The AGA Weblog

If You Think $4 a Gallon is Bad, You’ve Seen Nothing Yet!

By: Jeffrey C. Steinhoff, CGFM, CPA, CFE

Jeffrey C. Steinhoff, CGFM, CPA, CFE, a member of AGA’s Northern Virginia and Washington, D.C. Chapters, retired earlier this year after 40 years of government service. His most recent position was managing director, Financial Management and Assurance, U.S. Government Accountability Office (GAO). He is an AGA Past National President and is known in the Association as the “father” of the Certified Government Financial Manager (CGFM) Program.

We have seen the price of crude oil rise almost daily and the price at the pump explode to well over $4 in cities across the country. We have heard the public cries from inside and outside the Beltway as people spend $75 to $100 to fill up the tank. We are also seeing the trickle down ramifications as inflation is rising across the spectrum of the economy. Of course, there is finger pointing and the “solution of the day,” neither of which will provide any relief to the current pain at the pump. But if the public thinks the price of gas is bad, they’ve seen nothing yet.

Acting Comptroller General of the United States, Gene Dodaro, CGFM, a long-time AGA member, testified before the Senate Finance Committee on June 17, 2008, about the federal government’s unsustainable long-term fiscal path. The message per se is nothing new from GAO. But the situation continues to get bleaker and bleaker every day that goes by without action being taken to stop digging and start filing the fiscal hole. I do strongly recommend that all AGA members and their families read the testimony cover to cover, even if they have read it before, and share it with your family and friends—especially anyone who thinks the price at the pump is a burden.

Now let’s quickly look at some of the numbers. GAO found that closing the fiscal gap would require spending cuts or tax increases equal to 6.7 percent over the entire economy over the next 75 years. GAO put it in simple terms. To close the gap would require an increase in today’s federal tax revenues of more than one-third (which translates into an increase in individual income taxes of more than 78 percent!) or an equivalent decrease in all federal spending (except for interest on debt to the public, which cannot be directly controlled). Waiting 10 years would increase the revenue number to 45 percent and the spending number to 40 percent.

What do you think will happen in the short term? It is not too promising, is it? Better yet, what will happen in the next 10 years, short of sticker shock at the government’s fiscal pump? Most importantly, what can you, the financial management leaders at all levels of government, do on a continuing basis to drive home the seriousness of this problem?

Former Comptroller General David Walker, in his new role as President and CEO of the Peter G. Peterson Foundation, will undoubtedly make a big difference. No one is better able to make the case for action than David Walker. In the end, it will take a groundswell of demand from the public for elected officials to muster up the mountains of political courage that will be required, which is not manifest in today’s political dialogue. I watched all of the political talk shows this Sunday. None of the pundits were talking about the possibility of reducing government spending by one-third or raising individual income taxes by 78 percent as something of concern to the public. It was simply not on their radar screen. Yes, the economy was a concern (gas prices, foreclosures, inflation, etc) but not the nation’s burgeoning fiscal crisis.

AGA has been a leader in calling for action and was one of the early participants in the Fiscal Wake-Up Tour. We should be most proud of the leadership that our Association has provided. We need to continue what we are doing and expand our efforts by mobilizing as many AGAers (and their families and friends) as possible to drive home the seriousness of the problem and the need for action NOW to stop digging and start filling the fiscal hole.

My questions to the bloggers:

What ideas do you have for AGA to expand on its leadership role in addressing our nation’s fiscal outlook and avoiding a longer-term crisis? Feel free to think out of the box.

What can we do to increase the understanding of the public about the seriousness of the problem?

How can we help move the discussion from rhetoric to action by our elected officials and decisionmakers?

What can we do to support the work of the Peter G. Peterson Foundation?

TOMORROW: Kelly Stefanko, Deputy City Auditor, City of Norfolk, VA, Chair, AGA Emerging Leaders Task Force, on "Mentoring Opportunities at the PDC"

Is the Sky Really Falling or is the United States Financially Sound?

By: Lynda M. Dennis, Ph.D., CPA, CGFO

Lynda M. Dennis, Ph.D., CPA, CGFO, is on the faculty of the Kenneth Dixon School of Accounting at the University of Central Florida where she teaches accounting and auditing for governmental and not-for-profit organizations.

For the 11th consecutive year, the U.S. Government Accountability Office (GAO) issued a disclaimer of opinion on the accrual basis consolidated financial statements of the United States. For the fiscal year ended September 30, 2007, 19 federal agencies received unqualified opinions on their agency specific financial statements. Of the remaining five major federal agencies, one received a qualified opinion (U.S. Department of Agriculture) and four received disclaimers of opinion (U.S. Department of Defense (DoD), U.S. Department of Homeland Security, U.S. Department of State and National Aeronautics and Space Administration) on their respective agency-specific financial statements. Additionally, on a government-wide basis, 39 material weaknesses were noted, which was two less than that for the fiscal year ended September 30, 2006.

Generally, these material weaknesses in financial reporting, and other limitations on scope, prevented GAO from rendering an opinion on the 2007 federal consolidated financial statements. Material weaknesses, and other scope limitations, restricted the testing GAO was able to perform over compliance with significant laws and regulations. Specific material weaknesses related to incomplete documentation, financial systems, and basic recordkeeping and financial reporting. Ineffective internal controls over financial reporting also included ineffective controls related to safeguarding our nation’s assets.

According to the GAO, federal fiscal management has improved considerably since 1997 when the first federal consolidated financial statements were prepared.(1) However, three key issues continued to prevent GAO from rendering an opinion on the accrual based consolidated financial statements:

1. serious financial problems at the DoD;
2. an inability to effectively to account for federal intragovernmental activity and to reconcile these balances between federal agencies; and
3. an ineffective process to prepare the federal consolidated financial statements.

Of more concern than the disclaimer of opinion on our nation’s federal consolidated financial statements, is the significant matter of emphasis paragraph related to our nation’s long-term fiscal outlook. This was the fourth straight year that GAO included such an emphasis paragraph in its audit report. GAO indicates that regardless of continued improvement in annual net operating costs and the cash-based budget deficit, total reported liabilities, net social commitments and other financial exposures continued to grow. The total of these obligations increased $2 trillion from prior year levels to reach $53 trillion at September 30, 2007, largely due to increased Social Security and Medicare commitments. Additionally, GAO points out that these amounts will continue to grow as more baby boomers retire and begin to receive Social Security and Medicare benefits. At the conclusion of this emphasis paragraph, GAO clearly states these and other factors place the United States “on an imprudent and unsustainable long-term fiscal path.”(2)

A one-page message from the Secretary of the Treasury (the Secretary) serves as the transmittal letter for the 2007 Financial Report of the U.S. Government to Congress and to citizens and is placed at the beginning of the report. In the opening paragraph, the Secretary (a presidential appointment) cites increased corporate tax yields and solid economic growth as underlying reasons for the record-breaking levels of federal revenues for 2007. In the second paragraph, the Secretary refers to the challenge represented by the projected growth in the Social Security and Medicare entitlement programs. However, the Secretary states the costs of such programs “will grow substantially faster than the economy over the next several decades…”(3) This is a far softer message than the one voiced by the GAO on page 161 of the 2007 report.

The federal government regards financial condition as its current and past performance as well as an assessment of its capacity to meet future obligations including the fiscal sustainability of programs and services. In the Management’s Discussion and Analysis section of the 2007 report, the financial condition and long-term fiscal outlook of the federal government are discussed on pages 15 and 18 through 19, respectively. The overview portion of the long-term fiscal outlook section states the nation’s long-term fiscal outlook depends primarily on our aging population and the growth in future health care costs. This section concludes (on page 18) by simply stating the potential exists for the Social Security and Medicare programs to significantly and adversely affect the future financial condition of the United States. Again, a different message comes from GAO in their summary report where on page 32 the projected gap in these programs and other reported liabilities and implicit commitments is quantified at $175,000 per American or $455,000 per American household.

From this discussion it should be clear that our nation’s financial condition and its related long-term fiscal sustainability are of critical importance to every American. The United States plays a vital role in the global economy and as such, our nation’s long-term fiscal outlook should be of concern not only in our own country but throughout the world. As has been discussed herein, the alarm has been sounded by GAO for the last four years but Congress and the executive branch do not appear to have heard it.

What role can accounting educators play in helping to raise awareness of our nation’s unsustainable long-term fiscal outlook among taxpayers, elected and appointed government officials, the media and students?

End Notes
1. Consolidated federal financial statements were not prepared until required by the Chief Financial Officers Act of 1990.
2. 2007 Financial Report of the U.S. Government, p. 161.
3. Ibid, p. 5.

MONDAY: Lealan Miller, CGFM, Partner, Eide Bailly LLP

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