Washington, D.C. - Americans may be in for shocking news soon. Under a new standard issued by the Federal Accounting Standards Advisory Board, the federal government is going to have to issue annual reports on its fiscal sustainability.
Underlying the uproar over health care reform and many other issues is the question of how the U.S. can sustain its ever-increasing debt. Unofficial projections do not bode well, but none has ever been presented by the federal government in an auditable form under a set of standards.
Rep. James Cooper, D-Tenn., who served on the FASAB task force that researched the standard, is guardedly optimistic about its consequences. "Including a statement of fiscal sustainability into the financial report is a step in the right direction," Cooper said. "I'm proud of the members of FASAB for coming to consensus on this. If we're ever going to get a handle on our $56 trillion fiscal gap, we need to be more honest about how we account for it. I hope they can take the next step and begin treating our social insurance promises to Social Security and Medicare as liabilities in our national balance sheet - our accrued debt."
The federal government reports an official national debt of almost $12 trillion. The Institute for Truth in Accounting says that the debt, including unfunded liabilities, exceeds $72 trillion. The required sustainability reports may reconcile the two figures.
FASAB Chairman Tom Allen called the statement "the most important financial statement issued by FASAB." Its importance, he said, lies in the fact that it puts information together in an audited and credible financial statement. He expects disclosures to reveal that to remain sustainable, the federal government will have to increase revenues by 40 percent or decrease outflows by 30 percent, or a combination of both.
Allen noted that the standard is based on cash flow, rather than accrual, projections. Accrual accounting projections would present the difference between what one generation receives and what the next generation contributes. Cash flow projections do not show when promised benefits accrued. Rather, they show when cash flows may not be able to pay for those benefits.
As of fiscal year 2010, the federal government will have to issue a basic financial statement in the consolidated financial report of the U.S. government that presents the present value of projected receipts and non-interest spending under current policy, the relationship of these amounts to the gross domestic product, and changes in the present value of projected receipts and non-interest spending from the prior year.
The standard also calls for required supplementary information that explains and illustrates trends in receipts and spending, deficits or surpluses, and Treasury debt held by the public as a share of the gross domestic product.
FASAB project manager Eileen W. Parlow is satisfied with the standard. "The most important thing that the board wanted to do is to provide information that is understandable and meaningful to the public about the long-term fiscal outlook of the federal government," she said. "The challenge was how to simplify something so that it is understandable to a non-expert and at the same time be technically rigorous. That was extremely challenging for the board."
The sustainability report will be issued as an RSI for three years. After that, it must be an auditable part of the government's consolidated financial report.
The board decided to require information on trends in Treasury debt held by the public, but opted not to require a report on debt held by foreign countries because the Treasury Department said it would be unable to provide reliable figures.
Sheila Weinberg, chief executive officer of the Institute for Truth in Accounting and a task force member, praised the standard, but believes that it was written to make up for FASAB's failure to complete an earlier project that would have required the federal government to report the unfunded liabilities for social security and Medicare. That failure, she believes, was caused by federal pressure on the board.
"The standard is a good one," Weinberg said. "It does help with the objective of showing whether the federal government will have future budgetary resources to meet the expenditures that have been promised. But I would preface that by saying that I am leery of the board's ability to set any independent standard, including this one."
While the FASAB standard will apply only to the federal government, the concept may make its way to state and local governments. The board has met with the Governmental Accounting Standards Board to discuss the challenges and potential of the standard. GASB Chairman Robert Attmore said, "Although GASB does not have a fiscal sustainability project on its current agenda, the GASB staff is conducting research on economic condition reporting, which includes fiscal sustainability issues, and GASB will consider whether to add this as a current agenda project for next year's schedule."
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