oversight

Debt Limit: Analysis of 2011-2012 Actions Taken and Effect of Delayed Increase on Borrowing Costs

Published by the Government Accountability Office on 2012-07-23.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States Government Accountability Office

GAO          Report to the Congress




July 2012
             DEBT LIMIT

             Analysis of 2011-2012
             Actions Taken and
             Effect of Delayed
             Increase on
             Borrowing Costs




GAO-12-701
                                             July 2012

                                             DEBT LIMIT
                                             Analysis of 2011-2012 Actions Taken and Effect of
                                             Delayed Increase on Borrowing Costs
Highlights of GAO-12-701, a report to the
Congress




Why GAO Did This Study                       What GAO Found
GAO previously examined challenges
associated with managing cash and            On August 2, 2011, Congress and the President enacted the Budget Control Act
debt when delays in raising the debt         of 2011, which established a process that increased the debt limit to its current
limit occurred, focusing on the period       level of $16.4 trillion through incremental increases effective on August 2, 2011;
from 1995 through 2010. In February          after close of business on September 21, 2011; and after close of business on
2011, GAO reported that delays in            January 27, 2012. Delays in raising the debt limit occurred prior to the August
raising the debt limit create debt and       2011 and January 2012 increases, with the Department of the Treasury
cash challenges for Treasury, and            (Treasury) deviating from its normal debt management operations and taking a
these challenges have been                   number of actions, referred to by Treasury as extraordinary actions, to avoid
exacerbated in recent years by a large       exceeding the debt limit.
growth in debt.
                                             The extraordinary actions Treasury took during 2011 and January 2012 to
Delays in raising the debt limit             manage federal debt when delays in raising the debt limit occurred were
occurred during 2011 and January             consistent with relevant legislation and regulations. For 2011, these actions
2012. GAO has prepared this report           included suspending investments of the Civil Service Retirement and Disability
because of the nature of, and                Fund (CSRDF), the Postal Service Retiree Health Benefits Fund (Postal Benefits
sensitivity toward, actions taken to         Fund), the Government Securities Investment Fund of the Federal Employees’
manage federal debt during such              Retirement System (G-Fund), and the Exchange Stabilization Fund (ESF), and
delays. With regard to actions taken by
                                             redeeming certain investments held by the CSRDF earlier than normal. For
Treasury during 2011 and January
                                             January 2012, Treasury suspended investments to the G-Fund and ESF.
2012 to manage federal debt when
delays in raising the debt limit
occurred, this report provides (1) a         In accordance with relevant legislation, Treasury restored the uninvested
chronology of the significant events,        principal and interest losses for 2011 and January 2012 to the CSRDF, Postal
(2) an analysis of whether actions           Benefits Fund, and G-Fund. Treasury also invested the uninvested principal for
taken by Treasury were consistent with       2011 and January 2012 to the ESF. However, Treasury did not restore interest
legal authorities provided to manage         losses to the ESF because it lacks legislative authority to do so.
federal debt during such delays, (3) an
assessment of the extent to which            Delays in raising the debt limit can create uncertainty in the Treasury market and
Treasury restored uninvested principal       lead to higher Treasury borrowing costs. GAO estimated that delays in raising
and interest losses to federal               the debt limit in 2011 led to an increase in Treasury’s borrowing costs of about
government accounts in accordance            $1.3 billion in fiscal year 2011. However, this does not account for the multiyear
with relevant legislation, and (4) an        effects on increased costs for Treasury securities that will remain outstanding
analysis of the effect that delays in        after fiscal year 2011. Further, according to Treasury officials, the increased
raising the debt limit had on Treasury’s     focus on debt limit-related operations as such delays occurred required more
borrowing costs and operations. To           time and Treasury resources and diverted Treasury’s staff away from other
address these objectives, GAO                important cash and debt management responsibilities.
reviewed Treasury correspondence
and other documentation, analyzed
                                             The debt limit does not restrict Congress’s ability to enact spending and revenue
Treasury and private security yield
                                             legislation that affects the level of debt or otherwise constrains fiscal policy; it
data, and interviewed Treasury
officials. In commenting on GAO’s draft      restricts Treasury’s authority to borrow to finance the decisions already enacted
report, Treasury broadly agreed with         by Congress and the President. Congress also usually votes on increasing the
GAO’s conclusions and provided               debt limit after fiscal policy decisions affecting federal borrowing have begun to
technical comments, which GAO                take effect. This approach to raising the debt limit does not facilitate debate over
incorporated as appropriate.                 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
View GAO-12-701. For more information,       better link decisions about the debt limit with decisions about spending and
contact Gary T. Engel at (202) 512-3406 or   revenue to avoid potential disruptions to the Treasury market and to help inform
engelg@gao.gov or Susan J. Irving at (202)
512-6806 or irvings@gao.gov.
                                             the fiscal policy debate in a timely way.
                                                                                      United States Government Accountability Office
Contents


Letter                                                                                    1
               Background                                                                 4
               Chronology of Events                                                       9
               Extraordinary Actions to Manage Debt Were Consistent with
                 Legislation and Regulations                                            10
               Treasury Restored Uninvested Principal and Interest Losses as
                 Authorized                                                             18
               Delays in Raising the Debt Limit Increased Treasury’s Borrowing
                 Costs and Affected Its Operations                                      20
               Concluding Observations                                                  25
               Agency Comments                                                          25

Appendix I     Objectives, Scope, and Methodology                                       27



Appendix II    Detailed Methodology Used to Analyze Effect on Treasury’s
               Borrowing Costs                                                          31



Appendix III   GAO Contacts and Staff Acknowledgments                                   34



Tables
               Table 1: Extraordinary Actions Available to Treasury to Manage
                        Debt When Delays in Raising the Debt Limit Occur                  8
               Table 2: Chronology of Events Related to the Debt Limit, January
                        2011 through January 2012                                         9
               Table 3: Reported Balances as of April 30, 2011, and December 31,
                        2011, of Treasury Securities Held by Selected Major
                        Federal Government Accounts with Investment Authority           17
               Table 4: Restored Principal and Interest Related to Extraordinary
                        Actions Taken to Manage Debt during 2011 and January
                        2012                                                            18


Figures
               Figure 1: Debt Subject to the Limit, September 30, 1996, through
                       September 30, 2011, and May 31, 2012                               5



               Page i                                                  GAO-12-701 Debt Limit
Figure 2: Estimated Increase or Decrease in Spreads between
        Private and Treasury Security Yields for the 2011 Debt
        Limit Event Period (January 6, 2011, through August 1,
        2011)                                                                             22




Abbreviations

BCA               Budget Control Act of 2011
BPD               Bureau of the Public Debt
CM bills          cash management bills
CSRDF             Civil Service Retirement and Disability Fund
DISP              debt issuance suspension period
ESF               Exchange Stabilization Fund
FFB               Federal Financing Bank
FRED              Federal Reserve Economic Data
OFP               Office of Fiscal Projections
SLGS              State and Local Government Series
TIPS              Treasury Inflation-Protected Securities




This is a work of the U.S. government and is not subject to copyright protection in the
United States. The published product may be reproduced and distributed in its entirety
without further permission from GAO. However, because this work may contain
copyrighted images or other material, permission from the copyright holder may be
necessary if you wish to reproduce this material separately.




Page ii                                                             GAO-12-701 Debt Limit
United States Government Accountability Office
Washington, DC 20548




                                   July 23, 2012 Letter

                                   Report to the Congress

                                   Congress and the President have enacted laws to establish a limit on the
                                   amount of federal debt that can be outstanding at one time, referred to as
                                   the debt limit. 1 The debt limit does not restrict Congress’s ability to enact
                                   spending and revenue legislation that affects the level of debt or
                                   otherwise constrains fiscal policy; it restricts the Department of the
                                   Treasury’s (Treasury) 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 addition, when delays in raising the debt limit
                                   occur, Treasury often must deviate from its normal cash and debt
                                   management operations and take a number of extraordinary actions to
                                   meet the government’s obligations as they come due without exceeding
                                   the debt limit. 2

                                   We have 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. We reported in February 2011 that
                                   delays in raising the debt limit create debt and cash management
                                   challenges for Treasury, and these challenges have been exacerbated in
                                   recent years by a large growth in debt. 3 The amount of borrowing
                                   capacity provided by taking the extraordinary actions available to
                                   Treasury has grown in size but has not kept pace with the growth in
                                   Treasury’s borrowing needs. This means that once debt approaches the
                                   debt limit, Treasury may not be able to manage the amount of debt
                                   subject to the limit for as long a period of time as it had in the past before
                                   the debt limit must be increased. Further, failure to raise the debt limit in a
                                   timely manner could have serious negative consequences for the


                                   1
                                    The debt limit is codified at 31 U.S.C. §§ 3101 and 3101A.
                                   2
                                    Actions that are not part of Treasury’s normal cash and debt management operations are
                                   considered “extraordinary actions” by Treasury.
                                   3
                                    GAO, Debt Limit: Delays Create Debt Management Challenges and Increase Uncertainty
                                   in the Treasury Market, GAO-11-203 (Washington, D.C.: Feb. 22, 2011).




                                   Page 1                                                           GAO-12-701 Debt Limit
Treasury market and increase borrowing costs. Managing debt when
delays in raising the debt limit occur also diverts Treasury’s resources
away from other cash and debt management issues. In February 2011,
we reported 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.

On January 6, 2011, the Secretary of the Treasury notified Congress that
the debt limit would likely be reached between March 31, 2011, and
May 16, 2011. 4 On August 2, 2011, Congress and the President enacted
the Budget Control Act of 2011 (BCA), 5 which established a process that
resulted in debt limit increases effective on August 2, 2011; after close of
business on September 21, 2011; and after close of business on
January 27, 2012. 6 Delays in raising the debt limit occurred prior to the
August 2011 and January 2012 increases, with Treasury deviating from
its normal debt management operations and taking a number of
extraordinary actions to avoid exceeding the debt limit.

Because of the nature of, and sensitivity toward, actions taken to manage
federal debt when delays in raising the debt limit occur, we prepared this
report under the Comptroller General’s authority to conduct evaluations
on GAO’s initiative to assist Congress with its oversight responsibilities.
This report provides the results of our review of Treasury’s actions during
2011 and January 2012 to manage federal debt when delays in raising
the debt limit occurred. Specifically, the objectives of this report are to
(1) provide a chronology of the significant events, (2) analyze whether
actions taken by Treasury were consistent with legal authorities provided



4
Treasury began using extraordinary actions on May 6, 2011.
5
 Pub. L. No. 112-25, § 301, 125 Stat. 240, 251 (Aug. 2, 2011), codified at 31 U.S.C. §§
3101 and 3101A.
6
 Section 301 of the BCA provided for increases in the debt limit if the President certified
that the debt subject to the limit was within $100 billion of the limit and that further
borrowing was required to meet existing commitments subject to a joint congressional
resolution of disapproval within the designated statutory time frames (see 31 U.S.C. §§
3101A(a), (b)). The President provided his certifications to Congress, and the debt limit
was increased upon the expiration of the statutory time frames for Congress’s disapproval,
after close of business on September 21, 2011, and January 27, 2012. However,
additional borrowing pursuant to the increased debt limits did not occur until the next
business days, which were September 22, 2011, and January 30, 2012, respectively.




Page 2                                                              GAO-12-701 Debt Limit
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 answer the first three objectives, we reviewed Treasury
correspondence, announcements, and documentation of the actions
taken during 2011 and January 2012 to manage federal debt when delays
in raising the debt limit occurred. We compared Treasury’s actions to
relevant legislation and regulations authorizing the specific extraordinary
actions. We also reviewed documentation supporting uninvested
principal, calculations of forgone interest, and the restoration of principal
and interest losses. To evaluate whether Treasury followed normal
investment and redemption policies and procedures for federal
government accounts not affected by the extraordinary actions (e.g.,
Treasury’s actions did not involve accounts that it is not authorized to use
in such situations), we performed audit procedures over the investment
and redemption activity of selected major accounts.

To determine what effect delays in raising the debt limit in 2011 had on
Treasury’s borrowing costs, we performed a multivariate regression
analysis of the daily yield spread—yields on private securities minus
yields on Treasury securities of comparable maturities—during the debt
limit event period. 7 We used yield spreads during the 3-month pre-event
period as a benchmark against which yield spreads during the event
period were compared. We also examined changes in the yield spread
during the January 2012 debt limit event period. See appendix II for more
details on how we estimated increased borrowing costs, including
limitations to our using a multivariate regression to measure changes in
Treasury’s borrowing costs attributable to delays in raising the debt limit. 8
We obtained Treasury auction data for this analysis from Treasury and
private security yields and other data from the Federal Reserve Bank of
St. Louis’s Federal Reserve Economic Data (FRED) source. We also


7
 For the purposes of our analysis, a debt limit event period begins when Treasury first
warns of the need to raise the debt limit and ends when legislation to raise the limit takes
effect. For 2011, the debt limit event period was from January 6, 2011, through August 1,
2011.
8
 App. II also discusses differences with previous analyses, which focused on short-term
Treasury securities.




Page 3                                                                GAO-12-701 Debt Limit
             used data on Standard & Poor’s 500 total return index from IHS Global
             Insight in our analysis. To assess the reliability of these data, we looked
             for outliers and anomalies. These databases are commonly used by
             Treasury and researchers to examine the Treasury market and related
             transactions. On the basis of our assessment, we believe the data are
             sufficiently reliable for the purpose of this review. We also reviewed
             documents provided by Treasury, interviewed Treasury officials, and
             obtained estimates from Treasury of the number of personnel and amount
             of time involved in Treasury’s efforts to manage federal debt during such
             delays. We reviewed these estimates for reasonableness.

             We conducted this performance audit from May 2011 to July 2012 in
             accordance with generally accepted government auditing standards.
             Those standards require that we plan and perform the audit to obtain
             sufficient, appropriate evidence to provide a reasonable basis for our
             findings and conclusions based on our audit objectives. We believe that
             the evidence obtained provides a reasonable basis for our findings and
             conclusions based on our audit objectives. See appendixes I and II for
             more details on our objectives, scope, and methodology.


             Congress and the President first enacted a statutory limit on federal debt
Background   during World War I to eliminate the need for Congress to approve each
             new debt issuance and provide Treasury with greater discretion over how
             it finances the government’s day-to-day borrowing needs. With the Public
             Debt Act of 1941, 9 Congress and the President set an overall limit of
             $65 billion on Treasury debt obligations that could be outstanding at any
             one time and since then have enacted a number of debt limit increases.
             Most recently, Congress and the President enacted the BCA, which
             established a process that resulted in debt limit increases in three
             increments—$400 billion in August 2011, $500 billion in September 2011,
             and $1,200 billion in January 2012—for a total increase of $2.1 trillion,
             raising the debt limit to $16.394 trillion. As shown in figure 1, the amount
             of reported outstanding debt subject to the limit has increased from
             $5,137 billion on September 30, 1996, to $15,730 billion on May 31,
             2012.




             9
             Pub. L. No. 77-7, 55 Stat. 7 (Feb. 19, 1941).




             Page 4                                                   GAO-12-701 Debt Limit
Figure 1: Debt Subject to the Limit, September 30, 1996, through September 30, 2011, and May 31, 2012




                                         Debt subject to the limit includes both debt held by the public and
                                         intragovernmental debt holdings. Debt held by the public consists
                                         primarily of marketable Treasury securities, such as bonds, notes, bills,
                                         cash management bills (CM bills), and Treasury Inflation-Protected
                                         Securities (TIPS), which are sold through auctions and can be resold by
                                         whoever owns them. 10 Treasury also issues a smaller amount of
                                         nonmarketable securities, such as savings securities and special
                                         securities for state and local governments. Debt held by the public
                                         primarily represents the amount the federal government has borrowed to


                                         10
                                           CM bills are flexible securities that Treasury issues outside of its regular preannounced
                                         auction schedule. Treasury sets the amount and time to maturity to meet its immediate
                                         borrowing needs at the time. TIPS are inflation-indexed securities that unlike nominal
                                         securities offer inflation protection to investors who are willing to pay a premium for this
                                         protection in the form of lower interest rates.




                                         Page 5                                                                GAO-12-701 Debt Limit
finance cumulative cash deficits. Intragovernmental debt holdings
represent balances of Treasury securities held in federal government
accounts, such as the Social Security and Medicare trust funds.
Intragovernmental debt increases when these accounts run a surplus or
accrue interest on existing securities. 11

The Secretary of the Treasury has several responsibilities related to the
federal government’s financial management operations. These include
paying the government’s obligations and investing the excess annual
receipts (including interest earnings) over disbursements of federal
government accounts with investment authority. To meet these
responsibilities, the Secretary of the Treasury is authorized by law to
issue the necessary securities to federal government accounts with
investment authority for investment purposes and to borrow the
necessary funds from the public to pay government obligations. 12 Under
normal conditions, Treasury is notified by the appropriate agency (such
as the Office of Personnel Management for the Civil Service Retirement
and Disability Fund (CSRDF)) of the amount that should be invested on
its behalf, and Treasury then makes the investment. In some cases, the
actual security that Treasury should purchase is also specified. When a
federal government account with investment authority needs to make
disbursements, Treasury is normally notified of the amount of securities
that need to be redeemed. In some cases, Treasury is also notified to
redeem specific securities. The Treasury securities issued to federal
government accounts with investment authority count against the debt
limit. If these accounts’ receipts are not invested, the amount of debt
subject to the limit does not increase.




11
  A very small amount of total federal debt is not subject to the debt limit. This amount is
primarily composed of unamortized discounts on Treasury bills and Zero Coupon Treasury
bonds; debt securities issued by agencies other than Treasury, such as the Tennessee
Valley Authority; and debt securities issued by the Federal Financing Bank. As of
September 30, 2011, 99.5 percent of federal debt was subject to the debt limit.
12
  The majority of securities held by federal government accounts are Government
Account Series (GAS) securities. GAS securities consist of par value securities and
market-based securities, with terms ranging from on demand out to 30 years. Par value
securities are issued and redeemed at par (100 percent of face value), regardless of
current market conditions. Market-based securities, however, can be issued at a premium
or discount and are redeemed at par value on the maturity date or at market value if
redeemed before the maturing date.




Page 6                                                               GAO-12-701 Debt Limit
Under normal circumstances, the debt limit is not an impediment to
carrying out these investment responsibilities. However, when federal
debt is near or at the debt limit, increasing the debt limit frequently
involves lengthy debate by Congress. 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.
Treasury has also taken other actions in the past to manage federal debt
during such delays. Table 1 provides an overview of each action.




Page 7                                                 GAO-12-701 Debt Limit
Table 1: Extraordinary Actions Available to Treasury to Manage Debt When Delays in Raising the Debt Limit Occur

Extraordinary action                      Description of extraordinary action
Suspension of new issuances and           SLGS securities are special securities offered to state and local governments and other
conversion of demand deposit securities   issuers of tax-exempt bonds. Suspending new SLGS issuances reduces uncertainty over
to special 90-day certificates of         future increases in debt subject to the limit but eliminates a flexible, low-cost option that
indebtedness of State and Local           state and local government issuers have frequently used when refinancing their existing
Government Series (SLGS) securities       debt before maturity. Converting SLGS demand deposit securities, which increase daily
                                          for the interest earned, to special 90-day certificates of indebtedness, which pay interest
                                          separately, results in debt subject to the limit not increasing daily for the interest earned.
Exchanging Federal Financing Bank (FFB) FFB is a government corporation under the general supervision and direction of the
debt for debt subject to the limit      Secretary of the Treasury, which borrows from the Treasury to finance purchases of
                                        agency debt and agency guaranteed debt. It can also issue up to $15 billion of its own
                                        debt—FFB 9(a) obligations—that is not subject to the debt limit. This debt can be
                                        exchanged with other federal debt (e.g., securities held by the CSRDF) to reduce the
                                        amount of debt subject to the limit.
Suspension of investments to the          The G-Fund contains contributions made by federal employees toward their retirement as
Government Securities Investment Fund     part of the Thrift Savings Plan program, which are invested in one-day nonmarketable
of the Federal Employees’ Retirement      Treasury securities that are subject to the debt limit. If the Secretary determines that the
                 a
System (G-Fund)                           G-Fund may not be fully invested without exceeding the debt limit, Treasury can suspend
                                          investments for the entire amount or a portion of the G-Fund on a daily basis to reduce
                                          debt subject to the limit. Treasury must notify Congress in writing when the G-Fund
                                          cannot be fully invested without exceeding the debt limit. Treasury is required to make the
                                          G-Fund whole after the debt limit has been increased.
Suspension of Exchange Stabilization      The ESF is used to help provide a stable system of monetary exchange rates. Dollar-
Fund (ESF) investments                    denominated assets of the ESF not used for program purposes are generally invested in
                                          one-day nonmarketable Treasury securities that are subject to the debt limit. When debt
                                          approaches the limit, Treasury can suspend investment for the entire amount or a portion
                                          of the ESF’s maturing nonmarketable Treasury securities. Treasury lacks legislative
                                          authority to restore lost interest to the ESF when the debt limit is increased.
Suspension of new investments to the      Contributions into the CSRDF (by federal government agencies and their civilian
Civil Service Retirement and Disability   employees toward retirement benefits) and Postal Benefits Fund (by the United States
Trust Fund (CSRDF) and Postal Service     Postal Service toward its retirees’ health benefits) are invested in par value
Retiree Health Benefits Fund (Postal      nonmarketable Treasury securities that are subject to the debt limit. Treasury is able to
               b
Benefits Fund)                            suspend new investments to the CSRDF and Postal Benefits Fund if the investment
                                          cannot be made without exceeding the debt limit. Treasury must notify Congress in writing
                                          when the CSRDF cannot be fully invested without exceeding the debt limit. Treasury is
                                          required to make the CSRDF and Postal Benefits Fund whole after the debt issuance
                                          suspension period (DISP)—a period in which Treasury determines that it cannot issue
                                          debt without exceeding the debt limit—has ended.
Disinvestment of securities held by the   Treasury is able to disinvest (e.g., redeem earlier than normal) Treasury securities held by
                                  c
CSRDF and Postal Benefits Fund            the CSRDF and Postal Benefits Fund to prevent the amount of debt from exceeding the
                                          debt limit. Treasury must determine that a DISP exists and the length of the DISP, which
                                          Treasury uses to determine the amount of investments that can be disinvested. Treasury
                                          also must notify Congress in writing when the CSRDF cannot be fully invested without
                                          exceeding the debt limit. Treasury is required to make the CSRDF and Postal Benefits
                                          Fund whole after the DISP has ended.
                                           Source: GAO analysis of related legislation and regulations.
                                           a
                                               5 U.S.C. §§ 8438(g), (h).
                                           b
                                               5 U.S.C. §§ 8348(j), (l) and 5 U.S.C. § 8909a(c).
                                           c
                                            5 U.S.C. §§ 8348(k), (l) and 5 U.S.C. § 8909a(c).




                                           Page 8                                                                 GAO-12-701 Debt Limit
                                          We have previously reported on aspects of Treasury’s actions during the
                                          2003 and 2002 debt issuance suspension periods (DISP), and the 1995-
                                          1996 and other debt limit crises. 13


                                          In January 2011, Treasury determined that the debt limit of
Chronology of Events                      $14.294 trillion set in February 2010 would likely be reached by May 16,
                                          2011. In May 2011, Treasury determined that it was necessary to use
                                          extraordinary actions to manage federal debt during the delay in raising
                                          the debt limit, which lasted through August 1, 2011. Treasury again
                                          determined that extraordinary actions were needed to manage federal
                                          debt in January 2012. Table 2 shows the significant events from
                                          January 6, 2011, through January 30, 2012, that relate to the debt limit.

Table 2: Chronology of Events Related to the Debt Limit, January 2011 through January 2012

Date                            Event
Events leading up to the use of extraordinary actions in 2011
January 6, 2011                 The Secretary of the Treasury sent a letter to the Senate Majority Leader requesting an increase in
                                the debt limit. The letter stated that the debt limit would likely be reached sometime between March
                                31, 2011, and May 16, 2011.
April 4, 2011                   The Secretary of the Treasury sent a letter to the Senate and House Majority and Minority Leaders
                                stating that Treasury’s updated estimates indicated that the debt limit would be reached no later
                                than May 16, 2011. The letter projected that Treasury’s borrowing authority using available
                                extraordinary measures would be exhausted after about July 8, 2011.
May 2, 2011                     The Secretary of the Treasury sent a letter to the Senate and House Majority and Minority Leaders
                                indicating that Treasury would begin suspending the issuance of SLGS securities on May 6, 2011,
                                and if Congress had not increased the debt limit by May 16, 2011, Treasury would take further
                                extraordinary actions beginning on that date. Treasury stated that these actions would extend
                                Treasury’s borrowing authority until about August 2, 2011.
Extraordinary actions in 2011
May 6, 2011                     Treasury began suspending new issuances of SLGS securities and converted all outstanding SLGS
                                demand deposit securities to special 90-day certificates of indebtedness.
May 16, 2011                    The Secretary of the Treasury notified Congress that he had determined a DISP existed from May
                                16, 2011, until August 2, 2011, and Treasury
                                (1) redeemed a portion of investments held by the CSRDF earlier than normal and
                                (2) began suspending new investments to the CSRDF.
                                The Secretary of the Treasury notified Congress that he would be unable to fully invest the G-Fund
                                and Treasury began suspending investments to the G-Fund.




                                          13
                                           GAO products related to federal debt and debt management, including the debt limit, can
                                          be found at http://www.gao.gov/special.pubs/longterm/past/#debt.




                                          Page 9                                                               GAO-12-701 Debt Limit
Date                            Event
June 30, 2011                   Treasury suspended new investments to the Postal Benefits Fund.
July 15, 2011                   Treasury began suspending investments to the ESF.
Events to raise the debt limit and restore principal and interest in 2011
August 2, 2011                  As authorized by the BCA, the debt limit increased $400 billion to $14.694 trillion.
                                Treasury invested all uninvested principal of the CSRDF, Postal Benefits Fund, G-Fund, and ESF.
                                Treasury resumed the sale of SLGS securities and converted the special 90-day certificates of
                                indebtedness back to demand deposits including accrued interest.
August 3, 2011                  Treasury restored interest losses incurred by the G-Fund.
After close of business on      As authorized by the BCA, the debt limit increased $500 billion to $15.194 trillion.
September 21, 2011
December 30, 2011               Treasury restored interest losses incurred by the CSRDF and the Postal Benefits Fund.
Extraordinary actions in January 2012
January 4, 2012                 Treasury began suspending investments to the ESF.
January 17, 2012                The Secretary of the Treasury notified Congress that he would be unable to fully invest the G-Fund
                                and Treasury began suspending investments to the G-Fund.
Events to raise the debt limit and restore principal and interest in January 2012
After close of business on      As authorized by the BCA, the debt limit increased $1.2 trillion to $16.394 trillion.
January 27, 2012
January 30, 2012                Treasury invested all uninvested principal of the G-Fund and ESF and restored interest losses
                                incurred by the G-Fund.
                                           Source: GAO analysis of congressional actions and documentation from Treasury.




                                           The extraordinary actions Treasury took during 2011 and January 2012 to
Extraordinary Actions                      manage federal debt when delays in raising the debt limit occurred were
to Manage Debt Were                        consistent with relevant authorizing legislation and regulations. These
                                           actions related to State and Local Government Series (SLGS) securities,
Consistent with                            and the CSRDF, Postal Service Retiree Health Benefits Fund (Postal
Legislation and                            Benefits Fund), G-Fund, and Exchange Stabilization Fund (ESF). For
Regulations                                other major federal government accounts with investment authority,
                                           Treasury used its normal investment and redemption policies and
                                           procedures to handle receipts and maturing investments and to redeem
                                           Treasury securities.




                                           Page 10                                                                          GAO-12-701 Debt Limit
Actions Related to SLGS          Treasury took the first extraordinary action on May 6, 2011, by
Securities                       suspending new issuances of SLGS securities. 14 Prior to the suspension,
                                 the reported amount of SLGS securities outstanding was about
                                 $177.3 billion. This level declined to a reported amount of about
                                 $146.5 billion by August 1, 2011. On August 2, 2011, Treasury resumed
                                 the sale of SLGS securities. Treasury also converted SLGS demand
                                 deposit securities outstanding on May 6, 2011, to special 90-day
                                 certificates of indebtedness. On August 2, 2011, Treasury converted the
                                 special 90-day certificates of indebtedness back to demand deposits
                                 including accrued interest. Treasury maintained spreadsheets to track the
                                 certificates of indebtedness and the daily interest accruals. Treasury’s
                                 actions related to the SLGS demand deposit securities were in
                                 accordance with 31 C.F.R. Part 344.7 (b), which authorizes the Secretary
                                 of the Treasury to invest any unredeemed SLGS demand deposit
                                 securities in special 90-day certificates of indebtedness. Treasury did not
                                 use its authority to suspend new issuances of or convert SLGS securities
                                 during January 2012.

Actions Related to the           The Secretary of the Treasury notified Congress that he had determined
CSRDF                            that a DISP existed for the CSRDF on May 16, 2011, after concluding that
                                 he would not be able to issue debt securities without exceeding the debt
                                 limit. On that day, Treasury redeemed certain investments held by the
                                 CSRDF earlier than normal and began suspending new investments of
                                 CSRDF receipts. Treasury did not use its authority to redeem or suspend
                                 investments of the CSRDF during January 2012.

Early Redemption of Securities   Subsection 8348(k) of title 5, United States Code, authorizes the
Held by the CSRDF                Secretary of the Treasury to redeem securities or other invested assets of
                                 the CSRDF before maturity to prevent the amount of debt from exceeding
                                 the debt limit. The statute does not require that early redemptions be
                                 made only for the purpose of making CSRDF payments. Further, the
                                 statute permits early redemptions even if the CSRDF has adequate cash
                                 balances to cover such payments. However, the statute provides that the
                                 amount redeemed may not exceed the total amount of the payments
                                 authorized to be made from the CSRDF during the DISP.




                                 14
                                  Treasury announced that subscriptions for SLGS securities received before noon
                                 Eastern Daylight Time on May 6, 2011, would be honored.




                                 Page 11                                                         GAO-12-701 Debt Limit
                           Treasury decided to redeem securities held by the CSRDF earlier than
                           normal in accordance with subsection 8348(k)(1) of title 5, United States
                           Code. To take such action, the Secretary of the Treasury must determine
                           that a DISP exists and the length of the DISP. The statute authorizing the
                           DISP and its legislative history are silent as to how to determine the
                           length of a DISP. On May 16, 2011, the Secretary of the Treasury notified
                           Congress that a DISP, as it relates to the CSRDF, would begin that day
                           and would last through August 2, 2011.

                           On May 16, 2011, Treasury redeemed about $17.1 billion of securities
                           held by the CSRDF before maturity using its authority under subsection
                           8348(k)(1) of title 5, United States Code. The $17.1 billion redemption
                           amount was determined based on (1) the length of the DISP (May 16,
                           2011, through August 2, 2011) and (2) the estimated monthly CSRDF
                           benefit payments and expenses that would occur during that time. 15
                           These were appropriate factors to use in determining the amount of
                           Treasury securities held by the CSRDF to redeem early.

                           From May 16, 2011, through July 31, 2011, about $11.8 billion of actual
                           benefit payments and expenses occurred, leaving about $5.3 billion of
                           uninvested principal from the $17.1 billion that had been redeemed early.
                           On August 1, 2011, benefit payments were about $5.7 billion. As such,
                           Treasury redeemed only the approximate $0.4 billion difference between
                           the $5.3 billion uninvested principal amount and the actual amount of
                           benefit payments to be made.

Suspension of New          Subsection 8348(j)(1) of title 5, United States Code, authorizes the
Investments to the CSRDF   Secretary of the Treasury to suspend additional investment of amounts in
                           the CSRDF if the investment cannot be made without exceeding the debt
                           limit. From May 16, 2011, through August 1, 2011, Treasury suspended
                           about $86 billion of investments to the CSRDF. Of this amount,
                           $63.1 billion related to securities that matured on June 30, 2011, and
                           were to be reinvested; $17.4 billion was from the semiannual interest
                           payment on June 30, 2011; and $5.5 billion represented cash receipts.




                           15
                             CSRDF benefit payments and expenses for May through August 2011 were estimated
                           to be approximately $5.9 billion monthly, with the majority occurring on the first business
                           day of the month.




                           Page 12                                                               GAO-12-701 Debt Limit
Actions Related to the   Subsection 8909a(c) of title 5, United States Code, requires investments
Postal Benefits Fund     to be made for the Postal Benefits Fund in the same manner as
                         investments for the CSRDF under section 8348. This includes the
                         provisions authorizing the early redemption and suspension of
                         investments. As discussed above for the CSRDF, the amount redeemed
                         earlier than normal may not exceed the total amount of the payments
                         authorized to be made during the DISP. Subsection 8906(g)(2)(A) of title
                         5, United States Code, authorizes payments to be made from the Postal
                         Benefits Fund beginning after September 30, 2016. As such, Treasury did
                         not redeem investments of the Postal Benefits Fund earlier than normal
                         during 2011 and January 2012. On June 30, 2011, Treasury suspended
                         about $9.5 billion of new investments to the Postal Benefits Fund. Of this
                         amount, $8.7 billion related to securities that matured on June 30, 2011,
                         and were to be reinvested, and $0.8 billion was from the semiannual
                         interest payment on June 30, 2011. Treasury did not use its authority to
                         suspend investments of the Postal Benefits Fund during January 2012.


Actions Related to the   Subsection 8438(g)(1) of title 5, United States Code, authorizes the
G-Fund                   Secretary of the Treasury to suspend the issuance of additional amounts
                         of investments to the G-Fund if the issuance cannot be made without
                         causing the debt limit to be exceeded. On most days from May 16, 2011,
                         through August 1, 2011, and each day from January 17, 2012, through
                         January 27, 2012, Treasury did not fully invest the holdings of the
                         G-Fund. Since the G-Fund invests in one-day securities that are
                         redeemed and reinvested each business day, the amount of uninvested
                         principal varied most days depending on the federal government’s
                         outstanding debt. Although Treasury can accurately predict the outcome
                         of some events that affect the outstanding debt, it cannot precisely
                         determine the outcome of others until they occur. For example, the
                         amount of Treasury securities that Treasury will issue to the public from
                         an auction can be determined some days in advance because Treasury
                         can control the amount that will be issued. On the other hand, the amount
                         of savings bonds that will be issued and redeemed and the amount of
                         Treasury securities that will be issued to, or redeemed by, various federal
                         government accounts with investment authority are difficult to precisely
                         predict. Because of these difficulties, Treasury needed to ensure that the
                         normal investment and redemption activities associated with Treasury
                         securities did not cause the debt limit to be exceeded while also




                         Page 13                                                 GAO-12-701 Debt Limit
                             maintaining normal investment and redemption policies for the majority of
                             these accounts. To accomplish these objectives, for each day of the
                             above-noted periods, Treasury

                             •   calculated the amount of debt subject to the limit, excluding the
                                 receipts that the G-Fund would normally invest;
                             •   determined the amount of G-Fund receipts that could safely be
                                 invested without exceeding the debt limit and invested this amount in
                                 Treasury securities; and
                             •   suspended investment, when necessary, of the G-Fund’s remaining
                                 receipts.

                             As of August 1, 2011, the business day prior to the debt limit increase, the
                             G-Fund had approximately $137.5 billion available for suspension, with
                             the entire amount suspended as of that date. As of January 27, 2012, the
                             business day prior to the debt limit increase, the G-Fund had
                             approximately $147.6 billion available for suspension, with about
                             $36.9 billion suspended as of that date.


Actions Related to the ESF   The purpose of the ESF is to help provide a stable system of monetary
                             exchange rates. The law establishing the ESF authorizes the Secretary of
                             the Treasury to invest the ESF’s balances not needed for program
                             purposes in Treasury securities. Section 5302 of title 31, United States
                             Code, authorizes the Secretary of the Treasury to determine when, and if,
                             excess funds for the ESF will be invested. On several occasions from
                             July 15, 2011, through August 1, 2011, and each day from January 4,
                             2012, through January 27, 2012, Treasury did not fully invest the dollar-
                             denominated portion of the ESF in Treasury securities. Since the ESF
                             invests the dollar-denominated portion of the fund in one-day Treasury
                             securities that are redeemed and reinvested each business day, the
                             amount of uninvested principal varied several days, depending on the
                             federal government’s outstanding debt. For each day, Treasury
                             determined the amount of funds that the ESF would be allowed to invest
                             in Treasury securities and, when necessary, suspended some
                             investments of the ESF receipts and maturing securities that would have
                             caused the debt limit to be exceeded. The process discussed above for
                             the G-Fund was also used for the ESF. During the 2011 period, the ESF
                             had approximately $22.8 billion available for suspension, with about
                             $6.9 billion of this amount suspended as of August 1, 2011, the business
                             day prior to the debt limit increase. During January 2012, the ESF had
                             approximately $22.7 billion available for suspension, with the entire
                             amount suspended as of January 17, 2012. The entire amount continued



                             Page 14                                                  GAO-12-701 Debt Limit
to be suspended each day through January 27, 2012, the business day
prior to the debt limit increase.

As a result of an error in calculating debt subject to the limit from
November 2, 2011, through December 29, 2011, Treasury suspended an
incorrect amount from the ESF from January 4, 2012, through
January 10, 2012. A programming change to Treasury’s debt accounting
system caused an incorrect calculation of unamortized discounts on
Treasury bills to be subtracted from total debt outstanding in calculating
debt subject to the limit. 16 Treasury identified the error during a
contingency operation on December 29, 2011. At that time, the
cumulative effect of the error was $181 million. The error in the program
was corrected immediately; however, the adjustment to correct the
$181 million was not recorded until January 11, 2012. 17

Debt subject to the limit was sufficiently below the debt limit from
November 2, 2011, through January 3, 2012, such that if the error was
taken into account, debt subject to the limit would still have been below
the debt limit. Treasury began using the ESF to manage federal debt
during the delay in raising the debt limit on January 4, 2012. To determine
whether Treasury would have exceeded the debt limit from January 4,
2012, through January 10, 2012, absent this error, we reviewed the
invested balances of the ESF during this period. Based on our review, we
found that the ESF had sufficient invested balances that could have been
used to manage federal debt during the delay. For example, as of
January 10, 2012, cumulative investments totaling $12.306 billion had
been suspended from the ESF. If the error had not occurred, cumulative
investments totaling $12.487 billion would have been suspended from the
ESF, $181 million more than what was actually suspended, but well
below the approximate $22.7 billion available for suspension. Therefore,
Treasury would have been able to suspend additional investments from
the ESF to remain under the debt limit. As a result of overinvesting the
ESF from January 4, 2012, through January 10, 2012, Treasury also




16
  Treasury bills are usually issued at a discount from the face value, but may also be
issued at par. The discounts are amortized (or expensed) over the term of the securities
with the amount yet to be amortized referred to as the unamortized discount.
17
  While Treasury identified the source of the error on December 29, 2011, additional
research was required to determine the period of the error and the amount involved.




Page 15                                                             GAO-12-701 Debt Limit
                            overpaid interest to the ESF during this period. Treasury corrected the
                            interest paid by making an adjustment of $402.63 on January 11, 2012.


Normal Investment and       We analyzed major federal government accounts with investment
Redemption Policies Used    authority for which Treasury stated it had followed its normal investment
on Major Federal            and redemption policies and procedures during the periods from May 16,
                            2011, through August 1, 2011, and from January 4, 2012, through
Government Accounts         January 27, 2012, to manage federal debt when delays in raising the debt
with Investment Authority   limit occurred. 18 Our analysis was intended to verify that Treasury’s
                            actions to manage federal debt during such delays did not involve federal
                            government accounts that Treasury is not authorized to use in such
                            situations. We found that for all the accounts we reviewed, Treasury used
                            its normal investment and redemption policies and procedures to handle
                            receipts and maturing investments and to redeem Treasury securities.
                            Table 3 lists the federal government accounts with investment authority
                            included in our analysis.




                            18
                             Our analysis focused on accounts with reported balances as of April 30, 2011, and
                            December 31, 2011, of Treasury securities greater than $10 billion.




                            Page 16                                                           GAO-12-701 Debt Limit
Table 3: Reported Balances as of April 30, 2011, and December 31, 2011, of Treasury Securities Held by Selected Major
Federal Government Accounts with Investment Authority

Dollars in billions
                                                                                                 Treasury securities                         Treasury securities
                                                                                                          held as of                                  held as of
                                                               a                                                   b                                           b
Federal government accounts with investment authority                                                April 30, 2011                          December 31, 2011
SSA: Federal Old-Age and Survivors Insurance Trust Fundc                                                             $2,450                              $2,525
OPM: Civil Service Retirement and Disability Fund                                                                             d
                                                                                                                                                           803e
DOD: Military Retirement Fund                                                                                             335                               383
HHS: Federal Hospital Insurance Trust Fundf                                                                               261                               244
SSA: Federal Disability Insurance Trust Fundc                                                                             173                               154
DOD: DOD Medicare-Eligible Retiree Health Care Fund                                                                       161                               177
HHS: Federal Supplementary Medical Insurance Trust Fundf                                                                    72                               80
DOE: Nuclear Waste Disposal Fund                                                                                            48                               49
OPM: Postal Service Retiree Health Benefits Fund                                                                              d
                                                                                                                                                             45
FDIC: The Deposit Insurance Fund                                                                                            39                               32
OPM: Employees Life Insurance Fund                                                                                          39                               40
DOT: Highway Trust Fund                                                                                                     24                               14
OPM: Employees Health Benefits Fund                                                                                         18                               19
DOS: Foreign Service Retirement and Disability Fund                                                                         16                               17
DOL: Pension Benefit Guaranty Corporation                                                                                   15                               15
DOL: Unemployment Trust Fund                                                                                                12                               16
NCUA: National Credit Union Share Insurance Fund                                                                            10                               11
Total                                                                                                                $3,673                              $4,624
                                         Source: Monthly Statements of the Public Debt of the United States for April 30, 2011, and December 31, 2011.
                                         a
                                          Social Security Administration (SSA), Department of Defense (DOD), Department of Health and
                                         Human Services (HHS), Department of Energy (DOE), Federal Deposit Insurance Corporation
                                         (FDIC), Office of Personnel Management (OPM), Department of Transportation (DOT), Department of
                                         State (DOS), Department of Labor (DOL), National Credit Union Administration (NCUA).
                                         b
                                          These represent the reported holdings as of the month-end dates that immediately preceded
                                         Treasury’s initiation of extraordinary actions.
                                         c
                                             These are the Social Security trust funds.
                                         d
                                          Treasury took extraordinary actions related to these funds during 2011 to manage federal debt when
                                         delays in raising the debt limit occurred. As such, normal investment and redemption policies and
                                         procedures were not followed for these funds.
                                         e
                                          The CSRDF also held about $8 billion of FFB securities, which are not GAS securities. The reported
                                         balance of these securities remained the same throughout January 2012.
                                         f
                                         These are the Medicare trust funds.




                                         Page 17                                                                                            GAO-12-701 Debt Limit
                                          In accordance with relevant legislation and consistent with the timing of
Treasury Restored                         the debt limit increases authorized by the BCA, Treasury restored the
Uninvested Principal                      uninvested principal amounts to the CSRDF, Postal Benefits Fund, and
                                          G-Fund, and invested the uninvested principal to the ESF totaling
and Interest Losses as                    approximately $299.5 billion. This amount consisted of (1) $239.9 billion
Authorized                                of uninvested principal relating to the period from May 16, 2011, through
                                          August 1, 2011, 19 and (2) $59.6 billion relating to the period in January
                                          2012, in which Treasury took extraordinary actions to manage federal
                                          debt when delays in raising the debt limit occurred. In accordance with
                                          legislation, Treasury also restored interest losses totaling approximately
                                          $933.8 million to the CSRDF, Postal Benefits Fund, and G-Fund. This
                                          amount consisted of (1) $916.9 million relating to the period from May 16,
                                          2011, through August 1, 2011, and (2) $16.9 million relating to the period
                                          in January 2012. Treasury lacks legislative authority under section 5302
                                          of title 31, United States Code, to restore interest losses to the ESF.
                                          Table 4 summarizes the amounts of principal and interest restored.

Table 4: Restored Principal and Interest Related to Extraordinary Actions Taken to Manage Debt during 2011 and January
2012

                                               2011                                                              January 2012
Federal government     Uninvested principal         Interest losses from                         Uninvested principal as        Interest losses from
accounts               as of August 1, 2011        May 16-August 1, 2011                          of January 27, 2012            January 4-27, 2012
CSRDF                            $86.0 billion                   $516.9 million                                       n/a                         n/a
Postal Benefits Fund              $9.5 billion                     $21.5 million                                      n/a                         n/a
G-Fund                          $137.5 billion                   $378.5 million                              $36.9 billion               $16.9 million
                                               a                                    a                                       a                          a
ESF                              $6.9 billion                                                               $22.7 billion
Total                          $239.9 billion                   $916.9 million                              $59.6 billion               $16.9 million
                                          Source: GAO analysis of documentation from Treasury.
                                          a
                                           Section 5302 of title 31, United States Code, provides Treasury the authority to invest principal of the
                                          ESF. Treasury did not restore interest losses of $55,630 for 2011 and $284,691 for January 2012
                                          relating to the ESF because it lacks legislative authority to do so under section 5302 of title 31, United
                                          States Code.




CSRDF and Postal Benefits                 Subsections 8348(j)(3) and (4) of title 5, United States Code, require
Fund                                      Treasury to immediately restore, to the maximum extent practicable, the
                                          CSRDF’s Treasury holdings to the proper balances when a DISP ends


                                          19
                                            The investment of uninvested principal of $239.9 billion used a large portion of the
                                          $400 billion increase to the debt limit on August 2, 2011.




                                          Page 18                                                                               GAO-12-701 Debt Limit
         and to restore lost interest on the next normal interest payment date.
         Treasury is required by subsection 8909a(c) of title 5, United States
         Code, to follow these same procedures for the Postal Benefits Fund.
         Consequently, Treasury took the following actions, with respect to these
         two funds, once the DISP for 2011 had ended:

         •   Treasury invested about $86 billion of uninvested principal to the
             CSRDF on August 2, 2011, which equaled the amount of new
             investments suspended during 2011.
         •   All of the $17.1 billion of Treasury securities held by the CSRDF that
             Treasury redeemed earlier than normal had been used for CSRDF
             benefit payments and expenses during the DISP. As such, there was
             no remaining amount required to be invested.
         •   Treasury invested about $9.5 billion of uninvested principal to the
             Postal Benefits Fund on August 2, 2011, which equaled the amount of
             new investments suspended during 2011.
         •   On December 30, 2011, Treasury paid the CSRDF about
             $516.9 million and the Postal Benefits Fund about $21.5 million to
             restore interest losses incurred because of the actions Treasury had
             taken during the DISP. Because December 30, 2011, was the first
             semiannual interest payment date since the DISP ended, this was the
             proper restoration date according to the statute authorizing the
             restoration.
         We verified that subsequent to the initiation and recording of these
         transactions, the CSRDF’s and Postal Benefits Fund’s holdings were, in
         effect, the same as they would have been had the DISP not occurred.


G-Fund   On August 1, 2011, and January 27, 2012, the last business days before
         the debt limit was raised, the G-Fund had uninvested principal of about
         $137.5 billion and $36.9 billion, respectively. On August 2, 2011, and
         January 30, 2012, Treasury invested all uninvested principal for the
         G-Fund, as required by subsection 8438(g)(3) of title 5, United States
         Code. Treasury is also required by subsection 8438(g)(4) of title 5, United
         States Code, to make the G-Fund whole by restoring any losses once the
         suspension of debt has ended. During May through August 2011 and
         January 2012, interest losses to the G-Fund were about $378.5 million
         and $16.9 million, respectively, because its funds were not fully invested.
         On August 3, 2011, and January 30, 2012, Treasury fully restored the lost
         interest on the G-Fund’s uninvested funds. We verified that subsequent to
         the initiation and recording of these transactions, the G-Fund’s holdings
         were, in effect, the same as they would have been had the suspensions
         of debt not occurred.


         Page 19                                                 GAO-12-701 Debt Limit
ESF                      On August 1, 2011, and January 27, 2012, the last business days before
                         the debt limit was raised, the ESF had uninvested principal of about
                         $6.9 billion and $22.7 billion, respectively. 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. Treasury has the authority in section 5302 of title 31,
                         United States Code, to invest principal of the ESF. However, the
                         Secretary of the Treasury lacks legislative authority to restore any interest
                         losses relating to the ESF incurred as a result of authorized actions taken
                         by Treasury to manage federal debt when delays in raising the debt limit
                         occur. We verified that Treasury properly invested the ESF’s uninvested
                         principal and, in accordance with the law, did not restore interest losses.


                         Congress usually votes on increasing the debt limit after fiscal policy
Delays in Raising the    decisions affecting federal borrowing have begun to take effect. Debt limit
Debt Limit Increased     increases frequently involve lengthy debate, with the debates often
                         occurring when federal debt is near or at the debt limit. We reported in
Treasury’s Borrowing     February 2011 that managing debt when delays in raising the debt limit
Costs and Affected Its   occur diverts Treasury’s resources away from other cash and debt
Operations               management responsibilities and that Treasury’s borrowing costs
                         modestly increased during debt limit debates in 2002, 2003, and 2010. 20
                         As discussed below, increased borrowing costs also occurred during
                         2011 when there was a delay in raising the debt limit. For the January
                         2012 period, we found that there was no consistent pattern of yield
                         spread changes and the changes in borrowing costs were negligible. This
                         was expected given that the BCA provided for a future debt limit increase,
                         which minimized uncertainty in the Treasury market. In addition,
                         managing federal debt during such delays affected Treasury’s normal
                         operations in 2011 and January 2012.




                         20
                          GAO-11-203.




                         Page 20                                                  GAO-12-701 Debt Limit
Treasury’s Borrowing          Our analysis indicates that delays in raising the debt limit in 2011 led to
Costs on Certain Securities   increased borrowing costs on certain securities. We measured changes in
Increased When Delays in      Treasury’s borrowing costs when delays in raising the debt limit occurred
                              in 2011 using a multivariate regression analysis of the daily yield
Raising the Debt Limit        spread—yields on private securities minus yields on Treasury securities
Occurred in 2011              of comparable maturities—between the debt limit event period and the
                              previous 3 months, or pre-event period. Rates for Treasury and other
                              securities fluctuate from day to day in response to changes in the broader
                              economy. Focusing on a yield spread rather than changes in individual
                              interest rates facilitated the measurement of changes in the relative risk of
                              Treasury securities and the identification of potential risk premiums
                              (which is represented by a decrease in the yield spread). We also
                              controlled for other factors that could affect the yield spread, such as the
                              Federal Reserve’s holdings of Treasury securities and economic
                              uncertainty. (See app. II for more details on how we estimated increased
                              borrowing costs.) The results of our multivariate regression analysis
                              describe the change in yield spreads attributable to delays in raising the
                              debt limit. The estimated increase or decrease in the yield spreads
                              between the pre-event and event periods is shown in figure 2.




                              Page 21                                                  GAO-12-701 Debt Limit
Figure 2: Estimated Increase or Decrease in Spreads between Private and Treasury Security Yields for the 2011 Debt Limit
Event Period (January 6, 2011, through August 1, 2011)




                                         A decrease in the yield spread indicates that the market perceives the risk
                                         of Treasury securities to be closer to that of private securities, increasing
                                         the cost to Treasury. Conversely, an increase in the yield spread
                                         indicates that the market perceives the risk of Treasury securities to have
                                         decreased relative to that of private securities, making the securities less
                                         costly to Treasury. We found that the 2011 debt limit event led to a
                                         premium on Treasury securities with maturities of 2 years or more while
                                         Treasury securities with shorter maturities either experienced no change
                                         or became slightly less costly relative to private securities. Applying the
                                         relevant increase or decrease in the yield spread shown in figure 2 to all
                                         Treasury bills, notes, bonds, CM bills, and TIPS issued during the 2011
                                         debt limit event period, we estimated that borrowing costs increased by
                                         about $1.3 billion in fiscal year 2011. 21 Many of the Treasury securities


                                         21
                                          The 95 percent confidence interval of the borrowing cost estimate is about $1 billion to
                                         $1.7 billion.




                                         Page 22                                                             GAO-12-701 Debt Limit
                             issued during the 2011 debt limit event period will remain outstanding for
                             years to come. Accordingly, the multiyear increase in borrowing costs
                             arising from the event is greater than the additional borrowing costs
                             during fiscal year 2011 alone.

                             There are limitations to using a multivariate regression to measure
                             changes in Treasury’s borrowing costs attributable to delays in raising the
                             debt limit. Most important, many economic and financial developments
                             besides the uncertainty in the Treasury market arising from delays in
                             raising the debt limit likely affected yield spreads during this period. While
                             we controlled for changes in Federal Reserve holdings of Treasury
                             securities, stock market uncertainty, and economic activity, we cannot
                             capture every development affecting yield spreads, such as other policy
                             changes not easily quantifiable that might affect yield spreads.


Managing Debt When           Debt and cash management required more time and Treasury resources
Delays in Raising the Debt   as delays in raising the debt limit occurred in 2011 and January 2012. For
Limit Occurred in 2011 and   example, Treasury staff (1) forecasted and monitored with increasing
                             frequency and in increasing detail cash and borrowing needs and
January 2012 Affected        (2) developed, reviewed, and tested contingency plans and alternative
Treasury’s Normal            scenarios for the possible implementation of extraordinary actions.
Operations                   According to Treasury officials, these activities diverted time and Treasury
                             resources from other cash and debt management responsibilities. We
                             reviewed estimates provided by the Office of Fiscal Projections (OFP)
                             and the Bureau of the Public Debt (BPD), the entities primarily affected by
                             the delays, which indicated that these entities’ personnel devoted as
                             much as several hundred hours per week to managing federal debt when
                             delays in raising the debt limit occurred in 2011 and January 2012.

                             According to Treasury officials, for 2011, Treasury’s operational focus on
                             the debt limit began at least 6 months before the debt limit was expected
                             to be reached and increased as debt neared the limit. Treasury’s OFP
                             staff developed estimates under multiple scenarios of when debt might
                             reach the debt limit. As federal debt neared the debt limit, these estimates
                             were developed weekly, then daily, and finally multiple times a day.
                             According to Treasury officials, preparing these estimates, informing
                             departmental officials, and other preparatory tasks were a critical focus of
                             OFP’s staff. To manage federal debt when delays in raising the debt limit
                             occurred in 2011, Treasury officials estimated that OFP spent almost 15
                             staff hours per business day performing these tasks. In addition, Treasury
                             officials estimated that OFP expended about 200 staff hours in total to
                             prepare for and manage the extraordinary actions taken in January 2012.


                             Page 23                                                   GAO-12-701 Debt Limit
BPD—the bureau within Treasury that is responsible for implementing the
extraordinary actions and for the accounting associated with those
transactions—also dedicated extensive resources to operations related to
the debt limit. BPD estimated that managing federal debt when delays in
raising the debt limit occurred in 2011 and January 2012 resulted in
almost 5,750 hours of work, including over 400 hours of overtime and
compensatory time. This included more than 1,200 hours in the weeks
prior to the use of extraordinary actions for meetings, preparation of
parallel accounts and spreadsheets to use in tracking uninvested principal
and interest losses, tests of the accounting system, and training staff. The
majority of time was spent implementing the extraordinary actions. BPD
estimated that it spent almost 63 staff hours per business day on debt
limit–related activities from May 16, 2011, through August 1, 2011, and
almost 31 staff hours per business day from January 4, 2012, through
January 27, 2012. After the debt limit was increased, BPD estimated that
it spent over 500 hours on activities such as restoring uninvested funds
and preparing reports.

Treasury officials said that the increased focus on debt limit–related
operations in the months and weeks approaching the debt limit diverted
time and attention from other cash and debt management tasks that could
improve Treasury operations. For example, according to Treasury
officials, OFP delayed participation in federal cash expenditure process
modernization efforts and the development of a new fiscal forecasting
system. Similarly, BPD officials said that they spent less time updating
procedures for issuing debt to the public and modernizing debt
accounting systems. According to these officials, these activities help
Treasury more accurately project future borrowing needs and perform
debt management activities more effectively. More accurately projecting
future borrowing needs helps Treasury avoid (1) borrowing more than is
needed to fund the government’s immediate needs, which results in
increased interest costs, and (2) borrowing less than is sufficient to
maintain Treasury’s operating cash balance at a minimum level through
regularly scheduled issuances of marketable Treasury securities, which
may require Treasury to issue CM bills with little advance notice to the
market, resulting in potentially higher interest costs. Treasury officials also
stated that they spent less time on staff development and program
oversight activities to perform additional tasks needed to manage federal
debt when delays in raising the debt limit occurred.




Page 24                                                    GAO-12-701 Debt Limit
                  The extraordinary actions Treasury took during 2011 and January 2012 to
Concluding        manage federal debt when delays in raising the debt limit occurred were
Observations      consistent with relevant authorizing legislation and regulations. However,
                  delays in raising the debt limit can create uncertainty in the Treasury
                  market and lead to higher borrowing costs. 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. However, this does not
                  account for the multiyear effects on increased costs for Treasury
                  securities that will remain outstanding after fiscal year 2011. Further,
                  managing federal debt as such delays occurred was complex, time-
                  consuming, and technically challenging. 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.

                  Congress 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, 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.


                  We requested comments on a draft of this report from the Secretary of
Agency Comments   the Treasury. In providing oral comments on the draft, Treasury broadly
                  agreed with the draft’s conclusions, expressed appreciation for our efforts
                  to estimate the monetary impact of delays in raising the debt limit on
                  Treasury’s borrowing costs, and also commented on the broader impact
                  of delays in raising the debt limit on the economy, which was beyond the
                  scope of our review. Treasury also provided technical comments, which
                  we incorporated as appropriate.


                  We will send copies of this report to interested congressional committees,
                  the Secretary of the Treasury, and other interested parties. In addition,
                  the report is available at no charge on the GAO website at
                  http://www.gao.gov.




                  Page 25                                                  GAO-12-701 Debt Limit
If you or your staff have any questions about this report, please contact
Gary T. Engel at (202) 512-3406 or engelg@gao.gov, Susan J. Irving at
(202) 512-6806 or irvings@gao.gov, or Thomas J. McCool at (202) 512-
2642 or mccoolt@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. GAO staff who made major contributions to this report are
listed in appendix III.




Gary T. Engel
Director
Financial Management and Assurance




Susan J. Irving
Director for Federal Budget Analysis
Strategic Issues




Thomas J. McCool
Director
Center for Economics, Applied Research and Methods




Page 26                                                GAO-12-701 Debt Limit
Appendix I: Objectives, Scope, and
              Appendix I: Objectives, Scope, and
              Methodology



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. We reviewed
              letters sent by the Secretary of the Treasury to Congress requesting debt
              limit increases and discussing when Treasury’s borrowing authority would
              be exhausted, and Treasury announcements of specific extraordinary
              actions. For each business day from May 16, 2011, through August 2,
              2011, and January 4, 2012, through January 30, 2012, we reviewed
              correspondence from Treasury’s Office of Fiscal Projections (OFP) to
              Treasury’s Bureau of the Public Debt (BPD) providing specific instructions
              and timing of the extraordinary actions to be taken as well as BPD’s
              documentation implementing the actions.

              We performed the work for the second and third objectives as part of our
              financial audits of the fiscal years 2011 and 2012 Schedules of Federal
              Debt Managed by BPD.1 To address the second objective, for each
              business day during the above-noted periods, we reviewed Treasury
              accounting documentation, including specific instructions from OFP to
              BPD, to verify that the extraordinary actions taken for the affected federal
              government accounts were consistent with relevant legislation. For
              suspensions of investments, we reviewed BPD documentation and
              verified that BPD only invested the amount instructed by OFP using the
              appropriate security type and date. For the one Civil Service Retirement
              and Disability Fund (CSRDF) security that was redeemed earlier than
              normal, we reviewed BPD documentation and verified that BPD
              processed it for the amount, security type, and date as instructed by OFP.



              1
               GAO, Financial Audit: Bureau of the Public Debt’s Fiscal Years 2011 and 2010
              Schedules of Federal Debt, GAO-12-164 (Washington, D.C.: Nov. 8, 2011).




              Page 27                                                          GAO-12-701 Debt Limit
Appendix I: Objectives, Scope, and
Methodology




For State and Local Government Series (SLGS) securities, we reviewed
Treasury documentation of actions taken to suspend new issuances and
convert SLGS demand deposit securities and compared those actions
taken to authorizing regulations.

Over 230 federal government accounts have the authority or the
requirement to invest excess receipts in Treasury securities, and
Treasury officials stated that normal investment and redemption policies
and procedures were used for all but 4 of these accounts for 2011 and 2
of these accounts for January 2012. To evaluate whether Treasury
followed normal investment and redemption policies and procedures for
federal government accounts not affected by the extraordinary actions,
we selected for review accounts with balances greater than $10 billion as
of April 30, 2011 (15 accounts) and December 31, 2011 (17 accounts). As
of both dates, this represented about 97 percent of the reported total of
Treasury securities held by the federal government accounts not affected
by the extraordinary actions. We obtained investment and redemption
activity files from BPD for these accounts and performed the following
audit procedures:

•   Reviewed trends in daily investment and redemption activity and
    compared these trends to prior year trends to determine whether
    there were any unusual fluctuations.
•   Selected and reviewed investment and redemption transactions
    greater than $5 billion from May 16, 2011, through August 1, 2011,
    and January 4, 2012, through January 27, 2012, to determine whether
    the transactions were processed in accordance with Treasury’s
    normal policies and procedures. The selected transactions for the
    2011 and 2012 periods represented about 86 percent and 78 percent,
    respectively, of the total investment transactions, and 81 percent and
    80 percent, respectively, of the total redemption transactions.
•   Confirmed with personnel from the respective agencies the total
    amount of investments and redemptions reported by Treasury from
    May 16, 2011, through August 1, 2011. 2




2
 We determined that it was not necessary to perform this step for the January 2012 period
of managing federal debt when delays in raising the debt limit occurred because the risks
associated with this period were minimal. Specifically, the January 2012 period lasted 17
business days and Treasury only used a small portion of the extraordinary actions
available.




Page 28                                                            GAO-12-701 Debt Limit
Appendix I: Objectives, Scope, and
Methodology




We also reviewed Treasury reports of fund balances for federal
government accounts with investment authority to identify any large
positive uninvested balances, which would indicate that normal policies
and procedures were not being followed, as of the end of the month for
May through September 2011, December 2011, and January 2012.

To address the third objective, we reviewed BPD schedules and parallel
accounts of uninvested principal and forgone interest for the CSRDF,
Postal Service Retiree Health Benefits Fund, Government Securities
Investment Fund of the Federal Employees’ Retirement System, and
Exchange Stabilization Fund. We recalculated the cumulative uninvested
principal as of August 1, 2011, and January 27, 2012, and compared our
calculations to BPD restoration entries. We also recalculated the forgone
interest on these uninvested principal amounts and compared our
calculations to BPD’s interest restoration entries. We reviewed accounting
documentation of Treasury actions to restore uninvested principal and
interest and compared these actions to relevant legislation.

To address the fourth objective, we performed a multivariate regression
analysis of the daily yield spread—yields on private securities minus
yields on Treasury securities of comparable maturities—during the 2011
debt limit event period. We used yield spreads during the 3-month pre-
event period as a benchmark against which yield spreads during the
event period were compared. We also examined changes in the yield
spread during the January 2012 debt limit event period. See appendix II
for more details on how we estimated increased borrowing costs,
including limitations to our using a multivariate regression to measure
changes in Treasury’s borrowing costs attributable to delays in raising the
debt limit. We obtained Treasury auction data for this analysis from
Treasury. We obtained data on security yields, the Federal Reserve’s
holdings of Treasury securities, and the Chicago Board Options
Exchange’s Volatility Index from the Federal Reserve Bank of St. Louis’s
Federal Reserve Economic Data (FRED) source. FRED includes original
source data from the Federal Reserve Board, Bank of America Merrill
Lynch, the British Bankers Association, and the Chicago Board Options
Exchange. We also used data on Standard & Poor’s 500 total return
index from IHS Global Insight in our analysis. To assess the reliability of
these data, we looked for outliers and anomalies. These databases are
commonly used by Treasury and researchers to examine the Treasury
market and related transactions. On the basis of our assessment, we
believe the data are sufficiently reliable for the purpose of this review.




Page 29                                                 GAO-12-701 Debt Limit
Appendix I: Objectives, Scope, and
Methodology




To understand how managing debt affected agency operations when
delays in raising the debt limit occurred in 2011 and January 2012, we
reviewed documents provided by Treasury, interviewed Treasury officials
involved in the decision-making process and implementation of the
extraordinary actions, and obtained estimates of the number of personnel
and amount of time involved in managing debt during such delays. To
assess the reasonableness of Treasury’s estimates, we reviewed e-mails,
memos, press releases, written procedures, accounting documentation,
and other corroborating information prepared by OFP and BPD. However,
we did not obtain sufficient supporting documentation to independently
verify Treasury’s staff hour estimates. We were also unable to
independently verify the forgone opportunities that Treasury identified,
such as less time for other cash and debt management tasks that could
improve Treasury operations, in part because it is difficult to prove what
would have happened in the absence of the delay in raising the debt limit.

We conducted this performance audit from May 2011 to July 2012 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.




Page 30                                                GAO-12-701 Debt Limit
Appendix II: Detailed Methodology Used to
              Appendix II: Detailed Methodology Used to
              Analyze Effect on Treasury’s Borrowing Costs



Analyze Effect on Treasury’s Borrowing
Costs
              To measure changes in Treasury’s borrowing costs when delays in
              raising the debt limit occurred in 2011, we performed a multivariate
              regression analysis of the daily yield spread—yields on private securities
              minus yields on Treasury securities of comparable maturities—during the
              debt limit event period. 1 For our purposes, the 2011 debt limit event
              began with the January 6, 2011, letter from the Secretary of the Treasury
              notifying the Senate Majority Leader that the debt limit needed to be
              raised and ended August 1, 2011, the business day prior to the debt limit
              increase.

              We used daily yield spreads during the 3-month pre-event period as a
              benchmark against which yield spreads during the event period were
              compared. A decrease in the yield spread indicates that the market
              perceives the risk of Treasury securities to be closer to that of private
              securities, increasing the cost to Treasury. Conversely, an increase in the
              yield spread indicates that the market perceives the risk of Treasury
              securities to have decreased relative to that of private securities, making
              the securities less costly to Treasury. We assumed that Treasury
              Inflation-Protected Securities experienced the same yield spread changes
              as nominal securities with similar maturities and that any change in
              inflation expectations during the debt limit event should have equal effects
              on private securities and Treasury nominal securities. Our results indicate
              that the 2011 debt limit event period led to a premium (which is
              represented by a decrease in the yield spread) ranging from 11 to 33
              basis points on Treasury securities with maturities of 2 or more years. 2
              For 3-month and 6-month Treasury bills and cash management bills,
              which typically had a maturity of 56 days, the debt limit event period led to
              a 1 basis point decline in Treasury yields relative to private security yields
              during the period (which is represented by an increase in the yield
              spread), while there was no change in yields on 1-month and 1-year
              Treasury bills relative to private security yields. Overall, Treasury yields




              1
               During the January 2012 debt limit event period, which began with the use of the first
              extraordinary action on January 4, 2012, and ended January 27, 2012, the business day
              prior to the debt limit increase, there was no consistent pattern of yield spread changes
              and the changes in borrowing costs were negligible. Accordingly, we did not perform a
              multivariate regression of the yield spread.
              2
              A basis point is equal to 1/100th of 1 percent. Thus, 11 basis points is 0.11 percent.




              Page 31                                                              GAO-12-701 Debt Limit
Appendix II: Detailed Methodology Used to
Analyze Effect on Treasury’s Borrowing Costs




increased relative to comparable-maturity private securities during the
2011 debt limit event period. 3

The existing literature on the effect of the debt limit on Treasury’s
borrowing costs is limited. Previous analysis has focused mainly on the
effect of debt limit events on short-term Treasury interest rates. In an
analysis we replicated and updated, Liu, Shao, and Yeager (2009) 4 found
that during debt limit events in 2001-2002 and 2002-2003, the spread
between 3-month Treasury bill yields and 3-month commercial paper
yields narrowed, implying that Treasury bills were relatively more costly
during this period; however, this relationship was not observed in either
the 2004-2005 or 2005-2006 debt limit events. The authors hypothesized
that during these latter two debt limit events, investors may have
assumed based on past experience that Members of Congress would
resolve their differences before there were any serious disruptions in the
Treasury market and therefore did not charge a premium on securities
issued during the debt limit event. Our 2011 report replicated the authors’
analysis and also found that the 2009-2010 debt limit event coincided with
a 4 basis point increase in 3-month Treasury bill yields. 5 An earlier study
by Nippani, Liu, and Schulman found that Treasury paid a premium on 3-
month and 6-month Treasury bills issued during the debt limit event in
1995-1996. 6

Our analysis of Treasury’s borrowing costs around past debt limit events
focused on 3-month Treasury bills, consistent with the approach used in
past studies. However, because uncertainty could affect all Treasury
securities, we expanded our analysis of the 2011-2012 debt limit events
to cover yields on longer-term securities as well. For the 2011 debt limit


3
 A test of statistical significance attempts to rule out an effect purely attributable to
chance. The coefficient for the event was significant at the 95 percent level for all
maturities except for 1-month and 1-year securities, which displayed no statistically
significant change in the yield spread. A 95 percent significance level means that there is
less than a 5 percent probability of rejecting the null hypothesis that the coefficient is zero
when the null hypothesis is true.
4
 Pu Liu, Yingying Shao, and Timothy J. Yeager, “Did the repeated debt ceiling
controversies embed default risk in U.S. Treasury securities?” Journal of Banking and
Finance, vol. 33 (8) (2009): 1464-1471.
5
 GAO-11-203.
6
 Srinivas Nippani, Pu Liu, and Craig T. Schulman, “Are Treasury Securities Free of
Default?” Journal of Financial and Quantitative Analysis, vol. 36, no. 2 (2001): 251-265.




Page 32                                                                 GAO-12-701 Debt Limit
                              Appendix II: Detailed Methodology Used to
                              Analyze Effect on Treasury’s Borrowing Costs




                              event, we estimated a regression explaining the private-Treasury yield
                              spread for each maturity range using a constant term, dummy variables
                              for the event and postevent periods, 7 Federal Reserve holdings of
                              Treasury securities, the Chicago Board Options Exchange’s Volatility
                              Index 8 to capture financial market uncertainty, and the daily percentage
                              change in the Standard & Poor’s 500 total return index to capture
                              economic activity.


Effect of Delayed Increase    On the basis of our analysis, we estimated that delays in raising the debt
in the Debt Limit on          limit in 2011 led to an increase in Treasury’s borrowing costs of about
Treasury’s Borrowing          $1.3 billion in fiscal year 2011. 9 We derived this estimate by multiplying
                              the amount of Treasury securities issued at each maturity during the
Costs                         event period by regression-based estimates of the relevant yield spread
                              change attributable to the debt limit event and weighting the result by the
                              portion of fiscal year 2011 during which the security was outstanding.
                              Many of the Treasury securities issued during the 2011 debt limit event
                              will remain outstanding for years to come. Accordingly, the multiyear
                              increase in borrowing costs arising from the event is greater than the
                              additional borrowing costs during fiscal year 2011 alone.


Limitations of the Analysis   There are limitations to using a multivariate regression to measure
                              changes in Treasury’s borrowing costs attributable to delays in raising the
                              debt limit. Most important, many economic and financial developments
                              besides the uncertainty in the Treasury market arising from delays in
                              raising the debt limit likely affected yield spreads during this period. While
                              we controlled for changes in Federal Reserve holdings of Treasury
                              securities, financial market uncertainty, and economic activity, we cannot
                              capture every development affecting yield spreads, such as other policy
                              changes that are not easily quantifiable that might affect yield spreads.



                              7
                               Consistent with the approach used in past studies, the 2011 postevent period was for the
                              90-day period from August 2, 2011.
                              8
                               This variable represents the market expectations of volatility over the next 30-day period
                              and is calculated by the Chicago Board Options Exchange using Standard & Poor’s 500
                              stock index option bid/ask quotes. The variable is intended to control for volatility and
                              uncertainty in financial markets.
                              9
                               The 95 percent confidence interval of the borrowing cost estimate is about $1 billion to
                              $1.7 billion.




                              Page 33                                                              GAO-12-701 Debt Limit
Appendix III: GAO Contacts and Staff
                  Appendix III: GAO Contacts and Staff
                  Acknowledgments



Acknowledgments

                  Gary T. Engel, (202) 512-3406 or engelg@gao.gov
GAO Contacts      Susan J. Irving, (202) 512-6806 or irvings@gao.gov
                  Thomas J. McCool, (202) 512-2642 or mccoolt@gao.gov


                  In addition to the contacts named above, Richard S. Krashevski, Dawn B.
Staff             Simpson, and Melissa A. Wolf, Assistant Directors; Carolyn M. Voltz,
Acknowledgments   Analyst-in-Charge; Nicole X. Dow; Brian S. Harechmak; Dervla Carmen
                  Harris; Thomas J. McCabe; and Shaundell A. Williams made key
                  contributions to this report.




(198703)
                  Page 34                                              GAO-12-701 Debt Limit
GAO’s Mission         The Government Accountability Office, the audit, evaluation, and
                      investigative arm of Congress, exists to support Congress in meeting its
                      constitutional responsibilities and to help improve the performance and
                      accountability of the federal government for the American people. GAO
                      examines the use of public funds; evaluates federal programs and
                      policies; and provides analyses, recommendations, and other assistance
                      to help Congress make informed oversight, policy, and funding decisions.
                      GAO’s commitment to good government is reflected in its core values of
                      accountability, integrity, and reliability.

                      The fastest and easiest way to obtain copies of GAO documents at no
Obtaining Copies of   cost is through GAO’s website (www.gao.gov). Each weekday afternoon,
GAO Reports and       GAO posts on its website newly released reports, testimony, and
                      correspondence. To have GAO e-mail you a list of newly posted products,
Testimony             go to www.gao.gov and select “E-mail Updates.”

Order by Phone        The price of each GAO publication reflects GAO’s actual cost of
                      production and distribution and depends on the number of pages in the
                      publication and whether the publication is printed in color or black and
                      white. Pricing and ordering information is posted on GAO’s website,
                      http://www.gao.gov/ordering.htm.
                      Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
                      TDD (202) 512-2537.
                      Orders may be paid for using American Express, Discover Card,
                      MasterCard, Visa, check, or money order. Call for additional information.
                      Connect with GAO on Facebook, Flickr, Twitter, and YouTube.
Connect with GAO      Subscribe to our RSS Feeds or E-mail Updates. Listen to our Podcasts.
                      Visit GAO on the web at www.gao.gov.
                      Contact:
To Report Fraud,
Waste, and Abuse in   Website: www.gao.gov/fraudnet/fraudnet.htm
                      E-mail: fraudnet@gao.gov
Federal Programs      Automated answering system: (800) 424-5454 or (202) 512-7470

                      Katherine Siggerud, Managing Director, siggerudk@gao.gov, (202) 512-
Congressional         4400, U.S. Government Accountability Office, 441 G Street NW, Room
Relations             7125, Washington, DC 20548

                      Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800
Public Affairs        U.S. Government Accountability Office, 441 G Street NW, Room 7149
                      Washington, DC 20548




                        Please Print on Recycled Paper.