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). 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. 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. 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. 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. 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.