State and Local Government Series (SLGS)
Treasury Debt: A Description
Steven Maguire
Specialist in Public Finance
May 13, 2011
Congressional Research Service
7-5700
www.crs.gov
R41811
CRS Report for Congress
P
repared for Members and Committees of Congress
State and Local Government Series (SLGS) Treasury Debt: A Description
Introduction
The U.S. Treasury projected the federal debt will reach its statutory limit on May 16, 2011. On
May 2, 2011, in anticipation of reaching the statutory debt limit, U.S. Treasury Secretary Timothy
Geithner sent a letter to Congress indicating that he would declare a debt issuance suspension
period on May 16 to extend Treasury’s borrowing capacity until early August 2011.
In the same letter, Secretary Geithner also indicated that Treasury would use its existing
authorities to extend borrowing capacity. One example of this is that on May 6, 2011, the
Treasury Department “suspend[ed] until further notice the issuance of State and Local
Government Series (SLGS) Treasury securities.”1
As of April 30, 2011, SLGS represented 1.27% ($180.8 billion) of total debt outstanding
(approximately 0.5% of outstanding debt is not subject to the debt limit). Suspending SLGSs will
not change the debt limit, rather just delay the date when it is reached. Some have expressed
concern that this suspension will have a negative impact on state and local government finances
In the near term, the suspension is not expected to cause significant disruptions for state and local
government issuers. This report explains SLGS, a nonmarketable, custom tailored security, and
how suspension may impact state and local government issuers.
SLGS Purpose
SLGSs are an administrative tool state and local governments use to comply with Internal
Revenue Service rules on how the proceeds of tax-exempt bonds can be invested. Generally, state
and local government issuers cannot invest tax-exempt bond proceeds “to acquire higher yielding
instruments.”2 SLGSs are nonmarketable securities offered by the U.S. Treasury to state and local
government bond issuers that, by design, comply with IRS rules.
SLGSs are help state and local governments manage debt and capital spending. The timing of
spending on capital projects and the required coordination with state and local budget
appropriation cycles typically results in a mismatch between when bonds are issued and when
spending needs arise. SLGSs provide a “safe harbor” investment option for state and local
governments to “park” the proceeds until needed to pay vendors.
Issuers also use SLGSs to reduce interest cost. Issuers often sell a second tranche of tax-exempt
bonds to replace outstanding bonds to take advantage of falling interest rates or to establish a
reserve fund (or escrow account) to help repay or service outstanding bonds.3 The IRS identifies
two general types of refunding, “current” and “advanced.” If the old bonds are redeemed within
1 U.S. Treasury, Letter to The Honorable John A. Boehner, released May 2, 2011, available at http://www.treasury.gov/
connect/blog/Documents/FINAL%20Debt%20Limit%20Letter%2005-02-2011%20Boehner.pdf. This was the third
letter sent. See CRS Report RL31967, The Debt Limit: History and Recent Increases, by D. Andrew Austin and Mindy
R. Levit.
2 Generally, when proceeds of tax-exempt bonds are invested in higher-yielding instruments, they are considered
“arbitrage bonds.” These arbitrage bonds are not permitted under IRS rules and are taxable, see 26 U.S.C. 148(a)(1).
3 Generally, the size of the reserve fund cannot exceed 10% of the original bond issuance.
Congressional Research Service
1
State and Local Government Series (SLGS) Treasury Debt: A Description
six months the proceeds from the new bonds are in compliance with IRS regulations. This is
considered a “current refunding.”
In contrast, if the proceeds of the new issue are outstanding for more than six months, the new
bonds would likely violate IRS rules and lose their tax-exempt status. This is considered
“advanced refunding” and the proceeds from the bonds are most often used to purchase SLGSs.
Advance refunding is necessary as many outstanding bonds cannot be bought from the holder or
“called” back before a given number of years, typically 10 years. Thus, the SLGS maturity must
roughly match the time to the term of the old bond to be refunded. For example, if a refunding
bond were issued today for a bond that can be called one year from today, a SLGS with a term of
one year would be purchased. Today, the interest rate paid by the U.S. Treasury on the security
would be 0.18%.4
SLGS Volume
SLGS volume has declined as state and local governments have not been refunding existing debt
and the need for SLGSs has waned. As noted earlier, as of April 30, 2011, $180.8 billion of
SLGSs were outstanding—down from $291.3 billion four years earlier. Table 1 reports SLGSs
outstanding in April for the last five fiscal years. The slow decline will likely continue as market
participants seem to have a limited appetite for the SLGS instruments.5 The declining volume
likely reflects strained state and local budgets generally and the relatively low interest rate paid
by the U.S. Treasury. The lower rate reduces the opportunity cost of unspent bond proceeds.
Through April of FY2011, SLGS redemptions ($64.7 billion) have exceeded SLGS issues
($52.4 billion) by $12.3 billion.
Table 1. Total SLGS Outstanding and Percentage of Total Debt Outstanding
(On April 30 of year listed)
Percent of Total U.S.
April SLGS Outstanding
Change from
Treasury Debt
Year
(in millions)
Previous April
Outstandinga
2007 $291,250
3.3%
2008 $286,818 -1.5% 3.1%
2009 $238,195 -17.0% 2.1%
2010 $209,445 -12.1% 1.6%
2011 $180,849 -13.7% 1.3%
Source: U.S. Treasury, Debt Position and Activity Report, various fiscal years, available at
http://www.treasurydirect.gov/govt/reports/pd/pd_debtposactrpt.htm.
a. Roughly 0.5% of total debt outstanding is not subject to the debt limit.
4 U.S. Treasury, “SLGS Daily Rate Table,” available at https://www.treasurydirect.gov/GA-SL/SLGS/
selectSLGSDate.htm, visited May 5, 2011. The SLGS was suspended May 6, 2011.
5 Temple-West, Patrick, “Treasury Schedules SLGS Closure for Friday,” The Bond Buyer, May 2, 2011.
Congressional Research Service
2
State and Local Government Series (SLGS) Treasury Debt: A Description
SLGS Suspension
The suspension of the SLGS program will likely create some disruptions for tax-exempt bond
issuers that had anticipated using SLGSs for debt management in the near term. As noted in the
U.S. Treasury letter, the suspension will “impose some added cost and inconvenience on state and
local governments.”6 Without SLGSs, issuers will find other assets to invest and will be required
to monitor the investments to insure they do not violate IRS rules. The IRS rules apply to the
yield on the asset investment, not necessarily the type of asset. A likely alternative would be other
U.S. Treasury securities purchased on the secondary market. As noted above, the impact of the
suspension is mitigated by the apparent decline in demand for the instruments. An extended
suspension, however, may generate significantly more disruptions as compliance costs would
increase for potentially more issuers.
A long term suspension coupled with rising interest rates, however, could lead to a more
significant strain on state and local debt management.
According to the U.S. Treasury, the SLGS program has been suspended six times in the previous
20 years. The periods of suspension lasted an average of 63 days, and are detailed in Table 2. The
most recent suspension was for one day. In past suspensions, little market response was noted
though some used the opportunity to suggest changes to the SLGS program to improve its
operation.7
Table 2. Suspension of the SLGS Program Over Last 20 Years
Begin End
Days
October 18, 1995
March 29, 1996
163
May 15, 2002
July 7, 2002
53
February 19, 2003
May 26, 2003
96
October 14, 2004
November 21, 2004
38
February 16, 2006
March 16, 2006
28
September 27, 2007
September 28, 2007
1
Average
63
Source: U.S. Treasury, “State and Local Government Series: Frequently Asked Questions,” released May 2,
2011, available at http://www.treasury.gov/connect/blog/Pages/secretary-geithner-sends-debt-limit-letter-to-
congress.aspx.
Notes: CRS Calculations based on U.S. Treasury data.
6 U.S. Treasury, “State and Local Government Series: Frequently Asked Questions,” released May 2, 2011, available at
http://www.treasury.gov/connect/blog/Pages/secretary-geithner-sends-debt-limit-letter-to-congress.aspx.
7 The Bond Buyer, “Market Participants Ask Treasury to Make Changes in Slugs,” January 19, 1996.
Congressional Research Service
3
State and Local Government Series (SLGS) Treasury Debt: A Description
Author Contact Information
Steven Maguire
Specialist in Public Finance
smaguire@crs.loc.gov, 7-7841
Congressional Research Service
4