Reporting/Market Focus from the December 2006 Edition of the SGS Newsletter

The text of the December 16, 2006 Alert related to the government’s GAAP-based 2006 financial statements is repeated below. The following paragraph is added for clarification purposes:

The U.S. Treasury heavily reported the rapidly increasing shortfalls in the unfunded liabilities for Social Security and Medicare in its financial statements, but referred to the liabilities as off balance sheet. The actual $4.6 trillion deficit for 2006 is calculated with those numbers on balance sheet, as the year-to-year change in the negative net worth of the federal government shown in the table below.

That accounting is what a U.S. corporation would have to show. The Administration’s rationale as to why Social Security and Medicare should remain off balance sheet runs along the lines that the government always has the option of changing the Social Security and Medicare programs. That said, there clearly is no one in political Washington willing to go public with the concept of eliminating or substantially cutting those programs.

December 16th Alert on the 2006 Financial Statement of the United States Government:

Yesterday, the U.S. Treasury published its annual generally-accepted-accounting-principles (GAAP) basis financial statement, signed off on by Treasury Secretary Henry M. Paulson, Jr. The consolidated statements show that the actual annual federal deficit for fiscal year ended September 30, 2006 was $4.6 trillion, up from $3.5 trillion in 2005. Total federal obligations at year-end were $54.6 trillion, up from $50.0 trillion in 2005.

The actual deficit number was nearly 19-times the size of the gimmicked "official" deficit for 2006 of $248 billion. Total obligations were 4.2-times annual U.S. GDP.

The above GAAP numbers include accounting for the year-to-year change in the net present value of unfunded liabilities in social insurance programs such as Social Security and Medicare. The Treasury notes that these liabilities are "not considered liabilities on the balance sheet." While Treasury has pushed for such an accounting standard for the federal government, it would not have a choice as to reporting these obligations if it were a corporation such as General Motors.

Net of the obligations for Social Security and Medicare, the GAAP-based deficit narrowed to $450 billion in 2006 from $760 billion 2005. Such is not credible give the bookkeeping for Katrina relief and the Iraq War. While these numbers likely involve some accounting shenanigans — as did the last reported annual deficit decline in the 2004 — the method is not obvious given a quick review of the 172-page document. The issue will be looked at more closely in the December SGS. Nonetheless the published estimates are roughly double the "official" deficits reported for 2005 and 2006.

The 2006 GAAP statement can be found on the Treasury’s Web site, under Financial Management Services at: http://www.fms.treas.gov/fr/index.html

-----------------------------------------------------------------------
           U.S. Government - Alternate Fiscal Deficit and Debt
                       Reported by U.S. Treasury
          Dollars are either billions or trillions, as indicated.
           Sources: U.S. Treasury, Shadow Government Statistics.   -----------------------------------------------------------------------
           Formal      GAAP      GAAP       GAAP                   Total
           Cash-      Ex-SS    With SS     Federal     Gross      Federal
   Fiscal  Based       Etc.      Etc.     Negative    Federal  Obligations
   Year*  Deficit    Deficit   Deficit    Net Worth     Debt       (GAAP)
   -----------------------------------------------------------------------
          ($Bil)     ($Bil)    ($Tril)    ($Tril)     ($Tril)     ($Tril)
          ------     ------     ------     ------      ------      ------
   2006   $247.7     $449.5     $ 4.6      $53.1       $8.5        $54.6
   2005    318.5      760.3r      3.5       48.5r       7.9         50.0r
   2004    412.3      615.6      11.0r**    45.0r       7.4         46.4r
   2003    374.8      667.6       3.0r      34.0r       6.8         36.2
   2002    157.8      364.5       1.5       31.0r       6.2         32.7
   -----------------------------------------------------------------------
   * Fiscal year ended September 30th.   ** Estimated at $3.4 trillion, excluding one-time unfunded setup
   costs of the Medicare Prescription Drug, Improvement, and   Modernization Act of 2003 (enacted December 2003).
   r - Revised prior-period data as shown in the 2006 Report.   ———————————————————————–

The GAAP numbers in the above table are derived from or published in the tables on pages 3, 6 and 13 of the Report,

As usual, the Government Accountability Office (GAO) — formerly the General Accounting Office — would not certify the statement, due to "material weaknesses in financial reporting" (page 27). The GAO, which uses a less expensive definition (on an open versus closed group basis) than the Treasury in its Social Security and Medicare numbers, noted (page 28): "that the Federal government’s fiscal exposures total approximately $50 trillion as of September 20, 2006, an increase of about $4 trillion over September 30, 2005, and up from about $20 trillion as of September 30, 2000.

As noted in SGS analyses of prior years’ statements, the current GAAP-based deficit is beyond containment in the present environment. Severe political constraints limit any meaningful reduction of the Social Security and Medicare programs, while addressing the issue with taxes is impossible. If federal income taxes were adjusted to as to seize 100% of all salaries and wages earned in the United States, the government’s operations still would be in deficit. Contrary to the suggestion of Treasury Secretary Paulson, the United States cannot grow its way out this shortfall. The problem is out of control.