Guest Article

(From the June 6, 2011 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Federal Pension Assets Are Used to Extend U.S. Borrowing Authority Pending Legislation to Raise the Debt Ceiling

According to the Treasury Department, the United States reached the statutory debt limit on May 16, 2011. However, the Treasury Secretary has taken certain actions — including utilization funds in the Federal employees' retirement system — to forestall exhaustion of the nation's borrowing authority for nearly another three months.

Civil Service Retirement and Disability Fund

In order to create "additional headroom" under the debt limit — so the Federal government can continue funding obligations made by Congresses "past and present" — the Treasury Secretary declared a "debt issuance suspension period" for the Civil Service Retirement and Disability Fund (CSRDF). The CSRDF provides defined benefits to retired and disabled Federal employees, and is invested in special issue Treasury securities, which count against the debt limit. The declaration allows the Secretary to redeem certain existing investments in the CSRDF and to suspend new investments by the Fund.

As explained by the Treasury Department, redemption is permitted up to the amount of the civil service benefit payments that are to be made from the CSRDF during the "debt issuance suspension period." A suspension period was declared from May 16 to August 2, 2011. The Treasury Department estimates this step will permit the redemption of approximately $17 billion in debt securities — creating that much headroom for the U.S. to continue to borrow.

Similarly, the declaration permits the Treasury Department to suspend the investment of new amounts received by the CSRDF during the suspension period. These amounts would include employer and employee contributions and interest payments on securities that are held by the Fund. Significantly, a one-time suspension becomes available on June 30, when $67 billion in CSRDF investments mature. Instead of reinvesting the proceeds, the Treasury Department may suspend their reinvestment.

According to a set of Frequently Asked Questions issued by the Treasury Department, the impact of these extraordinary measures on Federal employees should be minimal:

Government Securities Investment Fund

Separate but similar action was taken with respect to the Government Securities Investment Fund, a money market investment fund of the Thrift Savings Plan. Like the CSRDF, the G Fund is invested in special-issue Treasury securities that count against the debt limit. The entire balance of the G Fund matures daily and is ordinarily reinvested. If the Secretary determines that the G Fund cannot be fully invested without exceeding the debt limit, the Treasury Department has the authority to suspend reinvestment of all or part of the G Fund. The Secretary made that determination, and the Treasury Department estimates that approximately $130 billion in headroom will be created by suspending the reinvestment of what appears to be only a portion of the G Fund.

As with the CSRDF, by law the G Fund must be made whole once the debt limit is increased according to the Treasury Department releases. On May 16, the Secretary sent a letter to members of Congress notifying them of the actions taken.

Extraordinary but not Unprecedented

The Treasury Department points out that these steps, while extraordinary, are not unprecedented. Redemption and suspension of new investments in the CSRDF was used during previous debt limit impasses in 1996, 2002, 2003, 2004 and 2006, and suspension of the reinvestment of the G Fund was also employed in those years.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.220.2692, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2011, Deloitte.