Questionable Corporate Accounting No Rival to Uncle Sam

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Questionable Corporate Accounting No Rival to Uncle Sam

It’s the biggest case on record of “the pot calling the kettle black.” Despite recent Congressional outrage over corporate accounting scandals, no private company could begin to rival the bookkeeping gimmicks of Uncle Sam. Exaggerated earnings, disguised liabilities and off-the books shenanigans occur in the government’s routine daily business on a scale that even the largest companies could not match. Here are just a few recent examples:

Restatement of earnings and expenses: In August, the Congressional Budget Office (CBO) offered our government’s version of a restatement of earnings and expenses in their annual mid-year budget and economic update. The total surplus for the 2003-2012 period is nearly $1.4 trillion smaller than estimated earlier this year. The CBO lowered their estimates of revenues by $678 billion, because tax collections have been far lower than anticipated. On the other hand, the CBO increased its projection of federal spending by $688 billion to account for recently enacted legislation. Earlier this year, the CBO reported deficits until 2004, but in August the CBO reported deficits will be far greater and last longer—until 2006. Not mentioned was the fact that when Social Security surpluses are not counted, the non-trust fund general revenue deficit lasts until 2011, one year after last year’s tax cuts expire in 2010.

Disguised liabilities: The year 2011 is significant for another reason. The CBO estimates that a year earlier, in 2010, the costs for Social Security and Medicare will begin to exceed revenues coming into the programs. Earlier this year, however, the Social Security and Medicare Trustees said that the costs would not begin to exceed revenues until 2016, a full six years later. Why the difference?

The difference has to do with what the Social Security and Medicare Trustees are counting. When revenues exceed benefits, the government accounts for the surplus by issuing a special obligation bonds or IOUs to the Trust Funds and the money is immediately used for other government operations. Interest earned on these IOUs is handled the same way. The Social Security Trustees say that by the year 2011 “interest to the Trust Fund is projected to be about 21% of the Trust Fund income.” In other words, one dollar out of every five in Trust Fund“income” exists only on paper!

To pay benefits from that interest or redeem the IOUs in the Trust fund, the government will need additional tax revenues or to cut the deficit. Current law specifies that all benefit payments shall be made only from assets in the Trust Fund. If Social Security’s income and assets are insufficient to cover the costs, benefits must be cut.

Off-the-books shenanigans: The government has also managed to cut annual Cost-of-Living Adjustments (COLAs) without calling it a cut. By making changes to the Consumer Price Index (CPI) rather than directly to COLAs, politicians avoid the politically risky maneuver by letting government economists do the dirty work, which they refer to as “improvements.”

This was confirmed in 1999 when the Social Security Trustees adjusted their projections of the Trust Funds by lowering their estimates of COLAs. The lower COLAs were directly attributed to changes made to the CPI by the Bureau of Labor Statistics. In March of 2002, Trustees again lowered estimated spending on COLAs citing additional changes to the CPI. By August, the CBO further substantiated this by cutting their estimates of COLA payments for 2003 by $1.4 billion and $2.2 billion in 2004.

Other bookkeeping gimmicks: The CBO has recently been under pressure from law -makers who want to change how the cost of tax cuts are estimated. Proponents claim that many tax cuts stimulate economic activity and results in extra federal revenue that should be counted to offset the money the government would otherwise lose. The director of the CBO argues there is no accurate way to estimate that.

Sources:
http://www.cbo.gov: “The Budget and Economic Outlook,” The Congressional Budget Office, January 2002 and August 2002. “Social Security and the Federal Budget: The Necessity of Maintaining a Comprehensive Long-Range Perspective,” The Congressional Budget Office, August 2002.
http://www.ssa.gov: The financial outlook for Social Security’s Old-Age, Survivors, and Disability Insurance (OASDI) Trust Funds 2002 Social Security Trustees Report, March 2002.
“Congress Argues Over Tax Cut Costs,” Alan Fram, The Associated Press, August 7, 2002.