Summary
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.
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.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change
from "In process" to "Implemented" or "Not implemented" based on our follow up work.
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Recommendations for Executive Action
Recommendation: Because of the importance of measuring the cost-effectiveness of financing mechanisms used to fund the operations of the federal government, the Secretary of the Treasury should 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. As part of that revision, the Commissioner should update the Series EE probabilities of redemption to capture any changes in redemption patterns caused by the proliferation of financial products or interest rate changes in the last 10 years. At a minimum, Treasury and BPD should collect data for a sample of the more recent time period to test the validity of the 1957-93 data.
Agency Affected: Department of the Treasury
Status: Not Implemented
Comments: Treasury generally agreed with our recommendation for updating the Series EE probabilities of redemption to incorporate actual experience with redemption over the past decade. However, at the time of our report, Treasury announced it was moving to an all-electronic environment for the retail securities program and stated they were shelving the existing paper-based model, which is based on paper bonds. As a result, Treasury stated that "if it becomes necessary for [Treasury] to reexamine the cost-effectiveness of paper savings bonds, [they'll] incorporate [GAO's] recommendations into [their] current [paper-based] model." (Agency Comment Letter, 6/4/2003)
Recommendation: Because of the importance of measuring the cost-effectiveness of financing mechanisms used to fund the operations of the federal government, the Secretary of the Treasury should 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. As part of that revision, the Commissioner should base Series I bond redemption patterns on actual experience with those bonds.
Agency Affected: Department of the Treasury
Status: Not Implemented
Comments: Treasury generally agreed with our recommendation to update the Series I bond redemption patterns to incorporate actual experience with redemption to date. However, at the time of our report, Treasury announced it was moving to an all-electronic environment for the retail securities program and stated they were shelving the existing paper-based model, which is based on paper bonds. As a result, Treasury stated that "if it becomes necessary for [Treasury] to reexamine the cost-effectiveness of paper savings bonds, [they'll] incorporate [GAO's] recommendations into [their] current [paper-based] model." (Agency Comment Letter, 6/4/2003)
Recommendation: Because of the importance of measuring the cost-effectiveness of financing mechanisms used to fund the operations of the federal government, the Secretary of the Treasury should 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. As part of that revision, the Commissioner should validate the cost estimate of education bond program participation based on the historical, 12-year data to date.
Agency Affected: Department of the Treasury
Status: Not Implemented
Comments: Treasury generally agreed with our recommendation to validate the cost estimate of the education bond program participation based on actual experience to date. However, at the time of our report, Treasury announced it was moving to an all-electronic environment for the retail securities program and stated they were shelving the existing paper-based model, which is based on paper bonds. As a result, Treasury stated that "if it becomes necessary for [Treasury] to reexamine the cost-effectiveness of paper savings bonds, [they'll] incorporate [GAO's] recommendations into [their] current [paper-based] model." (Agency Comment Letter, 6/4/2003)
Recommendation: Because of the importance of measuring the cost-effectiveness of financing mechanisms used to fund the operations of the federal government, the Secretary of the Treasury should 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. As part of that revision, the Commissioner should replace the 30-year equivalent marketable rate.
Agency Affected: Department of the Treasury
Status: Not Implemented
Comments: Treasury generally agreed with our recommendation to replace the discontinued 30-year equivalent marketable rate Treasury continued to use to price the marketable alternative. However, at the time of our report, Treasury announced it was moving to an all-electronic environment for the retail securities program and stated they were shelving the existing paper-based model, which is based on paper bonds. As a result, Treasury stated that "if it becomes necessary for [Treasury] to reexamine the cost-effectiveness of paper savings bonds, [they'll] incorporate [GAO's] recommendations into [their] current [paper-based] model." (Agency Comment Letter, 6/4/2003)
Recommendation: Because of the importance of measuring the cost-effectiveness of financing mechanisms used to fund the operations of the federal government, the Secretary of the Treasury should 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. As part of that revision, the Commissioner should update the software used for the model to enhance BPD's ability to maintain the model and protect against unauthorized modification.
Agency Affected: Department of the Treasury
Status: Not Implemented
Comments: Treasury generally agreed with our recommendation to update the software used for the model to a more current software but noted confidence in Treasury's ability to maintain and control the model in its current software. However, at the time of our report, Treasury announced it was moving to an all-electronic environment for the retail securities program and stated they were shelving the existing paper-based model, which is based on paper bonds. As a result, Treasury stated that "if it becomes necessary for [Treasury] to reexamine the cost-effectiveness of paper savings bonds, [they'll] incorporate [GAO's] recommendations into [their] current [paper-based] model." (Agency Comment Letter, 6/4/2003)
Recommendation: Because of the importance of measuring the cost-effectiveness of financing mechanisms used to fund the operations of the federal government, the Secretary of the Treasury should 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. As part of that revision, the Commissioner should put in place a process for ongoing verification, sensitivity analysis, and independent external review of the model.
Agency Affected: Department of the Treasury
Status: Not Implemented
Comments: Treasury generally agreed with our recommendation to put in place a process for ongoing verification, sensitivity analysis, and independent external review of the model and that Treasury's analysis would benefit from such a process. Treasury stated that it would "look into ways to incorporate these elements in [Treasury's] process." However, at the time of our report, Treasury announced it was moving to an all-electronic environment for the retail securities program and stated they were shelving the existing paper-based model, which is based on paper bonds. As a result, Treasury stated that "if it becomes necessary for [Treasury] to reexamine the cost-effectiveness of paper savings bonds, [they'll] incorporate [GAO's] recommendations into [their] current [paper-based] model." (Agency Comment Letter, 6/4/2003)
