Financial Audit: Bureau of the Public Debt's Fiscal Years 2004 and 2003 Schedules of Federal Debt
Published: 2004-11-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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 prepared are reliable, (2) BPD management maintained effective internal control relevant to the Schedule of Federal Debt, and (3) BPD complies 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 total 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.
section_title: What GAO Found
paragraphs: In GAO's opinion, BPD's Schedules of Federal Debt for fiscal years 2004 and 2003 were fairly presented in all material respects and BPD maintained effective internal control related to the Schedule of Federal Debt as of September 30, 2004. GAO also found no instances of noncompliance in fiscal year 2004 with the statutory debt limit. A s of September 30, 2004 and 2003, federal debt managed by BPD totaled about $7,379 billion and $6,783 billion, respectively. At the end of fiscal year 2004, debt held by the public as a percentage of the U.S. economy is estimated at 37.5 percent, up from 33.1 percent at the end of fiscal year 2001. 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 future budgetary resources. Gross federal debt has increased 27 percent between the end of fiscal years 2001 and 2004. As a result of the increasing federal debt, on October 14, 2004, Treasury entered into a debt issuance suspension period to avoid exceeding the current $7,384 billion statutory debt limit and requested the Congress take action to raise the debt limit by mid- November 2004. The total federal debt increased over each of the last 4 fiscal years. Debt held by the public decreased as a result of cash surpluses for fiscal year 2001, but increased during fiscal years 2002 through 2004, with the return 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.

section_title: Letter
paragraphs: 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, 2004 and 2003.  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.
The auditor’s report contains our (1) opinion on the Schedules of Federal  Debt for the fiscal years ended September 30, 2004 and 2003, (2) opinion on  the effectiveness of related internal control as of September 30, 2004,   (3) conclusion on the bureau's compliance in fiscal year 2004 with a  selected provision of a law we tested, and (4) conclusion on the  consistency between information in the Schedules of Federal Debt and the  Overview on Federal Debt Managed by the Bureau of the Public Debt.
As of September 30, 2004 and 2003, federal debt managed by the bureau  totaled about $7,379 billion and $6,783 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) $4,307 billion as of September 30, 2004, and $3,924 billion as of  September 30, 2003, of debt held by the public and about (2) $3,072 billion  as of September 30, 2004, and $2,859 billion as of September 30, 2003, 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.  However, because of the return to deficits, in fiscal years 2002  through 2004, debt held by the public increased by $968 billion, with about  $383 billion of this increase occurring in fiscal year 2004.  Treasury issued  more debt by increasing the number of auctions and the size of new debt  issues.  During fiscal year 2003, Treasury reintroduced the 3-year note,  which will be offered every quarter.  In addition, Treasury increased the  offerings of the 5-year note from quarterly to monthly offerings; the 10-year  note from an offering every quarter to eight offerings a year; and the 10- year Treasury Inflation-Protected Security (TIPS) from three offerings a  year to an offering every quarter.  During fiscal year 2004, Treasury  introduced a 20-year TIPS, first issued on July 30, 2004, and a 5-year TIPS,  first issued on October 29, 2004.  Both securities will be offered  semiannually.  Notwithstanding the increases in fiscal years 2002 through  2004, debt held by the public as a percentage of total federal debt has  decreased from approximately 71 percent as of September 30, 1997, to  approximately 58 percent as of September 30, 2004.
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 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 in order to  finance current operations.  As a result of total trust fund surpluses,  intragovernmental debt holdings have increased by approximately  $1,489 billion during fiscal years 1998 through 2004, from $1,583 billion as  of September 30, 1997, to $3,072 billion as of September 30, 2004, with  about $213 billion of this increase occurring in fiscal year 2004.   Intragovernmental debt holdings as a percentage of total federal debt have  increased from approximately 29 percent as of September 30, 1997, to  approximately 42 percent as of September 30, 2004.
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 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 when it has to be redeemed to  meet obligations under the respective programs.  However, these  intragovernmental debt holdings do not fully reflect the government’s total  future commitment to trust fund financed programs.  They primarily  represent the cumulative historical 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 2003, Treasury faced the challenge of managing the debt  within the statutory debt limit. On February 20, 2003, Treasury entered into  a debt issuance suspension period.  A debt issuance suspension period is  any period for which the Secretary of the Treasury has determined that  obligations of the United States may not be issued without exceeding the  debt limit. Actions taken by Treasury, which were consistent with legal  authorities provided to the Secretary, included suspending investment of  receipts of the Government Securities Investment Fund (G-Fund) of the  federal employees' Thrift Savings Plan, the Civil Service Retirement and  Disability Trust Fund (Civil Service fund), and the Exchange Stabilization  Fund; redeeming Civil Service fund securities early; suspending the sales of  State and Local Government Series nonmarketable Treasury securities;  exchanging Treasury securities for Federal Financing Bank 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 this period, Treasury turned to issuing bills with maturity dates of 14  days or less to manage short-term financing needs. On May 27, 2003,  legislation was enacted to raise the statutory debt limit by $984 billion to  $7,384 billion. Subsequently, Treasury restored all losses to the G-Fund and  Civil Service fund in accordance with legal authorities provided to the  Secretary of the Treasury.  On October 14, 2004, Treasury again determined  that a debt issuance suspension period was in effect.  So far during the  period, Treasury has suspended investment of receipts of the G-Fund and  sales of State and Local Government Series nonmarketable Treasury  securities to avoid exceeding the debt limit.  The Secretary of the Treasury  has requested that the Congress take action to raise the debt limit by mid- November 2004.  As of October 25, 2004, the statutory debt limit remains at  $7,384 billion.
During our audits, we have noted certain trends—the increase in the  amount of Treasury securities held by foreign and international investors  and the increased costs to finance the federal government’s growing debt.   Foreign and international investors are a major holder of debt held by the  public.  According to amounts reported in the September 2004 Treasury  Bulletin, Treasury estimates that the amount of Treasury securities held by  foreign and international investors has increased by $624 billion, from  about $1,135 billion as of June 30, 2002, to $1,759 billion as of June 30, 2004,  or an estimated 42 percent of total debt held by the public as of that date.   During the same 2-year period, debt held by the public increased by   $755 billion, from about $3,464 billion to $4,219 billion.  Based on amounts  reported in the September 2004 Treasury Bulletin, the estimated increase  in holdings by foreign and international investors represents about 83  percent of the increase in debt held by the public over the same period.   The United States benefits from foreign purchases of Treasury securities  because foreign investors fill part of our 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 a potential risk to the U.S. economy, especially since  the U.S. gross national saving rate is low by U.S. historical standards and  averages well below that of other major industrialized nations.
Rising interest rates on Treasury securities—although relatively low by  historical standards—are contributing to an increased cost to finance the  federal government’s growing debt.  During fiscal year 2004, the interest  rate for 13-week Treasury bills increased from a low of 0.87 percent to 1.71  percent as of September 30, 2004.  Also, the interest rate on 2-year Treasury  notes increased from a low of 1.50 percent to 2.50 percent during this same  period.  About $2,040 billion, or 47 percent, of Treasury securities held by  the public as of September 30, 2004, will mature at least once during the  next 2 years.  The Congressional Budget Office projects that interest rates  on Treasury securities, especially short-term rates, will continue to  increase. As such, as the Treasury securities mature over the next 2 years  and are replaced by new debt, the interest rates on the majority of the new  issuances will likely be higher than the September 30, 2004, rates and result  in continued increased cost to finance the federal government’s debt.  Thus,  the combined effect of greater levels of debt and higher interest rates will  likely place increasing pressure on the federal budget in the years ahead.
The challenge of managing the federal debt is not likely to diminish any  time soon.  Debt held by the public has continued to grow relative to the  economy.  At the end of fiscal year 2004, debt held by the public as a share  of gross domestic product (GDP) is estimated at 37.5 percent, up from 33.1  percent at the end of fiscal year 2001.  In addition, gross federal debt has  increased 27 percent during the same period, from $5,792 billion as of  September 30, 2001, to $7,379 billion as of September 30, 2004.  While  growth in the debt held by the public-to-GDP measure does not necessarily  create problems in the short term, continued growth in the long term would  reduce budgetary flexibility and ultimately lead to an unsustainable fiscal  path.
Indeed, GAO’s fiscal policy simulations show that over the long term, debt  held by the public will rise to unprecedented levels as a share of GDP.    These simulations illustrate that the fiscal policies in place today—absent  substantive entitlement reform or dramatic changes in tax and spending  policies—will result in large, escalating, and persistent deficits that are  economically unsustainable over the long term.  Without reform, known  demographic trends; escalating health care costs; and projected growth in  federal spending for Social Security, Medicare, and Medicaid will result in  massive fiscal pressures that will hobble the economy.  Budget controls  instituted to achieve balance in the past have expired, and no agreement  has been reached on the appropriate structure or process for focusing on  the large and growing fiscal challenges that now face the federal  government.
As discussed earlier, federal debt managed by the bureau totaled about   $7.4 trillion at the end of the fiscal year, or about $25,000 for every man,  woman, and child in this country today.  But that number excludes many  items, including the gap between promised 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 total burden in current dollars is at least   $42 trillion.  One of the biggest contributors to this total bill is the new  Medicare prescription drug benefit, whose estimated current-dollar cost  over the next 75 years is more than $8 trillion.  Stated differently, the  current total burden for every American is more than $140,000—and every  day that burden becomes larger.  Our long-term budget simulations show  that by 2040, the federal government may have to either cut federal  spending by 60 percent or raise taxes to about 2.5 times today’s level to pay  for the mounting cost of the federal government’s current unfunded  commitments.  Either option would be devastating to the economy and the  future standard of living for Americans.
A top-to-bottom review of government activities to ensure their relevance  and fit for the 21st century and their relative priority is long overdue.  As we  have spoken about in the past, the federal government needs a three- pronged approach to (1) restructure existing entitlement programs;   (2) reexamine the base of discretionary and other spending; and (3) review  and revise the federal government’s tax policy, including major tax  preferences, and enforcement programs.  In addition, new accounting and  reporting approaches, budget control mechanisms, and metrics are needed  for considering and measuring the impact of spending and tax policies and  decisions over the long term.
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 Transportation, 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 Transportation, Treasury,  and Independent Agencies, House Committee on Appropriations; and the  Subcommittee on Government Efficiency and Financial Management,  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 or engelg@gao.gov.  Another key contact and staff  acknowledgments are provided in appendix II.
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.
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,  2004 and 2003.  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.
In our audits of the Schedules of Federal Debt for the fiscal years ended  September 30, 2004 and 2003, 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, 2004; and  no reportable noncompliance in fiscal year 2004 with a selected  provision of a law we tested.
The following sections discuss, in more detail, (1) these conclusions and  our conclusion on the Overview on Federal Debt Managed by the Bureau of  the Public Debt and (2) the scope of our audits.
subsections: section_title: Opinion on Schedules of Federal Debt
paragraphs: 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, 2004, 2003, and  2002, 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, 2004 and  2003.
section_title: Opinion on Internal Control
paragraphs: 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, 2004,  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. § 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 June 21, 1995, Management  Accountability and Control.
We found matters involving information security controls that we do not  consider to be reportable conditions.  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.
section_title: Compliance with Laws and Regulations
paragraphs: Our tests for compliance in fiscal year 2004 with the statutory debt limit  disclosed no instances of noncompliance that would be reportable under  U.S. generally accepted government auditing standards or OMB audit  guidance.  However, the objective of our audit of the Schedule of Federal  Debt for the fiscal year ended September 30, 2004, was not to provide an  opinion on overall compliance with laws and regulations.  Accordingly, we  do not express such an opinion.
section_title: Consistency of Other Information
paragraphs: 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.
section_title: Objectives, Scope, and Methodology
paragraphs: 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, 2004, 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, 2004, 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, 2004,  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   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, 2004, 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, 2004;  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 2004 with the statutory debt limit (31  U.S.C. § 3101(b), as amended by Pub. L. No. 107-199, § 1, 116 Stat. 734  (2002) and Pub. L. No. 108-24, 117 Stat. 710 (2003)).
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 a selected provision of a law that has  a direct and material effect on the Schedule of Federal Debt for the fiscal  year ended September 30, 2004.  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.
section_title: Agency Comments
paragraphs: 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.
section_title: Overview, Schedules, and Notes
paragraphs: Federal debt managed by the Bureau of the Public Debt comprises debt held by the public and debt held by certain federal  government accounts, the latter of which is referred to as intragovernmental debt holdings.  As of September 30, 2004 and 2003, outstanding gross federal debt managed by the bureau totaled $7,379 and $6,783 billion, respectively.  The increase in gross federal  debt of $596 billion during fiscal year 2004 was due to an increase in gross intragovernmental debt holdings of $213 billion and an  increase in gross debt held by the public of $383 billion.  As Figure 1 illustrates, intragovernmental debt holdings have steadily  increased since fiscal year 2000 and debt held by the public decreased in fiscal year 2001, but increased in fiscal years 2002 through  2004.  The primary reason for the increases in intragovernmental debt holdings is the annual surpluses in the Federal Old-Age and  Survivors Insurance Trust Fund, Civil Service Retirement and Disability Trust Fund, Federal Hospital Insurance Trust Fund, Federal  Disability Insurance Trust Fund, and Military Retirement Fund.  The fiscal years 2002 through 2004 increases in debt held by the public are due primarily to total federal spending exceeding total federal revenues.  As of September 30, 2004, gross debt held by the  public totaled $4,307 billion and gross intragovernmental debt holdings totaled $3,072 billion.
Total Gross Federal Debt Outstanding (in billions)
Interest expense incurred during fiscal year 2004 consists of (1) interest accrued and paid on debt held by the public or credited to  accounts holding intragovernmental debt during the fiscal year, (2) interest accrued during the fiscal year, but not yet paid on debt  held by the public or credited to accounts holding intragovernmental debt, and (3) net amortization of premiums and discounts.  The  primary components of interest expense are interest paid on the debt held by the public and interest credited to federal government  trust funds and other federal government accounts that hold Treasury securities.  The interest paid on the debt held by the public  affects the current spending of the federal government and represents the burden in servicing its debt (i.e., payments to outside  creditors).  Interest credited to federal government trust funds and other federal government accounts, on the other hand, does not  result in an immediate outlay of the federal government because one part of the government pays the interest and another part  receives it.  However, this interest represents a claim on future budgetary resources and hence an obligation on future taxpayers.  This  interest, when reinvested by the trust funds and other federal government accounts, is included in the programs’ excess funds not  currently needed in operations, which are invested in federal securities.  During fiscal year 2004, interest expense incurred totaled  $322 billion, interest expense on debt held by the public was $158 billion, and $164 billion was interest incurred for  intragovernmental debt holdings.  As Figure 2 illustrates, total interest expense decreased each year from fiscal year 2001 through  2003, but increased in fiscal year 2004.  Average interest rates on principal balances outstanding as of fiscal year end are disclosed in  the Notes to the Schedules of Federal Debt. (in billions)
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.  As of September 30, 2004 and 2003, gross debt held by the  public totaled $4,307 billion and $3,924 billion, respectively (see Figure 1), an increase of $383 billion.  The borrowings  and repayments of debt held by the public increased from fiscal year 2003 to 2004 primarily due to Treasury’s decision to  finance current operations using more short-term securities.
As of September 30, 2004, $3,846 billion, or 89 percent, of the securities that constitute debt held by the public were  marketable, meaning that once the government issues them, they can be resold by whoever owns them.  Marketable debt is  made up of Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation-Protected Securities (TIPS) with maturity  dates ranging from less than 1 year out to 30 years.  Of the marketable securities currently held by the public as of September 30, 2004, $2,576 billion or 67 percent will mature within the next 4 years (see Figure 3).  As of September 30, 2004 and  2003, notes and TIPS held by the public maturing within the next 10 years totaled $2,274 billion and $1,919 billion,  respectively, an increase of $355 billion.
The government also issues to the public, state and local governments, and foreign governments and central banks  nonmarketable securities, which cannot be resold, and have maturity dates from on demand to more than 10 years.  As of  September 30, 2004, nonmarketable securities totaled $461 billion, or 11 percent of debt held by the public.  As of that date,  nonmarketable securities primarily consisted of savings securities totaling $204 billion and special securities for state and  local governments totaling $158 billion.
Intragovernmental debt holdings represent balances of Treasury securities held by over 200 individual federal government  accounts with either the authority or the requirement to invest excess receipts in special U.S. Treasury securities that are  guaranteed for principal and interest by the full faith and credit of the U.S. Government.  Intragovernmental debt holdings  primarily consist of balances in the Social Security, Medicare, Military Retirement, and Civil Service Retirement and  Disability trust funds.  As of September 30, 2004, such funds accounted for $2,726 billion, or 89 percent, of the $3,072  billion intragovernmental debt holdings balances (see Figure 4).  As of September 30, 2004 and 2003, gross  intragovernmental debt holdings totaled $3,072 billion and $2,859 billion, respectively (see Figure 1), an increase of $213  The majority of intragovernmental debt holdings are Government Account Series (GAS) securities. GAS securities consist of par value securities and market-based securities, with terms ranging from on demand out to 30 years.  Par value securities are issued and redeemed at par (100 percent of the face value), regardless of current market conditions.  Market-based securities,  however, can be issued at a premium or discount and are redeemed at par value on the maturity date or at market value if  redeemed before the maturity date.
Significant Events in FY 2004  Increased Issuance of Treasury Inflation-Protected Securities (TIPS)
During fiscal year 2004, Treasury increased the issuances of inflation-indexed securities known as Treasury Inflation-Protected Securities (TIPS).  In the May 5, 2004, Quarterly Refunding Statement, Treasury introduced both a 5-year TIPS and a 20-year  TIPS.  Each security will be issued semiannually with the 5-year TIPS issued in April and October and the 20-year TIPS issued  in January and July.  A 10-year TIPS will continue to be issued in January, April, July and October.  The first 20-year TIPS  was issued on July 30, 2004, in the amount of $11 billion and will be reopened in January 2005 and July 2005.  Similarly, the  5-year TIPS will be issued in late October 2004, and will be reissued in April 2005 and October 2005.
In the February 2004 Quarterly Refunding Statement, Treasury announced its intentions to compute price awards in auctions to  six decimal places per hundred.  Calculating prices to six decimals ensures price uniqueness for all discount rates or yields bid in all marketable Treasury securities auctions.  This change also makes Treasury’s pricing practice consistent with secondary  market practices.  In addition, the August 2004 Quarterly Refunding Statement announced that the limit on non-competitive  Treasury auction awards will be $5 million for all auctions.  The previous limit on non-competitive awards, in effect since  1991, was $1 million for bill auctions and $5 million for coupon auctions.  These changes were effective on September 20,  The Uniform Offering Circular (UOC), in conjunction with the announcement for each auction, provides the terms and  conditions for the auction and issuance of marketable Treasury securities to the public.  Treasury has rewritten the UOC in  plain language because the wide variety of bidders in our securities auctions – broker-dealers, depository institutions, non- financial firms, individuals, etc. – have widely different levels of experience in dealing with federal regulations in general and  with securities-related concepts and regulations in particular.  On July 28, 2004, the rewritten UOC was published in the  Federal Register.  Treasury believes that a better understanding of the auction rules may increase direct participation in our  auctions and improve the auction process overall, resulting in lower borrowing costs.
Significant Events in FY 2004, cont.
Series HH Savings Bonds Discontinued  As announced on February 18, 2004, the final Series HH Savings Bonds were issued to the public on August 31, 2004.  These  bonds are current-income securities that pay interest to their owners semiannually.  Series HH Savings Bonds issued through  August 2004 will continue to earn interest until they reach final maturity 20 years after issue.  Treasury withdrew the offering of HH bonds due to the high cost in relation to the relatively small value of transactions.  These bonds were initially issued in  1980 and were available in exchange for Series E or EE Savings Bonds.  After August 31, 2004, holders of eligible E and/or  EE bonds may choose to accept the proceeds of maturing issues or invest them in marketable bills, notes, or TIPS at auction, or they may choose to purchase Series EE or I Savings Bonds.
EasySaver Program To Be Discontinued EasySaver was introduced in November 1998 to encourage savings and broaden access to Treasury securities.  Customers  enrolled in EasySaver could buy U.S. Savings Bonds through authorized debits to their bank accounts thus allowing employees  of smaller businesses to have access to a regular savings plan like the millions of Americans who buy bonds through payroll  savings plans at work.  Since some of the same EasySaver features and even more features are available in TreasuryDirect   (www.treasurydirect.gov), the Bureau of the Public Debt stopped accepting EasySaver enrollments on December 31, 2003.  All  existing automatic EasySaver debits will be discontinued in March 2005.  Customers are encouraged to enroll in  TreasuryDirect to buy, manage, and redeem their securities online.
TreasuryDirect represents a direct relationship between customers — individuals and financial professionals alike — and the  U.S. Treasury.  The TreasuryDirect website (www.treasurydirect.gov) provides complete information for people who want to  buy securities directly from the Treasury — in a way that's easy for everyone to understand.  Electronic purchasers can use  TreasuryDirect to schedule electronic Series EE and I Savings Bond purchases.  TreasuryDirect enhanced its Internet website  capability during fiscal year 2004.  One new feature offered is a payroll deduction option to purchase a Zero-Percent Certificate  of Indebtedness (C of I).  While these securities do not earn any interest, they can be used as a source of funds to purchase  savings bonds within a TreasuryDirect account after accumulating a minimum of $25 in the C of I or by scheduling a purchase  in advance.  Customers may purchase electronic Series EE and I Savings Bonds ranging in value from $25 - $30,000 in  increments as low as $0.01.  There is a $30,000 annual limit per series per person.  Customers may redeem a bond one year  after purchase, or hold the bond to maturity.
Significant Events in FY 2004, cont.
Depositary Compensation Securities Redeemed, Replaced By Appropriation In July 2003, Treasury began issuing Depositary Compensation Securities (DCS), a non-marketable security, to compensate  those financial institutions serving as financial agents of the United States for essential banking services provided to the  Government.  These securities were issued to financial agents in an amount sufficient to generate interest payments equal to the monthly expenses for financial agent services provided to Treasury.  As part of the fiscal year 2004 Treasury appropriation, a  permanent and indefinite appropriation was enacted to reimburse financial institutions serving as financial agents for the United  States.  As a result, more than $16 billion of DCS were called on February 29, 2004.
Statutory Debt Limit Being Evaluated As a consequence of the changes in the government’s financing needs, resulting in part from the current economic  environment, Treasury Secretary John Snow urged the Congress on August 2, 2004, to raise the debt limit.  Delays in raising  the current debt limit of $7,384 billion have forced Treasury to enter into a debt issuance suspension period (DISP) that  involves Treasury’s departure from its normal investment and redemption procedures for certain federal government accounts.
Consistent with legal authorities available to the Secretary, on October 14, 2004, Treasury suspended sales of State and Local  Government series (SLGS) nonmarketable securities and was unable to fully invest contributions in the Government Securities  Investment Fund (G-Fund) of the federal employee 401(k) retirement plan.
Federal debt outstanding is one of the largest legally binding obligations of the federal government.  Nearly all the federal debt  has been issued by the Treasury with a small portion being issued by other federal government agencies.  Treasury issues debt  securities for two principal reasons, (1) to borrow needed funds to finance the current operations of the federal government and (2) to provide an investment and accounting mechanism for certain federal government accounts’ excess receipts, primarily  trust funds.  Total gross federal debt outstanding has dramatically increased over the past 25 years from $827 billion as of  September 30, 1979 to $7,379 billion as of September 30, 2004 (see Figure 5).  Large budget deficits emerged during the  1980’s due to tax policy decisions and increased outlays for defense and domestic programs.  Through fiscal year 1997, annual  federal deficits continued to be large and debt continued to grow at a rapid pace.  As a result, total federal debt increased more  than five fold between 1980 and 1997.
Historical Perspective, cont.
However, by fiscal year 1998, federal debt held by the public was beginning to decline.  In fiscal years 1998 through 2001, the amount of debt held by the public fell by $476 billion, from $3,815 billion to $3,339 billion.  As a consequence of the changes in the federal government’s financing needs, resulting from increased federal outlays, tax policy decisions, and the deterioration  of overall economic performance, from fiscal year 2001 to 2004 debt held by the public rose by $968 billion, from $3,339  billion to $4,307 billion.  Even in those years where debt held by the public declined, total federal debt increased because of increases in intragovernmental debt holdings.  Over the past 4 fiscal years, intragovernmental debt holdings increased by $852  billion, from $2,220 billion as of September 30, 2000, to $3,072 billion as of September 30, 2004.  By law, trust funds have the authority or are required to invest surpluses in federal securities.  As a result, the intragovernmental debt holdings balances primarily represent the cumulative surplus of funds due to the trust funds’ cumulative annual excess of tax receipts, interest  credited, and other collections compared to spending.
As shown in Figure 6, interest rates have fluctuated over the past 25 years.  The average interest rates reflected here represent  the original issue weighted effective yield on securities outstanding at the end of the fiscal year.
Average Interest Rates of Federal Debt  Outstanding (Unaudited)
subsections: section_title: Schedules of Federal Debt
paragraphs: Managed by the Bureau of the Public Debt  For the Fiscal Years Ended September 30, 2004 and 2003   (Note 2) (Note 3) (Discounts) (Discounts) (39,945) (10,362)
Accrued Interest (Note 4) (10,362)
Net Amortization (Note 4) (13,461) (13,461) (36,846) (312) (10,667)
Accrued Interest (Note 4) (10,667)
Net Amortization (Note 4) (12,735)  (12,735) ($34,778) ($589)
The accompanying notes are an integral part of these schedules.
section_title: Notes to the Schedules of Federal Debt
paragraphs: Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt  For the Fiscal Years Ended September 30, 2004 and 2003   Note 1. Significant Accounting Policies  The Schedules of Federal Debt Managed by the Bureau of the Public Debt (BPD) have been prepared to report  fiscal year 2004 and 2003 balances and activity relating to monies borrowed from the public and certain federal  government accounts to fund the U.S. government's operations.  Permanent, indefinite appropriations are available  for the payment of interest on the federal debt and the redemption of Treasury securities.
The Constitution empowers the Congress to borrow money on the credit of the United States.  The Congress has  authorized the Secretary of the Treasury to borrow monies to operate the federal government within a statutory  debt limit.  Title 31 U.S.C. authorizes Treasury to prescribe the debt instruments and otherwise limit and restrict  the amount and composition of the debt.  BPD, an organizational entity within the Fiscal Service of the  Department of the Treasury, is responsible for issuing Treasury securities in accordance with such authority and to  account for the resulting debt.  In addition, BPD has been given the responsibility to issue Treasury securities to  trust funds for trust fund receipts not needed for current benefits and expenses.  BPD issues and redeems Treasury  securities for the trust funds based on data provided by program agencies and other Treasury entities.
The schedules were prepared in conformity with U.S. generally accepted accounting principles and from BPD's  automated accounting system, Public Debt Accounting and Reporting System.  Interest costs are recorded as  expenses when incurred, instead of when paid.  Certain Treasury securities are issued at a discount or premium.
These discounts and premiums are amortized over the term of the security using an interest method for all long  term securities and the straight line method for short term securities.  The Department of the Treasury also issues  Treasury Inflation-Protected Securities (TIPS).  The principal for TIPS is adjusted over the life of the security  based on the Consumer Price Index for all Urban Consumers.
Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt  For the Fiscal Years Ended September 30, 2004 and 2003   Note 2.  Federal Debt Held by the Public  As of September 30, 2004 and 2003, Federal Debt Held by the Public consisted of the following:  Total Federal Debt Held by the Public Treasury issues marketable bills at a discount and pays the par amount of the security upon maturity.  The average  interest rate on Treasury bills represents the original issue effective yield on securities outstanding as of September  30, 2004 and 2003, respectively.  Treasury bills are issued with a term of one year or less.
Treasury issues marketable notes and bonds as long-term securities that pay semi-annual interest based on the  securities' stated interest rate.  These securities are issued at either par value or at an amount that reflects a  discount or a premium.  The average interest rate on marketable notes and bonds represents the stated interest rate  adjusted by any discount or premium on securities outstanding as of September 30, 2004 and 2003.  Treasury  notes are issued with a term of 2 – 10 years and Treasury bonds are issued with a term of more than 10 years.
Treasury also issues TIPS that have interest and redemption payments, which are tied to the Consumer Price  Index, the leading measurement of inflation.  TIPS are issued with a term of more than 5 years.  At maturity, TIPS  are redeemed at the inflation-adjusted principal amount, or the original par value, whichever is greater.  TIPS pay  a semi-annual fixed rate of interest applied to the inflation-adjusted principal.  Inflation-indexed securities, TIPS,  were previously included with Treasury notes and bonds.  The fiscal year 2003 amounts and average interest rates  have been reclassified to conform with the presentation adopted in fiscal year 2004.
Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt  For the Fiscal Years Ended September 30, 2004 and 2003   Note 2.  Federal Debt Held by the Public (continued)
As of September 30, 2004, nonmarketable securities primarily consisted of $204,246 million in U.S. Savings  Securities, $158,214 million in securities issued to State and Local Governments, $5,881 million in Foreign Series  Securities, and $29,995 million in Domestic Series Securities.  As of September 30, 2003, nonmarketable  securities primarily consisted of $201,606 million in U.S. Savings Securities, $148,366 million in securities issued  to State and Local Governments, $11,007 million in Foreign Series Securities, $29,995 million in Domestic Series  Securities, and $14,991 million in Depositary Compensation Securities.  Treasury issues nonmarketable securities  at either par value or at an amount that reflects a discount or a premium.  The average interest rate on the  nonmarketable securities represents the original issue weighted effective yield on securities outstanding as of  September 30, 2004 and 2003.  Nonmarketable securities are issued with a term of on demand to more than 10  Government Account Series (GAS) securities are nonmarketable securities issued to federal government accounts.
Federal Debt Held by the Public includes GAS securities issued to certain federal government accounts.  One  example is the GAS securities held by the Government Securities Investment Fund (G-Fund) of the federal  employees’ Thrift Savings Plan.  Federal employees and retirees who have individual accounts own the GAS  securities held by the fund.  For this reason, these securities are considered part of the Federal Debt Held by the  Public rather than Intragovernmental Debt Holdings.  The GAS securities held by the G-Fund consist of overnight  investments redeemed one business day after their issue.  The net increase in amounts borrowed from the fund  during fiscal years 2004 and 2003 are included in the respective Borrowings from the Public amounts reported on  the Schedules of Federal Debt.
Federal Debt Held by the Public includes federal debt held outside of the U. S. government by individuals,  corporations, Federal Reserve Banks (FRB), state and local governments, and foreign governments and central  banks.  The FRB owned $698 billion and $654 billion of Federal Debt Held by the Public as of September 30,  2004 and 2003, respectively.  These securities are held in the FRB System Open Market Account (SOMA) for the  purpose of conducting monetary policy.
Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt  For the Fiscal Years Ended September 30, 2004 and 2003   Note 3.  Intragovernmental Debt Holdings  As of September 30, 2004 and 2003, Intragovernmental Debt Holdings are owed to the following:  Federal Old-Age and Survivors Insurance Trust Fund  Civil Service Retirement and Disability Fund  Federal Hospital Insurance Trust Fund  Federal Disability Insurance Trust Fund  Employees' Life Insurance Fund   Federal Supplementary Medical Insurance Trust Fund  Pension Benefit Guaranty Corporation Fund  Foreign Service Retirement & Disability Fund  Savings Association Insurance Fund (SAIF)
Treasury:  Exchange Stabilization Fund  Airport & Airway Trust Fund   These amounts include marketable Treasury securities as well as GAS securities as follows:  As of September 30, 2004:  Civil Service Retirement and Disability Fund  Federal Disability Insurance Trust Fund  As of September 30, 2003:  Civil Service Retirement and Disability Fund  Federal Disability Insurance Trust Fund  Social Security Administration (SSA); Office of Personnel Management (OPM); Department of Health and Human  Services (HHS); Department of Defense (DOD); Department of Labor (DOL); Federal Deposit Insurance  Corporation (FDIC); Department of Energy (DOE); Department of Housing and Urban Development (HUD);  Department of Transportation (DOT); Department of State (DOS); Department of Veterans Affairs (VA);  Department of the Treasury (Treasury).
Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt  For the Fiscal Years Ended September 30, 2004 and 2003   Note 3.  Intragovernmental Debt Holdings (continued)
Intragovernmental Debt Holdings primarily consist of GAS securities.  Treasury issues GAS securities at either par  value or at an amount that reflects a discount or a premium.  The average interest rates for fiscal years 2004 and  2003 were 5.4 percent and 5.5 percent, respectively.  The average interest rate represents the original issue  weighted effective yield on securities outstanding as of September 30, 2004 and 2003.  GAS securities are issued  with a term of on demand to 30 years.
Note 4. Interest Expense  Interest expense on Federal Debt Managed by BPD for fiscal years 2004 and 2003 consisted of  Federal Debt Held by the Public   Net Amortization of Premiums and Discounts  Total Interest Expense on Federal Debt Held by the Public  Net Amortization of Premiums and Discounts  (3,717) (6,670)
Total Interest Expense on Intragovernmental Debt  Total Interest Expense on Federal Debt Managed by BPD  Note 5. Fund Balance With Treasury  The Fund Balance with Treasury, a non-entity, intragovernmental account, is not included on the Schedules of  Federal Debt and is presented for informational purposes.
section_title: Comments from the Bureau of the Public Debt
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the individual named above, Erik A. Braun, Dean D.  Carpenter, Dennis L. Clarke, Chau L. Dinh, Mickie E. Gray, Jennifer L. Hall,  Jay McTigue, Lori B. Ryza, Kathryn J. Peterson, and Jason O. Strange made  key contributions to this report.