Truth and Transparency: The Federal Government’s Financial Condition and Fiscal Outlook.

wear many professional hats as Comptroller General of the United States, including head of the General Accounting Office [GAO], lead partner on the audit of the U.S. government’s consolidated financial statements and de facto chief accountability officer of the federal government—and I am a grandfather.

Each of these roles provides me with a different perspective on the financial and fiscal challenges facing our nation, but they all lead me to the same conclusion: We must come to grips with the daunting fiscal realities that threaten our nation’s, children’s and grandchildren’s future.

My remarks are intended to be a professional and nonpartisan overview based on the GAO’s work and my tenure as comptroller general and are not intended to be a political opinion. I do not criticize the actions of any particular person, proposal or political party on either end of Pennsylvania Avenue. Rather, my remarks are meant to be a wake-up call and an attempt to simply state the facts and speak the truth to the American people, key policy makers and the press in a manner consistent with the GAO’s core values of accountability, integrity and reliability. I hope my remarks will serve to stimulate a broader discussion and much-needed debate about where we are as a nation and what we need to do to address our large and growing fiscal challenge. It’s also important to note I’m not the only person—and the GAO is not the only institution—concerned about our fiscal challenge. Ultimately, it will take the combined efforts of many parties to successfully address the issues that I will raise.

Like many things in life, how you measure and keep score matters. When it comes to the U.S. government’s financial condition and fiscal outlook, the federal government’s current measurement and scorekeeping approaches leave much to be desired. The result is an incomplete and misleading picture of the federal government’s current financial condition and future fiscal outlook, as well as a delay in addressing important issues.

SHORTCOMINGS IN REPORTING
Let me review the federal government’s current financial condition; its fiscal 2002 annual financial report says a lot but not enough. The good news is that as of September 30, 2002, we had about $1 trillion in reported assets. The bad news is that we had almost $8 trillion in reported liabilities. That left us with about a $7 trillion accumulated deficit, or a little more than $24,000 for every man, woman and child in the United States. In fiscal year 2002, the federal government reported a net operating deficit of $365 billion. Many of you may be more familiar with the unified budget deficit number, which in fiscal year 2002 was $158 billion. Irrespective of whether you focus on the accrual-based accounting numbers or the cash-based budget numbers, the picture isn’t good and it’s getting worse. For example, the Congressional Budget Office [CBO] projects that the unified budget deficits in fiscal years 2003 and 2004 will be $401 billion and $480 billion, respectively. These numbers are up significantly from fiscal year 2002. Interestingly, CBO estimates that we will incur about $157 billion in interest on publicly held federal debt in fiscal year 2003 even though current interest rates are low on a relative basis. CBO also estimates that, excluding Social Security surpluses, the total deficit for fiscal years 2003 and 2004 will be $562 billion and $644 billion, respectively. If all these numbers are making your head spin, just remember that they are all big, and they are all bad.

More important, although we know that we are in a financial hole, we don’t really have a very good picture of how deep it is. Several very significant items are not currently included as liabilities in the federal government’s financial statements. These items include several trillion dollars in nonmarketable government securities in the so-called “trust funds.” In the case of the Social Security and Medicare trust funds, the federal government took in taxpayer money, spent it on other items and replaced it with an IOU. Given this fact, the amounts attributed to such activities aren’t shown as a liability of the U.S. government. Does this make sense, especially when the government continues to tell Social Security and Medicare beneficiaries that they can count on the bonds in these “trust funds?” Is the federal government trying to have its cake and eat it too?

T he current liability figures for the U.S. government also do not adequately consider veterans’ health care benefit costs provided through the Department of Veterans Affairs, nor do they include the difference between future promised and funded benefits from the Social Security and Medicare programs. These additional amounts total tens of trillions of dollars in discounted present value terms. Simply put they are likely to exceed $100,000 in additional burden for every man, woman and child in America today, and these amounts are growing every day. These items may or may not ultimately be considered to be liabilities from an accounting perspective, but they do represent significant commitments that will have to be addressed. The burden of paying for these is not a very nice present for a child born today. Personally, I’d prefer a savings bond rather than a bill.

In fairness the federal government’s financial statements also exclude some assets and rights held by the government. For example, the financial statements do not acknowledge the federal government’s power to tax. The U.S. government owns and controls one out of every four acres of the U.S. landmass. Yet the financial statements do not include any asset value for so-called stewardship or heritage assets, such as public lands and monuments, or national defense assets, such as missiles, tanks, ships and planes. These items were acquired at a cost and have some value, but do we really ever expect to sell them? For the most part, the answer is no.

Beyond financial information the federal government as a whole and each federal department and agency need to be able to show the results they have achieved with the resources and authorities they have been given. I’m not talking about performance measurement in a narrow sense but about whether agencies can show they are making a difference towards meeting the needs of society. This type of performance information and related cost/benefit analyses needs to become a standard part of federal reporting and operations. Unfortunately, for the most part, this is not being done adequately.

The bottom line is that, in my view, the federal government’s current financial statements and annual reports do not give policy makers and the American people an adequate picture of our government’s overall performance and true financial condition. This is a serious issue. As Thomas Jefferson noted, an informed electorate is the basis for a sound democracy. But how can the American people and their elected officials make sound decisions if they aren’t given timely, accurate and useful information?

The recent accountability failures in the private sector underscore the importance of proper accounting and reporting practices. It is critically important that such failures not be allowed to occur in the public sector. We at the GAO are dedicated to ensuring they don’t occur and to furthering progress on these and other important transparency and accountability issues. Earlier this year the GAO was unable for a sixth consecutive year to express an opinion as to whether the U.S. government’s consolidated financial statements were fairly stated. We were unable to express an opinion primarily because of serious financial management problems at the Defense Department, the government’s inability to adequately account for intragovernmental transactions and the government’s inability to properly prepare consolidated financial statements. Despite this track record I believe that, as 21 of 24 major federal agencies do, the federal government can and ultimately will receive an unqualified opinion on its financial statements, it’s hoped well before my term ends in 2013. At the same time I can assure you the U.S. government will not receive an opinion on its financial statements from the GAO until it earns one.

Although we may be in a financial hole today, what about our fiscal outlook? After all, if the outlook is positive, then we don’t need to be as concerned. Unfortunately, the outlook is not positive under a status-quo or business-as-usual scenario. It’s true that deficits are understandable and sometimes necessary in times of recession or war. But, while it may not seem like it to those who are out of work or underemployed, we haven’t been in a recession for nearly two years. Moreover, the current and projected deficits far exceed the costs associated with Iraq, the global war against terrorism and any incremental homeland security costs. The bottom line is that deficits do matter, especially if they are large, structural and recurring in nature. In addition, our projected budget deficits are not manageable without significant changes in status-quo programs, policies, processes and operations.

A LARGE AND GROWING STRUCTURAL DEFICIT
GAO’s long-range budget simulations show this nation faces a large and growing structural deficit due primarily to known demographic trends and rising health care costs. In less than 10 years, as the baby boom generation retires, the United States will be hit by a huge demographic tidal wave that isn’t expected to recede. This is unprecedented in the history of our nation.

Candidly, we’ve had a long-range budget deficit problem for some time, even during recent years when we had significant annual budget surpluses. Unfortunately, the days of surpluses are gone, and our current and projected budget situation has worsened significantly.

I t’s true that additional economic growth can help us address our future fiscal gap. It’s also true that some recent economic indicators have given us some hope that things may get better in the short term. However, at a recent meeting, prominent economists, who represented a wide variety of ideological viewpoints, agreed that, as I said in my speech at the meeting, “we cannot simply grow our way out of this problem.”

The status-quo scenario and the stay-the-course approach to the deficit and fiscal matters simply aren’t viable options. Tough choices will have to be made by elected officials to address the nation’s large and growing fiscal gap. The ultimate alternatives to definitive and timely action not only are unattractive, they are arguably infeasible—specifically, raising taxes to levels far in excess of what the American people have ever supported before; cutting total federal spending by unthinkable amounts; or further mortgaging the future of our children and grandchildren to an extent that our economy, our competitive posture and the quality of life for Americans would be seriously threatened.

Although many members of Congress and other key policy makers and opinion leaders agree we have a major fiscal challenge that must be dealt with, many don’t want to talk about it publicly. Many believe we will ultimately act to address this imbalance, but when will we start? Other nations have already started to address their long-range imbalances. When will we? Clearly, the sooner we start the better. Early action will reduce the significance of the changes that will be required and will allow individuals more time to adjust to any changes. Early action will allow the miracle of compounding to start working for us rather than against us, as it is doing now. Early action will also help to avoid a dangerous budgetary and economic spiral that would ultimately hurt every American.

Beyond the numbers, our current budget process needs to be reviewed and reconsidered. We’re still making budget and appropriations decisions annually without adequately considering the longer-term cost and implications of legislative proposals before they are enacted into law. Ten-year cash-flow projections just aren’t adequate when you face a huge and unprecedented demographic tidal wave. And some of the current requirements and assumptions imposed on the Congressional Budget Office for calculating its 10-year baseline projections are simply unrealistic. Finally, back loading tax and spending proposals and including sunset provisions primarily as tactical budget scoring devices rather than as strategic and substantive fiscal control devices don’t help either.

Although reasonable people can and will disagree about the nature and extent of our long-range fiscal challenge and how to best address it, the time has come for all responsible parties to recognize reality. Our nation has a major long-term fiscal challenge that is not going away and that requires serious and sustained attention.

A CALL TO ACTION
I have a few suggestions for consideration by Congress, the administration, the press and the public:

From an overall fiscal perspective, it’s time to admit that we’re in a fiscal hole and to stop digging. The federal government must start exercising more fiscal discipline on both the spending side and the tax side. The simple truth is that, while many spending increases and tax cuts may be popular, they may not all be prudent. The time has come for a fiscal Hippocratic oath: “Do no harm!”

As for budget measurements and metrics, it’s time to ensure that the long-term cost of major spending and tax proposals are quantified and adequately considered before legislation is enacted into law. One possible approach would be to calculate the estimated discounted present value of major spending and tax proposals as a supplement to, not a substitute for, the CBO’s current 10-year cash-flow projections. This is especially important for proposals in which the related costs significantly escalate after the 10-year projection period. The rules for capital and other public/private transactions also need to be reviewed and reconsidered. The government should base lease versus purchase decisions on a simple concept: What is in the best economic interest of the taxpayers?

As for the Social Security and Medicare trust funds, we must address the accounting and reporting issues that I mentioned earlier, but it’s also time to recognize that trust fund solvency alone is not an adequate gauge of the financial condition of these programs. In fact focusing on solvency alone provides a false sense of security as to the true state and the budgetary and economic implications of these important social programs. We must take steps to ensure these programs are both solvent and sustainable.

As for existing government policies and programs, it’s time to restructure the entitlement programs to make them secure, sustainable and aligned with current economic and demographic realities. It’s also time to review and rationalize our promises to ensure we can deliver on the promises that we make. At the same time, entitlement reform alone won’t get the job done. Policy makers need to begin to do baseline reviews of all major mandatory and discretionary government programs, policies and functions on both the spending and tax sides. Contrary to the assertions of some, the base of government spending, policies, programs and operations is not OK. The federal government needs to look beyond incrementalism and start making some tough choices in setting priorities and linking resources to results.

From a performance perspective, it’s time to develop a set of key national indicators to assess America’s position and progress over time and relative to other major industrialized nations. After all, you manage what you measure, and the federal government needs an instrument panel to help guide our ship of state. Right now, the federal government is flying either blind or with inadequate instruments in many areas. We also need a government-wide strategic plan and annual performance and accountability plans that are linked to these key indicators and integrated into individual agency plans.

From an operational perspective, it’s time to streamline and simplify the federal government’s organizational structure to make it more economical, efficient, effective, flexible, responsive and accountable. We need to deal with duplicative, overlapping, conflicting and outdated government programs, policies and operations. We also need to modernize existing human capital and other federal operating rules to reflect 21st century realities, while protecting the integrity of the civil service and preventing abuse of federal employees.

Finally, since its creation, the Federal Accounting Standards Advisory Board [FASAB] has accomplished a lot when it comes to accounting and reporting issues, but it’s time to review and consider the accounting and reporting issues that I discussed earlier.

PROMISING STEPS
This is a big list, and it will take time to address all these issues. Fortunately, we can see some glimmers of hope and light. For example, the president’s most recent budget submission and the latest annual report of the U.S. government focus more attention on our long-range fiscal imbalance. The Secretary of the Treasury, the Director of the Office of Management and Budget (OMB) and I agree the accounting and financial reporting issues that I mentioned need to be considered by the FASAB. Under the leadership of Director Doug Holtz-Eakin, the CBO is placing more emphasis on longer-term fiscal risks in its semiannual reports. Clay Johnson, Deputy Director for Management at the OMB, is leading two important administration efforts. Specifically, the president’s management agenda, which closely correlates with the GAO’s high-risk list, is helping to focus greater attention on important government operational issues. In addition the administration’s program assessment and rating tool initiative is helping to assess the results programs are getting with the resources they have been given. The House of Representatives has taken strong steps this year to identify areas of fraud, waste, abuse and mismanagement for congressional action. The GAO has published a framework for analyzing various Social Security reform proposals and will soon publish a framework for analyzing health care reform proposals. The GAO has helped to form a consortium of “good government” organizations to stimulate the development of a set of key national indicators. Congresswoman Joanne Davis will chair a House Government Reform Subcommittee hearing this afternoon on the organization of government and the problem of duplicative and overlapping government programs. Senator George Voinovich and others are working together to modernize the federal government’s human capital policies and practices. Finally, the GAO is leading by example in transforming how the government does business.

RAISING PUBLIC AWARENESS
These are positive steps. However, much more needs to be done, given the magnitude of our challenge and because our fiscal clock is ticking. Tough choices lie ahead. But from a practical standpoint, elected officials aren’t likely to get too far out in front of the American people on complex and controversial issues that may affect their chances for reelection. As a result, I believe we need to begin a major national education campaign and outreach effort to help the American people understand the nature and the magnitude of our challenge. This effort, in which the press needs to play a big part, would spur needed changes while helping all Americans to plan for their future. We should not underestimate the intellect and ability of the American people. I am confident that a vast majority of them will, if given the facts, get the message and understand the need for serious, early and sustained action.

While my remarks are intended as a wake-up call, it’s also time for a call to action. My fellow baby boomers and others need to recognize the leadership and stewardship obligations we have to our children, grandchildren and future generations of Americans. Members of generations X and Y especially need to become active in this debate because they and their children will disproportionately bear the burden if policymakers fail to act.

We at the GAO are dedicated to doing our part for the Congress and the country, but others need to help. In addressing this challenge, I’m reminded of the words of my favorite 20th century president, Theodore Roosevelt, who once said: “Aggressive fighting for the right [cause] is the noblest sport the world affords.” I hope you will join me in this cause. Let’s work together to speak the truth, enhance transparency and ensure accountability in these and other areas of importance to the American people. The time to start is now.