http://www.usatoday.com/printedition/news/20060803/1a_coverart03.art_dom.htm

Quote :

"What's the real federal deficit? How many billions (or trillions) of dollars depends on how you do the accounting The federal government keeps two sets of books. The set the government promotes to the public has a healthier bottom line: a $318 billion deficit in 2005. The set the government doesn't talk about is the audited financial statement produced by the government's accountants following standard accounting rules. It reports a more ominous financial picture: a $760 billion deficit for 2005. If Social Security and Medicare were included — as the board that sets accounting rules is considering — the federal deficit would have been $3.5 trillion.[/b] Congress has written its own accounting rules — which would be illegal for a corporation to use because they ignore important costs such as the growing expense of retirement benefits for civil servants and military personnel. Last year, the audited statement produced by the accountants said the government ran a deficit equal to $6,700 for every American household. The number given to the public put the deficit at $2,800 per household. 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. They say accurate accounting would force Congress to show more restraint before approving popular measures to boost spending or cut taxes. “We're a bottom-line culture, and we've been hiding the bottom line from the American people,” says Rep. Jim Cooper, D-Tenn., a former investment banker. “It's not fair to them, and it's delusional on our part.” The House of Representatives supported Cooper's proposal this year to ask the president to include the audited numbers in his budgets, but the Senate did not consider the measure. Good accounting is crucial at a time when the government faces long-term challenges in paying benefits to tens of millions of Americans for Medicare, Social Security and government pensions, say advocates of stricter accounting rules in federal budgeting. “Accounting matters,” says Harvard University law professor Howell Jackson, who specializes in business law. “The deficit number affects how politicians act. We need a good number so politicians can have a target worth looking at.” The audited financial statement — prepared by the Treasury Department — reveals a federal government in far worse financial shape than official budget reports indicate, a USA TODAY analysis found. The government has run a deficit of $2.9 trillion since 1997, according to the audited number. The official deficit since then is just $729 billion. The difference is equal to an entire year's worth of federal spending. Congress and the president are able to report a lower deficit mostly because they don't count the growing burden of future pensions and medical care for federal retirees and military personnel. These obligations are so large and are growing so fast that budget surpluses of the late 1990s actually were deficits when the costs are included. The Clinton administration reported a surplus of $559 billion in its final four budget years. The audited numbers showed a deficit of $484 billion. In addition, neither of these figures counts the financial deterioration in Social Security or Medicare. Including these retirement programs in the bottom line, as proposed by a board that oversees accounting methods used by the federal government, would show the government running annual deficits of trillions of dollars. The Bush administration opposes including Social Security and Medicare in the audited deficit. Its reason: Congress can cancel or cut the retirement programs at any time, so they should not be considered a government liability for accounting purposes. The government's record-keeping was in such disarray 15 years ago that both parties agreed drastic steps were needed. Congress and two presidents took a series of actions from 1990 to 1996 that: • Created the Federal Accounting Standards Advisory Board to establish accounting rules, a role similar to what the powerful Financial Accounting Standards Board does for corporations. • Added chief financial officers to all major government departments and agencies. • Required annual audited financial reports of those departments and agencies. • Ordered the Treasury Department to publish, for the first time, a comprehensive annual financial report for the federal government — an audited report like those published every year by corporations. These laws have dramatically improved federal financial reporting. Today, 18 of 24 departments and agencies produce annual reports certified by auditors. (The others, including the Defense Department, still have record-keeping troubles so severe that auditors refuse to certify the reliability of their books, according to the government's annual report.) The culmination of improved record-keeping is the “Financial Report of the U.S. Government,” an annual report similar to a corporate annual report. (The 158-page report for 2005 is available online at http://fms.treas.gov/fr/index.html.) The House Budget Committee has tried to increase the prominence of the audited financial results. When the House passed its version of a budget this year, it included Cooper's proposal asking Bush to add the audited numbers to the annual budget he submits to Congress. The request died when the House and Senate couldn't agree on a budget. Cooper has reintroduced the proposal. The Federal Accounting Standards Advisory Board, established under the first President Bush in 1990 to set federal accounting rules, is considering adding Social Security and Medicare to the government's audited bottom line. Adding those costs would make federal accounting similar to that used by corporations, state and local governments and large non-profit entities such as universities and charities. It would show the government recording enormous losses because the deficit would reflect the growing shortfalls in Social Security and Medicare. The government would have reported nearly $40 trillion in losses since 1997 if the deterioration of Social Security and Medicare had been included, according to a USA TODAY analysis of the proposed accounting change. That's because generally accepted accounting principles require reporting financial burdens when they are incurred, not when they come due. For example: If Microsoft announced today that it would add a drug benefit for its retirees, the company would be required to count the future cost of the program, in today's dollars, as a business expense. If the benefit cost $1 billion in today's dollars and retirees were expected to pay $200 million of the cost, Microsoft would be required to report a reduction in net income of $800 million. This accounting rule is a major reason corporations have reduced and limited retirement benefits over the last 15 years. The federal government's audited financial statement now accounts for the retirement costs of civil servants and military personnel — but not the cost of Social Security and Medicare. The new Medicare prescription-drug benefit alone would have added $8 trillion to the government's audited deficit. That's the amount the government would need today, set aside and earning interest, to pay for the tens of trillions of dollars the benefit will cost in future years. Standard accounting concepts say that $8 trillion should be reported as an expense. Combined with other new liabilities and operating losses, the government would have reported an $11 trillion deficit in 2004 — about the size of the nation's entire economy. The federal government also would have had a $12.7 trillion deficit in 2000 because that was the first year that Social Security and Medicare reported broader measures of the programs' unfunded liabilities. That created a one-time expense. The proposal to add Social Security and Medicare to the bottom line has deeply divided the federal accounting board, composed of government officials and “public” members, who are accounting experts from outside government. The six public members support the change. “Our job is to give people a clear picture of the financial condition of the government,” board Chairman David Mosso says. “Whether those numbers are good or bad and what you do about them is up to Congress and the administration.” The four government members, who represent the president, Congress and the Government Accountability Office, oppose the change. The retirement programs do “not represent a legal obligation because Congress has the authority to increase or reduce social insurance benefits at any time,” wrote Clay Johnson III, then acting director of the president's Office of Management Budget, in a letter to the board in May. Why the big difference between the official government deficit and the audited one? The official number is based on “cash accounting,” similar to the way you track what comes into your checking account and what goes out. That works fine for paying today's bills, but it's a poor way to measure a financial condition that could include credit card debt, car loans, a mortgage and an overdue electric bill."

[Edited on August 3, 2006 at 3:31 PM. Reason : format]

8/3/2006 3:27:26 PM

Quote :

"The audited number is based on accrual accounting. This method doesn't care about your checking account. It measures income and expenses when they occur, or accrue. If you buy a velvet Elvis painting online, the cost goes on the books immediately, regardless of when the check clears or your eBay purchase arrives. Cash accounting lets income and expenses land in different reporting periods. Accrual accounting links them. Under cash accounting, a $25,000 cash advance on a credit card to pay for a vacation makes the books look great. You are $25,000 richer! Repaying the credit card debt? No worries today. That will show up in the future. Under accrual accounting, the $25,000 cash from your credit card is offset immediately by the $25,000 you now owe. Your bottom line hasn't changed. An accountant might even make you report a loss on the transaction because of the interest you're going to pay. “The problem with cash accounting is that there's a tremendous opportunity for manipulation,” says University of Texas accounting professor Michael Granof. “It's not just that you fool others. You end up fooling yourself, too.” Federal law requires that companies and institutions that have revenue of $1 million or more use accrual accounting. Microsoft used accrual accounting when it reported $12 billion in net income last year. The American Red Cross used accrual accounting when it reported a $445 million net gain. Congress used cash accounting when it reported the $318 billion deficit last year. Social Security chief actuary Stephen Goss says it would be a mistake to apply accrual accounting to Social Security and Medicare. These programs are not pensions or legally binding federal obligations, although many people view them that way, he says. Social Security and Medicare are pay-as-you go programs and should be treated like food stamps and fighter jets, not like a Treasury bond that must be repaid in the future, he adds. “A country doesn't record a liability every time a kid is born to reflect the cost of providing that baby with a K-12 education one day,” Goss says. Tom Allen, who will become the chairman of the federal accounting board in December, says sound accounting principles require that financial statements reflect the economic value of an obligation. “It's hard to argue that there's no economic substance to the promises made for Social Security and Medicare,” he says. Social Security and Medicare should be reflected in the bottom line because that's the most important number in any financial report, Allen says. “The point of the number is to tell the public: Did the government's financial condition improve or deteriorate over the last year?” he says. If you count Social Security and Medicare, the federal government's financial health got $3.5 trillion worse last year. Rep. Mike Conaway, R-Texas, a certified public accountant, says the numbers reported under accrual accounting give an accurate picture of the government's condition. “An old photographer's adage says, ‘If you want a prettier picture, bring me a prettier face,' ” he says."

Would you agree with the six members of the FASB who represent the public that the federal government should apply the accounting laws it imposes on corporations to itself? Or with the four members of the board who represent the four government officials who oppose the change?

Here we have the federal government creating, then very publicly enforcing laws that require any corporation whose revenues exceed $1 million to account for their dollars by one particular method. Meanwhile the same federal government's own tax revenues exceeded $2.15 trillion in 2005, and yet its officials are permitted to publicly disseminate accounting figures arrived at by a wholly different, far less accurate accounting system designed for use by entities no larger than a successful plumbing chain.

I cannot fathom a rational argument in favor of this policy. Only mindless, "don't change horses midstream" clichés that entirely fail to address the long term consequences of allowing an entity as massive, complex, and important to the lives of its stakeholders as the federal government to publicly misinform those who fund its operations about its financial condition.

How can a federal government that wouldn't allow Enron or Tyco or MCI-Worldcom to use creative accounting to mislead shareholders about their financial conditions, knowingly use even worse accounting to mislead its own taxpayers about its financial condition?

Even at the height of their crimes, those companies were still forced by the federal government to follow GAAP, the most accurate standard available, in their reports to the public. The federal government had decided that accurate accounting by any entity into which members of the public may invest be done according to the same standard. The federal government has also decided that as a citizen you must invest in it with every paycheck, and it does not owe you the same degree of accurate accounting.

In my mind it's shameful that in the post-Enron market-reform frenzy that nobody noticed this double standard and addressed it.

What, one wonders, does the government fear will happen to the shareholders and stakeholders of a company whose board of directors and management team persistently mistate their financial condition by a factor of -10? What will happen to them that won't happen to more painful degrees to the citizens of a government that does the exact same thing?

Quote :

"“A country doesn't record a liability every time a kid is born to reflect the cost of providing that baby with a K-12 education one day,” Goss says."

Here Stephen Goss is giving us all a very public demonstration of his own woeful understanding of GAAP rules, as well as that of the journalist's and his editors'. GAAP rules wouldn't require the country to record a liability any time a kid is born to reflect the cost of providing it with a K-12 education. The student isn't the cost incurred; the labor of his or her teachers, administrators, bus drivers, and janitors, and the desks, chairs, chalkboards, and books provided are.

That's basic fucking accounting. I'm more than concerned that the SSA's Chief Actuary was unaware of that.

[Edited on August 3, 2006 at 3:44 PM. Reason : ...]

8/3/2006 3:31:25 PM

indeed....this is a very serious topic with me....i want to write alot but dont have time...

but the way governmental accounting works is complete and utter nonsense...zero accountability

the government SHOULD be run like a good business....more later

8/3/2006 3:37:39 PM

we need to elect that exxon ceo that helped make record profits to run the country

streamline this shit

8/3/2006 4:11:12 PM

I agree with te GAAP accounting. I'd wager <2% of the population cares about the debt anyway, might as well use the real numbers

8/3/2006 4:14:02 PM

What use is good accounting when you can just put a gun to the heads of your customers?

8/3/2006 4:14:37 PM

IIRC, they "can't." At least not unless they're going to go V for Vendetta style. They can take away your shit and throw your ass in jail for tax evasion, though.

8/3/2006 4:23:32 PM

^
[off-topic]

damn son, how did you get 13K+ posts?

[/off-topic] 

8/3/2006 4:37:19 PM

Quote :

"man whatever, the US is the fucking best country to live in and the whole god damn world knows it"

Questioning your gov't is apparantly a no no now, G-Cat.

8/3/2006 11:00:25 PM

Quote :

"I agree with te GAAP accounting. I'd wager <2% of the population cares about the debt anyway, might as well use the real numbers "

i hear "deficit" in nearly every political discussion that comes up.

8/4/2006 12:31:09 AM

Yeah, its a scare tactic because people don't understand how government deficits and personal deficits are totally different.

8/4/2006 8:06:41 AM

Quote :

"Fry: i hear "deficit" in nearly every political discussion that comes up."

And we see how substantial an impact it's had on election results.

Oh... wait...

 

8/4/2006 8:59:24 AM

I agree that the government should use something like GAAP, but I don't think this is right:

Quote :

"The new Medicare prescription-drug benefit alone would have added $8 trillion to the government's audited deficit. That's the amount the government would need today, set aside and earning interest, to pay for the tens of trillions of dollars the benefit will cost in future years. Standard accounting concepts say that $8 trillion should be reported as an expense. Combined with other new liabilities and operating losses, the government would have reported an $11 trillion deficit in 2004 — about the size of the nation's entire economy."

I don't know of any businesses that take, for example, a 500k expense to pay for all future utility bills. I'm sure you could do it that way, but only if you were just trying to make things look bad. And using accrual based accounting, that 500k and its interest would be an asset until it was used in the form of utility. Since the interest would be paying for the utility bills, you'd always have 500k (or more as you'd have to account for inflation) as an asset.

In effect, $8 trillion contributes to the deficit that the U.S. will be running from now until forever. Given that, $8 trillion is pretty small. Because GAAP requires "reporting financial burdens when they are incurred, not when they come due." That means, not when you pass the bill, but when you have someone using the benefit.

8/4/2006 9:05:08 AM

Quote :

"I don't know of any businesses that take, for example, a 500k expense to pay for all future utility bills."

I suspect that businesses don't account for all future utility bills because they could at any point choose to cut the power off, eliminating the liability. Conversely, a business cannot choose to kill its former employees in an effort to escape retirement and health costs.

8/4/2006 9:59:13 AM

Quote :

"Yeah, its a scare tactic because people don't understand how government deficits and personal deficits are totally different."

Translation: The Federal Reserve has the only funtioning magic wand left, whereas the average citizen does not.

8/4/2006 11:02:52 AM

radu kind of hits on my "confusion" about this. I'm not exactly sure how they factor in some of the stuff.

When one talks about a "budget deficit," I tend to think of it as a yearly thing. As in, if I had a budget deficit of 500 bux, that means I spent 500 bux more than I had last year. Based on that, it's hard for me to think of a "future liability" as being applied continuously, the way the article makes it sound, because that would mean to me that I am adding that liability many times.

The "future liability" seems to be more in line with the notion of the "national debt," which seems entirely different. To me, that's a weighing of all of our liabilities versus assets, or really just an accumulation of all of our deficits. But that's odd, because in the article it talks about Clinton running a "surplus," but I find it hard to believe that he eliminated the national debt...

8/5/2006 1:08:07 AM

http://en.wikipedia.org/wiki/U.S._public_debt

http://en.wikipedia.org/wiki/Deficit

You really need to refine your understanding of the difference between those two concepts.

8/5/2006 1:16:32 AM

I'm sure I do. But the article you posted seems to intertwine the two...

8/5/2006 1:19:33 AM

Quote :

"But that's odd, because in the article it talks about Clinton running a "surplus," but I find it hard to believe that he eliminated the national debt..."

He did eliminate a lot of it. He was taxing 21% of GDP and congress would only let him spend about 18% of GDP. Today, we are taxing about 16% of GDP and spending about 21%. So, technically, if we raised taxes back to where Clinton had them then the deficit would be tiny.

8/5/2006 8:55:25 AM

Quote :

"I suspect that businesses don't account for all future utility bills because they could at any point choose to cut the power off, eliminating the liability. Conversely, a business cannot choose to kill its former employees in an effort to escape retirement and health costs."

In the case of this article, however, the US should also recognize all future revenues as revenues in 2004. Not that any of that would conform to the GAAP...

8/5/2006 4:31:39 PM

Quote :

"In the case of this article, however, the US should also recognize all future revenues as revenues in 2004"

Using the same logic as the electricity bill, future revenues should NOT be counted when determining assets because people could wake up next year and refuse to pay or collect any taxes. Nevermind that congress has made no promise to always collect taxes, but it has promised to pay back its debts.

8/6/2006 12:21:19 AM

No one has promised to need prescription drugs either.

8/6/2006 12:46:04 AM

But really is an 8 trillion dollar expense for items to be accrued in the future not an asset, like pre-paid rent?

8/6/2006 12:51:19 AM

Quote :

"I'm sure I do. But the article you posted seems to intertwine the two..."

Specifics are helpful...

8/6/2006 10:13:01 PM