This is the accessible text file for GAO report number GAO-07-117SP 
entitled 'Understanding Similarities and Differences between Accrual 
and Cash Deficits: Fiscal Year 2007 Budget of the U. S. Government' 
which was released on December 11, 2006. 

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as part 
of a longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to Webmaster@gao.gov. 

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately. 

United States Government Accountability Office: 
GAO: 

Understanding Similarities and Differences between Accrual and Cash 
Deficits: Fiscal Year 2007 Budget of the U. S. Government: 

GAO-07-117SP: 

Preface: 

Two key measures that have been used as indicators of the government’s 
annual fiscal condition are the unified budget deficit measured 
primarily on a cash basis and the net operating cost measured on an 
accrual basis for financial statement purposes. The unified budget 
deficit has historically been the focus of budget debates and media 
reports in part because it closely approximates the government’s short-
term borrowing needs. [Footnote 1] Cash accounting can also be useful 
for controlling spending in the current year. However, the cash measure 
of fiscal condition, which is similar to keeping a checkbook, by nature 
excludes information about the long-term consequences of today’s policy 
decisions and operations. Indeed, understanding our nation’s long-term 
fiscal outlook is important because, as GAO’s long-term simulations 
show, current fiscal policy is unsustainable. [Footnote 2] The accrual 
measure primarily provides more information on the longer-term 
implications of today’s policy decisions and operations by showing 
certain costs incurred today but not payable for years to come, such as 
civilian and military pensions and retiree health care. 

While cash and accrual measures each serve different purposes, they 
present complementary information and can be used together to provide a 
more comprehensive picture of the government’s fiscal condition today 
and over time. The goal of this primer is to improve understanding of 
the accrual deficit by describing (1) how it is similar and different 
from the more commonly reported cash budget deficit, (2) the key 
drivers behind changes in accrual deficits relative to cash budget 
deficits, and (3) how the two measures complement each other and give a 
fuller picture of the government’s overall fiscal condition. 

Throughout this report, we primarily used data from the Financial 
Report of the United States Government, referred to in this report as 
the Financial Report, which is prepared by the Department of the 
Treasury, in coordination with the Office of Management and Budget. 
[Footnote 3] However, the reader is cautioned not to focus on the 
precise amount of the accrual deficit, its components, or their change 
from year to year because significant issues regarding the reliability 
and presentation of the federal government’s financial information 
still need to be addressed. GAO is responsible for auditing the 
consolidated financial statements of the U.S. government, but we have 
been unable to express an opinion on them because the government could 
not demonstrate the reliability of significant portions of the 
financial statements or that the reconciling differences between 
accrual and cash deficits were complete. The primary reasons for this 
disclaimed opinion are described in this primer. 

The Financial Report can be found on the Department of the Treasury’s 
website at [hyperlink, http://www.fms.treas.gov/fr/index.html]. Information on the 
most recent President’s budget can be found on the Office of Management 
and Budget’s website at [hyperlink, http://www.whitehouse.gov/omb/budget/]. 

This primer is structured in a question and answer format. The key 
questions are shown at the top of each page. To find the answers, flip 
to the page with your question highlighted. For easy reference, key 
terms are defined in the glossary located in appendix I—these glossary 
terms appear in bold type the first time they are used in the text. 
Many definitions come from A Glossary of Terms Used in the Federal 
Budget Process. [Footnote 4] Other related GAO products are listed at 
the end of this report. 

Unless otherwise indicated, the years referred to in the primer are 
federal fiscal years, which run from October 1 through September 30. 

This report was prepared under the direction of Susan J. Irving, 
Director, Federal Budget Analysis, Strategic Issues, who may be reached 
at (202) 512-9142 or irvings@gao.gov if there are any questions. Gary 
T. Engel, Director, Financial Management and Assurance, and his staff 
also provided key assistance. He may be reached at (202) 512-8815 or 
engelg@gao.gov. Contact points for our Offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
report. Copies of this report are available upon request. In addition, 
this document will be available at no charge on the GAO Web site at 
[hyperlink, http://www.gao.gov].

Signed by: 

David M. Walker: 
Comptroller General of the United States: 

[End of section] 

Contents: 

Preface: 

How Are Cash and Accrual Deficits Measured? 

The Unified Budget Deficit—The Net Cash Deficit: 

Net Operating Cost—The Accrual Deficit: 

What Purpose Does Each Measure Serve? 

How Are Cash and Accrual Deficits Similar? 

How Are They Different? 

How Are Cash and Accrual Deficits Similar? 

How Are Cash and Accrual Deficits Different? 

How Do You Get to the Cash Deficit from the Accrual Deficit? 

What Drives Changes in Cash and Accrual Deficits from Year to Year? 

What Areas Explain the Largest Differences between Cash and Accrual 
Deficits? 

How Are Military Employee Benefits Recorded in the Cash and Accrual 
Deficits? 

How Are Civilian Employee Benefits Recorded in the Cash and Accrual 
Deficits? 

How Is Veterans Compensation Recorded in the Cash and Accrual Deficits? 

How Are Environmental Liabilities Recorded in the Cash and Accrual 
Deficits? 

How Are Insurance Programs Recorded in the Cash and Accrual Deficits? 

How Are Capital Assets Recorded in the Cash and Accrual Deficits? 

How Can Accrual and Cash Measures Complement Each Other? 

Other Measures Are Also Needed to Understand the Government’s Fiscal 
Condition: 

Some Federal Programs Use Both Cash and Accrual Measures in the Budget 
but More Could Be Done: 

Appendix I: Glossary of Key Terms: 

Appendix II: Budget Outlays Measured on an Accrual Basis: 

Appendix III: Obligational Accounting: 

Related GAO Products: 

Ordering Information: 

Contacts: 

Abbreviations: 

CFS: consolidated financial statements of the United States government: 
CSRS: Civil Service Retirement System: 
DOD: Department of Defense: 
DOE: Department of Energy: 
FERS: Federal Employee Retirement System: 
Financial Report: Financial 
Report of the United States Government: 
GAAP: generally accepted 
accounting principles: 
OMB: Office of Management and Budget: 
NFIP: National Flood Insurance Program: 
PBGC: Pension Benefit Guaranty Corporation: 
PP&E: property, plant, and equipment: 
Treasury: Department of the Treasury: 
VA: Department of Veterans Affairs: 

[End of section] 

How Are Cash and Accrual Deficits Measured? 

The Unified Budget Deficit—The Net Cash Deficit: 

The federal budget [Footnote 5] is the government’s primary financial 
planning and control [Footnote 6] tool. It helps establish national 
spending priorities and the allocation of resources. It also helps 
ensure that the government spends taxpayers’ money in accordance with 
applicable laws. The President submits his forward-looking budget to 
Congress each February and the Department of the Treasury (Treasury) 
reports the budget results in October after the end of the fiscal year. 

The unified budget deficit (or surplus) is the federal budget’s “bottom 
line.” It represents the actual amount by which total outlays exceed 
receipts (or receipts exceed outlays), including any Social Security 
surplus. For the budget deficit, receipts and outlays are primarily 
measured on a cash basis [Footnote 7] —that is, they are recorded when 
cash is received or paid, similar to keeping a checkbook. Because the 
budget deficit is primarily measured on a cash basis, it is hereafter 
called the cash budget deficit or simply cash deficit. 

The unified budget is a comprehensive measure of all federal 
activities, including those that are on-budget and off-budget. The on-
budget deficit includes all budgetary accounts other than those 
designated by law as off-budget. The off-budget accounts are the Postal 
Service and Social Security trust funds. In fiscal year 2005, the 
unified budget deficit was $319 billion as reported in the Financial 
Report of the United States Government, hereafter referred to as the 
Financial Report. [Footnote 8] It was composed of a $494 billion on-
budget deficit, a Postal Service surplus of $2 billion and a Social 
Security surplus of $173 billion.

Net Operating Cost—The Accrual Deficit: 

Similar to a corporation’s annual report, the Financial Report is the 
federal government’s annual general-purpose report of accountability to 
the American public on its finances. Some primary goals of the 
Financial Report are to provide a comprehensive overview of the cost 
[Footnote 9] of the federal government’s operations, the sources used 
to finance them, and the implications of long-term obligations and 
commitments. [Footnote 10] However, significant issues regarding the 
reliability and reporting of this financial information still need to 
be addressed. The Financial Report is prepared by Treasury, in 
coordination with the Office of Management and Budget (OMB). GAO is 
responsible for auditing the consolidated financial statements of the 
United States government (CFS). OMB requires the Financial Report to be 
published in December following the end of the fiscal year. For 
example, the Financial Report for fiscal year 2005, which ended on 
September 30, 2005, was published in December 2005. 

The net operating cost (or net operating revenue) is found in the 
Financial Report. Net operating cost (or net operating revenue) is the 
amount by which expenses exceed revenue (or revenue exceeds expenses). 
For this measure, expenses are recorded on an accrual basis—in the 
period when goods are used or services are performed as opposed to when 
the resulting cash payments are made. [Footnote 11] In some cases, 
expenses are estimates of amounts that will be outlays in the future 
and thus depend on assumptions for interest rates, inflation, and wage 
growth, among other things. 

Most revenues in the Financial Report are recorded on a modified cash 
basis. [Footnote 12] This means they are essentially recorded when 
collected, but there is an accrual adjustment for some taxes due that 
have not been paid by the taxpayer and refunds due to taxpayers that 
have not been paid by the government. A modified cash basis of 
accounting is used in part because of inherent limitations estimating 
the amount of revenue arising from underlying events (e.g., taxpayers 
may not know their taxable income until after the underlying event, 
they may not file returns on their due dates, or they may underpay). 

For simplicity, the net operating cost (or net operating revenue) is 
hereafter called the accrual deficit (or surplus). 

What Purpose Does Each Measure Serve? 

The cash basis of accounting has traditionally been used for federal 
budgeting for several reasons. Because cash can be tracked throughout 
the year it can be useful for controlling spending in the current year. 
Also, because the time between the occurrence of a transaction that 
commits the government to make a payment and the cash flow to make the 
payment is relatively short for many program areas, the cash measure 
provides adequate information about the government’s total commitment 
at the time budget decisions are made for these programs. Finally and 
perhaps most notably, the cash budget deficit closely approximates the 
government’s short-term borrowing needs and so is a widely used and 
traditionally accepted measure of the government’s effect on current 
financial markets. 

There are several areas, however, in which outlays measured on a cash 
basis do not provide complete information about the total amount of the 
government’s obligation upfront when decisions are made. For some of 
these program areas, the budget records outlays on an accrual basis. 
Perhaps the best known of these are credit programs—loans and loan 
guarantees. Appendix II provides more information on which programs’ 
outlays are measured on an accrual basis and how they affect the cash 
budget deficit. 

Accrual measures are useful for understanding the government’s annual 
operating cost, including costs incurred today but not payable for 
years to come. As such, it adds a longer-term focus to the government’s 
financial picture by providing more information on longer-term 
consequences of today’s policy decisions and operations. Under federal 
accounting standards, the long-term costs for social insurance 
(primarily Medicare and Social Security) are not included in the 
accrual deficit. However, the Statement of Social Insurance provides 
information about the future costs of these programs. [Footnote 13] 

Finally, financial accounting standards are intended to result in the 
provision of financial information that will be useful for decision 
making. Once the information reported in the financial statement is 
auditable, it would provide integrity to related information in the 
budget, including actual receipts and outlays, if the amounts are 
materially consistent and reliable.

How Are Cash and Accrual Deficits Similar? How Are They Different? 

The cash and accrual deficits are based on the same underlying 
activities—the differences arise due to the timing of when the costs of 
certain activities are recognized. For the accrual deficit, costs are 
recognized when goods are used or services are performed. For the cash 
deficit, costs are recorded when cash payments are made for goods 
received or services performed. For many program areas, the timing 
difference is small but for others the timing differences can amount to 
billions of dollars each year. For example, in 2005, the reported 
accrual deficit was $760 billion—more than twice the size of the $319 
billion cash deficit. 

Not only are some of the differences caused by timing large, but they 
can cause the cash and accrual deficits to send different signals. For 
example, accrual and cash measures have sent different signals about 
whether the government is in surplus or deficit. Figure 1 shows that in 
2001 the budget was running a cash surplus but the accrual measure 
showed a large deficit. 

Figure 1: The Cash and Accrual Measures of Fiscal Surplus and Deficit

This figure is a line graph with two lines depicted: Cash 
surplus/deficit and Accrual surplus/deficit. The vertical axis of the 
graph represents dollars in billions from -1000 to +200. The horizontal 
axis represents fiscal years 2001 through 2005. 

Source: Treasury. 

Note: Data from unaudited Financial Reports. In some years, the budget 
deficit reported in the Financial Report differs from the final deficit 
number published in the President’s budget. For example, the 2005 
Financial Report issued in December 2005 reported a $319 billion cash 
budget deficit. However, the final deficit number published in the 
President’s budget 2 months later was slightly lower—$318 billion. 

[End of figure] 

The two measures can also send different signals about the direction in 
which the government’s fiscal condition is heading. For example, 
although both measures were in deficit in 2005, the cash budget deficit 
decreased from the previous year while the accrual deficit increased. 
This leads to questions of how the two measures are similar, how 
they’re different, and what drives changes in the two measures.

How Are Cash and Accrual Deficits Similar? 

Since revenue is primarily recorded on a modified cash basis in the 
financial statements, there is very little difference between cash 
receipts and accrued revenue. [Footnote 14] 

On the spending side, many programs are also recorded similarly because 
the time between the occurrence of the underlying transaction and the 
cash flow is relatively short. So, for some program areas such as 
federal employee salaries and grants there is little difference between 
accrual and cash measures. 

Figure 2 below illustrates this point using federal salaries. 

Figure 2: Cost of Federal Salaries Reflected Similarly in Accrual and 
Cash Deficits: 

For federal salaries, the time between when salaries are earned and 
when they are paid is short—a little over a week. Under accrual 
accounting, an expense for federal salaries is recognized when the 
salaries are earned. Under cash accounting an outlay is recorded in the 
following week when the salary is paid. At year’s end, there is little 
difference between the cash and accrual measure of salaries because 
both include salary payments or expenses for roughly 52 weeks of work. 

However, the cash and accrual measures may not include the exact same 
52 weeks of salary. Because the accrual deficit includes an expense as 
the salary is earned, regardless of when paid in cash, it will include 
the 52 weeks of salary earned in the current year. However, the cash 
deficit includes cash payments for salaries earned in the prior year 
and excludes cash payments for salaries earned in the last week of the 
current year that will be paid in the next year.

Source: GAO. 

[End of figure] 

Cash and accrual measures are also similar in that they both exclude 
the value of: 
* future payments for certain contingencies and financial commitments 
and; 
* future benefits for entitlement programs, including social insurance. 

Neither contingencies nor financial commitments are reflected in the 
cash deficit until the government makes the cash payment. Only some 
contingencies are reflected in the accrual deficit—those that are 
assessed as “probable” as to the likelihood of loss and can be 
reasonably measured. However, many contingencies are not reflected in 
the accrual deficit in part because it is difficult to anticipate the 
amount to be paid. Contingencies assessed as “reasonably possible” as 
to the likelihood of loss, or assessed as “probable” as to the 
likelihood of loss but that cannot be reasonably measured, are not 
included in the accrual deficit but are disclosed in the notes to the 
financial statements. For example, in fiscal year 2005, possible 
estimated losses of $1.2 billion to $7.9 billion from administrative 
claims and legal actions were assessed as “reasonably possible” and 
therefore not included in the accrual deficit. Also, the potential 
costs associated with future natural disasters are not recorded in the 
accrual deficit even though the public anticipates and has received 
large amounts of assistance following natural disasters. Finally, 
financial commitments, such as contracted goods or services that have 
not yet been delivered, are not recorded in the accrual deficit until 
the goods or services are delivered but are disclosed in the notes to 
the financial statements.[Footnote 15] 

While both the cash and accrual deficits include payments to current 
beneficiaries for entitlement programs, including social insurance, 
neither the cash nor accrual deficit reflects the serious future fiscal 
challenges of Social Security, Medicare, and other social insurance 
programs. Future scheduled benefits and estimated receipts are included 
in the Statement of Social Insurance. [Footnote 16] However future 
benefits are not a liability under federal accounting standards. 
[Footnote 17]

How Are Cash and Accrual Deficits Different? 

The differences between cash and accrual deficits are almost entirely 
on the spending side since revenues are recorded similarly in the 
budget and financial statements. Differences arise when a cost is 
accrued (and affects the accrual deficit) in 1 fiscal year but paid 
(and affects the cash deficit) in another fiscal year. 

While there are a number of areas in the federal government where 
differences exist, the six listed below account for the largest 
differences between accrual and cash deficits: 
* civilian employee benefits; 
* military employee benefits; 
* veterans compensation; 
* environmental liabilities (e.g., cleanup and disposal); 
* insurance programs, and; 
* capital assets. 

For all of these areas except capital assets, the key difference 
between the accrual and cash measures is the annual change in the 
liability. Each year as expenses are accrued, those that are not paid 
(and not reflected in the budget) increase the government’s liability. 
As such, the liability represents unpaid expenses. The change in the 
liability from year to year is generally equal to accrued expenses less 
cash payments made to cover expenses. Figure 3 illustrates this point 
using federal employee benefits other than salaries. 

Figure 3: Difference between Accrual and Cash Measures of Federal 
Employee Benefits: 

The accrual deficit includes an accrued expense for each current 
employee’s pension and other retirement benefits, which are earned 
during the employee’s working years but not paid until sometime in the 
future when the employee retires. 

The cash budget deficit does not include retirement benefits earned 
today, but it does reflect payments made to current retirees. (These 
cash payments reflect past expenses.) 

The difference between the accrued retirement benefits recognized and 
cash payments made during the year is generally the change in the 
liability from year to year. It is also the amount of the difference 
between the accrual and cash measures due to employee benefits.

Source: GAO. 

[End of figure] 

Capital assets are treated differently. When capital assets such as 
structures and equipment are purchased, the budget recognizes the full 
cost up front in order to provide decision makers with the information 
and incentives to make efficient decisions at the only time that they 
can control the cost. [Footnote 18] Specifically, the cost of a capital 
asset is recorded as an outlay and included in the cash budget deficit 
when the asset is paid for. However, under the accrual basis of 
accounting used in the financial statements, the cost of the asset is 
initially recorded on the balance sheet. The cost of the asset is then 
spread over its expected useful life to match the asset’s cost with its 
use. Therefore, each year the accrual deficit only reflects 1 year’s 
worth of cost, called depreciation expense. Figure 4 below illustrates 
this point. 

Figure 4: Difference between Accrual and Cash Measures of Capital 
Assets: 

Let’s assume that the federal government purchased a building this year 
for $50 million and expected the building to be used for the next 50 
years. The cash budget deficit would reflect the $50 million cost this 
year. The accrual deficit would only reflect a $1 million depreciation 
expense (assuming a straight-line depreciation method)[a] in the 
current year. The remaining cost of the asset would be reflected in the 
accrual deficit over the next 49 years at an annual expense of $1 
million. 

Source: GAO. 

[a] The straight-line depreciation method assumes the asset will 
provide an equal amount of benefit each year. The annual depreciation 
expense is calculated by dividing the purchase price of the asset (less 
its estimated salvage or residual value) by the estimated useful life 
of the asset.

[End of figure] 

How Do You Get to the Cash Deficit from the Accrual Deficit? 

The Financial Report includes a statement called Reconciliation of Net 
Operating Revenue (or Cost) and Unified Budget Surplus (or Deficit), 
hereafter called the “reconciliation statement,” that provides a 
crosswalk between the net operating cost (accrual deficit) and the 
unified budget deficit (cash budget deficit). Figure 5 below shows the 
general relationship underlying the reconciliation statement and how to 
get to the cash budget deficit from the accrual deficit. 

Figure 5: Moving from the Accrual Deficit to the Cash Budget Deficit 
(Using Fiscal Year 2005 Numbers to Illustrate) (dollars in billions): 

Accrual surplus/deficit (-)(revenue - expenses) [-760.01(see number one 
on fig. 6)]; 
plus; 
Accrued expenses in excess of cash outlays [625.3(see number two on 
fig. 6)];
minus; 
Cash outlays that do not involve current year expenses [170.6 (see 
number three on fig. 6)]; 
plus; 
Net amount of all other differences (i.e., the “plug” needed to force 
the statement to balance) [-13.2(see number four on fig. 6)]; 
equals; 
Cash surplus/deficit (-)(receipts- outlays) [-318.5(see number five on 
fig. 6)].

The accrual deficit is equal to revenue less expenses in the current 
year. Some expenses are accrued but not paid in the current year and so 
are not reflected in the cash budget deficit. So, to get to the cash 
budget deficit from the accrual deficit, unpaid expenses are removed. 
Because accrued expenses enter into the accrual deficit as a negative, 
unpaid expenses are added to the accrual deficit in order to remove 
them and get to the cash budget deficit. Conversely, cash outlays not 
related to current year expenses, such as those for capital assets, are 
not included in the accrual deficit but are included in the cash budget 
deficit (i.e., they have already been subtracted from receipts). Thus, 
such cash outlays are subtracted from the accrual deficit to get to the 
cash deficit. 

Source: Treasury. 

[End of figure] 

Figure 6 summarizes the reconciliation statements contained in the CFS 
for fiscal years 2001–2005. In the figure, annual changes in 
liabilities can be either positive or negative: 

* If accrued expenses exceed cash payments, liabilities increase (a 
positive change). A positive change represents accrued expenses that 
are in the accrual deficit but not the cash budget deficit. 

* If cash payments exceed accrued expenses, liabilities decrease (a 
negative change). A negative change represents cash payments that are 
not included in the accrual deficit but are included in the cash budget 
deficit. 

Figure 6: Crosswalk between Accrual and Cash Deficits/Surpluses 
(dollars in billions): 

Net operating cost(i.e., accrual deficit) 
Fiscal year 2001: -514.8; 
Fiscal year 2002: -364.9; 
Fiscal year 2003: -667.6; 
Fiscal year 2004: -615.6;
Fiscal year 2005: -760.0 [1].

Components of accrual deficit not part of the cash budget deficit: 
Changes in liability for military employee benefits (see p. 20): 
Fiscal year 2001: 406.8; 
Fiscal year 2002: 32.4; 
Fiscal year 2003: 101.1; 
Fiscal year 2004: 143.4;
Fiscal year 2005: 169.6.

Components of accrual deficit not part of the cash budget deficit: 
Changes in liability for veterans compensation (see p. 24): 
Fiscal year 2001: 139.3; 
Fiscal year 2002: 157.3; 
Fiscal year 2003: 105.6; 
Fiscal year 2004: 30.0;
Fiscal year 2005: 197.8.

Components of accrual deficit not part of the cash budget deficit: 
Changes in liability for civilian employee benefits (see p. 22): 
Fiscal year 2001: 50.1; 
Fiscal year 2002: 38.9; 
Fiscal year 2003: 83.9; 
Fiscal year 2004: 68.7;
Fiscal year 2005: 62.3.

Components of accrual deficit not part of the cash budget deficit: 
Changes in environmental liabilities (see p. 26): 
Fiscal year 2001: 5.7; 
Fiscal year 2002: -33.8; 
Fiscal year 2003: -23.1; 
Fiscal year 2004: -0.7;
Fiscal year 2005: 10.6.

Components of accrual deficit not part of the cash budget deficit: 
Depreciation expense (see p. 30): 
Fiscal year 2001: 21.4; 
Fiscal year 2002: 20.5; 
Fiscal year 2003: 71.2; 
Fiscal year 2004: 89.9;
Fiscal year 2005: 79.7.

Components of accrual deficit not part of the cash budget deficit: 
Changes in insurance liabilities (see p. 28): 
Fiscal year 2001: a; 
Fiscal year 2002: a; 
Fiscal year 2003: a; 
Fiscal year 2004: 37.0a;
Fiscal year 2005: 31.0. 

Components of accrual deficit not part of the cash budget deficit: 
Other (e.g., disposals/revaluations of capital assets) (see p. 30): 
Fiscal year 2001: 42.2; 
Fiscal year 2002: 25.2; 
Fiscal year 2003: 47.1; 
Fiscal year 2004: -4.1;
Fiscal year 2005: 74.3. 

Components of accrual deficit not part of the cash budget deficit: 
Total: 
Fiscal year 2001: 665.5; 
Fiscal year 2002: 240.5; 
Fiscal year 2003: 385.8; 
Fiscal year 2004: 304.2;
Fiscal year 2005: 625,3; [2]. 

Components of cash budget deficit not part of the accrual deficit: 
Outlays for capitalized fixed assets (see p. 30): 
Fiscal year 2001: -34.4; 
Fiscal year 2002: -40.9; 
Fiscal year 2003: -102.0; 
Fiscal year 2004: 112.1;
Fiscal year 2005: -146.6. 

Components of cash budget deficit not part of the accrual deficit: 
Other (e.g., principal repayments on precredit reform loans): 
Fiscal year 2001: 17.1; 
Fiscal year 2002: 6.6; 
Fiscal year 2003: 12.5; 
Fiscal year 2004: -12.0;
Fiscal year 2005: -24.0. 

Components of cash budget deficit not part of the accrual deficit: 
Total: 
Fiscal year 2001: -17.3; 
Fiscal year 2002: -34.3; 
Fiscal year 2003: -89.5; 
Fiscal year 2004: -124.1;
Fiscal year 2005: -170.6; [3]. 

Net amount of all other differences: Net amount of all other 
differences (i.e., the “plug” needed to force the statement to balance) 
(see p. 16) 
Fiscal year 2001: -6.4; 
Fiscal year 2002: 1.0; 
Fiscal year 2003: -3.5; 
Fiscal year 2004: 23.2;
Fiscal year 2005: -13.2; [4]. 

Unified budget surplus/deficit(i.e.,cash surplus/deficit): 
Fiscal year 2001: 127.0; 
Fiscal year 2002: -157.7; 
Fiscal year 2003: -374.8; 
Fiscal year 2004: -412.3;
Fiscal year 2005: -318.5b; [5]. 

Information available on [hyperlink, 
http://www.fms.treas.gov/fr/index.html]: 

Source: Treasury. 

Notes: Data reported in the unaudited Financial Reports for fiscal 
years 2001–2005. 

[a] The change in insurance liabilities was not included in the 
reconciliation statement prior to the Financial Report for 2005. The 
2005 reconciliation statement included comparative data for both 2004 
and 2005. 

[b] The final deficit number published in the President’s budget was 
slightly lower—$318.3 billion.

[End of figure] 

While the reconciliation statement is useful for illustrating which 
program areas explain large differences between the cash and accrual 
measures in each year, too much focus should not be placed on the 
amounts shown for items listed in the reconciliation statement—nor the 
actual amount of the accrual deficit itself—for a number of reasons, 
which are discussed below. 

First, as of 2005, Treasury has not been able to identify all items 
needed to reconcile the accrual and cash deficits. As a result, certain 
items that would cause the accrual and cash deficits to be different 
are not itemized in the reconciliation statement. To make the statement 
balance, Treasury includes an entry—labeled “net amount of all other 
differences”—that is needed to force the statement into balance (i.e., 
a “plug”). In 2005, this entry was $13.2 billion (or 3 percent of the 
total difference between the accrual and cash budget deficits). 
[Footnote 19] 

Second, we identified material weaknesses relating to some of the areas 
listed in the reconciliation statement—namely capital assets, 
environmental liabilities, and military postretirement health benefits. 
[Footnote 20] Errors in the reported expenses for these areas could 
lead to errors in the amount of the accrual deficit itself. For 
example, the failure to report a depreciation expense for a certain 
capital asset would tend to result in an understatement of the accrual 
deficit while over reporting depreciation expense would overstate the 
accrual deficit. 

Finally, the accrual deficit itself includes an amount needed to force 
the CFS into balance (i.e., a “plug”). The accrual deficit should 
typically equal the annual change in net position, which is the 
difference between the assets and liabilities reported in the balance 
sheet. However, Treasury could not completely reconcile the difference 
between ending and beginning of year net position and thus included an 
amount labeled “unreconciled transactions affecting the change in net 
position” to force the CFS into balance. Also, as part of our audit of 
the CFS, we identified a number of issues, including problems relating 
to the compilation of the CFS and the reconciliation of 
intragovernmental activity and balances between federal agencies. 
[Footnote 21]

What Drives Changes in Cash and Accrual Deficits from Year to Year? 

In recent years, both cash and accrual measures show a general 
deterioration in the government’s fiscal condition. This deterioration 
was due to both tax and spending legislation, sometimes in response to 
outside events, such as the attacks of September 11, 2001 and the 
ensuing economic slowdown, operations in Iraq and Afghanistan, and 
Hurricanes Katrina and Rita, which together affected the government’s 
operating costs and revenue. 

Some changes in the cash deficit from year to year can be and have been 
due to changes in dates when cash is scheduled to be paid or received. 
For example, when October 1 falls on a weekend, certain federal 
payments due on that date, such as salaries for military employees, are 
paid in September. This shifts the cash outlay into the previous fiscal 
year. However, because these benefits are recorded as expenses when due 
and payable, the shift in the payment date would not affect the accrual 
deficit. In contrast, Congress sometimes changes the due date for tax 
payments, which can shift cash receipts from one year to the next. For 
example, Congress changed the corporate tax payment due date from 
September 15, 2001, to October 1, 2001, resulting in a shift of about 
$23 billion in revenue from fiscal year 2001 to 2002. Because revenues 
are generally recorded when collected in both the cash and accrual 
deficits, the change in the tax due date would affect both the cash and 
accrual deficits. 

However, the accrual deficit has also been driven by three additional 
factors: 
* legislation that obligates future government resources; 
* changes in methods or assumptions for estimating long-term 
liabilities, and; 
* changes in federal accounting standards. 

For example, enacting a law that expands future federal employee 
retirement benefits or insurance programs would be reflected 
immediately in the accrual deficit but would not affect the cash budget 
deficit until future years when the benefits are paid. Indeed, the 
largest change in the accrual deficit in recent years occurred between 
2000 and 2001 [Footnote 22] when legislation was passed that extended 
TRICARE—health care benefits for military employees—to Medicare-
eligible military retirees and their beneficiaries. This change alone 
increased the estimated value of future benefit payments and the 
accrual deficit by over $290 billion in 2001. However, because these 
benefits will not be paid until future years, the cost was not 
reflected in the cash budget deficit.

Second, whereas the cash measure is sensitive to changes in dates when 
cash is scheduled to be paid or received, accrual measures are 
sensitive to changes in assumptions—such as future salary increases, 
changes to the general price level, interest rates, and technology—used 
to estimate future payments. For example, some future payments are 
discounted into present value terms using nominal interest rate 
assumptions. Changes in interest rates can and have caused changes—and 
sometimes large ones—in expenses and the accrual deficit. For example, 
the change in interest rate assumptions drove wide swings in the 
liability for veterans compensation in recent years. This liability 
increased by $105 billion in 2003, decreased by $30 billion in 2004, 
and then increased by $228 billion in 2005. From 2003 to 2004, the 
Department of Veterans Affairs (VA) raised its long-term interest rate 
assumption from 4.91 to 5.23 percent. In 2005, VA reduced its long-term 
interest rate to 4.74 percent. 

Finally, changes in federal accounting standards can also drive large 
changes in the accrual deficit without any effect on the cash budget 
deficit. For example, beginning in fiscal year 2003, a new accounting 
standard was adopted that required national defense equipment to be 
capitalized—that is, included on the balance sheet—and depreciated. 
Prior to 2003, the purchases of national defense equipment were 
expensed in the year they were bought and the assets were not 
capitalized or depreciated. [Footnote 23] A primary reason for the 
increase in the amount of capitalized assets reported in the 
reconciliation statement from $40.9 billion in 2002 to $102.0 billion 
in 2003 was the capitalization of national defense equipment purchased 
in 2003. Also primarily as a result of national defense equipment being 
capitalized, the depreciation expense more than tripled from $20.5 
billion in 2002 to $71.2 billion in 2003. 

While a lot of variation in the accrual deficit may lead some to 
believe the measure is less reliable than the cash measure, the changes 
often result from improvements in government estimation methods or the 
implementation of new accounting standards. This suggests that caution 
must be taken when interpreting year-to-year changes in the accrual 
deficit. Sometimes a change in the accrual deficit may not mean a 
change in fiscal condition, but rather a change in the government’s 
methods of measuring its condition. As the reliability issues we raised 
in our audits are addressed, the accrual deficit will become a more 
meaningful complement to the cash measure.

What Areas Explain the Largest Differences between Cash and Accrual 
Deficits? 

In the following pages, we provide more detailed information on the six 
areas that explain the largest differences between accrual and cash 
deficits. As we stated before, the six areas are: 
* military employee benefits; 
* civilian employee benefits; 
* veterans compensation; 
* environmental liabilities (e.g., cleanup and disposal); 
* insurance programs, and; 
* capital assets. 

We explain how each area’s costs are reflected under the two measures 
and how the numbers in the reconciliation statement are developed. 
Also, because changes in the accrued liability for these programs can 
lead to changes in the accrual deficit without any corresponding 
changes to the cash budget deficit, we explain what drives the accrual 
measures of each area and the key events or changes in assumptions that 
led to large changes in their liabilities from fiscal years 2001 to 
2005.

How Are Military Employee Benefits Recorded in the Cash and Accrual 
Deficits? 

Military employee benefits include retirement benefits, such as 
pensions, health benefits, and insurance, for military personnel who 
remain on active duty for 20 years or more. The cash budget deficit 
reflects the payments made to retired military in the current year but 
not the estimated long-term costs. [Footnote 24] However, the accrual 
deficit reflects an expense for the estimated long-term cost of 
military pensions and other retirement benefits during the years the 
service members are working. The expense reflects services rendered in 
the current year, accrued interest on the outstanding liability, and 
adjustments for any pension plan amendments or deviations between 
actual experience and assumptions used to estimate past expenses. 

Table 1 shows the accrued liabilities—or the actuarial present value of 
the expected cost of military employee benefits that is unpaid at the 
end of the reporting year—and the corresponding year-to-year change in 
liabilities from 2001 to 2005.

Table 1: Military Employee Benefit Liabilities (dollars in billions): 

Accrued liability: 
Fiscal year 2001: 1,309.7; 
Fiscal year 2002: 1,324.1; 
Fiscal year 2003: 1,443.2; 
Fiscal year 2004: 1,586.6;
Fiscal year 2005: 1,756.2. 

Accrued liability: Pensions;
Fiscal year 2001: 708.3; 
Fiscal year 2002: 730.0; 
Fiscal year 2003: 739.0; 
Fiscal year 2004: 837.7;
Fiscal year 2005: 895.4. 

Accrued liability: Post retirement health; 
Fiscal year 2001: 580.9; 
Fiscal year 2002: 592.0; 
Fiscal year 2003: 683.0; 
Fiscal year 2004: 725.3;
Fiscal year 2005: 833.9. 

Accrued liability: Other (e.g., insurance); 
Fiscal year 2001: 20.5; 
Fiscal year 2002: 20.1; 
Fiscal year 2003: 21.2; 
Fiscal year 2004: 23.6;
Fiscal year 2005: 26.9. 

Change in liability from previous year: 
Fiscal year 2001: 406.8; 
Fiscal year 2002: 32.4; 
Fiscal year 2003: 101.1; 
Fiscal year 2004: 143.4;
Fiscal year 2005: 169.6. 

Change in liability from previous year: Pensions; 
Fiscal year 2001: 17.8; 
Fiscal year 2002: 21.7; 
Fiscal year 2003: 9.0; 
Fiscal year 2004: 98.7;
Fiscal year 2005: 57.7. 

Change in liability from previous year: Post retirement health; 
Fiscal year 2001: 388.6; 
Fiscal year 2002: 11.1; 
Fiscal year 2003: 91.0; 
Fiscal year 2004: 42.3;
Fiscal year 2005: 108.6. 

Change in liability from previous year: Other (e.g., insurance); 
Fiscal year 2001: 0.4; 
Fiscal year 2002: -0.4; 
Fiscal year 2003: 1.1; 
Fiscal year 2004: 2.4;
Fiscal year 2005: 3.3.  

Source: Treasury. 

Note: Data from unaudited Financial Reports for 2001 to 2005.

[End of table] 

The change in liability from the previous year (in the highlighted row 
of table 1) represents the primary difference between accrual and cash 
measures of military employee benefits. The change in liability is 
generally equal to expenses accrued for current workers less cash 
outlays to pay current retirees’ benefits, which were expensed in the 
past. Therefore a positive change in the liability represents accrued 
expenses in excess of cash outlays. Because accrued expenses enter into 
the accrual deficit as a negative, one must add the change in liability 
to the accrual deficit to get to the cash deficit. 

What Drives Changes in Military Employee Benefit Liabilities? 

Changes in the military employee benefit liabilities have accounted for 
large swings in the accrual deficit without any corresponding change in 
the cash budget deficit. The largest change in the military employee 
benefit liability during the period of 2001 to 2005 was due to a change 
in law. In 2001, the liability for military employee benefits increased 
by $406.8 billion. A large part of the increase—over $290 
billion—stemmed from the initial nonrecurring effect of the 2001 
National Defense Authorization Act (Pub. L. No. 106-398). This 
legislation extended Tricare—health care benefits for military 
employees—to Medicare-eligible military retirees and their 
beneficiaries. Prior to 2001, military retirees who were eligible for 
Medicare relied on Medicare benefits. 

The change in liability has also varied from year to year because of 
differences between actual experience and what was originally assumed. 
For example, from 2004 to 2005, the change in the military health 
liability was $108.6 billion. According to the Department of Defense 
(DOD), about $60 billion of this change reflects higher-than-assumed 
health care cost growth. 

It should be noted that DOD was unable to provide support for a 
significant portion of the reported military retiree health liability. 
DOD’s auditors found that DOD’s systems could not accurately report the 
costs of health care provided by DOD facilities or develop reliable 
projections of future health care costs and the military retiree health 
liability.

How Are Civilian Employee Benefits Recorded in the Cash and Accrual 
Deficits? 

Civilian employees earn pension and other retirement benefits over the 
course of their working years, but these benefits are not paid until 
the employee retires. Currently, pensions represent the largest 
civilian employee benefit, and postretirement health benefits are a 
relatively small but growing share of civilian employee benefits. In 
the cash budget, the payments made to retired employees are recorded as 
outlays and reflected in the cash budget deficit. Any contributions 
made by employees are recorded as receipts and offset part of the cash 
outlays. [Footnote 25] However, the accrual deficit reflects an annual 
expense for the estimated long-term cost of these benefits each year as 
the employee renders his or her services. The annual expense includes 
the pension, health, or other benefits accrued for current workers, 
accrued interest on the outstanding liability, and adjustments for any 
changes to assumptions or the plans’ benefits and any deviations 
between actual experience and assumptions. Contributions made by 
employees towards pension, health, or other benefits are recorded as 
earned revenue, which offset part of the expense. [Footnote 26] 

The reported civilian employee benefit liabilities—or the present value 
of the benefits that have been earned but not paid at the end of the 
reporting year—and the changes in liabilities are shown in table 2.

Table 2: Civilian Employee Benefit Liabilities (Dollars in billions): 

Accrued liability: 
Fiscal year 2001: 1,359.2; 
Fiscal year 2002: 1,398.1; 
Fiscal year 2003: 1,482.0; 
Fiscal year 2004: 1,550.7;
Fiscal year 2005: 1,613.0. 

Accrued liability: Pensions;
Fiscal year 2001: 1,112.9; 
Fiscal year 2002: 1,229.8; 
Fiscal year 2003: 1,190.4; 
Fiscal year 2004: 1,230.2;
Fiscal year 2005: 1,2273.8. 

Accrued liability: Post retirement health; 
Fiscal year 2001: 205.2; 
Fiscal year 2002: 221.4; 
Fiscal year 2003: 244.4; 
Fiscal year 2004: 266.1;
Fiscal year 2005: 290.7. 

Accrued liability: Other benefits; 
Fiscal year 2001: 41.1; 
Fiscal year 2002: 46.9; 
Fiscal year 2003: 47.2; 
Fiscal year 2004: 54.4;
Fiscal year 2005: 48.5. 

Change in liability from previous year: 
Fiscal year 2001: 50.1; 
Fiscal year 2002: 38.9; 
Fiscal year 2003: 83.9; 
Fiscal year 2004: 68.7;
Fiscal year 2005: 62.3. 

Change in liability from previous year: Pensions; 
Fiscal year 2001: 41.0; 
Fiscal year 2002: 16.9; 
Fiscal year 2003: 60.6; 
Fiscal year 2004: 39.8;
Fiscal year 2005: 43.6. 

Change in liability from previous year: Postretirement health; 
Fiscal year 2001: 7.2; 
Fiscal year 2002: 16.2; 
Fiscal year 2003: 23.0; 
Fiscal year 2004: 21.7;
Fiscal year 2005: 24.6. 

Change in liability from previous year: Other benefits; 
Fiscal year 2001: 1.9; 
Fiscal year 2002: 5.8; 
Fiscal year 2003: 0.3; 
Fiscal year 2004: 7.2;
Fiscal year 2005: -5.9. 

Source: Treasury. 

Note: Data from unaudited Financial Reports for 2001 to 2005. 

[End of table]

The change in the liability from the previous year (in the highlighted 
row of table 2) is the primary difference between what is recorded in 
the accrual deficit and the cash budget deficit for civilian employee 
benefits. The change in liability is generally equal to the accrued 
expense less payments made to current retirees during the current year. 
Therefore a positive change in the liability represents accrued 
expenses in excess of cash outlays. Because accrued expenses enter into 
the accrual deficit as a negative, the change in liability is added to 
the accrual deficit to get to the cash deficit. 

What Drives Changes in Civilian Employee Benefit Liabilities? 

Changes in civilian employee benefit liabilities can affect the accrual 
deficit with no corresponding change to the cash budget deficit. The 
accrued benefit expense depends on assumptions and projections for 
salaries, years of service, interest rates, inflation, and other 
economic and demographic variables. As such, deviations between actual 
experience and these assumptions can lead to large changes in the 
civilian employee benefit liability and the accrual deficit itself. For 
example, the change in liability attributed to pensions in 2002—$16.9 
billion—was lower than in 2001—$41.0 billion—because actual pay raises 
given to federal employees and the cost of living allowance given to 
retirees were both less than previously assumed. As a result, the 
previous year’s liability was reduced because of these deviations from 
the assumptions. Conversely, the change in liability attributed to 
pensions in 2003—$60.6 billion—was significantly larger than 2002 
because actual pay raises were larger than assumed. 

Most of the year-to-year changes in the postretirement health liability 
were also due to differences between actual experience and assumptions 
about health care costs and utilization. Health care cost trends have 
been more volatile than factors underlying estimates of pension benefit 
liabilities (e.g., wage growth and cost of living allowances); hence, 
estimates of postretirement health liabilities can be more volatile 
than pension liability estimates.

How Is Veterans Compensation Recorded in the Cash and Accrual Deficits? 

The veterans compensation program provides eligible veterans and their 
survivors with benefits to compensate for the loss of potential 
earnings due to service-connected disability or death. The cash budget 
deficit reflects compensation payments made in the current year to 
current veterans but not the estimated costs of future benefits. 
However, the accrual deficit reflects an expense for future payments to 
current veterans already receiving benefits, veterans that aren’t 
currently receiving benefits but will in the future, and a portion of 
those in active military service assumed by the VA to become eligible 
for benefits in the future. 

Table 3 shows the reported veterans compensation liability—or the 
present value of the estimated cost of future benefit payments earned 
but not paid at the end of the year—and the corresponding change in 
each year from 2001 to 2005. 

Table 3: Veterans Compensation Liabilities (Dollars in billions): 

Accrued liability: 
Fiscal year 2001: 691.9; 
Fiscal year 2002: 849.2; 
Fiscal year 2003: 954.8; 
Fiscal year 2004: 924.8;
Fiscal year 2005: 1,122.6. 

Change in liability from previous year: 
Fiscal year 2001: 139.3; 
Fiscal year 2002: 157.3; 
Fiscal year 2003: 105.6; 
Fiscal year 2004: -30.0;
Fiscal year 2005: 197.8. 

Source: Treasury. 

Note: Data from unaudited Financial Reports for 2001 to 2005.

[End of table} 

The difference between the cash and accrual measures of veterans 
compensation is the change in the liability from year to year (in the 
highlighted row of table 3). The change in the liability is generally 
equal to accrued compensation expense plus accrued interest on the 
outstanding liability less benefits paid to current beneficiaries. As 
such, a positive change in the liability represents accrued expenses 
(in excess of cash payments). Because accrued expenses enter into the 
accrual deficit as a negative, one must add the change in liability to 
the accrual deficit to get to the cash budget deficit. 

What Drives Changes in Veterans Compensation Liabilities? 

Changes in the veterans compensation liability can affect the accrual 
deficit with no corresponding change to the cash budget deficit. VA 
estimates the compensation liability using assumptions for the number 
of beneficiaries, life expectancy, future cost of living adjustments, 
and interest rates, among other things, and the liability is sensitive 
to changes in these assumptions. 

Indeed, the veterans compensation liability experienced wide 
fluctuations in recent years driven by changes in assumptions. The 
liability increased by $105.6 billion in 2003, decreased by $30.0 
billion in 2004, and then increased by $197.8 billion in 2005. These 
large swings resulted not from changes to benefit provisions, laws, or 
regulations, but from changes in the assumptions used—primarily for 
interest rates—to estimate the value of future benefits. Beginning in 
2004, VA used current market-based interest rates—rather than 
historical averages—on Treasury securities to discount future payments 
into present value terms for presentation in the financial statements. 
Interest rates can be—and have been—quite volatile, which can lead to 
volatility in the reported liability. Increases in the interest rate 
used to discount the liability would reduce the liability whereas 
decreases in the interest rate would increase the liability. For 
example, from 2003 to 2004, rates on longer-term Treasury securities 
increased from 4.91 to 5.23 percent, leading to a $30 billion reduction 
in VA’s liability. Conversely, for the next year, VA reduced its long-
term interest rate assumption from 5.23 percent in 2004 to 4.74 percent 
in 2005. Reducing the interest rate resulted in a higher present value 
estimate of future benefit payments and thus a greater liability. 

How Are Environmental Liabilities Recorded in the Cash and Accrual 
Deficits? 

Federal, state, or local laws and regulations require the federal 
government to clean up hazardous and radioactive waste resulting from 
its operations (e.g., nuclear submarines and nuclear weapons). While 
the cash deficit reflects cleanup costs when they are paid, accounting 
standards require agencies to recognize in their financial statements 
each year a portion of the estimated probable and measurable 
environmental cleanup costs associated with assets as they are used 
operations, even though cleanup will not actually occur for many years. 
In addition, agencies are required to include estimates to clean up and 
dispose of existing contamination and waste resulting from nuclear 
weapon production during World War II and the Cold War—also called 
“legacy waste.” These estimates make up the majority of the Department 
of Energy’s (DOE) environmental liabilities. 

Each year a portion of the estimated total cleanup costs for operating 
assets is to be recognized as an expense. Accounting standards require 
that this allocation be based on a systematic and rational method, such 
as the expected life of the asset and the amount of capacity used each 
period. So, for example, a nuclear submarine may have an estimated 
useful life of 10 years and estimated cleanup costs of $80 million. 
Under a straight-line allocation method, the expense and liability 
accrued in each year of its life would be $8 million. This $8 million 
would be reflected in the accrual deficit for that year but not the 
cash budget deficit. In contrast, any increase to the estimated cost of 
cleaning up legacy waste must be recognized in full in the period it is 
identified. Table 4 shows reported environmental liabilities from 2001 
to 2005 and the change in the liability each year. [Footnote 27] The 
change in the liability from the previous year (in the highlighted row 
of table 4) represents accrued expenses in the current year less 
payments for current year cleanup activities, which were expensed in 
the past: 
* If accrued expenses exceed cash payments, liabilities increase and a 
positive change is shown (see 2001 and 2005); 
* If cash payments exceed accrued expenses, liabilities decrease and a 
negative change is shown (see 2002, 2003, and 2004). 

To move from the accrual deficit to the cash deficit requires 
adjustment for these accrued expenses and cash payments. Because 
accrued expenses (in excess of cash payments) enter into the accrual 
deficit as a negative, they must be added to the accrual deficit in 
order to get to the cash deficit. Conversely, cash payments in excess 
of accrued expenses are subtracted from the accrual deficit to get to 
the cash deficit.

Table 4:Environmental Liabilities (Dollars in billions): 

Accrued liability: 
Fiscal year 2001: 306.8; 
Fiscal year 2002: 273.0; 
Fiscal year 2003: 249.9; 
Fiscal year 2004: 249.2;
Fiscal year 2005: 259.8. 

Accrued liability: DOE;
Fiscal year 2001: 238.3; 
Fiscal year 2002: 209.7; 
Fiscal year 2003: 183.4; 
Fiscal year 2004: 181.7;
Fiscal year 2005: 189.8. 

Accrued liability: DOD; 
Fiscal year 2001: 63.3; 
Fiscal year 2002: 59.3; 
Fiscal year 2003: 61.5; 
Fiscal year 2004: 64.3;
Fiscal year 2005: 65.0. 

Accrued liability: Others;
Fiscal year 2001: 5.2; 
Fiscal year 2002: 4.0; 
Fiscal year 2003: 5.0; 
Fiscal year 2004: 3.2;
Fiscal year 2005: 5.0. 

Change in liability from previous year: 
Fiscal year 2001: 5.7; 
Fiscal year 2002: -33.8; 
Fiscal year 2003: -23.1; 
Fiscal year 2004: -0.7;
Fiscal year 2005: 10.6. 

Change in liability from previous year: DOE; 
Fiscal year 2001: 4.1; 
Fiscal year 2002: -28.7; 
Fiscal year 2003: -26.2; 
Fiscal year 2004: -1.7;
Fiscal year 2005: 8.1. 

Change in liability from previous year: DOD; 
Fiscal year 2001: 0.1; 
Fiscal year 2002: -4.0; 
Fiscal year 2003: 2.2; 
Fiscal year 2004: 2.8;
Fiscal year 2005: 0.7. 

Change in liability from previous year: Others; 
Fiscal year 2001: 1.5; 
Fiscal year 2002: -1.2; 
Fiscal year 2003: 1.0; 
Fiscal year 2004: -1.8;
Fiscal year 2005: 1.8. 

Source: Treasury. 

Note: Data from unaudited Financial Reports for 2001 to 2005.

[End of table} 

What Drives Changes in Environmental Liability Estimates? 

Estimates of cleanup costs are inherently uncertain. Estimates must 
assume the use of current technology and involve making a number of 
assumptions about the level of restoration of the site; detailed 
projections about the schedule of funding and cleanup activities; and 
inflation. Costs (and hence the liability) may also change if there is 
a change in the laws or regulations determining the level of 
restoration. For example, restoration to “pristine condition” would 
have a higher cost than restoration to a point deemed to “pose no near-
term health risks.” 

The changes in DOE’s estimated environmental liability in 2002 and 2003 
illustrate the role assumptions play in these estimates. DOE reduced 
its environmental liability estimate by $28.7 billion in 2002 and $26.2 
billion in 2003 primarily by assuming it could accelerate the timing of 
cleanup activities, which would lead to cost savings. However, we 
reported in 2005 that while some progress had been made under its 
accelerated approach, it is not likely DOE will achieve its projected 
cost reductions in part because the plan depends on technological 
improvements and changes in regulatory requirements that may not occur 
as planned. [Footnote 28]  

While the accrual deficit reflects more long-term environmental cleanup 
costs than does the cash deficit, it does not include all long-term 
cleanup costs and some of the costs recorded may not be reliable. For 
example, if no technology exists to clean up the site, the costs are 
not measurable and agencies do not accrue expenses for the site. Also, 
we identified some issues with DOD’s environmental liability estimates. 
For example, DOD’s estimates have not reflected major changes to 
federal accounting standards that became effective in 2003. Also, the 
Navy had not been estimating and reporting all costs for disposing of 
spent nuclear fuel produced by its nuclear ships and submarines. 
[Footnote 29]  

How Are Insurance Programs Recorded in the Cash and Accrual Deficits?  

The federal government insures individuals and firms against a variety 
of risks, such as loss of deposits from bank failures, crop failures, 
property damages from flood, and loss of pension benefits. Although 
there are many federal insurance programs, only two—the National Flood 
Insurance Program (NFIP) and the Pension Benefit Guaranty Corporation 
(PBGC) [Footnote 30]—are separately listed in the Financial Report for 
2005. 

Budget reporting for insurance programs focuses on annual cash flows. 
Outlays are recorded when claims are paid and collections for insurance 
programs—such as premiums—are recorded in the budget when received. For 
example, in 2005, NFIP paid about $3.3 billion in claims and collected 
about $2.1 billion in premiums. Its net effect on the cash budget 
deficit was a net outlay of about $1.2 billion.  

In contrast, the Financial Report records expenses or losses for 
estimated insurance claims when events have occurred or are probable to 
occur and can be reasonably estimated. Accordingly, losses are 
recognized as a liability in the balance sheet when claims have not 
been paid and generally represent a difference between the cash and 
accrual deficits. Whether or not the increase in insurance liability 
constitutes the majority of the difference between the accrual and cash 
deficits depends on the type of federal insurance program that has been 
reported in the CFS. Table 5 shows the reported liabilities as of the 
end of 2004 and 2005 and the change in liability from the previous 
year. 

Table 5: Insurance Liabilities (Dollars in billions):  

Insurance Liabilities: 
Fiscal Year 2004: 62.2;
Fiscal Year 2005: 93.2.  

Insurance Liabilities: PBGC;
Fiscal Year 2004: 60.8;
Fiscal Year 2005: 69.8.  

Insurance Liabilities: NFIP;
Fiscal Year 2004: 1.4;
Fiscal Year 2005: 23.4.  

Change in liability from previous year: 
Fiscal Year 2004: 17.0[a];
Fiscal Year 2005: 31.0.  

Change in liability from previous year: PBGC; 
Fiscal Year 2004: 16.3;
Fiscal Year 2005: 9.0.  

Change in liability from previous year: NFIP; 
Fiscal Year 2004: 0.7;
Fiscal Year 2005: 22.0.  

Sources: Treasury, PBGC, and the Department of Homeland Security.  

Notes: Data from unaudited Financial Report for 2005, PBGC 2004 Annual 
Report, and Department of Homeland Security Performance and 
Accountability Report 2005. Insurance programs were not specifically 
reported in the reconciliation statement prior to 2005. Because the 
Financial Report for 2005 only includes information on fiscal years 
2004 and 2005, we did not include information prior to 2004 in table 
5.  

[a] Total for PBGC and NFIP only; does not equal total reported in CFS. 

[End of table]  

For NFIP, the difference between the accrual and cash deficit is the 
change in insurance liabilities, which reflects claims approved but not 
paid and estimated claims for events that have occurred. The increase 
in the NFIP liability from 2004 to 2005 accounted for $22 billion of 
the $31 billion increase in insurance liabilities for the year. This 
means that the accrual deficit was $22 billion greater than the cash 
budget deficit due to changes in NFIP’s liability. Because the accrued 
expense for NFIP enters into the accrual deficit as a negative, the 
change in the liability must be added back to the accrual deficit to 
get to the cash deficit.  

PBGC is somewhat different than NFIP and other insurance programs. For 
PBGC, the difference between the cash and accrual measures is not 
simply the change in the liability from the previous year. The 
difference between the cash and accrual deficits attributable to PBGC 
is also due to changes in the value of plan assets, whereas assets are 
not an important factor for NFIP’s reconciliation. The difference 
between the cash and accrual deficits attributable to PBGC is composed 
primarily of (1) losses (i.e., the difference between the present value 
of estimated future benefits and plan assets) that are recorded in the 
Financial Report for completed and probable pension plan terminations 
and (2) cash benefit payments that are recognized in the budget. The 
loss represents the amount PBGC estimates it will ultimately be 
responsible for. Because losses are included in the accrual deficit as 
a negative they are added back to the accrual deficit to get to the 
cash deficit. This total loss amount is not specifically identified in 
the reconciliation statement.  

What Drives Changes in Insurance Programs?  

The change in the NFIP liability each year is driven by external 
factors such as natural disasters that produce floods and damage 
property. In the 2 years shown in table 5, flood insurance had the 
largest single-year effect on the insurance liability and the accrual 
deficit. The $22 billion increase in the flood insurance liability in 
2005 was primarily a result of Hurricane Katrina. Many insurance claims 
from individuals who lost property from flooding as a result of 
Hurricane Katrina were not yet paid at the end of the fiscal year. 
[Footnote 31]  

The economic health and benefit obligations of companies that sponsor 
defined-benefit pension plans are the primary drivers of accrued losses 
recognized by PBGC. PBGC estimates the loss for pension plans that are 
probable to be terminated in the near future by assessing macroeconomic 
conditions that can influence firms and investments and the specific 
performance of particular companies. In 2004 PBGC recognized losses due 
to probable plan terminations of $14.4 billion, primarily due to the 
struggling airline industry. The loss also includes adjustments for 
deviations between actual experience and PBGC’s estimates and the 
underlying assumptions. As mentioned above, the loss represents the 
primary difference between the cash and accrual deficits but is not 
equal to the change in liability in table 5.[Footnote 32]  

How Are Capital Assets Recorded in the Cash and Accrual Deficits?  

The federal government acquires a wide variety of capital assets for 
its own use including land, structures, equipment, vehicles, and 
information technology. The differing treatment of capital assets 
between the budget and the financial statements is part of the 
reconciliation between the accrual deficit and the cash budget deficit. 
Table 6 below shows the components of the reconciliation statement 
attributable to capital assets.  

Table 6: Capital Asset Accounts (Dollars in billions):  

Components of accrual deficit not part of the cash budget deficit: 
Depreciation expenses; 
Fiscal year 2001: 21.4;
Fiscal year 2002: 20.5; 
Fiscal year 2003: 71.2; 
Fiscal year 2004: 89.9; 
Fiscal year 2005: 79.7.  

Components of accrual deficit not part of the cash budget deficit: 
Property, plant, and equipment disposals and revaluations; 
Fiscal year 2001: 0;
Fiscal year 2002: 0 
Fiscal year 2003: 13.0; 
Fiscal year 2004: 0.2; 
Fiscal year 2005: 47.8.  

Components of cash budget deficit not part of the accrual deficit: 
Outlays for capitalized fixed assets; 
Fiscal year 2001: -34.4;
Fiscal year 2002: -40.9 
Fiscal year 2003: -102.0; 
Fiscal year 2004: -112.1; 
Fiscal year 2005: -146.6.  

Sources: Treasury.  

Note: Data from unaudited Financial Reports for 2001 to 2005.  

[End of table]  

To determine the accrual deficit (or the annual cost of operations), 
the financial statements recognize the expense for a capital asset by 
spreading its cost over its expected useful life. This is known as 
depreciation expense and increases the accrual deficit each year of the 
asset’s life. Depreciation is not recognized in the cash deficit so it 
must be added back to the accrual deficit to get to the cash deficit.  

In addition, capital assets may be sold or destroyed or revalued to 
reflect the true value of the asset. For a sale, the difference between 
the amount that is received for the asset upon disposal and the book 
value of the asset is recognized in the accrual deficit but not in the 
budget deficit. [Footnote 33] The budget deficit reflects a cash 
receipt for the full amount of the sale. Similarly, if an asset is 
destroyed or revalued to reflect a better estimate of its value, this 
is recognized in the accrual deficit but not the cash deficit. 
Disposals and revaluations can increase or decrease the accrual deficit 
and must be accounted for when reconciling between the accrual and cash 
measures. 

In the budget, outlays made to purchase capital assets are recorded on 
a cash basis. Outlays are recorded when capital assets are paid for and 
therefore the cost of the asset increases the cash budget deficit in 
the year that the outlay is made. The cash cost of accrued expenses (in 
excess of assets—called “capitalized fixed assets” in table 6—must be 
subtracted from the accrual deficit to get to the cash budget deficit.  

What Drives Changes in Depreciation Expense and Capitalized Assets?  

Changes in accounting standards such as what assets are included in 
capitalized assets or how assets are depreciated can cause changes in 
accrual measures. For example, prior to 2003, the depreciation of 
national defense equipment (e.g., ships, aircraft, combat vehicles, and 
weapons) was not reflected in the accrual deficit because national 
defense equipment was reported as part of “stewardship assets,” which 
were not on the balance sheet, and thus not depreciated. Beginning in 
2003, a change in accounting standards required that DOD’s national 
defense equipment be recorded as capitalized assets on the balance 
sheet and depreciated. The primary reason for the increase in the 
depreciation expense from $20.5 billion in 2002 to $71.2 billion in 
2003 was the addition of these DOD assets. It is important to note that 
the change in accounting standards changed what was reported on the 
balance sheet and not what was actually owned by the government.  

Prior to the accounting change relating to national defense equipment, 
the cost of purchasing such equipment was not included in the 
reconciliation statement because it was reflected in both the accrual 
and cash budget deficits. Under the accounting change, the cost of 
purchasing national defense equipment is now capitalized and therefore 
not included in the accrual deficit, while such costs are still 
included in the budget deficit. The capitalization of purchases of 
DOD’s national defense equipment was a primary contributor to an 
increase in the amount of capitalized assets reported in the 
reconciliation statement from $40.9 billion in 2002 to $102.0 billion 
in 2003. [Footnote 34]  

Although the addition of national defense equipment to the balance 
sheet accounted for a large part of the increase in capitalized assets 
and depreciation expense, too much focus should not be placed on the 
exact size of the increase. As we have reported in the past, the 
federal government can not satisfactorily determine that capital assets 
are properly reported in the CFS. A majority of capital assets are the 
responsibility of the DOD and it has not maintained adequate systems or 
sufficient records to provide reliable information on these assets. 

How Can Accrual and Cash Deficit Measures Complement Each Other?  

Neither the accrual nor the cash budget deficit alone provides a full 
picture of the government’s fiscal condition or the cost of government. 
For example, the cash deficit provides information on borrowing needs 
and current cash flow. The accrual deficit provides information on the 
current cost of government, but it does not tell one how much the 
government has to borrow in the current year to finance government 
activities. Also, accrual deficits provide more information on the 
longer-term consequences of current government activities but by nature 
do not include information about the timing of payments and receipts, 
which can be important. Therefore, just as investors need income 
statements, statements of cash flow, and balance sheets to understand a 
business’s financial condition, both cash and accrual measures are 
important for understanding the government’s financial condition. Cash 
and accrual measures together provide a more complete picture of the 
government’s fiscal stance today and over time; however, additional 
measures of the long-term implications of existing programs and tax 
policies are needed to have a fully complete picture.  

Other Measures Are Also Needed to Understand the Government’s Fiscal 
Condition:  

Beyond accrual and cash budget deficits, there are even more measures, 
statements, and information that are used or could be used to more 
fully understand the government’s fiscal condition, including: 
* projected cash flows of large spending and tax programs; 
* summary present value measures of large spending and tax programs; 
* reports on the nation’s fiscal exposures; 
* governmentwide financial statements of fiscal sustainability, and; 
* a summary annual report.  

Some of this information is currently available, but more should be 
developed or made more transparent. For example, the long-term cash 
flow is projected for Social Security and Medicare. These cash flow 
projections help in understanding the expected timing of future 
payments and receipts and hence the potential effect of these programs 
on future borrowing needs and financial markets. Summary present value 
measures are a way to show the long-term expected cost of current or 
proposed policies in a single number. These are also available for 
Social Security and Medicare. However, projected cash flows and summary 
present value measures are still needed for other major spending and 
tax programs—both existing programs and new programs or benefits being 
considered by Congress. 

Measures or statements that illustrate the future cost of government as 
a whole would also be beneficial. For example, we have suggested that 
OMB report on the nation’s fiscal exposures—the wide range of 
responsibilities, programs, and activities that may explicitly or 
implicitly expose the federal government to future spending. This would 
include reporting liabilities, obligations, commitments, contingencies, 
and implicit promises embedded in current policy or public 
expectations. [Footnote 35] Some of these, such as environmental 
cleanup and disposal costs and postretirement benefits, are reported in 
the financial statements as liabilities. Others, such as financial 
commitments, certain contingencies, and future social insurance 
benefits are not reported as liabilities but are reported elsewhere in 
the Financial Report. [Footnote 36] Pulling all these together into one 
presentation would improve transparency and may prompt more explicit 
deliberation of the government’s long-term fiscal commitments.  

An even more comprehensive statement illustrating the long-term fiscal 
sustainability of the government as a whole, including future tax 
receipts and the cost of providing basic government services such as 
education and defense, might also be useful. Improved reporting would 
also involve a summary annual report that summarizes in a clear, 
concise, and transparent manner key financial and performance 
information embodied in the Financial Report. Such a report could be 
useful to both Congress and the American people.  

Some Federal Programs Use Both Cash and Accrual Measures in the Budget 
but More Could Be Done:  

Some federal programs use both cash- and accrual-based measures but 
more can be done. For example, agencies pay the cost of accrued pension 
benefits for some civilians (i.e., those hired since 1984) and military 
personnel (i.e., those in service after October 1, 1984) as they are 
earned. While the accrued cost is not reflected in the budget’s bottom 
line (i.e., the cash deficit), [Footnote 37] information on the full 
cost of current services is available to decision makers responsible 
for resource allocation. However, the full cost of all pensions (i.e., 
employees hired before 1984), retiree health, environmental 
liabilities, and insurance are still not recognized in the budget when 
the commitments are made. 

Accrual measures can be used to a greater extent to inform decision 
making. Although long-term estimates, including those used in the 
accrual deficit, are inherently uncertain, cash measures alone do not 
provide information about the longer-term consequences of today’s 
decisions. We have previously suggested [Footnote 38] that Congress 
consider expanding the selective use of accrual-based measures in the 
budget to program areas where it would enhance spending control and 
provide more information on the full cost at the time decisions to 
commit the government are made (i.e., up front). [Footnote 39] We 
identified several alternative approaches for Congress and the 
Executive Branch to consider that would improve the recognition of long-
term costs in the budget. For example, accrual budgeting could be 
adopted for programs that currently do not capture the long-term 
commitment entered into by the government such as:  

* employee pension programs; 
* retiree health programs for federal employees; 
* federal insurance programs, and; 
* environmental clean up.  

The bottom line is that having one measure without the other does not 
provide complete information about the government’s fiscal condition. 
The government—just like businesses and individuals—should not ignore 
the balance in its checking account or its longer-term financial 
picture. 

[End of section] 

Appendix I: Glossary of Key Terms:  

Term: Accrual basis; 
Definition: The basis of accounting whereby revenue is recognized when 
it is earned and expenses are recognized in the period incurred, 
regardless of when cash is received or paid.  

Term:Accrual deficit; 
Definition: The term used in this report to refer to the net operating 
cost. (See net operating cost.)  

Term: Actuarial liability; 
Definition: A liability based on statistical calculations and actuarial 
assumptions, which are conditions used to resolve uncertainties in the 
absence of information concerning future events affecting insurance, 
pension expenses,and so forth.  

Term: Budget authority; 
Definition: Authority provided by federal law to enter into financial 
obligations that will result in immediate or future outlays involving 
federal government funds.  

Term: Capital assets; 
Definition: Land, structures, equipment, intellectual property (e.g., 
software), and information technology (including information technology 
service contracts) that are used by the federal government and have an 
estimated useful life of 2 years or more.  

Term: Capitalized; 
Definition: Recorded as an asset on the balance sheet.Some capital 
assets may not be reported on the balance sheet if they fail to meet 
the entity’s criteria (e.g., a dollar threshold) for balance sheet 
reporting.  

Term: Cash basis; 
Definition: The basis whereby receipts are recorded when received and 
expenditures are recorded when paid, without regard to the accounting 
period in which the receipts are earned or the costs are incurred.  

Term: Cash budget deficit,cash deficit; 
Definition: The term used in this report to refer to the unified budget 
deficit. (See unified budget deficit.)  

Term: Contingency; 
Definition: An existing condition, situation, or set of circumstances 
involving uncertainty as to possible gain or loss to an entity that 
will ultimately be resolved when one or more future events occur or 
fail to occur.  

Term: Cost; 
Definition: For purposes of this primer, the value of the resources 
used to produce a program, provide a service,or achieve an objective.  

Term: Depreciation; 
Definition: The systematic and rational allocation of the acquisition 
cost of an asset, less its estimated salvage or residual value, over 
its estimated useful life.  

Term: Disclaimer of opinion; 
Definition: A statement in an auditor’s report indicating the inability 
of the auditor to express an opinion on the fairness of the financial 
statements referred to in the report.  

Term: Expense; 
Definition: Outflow or other use of assets, or incurrence of liability, 
during an operating period as a result of providing goods, services, or 
other activities the benefits from which do not extend beyond the 
present operating period.  

Term: Financial commitment; 
Definition: For federal proprietary accounting, contractual obligations 
that require the future use of resources.  

Term: Incur; To sustain, become liable for; the term is said of a cost, 
Definition: expense, loss, or debt.  

Term: Legal liability; 
Definition: Under obligational accounting,a claim that may be legally 
enforced against the government. It may be created in a variety of 
ways, such as by signing a contract, grant, or cooperative agreement by 
operation of law. (See also obligation.)  

Term: Liability; 
Definition: For federal proprietary accounting, a probable future 
outflow or other sacrifice of resources as a result of past 
transactions or events.  

Term: Modified cash basis; 
Definition: A term used to describe the federal government’s hybrid 
system for accounting for revenues from taxes and duties. Under a 
modified cash basis, revenue is recognized when received in cash except 
for tax receivables (taxes owed from taxpayers but not yet collected) 
and refunds payable (refunds owed to taxpayers but not yet paid by the 
federal government), which are both measured on an accrual basis.  

Term: Net operating cost; 
Definition: The excess of expenses overtax revenue. (See revenue; 
expenses.)  

Term: Net operating revenue; 
Definition: The excess of tax revenue over expenses. (See revenue; 
expenses.)  

Term: Obligation; 
Definition: A definite commitment that creates a legal liability of the 
government for the payment of goods and services ordered or received, 
or a legal duty on the part of the United States that could mature into 
a legal liability by virtue of actions on the part of the other party 
beyond the control of the United States.  

Term: Obligational accounting; 
Definition: The accounting systems, processes, and people involved in 
collecting financial information necessary to control, monitor, and 
report on all funds made available to federal entities by legislation, 
including permanent,indefinite appropriations as well as appropriations 
enacted in annual and supplemental appropriations laws that may be 
available for 1 or multiple fiscal years.  

Term: Off-budget; 
Definition: Those budgetary accounts (either federal or trust funds) 
designated by law as excluded from budget totals. As of the date of 
this primer, the revenues and outlays of the two Social Security trust 
funds (the Old-Age and Survivors Insurance Trust Fund and the 
Disability Insurance Trust Fund) and the transactions of the Postal 
Service are the only off-budget accounts. The budget documents 
routinely report the on-budget and off-budget amounts separately and 
then add them together to arrive at the consolidated government totals. 
(See also on-budget; unified budget deficit; unified budget surplus.)  

Term: On-budget; 
Definition: All budgetary accounts other than those designated by law 
as off-budget. (See also off-budget; unified budget deficit; unified 
budget surplus.)  

Term: Outlay; 
Definition: The issuance of checks, disbursement of cash, or electronic 
transfer of funds made to liquidate a federal obligation.  

Term: Present value; 
Definition: The worth of a future stream of returns or costs in terms 
of money paid immediately (or at some designated date). A dollar 
available at some date in the future is worth less than a dollar 
available today because the latter could be invested at interest in the 
interim. In calculating present value, prevailing interest rates 
provide the basis for converting future amounts into their “money now” 
equivalents.The net present value is the present value of estimated 
future cash inflows minus the present value of cash outflows.  

Term: Receipts; 
Definition: Collections from the public based on the government’s 
exercise of its sovereign powers, including individual and corporate 
income taxes and social insurance taxes, excise taxes, duties, court 
fines, compulsory licenses,and deposits of earnings by the Federal 
Reserve System. Total governmental receipts include those specified as 
off-budget by law. Total receipts are compared with total outlays in 
calculating the deficit or surplus.  

Term: Revenue; 
Definition: As used in federal accounting, an inflow of resources that 
the government demands, earns, or receives by donation.As used in the 
congressional budget process, a synonym for governmental receipts.  

Term: Stewardship property,plant, and equipment; Definition: Property 
owned by the federal government and meeting the definition of one of 
the following two categories: 
* Heritage Assets—property, plant, and equipment (PP&E) of historical, 
natural, cultural,educational, or artistic significance, or; 
* Stewardship Land—land other than that acquired for or in connection 
with general PP&E. The acquisition cost of stewardship PP&E is 
generally recognized as a cost when incurred. However, multiuse 
heritage assets, such as the White House, are used in an entity’s 
operations and are reported as capitalized assets on the balance 
sheet.  

Term: Unified budget deficit; 
Definition: The amount by which the government’son-budget and off-
budget outlays exceed the sum of its on-budget and off-budget receipts 
for a given period, usually a fiscal year. (See also off-budget; on-
budget.)  

Term: Unified budget surplus; 
Definition: The amount by which the sum of the government’s on-budget 
and off-budget receipts exceed the sum of its on-budget and off-budget 
outlays for a given period, usually a fiscal year. (See also off-
budget; on-budget.) 

[End of section]  

Appendix II: Budget Outlays Recorded on an Accrual Basis:  

Outlays in the cash budget deficit are primarily measured on a cash 
basis. However, there are some areas, such as federal credit programs, 
pensions, insurance, and environmental liabilities, where cash 
measurement does not reveal the full extent of the government’s 
commitment up front when the commitment is made. In some of these 
areas, the budget records outlays on an accrual basis rather than cash. 
The accrual-based outlays for program areas shown in table 7 affect the 
bottom line cash budget deficit. However, accrual-based outlays for 
other program areas shown in table 8 do not affect the bottom line cash 
budget deficit because the outlays are paid by one agency to another 
(i.e., intragovernmental) and so offset each other. Only payments that 
flow from or to entities outside the government affect the cash budget 
deficit.  

Table 7: Budget Outlays Measured on an Accrual Basis That Affect the 
Cash Budget Deficit:  

Program area: Credit programs;
Budget treatment: Outlay recorded for the credit subsidy cost, which is 
the net present value of the estimated cash flows over the life of a 
loan or loan guarantee (excluding administrative costs).  

Program area: Interest on the debt held by the public; 
Budget treatment: Outlay recorded when interest accrues on public debt 
securities,[a] not when payments are made.  

Source: GAO.  

[a] Some outlays from the Department of the Treasury to pay interest on 
special Treasury securities held by some federal trust funds are also 
recorded on an accrual basis but they are intragovernmental and do not 
affect the cash deficit.  

[End of table]  

Table 8: Intragovernmental Outlays/Receipts Measured on an Accrual 
Basis That Do Not Affect the Cash Budget Deficit:  

Program area: Federal Employees Retirement System (FERS) pensions; 
Budget treatment: Civilian agencies are charged for the full cost of 
pension benefits as they accrue for employees covered by FERS.[a] An 
accrual-based outlay is recorded by the employing agency for accruing 
pension costs not covered by employee contributions. The receipt is 
recorded by the civilian retirement system. Since no cash actually 
leaves the government, there is no effect on the governmentwide cash 
deficit. Only cash outlays from the civilian retirement system to 
current retirees are reflected in the cash budget deficit. 

Program area: Military pensions; 
Budget treatment: The Department of Defense (DOD) is charged for the 
accrued cost of military pension benefits as they accrue. An accrual-based 
outlay is recorded by DOD for accruing pension costs. The receipt is 
recorded by the military retirement system. Since no cash actually leaves 
the government,there is no effect on the governmentwide cash deficit. 
Only cash outlays from the military retirement system to current retirees 
are reflected in the cash budget deficit. 

Program area: Military retiree health for Medicare-eligible retirees; 
Budget treatment: DOD is charged for the accrual cost of retirees’ 
health care for benefits received by annuitants who are eligible for 
Medicare. An accrual-based outlay is recorded by DOD and the receipt is 
recorded by the Medicare-eligible military retiree health fund.[b] 
Since no cash actually leaves the government, there is no effect on the 
governmentwide cash deficit. Only cash outlays from the Medicare-
eligible military retirement health fund to current retirees are 
reflected in the cash budget deficit. 

Source: GAO.  

[a] FERS is the retirement system for civilian employees hired after 
1983. The Civil Service Retirement System (CSRS) provides defined 
benefits to most federal employees hired before 1984. Currently, 
federal agencies pay only about 40 percent of the pension costs for 
CSRS-covered employees.  

[b] Under the Floyd D. Spence National Defense Authorization Act of 
Fiscal Year 2001 (Pub. L. No. 106-398), the Secretary of Defense was 
required to make contributions into the Medicare-Eligible Retiree 
Health Care Fund. However, beginning in 2006, DOD stopped making 
contributions because the Ronald W. Reagan National Defense 
Authorization Act for Fiscal Year 2005 (Pub. L. No. 108-375) directed 
the Department of the Treasury to make the annual contribution instead 
of DOD.  

[End of table]  

For additional information on program areas where the budget does not 
recognize their total commitment up front, see GAO reports titled 
Accrual Budgeting: Experiences of Other Nations and Implications for 
the United States, GAO/AIMD-00-57 (Washington, D.C.: Feb. 18, 2000) and 
Fiscal Exposures: Improving the Budgetary Focus on Long-Term Costs and 
Uncertainties, GAO-03-213 (Washington, D.C.: Jan. 24, 2003).  

[End of section]  

Appendix III: Obligational Accounting:  

In addition to cash and accrual accounting, Congress and federal 
agencies also track funds using obligational accounting—a separate and 
distinct administrative control through which federal agencies control, 
monitor, and report on the status of the funds at their disposal.  

Obligational accounting differs from cash and accrual accounting by 
when transactions are recorded. For example, an agency can incur a 
legal liability (i.e., a claim that may be legally enforced against the 
government) in a variety of ways, such as by signing a contract, grant, 
or cooperative agreement, or by operation of law. When an agency 
creates a legal liability, it “obligates” itself to pay and records an 
obligation against available funds. Recording the obligation 
effectively sets aside those funds for the actual cash outlay. Under 
cash and accrual accounting, the recognition of the legal liability 
doesn’t show up until later. No transaction is recorded under accrual, 
or proprietary accounting, until the entity accepts the goods or 
services, at which point an account payable and related expense will be 
recorded. Under cash accounting, an outlay is recorded when the 
obligation is liquidated.  

The federal budget and budget process largely use obligational 
accounting. The obligational system of accounting is rooted in the 
Antideficiency Act. [Footnote 40] It is through this obligational 
accounting that federal agencies ensure compliance with the fiscal laws 
that Congress has enacted including the Antideficiency Act, the 
“recording statute,” and the “purpose” and “time” statutes. Thus, if an 
agency controls its obligations, it is unlikely to overspend its 
appropriations.  

A detailed discussion of obligations and obligational accounting can be 
found in GAO’s Glossary of Terms Used in the Federal Budget Process, 
GAO-05-734SP (Washington, D.C.: September 2005), appendix III, page 
120. 

[End of section]  

Related GAO Products:  

The Nation’s Long-Term Fiscal Outlook: September 2006 Update. GAO-06-
1077R. Washington, D.C.: September 15, 2006.  

Financial Audit: Significant Internal Control Weaknesses Remain in 
Preparing the Consolidated Financial Statements of the U.S. Government. 
GAO-06-415. Washington, D.C.: April 21, 2006.  

Environmental Liabilities: Long-Term Fiscal Planning Hampered by 
Control Weaknesses and Uncertainties in the Federal Government’s 
Estimates. GAO-06-427. Washington, D.C.: March 31, 2006.  

A Glossary of Terms Used in the Federal Budget Process. GAO-05-734SP. 
Washington, D.C.: September 2005.  

Understanding the Primary Components of the Annual Financial Report of 
the United States Government. GAO-05-958SP. Washington, D.C.: September 
2005.  

Financial Audit: Process for Preparing the Consolidated Financial 
Statements of the U.S. Government Needs Improvement. GAO-04-45. 
Washington, D.C.: October 30, 2003.  

Fiscal Exposures: Improving the Budgetary Focus on Long-Term Costs and 
Uncertainties. GAO-03-213. Washington, D.C.: January 24, 2003.  

Long-Term Commitments: Improving the Budgetary Focus on Environmental 
Liabilities. GAO-03-219. Washington, D.C.: January 24, 2003.  

Accrual Budgeting: Experiences of Other Nations and Implications for 
the United States. GAO/AIMD-00-57. Washington, D.C.: February 18, 
2000.  

Budget Issues: Budgeting for Federal Insurance Programs. GAO/AIMD-97-
16. Washington, D.C.: September 30, 1997.  

Budget Issues: Budgeting for Federal Capital. GAO/AIMD-97-5. 
Washington, D.C.: November 12, 1996. 

[End of section]  

Footnotes: 

[1] The unified budget deficit is net of any Social Security surplus. 
See p. 1 for more information.  

[2] GAO, The Nation’s Long-Term Fiscal Outlook: September 2006 Update, 
GAO-06-1077R (Washington, D.C.: Sept. 15, 2006).  

[3] For a guide to understanding the Financial Report see GAO, 
Understanding the Primary Components of the Annual Financial Report of 
the United States Government, GAO-05-958SP (Washington, D.C.: September 
2005).  

[4] GAO, A Glossary of Terms Used in the Federal Budget Process, GAO-05-
734SP (Washington, D.C.: September 2005). Other terms are based on the 
Federal Accounting Standards Advisory Board’s (FASAB) Statements of 
Federal Financial Accounting Standards, Current Text, vol. 2 
(Washington, D.C.: June 30, 2004).  

[5] For purposes of this primer, the “federal budget” is used broadly 
to include not only planning but also the end fiscal result of that 
plan (i.e., the fiscal effect of spending and revenue laws in effect 
for any given fiscal year).  

[6] The federal government uses obligational accounting to track and 
control the use of funds. However, in the context of the government’s 
fiscal condition, Congress and the public tend to focus on the cash 
deficit—and more recently the accrual deficit. Because of the attention 
to these two measures, this primer focuses on them. More information on 
obligational accounting is in app. III.  

[7] Credit programs and certain interest payments are not measured on a 
cash basis in the budget. For more information see app. II.  

[8] The final deficit number published in the President’s budget was 
slightly lower—$318 billion. However, the Financial Report reconciles 
the cash and accrual measures of fiscal condition, so we will use the 
number reported therein.  

[9] The term “cost” can have different meanings depending on the 
context in which it is used. Throughout this report, cost is used in a 
general sense to mean the value of resources used to produce a program, 
provide a service, or achieve an objective.  

[10] Unless otherwise noted, the term “commitments” is used in this 
report to mean potential draws on future resources that flow not only 
from the law but also from public expectations.  

[11] Accrual accounting, which is also used by private business 
enterprises for financial reporting, is generally the basis for U.S. 
generally accepted accounting principles (GAAP) for federal government 
entities. However, for some revenue, a modified cash basis of 
accounting is used and is also considered as GAAP.  

[12] While most revenue, including taxes, duties, and fines, are 
recorded on a modified cash basis, revenues from providing goods and 
services to the public at a price (e.g., user fees, premiums) are 
recorded on an accrual basis.  

[13] The Statement of Social Insurance has been included in the 
required supplemental stewardship section of the Financial Report and 
will be incorporated into the primary financial statements for fiscal 
year 2006.  

[14] The budget uses the term “receipts” while the financial statements 
use “revenue.” Both have the same meaning.  

[15] Even though they are not reflected in the cash budget deficit, the 
budget records an obligation, or legal liability, under obligational 
accounting at the time the government enters into a contract. See app. 
III for more information on the differences in when transactions are 
recorded under obligational accounting compared to accrual and cash 
accounting.  

[16] The Statement of Social Insurance has been included in the 
required supplemental stewardship information section of the Financial 
Report. Beginning with fiscal year 2006, the statement will be 
incorporated into the primary financial statements and audited. 
Information on the effect of large social insurance programs on the 
budget can be found in GAO-06-1077R.  

[17] A liability is recorded for unpaid amounts due at the end of the 
fiscal year. This is similar to how other countries budget and account 
for social insurance. See GAO, Accrual Budgeting: Experiences of Other 
Nations and Implications for the United States, GAO/AIMD-00-57 
(Washington, D.C.: Feb. 18, 2000).  

[18] For capital assets, budget authority for the asset’s cost must 
generally be provided up front before the asset can be purchased.  

[19] For more information on the issues GAO identified with the 
reconciliation statement and related recommendations see GAO, Financial 
Audit: Process for Preparing the Consolidated Financial Statements of 
the U.S. Government Needs Improvement, GAO-04-45 (Washington, D.C.: 
Oct. 30, 2003).  

[20] See pp. 15–26 for information on weaknesses in the reported 
expenses of these program areas.  

[21] For a list of GAO’s recommendations addressing these and other 
weaknesses in the financial statements, see GAO, Financial Audit: 
Significant Internal Control Weaknesses Remain in Preparing the 
Consolidated Financial Statements of the U.S. Government, GAO-06-415 
(Washington, D.C.: Apr. 21, 2006).  

[22] The accrual measure went from a surplus of $40 billion in 2000 to 
a deficit of $515 billion in 2001—a swing of about $555 billion. 

[23] National defense equipment was considered stewardship property, 
plant, and equipment and reported as required supplemental stewardship 
information to the financial statements.  

[24] The Department of Defense (DOD) makes contributions for some 
retirement benefits but the payments are intragovernmental—that is, 
they are recorded as outlays by DOD and receipts by the military 
retirement trust funds. Since no cash actually leaves the government, 
such contributions do not affect the governmentwide cash deficit. See 
app. II for more information.  

[25] Agencies also make contributions for some accrued pension benefits 
but the payments are intragovernmental—that is, they are recorded as 
outlays by one agency and receipts by the civil service retirement and 
disability trust fund. Since no cash actually leaves the government, 
such contributions do not affect the governmentwide cash deficit. See 
app. II for more information. Most civilian agencies are not required 
to make contributions for future health and life insurance benefits.  

[26] Agency contributions are also recorded as earned revenue but since 
these contributions are intragovernmental, they are netted out in the 
CFS.  

[27] For assets in operation, cleanup costs are recognized over the 
expected life of the asset and thus the reported liability does not 
include the full cleanup cost until the end of the asset’s life.  

[28] GAO, Nuclear Waste: Better Performance Reporting Needed to Assess 
DOE’s Ability to Achieve the Goals of the Accelerated Cleanup Program, 
GAO-05-764 (Washington, D.C.: July 29, 2005).  

[29] GAO, Environmental Liabilities: Long-Term Fiscal Planning Hampered 
by Control Weaknesses and Uncertainties in the Federal Government’s 
Estimates, GAO-06-427 (Washington, D.C.: Mar. 31, 2006).  

[30] Although PBGC’s financial activity and balances are shown in the 
Financial Report, under current law PBGC’s liabilities may be paid only 
from PBGC’s assets and not from the General Fund of the Treasury or 
assets of the government generally.  

[31] GAO identifies a list of high-risk federal programs that warrant 
attention by both Congress and the administration. NFIP was added to 
the list for 2006. See GAO’s High-Risk Program, GAO-06-497T 
(Washington, D.C.: Mar. 15, 2006).  

[32] PBGC’s Single-Employer Insurance Program has been listed on GAO’s 
High-Risk List since 2003. See GAO-06-497T.  

[33] The book value is the amount paid less depreciation already 
recognized.  

[34] The increase in outlays for capitalized assets reported in the 
reconciliation statement only reflects assets that were purchased in 
2003. The total increase in the balance sheet as a result of adding 
national defense equipment that was purchased in previous years was 
much greater.  

[35] GAO, Fiscal Exposures: Improving the Budgetary Focus on Long-Term 
Costs and Uncertainties, GAO-03-213 (Washington, D.C.: Jan. 24, 2003).  

[36] Information on the long-term costs of social insurance programs 
has been included in the required supplemental stewardship information 
section of the Financial Report and a Statement of Social Insurance 
will be incorporated into the primary financial statements for the 
first time for fiscal year 2006.  

[37] See app. II for more information.  

[38] See GAO, Budget Issues: Budgeting for Federal Insurance Programs, 
GAO/AIMD-97-16 (Washington, D.C.: Sept. 30, 1997), Long-Term 
Commitments: Improving the Budgetary Focus on Environmental 
Liabilities, GAO-03-219 (Washington, D.C.: Jan. 24, 2003), and GAO/AIMD-
00-57.  

[39] For purchases of capital assets, we do not recommend the use of 
accrual accounting for budget decisions because it would sacrifice up-
front control of budgetary resources. Recording depreciation rather 
than the purchase cost would delay budget recognition of the resource 
commitment.  

[40] The Antideficiency Act prohibits an officer or employee of the 
United States government from: obligating or spending in excess or in 
advance of an appropriation, accepting voluntary services except in 
emergencies, and obligating or spending in excess of amounts 
apportioned or in excess of amounts permitted by agency regulations 
that subdivide amounts apportioned.  

[End of section] 

Ordering Information:  

GAO’s Mission:  

The Government Accountability Office, the audit, evaluation and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the performance 
and accountability of the federal government for the American people. 
GAO examines the use of public funds; evaluates federal programs and 
policies; and provides analyses, recommendations, and other assistance 
to help Congress make informed oversight, policy, and funding 
decisions. GAO’s commitment to good government is reflected in its core 
values of accountability, integrity, and reliability.  

Obtaining Copies of GAO Documents:  

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO’s Web site [hyperlink, http://www.gao.gov]. Each 
weekday, GAO posts newly released reports, testimony, and 
correspondence on its Web site. To have GAO e-mail you a list of newly 
posted products every afternoon, go to [hyperlink, http://www.gao.gov] 
and select “Subscribe to Updates.”  

Order by Mail or Phone:  

However, you can also order GAO documents by mail or by phone. The 
first copy of each printed report is free. Additional copies are $2 
each. A check or money order should be made out to the Superintendent 
of Documents. GAO also accepts VISA and MasterCard. Orders for 100 or 
more copies mailed to a single address are discounted 25 percent.  

Orders Should Be Sent to:  

U.S. Government Accountability Office: 
441 G Street NW, Room LM: 
Washington, D.C. 20548:  

To Order Documents By Phone, Call:  

Voice: (202) 512-6000: 
TDD: (202) 512-2537: 
Fax: (202) 512-6061:  

To Obtain This Document Online Go to: [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-07-117SP]:  

Contacts:  

To Report Fraud, Waste, and Abuse in Federal Programs:  

Contact:  

Web site: [hyperlink, http://www.gao.gov/fraudnet/fradunet.htm]: 
E-mail: fraudnet@gao.gov: 
Automated answering system: (800)424-5445 or (202)512-7470,  

Congressional Relations:  

Gloria Jarmon, Managing Director, JarmonG@gao.gov: 
(202) 512-4400: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7125: 
Washington, D.C. 20548: 

Public Affairs:  

Paul Anderson, Managing Director, AndersonP1@gao.gov: 
(202) 512-4800: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7149: 
Washington, D.C. 20548: