News from the McCombs School of Business

Released to Near Silence, the U.S. Treasury 2009 Financial Report Shows Dire Course

April 12th, 2010 · Opinion · Texas Enterprise · Top Stories · Posted by Dave Wenger

By Michael Granof, Guest Blogger for McCombs TODAY

Michael Granof is the Ernst & Young Distinguished Centennial Professor in Accounting at McCombs. He is currently serving a five-year term on the Federal Accounting Standards Advisory Board. The views expressed herein are his own, not necessarily those of the Board.

If you listen to certain politicians and talking heads you might get the impression that the federal fiscal sky is falling. Unfortunately, unlike Chicken Little, they may be right.

The Treasury Department recently issued the 2009 financial report of the United States government. Whereas there is lots of talk in Congress and in the press about the federal budget, the annual report was released to near silence. That’s too bad, not only because the annual report is untainted by creative accounting but also because its message is too important to ignore.

That message is that the sky is indeed falling.

No Creative Accounting

What is the difference between the budget and the financial report?

Most notably the federal budget is on what is essentially a cash basis. Contrast that to the federal financial report which is on an “accrual” basis and thereby recognizes revenues and expenses when they have their true economic impact, not necessarily when cash is received or disbursed.

As but one example, whereas the federal budget delays recognition of military pension costs until personnel retire and receive their payments, the annual report recognizes them as they perform their service. Similarly, the cash basis, but not the accrual basis permits the government to reduce expenses of a particular year merely by postponing payment of its bills from that year to the next.

These devilish machinations are possible in part because there are no established accounting rules for the budget or requirements that it be independently audited.

By contrast, the annual report is based on accounting principles established by the Federal Accounting Standards Advisory Board. The FASAB is an independent body of nine members, two-thirds of whom have no direct connection with the federal government. The report is subject to audit by the Government Accountability Office, an agency whose independence and integrity is almost never questioned.

To be sure, the accounting principles adopted by the FASAB are not beyond challenge. However, for the most part the criticisms relate to the basic financial statements, those that report assets, liabilities, revenues and expenses, rather than to the report in its totality. The complete report consists of scores of pages and notes, supplementary data and analyses. Data that critics charge are absent from the basic financial statements are almost always conveyed elsewhere in the report.

The 2009 federal balance sheet indicates that the government’s net position (total assets less total liabilities) is a negative $11.5 trillion, 12.3 percent worse than the previous year. But that’s just the tip of the iceberg. That negative balance excludes government obligations for social insurance programs, mainly Social Security and Medicare.

Whether social insurance should be booked as a liability has long been a controversial issue among government accountants.

On the one hand, it is argued that social insurance programs are like pensions. Participants pay into the plan and earn their eventual benefits while they are employed. Hence, both the expense for the programs and a corresponding actuarial liability, it is said, should be recognized during their working years.

On the other hand, some contend, social insurance programs are not – and were never intended to be – pension-like programs. Rather, like other entitlement programs, they are a tax and spend program in which resources get redistributed from one group of citizens to another. After all, when social security was initially established the first recipient, Ida May Fuller of Brattleboro Vermont, contributed only $24.75 but received $22,888.92 in benefits.

Unable to reach agreement as to whether social insurance should be included as a balance sheet liability, the members of the FASAB compromised, and thus, immediately following the balance sheet is a “Statement of Social Insurance.” In the 2009 annual report this indicates that the total present value of estimated social insurance expenditures over revenues is $45.9 trillion.

Hence, simple addition indicates that the total net position of the government is a whopping negative $57.4 trillion.

Similarly, the potential losses from investments in Freddie Mac and Fannie Mae are not included among the government’s liabilities. That’s because these entities are government-sponsored enterprises, not part of the government itself. Still, the report reveals that in an “extreme case scenario” the government could be on the hook for an additional $130 billion to satisfy existing loan guarantees – an amount that unfortunately seems trivial compared to the social insurance obligation.

We Have Been Warned

The message of the annual report is frighteningly candid. In a section of the report entitled Management’s Discussion and Analysis, which is intended to put the basic numbers into perspective, a multi-colored chart is entitled  “Current Trends Are Not Sustainable Because Program Outlays Would Persistently Exceed Total Receipts.”  (See below.)  

Source: U.S. Department of the Treasury

Source: U.S. Department of the Treasury

It shows that, in the absence of policy changes, total government costs excluding interest will increase gradually from 19 percent of gross domestic product in 2014 to 25 percent in 2040 and 29 percent in 2080. Not surprisingly, rising health care costs is the major culprit.

Even more telling, another chart shows that if current policies are left unchecked U.S. government debt held by the public will increase from approximately 80 percent of GDP today to 700 percent in 2080 (when, one hopes, your children or grandchildren will still be alive). Correspondingly, per still another chart, net interest could rise from 1.3 percent of GDP in 2009 to 10 percent in 2040 and to 35 percent in 2080.

The federal annual report is 234 pages in length, and though some of the data are technical in nature, much is readily understandable by a layperson. There is virtually nothing in the report that a reasonable person would consider to be politically partisan. Indeed, in key respects the report is not much different than annual reports issued by the Bush Administration.

The message of the report is resoundingly clear. The federal government’s course is dire. Therefore, if, when the history of the current decade is written, it reveals that the American people and its representatives in Congress and the Administration failed to respond to the report’s warnings, then immediate future generations will have no doubt as to where to place the blame.

Tags: · , , ,

34 responses so far

We want to hear from you! To keep discussions on-topic and constructive, comments are moderated for relevance and for abusive or profane language. Please note that it may take some time for your comment to appear.

  • 1 Dave Wenger // Apr 13, 2010 at 9:52 am

    We received a comment with profanity, and unfortunately, as much as we want to provide a forum for opposing viewpoints, we had to remove it. Please follow our comment policy, and we’re happy to provide a forum for discussion of ideas.

  • 2 Tom Evans // Apr 13, 2010 at 11:28 am

    If we ran our businesses like our government officials run the government, we’d all be in jail. And they manage to escape all accountability for their actions.

  • 3 Robert Vera // Apr 13, 2010 at 1:49 pm

    What I don’t understand is how this new Health Care Bill is supposed to cut our National Debt. How can they do that when it’s costing close to $1 Trillion. They are spending too much not living within our means. You can’t sustain a business like this how are you supposed to sustain a country?

  • 4 Christopher Plummer // Apr 13, 2010 at 2:30 pm

    So, it is time to raise taxes. By a lot. There are those who would oppose this and recommend cutting spending instead. That’s fine. Specifically which spending and how much? Specifically. European countries have much higher tax rates and their economic performance on a median per capita basis is probably as good or better than that of the US. So there does not seem to be any great obstacle to running a market economy with higher taxes. Hopefully we could cut them back later.
    Regarding health care, unlike the 2001 tax cuts, Medicare Part B and the wars in Iraq and Afganistan, which were and are massive government spending programs that were completely unfunded, the new healthcare legislation is paid for by new taxes and cuts in other services.

  • 5 Diane Taylor // Apr 13, 2010 at 3:35 pm

    “In God we trust - all others must bring data” - a quote from a man that required data and took his company in a few decades from $250.00 to many billions in worth. A man of great integrity. We have the data - now we need to accept personal responsibility and ask God to give us the National will to change .

  • 6 Edward Summers // Apr 13, 2010 at 7:22 pm

    As with everything you write, Michael, this article is on point. I hope it has more influence than the equally valid opinion you gave Susan Combs on her policy as state treasurer on her refusal to recognize government pension liabilities.

  • 7 Josh Clark // Apr 14, 2010 at 3:38 am

    There’s no way that the new health care plan will cut the debt. Not only will it add to the deficit, but many small businesses will really be hurt by it’s extra expense of having to provide health benefits for all of it’s employees. That’s no way to create jobs and spur economic growth

  • 8 Steve Ballantyne // Apr 14, 2010 at 9:01 am

    Very interesting and frightening. Is there any analysis like this for the State of Texas?

  • 9 Felix // Apr 15, 2010 at 1:25 am

    Take the labels off Chart J. Imagine for a moment that it’s a chart of vital signs of a living organism. That spike on the left killed the poor blighter.

    Chart J troubles me because I believe that it reflects the nature of the thinking of many people on my side of this issue. Perhaps my thinking, too!

    A pretty fair chunk of the vertical space on the far east side of Chart J is taken up with what we now call medical … stuff. It’s no secret that the medical field - the whole biological field - is somewhere similar to the computer field in the 50’s or 60’s. Shall we review the Treasury’s Chart J from the 50’s? They must have made one showing how much the royal court would be spending on computers and communications? In 2030.

    Chart J is drawn on the basis of predicted GDP. Good luck with that.

    Now, I have personally found that demographic data can be wonderfully accurate for predictive purposes. Demography made both the good times and crime drops of the 80’s and 90’s completely predictable. Demography predicted 40 years ago, practically to the year, the current “Great Recession”.

    But extrapolating technology, organization and governance to such far limits is no argument against blowing resources - money - on things that don’t help the world now or in the future. And such extrapolations aren’t a strong argument against going in to hock to fund the jet-ski. Such arguments surely won’t convince the guy who really, really wants that new boat and has the credit card to “pay” for it.

    If it’s a waste to blow the dough, let’s stick with that point. Stick to facts.

    2 cents.

  • 10 pipster // Apr 15, 2010 at 1:39 pm

    I have seen different versions of that Chart J, and I fear the problem may be even worse than described. Look at the spike in “Other Noninterest Spending” (the red bar) in 2010. What makes anybody think that this number will go DOWN again in the next few years? What if this stays at current levels, or even continues to go up? Isn’t that much more likely, and won’t it make the problem much worse, much faster?

  • 11 Jim Kay // Apr 15, 2010 at 2:59 pm

    The unknowns that affect the graph are bad enough. But how about the unknowables? No one can even guess how the increases in tax rates will slow the progress of the country or how many businesses (and their “evil rich” owners) will leave for greener pastures. And 700% of GDP? Not even imaginable. Greece is pulling Europe into the abyss with far less debt. You are talking “Mad Max” here. (Post apocalypse)

  • 12 Arnold L. Goldman // Apr 15, 2010 at 4:45 pm

    Think of the present leadership as our youthful selves out on a summer joyride, perhaps to a beach area, something gone on with a casual frivolity in pursuit of good times. Soon it will grow late however and we are expected home for dinner on time. When we return we find we are in trouble for not doing our chores, for going around with a rough crowd, for smoking and for wearing our clothes in a revealing manner. We are punished for our sins and we suffer, hoping that G-d forgives us. Surely we shall never make such a mistake and disappoint our parents again.

  • 13 Phil McDaniel // Apr 16, 2010 at 12:07 am

    I want to comment, but afraid I’m ticked off already about finding out today we aren’t going to be allowed to have a “National Day of Prayer” anymore. Ronald Reagan said this, “Communism cannot exist without atheism.” So is there a communist living in the White House? Back to the this issue. I feel that our nation being continually forced to live under such a debt burden is nothing more than bondage.

    Couple of questions: Do the people want a national debt? No is the plain answer. Why is the government consistantly doing things to keep us in bondage, and who has the most to gain from this? I don’t know, but this chart shows common sense that it probably won’t work.

    One reason I suspect is they want to keep us in debt so “someone ” (hereafter known as “they”) can collect the INTEREST off the indebtedness. I believe they are structured somehow to receive personal gains from this setup. Otherwise, government perhaps would do the will of the people. I have never talked to ONE person who likes or agrees on the issue of the national debt. It is simply a barrel full of crooked nails that need straightening. Remember in November…

    If I did what the Government does, I’d go out and get a new credit card everytime I filled one up and just keep on borrowing to make payments. How long do you think I could keep that up? 2 or 3 years? maybe. The difference in me and the government is they can print money and I cannot. I just got a book written by Ron Paul, entitled “END THE FED” and I intend to read it the next few days, cover to cover.

  • 14 Gina Halle // Apr 16, 2010 at 4:18 am

    Where was this discussion/article 3 months ago?

  • 15 Ray // Apr 17, 2010 at 5:18 pm

    Christoper Plummer said, “European countries have much higher tax rates and their economic performance on a median per capita basis is probably as good or better than that of the US.” Last year, Europe grew at 1%, the US grew at 2-3%. Don’t compare Europe to the US. The US is the largest economy in the world. So when the US grew 2%, we far outstripped Europe. We have a Constitution and a Bill of Rights. European countries do not.

  • 16 Chris // Apr 18, 2010 at 10:11 pm

    Phil, I agree with you that we have too much debt. I disagree with you on the wanting to have national debt. Debt is a tool. It’s used by most companies for short and long-term reasons. Do you have a mortgage? Credit cards? Student loans? Probably. Do you want the debt? Probably not. Are you willing to give back all the things you received with that debt?

    As for your credit card example, it needs a little improvement. Checkout the debt to GDP ratio. Think of it as similar to the debt-to-income ratio.

    For the emergency issues at hand and the need for repairs and upgrades, debt typically goes up. For example, your AC goes out, do you 1)pay cash? 2)do without or 3) use credit (debt) to get it fixed ASAP?

  • 17 dunkinsusan // Apr 19, 2010 at 10:08 pm

    Regarding what I would cut: all foreign aid, all imperialistic international wars, and reduce every member of Congress to minimum wage.

  • 18 dunkinsusan // Apr 19, 2010 at 10:11 pm

    to Chris: I had the AC problem some years ago. My solution was to close off most rooms of the house and install a cheap window unit in the room where I slept. I survived the summer and spent the winter saving money. When spring came, I had sufficient cash to buy a new air conditioning system. At some point Americans are going to have to get over the “I’ve-got-to-have-it-right-now” attitude.

  • 19 Llewellyn // Apr 19, 2010 at 10:57 pm

    The federal gov’t is currently soaking up most of the available capital in the country financing the insanely huge deficit. Companies such as General Growth are going belly up because they can’t roll over their debt. Expect much more of that in the coming months.

    Soon the Treasury won’t be able to find enough capital to float the $100 billion or so per week of Treasury securities. The Fed will have to continue to monetize debt, but in increasing amounts, as we go forward. Let’s see where that takes us.

  • 20 truepatriot // Apr 20, 2010 at 12:16 am

    As long as we peacefully protest, and be good little sheep, and just discuss it, things will get better. Sheesh, as far as I am concerned we are at a minimum 30 years too late in the game for changes, you might as well brace for impact at this point. We were sold out long ago by greed.

    This is what happens when man replaces God for his own desires. Take it for it’s worth!

  • 21 OSCPJ // Apr 20, 2010 at 5:32 am

    Christopher. Health Care is not paid for. We will collect taxes to pay for it. But both the money brought in and and the total cost are created using “Best Case Scenerios”.

    I would point to the unemployment numbers, housing market and how the govt figures inflation.

    I have a better idea on taxes. Why don’t YOU SEND YOUR MONEY to all these people that don’t work? Stop dictating we need to be taxed so that those less fortunate don’t have to work.

  • 22 Joe P // Apr 20, 2010 at 7:31 am

    Although this is all valid, there is really no solution that works better than letting the entire system collapse into itself. It’s similar to trying to dismantle a burning building, you can’t do it. So why try? Destruction is a form of creation. Growth in any form ultimately becomes unsustainable over the long run. Nature takes care of these types of problems. Humans are nothing but a big swarm of locusts especially the parasites sucking the life out of the honest, freedom loving patriots that just want to live there lives without “civilization” and “society”. In the big scheme of things we’re expendable.

  • 23 templar knight // Apr 20, 2010 at 8:43 am

    These deficits we are now running are not sustainable, and it is incumbant on all of us to prepare for a time when the government will be effectively out of funds.

    Take steps now to get yourself out of debt, and put some supplies back for lean times, because lean times are on the way. I really don’t know what to expect, but there is a possibility of government default. One should not discount this possiblity, or pretend it doesn’t exist. Now is the time for action that will save you much pain in the future. Buy some gold and silver, put back an emergency food and water supply, and get out of the city. You will enjoy life much more. That will be one of the good things to come out of this mess. There won’t be many.

  • 24 Larry // Apr 20, 2010 at 9:54 am

    I am glad I am the age I am….

  • 25 Jean // Apr 20, 2010 at 1:46 pm

    Too much debt! My business could not survive if I treated it with this plan, and neither can our government. We cannot survive this problem unless it is admitted, addressed and tackled. This problem threatens the very fabric of our nation, and we are about to be torn apart at the seams if we do not address this huge debt.

    For the first time in my life, I am worried, worried sick actually, about our nation. I’m 54.

  • 26 Jon // Apr 20, 2010 at 4:40 pm

    Debt is fine for companies, who borrow the money from banks to fund growth, among other things.
    However the government is not a business. Government operates solely at the discretion of the governed and must be forced to survive on merely what it can take in at any given time. Governments do not have to earn their “profits”, they take them by force, therefore deficits and gov’t debt are a very serious issue that must be treated very carefully and never should be allowed to accumulate.
    When government overspends, and assumes we will all just be forced to pay more in the future to fund the never ending increases, that is the same as Gov’t turning us into forced debt slaves. private industry can do no such thing, we have a choice of whether to buy or not — with Uncle Sam, we do not.

  • 27 k // Apr 21, 2010 at 7:54 am

    ex Celente.
    Try VAT and you are flat broke.F gov.

  • 28 Mojo the Mellow // Apr 22, 2010 at 1:06 pm

    In response to the message below, I would specifically recommend to completely axe (cut) social security, medicaid, medicare, the military (significantly), and other entitlements, as well as the costly and inefficiently wasteful so-called “War on Drugs”. Just my 2-cents!


    So, it is time to raise taxes. By a lot. There are those who would oppose this and recommend cutting spending instead. That’s fine. Specifically which spending and how much? Specifically. European countries have much higher tax rates and their economic performance on a median per capita basis is probably as good or better than that of the US. So there does not seem to be any great obstacle to running a market economy with higher taxes. Hopefully we could cut them back later.
    Regarding health care, unlike the 2001 tax cuts, Medicare Part B and the wars in Iraq and Afganistan, which were and are massive government spending programs that were completely unfunded, the new healthcare legislation is paid for by new taxes and cuts in other services.

  • 29 Sceptic // Apr 23, 2010 at 7:30 am

    Well, I doubt that a national day of prayer is going to pay our debt. It hasn’t done so yet, anyway. And as for the people’s desire for a national debt, many of us *say* that we don’t want a debt. Alas, even if we say that, we still elect people who say they’re going to balance the budget and then dig the hole far, far deeper. With all of Obama’s spending on one side and the empty blather about “no new taxes” and “balanced budgets” and the like on the other, it’s pretty clear that the American people aren’t serious about engaging these issues. Imagine a politician who told you we’re going to have to cut spending (on everything, including your favorite programs) and raise taxes simultaneously. Can you picture that person getting elected?

  • 30 Bryan Dimery // Apr 23, 2010 at 10:59 am

    Lets cut out all the finger pointing and just be honest. Every president AND congress has played us for fools with their ponzi scheme. They enrich private enterprises through subsidies, tax breaks, sweetheart deals, Fed rate cuts(to make banks profitable/solvent) and favorable protection under the law. The best thing any of us can do is A). realize that “No matter who I vote for, this will continue for as long as possible.” and B). Buy into stocks that back the incoming congress. Play the game because, in the end, the rich will prosper and the nation will fail.

  • 31 Josh Clark // Apr 23, 2010 at 4:16 pm

    OSCPJ- I agree.
    Christopher- I can’t stand when people even think about raising taxes instead of monitoring spending. You are asking to increase the taxes (probably just for the upper brackets of course). Can you imagine what this will do to America? With higher taxes, what’s the incentive to work hard? To invest? To provide jobs? To be productive in society? Instead people become ultra-unproductive. This would essentially make America a communist country.

  • 32 Richard Billingsley // Apr 24, 2010 at 7:56 am

    For a hundred years our society has been taxed and regulated at an ever increasing rate. Strapped by taxation and regulation we can no longer compete. Incentive is on the wane. Is this not the decline of the American Empire?

  • 33 Jim H. // Apr 25, 2010 at 1:53 pm

    It’s a sad path that the government has put this country in. When the simplest way to solve the problem is to cut back spending and decrease the size of government, the politicians ignore the true solution. However, they continue to float the idea of more taxes and borrowing. It’s not hard to figure out that this policy with accelerate the decline of the financial position of the country. Political bickering from both sides will always crowd out what truely needs to be done.

    There are ways to solve this issue of financial responsibility: 1) How about forcing all governmental organizations on the accrual basis & making them follow GAAP like other publicly traded companies? This way people are not misled about the costs & benefits of different proposed programs. 2) Privatize SS & Medicare. Make them like 401K’s in that people that want to contribute can. Years ago politicians were talking out a “lockbox” for these programs because the government was using the proceeds to pay for other entitlements, thus making these programs unsustainable even with all the FICA taxes. The private sector ALMOST ALWAYS works better than something the government runs anyways. 3) Stop fighting unnecessary wars. There’s at least one that fits this category. 4) Lastly, limit the size of earmarks or “pork” that Congress can get in various pieces of legislation. These can corrupt the political process and waste taxpayer dollars.

    All these things can cut back on the size of government and take the country into a more sustainable path, at least economically. The country is on the path to financial ruin with the way it’s being run. Just look at Greece for an example. Spending, taxing, and borrowing will not work, so something has to be done sooner rather than later.

  • 34 Young TexEx // Apr 27, 2010 at 6:28 am

    As a recent grad from UT, I am entering the “real world” at a time where it seems as though even a degree may not help you much. After reading all these comments it is nearly impossible to remain optimistic about the future and all that is to come. I personally think, as many of you do, that this country needs to learn to down size. Like a single parent after divorce, the gov needs to spend less because it has less, yet with greater responsibility on its shoulders now. I am still believing in a bright future, I just need the gov to realize we can’t carry on in this manner. I did not expect Obama to walk into office and perform miracles (which is apparently what some were imagining) because he is only one man. Hopefully under his leadership we can make our way toward a different outcome than current trends would predict

Leave a Comment