WASHINGTON — The Treasury Department announced on Friday that it will indefinitely suspend sales of state and local government securities beginning at noon on March 13 because of the federal debt limit.
"The suspension applies to demand deposit and time deposit securities," the Treasury said in a notice on its site. "Subscriptions for SLGS received by the Bureau of the Fiscal Service prior to 12:00 noon, on March 13, 2015, will be issued on the date requested. New subscriptions for SLGS will not be accepted during the suspension."
Secretary Jack Lew informed House and Senate leaders that the administration will have to suspend sales of state and local government series securities on March 13 if Congress does not raise the U. S. debt limit.
He urged Congress to increase the debt limit as soon as possible in a March 6 letter sent to House Speaker John Boehner, R-Ohio, and House Minority Leader Nancy Pelosi, D-Calif., Senate Majority Leader Mitch McConnell, R-Ky., Senate Minority Leader Harry Reid, D-Nev., and other members.
Lew said the administration will have to take the action because the current federal statutory debt limit will expire on March 15. Congress extended it through that date in the Temporary Debt Limit Extension Act it passed in February 2014.
SLGS, created by the Treasury in 1972 and modified over the years, help state and local governments comply with tax rules that restrict the yields on investments of proceeds of tax-exempt bonds. They can be specially tailored in terms of maturities are most often used purchased by issuers for advance refunding escrows who want to ensure their investment yield does not exceed their bond yield. Many issuers prefer SLGS to open-market Treasuries, which can only be purchased through a competitive bidding process that can be costly, complex, and raise tax issues, as well as result in negative yields.
Apart from advance refunding escrows, some issuers may prefer to buy SLGS for project, debt service, or reserve funds because of their convenience, safety and simplicity. Bond documents may call on banks assisting issuers to purchase SLGS on scheduled reinvestment dates, possibly over multi-year periods, meaning the SLGS are rolled over at specific dates.
Generally, subscriptions for $10 million or less of SLGS must be submitted to the Bureau of Fiscal Service five calendar days before delivery. Subscriptions for $10 million or more of SLGS must be submitted seven calendar days before delivery.
But when the federal government comes close to reaching or exceeding the statutory federal debt limit, the Treasury takes several "extraordinary measures," which usually include temporarily halting SLGS sales. The Treasury has done this at least 10 times in the past, most recently from Feb. 7 to Feb.18 2014, according to the Treasury Department.
This causes problems for issuers that may have trouble getting bids for open-market Treasuries and will face increase costs. It also can cause dilemmas for issuers whose bond documents require SLGS be purchased or rolled over on certain dates.
"Increasing the debt limit does not authorize new spending commitments," Lew reminded the lawmakers in the letter."It simply allows the government to pay for expenditures Congress has already approved, thereby protecting the full faith and credit of the United States. Only Congress is empowered to increase the nation's borrowing authority, and I hope that Congress will address this matter without controversy or brinksmanship."
