2012   Financial Report of the United States Government

Management's Discussion & Analysis

The Government´s Financial Position and Condition

A complete assessment of the Government’s financial or fiscal condition requires analysis of historical results, projections of future revenues and expenditures, and an assessment of the Government's long-term fiscal sustainability.  This Report discusses the Government’s financial position at the end of the fiscal year, explains how and why the financial position changed during the year, and provides insight into how the Government’s financial condition may change in the future. 

Table 1:
The Federal Government's Financial Position and Condition
Dollars in Billions 2012 2011 Increase / (Decrease)
%
FINANCIAL MEASURES
Gross Cost $(3,844.9) $ (3,998.3) $(153.4) (3.8%)
  Less: Earned Revenue $350.8 $ 365.6 $(14.8) (4.0%)
    Gain/(Loss) from Changes in Assumptions $(320.2) $ (28.1) $292.1 1039.5%
Net Cost1 $(3,814.3) $ (3,660.8) $153.5 4.2%
  Less: Taxes and Other Revenue: $2,518.2 $ 2,363.8 $154.4 6.5%
    Unmatched Transactions & Balances $(20.2) $ (15.6) $4.6 29.5%
Net Operating Cost2 $(1,316.3) $ (1,312.6) $3.7 0.3%
Assets3:        
  Cash & Other Monetary Assets $206.2 $ 177.0 $29.2 16.5%
  Loans Receivable and Investments, Net4 $1,009.1 $ 985.2 $23.9 2.4%
  Property, Plant & Equipment, Net $855.0 $ 852.8 $2.2 0.3%
  Other  $678.0 $ 692.3 $(14.3) (2.1%)
Total Assets $2,748.3 $ 2,707.3 $41.0 1.5%
Liabilities3:        
  Federal Debt Held by the Public & Accrued Interest $(11,332.3) $ (10,174.1) $1,158.2 11.4%
  Federal Employee & Veterans Benefits Payable $(6,274.0) $ (5,792.2) $481.8 8.3%
  Other $(1,243.0) $ (1,526.4) $(283.4) (18.6%)
Total Liabilities $(18,849.3) $ (17,492.7) $1,356.6 7.8%
Net Position (Assets minus Liabilities) $(16,101.0) $ (14,785.4) $(1,315.6) (8.9%)
SUSTAINABILITY MEASURES
Social Insurance Net Expenditures5:        
  Social Security (OASDI) $(11,278) $ (9,157) $2,121 23%
  Medicare (Parts A, B, & D) $(27,174) $ (24,572) $2,602 11%
  Other $(102) $ (101) 1 1%
Total Social Insurance Net Expenditures $(38,554) $ (33,830) $4,724 14.0%
Total Federal Government Noninterest Net Expenditures6 $(16,500) $ (6,400) $10,100 157.8%
BUDGET DEFICIT
Unified Budget Deficit7 $(1,089.4) $ (1,298.6) $(209.2) (16.1%)

1 Source: Statement of Net Cost.
2 Source: Statements of Operations and Change in Net Position.
3 Source: Balance Sheet.
4 Includes Loans Receivable and Mortgage-Backed Securities, Troubled Asset Relief Program (TARP) Investments, and Investments in Government-Sponsored Enterprises (GSEs).
5 Source:  Statements of Social Insurance (SOSI).  Amounts equal estimated present value of projected revenues and expenditures for scheduled benefits over the next 75 years of certain 'Social Insurance' programs (Social Security, Medicare Parts A, B, & D, Railroad Retirement - Black Lung is projected through 2040).  Amounts reflect 'Open Group' totals (all current and projected program participants during the 75-year projection period). 
6 Represents the 75-year projection of the Federal Government's receipts less non-interest spending as reported in the Statement of Long-Term Fiscal Projections in the Supplemental Information section of the Financial Report.
7 Source: Final Monthly Treasury Statement (as of 9/30/2012 and 9/30/2011).
Note: totals may not equal sum of components due to rounding.

Table 1 on the previous page and the following summarize the Federal Government’s financial position:

This Report also contains information about potential impacts on the Government’s future financial condition.  Under Federal accounting rules, social insurance expenditures, as reported in the Statement of Social Insurance (SOSI) and the Statement of Long-Term Fiscal Projections (included in the Required Supplementary Information section of the Report) are not considered liabilities of the Federal Government.  They can, however, provide a valuable perspective on the sustainability of the Government’s fiscal path:

The Government’s current financial position and long-term financial condition can be evaluated both in dollar terms and in relation to the economy as a whole.  Gross Domestic Product (GDP) measures the size of the Nation’s economy in terms of the total value of all final goods and services that are produced in a year.  Considering financial results relative to GDP is a useful indicator of the economy’s capacity to sustain the Government’s many programs.  For example:

FY 2012 Financial Statement Audit Results by Agency

For FY 2012, the Government Accountability Office (GAO) issued a sixteenth consecutive disclaimer of audit opinion on the accrual-based, government-wide financial statements.  In addition, GAO issued disclaimers of opinion on the 2012, 2011, and 2010 Statements of Social Insurance (SOSI), following unqualified opinions on the 2009 and 2008 SOSI, and disclaimers of opinion on the 2012 and 2011 Statement of Changes in Social Insurance Amounts (SCSIA).  The SOSI and SCSIA disclaimers stem from significant uncertainties (discussed in note 26), primarily related to the achievement of projected reductions in Medicare cost growth reflected in the 2010-2012 SOSI.

Twenty-one of the 24 agencies required to issue audited financial statements under the Chief Financial Officers (CFO) Act received unqualified audit opinions, as did 10 of 11 additional significant reporting agencies, (see Table 2 and Appendix A for a list of these agencies)7

Table 2:
Chief Financial Officers (CFO) Act Agency Audit Opinion
Department of Agriculture (USDA) Unqualified
Department of Commerce (DOC) Unqualified
Department of Defense (DOD) Disclaimer
Department of Education (Education) Unqualified
Department of Energy (DOE) Unqualified
Department of Health and Human Services (HHS)1 Unqualified
Department of Homeland Security (DHS) Qualified
Department of Housing and Urban Development (HUD) Unqualified
Department of the Interior (DOI) Unqualified
Department of Labor (DOL) Unqualified
Department of Justice (DOJ) Unqualified
Department of State (State) Unqualified
Department of Transportation (DOT) Unqualified
Department of the Treasury (Treasury) Unqualified
Department of Veterans Affairs (VA) Unqualified
Agency for International Development (USAID) Qualified
Environmental Protection Agency (EPA) Unqualified
General Services Administration (GSA) Unqualified
National Aeronautics and Space Administration (NASA) Unqualified
National Science Foundation (NSF) Unqualified
Nuclear Regulatory Commission (NRC) Unqualified
Office of Personnel Management (OPM) Unqualified
Small Business Administration (SBA) Unqualified
Social Security Administration (SSA) Unqualified
Other Significant Reporting Entities Audit Opinion
Export-Import Bank of the United States Unqualified
Farm Credit System Insurance Corportation (FCSIC)2 Unqualified
Federal Communications Commission (FCC) Unqualified
Federal Deposit Insurance Corporation (FDIC)2 Unqualified
National Credit Union Administration (NCUA)2 Unqualified
Pension Benefit Guaranty Corporation (PBGC) Unqualified
Railroad Retirement Board (RRB) Disclaimer
Securities and Exchange Commission (SEC) Unqualified
Smithsonian Institution3 Unqualified
Tennessee Valley Authority (TVA) Unqualified
U.S. Postal Service (USPS) Unqualified
1  Recieved disclaimer of opinion on Statement of Social Insurance and Statement of Changes in Social Insurance Amounts.
2 Entities operate under calendar year (CY)-end. Opinions reflect CY 2011 audit results.  
3Opinion on the most recent annual report, covering FY 2011.

The Government-wide Reporting Entity

These financial statements cover the three branches of the Government (legislative, executive, and judicial).  Legislative and judicial branch reporting focuses primarily on budgetary activity.  Executive branch entities, as well as certain legislative branch agencies are required, by law, to prepare audited financial statements.  Some other legislative branch entities voluntarily produce audited financial reports.

A number of entities and organizations are excluded due to the nature of their operations, including the Federal Reserve System (considered to be an independent central bank under the general oversight of Congress), all fiduciary funds, and Government-Sponsored Enterprises, including the Federal Home Loan Banks, the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac).  The Emergency Economic Stabilization Act (EESA) of 2008 gave the Secretary of the Treasury temporary authority to purchase and guarantee assets from a wide range of financial institutions through the Troubled Asset Relief Program (TARP).  Following U.S. GAAP for Federal entities, the Government has not consolidated into its financial statements the assets, liabilities, or results of operations of any financial organization or commercial entity in which Treasury holds either a direct, indirect, or beneficial majority equity investment.  Even though some of the equity investments are significant, the entities in which the Federal Government holds equity investments meet the criteria under paragraph 50 of the Statement of Federal Financial Accounting Concepts (SFFAC) No. 2, which directs that the financial results of such entities should not be consolidated into the financial reports of the Federal Government, either in part or as a whole.  However, the investments in these entities and any related liabilities are recorded in the financial statements.  Appendix A includes a list of the agencies and entities contributing to this report.8

The following pages contain a more detailed discussion of the Government’s financial results for FY 2012, the budget, the economy, the debt, and a long-term perspective about fiscal sustainability, including the Government’s ability to meet its social insurance benefits obligations.  The information in this Report, when combined with the President’s Budget, collectively provides a valuable tool to the Nation’s leaders for managing current operations and planning future initiatives.

Limitations of the Financial Statements
The principal financial statements have been prepared to report the financial position and results of operations of the Federal Government, and the financial condition and changes in financial condition of its social insurance programs, pursuant to the requirements of 31 U.S.C. § 331(e)(1). These statements are in addition to the financial reports used to monitor and control budgetary resources that are prepared from the same books and records.

The President’s Budget and The Financial Report

Each year, the Administration issues two reports that detail financial results for the Federal Government: the President’s Budget, which provides a plan for future initiatives and the resources needed to support them, as well as prior year fiscal and performance results; and this Report, which provides the President, Congress, and the American people a broad, comprehensive overview of the cost on an accrual basis of the Government’s operations, the sources used to finance them, its balance sheet, and the overall financial outlook.

Treasury generally prepares the financial statements in this Report on an “accrual basis” of accounting as prescribed by U.S. GAAP for Federal entities.9  These principles are tailored to the Government’s unique characteristics and circumstances.  For example, agencies prepare a uniquely structured “Statement of Net Cost,” which is intended to present net Government resources used in its operations.  Also, unique to Government is the preparation of separate statements to reconcile differences and articulate the relationship between the budget and financial accounting results.

President´s Budget* Financial Report of the U.S. Government*
Prepared primarily on a "cash basis"; Prepared on an "accrual and modified cash basis"
Initiative-based and prospective: focus on current and future initiatives planned and how resources will be used to fund them. Agency-based and retrospective – prior and present resources used to implement initiatives.
Receipts ("cash in"), taxes and other collections recorded when received. Revenue: Tax revenue (more than 90 percent of total revenue) recognized on modified cash basis (see Financial Statement Note 1.B). Remainder recognized when earned, but not necessarily received.
Outlays ("cash out"), largely recorded when payment is made. Costs: recognized when owed, but not necessarily paid.

*See Statements of Changes in Cash Balance from Unified Budget and Other Activities and Reconciliations of Net Operating Cost and Unified Budget Deficits.

Budget Deficit vs. Net Operating Cost

As the economy continues along a path of gradual recovery, the Government’s primarily cash-based10 budget deficit decreased from approximately $1.3 trillion in FY 2011 to about $1.1 trillion in FY 2012.  The Government’s largely accrual-based net operating cost (which remained essentially unchanged at $1.3 trillion in FY 2012) typically exceeds the deficit due largely to the inclusion of cost accruals associated with changes in future estimated liabilities for the Government’s postemployment benefit programs for its military and civilian employees, as well as its veterans.  The longer-term estimated actuarial costs of these programs are included in the Government’s net operating cost, calculated on an accrual basis as described above, but are not included in the largely cash-based budget deficit.  Other programs that are subject to significant estimated liabilities and changes in those amounts can also impact net cost, but not the deficit.

Table 3 shows that, for FY 2012, the $226.9 billion net difference between the Government’s budget deficit of $1.1 trillion and net operating cost of $1.3 trillion is predominantly due to large, yet offsetting changes  in: (1) liabilities for Federal employee and veteran benefits payable ($481.8 billion increase), and (2) liabilities to Government-Sponsored Enterprises (GSEs) – Fannie Mae and Freddie Mac ($307.2 billion decrease) in FY 2012, compared to smaller changes for these same amounts in FY 2011 ($71.9 billion increase and $43.7 billion decrease, respectively).  As discussed later, changes in future estimated employee and veteran benefits liabilities stem from several factors, including experience losses or gains and changes in economic and demographic assumptions.  The GSE estimated liabilities decreased significantly due primarily to an amended dividend provision of the Senior Preferred Stock Purchase Agreements (SPSPAs) with the GSEs that is expected to drive downward the amount of future draws needed by the GSEs.

Table 3: Budget Deficit vs. Net Operating Cost
Dollars in Billions 2012 2011 Increase / (Decrease)
Net Operating Cost $(1,316.3) $(1,312.6) $3.7
Change in:      
  Federal Employee and Veterans Benefits Payable $481.8 $71.9 $409.9
  Liabilities for Government Sponsored Enterprises $(307.2) $(43.7) $(263.5)
Other, Net $52.3 $(14.2) $66.5
Subtotal - Net Difference: $226.9 $14.0 $212.9
Budget Deficit $(1,089.4) $(1,298.6) $(209.2)

The Reconciliation of Net Operating Cost and Unified Budget Deficit Statement, as summarized in Table 3, shows how the Government’s net operating cost from the primarily accrual-based financial statements relates to the more widely-known and primarily cash-based budget deficit.

The Government’s Net Position:  “Where We Are”

The Government’s financial position and condition have traditionally been expressed through the Budget, focusing on surpluses, deficits, and debt.  However, this primarily cash-based discussion of the Government’s net outlays (deficit) or net receipts (surplus) tells only part of the story.  The Government’s accrual-based net position, (the difference between its assets and liabilities), and its “bottom line” net operating cost (the difference between its revenues and costs) are also key financial indicators.  

Revenues and Costs: "What Came In & What Went Out"

The Government’s Statement of Operations and Change in Net Position, much like a corporation’s income statement, shows the Government’s “bottom line” and its impact on net position (i.e., assets net of liabilities).  The Government nets its costs against both: (1) earned revenues from Government programs (e.g., Medicare premiums, National Park entry fees, and postal service fees) to derive net cost; and (2) taxes and other revenue to arrive at the Government’s “bottom line” net operating cost.

Table 4:
Gross Cost, Revenues, and Net Cost
Dollars in Billions 2012 2011 Increase/(Decrease)
$ %
Gross Cost $(3,844.9) $(3,998.3) $(153.4) -(3.8%)
  Less: Earned Revenue 1 $350.8 $365.6 $(14.8) (4.0%)
Subtotal $(3,494.1) $(3,632.7) $(138.6) (3.8%)
  Gain/(Loss) from Changes in Assumptions 2 $(320.2) $(28.1) $292.1 1039.5%
Net Cost $(3,814.3) $(3,660.8) $153.5 4.2%
  Less: Taxes and Other Revenue $2,518.2 $2,363.8 $154.4 6.5%
  Unmatched Transactions and Balances3 $(20.2) $(15.6) $4.6 29.5%
Net Operating Cost $(1,316.3) $(1,312.6) $3.7 0.3%

1: Revenue earned for goods and services provided (e.g., Medicare premiums, national park entry fees, and postal fees)
2: Changes in assumptions used to estimate liabilities for federal employee pensions and other retirement and postemployment benefits
3: Represents unreconciled differences in intragovernmental activity and balances between Federal agencies.

Table 4 shows that the Government’s “bottom line” net operating cost remained essentially unchanged, increasing less than one-half of 1 percent from $1,312.6 billion in FY 2011 to $1,316.3 billion in FY 2012.  As discussed below, this slight change includes significant, yet offsetting changes in accrued or estimated future costs associated with Federal employee and veteran benefits programs and the GSEs.

Revenue: What Came In

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The Statement of Net Cost reports “earned” revenue generated by Federal programs, including Medicare premiums paid by program participants and postal service fees.  The Statement of Operations and Changes in Net Position shows the Government’s taxes and other revenues (i.e., revenues other than “earned”).  Chart A shows that increases in each of the three revenue categories shown - individual income tax and withholdings, corporate income taxes, and other revenues - combined to increase total Government revenues by $154.4 billion (6.5 percent) to just over $2.5 trillion for FY 2012.  Together, personal and corporate income taxes accounted for about 86 percent of total revenues in FY 2012.  The remaining 14 percent consists of various other taxes and receipts, including excise taxes, unemployment taxes, and customs duties.    

Cost:  “What Went Out”

The Statement of Net Cost also shows how much it costs to operate the Federal Government, recognizing expenses when they happen, regardless of when payment is made (accrual basis).  It shows the derivation of the Government’s net cost or the net of: (1) the costs of goods produced and services rendered by the Government, (2) the earned revenues generated by those goods and services during the fiscal year, and (3) gains or losses from changes in assumptions impacting longer-term estimated costs.  This amount, in turn, is offset against the Government’s taxes and other revenue in the Statement of Operations and Changes in Net Position to calculate the “bottom line” or net operating cost.

Chart B shows the composition of the Government’s net cost (gross cost less earned revenue and gain/loss from changes in assumptions) of $3,814.3 billion in FY 2012, a $153.5 billion (4.2 percent) increase compared to FY 2011.  In FY 2012, about two-thirds of total net cost came from the Department of Defense (DOD), the Social Security Administration (SSA), and the Department of Health and Human Services (HHS), which have consistently incurred the largest agency shares of the Government’s total net cost in recent years, as shown in Charts B and C.  The bulk of HHS and SSA net costs (which totaled $856.5 billion and $825.1 billion in FY 2012, respectively) are attributable to major social insurance programs administered by these agencies, e.g., Medicare by HHS and Social Security by SSA.  The Statement of Social Insurance (SOSI) and the related information in this report, including the broader discussion of the Government’s long-term fiscal projections, discuss the projected future revenues, expenditures, and sustainability of these programs in greater detail.  DOD net costs of $799.1 billion relate primarily to military operations and personnel, but as noted above, the longer-term costs of military retirement and health benefits accounted for most of DoD’s cost increase in FY 2012.  Charts B and C show that the Department of Veterans Affairs (VA) as well as interest on debt held by the public were also significant contributors to the Government’s net cost for FY 2012. The combined other agencies included in the Government’s Statement of Net Cost accounted for 19 percent of the Government’s total net cost.

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As indicated earlier, the change in the Government’s net cost ($153.5 billion or 4.2 percent) and minimal change in net operating cost ($3.7 billion or 0.3 percent) both include the individual, offsetting effects of changes in the current costs of and especially the changes in actuarial and other estimated costs associated with: (1) the Government’s postemployment benefits programs for its military and civilian employees and veterans, and (2) liabilities to the GSEs, specifically Fannie Mae and Freddie Mac, which relates to the Government’s economic recovery efforts.

DOD, VA, and OPM each attributed significant increases in their respective agency total net costs largely to changes in assumptions related to the Government’s postemployment benefits programs.  Table 4 on page 8 shows that the losses associated with changes in these assumptions totaled $320.2 billion in FY 2012, compared to $28.1 billion in FY 2011 – an increase of $292.1 billion.  These agencies, including but not limited to DOD, VA, and OPM, employ a complex series of assumptions, including but not limited to interest rates, beneficiary eligibility, life expectancy, medical cost levels, compensation levels, disability claims rates, and cost of living to make annual actuarial projections of their long-term benefits liabilities and their related costs.

In addition, the Statement of Net Cost in this Report shows net revenues for the Department of the Treasury of $177.5 billion for FY 2012, compared to a net cost amount of $84.2 billion in FY 2011, a combined decrease of $261.7 billion.  Contributing to this substantial decrease was a $288.7 billion reduction in expense associated with Senior Preferred Stock Purchase Agreements (SPSPAs).11  The SPSPAs are intended to maintain the solvency of GSEs, specifically Fannie Mae and Freddie Mac.  During FY 2012, Treasury introduced a revised SPSPA dividend provision, which commences with the quarter ending March 31, 2013.  This revision is forecasted to lower the amounts drawn from Treasury under the SPSPAs because the GSEs would no longer need to make draws to fund dividend payments to Treasury.  With the revision, dividend payments would be limited to the amount of the positive net worth in excess of a capital reserve amount.  Prior to the revision, dividends were forecasted to be paid on an amount that was projected to increase as draws continued to be made to fund the dividends.  The expected dividend payments after the revision are lower than previously forecasted.  The forecasted effect of the revision is a reduction in the contingent liability, and the net costs associated with the program.

As noted earlier, taxes and other revenues of $2,518.2 billion are deducted from the total net cost of $3,814.3 billion (including actuarial costs) to derive the Government’s “bottom line” net operating cost.12  As previously shown in Table 4, the increase in taxes and other revenues, combined with the increase in net costs, including the effects of the offsetting changes in actuarial and estimated costs described above, result in a “bottom line” net operating cost that remained essentially unchanged at about $1.3 trillion ($1,316.3 billion) for FY 2012, an increase of only $3.7 billion or less than one-half of one percent compared to the FY 2011 net operating cost of $1,312.6 billion. 

Assets and Liabilities: "What We Own and What We Owe"

The Government’s net position at the end of the year is derived by netting the Government’s assets against its liabilities, as presented in the Balance Sheet (summarized in Table 5).  It is important to note that the balance sheet does not include the financial value of the Government’s sovereign powers to tax, regulate commerce, and set monetary policy.  It also excludes its control over nonoperational resources, including national and natural resources, for which the Government is a steward.  In addition, as is the case with the Statement of Operations and Changes in Net Position, the Balance Sheet includes a separate presentation of the portion of net position earmarked for specific funds and programs.  Moreover, the Government’s exposures are broader than the liabilities presented on the balance sheet, when such items as the Government’s future social insurance exposures (namely, Medicare and Social Security), as well as other fiscal projections, commitments and contingencies, are taken into account.  These exposures are discussed later in this Management Discussion and Analysis (MD&A) section as well as in the required supplementary disclosures of this Report.

Table 5: Assets and Liabilities
Net Position Dollars in Billions 2012 2011
Increase/
(Decrease)
$
Increase/
(Decrease)
%
Assets        
  Cash & Other Monetary Assets $206.2 $177.0 $29.2 16.5%
  Loans Receivable and   Investments, Net* $1,009.1 $985.2 $23.9 2.4%
  Inventories $299.0 $296.1 $2.9 1.0%
  Property, Plant & Equipment,   Net $855.0 $852.8 $2.2 0.3%
  Other $379.0 $396.2 $(17.2) (4.3%)
Total Assets $2,748.3 $2,707.3 $41.0 1.5%
Less:Liabilities, comprised of:        
  Federal Debt Held by the Public & Accrued Interest $(11,332.3) $(10,174.1) $1,158.2 11.4%
  Federal Employee & Veterans   Benefits $(6,274.0) $(5,792.2) $481.8 8.3%
  Other $(1,243.0) $(1,526.4) $(283.4) (18.6%)
Total Liabilities $(18,849.3) $(17,492.7) $1,356.6 7.8%
Net Position
(Assets Minus Liabilities)
$(16,101.0) $(14,785.4) $(1,315.6) (8.9%)
*Includes Net Loans Receivable and Mortgage-Backed Securities, Troubled Asset Relief Program (TARP) Direct Loans and Equity Investments, and Investments in Government-Sponsored Enterprises (GSEs).

Assets – “What We Own”

As of September 30, 2012, the Government held about $2.7 trillion in assets, an increase of $41.0 billion (1.5 percent).  The Government’s assets are comprised mostly of net property, plant, and equipment ($855.0 billion in FY 2012) and a combined total of $1,009.1 billion in net loans receivable ($859.6 billion), and direct loans and  investments ($149.5 billion) associated with TARP and the GSEs, specifically Fannie Mae and Freddie Mac.

The Department of Education’s (Education’s) direct loan programs accounted for $673.2 billion (78.3 percent) of total net loans receivable.  Education’s receivables balances increased by 44 percent ($161.7 billion) during FY 2011 and 27 percent ($143.7 billion) during FY 2012 primarily due to legislation requiring a transition for new loans from guaranteed student loans to full direct lending by Education.13

Following the financial crisis in 2008, the Government’s assets grew with the implementation of these market stabilization and economic recovery initiatives.  However, in recent years, with the ongoing wind-down of these recovery programs, the balances of many of these investments have declined principally through repayments and sales.14  For example:

Beyond these assets, other significant resources are available to the Government, including stewardship assets, such as natural resources, and the Government’s power to tax and set monetary policy. 

Liabilities – “What We Owe”

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As indicated in Table 5 and Chart D, of the Government’s $18.8 trillion in total liabilities, the largest liability is Federal debt held by the public and accrued interest, the balance of which increased $1.2 trillion (11.4 percent) to $11.3 trillion as of September 30, 2012.

The other major component of the Government’s liabilities is Federal employee postemployment and veteran benefits payable (i.e., the Government’s pension and other benefit plans for its military and civilian employees), which increased $481.8 billion (8.3 percent) during FY 2012, from $5,792.2 billion to $6,274.0 billion.  OPM administers the largest civilian pension plan, covering nearly 2.8 million current employees20 and 2.5 million annuitants.21  The military pension plan covers more than three million current military personnel (including active service, reserve, and National Guard) and approximately 2.2 million retirees and annuitants.22 

Federal Debt

The unified budget surplus or deficit is the difference between total Federal spending and receipts (e.g., taxes) in a given year.  The Government borrows from the public (increases Federal debt levels) to finance deficits.  During a budget surplus (i.e., when receipts exceed spending), the Government typically uses those excess funds to reduce the debt held by the public.  The Statements of Changes in Cash Balance from Unified Budget and Other Activities reports how the annual unified budget surplus or deficit relates to the Federal Government’s borrowing and changes in cash and other monetary assets.  It also explains how a budget surplus or deficit normally affects changes in debt balances.

The Government’s publicly-held debt, or Federal debt held by the public, and accrued interest, which is reported on the Government’s balance sheet as a liability, is comprised of Treasury securities, such as bills, notes, and bonds, net of unamortized discounts and premiums; and accrued interest payable. The “public” consists of individuals, corporations, state and local governments, Federal Reserve Banks, foreign governments, and other entities outside the Federal Government.  Federal debt held by the public and accrued interest totaled $11.3 trillion as of September 30, 2012.  As indicated above, budget surpluses have typically resulted in borrowing reductions, and budget deficits have conversely yielded borrowing increases.  However, the Government’s debt operations are generally much more complex than this would imply.  Each year, trillions of dollars of debt matures and new debt is issued to take its place.  In FY 2012, new borrowings were $7.8 trillion and repayments of maturing debt held by the public were $6.6 trillion.  Both represented slight decreases over new borrowings and debt repayments as compared to FY 2011.

In addition to debt held by the public, the Government has about $4.9 trillion in intragovernmental debt outstanding, which arises when one part of the Government borrows from another.  It represents debt issued by the Treasury and held by Government accounts, including the Social Security ($2.7 trillion) and Medicare ($297.6 billion) trust funds.  Intragovernmental debt is primarily held in Government trust funds in the form of special nonmarketable securities by various parts of the Government.  Laws establishing Government trust funds generally require excess trust fund receipts (including interest earnings) over disbursements to be invested in these special securities.  Because these amounts are both liabilities of the Treasury and assets of the Government trust funds, they are eliminated as part of the consolidation process for the government-wide financial statements (see Note 14).  When those securities are redeemed, e.g., to pay future Social Security benefits, the Government will need to obtain the resources necessary to reimburse the trust funds.  The sum of debt held by the public and intragovernmental debt equals gross Federal debt, which (with some adjustments) is subject to a statutory ceiling (i.e., the debt limit). At the end of FY 2012, debt subject to the statutory limit was $16.027 trillion, $367 billion under the current limit of $16.394 trillion. 

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Prior to 1917, the Congress approved each debt issuance.  In 1917, to facilitate planning in World War I, Congress established a dollar ceiling for Federal borrowing.  With the Public Debt Act of 1941 (Public Law 77-7), Congress and the President set an overall limit of $65 billion on Treasury debt obligations that could be outstanding at any one time.  Since then, Congress and the President have enacted a number of debt limit increases.  Most recently, pursuant to the Budget Control Act (BCA) of 2011, the debt limit was raised by $400 billion in August 2011 to $14.694 trillion, by $500 billion in September 2011 to $15.194 trillion, and by $1.2 trillion to $16.394 trillion in January 2012.23

The Federal debt held by the public measured as a percent of GDP (debt-to-GDP ratio) (Chart E) compares the country’s debt to the size of its economy, making this measure sensitive to changes in both.  Over time, the debt-to-GDP ratio has varied widely.  For most of the Nation’s history, the debt-to-GDP ratio has tended to increase during wartime and decline during peacetime.  That pattern continued to hold following World War II until the 1970s.  As shown in Chart E, wartime spending and borrowing had pushed the debt-to-GDP ratio to an all-time high of 109 percent in 1946, but it decreased rapidly in the post-war years, falling to 80 percent by 1950, 46 percent in 1960, and the postwar low point of 24 percent in 1974.  Since then, the ratio has increased, growing rapidly from the mid-1970s until the early 1990s.  In the 1990s, strong economic growth and fundamental fiscal decisions, including measures to reduce the Federal deficit and implementation of binding "Pay As You Go" (“PAYGO”) rules, generated a significant decline in the debt-to-GDP ratio over the course of the 1990s, from a peak of 49 percent in 1993-1994, to 33 percent in 2001.  During the last decade, much of this progress was undone as PAYGO rules were allowed to lapse, significant tax cuts were implemented, entitlements were expanded, and spending related to defense and homeland security increased.  By September 2008, the debt-to-GDP ratio was 40 percent of GDP. The extraordinary demands of the recent economic and fiscal crisis and the consequent actions taken by the Federal Government, combined with slower economic growth in the wake of the crisis, have pushed the debt-to-GDP ratio up to about 73 percent as of September 30, 2012.

The Economy in Fiscal Year 2012

A review of the Nation’s key macroeconomic indicators can help place the discussion of the Government’s financial results in a broader context.  As summarized in Table 6, the economy continued to grow, and at a faster rate, during FY 2012.  Job growth accelerated, with private nonfarm payrolls rising by 1.9 million after a gain of 1.8 million the previous fiscal year.  The unemployment rate declined during FY 2012 but remained elevated.

After rising by 1.6 percent during FY 2011, real GDP growth accelerated to an annual average rate of 2.5 percent over the four quarters of FY 2012.  The economy added 1.9 million total nonfarm payroll jobs during FY 2012, more than the 1.8 million nonfarm payroll jobs added during FY 2011.  The unemployment rate declined from 9.1 percent in September 2011 to 7.8 percent in September 2012.  After accelerating in the two previous fiscal years, inflation slowed, mainly reflecting lower energy and food price inflation.  Underlying inflation (the core rate, excluding food and energy) stabilized at the previous fiscal year’s level and remained low by historical standards.  Real wages for private production nonsupervisory workers declined, reflecting slower nominal wage growth relative to the rise in consumer prices. The level of corporate profits increased in FY 2012, and at a much faster pace than in the previous fiscal year.  Federal spending declined, and federal tax receipts grew in FY 2012.  As a result, the Federal unified budget deficit fell to $1.1 trillion in FY 2012, and also narrowed as a share of the economy to 7.0 percent of GDP from 8.7 percent in FY 2011.

Table 6: National Economic Indicators*
  FY 2012 FY 2011
Real GDP Growth 2.5% 1.6%
Residential Investment Growth 13.7% 1.4%
     
Average monthly payroll job change (thousands) 156 151
Unemployment rate (percent, end of period) 7.8% 9.1%
     
Consumer Price Index (CPI) inflation 2.0% 3.9%
Core CPI, (excluding food and energy) inflation 2.0% 2.0%
     
Treasury constant maturity 10-year rate (end of period) 1.65% 1.9%
Moody's Baa bond rate (end of period). 4.7% 5.2%
*Some FY2011 data may differ from the FY2011 Report due to updates and revisions.

The following key points summarize economic performance in FY 2012: 

The Recovery Act

Improvement in the economic and financial outlook since the spring of 2009 reflects a broad and aggressive policy response that has included the initiatives and programs under HERA and TARP, other financial stability policies implemented by the FDIC and the Board of Governors of the Federal Reserve, accommodative monetary policy, and the American Recovery and Reinvestment Act of 2009 (ARRA or the Recovery Act).  The purpose of the original $787 billion ARRA package was to jump-start the economy and to create and save jobs, with one-third of ARRA dedicated to tax provisions to help businesses and working families, another third for emergency relief for those who have borne the brunt of the recession, and the final third devoted to investments to create jobs, spur economic activity, and lay the foundation for future sustained growth.  Cumulative ARRA amounts paid out by Federal agencies as of September 30, 2012 totaled $477.4 billion, as compared to $421.4 billion as of September 30, 2011.24  It is important to note that amounts spent by the Federal, State, and Local government agencies, as well as by the private sector are constantly changing.  Readers may find the most up-to-date information on where and how these funds are being used at www.recovery.gov.

The preceding section has focused on the Federal Government’s financial results for FY 2012.  The following sections discuss the issue of fiscal sustainability.

Footnotes

3 On the Government’s balance sheet, debt held by the public and accrued interest payable consists of Treasury securities, net of unamortized discounts and premiums, and accrued interest payable.  The “public” consists of individuals, corporations, state and local governments, Federal Reserve Banks, foreign governments, and other entities outside the Federal Government.(Back to Content)

4 The Black Lung Program is projected through September 30, 2040.(Back to Content)

5 Social Security and Medicare Part A are funded by the payroll taxes and revenue from taxation of benefits and premiums that support those programs.  Medicare Parts B and D are primarily financed by general revenues and premiums.  By accounting convention, general revenues transferred to Medicare Parts B and D are eliminated in consolidation at the government-wide level and, as such, are not included in SOSI projections.(Back to Content)

6 Final Monthly Treasury Statement (as of September 30, 2012 and 2011), 10/12/12 press release.(Back to Content)

7 The Department of Health and Human Services received a disclaimer of opinions on its 2012, 2011, and 2010 SOSI and its 2012 and 2011 SCSIA.(Back to Content)

8 Since programs are not administered at the government-wide level, performance goals and measures for the Federal Government, as a whole, are not reported here.  The outcomes and results of those programs are addressed at the individual agency level and can be found in each agency’s financial report.(Back to Content)

9 Under U.S. GAAP, most U.S. Government revenues are recognized on a ‘modified cash’ basis, or when they become measurable.  The Statement of Social Insurance presents the present value of the estimated future revenues and expenditures for scheduled benefits over the next 75 years for the Social Security, Medicare, Railroad Retirement programs; and through September 30, 2040 for the Black Lung program.(Back to Content)

10 Interest outlays on Treasury debt held by the public are recorded in the budget when interest accrues, not when the interest payment is made.  For Federal credit programs, outlays are recorded when loans are disbursed, in an amount representing the present value cost to the Government (excluding administrative costs), or the credit subsidy cost.  Credit programs record cash payments to and from the public in nonbudgetary financing accounts.(Back to Content)

11 Department of the Treasury FY 2012 Agency Financial Report, p. 101.  See also Note 11 – Investments in and Liabilities to GSEs – of this Report.(Back to Content)

12 As shown in Table 4, net operating cost includes a slight adjustment for unmatched transactions and balances.  These amounts are described in greater detail in the Other Accompanying Information section of this Report.(Back to Content)

13 U.S. Department of Education’s FY 2012 Agency Financial Report, p. 58.(Back to Content)

14 As of September 30, 2012, TARP Direct Loans and Equity Investments and Investments in Government-Sponsored Enterprises (GSEs) represented 1.5 percent and 4.0 percent of total assets, respectively.(Back to Content)

15 Department of the Treasury FY 2012 Agency Financial Report, pp. 11, 87.  See also Note 5 – TARP Direct Loans and Equity Investments and Note 28 – Subsequent Events – of this Report.  Additional information concerning the TARP programs and other related initiatives can be found at www.financialstability.gov. (Back to Content)

16 Department of the Treasury FY 2012 Agency Financial Report, pp.11, 89.  See also Note 5 – TARP Direct Loans and Equity Investments and Note 28 – Subsequent Events – of this Report.(Back to Content)

17 Department of the Treasury FY 2012 Agency Financial Report, pp. 11, 104.(Back to Content)

18 Department of the Treasury FY 2012 Agency Financial Report, p. 159.(Back to Content)

19 Department of the Treasury FY 2012 Agency Financial Report, pp. 11, 98-100.  See also Note 11 – Investments in and Liabilities to GSEs – of this Report.(Back to Content)

20 As of 9/30/2012 OPM Office of Actuaries.(Back to Content)

21 OPM FY 2012 Agency Financial Report, p. 9.(Back to Content)

22 DOD FY 2012 Agency Financial Report, p.12; DOD Military Retirement Fund (MRF) financial statements, p. 14.(Back to Content)

23 See also Note 28 - Subsequent Events – of  this Report.(Back to Content)

24 Agency Financial & Activity Reports as of September 30, 2012 and 2011.  For more information, see the Recovery Act website at www.recovery.gov.(Back to Content)


Last Updated:  February 27, 2013