November 8, 2010
The Honorable Timothy F. Geithner
The Secretary of the Treasury
Dear Mr. Secretary:
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, 2010 and 2009. 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 Department of the Treasury’s (Treasury) Bureau of the Public Debt (BPD).
The auditor’s report contains our (1) unqualified opinions on the Schedules of Federal Debt for the fiscal years ended September 30, 2010 and 2009, (2) opinion that BPD maintained, in all material respects, effective internal control over financial reporting relevant to the Schedule of Federal Debt as of September 30, 2010, and (3) conclusion that our tests of BPD’s compliance with the statutory debt limit for fiscal year 2010 disclosed no instances of reportable noncompliance.
As of September 30, 2010 and 2009, federal debt managed by BPD totaled about $13,551 billion and $11,898 billion, respectively, primarily for borrowings to fund the federal government’s operations. As shown on the Schedules of Federal Debt, these balances consisted of approximately (1) $9,023 billion as of September 30, 2010, and $7,552 billion as of September 30, 2009, of debt held by the public and (2) $4,528 billion as of September 30, 2010, and $4,346 billion as of September 30, 2009, of intragovernmental debt holdings.
Debt held by the public primarily represents the amount the federal government has borrowed to finance cumulative cash deficits. 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, that typically have an obligation to invest their excess annual receipts (including interest earnings) 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 federal trust funds’ invested cash surpluses to assist in funding other federal government operations. The Treasury securities held by the federal government accounts are not shown as balances on the federal government’s consolidated financial statements because, under current U.S. generally accepted accounting principles, they represent loans from one part of the federal government to another. When the federal government’s financial statements are consolidated, those offsetting balances are eliminated. 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 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 151 percent. During the last four fiscal years, managing the federal debt has been a challenge, as evidenced by the growth of total federal debt by $5,058 billion, or 60 percent, from $8,493 billion as of September 30, 2006, to $13,551 billion as of September 30, 2010. The increase to the federal debt became particularly acute with the onset of the recession in December 2007. Reduced federal revenues and federal government actions in response to both the financial market crisis and the economic downturn added significantly to the federal government’s borrowing needs. And, due to the persistent effects of the
recession, which ended in June 2009, federal financing needs remain high. As a result, the increases to total federal debt over the past three fiscal years represent the largest dollar increases over a three year period in history. The largest annual dollar increase occurred in fiscal year 2009 when total
federal debt increased by $1,887 billion. During fiscal year 2010, total federal debt increased by $1,653 billion. Of the fiscal year 2010 increase, about $1,471 billion was from the increase in debt held by the public and about $182 billion was from the increase in intragovernmental debt holdings. Treasury primarily utilized its existing suite of securities and increased or decreased auction sizes by security type as needed to finance the operations of the federal government and to lengthen the average maturity of securities within its portfolio. During fiscal years 2008, 2009, and 2010, legislation was enacted to raise the statutory debt limit on five different occasions. During this period, the statutory debt limit went from $9,815 billion to its current
level of $14,294 billion, an increase of about 46 percent. Recovery from the economic downturn is expected to be slow during the next few years and as a result, deficits are expected to remain high. The Congressional Budget Office (CBO) estimates the annual federal deficit will be just over $1 trillion for fiscal year 2011, down from $1.3 trillion for fiscal year 2010. Correspondingly, debt held by the public is expected to grow
from an estimated 62.5 percent of gross domestic product (GDP) at the end of fiscal year 2010 to over 66 percent of GDP at the end of fiscal year 2011. The real challenge is not this year’s deficit or even next year’s; it is how best to address the nation’s unsustainable long-term fiscal path over the coming decades.
While considerable attention has been understandably given to the nearterm fiscal position, the federal government faces even larger fiscal challenges that will persist long after the return to economic growth. The budget and economic implications of the baby boom generation’s retirement have already become a factor in near-term budget projections and will only intensify as the baby boomers age.
Since fiscal year 2008, the Medicare Hospital Insurance program has paid more in benefits than it receives in cash from payroll taxes. For the first time in over 25 years, the Social Security program, which has historically run large cash surpluses that helped reduce the need to borrow to finance other federal government activities, paid more in benefits than it received in tax income in fiscal year 2010 thereby contributing to borrowing needs. GAO and CBO’s long-range fiscal policy simulations continue to show that, absent significant changes in policy, the federal government’s fiscal condition over the coming decades is on an unsustainable path. The sooner action is taken to address this long-term fiscal challenge, the less disruptive and destabilizing the changes will be. As a result, the nation’s leaders face the challenge of dealing with current economic and financial issues in the context of the need to address the long-term fiscal challenges.
A continuing trend that we have noted is the increase in reported foreign ownership of Treasury securities. Treasury securities held by foreign and international investors have increased significantly since 2001. According to amounts reported in the September 2010 Treasury Bulletin, Treasury estimates that the amount of Treasury securities held by foreign and international investors has increased by $3,022 billion—from $983 billion as of June 30, 2001, to $4,005 billion as of June 30, 2010. As of June 30, 2010, this represents an estimated 46 percent of debt held by the public as compared to about 30 percent as of June 30, 2001.
We are sending copies of this report to interested congressional committees, the Commissioner of the Bureau of the Public Debt, the Inspector General of the Department of the Treasury, the Acting Director
of the Office of Management and Budget, and other agency officials. In addition, this report is available at no charge on the GAO Web site at http://www.gao.gov.
If you have any questions concerning this report, please contact me at (202) 512-3406 or firstname.lastname@example.org. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III.
Gary T. Engel