2011 SLGS Forum – May 17, 2011

Role of State and Local Government Securities and Other Activity in U.S. Treasury Cash and Debt Management

• Overview of Treasury Fiscal Operations– Cash Forecasting– Debt Forecasting

• Discussion of the Debt Subject to Limit

Contents

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3Office of Fiscal Projections

Organizational Chart

Primary Responsibilities

Produce daily cash and debt projections

– Used by Treasury’s debt managers to size and time the issuance of Marketable Securities

– To track Federal debt outstanding relative to the statuary limitation

Manage the Treasury’s daily cash position

Three Forecasting Groups• Tax Receipts

– Forecasts and tracks all tax inflows to the Federal government

– Typical composition of Tax Flows (Withheld, Non-Withheld, Corporate, Other Taxes)

• Government Outlays

– Forecasts and tracks expenditures of the government

– Major Outlay categories (Social Security, Defense, Health and Human Services, and Interest on Debt)

• Debt/Other Cash

– Forecast and tracks the outstanding debt of the United States as well as cash flows of all other categories

– Major Debt categories (Marketable Borrowing, Government Account Series, Other Non-Marketable Government Series)

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Office of Fiscal Projections

• Three executive branch entities (Troika) are responsible for identifying an Administration’s economic and budget issues:

• Office of Management and Budget

• Council of Economic Advisors

• Department of the Treasury

• The Troika develops the economic assumptions underlying an administration’s budget proposals

• Using the economic assumptions developed by the Troika:• Treasury produces the Administration’s tax estimates

• Each government agency is responsible for producing outlay (expenditure) estimates

• Semi-annually, the administration issues updated budget projections

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Budget Projections

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Monthly Deficit FiguresFY 2006-FY 2011 (Mar)

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Forecast Implementation

OFP carries out its mission objectives through production of official baseline forecasts:

• Baseline forecast • Constructed quarterly to support Treasury’s quarterly refunding

announcements (February, May, August, November)• Forecast covers a rolling 12-month period (only the immediate 6-month

forecast are publicly announced). • Monthly forecast updates

• Conducted at month-end to incorporate the most up-to-date information for the ensuing three months

• Daily and Ad-hoc forecast updatesQuarterly baseline

Daily Updates

Monthlyupdates

Ad-hocupdates

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Forecasting SLGS

-Near term forecast based upon reported issuances and redemptions adjusted for recent growth trends and relevant information

-Longer term forecast based on longer view of historical trends

-Highly unpredictable over long term

-Heavy reliance on advanced reporting for the near term

Quarter Issues Redmps Net CY Total FY Total2004 Q4 Total 23,947 21,483 2,464 11,4912005 Q1 Total 37,289 18,964 18,3252005 Q2 Total 52,749 25,010 27,7392005 Q3 Total 38,975 20,431 18,544 67,0722005 Q4 Total 27,727 17,448 10,279 74,8872006 Q1 Total 14,364 15,084 (720)2006 Q2 Total 21,354 14,173 7,1812006 Q3 Total 16,068 19,253 (3,185) 13,5552006 Q4 Total 35,476 16,689 18,787 22,0632007 Q1 Total 40,426 16,139 24,2872007 Q2 Total 40,207 20,511 19,6962007 Q3 Total 18,952 24,062 (5,110) 57,6602007 Q4 Total 20,203 23,479 (3,276) 35,5972008 Q1 Total 15,233 22,123 (6,890)2008 Q2 Total 24,341 35,485 (11,144)2008 Q3 Total 14,744 29,708 (14,964) (36,274)2008 Q4 Total 7,343 18,268 (10,925) (43,923)2009 Q1 Total 11,547 21,233 (9,225)2009 Q2 Total 20,719 27,850 (7,131)2009 Q3 Total 13,396 29,877 (16,481) (43,762)2009 Q4 Total 25,727 28,078 (2,351) (35,188)2010 Q1 Total 16,918 22,561 (5,643)2010 Q2 Total 25,436 29,922 (4,486)2010 Q3 Total 18,659 29,454 (10,795) (23,275)2010 Q4 Total 29,928 30,205 (277) (21,201)

SLGS - Issues and Redemptions

• Treasury does not control the timing of program and agency operations, seasonal flows and operations calendars give rise to periodic shortfall as well as surpluses in the government’s cash balances.– Shortfalls must be covered by additional marketable borrowing– Surpluses present an opportunity to invest funds not immediately needed

• The timing of major Federal receipts and outlays has given a distinctive pattern to the monthly variations of cash balances– Most of the principal recurring benefit programs are made at the beginning of the

month– There are heavy tax flows around the middle of certain months– The result is a low or even negative (before financing) balance during the first two

weeks of the month and higher balances during the 2nd half of the month.– The current coupon issuance pattern generally creates significant mid-month and

end-of –month balances

Cash Balance Management

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Target Balance:• In normal times, Treasury targets a $5 billion cash balance in the TGA• Normally, cash above the target level is placed in safe investments in order to receive a higher

return.

• TT&L program allows Treasury to place excess funds with qualified commercial depositaries – Normally, the first $2-$3 billion above the TGA target is invested in TT&L accounts– Funds may be called or placed on a same day basis if the projected cash balance is above or

below the target.

• Term Investment program developed as part of TT&L program to allow for fixed-term investment

– Better return on invested funds than TT&L– Fixed, longer terms of investments– Market bidding for funds

• Reverse Repurchase Agreement program developed to offer another investment tool – Better return on invested funds than TT&L– Expanded capacity for Treasury’s investment programs

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Portfolio Management: Cash Management/ Investment Strategy

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Cash BalanceOct 2006 – Apr 2011 ($’s in billions)

• The debt limit serves as a ceiling on the total amount that the Treasury may borrow.

• Prior to 1917, Congress separately authorized each borrowing by the U.S. Government.

• This process became too burdensome During World War I, and so Congress passed the first debt limit statute, in September 1917.

• Pursuant to statute, the Treasury is authorized to borrow amounts necessary to meet authorized expenditures, subject to the overall debt limit.

• Congress has raised the debt limit dozens of times, including ten times since 2001. It has been increased from $43 billion in 1940, to its current level of $14.294 trillion.

History of the Debt Limit

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DSL DSL Ceiling Recent Increases to the Debt Ceiling:13

Office of Fiscal Projections

Debt Subject to LimitFY 2003-FY 2011 (March)

Recent Increases to the Debt Ceiling:Jun 28, 2002 increased to $6.400 trillionMay 27, 2003 increased to $7.384 trillionNov 19, 2004 increased to $8.184 trillionMar 20, 2006 increased to $8.965 trillionSep 29, 2007 increased to $9.815 trillionJul 30, 2008 increased to $10.615 trillionOct 3, 2008 increased to $11.315 trillionFeb 17, 2009 increased to $12.104 trillionDec 28, 2009 increased to $12.394 trillionFeb 12, 2010 increased to $14.294 trillion

• Currently, the debt limit is set at $14.294 trillion.

• This debt limit applies to almost all federal borrowing, including:– Securities issued to the public (currently $9.6 trillion); and– Securities issued to government accounts (currently $4.6 trillion).

• Increasing the debt limit does not increase the obligations we have as a Nation.

• Increasing the debt limit simply permits the Treasury to fund those obligations that Congress has already established.

The Statutory Debt Limit

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In letters to congress of January 6, April 4, and May 2 of 2011, Treasury Secretary Geithner provided projections of when the Debt subject to Limit (DSL) would reach the statutory limit, outlined available extraordinary measures, and providing projections of how long such measures will last

• April 4 letter provides a detailed description of the extraordinary measures available1) Suspending sales of State and Local Government Securities2) Determining that a “debt issuance suspension period” (DISP) exists, permitting

• the redemption of existing Civil Service Retirement and Disability Fund (CSRDF) Investments

• the suspension of new CSRDF investments3) Suspending reinvestment of the Government Securities Investment Fund (G Fund)4) Suspending reinvestment of the Exchange Stabilization Fund (ESF)

• These measures have been taken in the past by Treasury Secretaries of both Republican and Democratic administrations.

Notification to Congress and Extraordinary Measures

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May 2 letter:• Announced the use of the 1st extraordinary measure, suspension of

SLGS issuances, to be effective May 6 until further notice– Does not provide additional room under the ceiling– Reduces uncertainty in projecting the growth of DSL

• Reiterated projection that debt would reach the ceiling on May 16, 2011.

• 2nd and 3rd extraordinary measures will be implemented May 16: – declaration of a DISP and redemption of existing and suspension of new CSRDF

investments– Suspend the daily reinvestment of funds held as G Fund investments

• 4th extraordinary measure, suspension of ESF investments may be necessary at a later date

Notification to Congress and Extraordinary Measures

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• The extraordinary measures can free up approximately $230 billion in “headroom” under the debt limit.

• They can create approximately $165 billion of “headroom” before June 30, 2011.

– G Fund: $130 billion– ESF: $23 billion– CSRDF: $12 billion (assuming a two-month debt issuance suspension period)

• An additional measure would free up $67 billion of headroom on June 30, 2011.

Extraordinary Measures

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• Under current estimates, these extraordinary measures, taken together, would extend the amount of time until the debt limit must be increased until about August 2, 2011.

– Although there is substantial month-by-month variation, the debt is increasing by approximately $125 billion per month.

– The Treasury’s estimate of the amount of time provided by the extraordinary measures is based on estimates of revenues and outlays and is subject to change.

Extraordinary Measures

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• The Congressional Research Service has estimated that if the debt limit is not increased, the government would have to:

– Eliminate all discretionary spending; or– Cut nearly 70% of outlays for mandatory programs; or– Increase revenue collection by nearly two-thirds; or– A combination of the above.

• None of these options is feasible or responsible.

Budget Changes Cannot Avoid the Need to Raise the Debt Limit

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• US Department of the Treasury– http://www.treasury.gov/Pages/default.aspx

• Daily Treasury Statement– http://www.fms.treas.gov/dts/overview.html

• Monthly Treasury Statement– http://www.fms.treas.gov/mts/overview.html

• Treasury Monthly Statement of Public Debt– http://www.treasurydirect.gov/govt/reports/pd/mspd/mspd.htm

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