FROM THE OFFICE OF PUBLIC AFFAIRS

Today the Treasury informed Congress that, absent extraordinary actions, the government will exceed the statutory debt ceiling no later than May 16. The Treasury also informed Congress that a "debt issuance suspension period" will begin no later than May 16. Today’s notification allows the Treasury to suspend or redeem investments in two trust funds, which will provide flexibility to fund the operations of the government during this period. The two funds are the Civil Service Retirement and Disability Fund (CSRDF) and the Government Securities Investment Fund of the Federal Employees Retirement System (G-Fund). Both funds will be restored in full as to principal and interest once the debt limit has been raised. There will be no effect on beneficiaries.

To reduce uncertainty over the Treasury’s borrowing needs during this period, the Treasury also has announced the suspension of new issuance of State and Local Government Series (SLGS) Treasury securities effective May 15.

Based upon the latest projections, debt subject to the limit would rise above the current statutory limit of $5,950 billion no later than May 16 and remain at a level roughly $40 to 50 billion above the limit through mid-June. Suspending investments in the two federal trust funds will provide approximately $44 billion in borrowing capacity, of which $4 billion will come from the CSRDF and $40 billion will come from the G-Fund. In addition to managing debt subject to the limit during this period by suspending or redeeming investments in the two trust funds, the Treasury also will make use of available cash resources, including balances held at the Federal Reserve and deposits held at commercial banks by which the Treasury compensates the banks for services essential to the collection of government receipts. Making use of these balances will require the Treasury to make larger deposits in the future as compensation to the banks.

In the second half of June, uncertainty with respect to taxes to be received on June 17 increases the chances that additional measures will be necessary to manage debt subject to the limit. These measures are the suspension of U.S. dollar investments in the Exchange Stabilization Fund, and a swap of non-Treasury securities held by the Federal Financing Bank for an equivalent value of Treasury securities held by CSRDF. The Treasury is not authorized to restore the funds with interest once the debt ceiling is raised; these funds can only be fully restored through congressional action.

Collectively, the devices announced today - and those that could become necessary in June -will add a total of roughly $80 billion to the Treasury’s borrowing capacity. All of these devices were used previously by Treasury in 1995 and 1996.

The Treasury faces obligations in late June that, on the basis of current projections, cannot be surmounted without an increase in the statutory debt limit. On June 28, the Treasury must credit an interest payment of approximately $67 billion to the Social Security and other federal trust funds that, on current projections, will result in an increase of debt subject to limit to almost $100 billion over the current statutory ceiling. In addition, the Treasury is scheduled to make $54 billion in payments between July 1 and 3, including approximately $30 billion of payments to trust fund beneficiaries. Lack of certainty by June 26 as to how the Treasury will fund these payments will challenge the Treasury’s ability to ensure timely processing of payments to Social Security and other beneficiaries.

The Treasury would normally announce on June 19 the size of the 2-year note auction scheduled for June 26. Particularly in light of the risk that the Treasury will draw down compensating balances before the last week of June, this 2-year note auction will be an important source of funds for the payment obligations scheduled for the first week of July. If the debt ceiling has not been raised prior to June 19, the Treasury may need to delay the announcement of the size of the auction, announce the auction subject to cancellation, or both.

The Treasury Department requests that Congress pass the President’s request for a permanent $750 billion increase in the debt ceiling as soon as possible.

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