Time to Bring Truth In Budgeting and Spending to Washington

Dear Friend,

Public concerns over our annual runaway federal deficits and our huge national debt now equal concerns over our failing economy. In 1980 our national debt stood at about $800 billion—an amount accumulated over 200 years. In just three decades, that debt has increased almost twenty times over. The national debt, excluding unrecorded and unfunded liabilities for Social Security and Medicare (estimated at $50 trillion dollars), will exceed $15 trillion by the end of this fiscal year, September 30, 2011. By 2017 it is projected to exceed $20 trillion. Even if rising interest rates remain at around 5 percent, the interest on the national debt alone will reach well over $1 trillion in ten years.

And who benefits from interest on our national debt? Not the impoverished, the unemployed, or even the States (which are collectively in terrible fiscal shape), but investors in America and abroad who have sought the financial safety of US Treasury bonds, bills, and notes. That includes countries like China, which currently is owed the largest portion of our debt to foreign nations. Worse still, we are being held hostage to countries that clearly do not share American values—in particular, China for money and Saudi Arabia for oil.

When you examine the real numbers, not the numbers that our Treasury Department focuses on each year, the reality is direr. At the federal level, there are myriad off-budget gimmicks, unrecorded liabilities, and financial management manipulations on a scale that would put many executives of publicly traded companies in prison for securities fraud. The bottom line is that our budget process has been broken for years, and the accounting system used by the federal government in the budget process is a fraud by Securities and Exchange Commission (SEC) standards.

Deficit reduction and effective financial management require a sound budget process, including fair and objective accounting standards. But, most of all, they require political will. Congress, driven by its primary motivation for reelection, makes the situation worse by deferring meaningful reforms. Everyone in Washington decries the ballooning federal deficit, but no federal officials seem to have any real plan or intention to solve the problem. What is lacking is the leadership of those with the financial expertise to rise up as informed citizens to lead America in a new revolution to straighten out our government’s budget process and financial records. Only in this way can America look forward to an economically sustainable future.

I tried to lead the way in 1992 as chairman of a Blue Ribbon Task Force on Truth in Budgeting and Accounting, sponsored by the Association of Government Accountants. In setting the stage for our Committee’s recommendations, our final report said that, “Weak governmentwide budgeting and accounting systems produce insufficiently reliable information about how the government spends its funds and how decisions made today will affect tomorrow’s taxpayers.” An even worse indictment of the Congressional budgeting process followed in the report language, which said that the budget process “commonly relies upon imaginary revenues, ignores unfunded obligations, and makes use of numerous other practices lacking economic and accounting reality.”

The Task Force, which was made up of some of the country’s top government accountants, went on to recommend six reforms, three of which cry out for action today—

1. The adoption of sound accounting and budgeting principles, including the need to use “generally accepted accounting principles” (GAAP), which will require the use of an accrual basis of accounting—not the current cash basis used in the budget process—to realistically capture and recognize all unrecorded, contingent, and unfunded liabilities and obligations. Also recommended was the integration of budgeting and accounting standards, since budget formulation begins as much as 18 months before the onset of a fiscal year, whereas final accounting and financial reporting occur far too late to have any impact on misleading budget practices or spending estimates.

2. The adoption of separate budgets for general funds, trust funds, and Government Sponsored Enterprises (GSEs). This was recommended by the Comptroller General in October 1989 to avoid treating the three areas as economically equivalent. Under this reform, trust fund surpluses could no longer be used to reduce the general and GSE parts of the budget, giving the public a far more accurate picture of the federal government’s spending activities.

3. The adoption of a capital budget to plan and control long-term asset expenditures such as buildings, space satellites, expensive weapon systems, and other capital items with a useful life longer than one year. Right now capital expenditures are shown as part of the annual deficit, which treats infrastructure expenditures as a current expense, not as an asset that can help the future through jobs and other long-term benefits.

The big debate taking place today in America is about the current fiscal crisis and the fast growing national debt. The United States is spending huge sums of money that it does not have, forcing us to borrow from foreign countries that do not share our commitment to democracy and human rights, and passing on trillions of dollars of unfunded debt obligations to future generations. As a result, we are threatening the very foundation of our democracy and the prospects of the next generation to achieve the American dream of self-development and prosperity. Estimates of our debt range from $15 trillion (100 percent of our Gross Domestic Product) to well over $60 trillion (over 400 percent of our GDP). Without proper accounting and budgeting, our elected officials will continue to give us the numbers that they want us to hear, not the numbers we need to know to wake up America before it is too late.