AP Online

April 2, 2002 Tuesday 11:53 AM Eastern Time

SECTION: WASHINGTON DATELINE

U.S. Moves to Avoid Debt Default

by JEANNINE AVERSA; Associated Press Writer

DATELINE: WASHINGTON

The Bush administration will take steps this week to prevent an unprecedented default on the national debt by moving federal retirement funds into a non-interest-bearing account, freeing up room for more borrowing.

The juggling of federal retirement accounts, which has been done before in standoffs with Congress over raising the debt limit, will not harm federal employees' retirement nest eggs, Treasury officials said Tuesday. The lost interest payments will be made up in coming months. Treasury Secretary Paul O'Neill explained his plans in a letter to congressional leaders.

He said his action involving the Federal Employees Retirement System interest-bearing account known as the G-Fund was done previously in 1995 by Robert Rubin, who was treasury secretary in the Clinton administration.

Without the shifting of funds, Treasury would not have been able to borrow the money it will need in coming weeks to keep the government operating, including making payments on debt that is coming due.

If it had missed those payments, the government would have been technically in default on the $5.95 trillion national debt, something that has never happened in the country's history.

"I know that you share the president's and my commitment to maintaining the full faith and credit of the U.S. government, especially at this critical time," O'Neill said in a letter to congressional leaders.

"Together we must continue working to enact an increase in the statutory debt limit as quickly as possible to avoid any negative repercussions at home or abroad," O'Neill said in his letter.

Republicans, who control the House, lack the votes to pass a measure increasing the debt limit because of opposition from GOP conservatives, who are leery that it will lead to more spending, and from Democrats.

Democrats seek to use the issue to drive home their message that the Bush administration's $1.35 trillion, 10-year tax cut last year was too generous and has pushed the country back into deficit spending.

Republicans counter that the tax cut was needed to lift the country out of recession. They blame the economic downturn and the war against terrorism for bringing back government deficits.

Treasury officials also announced Tuesday that they will auction 19-day and 12-day short-term cash management bills totaling $46 billion on Tuesday and Wednesday to refill government coffers.

Officials said the shift in the federal retirement accounts, which makes room for the increased borrowing, will begin Thursday and continue to around April 18, when the government will be receiving billions of dollars in income tax payments.

O'Neill stressed that the government retirement account "will receive complete restoration of all funds temporarily affected by this necessary action, including full and automatic restoration of any interest that would have been credited to the fund."

Treasury had warned that the $5.95 trillion debt ceiling would be hit sometime this week without action from Congress to raise the borrowing limit.

O'Neill has repeatedly asked Congress to boost the ceiling by $750 billion. But so far, Congress has not moved on the request.

Since the government began raising money to fight World War I in 1917, Congress has let the Treasury borrow the money it wants, as long as it stays within limits set by Congress.

On the Net: Treasury: http://www.ustreas.gov/