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. 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. 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. 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. 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. 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. 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) 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) Net Amortization (Note 4) (19,596) (1,347) (19,596) (1,347) (39,275) (1,514) (670) (39,945) (10,362) Accrued Interest (Note 4) (10,362) Net Amortization (Note 4) (13,461) (13,461) ($36,846) ($312) The accompanying notes are an integral part of these schedules. 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. In addition to the individual named above, Dawn B. Simpson, Dean D. Carpenter, Dennis L. Clarke, Chau L. Dinh, Martin J. Eble, Mickie E. Gray, Nichole Harrington, Jay McTigue, Kara M. Scott, Stacey L. Volis, and LaShawnda K. 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Summary: GAO audited the Bureau of Public Debt's schedule of Federal Debt for fiscal years 2003 and 2002. 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.