citizens guide 2008

8/14/2019 Citizens Guide 2008

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A Citizens Guide to the 2008 Financial Report of the U.S. Government

A citizens guide to the report of the united states government

The federal governments nancial health


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OVERVIEW

Fiscal Year (FY) 2008 was a year o unprecedented change in the nancial position and condition o the U.S.

Government, with potentially more changes in the near uture. Te Governments net operating cost and budget

decit both more than doubled during FY 2008. Chart 1 shows that the net operating cost increased rom$276 billion in FY 2007 to just over $1 trillion in FY 2008, and the budget decit jumped to $455 billion,

compared with a decit o $163 billion in FY 2007. Tese increases were due in part to the developing weakness

in the economy throughout 2008 and to the Administrations response to that weakness. Due to the weakening

economy, corporate tax revenues declined by $68 billion. Net operating cost increased, mainly due to large

increases in revaluations o long-term employee and veteran benets payable. See Where We Are Now, p.3.

Te unprecedented volatility in the Nations mortgage and credit markets in 2008 has led to extraordinary actions

by the Government intended to limit the extent o this turmoil. Congress passed and the President signed the

Housing and Economic Recovery Act (HERA) and the Emergency Economic Stabilization Act o 2008 (EESA) in

an efort to stabilize the nancial sector and protect the economy. Other actions with large nancial consequences

have been taken by the Federal Reserve, the central bank o the United States. So ar, the largest nancial efects

o these actions have not yet appeared in the nancial statements or the budget, but they will show up in FY 2009,

and they will likely result in continued historically high budget decit and net operating cost levels. See

Te Government Acts to Address the Financial Crisis, p. 5.

Chart 1U.S. Budget Deficit & Net Operating Cost

2004-2008

$760.3

$275.5

$1,009.1

$449.5

$615.6

$454.8

$162.8$247.7

$318.6

$412.3

$100.0

$ 00.0

$200.0

$300.0

$400.0

$500.0

$600.0

$700.0

$800.0

$900.0

$1,000.0

$1,100.0

2004 2005 2006 2007 2008

D

ollarsin

Billions

Net Operating Cost

Budget Deficit

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Te Governments immediate challenge is to deal with the current nancial crisis and the resulting economic

recession. Net operating costs and budget decits are likely to remain elevated or some time as the Government

works to restore market stability. I the Government is to retain the ability to manage a nancial crisis such as the

one today, it must eventually address the long-term scal imbalance resulting rom Social Security, Medicare, and

Medicaid. Te Governments scal policies or these programs as currently structured are not sustainable. Withoutchanges, spending or Social Security, Medicare, and Medicaid would permanently and dramatically increase the

Governments budget decit and debt, leading eventually to renewed nancial and economic instability. See Where

We Are Headed p. 7.

Tis Citizens Guide (Guide) highlights important inormation contained in the 2008 Financial Report o the

United States Government. Te Secretary o the reasury, Director o the Oce o Management and Budget

(OMB), and Acting Comptroller General o the United States believe that the inormation discussed in this Guide

is important to all Americans.

arDebt held by the Public

(as a percent of GDP)

0

100

200

300

400

500

600

700

1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

PercentofGDP

World War II

109% of GDP

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WHERE WE ARE NOW

Te Economy and the Decit

Te economy ell into recession in FY 2008. Te ongoing slump in the residential homebuilding sector and the

eects o record high energy prices and turmoil in nancial markets dampened both consumer spending and private

business investment. Employment declined steadily beginning in January 2008 with a loss o about 1 million jobs

through the nal quarter o FY 2008. Overall infation accelerated through much o the year because o signicant

increases in energy and ood prices, but the core infation rate (which excludes ood and energy) was more stable.

Partly as a result o higher infation, real wages ell through FY 2008. Corporate prots, outside the energy sector,

weakened or declined. Federal tax receipts remained relatively constant, and spending growth accelerated. As a

result, the 2008 budget decit increased to $455 billion more than double the 2007 decit o $163 billion.

What Came In and What Went Out

What came in? In FY 2008, Government revenue totaled $2.7 trillion. Chart 3 shows that total Government

revenue remained relatively constant, compared to FY 2007, increasing slightly by $34 billion or just over 1percent. Individual income tax revenue increased by $79 billion or almost 4 percent, but corporate income tax

revenue substantially decreased by $68 billion or 18.4 percent in FY 2008. Te corporate revenue decrease is

attributable largely to changing economic conditions as the economy entered a recession in December 2007. Social

Security tax revenue o $671 billion and Medicare tax revenue o $197 billion accounted or approximately one-

third o total revenues in FY 2008.

Chart 3

Revenues of the U.S. Government

FY 2004-2008

0.5

1.0

1.5

2.0

2.5

3.0

2004 2005 2006 2007 2008

Dollarsin

Trillions

Total Revenue

Other Individual tax

revenue

Social Security and Medicare

Tax Revenue

Corporate income tax revenue

0.0

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What went out? Te Governments net cost totaled $3.6 trillion, an increase o $731 billion or more than 25

percent over FY 2007. Te Governments bottom line net operating costthe dierence between revenue and

net costexceeded $1 trillion or the rst timemore than triple the FY 2007 net operating cost o $276 billion.

Chart 4 shows that the largest contributors to the Governments net cost include the Departments o Health and

Human Services (HHS) and Deense (DoD), the Social Security Administration, and the interest paid on debt heldby the public. In FY 2008, the Department o Veterans Aairs (VA) contribution to net cost increased rom just

over 2 percent or $59.4 billion in 2007 to nearly 12 percent or $430.4 billion, as shown in Chart 4 in FY 2008.

Tis $371 billion increase (in net cost) stems almost entirely rom a $339 billion increase in VAs estimated actuarial

liabilities or veterans benets. Tis net cost increase was the largest by ar at VA in recent years and accounted

or more than hal o the increase in total net cost across the Government. Te substantial reestimation o VAsactuarial liabilities was driven largely by changes in the discount rates used and in revised estimates o the number

o veterans that became eligible or and applied to receive benets. Te Financial Report contains additional

inormation about these and other changes.

Cost vs. Decit: Whats the Diference?

In FY 2008, the Governments budget decit

o $454.8 billion (budget basis reporting) was

$554.3 billion less than its net operating cost

(rom the Financial Report) o just over $1

trillion. able 1 shows that almost the entiredierence between the Governments budget

decit and net operating costs in FY 2008 can

be attributed to a $550 billion increase in net

accrued but unpaid Federal employee and veteran

benets. Tis amount is not included in the

Budget, but is recognized as a cost and liability in

the nancial statements, because it is cost that has

not yet been paid.

Chart 4

Net Cost of the U.S. Government: 2008

Departmentof Defense

20.3% All Other23.5%

Interest onDebt Held by

the Public6.6%

Department

of VeteransAffairs11.8%

SocialSecurityAdmin18.2%

Departmentof Health and

HumanServices19.6%

Table 1: Budget Defcit vs. Net Operating Cost

Dollars in billions 2008 2007

Budget Defcit $454.8 $162.8

Change in:

Federal Employee and Veteran

Benefts Payable $549.8 $90.1

Environmental & Disposal Liabilities $0.8 $36.8

Capitalized Fixed Assets, Net ($46.6) ($2.6)

Other $50.3 ($11.6)

Net Operating Cost $1,009.1 $275.5

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Te Presidents Budget(Budget) is the Governments primary nancial planning and control tool. It describes howthe Government spent and plans to spend its money, comparing receipts, or cash paid to the Government, to primarilycash-based outlays, or payments to individuals, businesses or other parties. Te Financial Report of the United StatesGovernment(Report) reports on the accrual-based cost o operations, the sources used to nance the Governmentscosts, how much the Government owns and owes, and the outlook or scal sustainability. It compares the Governments

revenues, or amounts that the Government has collected and expects to collect, but has not necessarily received, to its coststo derive net operating cost. ogether, the Budget and the Report present a complementary perspective on the Nationsnancial health and provide a valuable management tool or the countrys leaders.

Te Debt

Historically, the Government has incurred debt: (1) when it borrows rom the public to und budget decits, and (2)when Government unds invest excess receipts in government securities. However, in FY 2008, this relationship haschanged, with reasury borrowing $300 billion to increase cash balances at the Federal Reserve (Fed) to support theFeds market stabilization eorts (discussed later in this Guide). Te implementations o both HERA and EESA havethe potential to increase uture borrowings by more than $1 trillion. Substantial borrowings in FY 2009 and beyond areexpected to und equity and other asset purchases in nancial institutions and rom the markets.

O the Governments total debt o about $10 trillion at the end o FY 2008, approximately $5.8 trillion was debt heldby the public in the orm o reasury securities, such as bills, notes, and bonds. Te public consists o individuals,corporations, state and local governments, Federal Reserve Banks, and oreign governments. Te balancemore than$4.2 trillionwas intragovernmental debt, which arises when one part o the Government borrows rom another. Itrepresents debt held by Government unds, including the Social Security ($2.4 trillion) and Medicare ($378 billion) trustunds. Tese Government unds are typically required to invest any excess annual receipts in Federal securities. When theGovernment borrows these excess receipts, it still has an obligation to repay them to the Government unds with interest.

Gross Federal debt (with some adjustments) is subject to a statutory ceiling (i.e., the debt limit), which has beenrecently raised to $11.3 trillion.

I budget decits continue, the Government will have to borrow more rom the public in order to make benet

payments and to pay or other programs. Tis Guide examines these and other indicators o the challenges theGovernment will ace in maintaining long-term scal sustainability.

Te Government Acts to Address the Financial Crisis

Falling asset values in the mortgage and credit markets sparked extraordinary events and actions involving manynancial institutions in the United States in 2008. Much o the recent market instability can be attributed to thedecline in the housing market aggravated by the recession that began in December 2007. Declines in the value omortgage-backed securities (MBS) and sub-prime credit market debt precipitated signicant portolio losses acrossmany nancial and credit institutions that had invested heavily in these instruments in recent years. Tese losses led tonancial market instability, orced mergers, and bankruptcies. A sharp reduction in credit availability resulted as banksand nancial institutions struggled to maintain solvency in the ace o these widespread losses. Te large Government

Sponsored Enterprises (GSEs)1

Fannie Mae and Freddie Mac, which create and guarantee MBS, were placed intoconservatorship. Other nancial institutions required large inusions o Federal unds to remain in business.

Exhibit 1 on the ollowing page summarizes signicant actions taken by the Federal Government to respond tothese events. Further inormation is reported in the 2008 Financial Report.

1. GSEs are chartered by the Federal Government and pursue a Federally-mandated mission (e.g., Fannie Mae and Freddie

Mac were created to provide stability and liquidity in the secondary mortgage market). However, Fannie Mae and Freddie

Mac were both distinctly established as corporate entities owned by shareholders o stock traded on the New York Stock

Exchange. Teir debt is not guaranteed by the Federal Government.

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Exhibit 1 - Te Fiscal Crisis at a Glance

Te Federal Government is taking unprecedented actions, some o which are summarized below, to stabilize theeconomy. Te impact o these actions will largely be refected in the FY 2009 nancial statements and beyond.

Housing and Economic Recovery Act (HERA) (July 2008) HERA established a new regulatory agency, theFederal Housing Finance Agency (FHFA), with enhanced regulatory authority over the housing GSEs. HERAalso authorized the reasury Department to provide nancial support or the housing GSEs. reasury, inconjunction with the FHFAs decision to place Fannie Mae and Freddie Mac into conservatorship, has agreedto: (1) provide capital o up to $200 billion to Fannie Mae and Freddie Mac should it be needed; and(2) purchase GSE-guaranteed MBS. As o September 30, 2008, the Federal Governments nancial statementsrecognized a liability or $13.8 billion o capital to be paid to Freddie Mac, investments o $3.3 billion orpurchased MBS, and $7 billion or preerred stock and stock warrants received rom the GSEs. Additionally,reasury established a acility to lend money to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks,

i requested. Also, the HOPE or Homeowners Program was established under HERA to help borrowers acedwith oreclosure renance through the Federal Housing Administration (FHA).

Emergency Economic Stabilization Act (EESA) (October 2008) Under EESA, reasury established theroubled Asset Relie Program (ARP), which was authorized by the Act to purchase or insure up to $700 billiono troubled assets to stabilize nancial markets and support nancial institutions. As o December 9, 2008,reasury has used over $200 billion in FY 2009 to purchase nancial assets o qualiying entities. As FY 2009unolds, the disposition o the balance will be determined. Amounts expended have been and are expected tocontinue to be treated as either investments or loans. Te Government expects a recovery o at least some o theseunds and possibly even to earn a positive return on amounts spent as economic conditions improve. In the shortterm, reasury will need to increase borrowings. As these borrowings take place, reasurys ability to borrow orother purposes may become more challenging. In addition, the Federal Deposit Insurance Corporation (FDIC)

deposit insurance was temporarily increased rom $100,000 to $250,000 per depositor.

Also, the FDIC implemented a temporary liquidity guarantee program or participating institutions toguarantee newly issued senior unsecured debt and to provide ull coverage o non-interest bearing deposittransaction accounts, regardless o dollar amount. Further, through the Supplementary Financing Program,reasury increased its deposit balances with the Federal Reserve (Fed) to support the Feds market stabilizationactions, which resulted in an increase in cash and debt held by the public. As o September 30, 2008, thedeposit balance was $300 billion.

In addition to these actions, the Fed has been directly involved in addressing this nancial crisis. Tey (1)have taken actions to support several prominent nancial institutions, including Bear Stearns, AmericanInternational Group (AIG), and Citigroup; (2) have developed a program to support the commercial papermarket; and (3) are ormulating plans to lend support or new car, student, and small-business loans. Te vastmajority o Fed actions and transactions will not directly impact the Governments nancial statements sincethe Fed is an independent organization and not considered a part o the Federal reporting entity. As such, theirnancial results are not consolidated into the Governments nancial statements. However, there is a potentialthat reduced Fed earnings will be available in the uture or transer to the Government.

Exhibit 1 - The Fiscal Crisis at a Glance

Inormation on these and the Governments other market stabilization eorts under EESA

may be ound at http://www.treas.gov/initiatives/eesa/

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Where We Are Headed

As the rst quarter o FY 2009 draws to a close, the Government is exploring a number o recovery strategies. Actionsunder HERA, EESA, and other initiatives are expected to restore condence to lenders and consumers, and provide

stability to the nations economy. Regardless, the dramatic measures that the Government has already taken and maytake in the uture could in the long term signicantly impact scal sustainability. Despite the urgency with which theGovernment must act in the short term to restore market stability and emerge rom the current recession, it must not losesight o other key issues such as the entitlement programs that continue to pose a challenge to uture scal sustainability.

An Unsustainable Fiscal PathTe projected growth in entitlement spending under current law chiefy or Social Security, Medicare, andMedicaid will ultimately aect every citizen in the nation. Continued growth in health care costs is expectedto cause government spending or its major health programs to grow aster than both the economy and Federalrevenues over the next 75 years2 . Similarly, population aging is expected to cause the Governments Social Securityand health program costs and expenditures to increase as a share o GDP over that period. Consequently, total

Government expenditures are projected to exceed total assumed revenue throughout the projection period, with thescal imbalance between spending and revenue growing larger each year into the uture.

Chart 5 shows Government revenue and spending, expressed as a percentage o GDP, rom 1970 through 20803.For most o the past several decades, revenue as a share o GDP has averaged around 18 percent, with littlevariation4. For this reason, revenue is assumed to be about 18 percent o GDP throughout the projection period.Chart 5 also shows that by 2080, costs related to the currently scheduled benets or the three major entitlement

programs are projected to be about equal to total Government revenue. By 2060, total Government expendituresare projected to be 45 percent o GDP levels unseen since World War II, when Government expenditures reached44 percent o GDP. By 2080, expenditures could exceed 60 percent o GDP, more than three times the assumed

Chart 5Current Trends Are Not Sustainable

10.0

0.0

20.0

30.0

40.0

50.0

60.0

70.0

1970

1980

1990

2000

2010

2020

2030

2040

2050

2060

2070

2080

Net Interest

Other

Government

Medicaid

Medicare

Social Security

Total Revenues

Pe

rcentofGDP

2. Te FY 2008 Statement o Social Insurance may be ound in the 2008 Financial Report.

3. Projected spending is based on scheduled Social Security and Medicare benets and current spending trends.

4. GDP is one way o measuring the size o a nations economy and is dened as the total market value o all nal goods and

services that the nation produces in a given period. Te projection that the governments revenue as a percentage o GDP

will remain relatively constant is based on historical data and trends that are not expected to change.

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revenues. Tese large and growing decits could increase Government debt levels as a percentage o GDP tounprecedented and unsustainable heights rom 170 percent by 2040 to over 600 percent by 2080 ar exceedingthe historical high o 109 percent that occurred immediately ollowing WWII and ar exceeding the Governmentsability to und program expenditures. It is important to note that precise expenditure projections change withdierent orecasting assumptions (e.g., lie expectancy increases and health care cost growth), but even under a

wide range o reasonable assumptions, budget decits and debt are projected to increase dramatically5. Should suchdramatic increases occur, interest costs would increase, making the Federal Governments scal path even moreunsustainable, and the Governments ability to borrow rom the public could be aected.

Preparing or the Future

With respect to entitlement spending, the nation must change course beore the decit and debt reachunprecedented heights. Te Government must act to bring social insurance expenses and resources in balance.Delays will increase the magnitude o the reorms needed and will place more o the burden on uture generations.Tere is no simple x to the projected imbalance between social insurance expenditures and revenues. Te preciseamount o the Governments uture nancial responsibilities is ar rom certain, as they are based on many complexcalculations and assumptions. Nevertheless, the magnitude o these responsibilities and the pressing need to control

their continued growth are evident.

Te Government has made and is expected to continue to make a vast commitment o nancial resources toestablish and maintain stability in the credit markets. Te Government expects that at least some o the nancialassets acquired by the Government in its market stabilization eorts may eventually return ull value to the taxpayerand possibly even earn a positive return on amounts spent as economic conditions improve. Te Governmenthas been able to take these stabilization actions because o the deep, liquid market or reasury securities. Teunsustainable growth in Social Security, Medicare, and Medicaid remains a long-term scal challenge to beaddressed once the current credit crisis has passed and overall economic conditions have improved.

5. Chart 5 includes projections o scheduled benets or Medicare and Social Security. Te Medicare rustees Report shows

that, under current law, the Hospital Insurance rust Fund will not have sucient unds to pay scheduled benets beginning

in 2019. At that point, trust und income would cover only 78 percent o scheduled benets, alling to about 30 percent

in 2082. Te Social Security rust Fund could encounter a similar problem. Under current law, trust und income would

cover only 78 percent o scheduled benets in 2041 and only 75 percent by 2082.

KEY SUSTAINABILITY DATES

2008Medicare Hospital Insurance benefts begin toexceed program tax revenues.

2017Social Security benefts begin to exceed programtax revenues.

2040Federal Debt held by the Public surpasses historichigh o 109% o GDP.

2080Total Government cost is more than3 times revenue.*

* Revenue is assumed to be the historical average o about 18 percent o GDP.

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Looking Ahead

Te 2008 Financial Report o the United States Government, issued by the U.S. Department o the reasury, is acomprehensive nancial report that provides a backdrop or both the Governments current nancial position and

prospects or moving orward. It discusses the steps the Federal Government has taken to restore stability in theU.S. nancial system. Te issues discussed in the Citizens Guide and the Financial Report aect, and should beo interest to, every citizen. Te Financial Reports comprehensive reporting is intended to inorm and support thedecision-making needs o lawmakers and the public and to help keep the United States on solid nancial ground.

Find Out More

You will nd more detail on these matters in the Financial Report. You are encouraged to explore the inormationit contains and to ask questions about how the Government manages taxpayers money. Te 2008 Financial Reporto the United States Government and other inormation about the nations nances are available at:

U.S. Department of the Treasurys Financial Management Service,

http://www.ms.treas.gov/r/index.html;

OMBs Oce of Federal Financial Management,

http://www.whitehouse.gov/omb/nancial/index.html; and

GAO,

http://www.gao.gov/nancial/y2008nancialreport.html.

Tis Citizens Guide highlights inormation in the 2008 Financial Report. Te Government AccountabilityOces (GAO) complete audit report on the U.S. Governments consolidated nancial statements can beound beginning on page 165 o the Financial Report. For FY 2008 and FY 2007, GAO issued an unqualiedor clean opinion on the 2008 and 2007 Statements o Social Insurance. However, certain material nancialreporting control weaknesses and other limitations on the scope o its work prevented GAO rom expressing anopinion on the remaining nancial statements.

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The Governments Financial Position and Condition

The Financial Report of the U.S. Government (Report) provides the President, Congress, and the

American people a comprehensive view of how the Federal Government is managing taxpayer dol-

lars. It discusses the Governments nancial position and condition, its revenues and costs, assets andliabilities, and other responsibilities and commitments, as well as important nancial issues that affect

the Nation and its citizens both now and in the future.

The following table presents several key indicators of the Governments nancial health, which are

discussed in greater detail in the Report.

billions of dollars 2008 2007 2006

)6.198,3(stsoCssorG $ (3,157.3)$ (3,127.7)$

9.052seuneveRdenraE $ 247.8$ 226.4$

)7.046,3(tsoCteN $ (2,909.5)$ (2,901.3)$

Total Taxes and Other Revenues 2,661.4$ 2,627.3$ 2,440.8$

Other (29.8)$ 6.7$ 11.0$

)1.900,1(tsoCgnitarepOteN $ (275.5)$ (449.5)$

7.479,1stessA $ 1,581.1$ 1,496.5$Less: Liabilities, comprised of:

)2.638,5(cilbuPehtyBdleHtbeD $ (5,077.7)$ (4,867.5)$

Federal Employee & Veteran Benefits (5,318.9)$ (4,769.1)$ (4,679.0)$)1.320,1(seitilibaiLrehtO $ (940.1)$ (866.4)$

Total Liabilities (12,178.2)$ (10,786.9)$ (10,412.9)$

Net Posit ion (Assets Minus Liabili ties) (10,203.5)$ (9,205.8)$ (8,916.4)$

Statement of Social Insurance:1

Closed Group (current participants)2 (49,135)$ (45,062)$ (44,145)$

Open Group (current + future participants)3

(42,970)$ (40,948)$ (38,851)$

)8.454(ticifeDtegduBdeifinU $ (162.8)$ (247.7)$

A Snapshot of

The Government's Financial Position & Condition

1 Present value of projected revenues and expenditures for scheduled benefits over the next 75 years of certain benefit programs that are referred to as

Social Insurance (e.g., Social Security, Medicare). Not considered liabilites on the balance sheet.

2 Includes current participants (i.e., receiving and/or are eligible to receive benefits) for the Social Security and Medicare programs ages 15 and over at

the start of the 75-year projection period, except for the 2007 Medicare programs for which current participants are assumed to be at least 18 years of

age at the start of the 75-year projection period.

3 Includes all current and future projected participants over the 75-year projection period.

Budget Results

Sustainability Measures:The Statement of Social Insurance provides certain fiscal sustainability information concerning Social

Security, Medicare, and other social insurance programs.

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citizens guide 2008

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