Responding to the Looming Crisis of Federal Debt and

Financial Obligations

A Leadership Opportunity for State and Local Government Fiscal

Officers

A Presentation to the 2005 NASACT ANNUAL

CONFERENCEPortland, Oregon

Concurrent Panel Session No. 8Federal/State Spending – The Unsustainable Federal

Budget

By Edward J. Mazur, CPA

NASACT Past President and Life Member

Presentation Topics

Certifying the Problem

Gaining Historical Perspective

Projecting Possible Impact on States and Local Governments

Balancing the Need for Fiscal Discipline with the Contributions of Government

Reaching an Understanding of Personal Duty and Responsibility

Developing a Strategic Plan for Communications and Action

Taking the Important Initial Step

Understanding the Presenter's Perspective

Gained from:

AICPA Manager, Washington office

• 12 years as VA State Comptroller

• First Controller of OFFM in OMB

• President of NASACT

• Member, FASAB

• Member, GASB

Key Observation:

Sound policy leads effective action

Certifying the Problem

Assertion:

•The problem has been “certified” by the US Comptroller General

•The CG is authorized under law to opine on the Federal fiscal condition

•His assessment can be relied on and used

Documenting the Problem:

2004 Financial Report of US Government

“Our nation’s large and growing long term fiscal imbalance . . . . serves to sharpen the need to fundamentally review and reexamine the base of federal entitlement, discretionary, and other spending and tax policies.”

Comptroller General’s Statement

“. . . . it seems clear that the nation’s fiscal path is unsustainable . . . .”

Auditor’s Report

AGA's 54th Annual PD Conference 7/13/05

“The United States is facing threats that are far greater than those posed by any other country or terrorist group.”

“America needs strong leaders to deal with three critical challenges: the federal budget deficit, the balance of payments crisis and the dangerously low overall savings rate, which is the lowest of any major industrialized country.”

David Walker, Comptroller General

Assertion:

The Social Security Trust Fund is not a pot of money to be drawn on but $1.7 trillion in

Treasury Bonds

* * *

“There is no trust fund --- just IOU’s that I saw first hand”George W. Bush, April 5, 2005

Upon touring the Bureau of the Public Debt, Parkersburg, WV

Gaining Historical Perspective

Assertion:

The Problem is not caused by a lack of information!

Illustration:

“NASACT’s quarterly table on The FederalDeficit . . . . Mortgaging our Children’s Future”

National Debt exceeds $57,000 per family of 4

October 30, 1991

Bridgewater Associates Presentation to NASACT

November 15, 1991

In relation to GNP:

•Debt increasing faster

•Net interest increasing

•Personal savings lowest since Depression

•Annual budget deficit largest since WW II

•Balance of merchandise trade lowest ever

•Etc.

Chairman, House Appropriations Committee, 1976

“Congress is not willing to inflict pain on Americans today for a

problem that will not occur until future years.”

Projecting Possible Impact on State and Local Governments

Assertion:

Not addressed, the Problem will cause one or more of the following:

•A monetary crisis reducing the value of investments held by S & L governments

•A devolution of health care and safety net programs to the states

•Reduced services, dislocation and pain for Americans

A comprehensive risk matrix might illustrate:

• Revenue-related risks (e.g., large reliance on federal government to finance growing healthcare for elderly and poor ― Medicaid)

• Spending-related risks (e.g., changes in unfunded mandates due to federal laws related to homeland security, education, environment, and others)

• Future liquidity risks (relating to holdings of US Treasury Securities)

• Interest rate risks (related to foreign holders of US Treasury Securities)

Liquidity Risk Factor:•State and Local debt issued in trillions:

States $.6

Local $1.1

Total $1.7 (2002 Census)

•US Treasuries held as investments: Pension Funds $146 billion

Investment programs $391 billion

Total: $537 billion

(US Treasury 2004)

•Investments to Debt Ratio: 32%

Foreign Holders Risk Factors

Foreign Holdings (billions) of US Treasury Securities, January 2005:

Japan $701.6 (36%)

Mainland China 194.5 (10%)

United Kingdom 163.0 (8%)

Caribbean Bank Centers 92.5 (5%)

South Korea 67.7 (3%)

OPEC Countries 64.7

Others 768.5

Total $1960.0

“Dollar Selloff Sends Shocks Through Markets” WSJ 2/23/05

“The selloff stemmed from news stories in South Korea that the nation’s central bank was . . . . planning to diversify its ($200 billion) foreign exchange reserves.”

“Diversification” has come to mean “dumping dollars”, according to the article.

“The Dow Jones Industrial Average slipped 1.6%, the worst percentage drop in 5 months.”

Assertions:

Citizens today are less prepared to “survive” economic dislocations equivalent to the Great Depression

State and local governments will come under unavoidable pressure to address health and safety net requirements of their citizens

Balancing the Need for Fiscal Discipline with the

Contributions of Government

Assertion:

A government “of, by, and for the people” can more effectively address the Problem than a citizenry divided from its’ government.

A citizenry that truly comprehends the positive services and benefits received daily from its government will be more receptive to required changes and sacrifices.

Reaching an Understanding of Personal Duty and

Responsibility

Choices:

Are you an ostrich or eagle?

If not you, who in your state will lead?

Are not assessing and disclosing risks within the duties of preparers and auditors?

* * *

“If conscience disapproves, the loudest applause are of little value.” John Adams

Developing a Strategic Plan for Communications and Action

The Founding Fathers Understood

"to place before mankind a common sense of the subject in terms so plain and firm as to

command their ascent"

Thomas Jefferson

Exerting National Non-Partisan Leadership

Suggested Vision

An American public that understands how they and future generations will be impacted by our national debt and related long term obligations

Suggested Goal

For NASACT to partner with the Comptroller General and other national organizations to effectively address the Problem

Potential Strategies

For Communications:

•Develop a uniform but adaptable presentation for NASACT members

•Encourage presentations, this fall, to governors and key legislative committees

•Survey states re: (1) resulting understanding of impact (2) identified internal state initiatives for further communications, and (3) requirements for additional information

•Develop a national theme, logo and/or slogan

Potential Strategies

For Partnering:

•Participate in and study the results from GAO forums on fiscal challenges

•Meet with the three major bond rating firms regarding approaches to assessing short and long term US Treasury Securities

•Partner with GASAC member organizations as a base for extending communications

Potential Strategies

For involving Standards Setters:

•Call on GASB to establish a research project to address current and emerging risks associated with US Treasury Securities

•Call on FASAB to continue its study of the nature of long term federal fiscal obligations

•Call on OMB to study the matching of specific debt issues with the acquisition of long term federal capital assets

Potential Strategies

For NASACT continuing research:

•Establish a committee on federal debt and long term obligations•Analyze existing information on who holds federal debt •Review contemporary and historical writings on federal debt•Monitor and evaluate new publications and articles on federal debt and long term obligations•Explore partnering with university’s school of government

Taking the Important Initial Step

Resolve

To recognize, the extraordinary impact of past NASACT leadership on improving federal financial management through the passage of the CFOs and Cash Management Reform Acts, and

To commit, this organization, today, to providing leadership in addressing the long term fiscal imbalance of the Federal government

Comments or Questions?

Edward J. Mazur

2309 Schenley Dr.

Richmond, VA 23235

edmazur@comcast.net

Telephone: 804-272-8460

Fax: 804-422-3217