December 21, 2010
The President of the Senate
The Speaker of the House of Representatives
Given the federal government's fiscal challenges, there is a significant need for transparency and for the Congress, the administration, and federal managers to have reliable, useful, and timely financial and performance information. Even though significant progress has been made since the enactment of key financial management reforms in the 1990s, our report on the U.S. government's consolidated financial statements illustrates that much work remains to improve federal financial management. Consequently, financial management needs to be a top priority of this administration and the new Congress.
The recent economic recession and the federal government's actions to stabilize financial markets and promote economic recovery continued to significantly affect the federal government's financial condition. The U.S. government's consolidated financial statements for fiscal year 2010 include, as they did for fiscal year 2009, substantial assets and liabilities resulting from such actions. Although the federal government has received positive returns from investments in certain large financial institutions, it continues to report significant costs related to these actions. The ultimate cost of all of the federal government's market stabilization and economic recovery actions and the effect of such actions on its financial condition will not be known for some time.
The federal government faces long-term challenges resulting from large and growing structural deficits that are driven on the spending side primarily by rising health care costs and known demographic trends. These challenges are clearly shown in the comprehensive long-term fiscal projections presented in this 2010 Financial Report of the United States Government (2010 Financial Report). While the economy is still fragile and in need of careful attention, there is wide agreement on the need to look not only at the near term but also at steps that begin to change the long-term fiscal path as soon as possible without slowing the economy.
Our report on the U.S. government's consolidated financial statements is enclosed. In summary, we found the following:
While significant progress has been made in improving federal financial management since the federal government began preparing consolidated financial statements 14 years ago, three major impediments continued to prevent us from rendering an opinion on the federal government's accrual-based consolidated financial statements over this period: (1) serious financial management problems at the Department of Defense (DOD) that have prevented DOD's financial statements from being auditable, (2) the federal government's inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and (3) the federal government's ineffective process for preparing the consolidated financial statements.
In addition to the material weaknesses underlying these major impediments, we noted three other material weaknesses. Until the problems outlined in our report are adequately addressed, they will continue to have adverse implications for the federal government and American taxpayers.
The material weaknesses discussed in our report continued to
Additional details regarding the material weaknesses and their effect on the accrual-based consolidated financial statements and on the management of federal government operations can be found in our report.
The federal government reported a net operating cost of about $2.1 trillion and a unified budget deficit of approximately $1.3 trillion for fiscal year 2010, and as of September 30, 2010, debt held by the public increased to about 62 percent of gross domestic product (GDP).
In December 2007, the United States entered what has turned out to be its deepest recession since the end of World War II. GDP fell 4.1 percent from the beginning of the recession through the second quarter of 2009, which marked the recession's end. Since the end of the recession, GDP has grown slowly and unemployment remains at a high level.
As of September 30, 2010, the federal government's actions to stabilize the financial markets and to promote economic recovery resulted in assets of over $400 billion, which is net of about $75 billion in valuation losses. In addition, the federal government reported incurring significant liabilities and related net cost resulting from these actions. Because the valuation of these assets and liabilities is based on assumptions and estimates that are inherently subject to substantial uncertainty arising from the uniqueness of certain transactions and the likelihood of future changes in general economic, regulatory, and market conditions, actual results may be materially different from the reported amounts. For example, assets and liabilities reported by the federal government that are subject to substantial uncertainty include the following:
The ultimate cost of the federal government's actions to stabilize the financial markets and promote economic recovery will not be known for some time as these uncertainties are resolved and further federal government actions are taken in fiscal year 2011 and later. Looking ahead, the federal government will need to continue to determine the most expeditious manner in which to bring closure to its financial stabilization initiatives while optimizing its investment returns. Further, there are risks that the federal government's financial condition could be affected in the future by other factors, including the following:
The federal government faces even larger fiscal challenges in the long term. As discussed in the 2010 Financial Report, the federal government is on an unsustainable long-term fiscal path driven on the spending side primarily by rising health care costs and known demographic trends. Under new financial reporting standards, this 2010 Financial Report includes comprehensive long-term fiscal projections for the U.S. government, expanding on similar information presented in recent years' financial reports. These projections show continual increases in debt as a percentage of GDP, meaning fiscal policy is unsustainable over the long term. Also, the projections show that the present value of projected non-interest spending exceeds receipts by about $16.3 trillion over the next 75- year period. The projections relating to Social Security and Medicare are based on the same assumptions underlying the information presented in the Statement of Social Insurance and assume reductions in Medicare cost growth. GAO also prepares long-term fiscal projections for the U.S. government.7 Under GAO's Alternative simulation, absent policy change, debt held by the public as a share of GDP would exceed the historical high reached in the aftermath of World War II by 2020.8
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Our report on the U.S. government's consolidated financial statements would not be possible without the commitment and professionalism of inspectors general throughout the federal government who are responsible for annually auditing the financial statements of individual federal entities. We also appreciate the cooperation and assistance of Department of the Treasury and Office of Management and Budget officials as well as the federal entities' chief financial officers. We look forward to continuing to work with these individuals, the administration, and the Congress to achieve the goals and objectives of federal financial management reform.
Our report begins on page 221. Our guide9 to the Financial Report of the United States Government is intended to help those who seek to obtain a better understanding of the Financial Report and is available on GAO's Web site at www.gao.gov. In addition, the Web site includes a guide10 to understanding the differences between accrual and cash measures of the deficit and provides a useful perspective on the different purposes cash and accrual measures serve in providing a comprehensive picture of the federal government's fiscal condition today and over time.
Our report was prepared under the direction of Robert F. Dacey, Chief Accountant, and Gary T. Engel, Director, Financial Management and Assurance. If you have any questions, please contact me on (202) 512-5500 or them on (202) 512-3406.
Gene L. Dodaro
Acting Comptroller General
of the United States
cc: The Majority Leader of the Senate
cc: The Minority Leader of the Senate
cc: The Majority Leader of the House
cc: The Minority Leader of the House
1The accrual-based consolidated financial statements for the fiscal years ended September 30, 2010 and 2009, consist of the (1) Statements of Net Cost, (2) Statements of Operations and Changes in Net Position, (3) Reconciliations of Net Operating Cost and Unified Budget Deficit, (4) Statements of Changes in Cash Balance from Unified Budget and Other Activities, and (5) Balance Sheets, including the related notes to these financial statements. Most revenues are recorded on a modified cash basis. The 2010, 2009, 2008, 2007, and 2006 Statements of Social Insurance, including the related notes, are also included in the consolidated financial statements. The Statements of Social Insurance do not interrelate with the accrual-based consolidated financial statements. (Back to Content)
2Of the 24 Chief Financial Officers Act agencies, the agencies that, as of the date of our report, received disclaimers of opinions on all of their fiscal year 2010 financial statements were the Department of Defense and the Department of Labor. For the Department of Homeland Security for fiscal year 2010, only the Consolidated Balance Sheet and the Statement of Custodial Activity were subjected to audit; the auditor was unable to express an opinion on these two financial statements. (Back to Content)
3Beginning in fiscal year 2006, the Statement of Social Insurance became a principal financial statement and was audited as part of the applicable federal agencies' financial statements. We disclaimed an opinion on the fiscal year 2006 consolidated financial statements, including the Statement of Social Insurance. (Back to Content)
4Pub. L. No. 111-5, 123 Stat. 115 (Feb. 17, 2009). (Back to Content)
5Under Federal Reserve System policy, Federal Reserve Bank earnings in excess of statutory dividends to member banks are paid to the federal government. The federal government reported such net earnings of about $76 billion for fiscal year 2010. (Back to Content)
6Pub. L. No. 111-203 (July 21, 2010). (Back to Content)
7GAO, The Federal Government's Long-Term Fiscal Outlook: Fall 2010 Update, GAO-11-201SP (Washington, D.C.: November 2010). (Back to Content)
8GAO's Alternative simulation incorporates Congressional Budget Office and Centers for Medicare & Medicaid Services alternative projections for health care cost growth, which assume certain cost controls are not maintained over the long term and physician payments are not reduced as specified under current law. Also in this simulation, all tax provisions are extended to 2020 and the alternative minimum tax (AMT) exemption amount is indexed to inflation through 2020; revenues are then brought back to the 40-year historical average as a share of GDP; and discretionary spending grows with GDP during the entire period—keeping it just below the 40-year historical average as a share of GDP. (Back to Content)
9GAO, Understanding the Primary Components of the Annual Financial Report of the United States Government, GAO-05-958SP (Washington, D.C.: September 2005). In September 2009, we issued an update to this guide to reflect recent changes to the federal accounting standards and resulting changes to the Financial Report; see GAO-09-946SP (Washington, D.C.: September 2009). (Back to Content)
10See http://www.gao.gov/special.pubs/longterm/deficit/, which is based on information in GAO, Understanding Similarities and Differences between Accrual and Cash Deficits, GAO-07-117SP (Washington, D.C.: December 2006). In January 2007 and 2008, we issued updates to this guide for fiscal years 2006 and 2007; see GAO-07-341SP (Washington, D.C.: January 2007) and GAO-08-410SP (Washington, D.C.: January 2008). (Back to Content)
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