United States f A0 General Accounting Offke Washington, D.C. 20648 Accounting and Information Management Division B-281861 May 27,1999 The Honorable Henry J. Hyde Chairman, Committee on the Judiciary House of Representatives Subject: Federallv Chartered Cornoration: Review of the F’inancial Statement Audit ReDoIt for the Former Members of Congress for 1997 and 1996 Dear Mr. Chairman: As requested, we reviewed the audit report covering the financial statements of the Former Members of Congress, a federally chartered corporation, for the years ended December 31, 1997 and 1996. The corporation’s purpose is to promote the improved public understanding, both domestically and internationally, of the Congress as an institution and representative democracy as a system of government. Federally chartered corporations are required under 36 USC. 1102-1103to l present the corporation’s assets and liabilities and reasonable detail on the corporation’s income and expenses in annual financial statements, l obtain an annual fhxurcial audit by an independent public accountant, and l submit the auditor’s report and the corporation’s financial statements to the Congress. The objective of our review was to determine whether the audit report complied with the financial reporting requirements of the law. In carrying out our work, we reviewed the corporation’s financial statements and the accompanying notes, performed certain analytical procedures related to information presented in the financial statements, reviewed the auditor’s report, and made inquiries to corporation officials or the auditor as we deemed necessary. We did not review the auditor’s working papers. Our review disclosed no reportable instances of noncompliance. GAO/AJMD-99-192R Former Members of Congress B- 281861 For 1997,the corporation reported that expenses exceeded revenues by over $292,000. The corporation also reported that its liabilities exceeded its assets by $83,000for the year then ended. According to the President, the corporation’s Board of Directors conducted a fund- raising campaign to increase revenues. The audit report included the auditor’s opinion that the financial statements of the corporation were fairly presented in conformity with generally accepted accounting principles. We are returning the audit report you senti ‘th your letter. Sincerely yours, J2f%kd/fl& David L. Clark L Director, Audit Oversight and Liaison w/o enclosure (911932) Page 2 GAO/AIMD-99-192R Former Members of Cc,,,, Ordering Information The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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For information on how to access GAO reports on the INTERNET, send an e-mail message with “info” in the body to: info&vww.gao.gov or visit GAO’s World Wide Web Home Page at: PRINTED ON && RECYCLED PAPER United States General Accounting Office Washington, D.C. 20548-0001 1 Permit No. GlOO Official Business Penalty for Private Use $300 Address Correction Requested United States GAO General Accounting Office Washington, D.C. 20548 Accounting and Information Management Division B-282159 May 281999 The Honorable Bill Archer Chairman Committee on Ways and Means House of Representatives Subject Budget Issues: Treasurv’s Interest Rate Calculation Changes Dear Mr. Chairman: The Secretary of the Treasury informed the Congress in a letter dated December 18, 1998, about Treasury’s decision to change the calculation of the interest rates used since 1980 to determine the investment returns for a number of government trust funds, including Social Security and Medicare. You asked us to determine (1) how and why Treasury changed its rules for calculating interest rates in 1980 and 1998, (2) the effects of these changes on the unified budget and on the financial status of Social Security and Medicare trust funds, and (3) what other trust funds were affected by Treasury’s decision. This report presents information, which was provided in a briefing to your office in April 1999. Also, as part of the audit of the Bureau of the Public Debt’s fiscal year 1999 Schedule of Federal Debt, we will review whether Treasury’s methods for calculating interest rates on certain trust funds are being applied correctly. Background Treasury sets the interest rate earned on trust fund balances for Social Security and Medicare using a statutory formula. The interest rate is to be equal, at the time of issue, to the average market yield on outstanding marketable government securities not due or redeemable for at least 4 years. Although the formula is set by statute, the law does not defme the specific method to calculate the yield to be used, except that it must be based on market quotations. The Federal Reserve Bank of New York provides the market quotations that Treasury uses to calculate market yields. The prevalent market practice for calculating yields takes into account whether Treasury securities are callable or noncallable-meaning whether or not Treasury may redeem the securities prior to their stated maturity date. GAO/AIMD-99-194R Treasury’sInterest Rate Calculation Changes Es-282 159 Market participants compute the yields of non-callable Treasury securities based on their maturity date.’ Computing the yields of callable Treasury securities, on the other hand, is more complex because of the possibility that Treasury might call these securities before their maturity date. Treasury can call the bonds that contained call provisions when they were issued 5 years prior to their stated maturity date (“callable bonds”) and thereby pay the bonds’ par value rather than the bond’s current market price. The bond’s par value is the amount Treasury agreed to repay by the maturity date. The Treasury has not issued callable bonds since November 1984. As of September 30,1998, there were $3.3 trillion outstanding marketable Treasury securities, of which nearly $88 billion were callable bonds. Table 1 describes how to select one of two alternative yield values for callable bonds. If the current market interest rate is higher than the coupon rate on the callable bonds, the price of a bond is below its par value. In such cases, Treasury would be unlikely to call the security at par valuei so yield is computed based on the time to maturity of the bond. Treasury called no bonds between 1962and 1992because prevailing market rates were in general greater than coupon rates. When current market rates are lower than the callable bond’s coupon rate, which has generally been the case in the last 4 years, bond prices are higher than their parvalue. In this case, Treasury would likely call the bond at par value before its maturity date; thus, market participants would calculate yield based on the bond’s call date or 5 years before maturity date. Since 1992,the Treasury has called every eligible issue that has moved into its call period. Table 1: Rules for Calculating Yield-to-Call or Yield-to-Maturity If market yield is higher than If market yield is lower coupon rate, then than coupon rate, then Price of the bonds Callablebondstrade below par. Callablebondstrade above Treasury would be unlikely to Treasury would likely call call the security at par value. the security at par value. Which yield is Yield-t*maturiQ. Yield-tocall. calculated? ‘The yield-to-maturity is the rate of discount at which the market price of a Treasury security equals the presentvalue of the semiannualinterest paymentsand the par value paid upon maturity. Page2 . GAO/AIMD-99-194R Treasury’s Interest Rate CalculationChanges B-282159 Table 2 illustrates the effect that callability has on bond prices and yields by comparing the April I5,1999, market quotation and yield of two securities that mature on May 2005: one a callable Treasury bond and the other a noncallable Treasury note. Although the callable bond pays a higher coupon rate (8.25 percent) than the Treasury note (6.5 percent), the former has a lower price and lower yield. The Treasury note’s bid was 106 19/32,or $106.59per $100 of face value, while the Treasury bond’s bid was 103 11/32,or $103.34per $100 of face value” The lower bid of the callable bond reflects the market participants’ expectations that Treasury will call the bond at par value during May 2000, or 5 years earlier than its maturity date. Thus, the yield on the bond (5.02 percent) is the yield-to-call while the yield on the note (5.22 percent) is the yield-to-maturity. Table 2: Treasurv Securities, Market Quotations and Yields I I Mav2005Note 1 Mav2000-2005Bond 1 Couponrate 6.5% 8.25% Bid 106.19 103.11 Yield 5.22% 5.02%- Source:Yieldsprovided by Treasury;couponrate and bid reported by New York Times, April 16,1999. Treasum Changed Interest Rate Calculations in 1980 and 1998’ Treasury made changes.in 1980 and 1998 in the calculation of the interest rates used to determine the investment returns for a number of government trust funds. Before 1980, Treasury’s manual calculations were based on the prevalent market practices described above, In 1980,when prices of callable bonds were below par, Treasury’s computers were programmed to calculate yields on callable bonds based on yield-to- . maturity only. Treasury lawyers described the 1980change as a “programming shortcut that was made in the interest rate environment of the time.” According to Treasury officials, they found no documentation on the 1980 change and nothing to indicate it was meant as a policy or methodology change. The second change occurred in 1998,when Treasury officials discovered that the 1980 program for calculating interest rates did not conform to prevalent market practice. Treasury changed its method of calculating rates back to calculate yield-to- maturity when market prices are below par and to calculate yield-to-call when market prices are above par. Although estimates of computer programming and resource requirements to add the yield-to-call programming option in 1980 were unavailable, 2Bidis the price offered to buy securities. Prices are in units of l/32 of 1 percent of par value. Par value is taken to be $100. Page3 GAO/AIMD-99-194R Treasury’sInterest Rate Calculation Changes B-282159 Treasury officials said that the chtige when made in 1998 required about 40 staff hours. Treasury informed the Congress and trust funds’ trustees of the 1998 change. In January 1999,the Treasury Assistant General Counsel for Banking and F’inance was asked for a legal opinion on whether the Secretary of the Treasury has the authority to change the method of computing interest rates on intragovernmental borrowings linked to the “average market yield.” Because “average market yield” is not defined by law, the Assistant General Counsel found that the Secretary of the Treasury has discretion to compute interest rates on either a yield-to-maturity or a yield-to-call basis. The Assistant General Counsel also found that if the Secretary of the Treasury decided to change Treasury’s policy to compute interest rates on a yield- to-call basis, the Secretary of the Treasury has no obligation to apply the new policy retroactively. We agree with the conclusions of the Assistant General Counsel that the “average market yield” languageof the statute provides the Secretary with discretion in computing interest rates, that computing interest rates on a yield-to-call basis is permissible, and that the Secretary may apply such a change prospectively Effects of !Creasurv’s 1980 Changes on Social Securitv and Medicare According to Treasury, its 1980 change increased the rates for the trust funds of Social Security and Medicare in 1988,1992,1996,1997 and 1998 by one-eighth of one percentage point over what it would have been had the yield-to-call method been used.s Treasury estimated the revenue difference (i.e., the increased revenue credited to the trust funds as a result of using yield-to-maturity for callable bonds traded above par) was $1.4 billion for Social Security and $0.4 billion for Medicare. (See figure 1.) ?he two SocialS&xu-itytrust funds are Old-Ageand Survivors Insuranceand Disability Insuranceor OASDI;the two Medicaretrust funds are Hospital Insurance(Part A) and SupplementaryMedicalInsurance(Part B). Page4 GAO/ATMD-99-194R Treasury’s Interest Rate Calculation Changes B-282159 Figure 1: Estimated Revenue Difference in Social Securitv (OASDI) and Medicare, June 1988 Through December 1998, and Januarv 1999 Through June 2013 $4.3 . OASDI Medicare Source: Department of the Treasury. According to Treasury offkids, for outstanding Social Security and Medicare trust fund holdings as of December 1998, the 1980 change also results in higher future revenue in 1999to 2013. The amounts are $4.3 billion for Social Securitj and $0.7 billion for Medicare. (See figure 1.) For future investments after December 1998, Treasury believes the 1998 changes may produce a rate of interest one-eighth of one percent lower than the rates computed based only on yield-to-maturity. Effect of Treasum’s 1980 Change on the Unified Budget Treasury’s 1980 change increased the financial returns for 11 trust funds by one- eighth of one percentage point in 5 years in the period 1980 through 1998 over what it would have been had the yield-to-call method been used. The unified budget was not affected by the increases in 10 of the 11 trust funds because the higher interest credited was a transfer between federal and trust funds! The only trust fund that “The$4.3billion difference shown for Social Security representsless than one-halfof one percent of the total projected interest income for this 14 ‘/z -year period (as estimated by SSA in March 1999). This $4.3 billion over 14 % years can also be seen in the context of the fact that Social Security is expected to pay out $394 billion in 1999 alone. ?he unified budget is a comprehensive report that consolidates receipts and outlays from both federal and trust funds. Interfund transactions between the two fund groups are deducted to avoid double counting. Trust funds are any funds designated as such by law. All other receipt and expenditure funds are classified as federal funds. Page 5 GAONIMD-99-194R Treasury’s Interest Rate Calculation Changes B-282159 affected the unified budget was the Thrift “G” Fund, the higher interest rate of which led to an increase in outlaysp As a result, the deficit increased (or the surplus fell) about $0.1 billion in the period June 1988to December 1998. Other Trust Funds Affected by Changes in Interest Rate Calculations In addition to Social Security, Medicare tid the Thrift “G” funds, Treasury’s lawyers concluded that six other funds were affected because their interest rates are based on average market yields. These trust funds are Civil Service Retirement, Foreign Service Retirement and Disability, National Service Life, Serviceman’s Group Life, U.S. Government Life, and Veteran’s Reopened. Since the interest credited to these trust funds involved interfund transfers, none affected the unified budget. The reported differences, shown in table 3, ranged from $2.0 billion to less than $0.1 billion. , ?IYhe“G”Fund, which has been in operation since April 1987,is one of three investmentfunds availablethrough the Thrift SavingsPlan. This fund consists exclusively of investmentsin short-termnonmarketableU.S. Treasurysecurities specially issuedto the Thrift SavingsPlan for federal employees. Page 6 GAO/MIND-99-194RTreasury’s Interest Rate CalculationChanges B-282159 Table 3: Estimated Differences in Other Trust Funds Trust fund and invi&ment period Difference Civil ServiceRetirement 611988- 12l1998 $0.8 billion l/1999 - 6/2013 $2.0 billion Serviceman’s Group Life 611988- 12/1998 Lessthan $0.1 billion Foreign Service Retirement and Disability 6/1988 - 6/2013 Less than $0.1 billion National Service Life 6/1988 - 6f2013 Less than $0.1 billion U.S. Government Life 60988 - 6/2013 Less than $0.1 billion Veteran’sReopened 60988 - 6/2013 Lessthan $0.1billion Source:Departmentof the Treasury. ScoPe and Methodolom To identify the changes Tre&ury made in interest rate calculations in 1980 and 1998 and their effects on the unified budget and trust funds, we interviewed Treasury officials and reviewed Treasury and budget documents. We included their estimates and did not examine, test, or recalculate the interest rate calculations generated by Treasury’s computer program nor me amounts credited to the trust funds. To identify prevalent market practices for calculating bond yields, we reviewed Federal Reserve documents and the related financial literature. We performed our work between February and April 1999. We received comments on our briefing slides and provided a draft of this report for technical review to the Treasury’s Office of Market Finance. We have incorporated its comments as appropriate. We are sending copies of this report to The Honorable Charles B. Rangel, Ranking Minority Member of the Ways and Means Committee; The Honorable Robert E. Rubin, Secretary of the Treasury; The Honorable Jacob J. Lew, Director, Office of Management and Budget; other interested members of Congress and other interested parties. We will make copies available to others on request. Please call me Page 7 GAO/AIMD-99-194RTreasury’s Interest Rate Calculation Changes B-282159 at (202) 512-9142if you or your staff have any questions. This report was prepared under the direction of Denise Fantone, Assistant Director. Other major contributors were Jose Oyola and Chuck Roney (Attorney-Advisor). Sincerely yours, (935298) Page 8 GAO/AIMD-99-194RTreasury’s Interest Rate Calculation Changes Ordering Information The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and Mastercard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by mail: U.S. GeneraI Accounting Office P.O. Box 37050 Washington, DC 20013 or visit: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and . testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu wiII provide information on how to obtain these lists. For information on how to access GAO reports on the INTERNET, send an e-mail message with “info” in the body to: iufo&vww.gao.gov or visit GAO’s World Wide Web Home Page at: htQ&www.gao.gov United States General Accounting Office Washington, D.C. 20548-0001 Official Business Penalty for Private Use $300 Address Correction Requested
Federally Chartered Corporation: Review of the Financial Statement Audit Report for the Former Members of Congress for 1997 and 1996
Published by the Government Accountability Office on 1999-05-27.
Below is a raw (and likely hideous) rendition of the original report. (PDF)