About 44 percent, or $2.8 trillion, was held  by federal government accounts with investment authority, such as the  Social Security trust funds, the Civil Service Retirement and Disability Trust Fund (Civil Service fund), the Exchange Stabilization Fund (ESF),  and the Government Securities Investment Fund of the Federal Employees’  Retirement System (G-Fund). During that period, Treasury took several actions  that were similar to those discussed later in this report. Redemption of obligations held by the Civil Service fund. For example, subsection 8348(e) of title 5, United States Code,  authorizes the Secretary of the Treasury to invest surplus Civil Service  funds in other interest-bearing obligations of the United States or  obligations guaranteed as to both principal and interest by the United  States, if the Secretary of the Treasury determines that the purchases are in  the public interest. Objectives, Scope, and Methodology

develop a chronology of significant events related to the 2003 debt   evaluate the actions taken during the 2003 debt issuance suspension  period in relation to the normal policies and procedures Treasury uses  for investments and redemptions for major federal government  accounts with investment authority,   analyze the financial aspects of Treasury’s actions taken during the 2003  debt issuance suspension period and assess the legal basis of these  actions, and  analyze the impact of the policies and procedures Treasury used to  manage the debt during the 2003 debt issuance suspension period. On May 27, 2003, when the  debt ceiling was raised, Treasury fully invested the G-Fund’s receipts and  on May 28, 2003, fully restored the lost interest on the G-Fund’s uninvested  funds. The Secretary of the  Treasury is not authorized by law to restore these losses. Civil Service Fund Losses Associated with Early Redemptions and Suspended Investments Restored

When the Secretary of the Treasury redeems obligations earlier than  normal or refrains from promptly investing Civil Service fund receipts  because of debt ceiling limitations, the Secretary is required by subsection  8348(j)(3) of title 5, United States Code, to immediately restore, to the  maximum extent practicable, the Civil Service fund’s obligation holdings to  the proper balances when a debt issuance suspension period ends and to  restore lost interest on the next normal interest payment date. Effects of Exchange of Debt Obligations between the Civil Service Fund, FFB, and Treasury

During fiscal year 2003, Treasury initiated the following actions involving  the Civil Service fund, FFB, and the Treasury general fund related to its  efforts to (1) address FFB cash flow issues resulting from previously issued  FFB 9(a) obligations to the Civil Service fund and (2) manage the amount  of debt subject to the debt ceiling:  On October 18, 2002, FFB redeemed prior to maturity $15 billion in FFB  9(a) obligations held by the Civil Service fund. In some cases, we have been able to quantify the gains or losses that have  occurred or can be expected to occur that relate to the fiscal year 2003  transactions. However, in other cases, the information needed to  understand the potential consequences of the actions taken on March 5 and  June 30, 2003, will not be available for a number of years, and we are  unable to determine the potential impacts at this time. Treasury lacks the  statutory authority to restore such losses and has not developed the  documented policies and procedures that can be used to minimize such  losses in future exchanges between FFB and federal government accounts  with investment authority, such as the Civil Service fund. For example, during the 1985 debt ceiling crisis, Treasury was granted the  authority to restore the majority of interest losses associated with its  actions to avoid exceeding the debt ceiling.
Why GAO Did This Study

GAO is required to review the steps taken by the Department of the Treasury (Treasury) to avoid exceeding the debt ceiling during the 2003 debt issuance suspension period. The committee also directed GAO to determine whether all major accounts that were used for debt ceiling relief have been properly credited or reimbursed. Accordingly, GAO determined whether Treasury followed its normal investment and redemption policies and procedures for the major federal government accounts with investment authority, analyzed the financial aspects of actions Treasury took during this period, and analyzed the impact of policies and procedures Treasury used to manage the debt during the period.

What GAO Found

On February 20, 2003, Treasury determined that a debt issuance suspension period was in effect. A debt issuance suspension period is any period for which the Secretary of the Treasury has determined that obligations of the United States may not be issued without exceeding the debt ceiling. During this period, which lasted until May 27, 2003, the Secretary took actions related to the Government Securities Investment Fund of the Federal Employees' Retirement System (the G-Fund), the Civil Service Retirement and Disability Fund (the Civil Service fund), and the Exchange Stabilization Fund (ESF) to avoid exceeding the debt ceiling. Also, during fiscal year 2003, the Secretary initiated several actions involving the Civil Service Fund, FFB, and the Treasury general fund that related to Treasury's efforts to manage the amount of debt subject to the debt ceiling. The Secretary took other actions to avoid exceeding the debt ceiling, such as suspending the sales of State and Local Government Series Treasury obligations and recalling noninterest- bearing deposits held by commercial banks as compensation for banking services provided to Treasury. The actions taken, which were consistent with legal authorities provided to the Secretary and related to the G-Fund, the Civil Service fund, and ESF, initially resulted in interest losses to the G-Fund and ESF and principal and interest losses to the Civil Service fund. When the debt ceiling was increased to $7.4 trillion on May 27, 2003, the Secretary fully invested the G-Fund's investments and on May 28, 2003, fully restored the interest losses, as required by law. On June 30, 2003, the Secretary fully compensated the Civil Service fund for principal and interest losses, as required by law. The losses related to ESF could not be restored without special legislation. As a result, related ESF losses of $3.6 million were not restored. The actions initiated by Treasury in fiscal year 2003 that involved the early redemption of FFB debt obligations held by the Civil Service fund and exchanges of obligations among the Civil Service fund, FFB, and the Treasury general fund resulted in all three parties realizing gains or incurring losses. In some cases, GAO has been able to quantify the gains or losses that occurred as a result of these transactions. For example, according to FFB estimates, the Civil Service fund lost more than $1 billion in interest because of FFB's redemption of FFB obligations held by the Civil Service fund before their maturity date and unforeseen interest rate changes. In other cases, however, information needed to understand the potential consequences of these actions will not be available for a number of years. The Secretary currently lacks the statutory authority to restore such losses and has not developed documented policies and procedures that can be used to minimize such losses in future actions that may be taken by Treasury that involve FFB and an account with investment authority such as the Civil Service fund.