The government’s financial statements are out and they’re not pretty

The government's latest consolidated financial statements would give a normal CFO hives. Material control weaknesses, significant uncertainties, serious financi...

The government’s latest consolidated financial statements would give a normal CFO hives. Material control weaknesses, significant uncertainties, serious financial management problems. Those are words from the Government Accountability Office to explain why it can’t render an opinion on the whole thing. For more, the Federal Drive with Tom Temin  with Robert Dacey, GAO’s Chief Accountant.

Interview transcript:

Tom Temin  As a CPA yourself, you are the chief accountant for what used to be called the General Accounting Office, when it did accounting. This is kind of repetitious here, but there are some new developments. And I wanted to ask you about a statement in that report, on the financial reports, mentioning that the $4 trillion so far in COVID relief spending. We don’t even know the full effects of those on federal financial statements.

Robert Dacey Yes, as we reported, approximately 4.5 trillion in net appropriations were provided for COVID relief, and of that, approximately 4 trillion had been spent as of Sept. 30th, 2022. So there are remaining funds available to be spent on COVID funding.

Tom Temin Right. So we don’t really know what the net will be. And then along come the infrastructure bill and the so-called Inflation Reduction Act. And those are still unfolding as well? So that’s more uncertainty?

Robert Dacey Yeah, those are also unfolding and will have some impact on the federal government’s financial position over time.

Tom Temin All right. And the report did state that 49% of FY 22 assets and 23% of costs relate to entities that received a disclaimer of opinion. That’s good CPA talk. What does it mean, really, in terms of the government’s total picture here?

Robert Dacey What it really means is the auditors were unable to gather sufficient evidence to support the amounts in the financial statements. It doesn’t mean they’re right or wrong. It just means they could not determine. So, yes, almost half of the assets and almost a quarter of the net cost were not receiving clean opinions on their audit.

Tom Temin Right. And so it’s important, I think, to note here that a great deal of what the government spends is not part of the annual appropriations that Congress never does on time, that 1.5 trillion or so. But the real expenditures are in Social Security and in medical, Medicare, Medicaid.

Robert Dacey Yeah, if you look at the total net cost of the federal government, about 75% relate to four agencies plus interest. That would be Social Security, the Department of Health and Human Services, Department of Veterans Affairs and Department of Defense. And rounding that out is about 5% of total cost related to net interest, mainly on the debt held by the public.

Tom Temin And by the way, what’s going on with interest payments on the debt held by the public, which have grown a great deal in recent years, and now the interest rates are up.

Robert Dacey Right. As part of the financial statements, there are fiscal sustainability statements, which project the future revenues and spending based upon current revenue and spending policies over the next 75 years. And based upon those projections, net interest cost is expected to increase over that time horizon. Right now, it’s about 5%. It’s estimated that will become the single largest category of spending by 2036, representing at that point about 21% of total federal spending, and would continue to increase thereafter.

Tom Temin Yeah, So it’ll be almost like some of the states have gotten to that position, I guess, a long time before. And you mentioned, in the report, uncertainties in social insurance. Is that meaning that there’s no policy yet to change the trajectory of Social Security?

Robert Dacey What that means is that, with respect to Medicare particularly, there were significant uncertainties about whether or not the projected reductions in Medicare cost growth could be achieved. And as a result of that, we were unable to determine whether the amounts that were reported in the statement of social insurance, which reports basically Social Security and Medicare spending and revenues, we couldn’t determine whether it was reliable or not.

Tom Temin In other words, [Centers for Medicare and Medicaid Services (CMS)] has programs in place to try to rein in future costs, but it’s uncertain whether those will actually rein in those costs to the degree they hope?

Robert Dacey Well, basically, it comes down to legislation, which essentially establishes the payment rates that Medicare makes for its services. And so, it’s those that may or may not be adequate over time to sustain the Medicare program.

Tom Temin All right. We’re speaking with Robert Dacey. He is the chief accountant at the Government Accountability Office. Material weaknesses in internal controls says that it limits the ability to test to compliance with laws and regulations. What is that meaning? What are these material weaknesses? And are they only in the Defense Department?

Robert Dacey For many years, we’ve had material weaknesses. In fact, there’s been three major impediments since we started doing the audit in 1997, and those relate to serious financial management problems at the Department of Defense. Inability to adequately account for intergovernmental transactions between federal agencies, as well as weaknesses in the preparation of the financial statements. So those have been longstanding issues. There has been improvement over time, and there’s still a ways to go to address those three areas. In fiscal year 22, we had a couple of additional things. Small Business Administration was unable to receive an opinion on its financial statements, primarily due to accounting properly for the COVID funding that was provided to them. In addition, the Department of Education, also, was unable to have an opinion on its financial statements, because of support or inadequate support for certain assumptions that were used in estimating the cost of the student loan relief package that was announced late in 2022.

Tom Temin Right. So sometimes lack of policy causes financial uncertainties, and sometimes policy causes them. It sounds like.

Robert Dacey Well, there are internal control issues already existing at both education and SBA. So I think, what happened was kind of an expansion of those affecting their ability to get an audit opinion. Both those agencies had clean opinions on their financial statements for years. So this is more of a recent change as opposed to the long standing issues I spoke about a moment ago.

Tom Temin And when you think about the amount of debt that is being added every year, that is the accumulated deficits, really is what you call debt. Does any of this ability to account, what is the practical effect of it? With material weaknesses, inability to render an opinion on the whole statement. If the debt keeps piling on, none of the money is real. In some sense, it’s all just IOUs.

Robert Dacey Well, just to back up a minute, I know there are areas that we can’t audit, but looking at the agency audits, 20 of the 24 CFO Act agencies received gleaned opinions on their financial statements. In addition, GAO audits the schedules of public debt, and we’ve given clean opinions for years on those, and as well as the revenues from IRS. And so there are good things happening out there, but there are still challenges that need to be addressed.

Tom Temin And aside from the DoD, which you acknowledge is making progress in its ability to do sound accounting for its activities, they’re not quite there yet. That’s the biggest impediment to the entire statement?

Robert Dacey Well, that’s the impediment related to DoD, the other two relate to areas where there have been a lot of improvement. Intergovernmental, the amount of intergovernmental differences, that’s where one agency doesn’t show the same balances that the other partner shows, essentially. Those have come down significantly over the years, but there’s still a significant amount that’s left. And Treasury continues to work with agencies in reducing the extent of those intergovernmental differences. Again, there’s still a significant amount remaining. The other area has to do with the preparation of the financial statements, and there are a number of areas that have been worked on by Treasury. One of the areas, this past year, has been that Treasury teamed up with the State Department and we’re worked on the first two phases of a multi-phase project to determine whether or not the commitments and contingencies related to those treaties have been adequately supported.

Tom Temin Right. So people that are looking to tighten up things might want to partner with Treasury to undertake studies.

Robert Dacey Yeah, that’s been an area, like I say, both Intergovernmental and all of these areas, outside of the DOD, really require a concerted effort by both Treasury, [Office of Management and Budget (OMB)], as well as the agencies. For example, one of the other areas they dealt with, was adding some additional accounting coating that can be used to make sure the earnings were reported properly in the consolidated financial statements. And so those were developed, but it’s going to take the agencies a while to implement and ensure that those are applied appropriately.

Tom Temin And your report references the long-term debt-to-[Gross Domestic Product (GDP)] ratio, and that’s going to exceed World War II levels, sometime in the next eight or nine years.

Robert Dacey Projections that are in the consolidated financial statements, as well as similar projections done by GAO and the Congressional Budget Office, show that as a percentage of GDP will exceed the historic high of 106%, which was right after World War II, by 2031.

Tom Temin And what does that mean? If a company had debts and liabilities much greater than its assets or its income, those are two different things I understand, it might be declared bankrupt.

Robert Dacey Well, yeah, the government’s in a slightly different situation, but there’s still a serious issue that we’ve reported for many years. That the government is not on a sustainable fiscal path, that the projected debt to GDP will increase over the horizon of the projections, which means it’s unsustainable, essentially. So we’ve reported, since 2017, that Congress should develop a fiscal plan to place the government on a sustainable fiscal path. And subsequently, that fiscal plan should include appropriate targets for things like debt-to-GDP, as well as dealing with alternatives to the debt ceiling that we currently have as well.

Tom Temin Sure. Now, you are a CPA, and CPAs like their left and the right hand sides of their balance sheets to balance. If you were the chief accountant of the government itself, what’s the first thing you would do tomorrow?

Robert Dacey Well, that’s a good question, but I think what I would do is continue the efforts that are underway now. Again, it’s not one party needing to do things, it’s a lot of different parties working together to address them. So I think that’s the most important aspect. With respect to DoD, as well as the governmentwide, their action plans out there that need to be implemented. But those are probably going to take several years to fully implement.



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