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Government reaches debt limit, borrows against federal pension funds

May. 16, 2011 - 05:58PM   |  
By SEAN REILLY   |   Comments
Treasury Secretary Timothy Geithner testifies before the Senate Appropriations Subcommittee on Financial Services and General Government in Washington in April. Treasury officials have begun to borrow against federal pension funds to meet the government's financial obligations, as the U.S. is expected to reach the limit of its borrowing authority from other sources under the $14.3 trillion debt ceiling on Monday.
Treasury Secretary Timothy Geithner testifies before the Senate Appropriations Subcommittee on Financial Services and General Government in Washington in April. Treasury officials have begun to borrow against federal pension funds to meet the government's financial obligations, as the U.S. is expected to reach the limit of its borrowing authority from other sources under the $14.3 trillion debt ceiling on Monday. (Jewel Samad / AFP via Getty Images)

Treasury Department officials have begun to borrow against federal pension funds to meet the government's financial obligations because the country is expected on Monday to reach the limit of its borrowing authority from other sources under the $14.3 trillion debt ceiling.

In a letter to congressional leaders Monday, Treasury Secretary Timothy Geithner said he is suspending new investments in both the Civil Service Retirement and Disability Fund (CSRDF) and the Thrift Savings Plan G Fund, which is invested in federal securities. In addition, the department will redeem some of the investments held by the CSRDF, Geithner wrote.

"Federal retirees and employees will be unaffected by these actions," Geithner said. By law, both funds must be made whole once lawmakers agree to increase the debt limit.

The Federal Retirement Thrift Investment Board also Monday stressed that TSP investors will not be harmed. Under a 1987 law, the government is required to repay suspended G Fund investments, including interest, once the debt ceiling is raised and the government can resume borrowing. The board will keep track of what Treasury owes and how much interest the G Fund would have accumulated had the investments not been suspended.

"You have an IOU from the federal government for the G Fund," board chairman Andrew Saul said. "It's not going to affect them [TSP investors], period."

Agency contributions to TSP and matching funds will not be suspended.

In all, Treasury's steps could free up to $214 billion between now and Aug. 2, when the government expects to run out of options if lawmakers do not act by that point to raise the debt limit, according to a Treasury Department fact sheet.

Geithner noted the department has taken similar steps during other congressional stalemates over increasing the government's borrowing authority.

Boosting the national debt limit is never a popular step politically. It is particularly fraught this year as congressional Republicans are insisting on deep spending cuts in return. No agreement in sight at this point.

Geithner warned in a May 13 letter to Sen. Michael Bennet, D-Colo., that even a short-term default on the government obligations could cause "irrevocable damage" to the American economy. The letter is posted on http://www.treasury.gov/connect/blog/Documents/20110513%20Bennet%20Letter.pdf">Treasury's website.

The CSRDF, which provides benefits to retired and disabled federal workers covered by the Civil Service Retirement System, is invested in special-issue Treasury bonds. Under a 1986 law, the Treasury Department can temporarily stop investing new employee and agency contributions, along with interest earnings on existing investments and income from maturing securities. The department can also redeem income of about $6 billion per month in existing securities ahead of schedule. Taken together, those steps would create about $84 billion in "headroom" between now and August, according to the Treasury Department fact sheet.

The G Fund is also invested in special-issue Treasury notes. The total balance matures daily and is then reinvested, the department said. Suspending those reinvestments will free up about $130 billion during the same period, the department said.

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