This is the accessible text file for GAO report number GAO-07-341SP 
entitled 'Understanding Similarities and Differences between Accrual 
and Cash Deficits: Update for Fiscal Year 2006' which was released on 
January 24, 2007. 

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How Did the Accrual and Cash Measures Change in Fiscal Year 2006? 

The following pages update selected information in Understanding 
Similarities and Differences between Accrual and Cash Deficits (GAO-07- 
117SP) and should be read in conjunction with that document. 
Importantly, emphasis should not be placed on the precise numbers for 
either a single year accrual deficit or the change from year to year. 
Furthermore, for the 10TH consecutive year, the government was unable 
to demonstrate the reliability of significant portions of the 2006 
Financial Report of the United States Government, hereafter referred to 
as the Financial Report, from which the data in this update were 
taken.[Footnote 1] 

Both the unified budget deficit--sometimes called the "cash deficit"-- 
and the net operating cost--sometimes called the "accrual deficit"-- 
declined in 2006, but the accrual deficit declined more than the cash 
deficit (see fig. 1). The cash deficit declined by about $70 billion 
while the accrual deficit declined by over $300 billion. These changes 
are explained in the following pages.[Footnote 2] 

Figure 1: Cash and Accrual Surpluses/Deficits (Fiscal Years 2001-2006): 

[See PDF for Image] 

Source: Treasury. 

[End of Figure] 

What Drove the Change in Cash and Accrual Deficits in Fiscal Year 2006? 

The decline in 2006 in both cash and accrual deficits was primarily 
driven by an increase in federal revenue by almost 12 percent--or about 
$255 billion. Because revenue is measured similarly in the budget and 
financial statements, the increase in revenue reduced both the cash and 
accrual deficits. 

However, cash outlays and accrual-based expenses are measured 
differently and moved in different directions.[Footnote 3] Cash outlays 
increased in 2006 whereas accrual-based expenses declined.[Footnote 4] 
This decline was primarily driven by changes in assumptions that are 
the basis for actuarial estimates for certain accrued long-term 
liabilities. These changes are discussed below. 

Veteran and military employee benefits: 

* Veterans compensation: Veterans compensation expenses (in excess of 
cash outlays) declined by over $160 billion. The large change is due 
primarily to changes in the Department of Veterans Affairs' (VA) 
interest rate assumptions, which are used to discount future benefit 
payments. In 2006, market-based interest rates used by VA increased. 
Higher interest rates reduce the present value estimate of future 
benefit payments and related expenses. 

* Military employee benefits: Military employee benefit expenses (in 
excess of cash outlays) declined by about $95 billion in 2006. This was 
primarily the result of changes in assumptions underlying the military 
health benefit liability. In 2005, the military retiree health expense 
included a larger increase due to changes in assumptions for drug and 
other costs than in 2006. Additionally in 2006, the military retiree 
health expense declined because actual experience was better than 


* The $50 billion change in insurance expenses (in relation to cash 
outlays) is primarily attributable to the National Flood Insurance 
Program. In 2005, insurance costs increased primarily due to expenses 
accrued for Hurricanes Katrina and Rita, which were paid in 2006. 

* Expenses (in excess of cash outlays) related to the Pension Benefit 
Guaranty Corporation also declined in part because the airline relief 
provision in the Pension Protection Act of 2006[Footnote 5] caused some 
large plans that were previously classified as "probable" terminations 
to be changed to "reasonably possible," which reduced the estimated 
losses and removed them from the estimated liability. 

Environmental cleanup and disposal: 

* One area where expenses (in excess of cash outlays) grew is 
environmental cleanup, which recorded about a $35 billion increase over 
the previous year. The Department of Energy (DOE) accounts for the 
largest portion of the increase. According to DOE, this increase 
resulted from a variety of factors such as regulatory changes and 
changes in the assumptions it uses about the timing, scope, and 
technical approach used to clean up or dispose of hazardous waste. For 
example, DOE's estimated costs increased significantly because of the 
additional 7-year delay to 2017 for opening the permanent geologic 
repository for spent nuclear fuel and radioactive waste at Yucca 

Because accrual deficits are sensitive to changes in interest rates and 
other assumptions, any large change in the accrual deficit needs to be 
examined to evaluate whether it represents a fundamental change in the 
longer-term consequences of today's policy decisions. Cash deficits are 
also sensitive to factors unrelated to fundamental changes in policy 
such as changes in dates when cash is scheduled to be paid or received. 
For example, in 2006 legislation was passed to delay Medicare payments 
from the last week of September 2006 into October 2006, effectively 
shifting about $4 billion in outlays from fiscal year 2006 to fiscal 
year 2007.[Footnote 6] However, these types of changes have been 
smaller for the cash deficit than for the accrual deficit. 

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

The Financial Report includes a statement called Reconciliation of Net 
Operating Cost and Unified Budget Deficit that provides a crosswalk 
between the net operating cost (accrual deficit) and the unified budget 
deficit (cash budget deficit). Figure 2 summarizes this crosswalk. It 
shows components of the accrual deficit that are not in the cash 
deficit--costs incurred, but not yet paid--such as changes in 
liabilities for pensions and retiree health benefits for civilian and 
military employees and future compensation for veterans. The change in 
the liability is generally equal to accrued expenses less cash payments 
made to cover expenses. The figure also shows components of the cash 
deficit that are not in the accrual deficit--the largest of which are 
outlays to purchase various capital assets. 

Figure 2: Crosswalk between Accrual and Cash Deficits: 

[See PDF for Image] 

Source: Treasury. 

Notes: Data reported in the unaudited Financial Report for fiscal year 
2006. As discussed in the Financial Report, the federal government 
restated its fiscal year 2005 reconciliation statement to correct for 
errors that occurred during the preparation of the originally issued 
statement. Because of certain material weaknesses discussed in GAO's 
audit report, the restated amounts may not be reliable. 

[A] Nearly all of this increase was attributable to the Department of 
Defense (DOD). Because DOD's financial statements are unauditable and 
the 2005 numbers were restated by a large amount, it is unclear what 
exactly drove the large change. 

[B] The final deficit number published in the President's budget was 
slightly lower--$318.3 billion--due to subsequent adjustments. However, 
we use the numbers reported in the Financial Report since it contains 
the reconciliation between cash and accrual deficits. 

[End of Figure] 


[1] For more information regarding the reliability of federal financial 
data, see GAO's auditor report in Financial Report of the United States 
Government (Washington, D.C.: Dec. 15, 2006) and page 16 of GAO-07- 

[2] These changes do not represent a change in the fundamental drivers 
of the long-term fiscal outlook. For more information on the drivers of 
the long-term fiscal outlook, see GAO, The Nation's Long-Term Fiscal 
Outlook: September 2006 Update, GAO-06-1077R (Washington, D.C.: Sept. 
15, 2006). 

[3] The nature of these differences is discussed in GAO-07-117SP 
beginning on page 12. 

[4] While accrual-based expenses declined, in many areas liabilities 
still increased as seen in figure 2. The change in the liability is 
generally equal to accrued expenses less cash payments made to cover 

[5] Pub. L. No. 109-280. 

[6] Deficit Reduction Act of 2005 (Pub. L. No. 109-171, section 5203, 
120 STAT. 47-48 (2006)).