Debt Ceiling: Analysis of Actions During the 2002 Debt Issuance  
Suspension Periods (13-DEC-02, GAO-03-134).			 
                                                                 
In connection with fulfilling our requirement to audit the	 
financial statements of the U.S. government, we audited the	 
Schedules of Federal Debt Managed by the Bureau of the Public	 
Debt, which includes testing compliance with the debt ceiling. To
assist us in this testing and because of the nature of and	 
sensitivity towards actions taken during a debt issuance	 
suspension period, we (1) developed a chronology of significant  
events, (2) analyzed the financial aspects of Treasury's actions 
taken during the debt issuance suspensions period and assessed	 
the legal basis of these actions, and (3) analyzed the important 
of the policies and procedures used by Treasury to manage the	 
debt during the debt issuance suspension periods.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-134 					        
    ACCNO:   A05721						        
  TITLE:     Debt Ceiling: Analysis of Actions During the 2002 Debt   
Issuance Suspension Periods					 
     DATE:   12/13/2002 
  SUBJECT:   Federal fund accounts				 
	     Financial management				 
	     Public debt					 
	     Bureau of the Public Debt Schedule of		 
	     Federal Debt					 
                                                                 
	     Civil Service Retirement and Disability		 
	     Trust Fund 					 
                                                                 
	     Federal Employees Retirement System		 
	     Government Securities Investment Fund		 

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GAO-03-134

                                       A

Report to the Secretary of the Treasury

December 2002 DEBT CEILING Analysis of Actions During the 2002 Debt
Issuance Suspension Periods

GAO- 03- 134

Letter

December 13, 2002 The Honorable Paul H. O*Neill The Secretary of the
Treasury Dear Mr. Secretary: The Congress has traditionally imposed a
limit on the size of the federal government*s public debt by establishing
limits, known as debt ceilings, on the amount of Treasury securities that
can be outstanding. On various occasions over the years, normal government
financing has been disrupted because Treasury had borrowed up to, or near,
the debt ceiling and legislation to increase the debt ceiling had not been
enacted. As you are aware, in April, May, and June 2002, before the
current debt ceiling was raised to $6.4 trillion, Treasury used its
statutory authority to invoke two debt issuance suspension periods. 1
Accordingly, during these periods, Treasury took several actions to raise
funds to meet federal obligations without exceeding the debt ceiling.

In connection with fulfilling our requirement to audit the financial
statements of the U. S. government, we audit the Schedules of Federal Debt
Managed by the Bureau of the Public Debt, 2 which includes testing
compliance with the debt ceiling. To assist us in this testing and because
of the nature of and sensitivity toward actions taken during a debt
issuance suspension period, we (1) developed a chronology of significant
events, (2) analyzed the financial aspects of Treasury*s actions taken
during the

debt issuance suspension periods and assessed the legal basis of these
actions, and (3) analyzed the impact of the policies and procedures used
by Treasury to manage the debt during the debt issuance suspension
periods. This report presents the results of our review of the actions
taken and the policies and procedures implemented by Treasury during the
2002 debt issuance suspension periods.

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

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

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

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

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

Funds for investment purposes and to borrow the necessary funds from the
public to pay government obligations.

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

debt ceiling. Consequently, if Funds* receipts are not invested, an
increase in the debt subject to the debt ceiling does not occur. 3 The G-
Fund consists of nonmarketable Treasury securities held in trust by the
federal

government as custodian on behalf of individual federal employee
participants. Treasury securities held by the G- Fund are considered debt
held by the public.

When Treasury is unable to borrow because the debt ceiling has been
reached, the Secretary is unable to fully discharge his financial
management responsibilities using the normal methods. In 1985, the
government experienced a debt ceiling crisis from September 3 through
December 11. During that period, Treasury took several actions that were
similar to those discussed in this report. For example, Treasury redeemed

Treasury securities held by the Civil Service fund earlier than normal in
order to borrow sufficient cash from the public to meet the fund*s benefit
payments and did not invest some trust fund receipts. 4 In 1986 and 1987,
after Treasury*s experiences during prior debt ceiling crises, the
following statutory authorities were provided to the Secretary of the
Treasury to use the Civil Service fund and the G- Fund to assist Treasury
in managing its

financial operations during a debt ceiling crisis: 1. Redemption of
securities held by the Civil Service fund. Subsection (k) of 5 U. S. C.
8348 provides authority to the Secretary of the Treasury

to redeem securities or other invested assets of the Civil Service fund
before maturity to prevent the amount of public debt from exceeding the
debt ceiling.

Subsection (k) of 5 U. S. C. 8348 also provides that, before exercising
the authority to redeem securities of the Civil Service fund, the
Secretary must first determine that a *debt issuance suspension period*
exists. Subsection (j) of 5 U. S. C. 8348 defines a debt issuance
suspension period as any period for which the Secretary has determined
that

obligations of the United States may not be issued without exceeding the
debt ceiling.

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

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

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

authorizes the Secretary to make the Civil Service fund whole after the
debt issuance suspension period has ended.

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

We have previously reported on aspects of Treasury*s actions during the
1995/ 1996 debt issuance suspension period 5 and earlier debt ceiling
crises (see Related GAO Products). Results in Brief In April and May 2002,
Treasury announced two debt issuance suspension

periods because certain receipts could not be invested without exceeding
the statutory debt ceiling of $5.95 trillion. The first debt issuance
suspension period occurred from April 4 to April 16, 2002, and involved
use of the G- Fund. The second debt issuance suspension period occurred
from May 16 to June 28, 2002, and involved use of the Civil Service fund
and the G- Fund. Treasury also took other actions to avoid exceeding the
debt ceiling, such as suspending the sales of State and Local Government
Series (SLGS) Treasury securities 6 and recalling noninterest- bearing
deposits held by commercial banks as compensation for banking services
provided to Treasury (commonly referred to as compensating balances).

5 U. S. General Accounting Office, Debt Ceiling: Analysis of Actions
during the 1995- 1996 Crisis, GAO/ AIMD- 96- 130 (Washington, D. C.: Aug.
30, 1996). 6 The SLGS securities program was established in 1972,
following federal legislation enacted in 1969 restricting state and local
governments from earning arbitrage profits by investing bond proceeds in
higher- yielding investments.

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

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

 It suspended the investment of about $2 billion of trust fund receipts.
These actions were consistent with legal authorities provided to the
Secretary of the Treasury. In addition, while these actions to prevent the
debt ceiling from being exceeded initially resulted in interest losses of
$167.3 million to the G- Fund and principal and interest losses of $15.4
million to the Civil Service fund, Treasury has fully restored these
losses in accordance with 5 U. S. C. 8438( g) and 5 U. S. C. 8348( j),
respectively.

Although the actions that are allowed during a debt issuance suspension
period are well defined in law (e. g., suspending Civil Service fund and
GFund investments and redeeming Civil Service fund securities earlier than
normal to pay fund benefits and expenses), the policies and procedures
needed to implement such actions are not documented. Our review disclosed
some cases where the lack of documented policies and procedures
contributed to confusion and errors that had to be corrected. Properly
documenting the policies and procedures will (1) allow Treasury

management to better ascertain the impacts of these policies and
procedures on Treasury*s ability to manage the outstanding debt during a
debt issuance suspension period and (2) if effectively implemented, reduce
the chance for confusion and risk of errors should Treasury need to use
the

policies and procedures in the future. Such documentation is a prudent
management action consistent with federal internal control standards and
is a necessary hedge against the inevitable event of turnover of key
personnel. Accordingly, we are recommending that the Secretary of the
Treasury direct the Under Secretary for Domestic Finance to document
policies and procedures to guide the department*s actions during future
debt issuance suspension periods.

Treasury officials agreed that accurate documentation of policies and
procedures is a valuable objective, but stated that they were reluctant to
develop policies and procedures that would limit the Secretary*s
flexibility to manage the debt during a debt issuance suspension period.
In

subsequent conversations with Treasury officials, we noted that our
recommendation did not call for documenting the circumstances under which
the Secretary should invoke specific actions, but rather envisioned
documenting the policies and procedures needed to implement the
Secretary*s selected actions. Taken from this perspective, Treasury was in
general agreement with our recommendation.

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

Objectives, Scope, and Our objectives were to

Methodology  develop a chronology of significant events related to the
debt issuance

suspension periods during April 2002 and May/ June 2002,  analyze the
financial aspects of Treasury*s actions taken during the 2002 debt
issuance suspension periods and assess the legal basis of these

actions, and  analyze the impact of the policies and procedures used by
Treasury to

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

To analyze the financial aspects of Treasury*s actions taken, we (1)
reviewed the methodologies Treasury developed to minimize the impact of
such departures on the Civil Service fund and the G- Fund, (2) quantified
the impact of the departures, (3) assessed whether any principal and

interest losses were fully restored, and (4) assessed whether any losses
were incurred that could not be restored under Treasury*s current
statutory authority. To assess the legal basis of Treasury*s departures
from its normal policies and procedures, we identified the applicable
legal authorities and

determined how Treasury applied them during the 2002 debt issuance
suspension periods. Our evaluation included those authorities related to
issuing and redeeming Treasury securities during a debt issuance
suspension period and restoring losses after such a period has ended. To
analyze the impact of the policies and procedures used by Treasury to

manage the debt during debt issuance suspension periods, we reviewed the
actions taken and the stated policies and procedures used during debt
issuance suspension periods. To determine the stated policies and

procedures used during the 2002 debt issuance suspension periods, we
discussed with Treasury officials and examined the support for actions
taken during these periods. We also compiled and analyzed source documents
relating to previous debt issuance suspension periods, including executive
branch legal opinions, memorandums, and

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

Chronology of Events In December 2001, Treasury analysts concluded that
the debt ceiling of $5.95 trillion might be reached in February 2002.
Table 1 shows the

significant actions the Congress and the executive branch took from
December 2001 through June 2002 to address the debt ceiling.

Tabl e 1: Chronology of Events Relating to the 2002 Debt Ceiling Increase
Date Action

December 11, 2001 The Secretary of the Treasury wrote to the congressional
leadership requesting that the statutory debt ceiling be raised to $6.7
trillion. February 13, 2002 The Secretary of the Treasury reiterated the
need for an increase of $750 billion in the statutory debt ceiling. April
1- 2, 2002 Treasury called back about $7 billion in Treasury cash

balances from three banks. According to Treasury officials, these funds
were returned on April 4, 2002. April 2, 2002 The Secretary of the
Treasury announced his intent to suspend G- Fund investments beginning on
April 4, 2002, and ending on or about April 18, 2002.

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

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

May 14, 2002 The Secretary of the Treasury declared a debt issuance
suspension period beginning no later than May 16, 2002, and lasting until
June 28, 2002. This allowed Treasury to redeem

Treasury securities held by the Civil Service fund earlier than normal and
to suspend investments of Civil Service fund and G- Fund receipts.

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

June 3, 2002 Treasury called back about $20 billion in Treasury cash
balances from five banks. According to Treasury officials, these funds
were returned on June 17, 2002. June 18, 2002 The Secretary of the
Treasury announced that by June 28,

2002, the U. S. government would not have sufficient money to pay its
bills unless the debt ceiling was increased.

June 26, 2002 Treasury postponed the auction of the 2- year note. June 27,
2002 Treasury postponed the announcement of its weekly 13- and

26- week bill auctions. June 28- 30, 2002 On June 28, 2002, Public Law No.
107- 199 was enacted,

which raised the debt ceiling to $6. 4 trillion. Treasury restored the
losses incurred by the Civil Service fund and G- Fund.

Source: Department of the Treasury and GAO.

Actions Related to the During the second 2002 debt issuance suspension
period, the Secretary of

Civil Service Fund the Treasury redeemed Treasury securities held by the
Civil Service fund

earlier than normal and suspended the investment of Civil Service fund
receipts.

Statutory Authority Subsection (k) of 5 U. S. C. 8348 authorizes the
Secretary of the Treasury to

Exercised to Redeem redeem securities or other invested assets of the
Civil Service fund before

Treasury Securities before maturity to prevent the amount of public debt
from exceeding the debt

Needed to Pay Civil Service ceiling. The statute does not require that
early redemptions be made only

for the purpose of making Civil Service fund payments. Further, the
statute Fund Benefits and Expenses

permits early redemptions even if the Civil Service fund has adequate cash
balances to cover such payments.

Before redeeming Civil Service fund securities earlier than normal, the
Secretary must determine that a debt issuance suspension period exists.
The statute authorizing the debt issuance suspension period and its

legislative history are silent as to how to determine the length of a debt
issuance suspension period. On May 14, 2002, the Secretary of the Treasury
declared that a debt issuance suspension period would begin no later than
May 16 and would last until June 28, 2002.

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

be issued on the first business day of a month in this calculation.
Securities are redeemed on the payment date to cover any other benefit
payments and expenses incurred during the month by the Civil Service fund.

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

and the actual payments made on June 3, 2002. Statutory Authority Used to

Subsection (j) of 5 U. S. C. 8348 authorizes the Secretary of the Treasury
to Suspend Investment of

suspend additional investment of amounts in the Civil Service fund if the
Receipts

investment cannot be made without causing the amount of public debt to
exceed the debt ceiling. From May 17 to June 28, 2002, the Civil Service
fund had about $2 billion in receipts that were not invested. On June 28,
2002, after the debt ceiling was raised, these receipts were invested.

Actions Related to the Subsection (g) of 5 U. S. C. 8438 authorizes the
Secretary of the Treasury to

G- Fund suspend the issuance of additional amounts of obligations of the
United States to the G- Fund if the issuance cannot be made without
causing the

amount of public debt to exceed the debt ceiling. Each day from April 4 to
April 16, 2002, and from May 16 to June 28, 2002, Treasury determined the
amount of funds that the G- Fund would be allowed to invest in Treasury
securities and, when necessary, suspended some investments and
reinvestments of the G- Fund receipts and maturing securities that would
have caused the debt ceiling to be exceeded.

On April 4, 2002, when the Secretary determined that the first debt
issuance suspension period had begun, the G- Fund held about $41 billion
of Treasury securities that would mature that day. To ensure that it did
not exceed the statutory debt limit, Treasury did not reinvest about $13.7
billion of these securities on this date. On April 16, 2002, the debt
issuance

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

since Treasury was once again at the statutory debt limit. Other
reinvestments made during May were not redeemed until the June benefit
payments were made.

suspension period ended, and Treasury fully invested the G- Fund and
compensated the G- Fund for its interest losses. The G- Fund remained
fully invested until the start of the second debt issuance suspension
period on May 16, 2002. On that date, the G- Fund held about $41 billion
of maturing Treasury securities. To ensure that it did not exceed the
statutory debt limit, Treasury did not reinvest about $9.2 billion of
these securities.

During both debt issuance suspension periods, the amount of the G- Fund*s
receipts that Treasury invested changed daily, depending on the amount of
the government*s outstanding debt. Although Treasury can accurately
predict the outcome of some events that affect the outstanding debt, it

cannot precisely determine the outcome of others until they occur. For
example, the amount of securities that Treasury will issue to the public
from an auction can be determined some days in advance because Treasury
can control the amount that will be issued. On the other hand, the amount

of savings bonds that will be issued and redeemed and of securities that
will be issued to, or redeemed by, various government Funds is difficult
to precisely predict. Because of these difficulties, Treasury needed a way
to

ensure that the government*s Funds activities did not cause the debt
ceiling to be exceeded and also to maintain normal investment and
redemption policies for the majority of the government Funds. To do this,
each day during a debt issuance suspension period, Treasury

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

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

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

For example, on May 23, 2002, excluding G- Fund transactions, Treasury
issued about $32.2 billion and redeemed about $29.1 billion of other
Funds* securities that counted against the debt ceiling. Treasury also
issued about $66.4 billion and redeemed about $56.1 billion of other
securities. Since Treasury had been at the debt ceiling the previous day,
Treasury could not invest the entire amount that the G- Fund had requested
($ 41 billion) without exceeding the debt ceiling. As a result, the $13.4
billion difference between the $98.6 billion of securities issued and the
$85.2 billion of securities redeemed was added to the amount of uninvested
G- Fund

receipts. This raised the amount of uninvested funds for the G- Fund from
about $900 million to about $14 billion on that date. Interest on the
uninvested funds was not paid until the debt issuance suspension period
ended. Treasury used the same policies and procedures for calculating the
interest losses for both the 1995/ 1996 and 2002 debt issuance suspension
periods.

Civil Service Fund and On June 28, 2002, the statutory debt limit was
raised to $6.4 trillion. By

G- Fund Losses Were June 30, 2002, Treasury restored all losses to the
Civil Service fund and the

G- Fund. Restored

Restoring Civil Service Fund The Civil Service fund incurred about $15.4
million in principal and interest

Losses losses during the second 2002 debt issuance suspension period. When
5

U. S. C. 8348 was amended to expressly authorize the Secretary of the
Treasury to redeem securities earlier than normal or to refrain from
promptly investing Civil Service fund receipts because of debt ceiling
limitations, it was also amended to ensure that such actions would not
result in long- term losses to the Civil Service fund. Thus, the Secretary
of the Treasury was authorized to immediately restore, to the maximum
extent practicable, the Civil Service fund*s security holdings to the
proper

balances when a debt issuance suspension period ends and to restore lost
interest on the subsequent first normal interest payment date.

Under this statute, Treasury took the following actions once the debt
issuance suspension period had ended:  Treasury invested about $2 billion
of uninvested receipts on June 28,

2002.  Treasury paid the Civil Service fund about $15.4 million as

compensation for losses incurred because of the actions it had taken.
Treasury made payment on June 30, 2002, because this was the next
semiannual interest payment date.

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

Restoring G- Fund Losses For the two periods from April 4 to April 16,
2002, and from May 16 to June 28, 2002, the G- Fund lost about $27.7
million and $139.6 million in interest,

respectively, because its excess funds were not fully invested. As
discussed above, the amount of funds invested for the G- Fund fluctuated
daily during the debt issuance suspension period, with the investment of
some funds being suspended.

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

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

Documented Policies The basic actions taken during the 2002 and the 1995/
1996 debt issuance suspension periods were similar 9 *- G- Fund and Civil
Service fund receipts

and Procedures were not invested and Civil Service fund securities were
redeemed earlier

Needed during a Debt than needed to pay fund benefits and expenses.
However, Treasury had not

Issuance Suspension documented the policies and procedures that should be
used to implement

Period these actions. Further, the stated policies and procedures used to

implement the actions taken on the Civil Service fund between the 2002 and
the 1995/ 1996 debt issuance suspension periods were different.
Accordingly, some confusion existed about how to implement these actions
and some errors were made that had to be corrected. More importantly,
documented policies and procedures would allow Treasury to better

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

determine the potential impacts associated with the policies and
procedures it implements in managing the amount of debt subject to the
limit.

Impact of Using Different The stated policies and procedures Treasury used
to implement its actions Stated Policies and

related to the Civil Service fund during the second 2002 debt issuance
Procedures to Implement

suspension period differed from those used in the 1995/ 1996 debt issuance
Actions Related to the Civil suspension period. These differences were as
follows:

Service Fund  Current- year securities were redeemed earlier than normal
during the

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

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

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

Redeeming Securities Two basic policies and procedures can be used to
redeem Civil Service

Earlier Than Normal fund securities earlier than normal. The normal
redemption policy, which involves redeeming current- year securities
first, 10 was used during the

second 2002 debt issuance suspension period. For example, when Treasury
redeemed about $4 billion earlier than normal on May 16, 2002, the
securities selected were those that matured on June 30, 2002. During the
1995/ 1996 debt issuance suspension period, the early redemptions were
made from long- term securities that matured about 14 years later. The
impact between the two approaches on Treasury*s ability to manage the
amount of outstanding debt during a debt issuance suspension period can be
significant when a debt issuance suspension period also includes the date
when securities mature. This could have occurred during the second 2002
debt issuance suspension period as the Civil Service fund had more than
$45 billion of Treasury securities scheduled to mature on June 30, 2002.
11 Should a debt issuance suspension period cover a June 30 rollover date,
the

securities selected for early redemption can have a significant impact on
the amount of maturing securities, as shown in tables 2 and 3.

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

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

Tabl e 2: Early Redemption of Civil Service Fund Investments Funded with
CurrentYear Securities

Securities maturing Action on June 30, 2002

Balance on April 30, 2002 $53 billion Redeem $4 billion of current- year
securities to fund early

(4 billion) redemption authorization Normal redemption transactions less
investments made

(1 billion) from May 1 to June 30 Balance to be reinvested on June 30,
2002 $48 billion

Source: Bureau of the Public Debt.

Tabl e 3: Early Redemption of Civil Service Fund Investments Funded with
LongTerm Securities

Securities maturing Securities maturing Action on June 30, 2002 after June
30, 2002

Balance on April 30, 2002 $53 billion $474 billion Redeem $4 billion of
long- term securities

0 (4 billion) to fund early redemption authorization Normal redemption
transactions less

(1 billion) 0 investments made from May 1 to June 30 Balance to be
reinvested on June 30, 2002 $52 billion Not applicable

Source: Bureau of the Public Debt.

The amount of maturing securities to be reinvested is important because,
as in the case of the G- Fund, Treasury does not have to reinvest the
maturing Civil Service fund securities during a debt issuance suspension
period. 12 This, in turn, allows Treasury to take other actions, such as

investing other Funds* receipts or issuing securities to the public to
raise cash. As illustrated in tables 2 and 3, the amount of maturing
securities to be reinvested can have a significant impact on Treasury*s
debt management options. For example, (1) if the Civil Service fund had
$48 billion of maturing Treasury securities and (2) Treasury needed to
invest $52 billion of other Funds* receipts that could not remain legally
uninvested on June

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

30, by not reinvesting the maturing Civil Service fund*s current- year
securities Treasury could invest all but $4 billion of these receipts (see
table 2). Treasury would then need to find some other method of generating
room under the debt ceiling in order to invest the remaining $4 billion.
On the other hand, if Treasury had redeemed long- term securities, then
the $52 billion of other Funds* receipts could have been invested by
simply not reinvesting any of the Civil Service fund*s maturing securities
(see table 3).

During the second 2002 debt issuance suspension period, Treasury expected
to make about $50 billion in interest payments to the Funds, excluding the
Civil Service fund and the G- Fund, on June 30, 2002. Had Treasury
redeemed the long- term securities rather than the current- year

securities, the resulting $52 billion of maturing Civil Service fund
securities would have been adequate to fully invest the $50 billion of
interest payments. This assumes that Treasury would have decided to
suspend the reinvestment of these maturing securities and use the
resulting room under the debt ceiling provided by this suspension to
invest the interest payments to the other Funds. On the other hand, by
redeeming short- term securities, the $48 billion of maturing Civil
Service fund securities available would not have been adequate to fully
invest the interest payments, and Treasury would have had to obtain $2
billion of debt limit from other sources, such as the G- Fund.

Accrued Interest Used in Treasury*s normal redemption policy is to include
the accrued interest on

Redemption Calculations the security that is being redeemed when
determining the amount of

during Second 2002 Debt principal that should be redeemed. For example, if
Treasury needed to

Issuance Suspension Period redeem securities to make a $4 billion payment
and $3,950 million of

securities had earned $50 million of interest, then Treasury would need to
redeem only $3,950 million of securities because the accrued interest
would make up the difference between the payments to be made and the
securities redeemed.

During the second 2002 debt issuance suspension period, Treasury used the
accrued interest when it redeemed Civil Service fund securities early and
when it redeemed funds associated with one of the early redemptions that
had been reinvested. The interest payments associated with these
redemptions totaled about $84 million. However, during the 1995/ 1996 debt
issuance suspension period, which had a 14- month debt issuance suspension
period, Treasury did not use the accrued interest in determining the
amount of securities that should be redeemed. Including accrued

interest in the calculation, as noted below, can have a significant impact
on the amount of securities that are redeemed. This in turn affects the
amount of securities Treasury can issue to the public for cash or issue to
other Funds that have receipts that need to be invested.

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

Table 4: How Including Accrued Interest Affects the Amount of Securities
Redeemed Effect on outstanding debt if accrued

Effect on outstanding debt if accrued Action interest is included interest
is not included

Treasury declares debt issuance Amount of outstanding debt is decreased by
Amount of outstanding debt is decreased by suspension period of 14 months
and $54.6 billion. a $56 billion. a decides to redeem the full amount of
securities associated with the Civil Service fund benefit payments for
that time period.

Treasury reinvests $10 billion of early Amount of outstanding debt is
increased by Amount of outstanding debt is increased by redemptions. $10
billion. $10 billion. Treasury redeems the $10 billion of

Amount of outstanding debt is reduced by Amount of outstanding debt is
reduced by reinvested funds associated with the early $9. 7 billion. b $10
billion. redemptions.

Net effect on outstanding debt after all Net effect on outstanding debt
after all transactions would be that the amount of

transactions would be that the amount of outstanding debt is reduced by
$54.3 billion.

outstanding debt is reduced by $56 billion. Source: GAO. a For purposes of
this example, it is assumed that the monthly Civil Service fund benefit
payments are

$4 billion per month, or $56 billion for the 14- month period. It is also
assumed that the securities redeemed would have accrued $1.4 billion of
interest. b The example assumes that the redeemed securities would have
accrued about $300 million of

interest.

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

Policies and Procedures Are Treasury has not documented the policies and
procedures it used to Not Documented

implement the actions that it takes during a debt issuance suspension
period. Although the actions that are allowed are well defined in law (e.
g., suspending Civil Service fund and G- Fund investments and redeeming
Civil Service fund securities earlier than normal), the policies and
procedures needed to implement them are not documented. Our review
disclosed some cases in which the lack of documented policies and
procedures

contributed to some confusion and errors that had to be corrected, as
necessary. As stated in Standards for Internal Control in the Federal
Government, 13 all transactions and other significant events need to be
clearly documented, and documentation should be readily available. The

limited number of people involved in and the complex nature of managing
the debt during a debt issuance suspension period are factors that further
support the need to document policies and procedures to be implemented. As
noted above, policies and procedures can have an impact on managing

the debt during a debt issuance suspension period. Furthermore, the
policies and procedures developed should identify which office is
authorized to approve any modifications to the policies and procedures.

Treasury officials noted that the changes to the stated policies and
procedures used during the 2002 debt issuance suspension periods made the
operations more consistent with those that it uses during its normal

operations. They also noted that since the 1995/ 1996 debt issuance
suspension period, Treasury has implemented a new financial management
system that allows Treasury to use a more sophisticated approach to
ensuring that the Civil Service fund is adequately compensated for any
losses incurred. Therefore, the Treasury officials believe that the
current

stated policies and procedures are an improvement over those used in the
1995/ 1996 debt issuance suspension period.

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

13 U. S. General Accounting Office, Standards for Internal Control in the
Federal Government, GAO/ AIMD- 00- 21. 3.1 (Washington, D. C.: November
1999).

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

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

 When Treasury decided to reinvest funds associated with some of the
early Civil Service fund redemptions, it did not include the accrued
interest associated with those funds when they were subsequently

redeemed to pay the June 3, 2002, Civil Service fund benefit payments.
This was inconsistent with a similar reinvestment made on May 17, 2002,
that was redeemed on May 20, 2002, in which Treasury included the accrued
interest in its calculations.

 When Treasury restored the losses incurred by the Civil Service fund, it
misclassified about $1.2 million of principal losses as interest losses.
Treasury*s practice of keeping a dual set of accounts in its new financial
management system* one to track actual debt issuance suspension period
transactions and one to track transactions that would have occurred had
there not been a debt issuance suspension period* is a good first step
toward ensuring that losses caused by Treasury*s actions can be restored.
However, as a result of the restoration policies and procedures Treasury
used during the 2002 debt issuance suspension period, according to
Treasury*s new financial management system, the

amount of the Civil Service fund*s security holdings was about $1.2
million less on June 28, 2002, than it would have been had the debt
issuance suspension period not occurred. Nevertheless, as previously
noted, the restoration made on June 30, 2002, fully compensated the Civil
Service fund for all losses.

Although these errors were not significant and were subsequently corrected
as necessary, we believe that had Treasury established documented policies
and procedures and effectively implemented them, the likelihood of these
errors would have been greatly reduced. Conclusions During the 2002 debt
issuance suspension periods, Treasury acted in

accordance with its statutory authorities when it (1) suspended some
investments of the Civil Service fund and G- Fund and (2) redeemed

securities earlier than normal from the Civil Service fund. These and
other actions discussed in this report allowed the government to avoid
default on its obligations and to stay within the debt ceiling.

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

Recommendation for We recommend that the Secretary of the Treasury direct
the Under

Executive Action Secretary for Domestic Finance to document the necessary
policies and

procedures that should be used during any future debt issuance suspension
period. Further, the document developed should clearly state which office
is responsible for approving any modifications to the documented policies
and procedures. Agency Comments and

In written comments on a draft of this report, Treasury agreed that Our
Evaluation

accurate documentation of its policies and procedures is a valuable
objective and said that it believed it was desirable to maintain the
preexisting policies and procedures for the redemption of securities and
crediting of interest to the maximum extent possible. Treasury said that

maintaining these standards makes the operations transparent and reduces
confusion to the stakeholders of the funds affected by early redemption
activities. Because it was unclear whether Treasury*s proposed

development and documentation of guidelines for debt issuance suspension
periods would address our recommendation to document the necessary
policies and procedures that should be used during any future

debt issuance suspension period, we held subsequent discussions with
Treasury officials to clarify the department*s intentions. Treasury
officials were concerned that developing detailed policies and

procedures would limit their flexibility to manage the debt during debt
issuance suspension periods because they believed such situations may have
unique characteristics with distinct circumstances that need to be
addressed. We explained that our recommendation did not call for

documenting the circumstances under which the Secretary should invoke
specific actions. For example, we did not call for stipulating (1) how to
determine the length of a debt issuance suspension period, (2) which funds
should be used by Treasury to help manage its operations, (3) when to
exchange securities held by the Federal Financing Bank for securities held
by the Civil Service fund, (4) when to recall compensating balances, or
(5) when to suspend fund investments. On the other hand, we did envision
that such policies and procedures would document how to implement the

actions directed by the Secretary, including (1) how to implement a given
course of action, such as redeeming Civil Service fund securities earlier
than normal, and (2) how to fully compensate a fund for its losses.

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

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

As a backdrop for this discussion, the recurring theme of our report is
that Treasury did not have documented policies and procedures that should
be used during a debt issuance suspension period. Based on discussions
with cognizant Treasury officials, it was our understanding that Treasury
intended to apply what it referred to as its standard redemption policies
and procedures* those used in normal daily operations. In commenting on
this report, however, Treasury stated that it initially modeled its
actions

during the 2002 debt issuance suspension period on actions it had taken
during the 1995/ 1996 debt issuance suspension period but that after
further analysis it decided to instead use its standard redemption
policies and procedures. The 1995/ 1996 procedures for redeeming
securities earlier than normal used long- term securities and did not
consider accrued interest in determining the amount to be redeemed. In
contrast, Treasury*s standard redemption policies and procedures use
current- year securities and consider accrued interest. Regardless of
which approach Treasury opted to follow for the debt

issuance suspension period transactions discussed in our report, Treasury
did not consistently adhere to either approach and consequently made the
following errors:

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

calculating the amount of principal to be redeemed was a departure from
Treasury*s 1995/ 1996 practices.  For subsequent redemptions of
securities reinvested, although Treasury used current- year securities, it
was inconsistent in considering accrued interest in determining the amount
of principal that should be

redeemed. When Treasury redeemed the May 17, 2002, reinvestment on May 20,
2002, it redeemed current- year securities and included accrued interest
in this calculation. This was consistent with its standard redemption
policies and procedures. However, on June 3, 2002, when

Treasury redeemed 10 reinvestments, it did not consider accrued interest.
Instead, the June 3, 2002, redemption followed the practices used in the
1995/ 1996 debt issuance suspension period.

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

the Civil Service fund, it misclassified about $1.2 million of principal
losses as interest losses. As stated in our report, these errors were not
significant and were

subsequently corrected as necessary; however, we believe that had Treasury
established documented policies and procedures and effectively implemented
them, the likelihood of these errors would have been greatly reduced.
Specific technical comments provided orally by Treasury were

incorporated in this report as appropriate. We are sending copies of this
report to the chairmen and ranking minority members of the Senate
Committee on Appropriations; the Senate Committee on Governmental Affairs;
the Senate Committee on the Budget; the Subcommittee on Treasury and
General Government, Senate Committee on Appropriations; the Senate
Committee on Finance; the House Committee on Appropriations; the House
Committee on Government Reform; the House Committee on the Budget; the
House

Committee on Ways and Means; and the Subcommittee on Treasury, Postal
Service, and General Government, House Committee on Appropriations. We are
also sending copies of this report to the Under Secretary for

Domestic Finance, the Inspector General of the Department of the Treasury,
the Director of the Office of Management and Budget, and other agency
officials. In addition, the report will be available at no charge on the
GAO Web site at http:// www. gao. gov.

The head of a federal agency is required by 31 U. S. C. 720 to submit a
written statement on actions taken on this recommendation to the Senate
Committee on Governmental Affairs and the House Committee on Government
Reform not later than 60 days after the date of this report. A

written statement must also be sent to the House and Senate Committees

on Appropriations with the agency*s first request for appropriations made
more than 60 days after the date of this report. If I can be of further
assistance, please call me at (202) 512- 3406. Should you or members of
your staff have any questions concerning this report, please contact Mr.
Chris Martin, Senior Level Technologist, at (202) 512- 9481 or Ms. Louise
DiBenedetto, Assistant Director, at (202) 512- 6921.

Sincerely yours, Gary T. Engel Director Financial Management and Assurance

Appendi Appendi xes x I Comments From the Department of Treasury

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

Debt Ceiling: Analysis of Actions during the 1995- 1996 Crisis.

GAO/ AIMD- 96- 130. Washington, D. C.: August 30, 1996.

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

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

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

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

Civil Service Fund: Improved Controls Needed over Investments. GAO/ AFMD-
87- 17. Washington, D. C.: May 7, 1987. Opinion on the legality of the
plan of the Secretary of the Treasury to disinvest the Social Security and
other trust funds on November 1, 1985, to permit payments to beneficiaries
of these funds. B- 221077. 2. Washington, D. C.: December 5, 1985.

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

(191033)

a

GAO United States General Accounting Office

Page i GAO- 03- 134 2002 Debt Issuance Suspension Periods

Contents Letter 1

Background 2 Results in Brief 4 Objectives, Scope, and Methodology 6
Chronology of Events 7 Actions Related to the Civil Service Fund 9 Actions
Related to the G- Fund 10 Civil Service Fund and G- Fund Losses Were
Restored 12 Documented Policies and Procedures Needed during a Debt
Issuance Suspension Period 13

Conclusions 20 Recommendation for Executive Action 21 Agency Comments and
Our Evaluation 21

Appendix

Appendix I: Comments From the Department of Treasury 26 Related GAO
Products 28 Tables Table 1: Chronology of Events Relating to the 2002 Debt
Ceiling

Increase 8 Table 2: Early Redemption of Civil Service Fund Investments

Funded with Current- Year Securities 16 Table 3: Early Redemption of Civil
Service Fund Investments

Funded with Long- Term Securities 16 Table 4: How Including Accrued
Interest Affects the Amount of

Securities Redeemed 18

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Appendix I Comments From the Department of Treasury Page 27 GAO- 03- 134
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