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<tr><td><font size=5>U.S. to Tap Pension Funds to Avoid Hitting Debt Limit (Update1)</font>
04/02 10:18
By Simon Kennedy

Washington, April 2 (Bloomberg) -- The U.S. will reach the limit of its authority to borrow money on April 4, forcing the Treasury Department to tap a $40 billion civil service retirement fund to prevent the government from defaulting on its debts, Treasury Secretary Paul O'Neill said.

In a letter to congressional leaders, O'Neill said their refusal to lift the mandated $5.95 trillion debt limit will force him to tap the Federal Retirement Thrift Savings Fund, also known as the G-Fund.

Over the next 10 business days the government has obligations totaling $45 billion to $55 billion, including $27 billion in Social Security payments which it would be unable to meet without the maneuvering.

Treasury will sell $46 billion in short-term cash management bills this week to cover those expenditures. By mid-April, a slew of income tax receipts will provide the government with fresh cash and end the need to juggle funds. In his letter, O'Neill said he would end use of the G-Fund ``on or about'' April 18.

Congress has refused O'Neill's repeated requests to raise the limit by $750 billion, a move necessitated by additional spending for the war on terrorism, a drop in tax receipts brought on by the recession, and regularly increasing payments for Social Security benefits.

``We must continue working to enact an increase in the statutory debt limit as quickly as possible to avoid any negative repercussions at home or abroad,'' O'Neill wrote in his letter, which was released by the Treasury Department.

Following Rubin's Lead

Republicans in Congress want to maintain the limit as a check on spending. Democrats want to keep it so they can blame President George W. Bush's tax cuts for the government's inability to pay its debts. Congress is now in recess until April 8, and no action is expected for several weeks.

In tapping the G-Fund, O'Neill is following the lead of former Treasury Secretary Robert Rubin.

The last time the government reached its borrowing limit, in 1995 and early 1996, Rubin reworked auction schedules, stopped selling savings bonds and manipulated government retirement accounts such as the G-Fund to find $139 billion and remain beneath the ceiling.

The G-Fund was created in the early 1980s. Its assets are represented by a non-marketable government security with a one-day maturity. Each night, a new security paying the latest interest rates automatically replaces the maturing one.

Beneficiaries Protected

By suspending the nightly update or rollover, and leaving an IOU in place of the assets, O'Neill extinguishes debt, enabling Treasury to sell new notes or bills without threatening to breach the debt ceiling.

``G-Fund beneficiaries are full protected and will suffer no adverse consequences from this action'' because the money will be paid back in full once the debt limit is raised, O'Neill wrote.

``In short, the result on the G-Fund and its beneficiaries will be the same as if this temporary action had never taken place,'' he wrote.

Treasury officials have also used regular auctions to buy time. The department's debt managers pared the size of 4-week bill auctions, cutting issuance to $19 billion from $23 billion. They also capped the amount of two-year notes sold in March at February's level of $25 billion.

In a statement, Peter Fisher, Treasury undersecretary for domestic finance, said the department would take ``every prudent step'' to avoid breaching the debt limit. ``As we work with Congress to raise the limit going forward, we will do our utmost to avoid disruptions in our normal borrowing patterns,'' he said.

The government sells securities to pay its bills while it waits for tax receipts to come in, and to pay the interest on existing debt. The first debt ceiling of $11.5 billion was introduced in 1917. It reached $1.1 trillion in 1981 and was last boosted, from $5.5 trillion, as part of a bipartisan balanced budget agreement in 1997.

Few Repercussions

While the 1995-1996 crisis injected volatility into the $3 trillion government security market, few analysts expect there to be any repercussions from O'Neill's moves.

Treasury began to highlight its problem in December and signaled that it was considering copying Rubin's strategy, limiting the likelihood that the maneuvering will cause higher interest rates, analysts said.

``They made it clear early enough what they were thinking of doing so they'll not incur costs,'' said Lou Crandall, chief economist at Wrightson Associates Inc., a research firm.

And unlike 1996, when Moody's Investors Service placed U.S. debt ``on review for possible downgrade,'' the creditworthiness of U.S. government debt is not in doubt now.

``It's still the top credit on the planet,'' said Sean Egan, managing director of Egan-Jones Ratings Co. in Wynnewood, Pennsylvania. ``Terrorist attacks didn't change that so neither will this.''

Political Fallout

There are some risks. Foreign investors who don't understand the nuances of his actions could begin to ``question the credibility'' of the Treasury when it says it can back up its debt obligations, said Gerald Lucas, a government bond analyst with Merrill Lynch & Co. in New York. That could mean a rise in interest rates.

``There are methods to get around Congress, but when it's playing politics with the debt limit that leads to a risk premium on U.S. debt,'' he said.

Rubin's actions in 1995 also brought threats of impeachment from Republicans in Congress.

The worst O'Neill may face is criticism for touching retirement accounts at the same time as lawmakers are complaining about the impact of Enron Corp.'s collapse on its employees' pension funds, said Stephen Stanley, an economist at Greenwich Capital Markets Inc. in Greenwich, Connecticut.

``There may be political fallout because the Enron crisis has raised sensitivity toward retirement funds,'' he said. ``But that will be the only fallout.''


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