Savings bonds are an alternative for investors unable or unwilling to pay  the minimum denomination of marketable Treasury securities. In March 2002 the Treasury Assistant Secretary for Financial Markets  testified before the House Appropriations Committee, Subcommittee on  Treasury, Postal Service, and General Government that Treasury believes  that the availability of a savings vehicle with the full faith and credit of the  United States should not be limited to those who can afford the minimum  $1,000 denominations available in auctions of marketable Treasury  securities. For  Treasury, this is the value today of the future payments to investors of  securities offered for sale which, in the context of the model, is the  redemption value of Series EE and Series I savings bonds and the  repayment stream of the alternative marketable Treasury security (that is,  any coupons plus maturity value). Most notably, the interest rates and the timing of the interest payments are  different. Accurate implementation of the conceptual design requires that  the model address these issues in order to construct comparable present  values for the costs of savings bonds and marketable Treasury securities. The administrative unit cost to Treasury from redeeming savings bonds  reduces the revenues to Treasury. This additional step, according to model documentation, is intended to  reflect the difference between savings bonds, which do not pay periodic  interest, and marketable Treasury securities that do pay such interest in the  form of coupons. However, the model calculation does not incorporate all the life cycle costs  of the savings bond into the marketable Treasury security’s “present value”  calculation — the initial administrative cost of issuing the savings bond  (that is, unit cost to issue) is not included. Further, the redemptions do not reflect current interest rates. BPD has not independently verified the cost-effectiveness model. Conclusions

Our review of BPD’s savings bond cost-effectiveness model indicates that  the model’s results do not provide BPD, Treasury, OMB, or Congress  appropriate information to assess the relative costs of the savings bond  program versus marketable Treasury securities as a source of raising funds. Therefore the cost-effectiveness  ratio that the model creates does not provide BPD with the information it  needs to assess the relative costs of the savings bond program and  marketable Treasury securities to determine which financing approach  offers a greater financial benefit to Treasury. Recommendations

Because of the importance of measuring the cost-effectiveness of financing  mechanisms used to fund the operations of the federal government, we  recommend that the Secretary of the Treasury direct that the  Commissioner of the Public Debt in conjunction with Treasury’s Office of  Domestic Finance revise the savings bond cost-effectiveness model to  estimate the relative (or net) present value of the life cycle costs of issuing  savings bonds versus marketable Treasury securities. However, the Commissioner  also noted that, with Treasury’s goal of moving toward a totally electronic  environment for the savings bond program, “we think it's appropriate for us  to shelve the existing model, which is based on paper bonds, and focus our  attention on the transition to a fully electronic program.”
The model compares the amount of funds raised by selling a given amount of Series EE and  I bonds in various denominations and the present value of the future costs to Treasury in  connection with issuing the bonds. A  model that accurately recognizes these differences will continue to be as  crucial to understanding the relative cost-effectiveness of the two debt  instruments as it is in the current paper-based environment. Comments from the Bureau of the Public Debt

	GAO Comments

The following are GAO's comments on the Bureau of the Public Debt's  (BPD) letter dated June 4, 2003. 3.
Why GAO Did This Study

While the Treasury generally pays lower interest rates on U.S. Savings Bonds than it does on other forms of borrowing from the public, it also incurs substantially higher administrative costs to issue and redeem the paper savings bond certificates. To determine whether these higher administrative costs exceed its interest rate savings, Treasury's Bureau of the Public Debt uses a spreadsheet model to compare the costs of issuing Series EE and Series I savings bonds with those of issuing marketable Treasury securities. GAO was asked to review this model to judge its reliability in measuring the relative costs of Treasury's borrowing alternatives.

What GAO Found

Treasury has several alternative vehicles for issuing debt to the public. A substantial majority of that debt is issued in the form of marketable Treasury securities. U.S. Savings Bonds today account for about 3 percent of total Treasury securities outstanding. A majority of these bonds have lower minimum denominations or face amounts than marketable Treasury securities and generally pay lower interest rates as well, but provide the same assurance of the full faith and credit of the United States, making them an alternative for investors unable or unwilling to pay the minimum denominations of marketable Treasury securities. Savings bonds continue to be issued as paper certificates, rather than in the format of the "book entry" system for marketable Treasury securities; however, this increases the administrative costs of issuing, servicing, and redeeming savings bonds, relative to the marketable securities. The cost-effectiveness of the savings bond program depends on whether Treasury's savings--in terms of the generally lower interest payments on savings bonds relative to marketable Treasury securities--exceed the costs that Treasury incurs with processing the paper savings bond certificates. The question is complicated by the fact that the interest savings occur over the life of a savings bond, and that Treasury pays costs upfront at issuance and in the future when the savings bond is redeemed. As prescribed by the Office of Management and Budget and common financial practice, in dealing with savings or costs over time, the value of future savings or costs must be discounted to present value. Treasury has reported that its cost-effectiveness model does calculate the present values of the relative costs of savings bonds and marketable Treasury securities. However, because of flaws in the design and implementation of the spreadsheet used to calculate these present values, the cost-effectiveness model's results do not provide the Bureau of the Public Debt, Treasury, or Congress with accurate information that is needed to assess the relative costs of issuing debt through savings bonds or marketable Treasury securities, or to manage the savings bond program. Further, the bureau has not updated some key data elements in the cost-effectiveness model. In particular, citing budget considerations, the bureau uses data on the redemption patterns for savings bonds that date back to 1993, which do not reflect the effects of the wide variety of financial instruments now available to investors.