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. Federal debt subject to the limit includes both debt held by the public and debt held by government accounts (intragovernmental debt holdings). The majority of debt held by the public consists of marketable Treasury securities, such as bills, notes, bonds, and Treasury Inflation-Protected Securities (TIPS), that are sold through auctions and can be resold by whoever owns them. Treasury also issues a smaller amount of 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 government accounts such as the Social Security trust funds. It increases when these accounts run a surplus or accrue interest on existing securities. Debt subject to the limit increased from roughly $43 billion in 1940 to more than $13,000 billion (or $13 trillion) in 2010. In the past, Congress has sought to link decisions about the level of debt to those about the level of federal spending and revenue by integrating changes to the debt limit into the larger budget process. For example, the Congressional Budget Act of 1974 requires that Congress include the levels of debt implied by the spending and revenue levels in the budget resolution for the next 5 years and allows for specific estimates of the increase in debt subject to the limit. Until recently, the House of Representatives had a rule that automatically generated a joint resolution considered to have been passed in the House changing the debt limit by the amount recommended in the budget resolution for the next fiscal year. The Congressional Budget Act as amended also established an alternative procedure for changing the debt limit through reconciliation legislation that is subject to expedited procedures. Despite these rules and procedures, Congress usually votes on the debt limit after fiscal policy decisions affecting federal borrowing have begun to take effect. Debt limit increases frequently involve protracted debate, regardless of prior votes on the budget resolution or other legislation that increases the need to borrow. This debate often occurs when federal debt is near or at the debt limit. Three pieces of legislation enacted to respond to the financial market crisis and economic downturn are recent exceptions—in each of these the debt limit was increased by roughly the amount the legislation was expected to increase debt. For example, in addition to spending and revenue provisions, the American Recovery and Reinvestment Act of 2009 (Recovery Act) increased the debt limit by $789 billion from $11,315 billion to $12,104 billion. Federal debt at the time of enactment was more than $600 billion below the limit. Treasury’s normal cash management operations involve ensuring that there is enough cash on hand to pay government obligations as they come due. Treasury has two primary sources of funds to finance these obligations: (1) revenue collections, such as federal tax revenues and other fees the federal government imposes and (2) cash borrowed from the public through auctions of marketable securities. One of Treasury’s goals is to finance the government’s borrowing needs at the lowest cost over time by, among other things, issuing a wide range of securities in a regular and predictable pattern. Treasury currently issues bills that mature in a year or less, notes with maturities of 2 to 10 years, and bonds with maturities of greater than 10 years. Treasury also issues 5-year, 10- year, and 30-year TIPS, which offer inflation protection to investors who are willing to pay a premium for this protection in the form of lower interest rates. Treasury does not “time the market”—or seek to take advantage of low interest rates—when it issues securities. Instead, Treasury strives to lower its borrowing costs over time by relying on a regular preannounced schedule of auctions. Treasury holds cash in its operating cash balance in an account at the Federal Reserve and in accounts at depository institutions across the country. Treasury can draw down its operating cash balance as debt approaches the limit, which allows Treasury to temporarily make payments without increasing the amount of debt subject to the limit. However, cash balances in its account at the Federal Reserve must be kept at a sufficient level to avoid overdrawing this account since the Federal Reserve System cannot legally lend directly to the Treasury. The issuance of cash management bills (CM bills) provides another way for Treasury to manage more closely the amount of additional debt subject to the limit. CM bills are flexible securities that Treasury issues outside of its regular preannounced auction schedule. Treasury sets the amount and time to maturity to meet its immediate borrowing needs at the time. Issuing CM bills allows Treasury to borrow cash for shorter periods than regular bills to help manage the uncertainty around the timing of increases to the debt limit. However, our past work showed that Treasury paid a premium, in the form of higher yields, for CM bills relative to regular bills. There are also a number of extraordinary actions currently available to Treasury to avoid exceeding the debt limit. These actions reduce uncertainty over future increases in debt subject to the limit or reduce the amount of debt subject to the limit. Table 1 provides an overview of each one. Two of these actions relate to the Civil Service Retirement and Disability Fund (CSRDF), which is the trust fund for two federal retirement plans that hold nonmarketable securities. To take these actions, Treasury must declare in advance a debt issuance suspension period (DISP)—a period in which Treasury determines that it cannot issue debt without exceeding the debt limit. Another four actions can be taken without first declaring a DISP. Since 1995, the debt limit has been increased 12 times. Prior to 6 of these, Treasury had to take one or more extraordinary actions to avoid exceeding the debt limit. Figure 1 shows when the debt limit was increased and the extraordinary actions that were used. Prior to five of the six debt limit increases between 1996 and 2006, Treasury took extraordinary actions, including declaring a DISP. During the period immediately preceding the debt limit increase in August 1997, Treasury did not take any extraordinary actions. The federal government ran budget surpluses in fiscal years 1998 through 2001. Debt subject to the limit increased by $293 billion during this period, but no increases to the debt limit were required. During the period immediately preceding the debt limit increase in September 2007, Treasury suspended the issuance of SLGS but did not take any other extraordinary actions or declare a DISP. In 2008 and 2009, three laws that were expected to increase the amount of debt held by the public included corresponding increases in the debt limit at the time of enactment. In December 2009 and February 2010, Treasury avoided taking extraordinary actions as debt approached the limit in part by allowing the Treasury securities it issued for the Supplementary Financing Program (SFP)—a temporary program begun in 2008 at the request of the Federal Reserve to drain reserves from the banking system and assist with its emergency liquidity and lending initiatives—to mature without rolling them over. If debt is at the limit and the extraordinary actions are exhausted, Treasury may not issue debt without further action from Congress and could be forced to delay payments until sufficient funds become available. In the past, Congress and the Secretary of the Treasury have taken additional actions beyond those described above when necessary to ensure that the government paid its obligations as they came due without breaching the debt limit. For example, in 1996, Congress passed and the President signed legislation allowing Treasury to issue securities temporarily excluded from the debt limit in an amount equal to the March 1996 Social Security payments to ensure that benefit payments were made on time. Treasury has never been unable to pay interest or principal on debt held by the public because of the debt limit. Treasury, credit rating agencies, and others agree that failure to pay principal or interest on Treasury securities because of the debt limit could have costly consequences for the U.S. government and financial markets including higher future borrowing costs for Treasury and the public; stress on the value of the dollar in currency markets; and major disruptions in capital markets due to the repricing of products, services, and transactions dependent on an efficiently functioning Treasury market. The borrowing capacity provided by the extraordinary actions has grown in size but has not kept pace with the growth in Treasury’s borrowing needs. The amount potentially provided by the extraordinary actions for a 1-month DISP in fiscal year 2010 was less than the monthly increase in debt subject to the limit for most months of the year. As of August 31, 2010, the extraordinary actions available to Treasury could provide about $147.5 billion in additional borrowing capacity without a DISP and an additional $7.7 billion per month based on the length of the DISP declared. As table 2 shows, the amounts available from suspending G-Fund investments, suspending ESF investments and the disinvestment of CSRDF funds have all grown—with the bulk of the growth in the G-Fund. G-Fund growth results from an increase in federal employee retirement funds being invested in Treasury securities. However, the estimated total borrowing capacity provided by extraordinary actions available without a DISP is still $15 billion below Treasury’s average monthly borrowing needs in fiscal year 2010, which was over $162 billion, and only 44 percent of the largest single monthly increase in debt subject to the limit, which was over $330 billion. Treasury officials stated that there are no additional extraordinary actions within their legal authorities that could be prudently used in the future to create additional borrowing capacity. Some of the options used in the past are either more limited or no longer available. FFB has the authority to issue up to $15 billion in securities that are not subject to the debt limit that it can exchange for other Treasury securities to reduce the amount of debt subject to the limit.