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National Association of State Comptrollers [email protected]
National Association of State Comptrollers
2010 Annual Conference
Recognizing, Reporting, and Responding To the Risks Associated With
Intergovernmental Financial Dependency------
A National Imperative
Presented by Edward J. MazurSenior Advisor for Governmental Financial Management
Cherry, Bekaert & Holland, L.L.P.
Des Moines, IowaMarch 24, 2010
National Association of State Comptrollers [email protected]
Recognizing the Risks of IntergovernmentalFinancial Dependency
Important Reference Materials:
2009 Financial Report of the U.S. Government http://www.fms.treas.gov/fr/index.html
The Federal Government's Long-Term Fiscal Outlook: January 2010 Update, GAO-10-468SP, March 2, 2010 www.gao.gov
A SUMMARY OF THE 2009 ANNUAL REPORTS--Social Security and Medicare Boards of Trustees
http://www.ssa.gov/OACT/TRSUM/index.html
National Association of State Comptrollers [email protected]
Published Federal Sustainability Concerns
2009 Federal Financial Report, p. ii:
“As currently structured, the Government’s fiscal path cannot be sustained indefinitely and, would over time, dramatically increase the Government’s budget deficit and debt.”
GAO’s Long-Term Fiscal Outlook, Jan. 2010 update, p.1 “Our long-term simulations show that absent policy changes the
federal government faces an unsustainable growth in debt.”
S.S and Medicare Trustees 2009 Summary Report, p. 1 “Projected long run program costs are not sustainable under current
program parameters.”
National Association of State Comptrollers [email protected]
Basis for Federal Sustainability Concerns
1st—Annual Expenditures Exceed Revenues (in billions):
2009 Revenue $2,198 Budget Deficit $(1,417)Accrual-Based Operating Deficit $(1,254)
Note: Projected FY 10 Budget Deficit*: $1.5 Trillion
*Source: President’s Budget for 2011
2nd--Excessive Federal Liabilities (in billions):
Publicly-held Debt $7,583Owed to Social Security, Medicare and $4,391
other “Trust Funds” (as intragovernmental debt)Federal Employee & VA Benefits Liabilities $5,284
Source: 2009 Financial Report of U.S. Government
National Association of State Comptrollers [email protected]
Basis for Federal Sustainability Concerns (cont’d)
3rd--Unsupported Federal “Stewardship” Obligations (in Billions)
*Closed Group: Current receiving or eligible participants over age 15
Source: 2009 Financial Report of U.S. Government, Table 7, Management’s Discussion and Analysis, p. 14
2009 2008
Social Security (OASDI) 7,677$ 6,555$
Medicare (Parts A, B, & D) 38,107 36,312
Other 94 104
Total Open Group, Net 45,878$ 42,970$
Total Closed Group*, Net 52,145$ 49,135$
National Association of State Comptrollers [email protected]
Basis for Federal Sustainability Concerns (cont’d)
Total Federal Liabilities and Obligations:
$63,136,000,000,000*
*As a percentage of GDP: 437% vs. 110% in WW II
Note: -- The market value of the nation's 2009 output of goods and services --
Current-dollar GDP – reached $14.5 billion in 4th quarter 2009 Source: BEA
Reported “Publicly-held Debt” to GDP ratio in September 2009 was 53%
Source: 2009 Financial Report of U.S. Government, p. 33
National Association of State Comptrollers [email protected]
Reporting the Risks of IntergovernmentalFinancial Dependency
1. Significant and unplanned disruptions to current intergovernmental revenue flows • e.g. $500 billion/yr in FY 2009 • Plus $230 Billion in ARRA funding between FY 2009 and 2013
2. Significant and unplanned disruptions to indirect flows impacting state and local government economic activity and tax revenues • e.g. In excess of $1 trillion in FY 2009 for:
Federal Purchases from S & L businesses Salaries of Federal Employees Social Security and Medicare payments Federal retirement benefits Federal military and other facilities in S & L jurisdictions
National Association of State Comptrollers [email protected]
Reporting the Risks of Intergovernmental Financial Dependency (cont’d)
3. Potential disruptions to investment income• e.g. Yields on Treasury securities were low in 2009
4. Potential disruptions to asset values as foreign governments and other parties assess, renew, and/or modify their holdings of U.S. Treasury Securities • e.g. in June 2009 S & L governments held $706 billion in
Treasury securities as short-term and pensions investments• Or, 6.1 % of $11.5 trillion in total Public Debt outstanding
Source: U.S. Treasury TABLE OFS-2.—Estimated Ownership of U.S. Treasury Securities
National Association of State Comptrollers [email protected]
Reporting the Risks of Intergovernmental Financial Dependency (cont’d)
Specifically, State Governments should consider adding an summary element of disclosure to the State’s CAFR, such as:
“The State depends on significant financial resources flowing from the Federal government, both those received directly by the State or by its resident businesses and individuals.
Because of this dependency, the State is subject to changes in intergovernmental and certain state tax revenues based on modifications to Federal programs and appropriations.
It is also subject to changes in investment earnings and asset values associated with holding U.S. treasury securities, in part, because of actions by other holders of publicly held U.S. treasury securities, including foreign governments.”
National Association of State Comptrollers [email protected]
Responding to the Risks of Intergovernmental Financial Dependency (cont’d)
Further, State Governments can consider adding more specific elements of disclosure to the State’s CAFR, or preparing a separate report, that might include:• Excerpts from the Federal Financial Report that address sustainability
and debt (see following slides)
• The concentration of Federal revenues as a % of total revenues, and the % of expenditures that are Federally funded
• A review of indirect Federal flows that impact State businesses, individuals, and local governments—and tax revenues
• The degree of reliance associated with Federal flows by selected State program areas and the funding of personnel
(See Appendix for reference to available model for such reporting)
National Association of State Comptrollers [email protected]
Responding to the Risks of Intergovernmental Financial Dependency (cont’d)
The following four slides provide examples of materials from authoritative Federal publications, or sources, that could be included as components of disclosure in State CAFRs or special reports addressing risks associated with intergovernmental financial dependency
National Association of State Comptrollers [email protected]
Potential Federal Fiscal Outcomes: Revenues and Composition of Spending as Shares of GDP
Notes: Discretionary spending grows with GDP after 2008. The AMT exemption amount is retained at the 2007 level through 2018 and expiring tax provisions are extended. After 2018, revenue as a share of GDP is brought to its historical level of 18.3 percent plus expected revenues from deferred taxes (i.e., taxes on withdrawals from retirement accounts). Medicare spending is based on the Trustees’ 2008 projections adjusted for CMS’s alternative assumption that physician payments are not reduced as specified under current law. Source: Treasury—Citizen’s Guide 2009, Chart 9, p. xi.
National Association of State Comptrollers [email protected]
National Association of State Comptrollers [email protected]
National Association of State Comptrollers [email protected]
National Association of State Comptrollers [email protected]
Reporting the Risks of Intergovernmental Financial Dependency (cont’d)
Illustrations of Intergovernmental Financial Dependency Experienced by
Seven States
Note: Numbers are unaudited and, except for Nevada, are unofficial and unapproved
National Association of State Comptrollers [email protected]
Key DependencyMeasurements
VA2008
MA2008
NV2008
NC2008
WV2008
NY2008
FL2008
Federal Revenues (billions)(VA & NY 2009)
$10.8 $10.5 $2.4 $15 $2.7 $48.9 $24.5
Percentage of Total Revenues
26.9% 23% 33% 31.8% 29% 30.6% 28%
Federal Grants to Local governments (millions)
$1,075 $758 $475 $1,799 $232 $5,571 $4,033
Federal Purchases from State Businesses (billions)
$53.9 $13.3 $2.7 $5.8 $1.3 $13.7 $16.6
Federal Payments to Individuals (billions)
$53.9 $36.2 $11.3 $47.6 $12.8 $102.4 $110.7
Total Federal Flows (billions)
$108.9 $50.3 $14.5 $55.3 $14.4 $116.1 $131.3
National Association of State Comptrollers [email protected]
KeyMeasurements
VA2008
MA2008
NV2008
NC2008
WV2008
NY2008
FL2008
Real GDP by StateInflation Adjusted to 2000
(billions)$324.5 $312.5 $103.2 $329.4 $46.3 $964.8 $603.5
Total Federal FlowsGross State Product
33.6% 16.1% 14.1% 16.8% 31.1% 12% 21.8%
Federal Leased/Owned Buildings (millions sq/ft)
As of March 201050.4 6.9 2.4 4.3 4.0 23.3 14.0
Federal Debt Securities Held by State (billions)
$6.3 N/A $6.9 N/A $6.6 N/A $40.1
Estimated 2009 Population (millions)
7.8 6.6 2.6 9.4 1.8 19.5 18.5
National Association of State Comptrollers [email protected]
KeyMeasurements
VA2008
MA2008
NV2008
NC2008
WV2008
NY2009
FL2008
Military Facilities (9/30/08) 148 63 57 124 47 216 235
Military Facilities--Present Replacement Value (9/30/08,
billions)$37.6 $5.0 $10.6 $20.4 $1.1 $11.7 $23.4
Military Facilities--Military and Civilian Personnel (9/30/08,
thousands)181.8 16.6 15.2 147.2 8.5 60.0 91.2
National Association of State Comptrollers [email protected]
Responding to the Risks of Intergovernmental Financial Dependency
As an overview, State Governments can and should:
Anticipate and disclose the threats and risks associated with intergovernmental financial dependency
Increase internal and public visibility and understanding regarding such threats and risks
—in part through internal and external reporting
Create collaborative initiatives to address the threats and risks, and exert shared leadership with Federal elected officials
National Association of State Comptrollers [email protected]
Responding to the Risks of Intergovernmental Financial Dependency (cont’d)
More specifically, State Governments can:1. Request hard copies of the full 2009 Financial Report of the U.S.
Government for distribution to the Governor and State Budget Director (and others you may choose)
Contact: Nancy Fleetwood, Deputy Assistant Secretary for Fiscal Policy, U.S. Department of the Treasury, [email protected], (202) 622-6943
2. Build a table illustrating Direct and Indirect financial dependency of State on Federal flows (takes 8hrs or less)
3. Brief the State Budget Director and Governor’s staff (and others you may choose) on the sustainability concerns associated with the reported Federal fiscal position and intergovernmental financial dependency
National Association of State Comptrollers [email protected]
Responding to the Risks of Intergovernmental Financial Dependency (cont’d)
More specifically, State Governments can also (cont’d): 4. Seek opportunities for yourselves as leaders and your State to work with other Americans to construct a
bridge from where our Country is today to where we want it to be in 20 years
For example:
a. Seek to provide input to the President’s National Commission on Fiscal Responsibility and Reform
b. Seek involvement from State economic development leaders and major State business interests
National Association of State Comptrollers [email protected]
Responding to the Risks of Intergovernmental Financial Dependency (cont’d)
More specifically, State Governments can also (cont’d): 5. Research options for Federal budgetary and financial
reform Recommended References:
a. Comeback America—Turning the Country Around and Restoring Fiscal Responsibility, by David Walker
b. 21st Century Challenges—Reexamining the Base of the Federal Government, GAO-05-325SP
6. Conduct Workshops on Building a Fiscally Sustainable Federal Government by 2030
National Association of State Comptrollers [email protected]
Workshop Process
Acknowledge current national initiatives to address Federal sustainability concerns
Acknowledge Sources of objective information
Break the Federal Government into several major areas
Cite key facts and pose questions on the effectiveness and sustainability of current programs
Consider, pose, and respond favorably or unfavorably to nonpartisan ideas for building a fiscally sustainable Federal Government by 2030
Share conclusions and concerns
National Association of State Comptrollers [email protected]
Workshop (cont’d)
Government Policy Areas and Operations Significantly Impacting Federal Fiscal Sustainability
1. Social Security
2. Medicare/Medicaid
3. Assessing and Collecting Federal Taxes
4. International Deficits in trade, currency and national debt
5. National Defense
National Association of State Comptrollers [email protected]
Contact Information
Edward J. Mazur, CPA
Senior Advisor for Governmental Financial ManagementCherry, Bekaert, & Holland, L.L.P.
Richmond, VA 23226
804-673-5731
National Association of State Comptrollers [email protected]
Presentation Appendix
Available Model for Reporting by State Governments
A Three Volume Report entitled-- Intergovernmental Financial Dependency and Related Risks—Proposed Reporting
By State and Local Governments
Published by: Cherry, Bekaert & Holland, L.L.P. -- in the Public Interest
Available for downloading at no cost at-- www.cbh.com/intergovernmentalreport
National Association of State Comptrollers [email protected]
Report Topics Include:
Importance of reporting to: Governors, mayors, and other elected officials, and Bondholders, credit analysts, citizens, and other users of CAFRs
Recommended reporting for: MD&A (13 new disclosures) Notes to the Financial Statements (5 new disclosures) RSI (1 new disclosure) the Statistical Section (10 new schedules)
Technical basis in GAAP for each reporting element
Illustrations of recommended reporting Preparation guidance (with links to sources)
Extensive background studies and material