Truthful Accounting Should Be the First Objective of Any Debt Ceiling Compromise

Weather will fade as the reason Washington D.C. becomes uncomfortable as debate on the nation's debt ceiling will become as unavoidable as the heat and humidity.  This summer's most over-reported story naturally pits Democrats insisting on higher taxes against Republicans set on lower spending.  But, before our representatives adopt either approach, they should first recognize that government accounting and budgeting is a big reason why we're in such fiscal difficulty.  Any debt ceiling compromise should include a provision for more accurate government accounting and more transparent annual budgeting because we cannot improve what we do not measure...truthfully.

The debate over raising the $14.3-trillion debt ceiling to some higher number is what Congress will discuss and the media will report over the next 30 days.  What will be missing, however, is debate about the nation's real debt burden.  Our calculations show it's more than $76 trillion, consisting of Treasury securities recognized under the debt ceiling and the unfunded promises we've made to our seniors, military veterans, and federal workers.  Add to that the federal guarantees for everything from coastal flood insurance to expected bailouts for Fannie, Freddie, and the too-big-to-fails, and the nation's total obligations may exceed $100 trillion.

The reason for these accumulated liabilities over and above the debt ceiling is because the accounting principles that are used to calculate the budget and debt limit simply ignore them.  Unlike private-sector companies which must recognize the present value of all future promises to their employees, the government does not recognize its future, similar liabilities.  Programs like Social Security and Medicare are off the federal balance sheet, even though we are legally obligated to pay these benefits under current law.  Moreover, other federal programs that provide what are essentially insurance benefits to individuals and companies have no reserves other than the credit of the federal government.   

The excuse for keeping these liabilities off the balance sheet is the flimsy notion that Congress might change them in the future. That presumes future congressional action is much more predictable than estimating the certain and compulsory obligations as they currently exist.  This is not only faulty accounting; it's fundamentally dishonest.  It's time we recognize our actual financial position by accounting more truthfully. 

As baby-boomers retire and the entitled collect on their federal guarantees, these unfunded liabilities are beginning to mature.  As they do, pressure on the debt ceiling will increase, whatever the Congress might decide to do this summer.  So, before we agree to a short-term "solution" to the ceiling crisis, members of Congress should take the opportunity to improve federal accounting and budgeting and to truthfully inform themselves and the public of our actual financial condition.

Bringing Democrats and Republicans together could start by agreement to adopt these four measures to bring more truth to federal accounting and budgeting:

  • Any debt ceiling compromise should mandate that all federal government accounting and budgeting be conducted on a full accrual basis.  This should include any and all social programs that exist under current law.  This would eliminate the excuse that Social Security and Medicare should be off the balance sheet because they are "optional" obligations of the federal government.  If Social Security and Medicare are eliminated or future costs reduced, only then should the present obligation be reduced.
  • At the beginning of the budget process, the president and the Congress should jointly estimate the amount of revenue they expect will be available as well as the fiscal year's actuarially accrued "non-discretionary" expenses.  Obligations that are truly "non-discretionary" like Social Security and Medicare should then be transparently appropriated as the first task.  What remains would become the management report information on which Congress deliberates.  If appropriations tasks from the previous year have not been completed, as was the case in FY 2010 when Congress failed to produce a budget, no new appropriations should be allowed to ensure that accounting estimates are based on complete and truthful information.
  • Going forward, total and non-discretionary spending should include a provision of actuarially prudent reserves for any federal insurance programs or guarantees now in existence or provided at the time Congress creates them in the future.  This would require explicit, current recognition of the future costs for such specialized programs as flood and crop insurance, Export-Import guarantees, and prospective bailouts at the time they are granted rather than the time they are likely to be paid.
  • Mandates and their enabling regulations should be recognized as the responsibility of the federal government and charged to the federal budget.  Open-ended, mandated entitlements like Medicaid place intolerable burdens on states.  Without some effective accounting and transparency at the federal level, Congress will continue to obligate the states, often without their permission and against their interests.

The immediate effect of these recommendations will be to significantly expand the scale and perception of the nation's "official" liabilities.  Some will argue that disclosing and recognizing them will roil the financial markets and raise the interest costs for Treasury securities.  We disagree; markets recognize the true obligations of the federal government and have already begun marking down the U.S. dollar.  As "quantitative easing" ends, interest rates may rise, but that is unrelated to better disclosure.  On the other hand, average Americans, who vote, often do so without a sufficient grasp of the nation's true financial condition.  They would make more informed decisions about public policies with more truthful and timely financial information that recognized all of the nation's obligations.

When debate begins on the debt ceiling, a rare opportunity will develop for legislators to forge a compromise based on a foundation of honest accounting.  Only by recognizing our financial position as it truly is can we hope to rectify our current fiscal mess.  As they debate, Congress will undoubtedly call for all Americans to make some "sacrifice" but, before we make any painful public policy choices, Congress owes us transparent budgeting and truthful accounting.     

Sheila Weinberg is the founder and CEO of the Institute for Truth in Accounting, a nonpartisan organization concerned with public-sector accounting.  Ralf Seiffe is its research director.