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entitled 'Fiscal Stewardship: A Critical Challenge Facing Our Nation'
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United States Government Accountability Office:
Fiscal Stewardship: A Critical Challenge Facing Our nation:
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GAO-07-362SP:
Preface:
The U.S. government is the largest, most diverse, most complex, and
arguably the most important entity on earth today. The United States is
also a great nation. It has much to be proud of and much to be thankful
for. However, our nation is not well positioned to meet the challenges
and capitalize on the opportunities of the 21st Century. We are also
failing to properly discharge one of our biggest stewardship
responsibilities to our children, grandchildren, and generations of
unborn Americans: fiscal responsibility. The purpose of this
publication is to assist both the Congress and American citizens in
understanding and evaluating the federal government's current financial
condition and long-term fiscal outlook.
The federal government's financial condition and fiscal outlook are
worse than many may understand. Despite an increase in revenues in
fiscal year 2006 of about $255 billion, the federal government reported
that its costs exceeded its revenues by $450 billion (i.e., net
operating cost) and that its cash outlays exceeded its cash receipts by
$248 billion (i.e., unified budget deficit). Further, as of September
30, 2006, the U.S. government reported that it owed (i.e., liabilities)
more than it owned (i.e., assets) by almost $9 trillion. In addition,
the present value[Footnote 1] of the federal government's major
reported long-term "fiscal exposures"--liabilities (e.g., debt),
contingencies (e.g., insurance), and social insurance and other
commitments and promises (e.g., Social Security, Medicare)--rose from
$20 trillion to about $50 trillion in the last 6 years.
The federal government faces large and growing structural deficits in
the future due primarily to known demographic trends and rising health
care costs. These structural deficits--which are virtually certain
given the design of our current programs and policies--will mean
escalating and ultimately unsustainable federal deficits and debt
levels. Based on various measures--and using reasonable assumptions--
the federal government's current fiscal policy is unsustainable.
Continuing on this imprudent and unsustainable path will gradually
erode, if not suddenly damage, our economy, our standard of living, and
ultimately our domestic tranquility and national security.
This publication brings together selected financial statement
information from the fiscal year 2006 Financial Report of the United
States Government (Financial Report) and certain fiscal year 2006
budget information reported by the Department of the Treasury.[Footnote
2] This budget information will also be included in the President's
Budget proposal for fiscal year 2008, which will be released in
February 2007. The Department of the Treasury, in coordination with the
Office of Management and Budget, annually prepares the Financial Report
and submits it to the President and the Congress. The Financial Report
is the federal government's annual overall report of accountability to
the American public and provides a comprehensive overview of the
financial condition of the federal government, the cost of the federal
government's operations, the revenue sources used to finance them, and
the implications of various long-term federal obligations and
commitments.3 The President's Budget includes information on revenues
and spending for previous fiscal years and presents the President's
proposals for revenue and spending for the next fiscal year. It also
contains additional analytical material.
GAO is responsible for auditing the financial statements included in
the Financial Report, but we have been unable to express an opinion on
them for the 10th year in a row because the federal government could
not demonstrate the reliability of significant portions of the
financial statements, especially in connection with major financial
management challenges at the Department of Defense. Accordingly,
amounts reported in this publication taken from the Financial Report
may not be reliable. GAO also reported that the federal government did
not maintain effective internal control over financial reporting
(including safeguarding assets) and compliance with significant laws
and regulations as of September 30, 2006. Further, GAO's audit report
also included an emphasis paragraph for the 3rd consecutive year noting
that the nation's current fiscal path is unsustainable and that tough
choices by the President and the Congress are necessary to address the
nation's large and growing long-term fiscal imbalance.
This publication was prepared under the direction of Gary T. Engel,
Director, Financial Management and Assurance, who may be reached at
(202) 512-3406 or engelg@gao.gov and 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. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this publication. Copies of this publication 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:
The Federal Government's Current Financial Condition-Fiscal Year 2006:
Where the Money Came From (i.e., Federal Revenue):
Where the Money Went (i.e., Federal Cost):
The Federal Government's Financial and Budget Reporting:
What We Own and What We Owe (i.e., the Balance Sheet):
Gross Federal Debt:
The Long-Term Fiscal Outlook:
Statement of Social Insurance:
Major Reported Long-Term Fiscal Exposures:
Long-Term Fiscal Simulations:
A Way Forward:
Endnotes:
Related GAO Products:
Ordering Information:
Contacts:
[End of Table of contents]
The Federal Government's Current Financial Condition--Fiscal Year 2006:
The federal government's current financial condition as shown in the
consolidated financial statements considers the results of the current
fiscal year's activities including sources of federal revenue and where
that money went, as well as the status of what the federal government
owns and owes at the end of the fiscal year.
Where the Money Came From (i.e., Federal Revenue):
For the fiscal year ended September 30, 2006, the federal government
reported total revenue[Footnote 4]--principally tax receipts--of about
$2,441 billion. Figure 1 provides a breakout of the various sources of
this revenue. Certain revenues (e.g., Social Security and Medicare
payroll taxes and unemployment taxes) are classified in the Financial
Report as earmarked revenue, which are required to be used for
designated activities, benefits, or purposes.[Footnote 5]
Figure 1: Where the Money Came From in Fiscal Year 2006:
[See PDF for Image]
Source: The Department of the Treasury.
Note: Data are from the fiscal year 2006 Financial Report.
[End of Figure]
Where the Money Went (i.e., Federal Cost):
For the fiscal year ended September 30, 2006, the federal government
reported total net cost of about $2,901 billion.[Footnote 6] Figure 2
provides a breakout of the net cost.
Figure 2: Where the Money Went in Fiscal Year 2006:
[See PDF for Image]
Source: The Department of the Treasury.
[A] Medicaid costs represent $180 billion or 62 percent of Health and
Human Services's $290 billion of nonearmarked funds net costs.
Note: Data are from the fiscal year 2006 Financial Report.
[End of figure]
The Federal Government's Financial and Budget Reporting:
The federal government produces two types of measures--budget and
financial--which further break down into three different numbers that
can be seen as indicators of our current financial condition: the
unified budget deficit, the on-budget deficit, and the net operating
cost. Table 1 shows the reported amounts of these for the fiscal year
ended September 30, 2006.
Table 1: Fiscal Year 2006 Budget Deficits and Net Operating Cost:
Unified budget deficit: ($248 billion).
On-Budget deficit: ($434 billion).
Net operating cost[A]: ($450 billion).
Source: The Department of the Treasury.
[A] For fiscal year 2006, there was a significant decrease in certain
actuarial costs primary due to changes in interest rates and other
assumptions.
Note: Data are from the Monthly Treasury Statement as of the fiscal
year end 2006 and the fiscal year 2006 Financial Report.
[End of table]
The most commonly reported measure is the unified budget deficit. This
is a largely cash-based number that represents the difference between
revenues and outlays--recorded in the period that cash is received or
paid--for the government as a whole. It is an important measure since
it is indicative of the government's draw on today's credit markets--
and its claim on today's economy. The unified budget is a comprehensive
measure of all federal activities, including those that are on-budget
and off-budget. By law the Postal Service and Social Security trust
funds are designated as off-budget. All other budget accounts are on-
budget.
Net operating cost is the amount by which costs exceed revenue. Costs
are recorded on an accrual basis--namely, in the period when goods are
used or services are performed as opposed to when the resulting cash
payments are made. Most revenues, on the other hand, are recorded on a
modified cash basis--that is, they are essentially recorded when
collected. For fiscal year 2006, the net operating cost of the federal
government was comprised of earmarked funds net operating
revenue[Footnote 7] of approximately $172 billion (e.g., Social
Security) and nonearmarked funds net operating cost of about $622
billion.[Footnote 8]
Table 2 shows the relationship between these numbers.
Table 2: Relationship between Fiscal Year 2006 Budget Deficits and Net
Operating Cost:
On-Budget deficit;
($434 billion).
On-budget deficit: Add: Off-budget surplus[A];
$186 billion.
Unified budget deficit;
($248 billion).
Unified budget deficit: Add: Operating costs not in unified budget
deficit (accrual basis)[B];
($318 billion).
Unified budget deficit: Less: Budget outlays not in net operating costs
(cash basis)[C];
$116 billion.
Net operating cost;
($450 billion).
Source: The Department of the Treasury.
[A] Comprised of $185 billion in Social Security surplus and $1 billion
for Postal Service surplus.
[B] For example, increase in accrued Federal Employee and Veteran
Benefits.
[C] For example, purchase of capital assets (e.g., property, plant, and
equipment).
Note: Data are from the Monthly Treasury Statement as of the fiscal
year end 2006 and the fiscal year 2006 Financial Report.
[End of figure]
What We Own and What We Owe (i.e., the Balance Sheet):
What We Own (i.e., Federal Assets):
Assets represent items of economic value owned by the federal
government. Figure 3 provides a breakout of the assets that are
reported with dollar values in the Balance Sheet in the Financial
Report. As of September 30, 2006, the federal government reported total
federal assets of about $1,497 billion. In addition to these assets,
certain federal assets are instead reported in physical quantities:
stewardship land (e.g., national parks and forests) and heritage assets
(e.g., national memorials, historic structures, and museum
collections).[Footnote 9]
Figure 3: Components of Total Federal Assets Reported as of September
30, 2006:
[See PDF for Image]
Source: The Department of the Treasury.
Note: Data are from the fiscal year 2006 Financial Report.
[End of figure]
What We Owe (i.e., Federal Liabilities):
As of September 30, 2006, the federal government reported total federal
liabilities of about $10,413 billion. These liabilities represent a
financial obligation, debt, claim or probable potential loss that is
reported in the Balance Sheet in the Financial Report. Figure 4 shows
the components of these liabilities.
Figure 4: Components of Total Federal Liabilities Reported as of
September 30, 2006:
[See PDF for Image]
Source: The Department of the Treasury.
[A] This consists of $4,866 billion of gross federal debt minus $40
billion of net unamortized discounts plus $42 billion of accrued
interest payable.
Note: Data are from the fiscal year 2006 Financial Report.
[End of figure]
Gross Federal Debt:
As shown in Figure 5, gross federal debt, which totaled about $8,530
billion as of September 30, 2006, consists of debt held by the public-
-$4,866 billion--and debt held by government accounts (referred to as
intragovernmental debt holdings)--$3,664 billion.[Footnote 10] The
federal government borrows excess cash receipts from earmarked (e.g.,
Social Security) and certain other activities to finance general
government operations and, in exchange, issues special U.S. Treasury
securities. Of the $3,664 billion of intragovernmental debt holdings,
$1,995 billion or 54 percent is held by the Social Security Trust Funds
and $335 billion or 9 percent is held by the Medicare Trust Funds.
Intragovernmental debt holdings are not reported in the federal
government's Balance Sheet because under accounting principles they are
treated as loans from one part of the federal government to another
part of the federal government.[Footnote 11]
Figure 5: Components of Gross Federal Debt as of September 30, 2006:
[See PDF for Image]
Source: The Department of the Treasury.
Note: Data are from the fiscal year 2006 Financial Report.
[End of figure]
As shown in Figure 6, debt held by the public is composed of debt held
by the Federal Reserve banking system (Federal Reserve), by state and
local governments, by domestic investors in the United States and by
foreign and international investors abroad. Over the last several
years, there has been an upward trend in the amount of Treasury
securities held by foreign and international investors. The United
States benefits from purchases of Treasury securities by foreign
investors because such investors fill part of the U.S. government's
borrowing needs. However, the interest paid on this debt is sent
abroad, which adds to the incomes of residents of other countries
rather than to the incomes of U.S. residents. In addition, this
increasing reliance on foreign investors to finance the deficits of the
U.S. government presents potential risk to the U.S. economy, especially
since the U.S. gross national saving rate is low by U.S. historical
standards.
Figure 6: Components of Debt Held by the Public as of September 30,
2006:
[See PDF for Image]
Source: The Department of the Treasury.
[A] Excluding the $765 billion of debt held by the Federal Reserve,
foreign and international investors hold 52 percent of the remaining
$4,101 billion of debt held by the public.
Note: Data are from the fiscal year 2006 Financial Report and the
December 2006 Treasury Bulletin.
[End of figure]
Historically, the Congress and the President have enacted laws to
establish a limit on the amount of public debt that can be outstanding-
-referred to as the debt ceiling.[Footnote 12] The debt ceiling does
not determine federal borrowing needs: these needs result from all of
the revenue received and spending decisions the government makes as
well as the performance of the economy. Whenever the federal government
approaches the debt ceiling, the Congress and the President must
eventually raise the ceiling to pay the government's bills as they come
due. As of September 30, 2006, the debt ceiling was $8,965 billion and
the debt subject to the ceiling was $8,420 billion.[Footnote 13]
The Long-Term Fiscal Outlook:
In addition to considering the federal government's current financial
condition, it is critical to look at other measures of the long-term
fiscal outlook of the federal government. An evaluation of the nation's
long-term fiscal outlook should include not only liabilities included
in the Financial Report but also the implicit promises embedded in
current policy and the timing of these longer-term obligations and
commitments in relation to the resources available under various
assumptions.
Over the next few decades, the nation's fiscal outlook will be shaped
largely by known demographic trends and rising health care costs. As
the baby-boom generation retires, federal spending on current
retirement and health care programs--Social Security, Medicare, and
Medicaid--will grow dramatically. A range of other federal fiscal
commitments, some explicit and some representing implicit public
expectations, also bind the nation's fiscal future. Absent policy
changes, a growing imbalance between expected federal spending and tax
revenues will mean escalating and ultimately unsustainable federal
deficits and debt levels.
There are various ways to consider and assess the long-term fiscal
outlook. In this regard, information included in the Financial Report,
and other information and analyses, can be used to more fully
understand the nation's long-term fiscal outlook, including:
* the Statement of Social Insurance,
* major reported long-term fiscal exposures, and:
* long-term fiscal simulations.
Statement of Social Insurance:
The Statement of Social Insurance in the Financial Report displays the
present value of projected revenues and expenditures for scheduled
benefits of certain benefit programs that are referred to as social
insurance (e.g., Social Security, Medicare). For these programs,
projected expenditures for scheduled benefits exceed earmarked revenues
by approximately $39 trillion in present value terms over the next 75
years. Stated differently, one would need approximately $39 trillion
invested today to deliver on the currently promised benefits for the
next 75 years. Table 3 shows a simplified version of the Statement of
Social Insurance by its primary components.
Table 3: Simplified Statement of Social Insurance as of January 1,
2006:
Dollars in billions.
Present value of future revenue )earmarked contributions, taxes, and
premiums);
Social Security: $32;
Medicare Hospital Insurance (Part A): $11;
Medicare Supplementary Medical Insurance-Part B: $5;
Medicare Supplementary Medical Insurance-Part D: $2;
Total: $50.
Present value of expenditures for scheduled future benefits[A];
Social Security: ($39);
Medicare Hospital Insurance (Part A): ($22);
Medicare Supplementary Medical Insurance-Part B: ($18);
Medicare Supplementary Medical Insurance-Part D: ($10);
Total: ($89).
Present value of future expenditures in excess of future revenue[B];
Social Security: ($7);
Medicare Hospital Insurance (Part A): ($11);
Medicare Supplementary Medical Insurance-Part B: ($13);
Medicare Supplementary Medical Insurance-Part D: ($8);
Total: ($39).
Source: The Department of the Treasury.
[A] These amounts include administrative expenses for the programs.
[B] Under current law, Social Security and Federal Hospital Insurance
(Medicare Part A) payments are limited to amounts available to the
respective trust funds.
Note: Data are from the fiscal year 2006 Financial Report.
[End of table]
Major Reported Long-Term Fiscal Exposures:
GAO developed the concept of "fiscal exposures" to provide a framework
for considering the wide range of responsibilities, programs, and
activities that explicitly or implicitly expose the federal government
to future spending.
The concept of fiscal exposures is meant to provide a broader
perspective on long-term costs. Major reported long-term fiscal
exposures in fiscal year 2006 with a present value totaling about $50
trillion consisted of $10 trillion of liabilities reported on the
Balance Sheet, $1 trillion of other commitments and contingencies, and
the $39 trillion of social insurance responsibilities, the last two of
which are reported elsewhere in the Financial Report. This $50 trillion
compares to $20 trillion in fiscal year 2000.
These large numbers are difficult to comprehend. Table 4 seeks to
translate them into several figures and ratios that are more
understandable.
Table 4: Understanding the Size of Major Reported Fiscal Exposures:
Major fiscal exposures: Total household net worth;
2000: $20.4 trillion;
2006: $50.5 trillion;
Percentage increase: 147%.
Major fiscal exposures: Total household net worth: Ratio of fiscal
exposures to net worth;
2000: $42.0 trillion;
2006: $53.3 trillion;
Percentage increase: 27%.
Major fiscal exposures: Burden: Per person;
2000: $70,000;
2006: $170,000;
Percentage increase: 132%.
Major fiscal exposures: Burden: Per full-time worker;
2000: $165,000;
2006: $400,000;
Percentage increase: 143%.
Major fiscal exposures: Burden: Per household;
2000: $190,000;
2006: $440,000;
Percentage increase: 134%.
Major fiscal exposures: Income: Median household income;
2000: $41,990;
2006: $46,326;
Percentage increase: 10%.
Major fiscal exposures: Income: Disposable personal income per capita;
2000: $25,127;
2006: $31,519;
Percentage increase: 25%.
Major fiscal exposures: Ratio of household burden to median burden;
2000: 4.5;
2006: 9.5;
Percentage increase: 112%.
Sources: GAO analysis of data from the Department of the Treasury,
Federal Reserve Board, U.S. Census Bureau, and Bureau of Economic
Analysis.
Note: Percentage increases reflect actual data and may differ from
calculation of rounded numbers presented in table.
[End of table]
Long-Term Fiscal Simulations:
Another way to assess the U.S. government's long-term fiscal outlook
and the sustainability of federal programs is to run simulations of
future revenues and costs for all federal programs, based on a
continuation of current or proposed policy. The simulations GAO has
published since 1992 are designed to do that. As shown in Figure 7,
GAO's long-term simulations--which are neither forecasts nor
predictions--continue to show ever-increasing long-term deficits
resulting in a federal debt level that ultimately spirals out of
control. The timing of deficits and the resulting debt buildup varies
depending on the assumptions used, but under either optimistic
("Baseline extended") or more realistic assumptions, the federal
government's current fiscal policy is unsustainable.
Figure 7: Unified Surpluses and Deficits as a Share of Gross Domestic
Product (GDP) under Alternative Fiscal Policy Simulations:
[See PDF for Image]
Source: GAO's August 2006 analysis.
Note: Assumes currently scheduled Social Security benefits are paid in
full throughout the simulation period.
[End of figure]
Over the long term, the nation's growing fiscal imbalance stems
primarily from the aging of the population and rising health care
costs. Absent significant changes on the spending or revenue sides of
the budget or both, these long-term deficits will encumber a growing
share of federal resources and test the capacity of current and future
generations to afford both today's and tomorrow's commitments.
Continuing on this unsustainable path will gradually erode, if not
suddenly damage, our economy, our standard of living, and ultimately
our domestic tranquility and national security.
If, for example, as shown in Figure 8, it is assumed that recent tax
reductions are made permanent and discretionary spending keeps pace
with the growth of our economy, our long-term simulations suggest that
by 2040 federal revenues may be adequate to pay little more than
interest on debt held by the public and some Social Security benefits.
Neither slowing the growth in discretionary spending nor allowing the
tax provisions, including the tax cuts enacted in 2001 and 2003, to
expire--nor both together--would eliminate the imbalance.
Figure 8: Composition of Spending as a Share of GDP Assuming
Discretionary Spending Grows with GDP after 2006 and All Expiring Tax
Provisions Are Extended:
[See PDF for Image]
Source: GAO's August 2006 analysis.
[End of figure]
At some point, action will need to be taken to change the nation's
fiscal course. The sooner appropriate actions are taken, the sooner the
miracle of compounding will begin to work for the federal budget rather
than against it. Conversely, the longer that action to deal with the
nation's long-term fiscal outlook is delayed, the greater the risk that
the eventual changes will be disruptive and destabilizing. Acting
sooner rather than later will give us more time to phase in gradual
changes, while also providing more time for those likely to be most
affected to make compensatory changes.
The "fiscal gap" is a quantitative measure of long-term fiscal
imbalance. Under GAO's more realistic simulation, even if the federal
government continued to borrow money from the public at the current
share of the economy (i.e., GDP), closing the fiscal gap would require
spending cuts or tax increases equal to 8 percent of the entire economy
each year over the next 75 years, or a total of about $61 trillion in
present value terms. To put this in perspective, closing the gap would
require an immediate and permanent increase in federal tax revenues of
more than 40 percent or an equivalent reduction in federal program
spending (i.e., in all spending except for interest on the debt held by
the public, which cannot be directly controlled).
A Way Forward:
Although the long-term fiscal outlook is driven by rising health care
costs and known demographics, we cannot ignore other government
programs and activities. There is a need to engage in a fundamental
review, reprioritization, and reengineering of the base of government.
Aligning the federal government to meet the challenges and capitalize
on the opportunities of the 21st century will require a fundamental
review of what the federal government does, how it does it, and how it
is financed. Many of the federal government's current policies,
programs, functions, and activities are based on conditions that
existed decades ago, are not results-based, and are not well aligned
with 21st century realities. We need to address the growing costs of
the major entitlement programs and also review and reexamine all other
major programs, policies, and activities on both the spending and the
revenue side of the budget. Programs that run through the tax code--
sometimes referred to as tax expenditures[Footnote 14]--must be
reexamined along with those that run through the spending side. As we
move forward, the federal government needs to start making tough
choices in setting priorities and linking resources and activities to
results. Meeting our nation's large, growing, and structural fiscal
imbalance will require a multipronged approach:
* increasing transparency in financial and budget reporting and in
budget and legislative processes to highlight our long-term fiscal
challenges;
* reinstituting and strengthening budget controls for both spending and
tax policies to deal with both near-term and longer-term deficits;
* strengthening oversight of programs and activities including creating
approaches to better facilitate the discussion of integrated solutions
to crosscutting issues; and:
* reengineering and reprioritizing the federal government's existing
programs, policies, and activities to address 21st century challenges
and capitalize on related opportunities.
In order to effectively address our long-term fiscal imbalance,
fundamental reform of existing entitlement programs is essential.
However, entitlement reform alone will not get the job done. We also
need to reprioritize and constrain other federal government spending
and generate more revenues--hopefully through a reformed tax system.
In November 2006, the Comptroller General of the United States provided
the congressional leadership[Footnote 15] with recommendations, based
on the work of GAO, for consideration for the agenda of the 110th
Congress. These recommendations focused on three areas: (1) targets for
near-term oversight, (2) policies and programs that are in need of
fundamental reform and reengineering, and (3) governance issues. In
addition, GAO's 21st Century Challenges: Reexamining the Base of the
Federal Government contains a suggested list of specific federal
activities for reexamination, illustrative reexamination questions, and
perspectives on various strategies, processes, and approaches, for
congressional consideration stemming from our audit and evaluation work
that can be used in reexamining the federal base.[Footnote 16] Answers
to these questions may draw on the work of GAO and others; however,
only elected officials can and should decide which issues to address as
well as how and when to address them. Addressing these problems will
require tough choices, and our fiscal clock is ticking. As a result,
the time to start is now, to help save our future.
[End of section]
Footnotes:
[1] Present value is the discounted value of a payment or stream of
payments to be received or paid in the future, taking into
consideration a specific interest or discount rate.
[2] The consolidated financial statements are prepared based on
generally accepted accounting principles which differ from budgetary
reporting. Generally accepted accounting principles are based on
accrual accounting whereas the budget is primarily cash-based. These
differences are discussed in the Financial Report and in GAO,
Understanding Similarities and Differences between Accrual and Cash
Deficits, GAO-07-117SP (Washington, D.C.: December 2006). The Financial
Report can be found at [Hyperlink,
http://www.fms.treas.gov/fr/index.html].
[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] Revenues are reported in the Statement of Operations and Changes in
Net Position in the Financial Report.
[5] As used in the Financial Report, earmarked funds are financed by
specifically identified revenues and other financing sources (earmarked
revenue) that remain available over time; are required by statute to be
used for designated activities, benefits, or purposes (e.g., Social
Security, Medicare, Unemployment, and Transportation trust funds); and
must be accounted for separately from the federal government's
nonearmarked funds (i.e., general revenues). Earmarked funds revenue in
the Financial Report includes $185 billion of intragovernmental
interest, that is eliminated for consolidated reporting purposes.
Earmarked funds are different from the budget terms "earmarked
collections" and "earmarking". Earmarked collections include trust fund
receipts, special fund receipts, intragovernmental receipts, and
offsetting collections credited to appropriation accounts. Earmarking
refers to designating any portion of a lump-sum amount for particular
purposes by means of legislative language or language included in
congressional committee reports.
[6] Net Cost is reported in the Statement of Net Cost in the Financial
Report. Nonearmarked funds net cost in the Financial Report includes
$185 billion of intragovernmental interest, that is eliminated for
consolidated reporting purposes.
[7] While the net operating cost and the unified budget deficit are
based on the same underlying activities, in addition to the different
bases of accounting, "Earmarked Funds Net Operating Revenue" includes
programs (e.g., Medicare) in addition to those included in the "Off-
budget surplus" (i.e., Social Security and Postal Service). Although
earmarked funds in the aggregate run surpluses, some funds (e.g.,
Military Retirement Fund) run deficits.
[8] The Earmarked Funds Net Operating Revenue is the excess of revenues
and of transfers from nonearmarked funds over net costs. The
nonearmarked funds net operating cost is the excess of net costs and of
transfers to earmarked funds over revenues.
[9] Stewardship land includes federally-owned land that is set aside
for the use and enjoyment of current and future generations and land on
which military bases are located. Heritage assets are federal
government-owned assets that have one or more of the following
characteristics--historical or natural significance, cultural,
educational, or artistic importance, and significant architectural
characteristics. Such assets are described in the Financial Report in
Notes 24 and 25 to the Financial Statements.
[10] Approximately $3,555 billion or 97 percent of intragovernmental
debt holdings is held by earmarked funds.
[11] For in-depth discussions on debt held by the public and
intragovernmental debt holdings, see GAO, Financial Audit: Bureau of
the Public Debt's Fiscal Years 2006 and 2005 Schedules of Federal Debt,
GAO-07-127 (Washington, D.C.: Nov. 7, 2006) and GAO, Federal Debt:
Answers to Frequently Asked Questions, An Update, GAO-04-485SP
(Washington, D.C.: August 2004).
[12] The public debt limit is established by 31 U.S.C. § 3101 (2000) as
amended by Pub. L. No. 107-199, § 1, 116 Stat. 734 (2002), Pub. L. No.
108-24, 117 Stat. 710 (2003), Pub. L. No. 108-415, § 1, 118 Stat. 2337
(2004), and Pub. L. No. 109-182, 120 Stat. 289 (2006).
[13] Not all of the obligations issued by federal government agencies
are subject to the debt ceiling because either they are not issued
under chapter 31 of title 31, U.S.C., or their principal and interest
are not guaranteed by the U.S. government (e.g., obligations issued by
the Tennessee Valley Authority (TVA) under authority of section 15d(a)
of the TVA Act of 1933, 16 U.S.C. 831n-4(a) [2000]).
[14] In addition to the reported net cost, the federal government
foregoes tax revenues as a result of preferential provisions, such as
tax exclusions, credits, and deductions. These revenue losses are
referred to as tax expenditures.
[15] GAO, Suggested Areas for Oversight for the 110th Congress, GAO-07-
235R (Washington, D.C.: November 17, 2006).
[16] GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: February 2005).
Related GAO Products:
The Nation's Long-Term Fiscal Outlook: September 2006 Update. GAO-06-
1077R. Washington, D.C.: September 2006.
Understanding Similarities and Differences between Accrual and Cash
Deficits. GAO-07-117SP. Washington, D.C.: December 2006.
Understanding Similarities and Differences between Accrual and Cash
Deficits: Update for Fiscal Year 2006. GAO-07-341SP. Washington, D.C.:
January 2007.
Understanding the Primary Components of the Annual Financial Report of
the United States Government. GAO-05-958SP. Washington, D.C.: September
2005.
Financial Audit: Bureau of the Public Debt's Fiscal Years 2006 and 2005
Schedules of Federal Debt. GAO-07-127. Washington, D.C.: November 7,
2006.
Federal Debt: Answers to Frequently Asked Questions, An Update. GAO-04-
485SP. Washington, D.C.: August 2004.
21st Century Challenges: Reexamining the Base of the Federal
Government. GAO-05-325SP. Washington, D.C.: February 2005.
Suggested Areas for Oversight for the 110th Congress. GAO-07-235R.
Washington, D.C.: November 17, 2006.
(198501):
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