Financial Audit: Bureau of the Public Debt's Fiscal Years 2006
and 2005 Schedules of Federal Debt (07-NOV-06, GAO-07-127).
GAO is required to audit the consolidated financial statements of
the U.S. government. Due to the significance of the federal debt
held by the public to the governmentwide financial statements,
GAO has also been auditing the Bureau of the Public Debt's (BPD)
Schedules of Federal Debt annually. The audit of these schedules
is done to determine whether, in all material respects, (1) the
schedules are reliable and (2) BPD management maintained
effective internal control relevant to the Schedule of Federal
Debt. Further, we test compliance with selected provisions of
significant laws related to the Schedule of Federal Debt. Federal
debt managed by BPD consists of Treasury securities held by the
public and by certain federal government accounts, referred to as
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 federal revenues. Intragovernmental debt holdings
represent balances of Treasury securities held by federal
government accounts, primarily federal trust funds such as Social
Security, that typically have an obligation to invest their
excess annual receipts over disbursements in federal securities.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-127
ACCNO: A63064
TITLE: Financial Audit: Bureau of the Public Debt's Fiscal Years
2006 and 2005 Schedules of Federal Debt
DATE: 11/07/2006
SUBJECT: Debt held by public
Federal debt
Financial management systems
Financial statement audits
Internal controls
Public debt
Trust funds
US Treasury securities
Bureau of the Public Debt Schedule of
Federal Debt
******************************************************************
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GAO-07-127
* [1]Report to the Secretary of the Treasury
* [2]November 2006
* [3]FINANCIAL AUDIT
* [4]Bureau of the Public Debt's Fiscal Years 2006 and 2005
Schedules of Federal Debt
* [5]Contents
* [6]Opinion on Schedules of Federal Debt
* [7]Opinion on Internal Control
* [8]Compliance with Laws and Regulations
* [9]Consistency of Other Information
* [10]Objectives, Scope, and Methodology
* [11]Agency Comments
* [12]Overview, Schedules, and Notes
* [13]Comments from the Bureau of the Public Debt
* [14]GAO Contact and Staff Acknowledgments
Report to the Secretary of the Treasury
November 2006
FINANCIAL AUDIT
Bureau of the Public Debt's Fiscal Years 2006 and 2005 Schedules of
Federal Debt
Contents
Abbreviations
November 7, 2006Letter
The Honorable Henry M. Paulson, Jr. 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, 2006 and 2005. 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, 2006 and 2005, (2) opinion
on the effectiveness of relevant internal control as of September 30,
2006, (3) conclusion on the bureau's compliance in fiscal year 2006 with
selected provisions of laws we tested, and (4) conclusion on the
consistency between information in the Schedules of Federal Debt and the
accompanying Overview on Federal Debt Managed by the Bureau of the Public
Debt.
As of September 30, 2006 and 2005, federal debt managed by the bureau
totaled about $8,493 billion and $7,918 billion, respectively, for moneys
borrowed to fund the federal government's operations. As shown on the
Schedules of Federal Debt, these balances consisted of approximately (1)
$4,843 billion as of September 30, 2006, and $4,601 billion as of
September 30, 2005, of debt held by the public and about (2) $3,650
billion as of September 30, 2006, and $3,317 billion as of September 30,
2005, 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 federal revenues. It best represents the
cumulative effect of past federal borrowing on today's economy and the
federal budget. To finance a cash deficit, the federal government borrows
from the public. When a cash surplus occurs, the annual excess funds can
then be used to reduce debt held by the public. In other words, annual
cash deficits or surpluses generally approximate the annual net change in
the amount of federal government borrowing from the public.
Intragovernmental debt holdings represent balances of Treasury securities
held by federal government accounts, primarily federal trust funds (e.g.,
Social Security), 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. The transactions relating to the use of the federal government
accounts' surpluses net out on the federal government's consolidated
financial statements because, in effect, they represent loans from one
part of the federal government to another. These securities are
nonmarketable; however, they represent a priority call on future budgetary
resources.
While both are important, debt held by the public and intragovernmental
debt holdings are very different. Debt held by the public approximates the
federal government's competition with other sectors in the credit markets.
Federal borrowing absorbs resources that would otherwise be 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
federal government pays to its outside creditors. In contrast,
intragovernmental debt holdings perform an accounting function but
typically do not require cash payments from the current budget or
represent a burden on the current economy. In addition, from the
perspective of the budget as a whole, interest payments to federal
government accounts by the Treasury are entirely offset by the income
received by such accounts. 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. Specifically, 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.
Over the past decade that we have audited the Schedule of Federal Debt,
managing the federal debt has been a challenge as evidenced by the growth
of total federal debt by $3,283 billion, or 63 percent, during this
period, from $5,210 billion as of October 1, 1996, to $8,493 billion as of
September 30, 2006. As a result of the increasing debt, again this past
year, Congress had to enact legislation to increase the debt limit to
avoid breaching the statutory debt limit. On March 20, 2006, Congress
increased the statutory debt limit from $8,184 billion to $8,965 billion.
This was the fourth occurrence since 2002 that Congress has raised the
statutory debt limit, with the debt limit increasing over $3 trillion,
from $5,950 billion to $8,965 billion, over that period.
Over the last several years, we have noted a trend in the amount of
Treasury securities held by foreign and international investors. According
to amounts reported in the September 2006 Treasury Bulletin, Treasury
estimates that the amount of Treasury securities held by foreign and
international investors has increased $957 billion, from $1,135 billion as
of June 30, 2002, to $2,092 billion as of June 30, 2006. As of June 30,
2006, this represents an estimated 44 percent of debt held by the public,
up from about 33 percent as of June 30, 2002. The United States benefits
from foreign purchases of Treasury securities because foreign investors
fill part of the U.S. government's borrowing needs. However, to service
this foreign-held debt, the U.S. government must send interest payments
abroad, which adds to the incomes of residents of other countries rather
than to the incomes of U.S. residents. In addition, this increasing
reliance on foreign investors to finance the deficits of the U.S.
government presents potential risk to the U.S. economy, especially since
the U.S. gross national saving rate is low by U.S. historical standards.
The challenge of managing the federal debt is not likely to diminish any
time soon. At the end of fiscal year 2006, debt held by the public as a
share of gross domestic product (GDP) is estimated at 36.9 percent, down
from 37.5 percent last year but well above the 34.1 percent at the end of
fiscal year 2002. In addition, gross federal debt has increased 37 percent
during the same period, from $6,213 billion, as of September 30, 2002, to
$8,493 billion, as of September 30, 2006. This increase represents an
additional burden on future generations and the future economy. Further,
interest expense on debt held by the public continued to grow rapidly,
rising about 22 percent above the fiscal year 2005 level. As federal debt
is expected to continue rising in both the near and long term, the amount
the government pays to finance that debt will grow as well and place
increasing pressure on the federal budget.
The pending retirement of the Baby Boom generation and rising health care
costs will soon place unprecedented and long-lasting stress on the federal
budget, raising debt held by the public to unprecedented levels as a share
of GDP. GAO's long-range fiscal policy simulations show that the nation's
current fiscal condition is but a prelude to a much more daunting
long-term fiscal challenge.^2 Absent significant changes on the spending
or revenue sides of the budget, or both, these long-term deficits will
encumber a growing share of federal resources and test the capacity of
current and future generations to afford both today's and tomorrow's
commitments. Continuing on this unsustainable path will gradually erode,
if not suddenly damage, our economy, our standard of living, and
ultimately our national security.
As discussed earlier, federal debt managed by the bureau totaled about
$8.5 trillion at the end of fiscal year 2006. However, that number
excludes many items, including the gap between scheduled and funded Social
Security and Medicare benefits, veterans' health care, and a range of
other commitments and contingencies that the federal government has
pledged to support. If these items are factored in, the present value of
the total burden is estimated to be about $50 trillion.^3 Stated
differently, the estimated current total burden for every American is more
than $160,000--and every day that burden becomes larger.
Addressing the nation's long-term fiscal imbalance constitutes a major
transformational challenge that may take a generation or more to resolve.
Given the size of the projected imbalance, the U.S. government will not be
able to grow its way out of this problem--tough choices will be required.
Our report, 21^st Century Challenges: Reexamining the Base of the Federal
Government, is intended to support Congress in identifying issues and
options that could help address these fiscal pressures.^4
We are sending copies of this report to the Chairmen and Ranking Minority
Members of the Senate Committee on Appropriations; the Senate Committee on
Homeland Security and Governmental Affairs; the Senate Committee on the
Budget; the Subcommittee on Transportation, Treasury, the Judiciary,
Housing and Urban Development, and Related Agencies, Senate Committee on
Appropriations; the Subcommittee on Federal Financial Management,
Government Information, and International Security, the Senate Committee
on Homeland Security and Governmental Affairs; the House Committee on
Appropriations; the House Committee on Government Reform; the House
Committee on the Budget; the Subcommittee on Transportation, Treasury, and
Housing and Urban Development, the Judiciary, District of Columbia, House
Committee on Appropriations; and the Subcommittee on Government
Management, Finance, and Accountability, House Committee on Government
Reform. We are also sending copies of this report to the Commissioner of
the Bureau of the Public Debt, the Inspector General of the Department of
the Treasury, the Director of the Office of Management and Budget, and
other agency officials. In addition, the report will be available at no
charge on the GAO Web site at [15]http://www.gao.gov .
If I can be of further assistance, please call me at (202) 512-5500. This
report was prepared under the direction of Gary T. Engel, Director,
Financial Management and Assurance. Should you or members of your staff
have any questions concerning this report, please contact Mr. Engel at
(202) 512-3406 or [16][email protected] . 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 Auditor's Report
In connection with fulfilling our requirement to audit the financial
statements of the U.S. government,^1 we have 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.
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,
2006 and 2005. The Schedules of Federal Debt present the beginning
balances, increases and decreases, and ending balances for (1) Federal
Debt Held by the Public and Intragovernmental Debt Holdings, (2) the
related Accrued Interest Payables, and (3) the related Net Unamortized
Premiums and Discounts managed by BPD.^2
In our audits of the Schedules of Federal Debt for the fiscal years ended
September 30, 2006 and 2005, we found the following:
othe Schedules of Federal Debt are presented fairly, in all material
respects, in conformity with U.S. generally accepted accounting
principles;
oBPD had effective internal control over financial reporting and
compliance with laws and regulations relevant to the Schedule of Federal
Debt as of September 30, 2006; and
ono reportable noncompliance in fiscal year 2006 with selected provisions
of laws we tested.
The following sections discuss, in more detail, (1) these conclusions and
our conclusion on the Overview on Federal Debt Managed by the Bureau of
the Public Debt and (2) the scope of our audits.
Opinion on Schedules of Federal Debt
The Schedules of Federal Debt including the accompanying notes present
fairly, in all material respects, in conformity with U.S. generally
accepted accounting principles, the balances as of September 30, 2006,
2005, and 2004, 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,
2006 and 2005.
Opinion on Internal Control
BPD maintained, in all material respects, effective internal control
relevant to the Schedule of Federal Debt related to financial reporting
and compliance with applicable laws and regulations as of September 30,
2006, that provided reasonable assurance that misstatements, losses, or
noncompliance material in relation to the Schedule of Federal Debt would
be prevented or detected on a timely basis. Our opinion is based on
criteria established under 31 U.S.C. S 3512 (c), (d) (commonly referred to
as the Federal Managers' Financial Integrity Act) and the Office of
Management and Budget (OMB) Circular A-123, revised December 21, 2004,
Management's Responsibility for Internal Control.
We found matters involving information security controls that we consider
not to be reportable conditions.^3 We will communicate these matters to
BPD's management, along with our recommendations for improvement, in a
separate letter to be issued at a later date.
Compliance with Laws and Regulations
Our tests for compliance in fiscal year 2006 with selected provisions of
laws disclosed no instances of noncompliance that would be reportable
under U.S. generally accepted government auditing standards or applicable
OMB audit guidance. However, the objective of our audit of the Schedule of
Federal Debt for the fiscal year ended September 30, 2006, was not to
provide an opinion on overall compliance with laws and regulations.
Accordingly, we do not express such an opinion.
Consistency of Other Information
BPD's Overview on Federal Debt Managed by the Bureau of the Public Debt
contains information, some of which is not directly related to the
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 Methodology
Management is responsible for the following:
opreparing the Schedules of Federal Debt in conformity with U.S. generally
accepted accounting principles;
oestablishing, maintaining, and assessing internal control to provide
reasonable assurance that the broad control objectives of the Federal
Managers' Financial Integrity Act are met; and
ocomplying 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 relevant internal control as of
September 30, 2006, the objectives of which are the following:
oFinancial 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, 2006, in conformity with U.S.
generally accepted accounting principles.
oCompliance with laws and regulations: Transactions related to the
Schedule of Federal Debt for the fiscal year ended September 30, 2006,
are executed in accordance with laws governing the use of budget authority
and with other laws and regulations that could have a direct and material
effect on the Schedule of Federal Debt.
We are also responsible for testing compliance with selected provisions of
laws and regulations that have a direct and material effect on the
Schedule of Federal Debt. Further, we are responsible for performing
limited procedures with respect to certain other information appearing
with the Schedules of Federal Debt.
In order to fulfill these responsibilities, we
oexamined, on a test basis, evidence supporting the amounts and
disclosures in the Schedules of Federal Debt;
oassessed the accounting principles used and any significant estimates
made by management;
oevaluated the overall presentation of the Schedules of Federal Debt;
oobtained an understanding of internal control relevant to the Schedule of
Federal Debt as of September 30, 2006, related to financial reporting and
compliance with laws and regulations (including execution of transactions
in accordance with budget authority);
otested relevant internal controls over financial reporting and
compliance, and evaluated the design and operating effectiveness of
internal control relevant to the Schedule of Federal Debt as of September
30, 2006;
oconsidered the process for evaluating and reporting on internal control
and financial management systems under the Federal Managers' Financial
Integrity Act; and
otested compliance in fiscal year 2006 with the (1) statutory debt limit
(31 U.S.C. S 3101(b), as amended by Pub. L. No. 107-199, S 1, 116 Stat.
734 (2002), Pub. L. No. 108-24, 117 Stat. 710 (2003), Pub. L. No. 108-415,
S 1, 118 Stat. 2337 (2004), and Pub. L. No. 109-182, 120 Stat. 289
(2006)); (2) suspension and early redemption of investments from the Civil
Service Retirement and Disability Trust Fund (5 U.S.C. S 8348(j)(k)); and
(3) suspension of investments from the G-Fund (5 U.S.C. S 8438(g)).
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
that have a direct and material effect on the Schedule of Federal Debt for
the fiscal year ended September 30, 2006. 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
conclusions in our report. The comments are reprinted in appendix I.
David M. Walker Comptroller General of the United States
October 25, 2006
Overview, Schedules, and Notes
Appendix I
Comments from the Bureau of the Public Debt
Appendix II
GAO Contact and Staff Acknowledgments
GAO Contact
Gary Engel, (202) 512-3406
Acknowledgments
In addition to the individual named above, Dawn B. Simpson, Assistant
Director; Cara L. Bauer; Theresa M. Bowman; Erik A. Braun; Dean D.
Carpenter; Dennis L. Clarke; Chau L. Dinh; Jennifer L. Henderson; Erik S.
Huff; Brent J. LaPointe; Nicole M. McGuire; Jay McTigue; Timothy J.
Murray; and Danietta S. Williams made key contributions to this report.
(198410)
www.gao.gov/cgi-bin/getrpt? [17]GAO-07-127 .
For a fuller understanding of GAO's opinion on BPD's fiscal years 2006 and
2005 Schedules of Federal Debt, readers should refer to the complete audit
report, available by clicking the link above, which includes information
on audit objectives, scope, and methodology. For more information, contact
Gary T. Engel at (202) 512-3406 or [email protected].
Highlights of [18]GAO-07-127 , a report to the Secretary of the Treasury
November 2006
FINANCIAL AUDIT
Bureau of the Public Debt's Fiscal Years 2006 and 2005 Schedules of
Federal Debt
GAO is required to audit the consolidated financial statements of the U.S.
government. Due to the significance of the federal debt held by the public
to the governmentwide financial statements, GAO has also been auditing the
Bureau of the Public Debt's (BPD) Schedules of Federal Debt annually. The
audit of these schedules is done to determine whether, in all material
respects, (1) the schedules are reliable and (2) BPD management maintained
effective internal control relevant to the Schedule of Federal Debt.
Further, we test compliance with selected provisions of significant laws
related to the Schedule of Federal Debt.
Federal debt managed by BPD consists of Treasury securities held by the
public and by certain federal government accounts, referred to as
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 federal
revenues. Intragovernmental debt holdings represent balances of Treasury
securities held by federal government accounts, primarily federal trust
funds such as Social Security, that typically have an obligation to invest
their excess annual receipts over disbursements in federal securities.
In GAO's opinion, BPD's Schedules of Federal Debt for fiscal years 2006
and 2005 were fairly presented in all material respects and BPD maintained
effective internal control relevant to the Schedule of Federal Debt as of
September 30, 2006. GAO also found no instances of noncompliance in fiscal
year 2006 with selected provisions of the statutory debt limit and debt
issuance suspension period laws we tested.
As of September 30, 2006 and 2005, federal debt managed by BPD totaled
about $8,493 billion and $7,918 billion, respectively. At the end of
fiscal year 2006, debt held by the public as a percentage of the U.S.
economy is estimated at 36.9 percent, compared to 34.1 percent at the end
of fiscal year 2002. Further, certain trust funds (e.g., Social Security)
continue to run surpluses, resulting in increased intragovernmental debt
holdings. These debt holdings are backed by the full faith and credit of
the U.S. government and represent a priority call on budgetary resources.
As a result, total gross federal debt has increased 37 percent between the
end of fiscal years 2002 and 2006. During fiscal year 2006, a debt
issuance suspension period was invoked to avoid breaching the statutory
debt limit. On March 20, 2006, legislation was enacted to raise the debt
limit by $781 billion to $8,965 billion. This was the fourth occurrence
since 2002 that the statutory debt limit had to be raised to avoid
breaching the statutory debt limit. During that time, the debt limit has
increased more than $3 trillion, from $5,950 billion in 2002 to the
current limit of $8,965 billion.
As shown in figure 1 below, total federal debt increased over each of the
last 4 fiscal years. Debt held by the public increased during this 4-year
period primarily as a result of annual unified budget deficits.
Intragovernmental debt holdings steadily increased during this 4-year
period primarily due to excess receipts over disbursements in federal
trust funds (e.g., Social Security).
*** End of document. ***