Financial Audit: Bureau of the Public Debt's Fiscal Years 2008 and 2007 Schedules of Federal Debt
Published: 2008-11-07T00:00:00

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 audits 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 provision of law related to the Schedule of Federal Debt (statutory debt limit). 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 primarily 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 2008 and 2007 were fairly presented in all material respects, and BPD maintained effective internal control relevant to the Schedule of Federal Debt as of September 30, 2008. GAO found no instances of noncompliance in fiscal year 2008 with the statutory debt limit. As of September 30, 2008 and 2007, federal debt managed by BPD totaled about $10,011 billion and $8,993 billion, respectively. Total federal debt increased over each of the last 4 fiscal years. 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 $2,632 billion, or 36 percent, from $7,379 billion as of September 30, 2004, to $10,011 billion as of September 30, 2008. In fiscal year 2008 alone, total federal debt increased by $1,018 billion, the single largest annual increase in history. Of this amount, about $760 billion was from the increase in debt held by the public, which included $300 billion in cash management bills issued in September 2008 under the Supplementary Financing Program initiated by Treasury. The remaining increase in federal debt of about $258 billion was from intragovernmental debt holdings. On July 30, 2008, legislation was enacted to raise the statutory debt limit from $9,815 billion to $10,615 billion. In addition, in response to the nation's growing financial crisis, on October 3, 2008, the President signed into law legislation authorizing the Secretary of the Treasury to purchase up to $700 billion in troubled assets from financial institutions. This legislation increased the statutory debt limit by $700 billion to $11,315 billion. These increases in the statutory debt limit were the fourth and fifth such occurrences since fiscal year 2004.

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, 2008 and 2007.  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 of the Public Debt (BPD).
The auditor’s report contains our (1) opinion on the Schedules of Federal  Debt for the fiscal years ended September 30, 2008 and 2007, (2) opinion on  the effectiveness of relevant internal control as of September 30, 2008,   (3) conclusion on BPD’s compliance in fiscal year 2008 with a selected  provision of a law we tested, and (4) conclusion on the consistency  between information in the Schedules of Federal Debt and the  accompanying Overview on Federal Debt Managed by the Bureau of the  Public Debt.
As of September 30, 2008 and 2007, federal debt managed by the bureau  totaled about $10,011 billion and $8,993 billion, respectively, primarily for  moneys borrowed to fund the federal government’s operations.  As shown  on the Schedules of Federal Debt, these balances consisted of  approximately (1) $5,809 billion as of September 30, 2008, and $5,049  billion as of September 30, 2007, of debt held by the public and about   (2) $4,202 billion as of September 30, 2008, and $3,944 billion as of  September 30, 2007, of intragovernmental debt holdings.
The level of debt held by the public primarily reflects how much of the  nation’s wealth has been absorbed by the federal government to finance  prior federal spending in excess of federal revenues.  It best represents the  cumulative effect of past federal borrowing on today’s economy and the  federal budget.  To finance a cash deficit, the federal government borrows  from the public. When a cash surplus occurs, the annual excess funds can  then be used to reduce debt held by the public. In other words, annual cash  deficits or surpluses generally approximate the annual net change in the  amount of federal government borrowing from the public.
Intragovernmental debt holdings represent balances of Treasury securities  held by federal government accounts, primarily federal trust funds (e.g.,  Social Security), that typically have an obligation to invest their excess  annual receipts over disbursements in federal securities.  Most federal trust  funds invest in special U.S. Treasury securities that are guaranteed for  principal and interest by the full faith and credit of the U.S. government.   The federal government uses the trust funds’ invested cash surpluses to  assist in funding other federal government operations. 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 federal 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 Treasury are entirely offset by the income  received by such accounts. This intragovernmental debt and related  interest represent 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 for funds 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 92 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 $2,632 billion, or 36  percent, from $7,379 billion as of September 30, 2004, to $10,011 billion as  of September 30, 2008.  In fiscal year 2008, total federal debt increased by  $1,018 billion, the single largest annual increase in history.  Of this amount,  about $760 billion was from the increase in debt held by the public and  about $258 billion was from intragovernmental debt holdings.  Two primary  factors contributed to the increase in debt held by the public.  First, there  was a return to large reported deficits, which totaled $455 billion in fiscal  year 2008 compared to $162 billion in fiscal year 2007.  Second, at the  request of the Federal Reserve, Treasury initiated the Supplementary  Financing Program. As part of this program, Treasury issued cash  management bills to provide cash for Federal Reserve initiatives. As of  September 30, 2008, there were $300 billion of these cash management bills  outstanding. In addition, during fiscal year 2008, Treasury experienced a  reduction in the holdings of Treasury securities by state and local  governments, the Federal Deposit Insurance Corporation, and the Federal  Reserve. Much of this reduction can be attributed to the nation’s growing  financial crisis. As a result, Treasury had to rely more on domestic and  foreign investors for purchasing Treasury securities.  Treasury met its  borrowing objectives in part by reintroducing the 52-week bill, which will  be offered each month, and increasing the amounts offered at public debt  auctions.
Further increases in debt held by the public are expected. On July 30, 2008,  legislation was enacted to raise the statutory debt limit from $9,815 billion  to $10,615 billion.  In addition, in response to the nation’s growing financial  crisis, on October 3, 2008, the President signed into law legislation  authorizing the Secretary of the Treasury to purchase up to $700 billion in  troubled assets from financial institutions. This legislation increased the  statutory debt limit by $700 billion to $11,315 billion. These increases in the  statutory debt limit were the fourth and fifth such occurrences since fiscal  year 2004.
The slowdown in the economy and efforts to revive it reversed the recent  trend of declining annual budget deficits.  The reported fiscal year 2008  budget deficit was $455 billion compared to the fiscal year 2007 deficit of  $162 billion.  Official estimates for fiscal year 2009 show the annual deficit  approaching $500 billion.  Correspondingly, debt held by the public grew to  a reported 40.8 percent of gross domestic product (GDP) at the end of  fiscal year 2008, after hitting a 4-year low of 36.8 percent in fiscal year 2007.   However, the real challenge is not this year’s deficit or even next year’s; it is  how to change the nation’s long-term fiscal path over the coming decades.
The beginning stages of the longer-term fiscal challenge are not in the  distant future. The first of the baby boomers began collecting Social  Security retirement benefits this year and will become eligible for Medicare  in about 2 years. The budget and economic implications of the baby boom  generation’s retirement have already become a factor in the Congressional  Budget Office’s (CBO) 10-year budget projections and will only intensify as  the baby boomers age. GAO and CBO’s long-range fiscal policy simulations  show that the federal government’s current fiscal condition over the  coming decades is on an unsustainable long-term fiscal path absent  significant changes in policy. Currently, policymakers are understandably  focused on dealing with stabilizing financial markets and stimulating the  economy.  Once these issues are addressed, the nation’s new and returning  leaders will need to turn their attention to the long-term challenges that lie  ahead.
A continuing trend that we also have noted is the significant increase in  reported foreign ownership of Treasury securities. Treasury securities held  by foreign and international investors increased in fiscal year 2008,  continuing a trend dating back to 2001.  According to amounts reported in  the September 2008 Treasury Bulletin, Treasury estimates that the amount  of Treasury securities held by foreign and international investors has  increased by $1,647 billion—from $1,001 billion as of June 30, 2001, to  $2,648 billion as of June 30, 2008.  As of June 30, 2008, this represents an  estimated 50 percent of debt held by the public, up from about 31 percent  as of June 30, 2001. 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.
We are sending copies of this report to the Chairman and Ranking Minority  Members of the Senate Committee on Appropriations; the Senate  Committee on Homeland Security and Governmental Affairs; the  Subcommittee on Federal Financial Management, Government  Information, Federal Services, and International Security, Senate  Committee on Homeland Security and Governmental Affairs; the  Subcommittee on Financial Services and General Government, Senate  Committee on Appropriations; the House Committee on Oversight and  Government Reform; the House Committee on Appropriations; the  Subcommittee on Government Management, Organization, and  Procurement, House Committee on Oversight and Government Reform;  and the Subcommittee on Financial Services and General Government,  House Committee on Appropriations. 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 contact me at (202) 512-3406 or  engelg@gao.gov. 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 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,  2008 and 2007.  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, 2008 and 2007, 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, 2008; and  no reportable noncompliance in fiscal year 2008 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, 2008, 2007, and  2006 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, 2008 and  2007.
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, 2008,  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 of BPD’s compliance with the statutory debt limit for fiscal year  2008 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, 2008, 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.  On the basis of 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: BPD 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) BPD management maintained effective relevant internal control as  of September 30, 2008, the objectives of which are as follows:    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, 2008, 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, 2008,  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, 2008, 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, 2008;  considered the design of 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 2008 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), Pub. L. No. 110-91, 121 Stat. 988 (2007), and Pub. L. No.  110-289, Div. C, Title III, § 3083, 122 Stat. 2908 (2008)).
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, 2008.  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 audit 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 1.
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 (under Title 31 U.S.C. § 3101), the latter of which is referred to as intragovernmental debt holdings.  As of September 30, 2008 and 2007, outstanding gross federal debt managed by the bureau totaled $10,011 and $8,993 billion, respectively.
The increase in gross federal debt of $1,018 billion during fiscal year 2008 was due to an increase in gross intragovernmental debt  holdings of $258 billion and an increase in gross debt held by the public of $760 billion.  As Figure 1 illustrates, both  intragovernmental debt holdings and debt held by the public have steadily increased since fiscal year 2004.  The primary reason for  the increases in intragovernmental debt holdings is the surpluses in the Federal Old-Age and Survivors Insurance Trust Fund, Civil Service Retirement and Disability Fund, Federal Supplementary Medical Insurance Trust Fund, Military Retirement Fund, and DOD  Medicare-Eligible Retiree Health Care Fund.  The increases in debt held by the public are due primarily to total federal spending  exceeding total federal revenues.  As of September 30, 2008, gross debt held by the public totaled $5,809 billion and gross  intragovernmental debt holdings totaled $4,202 billion.
Total Gross Federal Debt Outstanding (in billions)
Interest expense incurred during fiscal year 2008 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 2008, interest expense incurred totaled  $454 billion, interest expense on debt held by the public was $242 billion, and $212 billion was interest incurred for  intragovernmental debt holdings.  As Figure 2 illustrates, total interest expense has increased from fiscal years 2004 through 2008.
Average interest rates on principal balances outstanding as of September 30, 2008 and 2007, are disclosed in the Notes to the  Schedules of Federal Debt. (in billions)
Debt held by the public primarily 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, 2008 and 2007, gross debt held  by the public totaled $5,809 billion and $5,049 billion, respectively (see Figure 1), an increase of $760 billion.  The  borrowings and repayments of debt held by the public increased from fiscal year 2007 to 2008 due to an increase in short- term debt issuances by Treasury.
As of September 30, 2008, $5,210 billion, or 90 percent, of the securities that constitute debt held by the public were  marketable, meaning that once the Federal Government issues them, they can be resold by whoever owns them.  Marketable  debt is made up of Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation-Protected Securities (TIPS) with  maturity dates ranging from less than 1 year out to 30 years.  Of the marketable securities currently held by the public as of  September 30, 2008, $3,429 billion, or 66 percent, will mature within the next 4 years (see Figure 3).  As of September 30,  2008 and 2007, notes and TIPS held by the public maturing within the next 10 years totaled $3,004 billion and $2,767 billion,  respectively, an increase of $237 billion.
Debt Held by the Public, cont.
The Federal Government also issues to the public nonmarketable securities, which cannot be resold, and have maturity dates  from on demand to more than 10 years.  As of September 30, 2008, nonmarketable securities totaled $599 billion, or 10 percent  of debt held by the public.  As of that date, nonmarketable securities primarily consisted of savings securities totaling $194  billion, special securities for state and local governments totaling $260 billion, and Government Account Series securities  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 Health Care, and Civil Service  Retirement and Disability trust funds.  As of September 30, 2008, such funds accounted for $3,788 billion, or 90 percent, of  the $4,202 billion intragovernmental debt holdings balances (see Figure 4).  As of September 30, 2008 and 2007, gross  intragovernmental debt holdings totaled $4,202 billion and $3,944 billion, respectively (see Figure 1), an increase of $258  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.
On July 30, 2008, the Housing and Economic Recovery Act of 2008 was signed into law becoming Public Law No: 110-289.
This legislation strengthens and modernizes the regulation of the housing government-sponsored enterprises – Fannie Mae and  Freddie Mac, and the Federal Home Loan Banks.  Section 3083 of this law increased the statutory debt limit from $9,815  billion to $10,615 billion.
Significant Actions Related to the Issuance of Marketable Securities  Over the course of the fiscal year, changes in economic conditions, financial markets, and fiscal policy as well as a reduction in  nonmarketable debt issuances have caused an increase in Treasury’s marketable borrowing needs.  Financial market strains  have impacted the real economy, and the nation has experienced lower economic growth, lower receipts, and increased outlays.
Treasury has responded to the increase in marketable borrowing requirements by increasing (1) issuance sizes of regular bills,  (2) the frequency, terms, and issuance sizes of cash management bills, and (3) the issuance sizes of nominal coupon security  The amount of the Federal Reserve’s System Open Market Account (SOMA) holdings has decreased significantly, which has  led to more issuances to domestic and foreign investors.  Specifically, total SOMA holdings were $780 billion on September  30, 2007 compared to $477 billion as of September 30, 2008.
On September 18, 2008, the Bureau of the Public Debt began issuing specific cash management bills to fund the  Supplementary Financing Program (SFP).  The SFP is a temporary program announced by Treasury and the Federal Reserve on  September 17, 2008, to provide emergency cash for Federal Reserve initiatives aimed at addressing the ongoing crisis in  financial markets.  As of September 30, 2008, there were a total of eight of these cash management bills outstanding that  New Treasury Automated Auction Processing System In April 2008, the Office of Financing  successfully implemented the New Treasury Automated Auction Processing System  (NTAAPS).  The new system brings a significant number of improvements in auction processes, security features, and  consolidated back-end processing.  On April 3, 2008 the 13- and 26-week bills were the first securities announced in the new  system.  The auctions followed on April 7, 2008, with the results released to the public within the expected window of two  minutes plus or minus 30 seconds after the auction close time.
Overview, Schedules, and Notes Significant Events in Fiscal Year 2008, cont.
In connection with the implementation of NTAAPS, the minimum purchase amount and increment value for Treasury  marketable securities was lowered from $1,000 to $100.  The change was expected to broaden distribution, improve individual  investor access to Treasury marketable securities, and lower issuance costs to Treasury.  An amendment to the Uniform  Offering Circular was also published in the Federal Register to lower the minimum and multiple par amounts of Treasury  marketable bills, notes, bonds and TIPS that may be stripped from $1,000 to $100.  The new minimum and multiples for  stripping also applies to outstanding Treasury marketable securities.
Treasury’s ongoing assessment of its debt management strategies resulted in the reintroduction of the 52-week bill.  The last  issue date for 52-week bills was March 1, 2001.  The 52-week bills were reintroduced with the initial announcement on  Thursday, May 29, 2008 and initial auction of June 3, 2008.  Treasury will auction this security once every four weeks,  concurrently with the 4-week bill.
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 $1,377 billion as of  September 30, 1983, to $10,011 billion as of September 30, 2008 (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 nearly  four fold between 1983 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, tax policy decisions, and recent actions to stabilize the financial markets have resulted in an increase in debt held by the public from  $3,339 billion in 2001 to $5,809 billion in 2008.
Bank.
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 $1,130 billion,  from $3,072 billion as of September 30, 2004, to $4,202 billion as of September 30, 2008.  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.
The Emergency Economic Stabilization Act of 2008 was enacted into law on October 3, 2008.  Section 122 of the Act  increased the statutory debt limit by $700 billion to $11,315 billion.
In order to address the increased funding needs posed by the Emergency Economic Stabilization Act, Treasury announced in a  Press Release on October 6, 2008, that it would be making adjustments to the auction calendar.  Treasury will continue to  increase auction sizes of bills and coupon securities and continue to issue cash management bills with varying maturity dates.
Additionally, Treasury is considering its options regarding the frequency and issuance of additional nominal coupons.
subsections: section_title: Schedules of Federal Debt
paragraphs: Managed by the Bureau of the Public Debt  For the Fiscal Years Ended September 30, 2008 and 2007  (Note 2) (Note 3) (Discounts) (Discounts) ($40,165) ($1,159) (48,776) (48,776)
subsections: section_title: Repayments of Debt Held
paragraphs: Net Amortization (Note 4) (49,500)  (49,500) (39,441) (29,192)
Accrued Interest (Note 4) (29,192)
section_title: Repayments of Debt Held
paragraphs: Net Amortization (Note 4) (32,509) (32,509) ($36,124)
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, 2008 and 2007   (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 2008 and fiscal year 2007 balances and activity relating to monies borrowed from the public and certain federal  government accounts under Title 31 U.S.C. § 3101 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  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.  BPD also issues other specific  securities outside of the authority of Title 31 U.S.C. §3101, such as HOPE Bonds.  These securities are not reported  on the Schedules of Federal Debt Managed by the Bureau of the Public Debt  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, 2008 and 2007  Note 2.  Federal Debt Held by the Public  As of September 30, 2008 and 2007, 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, 2008 and 2007, 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, 2008 and 2007.  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 $72,930 million and $50,517 million as of  September 30, 2008 and 2007, 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.  As of September 30, 2008, the FRB owned $221 billion, net of $256 billion in securities lent to dealers, for  total holdings of $477 billion.  As of September 30, 2007, the FRB owned $775 billion, net of $5 billion in  securities lent to dealers, for total holdings of $780 billion.  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, 2008 and 2007   (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, 2008 and 2007.  Nonmarketable securities are issued with a term of on  demand to more than 10 years.
As of September 30, 2008 and 2007, 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 2008 and 2007 are included in the respective Borrowings from the Public amounts reported on  the Schedules of Federal Debt.
Fiscal year-end September 30, 2007 occurred on a Sunday.  As a result, $26,591 million of marketable Treasury  notes matured but not repaid were included in the balance of the total Federal Debt Held by the Public as of  September 30, 2007.  Settlement of these debt repayments occurred on Monday, October 1, 2007.
Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt  For the Fiscal Years Ended September 30, 2008 and 2007   (Dollars in Millions)
Foreign Service Retirement and Disability Fund  *  This amount includes $5,580 million of marketable Treasury securities as well as $16,787 million of GAS  Social Security Administration (SSA); Office of Personnel Management (OPM); Department of Health and Human   Services (HHS); Department of Defense (DOD); Department of Labor (DOL); Department of Energy (DOE);  Federal Deposit Insurance Corporation (FDIC); Department of Housing and Urban Development (HUD);  Department of the Treasury (Treasury); Department of State (DOS); Department of Transportation (DOT).
Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt  For the Fiscal Years Ended September 30, 2008 and 2007   (Dollars in Millions)
Note 3.  Intragovernmental Debt Holdings (continued)
Intragovernmental Debt Holdings primarily consist of GAS securities.  Treasury issues GAS securities at either par  value or at an amount that reflects a discount or a premium.  The average interest rates for fiscal years 2008 and  2007 were 4.8 and 5.1 percent, respectively.  The average interest rate represents the original issue weighted  effective yield on securities outstanding as of September 30, 2008 and 2007.  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, 2008 and 2007, the inflation-adjusted principal  balance included inflation of $54,776 million and $28,643 million, respectively.
Fiscal year-ended September 30, 2007 occurred on a Sunday.  As a result, $53 million of GAS securities held by  Federal Agencies matured but not repaid were included in the balance of the Intragovernmental Debt Holdings as of  September 30, 2007.  Settlement of these debt repayments occurred on Monday, October 1, 2007.
Note 4. Interest Expense  Interest expense on Federal Debt Managed by BPD for fiscal years 2008 and 2007 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  (1,505) (1,116)
Total Interest Expense on Intragovernmental Debt Holdings 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  $26,982 million and $10,276 million for fiscal  years 2008 and 2007, respectively.  Accrued interest on Intragovernmental Debt Holdings includes inflation  adjustments of $14,479 million and $378 million for fiscal years 2008 and 2007, respectively.
Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt  For the Fiscal Years Ended September 30, 2008 and 2007  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.
Note 6. Subsequent Event  In order to address funding needs posed by the Emergency Economic Stabilization Act of 2008 enacted into law on  October 3, 2008, issuances of marketable securities will continue to increase.  This act increased the statutory debt  limit by $700 billion to $11,315 billion.
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; Dennis L. Clarke; Chau L. Dinh; Michael T.  Grimes; Natasha F. Guerra; J. Andrew Long; Megan J. Maisel; Nicole M.  McGuire; Richard P. McLean; Jay R. McTigue; Stephanie A. Miller; and  David L. Yoder made key contributions to this report.