2011 SLGS Forum – May 17, 2011

1. Role of State and Local Government Securities and Other Activity in U.S. Treasury Cash and Debt Management 2011 SLGS Forum – May 17, 2011

2. Contents • Overview of Treasury Fiscal Operations • Cash Forecasting • Debt Forecasting • Discussion of the Debt Subject to Limit

3. Organizational Chart Office of Fiscal Projections

4. Office of Fiscal Projections 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) Office of Fiscal Projections

5. Budget 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 Office of Fiscal Projections

6. Monthly Deficit Figures FY 2006-FY 2011 (Mar) Office of Fiscal Projections

7. 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 updates Office of Fiscal Projections

8. 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 Office of Fiscal Projections

9. Cash Balance Management • 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

10. Portfolio Management: Cash Management/ Investment Strategy 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 Office of Fiscal Projections

11. Cash Balance Oct 2006 – Apr 2011 ($’s in billions) Office of Fiscal Projections

12. History of the Debt Limit • 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.

13. Debt Subject to Limit FY 2003-FY 2011 (March) Office of Fiscal Projections

14. The Statutory Debt Limit • 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.

15. Notification to Congress and Extraordinary Measures 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 available • Suspending sales of State and Local Government Securities • 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 investments • Suspending reinvestment of the Government Securities Investment Fund (G Fund) • 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.

16. Notification to Congress and Extraordinary Measures 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

17. Extraordinary Measures • 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.

18. Extraordinary Measures • 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.

19. Budget Changes Cannot Avoid the Need to Raise the Debt Limit • 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.

20. Treasury Links • 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 Office of Fiscal Projections