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entitled 'Financial Audit: Bureau of Public Debt's Fiscal Years 2002 
and 2001 Schedules of Federal Debt' which was released on November 01, 
2002.



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Report to the Secretary of the Treasury:



November 2002:



Financial Audit:



Bureau of the Public Debt’s Fiscal Years 2002 and 2001 Schedules of 

Federal Debt:



GAO-03-199:



Contents:



Letter:



Auditor’s Report:



Opinion on Schedules of Federal Debt:



Opinion on Internal Control:



Compliance with Laws and Regulations:



Consistency of Other Information:



Objectives, Scope, and Methodology:



Agency Comments:



Overview, Schedules, and Notes::



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



Schedules of Federal Debt:



Notes to the Schedules of Federal Debt:



Appendixes:



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



Appendix II: GAO Contact and Staff Acknowledgments:



GAO Contact:



Acknowledgments:



BPD: Bureau of the Public Debt:



OMB: Office of Management and Budget:



Lette:



November 1, 2002:



The Honorable Paul H. O’Neill 

The Secretary of the Treasury:



Dear Mr. Secretary:



The accompanying auditor’s report presents the results of our audits of 

the Schedules of Federal Debt Managed by the Bureau of the Public Debt 

for the fiscal years ended September 30, 2002 and 2001. 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.[Footnote 1]



The auditor’s report contains our (1) opinion on the Schedules of 

Federal Debt for the fiscal years ended September 30, 2002 and 2001, 

(2) opinion on the effectiveness of related internal control as of 

September 30, 2002, 

(3) conclusion on the bureau’s compliance in fiscal year 2002 with laws 

we tested, and (4) conclusion on the consistency between information in 

the Schedules of Federal Debt and the Overview on Federal Debt Managed 

by the Bureau of the Public Debt.



As of September 30, 2002 and 2001, federal debt managed by the bureau 

totaled about $6,213 billion and $5,792 billion, respectively, for 

moneys borrowed to fund the government’s operations. As shown on the 

Schedules of Federal Debt, these balances consisted of approximately

(1) $3,553 billion as of September 30, 2002, and $3,339 billion as of 

September 30, 2001, of debt held by the public and about (2) $2,660 

billion as of September 30, 2002, and $2,453 billion as of September 

30, 2001, of intragovernmental debt holdings.



The level of debt held by the public reflects how much of the nation’s 

wealth has been absorbed by the federal government to finance prior 

federal spending in excess of total federal revenues. It best 

represents the cumulative effect of past federal borrowing on today’s 

economy and the federal budget. To finance a cash deficit, the 

government borrows from the public. When a cash surplus occurs, the 

annual excess funds can then be used to reduce debt held by the public. 

In other words, cash deficits or surpluses generally approximate the 

annual net change in the amount of government borrowing from the 

public.



Cash surpluses during fiscal years 1998 through 2001 enabled Treasury 

to reduce debt held by the public by $476 billion, from $3,815 billion 

as of September 30, 1997, to $3,339 billion as of September 30, 2001. 

Treasury reduced this debt by redeeming maturing debt, reducing the 

number of auctions and size of new debt issues, conducting “buybacks” 

of debt before its maturity date, and redeeming callable securities 

when the opportunities arose.[Footnote 2] However, because of the 

return to a deficit, in fiscal year 2002, debt held by the public 

increased by $214 billion. Notwithstanding the increase in fiscal year 

2002, debt held by the public as a percentage of total federal debt has 

decreased from approximately 71 percent as of September 30, 1997, to 

approximately 57 percent as of September 30, 2002.



Intragovernmental debt holdings represent balances of Treasury 

securities held by federal government accounts, primarily federal trust 

funds, that typically have an obligation to invest their excess annual 

receipts over disbursements in federal securities. Most federal trust 

funds invest in special U.S. Treasury securities that are guaranteed 

for principal and interest by the full faith and credit of the U.S. 

government. These securities are nonmarketable; however, they represent 

a priority call on future budgetary resources. Certain of these trust 

funds, such as the Social Security and federal civilian employee and 

military retirement trust funds, have been running cash surpluses, 

which are loaned to the Treasury and reduce the current need for the 

government to borrow from the public. Primarily as a result of such 

trust fund surpluses, intragovernmental debt holdings have increased by 

approximately $1,077 billion during fiscal years 1998 through 2002, 

from $1,583 billion as of September 30, 1997, to 

$2,660 billion as of September 30, 2002, with about $207 billion of 

this increase occurring in fiscal year 2002. Intragovernmental debt 

holdings as a percentage of total federal debt have increased from 

approximately 29 percent as of September 30, 1997, to approximately 43 

percent as of September 30, 2002.



The transactions relating to the use of the federal government 

accounts’ surpluses net out on the government’s consolidated financial 

statements because, in effect, they represent loans from one part of 

the government to another. Importantly, these intragovernmental debt 

holdings also constitute future obligations of the Treasury since the 

Treasury must provide cash to redeem these securities in order for the 

individual accounts to pay their benefits or other obligations as they 

come due. When this occurs, if sufficient cash surpluses are not 

available to redeem the securities, the government would either need to 

increase borrowing from the public, raise future taxes, reduce future 

spending, retire less debt (if the budget as a whole is in surplus), or 

some combination thereof.



While both are important, debt held by the public and intragovernmental 

debt holdings are very different. Debt held by the public approximates 

the federal government’s competition with other sectors in the credit 

markets. Federal borrowing absorbs resources available for private 

investment and may put upward pressure on interest rates. In addition, 

interest on debt held by the public is paid in cash and represents a 

burden on current taxpayers. It reflects the amount the government pays 

to its outside creditors. In contrast, intragovernmental debt holdings 

perform an accounting function but typically do not require cash 

payments from the current budget or represent a burden on the current 

economy. In addition, from the perspective of the budget as a whole, 

interest payments to the federal government accounts by the Treasury 

are entirely offset by the income received by such accounts--in effect, 

one part of the government pays the interest and another part receives 

it. This intragovernmental debt and the interest on it represents a 

claim on future resources and hence a burden on future taxpayers and 

the future economy. However, these intragovernmental debt holdings may 

not fully reflect the government’s total future commitment to trust 

fund financed programs. They primarily represent the cumulative cash 

surpluses of those trust funds and also reflect future priority claims 

on the U.S. Treasury. They do not have the current economic effects of 

borrowing from the public and do not currently compete with the private 

sector for available funds in the credit markets. However, when trust 

funds redeem Treasury securities to obtain cash to fund expenditures, 

and Treasury borrows from the public to finance these redemptions, 

there is competition with the private sector and thus an effect on the 

economy.



During fiscal year 2002, Treasury faced the challenge of managing the 

debt within the statutory debt limit as a result of an earlier-than-

anticipated return to deficits. Treasury twice from April 4 to April 16 

and from May 16 to June 28 announced debt issuance suspension periods 

that required it to depart from its normal debt management procedures 

and to invoke legal authorities provided to avoid breaching the debt 

limit. Actions taken by Treasury included suspending investment of 

receipts of the Government Securities Investment Fund (G-Fund) of the 

federal employees’ Thrift Savings Plan and the Civil Service Retirement 

and Disability Trust Fund (Civil Service fund), redeeming Civil Service 

fund securities early, suspending the sales of State and Local 

Government Series nonmarketable Treasury securities, and recalling 

compensating balances held at some commercial banks. In addition, 

because the debt subject to the limit was so close to the ceiling 

during these periods, Treasury turned to issuing bills with maturity 

dates of 19 days or less to manage short-term financing needs. On June 

28, 2002, legislation was enacted to raise the statutory debt limit by 

$450 billion to $6.4 trillion. Subsequently, Treasury restored all 

losses to the G-Fund and Civil Service fund. Current projections are 

that this new debt limit will be reached in fiscal year 2003.



Today the challenges of combating terrorism and ensuring homeland 

security have come to the forefront as urgent claims on the federal 

budget. While there are indications that a modest economic recovery may 

be under way, the recession of 2001 has had real consequences for the 

budget. At the same time, the known long-term fiscal pressures created 

by the retirement of the baby boom generation and rising health care 

costs remain the same. Absent substantive reform of federal entitlement 

programs, a rapid escalation of federal spending for Social Security, 

Medicare, and Medicaid beginning less than 10 years from now is 

virtually certain to overwhelm the rest of the federal budget. Indeed, 

the current weak economy coupled with various tax and spending 

decisions have resulted in debt held by the public as a percentage of 

the annual size of the U.S. economy increasing in 2002 for the first 

time since 1993. Ultimately, restoring our long-term fiscal flexibility 

and preventing debt held by the public from rising to unsustainable 

levels will involve reforming existing federal entitlement programs and 

promoting the saving and investment necessary for robust long-term 

economic growth. Correspondingly, the task of addressing today’s 

compelling national needs without unduly exacerbating the long-range 

fiscal challenge has become much more difficult.



We are sending copies of this report to the Chairmen and Ranking 

Minority Members of the Senate Committee on Appropriations; the Senate 

Committee on Governmental Affairs; the Senate Committee on the Budget; 

the Subcommittee on Treasury and General Government, Senate Committee 

on Appropriations; the House Committee on Appropriations; the House 

Committee on Government Reform; the House Committee on the Budget; the 

Subcommittee on Treasury, Postal Service, and General Government, House 

Committee on Appropriations; and the Subcommittee on Government 

Efficiency, Financial Management and Intergovernmental Relations, 

House Committee on Government Reform. We are also sending copies of 

this report to the Commissioner of the Bureau of the Public Debt, the 

Inspector General of the Department of the Treasury, the Director of 

the Office of Management and Budget, and other agency officials. In 

addition, the report will be available at no charge on the GAO Web site 

at http://www.gao.gov.



If I can be of further assistance, please call me at (202) 512-5500. 

This report was prepared under the direction of Gary T. Engel, 

Director, Financial Management and Assurance. Should you or members of 

your staff have any questions concerning this report, please contact 

Mr. Engel at (202) 512-3406. Another key contact and staff 

acknowledgments are provided in appendix II.



Sincerely yours,



Signed by David M. Walker:



David M. Walker

Comptroller General

of the United States:



Auditor’s Report:



To the Commissioner of the Bureau of the Public Debt:



In connection with fulfilling our requirement to audit the financial 

statements of the U.S. government, we audited the Schedules of Federal 

Debt Managed by the Bureau of the Public Debt (BPD) because of the 

significance of the federal debt to the federal government’s financial 

statements.[Footnote 3]



This auditor’s report presents the results of our audits of the 

Schedules of Federal Debt Managed by BPD for the fiscal years ended 

September 30, 2002 and 2001. 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.[Footnote 

4]



In our audits of the Schedules of Federal Debt for the fiscal years 

ended September 30, 2002 and 2001, we found the following:



* the Schedules of Federal Debt are presented fairly, in all material 

respects, in conformity with U.S. generally accepted accounting 

principles;



* BPD had effective internal control over financial reporting and 

compliance with laws and regulations related to the Schedule of Federal 

Debt as of September 30, 2002; and:



* no reportable noncompliance in fiscal year 2002 with laws we tested.



The following sections discuss, in more detail, (1) these conclusions 

and our conclusion on the Overview on Federal Debt Managed by the 

Bureau of the Public Debt and (2) the scope of our audits.



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, 2002, 

2001, and 2000, 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, 2002 and 2001.



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, 

2002. The internal control provided reasonable assurance that 

misstatements, losses, or noncompliance material in relation to the 

Schedule of Federal Debt for the fiscal year ended September 30, 2002, 

would be prevented or detected on a timely basis. Our opinion is based 

on criteria established under 31 U.S.C. 3512(c), (d) (commonly referred 

to as the Federal Managers’ Financial Integrity Act) and the Office of 

Management and Budget (OMB) Circular A-123, Management Accountability 

and Control.



We found matters involving computer controls that we do not consider to 

be reportable conditions.[Footnote 5] We will communicate these matters 

to BPD’s management, along with our recommendations for improvement, in 

a separate letter to be issued at a later date.



Compliance with Laws and Regulations:



Our tests in fiscal year 2002 disclosed no instances of noncompliance 

with selected provisions of laws that would be reportable under U.S. 

generally accepted government auditing standards or OMB audit guidance. 

However, the objective of our audit of the Schedule of Federal Debt for 

the fiscal year ended September 30, 2002, 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:



* preparing the Schedules of Federal Debt in conformity with U.S. 

generally accepted accounting principles;



* establishing, maintaining, and assessing internal control to provide 

reasonable assurance that the broad control objectives of the Federal 

Managers’ Financial Integrity Act are met; and:



* complying with applicable laws and regulations.



We are responsible for obtaining reasonable assurance about whether 

(1) the Schedules of Federal Debt are presented fairly, in all material 

respects, in conformity with U.S. generally accepted accounting 

principles and (2) management maintained effective related internal 

control as of September 30, 2002, the objectives of which are the 

following:



* Financial reporting: Transactions are properly recorded, processed, 

and summarized to permit the preparation of the Schedule of Federal 

Debt for the fiscal year ended September 30, 2002, in conformity with 

U.S. generally accepted accounting principles.



* Compliance with laws and regulations: Transactions related to the 

Schedule of Federal Debt for the fiscal year ended September 30, 2002, 

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:



* examined, on a test basis, evidence supporting the amounts and 

disclosures in the Schedules of Federal Debt;



* assessed the accounting principles used and any significant estimates 

made by management;



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



* obtained an understanding of internal control relevant to the 

Schedule of Federal Debt as of September 30, 2002, related to financial 

reporting and compliance with laws and regulations (including execution 

of transactions in accordance with budget authority);



* tested relevant internal controls over financial reporting and 

compliance, and evaluated the design and operating effectiveness of 

internal control related to the Schedule of Federal Debt as of 

September 30, 2002;



* considered the process for evaluating and reporting on internal 

control and financial management systems under the Federal Managers’ 

Financial Integrity Act; and:



* tested compliance in fiscal year 2002 with selected provisions of the 

following laws: statutory debt limit (31 U.S.C. 3101(b), as amended), 

suspension and early redemption of investments from the Civil Service 

Retirement and Disability Trust Fund (5 U.S.C. 8348(j)(k)), and 

suspension of investments from the G-Fund (5 U.S.C. 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 

and regulations that have a direct and material effect on the Schedule 

of Federal Debt for the fiscal year ended September 30, 2002. We 

caution that noncompliance may occur and not be detected by these tests 

and that such testing may not be sufficient for other purposes.



We performed our work in accordance with U.S. generally accepted 

government auditing standards and applicable OMB audit guidance.



Agency Comments:



In commenting on a draft of this report, BPD concurred with the facts 

and conclusions in our report. The comments are reprinted in appendix 

I.



Signed by David M. Walker:



David M. Walker

Comptroller General

of the United States:



October 24, 2002:



[End of section]



Overview, Schedules, and Notes:



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



[See PDF for image]



[End of figure]



Schedules of Federal Debt:



[See PDF for image]



[End of figure]



Notes to the Schedules of Federal Debt:



[See PDF for image]



[End of figure]



[End of section]



Appendixes:



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



DEPARTMENT OF THE TREASURY BUREAU OF THE PUBLIC DEBT WASHINGTON, OC 

20239-0001:



October 29, 2002:



Mr. Gary T. Engel 

Director:



U.S. General Accounting Office 441 G Street, NW Washington, DC 20548:



Dear Mr. Engel:



This letter is our response to your audit of the Schedules of Federal 

Debt Managed by the Bureau of the Public Debt for the fiscal years 

ended September 30, 2002, and 2001. We agree with your audit report’s 

conclusions.



I would like to thank you and your staff for conducting a thorough 

audit of these schedules. We appreciate the dedication and commitment 

of your audit team. Even with the added challenge of complying with our 

Secretary’s goal of publishing audited departmental financial 

statements by November 15, 2002, the overall audit process still 

continues to grow less arduous and more streamlined each year. Without 

the significant amount of coordination and planning between our offices 

that began in April, the burden of condensing our audit completion 

timeline by three and one-half months would have been overwhelming.



As always, we look forward to continuing this productive and successful 

relationship.



Sincerely,



Signed by Van Zeck:



Van Zeck

Commissioner:



www.publicdebt.treas.gov:



[End of section]



Appendix II: GAO Contact and Staff Acknowledgments:



GAO Contact:



Louise DiBenedetto, (202) 512-6921:



Acknowledgments:



In addition to the individual named above, William E. Boutboul, Dawn B. 

Simpson, Dean D. Carpenter, Dennis L. Clarke, Chau L. Dinh, Bronwyn E. 

Hughes, Gina K. Ross, and LaShawnda K. Wilson made key contributions to 

this report.



FOOTNOTES



[1] Intragovernmental Debt Holdings represent federal debt issued by 

Treasury and held by certain federal government accounts, such as the 

Social Security and Medicare trust funds.



[2] During this period, Treasury eliminated the 3-year note and the 52-

week bill. On

October 31, 2001, Treasury suspended issuance of the 30-year bond.



[3] 31 U.S.C. 331(e) (2000).



[4] Intragovernmental Debt Holdings represent federal debt issued by 

Treasury and held by certain federal government accounts, such as the 

Social Security and Medicare trust funds.



[5] Reportable conditions are matters coming to our attention that, in 

our judgment, should be communicated because they represent significant 

deficiencies in the design or operation of internal control, which 

could adversely affect the organization’s ability to meet the internal 

control objectives described in the Objectives, Scope, and Methodology 

section of this report.



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