Savings Bonds: Actions Needed to Increase the Reliability of	 
Cost-effectiveness Measures (16-JUN-03, GAO-03-513).		 
                                                                 
While the Treasury generally pays lower interest rates on U.S.	 
Savings Bonds than it does on other forms of borrowing from the  
public, it also incurs substantially higher administrative costs 
to issue and redeem the paper savings bond certificates. To	 
determine whether these higher administrative costs exceed its	 
interest rate savings, Treasury's Bureau of the Public Debt uses 
a spreadsheet model to compare the costs of issuing Series EE and
Series I savings bonds with those of issuing marketable Treasury 
securities. GAO was asked to review this model to judge its	 
reliability in measuring the relative costs of Treasury's	 
borrowing alternatives. 					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-513 					        
    ACCNO:   A07191						        
  TITLE:     Savings Bonds: Actions Needed to Increase the Reliability
of Cost-effectiveness Measures					 
     DATE:   06/16/2003 
  SUBJECT:   Interest rates					 
	     Public debt					 
	     US savings bonds					 
	     Cost effectiveness analysis			 
	     Cost control					 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-03-513

                                       A

Report to the Chairman, Subcommittee on Transportation, Treasury, and
Independent Agencies, Committee on Appropriations, House of
Representatives

June 2003 SAVINGS BONDS Actions Needed to Increase the Reliability of
Cost- effectiveness Measures

GAO- 03- 513

Letter 1 Results in Brief 2 Background 3 Conceptual Design for Estimating
Savings Bond Cost- effectiveness

Is Appropriate, but Model Calculations Contain Errors 8 Key Model
Parameters and Components May Not Be Reliable 15 Conclusions 20
Recommendations 21 Agency Comments and Our Evaluation 22

Appendixes

Appendix I: Objectives, Scope, and Methodology 26

Appendix II: Present Value Theory and Model Calculations 27

Appendix III: Future Value Examples for Series EE and Series I Savings
Bonds for Bonds 5 Years and Older 30

Appendix IV: Model Calculations Detail 32

Appendix V: Comments from the Bureau of the Public Debt 35 GAO Comments 43

Appendix VI: GAO Contacts and Staff Acknowledgments 44 GAO Contacts 44
Acknowledgments 44

Tables Table 1: Savings Bonds and Selected Treasury Securities 4 Table 2:
Key Parameters of the Savings Bond Cost- effectiveness

Model 7 Table 3: Redemption Value Calculation for Series EE and Series I

Savings Bonds 5 Years and Older 12 Table 4: BPD Changes to Savings Bond
Cost- effectiveness Model

Parameters since 1995 16 Figure Figure 1: Conceptual Design of the Savings
Bond Cost- effectiveness Model 9

Abbreviations

BPD Bureau of the Public Debt CMT constant maturity Treasury FV future
value OMB Office of Management and Budget PV present value

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. It may contain
copyrighted graphics, images or other materials. Permission from the
copyright holder may be necessary should you wish to reproduce copyrighted
materials separately from GAO*s product.

June 16, 2003 Let er t The Honorable Ernest J. Istook, Jr. Chairman,
Subcommittee on Transportation, Treasury, and Independent Agencies
Committee on Appropriations House of Representatives

Dear Mr. Chairman: Savings bonds, which offer low- risk, affordable
investment opportunities to many Americans, represent almost 3 percent of
the total Department of the Treasury (Treasury) securities outstanding but
nearly 6 percent of the total

nonmarketable Treasury securities outstanding. 1 While savings bonds
generally pay lower interest rates than marketable Treasury securities,
Treasury incurs higher administrative costs to produce, market, service,
and redeem savings bond certificates. Concerns have been raised regarding
whether, and to what extent, savings bonds are cost effective for
Treasury* whether Treasury*s administrative and tax deferral costs on
savings bonds are more than offset by lower interest payments. To address

these concerns, in 1985, Treasury introduced the savings bond
costeffectiveness model that measures, according to model documentation,
the difference between the projected costs for raising funds through the

issuance of $1 billion of new savings bonds and the estimated costs for
comparable borrowing through marketable securities. In 1995, Treasury*s
Bureau of the Public Debt (BPD) assumed responsibility for the model.

BPD believes the model shows that over time savings bonds are a more cost-
effective means of raising funds in that the administrative and tax
deferral costs of issuing savings bonds are offset by the lower interest
payments on savings bonds.

This report responds to your July 16, 2002, request that we assess the
effectiveness of BPD*s cost- effectiveness model. As agreed with your
staff, this report presents our assessment of (1) the appropriateness of
the model*s design to compare the costs associated with savings bonds with
those of other Treasury debt and (2) the reliability of certain key

parameters and components of the model. 1 Treasury Department, Bureau of
the Public Debt, Monthly Statement of the Public Debt of the United States
(April 30, 2003). Available from www. publicdebt. treas. gov.

To address these objectives, we reviewed an electronic copy of the model,
related hard- copy documentation, and savings bond program regulations. We
did not assess the overall savings bond program or the accuracy or
completeness of all data used in the model. As a result, we do not know
what effect such data had on the model*s cost- effectiveness calculation.
Appendix I contains a more detailed description of our scope and
methodology.

We conducted our work in Washington, D. C., from September 2002 through
April 2003 in accordance with generally accepted government auditing
standards.

Results in Brief Treasury has presented the savings bond cost-
effectiveness model as a way to measure the cost- effectiveness of savings
bonds over time, one that is

based on a present value approach* calculating the value today of future
costs and revenues in order to provide a common basis for comparison
between savings bonds and marketable Treasury securities. The conceptual
design underlying the savings bond cost- effectiveness model reflects
Office of Management and Budget (OMB) guidance and common financial
economics practice. According to OMB Circular A- 94, such analysis is
appropriate when the benefits of competing alternatives*

alternative debt instruments in this case that provide equal funds to
Treasury* are the same. A program is cost effective if, on the basis of
appropriately measuring the costs of competing alternatives over time, it

has the lowest costs, expressed in present value terms, for a given amount
of benefits. For savings bonds, the question is whether, over time,
savings bonds cost less than marketable Treasury securities. However, the
model as constructed does not provide Treasury with the information it
needs to determine whether savings bonds are cost effective because of
errors in several steps in the model. In particular, we found that the
model does not accurately calculate the present value of either
alternative and thus does not provide a valid comparison.

BPD has changed several parameters in the model in an effort to better
reflect changes in the savings bond program. However, despite these
enhancements, some of the data used to adjust the model*s parameters have
not been updated and do not incorporate historical experience. In
particular, data on savings bond redemptions do not reflect the most
recent

experience, possibly affecting the validity of the model*s cost-
effectiveness estimates. In addition, the model contains other
inaccuracies that could affect its reliability and accuracy. Finally, the
model has not been subject to

ongoing and periodic reviews by independent external reviewers, a common
practice endorsed by OMB.

This report includes recommendations to the Secretary of the Treasury that
are designed to increase the reliability of the savings bond
costeffectiveness model. We obtained comments on a draft of this report
from BPD. BPD disagreed with our description of the savings bond
costeffectiveness model and our conclusion that the model*s comparisons
were invalid, but agreed in general with our recommendations. However, BPD
noted that the goal of moving to an electronic environment for savings
bonds would make it appropriate to *shelve* the current model. BPD*s
comments are discussed in the Agency Comments and Our Evaluation section,
and its written comments are reprinted in appendix V.

Background Savings bonds offer investors the ability to purchase
securities with lower minimum denominations than those for marketable
Treasury securities. In

response to concerns raised regarding the cost- effectiveness of the
savings bond program as a funding mechanism for federal government
operations, Treasury created a cost- effectiveness model that is now used
and maintained by BPD. The model was intended to compare the projected
costs for $1 billion of new savings bond borrowing and comparable
borrowing through marketable Treasury securities. The model is based on
the characteristics of the Series EE and Series I savings bonds and is
intended to compare these costs on a present value basis.

Savings Bond Program Treasury is authorized to borrow money on the credit
of the United States to fund federal government operations. Within
Treasury, BPD is responsible

for prescribing the debt instruments, limiting and restricting the amount
and composition of the debt, paying interest to investors, and accounting
for the resulting debt. However, Treasury sets the financial terms and
conditions of savings bonds and marketable Treasury securities, including
denomination and pricing changes. 2 2 Treasury securities are marketable
bills, notes, and bonds issued at various schedules throughout the year.
These instruments are negotiable debt obligations of the U. S. government
secured by its full faith and credit. Treasury bills are short- term
obligations

issued with a term of 1 year or less. Treasury notes have a term of more
than 1 year, but not more than 10 years. Treasury bonds are long- term
obligations issued with a term of more than 10 years.

Savings bonds are an alternative for investors unable or unwilling to pay
the minimum denomination of marketable Treasury securities. Table 1
describes several principal differences between Series EE and Series I
savings bonds and selected marketable Treasury securities.

Table 1: Savings Bonds and Selected Treasury Securities Savings bonds
Marketable Treasury securities Series EE Series I Fixed- principal notes
Inflation- indexed notes a

General Nonmarketable. Sold at 50

Nonmarketable. Sold at face Marketable. Sold at auction Marketable. Sold
at auction features percent of face value in value in denominations as low
with a minimum face value with a minimum face value denominations as low
as as $50.

of $1,000. of $1, 000. $50.

Interest rate Calculated as 90 percent Calculated to provide a fixed Rate
is determined at

Rate is determined at of 6- month averages of 5year rate plus a semiannual

auction. auction. The fixed rate of Treasury securities inflation
adjustment. interest is applied to the yields.

inflation- adjusted principal. Earnings Interest is paid when the

Interest is paid when the bond Interest is paid

Interest is paid semiannually bond is redeemed; value

is redeemed; generally semiannually. (Interest

based on the inflation increases monthly with increases in value monthly,
payment is commonly called

adjusted principal value of accrued interest. but may remain unchanged in
the note*s *coupon*). the note; in the event of times of deflation.
deflation, interest payments

will decrease. Earn interest for up to 30 Earn interest for up to 30

Interest paid until the note Interest paid until the note years.

years. matures; more than 1 year

matures; more than 1 year but not more than 10 years. but not more than 10
years.

Redemption Can be redeemed after

Can be redeemed after first Marketable, can be sold at

Marketable, can be sold at and cashing

first 12 months. b A 3- 12 months. A 3- month interest

any time prior to maturity any time prior to maturity options

month interest penalty penalty applies to bonds

date. date. applies to bonds

redeemed during the first 5 redeemed during the first

years. 5 years.

(Continued From Previous Page)

Savings bonds Marketable Treasury securities Series EE Series I Fixed-
principal notes Inflation- indexed notes a

Special federal Federal income tax on Federal income tax on

Interest income is subject to Interest income is subject to tax treatment
earnings may be deferred earnings may be deferred until federal income
tax, which is

federal income tax, which is until redemption; all or

redemption; all or part of generally reported in the

generally reported in the part of earnings may be

earnings may be excluded year paid.

year paid. Inflation excluded from federal from federal income tax if

adjustments must be income tax if used for

used for qualified education reported in the year earned. qualified
education expenses. expenses. Sources: BPD and the Internal Revenue
Service.

Note: Table data taken from the following publications of the Treasury
Department, Bureau of the Public Debt: FAQs Regarding Treasury Bills,
Notes, and Bonds, The U. S. Savings Bonds Owner*s Manual (June 2002),
Minimum Holding Period For Savings Bonds Extended to 12 Months (press

release: January 15, 2003), available from www. publicdebt. treas. gov;
and Internal Revenue Service, Investment Income and Expenses for 2002
Returns, Publication 550, available from www. irs. gov. a Treasury notes
and bonds for which the interest and redemption payments are tied to
inflation. Treasury bills are not offered in inflation indexed form. b The
12- month period, referred to as the minimum holding period, is the length
of time from the issue

date that a bond must be held before it is eligible for redemption. On
January 15, 2003, Treasury announced that the minimum holding period that
applies to U. S. Savings Bonds would be extended from 6 to 12 months,
effective for bonds issued on and after February 1, 2003. Series EE and
Series I savings bonds bearing issue dates prior to February 2003 retain
the 6- month minimum holding period in effect when they were issued.

In March 2002 the Treasury Assistant Secretary for Financial Markets
testified before the House Appropriations Committee, Subcommittee on
Treasury, Postal Service, and General Government that Treasury believes
that the availability of a savings vehicle with the full faith and credit
of the United States should not be limited to those who can afford the
minimum $1,000 denominations available in auctions of marketable Treasury
securities. The official also said that even though savings bonds are not
the most efficient form of borrowing in operational terms, Treasury would
continue to offer them to the public. 3 3 In March 2002, the Commissioner
of the Public Debt testified before the Subcommittee on

Treasury, Postal Service, and General Government, House Committee on
Appropriations that savings bonds are the only security sold to the public
in the form of paper certificates.

Treasury is seeking to reduce the operational costs of savings bonds by
offering the securities in paperless form. Treasury has started to offer
savings bonds that are held in direct Treasury accounts instead of issuing
paper certificates for the bonds. The Series EE and Series I savings bonds
are available through the new TreasuryDirect system. 4 A BPD planning
document describes BPD*s objective as enabling Treasury to stop issuing
paper savings bonds and thus begin to realize the long- term cost
reductions expected from additional automation and more efficient
processing. Savings Bond Costeffectiveness

In response to concerns raised regarding the cost- effectiveness of the
Model savings bond program as a funding mechanism for federal government
operations, Treasury created a cost- effectiveness model. According to a
Treasury report to the House Committee on Appropriations and Committee on
Financial Services, the savings bond cost- effectiveness model has been
used to assess potential changes in the financial terms and conditions for

Series EE and Series I savings bonds. 5 According to model documentation,
BPD also uses model results to project and trace annual costs and
recoveries for distinct cost centers over the life of a savings bond loan.

What is collectively referred to as the savings bond cost- effectiveness
model comprises two submodels, Series EE and Series I, with the
differences between the two reflecting differences between the two series
of savings bonds. The results of each submodel are averaged to estimate
the overall cost- effectiveness of the savings bond program. According to
a BPD official, the model calculates the value of a single savings bond
and its costs to Treasury, and extends this to the total savings bond
population in a given year. Subsequently, the model attempts to quantify
the differences between the savings bonds and marketable Treasury
securities (noted in table 1). 6 4 The original TreasuryDirect system was
a Web- based system for marketable Treasury

securities that is now called Electronic Services for Treasury Bills,
Notes, and Bonds. The new TreasuryDirect is a Web- based system that
allows investors to establish accounts to purchase, hold, and conduct
transactions for Series EE and Series I savings bonds on- line.

5 Department of the Treasury, Report to the Committee on Appropriations
and the Committee on Financial Services, United States House of
Representatives: On Federal Debt Financing and the Role of United States
Savings Bonds (Washington, D. C.: July 1,

2002). 6 Treasury has not issued bonds of any maturity since its decision
in October 2001 to suspend issuance of the 30- year bond.

The model was intended to compare the projected costs for $1 billion of
new savings bond borrowing and those for $1 billion in marketable Treasury
securities on a present value basis, that is, discounting the costs over
time to permit a valid comparison. The savings bond costeffectiveness
model utilizes seven key parameters: administrative costs, historic
redemption patterns, sales volume, savings bond yields, maturity period,
equivalent marketable yield, and tax recovery. Table 2 describes the key
parameters of the model in detail.

Tabl e 2: Key Parameters of the Savings Bond Cost- effectiveness Model Key
parameters Description

Administrative costs Includes all federal government costs for marketing/
issuing, servicing, and redeeming savings bonds. a Issue cost comprises
marketing/ issuing costs plus one- half of servicing costs. Redemption
cost comprises cost of redemption plus one- half of

servicing costs. Each of these total costs is then divided by its
respective transactions during the prior fiscal year budget activity to
return unit cost to issue per bond and unit cost to redeem per bond. Unit
costs per bond are the same across all denominations.

Historic redemption A probability distribution of the number of bonds
redeemed by patterns denomination and period outstanding. The data were
derived from the redemption patterns from 1957 through 1993. Monthly rates
of redemption in the first 3 years outstanding are expressed as the
quotient of the total bonds redeemed at a given age by the total bonds of
that age outstanding. Annual rates of redemption for bonds that remain
outstanding for 3 years or longer were similarly derived. The annual rates
are prorated to allocate bond redemptions equally among the 12 months in a
year. The model applies the redemption probabilities of Series

EE bonds to similarly priced Series I bonds (that is, the probabilities
for a $100 Series EE bond and a $50 Series I bond are equal). Sales volume
The number of bonds issued by denomination in the prior fiscal

year. Savings bond yields Series EE * 90 percent of 6- month averages of
5- year Treasury

securities yields. Series I - a fixed rate of return and a semiannual
inflation rate.

Maturity period Series EE and Series I bonds earn interest for 30 years.
The model incorporates an additional 20 years of redemption patterns
beyond final maturity.

(Continued From Previous Page)

Key parameters Description

Equivalent marketable An estimate of the comparable borrowing costs for
marketable yield Treasury securities based on the constant maturity yield
curve.

Tax recovery An estimate of taxes paid by an investor upon redeeming the
bond. b Source: BPD model documentation. a According to model
documentation, since BPD*s administrative costs for marketable Treasury

securities are negligible to the total amount financed, they are not built
into the model. b The tax recovery rate is provided by Treasury*s Office
of Tax Policy, which, among other functions,

provides the official estimates of all government receipts for Treasury
cash management decisions.

Conceptual Design for OMB guidelines state that a cost- effectiveness
analysis is appropriate to

Estimating Savings use in an analysis of government programs when the
benefits of competing

alternatives are the same or where a policy decision has been made that
the Bond Costeffectiveness benefits of a program must be provided. 7 A
program is cost effective if, on

Is the basis of life cycle cost analysis of competing alternatives, it is

determined to have the lowest costs expressed in present value terms for a
Appropriate, but Model given amount of benefits. 8 The conceptual design
underlying the savings

Calculations Contain bond cost- effectiveness model reflects this OMB
guidance. However, the Errors

present value calculations in the model contain errors. As a result, the
model*s estimated *present values* do not follow OMB guidance and common
financial economics practice, and the model does not provide Treasury with
the information it needs to determine whether savings bonds are cost-
effective.

Model*s Conceptual Design The model*s conceptual design follows OMB
guidelines for costeffectiveness

Follows OMB Guidelines analysis. Figure 1 shows the conceptual design of
the model.

7 Office of Management and Budget, Guidelines and Discount Rates for
Benefit- Cost Analysis of Federal Programs, Circular A- 94 (Washington, D.
C.: October 29, 1992). This circular provides general guidance for
conducting benefit- cost and cost- effectiveness analyses and serves as a
checklist of whether an agency has considered and properly dealt with all
the elements for sound benefit- cost and cost- effectiveness analyses.

8 OMB states that life cycle cost represents the overall estimated cost
for a particular program alternative over the time period corresponding to
the life of the program, including direct and indirect initial costs plus
any periodic or continuing costs of operation and maintenance.

Figure 1: Conceptual Design of the Savings Bond Cost- effectiveness Model

OMB Circular A- 94, which is applicable to executive branch agencies,
provides that the standard criterion for deciding whether a government
program is cost- effective is net present value* a comparison of the
discounted monetized value of the expected life cycle costs of alternative

means of achieving the same stream of benefits. However, in its comments
on this report BPD asserted that the model*s approach follows an
alternative OMB method to determine cost- effectiveness. BPD stated that
the model measures cost- effectiveness as the *relative financial benefit

from two borrowing options whose overall costs are identical. Treasury*s
benefit from each alternative is the amount of financing realized at the
time

borrowing occurs.* We have addressed this comment in the Agency Comments
and Our Evaluation section.

A key concept in finance is recognizing that the value associated with
funds received or paid at different points changes over time. Funds have a
time value because of the opportunity to invest them at different interest
rates and in different financial alternatives. Investors demand some
compensation for making funds available today in return for future
repayment. For example, the interest paid on a loan is a measure of this
compensation.

Essentially, a present value calculation measures the value today that
would be equivalent to a future payment, or stream of payments, by
discounting the future payments (using an appropriate discount rate). 9
For Treasury, this is the value today of the future payments to investors
of securities offered for sale which, in the context of the model, is the
redemption value of Series EE and Series I savings bonds and the repayment
stream of the alternative marketable Treasury security (that is, any
coupons plus maturity value). Calculating the present value for each
alternative takes the monetary value of costs over time and discounts them

at an appropriate discount rate. Discounting transforms costs occurring in
different time periods to a common unit of measurement (app. II describes
this in greater detail).

As table 1 notes, there are several distinctions between savings bonds and
marketable Treasury securities; several of these are relevant to the
model. Most notably, the interest rates and the timing of the interest
payments are different. Accurate implementation of the conceptual design
requires that the model address these issues in order to construct
comparable present values for the costs of savings bonds and marketable
Treasury securities. The model attempts to address these distinctions by
(1) creating an aftertax present value discount factor for the marketable
Treasury security from a 6- month average of the constant maturity yield
curve, commonly referred to as the *constant maturity Treasury,* or CMT),
10 and (2) reducing the

9 The interest rate used in calculating the present value of expected
future benefits and costs. 10 The Federal Reserve Bank of New York
collects prices for all actively traded U. S. Treasury securities.
Treasury takes this information and calculates a yield curve. The curve is
known as the constant maturity yield curve because it gives an estimate of
the yield on Treasury securities at the maturities shown even if no
current Treasury security has a remaining maturity exactly equal to one of
those points.

present value of the marketable Treasury security by subtracting its
estimated (that is, not paid) *discounted* coupons.

Model Creates Costeffectiveness In general, the model is conceptually
designed to create a marketable Ratio Based

Treasury security comparable to a savings bond such that the repayment on
Calculated *Present

stream (that is, any coupons plus maturity value) to an investor is equal
to Values* for Both that of a savings bond*s net cost to Treasury (that
is, redemption value

adjusted for administrative unit costs and tax revenue implications). The
Alternatives

repayment stream of the created marketable Treasury security and the
adjusted redemption value of the savings bonds represent costs to Treasury
from offering these securities for sale. From this point, the model is
intended to compare the costs of these two financing alternatives on a
present value basis.

According to model documentation, the present value of the marketable
Treasury security is constructed by discounting the savings bond*s
redemption value, adjusted for Treasury*s unit cost of redemption and tax
revenue implications, at an equivalent after- tax rate for marketable
Treasury securities of the same maturity. 11 The model*s calculation of
the redemption value of the Series EE and Series I savings bond is
similar; changes are due to the different structures of the two series.
Table 3

provides additional detail on the redemption value calculation and
variables for both the Series EE and Series I savings bond. Appendix III
provides examples of redemption value calculations for both the Series EE
and Series I savings bond.

11 According to model documentation, the model assumes that the tax
recovery for the marketable Treasury security occurs simultaneously with
each interest payment.

Tabl e 3: Redemption Value Calculation for Series EE and Series I Savings
Bonds 5 Years and Older

Series EE, FV = PV * {[ 1+( i/ 2)] (m/ 6) }, where Series I, FV = PV * {[
1+( CR/ 2)] (m/ 6) }, where FV (future value) = redemption value on FV
(future value) = redemption value on redemption (accrual) date rounded to
the redemption (accrual) date rounded to the nearest cent nearest cent PV
(present value) = redemption value at PV (present value) = redemption
value at the beginning of the semiannual rate period

the beginning of the semiannual rate period i = savings bond rate

CR (composite rate) = fixed rate of return m = number of full calendar
months elapsed plus the semiannual inflation rate during the semiannual
rate period

m = number of full calendar months elapsed during the semiannual rate
period

Sources: Series EE: 31C. F. R. S: 351.2-( k)( 4)( ii)( A); Series I: 31C.
F. R. S: 359. 2-( e)( 4)( ii)( A). Note: Bonds are subject to a 12- month
holding period and those redeemed before 5 years are subject to a 3- month
interest penalty. All calculations of interest are based on a hypothetical
savings bond with a denomination of $25.

The tax revenue implications are reflected in the model as a tax recovery
rate. The model assumes that all savings bond tax recoveries are deferred
until redemption. 12 Tax recovery* the taxes collected on savings bond
earnings that had been deferred until redemption* increases the revenues
to Treasury. The model calculates the effect of tax recovery, in terms of
life cycle costs for the model, by reducing the amount Treasury pays to an
investor at redemption. However, the tax recovery rate is reduced in the
model to reflect the education bond program. In general, as shown in table
1, savings bonds are eligible for tax benefits upon redemption when used
for qualified education expenses.

12 An investor may choose to use the accrual method of accounting, where
increases in the redemption value are reported as interest each year, or
the cash method of accounting, where reporting of interest earned is
postponed until the earlier of the year in which the bond is cashed or
disposed of or the year in which the bond matures.

The administrative unit cost to Treasury from redeeming savings bonds
reduces the revenues to Treasury. The model calculates the effect of
administrative unit redemption cost, in terms of life cycle costs for the
model, by increasing the amount Treasury pays to an investor at
redemption. The model constructs an after- tax *discount factor* based on
a 6- month average of the CMT. 13 At the time of our review, the window
was the 6- month period ending October 31, 2001.

According to BPD officials, the model is intended to perform an additional
step to calculate the *present value* of the marketable Treasury security.
This additional step, according to model documentation, is intended to
reflect the difference between savings bonds, which do not pay periodic

interest, and marketable Treasury securities that do pay such interest in
the form of coupons. The model treats the coupon payments that the
marketable Treasury security would pay as a separate security in which the
tax recovery is simultaneous with the payment. First, the estimated
coupons are created based on the savings bond*s redemption value, adjusted
for Treasury*s unit cost of redemption and tax revenue estimates. Second,
these coupons are *discounted* by an after- tax *discount factor*

based on a 6- month average of the CMT. BPD believes that these coupons
would reduce the benefit of the initial marketable Treasury security and
therefore its *present value.* According to model documentation, these are
subtracted from the *discounted* savings bond final payout, adjusted for
Treasury*s unit cost of redemption and tax revenue implications. The model
calculations for the *present value* of the marketable Treasury security,
however, do not follow model documentation in that the savings bond final
payout is not discounted. BPD

officials confirmed that the model calculations actually construct the
*present value* of the marketable Treasury security as equal to the
redemption value of the savings bond, adjusted for Treasury*s unit cost of
redemption and tax revenue implications, net of estimated *discounted*
coupons.

According to model documentation, the *present value* of the savings bond
is its issue price less the unit cost to issue. The model*s calculation
returns a value that is equal to Treasury receipts from a savings bond,
net of the administrative unit cost of issuance.

13 The tax rate applied to the 6- month average of the CMT is the
unadjusted tax recovery rate provided by Treasury*s Office of Tax Policy.

As previously mentioned, the model is intended to compare a savings bond
and a marketable Treasury security on a present value basis. The
difference, according to a BPD official, is then translated to the total

savings bond population in a given year and converted to a ratio of
millions of dollars in cost per $1 billion borrowed. The model calculation
takes the difference between the two *present values* described above,
projects the difference across the sales volume for the prior fiscal year,
and then converts the difference to a ratio that measures cost savings in
millions per $1 billion borrowed. Appendix IV provides a more detailed
discussion of the model calculations.

BPD*s Definition of Present Although Treasury has presented the model as
measuring costeffectiveness

Value Does Not Follow OMB on a present value basis, most notably in a July
2002 report to

Guidance Congress, the model does not construct a present value comparison
in accordance with OMB guidance. Our review indicates that the model does

not accurately incorporate all the life cycle costs in the present value
calculations for either alternative, does not calculate and apply a true
economic discount factor needed to derive present value that would be
relevant to the time periods, and ultimately compares values that are not
equivalent based on the time value of money. The result is that the
model*s calculation of a cost- effectiveness ratio does not provide an
accurate present value assessment of the alternatives.

As previously discussed, to create comparable borrowing between the two
alternatives, the model is intended to set the repayment stream (that is,
any coupons plus maturity value) of the marketable Treasury security equal
to that of a savings bond*s net cost to Treasury (that is, redemption
value

adjusted for administrative unit costs and tax revenue implications).
However, the model calculation does not incorporate all the life cycle
costs of the savings bond into the marketable Treasury security*s *present
value* calculation * the initial administrative cost of issuing the
savings bond (that is, unit cost to issue) is not included. In addition,
the model calculation does not incorporate all the life cycle costs of the
savings bond into the saving bond*s *present value* calculation * the
redemption value paid to an investor and the final administrative cost of
the savings bond (that is, unit cost to redeem) is not included.

The present value of a bond (or bond price) is equal to the present value
of its expected cash flows (that is, any coupons plus maturity value). As
noted previously, BPD officials confirmed that the model measures what it
terms

the *present value* of the marketable Treasury security as equal to the

redemption value of the savings bond, adjusted for Treasury*s unit cost of
redemption and tax revenue implications, net of estimated *discounted*
coupons. However, this calculation implicitly values current and future
funds as the same. In addition, as previously discussed, the model treats
coupons as if they reduce the benefit of the marketable Treasury security
and therefore its *present value.* However, since the CMT already reflects

the value of the coupons that Treasury is obligated to pay, reducing the
benefit to Treasury essentially counts the coupons twice. Additionally,
the construction of the discount factor in the model departs from OMB
guidance since the model*s *discount factor* does not create an
appropriate time value.

Further, the model treats Treasury receipts from a savings bond, net of
the administrative unit cost of issuance, as the *present value* of the
savings bond. However, the model does not include or discount over time
the savings bond*s redemption value in this calculation, and therefore the
model does not reflect a time value associated with these funds, or
present value as the term is used in OMB guidance or in general finance
usage.

Key Model Parameters The savings bond cost- effectiveness model utilizes
seven key parameters:

and Components May administrative costs, historic redemption patterns,
sales volume, savings

bond yields, maturity period, equivalent marketable yield, and tax
recovery. Not Be Reliable Since 1995, when BPD assumed responsibility for
the model, it has made four model enhancements in an effort to better
reflect changes in the savings bond program, three of which directly
affect these parameters. 14 Table 4 presents BPD*s changes to the three
key model parameters since

1995. However, despite these enhancements, some of the data used to adjust
the model*s parameters have not been updated and do not incorporate
historical experience. In addition, the model contains other inaccuracies
that could affect its reliability and accuracy. Finally, the model has not
been subject to ongoing and periodic reviews by independent external
reviewers, a common practice endorsed by OMB.

14 The fourth change, building cost centers, does not directly affect the
model parameters.

Tabl e 4: BPD Changes to Savings Bond Cost- effectiveness Model Parameters
since 1995 Parameters BPD changes

Redemption The model originally based bond redemption projections on
probabilities current snapshots of redemption activity. To limit the
model*s exposure to short- term market swings, BPD developed redemption
patterns based on longer- term historical data (1957- 93). Activity beyond

Series EE and Series I bonds earn interest for 30 years. maturity However,
not all bonds are redeemed before or at this final maturity; some owners
choose to hold them even though they are no longer earning interest. For
this reason, BPD refined the model to incorporate redemption patterns for
20 years beyond final maturity. Tax recovery Savings bonds have an
education bond feature that is a tax

benefit to investors; participation does not occur until investors
actually redeem their bonds. According to BPD, while the full effects of
the program are not known, BPD estimates the program*s effect in the model
by reducing savings bond tax recovery by 10 percent, an estimate it
believes to be at or above the maximum reduction in tax recovery.

Source: BPD model documentation.

Despite Enhancements, The first enhancement affects a key calculation in
the savings bond costeffectiveness

Model Results May Not Be model: the redemption value, or future value, of
the savings

Accurate bond over time. These values form the basis for constructing a
marketable

Treasury security that is the alternative to savings bonds. The earlier
bonds are redeemed, the less administrative costs are offset. Therefore,
the accuracy of the model*s cost- effectiveness calculation depends
heavily on the accuracy of predicted early redemptions.

The key driver for the redemption values in the model is probability of
redemption. The model accounts for redemption probabilities differently
than in the original model transferred to BPD in 1995. According to BPD
officials, the original model estimated redemption probabilities with the
most recent 13 months of Series EE redemption data. When BPD assumed
responsibility for the model, staff began estimating redemption
probabilities for each denomination of Series EE savings bonds back to
1957. The current model continues to incorporate the historical redemption
patterns from 1957 to 1993. However, citing cost concerns, BPD has not

updated the probabilities to reflect redemption patterns of the most
recent 10 years. Since then, however, a wide variety of financial
instruments have

become available to investors, which could affect the patterns of
redemption. Further, the redemptions do not reflect current interest
rates. As previously discussed, the model also applies the redemption
probabilities of Series EE bonds to similarly priced Series I bonds (that
is, the redemption probabilities for a $100 Series EE bond and a $50
Series I bond are equal). BPD has not estimated the redemption
probabilities of Series I bonds, introduced in 1998, therefore the
redemption probabilities applied in the Series I submodel have no direct
relation to the Series I bond redemption patterns since 1998.

The second model enhancement deals with the maturity period. The original
model assumed the stated maturity date for both securities of 30 years.
BPD adjusted the current model to include an additional 20- year horizon
beyond the stated maturities of savings bonds and marketable Treasury
securities to account for those investors who hold on to the securities
past the maturity date. However, according to a statement made by
Treasury, the regulations governing savings bonds provide that bonds

for which no claims have been filed within 10 years of the maturity date
will be presumed to have been properly paid. The 20- year horizon
enhancement appears to be inconsistent with this Treasury statement.
Further, adding the 20 years appears to be inconsistent with OMB guidance
for the alternatives to be compared over their stated life cycles, which
for both alternatives should be the 30- year maturity period.

Finally, the third enhancement to the model adjusts the tax recovery rate
for savings bonds by 10 percent to account for the education bond program.
The 10 percent adjustment was an estimate since there was no program
experience to guide the adjustment. The education bond benefit, which
allows for the exclusion of interest earned subject to certain rules and
limits, applies only to savings bonds. Adjusting the tax recovery rate

for savings bonds to reflect this program is appropriate. However, the
education bond program was introduced in 1990, providing program
experience of at least 12 years. BPD has not analyzed whether the
historical experience is consistent with the 10 percent adjustment and
thus does not know whether the adjustment improves the model*s accuracy.

Discontinuance of 30- Year A BPD official told us that the equivalent
marketable yield, or CMT, has the

Marketable Treasury Bonds strongest impact on model results. The CMT is
the basis for BPD*s

Directly Affects the *discount factor* used to derive the *present value*
of the alternative

Marketable Yield Model marketable Treasury security. Treasury discontinued
the issuance of the 30year Treasury bond in October 2001, however,
directly affecting how the

Parameter discount rate is calculated.

Beginning on February 18, 2002, Treasury ceased publication of the 30-
year constant maturity series. Instead, Treasury publishes a Long- Term
Average Rate and a linear extrapolation factor that can be added to the
Long- Term Average Rate to allow interested parties to compute an
estimated 30- year rate. 15 BPD staff told us that BPD is still
considering how to reflect this

change in the model*s *discount factor.* Other Model Features Could

The model coding contains additional inaccuracies that, in comparison to
Affect the Reliability of

the present value inaccuracy, appear to have a minor impact. Also, the
Model Results

model*s use of older software and lack of controls over changes may allow
additional errors to remain undetected.

A coding error in the bonds redeemed calculation occurs in some
denominations for both submodels. From the time of issuance through 4
months outstanding, the formula uses the probability of redemption for the
month following the correct month. BPD staff told us this error occurred
during model maintenance by BPD staff. Additionally, BPD staff told us
that this error would be corrected (app. IV describes the correction for
this calculation).

Another inaccuracy involves the redemption value calculation in the Series
I submodel. The calculation there does not match the savings bond
regulations since the redemption value does not reflect the accrued value
at the beginning of each semiannual period.

15 The Long- Term Average Rate is the arithmetic average of the bid yields
on all outstanding fixed- coupon securities (i. e., excludes inflation-
indexed securities) with 25 years or more remaining to maturity. This
series first appeared on February 19, 2002, following discontinuation of
the 30- year Treasury constant maturity series.

In addition, the savings bond cost- effectiveness model is maintained in
older software. 16 Use of the older software can be appropriate, but does
increase the difficulty in maintaining and updating the model without
introducing errors. As noted above, BPD acknowledged one such error. BPD
staff told us that they have not moved the model into current software

because of concerns that the software*s features used to calculate the
scenario effects of program changes will not function properly.

During the course of our review, we also found that the model contained
unlabeled and undocumented data fields. BPD staff told us that these
fields were remnants of scenarios that staff had run on the model in the
past, which were accidentally left in the model when it was sent to us for
review. One aspect of an effective general control and application
environment is

the protection of data, files, and programs from unauthorized access,
modification, and destruction. BPD staff could, by saving scenario data in
the master model file, inadvertently add, alter, or delete sensitive data
or coding.

BPD Has Not Requested an While OMB guidance calls for an independent
external review of costeffectiveness

Independent External models, as well as assessments of their accuracy and

Review of the Model reliability, BPD has not commissioned such analysis.
As a result, BPD

cannot assess the accuracy and reliability of the model. OMB guidelines
provide elements for a cost- effectiveness analysis and promote subjecting
such analyses to independent external reviews. Verification and explicit
assumptions are two of the four elements OMB identified for a cost-
effectiveness analysis. OMB states that verification through retrospective
studies to determine whether anticipated benefits and costs have been
realized are potentially valuable. Such studies can be used to determine
necessary corrections in existing programs, and to improve future
estimates of benefits and costs in these programs. Agencies should have a
plan for periodic, results- oriented evaluation of program

effectiveness. OMB adds that a cost- effectiveness analysis should be
explicit about the underlying assumptions used to arrive at estimates of
future benefits and costs and include a statement of the assumptions, the
rationale behind them, and a review of their strengths and weaknesses. Key

16 The model is maintained in version 5 of a spreadsheet program that is
currently marketed in version 9.

data and results should be reported to promote independent analysis and
review.

OMB guidance also acknowledges that estimates are typically uncertain
because of imprecision in both underlying data and modeling assumptions
and states that analyses should attempt to characterize the sources and
nature of uncertainty. In analyzing uncertain data, objective estimates of
probabilities, such as those derived from market data, should be used
whenever possible. Any limitations of the analysis because of uncertainty
or biases surrounding the data or assumptions should be discussed. In
addition, major assumptions should be varied and net present value and

other outcomes recomputed to determine how sensitive outcomes are to
changes in the assumptions. In general, sensitivity analysis should be
considered for estimates of benefits and costs, the discount rate, the
general inflation rate, and distributional assumptions of probabilities.
Models used in the analysis should be well documented and, where possible,
available to facilitate independent review.

BPD has not independently verified the cost- effectiveness model.
According to BPD officials, a survey and investigations team from the
House Committee on Appropriations, which visited BPD*s Parkersburg, West
Virginia, location in 1996, conducted the only review of the savings bond
cost- effectiveness model. Since the team did not initiate further
inquiry, BPD officials said they assumed that the team had found no issues
requiring further review and discussion. Although BPD and Treasury
officials have maintained in congressional testimonies and in a recent
report that the model results are accurate, to date neither BPD nor
Treasury has requested an independent external review to validate the
savings bond cost- effectiveness model. Further, while BPD has used the
model to estimate the potential effects of changes in the savings bond
program, it has not sought to conduct any sensitivity analysis that could
reveal the model*s limitations.

Conclusions Our review of BPD*s savings bond cost- effectiveness model
indicates that the model*s results do not provide BPD, Treasury, OMB, or
Congress

appropriate information to assess the relative costs of the savings bond
program versus marketable Treasury securities as a source of raising
funds. Although the model was intended to compare savings bonds and
marketable Treasury securities on a present value basis, the model*s
comparison is not based on present values and thus does not follow OMB
guidance and common financial economics practice. As previously

discussed, a discount factor brings future costs and revenues into present
value terms to permit comparisons. While the model calculates a value that
BPD terms a *discount factor,* the calculation is incorrect and, as a
result, the model does not correctly calculate the present value of the
alternatives.

In addition, this calculated value is not applied consistent with the
model*s conceptual design and OMB guidance. Therefore the cost-
effectiveness ratio that the model creates does not provide BPD with the
information it needs to assess the relative costs of the savings bond
program and marketable Treasury securities to determine which financing
approach

offers a greater financial benefit to Treasury. The model also uses data
that may not be reliable. In particular, the probabilities of redemption
for the Series EE bond are 10 years out of date and BPD has not estimated
any probabilities of redemption that have any direct relation to the
Series I bond redemption patterns since 1998 when these bonds were first
introduced. The model also incorporates a time horizon that extends beyond
the life cycles of either security and distorts

the cost- effectiveness analysis, allowing a longer time period for the
administrative costs of savings bonds to be offset. Finally, the reduction
in the tax recovery rate to reflect the education bond program is not
based on actual program experience and may be over- or underestimating the

financial impact of the program to Treasury. Given that the model uses
data that may not be reliable and BPD has not decided how to reflect the
discontinuance of the 30- year constant maturity series in the model*s
*discount factor,* we did not make corrections to the model. As a result,
we do not know to what degree the present value errors and these data
affect the model*s cost- effectiveness ratio.

BPD*s ability to assess the impact of policy changes to the savings bond
program, project cost centers for the savings bond program, and determine
cost- effectiveness in relation to marketable Treasury securities is
hampered by fundamental errors in the present value calculations. When

combined with model data that may not be reliable, the need for
independent reviews of cost- effectiveness and sensitivity analyses, which
are called for in OMB Circular A- 94, becomes particularly important.

Recommendations Because of the importance of measuring the cost-
effectiveness of financing mechanisms used to fund the operations of the
federal government, we recommend that the Secretary of the Treasury direct
that the Commissioner of the Public Debt in conjunction with Treasury*s
Office of

Domestic Finance revise the savings bond cost- effectiveness model to
estimate the relative (or net) present value of the life cycle costs of
issuing savings bonds versus marketable Treasury securities.

As part of that revision, the Commissioner should do the following: 
Update the Series EE probabilities of redemption to capture any

changes in redemption patterns caused by the proliferation of financial
products or interest rate changes in the last 10 years. At a minimum,
Treasury and BPD should collect data for a sample of the more recent time
period to test the validity of the 1957- 93 data.

 Base Series I bond redemption patterns on actual experience with those
bonds.

 Validate the cost estimate of education bond program participation based
on the historical, 12- year data to date.

 Replace the 30- year equivalent marketable rate.  Update the software
used for the model to enhance BPD*s ability to

maintain the model and protect against unauthorized modification.  Put in
place a process for ongoing verification, sensitivity analysis, and

independent external review of the model. Agency Comments and In a June 4,
2003, letter commenting on a draft of this report, the Our Evaluation

Commissioner of the Public Debt wrote that the cost- effectiveness model
conformed to OMB Circular A- 94, sec. 5b, since it *measures Treasury*s
relative financial benefit from two borrowing options whose overall costs

are identical. Treasury*s benefit from each alternative is the amount of
financing realized at the time borrowing occurs.* Noting that the model
*is not intended to be a classic present value exercise,* the Commissioner
explained that the model *compares the present value of a projected stream
of payments associated with the sale of savings bonds with the amount
realized from the sale.* BPD suspects it may have inadvertently misused
the terms *discount factor* and *present value* in internal Treasury
discussions. Further, BPD said that we did not understand the model*s
life- cycle duration, the minimum holding period, and the Series I
redemption values.

The Commissioner noted that while BPD disagreed with our conclusion that
the model*s comparisons were invalid, BPD generally agreed with our
recommendations for updating the model. However, the Commissioner also
noted that, with Treasury*s goal of moving toward a totally electronic
environment for the savings bond program, *we think it's appropriate for
us to shelve the existing model, which is based on paper bonds, and focus
our attention on the transition to a fully electronic program.*

We disagree with the Commissioner*s portrayal of the cost- effectiveness
model as measuring ** Treasury*s relative financial benefit from two
borrowing options whose overall costs are identical.* Neither the model
documentation nor BPD*s public statements are consistent with this
explanation. BPD*s model documentation explained that the savings bond
cost- effectiveness model compares the projected costs for $1 billion of
new savings bond borrowing and those for $1 billion in marketable Treasury
securities on a present value basis. In March 2002 testimony before the
House Appropriations Subcommittee on Treasury, Postal Service, and General
Government, the Commissioner described the model as one that ** measures
the cost- effectiveness of savings bonds vis- `a- vis borrowing equivalent
amounts of money with marketable issues. *Our latest

calculations indicate that every $1 billion borrowed through Series EE and
Series I savings bonds is $35 million less expensive than borrowing with
marketable securities.* Additionally, the July 2002 report to the House
Committees on Appropriations and Financial Services explained the savings
bond cost- effectiveness model as one based on a present value analysis:

The model compares the amount of funds raised by selling a given amount of
Series EE and I bonds in various denominations and the present value of
the future costs to Treasury in connection with issuing the bonds. If the
amount raised is greater than the present value of the future costs
associated with the bonds, taking into account administrative costs and
tax benefits, then the program is deemed to be cost- effective.

While we agree that an approach comparing the benefits of two approaches
having identical costs would be a valid alternative to the present value
approach that we described in our report, the model*s calculations do not

support this analysis. Marketable Treasury securities and savings bonds
can be compared by either comparing the costs of raising identical sums
using two alternative debt instruments or by comparing the funds raised
when the costs of the two instruments are identical. However, if BPD were
to base the cost- effectiveness model on a comparison of the *financial
benefit from two borrowing options whose overall costs are identical,* the
key issue that this approach would have to address is that marketable

Treasury securities and savings bonds do not necessarily have identical
overall costs.

The challenge of this modeling approach would be to appropriately measure
costs over time of the two options in a way that would permit treating the
costs as identical. Since the costs vary over time, accurately calculating
the present value of the costs of the two options would be an

essential step. However, we did not find, for reasons noted in the report,
that the model accurately or reliably calculates the present value of the
stream of costs associated with the sale of savings bonds. In particular,
the report explains that the discount rate used to calculate the present
value of the projected stream of costs is inappropriate.

We have changed the report to recognize that BPD allocates a small number
of redemptions prior to 6 months to reflect hardship waivers; these
waivers are not discussed in BPD*s model documentation. We have not,
however, changed the report in response to the Commissioner*s statements
regarding life cycle costs and Series I redemption values. As the report
notes, the 20- year extension on the life cycle appears to be inconsistent

with regulations that provide that bonds for which no claims have been
filed within 10 years of the maturity date are presumed to have been
properly paid. Our analysis of the Series I savings bond redemption value
found that the formula does not correctly recognize the savings bond*s
accrued value at the beginning of each semiannual period.

The Commissioner*s letter noted that BPD generally agrees with the
recommendations for updating the model, but that BPD believes it
appropriate to *shelve* the existing model and focus on the transition to
a fully electronic retail securities program. We agree that the importance
of many administrative costs will decline if BPD successfully transforms
the current paper- based savings bond program to an electronic
environment. Further, there may be changes in investors* purchases and
redemptions of

savings bonds in an electronic environment. However, important differences
will continue to exist between the costs of savings bonds and marketable
Treasury securities, particularly the payment of coupons and the tax
treatment of the two debt instruments. A model that accurately recognizes
these differences will continue to be as crucial to understanding the
relative cost- effectiveness of the two debt instruments as it is in the
current paper- based environment. That model, furthermore, will have to be
updated regularly to reflect the effect of any changes in investor
preferences and behavior on the savings bond program

as it moves into this new electronic environment. Our recommendations will
remain appropriate for assessing the cost- effectiveness of the savings
bond program managed in an electronic environment.

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from
its date. At that time, we will send copies to the Secretary of the
Treasury, the Treasury Under Secretary for Domestic Finance, and the
Commissioner of the Public Debt. Copies will be made available to others
upon request. In addition, this report is also available at no charge on
GAO*s Web site at http:// www. gao. gov.

If you have any further questions, please call me at (202) 512- 8678 or
mccoolt@ gao. gov or James M. McDermott, Assistant Director, at (202)
5125373 or mcdermottjm@ gao. gov.

Sincerely yours, Thomas J. McCool Managing Director, Financial Markets and
Community Investment

Appendi Appendi xes I x Objectives, Scope, and Methodology To assess the
savings bond cost- effectiveness model, we obtained an electronic copy of
the model as of fiscal year 2001 in addition to hard- copy background and
supporting documentation. Given that the model is maintained in older
software, Lotus 1- 2- 3 version 5, we reviewed the model using the same
program and version to avoid corruption or translation errors. We then
identified and reviewed the various regulations regarding the Series EE
and Series I savings bond structure on which the costeffectiveness model
is based. In addition, we reviewed relevant portions of Internal Revenue
Service publications regarding the tax implications of the savings bond
program. We compared these information sources with the model coding to
verify that the calculations reflect the structure of the savings bond
program.

To determine if the model constructed a present value comparison, we
analyzed the model coding and supplied documentation to determine if (1)
the model*s design matched Office of Management and Budget and

conventional approaches and (2) the model*s calculations accurately
implement the model*s design to arrive at a present value comparison.

Given that the model calculations did not result in a present value
comparison, we did not assess the accuracy or completeness of the data
input used in the various model parameters and assumptions. As a result,
we do not know what effect such data had on the model*s costeffectiveness
calculation.

We conducted our work in Washington, D. C., from September 2002 through
April 2003 in accordance with generally accepted government auditing
standards.

Appendi I I x Present Value Theory and Model Calculations The present
value of a bond (or, bond price) is equal to the present value of its
expected cash flows (any coupons plus maturity value). Each cash flow must
be discounted at the relevant rate for the time period.

t 0 1 2 3 ... n- 1 n n+ 1 ...

discount rate r 0,1 r 1,2 r 2,3 ... r n- 2,n- 1 r n- 1,n r n, n+ 1 ...

cash flows coupon 0 C 1 C 2 C 3 ... C n- 1 C n 0 ...

face 0 0 0 0 ... 0 M 0 ... Here, t represents time, where t = 0 represents
the present moment, t = 1 represents the end of the first period, t = 2
represents the end of the second period, and so on. A given cash flow is
specified to occur at the end of the

given period. The discount rate, r s- 1,s , is the appropriate one- period
discount rate from s * 1 to s, at t = s (for s = 1, *, n). 1 The
appropriate oneperiod discount factor (or deflator) is as follows:

    1 1

( 1 + r s * 1 , s ) For example, to determine the value of C 1 at t = 0,
the appropriate discount rate is r and the appropriate one- period
discount factor is as follows: 2

0,1  ; thus the present value at t = 0 of C
received at t = 1 is:

   

C 1

( 1 + r ) 1 ( 1 + r ) 0 , 1 0 , 1 For the cash flows specified in the
above table, which are designed to mimic the cash flows of an n- period
bond paying coupon C s at t = s (for s = 1, *, n) and M at maturity, t =
n, the present value at t = 0 is as follows:

1 In many explanations of present value, the discount rate is held
constant, removing the need for r s- 1,s to vary over time. 2 The factor
that translates expected benefits or costs in any given future year into
present value terms.

C t M

PV t = 0 (coupon + face) =

    +
    - , in which t = 1 t

(

1 + r s * 1, s ) (

1 + r t * 1, t ) s = 1 t =

1 t

(

1 + r s * 1, s ) = ( 1 + r 0 , 1 ) *1 ( + r 1 , 2 ) *...* ( 1 + r t * 1, t
) for some t >2, for example.

s = 1 Based on the above table, the following illustrations assume that
the

periods correspond to years (for example t = 1 represents the end of the
first year).

The present value of a one- period (that is 1- year) bond is as follows:

PV=  C 1

- +  M - ( 1 + r 0 , 1 ) ( 1 + r 0 , 1 ) The present
value of a two- period bond is as follows:

PV =  C 1

- ++  C 2
    M

( 1 + r 0 , 1 ) ( 1 + r 0 , 1 ) ( 1 + r 1 , 2 ) ( 1 + r 0 , 1 ) ( 1 + r 1
, 2 ) Note that if r is identical through all time periods, such that r =
r 0,1 = r 1,2 , the above two- time period present value is equivalent to
the following:

PV =  C 1

++  C 2  M

( 1 + r) ( 1 + r) 2 ( 1 + r) 2 The present value of a three- period bond
is as follows:

PV =  C 1

- ++  C 2
    C 3

+  M

( 1 + r 0 , 1 ) ( 1 + r 0 , 1 ) ( 1 + r 1 , 2 ) ( 1 + r 0 , 1 ) ( 1 + r 1
, 2 ) ( 1 + r 2 , 3 ) ( 1 + r 0 , 1 ) ( 1 + r 1 , 2 ) ( 1 + r 2 , 3 ) In
the illustrations above, the rate or rates used to discount each component
is relevant to the time period.

Model Calculation for the *Present Value* of the Marketable Treasury
Alternative Based on model documentation, the coupon payments are
subtracted to

reflect that the coupon payments on the Treasury alternative would reduce
the benefit Treasury would receive from the initial security.

Redemption Value n substituted for M in the prior equation, where n =
months outstanding

Redemption Value n * r n substituted for C in the prior equation, where n
= months outstanding r n = Monthly after- tax *discount rate* (derived
from CMT), where n =

months outstanding The *present value* of a 1- month marketable
alternative is calculated as follows:

PV = Redemption Value *
    Redemption Value 1
*r 1

1

( 1 + r ) 1 However, the *present value* of a 2- month marketable
alternative is calculated as follows:

PV = Redemption Value *
    Redemption Value
2 * r 2

+  Redemption
Value 2 * r 2 2

( 1 + r ) ( 1 + r ) ( 1 + r ) 2 2 1 Further, the *present value* of a 3-
month marketable alternative is calculated as follows:

PV = Redemption Value *
    Redemption Value
3 * r 3

+  Redemption
Value 3 * r 3 + 
Redemption Value 3 * r 3 3

( 1 + r ) ( 1 + r ) ( 1 + r ) ( 1 + r ) ( 1 + r ) ( 1 + r ) 3 3 2 3 2 1
The discounting is incorrect in the model, and is carried through for
periods two and greater. Appendix IV provides a more detailed discussion
of the model calculations, including the monthly after- tax *discount
rate* mentioned above.

Future Value Examples for Series EE and Series I Savings Bonds for Bonds 5
Years and

Appendi I I I x Older All calculations of interest are based on a
hypothetical savings bond with a denomination of $25, 1 such that for the
following:

Series EE, FV = PV * {[ 1+( i/ 2)] (m/ 6) } Example: An EE savings bond
rate of 5.07 percent will result in a newly purchased hypothetical $25
bond increasing in value after 6 months to $12.82, when rounded to the
nearest cent.

At the beginning of the first semiannual rate period, the present value
(PV) is equal to $12.50 such that

Month 1: FV = 12.50 * {[ 1 + (. 0507/ 2)] (1/ 6) = 12.55 Month 2: FV =
12.50 * {[ 1 + (. 0507/ 2)] (2/ 6) = 12.60 Month 3: FV = 12.50 * {[ 1 + (.
0507/ 2)] (3/ 6) = 12.66 Month 4: FV = 12.50 * {[ 1 + (. 0507/ 2)] (4/ 6)
= 12.71 Month 5: FV = 12.50 * {[ 1 + (. 0507/ 2)] (5/ 6) = 12.76 Month 6:
FV = 12.50 * {[ 1 + (. 0507/ 2)] (6/ 6) = 12.82 Thus, a $5,000 bond
purchased at the same time as the hypothetical $25 bond will be worth
$2,564 after 6 months ([$ 5, 000 -: $25] x $12.82 = $2, 564).

The PV variable changes in months 7 through 12 such that the PV is equal
to the redemption value at the beginning of the semiannual rate period,
which in the above example is equal to month 6 future value (FV) such that

Month 7: FV = 12. 82 * {[ 1 + (. 0507/ 2)] (1/ 6) = 12.87 Month 8: FV =
12. 82 * {[ 1 + (. 0507/ 2)] (2/ 6) = 12.93 Month 9: FV = 12. 82 * {[ 1 +
(. 0507/ 2)] (3/ 6) = 12.98 Month 10: FV = 12. 82 * {[ 1 + (. 0507/ 2)]
(4/ 6) = 13.04 Month 11: FV = 12. 82 * {[ 1 + (. 0507/ 2)] (5/ 6) = 13.09
Month 12: FV = 12. 82 * {[ 1 + (. 0507/ 2)] (6/ 6) = 13.14 The PV variable
changes in months 13 through 18 such that the PV is equal to the
redemption value at the beginning of the semiannual rate period, which in
the above example is equal to month 12 FV, and so on.

Sources: 31C. F. R. S: 351.2-( k)( 4)( ii)( A), U. S. Savings Bond Series
EE Information Statement for bonds issued May 1997 or later, and GAO
analysis.

Note: Savings bonds are subject to a 12- month holding period and those
redeemed before 5 years are subject to a 3- month interest penalty.

1 Series EE - 31C. F. R. S:351.2-( k)( 1)( iii); Series I * 31C. F. R. S:
359.2-( e)( 1)( vi).

Series I, FV = PV * {[ 1+( CR/ 2)] (m/ 6) } Example: An I composite rate
of 5.07 percent will result in a newly purchased hypothetical $25 bond
increasing in value after 6 months to $25.63, when rounded to the nearest
cent.

At the beginning of the first semiannual rate period, the PV is equal to
$25 such that

Month 1: FV = 25 * {[ 1 + (. 0507/ 2)] (1/ 6) = 25.10 Month 2: FV = 25 *
{[ 1 + (. 0507/ 2)] (2/ 6) = 25.21 Month 3: FV = 25 * {[ 1 + (. 0507/ 2)]
(3/ 6) = 25.31 Month 4: FV = 25 * {[ 1 + (. 0507/ 2)] (4/ 6) = 25.42 Month
5: FV = 25 * {[ 1 + (. 0507/ 2)] (5/ 6) = 25.53 Month 6: FV = 25 * {[ 1 +
(. 0507/ 2)] (6/ 6) = 25.63 Thus, a $5,000 bond purchased at the same time
as the hypothetical $25 bond will be worth $5,126 after 6 months ([$ 5,
000 -: $25] x $25.63 = $5, 126).

The PV variable changes in months 7 through 12 such that the PV is equal
to the redemption value at the beginning of the semiannual rate period,
which in the above example is equal to month 6 FV such that

Month 7: FV = 25. 63 * {[ 1 + (. 0507/ 2)] (1/ 6) = 25.74 Month 8: FV =
25. 63 * {[ 1 + (. 0507/ 2)] (2/ 6) = 25.84 Month 9: FV = 25. 63 * {[ 1 +
(. 0507/ 2)] (3/ 6) = 25.95 Month 10: FV = 25. 63 * {[ 1 + (. 0507/ 2)]
(4/ 6) = 26.06 Month 11: FV = 25. 63 * {[ 1 + (. 0507/ 2)] (5/ 6) = 26.17
Month 12: FV = 25. 63 * {[ 1 + (. 0507/ 2)] (6/ 6) = 26.28 The PV variable
changes in months 13 through 18 such that the PV is equal to the
redemption value at the beginning of the semiannual rate period, which in
the above example is equal to month 12 FV, and so on.

Sources: 31C. F. R. S: 359.2-( e)( 4)( ii)( A), U. S. Savings Bond Series
I Information Statement, and GAO analysis. Note: Savings bonds are subject
to a 12- month holding period and those redeemed before 5 years are
subject to a 3- month interest penalty.

Appendi V I x Model Calculations Detail The cost- effectiveness
calculations in the Series EE and Series I submodels, as well as preceding
steps, are similar; coding changes are due to the different structures of
the two series, as noted in table 3, and modeling errors, as previously
discussed. Though not shown here, both submodel calculations for savings
bond redemption value incorporate the 3- month interest penalty for bonds
redeemed before 5 years from issue.

Calculations for Marketable Treasury *Present Value* * Five Steps

Where n = months outstanding Step 1: Savings bond redemption value n
respective to denomination (as

previously shown in table 3). Step 2: Savings bond redemption value n
after unit cost to redeem and tax

revenue implications = Adjusted Redemption Value n : Redemption Value n *
(( Redemption Value n * savings bond issue price) * savings bond tax
recovery rate) + unit cost to redeem 1 Step 3: Algebraic after- tax
*present value discount factor* n (comprising

several component calculations): 3a. after- tax semiannual CMT n = (6-
month average of CMT n /2) * (1 * tax recovery rate)

3b. after- tax semiannual CMT n expressed as a monthly rate = Y n = ((
after- tax semiannual CMT + 1) ^ (1/ 6) ) * 1 n 3c. Y n algebraic
conversion leading to after- tax *present value

discount factor*: 3c. 1. S n = 1/( 1 + Y n ) 3. c. 2 Month 1 FAC (that is,
FAC 1 ) = S 1 ; for all other n, FAC n = S n * (FAC n- 1 + 1)

3d. After- tax *present value discount factor* n = FACT n = 1 * (Y n * FAC
n )

Step 4: Algebraic after- tax *present value discount factor* n expressed
as a monthly rate: Ie = ((( 1/ FACT ) ^ (1/ n) ) * 1)

n n 1 Adjusted for the education bond program such that savings bond tax
recovery = tax recovery rate provided by the Treasury*s Office of Tax
Policy * ( 1 - .10).

Step 5: Treasury *present value* : Adjusted Redemption Value / (1 + Ie ) ^
n n n n The resulting marketable Treasury *present value* n = Adjusted
Redemption

Value n * FACT n , which returns the following: Month 1 marketable
Treasury *present value* = Adjusted Redemption Value 1 - Adjusted
Redemption Value 1 * Y 1 / (1 + Y 1 )

Month 2 marketable Treasury *present value* = Adjusted Redemption Value 2
* [Adjusted Redemption Value 2 * Y 2 / (1 + Y 2 ) + Adjusted Redemption
Value 2 * Y 2 / (1 + Y 2 )( 1 + Y 1 )], and so on.

Calculation for Savings Bond *Present Value* * One Step

Savings bond issue price respective to denomination * savings bond unit
cost to issue

Calculations for Cost- effectiveness Ratio * Six Steps

Where n = months outstanding Step 1: *present value* difference n Savings
bond *present value* - marketable Treasury *present

value* n Step 2: Bonds redeemed n : Month 0 bonds redeemed = probability
of redemption 0 * savings bond sales volume respective to denomination

Month 1 bonds redeemed = probability of redemption 1 * (savings bond sales
volume respective to denomination * bonds redeemed 0 ); for all other
bonds redeemed n = probability of redemption n *

(savings bond sales volume respective to denomination * bonds redeemed 0..
n )

Step 3: Projected *present value* difference n : *present value*
difference n * bonds redeemed n Step 4: Cumulative projected *present
value* difference: Month 0 cumulative projected *present value* difference
=

projected *present value* difference 0 ; for all other cumulative
projected *present value* difference n = projected *present value*
difference n + cumulative projected *present value* difference n- 1

Step 5: Bonds outstanding n : Month 0 bonds outstanding = sales volume
respective to denomination * bonds redeemed 0 ; for all other bonds
outstanding n = bonds outstanding n- 1 - bonds redeemed n

Step 6: Cost- effectiveness ratio for each denomination (comprising
several component calculations):

6a. (cumulative projected *present value* difference 50 years * pieces
outstanding 50 years * savings bond unit cost to issue)

6b. (sales volume respective to denomination * savings bond issue price)

6c. (result of 6a. / results of 6b.) * 1,000 The resulting cost-
effectiveness calculation returns a ratio of millions saved per $1 billion
borrowed.

Additional Calculations That Are Not Relevant to the Model*s
Costeffectiveness Calculation

Though not detailed above, the model includes five calculations that do
not produce output relevant to the cost- effectiveness calculation.

In addition, the model performs an additional step in the after- tax
*present value discount factor* calculation that is not necessary. The
model creates an after- tax *present value discount factor* expressed as a
monthly rate, shown above as step 4 in the calculations for the marketable
Treasury *present value.* Step 5, as shown above in the calculations for
the marketable Treasury *present value,* reverses this calculation through
the 30- year life cycle of the marketable Treasury alternative.

Appendi V x Comments from the Bureau of the Public Debt Note: GAO comments
supplementing those in the report text appear at the end of this appendix.

See comment 1.

See comment 2. See comment 3.

See comment 4.

GAO Comments The following are GAO's comments on the Bureau of the Public
Debt's (BPD) letter dated June 4, 2003.

1. As we note in this report's Agency Comments and Our Evaluation section,
the approach that BPD outlines here would be an appropriate alternative to
the cost- effectiveness model based on a present value analysis described
in the report. The description in this report is based on documentation
for the cost- effectiveness model that BPD provided in an October 16,
2002, meeting; on a July 2002 report that BPD prepared for the House
Committees on Appropriations and on Financial Services; and on March 2002
testimony by the Commissioner of the Public Debt before the House
Appropriations Subcommittee on Treasury, Postal Service, and General
Government.

2. As we note in the report, the 20- year extension is not consistent with
a statement previously made by the Department of the Treasury regarding
the presumption of payment 10 years beyond the maturity date. We agree
that all administrative costs are included in the model. As the

report notes, however, the model calculation does not accurately
incorporate these costs in computing the present value of the marketable
Treasury security and the savings bond.

3. Based on BPD's explanation that redemptions within 6 months of a
savings bond's issuance are sometimes granted in hardship cases, we have
deleted discussion of their inclusion in the model from the report.

4. As we note in the report, the model's compound interest formula for the
Series I bonds does not recognize the bond's accrued value at the
beginning of each semiannual period. When calculated out over 30 years,
the difference between the formula in the regulation and the model's
calculation is minor but still exists.

Appendi VI x GAO Contacts and Staff Acknowledgments GAO Contacts Thomas J.
McCool, (202) 512- 8678 James M. McDermott, (202) 512- 5373
Acknowledgments In addition to those named above, Heather T. Dignan,
Mitchell B. Rachlis,

and Barbara M. Roesmann made key contributions to this report.

(250098)

a

GAO United States General Accounting Office

Treasury has several alternative vehicles for issuing debt to the public.
A substantial majority of that debt is issued in the form of marketable
Treasury securities. U. S. Savings Bonds today account for about 3 percent
of total Treasury securities outstanding. A majority of these bonds have
lower minimum denominations or face amounts than marketable Treasury
securities and generally pay lower interest rates as well, but provide the
same assurance of the full faith and credit of the United States, making
them an alternative for investors unable or unwilling to pay the minimum

denominations of marketable Treasury securities. Savings bonds continue to
be issued as paper certificates, rather than in the format of the *book
entry* system for marketable Treasury securities; however, this increases
the administrative costs of issuing, servicing, and redeeming savings
bonds, relative to the marketable securities.

The cost- effectiveness of the savings bond program depends on whether
Treasury*s savings* in terms of the generally lower interest payments on
savings bonds relative to marketable Treasury securities* exceed the costs
that Treasury incurs with processing the paper savings bond certificates.
The question is complicated by the fact that the interest savings occur
over the life of a savings bond, and that Treasury pays costs upfront at
issuance and in the future when the savings bond is redeemed.

As prescribed by the Office of Management and Budget and common financial
practice, in dealing with savings or costs over time, the value of future
savings or costs must be discounted to present value. Treasury has
reported that its cost- effectiveness model does calculate the present
values of the relative costs of savings bonds and marketable Treasury
securities. However, because of flaws in the design and implementation of
the spreadsheet used to calculate these present values, the cost-
effectiveness model*s results do not provide the Bureau of the Public
Debt, Treasury, or

Congress with accurate information that is needed to assess the relative
costs of issuing debt through savings bonds or marketable Treasury
securities, or to manage the savings bond program. Further, the bureau has
not updated some key data elements in the cost- effectiveness model. In
particular, citing budget considerations, the bureau uses data on the
redemption patterns for savings bonds that date back to 1993, which do not
reflect the effects of the wide variety of financial instruments now
available to investors. While the Treasury generally pays

lower interest rates on U. S. Savings Bonds than it does on other forms of
borrowing from the public, it also incurs substantially higher
administrative costs to issue and redeem the paper savings bond
certificates. To determine whether

these higher administrative costs exceed its interest rate savings,
Treasury*s Bureau of the Public Debt uses a spreadsheet model to compare
the costs of issuing Series

EE and Series I savings bonds with those of issuing marketable Treasury
securities. GAO was asked to review this model to judge its reliability in
measuring the relative costs of Treasury*s

borrowing alternatives. GAO is recommending that the Bureau of the Public
Debt revise the cost- effectiveness model so

that it provides reliable information on the costs of the savings bond
program. As part of that revision, the bureau should consider updating
some of the key data on

the performance of the savings bond program, particularly on savings bond
redemption patterns.

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 513. To view the full report,
including the scope and methodology, click on the link above. For more
information, contact Thomas J. McCool at (202) 512- 8678 or McCoolT@ gao.
gov. Highlights of GAO- 03- 513, a report to the

Chairman, Subcommittee on Transportation, Treasury, and Independent
Agencies, Committee on Appropriations, House of Representatives June 2003

SAVINGS BONDS

Actions Needed to Increase the Reliability of Cost- effectiveness Measures

Page i GAO- 03- 513 Savings Bonds

Contents

Contents

Page ii GAO- 03- 513 Savings Bonds

Page 1 GAO- 03- 513 Savings Bonds United States General Accounting Office
Washington, D. C. 20548

Page 1 GAO- 03- 513 Savings Bonds

A

Page 2 GAO- 03- 513 Savings Bonds

Page 3 GAO- 03- 513 Savings Bonds

Page 4 GAO- 03- 513 Savings Bonds

Page 5 GAO- 03- 513 Savings Bonds

Page 6 GAO- 03- 513 Savings Bonds

Page 7 GAO- 03- 513 Savings Bonds

Page 8 GAO- 03- 513 Savings Bonds

Page 9 GAO- 03- 513 Savings Bonds

Page 10 GAO- 03- 513 Savings Bonds

Page 11 GAO- 03- 513 Savings Bonds

Page 12 GAO- 03- 513 Savings Bonds

Page 13 GAO- 03- 513 Savings Bonds

Page 14 GAO- 03- 513 Savings Bonds

Page 15 GAO- 03- 513 Savings Bonds

Page 16 GAO- 03- 513 Savings Bonds

Page 17 GAO- 03- 513 Savings Bonds

Page 18 GAO- 03- 513 Savings Bonds

Page 19 GAO- 03- 513 Savings Bonds

Page 20 GAO- 03- 513 Savings Bonds

Page 21 GAO- 03- 513 Savings Bonds

Page 22 GAO- 03- 513 Savings Bonds

Page 23 GAO- 03- 513 Savings Bonds

Page 24 GAO- 03- 513 Savings Bonds

Page 25 GAO- 03- 513 Savings Bonds

Page 26 GAO- 03- 513 Savings Bonds

Appendix I

Page 27 GAO- 03- 513 Savings Bonds

Appendix II

Appendix II Present Value Theory and Model Calculations

Page 28 GAO- 03- 513 Savings Bonds

Appendix II Present Value Theory and Model Calculations

Page 29 GAO- 03- 513 Savings Bonds

Page 30 GAO- 03- 513 Savings Bonds

Appendix III

Appendix III Future Value Examples for Series EE and Series I Savings
Bonds for Bonds 5 Years and

Older Page 31 GAO- 03- 513 Savings Bonds

Page 32 GAO- 03- 513 Savings Bonds

Appendix IV

Appendix IV Model Calculations Detail

Page 33 GAO- 03- 513 Savings Bonds

Appendix IV Model Calculations Detail

Page 34 GAO- 03- 513 Savings Bonds

Page 35 GAO- 03- 513 Savings Bonds

Appendix V

Appendix V Comments from the Bureau of the Public Debt Page 36 GAO- 03-
513 Savings Bonds

Appendix V Comments from the Bureau of the Public Debt Page 37 GAO- 03-
513 Savings Bonds

Appendix V Comments from the Bureau of the Public Debt

Page 38 GAO- 03- 513 Savings Bonds

Appendix V Comments from the Bureau of the Public Debt Page 39 GAO- 03-
513 Savings Bonds

Appendix V Comments from the Bureau of the Public Debt Page 40 GAO- 03-
513 Savings Bonds

Appendix V Comments from the Bureau of the Public Debt

Page 41 GAO- 03- 513 Savings Bonds

Appendix V Comments from the Bureau of the Public Debt

Page 42 GAO- 03- 513 Savings Bonds

Appendix V Comments from the Bureau of the Public Debt

Page 43 GAO- 03- 513 Savings Bonds

Page 44 GAO- 03- 513 Savings Bonds

Appendix VI

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 GAO Reports and Testimony

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 fulltext 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 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
GAO Mailing Lists* under *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, Waste, and Abuse in Federal Programs

Contact: Web site: www. gao. gov/ fraudnet/ fraudnet. htm E- mail:
fraudnet@ gao. gov 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 General Accounting Office Washington, D. C. 20548- 0001
Official Business Penalty for Private Use $300 Address Service Requested

Presorted Standard Postage & Fees Paid

GAO Permit No. GI00
*** End of document. ***