GAO Says Consolidated Statements Cannot Clarify State of Federal Finances

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Financial management problems at the Department of Defense show up year after year. Add problems at the Small Business Administration and a few other lingering problems, and it’s impossible to accurately assess the state of federal finances. And that’s the conclusion of the latest look at the consolidated statements of government conducted by the Government Accountability Office. the Federal Drive with Tom Temin got the latest from GAO’s Director of Financial Management and Assurance Issues, Dawn Simpson.

Tom Temin: Miss Simpson, good to see you again.

Dawn Simpson: Thanks Tom. Glad to be here.

Tom Temin: Well, give us the gist, I guess, for lack of a better word, about the GAO’s ability to certify these statements and say, yes, we know what the state of federal finances really is.

Dawn Simpson: We have therefore issued a disclaimer on this year’s consolidated financial statements. And our opinion has not changed on an accrual basis, the consolidated financial statements since we performed our first audit in fiscal year 1997. So while the disclaimer continues, the main obstacles that have existed since the beginning, there are three major obstacles, these major obstacles continue to exist. One of them is precisely the Ministry of Defense. The Ministry of Defense has, however, made improvements. And so when you think about, you know, maybe what has changed from the year before is that we continue to see corrective actions that are being taken by both the Department of Defense and the Ministry of the Treasury and the Office of Management and Budget, which are responsible for preparing the consolidated accounts. We continue to see commitment at these levels to improve their financial management, as well as specific corrective actions taken to improve financial management.

Tom Temin: Now another problem area is the Small Business Administration, as outlined in your most recent report, my question is whether they’ve always been an ongoing problem, or the huge amount of pandemic spending funneled through the SBA, that did it make things worse?

Dawn Simpson: This affected SBA. Before the pandemic, they received favorable opinions on their financial statements. And then starting in fiscal year 2020, and then again, in fiscal year 2021, they weren’t able to get an opinion on their financial statements for SBA. And the issues that they are having and the control issues that are facing this agency are due to the extra expenses that have occurred and the new programs that have been established due to the COVID-19 pandemic.

Tom Temin: And we don’t even know the extent of improper payments under all these programs, and yet the reports are starting to come in. And they are not pretty. But we don’t know the outer edges of it all yet, do we?

Dawn Simpson: On the right, the estimated amount of improper payments has increased to 281 billion for fiscal year 2021. And every year there are increases and decreases in different programs that take into account this estimated amount of improper payments. And so it increased by about 70 billion compared to the previous year. But the thing to keep in mind is that what you just mentioned is that some of the new programs established for COVID-19 programs are not yet factored into these estimates. And this is how the process works under the guidelines of the OMB. The first year of established programs goes through a risk assessment process. And then once this process has taken place and it is determined that the program is likely to be subject to irregular payments, the agency proceeds to estimate the amount of the irregular payments. And so that is what is happening now.

Tom Temin: And I think it’s worth noting that when you just listed one of the very first charts, the net costs of the US government in 2021, and when you hear Congress talking about the 1.3 to 1 appropriations $.4 trillion for the fiscal year they’re trying to top CR, but the total net cost to government is $7.4 trillion. And most of these benefits come from the Department of Health and Human Services and Social Security. It’s 38% to 37%, one-third of all of government, but I think that fact is sometimes overlooked that these non-so-called discretionary benefits and programs are really, really big and growing, isn’t it not?

Dawn Simpson: Yes, you will see that even though our net cost has remained fairly consistent with fiscal year 2020. Net costs, when looked at, are higher in the past two years due to additional expenses related to COVID-19. Another thing that I find interesting to look at, you mentioned that you know about the two major agencies there, but you can take the seven major agencies and you’re at 80% of the net cost to the entire federal government. And so, when you think about it, that there are seven agencies representing 80% of that, that’s another interesting way to look at the net cost statement.

Tom Temin: Well, nobody talks about cutting federal spending anymore. It’s just a quaint speech from the last century, I guess. We speak with Dawn Simpson, Director of Financial Management and Insurance Issues at GAO. And what were your recommendations this year, I mean, it’s always, you know, get your DoD house in order, get your SBA house in order. But is there anything specifically new that you think stands out from this latest look at consolidated statements?

Dawn Simpson: So according to the GAO, what we’ve been suggesting for some time is that a fiscal plan is needed to put the government on a more sustainable fiscal path. If you look at the financial statements and specifically, when you look at the long-term financial projections that are included in the financial statements and the accompanying information, you see that based on those projections, the government is on a fiscal trajectory unsustainable. And that means debt is growing faster than GDP, our debt-to-GDP ratio is increasing over the long term, which means we’re not on a sustainable path. And we’ve been recommending, as I said, for several years precisely, that a plan be made to put the government more on a sustainable fiscal path and think about rules or fiscal targets that can help achieve that.

Tom Temin: And looking at the year ahead, I mean, I look at this pie chart again, and the interest on the federal debt is 5% of net government costs. And now the Fed is talking about, you know, inflationary controls, which would raise interest rates, would that affect the interest on the federal debt?

Dawn Simpson: Yes, with current long-term budget projections where non-interest spending is greater than your revenue, the difference is, of course, then debt that makes up for that difference where you spend, or where their projections show there is has more expenses than revenue, then the one showing that the debt is increasing. And so, with more debt, obviously, there are more interest costs, as well as the compounding effect of higher interest rates. A good percentage of the current debt stock is made up of securities such as bills that are due within a year or less. And when the Treasury must then refinance this debt in new securities, it is the interest rate in force that the Treasury then incurs on this debt. And so there is this effect of new debt being issued at a higher interest rate which plays a significant effect on the amount of interest that would be paid.

Tom Temin: Yeah, so all those variables remind me of like a really big wedding cake. And if it deviates more than two or three degrees from the vertical, very quickly, everything collapses. And again, going back to the main obstacles, we talked about the DoD, and some weaknesses appeared in SBA. But there are also weaknesses in the federal government’s process for preparing consolidated financial statements, maybe expand on that a bit.

Dawn Simpson: So there are three major hurdles, one being the DoD, and the other two, one being intergovernmental transactions. And so the federal agencies do a lot of business with each other. And these intergovernmental transactions, under federal accounting standards, must be eliminated on consolidation to accurately present the financial statements at that consolidated level. And so, there continue to be problems in effectively eliminating these intergovernmental transactions during the consolidated process. And it really starts at the agency level, with agencies having the processes and controls they need to identify and resolve these differences with their business partners.

And then the second obstacle concerns the actual preparation of the consolidated financial statements by the Treasury Department and the Management and Budget Office. And they’ve made significant improvements over the years in how they collect data, reconcile it, and present it. The question of intergovernmental transactions that I have just mentioned also affects the preparation process. They currently cannot balance the financial statements because these intergovernmental transactions do not eliminate properly. Reporting in accordance with generally accepted accounting principles also poses challenges. And then another area in the preparation process is that there are two financial statements that are prepared only at the consolidated level. And these financial statements reconcile the budget deficit with the net operating expenses as well as the cash flow variations and the Treasury is always working to improve its processes to effectively present the reconciling items on these financial statements.

Tom Temin: So lots of work for lots of people with big piles of sharp pencils.

Dawn Simpson: Yes, there is still work to be done to improve those areas, but a lot of improvements too, I mean, it’s hard to see when you see that our general opinion regarding a disclaimer isn’t has not changed in 25 years, but improvements have been made by both Treasury and Office and Budget Management as well as the Department of Defense on these major obstacles. And we keep seeing the corrective action plans that the agencies have, the improvements that they’re making, and the things that we see that things are improving. There is still work to be done. But we see the commitment of agency officials, as well as the corrective actions they are taking to make these improvements.

Tom Temin: Dawn Simpson is the Director of Financial Management and Insurance Issues at GAO. Thank you very much for joining me. We’ll catch you next year, if not before.

Dawn Simpson: Thanks Tom.

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