Financial Audit: Bureau of the Public Debt's Fiscal Years 2000 and 1999
Schedules of Federal Debt (Letter Report, 03/01/2001, GAO/GAO-01-389).

GAO audited the Bureau of Public Debt's (BPD) Schedule of Federal Debt
for the fiscal years ended September 30, 2000 and 1999. GAO found that
(1) the Schedules of Federal Debt were presented fairly, in all material
respects, in conformity with generally accepted accounting principles,
(2) BPD had effective internal control over financial reporting and
compliance with laws and regulations related to the Schedule of Federal
Debt for the fiscal year ended September 30, 2000, and (3) there were no
reportable noncompliance in fiscal year 2000 with a selected provision
of a law GAO tested.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GAO-01-389
     TITLE:  Financial Audit: Bureau of the Public Debt's Fiscal Years
	     2000 and 1999 Schedules of Federal Debt
      DATE:  03/01/2001
   SUBJECT:  Debt held by public
	     Accountability
	     Financial management
	     Internal controls
	     Tax administration systems
	     Financial statement audits
	     Financial records
	     Reporting requirements

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GAO-01-389

A

Report to the Secretary of the Treasury

March 2001 FINANCIAL AUDIT Bureau of the Public Debt's Fiscal Years 2000 and
1999 Schedules of Federal Debt

GAO- 01- 389

Letter 3 Auditor's Report 7 Overview, Schedules, 12 and Notes

Overview on Federal Debt Managed by the Bureau of the Public Debt 12
Schedules of Federal Debt 18 Notes to the Schedules of Federal Debt 19

Appendixes Appendix I: Comments From the Bureau of the Public Debt 26
Appendix II: GAO Contact and Staff Acknowledgments 27

Abbreviations

BPD Bureau of the Public Debt OMB Office of Management and Budget

Lett er

March 1, 2001 The Honorable Paul H. O'Neill 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, 2000 and 1999. 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 Holdings, (2) the related Accrued Interest Payables, and
(3) the related Net Unamortized Discounts and Premiums 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, 2000 and 1999, (2)
opinion on

the effectiveness of related internal control as of September 30, 2000, (3)
conclusion on the bureau's compliance in fiscal year 2000 with a selected
provision of a significant law 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, 2000 and 1999, federal debt managed by the bureau
totaled about $5,659 billion and $5,641 billion, respectively, for moneys
borrowed to fund the government's operations. These balances consisted

of approximately (1) $3, 439 billion as of September 30, 2000, and $3, 668
billion as of September 30, 1999, of debt held by the public and about (2)
$2, 220 billion as of September 30, 2000, and $1,973 billion as of September
30, 1999, of intragovernmental 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 revenues. It best represents the cumulative effect of
past federal borrowing on today's economy and the federal 1
Intragovernmental Holdings represent federal debt issued by Treasury and
held by certain federal government accounts, such as the Social Security and
Medicare trust funds.

budget. When an actual budget surplus occurs, the annual excess funds are
then used to reduce debt held by the public. In other words, actual deficits
or surpluses generally approximate the annual net change in the amount of
government borrowing from the public.

As we recently reported in our Performance and Accountability Series, 2
budget surpluses over the past 3 years have resulted in Treasury reducing
debt held by the public. Treasury has reduced this debt by redeeming
maturing debt, reducing the number of auctions and size of new debt issues,
eliminating the 3- year note, conducting “buybacks” of debt
before its maturity date, and redeeming callable securities when the
opportunities arose. 3 As a result of Treasury's actions, debt held by the
public and

managed by the Bureau of the Public Debt, has been reduced by approximately
$376 billion since September 30, 1997, with about $229 billion of this
decrease occurring in fiscal year 2000.

Intragovernmental holdings represent balances of Treasury securities held by
individual funds, primarily 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
annual 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 holdings have increased by
approximately $637 billion since September 30, 1997, with about $247 billion
of this increase occurring in fiscal year 2000.

The transactions relating to the use of the funds' 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 holdings also constitute future obligations of the
Treasury since the Treasury must provide cash to redeem these securities 2
Major Management Challenges and Program Risks: Department of the Treasury
(GAO- 01254,

January 2001). 3 On January 31, 2001, Treasury announced that it is
eliminating the 52- week bill.

in order for the funds to pay their benefits or other obligations as they
come due. When this occurs, the government must fund these redemptions
through some combination of reduced future surpluses, if available; lower
relative spending for federal programs; higher relative taxes; and/ or
greater relative borrowing from the public. Debt held by the public and
intragovernmental holdings are very different. Debt held by the public
approximates the federal government's competition with other sectors in the
credit markets. This competition affects current interest rates and private
capital accumulation. In addition, interest on debt held by the public is a
current burden on taxpayers. In contrast, intragovernmental holdings perform
an accounting function but typically do not constitute the government's
total future commitment to trust fund financed programs. They primarily
represent the cumulative annual surpluses of those trust funds and also
reflect future 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 fund expenditures, they compete with
the private sector and thus have an effect on the economy.

Even after 3 years of budgetary surpluses, debt held by the public stands at
about $3. 4 trillion, or 35 percent of the annual size of the U. S. economy,
a level that the United States rarely exceeded before 1940. However, the
projected surpluses, if they materialize and depending on how much is saved,
could lead to a dramatic reduction in or potential elimination of debt held
by the public. Over the longer term, the retirement of the baby boom
generation will place significant pressures on the federal budget. These

pressures- including, for example, increasing demand for health services-
will require reform of existing entitlement programs and/ or other policy
actions to prevent debt held by the public from dramatically rising again in
future decades. We are sending copies of this report to Senator Max Baucus,
Senator Robert Byrd, Senator Ben Nighthorse Campbell, Senator Kent Conrad,
Senator Pete Domenici, Senator Byron Dorgan, Senator Charles Grassley,
Senator Joseph Lieberman, Senator Ted Stevens, Senator Fred Thompson, and to
Representative Dan Burton, Representative Stephen Horn, Representative Steny
Hoyer, Representative Ernest Istook, Representative Jim Nussle,
Representative David Obey, Representative Charles Rangel, Representative
Janice Schakowsky, Representative John Spratt, Representative William
Thomas, Representative Henry Waxman, and

Representative C. W. Bill Young in their capacities as Chairmen, Ranking
Members, or Ranking Minority Members of Senate or House Committees and
Subcommittees. We are also sending copies of this report to Van Zeck,
Commissioner, Bureau of the Public Debt; the Honorable Jeffrey Rush, Jr.,
Inspector General, Department of the Treasury; the Honorable Mitchell
Daniels, Jr., Director, Office of Management and Budget; and other agency
officials. Copies will be made available to others upon request. 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 (202) 512-
3406. Another key contact and staff acknowledgments are in appendix II.

Sincerely yours, David M. Walker Comptroller General of the United States

Audi Report tor' s 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 on 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, 2000
and 1999. 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 Holdings, (2) the related Accrued Interest
Payables, and (3) the related Net Unamortized Discounts and Premiums managed
by BPD. 2 In our audits of the Schedules of Federal Debt for the fiscal
years ended

September 30, 2000 and 1999, we found ? the Schedules of Federal Debt are
presented fairly, in all material respects, in conformity with generally
accepted accounting principles; ? BPD had effective internal control over
financial reporting (including

safeguarding assets) and compliance with laws and regulations related to the
Schedule of Federal Debt for the fiscal year ended September 30, 2000; and ?
no reportable noncompliance in fiscal year 2000 with a selected

provision of a law 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. 331( e) (1994). 2 Intragovernmental Holdings represent federal
debt issued by Treasury and held by certain federal government accounts,
such as the Social Security and Medicare trust funds.

Opinion on Schedules The Schedules of Federal Debt including the
accompanying notes present of Federal Debt

fairly, in all material respects, in conformity with U. S. generally
accepted accounting principles, the balances as of September 30, 2000, 1999,
and 1998, for Federal Debt Managed by BPD; the related Accrued Interest
Payables and Net Unamortized Discounts and Premiums; and the related
increases and decreases for the fiscal years ended September 30, 2000 and

1999. Opinion on Internal BPD maintained, in all material respects,
effective internal control relevant Control

to the Schedule of Federal Debt related to financial reporting (including
safeguarding assets) and compliance with applicable laws and regulations as
of September 30, 2000. 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, 2000, would be prevented or detected on a timely basis.
Management asserted that its internal control is effective based on criteria
established under 31 U. S. C. 3512 (Federal Managers' Financial Integrity
Act) and the Office of Management and Budget (OMB) Circular A- 123,
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
report to be issued at a later date. Compliance With Laws

Our tests for compliance in fiscal year 2000 with Statutory Debt Limits, 31
and Regulations

U. S. C. 3101( b), as amended, disclosed no instances of noncompliance that
would be reportable under U. S. generally 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, 2000, 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 report.

Consistency of Other BPD's Overview on Federal Debt Managed by the Bureau of
the Public Debt

Information contains information, some of which is not directly related to
the

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 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 generally accepted accounting
principles and

(2) management maintained effective related internal control as of September
30, 2000, 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, 2000, in conformity with generally accepted accounting
principles, and assets, as reflected in note 5 to the Schedules of Federal
Debt, are safeguarded against loss from unauthorized acquisition, use, or
disposition. ? Compliance with laws and regulations: Transactions related to
the

Schedule of Federal Debt for the fiscal year ended September 30, 2000, 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 Schedules of Federal Debt and any other laws,

regulations, and governmentwide policies identified by OMB audit guidance.

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

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 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 for the fiscal year ended September 30, 2000, related to
financial reporting (including safeguarding assets as reflected in note 5 to
the schedules) and compliance with laws and regulations (including execution
of transactions in accordance with budget authority); ? tested relevant
internal controls over financial reporting (including safeguarding assets as
reflected in note 5 to the schedules) and

compliance, and evaluated the design and operating effectiveness of internal
control related to the Schedule of Federal Debt for the fiscal year ended
September 30, 2000; ? 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 2000 with Statutory Debt Limits, 31 U. S.
C. 3101( b), as amended. 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 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. 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

January 31, 2001

Overview, Schedules, and Notes

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

Schedules of Federal Debt

Notes to the Schedules of Federal Debt

Appendi xes Comments From the Bureau of the Public

Appendi x I Debt

Appendi x II

GAO Contact and Staff Acknowledgments GAO Contact Louise DiBenedetto, (202)
512- 6921 Acknowledgments In addition to the individual named above, Paul F.
Foderaro, Dawn B.

Simpson, Dean D. Carpenter, Chau L. Dinh, Carolyn A. Frye, and LaShawnda K.
Wilson made key contributions to this report.

(919502) Lett er

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Page 1 GAO- 01- 389 Schedules of Federal Debt

Contents

Page 2 GAO- 01- 389 Schedules of Federal Debt

Page 3 GAO- 01- 389 Schedules of Federal Debt United States General
Accounting Office

Washington, D. C. 20548 Comptroller General

of the United States

Page 4 GAO- 01- 389 Schedules of Federal Debt

Page 5 GAO- 01- 389 Schedules of Federal Debt

Page 6 GAO- 01- 389 Schedules of Federal Debt

Page 7 GAO- 01- 389 Schedules of Federal Debt United States General
Accounting Office

Washington, D. C. 20548 Comptroller General

of the United States

Page 8 GAO- 01- 389 Schedules of Federal Debt

Page 9 GAO- 01- 389 Schedules of Federal Debt

Page 10 GAO- 01- 389 Schedules of Federal Debt

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Overview, Schedules, and Notes Page 13 GAO- 01- 389 Schedules of Federal
Debt

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Debt

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Appendix I

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Appendix II

United States General Accounting Office Washington, D. C. 20548- 0001

Official Business Penalty for Private Use $300

Address Correction Requested Presorted Standard

Postage & Fees Paid GAO Permit No. GI00
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