Based on this limited work, we found no material  inconsistencies with the schedules. 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, 2006, 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, 2006;  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 2006 with the (1) statutory debt limit (31  U.S.C. We limited our tests of compliance to selected provisions of laws that have  a direct and material effect on the Schedule of Federal Debt for the fiscal  year ended September 30, 2006. The comments are reprinted in appendix I.

Overview, Schedules, and Notes

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, the latter of which is referred to as intragovernmental debt holdings. As of September 30, 2006 and 2005, outstanding gross federal debt managed by the bureau totaled $8,493 and $7,918 billion, respectively. The increase in gross federal  debt of $575 billion during fiscal year 2006 was due to an increase in gross intragovernmental debt holdings of $333 billion and an  increase in gross debt held by the public of $242 billion. As Figure 1 illustrates, both intragovernmental debt holdings and debt held  by the public have steadily increased since fiscal year 2002. (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. 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. From February 16 to March 20, 2006, Treasury faced a period that required it to depart from its normal debt management  procedures and to invoke legal authorities to avoid breaching the statutory debt limit. On March 20, 2006, Public Law 109-182 was enacted, which raised the statutory debt ceiling by $781 billion  to $8,965 billion. 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 more than five fold between 1981 and 1997. 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. The average interest rates for both fiscal years 2006  and 2005 were 5.2 percent. Interest Expense  Interest expense on Federal Debt Managed by BPD for fiscal years 2006 and 2005 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  (3,269) (1,814)
Total Interest Expense on Intragovernmental Debt  Total Interest Expense on Federal Debt Managed by BPD  The principal for TIPS is adjusted daily over the life of the security based on the Consumer Price Index for all  Urban Consumers.
Why GAO Did This Study

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 has also been auditing 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, we test compliance with selected provisions of significant laws related to the Schedule of Federal Debt. 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 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.

What GAO Found

In GAO's opinion, BPD's Schedules of Federal Debt for fiscal years 2006 and 2005 were fairly presented in all material respects and BPD maintained effective internal control relevant to the Schedule of Federal Debt as of September 30, 2006. GAO also found no instances of noncompliance in fiscal year 2006 with selected provisions of the statutory debt limit and debt issuance suspension period laws we tested. As of September 30, 2006 and 2005, federal debt managed by BPD totaled about $8,493 billion and $7,918 billion, respectively. At the end of fiscal year 2006, debt held by the public as a percentage of the U.S. economy is estimated at 36.9 percent, compared to 34.1 percent at the end of fiscal year 2002. Further, certain trust funds (e.g., Social Security) continue to run surpluses, resulting in increased intragovernmental debt holdings. These debt holdings are backed by the full faith and credit of the U.S. government and represent a priority call on budgetary resources. As a result, total gross federal debt has increased 37 percent between the end of fiscal years 2002 and 2006. During fiscal year 2006, a debt issuance suspension period was invoked to avoid breaching the statutory debt limit. On March 20, 2006, legislation was enacted to raise the debt limit by $781 billion to $8,965 billion. This was the fourth occurrence since 2002 that the statutory debt limit had to be raised to avoid breaching the statutory debt limit. During that time, the debt limit has increased more than $3 trillion, from $5,950 billion in 2002 to the current limit of $8,965 billion. Total federal debt increased over each of the last 4 fiscal years. Debt held by the public increased during this 4-year period primarily as a result of annual unified budget deficits. Intragovernmental debt holdings steadily increased during this 4-year period primarily due to excess receipts over disbursements in federal trust funds (e.g., Social Security).