Free Minds & Free Markets

The Federal Government's Finances Are a Total Wreck

And the biggest liabilities don’t even appear on the official balance sheet.

The federal government's latest financial statements came out last week and they paint a dire picture of our nation's fiscal health. It's not just the annual deficit, which is too large and growing. The new report shows trillions in long-term liabilities that could burden the country for years to come. And it suggests that financial management in large government agencies, like the Department of Defense, is appallingly poor.

The federal government reports assets of $3.5 trillion and liabilities of $23.9 trillion yielding a negative net position of $20.4 trillion. Although this last amount is similar in size to the national debt, net worth is conceptually different.

Federal audited financial statements use accrual accounting, which means that obligations are recognized as they are incurred. For example, the $23.9 trillion in liabilities includes $7.7 trillion in veterans benefits and retirement benefits earned by federal civilian employees. Another $200 trillion in liabilities arise from various guarantees the government has made, including its commitment to backstop private pension plans—many of which are becoming insolvent.

But the biggest federal liabilities of all do not appear on the government's balance sheet. According to a supplemental schedule, the federal government has $49 trillion in Social Security and Medicare liabilities. Although these retirement obligations are just as politically sacrosanct as federal employee pensions and federal guarantees for private pension systems, they receive very different accounting treatment. If these obligations were placed on balance sheet where they belong, the government's negative net position (i.e., its unfunded debt) would balloon to $69 trillion—well over triple the nation's $19 trillion gross domestic product.

As the accompanying chart shows, the federal government's net position has been deteriorating throughout the 21st century. The only apparent bright spot occurred in 2010 when actuaries bumped down Medicare liabilities amidst optimism about Obamacare's prospects for reining in medical costs—a hope that has not fully panned out. The big spike between 2003 and 2004 was largely the result of George W. Bush's unfunded Medicare prescription drug benefit.

Source: Federal Financial Statements, Various YearsSource: Federal Financial Statements, Various Years

Although the government's fiscal year 2017 deficit was an already alarming $666 billion, its balance sheet net position worsened by over $1.1 trillion. Social insurance obligations increased a further $2.3 trillion. So, while the government added less than $700 billion in red ink during fiscal year 2017 on a cash basis, the total bleeding in accrual terms was closer to $3.4 trillion. Just as accountants and regulators insist that corporations use accrual accounting to properly inform investors about their financial condition, we should have similar expectations for sovereigns such as the federal government.

Even worse, the chart doesn't include all federal liabilities. Government financial statements exclude $5 trillion in outstanding mortgage backed securities issued by Fannie Mae and Freddie Mac. These Government Sponsored Enterprises (GSEs) were placed under federal conservatorship during the financial crisis. Although the federal government owns 79.9% of each of these entities and would undoubtedly cover any shortfalls they experience with taxpayer money (as they did in 2008), their liabilities are not consolidated onto the federal government's balance sheet.

Finally, it is worth noting that the 2017 federal financial statements—incomplete as they are—received a negative audit opinion, as they do every year. Specifically, the Government Accountability Office (GAO) acting in its role as the federal government's CPA concluded:

The federal government is not able to demonstrate the reliability of significant portions of the accompanying accrual-based consolidated financial statements as of and for the fiscal years ended September 30, 2017, and 2016, principally resulting from limitations related to certain material weaknesses in internal control over financial reporting and other limitations affecting the reliability of these financial statements.

The GAO reported favorable opinions for most of the federal departments it reviewed, but the Department of Defense (DOD) remains problematic. The GAO found weaknesses in the DOD's cost reporting and its accounting for plant, property and equipment.

These findings invite the question of whether the DOD can effectively manage all the new money Congress and the Administration are giving it. If Pentagon accountants don't really know what the department owns and can't document what the military establishment is spending, what assurance do we have that all the extra tax money it is about to receive won't be wasted?

It is unfortunate that each year's federal financial statements do not receive more attention. Any company reporting results like those the government reported last week would face liquidation. Any state or local government reporting such a lopsided balance sheet would lose access to the municipal bond market. While the federal government enjoys a special status because it can lean on the Federal Reserve to buy its bonds with newly created money, that money printing capability can only go so far.

If the bleeding doesn't stop, we should expect investors in Tresasury securities to demand higher rates as the perceived risk of not being paid on time, in full and with uninflated dollars increases. With over $14 trillion in publicly held debt already on the books and trillions more being added in the coming years, federal interest costs will mount placing added pressure on the budget. At some point, the nation could face a sovereign debt crisis with serious global consequences.

Photo Credit: Louie Palu/ZUMAPRESS/Newscom

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  • BYODB||

    Uhh, well no of course the liabilities don't show up on the sheets. What, you want people to panic? Plus, this is how we claimed a balanced budget once upon a time. What do you want to do, ruin the legacy of former Democratic presidents?

    You monster!


  • jcw||

    You are a focused guy. Willing and able to bend any article to your comment's needs.

  • BYODB||

    Am I wrong though?

  • BYODB||

    (Answer: probably. But it was sarcasm ^_- )

  • BYODB||

    The GAO reported favorable opinions for most of the federal departments it reviewed, but the Department of Defense (DOD) remains problematic. The GAO found weaknesses in the DOD's cost reporting and its accounting for plant, property and equipment.

    I'm not disagreeing, but I feel like mentioning the DOD is just throwing a bone to Progressives and Democrats since the amount of money we flush down the toilet for defense is a drop in the fucking ocean of money we're lighting on fire.

    Why is it particularly noteworthy to mention the DOD wasting money when they spend a whole hell of a lot less than those programs that aren't...on...the balance sheets...oh wait I think I see it now.

  • Longtobefree||

    Well, at least the DOD has not literally shipped cash out of the country on pallets. Some government departments have done that, you know.

  • BYODB||

    I'm just noting that leaving those items off the balance sheets is to specifically make the DOD look like they're 'the most wasteful' when it's far from the case. It gives Progressives ammo to say that we spend 'too much' on the military while they blow through orders of magnitude more money off the radar.

  • NotAnotherSkippy||

    You need to simultaneously hold two disparate concepts in your head:

    1) Starving the beast by cutting taxes accomplishes nothing since the government will spend what it wants to spend regardless, and

    2) Starving DOD of funding will stop all of this military adventurism because that same government that does whatever it pleases on the domestic side will totally not over commit military resources in the same way.

    Once you do that you achieve the quantum state of modern libertarianism and the fount of cosmos is endless.

  • Longtobefree||

    The federal government's finances are a total wreck - New at reason.
    Well, it may be new at Reason, but it is well known every where else in the country.

  • Brett Bellmore||

    Been a total wreck for, what, a decade now?

    That's why I supported Trump: Experience in taking large enterprises through bankruptcy!

  • wef||

    TFW you're in debt denominated in your own fiat currency and central banks across the globe use your currency as reserve, and silly libertarian pundits still wring their hands as if you had eventually to pay the debt in real stuff you couldn't simply print.

  • Brett Bellmore||

    Well, no, of course you can print money to pay it off, hyperinflating it away.

    Ruins the economy and nobody will loan you money anymore, but, yeah, you can do it. It's just another way of repudiating the debt, only less honest than, "Remember that money you loaned me? Might as well forget it."

  • Rockabilly||

    Why can't the government print more money?

    Comrades ! Stop freaking out about the debt !

  • Mark22||

    And the problem with that argument is... what?

    People who buy long term US government debt are fools: the US simply will not pay off its obligations in the long term. And I'd much rather have fools pay for the operation of the US government than be taxed to pay for it.

  • sharmota4zeb||

    We could help balance the budget with a 20 year moratorium on social security retirement benefits paid to Americans living in America. Let's make Mexico great again (#MMGA) by encouraging elderly Americans to immigrate there.

  • Brett Bellmore||

    Not totally irrational. There are a lot of countries where you can live quite comfortably on SS alone. The US just happens to not be one of them.

  • Mark22||

    The federal government's latest financial statements came out last week and they paint a dire picture of our nation's fiscal health. It's not just the annual deficit, which is too large and growing. The new report shows trillions in long-term liabilities that could burden the country for years to come.

    Those "liabilities" are worth nothing (not even worth worrying about) because the US repays them with dollars the US itself can print freely.

  • Robert||

    Most of those liabilities aren't legally enforceable, hence aren't liabilities.

  • blondrealist||

    I understand that the federal may be reporting $3.5 trillion in assets - but perhaps we should remember that the federal government isn't including the estimated $150 trillion in recoverable fossil fuel assets and $2 trillion federally owned lands. I am not suggesting the federal government begin selling off federal lands and one could argue that the fossil fuel number is inflated - but even if we slash that number in half, the federal government's balance sheet looks far better than Joffe suggests.

    Having said that, the problem is harmful inflation - which Joffe hints at towards the end of the piece, even if he does not describe it as such. The federal government does not face a solvency problem - it faces harmful inflation if investors lose confidence in our economy and monetary system (and government). Japan's currency system is similar to ours, and their federal debt relative to GDP has been far higher than ours for quite a while. So far, there's no hyperinflation in Japan. Perhaps we have more time to sort this out than Joffe and his friends think.


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