Treasury Secretary Timothy Geithner told Congress he would start tapping into federal pension funds on Monday to free up borrowing capacity as the nation hits the $14.294 trillion legal limit on its debt.
The Treasury will issue $72 billion in bonds and notes on Monday, pushing the nation right up against its borrowing cap at some point during the day, a Treasury official said.
Geithner said he would suspend investments in two government retirement funds to give the U.S. Treasury additional room to borrow.
"I will be unable to invest fully" in the civil service retirement and disability fund and the government securities investment fund, he said in a letter to congressional leaders.
The Treasury has said the suspension of the investments and other measures it could take would give the government until about August 2 before it will start defaulting on obligations, such as paying bond investors.
Congress is in charge of increasing the debt ceiling, but Republicans are demanding deep cuts to federal spending for the price of their support in doing so.
Geithner reiterated previous pleas for action. "I again urge Congress to act to increase the statutory debt limit as soon as possible," he said.
Previous administrations have also tapped the retirement funds at times to avoid breaching the debt limit. Over the past two decades, Treasury has suspended investments five times, with the most recent suspension in 2006.
"Federal retirees and employees will be unaffected by these actions," Geithner said, since Treasury must make the funds whole once the debt limit is raised.
But the measures still disrupt Treasury's operations, as it must run two sets of books among other things.
The White House weighed in, saying that not raising the U.S. debt limit would have very serious consequences. Those who suggest the opposite are "whistling past the graveyard," White House spokesman Jay Carney said Monday.
The debt limit is the amount of money the government can borrow to help finance its operations. The nation has reached its debt limit because the federal government has grown accustomed to borrowing massive amounts of money. The latest estimate is that it borrows 40 cents for every dollar it spends.
Republicans have said they will not vote to raise the borrowing limit until Congress and the White House agree on a plan to reduce the deficit through spending cuts. House Speaker John Boehner last week said those cuts should be larger than any increase in the debt ceiling.
Vice President Joe Biden is holding negotiations with lawmakers over the types of deficit-cutting measures that need to be approved to win congressional approval of a higher debt limit.
The move to dip into pension funds is one of several the Treasury could take to buy time for the Obama administration and lawmakers to strike a deal to raise the debt ceiling.
The following is a rundown of measures the Treasury has either employed, will employ Monday or could employ in the future to push back the date on which the current debt limit becomes binding:
Suspend state, local government securities
The Treasury on May 6 suspended sales of State and Local Government Series securities -- known as "slugs" -- which are special, low-interest Treasury securities offered to state and local governments to temporarily invest proceeds from municipal bond sales.
Slugs, which count against the debt limit, have been suspended six times in the past 20 years to avoid hitting the debt ceiling. The last time they were halted was in September 2007. So far in fiscal 2011, which began on Oct. 1, the Treasury has sold $47.4 billion in slugs to muni bond issuers.
Civil service retirement
The Treasury will suspend investments Monday in the Civil Service Retirement and Disability Fund, a government employee pension fund, and redeem certain investments.
Initially, the Treasury can claw back $12 billion in borrowing room by declaring a two-month "debt issuance suspension period," a legal determination specific to this fund. It could also declare a one-year suspension that would free up $72 billion in borrowing ability -- an amount equal to about one year's worth of benefit payments.
On June 30, the Treasury has another option to halt reinvestment of $67 billion of the fund's securities that mature on that date. But the Treasury has noted it has a bond interest payment of $12 billion due on June 30, diminishing the effect of that maneuver. It must also replace any missed contributions and lost earnings to the fund once the borrowing limit is raised.
Government securities investment fund
The Treasury will suspend reinvestments Monday in another federal employee pension fund known as the G-Fund, which has a balance of about $130 billion. Normally the money market-like fund reinvests its entire balance daily into special-issue Treasury securities that count against the debt limit. Halting reinvestments would instantly claw back $130 billion in borrowing capacity, but the Treasury must make the fund whole for any lost earnings once the debt limit impasse ends.
Exchange stabilization
The Treasury could dip into this seldom-used $50 billion fund earmarked to stabilize currency rates and access the dollar balance -- currently about $23 billion -- to avoid debt issuance. Created during the Great Depression of the 1930s, the fund was last used as a backstop to guarantee money market mutual funds during the financial crisis from September 2008 to September 2009. The Treasury would not have to restore lost interest earnings to the fund.
Issue more cash management bills
The Treasury could cut issuance of longer-term government debt and rely more heavily on short-term cash management bills to gain more day-to-day control over debt outstanding. Cash management bills are typically issued for days instead of normal Treasury bill maturities of four weeks to one year. But this is unlikely to buy much time and officials are wary of making any major shifts in the Treasury's debt issuance calendar, which could upset markets.
Suspend savings bonds
Treasury secretaries in the past have halted sales of U.S. savings bonds to the public during debt limit impasses, but Treasury Secretary Timothy Geithner argues this would be of little or no use. It would not free up borrowing authority and it would only prevent small amounts of new debt from being issued. Savings bond sales increase the debt by less than $220 million per month on average, giving this measure little potency during a time of trillion-dollar deficits.
Swap federal financing bank debt
The Federal Financing Bank can issue up to $15 billion in debt on behalf of other government agencies that is not subject to the debt limit. So the Treasury could exchange FFB debt for other debt to reduce the total amount subject to the limit. However, the Treasury says this measure is also of little use because of the very small amount of obligations available for exchange. The Government Accountability Office has estimated that based on data from last Aug. 31, this measure offered just $4.8 billion in borrowing headroom at that time.
Sell assets
The government could raise money by selling off chunks of companies it bailed out under its $700 billion Troubled Asset Relief Program. However, Geithner has said this may not be a viable option because taxpayers could end up suffering losses from a "fire sale" of financial assets.
He also said selling U.S. gold holdings could undermine confidence in the United States. And a recently announced plan to sell down the Treasury's mortgage-backed securities portfolio at a rate of $10 billion a month is not expected to make a material difference on the debt limit.
Treasury and insurer American International Group Inc said on May 11 they would sell 300 million shares, which at Friday's closing price would net about $9 billion for taxpayers. The government's 1.66 billion AIG common shares have taken a hit in recent weeks. At their peak in January, the government's holdings were valued at $87.4 billion, but that value now is down to about $50.49 billion.
The Treasury also anticipates initial public offerings this year in automaker Chrysler Holdings and lender Ally Financial Inc, formerly GMAC. It can resume selling General Motors shares after a lock-up agreement expires in late May.
Higher tax receipts?
The Treasury was able to stave off its debt limit reckoning by about a month because the April tax filing season produced higher-than-expected receipts.
Job growth is picking up, arguing for higher income tax withholding, but many economists have expressed concern that high fuel and food costs, coupled with lower government spending, may slow economic growth.