is composed primarily of Treasury securities, which
include bills, notes, and bonds that Treasury issues to raise cash to
finance government operations and invest trust fund receipts. On
October 31, 1995, most (about 75 percent) of the $4.9 trillion public
debt was Treasury securities held by the public. The remaining debt
was Treasury securities held by federal trust funds, which totaled
about $1.3 trillion as shown in table 1.
Table 1
Trust Funds Which Hold Treasury
Securities
(Dollars in billions)
Securities
held at
October 31,
Fund 1995
------------------------------------------------------ --------------
Federal Old Age and Survivors Insurance Trust Fund\a $ 445
Civil Service Retirement and Disability Trust Fund 348
(Civil Service fund)
Federal Hospital Insurance Trust Fund 128
Department of Defense Military Retirement Fund 121
(Military Retirement Fund)
Unemployment Trust Fund 47
Federal Disability Insurance Trust Fund\a 35
Bank Insurance Fund 22
Government Securities Investment Fund (G-Fund) 21
Employees Life Insurance Fund 16
Federal Supplementary Medical Insurance Trust Fund 14
National Service Life Insurance Fund 12
Railroad Retirement Account 12
Airport and Airways Trust Fund 11
Highway Trust Fund 8
Exchange Stabilization Fund\b 3
Other Government Trust Funds 82
======================================================================
Total $1,325
----------------------------------------------------------------------
\a Social Security trust funds.
\b The Stabilization Fund (31 U.S.C. 5302) is commonly referred to
as the Exchange Stabilization Fund.
Although these securities represent a loan from one part of the
government to another, they count against the debt ceiling.
When a debt ceiling is reached, Treasury is unable to issue
additional Treasury securities without adding to the public debt and
exceeding the debt ceiling. Treasury is also unable to discharge its
normal trust fund investment and redemption responsibilities.
Treasury can avoid exceeding the debt ceiling by not issuing Treasury
securities for trust fund receipts or reinvesting maturing Treasury
securities. Also, when government trust funds redeem Treasury
securities to pay for benefits and expenses, the debt subject to the
debt ceiling is lowered, and thus, Treasury can sell additional
securities to the public to raise cash.
During the debt ceiling crisis in 1985, Treasury was unable to follow
its normal trust fund investment and redemption polices and
procedures. Specifically, it suspended investing certain trust fund
receipts and redeemed some Treasury securities issued to one trust
fund earlier than normal to pay fund benefits. Subsequently, the
Congress provided the Secretary of the Treasury with statutory
authority to take certain types of actions for the Civil Service fund
and the G-Fund to prevent Treasury from exceeding the debt ceiling.
Specifically, the Secretary of the Treasury has been provided the
following statutory authorities.
1. Redemption of securities held by the Civil Service fund. In
subsection (k) of 5 U.S.C. 8348, the Congress 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.
5 U.S.C. 8348(k) 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. 5
U.S.C. 8348(j) 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, 5 U.S.C. 8348(j)(5) states
"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. In subsection (j)
of
5 U.S.C. 8348, the Congress authorizes the Secretary of the Treasury
to suspend additional investment of amounts in the Civil Service fund
if such investment cannot be made without causing the amount of
public debt to exceed the debt ceiling. This subsection of the
statute instructs the Secretary on how to make the Civil Service fund
whole after the debt issuance suspension period has ended.
3. Suspension of G-Fund investments. In subsection (g) of 5 U.S.C.
8438, the Congress authorized the Secretary of the Treasury to
suspend the issuance of additional amounts of obligations of the
United States to the G-Fund if such issuance cannot be made without
causing the amount of public debt to exceed the debt ceiling. The
subsection contains instructions on how the Secretary is to make the
G-Fund whole after the debt ceiling crisis has ended.
Also, during the 1995-1996 debt ceiling crisis, the Congress provided
the Secretary of the Treasury authority to issue securities that did
not count toward the debt ceiling. Specifically, on February 8,
1996, Public Law 104-103 provided Treasury with the authority to
issue securities in an amount equal to the March 1996 social security
payments. This statute provided that the securities issued under its
provisions were not to be counted against the debt ceiling until
March 15, 1996, which was later extended to March 30, 1996. In
addition, on March 12, 1996, the Congress enacted Public Law 104-115,
which exempted government trust fund investments and reinvestments
from the debt ceiling until March 30, 1996.
RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3
During the 1995-1996 debt ceiling crisis, Treasury used its normal
investment procedures for 12 of the 15 major government trust funds
included in our review. These 12 trust funds accounted for about
$871 billion, or about 65 percent, of the $1,325 billion of Treasury
securities held by government trust funds on October 31, 1995.
Treasury departed from its normal procedures in handling the
investments and redemptions for the remaining three major trust funds
(Civil Service fund, G-Fund, and Exchange Stabilization Fund) and
took other actions to stay within the $4.9 trillion debt ceiling
established in August 1993. These departures and other actions were
proper and consistent with legal authorities the Congress has
provided to the Secretary of the Treasury.
First, regarding the Civil Service trust fund, Treasury
-- redeemed about $46 billion in Treasury securities held by the
Civil Service fund before they were needed to pay benefits and
trust fund expenses and
-- suspended the investment of $14 billion in Civil Service fund
receipts.
In exercising the authority to redeem Civil Service fund Treasury
securities, the Secretary of the Treasury determined that a debt
issuance suspension period existed, as required by 5 U.S.C. 8348(k).
Treasury's General Counsel advised the Secretary that he could
determine that a debt issuance suspension period existed based on the
actions of the Congress and the President and the resulting impasse.
The General Counsel further advised that the impasse made it unlikely
that a statute raising the debt ceiling could be enacted before the
next election.
Second, Treasury exchanged about $8.6 billion of Treasury securities
held by the Civil Service fund for non-Treasury securities held by
the Federal Financing Bank (FFB). The non-Treasury securities used
in the exchange had been issued by the Postal Service and the
Tennessee Valley Authority. The laws authorizing these entities to
issue securities state that they are lawful investments of federal
trust funds (39 U.S.C. 2005(d)(3) and
16 U.S.C. 831n-4(d)). FFB redeemed the Treasury securities it
received from the Civil Service fund to repay borrowings from
Treasury, which allowed Treasury to raise additional cash from the
public.
Third, Treasury suspended some investments and reinvestments of the
G-Fund's receipts and maturing securities. Daily during the crisis,
Treasury determined the amount of funds that the G-Fund could invest
without exceeding the debt ceiling and suspended the investment of
the remaining funds.
Fourth, on several occasions, Treasury did not reinvest some of the
maturing Treasury securities held by the Exchange Stabilization Fund,
which was established to help provide a stable system of monetary
exchange rates. 31 U.S.C. 5302, gives the Secretary of the Treasury
the sole discretion for determining when, and if, excess funds for
the Exchange Stabilization Fund will be invested.
Fifth, Treasury issued some securities that were temporarily exempted
from being counted by Public Law 104-103 and Public Law 104-115.
These exemptions allowed Treasury to (1) raise $29 billion to pay
March 1996 Social Security benefits and (2) in March 1996, invest
$58.2 billion from government trust fund receipts and maturing
securities.
Although these actions prevented the debt ceiling from being exceeded
during the 1995-1996 debt ceiling crisis, the government incurred
about $138.9 billion in additional debt that would normally have been
considered subject to the debt ceiling. Also, several of these
actions resulted in interest losses to certain government trust
funds. Treasury has fully restored the Civil Service fund's $995
million and the G-Fund's $255 million interest losses, under 5 U.S.C.
8348(j) and 5 U.S.C. 8438(g), respectively. Treasury cannot restore
the Exchange Stabilization Fund's $1.2 million interest loss without
special legislation.
GAO'S ANALYSIS
---------------------------------------------------------- Chapter 0:4
NORMAL PROCEDURES USED FOR
MOST TRUST FUNDS
-------------------------------------------------------- Chapter 0:4.1
Between November 15, 1995, and March 28, 1996, Treasury followed its
normal investment and redemption policies for most of the trust funds
reviewed. For example, during this period, Treasury invested about
$156.7 billion and redeemed about $115.8 billion of Treasury
securities on behalf of the Social Security funds and invested about
$7.1 billion and redeemed about $6.8 billion of Treasury securities
on behalf of the Military Retirement Fund.
ACTIONS AFFECTING THE CIVIL
SERVICE FUND
-------------------------------------------------------- Chapter 0:4.2
The Secretary's actions affecting the Civil Service fund were to (1)
redeem securities before needed to pay the fund's benefits and
expenses (5 U.S.C. 8348(k)), (2) suspend investment of the fund's
receipts (5 U.S.C. 8348(j)), and (3) exchange Treasury securities
held by the fund for non-Treasury securities held by FFB.
The redemption of securities before needed to pay trust fund benefits
and expenses involved about $46 billion. This decreased the amount
of debt subject to the debt ceiling until Treasury issued a like
amount of securities to the public for cash. The significant actions
relating to the early redemptions follow.
-- On November 15, 1995, the Secretary determined that a debt
issuance suspension period existed. On February 14, 1996, the
Secretary extended the initial 12-month debt issuance suspension
period to 14 months.
-- About $39.8 billion of the Civil Service fund's Treasury
securities were redeemed earlier than needed to pay fund
benefits and expenses between November 15 and November 30, 1995.
Between February 15 and February 20, 1996, an additional $6.4
billion in Treasury securities held by the Civil Service fund
was redeemed. Treasury based these redemptions on (1) the
14-month debt issuance suspension period determination made by
the Secretary (November 15, 1995, through January 15, 1997) and
(2) the estimated monthly Civil Service fund benefit payments.
The suspension of the investment of Civil Service fund receipts in
Treasury securities involved about $14 billion. Between November 15,
1995, and March 29, 1996, the Civil Service fund had about $20
billion in receipts, which in all but one case, Treasury invested
using its normal policies and procedures. The exception involved the
Civil Service fund's December 31, 1995, receipt of a $14 billion
semiannual interest payment on the fund's securities portfolio. The
significant actions involving these uninvested receipts follow.
-- The Secretary determined that investing these funds in
additional Treasury securities would have exceeded the debt
ceiling and, therefore, under
5 U.S.C. 8348(j) suspended the investment of these receipts.
-- During the debt ceiling crisis, about $6.3 billion of the Civil
Service fund's uninvested receipts were used to pay for the
fund's benefits and expenses. This action was in accordance
with policies and procedures Treasury developed in 1989 stemming
from prior debt ceiling crises.
The exchange of Treasury securities held by the Civil Service fund
for non-Treasury securities held by FFB involved about $8.6 billion.
The non-Treasury securities owned by the FFB that ultimately were
exchanged had been issued by the Postal Service and the Tennessee
Valley Authority.
Before making the exchange, however, Treasury had to determine (1)
which non-Treasury securities were eligible for the exchange and (2)
how to value the securities so that the exchange was fair to both the
Civil Service fund and FFB. These determinations involved the
following.
-- The law governing the Civil Service fund does not specifically
identify which securities issued by an agency can be purchased.
However, the laws authorizing the Postal Service and the
Tennessee Valley Authority to issue securities state that these
securities are lawful investments of the federal trust funds (39
U.S.C. 2005(d)(3) and 16 U.S.C. 831(n-4)(d)).
-- To compute the value of each portfolio, Treasury considered (1)
the current market rates for outstanding Treasury securities at
the time of the exchange, (2) the probability of changing
interest rates, (3) the probability of the agency paying off the
debt early, and (4) the premium that the market would provide to
a security that could be redeemed at par regardless of the
market interest rates. Also, Treasury obtained the opinion of
an independent third party to determine whether its valuations
were accurate. By having an independent verification of the
value of the exchanged securities, Treasury helped to ensure
that both the Civil Service fund and FFB were treated equitably
in the exchange.
FFB redeemed the Treasury securities it received in this exchange
transaction to repay some of its borrowings from Treasury. This
reduced the amount of outstanding Treasury securities, and thus,
allowed Treasury to raise additional cash from the public.
OTHER ACTIONS TO STAY UNDER
THE DEBT CEILING
-------------------------------------------------------- Chapter 0:4.3
In other actions, the Secretary (1) suspended G-Fund investments
(5 U.S.C. 8438(g)), (2) suspended reinvestment of some of the
Exchange Stabilization Fund's maturing Treasury securities, and (3)
issued securities not counted toward the debt ceiling (Public Laws
104-103 and 104-115).
First, between November 15, 1995, and March 18, 1996, the Secretary
did not fully invest G-Fund receipts. As with the Civil Service
fund, the Secretary is authorized to suspend G-Fund investments
during periods when obligations of the federal government cannot be
issued without exceeding the debt ceiling.
Initially, on November 15, 1996, when the Secretary determined a debt
issuance suspension period, the G-Fund held about $21.6 billion of
Treasury securities maturing on that day. In order to meet its cash
needs, Treasury did not reinvest about $18 billion of these
securities. Then, throughout the debt ceiling crisis, the amount of
the G-Fund's receipts that Treasury invested changed daily. The
amount invested was limited by the amount that could be invested and
still remain under the debt ceiling.
Second, on several occasions between February 21 and March 12, 1996,
Treasury did not reinvest some of the maturing Treasury securities
held by the Exchange Stabilization Fund. The Exchange Stabilization
Fund was created to help provide a stable system of monetary exchange
rates. The Secretary is authorized by 31 U.S.C. 5302 to invest
balances of the Fund that are not needed for program purposes in
obligations of the federal government. The Secretary has the sole
discretion for determining when, and if, the excess funds will be
invested.
Third, the Congress passed legislation allowing Treasury to issue
some Treasury securities that were temporarily exempted from being
counted against the debt ceiling. Specifically, these exempted
securities involved the following situations.
-- The Secretary notified the Congress that, unless the debt
ceiling was raised before the end of February 1996, Social
Security and other benefit payments could not be made in March
1996. To ensure that these benefits would be paid on time, on
February 8, 1996, the Congress provided Treasury with the
authority to issue securities which would not count against the
debt ceiling until March 15, 1996, in an amount equal to March
1996 Social Security payments. This authority allowed Treasury
to issue about $29 billion of securities to the public. These
securities were issued on February 23, 1996. The exemption for
excluding them from counting against the debt ceiling was later
extended to March 30, 1996.
-- On March 12, 1996, the Congress enacted legislation that
exempted government trust fund investments and reinvestments
from the debt ceiling until March 30, 1996. Under this statute,
between March 13 and March 29, 1996, Treasury issued about $58.2
billion in Treasury securities to government trust funds as
investments of their receipts or reinvestments of their maturing
securities.
GOVERNMENT DEBT INCREASED
AND FUND LOSSES WERE
RESTORED
-------------------------------------------------------- Chapter 0:4.4
The level of the public debt is determined by the government's prior
spending and revenue decisions along with the performance of the
economy. In 1979, we reported\1 that debt ceiling increases were
needed simply to allow borrowing adequate to finance deficit budgets
which had already been approved. The 1995-1996 debt ceiling crisis
provides an illustration of this. Although actions taken during the
debt ceiling crisis to issue and redeem Treasury securities allowed
the government to pay the government's obligations while staying
under the $4.9 trillion debt ceiling, the government's debt which
normally would be considered part of this ceiling, increased by
$138.9 billion--the amount necessary to finance those obligations
during this period. The $138.9 billion is comprised of the
following:
-- $46.2 billion associated with the early redemption of Treasury
securities held by the Civil Service fund,
-- $8.6 billion resulting from the exchange of agency securities
held by FFB for Treasury securities held by the Civil Service
fund,
-- $29 billion in Treasury securities issued to ensure timely
payment of March 1996 social security benefit payments,
-- $58.2 billion in Treasury securities issued to invest government
trust fund receipts and reinvest maturing securities that did
not count against the debt ceiling, and
-- $0.5 billion for the restoration of interest that would have
been invested prior to March 29, 1996, had normal procedures
been used.
These amounts are reduced by $3.6 billion, which is the difference
between the outstanding debt subject to the debt ceiling on November
15, 1995, and on March 28, 1996.
When Treasury departed from its normal investment and redemption
polices and procedures during the 1995-1996 debt ceiling crisis, the
Civil Service fund, the G-Fund, and the Exchange Stabilization Fund
incurred interest losses. In accordance with 5 U.S.C. 8348(j) and 5
U.S.C. 8438(g), Treasury restored the interest losses to the Civil
Service fund and G-Fund, respectively, once the Congress raised the
debt ceiling. The Exchange Stabilization Fund lost $1.2 million in
interest that cannot be restored without special legislation.
--------------------
\1 A New Approach to the Public Debt Legislation Should Be Considered
(FGMSD-79-56, September 7, 1979).
AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:5
GAO requested oral comments on a draft of this report from the
Secretary of the Treasury or his designee. On August 22, 1996,
Treasury officials provided GAO with oral comments that generally
agreed with the report's findings and conclusions.
INTRODUCTION
============================================================ Chapter 1
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 could be outstanding. In February 1941, the Congress set an
overall ceiling of $65 billion on all types of Treasury securities
that could be outstanding at any one time.
This ceiling was raised several times between February 1941 and June
1946 when a ceiling of $275 billion was set and remained in effect
until August 1954. At that time, the Congress imposed the first
temporary debt ceiling which added $6 billion to the $275 billion
permanent ceiling. Since that time, the Congress has enacted
numerous temporary and permanent increases in the debt ceiling.
Although most of this debt is held by the public, about one fourth of
it or $1.325 trillion, as of October 31, 1995, is issued to federal
trust funds, such as the Social Security funds, the Civil Service
fund, and the G-Fund.
The Secretary of the Treasury has several responsibilities relating
to the federal government's financial management operations. These
include paying the government's obligations and investing trust fund
receipts not needed for current benefits and expenses. The Congress
has generally provided the Secretary with the ability to issue the
necessary securities to the trust 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 in
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
actual security that Treasury should purchase may also be specified.
These securities count against the debt ceiling. Consequently, if
trust fund receipts are not invested, an increase in the debt subject
to the debt ceiling does not occur.
When Treasury is unable to borrow as a result of reaching the debt
ceiling, the Secretary is unable to fully discharge his financial
management responsibilities using the normal methods. 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 yet been
enacted. These situations are commonly referred to as debt ceiling
crises.
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.\1 In 1986 and 1987, following
Treasury's experiences during prior debt ceiling crises, the Congress
provided to the Secretary of the Treasury statutory authority to use
the Civil Service fund and the G-Fund to assist Treasury in managing
its financial operations during a debt ceiling crisis.
--------------------
\1 Civil Service Fund: Improved Controls Needed Over Investments
(GAO/AFMD-87-17, 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 November 1, 1985, to permit payments to
beneficiaries of these funds (B-221077.2, December 5, 1985).
STATUTORY AUTHORITIES
---------------------------------------------------------- Chapter 1:1
The following are statutory authorities provided to the Secretary of
Treasury that are pertinent to the 1995-1996 debt ceiling crisis and
the actions discussed in this report.
1. Redemption of securities held by the Civil Service fund. In
subsection (k) of 5 U.S.C. 8348, the Congress 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.
5 U.S.C. 8348(k) 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. 5
U.S.C. 8348(j) also 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, 5 U.S.C. 8348(j)(5) states
"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. In subsection (j)
of
5 U.S.C. 8348, the Congress authorizes the Secretary of the Treasury
to suspend additional investment of amounts in the Civil Service fund
if such investment cannot be made without causing the amount of
public debt to exceed the debt ceiling. This subsection of the
statute instructs the Secretary on how to make the Civil Service fund
whole after the debt issuance suspension period has ended.
3. Suspension of G-Fund investments. In subsection (g) of 5 U.S.C.
8438, the Congress authorized the Secretary of the Treasury to
suspend the issuance of additional amounts of obligations of the
United States to the G-Fund if such issuance cannot be made without
causing the amount of public debt to exceed the debt ceiling. The
subsection contains instructions on how the Secretary is to make the
G-Fund whole after the debt ceiling crisis has ended.
4. Issuance of securities not counted toward the debt ceiling. On
February 8, 1996, the Congress provided Treasury with the authority
(Public Law 104-103) to issue securities in an amount equal to March
1996 social security payments. This statute provided that the
securities issued under its provisions were not to be counted against
the debt ceiling until March 15, 1996, which was later extended to
March 30, 1996. On March 12, 1996, the Congress enacted Public Law
104-115 which exempted government trust fund investments and
reinvestments from the debt ceiling until March 30, 1996.
PRIOR REPORTS ON DEBT CEILING
CRISES
---------------------------------------------------------- Chapter 1:2
We have previously reported on aspects of Treasury's actions during
the 1985 and other debt ceiling crises. Those reports are:
1. A New Approach to the Public Debt Legislation Should Be
Considered (FGMSD-79-58, September 7, 1979).
2. 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, December 5, 1985).
3. Civil Service Fund: Improved Controls Needed Over Investments
(GAO/AFMD-87-17, May 7, 1987).
4. Debt Ceiling Options (GAO/AIMD-96-20R, December 7, 1995).
5. Social Security Trust Funds (GAO/AIMD-96-30R, December 12, 1995).
6. Debt Ceiling Limitations and Treasury Actions (GAO/AIMD-96-38R,
January 26, 1996).
7. Information on Debt Ceiling Limitations and Increases
(GAO/AIMD-96-49R, February 23, 1996).
OBJECTIVES, SCOPE, AND
METHODOLOGY
---------------------------------------------------------- Chapter 1:3
Our objectives were to
-- develop a chronology of significant events relating to the
1995-1996 debt ceiling crisis,
-- evaluate the actions taken during the 1995-1996 debt ceiling
crisis in relation to the normal policies and procedures
Treasury uses for federal trust fund investments and
redemptions, and
-- analyze the financial aspects of the departures from the normal
policies and procedures and assess their legal basis.
To develop a chronology of the significant events involving the
1995-1996 debt ceiling crisis, we obtained and reviewed applicable
documents. We also discussed Treasury's actions during the crisis
with Treasury officials.
To evaluate the actions taken during the 1995-1996 debt ceiling
crisis in relation to the normal policies and procedures Treasury
uses for federal trust fund investments, we obtained an overview of
the procedures used. For the 15 selected trust funds, which are
identified in chapter 3, we examined the significant transactions
that affected the trust funds between November 1, 1995, and March 31,
1996. In cases where the procedures were not followed, we obtained
documentation and other information to help understand the basis and
impact of the alternative procedures that were used.
Although Treasury maintains accounts for over 150 different trust
funds, we selected for review those with investments in Treasury
securities that exceeded $8 billion on November 1, 1995. In
addition, we selected the Exchange Stabilization Fund because
Treasury used this fund in previous debt ceiling crises to help raise
cash and stay under the debt ceiling. The funds we examined
accounted for over 93 percent of the total securities held by these
150 trust funds as of October 31, 1995, and March 31, 1996.
To analyze the financial aspects of Treasury's departures from its
normal polices and procedures, we (1) reviewed the methodologies
Treasury developed to minimize the impact of such departures on the
federal trust funds, (2) quantified the impact of the departures, and
(3) assessed whether any interest losses were properly restored.
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 debt
ceiling crisis. Our evaluation included those authorities relating
to (1) issuing and redeeming Treasury securities during a debt
issuance suspension period and restoring losses after a debt ceiling
crisis has ended, (2) the ability to exchange Treasury securities
held by the Civil Service fund for agency securities held by the FFB,
and (3) the use of the Exchange Stabilization Fund during a debt
ceiling crisis.
We also compiled and analyzed applicable source documents, including
executive branch legal opinions, memos, and correspondence. We have
provided these documents to the Committees' staffs.
We performed our work between November 9, 1995, and July 1, 1996.
Our audit was performed in accordance with generally accepted
government auditing standards. We requested oral comments on a draft
of this report from the Secretary of the Treasury or his designee.
On August 22, 1996, Treasury officials provided us with oral comments
that generally agreed with our findings and conclusions. Their views
have been incorporated where appropriate.
CHRONOLOGY OF EVENTS
============================================================ Chapter 2
On August 10, 1993, the Congress raised the debt ceiling to $4.9
trillion, which was expected to fund government operations until
spring 1995. In early 1995, analysts concluded that the debt ceiling
would be reached in October 1995. This set the stage for the
1995-1996 debt ceiling crisis, which was resolved on March 29, 1996,
when Congress raised the debt ceiling to $5.5 trillion.
The major actions taken by the Congress and the Executive Branch
involving the 1995-1996 debt ceiling crisis are shown in table 2.1.
Table 2.1
Chronology of 1995-1996 Debt Ceiling
Crisis Events
Date Event
------------------------- -----------------------------------------------------
June 29, 1995 The Congress passed the Conference Report on the 1996
Budget Resolution, which called for a $5.5 trillion
debt ceiling in order to fund government operations
through fiscal year 1997.
July 17, 1995 The Secretary of the Treasury wrote to the
congressional leadership calling for an increase in
the debt ceiling before October 31, 1995.
September 18, 1995 The Secretary of the Treasury wrote to the
congressional leadership urging an increase in the
debt ceiling separate from the resolution of the
budget debate.
October 17, 1995 Treasury announced that it would reduce by $7 billion
the October 23, 1995, auction of 13-week Treasury
bills in order to stay under the debt ceiling on
October 31, 1996. Treasury also suspended foreign
add-ons,\a and the issuance of State and Local
Government Series Treasury securities.
November 1, 1995 Treasury called back about $2.4 billion in Treasury
cash balances from eight large banks. According to
Treasury officials, these funds were received between
November 2 and November 8, 1996.
November 6-8, 1995 Treasury postponed auctions of 3-and 10-year notes
and 52-week bills.
November 10, 1995 The Congress passed a bill that increased the debt
ceiling by $67 billion through December 12, 1995. The
bill would have repealed the Secretary's authorities
contained in 5 U.S.C. 8348 and 5 U.S.C. 8438. The
authorities allow the Secretary to use the Civil
Service fund and G-Fund to help discharge his
financial management responsibilities during a debt
ceiling crisis. This was vetoed on November 13, 1995.
November 15, 1995 The Secretary of the Treasury declared a 12-month
debt issuance suspension period. This allowed
Treasury to prematurely redeem Treasury securities
held by the Civil Service fund and not reinvest a
portion of the G-Fund. As a result, Treasury issued
securities to the public to raise the cash needed to
pay $24.9 billion in interest due on the public debt.
(See chapters 4 and 5.)
November 30, 1995 The Congress passed the Balanced Budget Act of 1995.
This increased the debt ceiling to $5.5 trillion. On
December 6, 1995, the President vetoed this bill.
December 31, 1995 Treasury did not have sufficient room under the debt
ceiling to invest about $14 billion in Civil Service
fund receipts. The receipts were associated with
semiannual interest payments made on trust fund
holdings. (See chapter 4.)
January 22, 1996 The Secretary of the Treasury notified the Congress
that unless the debt ceiling was raised prior to
February 15, 1996, Treasury would (1) suspend
reinvestment of about $3.9 billion in the Exchange
Stabilization Fund, (2) exchange about $9 billion of
agency securities held by FFB for Treasury securities
held by certain government trust funds, and (3)
extend the debt issuance suspension period for 2
months and redeem about $6.4 billion of Treasury
securities held by the Civil Service fund earlier
than normal. In the letter, the Secretary stated that
"I want to emphasize that we will have no other
options that are both legal and prudent." (See
chapters 4 and 5.)
February 8, 1996 The Congress authorized Treasury to issue about $29
billion of securities prior to
March 1, 1996, in order to ensure that the March
Social Security payments could be made (Public Law
104-103). These securities, when issued, would not
count against the debt ceiling until March 15, 1996.
(See chapter 5.)
February 14, 1996 The Secretary (1) authorized the suspension of
reinvestment of maturing Treasury securities in the
Exchange Stabilization Fund, (2) authorized the
exchange of agency securities held by FFB for
Treasury securities held by the Civil Service fund,
and (3) extended the debt issuance suspension period
by 2 months and authorized the redemption of an
additional $6.4 billion of Treasury securities held
by the Civil Service fund earlier than normal. (See
chapters 4 and 5.)
February 23, 1996 Treasury issued about $29 billion of securities that
did not count against the debt ceiling in accordance
with Public Law 104-103. (See chapter 5.)
March 12, 1996 Public Law 104-115 was enacted which authorized
Treasury to invest trust fund receipts in Treasury
securities which did not count against the debt
ceiling until March 30, 1996. In addition, it
extended the exemption of the securities issued under
Public Law 104-103 from counting against the public
debt ceiling until March 30, 1996. (See chapter 5.)
March 29, 1996 The debt ceiling was raised to $5.5 trillion and
Treasury began to restore the losses incurred by the
Civil Service fund and G-Fund. (See chapter 6.)
June 30, 1996 Treasury completed the restoration of the losses
incurred by the Civil Service fund. (See chapter 6.)
--------------------------------------------------------------------------------
\a Purchases of U.S. government securities made by foreign central
banks and international organizations through the New York Federal
Reserve Bank.
NORMAL INVESTMENT AND REDEMPTION
PROCEDURES USED FOR MOST TRUST
FUNDS
============================================================ Chapter 3
Our analysis showed that, during the 1995-1996 debt ceiling crisis,
Treasury used its normal investment and redemption procedures to
handle the receipts and maturing investments and to redeem Treasury
securities for 12 of the 15 trust funds we examined. These 12 trust
funds accounted for about 65 percent, or about $871 billion, of the
$1.3 trillion in Treasury securities held by the federal trust funds
on October 31, 1995. The trust funds included in our analysis are
listed in table 3.1.
Table 3.1
Trust Funds for Which Normal Investment
and Redemption Procedures Were Used
(Dollars in billions)
Securities
held on
October 31,
Fund 1995
------------------------------------------------------ --------------
Federal Old Age and Survivors Insurance Trust Fund\a $445
Federal Hospital Insurance Trust Fund 128
Military Retirement Fund 121
Unemployment Trust Fund 47
Federal Disability Insurance Trust Fund\a 35
Bank Insurance Fund 22
Employees Life Insurance Fund 16
Federal Supplementary Medical Insurance Trust Fund 14
National Service Life Insurance Fund 12
Railroad Retirement Account 12
Airport and Airways Trust Fund 11
Highway Trust Fund 8
======================================================================
Total $871
----------------------------------------------------------------------
\a Social Security trust funds.
Trust funds which are allowed to invest receipts, such as the Social
Security funds, normally invest them in nonmarketable Treasury
securities. Under normal conditions, Treasury is notified by the
appropriate agency of the amount that should be invested or
reinvested, and Treasury then makes the investment. In some cases,
the actual security that Treasury should purchase is also specified.
When a trust fund needs to pay benefits and expenses, Treasury is
normally notified of the amount and the date that the disbursement is
to be made. Depending on the fund, Treasury may also be notified to
redeem specific securities. Based on this information, Treasury
redeems a fund's securities.
Between November 15, 1995, and March 28, 1996, Treasury followed its
normal investment and redemption policies for all of the trust funds
shown in table 3.1. For example, during this period, Treasury
invested about $156.7 billion and redeemed about $115.8 billion of
Treasury securities on behalf of the Social Security funds and
invested about $7.1 billion and redeemed about $6.8 billion of
Treasury securities on behalf of the Military Retirement Fund.
The departures from normal investment and redemption procedures
involving the other three trust funds (Civil Service fund, G-Fund,
and Exchange Stabilization Fund), which held over $370 billion of
Treasury securities on October 31, 1995, or about 28 percent of the
Treasury securities held by all federal trust funds at that time, are
discussed in chapters 4 and 5.
ACTIONS RELATED TO THE CIVIL
SERVICE FUND
============================================================ Chapter 4
During the 1995-1996 debt ceiling crisis, the Secretary of the
Treasury redeemed Treasury securities held by the Civil Service fund
and suspended the investment of some Civil Service fund receipts.
Also, Treasury exchanged Treasury securities held by the Civil
Service fund for non-Treasury securities held by the FFB.
STATUTORY AUTHORITY EXERCISED
TO REDEEM TREASURY SECURITIES
BEFORE NEEDED TO PAY TRUST FUND
BENEFITS AND EXPENSES
---------------------------------------------------------- Chapter 4:1
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 benefit payments. Furthermore, the statute permits the
early redemptions even if the Civil Service fund has adequate cash
balances to cover these payments. During November 1995 and February
1996 the Secretary of the Treasury redeemed about $46 billion of the
Civil Service fund's Treasury securities before they were needed to
pay for trust fund benefits and expenses.
Table 4.1 shows an example of the use of this procedure during the
1995-1996 debt ceiling crisis.
Table 4.1
How Redeeming Securities Earlier Than
Normal Raises Cash
Effect on Effect on
Treasury's outstanding
Date Action cash debt
-------------- -------------------------- ---------- --------------
November 15, Treasury redeems $11.9 None\a Reduces debt
1995 billion of trust fund by $11.9
securities for benefit billion
payments earlier than
normal
November 15, Treasury issues $11.9 Increases Increases debt
1995 billion of securities to cash by by $11.9
the public for cash $11.9 billion
billion
----------------------------------------------------------------------
\a When a trust fund redeems securities, Treasury promises to honor
the instruments used to pay for the trust fund's benefits and
expenses when they are presented for payment. Normally, to raise the
cash necessary to honor these payments, Treasury issues securities to
the public.
DETERMINING DEBT ISSUANCE
SUSPENSION PERIOD
-------------------------------------------------------- Chapter 4:1.1
Before redeeming Civil Service fund securities earlier than normal,
the Secretary must first determine that a "debt issuance suspension
period" exists. Such a period is defined 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 to determine the length of a debt
issuance suspension period.
On November 15, 1995, the Secretary declared a 12-month debt issuance
suspension period. On February 14, 1996, the Secretary extended this
period from 12 to 14 months.
The Secretary, in the November 15, 1995, determination, stated that a
debt issuance suspension period existed for a period of 12 months
"[b]ased on the information that is available to me today." A
memorandum to the Secretary from Treasury's General Counsel provided
the Secretary a rationale to support his determination. The
memorandum noted that based on the actions of the Congress and the
President and on public statements by both these parties, there was a
significant impasse that made it unlikely that a statute raising the
debt ceiling could be enacted. Furthermore, the positions of the
President and the Congress were so firm that it seemed unlikely that
an agreement could be reached before the next election, which was 12
months away.
The Secretary extended the debt issuance suspension period by 2
months on February 14, 1996. Treasury's General Counsel again
advised the Secretary concerning the reasons underlying the extension
and noted that nothing had changed since November to indicate that
the impasse was any closer to being resolved. The General Counsel
further reasoned that it would take until January 1997 for a newly
elected President or a new Congress to be able to enact legislation
raising the debt ceiling.
DETERMINING THE AMOUNT OF
TREASURY SECURITY
REDEMPTIONS
-------------------------------------------------------- Chapter 4:1.2
On November 15, 1995, the Secretary authorized the redemption of
$39.8 billion of the Civil Service fund's Treasury securities, and on
February 14, 1996, authorized the redemption of another $6.4 billion
of the fund's Treasury securities. The total, $46 billion of
authorized redemptions was determined based on (1) the 14-month debt
issuance suspension period determination made by the Secretary
(November 15, 1995, through January 15, 1997) and (2) the estimated
monthly Civil Service fund benefit payments. Treasury considered
appropriate factors in determining the amount of Treasury securities
to redeem early.
About $39.8 billion of these securities were redeemed between
November 15 and 30, 1995. Then, in December 1995, Treasury's cash
position improved for a few days, primarily because of the receipt of
quarterly estimated tax payments due in December. This inflow of
cash enabled Treasury to reinvest, in late December 1995, about $21.2
billion in securities that had the same terms and conditions as those
that were redeemed in November. However, because of Treasury's
deteriorating cash position, these securities were again redeemed by
the end of December. Finally, between February 15 and 20, 1996, an
additional $6.4 billion in Treasury securities held by the Civil
Service fund were redeemed.
STATUTORY AUTHORITY USED TO
SUSPEND INVESTMENT OF RECEIPTS
---------------------------------------------------------- Chapter 4:2
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 such investment cannot be made without causing the
amount of public debt to exceed the debt ceiling. Between November
15, 1995, and March 29, 1996, the Civil Service fund had about $20
billion in receipts.
In all but one case, Treasury used its normal investment policies to
handle the trust fund's requests to invest these receipts. The
exception involved the trust fund's December 31, 1995, receipt from
Treasury of a $14 billion semiannual interest payment on the fund's
securities portfolio. The Secretary determined that investing these
funds in additional Treasury securities would have caused the public
debt to exceed the debt ceiling and, therefore, suspended the
investment of these receipts.
UNINVESTED RECEIPTS WERE
USED TO PAY BENEFITS AND
EXPENSES
-------------------------------------------------------- Chapter 4:2.1
During the debt ceiling crisis, about $6.3 billion of the Civil
Service fund's uninvested receipts were used to pay for the trust
fund's benefits and expenses. Normally, government trust funds that
are authorized to invest in Treasury securities do not have
uninvested cash--all of a trust fund's receipts that are not needed
to pay for benefits and expenses are invested.\1 In the case of the
Civil Service fund, when a redemption is necessary, Treasury's stated
policy is to redeem the securities with the shortest maturity first.
Should a group of securities have the same maturity date, but
different interest rates, the securities with the lowest interest
rate are redeemed first.\2
During previous debt ceiling crises, Treasury's actions resulted in
uninvested cash.\3 The uninvested cash not only required restoring
lost investment interest but also affected the normal method Treasury
uses to determine securities to redeem to pay for trust fund benefits
and expenses.
Accordingly, in 1989, Treasury developed policies and procedures for
determining when uninvested trust fund cash should be used to pay
trust fund benefits and expenses and used these policies during the
1995-1996 debt ceiling crisis. Overall, Treasury's policy continued
to be to redeem the securities with the lowest interest rate first.
However, in making this determination, uninvested cash is treated as
though it had been invested in Treasury securities. These procedures
are presented in table 4.2.
Table 4.2
Procedures Used to Determine When
Uninvested Cash Should Be Used to Pay
Fund Benefits and Expenses
Event Action
---------------------- ----------------------------------------------
Treasury decides not Treasury determines how the uninvested
to invest trust fund receipts would have been invested and the date
receipts. the funds would have been invested. For
example, the receipts might have been invested
on December 31 in a 6-percent security
maturing on June 30, 1996.
Trust fund benefits Treasury determines the securities with the
and expenses need to lowest interest rate and redeems the amount
be paid. necessary to pay the trust fund's benefits and
expenses, which is essentially Treasury's
normal redemption policy. In making this
determination, the uninvested cash is
considered as having been "invested."
"Securities" with the Once the securities that should be redeemed
lowest interest rate are identified, Treasury then determines the
are comprised of actual "investment dates" for each investment.
actual securities and (This includes the uninvested cash.) In
uninvested cash. accordance with its normal procedures, the
earliest investment is redeemed first to make
benefit and expense payments.
----------------------------------------------------------------------
The following illustrates how this policy was implemented. On
January 2, 1996, Treasury needed about $2.6 billion to pay fund
benefits and expenses for the Civil Service fund. To make these
payments, it redeemed or used
-- $43 million of the fund's Treasury securities which carried an
interest rate of 5-7/8 percent and matured on June 30, 1996;
-- $815 million of the fund's Treasury securities which carried an
interest rate of 6 percent and matured on June 30, 1996 (these
securities were redeemed first since the $815 million had been
invested prior to December 31, 1995); and
-- $1.7 billion of uninvested cash since the uninvested cash, if
normal procedures had been followed, would have been invested on
December 31, 1995, in 6 percent securities maturing on June 30,
1996.
--------------------
\1 Because Treasury securities are issued in $1,000 increments, an
agency may have less than $1,000 uninvested at any given point in
time. Although the fund may have less than $1,000 of uninvested
cash, the fund is considered fully invested.
\2 In this report, we refer to this policy as "redeeming securities
with the lowest interest rate first."
\3 Civil Service Fund: Improved Controls Needed Over Investments
(GAO/AFMD-87-17, May 7, 1987).
TREASURY SECURITIES EXCHANGED
FOR NON-TREASURY SECURITIES
HELD BY FFB
---------------------------------------------------------- Chapter 4:3
On February 14, 1996, about $8.6 billion in Treasury securities held
by the Civil Service fund were exchanged for agency securities held
by FFB. FFB\4 used the Treasury securities it received in this
exchange to repay some of its borrowings from Treasury. Since the
Treasury securities provided by the Civil Service fund had counted
against the debt ceiling, reducing these borrowings resulted in a
corresponding reduction in the public debt subject to the debt
ceiling. Thus, Treasury could borrow additional cash from the
public.
--------------------
\4 FFB was established, in part, to eliminate the need for agencies
to issue securities in the public market. It lends funds to and
purchases securities issued by certain federal agencies, such as the
Postal Service and the Tennessee Valley Authority, to finance their
operations. Since Treasury borrows to provide funds to FFB, the
agency debt to FFB are translated into debt subject to the debt
ceiling. On September 30, 1995, the FFB's assets were about $87
billion.
SELECTING AND VALUING THE
SECURITIES EXCHANGED
-------------------------------------------------------- Chapter 4:3.1
The decision to exchange Treasury securities held by the Civil
Service fund for non-Treasury securities held by FFB required
Treasury to determine (1) which non-Treasury securities were eligible
for the exchange and (2) how to value the securities so that the
exchange was fair to both the Civil Service fund and FFB. Treasury's
objective was to ensure that the securities that were exchanged were
of equal value and that the Civil Service fund would not incur any
long-term loss.
Regarding the first issue, the law governing the Civil Service fund
does not specifically identify which securities issued by an agency
can be purchased. However, the laws authorizing the Postal Service
and the Tennessee Valley Authority to issue securities state that
these securities are lawful investments of the federal trust funds
(39 U.S.C. 2005(d)(3) and 16 U.S.C. 831n-4(d)).
Regarding the second issue, the Treasury securities held by the Civil
Service fund and the non-Treasury securities held by FFB had
different terms and conditions; thus complicating the task of valuing
the securities. For example, most of the Treasury securities held by
the Civil Service fund mature on June 30 of a given year and can be
redeemed at par when needed to pay benefits and expenses. None of
the agency securities held by FFB, and selected by Treasury for the
exchange transaction, matured on June 30 and, if redeemed\5 before
maturity, the redemption price would be based on market interest
rates.
Because the effects of these differences can be significant, a
methodology was needed to determine the proper valuation for the
securities that would be exchanged. Therefore, Treasury used a
generally accepted methodology to compute the value of each
portfolio. Examples of factors used in this methodology include (1)
the current market rates for outstanding Treasury securities at the
time of the exchange, (2) the probability of changing interest rates,
(3) the probability of the agency paying off the debt early, and (4)
the premium that the market would provide to a security that could be
redeemed at par regardless of the market interest rates.
Treasury obtained the opinion of an independent third party to
determine whether its valuations were accurate. Our review of the
consultant's report showed that the consultant (1) identified the
characteristics of each security to be exchanged, (2) reviewed the
pricing methodology to be used, (3) calculated the value of each
security based on the pricing methodology, and (4) reviewed the terms
and conditions of the exchange agreement. The consultant concluded
that the exchange was fair. Due to the complexity of the
consultant's computations and the large number of securities
exchanged, we did not independently verify the consultant's
conclusion. The factors included in Treasury's methodology and the
consultant's analysis were appropriate for assessing the exchange.
--------------------
\5 If these securities are needed to pay benefits and expenses before
maturity, then the Civil Service fund would "redeem" them by selling
them back to FFB.
CONCLUSIONS
---------------------------------------------------------- Chapter 4:4
Treasury's actions during the 1995-1996 debt ceiling crisis involving
the Civil Service fund were in accordance with statutory authority
provided by the Congress and the administrative policies and
procedures established by Treasury. These actions helped the
government to avoid default on its obligations and to stay within the
debt ceiling. Specifically, we conclude the following:
-- Based on the information available to the Secretary when the
November 15, 1995, and February 14, 1996, debt issuance
suspension period determinations were made, the Secretary's
determinations were not unreasonable.
-- Treasury considered appropriate factors in determining the
amount of Treasury securities to redeem early.
-- The Secretary acted within the authorities provided by law when
suspending the investment of Civil Service fund receipts.
-- Treasury's policies and procedures regarding the uninvested
funds are designed primarily to facilitate the restoration of
fund losses when Treasury does not follow its normal investment
and redemption policies and procedures. They also provide an
adequate basis for considering the uninvested receipts in
determining the securities to be redeemed to pay Civil Service
fund benefits and expenses during the debt ceiling crisis.
-- The agency securities used in the exchange between the Civil
Service fund and FFB were lawful investments for the Civil
Service fund. In addition, by having an independent
verification of the value of the exchanged securities, Treasury
helped to ensure that both the Civil Service fund and FFB were
treated equitably in the exchange.
OTHER ACTIONS TO STAY WITHIN THE
DEBT CEILING
============================================================ Chapter 5
In addition to the actions involving the Civil Service fund, during
the 1995-1996 debt ceiling crisis, the Secretary of the Treasury (1)
suspended the investment of G-Fund receipts and (2) did not reinvest
some of the Exchange Stabilization Fund's maturing securities. Also,
the Congress authorized Treasury to issue selected securities that
were temporarily exempted from being counted against the debt
ceiling. These actions also assisted Treasury in staying under the
debt ceiling.
STATUTORY AUTHORITY ALLOWED
SUSPENSION OF G-FUND
INVESTMENTS
---------------------------------------------------------- Chapter 5:1
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 such issuance cannot be made
without causing the amount of public debt to exceed the debt ceiling.
Each day, between November 15, 1995, and March 18, 1996, Treasury
determined the amount of funds that the G-Fund would be allowed to
invest in Treasury securities and suspended the investment of G-Fund
receipts\1 that would have resulted in exceeding the debt ceiling.
On November 15, 1995, when the Secretary determined a debt issuance
suspension period, the G-Fund held about $21.6 billion of Treasury
securities maturing on that day. In order to meet its cash needs,
Treasury did not reinvest about $18 billion of these securities.
Until March 19, 1996, 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 result of some of these
factors affecting the outstanding debt, the result of others cannot
be precisely determined 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 actually be issued. On the other hand, the amount
of savings bonds that will be issued and of securities that will be
issued to, or redeemed by, various government trust funds are
difficult to predict.
Because of these difficulties, Treasury needed a way to ensure that
the government's trust fund activities did not cause the debt ceiling
to be exceeded and also to maintain normal trust fund investment and
redemption policies. To do this, each day during the debt ceiling
crisis, Treasury
-- calculated the amount of public debt subject to the debt
ceiling, excluding the funds 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 of the G-Fund's remaining funds.
For example, on January 17, 1996, excluding G-Fund transactions,
Treasury issued about $17 billion and redeemed about $11.4 billion of
securities that counted against the debt ceiling. Since Treasury had
been at the debt ceiling the previous day, Treasury could not invest
the entire amount ($21.8 billion) that the G-Fund had requested
without exceeding the debt ceiling. As a result, the $5.6 billion
difference was added to the amount of uninvested G-Fund receipts and
raised the amount of uninvested funds for the G-Fund to $7.2 billion
on that date. Interest on the uninvested funds was not paid until
the debt ceiling crisis ended.
--------------------
\1 The G-Fund normally invests in Treasury securities which mature
the next business day.
EXCHANGE STABILIZATION FUND'S
MATURING INVESTMENTS NOT
REINVESTED
---------------------------------------------------------- Chapter 5:2
On several occasions between February 21 and March 12, 1996, Treasury
did not reinvest some of the maturing securities held by the Exchange
Stabilization Fund. Because the Fund's securities are considered
part of the government's outstanding debt subject to the debt
ceiling, when the Secretary does not reinvest the Fund's maturing
securities, the government's outstanding debt is reduced.
The purpose of the Exchange Stabilization Fund is to help provide a
stable system of monetary exchange rates. The law establishing the
Fund authorizes the Secretary to invest Fund balances not needed for
program purposes in obligations of the federal government. This law
also gives the Secretary the sole discretion for determining when,
and if, the excess funds will be invested. During previous debt
ceiling crises, Treasury exercised the option of not reinvesting the
Fund's maturing Treasury securities, which enabled Treasury to raise
additional cash and helped the government stay within the debt
ceiling limitation.
LEGISLATION ENACTED TO ISSUE
SECURITIES NOT COUNTED TOWARD
THE DEBT CEILING
---------------------------------------------------------- Chapter 5:3
In other actions to stay within the debt ceiling, the Congress passed
legislation allowing Treasury to issue some Treasury securities that
were temporarily exempted from being counted against the debt
ceiling.
EXEMPTING SECURITIES ISSUED
TO ENSURE SOCIAL SECURITY
BENEFIT PAYMENTS
-------------------------------------------------------- Chapter 5:3.1
During January 1996, Treasury's cash position continued to
deteriorate. The Secretary notified the Congress that, unless the
debt ceiling was raised before the end of February 1996, Social
Security and other benefit payments could not be made in March 1996.
Under normal procedures, monthly Social Security benefits are paid by
direct deposit on the third day of each month.\2 Because checks take
a period of time to clear, Treasury only redeems securities equal to
the amount of benefits paid by direct deposit on this date. The
securities necessary to pay the benefits made by check are redeemed
on the third and fourth business day after the payments are made.
This sequencing is designed to allow the fund to earn interest during
the average period that benefit checks are outstanding but not cashed
(the so-called "float period"). For Social Security payments, the
check float period is about 3.6 days.
According to Treasury officials, they may need to raise the actual
cash needed to pay these benefits several days before the payments
are made since the check float is an average. For example, some
checks may clear the next business day while others may clear several
days after the securities are redeemed. Under normal conditions,
this is not a problem since Treasury is free to issue the securities
to raise the necessary cash without worrying about when the trust
fund securities will be redeemed.
To ensure that these benefits would be paid on time, on February 8,
1996, the Congress provided Treasury with the authority (Public Law
104-103) to issue securities in an amount equal to the March 1996
Social Security payments. Further, this statute provided that the
securities issued under its provisions were not to be counted against
the debt ceiling until March 15, 1996, which was later extended to
March 30, 1996.
The special legislation did not create any long-term borrowing
authority for Treasury since it only allowed Treasury to issue
securities that, in effect, would be redeemed in March 1996.
However, it allowed Treasury to raise significant amounts of cash.
This occurred because March 15, 1996--the date initially established
in the special legislation for which this debt would be counted
against the debt ceiling--was later than the date that most of the
securities would have been redeemed from the trust fund under normal
procedures.
On February 23, 1996, Treasury issued these securities. Following
normal redemption policies, Treasury redeemed about $29 billion of
Treasury securities from the Social Security fund for the March
benefit payments. Since the majority of the Social Security fund
payments are made at the beginning of the month, by March 7, 1996,
Treasury had redeemed about $28.3 billion of the trust fund's
Treasury securities. This lowered the amount of debt subject to the
limit, and Treasury was able to issue securities to the public for
cash or invest trust funds receipts--as long as they were issued
before March 15, 1996. Therefore, Treasury could raise an additional
$28.3 billion in cash because of the difference in timing between
when the securities could be issued (March 15, 1996) and when they
were redeemed to pay fund benefits and expenses. According to
Treasury officials, during the 1995-1996 debt ceiling crisis, this
flexibility allowed Treasury to raise about $12 billion of cash. The
remaining capacity was used to invest trust fund receipts.
According to Treasury officials, this was the first time that
Treasury had been provided with this kind of authority during a debt
ceiling crisis. Providing this legislation was important because
during a debt ceiling crisis, Treasury may not be free to issue
securities in advance to raise the necessary cash.
Without this legislation, Treasury would have had at least the
following three choices, of which only the first would have been
practical.
-- Trust fund securities could have been redeemed earlier than
normal. This action was used in the 1985 debt ceiling crisis to
make benefit payments for the Social Security and Civil Service
funds. In exercising this option, securities could have been
redeemed on the same day that a like amount of securities were
issued to the public for cash; these issues would have had no
effect on the amount of debt subject to the debt ceiling.
However, since the securities would have been redeemed earlier
than normal, the trust fund would have lost interest income. In
the case of the Social Security funds, such a loss could not be
restored without special legislation.
-- The government could have not paid the benefits. This option
would have resulted in the government not meeting an obligation,
which it has never done.
-- Treasury could have issued additional securities, which would
have caused the debt ceiling to be exceeded, in violation of the
law, and raised legal issues concerning the validity of the
securities as obligations of the United States. According to
Treasury officials, Treasury has never issued securities that
would cause the debt ceiling to be exceeded. We reviewed
Treasury reports and confirmed that, at least since July 1,
1954, that this statement was correct.
--------------------
\2 If the third day is a weekend or holiday, then the payment date is
moved up to the first business day preceding it.
EXEMPTING SOME GOVERNMENT
TRUST FUND INVESTMENTS AND
REINVESTMENTS
-------------------------------------------------------- Chapter 5:3.2
On March 12, 1996, the Congress enacted Public Law 104-115 which
exempted government trust fund investments and reinvestments from the
debt ceiling until March 30, 1996. Under the authority provided by
this statute, between March 13 and March 29, 1996, Treasury issued
about $58.2 billion in Treasury securities to government trust funds
as investments of their receipts or reinvestments of their maturing
securities. In addition, using its normal redemption policies,
Treasury redeemed significant amounts of Treasury securities, which
counted against the debt ceiling, held by various government trust
funds to pay for benefits and expenses. Thus, Treasury was provided
the ability to raise significant amounts of cash because these
actions reduced the amount of public debt subject to the debt
ceiling.
To designate government trust fund investments that were not
considered subject to the debt ceiling, Treasury issued special
Treasury securities. This enabled Treasury, at the time a trust fund
redemption was made, to identify whether the redemption lowered the
amount of outstanding debt subject to the debt ceiling.
For example, on March 12, 1996, the Civil Service fund invested about
$100 million in Treasury securities that were counted against the
debt ceiling and on March 14, 1996, invested about $184 million in
Treasury securities that were exempt. Therefore, if on March 19,
1996, using normal procedures, Treasury redeemed the trust fund's
Treasury securities to pay for benefits and expenses, it would know
whether, or how much of, the redemption reduced outstanding
securities subject to the debt ceiling.
A similar determination could also be made for securities that were
reinvested. For example, on March 12, 1996, the Postal Service fund
had about $1.2 billion in maturing securities that were subject to
the debt ceiling. These funds were reinvested in securities that
matured the next business day and were not subject to the debt
ceiling. As a result, the amount of debt subject to the debt ceiling
decreased by this amount, thus enabling Treasury to issue additional
securities to the public for cash. On March 14, 1996, this
reinvestment matured and was again reinvested. This transaction did
not change the amount of securities subject to the debt ceiling
because the maturing securities did not count against the debt
ceiling when they were issued.
CONCLUSIONS
---------------------------------------------------------- Chapter 5:4
During the 1995-1996 debt ceiling crisis, Treasury acted in
accordance with statutory authorities when it (1) suspended some
investments of the G-Fund, (2) exercised its discretion in not
reinvesting some of the Exchange Stabilization Fund's maturing
Treasury securities, and (3) issued certain Treasury securities to
government trust funds without counting them toward the debt ceiling.
GOVERNMENT DEBT INCREASED AND MOST
FUND LOSSES WERE RESTORED
============================================================ Chapter 6
During the 1995-1996 debt ceiling crisis, Treasury did not exceed the
$4.9 trillion debt ceiling limitation established in August 1993.
However, Treasury's actions during the crisis resulted in the
government incurring about $138.9 billion in additional debt that
would normally have been considered as subject to the debt ceiling.
Several of Treasury's actions during the debt ceiling crisis also
resulted in interest losses to certain government trust funds.
SUBSTANTIAL ADDITIONAL DEBT
INCURRED DURING DEBT CEILING
CRISIS
---------------------------------------------------------- Chapter 6:1
Our analysis showed that, because of several of the actions discussed
in chapters 4 and 5, the government incurred about $138.9 billion in
debt that Treasury would have normally included in calculating debt
subject to the debt ceiling. The methods of financing this
additional debt are presented in table 6.1.
Table 6.1
Debt Incurred During 1995-1996 Debt
Ceiling Crisis Normally Considered
Subject to the Debt Ceiling
(Dollars in billions)
Amount
------------------------------------------------------ --------------
Treasury securities held by the Civil Service fund $ 46.2
that were redeemed earlier than normal
Exchanging Treasury securities held by the Civil 8.6
Service fund for agency securities held by FFB
Securities issued to pay the March 1996 Social 29.0
Security payments
Investing trust fund receipts and reinvestments that 58.2
were not counted against the debt ceiling
Restoration of interest losses that would have been 0.5
invested prior to March 29, 1996, had normal
procedures been used
Difference between the outstanding debt subject to the (3.6)
limit on November 15, 1995, and March 28, 1996
======================================================================
Total $138.9
----------------------------------------------------------------------
It was necessary for Treasury to issue debt to raise the funds
necessary to honor authorized government obligations. Consequently,
actions by the Congress and Treasury during the 1995-1996 debt
ceiling crisis allowed Treasury to avoid defaulting on government
obligations while staying under the debt ceiling.
On March 29, 1996, legislation was enacted to raise the debt ceiling
to
$5.5 trillion, which ended the debt ceiling crisis. The legislation
enabled Treasury to resume its normal issuance and redemption of
trust fund securities and, where statutorily allowed, to begin
restoring the interest losses government trust funds incurred during
the debt ceiling crisis.
Passage of this legislation was inevitable; without it, the federal
government's ability to operate was jeopardized. The level of the
public debt is determined by the government's prior spending and
revenue decisions along with the performance of the economy. In
1979,\1 we reported that debt ceiling increases were needed simply to
allow borrowing adequate to finance deficit budgets which had already
been approved.
--------------------
\1 A New Approach to The Public Debt Legislation Should Be Considered
(FGMSD-79-58, September 7, 1979).
RESTORATION OF TRUST FUND
LOSSES
---------------------------------------------------------- Chapter 6:2
RESTORING CIVIL SERVICE FUND
LOSSES
-------------------------------------------------------- Chapter 6:2.1
The Civil Service fund incurred $995 million in interest losses
during the 1995-1996 debt ceiling crisis. In 5 U.S.C. 8348, the
Congress recognized that the Civil Service fund would be adversely
affected if Treasury exercised its authority to redeem Treasury
securities earlier than normal or failed to promptly invest trust
fund receipts. To ensure that the fund would not have long-term
losses, the Congress provided Treasury with the authority to restore
such losses once a debt ceiling crisis was resolved.
Under this statute, Treasury took the following actions once the debt
ceiling crisis had ended.
-- Treasury reinvested about $46 billion in Treasury securities
which had the same interest rates and maturities as those
redeemed during November 1995 and February 1996. We verified
that, after this transaction, the Civil Service fund's
investment portfolio was, in effect, the same as it would have
been had Treasury not redeemed these securities early.
-- Treasury issued about $250.2 million in Treasury securities to
cover the interest that would have been earned through December
31, 1995, on the securities that were redeemed in November 1995.
Treasury issued these securities to replace securities that
would otherwise have been issued to the fund if normal
investment polices had been followed.
-- Treasury issued about $33.7 million in Treasury securities
associated with the benefit payments made from the Civil Service
fund's uninvested cash balances from January 1996 through March
29, 1996. We verified that, in completing this transaction,
Treasury calculated the amount of securities that would have
been contained in the Civil Service fund's portfolio had normal
investment and redemption policies been followed.
Also, between December 31, 1995, and March 29, 1996, the Civil
Service fund's Treasury securities that were redeemed early did not
earn about $711 million in interest, as required by law. Treasury
restored this lost interest on June 30, 1996, when the semiannual
interest payment for these securities would have been paid if normal
procedures had been followed.
RESTORING G-FUND LOSSES
-------------------------------------------------------- Chapter 6:2.2
Between November 15, 1995, and March 29, 1996, the G-Fund lost about
$255 million in interest because its excess funds were not fully
invested. As discussed in chapter 5, the amount of funds invested
for the G-Fund fluctuated daily during the debt ceiling crisis, with
the investment of some funds being suspended.
In 5 U.S.C. 8438(g) the Congress recognized that the G-Fund would be
adversely affected if Treasury exercised its authority to suspend
G-Fund investments. To ensure that the Fund would not have long-term
losses, the Congress provided Treasury with the authority to restore
such losses once a debt ceiling crisis was resolved.
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 1995-1996 debt ceiling
crisis.
EXCHANGE STABILIZATION FUND
LOSSES
-------------------------------------------------------- Chapter 6:2.3
During the 1995-1996 debt ceiling crisis, the Exchange Stabilization
Fund lost about $1.2 million in interest. As discussed in chapter 5,
these losses occurred because Treasury, to avoid exceeding the debt
ceiling, did not reinvest some of the maturing Treasury securities
held by the Exchange Stabilization Fund.
Treasury officials said that the Fund's losses could not be restored
without special legislation authorizing Treasury to do so. They said
further that such legislation was not provided during the 1995-1996
debt ceiling crisis. Consequently, without specific legal authority,
Treasury cannot restore the Exchange Stabilization Fund's losses. As
of August 1, 1996, Treasury had no plans to seek such statutory
authority.
CONCLUSIONS
---------------------------------------------------------- Chapter 6:3
During the 1995-1996 debt ceiling crisis, the federal government's
debt increased substantially. Under normal procedures, this debt
would have been considered in calculating whether the government was
within the debt ceiling.
Regarding restoration of the Civil Service fund, Treasury restored
the securities that would have been issued had a debt issuance
suspension period not occurred and the interest losses. Treasury's
restoration actions will eliminate any long-term losses to the Civil
Service fund.
Also, Treasury restored the G-Fund's interest losses, ensuring that
the G-Fund will not incur any long-term adverse affects from
Treasury's actions.
Regarding the Exchange Stabilization Fund, Treasury cannot restore
the $1.2 million in interest losses resulting from the Secretary's
decision not to reinvest the Fund's maturing Treasury securities
without special statutory authority.
MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix I
ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION,
WASHINGTON, D.C.
--------------------------------------------------------- Appendix I:1
Gary T. Engel, Assistant Director
John C. Martin, Assistant Director
Barbara S. Oliver, Audit Manager
Keith A. Thompson, Audit Manager
OFFICE OF THE GENERAL COUNSEL
--------------------------------------------------------- Appendix I:2
Bertram J. Berlin, Assistant General Counsel
*** End of document. ***