national association of state comptrollers

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National Association of State Comptrollers

2010 Annual Conference

Recognizing, Reporting, and Responding To the Risks Associated With

Intergovernmental Financial Dependency------

A National Imperative

Presented by Edward J. MazurSenior Advisor for Governmental Financial Management

Cherry, Bekaert & Holland, L.L.P.

Des Moines, IowaMarch 24, 2010

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Recognizing the Risks of IntergovernmentalFinancial Dependency

Important Reference Materials:

2009 Financial Report of the U.S. Government http://www.fms.treas.gov/fr/index.html

The Federal Government's Long-Term Fiscal Outlook: January 2010 Update, GAO-10-468SP, March 2, 2010 www.gao.gov

A SUMMARY OF THE 2009 ANNUAL REPORTS--Social Security and Medicare Boards of Trustees

http://www.ssa.gov/OACT/TRSUM/index.html

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Published Federal Sustainability Concerns

2009 Federal Financial Report, p. ii:

“As currently structured, the Government’s fiscal path cannot be sustained indefinitely and, would over time, dramatically increase the Government’s budget deficit and debt.”

GAO’s Long-Term Fiscal Outlook, Jan. 2010 update, p.1 “Our long-term simulations show that absent policy changes the

federal government faces an unsustainable growth in debt.”

S.S and Medicare Trustees 2009 Summary Report, p. 1 “Projected long run program costs are not sustainable under current

program parameters.”

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Basis for Federal Sustainability Concerns

1st—Annual Expenditures Exceed Revenues (in billions):

2009 Revenue $2,198 Budget Deficit $(1,417)Accrual-Based Operating Deficit $(1,254)

Note: Projected FY 10 Budget Deficit*: $1.5 Trillion

*Source: President’s Budget for 2011

 2nd--Excessive Federal Liabilities (in billions):

Publicly-held Debt $7,583Owed to Social Security, Medicare and $4,391

other “Trust Funds” (as intragovernmental debt)Federal Employee & VA Benefits Liabilities $5,284

Source: 2009 Financial Report of U.S. Government

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Basis for Federal Sustainability Concerns (cont’d)

3rd--Unsupported Federal “Stewardship” Obligations (in Billions)

*Closed Group: Current receiving or eligible participants over age 15

Source: 2009 Financial Report of U.S. Government, Table 7, Management’s Discussion and Analysis, p. 14

2009 2008

Social Security (OASDI) 7,677$ 6,555$

Medicare (Parts A, B, & D) 38,107 36,312

Other 94 104

Total Open Group, Net 45,878$ 42,970$

Total Closed Group*, Net 52,145$ 49,135$

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Basis for Federal Sustainability Concerns (cont’d)

Total Federal Liabilities and Obligations:

$63,136,000,000,000*

*As a percentage of GDP: 437% vs. 110% in WW II

Note: -- The market value of the nation's 2009 output of goods and services --

Current-dollar GDP – reached $14.5 billion in 4th quarter 2009 Source: BEA

Reported “Publicly-held Debt” to GDP ratio in September 2009 was 53%

Source: 2009 Financial Report of U.S. Government, p. 33

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Reporting the Risks of IntergovernmentalFinancial Dependency

1. Significant and unplanned disruptions to current intergovernmental revenue flows • e.g. $500 billion/yr in FY 2009 • Plus $230 Billion in ARRA funding between FY 2009 and 2013

2. Significant and unplanned disruptions to indirect flows impacting state and local government economic activity and tax revenues • e.g. In excess of $1 trillion in FY 2009 for:

Federal Purchases from S & L businesses Salaries of Federal Employees Social Security and Medicare payments Federal retirement benefits Federal military and other facilities in S & L jurisdictions

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Reporting the Risks of Intergovernmental Financial Dependency (cont’d)

3. Potential disruptions to investment income• e.g. Yields on Treasury securities were low in 2009

4. Potential disruptions to asset values as foreign governments and other parties assess, renew, and/or modify their holdings of U.S. Treasury Securities • e.g. in June 2009 S & L governments held $706 billion in

Treasury securities as short-term and pensions investments• Or, 6.1 % of $11.5 trillion in total Public Debt outstanding

Source: U.S. Treasury TABLE OFS-2.—Estimated Ownership of U.S. Treasury Securities

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Reporting the Risks of Intergovernmental Financial Dependency (cont’d)

Specifically, State Governments should consider adding an summary element of disclosure to the State’s CAFR, such as:

“The State depends on significant financial resources flowing from the Federal government, both those received directly by the State or by its resident businesses and individuals.

Because of this dependency, the State is subject to changes in intergovernmental and certain state tax revenues based on modifications to Federal programs and appropriations.

It is also subject to changes in investment earnings and asset values associated with holding U.S. treasury securities, in part, because of actions by other holders of publicly held U.S. treasury securities, including foreign governments.”

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Responding to the Risks of Intergovernmental Financial Dependency (cont’d)

Further, State Governments can consider adding more specific elements of disclosure to the State’s CAFR, or preparing a separate report, that might include:• Excerpts from the Federal Financial Report that address sustainability

and debt (see following slides)

• The concentration of Federal revenues as a % of total revenues, and the % of expenditures that are Federally funded

• A review of indirect Federal flows that impact State businesses, individuals, and local governments—and tax revenues

• The degree of reliance associated with Federal flows by selected State program areas and the funding of personnel

(See Appendix for reference to available model for such reporting)

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Responding to the Risks of Intergovernmental Financial Dependency (cont’d)

The following four slides provide examples of materials from authoritative Federal publications, or sources, that could be included as components of disclosure in State CAFRs or special reports addressing risks associated with intergovernmental financial dependency

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Potential Federal Fiscal Outcomes: Revenues and Composition of Spending as Shares of GDP

Notes: Discretionary spending grows with GDP after 2008. The AMT exemption amount is retained at the 2007 level through 2018 and expiring tax provisions are extended. After 2018, revenue as a share of GDP is brought to its historical level of 18.3 percent plus expected revenues from deferred taxes (i.e., taxes on withdrawals from retirement accounts). Medicare spending is based on the Trustees’ 2008 projections adjusted for CMS’s alternative assumption that physician payments are not reduced as specified under current law. Source: Treasury—Citizen’s Guide 2009, Chart 9, p. xi.

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Reporting the Risks of Intergovernmental Financial Dependency (cont’d)

Illustrations of Intergovernmental Financial Dependency Experienced by

Seven States

Note: Numbers are unaudited and, except for Nevada, are unofficial and unapproved

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Key DependencyMeasurements

VA2008

MA2008

NV2008

NC2008

WV2008

NY2008

FL2008

Federal Revenues (billions)(VA & NY 2009)

$10.8 $10.5 $2.4 $15 $2.7 $48.9 $24.5

Percentage of Total Revenues

26.9% 23% 33% 31.8% 29% 30.6% 28%

Federal Grants to Local governments (millions)

$1,075 $758 $475 $1,799 $232 $5,571 $4,033

Federal Purchases from State Businesses (billions)

$53.9 $13.3 $2.7 $5.8 $1.3 $13.7 $16.6

Federal Payments to Individuals (billions)

$53.9 $36.2 $11.3 $47.6 $12.8 $102.4 $110.7

Total Federal Flows (billions)

$108.9 $50.3 $14.5 $55.3 $14.4 $116.1 $131.3

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KeyMeasurements

VA2008

MA2008

NV2008

NC2008

WV2008

NY2008

FL2008

Real GDP by StateInflation Adjusted to 2000

(billions)$324.5 $312.5 $103.2 $329.4 $46.3 $964.8 $603.5

Total Federal FlowsGross State Product

33.6% 16.1% 14.1% 16.8% 31.1% 12% 21.8%

Federal Leased/Owned Buildings (millions sq/ft)

As of March 201050.4 6.9 2.4 4.3 4.0 23.3 14.0

Federal Debt Securities Held by State (billions)

$6.3 N/A $6.9 N/A $6.6 N/A $40.1

Estimated 2009 Population (millions)

7.8 6.6 2.6 9.4 1.8 19.5 18.5

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KeyMeasurements

VA2008

MA2008

NV2008

NC2008

WV2008

NY2009

FL2008

Military Facilities (9/30/08) 148 63 57 124 47 216 235

Military Facilities--Present Replacement Value (9/30/08,

billions)$37.6 $5.0 $10.6 $20.4 $1.1 $11.7 $23.4

Military Facilities--Military and Civilian Personnel (9/30/08,

thousands)181.8 16.6 15.2 147.2 8.5 60.0 91.2

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Responding to the Risks of Intergovernmental Financial Dependency

As an overview, State Governments can and should:

Anticipate and disclose the threats and risks associated with intergovernmental financial dependency

Increase internal and public visibility and understanding regarding such threats and risks

—in part through internal and external reporting

Create collaborative initiatives to address the threats and risks, and exert shared leadership with Federal elected officials

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Responding to the Risks of Intergovernmental Financial Dependency (cont’d)

More specifically, State Governments can:1. Request hard copies of the full 2009 Financial Report of the U.S.

Government for distribution to the Governor and State Budget Director (and others you may choose)

Contact: Nancy Fleetwood, Deputy Assistant Secretary for Fiscal Policy, U.S. Department of the Treasury, Nancy.fleetwood@do.treas.gov, (202) 622-6943

2. Build a table illustrating Direct and Indirect financial dependency of State on Federal flows (takes 8hrs or less)

3. Brief the State Budget Director and Governor’s staff (and others you may choose) on the sustainability concerns associated with the reported Federal fiscal position and intergovernmental financial dependency

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Responding to the Risks of Intergovernmental Financial Dependency (cont’d)

More specifically, State Governments can also (cont’d): 4. Seek opportunities for yourselves as leaders and your State to work with other Americans to construct a

bridge from where our Country is today to where we want it to be in 20 years

For example:

a. Seek to provide input to the President’s National Commission on Fiscal Responsibility and Reform

b. Seek involvement from State economic development leaders and major State business interests

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Responding to the Risks of Intergovernmental Financial Dependency (cont’d)

More specifically, State Governments can also (cont’d): 5. Research options for Federal budgetary and financial

reform Recommended References:

a. Comeback America—Turning the Country Around and Restoring Fiscal Responsibility, by David Walker

b. 21st Century Challenges—Reexamining the Base of the Federal Government, GAO-05-325SP

6. Conduct Workshops on Building a Fiscally Sustainable Federal Government by 2030

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Workshop Process

Acknowledge current national initiatives to address Federal sustainability concerns

Acknowledge Sources of objective information

Break the Federal Government into several major areas

Cite key facts and pose questions on the effectiveness and sustainability of current programs

Consider, pose, and respond favorably or unfavorably to nonpartisan ideas for building a fiscally sustainable Federal Government by 2030

Share conclusions and concerns

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Workshop (cont’d)

Government Policy Areas and Operations Significantly Impacting Federal Fiscal Sustainability

1. Social Security

2. Medicare/Medicaid

3. Assessing and Collecting Federal Taxes

4. International Deficits in trade, currency and national debt

5. National Defense

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Contact Information

Edward J. Mazur, CPA

Senior Advisor for Governmental Financial ManagementCherry, Bekaert, & Holland, L.L.P.

Richmond, VA 23226

804-673-5731

emazur@cbh.com

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Presentation Appendix

Available Model for Reporting by State Governments

A Three Volume Report entitled-- Intergovernmental Financial Dependency and Related Risks—Proposed Reporting

By State and Local Governments

Published by: Cherry, Bekaert & Holland, L.L.P. -- in the Public Interest

Available for downloading at no cost at-- www.cbh.com/intergovernmentalreport

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Report Topics Include:

Importance of reporting to: Governors, mayors, and other elected officials, and Bondholders, credit analysts, citizens, and other users of CAFRs

Recommended reporting for: MD&A (13 new disclosures) Notes to the Financial Statements (5 new disclosures) RSI (1 new disclosure) the Statistical Section (10 new schedules)

Technical basis in GAAP for each reporting element

Illustrations of recommended reporting Preparation guidance (with links to sources)

Extensive background studies and material