The Treasury Department this week will begin taking measures to avert a U.S. default, but, in an unusual move, will not suspend the sale of State and Local Government Series securities, the measure most closely watched by the municipal market.
Halting the sale of new SLGS, also known as closing the SLGS window, is typically one of several extraordinary measures taken by Treasury to avoid breaching the debt ceiling. The recent decision not to close the window is “not standard practice,” Treasury noted on its website. “As of right now, business will continue as normal.”
In a letter to House Speaker Kevin McCarthy on Friday, Treasury Secretary Janet Yellen warned that the government is expected to hit the $31.4 trillion debt cap Thursday and urged lawmakers to pass legislation lifting the cap as soon as possible.
To free up capacity in the meantime, Yellen said Treasury would undertake two extraordinary measures: redeeming investments of the Civil Service Retirement and Disability Fund and the post office retiree health benefits fund, and suspending reinvestment of the Government Securities Investment Fund of the federal employees Retirement System Thrift Savings Plan.
It’s not clear why Treasury has opted to keep open the SLGS window for now. A spokesperson did not immediately return a request for comment.
Yellen said it’s likely that the extraordinary measures will be sufficient to last through June. But that date is “subject to considerable uncertainty,” she said, asking lawmakers to “act in a timely manner.”
SLGS are special purpose securities that Treasury issues to state and local governments to assist with compliance of federal tax laws and IRS regulations governing the investment of cash proceeds generated from a tax-exempt bond issue, according to the Treasury website.
SLGS are typically used by state and local governments and other entities that issue tax-exempt municipal bonds because of yield restrictions and arbitrage rebate requirements.
State and local governments issuing new municipal debt during an SLGS suspension may have to invest the proceeds in alternative assets to stay in compliance with federal tax law, according to Treasury.
The role of SLGS has been significantly diminished by the termination of tax-exempt advance refunding under the 2017 Tax Cuts and Jobs Act.
There still are three uses for SLGS. First, they are sometimes used for escrows in current refundings. Second, they also are sometimes used for equity defeasance escrows which are yield restricted. The third use is for longstanding advance refunding escrows.
For the month ended December 30, 2022, there were $99.9 billion of outstanding SLGS.
The SLGS window has been closed more than 15 times since 1995.
Treasury last suspended SLGS in July 2021.
The debate over a debt ceiling bill is expected to be particularly acrimonious this year.
To win votes during his embattled battle for Speaker, McCarthy promised that any debate over lifting the debt ceiling would include spending cuts or policy reforms.
On Sunday, McCarthy reiterated the promise, and said he would press for spending cuts as part of the debt ceiling legislation.
Democrats have said they’re opposed to any cuts. “We will not be doing any negotiation over the debt ceiling,” White House press secretary Karine Jean-Pierre said Friday.
The last time cuts or concessions have been granted with the debt limit was in 2011, according to Roll Call.
The X Date, when extraordinary measures run out and Treasury nears default, is unclear, but early indications put it around August or September.
In 2011, a long fight over the debt ceiling prompted S&P Global Ratings to downgrade the U.S.