	Background

In managing the funds that flow through the federal government’s account,  Treasury frequently accumulates cash due to timing differences in when  borrowing occurs, taxes are received, and agency payments are made. Treasury often receives large cash inflows in the middle of the month and  makes large, regular payments in the beginning of the month. Before Treasury invests any portion of its operating cash  balance, Treasury generally targets a $5 billion balance in the TGA. 1.) 2.) A stable TGA balance assists the Federal Reserve in its execution of  monetary policy. The three short-term vehicles  currently used by Treasury subject Treasury to high concentration risks  and have limited capacity. To improve returns, Treasury established the  TIO program in 2003, which provides near market rates of return but still  subjects Treasury to concentration risk and does not alleviate Treasury’s  capacity concerns. Treasury earned near market rates of  return in the pilot, but because of its temporary status and limits in  Treasury’s current legislative authority, the pilot’s features—including  participants, collateral, trading terms, and clearing and settlement  arrangements—are restricted and prevent Treasury from accessing the  broader repo market. The TT&L Program Serves Key Functions but Has Significant Limitations

The TT&L program provides Treasury with an effective system for  collecting federal tax payments and helps Treasury meet its target balance  in the TGA, but it subjects Treasury to concentration risk and earns a  return well below market rate. TIO Rates: TIOs earn a higher rate of return than TT&L deposits. Options Exist to Increase Treasury’s Rate of Return and Reduce Risk on Short- Term Investments

		Treasury Should Minimize TT&L Investments and Expand the Repo Program to Increase Returns and Reduce the Risks of Concentration and Constrained Capacity

Treasury could increase its return on investment by continuing to reduce  funds in TT&L accounts and reallocate those funds to a mix of TIOs and  repos. Treasury Will Need to Consider Primary Investment Objectives If Given Authority to Design a Permanent, Expanded Repo Program

In designing the operational elements of a permanent, expanded repo  program, Treasury would need to consider industry investment practices  in designing the program’s operational elements and managing risks that  are associated with the selection of participants, collateral types, terms of  trade, and trading arrangements. It is maintained across the 12 Federal Reserve Banks  and rolled into one account at the end of each business day.
Why GAO Did This Study

Growing debt and net interest costs are a result of persistent fiscal imbalances, which, if left unchecked, threaten to crowd out spending for other national priorities. The return on every federal dollar that the Department of the Treasury (Treasury) is able to invest represents an opportunity to reduce interest costs. This report (1) analyzes trends in Treasury's main receipts, expenditures, and cash balances, (2) describes Treasury's current investment strategy, and (3) identifies options for Treasury to consider for improving its return on short-term investments. GAO held interviews with Treasury officials and others and reviewed related documents.

What GAO Found

In managing the funds that flow through the federal government's account, Treasury frequently accumulates cash because of timing differences between when borrowing occurs, taxes are received, and agency payments are made. Treasury often receives large cash inflows in the middle of the month and makes large, regular payments in the beginning of the month. Treasury uses three short-term vehicles--Treasury Tax & Loan (TT&L) notes, Term Investment Option (TIO) offerings, and limited repurchase agreements (repo)--to invest operating cash. Before Treasury invests any portion of its operating cash balance, Treasury generally targets a $5 billion balance in its Treasury General Account (TGA) which is maintained across the 12 Federal Reserve Banks. The TT&L program provides Treasury with an effective system for collecting federal tax payments while assisting the Federal Reserve in executing monetary policy, but it subjects Treasury to concentration risk and earns a return well below the market rate. The TIO program earns a greater rate of return but it also subjects Treasury to concentration risk. Both programs also present capacity concerns. Treasury began testing repos through a pilot program in 2006. Repos have earned near market rates of return, but because of the pilot's scope and the current, limited legislative authority under which it operates, the repo participants, collateral, trading terms, and trading arrangements are restricted. A permanent, expanded repo program could permit Treasury to earn a higher rate of return, expand investment capacity, and reduce concentration risk. If given authority to design such a program, Treasury would need to tailor it to meet liquidity needs and to achieve a higher rate of return while minimizing risks that are associated with the selection of program participants, collateral types, terms of trade, and trading arrangements.