Financial Report of the United States Government AGA-DC / GWSCPA Spring Conference May 8, 2007

2 Why Should I Care? “We suffer from a fiscal cancer…when those [baby] boomers start retiring in mass, then that will be a tsunami of spending that could swamp our ship of state.” “…we’re spending more money than we make, …we’re charging it to a credit card,…and expecting our grandchildren to pay for it.” David Walker, U.S. Comptroller General, 60 Minutes interview aired March “[The Financial Report] is the only government-wide report that uses modern accounting to tell how America is doing.” “…the real deficit is probably 10 times larger than you have been told. “Both [cash and accrual] ways of measuring are important if you want a clear understanding of your financial position…keep one eye on your cash accounts, and the other on your accruals.” Congressman Jim Cooper (D-TN) The United States Financial Report – The Official Report the White House Does Not Want You To Read. “The federal government keeps two sets of books.” “A growing number of Congress members and accounting experts say it’s time for Congress to start using the audited financial statement when it makes budget decisions.” “The audited financial statement…reveals a federal government in far worse financial shape than official budget reports indicate.” Dennis Cauchon, ‘What’s the Real Federal Deficit?’ USA Today; August 2006.

3 What Do We Know? 2006 Unified Budget Deficit ($247.7 billion) ($187.2b) Unfunded postemployment programs + ($14.6b) Change in: Environmental Liabilities; Net Capitalized Fixed Assets; Net Other 2006 Accrual Deficit (Net Operating Cost) ($449.5 billion) + =

4 What Do We Know? Both budget and accrual deficits include effect of social security surplus. As of 12/31/2005, under current conditions, actuaries estimate that there will be a social insurance shortfall of $44t. –75-year estimate of future benefit expenditures net of contributions. –$44t is NOT a liability figure. –It IS a sustainability measure (i.e., an indication of the government’s ability to sustain social insurance programs in the future). Let’s break this into two pieces…

5 General Government Portion 2006 Accrual Deficit (Net Operating Cost) ($449.5 billion) - $186b Social Insurance Surplus = Deficit ($636b)

6 What is the Social Insurance Portion? = ??? 800 lbs

7 Summary General Government Deficit Social Insurance + Total = ($636b) $186b surplus ($450b)($500b) ($1,000b) ($300b) ($114b)($750b) TOTAL + Additional Unpaid Expense ($314b)($950b)($814b)($1,450b)

8 What is the Financial Report of the United States Government? ‘Annual Report to the Citizens’ Complement to the President’s Budget Submission deadline –Until 2004: 180 days after FY-end March 31). –2004 to present: December 15 following year- end per OMB acceleration policy.

9 What Does the FR Contain? –Secretary’s Letter →Management Discussion & Analysis (MD&A) –GAO letter →Basic Financial Statements, including Statement of Social Insurance (2006) –Stewardship Information –Notes to Financial Statements –Supplemental information –Management Representation Letter –It does NOT contain a performance report.

10 Management’s Discussion & Analysis Overview – Clear, concise discussion and analysis of the government’s financial condition and key fiscal issues. –Economy, Budget, and Debt –Financial Position, Revenues and Costs –Social Insurance –Systems, Controls, Legal Compliance –President’s Management Agenda First section of the report - most widely read. Financial information and analysis must be consistent with financial statements/notes.

11 Financial Statements Statement of Net Cost Statements of Operations and Changes in Net Position Reconciliations of Net Operating Cost and Unified Budget Deficit Statements of Changes in Cash Balance from Unified Budget and Other Activities. Balance Sheet Statement of Social Insurance

12 What We Own & …

13 …What We Owe

14 What Comes In &…

15 What Goes Out

16 $20.8 Capitalized Fixed Assets, net of Depreciation Deficit vs. Cost 2006 Unified Budget Deficit $247.7 billion $187.2b Unfunded pension programs + $45.4b Increase in Environmental Liabilities $10.0b Other = 2006 Accrual Deficit (Net Cost) $449.5 billion + $14.6b Increase in: Environmental Liabilities; Net Capitalized Fixed Assets; Other

17 Impact of Accrual Accounting

18

19 Statement of Social Insurance Eligible participants (age 62 and over) Participants who have who have not yet attained eligibility age (62) FUTURE participants (under age 15 and births during reporting period) Contributions & Earmarked Taxes paid by: [less] Expenditures for Scheduled Benefits for: + + “Open” Group “Closed” Group The present value over 75 years of:

20 Statement of Social Insurance

21 Audit Results & Concerns Disclaimer of opinion –DoD agency audit opinion is disclaimed –Unreconciled intragovernmental transactions (between government agencies) –Report preparation concerns Concerns: –‘Plug’ –GAO finding: Statement of Budgetary Resources does not equal FACTS II submissions.

22 Where We Are