WASHINGTON — The Treasury Department’s current suspension of state and local government series securities, which started on May 17, is the longest in 17 years, the Pew Charitable Trusts said in paper released Thursday.
SLGs have been suspended eight times over the past 20 years, noted the three-page fact sheet, called “The Federal Debt Ceiling and the States.”
Issuers buy SLGs from the Treasury for their advance refunding escrows to avoid violating yield restriction requirements. The maturities of SLGs can be tailored to match the maturities of the bonds refunding bonds so the investment yield does not exceed the bond yield.
But when the federal government approaches its debt limit, which currently stands at about $16.7 trillion, the Treasury begins taking extraordinary measures to avoid reaching the limit. Suspending SLGs is one of those measures.
Treasury Secretary Jacob Lew told Congress on Tuesday that the department will exhaust the extraordinary measures it can take and risk exceeding the debt limit on Oct. 17
During the past year, state and local governments invested almost $11 billion per month on average in SLGs, according to the Pew paper.
At the end of May, when SLG sales were halted, more than $166 billion of these securities were outstanding, it said.
“Although the suspension will not stop state and local governments from issuing new tax-exempt bonds and refinancing their debt,” the suspension in sales “means that they will have to find alternative ways to invest the proceeds,” the Pew paper said.
“Many states will probably turn to other government securities, such as regular Treasury bills, which, unlike state and local government series securities, are not specifically designed to help states avoid the problem of arbitrage.”
Pew pointed out that the Treasury has conceded the temporary halt in sales “will impose some added cost and convenience” on state and local governments.
“Quantifying the actual effect on states is difficult,” Pew said, “But the debt ceiling debate’s intersection with state financing mechanisms shows how actions designed to address a purely federal issue can have consequences on the states.”
