Financial Audit: Bureau of the Public Debt's Fiscal Years 2007 and 2006 Schedules of Federal Debt
Published: 2007-11-07T00:00:00

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 are reliable and (2) BPD management maintained effective internal control relevant to the Schedule of Federal Debt. Further, GAO tests compliance with a significant selected provision of law 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.
section_title: What GAO Found
paragraphs: In GAO's opinion, BPD's Schedules of Federal Debt for fiscal years 2007 and 2006 were fairly presented in all material respects and BPD maintained effective internal control relevant to the Schedule of Federal Debt as of September 30, 2007. GAO also found no instances of noncompliance in fiscal year 2007 with the statutory debt limit. As of September 30, 2007 and 2006, federal debt managed by BPD totaled about $8,993 billion and $8,493 billion, respectively. Total federal debt increased over each of the last 4 fiscal years. Total federal spending has exceeded total federal revenues which have resulted in increases in debt held by the public. Further, certain trust funds (e.g., Social Security) continue to run cash surpluses, resulting in increased intragovernmental debt holdings since the federal government spends these surpluses on other operating costs and replaces them with federal debt instruments. 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. As a result, total gross federal debt has increased about 33 percent between the end of fiscal years 2003 and 2007. On September 29, 2007, legislation was enacted to raise the statutory debt limit by $850 billion to $9,815 billion. This was the third occurrence since the end of fiscal year 2003 that the statutory debt limit had to be raised to avoid breaching the statutory debt limit. During that time, the debt limit has increased by over $2.4 trillion, or about 33 percent, from $7,384 billion on September 30, 2003, to the current limit of $9,815 billion.

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  (BPD) for the fiscal years ended September 30, 2007 and 2006.  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.
The auditor’s report contains our (1) opinion on the Schedules of Federal  Debt for the fiscal years ended September 30, 2007 and 2006, (2) opinion on  the effectiveness of relevant internal control as of September 30, 2007,   (3) conclusion on compliance in fiscal year 2007 with a selected provision  of law 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, 2007 and 2006, federal debt managed by the bureau  totaled about $8,993 billion and $8,493 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)  $5,049 billion as of September 30, 2007, and $4,843 billion as of September  30, 2006, of debt held by the public and about (2) $3,944 billion as of  September 30, 2007, and $3,650 billion as of September 30, 2006, 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 total 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 federal government uses the trust funds’ invested cash surpluses to  assist in funding other federal government costs. The transactions relating  to Treasury securities held by the federal government accounts net out on  the federal government’s consolidated financial statements because under  current U.S. generally accepted accounting principles they essentially  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 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, Treasury usually  borrows from the public to finance these redemptions. Such borrowings  result in competition with the private sector and thus an effect on the  economy.
We have audited the Schedule of Federal Debt since fiscal year 1997. Over  this period, total federal debt has increased by 73 percent.  During the last 4  fiscal years, managing the federal debt has continued to be a challenge as  evidenced by the growth of total federal debt by $2,210 billion, or 33  percent, from $6,783 billion as of September 30, 2003, to $8,993 billion as of  September 30, 2007.  As a result of the increasing debt, again this past year,  Congress enacted a bill to increase the debt limit to avoid breaching the  statutory debt limit.  On September 29, 2007, the President approved the  bill to increase the statutory debt limit from $8,965 billion to $9,815 billion.   This was the third occurrence since the end of fiscal year 2003 that a law  has been enacted to raise the statutory debt limit, with the debt limit  increasing over $2.4 trillion, or about 33 percent, from $7,384 billion on  September 30, 2003, to $9,815 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 2007 Treasury Bulletin, Treasury  estimates that the amount of Treasury securities held by foreign and  international investors has increased $837 billion, from $1,383 as of June  30, 2003, to $2,220 billion as of June 30, 2007. As of June 30, 2007, this  represents an estimated 45 percent of debt held by the public, up from  about 36 percent as of June 30, 2003. The United States benefits from  foreign purchases of Treasury securities because foreign and international  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 and international 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.
Another trend we have observed is the decline in annual budget deficits. As  widely reported last month, the fiscal year 2007 budget deficit of $163  billion represents the third consecutive decline in budget deficits, down  from last year’s deficit of $248 billion. Certainly lower short-term deficits  are better than higher short-term deficits. However, our nation’s real  challenge is not short-term deficits, rather it’s the U.S. government’s  impending longer-term structural deficits and related debt burdens. Indeed,  what we call the longer-term fiscal challenge is not in the distant future.  The first of the baby boomers become eligible for early retirement under  Social Security on January 1, 2008—only two months from now— and for  Medicare benefits just 3 years later. The budget and economic implications  of the baby boom generation’s retirement have already become a factor in  Congressional Budget Office’s 10-year baseline projections and will only  intensify as the baby boomers age.  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.  Simply put, our  nation is on an imprudent and unsustainable long-term fiscal path that is  getting worse with the passage of time.  Absent significant changes on the  spending and/or revenue sides of the budget, 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.
As discussed earlier, federal debt managed by the bureau totaled about $9  trillion at the end of fiscal year 2007.  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 total burden in present value dollars is  estimated to be about $53 trillion.  Stated differently, the estimated current  total burden for every American is nearly $175,000; and every day that  burden becomes larger.  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, 21st 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.
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 Financial Services and  General Government, Senate Committee on Appropriations; the  Subcommittee on Federal Financial Management, Government  Information, Federal Services, and International Security, Senate  Committee on Homeland Security and Governmental Affairs; the House  Committee on Appropriations; the House Committee on Oversight and  Government  Reform; the House Committee on the Budget; the  Subcommittee on Financial Services and General Government, House  Committee on Appropriations; and the Subcommittee on Government  Management, Organization, and Procurement, House Committee on  Oversight and Government Reform. We are also sending copies of this  report to the Commissioner of the Bureau of the Public Debt, the Acting  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. Staff acknowledgements 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 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,  2007 and 2006.  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 Managed by BPD for the  fiscal years ended September 30, 2007 and 2006, we found  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 relevant to the Schedule of  Federal Debt as of September 30, 2007; and  no reportable noncompliance in fiscal year 2007 with a selected  provision of law we tested.
The following sections discuss, in more detail, (1) these conclusions;   (2) our conclusion on the Overview on Federal Debt Managed by the  Bureau of the Public Debt; (3) our audit objectives, scope, and  methodology; and (4) agency comments.
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, 2007, 2006, and  2005 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, 2007 and  2006.
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, 2007,  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), the Federal Managers’ Financial  Integrity Act, and the Office of Management and Budget (OMB) Circular A- 123, Management’s Responsibility for Internal Control.
We found matters involving information security controls that we do not  consider to be significant deficiencies.  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 a Selected Provision of Law
paragraphs: Our tests for compliance in fiscal year 2007 with the statutory debt limit  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, 2007, 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 or U.S. generally accepted accounting  principles.
section_title: Objectives, Scope, and Methodology
paragraphs: Management is responsible for (1) preparing the Schedules of Federal Debt  in conformity with U.S. generally accepted accounting principles;   (2) 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 (3) 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 relevant internal control as of  September 30, 2007, 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, 2007, 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, 2007,  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 (1) testing compliance with selected provisions  of laws and regulations that have a direct and material effect on the  Schedule of Federal Debt and (2) 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 the entity and its operations, including its  internal control relevant to the Schedule of  Federal Debt as of  September 30, 2007, 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 relevant to the Schedule of Federal Debt as of  September 30, 2007;  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 2007 with the statutory debt limit (31  U.S.C. § 3101(b) (Supp IV 2005), as amended by Pub. L. No. 109-182, 120  Stat. 289 (2006), and Pub L. No. 110-91, 121 Stat. 988 (2007)).
We did not evaluate all internal controls relevant to operating objectives as  broadly defined 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 law that has a  direct and material effect on the Schedule of Federal Debt for the fiscal  year ended September 30, 2007.  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  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 (BPD) 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, 2007 and 2006, outstanding gross federal debt managed by the bureau totaled $8,993 and $8,493 billion, respectively.  The increase in gross federal  debt of $500 billion during fiscal year 2007 was due to an increase in gross intragovernmental debt holdings of $294 billion and an  increase in gross debt held by the public of $206 billion.  As Figure 1 illustrates, both intragovernmental debt holdings and debt held  by the public have steadily increased since fiscal year 2003.  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 Fund, Federal Hospital Insurance Trust Fund, Federal Disability Insurance Trust Fund, and Military Retirement Fund.  The increases in debt  held by the public are due primarily to total federal spending exceeding total federal revenues.  As of September 30, 2007, gross debt  held by the public totaled $5,049 billion and gross intragovernmental debt holdings totaled $3,944 billion.
Total Gross Federal Debt Outstanding (in billions)
Interest expense incurred during fiscal year 2007 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 2007, interest expense incurred totaled $433 billion, interest expense on debt held by the public was $239 billion, and $194 billion was interest incurred for  intragovernmental debt holdings.  As Figure 2 illustrates, total interest expense has increased in fiscal years 2003 through 2007. (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, 2007 and 2006, gross debt held by the  public totaled $5,049 billion and $4,843 billion, respectively (see Figure 1), an increase of $206 billion.  The borrowings  and repayments of debt held by the public increased from fiscal year 2006 to 2007.  After Treasury took into account the  increased issuances of State and Local Government Series securities, Treasury decided to finance the remaining current  operations using more short-term securities.
Callable securities mature between fiscal years 2013 and 2015, but are reported by their call date.
Debt Held by the Public, cont.
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, 2007, nonmarketable securities totaled $621 billion, or 12 percent of debt held by the public.  As of that date,  nonmarketable securities primarily consisted of savings securities totaling $197 billion and special securities for state and local governments totaling $297 billion.
The Federal Reserve Banks (FRBs) act as fiscal agents for Treasury, as permitted by the Federal Reserve Act.  As fiscal agents  for Treasury, the FRBs play a significant role in the processing of marketable book-entry securities and paper U.S. savings  bonds.  For marketable book-entry securities, selected FRBs receive bids, issue book-entry securities to awarded bidders and  collect payment on behalf of Treasury, and make interest and redemption payments from Treasury’s account to the accounts of  security holders.  For paper U.S. savings bonds, selected FRBs sell, print, and deliver savings bonds; redeem savings bonds; and handle the related transfers of cash.
Callable securities mature between fiscal years 2012 and 2015, but are reported by their call date.
Intragovernmental debt holdings represent balances of Treasury securities held by over 230 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, 2007, such funds accounted for $3,419 billion, or 87 percent, of the $3,944  billion intragovernmental debt holdings balances (see Figure 4).  As of September 30, 2007 and 2006, gross  intragovernmental debt holdings totaled $3,944 billion and $3,650 billion, respectively (see Figure 1), an increase of $294  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.
Com ponents of Intragovernm ental Debt Holdings  as of Septem ber 30, 2007 The Social Security trust funds consist of the Federal Old-Age and Survivors Insurance Trust Fund and the Federal  Disability Insurance Trust Fund.  In addition, the Medicare trust funds are made up of the Federal Hospital Insurance  Trust Fund and the Federal Supplementary Medical Insurance Trust Fund.
On May 17, 2007, a house bill was introduced and approved to increase the debt limit from $8,965 billion to $9,815 billion.
The bill was then referred to the Senate Committee on Finance on May 21, 2007, where it gained approval on September 12,  2007.  Projections determined that the United States would hit the statutory debt limit on October 1, 2007, and consequently,  the full senate passed this measure to raise the debt limit by $850 billion on September 27, 2007.  On September 29, 2007,  Public Law 110-91 was enacted, which raised the statutory debt ceiling to $9,815 billion.
Thirty-Year Bond Issuance/Discontinuation of 3-Year Note The thirty-year bond was re-introduced in February 2006 with semi-annual issuance planned.  In August 2006, Treasury  announced that the 30-year bond would be issued on a quarterly basis beginning in February 2007.  The February issue was  reopened in May 2007, followed by an original issue in August 2007 that will be reopened in November 2007.  This quarterly  issuance pattern has benefited the Separate Trading of Registered Interest and Principal of Securities (STRIPS) market by  creating interest payments for February, May, August and November.  Beginning in February 2006, the auction and issuance of  the monthly 5-year note was shifted to month end to accommodate the re-introduction of the 30-year bond.
Additionally, Treasury’s ongoing monitoring of the fiscal year’s economic outlook has resulted in the discontinuance of the 3- year note.  Discontinuance of the 3-year note will allow Treasury to ensure large liquid benchmark issuances, better balance its portfolio, and manage the fiscal outlook.  The final scheduled auction of the 3-year note was held on May 7, 2007.
Discontinuance of Long-Term Securities in Legacy Treasury Direct On January 18, 2007, a final amendment to the Uniform Offering Circular (UOC) was published in the Federal Register  clarifying that the Treasury Department may announce certain marketable Treasury securities as not eligible for purchase or  holding in Legacy Treasury Direct.  Legacy Treasury Direct, which was implemented in 1986, will be phased out and replaced  by the newer, online TreasuryDirect system.  To assist with this phasing out, the offering of longer-term securities in Legacy  Treasury Direct was discontinued.  Since January 2007, 30-year bonds and 20-year TIPS are no longer available in Legacy  Treasury Direct.  This amendment also clarified that the announcement for each auction, in conjunction with the UOC,  provides the terms and conditions for the sale and issuance of marketable Treasury bills, notes, bonds, and TIPS.
TreasuryDirect is an Internet-accessed system that enables investors to purchase the full range of Treasury securities and  manage their holdings in a single account.  Sensitive online transactions such as bank account changes and securities sales and transfers could become vulnerable to fraud.  In July 2007, BPD initiated certified paper requests to process these sensitive  transactions.  This third-party investor identification helps mitigate risk and assure individual investors of the security of their  Treasury Direct investments by providing additional verification and a written record of transaction requests.
Significant Events in FY 2007, cont.
Postal Retiree Health Benefits Fund On December 20, 2006, the President signed H.R. 6407, which enacted Public Law 109-435, the “Postal Accountability and  Enhancement Act.”  This Act created a new Government Account Series Trust Fund, the Postal Retiree Health Benefits Fund.
This fund is administered by the Office of Personnel Management and receives transfers from the United States Postal Service  (USPS).  The initial transfer in the amount of $3 billion was received and invested in par value securities on April 6, 2007.
Additional amounts of $17.1 billion and $5.4 billion were transferred and invested on June 30, 2007 and September 28, 2007,  respectively.  The fund is not expected to make payouts until 2017.
Beginning with the accounting date of June 1, 2007, BPD is publishing key daily debt-related financial data on our website,  http://www.treasurydirect.gov/govt/reports/pd/feddebt/feddebt_daily.htm.  Similar financial information is currently published  monthly.  During the past fiscal year, BPD strengthened internet communications with customers by redesigning the  government section of the Treasurydirect.gov website.  Additional on-line resources are now available and the overall  functionality and accessibility features are greatly improved.  The Schedules of Federal Debt daily reporting was implemented  to support the Treasury strategic objective to “make accurate, timely financial information on U.S. Government programs  readily available.” The enhanced financial reporting is geared toward providing our customers more timely information and is  one of BPD’s strategic goals for FY 2007.
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 $1,142 billion as of  September 30, 1982, to $8,993 billion as of September 30, 2007 (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 almost  five fold between 1982 and 1997.
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.  However, higher Federal outlays and tax  policy decisions have resulted in an increase in debt held by the public from $3,339 billion in 2001 to $5,049 billion in 2007.
Historical Perspective, cont.
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 $1,085 billion,  from $2,859 billion as of September 30, 2003, to $3,944 billion as of September 30, 2007.  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.
subsections: section_title: Schedules of Federal Debt
paragraphs: Managed by the Bureau of the Public Debt  For the Fiscal Years Ended September 30, 2007 and 2006  (Dollars in Millions) (Note 2) (Note 3) (Discounts) (Discounts) ($35,531) (48,568) (12,630)
Accrued Interest (Note 4) (48,568) (12,630)
Net Amortization (Note 4) (43,934)  (43,934) (40,165) (1,159) (48,776)
Accrued Interest (Note 4) (48,776)
Net Amortization (Note 4) (49,500) (49,500) ($39,441)
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, 2007 and 2006   (Dollars in Millions)
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 2007 and 2006 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 daily 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, 2007 and 2006   (Dollars in Millions)
Note 2.  Federal Debt Held by the Public  As of September 30, 2007 and 2006, 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, 2007 and 2006, 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, 2007 and 2006.  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,  a widely used measure of inflation.  TIPS are issued with a term of 5 years or more.  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.  The TIPS Federal Debt Held by the  Public inflation-adjusted principal balance includes inflation of $50,517 million and $43,927 million as of  September 30, 2007 and 2006, respectively.
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 $775 billion and $765 billion of Federal Debt Held by the Public as of September 30, 2007  and 2006, 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, 2007 and 2006   (Dollars in Millions)
Note 2.  Federal Debt Held by the Public (continued)
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, 2007 and 2006.  Nonmarketable securities are issued with a term of on  demand to more than 10 years.
As of September 30, 2007 and 2006, nonmarketable securities consisted of the following:  State and Local Government Series  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 2007 and 2006 are included in the respective Borrowings from the Public amounts reported on  the Schedules of Federal Debt.
Fiscal years-end September 30, 2007 and 2006, occurred on a Sunday and Saturday, respectively.  As a result,  $26,591 million and $31,656 million of marketable Treasury notes matured but not repaid is included in the balance  of the total Federal Debt Held by the Public as of September 30, 2007 and 2006, respectively.  Settlement of these  debt repayments occurred on Monday, October 1, 2007, and Monday, October 2, 2006.
Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt  For the Fiscal Years Ended September 30, 2007 and 2006   (Dollars in Millions)
Foreign Service Retirement and Disability Fund  National Service Life Insurance 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 the Treasury (Treasury); Department of State (DOS); Department of Transportation (DOT);  Department of Veterans Affairs (VA).
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 2007 and  2006 were 5.1 and 5.2 percent, respectively.  The average interest rate represents the original issue weighted  effective yield on securities outstanding as of September 30, 2007 and 2006.  GAS securities are issued with a term  of on demand to 30 years.  GAS securities include TIPS, which are reported at an inflation-adjusted principal  balance using the Consumer Price Index.  As of September 30, 2007 and 2006, the inflation-adjusted principal  balance included inflation of $28,643 million and $19,576 million, respectively.
Fiscal years-ended September 30, 2007 and 2006, occurred on a Sunday and Saturday, respectively.  As a result,  $53 million and $360 million of GAS securities held by Federal Agencies matured but not repaid is included in the  balance of the Intragovernmental Debt Holdings as of September 30, 2007 and 2006, respectively.  Settlement of  these debt repayments occurred on Monday, October 1, 2007 and Monday, October 2, 2006.
Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt  For the Fiscal Years Ended September 30, 2007 and 2006   (Dollars in Millions)
Note 4. Interest Expense  Interest expense on Federal Debt Managed by BPD for fiscal years 2007 and 2006 consisted of the  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  (1,116) (3,269)
Total Interest Expense on Intragovernmental Debt  Total Interest Expense on Federal Debt Managed by BPD  The valuation of TIPS is adjusted daily over the life of the security based on the Consumer Price Index for all  Urban Consumers. This daily adjustment is an interest expense for the Bureau of the Public Debt.  Accrued interest  on Federal Debt Held by the Public includes inflation adjustments of  $10,276 million and $14,512 million for  fiscal years 2007 and 2006, respectively.  Accrued interest on Intragovernmental Debt Holdings includes inflation  adjustments of $378 million and $607 million for fiscal years 2007 and 2006, respectively.
Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt  For the Fiscal Years Ended September 30, 2007 and 2006   (Dollars in Millions)
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, Dawn B. Simpson, Assistant  Director; Dean D. Carpenter; Emily M. Clancy; Dennis L. Clarke; Chau L.  Dinh; Lisa M. Galvan-Treviño; Vivian M. Gutierrez; Erik S. Huff; Bret R.  Kressin; Nicole M. McGuire; and Jay R. McTigue made key contributions to  this report.