Debt Ceiling: Analysis of Actions During the 2002 Debt Issuance Suspension Periods
Published: 2002-12-13T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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, 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 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.
section_title: What GAO Found
paragraphs: In April and May 2002, the Department of the 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 Government Securities Investments Fund (G-Fund). The second debt issuance suspension period occurred from May 16 to June 28, 2002, and involved the use of the Civil Service Retirement and Disability Trust Fund (Civil Service fund) and the G-Fund. 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: (1) it redeemed about $4 billion in Treasury securities held by the Civil Service fund before they were needed to pay benefits and expenses, and (2) 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. Although the actions that are allowed during a debt issuance suspension period are well defined in law, 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.

section_title: Letter
paragraphs: 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.  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, 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.
subsections: section_title: Background
paragraphs: 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), 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.
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.   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.” 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 and earlier debt ceiling crises  (see Related GAO Products).
section_title: Objectives, Scope, and Methodology
paragraphs: 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.
section_title: Chronology of Events
paragraphs: 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.
section_title: Actions Related to the Civil Service Fund
paragraphs: During the second 2002 debt issuance suspension period, the Secretary of  the Treasury redeemed Treasury securities held by the Civil Service fund  earlier than normal and suspended the investment of Civil Service fund  receipts.
subsections: section_title: Statutory Authority Exercised to Redeem Treasury Securities before Needed to Pay Civil Service Fund Benefits and Expenses
paragraphs: 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 payments.  Further, the statute  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.  These were appropriate factors to use in determining the amount  of Treasury securities to redeem early.
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) 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.
section_title: Statutory Authority Used to Suspend Investment of Receipts
paragraphs: 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 the  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.
section_title: Actions Related to the G-Fund
paragraphs: 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 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  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.
section_title: Civil Service Fund and G-Fund Losses Were Restored
paragraphs: On June 28, 2002, the statutory debt limit was raised to $6.4 trillion.  By  June 30, 2002, Treasury restored all losses to the Civil Service fund and the  G-Fund.
subsections: section_title: Restoring Civil Service Fund Losses
paragraphs: The Civil Service fund incurred about $15.4 million in principal and interest  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.
section_title: Restoring G-Fund Losses
paragraphs: 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.
section_title: Documented Policies and Procedures Needed during a Debt Issuance Suspension Period
paragraphs: The basic actions taken during the 2002 and the 1995/1996 debt issuance  suspension periods were similar–-G-Fund and Civil Service fund receipts  were not invested and Civil Service fund securities were redeemed earlier  than needed to pay fund benefits and expenses.  However, Treasury had not  documented the policies and procedures that should be used to implement  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  determine the potential impacts associated with the policies and  procedures it implements in managing the amount of debt subject to the  limit.
subsections: section_title: Impact of Using Different Stated Policies and Procedures to Implement Actions Related to the Civil Service Fund
paragraphs: The stated policies and procedures Treasury used to implement its actions  related to the Civil Service fund during the second 2002 debt issuance  suspension period differed from those used in the 1995/1996 debt issuance  suspension period.  These differences were as follows:   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.
section_title: Redeeming Securities Earlier Than Normal
paragraphs: Two basic policies and procedures can be used to redeem Civil Service  fund securities earlier than normal.  The normal redemption policy, which  involves redeeming current-year securities first, 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.
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.
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.  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  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.
section_title: Accrued Interest Used in Redemption Calculations during Second 2002 Debt Issuance Suspension Period
paragraphs: Treasury’s normal redemption policy is to include the accrued interest on  the security that is being redeemed when determining the amount of  principal that should be redeemed.  For example, if Treasury needed to  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.
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.
section_title: Policies and Procedures Are Not Documented
paragraphs: Treasury has not documented the policies and procedures it used to  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, 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.
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.
section_title: Conclusions
paragraphs: 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.
section_title: Recommendation for Executive Action
paragraphs: We recommend that the Secretary of the Treasury direct the Under  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.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments on a draft of this report, Treasury agreed that  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.
section_title: Related GAO Products
paragraphs: 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.