Financial Audit: Bureau of the Public Debt's Fiscal Years 2001	 
and 2000 Schedules of Federal Debt (15-FEB-02, GAO-02-354).	 
								 
GAO audited the Bureau of Public Debt's (BPD) Schedule of Federal
Debt for fiscal years 2001 and 2000. 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 fiscal year 2001, and (3) there was 
no reportable noncompliance in fiscal year 2001 with a selected  
provision of a law GAO tested.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-354 					        
    ACCNO:   A02752						        
  TITLE:     Financial Audit: Bureau of the Public Debt's Fiscal Years
2001 and 2000 Schedules of Federal Debt 			 
     DATE:   02/15/2002 
  SUBJECT:   Accountability					 
	     Debt held by public				 
	     Financial records					 
	     Financial statement audits 			 
	     Internal controls					 
	     Reporting requirements				 
	     Federal debt					 
	     Data integrity					 
	     Bureau of the Public Debt Schedule of		 
	     Federal Debt					 
								 

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GAO-02-354
     
A

Report to the Secretary of the Treasury

February 2002 FINANCIAL AUDIT Bureau of the Public Debt?s Fiscal Years 2001
and 2000 Schedules of Federal Debt

GAO- 02- 354

Letter 1 Auditor?s Report 7

Opinion on Schedules of Federal Debt 7 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 and Notes Overview on Federal Debt Managed by the
Bureau of the Public

Debt 12 Schedules of Federal Debt 19 Notes to the Schedules of Federal Debt
20

Appendixes

Appendix I: Comments from the Bureau of the Public Debt 26

Appendix II: GAO Contact and Staff Acknowledgments 27 GAO Contact 27
Acknowledgments 27

Abbreviations

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

February 15, 2002 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, 2001 and 2000. 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, 2001 and 2000, (2) opinion on
the effectiveness of related internal control as of September 30, 2001, (3)
conclusion on the bureau's compliance in fiscal year 2001 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, 2001 and 2000, federal debt managed by the bureau
totaled about $5,792 billion and $5,659 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, 339 billion
as of September 30, 2001, and $3,439 billion as of September 30, 2000, of
debt held by the public and about (2) $2, 453 billion as of September 30,
2001, and $2,220 billion as of September 30, 2000, 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. When a cash surplus occurs, the annual excess funds are

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.

then 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 over the past 4 years have enabled Treasury to reduce 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,
conducting ?buybacks? of debt before its maturity date, and redeeming
callable securities when the opportunities arose. 2 The effect of these
actions is that debt held by the public and managed by the Bureau of the
Public Debt has been reduced by approximately $476 billion since September
30, 1997, with about $100 billion of this decrease occurring in fiscal year
2001. 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, 2001.

Notwithstanding the reduction in debt held by the public, total federal debt
increased by approximately $133 billion during fiscal year 2001, because of
the increase in intragovernmental debt holdings. Intragovernmental debt
holdings represent balances of Treasury securities held by individual funds,
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 $870 billion
since September 30, 1997, with about $233 billion of this increase occurring
in fiscal year 2001. 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, 2001.

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.

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 debt holdings also constitute future obligations of
the Treasury since the Treasury must provide cash to redeem these securities
in order for the funds 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 funds 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 the individual funds by the Treasury
are entirely offset by the income received by such funds- 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 may 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 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.

After 4 years of cash surpluses, debt held by the public as a percentage of
the annual size of the U. S. economy has decreased from 43 percent as of
September 30, 1998, to 33 percent as of September 30, 2001. However, these
levels are still relatively high by historical standards, as the United

States rarely exceeded such levels before 1932. In addition, the combination
of federal spending for the international war on terrorism and homeland
security efforts, recent tax policy decisions, and the deterioration in
overall economic performance is likely to eliminate nearterm budget
surpluses, reduce medium- range projected surpluses, and exacerbate our
long- range fiscal challenge. As a result, the financial landscape has now
changed from projected surpluses, once thought to possibly lead to a
dramatic reduction in or elimination of debt held by the public, to
projected near- term deficits and an accelerated need to increase the
current $5, 950 billion statutory debt limit.

Over the longer term, the retirement of the baby boom generation will place
significant pressures on the federal budget. The expected growth in Social
Security spending in combination with the even faster expected growth in
Medicare and Medicaid spending is a major challenge. Absent any changes in
the structure of Social Security and Medicare, such growth would leave very
little room for any other federal spending priorities in future decades.
Ultimately, restoring our long- term fiscal flexibility and preventing debt
held by the public from rising again will involve reforming existing federal
entitlement programs and promoting the saving and investment necessary for
robust long- term economic growth.

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 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 Treasury, Postal
Service, and General Government, House Committee on Appropriations; and the
Subcommittee on Government Efficiency, Financial Management and
Intergovernmental Relations, 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.
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 provided
in appendix II.

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

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. 3

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, 2001
and 2000. 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. 4

In our audits of the Schedules of Federal Debt for the fiscal years ended
September 30, 2001 and 2000, 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 for the
fiscal year ended September 30, 2001; and

 no reportable noncompliance in fiscal year 2001 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.

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, 2001, 2000, and

3 31 U. S. C. 331( e) (1994). 4 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.

1999, 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, 2001 and 2000.

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

Control to the Schedule of Federal Debt related to financial reporting and

compliance with applicable laws and regulations as of September 30, 2001.
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, 2001, would be prevented or
detected on a timely basis. Our opinion is based on criteria established
under 31 U. S. C. 3512( c), (d) (commonly referred to as the 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. 5 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 for compliance in fiscal year 2001 with the
Statutory Debt Limit,

and Regulations 31 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, 2001, was
not to provide an opinion on overall compliance with laws and regulations.
Accordingly, we do not express such an opinion.

5 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.

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 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, 2001, 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, 2001, 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, 2001, 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 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, 2001, 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 for the fiscal year ended September
30, 2001;

 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 2001 with the Statutory Debt Limit, 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 23, 2002

Overview, Schedules, and Notes

Overview on Federal Debt Managed by the Bureau of the Public Debt 
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