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Guarding the G Fund

Since 1987, the federal government has tapped the Thrift Savings Plan's G Fund five times to avoid hitting the federal debt ceiling. Each time, the government has made good on the requirement that it repay the G Fund for its temporary losses as soon as possible. Now the G Fund may be tapped again. And once again, the government would be required to repay the G Fund as soon as it can. The thought of your employer tapping your retirement funds to stave off a debt crisis is sure to make you think of Enron and the fate of its employees' pension fund. But the federal government is not Enron, and the G Fund is not like the Enron pension fund. The 401k-style Thrift Savings Plan invests the retirement savings of federal employees and military personnel in five funds: the C, S, I, F and G Funds. The first four funds are invested in stocks and bonds. The G Fund is invested in government securities. The Treasury Department invests the G Fund in securities that mature in one day. The G Fund earns interest on those investments, more like a bank account than a stock fund, since the G Fund never loses value. Meanwhile, the government each day tries to keep itself under a statutory debt ceiling. The current debt ceiling is $5.95 trillion, which the Treasury Department expects to exceed in the next few weeks. Congress could increase the debt limit, but such a move is running into opposition on Capitol Hill. If the debt limit isn't raised, then Treasury's first move to avoid defaulting on its debt each day would be to tap the G Fund. The way Treasury taps the G Fund is by holding off on investing the fund's money. That move keeps Treasury below the debt ceiling, but also prevents the G Fund from collecting scheduled interest. In a 1996 report, (AIMD-96-130), the General Accounting Office provided a one-day example of how the maneuver works. The example comes from the last time the government came close to breaking the debt ceiling, during the November 1995 to March 1996 debt crisis and government shutdown period.

"On Jan. 17, 1996, excluding G Fund transactions, Treasury issued about $17 billion and redeemed about $11.4 billion in securities that counted against the debt ceiling," the report explained. "Since Treasury had been at the debt ceiling the previous day, Treasury could not invest the entire amount ($21.8 billion) that the G Fund had requested without exceeding the debt ceiling. As a result, the $5.6 billion difference was added to the amount of uninvested G Fund receipts and raised the amount of uninvested funds for the G Fund to $7.2 billion on that date. Interest on the uninvested funds was not paid until the debt ceiling crisis ended." Treasury and the Federal Retirement Thrift Investment Board, which oversees the TSP, kept track of the interest that would have been earned had the investments taken place. During the 1995-96 debt crisis, the government didn't pay $255 million of interest that should have been credited to the G Fund. As soon as the crisis ended, the government paid that amount into the G Fund. G Fund investors didn't lose any money. If another debt ceiling limit is reached in the next few weeks, the scenario would be the same. Each day, the Treasury would calculate the amount of public debt, not including the G Fund investments, that the government would incur that day. Then Treasury would calculate how much of the G Fund's current $41.6 billion could be invested without going over the debt ceiling. The amount falling within the debt ceiling would be invested; the amount over the debt ceiling would not be invested. The government would keep track of how much interest the G Fund would have earned had the full amount been invested. Then, once the debt ceiling is raised or concerns about hitting the debt ceiling pass, Treasury would pay all of the outstanding interest to the G Fund. According to the Federal Retirement Thrift Investment Board, the G Fund's investments generate more than $5.6 million in interest per day. Treasury is required by law to repay any outstanding interest owed to the G Fund. The safeguard on G Fund investments, called the 'make-whole' provision, has been in place since President Reagan signed the 1987 Thrift Savings Fund Investment Act. Before 1995, the government tapped the G Fund three times in 1987 and once in 1989. Each time, the government repaid the outstanding interest as soon as the debt ceiling was no longer threatened. Despite that safeguard, National Treasury Employees Union President Colleen Kelley said Wednesday that Congress should raise the debt limit instead of tapping the G Fund. "The position of the House Republican leadership is wrong, inappropriate and fiscally irresponsible, particularly so in the wake of the Enron debacle," Kelley said in a statement. "This maneuver appears to be driven by the political consideration of not wanting to raise the debt ceiling in an election year. … On this issue, fiscal responsibility to federal employees and the American public should be above politics." In 1995 and 1996, it was congressional Republicans who criticized the Clinton administration for tapping the G Fund. At that time, House Republicans proposed a provision that would have eliminated the 1987 Thrift Savings Fund Investment Act requirement that the government repay the interest the G Fund loses during debt crises. The proposal made it all the way to the White House as part of a larger bill, but President Clinton vetoed the bill. "At every opportunity, I have advised the Congress that, with the make-whole protection, G Fund investments are safe," TSP Executive Director Roger Mehle said in 1996 when Congress considered revoking the 1987 law. If such a proposal were to resurface, federal employees could start worrying about their investments. But as long as the make-whole provision is part of the law, G Fund investors won't be shortchanged if and when the government turns to the fund during a debt crisis.


Brian Friel is founder of One Nation Analytics, an independent research, analytics and consulting firm for the federal market.

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