Financial Audit: Bureau of the Public Debt's Fiscal Years 2003 and 2002 Schedules of Federal Debt
Published: 2003-11-07T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: GAO audited the Bureau of Public Debt's schedule of Federal Debt for fiscal years 2003 and 2002.
section_title: What GAO Found
paragraphs: GAO found that (1) the Schedules of Federal Debt were presented fairly, in all material respects, in conformity with generally accepted accounting principles; (2) the Bureau had effective internal control over financial reporting and compliance with laws and regulations related to the Schedule of Federal Debt for fiscal year 2003; and (3) there was no reportable noncompliance in fiscal year 2003 with a selected provision of a law GAO tested.

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, 2003 and 2002. 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, 2003 and 2002, (2) opinion on  the effectiveness of related internal control as of September 30, 2003,  (3) conclusion on the bureau's compliance in fiscal year 2003 with laws we  tested, and (4) conclusion on the consistency between information in the  Schedules of Federal Debt and the Overview on Federal Debt Managed by  the Bureau of the Public Debt.
As of September 30, 2003 and 2002, federal debt managed by the bureau  totaled about $6,783 billion and $6,213 billion, respectively, for moneys  borrowed to fund the government’s operations. As shown on the Schedules  of Federal Debt, these balances consisted of approximately (1)  $3,924 billion as of September 30, 2003, and $3,553 billion as of September  30, 2002, of debt held by the public and about (2) $2,859 billion as of  September 30, 2003, and $2,660 billion as of September 30, 2002, 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 and  2003, debt held by the public increased by $585 billion, with about  $371 billion of this increase occurring in fiscal year 2003. 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 inflation indexed note from three offerings a year to an offering every  quarter. Notwithstanding the increases in fiscal years 2002 and 2003, 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, 2003.
Intragovernmental debt holdings represent balances of Treasury securities  held by federal government accounts, primarily federal trust funds, that  typically have an obligation to invest their excess annual receipts over  disbursements in federal securities. Most federal trust funds invest in  special U.S. Treasury securities that are guaranteed for principal and  interest by the full faith and credit of the U.S. government. These securities  are nonmarketable; however, they represent a priority call on future  budgetary resources. Certain of these trust funds, such as the Social  Security and federal civilian employee and military retirement trust funds,  have been running cash surpluses, which are loaned to the Treasury and  reduce the current need for the government to borrow from the public.  Primarily as a result of such trust fund surpluses, intragovernmental debt  holdings have increased by approximately $1,276 billion during fiscal years  1998 through 2003, from $1,583 billion as of September 30, 1997, to  $2,859 billion as of September 30, 2003, with about $199 billion of this  increase occurring in fiscal year 2003. 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, 2003.
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. 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 cash surpluses of those trust funds and also  reflect future priority claims on the U.S. Treasury. They do not have the  current economic effects of borrowing from the public and do not currently  compete with the private sector for available funds in the credit markets.  However, when trust funds redeem Treasury securities to obtain cash to  fund expenditures, and Treasury borrows from the public to finance these  redemptions, there is competition with the private sector and thus an effect  on the economy.
During fiscal year 2003, Treasury again faced the challenge of managing the  debt within the statutory debt limit. On February 20, 2003, Treasury entered  into a debt issuance suspension period that required it to depart from its  normal debt management procedures and to invoke legal authorities  provided to avoid breaching the debt limit. Actions taken by Treasury  included suspending investment of receipts of the Government Securities  Investment Fund (G-Fund) of the federal employees’ Thrift Savings Plan,  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. The  Congressional Budget Office recently projected that this new debt limit will  be reached during fiscal year 2004.
The challenge of managing the federal debt is not likely to diminish any  time soon. In fiscal year 2003 alone, debt held by the public increased by  approximately 2.3 percent of gross domestic product (GDP)—from  34.2 percent at the start of the fiscal year to an estimated 36.5 percent at the  end. Although the recession of 2001 has been over for almost 2 years, the  federal budget deficit for fiscal year 2003 is the largest (in nominal dollars)  on record, and projections suggest that the deficit for fiscal year 2004 will  be even larger. 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.
These large deficits come as the squeeze on the federal budget from the  impending retirement of the baby boom generation is becoming more  apparent in the fiscal outlook. Under the Congressional Budget Office’s  most recent 10-year budget outlook, economic growth is projected to be  about half a percentage point lower on average after 2008 when the leading  edge of the baby boom generation becomes eligible for early retirement. At  the same time, growth in Social Security and Medicare spending is  projected to accelerate while Medicaid spending is projected to continue  growing even faster than these two programs. Under current law, spending  for these three programs will account for nearly half of all federal spending  in 2013. Indeed, GAO’s long-term budget simulations continue to show that  without changes to the major entitlement programs for the elderly, the  nation will ultimately have to choose between escalating federal deficits  and debt, significant tax increases, and/or dramatic budget cuts in other  areas. Acting sooner rather than later is essential to ease these building  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 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. 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,  2003 and 2002. 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, 2003 and 2002, 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, 2003; and no reportable noncompliance in fiscal year 2003 with laws we tested.
The following sections discuss, in more detail, (1) these conclusions and  our conclusion on the Overview on Federal Debt Managed by the Bureau of  the Public Debt and (2) the scope of our audits.
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, 2003, 2002, and  2001, 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, 2003 and  2002.
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, 2003.  The internal control provided reasonable assurance that misstatements,  losses, or noncompliance material in relation to the Schedule of Federal  Debt for the fiscal year ended September 30, 2003, would be prevented or  detected on a timely basis. Our opinion is based on criteria established  under 31 U.S.C. sec. 3512 (c), (d) (2000) (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 computer 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 in fiscal year 2003 disclosed no instances of noncompliance with  selected provisions of laws that would be reportable under U.S. generally  accepted government auditing standards or OMB audit guidance. However,  the objective of our audit of the Schedule of Federal Debt for the fiscal year  ended September 30, 2003, 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, 2003, 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, 2003, 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, 2003,  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, 2003, 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, 2003; 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 2003 with selected provisions of the  following laws: statutory debt limit (31 U.S.C. sec. 3101(b) (2000), as  amended by Pub. L. No. 107-199, sec. 1, 116 Stat. 734 (2002) and Pub. L.  108-24, 117 Stat. 710 (2003)), suspension and early redemption of  investments from the Civil Service Retirement and Disability Trust Fund  (5 U.S.C. sec. 8348(j)(k) (2000)), and suspension of investments from  the G-Fund (5 U.S.C. sec. 8438(g) (2000)).
We did not evaluate all internal controls relevant to operating objectives as  broadly described by the Federal Managers' Financial Integrity Act, such as  those controls relevant to preparing statistical reports and ensuring  efficient operations. We limited our internal control testing to controls over  financial reporting and compliance. Because of inherent limitations in  internal control, misstatements due to error or fraud, losses, or  noncompliance may nevertheless occur and not be detected. We also  caution that projecting our evaluation to future periods is subject to the  risk that controls may become inadequate because of changes in conditions  or that the degree of compliance with controls may deteriorate.
We did not test compliance with all laws and regulations applicable to BPD.  We limited our tests of compliance to selected provisions of laws and  regulations that have a direct and material effect on the Schedule of  Federal Debt for the fiscal year ended September 30, 2003. 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: Total Gross Federal Debt Outstanding  (in billions)
Interest expense incurred during fiscal year 2003 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. 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. g fiscal year 2003, interest expense incurred  totaled $315 billion, interest expense on debt held by the public was $157 billion, and $158 billion was interest incurred for  intragovernmental debt holdings.  Figure 2 shows total interest expense incurred during fiscal years 1999 through 2003.  Although  the total federal debt continued to increase during fiscal year 2003, total interest expense decreased due to declining interest rates.
Average interest rates on principal balances outstanding as of fiscal year end are disclosed in the Notes to the Schedules of Federal  (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, 2003 and 2002, gross debt held by the public totaled  $3,924 billion and $3,553 billion, respectively (see Figure 1), an increase of $371 billion.  The borrowings and repayments of  debt held by the public increased from fiscal year 2002 to 2003 primarily due to Treasury’s decision to finance current  operations using more short-term securities.
As of September 30, 2003, $3,460 billion, or 88 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, notes, and bonds with maturity dates ranging from less than 1 year out to 30 years.  marketable securities currently held by the public as of September 30, 2003, $2,349 billion or 68 percent will mature within the  next 4 years (see Figure 3). ptember 30, 2003 and 2002, notes maturing within the next 10 years totaled $1,919 billion  and $1,615 billion, respectively, an increase of $304 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, 2003, nonmarketable securities totaled $464 billion, or 12 percent of debt held by the public.  As of that date,  nonmarketable securities primarily consisted of savings securities totaling $202 billion and special securities for state and local  governments totaling $148 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, 2003, such funds accounted for $2,535 billion, or 89 percent, of the $2,859  billion intragovernmental debt holdings balances (see Figure 4).  As of September 30, 2003 and 2002, gross  intragovernmental debt holdings totaled $2,859 billion and $2,660 billion, respectively (see Figure 1), an increase of $199  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. 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.
The Railroad Retirement and Survivors’ Improvement Act of 2001 established a new non-Federal entity, the National Railroad  Retirement Investment Trust (Trust).  The act required that upon the direction of the Railroad Board, transfers be made from  the Railroad Retirement Account (RRA) to the Trust to be held outside the government with a private trust account.  RRA  investments in Government Account Series (GAS) securities were redeemed to generate cash transfers to the Trust totaling  $19,250 million, $17,750 million was transferred during fiscal year 2003 and $1,500 million during fiscal year 2002.  The cash  transfers began on September 18, 2002, and were made twice a month with the last one paid on March 19, 2003, as dictated by  a 6 month schedule provided to Treasury in accordance with the Memorandum of Understanding (MOU) between the Railroad  Retirement Board (the RRB), the Trust, the Department of the Treasury (Treasury), and the Office of Management and Budget  (OMB).  In addition to the $17,750 million of GAS securities redeemed during fiscal year 2003 and transferred to the Trust,  $5,130 million was redeemed by RRA for disbursements.  The Railroad Retirement Account currently holds $503 million in  In fiscal year 2003, Public Debt issued the first book-entry (electronic) savings bonds in the new TreasuryDirect system.
Electronic Series I bonds were introduced in October 2002, and electronic Series EE bonds were added in May 2003.  When  fully implemented, TreasuryDirect will enable investors to establish accounts, purchase book-entry savings bonds and  marketable securities, and manage their holdings online in a secure environment.  The system will validate their identity and  process transactions electronically whenever possible; communications will occur via e-mail; payments will be made  electronically; and investors will be able to access statements, confirmations, and tax information online.
Department of Defense (DoD) Medicare Retirement Fund  The Department of Defense (DoD) established a new fund, the Medicare Retirement Fund, in fiscal year 2003.  The purpose of  the Medicare Retirement Fund is to accumulate funds in order to finance actuarially determined liabilities relating to DoD's  health care programs for Medicare eligible beneficiaries.  On October 3, 2002, DoD began investing into GAS securities.
Initially, DoD purchased $13 billion in short-term GAS securities with various maturity dates.  Throughout fiscal year 2003,  DoD purchased and sold additional short-term GAS securities and also invested in overnight GAS securities.  At the end of the  fiscal year, the balance in the account totaled $18 billion.
Overview, Schedules, and Notes  Significant Events in FY 2003, cont.
From February 20 to May 27, 2003, Treasury faced a debt issuance suspension period that required it to depart from its normal  debt management procedures and to invoke legal authorities provided to avoid breaching the debt limit.  During this period,  actions taken by Treasury 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 securities; and exchanging Government Account Series securities for Federal Financing Bank securities  not reported on these schedules.  In addition, because the debt subject to the limit was so close to the ceiling during these  periods, Treasury issued cash management bills to manage short-term financing needs.  On May 27, 2003, Public Law 108-24  was enacted, which raised the statutory debt ceiling by $984 billion to $7,384 billion.
Increased Issuance of Marketable Securities  In the February 5, 2003, Quarterly Refunding Statement, Treasury reintroduced a 3-year note to be part of future quarterly  financing packages, with the first auction on May 6, 2003.  The primary purpose of introducing the 3-year note was to  diversify issuance.  Issuance of the 3-year note was expected to provide additional capacity for fresh borrowing.  During fiscal  year 2003, Treasury issued a total of $50 billion in 3-year notes.  The February 5, 2003, Quarterly Refunding Statement also  instituted a regular reopening policy for 5-year notes, beginning with May 15, 2003.  The reopening will occur one month after  the initial auction (two months before the next auction for a new note).
The April 30, 2003, Quarterly Refunding Statement stated that beginning in August, Treasury will issue 5-year notes on the  th of each month.  Treasury will also regularly reopen 10-year notes on the 15th in the month following the traditional  refunding and expand the issuance of 10-year inflation-indexed notes to 4 times a year.  This additional issuance will help  Treasury maintain its flexibility in responding to unexpected changes in financing requirements.
On July 14, 2003, Treasury issued $44.7 billion in non-marketable securities, Depositary Compensation Securities (DCS), to  compensate those financial institutions serving as financial agents of the United States for essential banking services provided  to the Government.  The phase out of compensating balances, beginning on July 3, 2003, led to a short-term infusion of cash  into Treasury accounts.  Treasury implemented this temporary measure to pay financial agents and ensure that there was no  interruption in services.  DCS are similar to the non-marketable 2 percent Depositary Bonds first issued in 1941 as a means to  compensate depositaries and financial agents of the Government for essential banking services including the collection and  deposit of all Treasury receipts.  The Depositary Bonds were phased out when other methods of compensation, including  compensating balances, were used and the offering was terminated in 1994.
Overview, Schedules, and Notes  Significant Events in FY 2003, cont.
Release of Auction Results in 2 Minutes  On August 4, 2003, Treasury implemented new procedures that reduced the time to calculate the results of an auction.  The  results of the auction will now be published in 2 minutes with a variance of plus or minus 30 seconds after the close of the  auction.  The 2 minute auctions will help to reduce the premium that Treasury has to pay to compensate bidders for the period  of market uncertainty between the close of the auction and the release of the results.
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 $772 billion  as of September 30, 1978 to $6,783 billion as of September 30, 2003 (see Figure 5).  Large budget deficits emerged during the  1970’s as the economy was disrupted by oil crises and inflation.  Through fiscal year 1997, annual federal deficits continued to  be large and debt continued to grow at a rapid pace. a result, total federal debt increased nearly five fold since 1980.
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 for the international war on terrorism and  homeland security efforts, tax policy decisions, and the deterioration of overall economic performance, from fiscal year 2001  to 2003 debt held by the public rose by $585 billion, from $3,339 billion to $3,924 billion. n in those years where debt  held by the public declined, total federal debt increased because of increases in intragovernmental debt holdings.  past 4 fiscal years, intragovernmental debt holdings increased by $886 billion, from $1,973 billion as of September 30, 1999,  to $2,859 billion as of September 30, 2003.  By law, trust funds have the authority or are required to invest surpluses in federal   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.
Av e rage  Inte re st Rate s of Fe de ral De bt  Outstanding (Unaudite d)
subsections: section_title: Schedules of Federal Debt
paragraphs: Managed by the Bureau of the Public Debt  For the Fiscal Years Ended September 30, 2003 and 2002  (Note 2) (Note 3) (Discounts) (Discounts) ($46,010) ($6,170) (12,861)
Accrued Interest (Note 4) (12,861)
subsections: section_title: Repayments of Debt Held
paragraphs: Net Amortization (Note 4) (19,596) (1,347) (19,596) (1,347) (39,275) (1,514)
section_title: Amortization Method (Note 7)
paragraphs: (670)  (39,945)  (10,362)
Accrued Interest (Note 4) (10,362)
section_title: Repayments of Debt Held
paragraphs: Net Amortization (Note 4) (13,461)   (13,461)  ($36,846) ($312)
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, 2003 and 2002  (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 2003 and 2002 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, the redemption of Treasury securities, and the loss on marketable  securities bought back prior to maturity through competitive redemption processes.
The Constitution empowers Congress to borrow money on the credit of the United States.  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.
Prior to October 1, 2002, these discounts and premiums were amortized over the term of the security using an  interest method for zero-coupon bonds and the straight line method, which was not materially different from the  interest method, for the other securities.  As of October 1, 2002, 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 the short  term securities.  The Department of the Treasury also issues inflation-indexed securities.  Inflation-indexed  securities accrue principal over the life of the security based on the Consumer Price Index for all Urban Consumers.
For marketable securities bought back prior to maturity through competitive redemption processes, the difference  between the reacquisition price and the net carrying value of the extinguished debt is recognized as a gain or loss in  the period of extinguishment.
Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt  For the Fiscal Years Ended September 30, 2003 and 2002  Note 2.  Federal Debt Held by the Public  As of September 30, 2003 and 2002, 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, 2003 and 2002, 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.  hese securities are issued at either par value or at an amount that reflects a discount  or a premium.  he 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, 2003 and 2002.  Treasury notes are  issued with a term of 2 – 10 years and Treasury bonds are issued with a term of more than 10 years.  As of  September 30, 2003, Treasury marketable notes included $120,035 million of inflation-indexed notes and Treasury  marketable bonds included $46,085 million of inflation-indexed bonds. As of September 30, 2002, Treasury  marketable notes included $93,738 million of inflation-indexed notes and Treasury marketable bonds included  $45,132 million of inflation-indexed bonds.
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.  As of September 30, 2002, nonmarketable securities primarily consisted of $193,357 million in U.S.
Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt  For the Fiscal Years Ended September 30, 2003 and 2002  (Dollars in Millions)
Note 2.  Federal Debt Held by the Public (continued)
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 2003 and 2002 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 $654 billion and $603 billion of Federal Debt Held by the Public as of September 30, 2003  and 2002, respectively.  These securities are held in the FRB System Open Market Account (SOMA) for the purpose  of conducting monetary policy.
Note 3.  Intragovernmental Debt Holdings  As of September 30, 2003 and 2002, 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)
Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt  For the Fiscal Years Ended September 30, 2003 and 2002  Note 3.  Intragovernmental Debt Holdings (continued)
As of September 30, 2003:  Civil Service Retirement and Disability Fund  Federal Disability Insurance Trust Fund  As of September 30, 2002:  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); Railroad Retirement Board (RRB).
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 2003 and  2002 were 5.5 percent and 6.0 percent, respectively.  The average interest rate represents the original issue weighted  effective yield on securities outstanding as of September 30, 2003 and 2002.  GAS securities are issued with a term  of on demand to 30 years.
Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt  For the Fiscal Years Ended September 30, 2003 and 2002  Note 4. Interest Expense  Interest expense on Federal Debt Managed by BPD for fiscal years 2003 and 2002 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  (6,670)
Total Interest Expense on Intragovernmental Debt Holdings  Total Interest Expense on Federal Debt Managed by BPD  *Amount shown here differs from the net amortization amount on the Schedules of Federal Debt as of September  30, 2002 due to $43 million of net unamortized premiums and discounts written off relating to the marketable  securities bought back prior to maturity through competitive redemption processes.  (See note 6 for additional  information on debt buybacks.)
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.
Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt  For the Fiscal Years Ended September 30, 2003 and 2002  (Dollars in Millions)
Note 6.  Debt Buybacks  Debt buybacks are competitive redemption processes by which Treasury accepts offers to redeem particular  marketable Treasury securities prior to their maturity dates.  Once the securities have been redeemed from investors,  they are removed from the total Treasury securities outstanding.  On January 19, 2000, the Department of the  Treasury issued a final rule adding part 375 to 31 CFR, setting out the terms and conditions by which outstanding,  unmatured marketable Treasury securities may be redeemed through Treasury buying back the securities.  This  authority to buy back securities enables Treasury to better manage financing needs, promote more efficient capital  markets, and may lower financing costs for taxpayers.
Three factors are considered if a debt buyback is to occur and on the amount and timing of any purchases:  1) Treasury’s projections of the federal government’s annual, unified surplus or deficit position; 2) Treasury’s three- month projections of the cash position at the time of the regular quarterly refunding announcements; and 3)
Treasury’s analysis of how best to minimize borrowing costs over time.
Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt  For the Fiscal Years Ended September 30, 2003 and 2002  (Dollars in Millions)
Note 7.  Change in Amortization Method  Net Unamortized Premiums/(Discounts)
Balance as of September 30, 2002  ($39,275) ($1,514)
Adjustment for change in Amortization Method  (670)
Net Unamortized Premiums/(Discounts)
Adjusted Balance as of September 30, 2002  ($39,945)
On October 1, 2002, the method for amortizing discounts and premiums was changed from the straight line method  to an interest method for notes and bonds (other than zero coupon bonds already being amortized using an interest  method).  This change was made to standardize the processing and recording of amortizations for intragovernmental  activity.  Amortization for debt held by the public securities was also changed for consistent reporting with  intragovernmental debt holdings.
section_title: Comments from the Bureau of the Public Debt
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