Posted by Abdul Khan
Making sense of the finances of what the U.S. Government Accountability Office (GAO), without undue modesty, refers to as the “the most diverse, most complex, and arguably the most important entity on earth” is not meant to be easy. However, this is precisely what the GAO, the so-called congressional watchdog, has set out to do through its publication Understanding the Primary Components of the Annual Financial Report of the United States Government.[1] Written in non-technical language, this guide to the U.S. government financial report should go a long way to help citizens and other interested parties achieve a broad understanding of the federal government’s finances.
The guide explains that the objectives of the CFR is to: provide an overall view of the annual financial results of operations (i.e. revenues and expenses) and the financial position (i.e. assets and liabilities) of the federal government, including long-term commitments and obligations; demonstrate accountability for the money the federal government raises through taxes and for spending money according to the laws and regulations that govern the federal government’s budgets and financial operations; report on the federal government’s operating performance, accounting systems, and internal control; and demonstrate the federal government’s stewardship over its resources. The financial statements are prepared in accordance with standards issued by the Federal Accounting Standards Advisory Board (FASAB).
The guide discusses the significant content of each of the following seven sections in the CFR:
· A Citizen’s Guide (see above)
· Management’s Discussion and Analysis provides management’s insights into the information presented in the federal government’s financial statements.
· Financial Statements consolidate financial information from federal entities to provide an overall view of the federal government’s financial operations and condition.
· Notes to the Financial Statements provide important disclosures and details related to information reported on the financial statements.
· Supplemental Information provides additional information to enhance the understanding of the federal government’s operations and financial condition.
· Stewardship Information highlights substantial investments that have long-term benefits to the public including programs related to nonfederal physical property, human capital, and research and development.
· Government Accountability Office Report presents the results of GAO’s audit of the financial statements and notes to the financial statements.
Some of the more interesting aspects of the CFR covered in the guide is discussed in the following paragraphs.
Fiscal indicators: Accrual and Cash
The guide brings out the differences between accrual and cash based fiscal indicators. The CFR shows an accrual-based “net operating cost” of just over $1 trillion in 2008 (2007: $276 billion), while the primarily cash-based “unified budget deficit [3]” in 2008 was less than half that amount at $455 billion (2007: $163 billion). It is important to note that the government actions in response to the global financial crisis were taken too late for the 2008 CFR, but will be reflected in the 2009 CFR.
The CFR includes a statement of Reconciliation of Net Operating Revenue (or Cost) and Unified Budget Surplus (or deficit). The guide explains that this statement is intended to demonstrate the federal government’s accountability to the budget by reconciling its net operating cost to its unified budget results. The main reason for the difference in 2008 is that the accrual based net operating cost takes into account the increase in liabilities for employee and veteran benefits of nearly $550 billion, while the cash based budget deficit does not.
The CFR also includes a Statement of Changes in Cash Balance from Unified Budget and Other Activities. This statement helps bring out the interesting point that while the federal government incurred an accrual based deficit of over $1 trillion, and a cash based deficit of close to $0.5 trillion, its liquidity position (cash and other monetary assets) improved substantially from $297 billion as at September 30, 2007 to $425 billion a year later. This improved liquidity appears to be simply the result of increased borrowing, and does not reflect any improvements in the financial position. This could be good case study to bring out the importance of basing financial analysis on a range of indicators and avoiding an over-emphasis on any single indicator.
Long-term Fiscal Sustainability
In what may be considered an example of best practice, the CFR goes beyond simply presenting the ex post information contained in conventional financial statements, and includes forward looking data to help assess the sustainability of fiscal policies. This information is contained in a separate Statement of Social Insurance. As the guide explains, this statement, based on present value of long-range (75 Years) actuarial projections, shows how much more money would be needed, in today’s dollars, for the federal government’s social insurance programs to continue operating over the long term, as they are structured today. The statement covers the Federal Old-Age, Survivors and Disability Insurance (Social Security), and Federal Hospital Insurance (Medicare Part A), Federal Supplementary Medical Insurance (Medicare Part B), and Federal Supplementary Medical Insurance (Medicare Part D).
More admirably, the Statement of Social Insurance is included as part of the financial statements and subject to audit by the GAO. In a reversal of the conventional concerns about the auditability of such projected data, the historic part of the financial statements of 2008 failed to obtain an opinion of any sort from the auditors (see below), but the Statement of Social Insurance of 2008 received a clean audit opinion. The message delivered by the Statement of Social Insurance itself is less upbeat, however. Projections show that, even before the impact of the global financial crisis is taken into account, the federal government’s existing policies are unsustainable with government debt levels reaching unprecedented levels. For example, in 2008, the projected expenditures of about $99 trillion exceeded projected revenue of about $56 trillion by approximately $43 trillion.
Finally, the guide explains that the Treasury borrows from certain trust funds, such as the Social Security trust funds, to finance government activities. These intra-government borrowings are eliminated from the government’s balance sheet. However, they represent future obligations of the Treasury because the Treasury must provide cash to redeem these securities in order for the trust funds to pay benefits or other obligations as they come due.
Audit
GAO audits the CFR with a view to providing an opinion on the fairness of the consolidated financial statements taken as a whole. As indicated above GAO expressed an unqualified opinion on the 2008 and 2007 Statements of Social Insurance. However, as in past years, due to persistent material weaknesses in the federal government’s internal control and certain accounting and reporting practices that limited the scope of the audit work that could be performed, GAO disclaimed an opinion on the rest of the Consolidated Financial Statements. The guide also explains that a major factor in the limitation is the Department of Defense’s continued inability to undergo an audit of its financial statements.
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[1] http://www.gao.gov/cgi-bin/getrpt?GAO-09-946SP
[2] http://www.fms.treas.gov/fr/
[3] The term “unified budget” refers to the budget compilation that includes all federal activities, both “on-budget” and “off-budget” amounts. Social Security and the Postal Service are the only two material activities considered off-budget. The approximately $454.8 billion fiscal year 2008 unified budget deficit shown on the statement consists of about $638.1 billion on-budget deficit and approximately $183.3 billion off-budget surplus. The off-budget surplus for fiscal year 2008 consisted of $185.7 billion in surplus revenue from the Social Security trust funds offset by a $2.4 billion deficit in the Postal Service.
