US debt ceiling forces Treasury into 'extraordinary measures'

The federal government officially reached its $31.38 trillion debt limit on Thursday, prompting the Treasury Department to begin using its "extraordinary measures" to avoid defaulting on the national debt for the next few months.

Treasury Secretary Janet Yellen announced in a letter to Congress last week that the U.S. would reach the debt limit on Jan. 19 and that her agency would have to deploy two of the four extraordinary measures at its disposal to continue to make payments on the debt and avoid default.

"Once the limit is reached, Treasury will need to start taking certain extraordinary measures to prevent the United States from defaulting on its obligation," she wrote.

Based on the Treasury Department's projections, Yellen noted that while there is uncertainty over how much time her agency can buy, "it is unlikely that cash and extraordinary measures will be exhausted before early June." With the federal government now on borrowed time to act on the debt, lawmakers will have to work with the Biden administration to raise or suspend the debt limit to avoid a default later this year.

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The U.S. national debt, which now exceeds $31.38 trillion, grew to its current level due to bipartisan spending by presidential administrations and congressional majorities from both sides of the aisle. Given the composition of Congress, it will take a degree of bipartisan compromise from the Republican House and Democratic Senate to deal with the debt limit before the extraordinary measures run out.

Extraordinary measures explained

Extraordinary measures are accounting and budgetary tools the Treasury Department may use to avoid defaulting until Congress takes action on the debt limit to let the federal government resume borrowing. They don't last forever, and their duration depends on how much the government is spending.

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While there are four extraordinary measures, the Treasury Department is only going to use two of them for the initial phase of this debt standoff – the G Fund and delaying certain federal pension investments. Here's how those extraordinary measures work:

Government Securities Investment Fund, or the G Fund 

The Government Securities Investment Fund, known as the G Fund, is a money market retirement fund for federal employees enrolled in the Thrift Savings Plan (TSP) that gets invested in special-issue Treasury securities that mature daily and are typically reinvested. The G Fund's balance was about $210.9 billion as of Dec. 31, 2022.

When the federal government is operating at the debt limit, the Treasury Department has the authority to stop fully investing in the G Fund from day to day to prevent it from exceeding the debt limit. For example, if the Treasury wants to create $10 billion of space under the debt limit to allow the agency to sell more debt securities to the public that finance federal spending, it would simply not invest that amount on a given day.

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After the debt limit is either raised or suspended, the G Fund is required to be made whole with interest, so federal employees and retirees who invest in it through the TSP are ultimately unaffected despite the accounting maneuvers.

Federal pension adjustments to retirees, postal workers 

Treasury can also declare a "debt issuance suspension period" during which the agency delays some of its accounting moves to free up cash during a specific window of time. During this period, the agency can suspend making new investments and redeem certain existing investments in a pair of federal pensions.

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It affects the Civil Service Retirement and Disability Fund (CSRDF), which is the main pension fund for federal employees, as well as the smaller Postal Service Retiree Health Benefits Fund (PSRHBF), which funds the health care expenses of retired Postal Service employees. Both funds are invested in special-issue Treasury securities.

The Treasury Department noted in August 2021 that each month of a debt issuance suspension period frees up temporary headroom of about $7 billion from the CSRDF plus about $300 million from the PSRHBF through the early redemption of investments in those funds. At the end of the suspension period, the net increase in budgetary headroom goes away because those securities would've matured at that date.