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entitled 'Fiscal Stewardship: A Critical Challenge Facing Our Nation' 
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United States Government Accountability Office: 

GAO: 

Fiscal Stewardship: A Critical Challenge Facing Our Nation: 

January 2007: 

GAO-07-362SP: 

This page left intentionally blank. 

United States Government Accountability Office: 

Fiscal Stewardship: A Critical Challenge Facing Our nation: 

January 2007: 

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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