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To: Tommaso who wrote (165886)	5/14/2002 9:30:17 PM
From: Haim R. Branisteanu	Read Replies (1) \| Respond to of 436258

Treasury to Tap Pension Funds to Work Around Debt Limit Amid Cash Crunch Tue May 14,12:18 PM ET WASHINGTON -- The federal government plans to tap two government retirement funds no later than Thursday and take other steps to work around the fast- approaching limit on federal debt. Because Congress has yet to raise the $5.95 trillion debt limit, the Treasury Department (news - web sites) said Tuesday that it plans to take $44 billion from the Federal Employee Retirement System's Government Securities Investment Fund, or G-Fund, and the Civil Service Retirement and Disability Fund. The extra funds will allow the government to continue to borrow to finance its obligations. The funds will be restored fully, along with interest, once the cap is raised, Treasury said. Treasury also is suspending all new issues of state and local government securities as of Wednesday to reduce uncertainty in its borrowing needs and keep as much room as possible under the borrowing cap. "Based on current Treasury forecasts, these actions should be sufficient to enable us to finance the government's operations through mid-June," Treasury Secretary Paul O'Neill said Tuesday in a letter to congressional leaders. Mr. O'Neill cautioned that because of uncertainty about tax receipts due June 17 , Treasury may have to resort to further measures to allow the government to continue borrowing without exceeding the debt cap. "In the second half of June, uncertainty with respect to taxes to be received on June 17 increases the chances that additional measures will be necessary to manage debt subject to limit," Treasury said in a statement. These steps include suspending U.S. dollar investments in the Exchange Stabilization Fund and swapping non-Treasury securities held by the Federal Financing Bank for an equivalent value of Treasury securities held by the Civil Service Retirement and Disability Fund. Former Treasury Secretary Robert Rubin took such actions during the last debt-limit crisis in 1995-1996. Further, if the debt ceiling hasn't been raised by June 19 , Treasury may need to delay the announcement of the two-year note offering or announce the auction subject to cancellation, or both, Treasury said. Treasury also expects it will again tap its cash reserves with large banks, known as compensating balances. In addition to suspending or redeeming investments in the two trust funds, " Treasury also will make use of available cash resources, including balances held at the Federal Reserve (news - web sites) and deposits held at commercial banks by which the Treasury compensated the banks for services essential to the collection of government receipts," Treasury said. To reduce borrowing as much as possible during this cash crunch, Treasury will draw upon "all available cash resources," which totaled about $30 billion as of Monday, Mr. O'Neill said. Treasury's plans to tap the two trust funds, suspend issuance of state and local government securities, use its cash reserves held with large banks, and potentially resort to the Exchange Stabilization Fund and Federal Financing Bank for stopgap cash, will add a total of roughly $80 billion to the government's borrowing capacity. However, these maneuvers "will be insufficient to manage debt subject to limit beyond June 28 ," Mr. O'Neill warned. "These devices could also be exhausted earlier than June 28 because of uncertainty associated with federal receipts in mid-June. I will alert you as soon as possible if that should prove to be the case," O'Neill said. On June 28 , Treasury must make an interest payment of about $67 billion to various federal trust funds, including Social Security (news - web sites), Mr. O'Neill said. "This payment is projected to exceed Treasury's flexibility in managing debt subject to limit," he added. Beyond the critical June 28 date when the $67 billion Social Security interest payment is due, Treasury is scheduled to make $54 billion in payments between July 1 and July 3 , including about $30 billion to trust-fund beneficiaries. Speaking to reporters, Treasury Undersecretary Peter Fisher said the U.S. will not default on its obligations, but he qualified his statement by saying that it was a judgment based on his hopes and expectations. "Default is unthinkable. It is my hope and my expectation that Congress will act," Mr. Fisher said. This is the second time Treasury has used the G-fund since April as a way of avoiding the debt ceiling and the first time it has used the $540 billion Civil Service Retirement and Disability Fund for debt management purposes since the last debt limit crisis in 1995-1996. In early April, Treasury was forced to tap the $40 billion G-fund for cash to make critical Social Security payments and pay out tax refunds. Treasury has since completely restored the fund, with interest, as required by law. Laws governing the two pension funds allow them to be used for cash-management purposes and call for lost interest to be restored after the crisis has passed. "Beneficiaries will be fully protected and will suffer no adverse consequences," Mr. O'Neill said. Treasury asked Congress in December to increase the debt limit to $6.7 trillion and recently warned that the U.S. would hit the debt ceiling by the middle of this month unless Congress approved a permanent debt hike in time. House Republican leaders want to add a debt-ceiling increase to terrorism- spending legislation when final negotiations on a bill take place between the House and Senate, but it is unclear whether the package could clear Congress before the end of May. "I again urge Congress to pass the president's request for a permanent $750 billion increase in the debt ceiling as soon as possible," Mr. O'Neill said. The debt ceiling was last raised in 1997 as part of the Balanced Budget Act from its previous level of $5.5 trillion. -Deborah Lagomarsino and Rebecca Christie, Dow Jones Newswires; 202-862-9255; deborah.lagomarsino@dowjones.com