Budget Issues

Pursuant to a congressional request, GAO reported on the Department of the Treasury's decision to change the calculation of the interest rates used since 1980 to determine the investment returns for a number of government trust funds, including Social Security and Medicare, focusing on: (1) how and why Treasury changed its rules for calculating interest rates in 1980 and 1998; (2) the effects of these changes on the unified budget and on the financial status of Social Security and Medicare trust funds; and (3) what other trust funds were affected by Treasury's decision.

GAO noted that: (1) Treasury made changes in 1980 and 1998 in the calculation of the interest rates used to determine the investment returns for a number of government trust funds; (2) in 1980, when prices of callable bonds were below par, Treasury's computers were programmed to calculate yields on callable bonds based on yield-to-maturity only; (3) Treasury lawyers described the 1980 change as a programming shortcut that was made in the interest rate environment of the time; (4) according to Treasury officials, they found no documentation on the 1980 change and nothing to indicate it was meant as a policy or methodology change; (5) the second change occurred in 1998, when Treasury officials discovered that the 1980 program for calculating interest rates did not conform to prevalent market practice; (6) Treasury changed its method of calculating rates back to calculate yield-to-maturity when market prices are below par and to calculate yield-to-call when market prices are above par; (7) although estimates of computer programming and resource requirements to add the yield-to-call programming option in 1980 were unavailable, Treasury officials said that the change when made in 1998 required about 40 staff hours; (8) Treasury informed Congress and trust funds' trustees of the 1998 change; (9) according to Treasury, its 1980 change increased the rates for the trust funds of Social Security and Medicare in 1988, 1992, 1996, 1997 and 1998 by one-eighth of one percentage point over what it would have been had the yield-to-call method been used; (10) Treasury's 1980 change increased the financial returns for 11 trust funds by one-eighth of one percentage point in 5 years in the period 1980 through 1998 over what it would have been had the yield-to-call method been used; (11) the unified budget was not affected by the increases in 10 of the 11 trust funds because the higher interest credited was a transfer between federal and trust funds; (12) the only trust fund that affected the unified budget was the Thrift G Fund, the higher interest rate of which led to an increase in outlays; (13) in addition to Social Security, Medicare, and the Thrift G funds, Treasury's lawyers concluded that six other funds were affected because their interest rates are based on average market yields; (14) these trust funds are Civil Service Retirement, Foreign Service Retirement and Disability, National Service Life, Serviceman's Group Life, U.S. Government Life, and Veteran's Reopened; and (15) since the interest credited to these trust funds involved interfund transfers, none affected the unified budget.