WASHINGTON — The Treasury Department will stop selling state and local government series securities to municipal issuers on Friday unless Congress votes to raise the federal debt limit, Treasury Secretary Timothy Geithner told congressional leaders Monday.
Warning that it will “deprive state and local governments of an important tool to manage their outstanding debt expenses,” Geithner said the Treasury will have to close the SLGS window as part of several “extraordinary measures” that will be needed to extend the country’s ability to meet its debt obligations.
“Because it appears that Congress will not act by May 16, it will be necessary for the Treasury to begin implementing these extraordinary measures this week,” he said.
SLGS are specially-tailored Treasury securities that states and municipalities purchase for advance refunding escrows to ensure their investment yield will not exceed bond yield in violation of arbitrage restrictions. The maturity dates of SLGS match those of the muni bonds being refunded.
However, when the Treasury issues SLGS, they count against the debt limit.
“Because the U.S. is very close to reaching the debt limit, Treasury must take this action now,” Geithner wrote.
The SLGS window closure is not expected to have a detrimental effect on the municipal market because few advance refundings are coming to market right now, market sources contend.
In March, there were $181.9 billion of SLGS outstanding, down from $208.5 billion in March 2010, according to the Treasury.
The Treasury has suspended SLGS sales six times in the past, the most recent of which was Sept. 27-28, 2007, according to the department. The other suspensions were: Feb. 16 to March 16, 2006; Oct. 14 to Nov. 21, 2004; Feb. 19 to May 26, 2003; May 15 to July 7, 2002, and Oct. 18, 1995 to March 28, 1996.
