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. Extraordinary Actions to Manage Debt Were Consistent with Legislation and Regulations

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). On August 2, 2011, Treasury resumed  the sale of SLGS securities. As such, Treasury did  not redeem investments of the Postal Benefits Fund earlier than normal  during 2011 and January 2012. Treasury Restored Uninvested Principal and Interest Losses as Authorized

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. 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. Delays in Raising the Debt Limit Increased Treasury’s Borrowing Costs and Affected Its Operations

Congress usually votes on increasing the debt limit after fiscal policy  decisions affecting federal borrowing have begun to take effect. Managing Debt When Delays in Raising the Debt Limit Occurred in 2011 and January 2012 Affected Treasury’s Normal Operations

Debt and cash management required more time and Treasury resources  as delays in raising the debt limit occurred in 2011 and January 2012. However,  delays in raising the debt limit can create uncertainty in the Treasury  market and lead to higher borrowing costs. However, this does not  account for the multiyear effects on increased costs for Treasury  securities that will remain outstanding after fiscal year 2011. 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. 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. Treasury also provided technical comments, which  we incorporated as appropriate. Appendix I: Objectives, Scope, and Methodology

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. Effect of Delayed Increase in the Debt Limit on Treasury’s Borrowing Costs

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.
Why GAO Did This Study

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 Treasurys 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 GAOs draft report, Treasury broadly agreed with GAOs conclusions and provided technical comments, which GAO incorporated as appropriate.

What GAO Found

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 Treasurys 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 Treasurys staff away from other important cash and debt management responsibilities.
The debt limit does not restrict Congresss ability to enact spending and revenue legislation that affects the level of debt or otherwise constrains fiscal policy; it restricts Treasurys 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.