Cooked Books Letting Them Serve Man

What's the real federal deficit?
By Dennis Cauchon, USA TODAY

The federal government keeps two sets of books.

The set the government promotes to the public has a healthier bottom line: a $318 billion deficit in 2005.

The set the government doesn't talk about is the audited financial statement produced by the government's accountants following standard accounting rules. It reports a more ominous financial picture: a $760 billion deficit for 2005. If Social Security and Medicare were included — as the board that sets accounting rules is considering — the federal deficit would have been $3.5 trillion.

Congress has written its own accounting rules — which would be illegal for a corporation to use because they ignore important costs...

The audited financial statement — prepared by the Treasury Department — reveals a federal government in far worse financial shape than official budget reports indicate, a USA TODAY analysis found. The government has run a deficit of $2.9 trillion since 1997, according to the audited number. The official deficit since then is just $729 billion. The difference is equal to an entire year's worth of federal spending.

Congress and the president are able to report a lower deficit mostly because they don't count the growing burden of future pensions and medical care for federal retirees and military personnel. These obligations are so large and are growing so fast that budget surpluses of the late 1990s actually were deficits when the costs are included.

The Clinton administration reported a surplus of $559 billion in its final four budget years. The audited numbers showed a deficit of $484 billion.

In addition, neither of these figures counts the financial deterioration in Social Security or Medicare. Including these retirement programs in the bottom line, as proposed by a board that oversees accounting methods used by the federal government, would show the government running annual deficits of trillions of dollars.

The Bush administration opposes including Social Security and Medicare in the audited deficit. Its reason: Congress can cancel or cut the retirement programs at any time, so they should not be considered a government liability for accounting purposes. ..

The government's record-keeping was in such disarray 15 years ago that both parties agreed drastic steps were needed. Congress and two presidents took a series of actions from 1990 to 1996 that:

• Created the Federal Accounting Standards Advisory Board to establish accounting rules, a role similar to what the powerful Financial Accounting Standards Board does for corporations.

• Added chief financial officers to all major government departments and agencies.

• Required annual audited financial reports of those departments and agencies.

• Ordered the Treasury Department to publish, for the first time, a comprehensive annual financial report for the federal government — an audited report like those published every year by corporations.

These laws have dramatically improved federal financial reporting. Today, 18 of 24 departments and agencies produce annual reports certified by auditors. (The others, including the Defense Department, still have record-keeping troubles so severe that auditors refuse to certify the reliability of their books, according to the government's annual report.)

The culmination of improved record-keeping is the "Financial Report of the U.S. Government," an annual report similar to a corporate annual report. (The 158-page report for 2005 is available online at fms.treas.gov/fr/index.html.)

The House Budget Committee has tried to increase the prominence of the audited financial results. When the House passed its version of a budget this year, it included Cooper's proposal asking Bush to add the audited numbers to the annual budget he submits to Congress. The request died when the House and Senate couldn't agree on a budget. Cooper has reintroduced the proposal.

The Federal Accounting Standards Advisory Board, established under the first President Bush in 1990 to set federal accounting rules, is considering adding Social Security and Medicare to the government's audited bottom line. ..

Tom Allen, who will become the chairman of the federal accounting board in December, says sound accounting principles require that financial statements reflect the economic value of an obligation.

"It's hard to argue that there's no economic substance to the promises made for Social Security and Medicare," he says.

Social Security and Medicare should be reflected in the bottom line because that's the most important number in any financial report, Allen says.

"The point of the number is to tell the public: Did the government's financial condition improve or deteriorate over the last year?" he says.

If you count Social Security and Medicare, the federal government's financial health got $3.5 trillion worse last year.

But they're only trying have government work to serve us all.