If the U.S. government were a corporation, would you buy its stock?

What do you call an organization that:

• Consistently loses money every year
• Projects that its losses will continue indefinitely
• Receives qualified opinions annually from their auditors
• Spends all trust fund assets to cover operating expenses
• Has large unfunded liabilities (UL), both on and off its balance sheet, and
• Has a dysfunctional “management” and “board of directors”?

That organization, as you have probably deduced, is the United States government, which, according to the U.S. Government Accountability Office (GAO), “continues to face an unsustainable long-term fiscal path.” Let’s take a look at the biggest areas of risk and concern.

On a corporate basis, the present-value of federal government liabilities would total $73.3 trillion, equaling $231,230 for every man, woman and child, or $620,135 for every full-time worker.

“Trust” Fund “Investments”

The Social Security and Medicare trust funds have accumulated about $4.8 trillion in excess receipts over disbursements and “placed” these amounts in trust funds that are supposedly reserved for future benefit payments. All of this money has, in fact, been spent and replaced by “special,” non-negotiable U.S. Treasury securities. In fact, no liability for this $4.8 trillion is even shown in the U.S. financial statement.

The federal government looks at the funds as being part of the government; so the $4.8 trillion liability is eliminated in the consolidation. “Under federal accounting rules, social insurance expenditures, as reported in the Statement of Social Insurance (SOSI) and the Statement of Long-Term Fiscal Projections. . .are not considered liabilities of the Government.”

Largest Government Liability

Social Security and Medicare represent 73 percent of the government’s liabilities. The $48.6 trillion unfunded liability, plus the $4.8 trillion debt to the trust fund, equals $53.4 trillion, or $451,777 per full-time worker.

Department of Defense

The Department of Defense (DOD) operated at a gross cost of $685 billion, with a net cost of $577 billion. Costs would have been higher except for a somewhat extraordinary gain of $63 billion from changes in assumptions in “actuarial projections of their long-term benefits liabilities and their related costs.” How much should be spent on the DOD is the subject of much debate, but it is noteworthy that the U.S. spends as much as the next 9 largest spending countries, combined.
                                                                        

Liquidity risks

To finance the $805 billion FYE shortfall, the government borrowed $8.145 trillion and paid off $7.44 trillion. The more than $8.1 trillion borrowed last year represents 67 percent of all federal debt outstanding. This implies that the average maturity of all debt outstanding is less than two years, meaning the U.S. is exposed to both interest rate and liquidity risks, much greater than if the outstanding debt was concentrated in 10- or 30-year bonds.

The fed and quantitative easing

The Federal Reserve Bank (Fed) has taken extraordinary measures to stimulate the economy by facilitating the government’s borrowing with low interest rates. However, it should be noted that none of the Federal Reserve System (Fed) activities is “included in the federal budget. It is considered an independent central bank, and its decisions are not ratified by the executive branch of the Federal Government.” Also excluded from the statements are all fiduciary funds and Government Sponsored Enterprises (GSEs), such as the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Banks, Federal Home Loan Mortgage Corp. (Freddie Mac) and Federal Farm Credit Bank.

Conclusion

The government’s deficits, outstanding debt, and unfunded liabilities are so large they are hard to comprehend. By converting these large numbers into stakeholder amounts, hopefully, it is easier for people to understand the gravity of the U.S. financial condition and demand that their “management” take corrective action, before the numbers get even worse.

Medicare Part D was passed in 2003 and became effective in 2006. Would the bill still have passed if it was reported at the time that the president and members of Congress were committing to another unfunded liability of $6.9 trillion? Would every full-time worker have been willing to pay a one-time tax of $58,375 to pay for the benefits provided by this coverage?

Since Social Security and Medicare represent 73 percent of the government’s liabilities, is it realistic to think we can dig out of the debt we’re in without addressing these programs?

TOM VISOTSKY, CPA, is a Virginia Society of CPAs past president and currently serves as Finance & Business Manager for First Baptist Church in Richmond. He can be reached at [email protected]