oversight

Financial Audit: Bureau of the Public Debt's Fiscal Years 2003 and 2002 Schedules of Federal Debt

Published by the Government Accountability Office on 2003-11-07.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States General Accounting Office

GAO             Report to the Secretary of the Treasury




November 2003
                FINANCIAL AUDIT
                Bureau of the Public
                Debt’s Fiscal Years
                2003 and 2002
                Schedules of Federal
                Debt




GAO-04-177

                a

                                                       November 2003


                                                       FINANCIAL AUDIT

                                                       Bureau of the Public Debt's Fiscal Years
Highlights of GAO-04-177, a report to                  2003 and 2002 Schedules of Federal Debt
Secretary of the Treasury




GAO is required to audit the                           In GAO’s opinion, BPD’s Schedules of Federal Debt for fiscal years 2003
consolidated financial statements                      and 2002 were fairly presented in all material respects and BPD
of the U.S. government. Due to the                     maintained effective internal control related to the Schedule of Federal
significance of the federal debt
held by the public to the
                                                       Debt as of September 30, 2003. GAO also found no instances of
governmentwide financial                               noncompliance in fiscal year 2003 with selected provisions of the
statements, GAO has also been                          statutory debt limit and debt issuance suspension period laws we tested.
auditing the Bureau of the Public
Debt’s (BPD) Schedules of Federal                      As of September 30, 2003 and 2002, federal debt managed by BPD totaled
Debt annually. The audit of these                      about $6,783 billion and $6,213 billion, respectively. In fiscal year 2003,
schedules is done to determine                         debt held by the public as a percentage of the annual size of the U.S.
whether, in all material respects,
                                                       economy increased by approximately 2.3 percentage points to an
(1) the schedules prepared are
reliable, (2) BPD management                           estimated 36.5 percent. Further, certain trust funds (e.g., Social Security
maintained effective internal                          and Medicare) continue to run cash surpluses, resulting in increased
control relevant to the Schedule of                    intragovernmental debt holdings. These debt holdings represent a
Federal Debt, and (3) BPD                              priority call on future budgetary resources. During fiscal year 2003, a
complies with selected provisions                      debt issuance suspension period was invoked to avoid breaching the
of significant laws related to the                     statutory debt limit. On May 27, 2003, legislation was enacted to raise the
Schedule of Federal Debt.                              debt limit by $984 billion to $7,384 billion. The Congressional Budget
                                                       Office recently projected that this new debt limit will be reached during
Federal debt managed by BPD                            fiscal year 2004.
consists of Treasury securities held
by the public and by certain federal                   As shown below, total federal debt increased each year over the last
government accounts, referred to                       4 years. Debt held by the public decreased as a result of cash surpluses
as intragovernmental debt                              for the first 2 years of this period, but increased during fiscal years 2002
holdings. The level of debt held by                    and 2003, with the return of annual deficits. Intragovernmental debt
the public reflects how much of the
nation’s wealth has been absorbed                      holdings steadily increased during this 4-year period primarily due to
by the federal government to                           excess receipts over disbursements in federal trust funds.
finance prior federal spending in
excess of total federal revenues.
Intragovernmental debt holdings                                          Total Gross Federal Debt Outstanding
represent balances of Treasury                                                               (in billions)
securities held by federal                                                $5,641   $5,659      $5,792        $6,213    $6,783
government accounts, primarily
federal trust funds such as Social
Security, that typically have an                                                                                      $2,859
obligation to invest their excess                                        $1,973     $2,220     $2,453        $2,660
annual receipts over disbursements
in federal securities.                                                   $3,668                                       $3,924
                                                                                   $3,439       $3,339       $3,553


 www.gao.gov/cgi-bin/getrpt?GAO-04-177.                                  1999      2000        2001          2002     2003
 For a fuller understanding of GAO’s opinion on                                      As of September 30
 BPD’s fiscal years 2003 and 2002 Schedules of
 Federal Debt, readers should refer to the complete
 audit report, available by clicking the link above,                   Held by the Public    Intragovernmental Debt Holdings
 which includes information on audit objectives,
 scope, and methodology. For more information,
                                                       Source: BPD.
 contact Gary T. Engel at (202) 512-3406.
Contents




Letter                                                                                                                 1



Auditor’s Report                                                                                                    7
                            Opinion on Schedules of Federal Debt                                                    8
                            Opinion on Internal Control                                                             8
                            Compliance with Laws and Regulations                                                    8
                            Consistency of Other Information                                                        9
                            Objectives, Scope, and Methodology                                                      9
                            Agency Comments                                                                        11


Overview, Schedules,                                                                                               12
                            Overview on Federal Debt Managed by the Bureau of the Public
and Notes                     Debt                                                                                 12
                            Schedules of Federal Debt                                                              20
                            Notes to the Schedules of Federal Debt                                                 21


Appendixes
              Appendix I:   Comments from the Bureau of the Public Debt                                            28
              Appendix II:	 GAO Contact and Acknowledgements                                                       29
                            GAO Contact                                                                            29
                            Acknowledgments                                                                        29




                            Abbreviations

                            BPD          Bureau of the Public Debt

                            OMB          Office of Management and Budget


                             This is a work of the U.S. government and is not subject to copyright protection in the
                             United States. It may be reproduced and distributed in its entirety without further
                             permission from GAO. However, because this work may contain copyrighted images or
                             other material, permission from the copyright holder may be necessary if you wish to
                             reproduce this material separately.




                            Page i                                              GAO-04-177 Schedules of Federal Debt
Page ii   GAO-04-177 Schedules of Federal Debt
A

United States General Accounting Office
Washington, D.C. 20548



                                    November 7, 2003

                                    The Honorable John W. Snow
                                    The Secretary of the Treasury

                                    Dear Mr. Secretary:

                                    The accompanying auditor’s report presents the results of our audits of the
                                    Schedules of Federal Debt Managed by the Bureau of the Public Debt for
                                    the fiscal years ended September 30, 2003 and 2002. The Schedules of
                                    Federal Debt present the beginning balances, increases and decreases, and
                                    ending balances for (1) Federal Debt Held by the Public and
                                    Intragovernmental Debt Holdings, (2) the related Accrued Interest
                                    Payables, and (3) the related Net Unamortized Premiums and Discounts
                                    managed by the bureau.1

                                    The auditor’s report contains our (1) opinion on the Schedules of Federal
                                    Debt for the fiscal years ended September 30, 2003 and 2002, (2) opinion on
                                    the effectiveness of related internal control as of September 30, 2003,
                                    (3) conclusion on the bureau's compliance in fiscal year 2003 with laws we
                                    tested, and (4) conclusion on the consistency between information in the
                                    Schedules of Federal Debt and the Overview on Federal Debt Managed by
                                    the Bureau of the Public Debt.

                                    As of September 30, 2003 and 2002, federal debt managed by the bureau
                                    totaled about $6,783 billion and $6,213 billion, respectively, for moneys
                                    borrowed to fund the government’s operations. As shown on the Schedules
                                    of Federal Debt, these balances consisted of approximately (1)
                                    $3,924 billion as of September 30, 2003, and $3,553 billion as of September
                                    30, 2002, of debt held by the public and about (2) $2,859 billion as of
                                    September 30, 2003, and $2,660 billion as of September 30, 2002, of
                                    intragovernmental debt holdings.

                                    The level of debt held by the public reflects how much of the nation’s
                                    wealth has been absorbed by the federal government to finance prior
                                    federal spending in excess of total federal revenues. It best represents the
                                    cumulative effect of past federal borrowing on today’s economy and the
                                    federal budget. To finance a cash deficit, the government borrows from the


                                    1
                                     Intragovernmental Debt Holdings represent federal debt issued by Treasury and held by
                                    certain federal government accounts, such as the Social Security and Medicare trust funds.




                                    Page 1                                              GAO-04-177 Schedules of Federal Debt
public. When a cash surplus occurs, the annual excess funds can then be
used to reduce debt held by the public. In other words, cash deficits or
surpluses generally approximate the annual net change in the amount of
government borrowing from the public.

Cash surpluses during fiscal years 1998 through 2001 enabled Treasury to
reduce debt held by the public by $476 billion, from $3,815 billion as of
September 30, 1997, to $3,339 billion as of September 30, 2001. Treasury
reduced this debt by redeeming maturing debt, reducing the number of
auctions and size of new debt issues, conducting “buybacks” of debt before
its maturity date, and redeeming callable securities when the opportunities
arose.2 However, because of the return to deficits, in fiscal years 2002 and
2003, debt held by the public increased by $585 billion, with about
$371 billion of this increase occurring in fiscal year 2003. Treasury issued
more debt by increasing the number of auctions and the size of new debt
issues. During fiscal year 2003, Treasury reintroduced the 3-year note,
which will be offered every quarter. In addition, Treasury increased the
offerings of the 5-year note from quarterly to monthly offerings; the 10-year
note from an offering every quarter to eight offerings a year; and the 10-
year inflation indexed note from three offerings a year to an offering every
quarter. Notwithstanding the increases in fiscal years 2002 and 2003, debt
held by the public as a percentage of total federal debt has decreased from
approximately 71 percent as of September 30, 1997, to approximately
58 percent as of September 30, 2003.

Intragovernmental debt holdings represent balances of Treasury securities
held by federal government accounts, primarily federal trust funds, that
typically have an obligation to invest their excess annual receipts over
disbursements in federal securities. Most federal trust funds invest in
special U.S. Treasury securities that are guaranteed for principal and
interest by the full faith and credit of the U.S. government. These securities
are nonmarketable; however, they represent a priority call on future
budgetary resources. Certain of these trust funds, such as the Social
Security and federal civilian employee and military retirement trust funds,
have been running cash surpluses, which are loaned to the Treasury and
reduce the current need for the government to borrow from the public.
Primarily as a result of such trust fund surpluses, intragovernmental debt
holdings have increased by approximately $1,276 billion during fiscal years


2
 During this period, Treasury eliminated the 3-year note and the 52-week bill. On October 31, 2001,
Treasury suspended issuance of the 30-year bond.




Page 2                                                   GAO-04-177 Schedules of Federal Debt
1998 through 2003, from $1,583 billion as of September 30, 1997, to
$2,859 billion as of September 30, 2003, with about $199 billion of this
increase occurring in fiscal year 2003. Intragovernmental debt holdings as a
percentage of total federal debt have increased from approximately
29 percent as of September 30, 1997, to approximately 42 percent as of
September 30, 2003.

The transactions relating to the use of the federal government accounts’
surpluses net out on the government’s consolidated financial statements
because, in effect, they represent loans from one part of the government to
another. Importantly, these intragovernmental debt holdings also constitute
future obligations of the Treasury since the Treasury must provide cash to
redeem these securities in order for the individual accounts to pay their
benefits or other obligations as they come due. When this occurs, if
sufficient cash surpluses are not available to redeem the securities, the
government would either need to increase borrowing from the public, raise
future taxes, reduce future spending, retire less debt (if the budget as a
whole is in surplus), or some combination thereof.

While both are important, debt held by the public and intragovernmental
debt holdings are very different. Debt held by the public approximates the
federal government’s competition with other sectors in the credit markets.
Federal borrowing absorbs resources available for private investment and
may put upward pressure on interest rates. In addition, interest on debt
held by the public is paid in cash and represents a burden on current
taxpayers. It reflects the amount the government pays to its outside
creditors. In contrast, intragovernmental debt holdings perform an
accounting function but typically do not require cash payments from the
current budget or represent a burden on the current economy. In addition,
from the perspective of the budget as a whole, interest payments to federal
government accounts by the Treasury are entirely offset by the income
received by such accounts—in effect, one part of the government pays the
interest and another part receives it. This intragovernmental debt and the
interest on it represents a claim on future resources and hence a burden on
future taxpayers and the future economy. However, these
intragovernmental debt holdings do not fully reflect the government’s total
future commitment to trust fund financed programs. They primarily
represent the cumulative cash surpluses of those trust funds and also
reflect future priority claims on the U.S. Treasury. They do not have the
current economic effects of borrowing from the public and do not currently
compete with the private sector for available funds in the credit markets.
However, when trust funds redeem Treasury securities to obtain cash to



Page 3                                      GAO-04-177 Schedules of Federal Debt
fund expenditures, and Treasury borrows from the public to finance these
redemptions, there is competition with the private sector and thus an effect
on the economy.

During fiscal year 2003, Treasury again faced the challenge of managing the
debt within the statutory debt limit. On February 20, 2003, Treasury entered
into a debt issuance suspension period that required it to depart from its
normal debt management procedures and to invoke legal authorities
provided to avoid breaching the debt limit. Actions taken by Treasury
included suspending investment of receipts of the Government Securities
Investment Fund (G-Fund) of the federal employees’ Thrift Savings Plan,
the Civil Service Retirement and Disability Trust Fund (Civil Service fund),
and the Exchange Stabilization Fund; redeeming Civil Service fund
securities early; suspending the sales of State and Local Government Series
nonmarketable Treasury securities; exchanging Treasury securities for
Federal Financing Bank securities; and recalling compensating balances
held at some commercial banks. In addition, because the debt subject to
the limit was so close to the ceiling during this period, Treasury turned to
issuing bills with maturity dates of 14 days or less to manage short-term
financing needs. On May 27, 2003, legislation was enacted to raise the
statutory debt limit by $984 billion to $7,384 billion. Subsequently, Treasury
restored all losses to the G-Fund and Civil Service fund in accordance with
legal authorities provided to the Secretary of the Treasury. The
Congressional Budget Office recently projected that this new debt limit will
be reached during fiscal year 2004.3

The challenge of managing the federal debt is not likely to diminish any
time soon. In fiscal year 2003 alone, debt held by the public increased by
approximately 2.3 percent of gross domestic product (GDP)—from
34.2 percent at the start of the fiscal year to an estimated 36.5 percent at the
end. Although the recession of 2001 has been over for almost 2 years, the
federal budget deficit for fiscal year 2003 is the largest (in nominal dollars)
on record, and projections suggest that the deficit for fiscal year 2004 will
be even larger. Budget controls instituted to achieve balance in the past
have expired, and no agreement has been reached on the appropriate
structure or process for focusing on the large and growing fiscal challenges
that now face the federal government.



3
Congressional Budget Office, The Budget and Economic Outlook: An Update (Washington,
D.C.: August 2003).




Page 4                                           GAO-04-177 Schedules of Federal Debt
These large deficits come as the squeeze on the federal budget from the
impending retirement of the baby boom generation is becoming more
apparent in the fiscal outlook. Under the Congressional Budget Office’s
most recent 10-year budget outlook, economic growth is projected to be
about half a percentage point lower on average after 2008 when the leading
edge of the baby boom generation becomes eligible for early retirement. At
the same time, growth in Social Security and Medicare spending is
projected to accelerate while Medicaid spending is projected to continue
growing even faster than these two programs. Under current law, spending
for these three programs will account for nearly half of all federal spending
in 2013. Indeed, GAO’s long-term budget simulations continue to show that
without changes to the major entitlement programs for the elderly, the
nation will ultimately have to choose between escalating federal deficits
and debt, significant tax increases, and/or dramatic budget cuts in other
areas. Acting sooner rather than later is essential to ease these building
fiscal pressures.


We are sending copies of this report to the Chairmen and Ranking Minority
Members of the Senate Committee on Appropriations; the Senate
Committee on Governmental Affairs; the Senate Committee on the Budget;
the Subcommittee on Transportation, Treasury, and General Government,
Senate Committee on Appropriations; the House Committee on
Appropriations; the House Committee on Government Reform; the House
Committee on the Budget; the Subcommittee on Transportation, Treasury,
and Independent Agencies, House Committee on Appropriations; and the
Subcommittee on Government Efficiency and Financial Management,
House Committee on Government Reform. We are also sending copies of
this report to the Commissioner of the Bureau of the Public Debt, the
Inspector General of the Department of the Treasury, the Director of the
Office of Management and Budget, and other agency officials. In addition,
the report will be available at no charge on the GAO Web site at
http://www.gao.gov.

If I can be of further assistance, please call me at (202) 512-5500. This
report was prepared under the direction of Gary T. Engel, Director,
Financial Management and Assurance. Should you or members of your
staff have any questions concerning this report, please contact Mr. Engel at




Page 5                                       GAO-04-177 Schedules of Federal Debt
(202) 512-3406. Another key contact and staff acknowledgments are
provided in appendix II.

Sincerely yours,




David M. Walker
Comptroller General
of the United States




Page 6                                   GAO-04-177 Schedules of Federal Debt
A

United States General Accounting Office
Washington, D.C. 20548



                                    To the Commissioner of the Bureau of the Public Debt

                                    In connection with fulfilling our requirement to audit the financial
                                    statements of the U.S. government, we audited the Schedules of Federal
                                    Debt Managed by the Bureau of the Public Debt (BPD) because of the
                                    significance of the federal debt to the federal government’s financial
                                    statements.1

                                    This auditor’s report presents the results of our audits of the Schedules of
                                    Federal Debt Managed by BPD for the fiscal years ended September 30,
                                    2003 and 2002. The Schedules of Federal Debt present the beginning
                                    balances, increases and decreases, and ending balances for (1) Federal
                                    Debt Held by the Public and Intragovernmental Debt Holdings, (2) the
                                    related Accrued Interest Payables, and (3) the related Net Unamortized
                                    Premiums and Discounts managed by BPD.2

                                    In our audits of the Schedules of Federal Debt for the fiscal years ended
                                    September 30, 2003 and 2002, we found the following:

                                    •	 the Schedules of Federal Debt are presented fairly, in all material
                                       respects, in conformity with U.S. generally accepted accounting
                                       principles;

                                    •	 BPD had effective internal control over financial reporting and
                                       compliance with laws and regulations related to the Schedule of Federal
                                       Debt as of September 30, 2003; and

                                    • no reportable noncompliance in fiscal year 2003 with laws we tested.

                                    The following sections discuss, in more detail, (1) these conclusions and
                                    our conclusion on the Overview on Federal Debt Managed by the Bureau of
                                    the Public Debt and (2) the scope of our audits.




                                    1
                                     31 U.S.C. sec. 331(e) (2000).
                                    2
                                     Intragovernmental Debt Holdings represent federal debt issued by Treasury and held by certain
                                    federal government accounts, such as the Social Security and Medicare trust funds.




                                    Page 7                                                   GAO-04-177 Schedules of Federal Debt
Opinion on Schedules 	   The Schedules of Federal Debt including the accompanying notes present
                         fairly, in all material respects, in conformity with U.S. generally accepted
of Federal Debt	         accounting principles, the balances as of September 30, 2003, 2002, and
                         2001, for Federal Debt Managed by BPD; the related Accrued Interest
                         Payables and Net Unamortized Premiums and Discounts; and the related
                         increases and decreases for the fiscal years ended September 30, 2003 and
                         2002.



Opinion on Internal      BPD maintained, in all material respects, effective internal control relevant
                         to the Schedule of Federal Debt related to financial reporting and
Control                  compliance with applicable laws and regulations as of September 30, 2003.
                         The internal control provided reasonable assurance that misstatements,
                         losses, or noncompliance material in relation to the Schedule of Federal
                         Debt for the fiscal year ended September 30, 2003, would be prevented or
                         detected on a timely basis. Our opinion is based on criteria established
                         under 31 U.S.C. sec. 3512 (c), (d) (2000) (commonly referred to as the
                         Federal Managers' Financial Integrity Act) and the Office of Management
                         and Budget (OMB) Circular A-123, revised June 21, 1995, Management
                         Accountability and Control.

                         We found matters involving computer controls that we do not consider to
                         be reportable conditions.3 We will communicate these matters to BPD's
                         management, along with our recommendations for improvement, in a
                         separate letter to be issued at a later date.



Compliance with Laws     Our tests in fiscal year 2003 disclosed no instances of noncompliance with
                         selected provisions of laws that would be reportable under U.S. generally
and Regulations          accepted government auditing standards or OMB audit guidance. However,
                         the objective of our audit of the Schedule of Federal Debt for the fiscal year
                         ended September 30, 2003, was not to provide an opinion on overall
                         compliance with laws and regulations. Accordingly, we do not express such
                         an opinion.


                         3
                           Reportable conditions are matters coming to our attention that, in our judgment, should be
                         communicated because they represent significant deficiencies in the design or operation of
                         internal control, which could adversely affect the organization’s ability to meet the internal
                         control objectives described in the Objectives, Scope, and Methodology section of this
                         report.




                         Page 8                                                GAO-04-177 Schedules of Federal Debt
Consistency of Other 	   BPD’s Overview on Federal Debt Managed by the Bureau of the Public Debt
                         contains information, some of which is not directly related to the
Information	             Schedules of Federal Debt. We do not express an opinion on this
                         information. However, we compared this information for consistency with
                         the schedules and discussed the methods of measurement and presentation
                         with BPD officials. Based on this limited work, we found no material
                         inconsistencies with the schedules.



Objectives, Scope, and   Management is responsible for the following:

Methodology              •	 preparing the Schedules of Federal Debt in conformity with U.S.
                            generally accepted accounting principles;

                         •	 establishing, maintaining, and assessing internal control to provide
                            reasonable assurance that the broad control objectives of the Federal
                            Managers’ Financial Integrity Act are met; and

                         • complying with applicable laws and regulations.

                         We are responsible for obtaining reasonable assurance about whether (1)
                         the Schedules of Federal Debt are presented fairly, in all material respects,
                         in conformity with U.S. generally accepted accounting principles and (2)
                         management maintained effective related internal control as of September
                         30, 2003, the objectives of which are the following:

                         •	 Financial reporting: Transactions are properly recorded, processed, and
                            summarized to permit the preparation of the Schedule of Federal Debt
                            for the fiscal year ended September 30, 2003, in conformity with U.S.
                            generally accepted accounting principles.

                         •	 Compliance with laws and regulations: Transactions related to the
                            Schedule of Federal Debt for the fiscal year ended September 30, 2003,
                            are executed in accordance with laws governing the use of budget
                            authority and with other laws and regulations that could have a direct
                            and material effect on the Schedule of Federal Debt.

                         We are also responsible for testing compliance with selected provisions of
                         laws and regulations that have a direct and material effect on the Schedule
                         of Federal Debt. Further, we are responsible for performing limited




                         Page 9                                       GAO-04-177 Schedules of Federal Debt
procedures with respect to certain other information appearing with the
Schedules of Federal Debt.

In order to fulfill these responsibilities, we

•	 examined, on a test basis, evidence supporting the amounts and
   disclosures in the Schedules of Federal Debt;

•	 assessed the accounting principles used and any significant estimates
   made by management;

• evaluated the overall presentation of the Schedules of Federal Debt;

•	 obtained an understanding of internal control relevant to the Schedule
   of Federal Debt as of September 30, 2003, related to financial reporting
   and compliance with laws and regulations (including execution of
   transactions in accordance with budget authority);

•	 tested relevant internal controls over financial reporting and
   compliance, and evaluated the design and operating effectiveness of
   internal control related to the Schedule of Federal Debt as of September
   30, 2003;

•	 considered the process for evaluating and reporting on internal control
   and financial management systems under the Federal Managers’
   Financial Integrity Act; and

•	 tested compliance in fiscal year 2003 with selected provisions of the
   following laws: statutory debt limit (31 U.S.C. sec. 3101(b) (2000), as
   amended by Pub. L. No. 107-199, sec. 1, 116 Stat. 734 (2002) and Pub. L.
   108-24, 117 Stat. 710 (2003)), suspension and early redemption of
   investments from the Civil Service Retirement and Disability Trust Fund
   (5 U.S.C. sec. 8348(j)(k) (2000)), and suspension of investments from
   the G-Fund (5 U.S.C. sec. 8438(g) (2000)).

We did not evaluate all internal controls relevant to operating objectives as
broadly described by the Federal Managers' Financial Integrity Act, such as
those controls relevant to preparing statistical reports and ensuring
efficient operations. We limited our internal control testing to controls over
financial reporting and compliance. Because of inherent limitations in
internal control, misstatements due to error or fraud, losses, or
noncompliance may nevertheless occur and not be detected. We also



Page 10                                          GAO-04-177 Schedules of Federal Debt
                    caution that projecting our evaluation to future periods is subject to the
                    risk that controls may become inadequate because of changes in conditions
                    or that the degree of compliance with controls may deteriorate.

                    We did not test compliance with all laws and regulations applicable to BPD.
                    We limited our tests of compliance to selected provisions of laws and
                    regulations that have a direct and material effect on the Schedule of
                    Federal Debt for the fiscal year ended September 30, 2003. We caution that
                    noncompliance may occur and not be detected by these tests and that such
                    testing may not be sufficient for other purposes.

                    We performed our work in accordance with U.S. generally accepted
                    government auditing standards and applicable OMB audit guidance.



Agency Comments 	   In commenting on a draft of this report, BPD concurred with the facts and
                    conclusions in our report. The comments are reprinted in appendix I.




                    David M. Walker
                    Comptroller General
                    of the United States

                    October 24, 2003




                    Page 11                                    GAO-04-177 Schedules of Federal Debt
Overview, Schedules, and Notes



Overview on Federal Debt Managed by the Bureau of the Public Debt

                 Overview on Federal Debt Managed by the Bureau of the Public Debt
                 Gross Federal Debt Outstanding1
                 Federal debt managed by the Bureau of the Public Debt comprises debt held by the public and debt held by certain federal
                 government accounts, the latter of which is referred to as intragovernmental debt holdings. As of September 30, 2003 and 2002,
                 outstanding gross federal debt managed by the bureau totaled $6,783 and $6,213 billion, respectively. The increase in gross
                 federal debt of $570 billion during fiscal year 2003 was due to an increase in gross intragovernmental debt holdings of $199 billion
                 and an increase in gross debt held by the public of $371 billion. As Figure 1 illustrates, intragovernmental debt holdings have
                 steadily increased since fiscal year 1999 and debt held by the public has decreased from fiscal years 1999 through 2001, but
                 increased in fiscal years 2002 and 2003. The primary reason for the increases in intragovernmental debt holdings is the annual
                 cash surpluses in the Federal Old-Age and Survivors Insurance Trust Fund, Civil Service Retirement and Disability Trust Fund,
                 Federal Hospital Insurance Trust Fund, Military Retirement Fund, and Federal Disability Insurance Trust Fund. The fiscal years
                 2002 and 2003 increases in debt held by the public are due primarily to total federal spending exceeding total federal revenues. As
                 of September 30, 2003, gross debt held by the public totaled $3,924 billion and gross intragovernmental debt holdings totaled
                 $2,859 billion.

                         Figure 1
                                             Total Gross Federal Debt Outstanding
                                                                             (in billions)
                                        $5,641              $5,659               $5,792               $6,213                 $6,783


                                                                                                                           $2,859
                                       $1,973                $2,220               $2,453               $2,660


                                       $3,668               $3,439                $3,339               $3,553               $3,924


                                      1999                 2000                 2001                 2002                 2003
                                                                 As of September 30

                                        Held by the Public                     Intragovernmental Debt Holdings



                     1
                       Federal debt outstanding reported here differs from the amount reported in the Financial Report of the United States Government because of
                     the securities not maintained or reported by the bureau and which are issued by the Federal Financing Bank and other federal government
                     agencies.




                                                        Page 12                                                                     GAO-04-177 Schedules of Federal Debt
                                     Overview, Schedules, and Notes




Interest Expense
Interest expense incurred during fiscal year 2003 consists of (1) interest accrued and paid on debt held by the public or credited to
accounts holding intragovernmental debt during the fiscal year, (2) interest accrued during the fiscal year, but not yet paid on debt
held by the public or credited to accounts holding intragovernmental debt, and (3) net amortization of premiums and discounts. The
primary components of interest expense are interest paid on the debt held by the public and interest credited to federal government
trust funds and other federal government accounts that hold Treasury securities. The interest paid on the debt held by the public
affects the current spending of the federal government and represents the burden in servicing its debt (i.e., payments to outside
creditors). Interest credited to federal government trust funds and other federal government accounts, on the other hand, does not
result in an immediate outlay of the federal government because one part of the government pays the interest and another part
receives it. However, this interest represents a claim on future budgetary resources and hence an obligation on future taxpayers.
This interest, when reinvested by the trust funds and other federal government accounts, is included in the programs’ excess funds
not currently needed in operations, which are invested in federal securities. During fiscal year 2003, interest expense incurred
totaled $315 billion, interest expense on debt held by the public was $157 billion, and $158 billion was interest incurred for
intragovernmental debt holdings. Figure 2 shows total interest expense incurred during fiscal years 1999 through 2003. Although
the total federal debt continued to increase during fiscal year 2003, total interest expense decreased due to declining interest rates.
Average interest rates on principal balances outstanding as of fiscal year end are disclosed in the Notes to the Schedules of Federal
Debt.




                  Figure 2
                                             Total Interest Expense
                                                         (in billions)
                               $355          $366             $363          $335           $315


                               $125           $142            $156
                                                                            $163           $158

                               $230           $224           $207           $172            $157


                             1999     2000       2001         2002       2003
                                 Fiscal Y e ar En d e d Se p te mb e r 30
                                 Held by the Public       Intragovernmental Debt Holdings




                                     Page 13                                                                  GAO-04-177 Schedules of Federal Debt
                                          Overview, Schedules, and Notes




Debt Held by the Public
Debt held by the public reflects how much of the nation’s wealth has been absorbed by the federal government to finance prior
federal spending in excess of total federal revenues. As of September 30, 2003 and 2002, gross debt held by the public totaled
$3,924 billion and $3,553 billion, respectively (see Figure 1), an increase of $371 billion. The borrowings and repayments of
debt held by the public increased from fiscal year 2002 to 2003 primarily due to Treasury’s decision to finance current
operations using more short-term securities.


As of September 30, 2003, $3,460 billion, or 88 percent, of the securities that constitute debt held by the public were
marketable, meaning that once the government issues them, they can be resold by whoever owns them. Marketable debt is
made up of Treasury bills, notes, and bonds with maturity dates ranging from less than 1 year out to 30 years. Of the
marketable securities currently held by the public as of September 30, 2003, $2,349 billion or 68 percent will mature within the
next 4 years (see Figure 3). As of September 30, 2003 and 2002, notes maturing within the next 10 years totaled $1,919 billion
and $1,615 billion, respectively, an increase of $304 billion.


The government also issues to the public, state and local governments, and foreign governments and central banks
nonmarketable securities, which cannot be resold, and have maturity dates from on demand to more than 10 years. As of
September 30, 2003, nonmarketable securities totaled $464 billion, or 12 percent of debt held by the public. As of that date,
nonmarketable securities primarily consisted of savings securities totaling $202 billion and special securities for state and local
governments totaling $148 billion.


                     F ig u r e 3
                                                        2
                              M a t u r it y D a t e s o f M a r k e t a b le D e b t H e ld b y
                                    t h e P u b lic a s o f S e p t e m b e r 3 0 , 2 0 0 3
                        $ 1 ,6 0 0

                        $ 1 ,4 0 0                                                                    Bonds

                                                                                                      N o te s
                        $ 1 ,2 0 0
                                                                                                      B ills
                        $ 1 ,0 0 0
       in billions




                          $800

                          $600

                          $400

                          $200

                              $0
                                         2008       2013          2018          2023     2028
                                                F is c a l Y e a r o f M a t u r it y


2
    Callable securities mature between 2009 and 2015, but are reported by their call date.




                                          Page 14                                                         GAO-04-177 Schedules of Federal Debt
                                           Overview, Schedules, and Notes




Intragovernmental Debt Holdings

Intragovernmental debt holdings represent balances of Treasury securities held by over 200 individual federal government
accounts with either the authority or the requirement to invest excess receipts in special U.S. Treasury securities that are
guaranteed for principal and interest by the full faith and credit of the U.S. Government. Intragovernmental debt holdings
primarily consist of balances in the Social Security, Medicare, Military Retirement, and Civil Service Retirement and
Disability trust funds.3 As of September 30, 2003, such funds accounted for $2,535 billion, or 89 percent, of the $2,859
billion intragovernmental debt holdings balances (see Figure 4). As of September 30, 2003 and 2002, gross
intragovernmental debt holdings totaled $2,859 billion and $2,660 billion, respectively (see Figure 1), an increase of $199
billion.

The majority of intragovernmental debt holdings are Government Account Series (GAS) securities. GAS securities consist of
par value securities and market-based securities, with terms ranging from on demand out to 30 years. Par value securities are
issued and redeemed at par (100 percent of the face value), regardless of current market conditions. Market-based
securities, however, can be issued at a premium or discount and are redeemed at par value on the maturity date or at market
value if redeemed before the maturity date.



         Figure 4
                         Components of Intragovernmental Debt Holdings
                                  as of September 30, 2003


                                                                                       Civil Service
                                                                                     Retirem ent and
                                                                                   Disability trus t fund
                                                                                            21%




            Social Security trust

                    funds

                     52%

                                                                                         Medicare trust

                                                                                            funds

                                                                                              10%


                                                                                Military Retirem ent
                                                                                     trust fund
                                                                                         6%
                                                                   Other program s and
                                                                       trust funds
                                                                           11%




     3
      The Social Security trust funds consist of the Federal Old-Age and Survivors Insurance Trust Fund and the Federal
     Disability Insurance Trust Fund. In addition, the Medicare trust funds are made up of the Federal Hospital Insurance
     Trust Fund and the Federal Supplementary Medical Insurance Trust Fund.




                                           Page 15                                                                      GAO-04-177 Schedules of Federal Debt
                                  Overview, Schedules, and Notes




Significant Events in FY 2003

Railroad Retirement Account
The Railroad Retirement and Survivors’ Improvement Act of 2001 established a new non-Federal entity, the National Railroad
Retirement Investment Trust (Trust). The act required that upon the direction of the Railroad Board, transfers be made from
the Railroad Retirement Account (RRA) to the Trust to be held outside the government with a private trust account. RRA
investments in Government Account Series (GAS) securities were redeemed to generate cash transfers to the Trust totaling
$19,250 million, $17,750 million was transferred during fiscal year 2003 and $1,500 million during fiscal year 2002. The cash
transfers began on September 18, 2002, and were made twice a month with the last one paid on March 19, 2003, as dictated by
a 6 month schedule provided to Treasury in accordance with the Memorandum of Understanding (MOU) between the Railroad
Retirement Board (the RRB), the Trust, the Department of the Treasury (Treasury), and the Office of Management and Budget
(OMB). In addition to the $17,750 million of GAS securities redeemed during fiscal year 2003 and transferred to the Trust,
$5,130 million was redeemed by RRA for disbursements. The Railroad Retirement Account currently holds $503 million in
par value securities.


Electronic Savings Bonds Introduced
In fiscal year 2003, Public Debt issued the first book-entry (electronic) savings bonds in the new TreasuryDirect system.
Electronic Series I bonds were introduced in October 2002, and electronic Series EE bonds were added in May 2003. When
fully implemented, TreasuryDirect will enable investors to establish accounts, purchase book-entry savings bonds and
marketable securities, and manage their holdings online in a secure environment. The system will validate their identity and
process transactions electronically whenever possible; communications will occur via e-mail; payments will be made
electronically; and investors will be able to access statements, confirmations, and tax information online.


Department of Defense (DoD) Medicare Retirement Fund
The Department of Defense (DoD) established a new fund, the Medicare Retirement Fund, in fiscal year 2003. The purpose of
the Medicare Retirement Fund is to accumulate funds in order to finance actuarially determined liabilities relating to DoD's
health care programs for Medicare eligible beneficiaries. On October 3, 2002, DoD began investing into GAS securities.
Initially, DoD purchased $13 billion in short-term GAS securities with various maturity dates. Throughout fiscal year 2003,
DoD purchased and sold additional short-term GAS securities and also invested in overnight GAS securities. At the end of the
fiscal year, the balance in the account totaled $18 billion.




                                  Page 16                                                               GAO-04-177 Schedules of Federal Debt
                         Overview, Schedules, and Notes




Significant Events in FY 2003, cont.

Statutory Debt Ceiling Raised
From February 20 to May 27, 2003, Treasury faced a debt issuance suspension period that required it to depart from its normal
debt management procedures and to invoke legal authorities provided to avoid breaching the debt limit. During this period,
actions taken by Treasury included suspending investment of receipts of the Government Securities Investment Fund (G-Fund)
of the federal employees’ Thrift Savings Plan, the Civil Service Retirement and Disability trust fund (Civil Service fund), and
the Exchange Stabilization fund; redeeming Civil Service fund securities early; suspending the sales of State and Local
Government Series securities; and exchanging Government Account Series securities for Federal Financing Bank securities
not reported on these schedules. In addition, because the debt subject to the limit was so close to the ceiling during these
periods, Treasury issued cash management bills to manage short-term financing needs. On May 27, 2003, Public Law 108-24
was enacted, which raised the statutory debt ceiling by $984 billion to $7,384 billion.



Increased Issuance of Marketable Securities
In the February 5, 2003, Quarterly Refunding Statement, Treasury reintroduced a 3-year note to be part of future quarterly
financing packages, with the first auction on May 6, 2003. The primary purpose of introducing the 3-year note was to
diversify issuance. Issuance of the 3-year note was expected to provide additional capacity for fresh borrowing. During fiscal
year 2003, Treasury issued a total of $50 billion in 3-year notes. The February 5, 2003, Quarterly Refunding Statement also
instituted a regular reopening policy for 5-year notes, beginning with May 15, 2003. The reopening will occur one month after
the initial auction (two months before the next auction for a new note).


The April 30, 2003, Quarterly Refunding Statement stated that beginning in August, Treasury will issue 5-year notes on the
15th of each month. Treasury will also regularly reopen 10-year notes on the 15th in the month following the traditional
refunding and expand the issuance of 10-year inflation-indexed notes to 4 times a year. This additional issuance will help
Treasury maintain its flexibility in responding to unexpected changes in financing requirements.


Depositary Compensation Securities
On July 14, 2003, Treasury issued $44.7 billion in non-marketable securities, Depositary Compensation Securities (DCS), to
compensate those financial institutions serving as financial agents of the United States for essential banking services provided
to the Government. The phase out of compensating balances, beginning on July 3, 2003, led to a short-term infusion of cash
into Treasury accounts. Treasury implemented this temporary measure to pay financial agents and ensure that there was no
interruption in services. DCS are similar to the non-marketable 2 percent Depositary Bonds first issued in 1941 as a means to
compensate depositaries and financial agents of the Government for essential banking services including the collection and
deposit of all Treasury receipts. The Depositary Bonds were phased out when other methods of compensation, including
compensating balances, were used and the offering was terminated in 1994.




                         Page 17                                                                 GAO-04-177 Schedules of Federal Debt
                                Overview, Schedules, and Notes




Significant Events in FY 2003, cont.

Release of Auction Results in 2 Minutes
On August 4, 2003, Treasury implemented new procedures that reduced the time to calculate the results of an auction. The
results of the auction will now be published in 2 minutes with a variance of plus or minus 30 seconds after the close of the
auction. The 2 minute auctions will help to reduce the premium that Treasury has to pay to compensate bidders for the period
of market uncertainty between the close of the auction and the release of the results.


Historical Perspective
Federal debt outstanding is one of the largest legally binding obligations of the federal government. Nearly all the federal debt
has been issued by the Treasury with a small portion being issued by other federal government agencies. Treasury issues debt
securities for two principal reasons, (1) to borrow needed funds to finance the current operations of the federal government
and (2) to provide an investment and accounting mechanism for certain federal government accounts’ excess receipts,
primarily trust funds. Total gross federal debt outstanding has dramatically increased over the past 25 years from $772 billion
as of September 30, 1978 to $6,783 billion as of September 30, 2003 (see Figure 5). Large budget deficits emerged during the
1970’s as the economy was disrupted by oil crises and inflation. Through fiscal year 1997, annual federal deficits continued to
be large and debt continued to grow at a rapid pace. As a result, total federal debt increased nearly five fold since 1980.



                    Fig u r e 5
                                            T o ta l G r o s s F e d e r a l D e b t O u ts ta n d in g
                   $ 7 ,0 0 0


                   $ 6 ,0 0 0                                                                                              S o u rc e : M o n t h ly
                                                                                                                           S tatem ent o f
                                                                                                                           P u b lic D e b t
                   $ 5 ,0 0 0
                                                                                                                           F ig u re s s h o w n
                                                                                                                           p rio r t o 19 9 6 a re
                                                                                                                           u n a u d it e d a n d
     in billions




                   $ 4 ,0 0 0
                                                                                                                           in c lu d e s e c u rit ie s
                                                                                                                           is s u e d b y t h e
                                                                                                                           F e d e ra l F in a n c in g
                   $ 3 ,0 0 0                                                                                              B ank.



                   $ 2 ,0 0 0


                   $ 1 ,0 0 0


                         $0
                                1978       1983               1988                1993               1998         2003

                                                               A s o f S e p te m b e r 3 0




                                Page 18                                                                     GAO-04-177 Schedules of Federal Debt
                                                    Overview, Schedules, and Notes




                          Historical Perspective, cont.

                          However, by fiscal year 1998, federal debt held by the public was beginning to decline. In fiscal years 1998 through 2001, the
                          amount of debt held by the public fell by $476 billion, from $3,815 billion to $3,339 billion. As a consequence of the changes
                          in the federal government’s financing needs, resulting from increased federal outlays for the international war on terrorism and
                          homeland security efforts, tax policy decisions, and the deterioration of overall economic performance, from fiscal year 2001
                          to 2003 debt held by the public rose by $585 billion, from $3,339 billion to $3,924 billion. Even in those years where debt
                          held by the public declined, total federal debt increased because of increases in intragovernmental debt holdings. Over the
                          past 4 fiscal years, intragovernmental debt holdings increased by $886 billion, from $1,973 billion as of September 30, 1999,
                          to $2,859 billion as of September 30, 2003. By law, trust funds have the authority or are required to invest surpluses in federal
                          securities. As a result, the intragovernmental debt holdings balances primarily represent the cumulative surplus of funds due
                          to the trust funds’ cumulative annual excess of tax receipts, interest credited, and other collections compared to spending.


                          As shown in Figure 6, interest rates have fluctuated over the past 25 years. The average interest rates reflected here represent
                          the original issue weighted effective yield on securities outstanding at the end of the fiscal year.



                           Figure 6                              Av e rage Inte re st Rate s of Fe de ral De bt
                                                                         Outstanding (Unaudite d)
                         14%
Average Interest Rates




                         12%
                                                                                                                                                So urce:
                         10%                                                                                                                    Prior t o f iscal year 2001:
                         8%                                                                                                                     M o nt hly St at ement o f
                                                                                                                                                Public Debt
                         6%                                                                                                                     Fiscal year 2001and af t er:
                                                                                                                                                Public Debt Online
                         4%                                                                                                                     A verag e Int erest Rat es
                         2%
                         0%
                               1978                1983                 1988                  1993                  1998               2003

                                                                        As of September 30




                                                    Page 19                                                                  GAO-04-177 Schedules of Federal Debt
                                                       Overview, Schedules, and Notes




Schedules of Federal Debt

                  Schedules of Federal Debt
                  Managed by the Bureau of the Public Debt
                  For the Fiscal Years Ended September 30, 2003 and 2002
                  (Dollars in Millions)
                                                                                             Federal Debt
                                                                    Held by the Public                  Intragovernmental Debt Holdings
                                                                      Accrued       Net Unamortized                    Accrued      Net Unamortized
                                                       Principal                                       Principal
                                                                      Interest        Premiums/                        Interest        Premiums/
                                                       (Note 2)                                        (Note 3)
                                                                      Payable         (Discounts)                      Payable        (Discounts)
                 Balance as of
                 September 30, 2001                    $3,339,310         $39,496         ($46,010)    $2,453,153        $39,986           ($6,170)
                 Increases
                    Borrowings from the
                       Public                           3,803,649                          (12,861)
                    Net Increase in
                       Intragovernmental Debt
                       Holdings                                                                             206,903                          3,309
                    Accrued Interest (Note 4)                             152,038                                        161,627
                 Total Increases                        3,803,649         152,038          (12,861)         206,903      161,627             3,309
                 Decreases
                     Repayments of Debt Held
                        by the Public                   3,589,779
                     Interest Paid                                        158,660                                        160,537
                     Net Amortization (Note 4)                                             (19,596)                                         (1,347)
                 Total Decreases                        3,589,779         158,660          (19,596)                0     160,537            (1,347)
                 Balance as of
                 September 30, 2002                     3,553,180          32,874          (39,275)     2,660,056          41,076           (1,514)
                 Adjustment for Change in
                 Amortization Method (Note 7)                                                 (670)                                          4,271

                 Adjusted Balance as of
                 September 30, 2002                     3,553,180          32,874          (39,945)     2,660,056          41,076            2,757
                 Increases
                     Borrowings from the
                        Public                          4,299,022                          (10,362)
                     Net Increase in
                        Intragovernmental Debt
                        Holdings                                                                            199,174                          3,601
                     Accrued Interest (Note 4)                            143,335                                        164,379

                 Total Increases                        4,299,022         143,335          (10,362)         199,174      164,379             3,601

                 Decreases
                    Repayments of Debt Held
                        by the Public                   3,928,112
                     Interest Paid                                        144,399                                        164,701
                    Net Amortization (Note 4)                                              (13,461)                                          6,670

                 Total Decreases                        3,928,112         144,399          (13,461)                0     164,701             6,670

                 Balance as of
                 September 30, 2003                    $3,924,090         $31,810         ($36,846)    $2,859,230        $40,754            ($312)

                  The accompanying notes are an integral part of these schedules.




                                                       Page 20                                                              GAO-04-177 Schedules of Federal Debt
                                                   Overview, Schedules, and Notes




Notes to the Schedules of Federal Debt


                        Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt
                        For the Fiscal Years Ended September 30, 2003 and 2002

                        (Dollars in Millions)
                        Note 1. Significant Accounting Policies

                        Basis of Presentation

                        The Schedules of Federal Debt Managed by the Bureau of the Public Debt (BPD) have been prepared to report fiscal
                        year 2003 and 2002 balances and activity relating to monies borrowed from the public and certain federal
                        government accounts to fund the U.S. government's operations. Permanent, indefinite appropriations are available
                        for the payment of interest on the federal debt, the redemption of Treasury securities, and the loss on marketable
                        securities bought back prior to maturity through competitive redemption processes.

                        Reporting Entity

                        The Constitution empowers Congress to borrow money on the credit of the United States. Congress has authorized
                        the Secretary of the Treasury to borrow monies to operate the federal government within a statutory debt limit.
                        Title 31 U.S.C. authorizes Treasury to prescribe the debt instruments and otherwise limit and restrict the amount and
                        composition of the debt. BPD, an organizational entity within the Fiscal Service of the Department of the Treasury,
                        is responsible for issuing Treasury securities in accordance with such authority and to account for the resulting debt.
                        In addition, BPD has been given the responsibility to issue Treasury securities to trust funds for trust fund receipts
                        not needed for current benefits and expenses. BPD issues and redeems Treasury securities for the trust funds based
                        on data provided by program agencies and other Treasury entities.

                        Basis of Accounting

                        The schedules were prepared in conformity with U.S. generally accepted accounting principles and from BPD's
                        automated accounting system, Public Debt Accounting and Reporting System. Interest costs are recorded as
                        expenses when incurred, instead of when paid. Certain Treasury securities are issued at a discount or premium.
                        Prior to October 1, 2002, these discounts and premiums were amortized over the term of the security using an
                        interest method for zero-coupon bonds and the straight line method, which was not materially different from the
                        interest method, for the other securities. As of October 1, 2002, these discounts and premiums are amortized over
                        the term of the security using an interest method for all long term securities and the straight line method for the short
                        term securities. The Department of the Treasury also issues inflation-indexed securities. Inflation-indexed
                        securities accrue principal over the life of the security based on the Consumer Price Index for all Urban Consumers.
                        For marketable securities bought back prior to maturity through competitive redemption processes, the difference
                        between the reacquisition price and the net carrying value of the extinguished debt is recognized as a gain or loss in
                        the period of extinguishment.




                                                   Page 21                                                                 GAO-04-177 Schedules of Federal Debt
                               Overview, Schedules, and Notes




Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt
For the Fiscal Years Ended September 30, 2003 and 2002

(Dollars in Millions)
Note 2. Federal Debt Held by the Public


As of September 30, 2003 and 2002, Federal Debt Held by the Public consisted of the following:


                                                           2003                                       2002

                                                               Average Interest                            Average Interest
                                                    Amount           Rates                      Amount           Rates
Marketable:
        Treasury Bills                             $918,196          1.0%                      $868,221           1.7%
        Treasury Notes                            1,919,459          3.8%                      1,615,309          4.7%
        Treasury Bonds                              622,675          7.8%                        637,827          8.0%
Total Marketable                                 $3,460,330                                  $3,121,357
Nonmarketable                                      $463,760          5.3%                      $431,823          6.0%
Total Federal Debt Held by the Public            $3,924,090                                  $3,553,180


Treasury issues marketable bills at a discount and pays the par amount of the security upon maturity. The average
interest rate on Treasury bills represents the original issue effective yield on securities outstanding as of September
30, 2003 and 2002, respectively. Treasury bills are issued with a term of one year or less.

Treasury issues marketable notes and bonds as long-term securities that pay semi-annual interest based on the
securities' stated interest rate. These securities are issued at either par value or at an amount that reflects a discount
or a premium. The average interest rate on marketable notes and bonds represents the stated interest rate adjusted
by any discount or premium on securities outstanding as of September 30, 2003 and 2002. Treasury notes are
issued with a term of 2 – 10 years and Treasury bonds are issued with a term of more than 10 years. As of
September 30, 2003, Treasury marketable notes included $120,035 million of inflation-indexed notes and Treasury
marketable bonds included $46,085 million of inflation-indexed bonds. As of September 30, 2002, Treasury
marketable notes included $93,738 million of inflation-indexed notes and Treasury marketable bonds included
$45,132 million of inflation-indexed bonds.

As of September 30, 2003, nonmarketable securities primarily consisted of $201,606 million in U.S. Savings
Securities, $148,366 million in securities issued to State and Local Governments, $11,007 million in Foreign Series
Securities, $29,995 million in Domestic Series Securities, and $14,991 million in Depositary Compensation
Securities. As of September 30, 2002, nonmarketable securities primarily consisted of $193,357 million in U.S.
Savings Securities, $144,286 million in securities issued to State and Local Governments, $12,519 million in
Foreign Series Securities, and $29,995 million in Domestic Series Securities. Treasury issues nonmarketable
securities at either par value or at an amount that reflects a discount or a premium. The average interest rate on the
nonmarketable securities represents the original issue weighted effective yield on securities outstanding as of
September 30, 2003 and 2002. Nonmarketable securities are issued with a term of on demand to more than 10
years.




                               Page 22                                                                   GAO-04-177 Schedules of Federal Debt
                          Overview, Schedules, and Notes




Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt
For the Fiscal Years Ended September 30, 2003 and 2002

(Dollars in Millions)
Note 2. Federal Debt Held by the Public (continued)

Government Account Series (GAS) securities are nonmarketable securities issued to federal government accounts.
Federal Debt Held by the Public includes GAS securities issued to certain federal government accounts. One
example is the GAS securities held by the Government Securities Investment Fund (G-Fund) of the federal
employees’ Thrift Savings Plan. Federal employees and retirees who have individual accounts own the GAS
securities held by the fund. For this reason, these securities are considered part of the Federal Debt Held by the
Public rather than Intragovernmental Debt Holdings. The GAS securities held by the G-Fund consist of overnight
investments redeemed one business day after their issue. The net increase in amounts borrowed from the fund
during fiscal years 2003 and 2002 are included in the respective Borrowings from the Public amounts reported on
the Schedules of Federal Debt.

Federal Debt Held by the Public includes federal debt held outside of the U. S. government by individuals,
corporations, Federal Reserve Banks (FRB), state and local governments, and foreign governments and central
banks. The FRB owned $654 billion and $603 billion of Federal Debt Held by the Public as of September 30, 2003
and 2002, respectively. These securities are held in the FRB System Open Market Account (SOMA) for the purpose
of conducting monetary policy.

Note 3. Intragovernmental Debt Holdings

As of September 30, 2003 and 2002, Intragovernmental Debt Holdings are owed to the following:
                                                                                      2003             2002
SSA:        Federal Old-Age and Survivors Insurance Trust Fund                  $1,313,427        $1,173,759
OPM:        Civil Service Retirement and Disability Fund                           601,709 *         558,713 *
HHS:        Federal Hospital Insurance Trust Fund                                  251,323           228,906
DOD:        Military Retirement Fund                                               172,362           162,396
SSA:        Federal Disability Insurance Trust Fund                                170,792 *         155,286 *
DOL:        Unemployment Trust Fund                                                 48,188            68,265
FDIC:       The Bank Insurance Fund                                                 31,055            30,542
OPM:        Employees' Life Insurance Fund                                          26,778            25,350
DOE:        Nuclear Waste Disposal Fund                                             25,881            23,421
HHS:        Federal Supplementary Medical Insurance Trust Fund                      24,922            38,804
HUD:        FHA – Liquidating Account                                               23,819            21,249
DOD:        DOD Medicare Retirement Fund                                            18,445                 0
DOT:        Highway Trust Fund                                                      13,578            18,840
DOL:        Pension Benefit Guaranty Corporation Fund                               12,937            12,834
DOS:        Foreign Service Retirement & Disability Fund                            12,289            11,734
FDIC:       Savings Association Insurance Fund (SAIF)                               11,423            11,153
VA:         National Service Life Insurance Fund                                    11,246            11,465
DOT:        Airport & Airway Trust Fund                                             10,518            10,997
Treasury: Exchange Stabilization Fund                                               10,503             9,717
RRB:        Railroad Retirement Account                                                503            23,383
Other Programs and Funds                                                            67,532            63,242
Total Intragovernmental Debt Holdings                                           $2,859,230        $2,660,056
∗   These amounts include marketable Treasury securities as well as GAS securities as follows:




                          Page 23                                                              GAO-04-177 Schedules of Federal Debt
                               Overview, Schedules, and Notes




Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt
For the Fiscal Years Ended September 30, 2003 and 2002

(Dollars in Millions)
Note 3. Intragovernmental Debt Holdings (continued)




                                                                            Marketable
                                                       GAS Securities                                 Total
                                                                         Treasury Securities
As of September 30, 2003:
Civil Service Retirement and Disability Fund                  $601,429                   $280             $601,709
Federal Disability Insurance Trust Fund                        170,762                     30              170,792

As of September 30, 2002:
Civil Service Retirement and Disability Fund                  $558,433                   $280             $558,713
Federal Disability Insurance Trust Fund                        155,256                     30              155,286



Social Security Administration (SSA); Office of Personnel Management (OPM); Department of Health and Human
Services (HHS); Department of Defense (DOD); Department of Labor (DOL); Federal Deposit Insurance
Corporation (FDIC); Department of Energy (DOE); Department of Housing and Urban Development (HUD);
Department of Transportation (DOT); Department of State (DOS); Department of Veterans Affairs (VA);
Department of the Treasury (Treasury); Railroad Retirement Board (RRB).

Intragovernmental Debt Holdings primarily consist of GAS securities. Treasury issues GAS securities at either par
value or at an amount that reflects a discount or a premium. The average interest rates for fiscal years 2003 and
2002 were 5.5 percent and 6.0 percent, respectively. The average interest rate represents the original issue weighted
effective yield on securities outstanding as of September 30, 2003 and 2002. GAS securities are issued with a term
of on demand to 30 years.




                               Page 24                                                               GAO-04-177 Schedules of Federal Debt
                               Overview, Schedules, and Notes




Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt
For the Fiscal Years Ended September 30, 2003 and 2002

(Dollars in Millions)


Note 4. Interest Expense


Interest expense on Federal Debt Managed by BPD for fiscal years 2003 and 2002 consisted of the
following:
                                                                            2003                     2002
   Federal Debt Held by the Public
       Accrued Interest                                                  $143,335                 $152,038
       Net Amortization of Premiums and Discounts                          13,461                   19,553 *

   Total Interest Expense on Federal Debt Held by the Public               156,796                 171,591
   Intragovernmental Debt Holdings
        Accrued Interest                                                   164,379                 161,627
        Net Amortization of Premiums and Discounts                          (6,670)                  1,347

   Total Interest Expense on Intragovernmental Debt Holdings               157,709                 162,974

 Total Interest Expense on Federal Debt Managed by BPD                   $314,505                 $334,565


*Amount shown here differs from the net amortization amount on the Schedules of Federal Debt as of September
30, 2002 due to $43 million of net unamortized premiums and discounts written off relating to the marketable
securities bought back prior to maturity through competitive redemption processes. (See note 6 for additional
information on debt buybacks.)

Note 5. Fund Balance With Treasury


                                                     As of                             As of
                                               September 30, 2003                September 30, 2002

Appropriated Funds Obligated                           $162                              $168



The Fund Balance with Treasury, a non-entity, intragovernmental account, is not included on the Schedules of
Federal Debt and is presented for informational purposes.




                               Page 25                                                             GAO-04-177 Schedules of Federal Debt
                            Overview, Schedules, and Notes




Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt
For the Fiscal Years Ended September 30, 2003 and 2002

(Dollars in Millions)
Note 6. Debt Buybacks


Debt buybacks are competitive redemption processes by which Treasury accepts offers to redeem particular
marketable Treasury securities prior to their maturity dates. Once the securities have been redeemed from investors,
they are removed from the total Treasury securities outstanding. On January 19, 2000, the Department of the
Treasury issued a final rule adding part 375 to 31 CFR, setting out the terms and conditions by which outstanding,
unmatured marketable Treasury securities may be redeemed through Treasury buying back the securities. This
authority to buy back securities enables Treasury to better manage financing needs, promote more efficient capital
markets, and may lower financing costs for taxpayers.

Three factors are considered if a debt buyback is to occur and on the amount and timing of any purchases:
1) Treasury’s projections of the federal government’s annual, unified surplus or deficit position; 2) Treasury’s three-
month projections of the cash position at the time of the regular quarterly refunding announcements; and 3)
Treasury’s analysis of how best to minimize borrowing costs over time.

The first of these “buybacks” occurred on March 9, 2000, and the latest occurred on April 29, 2002. The premium
paid represents the amount of money paid above par value to buy back securities. There were no buyback
operations in fiscal year 2003. During fiscal year 2002, there were 9 buyback operations, which involved the
following:

                                                                                                                  2002
Total Amount Paid for Debt Buybacks, excluding Accrued Interest                                               $16,278
Principal Amount of Debt Buybacks                                                                               12,521


Premium Paid on Debt Buybacks                                                                                   $3,757
Write Off of Net Unamortized Discounts on Debt Buybacks                                                             43
Loss on Debt Buybacks                                                                                           $3,800




                            Page 26                                                                GAO-04-177 Schedules of Federal Debt
                           Overview, Schedules, and Notes




Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt
For the Fiscal Years Ended September 30, 2003 and 2002

(Dollars in Millions)
Note 7. Change in Amortization Method


                                                                  Debt Held by          Intragovernmental
                                                                   the Public             Debt Holdings
Net Unamortized Premiums/(Discounts)
   Balance as of September 30, 2002                                   ($39,275)                  ($1,514)

Adjustment for change in Amortization Method                               (670)                    4,271

Net Unamortized Premiums/(Discounts)
   Adjusted Balance as of September 30, 2002                          ($39,945)                    $2,757

On October 1, 2002, the method for amortizing discounts and premiums was changed from the straight line method
to an interest method for notes and bonds (other than zero coupon bonds already being amortized using an interest
method). This change was made to standardize the processing and recording of amortizations for intragovernmental
activity. Amortization for debt held by the public securities was also changed for consistent reporting with
intragovernmental debt holdings.




                           Page 27                                                             GAO-04-177 Schedules of Federal Debt
Appendix I

Comments from the Bureau of the Public Debt
                      Append
                                                                       x
                                                                       iI





              Page 28          GAO-04-177 Schedules of Federal Debt
Appendix II

GAO Contact and Acknowledgements




GAO Contact         Louise DiBenedetto, (202) 512-6921



Acknowledgments 	   In addition to the individual named above, Dawn B. Simpson, Dean D.
                    Carpenter, Dennis L. Clarke, Chau L. Dinh, Martin J. Eble, Mickie E. Gray,
                    Nichole Harrington, Jay McTigue, Kara M. Scott, Stacey L. Volis, and
                    LaShawnda K. Wilson made key contributions to this report.




(198166)            Page 29                                    GAO-04-177 Schedules of Federal Debt
GAO’s Mission	            The General Accounting Office, the audit, evaluation and investigative arm of
                          Congress, exists to support Congress in meeting its constitutional responsibilities
                          and to help improve the performance and accountability of the federal government
                          for the American people. GAO examines the use of public funds; evaluates federal
                          programs and policies; and provides analyses, recommendations, and other
                          assistance to help Congress make informed oversight, policy, and funding
                          decisions. GAO’s commitment to good government is reflected in its core values of
                          accountability, integrity, and reliability.


Obtaining Copies of       The fastest and easiest way to obtain copies of GAO documents at no cost is
                          through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full-
GAO Reports and           text files of current reports and testimony and an expanding archive of older
                          products. The Web site features a search engine to help you locate documents
Testimony                 using key words and phrases. You can print these documents in their entirety,
                          including charts and other graphics.
                          Each day, GAO issues a list of newly released reports, testimony, and
                          correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site
                          daily. The list contains links to the full-text document files. To have GAO e-mail this
                          list to you every afternoon, go to www.gao.gov and select “Subscribe to
                          e-mail alerts” under the “Order GAO Products” heading.


Order by Mail or Phone	   The first copy of each printed report is free. Additional copies are $2 each. A check
                          or money order should be made out to the Superintendent of Documents. GAO
                          also accepts VISA and Mastercard. Orders for 100 or more copies mailed to a single
                          address are discounted 25 percent. Orders should be sent to:
                          U.S. General Accounting Office
                          441 G Street NW, Room LM
                          Washington, D.C. 20548
                          To order by Phone: 	   Voice: (202) 512-6000
                                                 TDD: (202) 512-2537
                                                 Fax: (202) 512-6061


To Report Fraud, 	        Contact:
                          Web site: www.gao.gov/fraudnet/fraudnet.htm
Waste, and Abuse in       E-mail: fraudnet@gao.gov
Federal Programs          Automated answering system: (800) 424-5454 or (202) 512-7470



Public Affairs	           Jeff Nelligan, Managing Director, NelliganJ@gao.gov (202) 512-4800
                          U.S. General Accounting Office, 441 G Street NW, Room 7149
                          Washington, D.C. 20548
United States
                  Presorted Standard

General Accounting Office
      Postage & Fees Paid

Washington, D.C. 20548-0001
           GAO

                                  Permit No. GI00

Official Business

Penalty for Private Use $300


Address Service Requested