Debt Limit: Analysis of 2011-2012 Actions Taken and Effect of Delayed Increase on Borrowing Costs
Published: 2012-07-23T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: GAO previously examined challenges associated with managing cash and debt when delays in raising the debt limit occurred, focusing on the period from 1995 through 2010. In February 2011, GAO reported that delays in raising the debt limit create debt and cash challenges for Treasury, and these challenges have been exacerbated in recent years by a large growth in debt.
Delays in raising the debt limit occurred during 2011 and January 2012. GAO has prepared this report because of the nature of, and sensitivity toward, actions taken to manage federal debt during such delays. With regard to actions taken by Treasury during 2011 and January 2012 to manage federal debt when delays in raising the debt limit occurred, this report provides (1) a chronology of the significant events, (2) an analysis of whether actions taken by Treasury were consistent with legal authorities provided to manage federal debt during such delays, (3) an assessment of the extent to which Treasury restored uninvested principal and interest losses to federal government accounts in accordance with relevant legislation, and (4) an analysis of the effect that delays in raising the debt limit had on Treasurys borrowing costs and operations. To address these objectives, GAO reviewed Treasury correspondence and other documentation, analyzed Treasury and private security yield data, and interviewed Treasury officials. In commenting on GAOs draft report, Treasury broadly agreed with GAOs conclusions and provided technical comments, which GAO incorporated as appropriate.
section_title: What GAO Found
paragraphs: On August 2, 2011, Congress and the President enacted the Budget Control Act of 2011, which established a process that increased the debt limit to its current level of $16.4 trillion through incremental increases effective on August 2, 2011; after close of business on September 21, 2011; and after close of business on January 27, 2012. Delays in raising the debt limit occurred prior to the August 2011 and January 2012 increases, with the Department of the Treasury (Treasury) deviating from its normal debt management operations and taking a number of actions, referred to by Treasury as extraordinary actions, to avoid exceeding the debt limit.
The extraordinary actions Treasury took during 2011 and January 2012 to manage federal debt when delays in raising the debt limit occurred were consistent with relevant legislation and regulations. For 2011, these actions included suspending investments of the Civil Service Retirement and Disability Fund (CSRDF), the Postal Service Retiree Health Benefits Fund (Postal Benefits Fund), the Government Securities Investment Fund of the Federal Employees Retirement System (G-Fund), and the Exchange Stabilization Fund (ESF), and redeeming certain investments held by the CSRDF earlier than normal. For January 2012, Treasury suspended investments to the G-Fund and ESF.
In accordance with relevant legislation, Treasury restored the uninvested principal and interest losses for 2011 and January 2012 to the CSRDF, Postal Benefits Fund, and G-Fund. Treasury also invested the uninvested principal for 2011 and January 2012 to the ESF. However, Treasury did not restore interest losses to the ESF because it lacks legislative authority to do so.
Delays in raising the debt limit can create uncertainty in the Treasury market and lead to higher Treasury borrowing costs. GAO estimated that delays in raising the debt limit in 2011 led to an increase in Treasurys borrowing costs of about $1.3 billion in fiscal year 2011. However, this does not account for the multiyear effects on increased costs for Treasury securities that will remain outstanding after fiscal year 2011. Further, according to Treasury officials, the increased focus on debt limit-related operations as such delays occurred required more time and Treasury resources and diverted Treasurys staff away from other important cash and debt management responsibilities.
The debt limit does not restrict Congresss ability to enact spending and revenue legislation that affects the level of debt or otherwise constrains fiscal policy; it restricts Treasurys authority to borrow to finance the decisions already enacted by Congress and the President. Congress also usually votes on increasing the debt limit after fiscal policy decisions affecting federal borrowing have begun to take effect. This approach to raising the debt limit does not facilitate debate over specific tax or spending proposals and their effect on debt. In February 2011, GAO reported, and continues to believe, that Congress should consider ways to better link decisions about the debt limit with decisions about spending and revenue to avoid potential disruptions to the Treasury market and to help inform the fiscal policy debate in a timely way.

section_title: Letter
paragraphs: Congress and the President have enacted laws to establish a limit on the  amount of federal debt that can be outstanding at one time, referred to as  the debt limit. The debt limit does not restrict Congress’s ability to enact  spending and revenue legislation that affects the level of debt or  otherwise constrains fiscal policy; it restricts the Department of the  Treasury’s (Treasury) authority to borrow to finance the decisions already  enacted by Congress and the President. Congress also usually votes on  increasing the debt limit after fiscal policy decisions affecting federal  borrowing have begun to take effect. This approach to raising the debt  limit does not facilitate debate over specific tax or spending proposals and  their effect on debt. In addition, when delays in raising the debt limit  occur, Treasury often must deviate from its normal cash and debt  management operations and take a number of extraordinary actions to  meet the government’s obligations as they come due without exceeding  the debt limit.
GAO, Debt Limit: Delays Create Debt Management Challenges and Increase Uncertainty  in the Treasury Market, GAO-11-203 (Washington, D.C.: Feb. 22, 2011).
Treasury market and increase borrowing costs. Managing debt when  delays in raising the debt limit occur also diverts Treasury’s resources  away from other cash and debt management issues. In February 2011,  we reported that Congress should consider ways to better link decisions  about the debt limit with decisions about spending and revenue to avoid  potential disruptions to the Treasury market and to help inform the fiscal  policy debate in a timely way.
On January 6, 2011, the Secretary of the Treasury notified Congress that  the debt limit would likely be reached between March 31, 2011, and   May 16, 2011. On August 2, 2011, Congress and the President enacted  the Budget Control Act of 2011 (BCA), which established a process that  resulted in debt limit increases effective on August 2, 2011; after close of  business on September 21, 2011; and after close of business on   January 27, 2012. Delays in raising the debt limit occurred prior to the  August 2011 and January 2012 increases, with Treasury deviating from  its normal debt management operations and taking a number of  extraordinary actions to avoid exceeding the debt limit.
Because of the nature of, and sensitivity toward, actions taken to manage  federal debt when delays in raising the debt limit occur, we prepared this  report under the Comptroller General’s authority to conduct evaluations  on GAO’s initiative to assist Congress with its oversight responsibilities.  This report provides the results of our review of Treasury’s actions during  2011 and January 2012 to manage federal debt when delays in raising  the debt limit occurred. Specifically, the objectives of this report are to   (1) provide a chronology of the significant events, (2) analyze whether  actions taken by Treasury were consistent with legal authorities provided  to manage federal debt during such delays, (3) assess the extent to which  Treasury restored uninvested principal and interest losses to federal  government accounts in accordance with relevant legislation, and   (4) analyze the effect that delays in raising the debt limit had on  Treasury’s borrowing costs and operations.
To answer the first three objectives, we reviewed Treasury  correspondence, announcements, and documentation of the actions  taken during 2011 and January 2012 to manage federal debt when delays  in raising the debt limit occurred. We compared Treasury’s actions to  relevant legislation and regulations authorizing the specific extraordinary  actions. We also reviewed documentation supporting uninvested  principal, calculations of forgone interest, and the restoration of principal  and interest losses. To evaluate whether Treasury followed normal  investment and redemption policies and procedures for federal  government accounts not affected by the extraordinary actions (e.g.,  Treasury’s actions did not involve accounts that it is not authorized to use  in such situations), we performed audit procedures over the investment  and redemption activity of selected major accounts.
To determine what effect delays in raising the debt limit in 2011 had on  Treasury’s borrowing costs, we performed a multivariate regression  analysis of the daily yield spread—yields on private securities minus  yields on Treasury securities of comparable maturities—during the debt  limit event period. We used yield spreads during the 3-month pre-event  period as a benchmark against which yield spreads during the event  period were compared. We also examined changes in the yield spread  during the January 2012 debt limit event period. See appendix II for more  details on how we estimated increased borrowing costs, including  limitations to our using a multivariate regression to measure changes in  Treasury’s borrowing costs attributable to delays in raising the debt limit.We obtained Treasury auction data for this analysis from Treasury and  private security yields and other data from the Federal Reserve Bank of  St. Louis’s Federal Reserve Economic Data (FRED) source. We also  used data on Standard & Poor’s 500 total return index from IHS Global  Insight in our analysis. To assess the reliability of these data, we looked  for outliers and anomalies. These databases are commonly used by  Treasury and researchers to examine the Treasury market and related  transactions. On the basis of our assessment, we believe the data are  sufficiently reliable for the purpose of this review. We also reviewed  documents provided by Treasury, interviewed Treasury officials, and  obtained estimates from Treasury of the number of personnel and amount  of time involved in Treasury’s efforts to manage federal debt during such  delays. We reviewed these estimates for reasonableness.
We conducted this performance audit from May 2011 to July 2012 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives. See appendixes I and II for  more details on our objectives, scope, and methodology.
subsections: section_title: Background
paragraphs: Congress and the President first enacted a statutory limit on federal debt  during World War I to eliminate the need for Congress to approve each  new debt issuance and provide Treasury with greater discretion over how  it finances the government’s day-to-day borrowing needs. With the Public  Debt Act of 1941, Congress and the President set an overall limit of   $65 billion on Treasury debt obligations that could be outstanding at any  one time and since then have enacted a number of debt limit increases.  Most recently, Congress and the President enacted the BCA, which  established a process that resulted in debt limit increases in three  increments—$400 billion in August 2011, $500 billion in September 2011,  and $1,200 billion in January 2012—for a total increase of $2.1 trillion,  raising the debt limit to $16.394 trillion. As shown in figure 1, the amount  of reported outstanding debt subject to the limit has increased from  $5,137 billion on September 30, 1996, to $15,730 billion on May 31,  2012.
Debt subject to the limit includes both debt held by the public and  intragovernmental debt holdings. Debt held by the public consists  primarily of marketable Treasury securities, such as bonds, notes, bills,  cash management bills (CM bills), and Treasury Inflation-Protected  Securities (TIPS), which are sold through auctions and can be resold by   Treasury also issues a smaller amount of  whoever owns them.nonmarketable securities, such as savings securities and special  securities for state and local governments. Debt held by the public  primarily represents the amount the federal government has borrowed to  finance cumulative cash deficits. Intragovernmental debt holdings  represent balances of Treasury securities held in federal government  accounts, such as the Social Security and Medicare trust funds.  Intragovernmental debt increases when these accounts run a surplus or  accrue interest on existing securities.
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 the excess annual  receipts (including interest earnings) over disbursements of federal  government accounts with investment authority. To meet these  responsibilities, the Secretary of the Treasury is authorized by law to  issue the necessary securities to federal government accounts with  investment authority for investment purposes and to borrow the  necessary funds from the public to pay government obligations. normal conditions, Treasury is notified by the appropriate agency (such  as the Office of Personnel Management for the Civil Service Retirement  and Disability Fund (CSRDF)) of the amount that should be invested on  its behalf, and Treasury then makes the investment. In some cases, the  actual security that Treasury should purchase is also specified. When a  federal government account with investment authority needs to make  disbursements, Treasury is normally notified of the amount of securities  that need to be redeemed. In some cases, Treasury is also notified to  redeem specific securities. The Treasury securities issued to federal  government accounts with investment authority count against the debt  limit. If these accounts’ receipts are not invested, the amount of debt  subject to the limit does not increase.
The majority of securities held by federal government accounts are Government  Account Series (GAS) securities. GAS securities consist of par value securities and  market-based securities, with terms ranging from on demand out to 30 years. Par value  securities are issued and redeemed at par (100 percent of face value), regardless of  current market conditions. Market-based securities, however, can be issued at a premium  or discount and are redeemed at par value on the maturity date or at market value if  redeemed before the maturing date.
Under normal circumstances, the debt limit is not an impediment to  carrying out these investment responsibilities. However, when federal  debt is near or at the debt limit, increasing the debt limit frequently  involves lengthy debate by Congress. When delays occur, Treasury has  to depart from normal cash and debt management operations to avoid  exceeding the debt limit. In 1986 and 1987, after Treasury’s experiences  during prior debt limit crises, Congress authorized the Secretary of the  Treasury to use the CSRDF and the Government Securities Investment  Fund of the Federal Employees’ Retirement System (G-Fund) to help  Treasury manage federal debt when delays in raising the debt limit occur.  Treasury has also taken other actions in the past to manage federal debt  during such delays. Table 1 provides an overview of each action.
We have previously reported on aspects of Treasury’s actions during the  2003 and 2002 debt issuance suspension periods (DISP), and the 1995- 1996 and other debt limit crises.
section_title: Chronology of Events
paragraphs: In January 2011, Treasury determined that the debt limit of   $14.294 trillion set in February 2010 would likely be reached by May 16,  2011. In May 2011, Treasury determined that it was necessary to use  extraordinary actions to manage federal debt during the delay in raising  the debt limit, which lasted through August 1, 2011. Treasury again  determined that extraordinary actions were needed to manage federal  debt in January 2012. Table 2 shows the significant events from   January 6, 2011, through January 30, 2012, that relate to the debt limit.
section_title: Extraordinary Actions to Manage Debt Were Consistent with Legislation and Regulations
paragraphs: The extraordinary actions Treasury took during 2011 and January 2012 to  manage federal debt when delays in raising the debt limit occurred were  consistent with relevant authorizing legislation and regulations. These  actions related to State and Local Government Series (SLGS) securities,  and the CSRDF, Postal Service Retiree Health Benefits Fund (Postal  Benefits Fund), G-Fund, and Exchange Stabilization Fund (ESF). For  other major federal government accounts with investment authority,  Treasury used its normal investment and redemption policies and  procedures to handle receipts and maturing investments and to redeem  Treasury securities.
subsections: section_title: Actions Related to SLGS Securities
paragraphs: Treasury took the first extraordinary action on May 6, 2011, by  suspending new issuances of SLGS securities. Prior to the suspension,  the reported amount of SLGS securities outstanding was about   $177.3 billion. This level declined to a reported amount of about   $146.5 billion by August 1, 2011. On August 2, 2011, Treasury resumed  the sale of SLGS securities. Treasury also converted SLGS demand  deposit securities outstanding on May 6, 2011, to special 90-day  certificates of indebtedness. On August 2, 2011, Treasury converted the  special 90-day certificates of indebtedness back to demand deposits  including accrued interest. Treasury maintained spreadsheets to track the  certificates of indebtedness and the daily interest accruals. Treasury’s  actions related to the SLGS demand deposit securities were in  accordance with 31 C.F.R. Part 344.7 (b), which authorizes the Secretary  of the Treasury to invest any unredeemed SLGS demand deposit  securities in special 90-day certificates of indebtedness. Treasury did not  use its authority to suspend new issuances of or convert SLGS securities  during January 2012.
section_title: Actions Related to the CSRDF
paragraphs: The Secretary of the Treasury notified Congress that he had determined  that a DISP existed for the CSRDF on May 16, 2011, after concluding that  he would not be able to issue debt securities without exceeding the debt  limit. On that day, Treasury redeemed certain investments held by the  CSRDF earlier than normal and began suspending new investments of  CSRDF receipts. Treasury did not use its authority to redeem or suspend  investments of the CSRDF during January 2012.
Subsection 8348(k) of title 5, United States Code, authorizes the  Secretary of the Treasury to redeem securities or other invested assets of  the CSRDF before maturity to prevent the amount of debt from exceeding  the debt limit. The statute does not require that early redemptions be  made only for the purpose of making CSRDF payments. Further, the  statute permits early redemptions even if the CSRDF has adequate cash  balances to cover such payments. However, the statute provides that the  amount redeemed may not exceed the total amount of the payments  authorized to be made from the CSRDF during the DISP.
Treasury decided to redeem securities held by the CSRDF earlier than  normal in accordance with subsection 8348(k)(1) of title 5, United States  Code. To take such action, the Secretary of the Treasury must determine  that a DISP exists and the length of the DISP. The statute authorizing the  DISP and its legislative history are silent as to how to determine the  length of a DISP. On May 16, 2011, the Secretary of the Treasury notified  Congress that a DISP, as it relates to the CSRDF, would begin that day  and would last through August 2, 2011.
On May 16, 2011, Treasury redeemed about $17.1 billion of securities  held by the CSRDF before maturity using its authority under subsection  8348(k)(1) of title 5, United States Code. The $17.1 billion redemption  amount was determined based on (1) the length of the DISP (May 16,  2011, through August 2, 2011) and (2) the estimated monthly CSRDF benefit payments and expenses that would occur during that time.These were appropriate factors to use in determining the amount of  Treasury securities held by the CSRDF to redeem early.
From May 16, 2011, through July 31, 2011, about $11.8 billion of actual  benefit payments and expenses occurred, leaving about $5.3 billion of  uninvested principal from the $17.1 billion that had been redeemed early.  On August 1, 2011, benefit payments were about $5.7 billion. As such,  Treasury redeemed only the approximate $0.4 billion difference between  the $5.3 billion uninvested principal amount and the actual amount of  benefit payments to be made.
Subsection 8348(j)(1) of title 5, United States Code, authorizes the  Secretary of the Treasury to suspend additional investment of amounts in  the CSRDF if the investment cannot be made without exceeding the debt  limit. From May 16, 2011, through August 1, 2011, Treasury suspended  about $86 billion of investments to the CSRDF. Of this amount,   $63.1 billion related to securities that matured on June 30, 2011, and  were to be reinvested; $17.4 billion was from the semiannual interest  payment on June 30, 2011; and $5.5 billion represented cash receipts.
section_title: Actions Related to the Postal Benefits Fund
paragraphs: Subsection 8909a(c) of title 5, United States Code, requires investments  to be made for the Postal Benefits Fund in the same manner as  investments for the CSRDF under section 8348. This includes the  provisions authorizing the early redemption and suspension of  investments. As discussed above for the CSRDF, the amount redeemed  earlier than normal may not exceed the total amount of the payments  authorized to be made during the DISP. Subsection 8906(g)(2)(A) of title  5, United States Code, authorizes payments to be made from the Postal  Benefits Fund beginning after September 30, 2016. As such, Treasury did  not redeem investments of the Postal Benefits Fund earlier than normal  during 2011 and January 2012. On June 30, 2011, Treasury suspended  about $9.5 billion of new investments to the Postal Benefits Fund. Of this  amount, $8.7 billion related to securities that matured on June 30, 2011,  and were to be reinvested, and $0.8 billion was from the semiannual  interest payment on June 30, 2011. Treasury did not use its authority to  suspend investments of the Postal Benefits Fund during January 2012.
section_title: Actions Related to the G-Fund
paragraphs: Subsection 8438(g)(1) of title 5, United States Code, authorizes the  Secretary of the Treasury to suspend the issuance of additional amounts  of investments to the G-Fund if the issuance cannot be made without  causing the debt limit to be exceeded. On most days from May 16, 2011,  through August 1, 2011, and each day from January 17, 2012, through  January 27, 2012, Treasury did not fully invest the holdings of the   G-Fund. Since the G-Fund invests in one-day securities that are  redeemed and reinvested each business day, the amount of uninvested  principal varied most days depending on the federal 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 Treasury 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 the amount of  Treasury securities that will be issued to, or redeemed by, various federal  government accounts with investment authority are difficult to precisely  predict. Because of these difficulties, Treasury needed to ensure that the  normal investment and redemption activities associated with Treasury  securities did not cause the debt limit to be exceeded while also   maintaining normal investment and redemption policies for the majority of  these accounts. To accomplish these objectives, for each day of the  above-noted periods, Treasury   calculated the amount of debt subject to the limit, 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 limit and invested this amount in  Treasury securities; and  suspended investment, when necessary, of the G-Fund’s remaining  receipts.
As of August 1, 2011, the business day prior to the debt limit increase, the  G-Fund had approximately $137.5 billion available for suspension, with  the entire amount suspended as of that date. As of January 27, 2012, the  business day prior to the debt limit increase, the G-Fund had  approximately $147.6 billion available for suspension, with about   $36.9 billion suspended as of that date.
section_title: Actions Related to the ESF
paragraphs: The purpose of the ESF is to help provide a stable system of monetary  exchange rates. The law establishing the ESF authorizes the Secretary of  the Treasury to invest the ESF’s balances not needed for program  purposes in Treasury securities. Section 5302 of title 31, United States  Code, authorizes the Secretary of the Treasury to determine when, and if,  excess funds for the ESF will be invested. On several occasions from   July 15, 2011, through August 1, 2011, and each day from January 4,  2012, through January 27, 2012, Treasury did not fully invest the dollar- denominated portion of the ESF in Treasury securities. Since the ESF  invests the dollar-denominated portion of the fund in one-day Treasury  securities that are redeemed and reinvested each business day, the  amount of uninvested principal varied several days, depending on the  federal government’s outstanding debt. For each day, Treasury  determined the amount of funds that the ESF would be allowed to invest  in Treasury securities and, when necessary, suspended some  investments of the ESF receipts and maturing securities that would have  caused the debt limit to be exceeded. The process discussed above for  the G-Fund was also used for the ESF. During the 2011 period, the ESF  had approximately $22.8 billion available for suspension, with about   $6.9 billion of this amount suspended as of August 1, 2011, the business  day prior to the debt limit increase. During January 2012, the ESF had  approximately $22.7 billion available for suspension, with the entire  amount suspended as of January 17, 2012. The entire amount continued  to be suspended each day through January 27, 2012, the business day  prior to the debt limit increase.
As a result of an error in calculating debt subject to the limit from  November 2, 2011, through December 29, 2011, Treasury suspended an  incorrect amount from the ESF from January 4, 2012, through   January 10, 2012. A programming change to Treasury’s debt accounting  system caused an incorrect calculation of unamortized discounts on  Treasury bills to be subtracted from total debt outstanding in calculating  debt subject to the limit. Treasury identified the error during a  contingency operation on December 29, 2011. At that time, the  cumulative effect of the error was $181 million. The error in the program  was corrected immediately; however, the adjustment to correct the   $181 million was not recorded until January 11, 2012.
Debt subject to the limit was sufficiently below the debt limit from  November 2, 2011, through January 3, 2012, such that if the error was  taken into account, debt subject to the limit would still have been below  the debt limit. Treasury began using the ESF to manage federal debt  during the delay in raising the debt limit on January 4, 2012. To determine  whether Treasury would have exceeded the debt limit from January 4,  2012, through January 10, 2012, absent this error, we reviewed the  invested balances of the ESF during this period. Based on our review, we  found that the ESF had sufficient invested balances that could have been  used to manage federal debt during the delay. For example, as of  January 10, 2012, cumulative investments totaling $12.306 billion had  been suspended from the ESF. If the error had not occurred, cumulative  investments totaling $12.487 billion would have been suspended from the  ESF, $181 million more than what was actually suspended, but well  below the approximate $22.7 billion available for suspension. Therefore,  Treasury would have been able to suspend additional investments from  the ESF to remain under the debt limit. As a result of overinvesting the  ESF from January 4, 2012, through January 10, 2012, Treasury also  overpaid interest to the ESF during this period. Treasury corrected the  interest paid by making an adjustment of $402.63 on January 11, 2012.
section_title: Normal Investment and Redemption Policies Used on Major Federal Government Accounts with Investment Authority
paragraphs: We analyzed major federal government accounts with investment  authority for which Treasury stated it had followed its normal investment  and redemption policies and procedures during the periods from May 16,  2011, through August 1, 2011, and from January 4, 2012, through  January 27, 2012, to manage federal debt when delays in raising the debt  limit occurred. Our analysis was intended to verify that Treasury’s  actions to manage federal debt during such delays did not involve federal  government accounts that Treasury is not authorized to use in such  situations. We found that for all the accounts we reviewed, Treasury used  its normal investment and redemption policies and procedures to handle  receipts and maturing investments and to redeem Treasury securities.  Table 3 lists the federal government accounts with investment authority  included in our analysis.
section_title: Treasury Restored Uninvested Principal and Interest Losses as Authorized
paragraphs: In accordance with relevant legislation and consistent with the timing of  the debt limit increases authorized by the BCA, Treasury restored the  uninvested principal amounts to the CSRDF, Postal Benefits Fund, and  G-Fund, and invested the uninvested principal to the ESF totaling  approximately $299.5 billion. This amount consisted of (1) $239.9 billion  of uninvested principal relating to the period from May 16, 2011, through  August 1, 2011, and (2) $59.6 billion relating to the period in January  2012, in which Treasury took extraordinary actions to manage federal  debt when delays in raising the debt limit occurred. In accordance with  legislation, Treasury also restored interest losses totaling approximately  $933.8 million to the CSRDF, Postal Benefits Fund, and G-Fund. This  amount consisted of (1) $916.9 million relating to the period from May 16,  2011, through August 1, 2011, and (2) $16.9 million relating to the period  in January 2012. Treasury lacks legislative authority under section 5302  of title 31, United States Code, to restore interest losses to the ESF.  Table 4 summarizes the amounts of principal and interest restored.
Subsections 8348(j)(3) and (4) of title 5, United States Code, require  Treasury to immediately restore, to the maximum extent practicable, the  CSRDF’s Treasury holdings to the proper balances when a DISP ends  and to restore lost interest on the next normal interest payment date.  Treasury is required by subsection 8909a(c) of title 5, United States  Code, to follow these same procedures for the Postal Benefits Fund.  Consequently, Treasury took the following actions, with respect to these  two funds, once the DISP for 2011 had ended:
Treasury invested about $86 billion of uninvested principal to the  CSRDF on August 2, 2011, which equaled the amount of new  investments suspended during 2011.
All of the $17.1 billion of Treasury securities held by the CSRDF that  Treasury redeemed earlier than normal had been used for CSRDF  benefit payments and expenses during the DISP. As such, there was  no remaining amount required to be invested.
Treasury invested about $9.5 billion of uninvested principal to the  Postal Benefits Fund on August 2, 2011, which equaled the amount of  new investments suspended during 2011.
On December 30, 2011, Treasury paid the CSRDF about   $516.9 million and the Postal Benefits Fund about $21.5 million to  restore interest losses incurred because of the actions Treasury had  taken during the DISP. Because December 30, 2011, was the first  semiannual interest payment date since the DISP ended, this was the  proper restoration date according to the statute authorizing the  restoration.
We verified that subsequent to the initiation and recording of these  transactions, the CSRDF’s and Postal Benefits Fund’s holdings were, in  effect, the same as they would have been had the DISP not occurred.
subsections: section_title: G-Fund
paragraphs: On August 1, 2011, and January 27, 2012, the last business days before  the debt limit was raised, the G-Fund had uninvested principal of about  $137.5 billion and $36.9 billion, respectively. On August 2, 2011, and  January 30, 2012, Treasury invested all uninvested principal for the   G-Fund, as required by subsection 8438(g)(3) of title 5, United States  Code. Treasury is also required by subsection 8438(g)(4) of title 5, United  States Code, to make the G-Fund whole by restoring any losses once the  suspension of debt has ended. During May through August 2011 and  January 2012, interest losses to the G-Fund were about $378.5 million  and $16.9 million, respectively, because its funds were not fully invested.  On August 3, 2011, and January 30, 2012, Treasury fully restored the lost  interest on the G-Fund’s uninvested funds. We verified that subsequent to  the initiation and recording of these transactions, the G-Fund’s holdings  were, in effect, the same as they would have been had the suspensions  of debt not occurred.
On August 1, 2011, and January 27, 2012, the last business days before  the debt limit was raised, the ESF had uninvested principal of about   $6.9 billion and $22.7 billion, respectively. On August 2, 2011, and  January 30, 2012, Treasury invested all uninvested principal for the ESF.  During May through August 2011 and January 2012, interest losses to the  ESF were $55,630 and $284,691, respectively, because its funds were  not fully invested. Treasury has the authority in section 5302 of title 31,  United States Code, to invest principal of the ESF. However, the  Secretary of the Treasury lacks legislative authority to restore any interest  losses relating to the ESF incurred as a result of authorized actions taken  by Treasury to manage federal debt when delays in raising the debt limit  occur. We verified that Treasury properly invested the ESF’s uninvested  principal and, in accordance with the law, did not restore interest losses.
section_title: Delays in Raising the Debt Limit Increased Treasury’s Borrowing Costs and Affected Its Operations
paragraphs: Congress usually votes on increasing the debt limit after fiscal policy  decisions affecting federal borrowing have begun to take effect. Debt limit  increases frequently involve lengthy debate, with the debates often  occurring when federal debt is near or at the debt limit. We reported in  February 2011 that managing debt when delays in raising the debt limit  occur diverts Treasury’s resources away from other cash and debt  management responsibilities and that Treasury’s borrowing costs  modestly increased during debt limit debates in 2002, 2003, and 2010.  As discussed below, increased borrowing costs also occurred during  2011 when there was a delay in raising the debt limit. For the January  2012 period, we found that there was no consistent pattern of yield  spread changes and the changes in borrowing costs were negligible. This  was expected given that the BCA provided for a future debt limit increase,  which minimized uncertainty in the Treasury market. In addition,  managing federal debt during such delays affected Treasury’s normal  operations in 2011 and January 2012.
subsections: section_title: Treasury’s Borrowing Costs on Certain Securities Increased When Delays in Raising the Debt Limit Occurred in 2011
paragraphs: Our analysis indicates that delays in raising the debt limit in 2011 led to  increased borrowing costs on certain securities. We measured changes in  Treasury’s borrowing costs when delays in raising the debt limit occurred  in 2011 using a multivariate regression analysis of the daily yield  spread—yields on private securities minus yields on Treasury securities  of comparable maturities—between the debt limit event period and the  previous 3 months, or pre-event period. Rates for Treasury and other  securities fluctuate from day to day in response to changes in the broader  economy. Focusing on a yield spread rather than changes in individual  interest rates facilitated the measurement of changes in the relative risk of  Treasury securities and the identification of potential risk premiums  (which is represented by a decrease in the yield spread). We also  controlled for other factors that could affect the yield spread, such as the  Federal Reserve’s holdings of Treasury securities and economic  uncertainty. (See app. II for more details on how we estimated increased  borrowing costs.) The results of our multivariate regression analysis  describe the change in yield spreads attributable to delays in raising the  debt limit. The estimated increase or decrease in the yield spreads  between the pre-event and event periods is shown in figure 2.
A decrease in the yield spread indicates that the market perceives the risk  of Treasury securities to be closer to that of private securities, increasing  the cost to Treasury. Conversely, an increase in the yield spread  indicates that the market perceives the risk of Treasury securities to have  decreased relative to that of private securities, making the securities less  costly to Treasury. We found that the 2011 debt limit event led to a  premium on Treasury securities with maturities of 2 years or more while  Treasury securities with shorter maturities either experienced no change  or became slightly less costly relative to private securities. Applying the  relevant increase or decrease in the yield spread shown in figure 2 to all  Treasury bills, notes, bonds, CM bills, and TIPS issued during the 2011  debt limit event period, we estimated that borrowing costs increased by   Many of the Treasury securities  about $1.3 billion in fiscal year 2011.issued during the 2011 debt limit event period will remain outstanding for  years to come. Accordingly, the multiyear increase in borrowing costs  arising from the event is greater than the additional borrowing costs  during fiscal year 2011 alone.
There are limitations to using a multivariate regression to measure  changes in Treasury’s borrowing costs attributable to delays in raising the  debt limit. Most important, many economic and financial developments  besides the uncertainty in the Treasury market arising from delays in  raising the debt limit likely affected yield spreads during this period. While  we controlled for changes in Federal Reserve holdings of Treasury  securities, stock market uncertainty, and economic activity, we cannot  capture every development affecting yield spreads, such as other policy  changes not easily quantifiable that might affect yield spreads.
section_title: Managing Debt When Delays in Raising the Debt Limit Occurred in 2011 and January 2012 Affected Treasury’s Normal Operations
paragraphs: Debt and cash management required more time and Treasury resources  as delays in raising the debt limit occurred in 2011 and January 2012. For  example, Treasury staff (1) forecasted and monitored with increasing  frequency and in increasing detail cash and borrowing needs and   (2) developed, reviewed, and tested contingency plans and alternative  scenarios for the possible implementation of extraordinary actions.  According to Treasury officials, these activities diverted time and Treasury  resources from other cash and debt management responsibilities. We  reviewed estimates provided by the Office of Fiscal Projections (OFP)  and the Bureau of the Public Debt (BPD), the entities primarily affected by  the delays, which indicated that these entities’ personnel devoted as  much as several hundred hours per week to managing federal debt when  delays in raising the debt limit occurred in 2011 and January 2012.
According to Treasury officials, for 2011, Treasury’s operational focus on  the debt limit began at least 6 months before the debt limit was expected  to be reached and increased as debt neared the limit. Treasury’s OFP  staff developed estimates under multiple scenarios of when debt might  reach the debt limit. As federal debt neared the debt limit, these estimates  were developed weekly, then daily, and finally multiple times a day.  According to Treasury officials, preparing these estimates, informing  departmental officials, and other preparatory tasks were a critical focus of  OFP’s staff. To manage federal debt when delays in raising the debt limit  occurred in 2011, Treasury officials estimated that OFP spent almost 15  staff hours per business day performing these tasks. In addition, Treasury  officials estimated that OFP expended about 200 staff hours in total to  prepare for and manage the extraordinary actions taken in January 2012.
BPD—the bureau within Treasury that is responsible for implementing the  extraordinary actions and for the accounting associated with those  transactions—also dedicated extensive resources to operations related to  the debt limit. BPD estimated that managing federal debt when delays in  raising the debt limit occurred in 2011 and January 2012 resulted in  almost 5,750 hours of work, including over 400 hours of overtime and  compensatory time. This included more than 1,200 hours in the weeks  prior to the use of extraordinary actions for meetings, preparation of  parallel accounts and spreadsheets to use in tracking uninvested principal  and interest losses, tests of the accounting system, and training staff. The  majority of time was spent implementing the extraordinary actions. BPD  estimated that it spent almost 63 staff hours per business day on debt  limit–related activities from May 16, 2011, through August 1, 2011, and  almost 31 staff hours per business day from January 4, 2012, through  January 27, 2012. After the debt limit was increased, BPD estimated that  it spent over 500 hours on activities such as restoring uninvested funds  and preparing reports.
Treasury officials said that the increased focus on debt limit–related  operations in the months and weeks approaching the debt limit diverted  time and attention from other cash and debt management tasks that could  improve Treasury operations. For example, according to Treasury  officials, OFP delayed participation in federal cash expenditure process  modernization efforts and the development of a new fiscal forecasting  system. Similarly, BPD officials said that they spent less time updating  procedures for issuing debt to the public and modernizing debt  accounting systems. According to these officials, these activities help  Treasury more accurately project future borrowing needs and perform  debt management activities more effectively. More accurately projecting  future borrowing needs helps Treasury avoid (1) borrowing more than is  needed to fund the government’s immediate needs, which results in  increased interest costs, and (2) borrowing less than is sufficient to  maintain Treasury’s operating cash balance at a minimum level through  regularly scheduled issuances of marketable Treasury securities, which  may require Treasury to issue CM bills with little advance notice to the  market, resulting in potentially higher interest costs. Treasury officials also  stated that they spent less time on staff development and program  oversight activities to perform additional tasks needed to manage federal  debt when delays in raising the debt limit occurred.
section_title: Concluding Observations
paragraphs: The extraordinary actions Treasury took during 2011 and January 2012 to  manage federal debt when delays in raising the debt limit occurred were  consistent with relevant authorizing legislation and regulations. However,  delays in raising the debt limit can create uncertainty in the Treasury  market and lead to higher borrowing costs. We estimated that delays in  raising the debt limit in 2011 led to an increase in Treasury’s borrowing  costs of about $1.3 billion in fiscal year 2011. However, this does not  account for the multiyear effects on increased costs for Treasury  securities that will remain outstanding after fiscal year 2011. Further,  managing federal debt as such delays occurred was complex, time- consuming, and technically challenging. According to Treasury officials,  these events diverted Treasury’s staff away from other important cash  and debt management responsibilities as well as staff development and  program oversight activities.
Congress usually votes on increasing the debt limit after fiscal policy  decisions affecting federal borrowing have begun to take effect. This  approach to raising the debt limit does not facilitate debate over specific  tax or spending proposals and their effect on debt. In February 2011, we  reported, and continue to believe, that Congress should consider ways to  better link decisions about the debt limit with decisions about spending  and revenue to avoid potential disruptions to the Treasury market and to  help inform the fiscal policy debate in a timely way.
section_title: Agency Comments
paragraphs: We requested comments on a draft of this report from the Secretary of  the Treasury. In providing oral comments on the draft, Treasury broadly  agreed with the draft’s conclusions, expressed appreciation for our efforts  to estimate the monetary impact of delays in raising the debt limit on  Treasury’s borrowing costs, and also commented on the broader impact  of delays in raising the debt limit on the economy, which was beyond the  scope of our review. Treasury also provided technical comments, which  we incorporated as appropriate.
We will send copies of this report to interested congressional committees,  the Secretary of the Treasury, and other interested parties. In addition,  the report is available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff have any questions about this report, please contact  Gary T. Engel at (202) 512-3406 or engelg@gao.gov, Susan J. Irving at  (202) 512-6806 or irvings@gao.gov, or Thomas J. McCool at (202) 512- 2642 or mccoolt@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: With regard to actions taken by the Department of the Treasury  (Treasury) during 2011 and January 2012 to manage federal debt when  delays in raising the debt limit occurred, our objectives were to (1) provide  a chronology of the significant events, (2) analyze whether actions taken  by Treasury were consistent with legal authorities provided to manage  federal debt during such delays, (3) assess the extent to which Treasury  restored uninvested principal and interest losses to federal government  accounts in accordance with relevant legislation, and (4) analyze the  effect that delays in raising the debt limit had on Treasury’s borrowing  costs and operations.
To address the first objective, we reviewed congressional actions  increasing the debt limit and Treasury correspondence, announcements,  and documentation of the extraordinary actions taken. We reviewed  letters sent by the Secretary of the Treasury to Congress requesting debt  limit increases and discussing when Treasury’s borrowing authority would  be exhausted, and Treasury announcements of specific extraordinary  actions. For each business day from May 16, 2011, through August 2,  2011, and January 4, 2012, through January 30, 2012, we reviewed  correspondence from Treasury’s Office of Fiscal Projections (OFP) to  Treasury’s Bureau of the Public Debt (BPD) providing specific instructions  and timing of the extraordinary actions to be taken as well as BPD’s  documentation implementing the actions.
We performed the work for the second and third objectives as part of our  financial audits of the fiscal years 2011 and 2012 Schedules of Federal  Debt Managed by BPD. To address the second objective, for each  business day during the above-noted periods, we reviewed Treasury  accounting documentation, including specific instructions from OFP to  BPD, to verify that the extraordinary actions taken for the affected federal  government accounts were consistent with relevant legislation. For  suspensions of investments, we reviewed BPD documentation and  verified that BPD only invested the amount instructed by OFP using the  appropriate security type and date. For the one Civil Service Retirement  and Disability Fund (CSRDF) security that was redeemed earlier than  normal, we reviewed BPD documentation and verified that BPD  processed it for the amount, security type, and date as instructed by OFP.
For State and Local Government Series (SLGS) securities, we reviewed  Treasury documentation of actions taken to suspend new issuances and  convert SLGS demand deposit securities and compared those actions  taken to authorizing regulations.
Over 230 federal government accounts have the authority or the  requirement to invest excess receipts in Treasury securities, and  Treasury officials stated that normal investment and redemption policies  and procedures were used for all but 4 of these accounts for 2011 and 2  of these accounts for January 2012. To evaluate whether Treasury  followed normal investment and redemption policies and procedures for  federal government accounts not affected by the extraordinary actions,  we selected for review accounts with balances greater than $10 billion as  of April 30, 2011 (15 accounts) and December 31, 2011 (17 accounts). As  of both dates, this represented about 97 percent of the reported total of  Treasury securities held by the federal government accounts not affected  by the extraordinary actions. We obtained investment and redemption  activity files from BPD for these accounts and performed the following  audit procedures:
Reviewed trends in daily investment and redemption activity and  compared these trends to prior year trends to determine whether  there were any unusual fluctuations.
Selected and reviewed investment and redemption transactions  greater than $5 billion from May 16, 2011, through August 1, 2011,  and January 4, 2012, through January 27, 2012, to determine whether  the transactions were processed in accordance with Treasury’s  normal policies and procedures. The selected transactions for the  2011 and 2012 periods represented about 86 percent and 78 percent,  respectively, of the total investment transactions, and 81 percent and  80 percent, respectively, of the total redemption transactions.
Confirmed with personnel from the respective agencies the total  amount of investments and redemptions reported by Treasury from  May 16, 2011, through August 1, 2011.
We also reviewed Treasury reports of fund balances for federal  government accounts with investment authority to identify any large  positive uninvested balances, which would indicate that normal policies  and procedures were not being followed, as of the end of the month for  May through September 2011, December 2011, and January 2012.
To address the third objective, we reviewed BPD schedules and parallel  accounts of uninvested principal and forgone interest for the CSRDF,  Postal Service Retiree Health Benefits Fund, Government Securities  Investment Fund of the Federal Employees’ Retirement System, and  Exchange Stabilization Fund. We recalculated the cumulative uninvested  principal as of August 1, 2011, and January 27, 2012, and compared our  calculations to BPD restoration entries. We also recalculated the forgone  interest on these uninvested principal amounts and compared our  calculations to BPD’s interest restoration entries. We reviewed accounting  documentation of Treasury actions to restore uninvested principal and  interest and compared these actions to relevant legislation.
To address the fourth objective, we performed a multivariate regression  analysis of the daily yield spread—yields on private securities minus  yields on Treasury securities of comparable maturities—during the 2011  debt limit event period. We used yield spreads during the 3-month pre- event period as a benchmark against which yield spreads during the  event period were compared. We also examined changes in the yield  spread during the January 2012 debt limit event period. See appendix II  for more details on how we estimated increased borrowing costs,  including limitations to our using a multivariate regression to measure  changes in Treasury’s borrowing costs attributable to delays in raising the  debt limit. We obtained Treasury auction data for this analysis from  Treasury. We obtained data on security yields, the Federal Reserve’s  holdings of Treasury securities, and the Chicago Board Options  Exchange’s Volatility Index from the Federal Reserve Bank of St. Louis’s  Federal Reserve Economic Data (FRED) source. FRED includes original  source data from the Federal Reserve Board, Bank of America Merrill  Lynch, the British Bankers Association, and the Chicago Board Options  Exchange. We also used data on Standard & Poor’s 500 total return  index from IHS Global Insight in our analysis. To assess the reliability of  these data, we looked for outliers and anomalies. These databases are  commonly used by Treasury and researchers to examine the Treasury  market and related transactions. On the basis of our assessment, we  believe the data are sufficiently reliable for the purpose of this review.
To understand how managing debt affected agency operations when  delays in raising the debt limit occurred in 2011 and January 2012, we  reviewed documents provided by Treasury, interviewed Treasury officials  involved in the decision-making process and implementation of the  extraordinary actions, and obtained estimates of the number of personnel  and amount of time involved in managing debt during such delays. To  assess the reasonableness of Treasury’s estimates, we reviewed e-mails,  memos, press releases, written procedures, accounting documentation,  and other corroborating information prepared by OFP and BPD. However,  we did not obtain sufficient supporting documentation to independently  verify Treasury’s staff hour estimates. We were also unable to  independently verify the forgone opportunities that Treasury identified,  such as less time for other cash and debt management tasks that could  improve Treasury operations, in part because it is difficult to prove what  would have happened in the absence of the delay in raising the debt limit.
We conducted this performance audit from May 2011 to July 2012 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Detailed Methodology Used to Analyze Effect on Treasury’s Borrowing Costs
paragraphs: To measure changes in Treasury’s borrowing costs when delays in  raising the debt limit occurred in 2011, we performed a multivariate  regression analysis of the daily yield spread—yields on private securities  minus yields on Treasury securities of comparable maturities—during the  debt limit event period. For our purposes, the 2011 debt limit event  began with the January 6, 2011, letter from the Secretary of the Treasury  notifying the Senate Majority Leader that the debt limit needed to be  raised and ended August 1, 2011, the business day prior to the debt limit  increase.
A basis point is equal to 1/100th of 1 percent. Thus, 11 basis points is 0.11 percent. increased relative to comparable-maturity private securities during the  2011 debt limit event period.
The existing literature on the effect of the debt limit on Treasury’s  borrowing costs is limited. Previous analysis has focused mainly on the  effect of debt limit events on short-term Treasury interest rates. In an  analysis we replicated and updated, Liu, Shao, and Yeager (2009) that during debt limit events in 2001-2002 and 2002-2003, the spread  between 3-month Treasury bill yields and 3-month commercial paper  yields narrowed, implying that Treasury bills were relatively more costly  during this period; however, this relationship was not observed in either  the 2004-2005 or 2005-2006 debt limit events. The authors hypothesized  that during these latter two debt limit events, investors may have  assumed based on past experience that Members of Congress would  resolve their differences before there were any serious disruptions in the  Treasury market and therefore did not charge a premium on securities  issued during the debt limit event. Our 2011 report replicated the authors’  analysis and also found that the 2009-2010 debt limit event coincided with  a 4 basis point increase in 3-month Treasury bill yields. An earlier study  by Nippani, Liu, and Schulman found that Treasury paid a premium on 3- month and 6-month Treasury bills issued during the debt limit event in  1995-1996.
Pu Liu, Yingying Shao, and Timothy J. Yeager, “Did the repeated debt ceiling  controversies embed default risk in U.S. Treasury securities?” Journal of Banking and  Finance, vol. 33 (8) (2009): 1464-1471.
subsections: section_title: Effect of Delayed Increase in the Debt Limit on Treasury’s Borrowing Costs
paragraphs: On the basis of our analysis, we estimated that delays in raising the debt  limit in 2011 led to an increase in Treasury’s borrowing costs of about  $1.3 billion in fiscal year 2011. We derived this estimate by multiplying  the amount of Treasury securities issued at each maturity during the  event period by regression-based estimates of the relevant yield spread  change attributable to the debt limit event and weighting the result by the  portion of fiscal year 2011 during which the security was outstanding.  Many of the Treasury securities issued during the 2011 debt limit event  will remain outstanding for years to come. Accordingly, the multiyear  increase in borrowing costs arising from the event is greater than the  additional borrowing costs during fiscal year 2011 alone.
section_title: Limitations of the Analysis
paragraphs: There are limitations to using a multivariate regression to measure  changes in Treasury’s borrowing costs attributable to delays in raising the  debt limit. Most important, many economic and financial developments  besides the uncertainty in the Treasury market arising from delays in  raising the debt limit likely affected yield spreads during this period. While  we controlled for changes in Federal Reserve holdings of Treasury  securities, financial market uncertainty, and economic activity, we cannot  capture every development affecting yield spreads, such as other policy  changes that are not easily quantifiable that might affect yield spreads.
section_title: Appendix III: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to the contacts named above, Richard S. Krashevski, Dawn B.  Simpson, and Melissa A. Wolf, Assistant Directors; Carolyn M. Voltz,  Analyst-in-Charge; Nicole X. Dow; Brian S. Harechmak; Dervla Carmen  Harris; Thomas J. McCabe; and Shaundell A. Williams made key  contributions to this report.