CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

A

STUDY

DECEMBER 2006

Comparing Budget 

and Accounting

Measures of the

Federal

Government’s

Fiscal Condition

CBO
Pub. No. 2860
The Congress of the United States O Congressional Budget Office

CBO

Comparing Budget and Accounting 

Measures of the Federal Government’s 

Fiscal Condition

December 2006

A

PAPER
Note

Numbers in the text and tables may not add up to totals because of rounding.
Preface

This Congressional Budget Office (CBO) paper, prepared at the request of the Chairman 

and Ranking Member of the Senate Budget Committee, examines two reports on fiscal policy: the budget and the government’s financial statements. The reports differ in concept and 

scope. Neither provides all of the relevant information about federal finances, and together 

they offer a more comprehensive perspective on the fiscal implications of present policies. In 

keeping with CBO’s mandate to provide objective, impartial analysis, the paper makes no recommendations.

David Torregrosa wrote the paper under the direction of Robert Dennis and Marvin Phaup. 

Andrew Gisselquist assisted with the preparation of the figures, and Linda Lewis Harris 

assisted with the preparation of the tables. 

Edward (Sandy) Davis, Peter Fontaine, Mark Hadley, Jeffrey Holland, Arlene Holen, Wendy 

Kiska, Noah Meyerson, John Sabelhaus, and Robert Sunshine of CBO provided useful suggestions. So did Wendy Comes, Richard Fontenrose, and Eileen Parlow of the Federal 

Accounting Standards Advisory Board; Robert B. Anderson, Audrey Duchesne, Patrick 

Locke, Justine F. Rodriguez, and Arthur Stigile of the Office of Management and Budget; Ron 

Feldman of the Federal Reserve Bank of Minneapolis; and Allan Lund, formerly of the 

Department of the Treasury. The assistance of external reviewers implies no responsibility for 

the final product, which rests solely with CBO.

John Skeen edited the paper. Maureen Costantino took the photograph for the cover and prepared the paper for publication, and Lenny Skutnik produced the printed copies. 

Donald B. Marron

Acting Director

December 2006

Contents

Summary and Introduction 1

The Budget 2

Budget Measures 2

Long-Term Budget Projections 3

The Federal Government’s Financial Statements 4

The Balance Sheet 6

Net Operating Cost 8

Comparing the Measures 8

Reconciling Net Operating Cost and the Budget 

Deficit 9

Sources of Change 10

Appendix: Comparing the Department of the Treasury’s Balance 

Sheet and OMB’s Asset and Liability Presentation 13
VI COMPARING BUDGET AND ACCOUNTING MEASURES OF THE FEDERAL GOVERNMENT’S FISCAL CONDITION

Tables

1. The Federal Government’s Budget Surplus or Deficit and 

Net Operating Cost 3

2. The Federal Government’s Balance Sheet, 2004 and 2005 6

3. Reconciling the Federal Government’s Budget Deficit and 

Net Operating Cost, 2004 and 2005 9

A-1. OMB’s Presentation of the Federal Government’s Assets and 

Liabilities, 2004 and 2005 14

Figures

1. The Budget Surplus or Deficit and Net Operating Cost 4

2. The Federal Government’s Debt, Assets, Liabilities, and 

Net Position 4

3. Accrued Expenses and Outlays for Federal Employees’ 

Pensions and Retirement Health Benefits 10

A-1. Debt, Treasury’s Estimate of Negative Net Position, and 

OMB’s Estimate of Negative Net Position 14

Box

1. The Role of the Federal Accounting Standards Advisory Board 5
Comparing Budget and Accounting Measures of the 

Federal Government’s Fiscal Condition

Summary and Introduction

The federal government issues two different reports of its 

fiscal performance: the budget and the Financial Report of 

the United States Government. Both contain useful information for policymakers, and taken together they provide 

a richer perspective than can be obtained from either 

report singly. But to make best use of the reports, it is 

important to understand their differences and the 

strengths and limitations of each.

The federal budget largely measures cash flows in and out 

of the U.S. Treasury, and, for the most part, reports those 

cash flows in the year in which they occur. The financial 

report, by contrast, primarily uses an accrual basis of 

accounting to measure assets, liabilities, revenues, and 

expenses.1

 The principal difference between cash and 

accrual accounting is the timing of recognition. An 

accrual system generally recognizes transactions when an 

economic event occurs rather than when the resulting 

cash flows take place.

The differences between cash and accrual measures are 

particularly evident in presentations of retirement benefits for federal employees and of federal insurance programs and in the treatment of the federal government’s 

capital investments: 

B The federal budget reports outlays for pension and 

health benefits to retired federal civilian and military 

personnel when those payments are made. In contrast, 

the financial statements report an operating expense 

for the estimated cost of retirement benefits when 

those benefits are earned. 

B The budget reports payments for federally insured 

losses when the government pays the claims.2 In contrast, the financial report records as operating expenses 

any new insurance claims that are received during the 

year regardless of when they will be paid. 

B The budget reports expenditures on capital investments—property, plant, and equipment—as outlays. 

In contrast, the financial statements report those 

expenditures as an exchange of assets on the government’s balance sheet and report the associated depreciation expense of those assets as an annual operating 

cost.

Because of differences in the timing of the recognition of 

costs, the summary measures of the budget and the financial statements differ significantly from one another. In 

2005, the budget recorded a deficit—the amount by 

which total outlays exceeded total revenues—of $319 billion.3

 The financial report’s net operating cost—the 

excess of the cost of operations over revenues—for 2005 

was $760 billion. That difference resulted largely from 

increases in retirement liabilities that are reflected in the 

net operating cost but not in the budget figure.

The budget and the financial report serve different and 

complementary purposes. The President and the Con1. See Department of the Treasury, Financial Report of the 

United States Government (December 2005), available at 

www.fms.treas.gov/fr/05frusg/05frusg.pdf. See also Congressional 

Budget Office, Measures of the U.S. Government’s Fiscal Position 

Under Current Law (August 2004). 

2. “Insurance programs,” as referred to in this paper, include ones 

providing deposit, flood, and pension insurance, for example, 

but not social insurance programs such as Social Security and 

Medicare. 

3. In 2006, the budget deficit declined to $248 billion. This paper 

uses 2005 numbers because the financial statements for 2006 are 

not yet available.
2 COMPARING BUDGET AND ACCOUNTING MEASURES OF THE FEDERAL GOVERNMENT’S FISCAL CONDITION

gress use the budget to set spending and tax priorities. It 

reports actual cash inflows and outflows for past years and 

estimates for the current and future years, and it is organized by function and agency. Financial reporting 

explains changes in the government’s financial position 

based on an accrual-based balance sheet and operating 

statement. Financial reporting also assists in demonstrating accountability to taxpayers for money raised and 

expenses incurred through its requirements for agencies 

to prepare financial reports that are then audited, 

together with internal accounting and administrative 

controls. Like the budget, the financial statements largely 

describe what has already happened, but in comparison, 

they are more forward-looking in that they reflect the liabilities for some cash flows that will show up in the budget in later years. 

The federal government has reported consolidated budget information for at least 85 years (since the enactment 

of the Budget and Accounting Act of 1921); in contrast, 

the financial reports have been used for only about 10 

years. The first audited financial statement for the United 

States was issued by the Department of the Treasury in 

1997, so it is a work in progress. A comprehensive set of 

accounting standards is still being developed (and 

revised). 

The Budget

The federal budget is the basic tool used by the President 

and the Congress to set the government’s fiscal policy. It 

focuses on revenues and outlays—generally the cash flows 

that occur with the collection of taxes and other forms of 

federal income, and the disbursement of funds for various 

federal programs and activities. Each year, the President 

transmits to the Congress a proposed budget, which provides historical budget data, estimates of revenues and 

outlays under current law, and the projected impact of 

the Administration’s proposals for the current and future 

fiscal years. (Recent budgets have provided detailed estimates spanning the next five years and some information 

for the subsequent five years.) Spending in the budget is 

divided into thousands of individual budget accounts, 

which determine the purposes for which money can be 

spent by government agencies. That information, along 

with similar estimates prepared by the Congressional 

Budget Office (CBO), is used in policy deliberations by 

the Congress, which usually adopts a budget plan in the 

form of a Congressional budget resolution. The Congress 

implements and enforces its budget plan by measuring 

the impact of subsequent legislation relative to the 

amounts specified in the budget resolution. Ultimately, 

the surplus or deficit in any year is the result of the spending that occurs and the revenues that are collected under 

existing law, as well as the effects of new legislation. 

Budget rules and practices have a variety of sources. For 

example, the concept of a single, unified budget was a key 

recommendation of the October 1967 Report of the President’s Commission on Budget Concepts, which remains 

influential today. The Office of Management and Budget’s (OMB’s) Circular No. A-11 provides detailed guidance to agencies on preparing and submitting their budgets. The Congressional Budget and Impoundment 

Control Act of 1974 governs much of the Congressional 

budget process.4 It establishes the procedures by which 

the Congress determines its annual budgetary priorities 

and then implements and enforces them through the legislative process. 

Budget Measures

Although the budget is mostly on a cash basis, in some 

cases it counts as outlays amounts that are obligated now 

but will be paid or received in the future—that is, some 

programs or activities are reported on an accrual basis. 

The most significant of those are credit programs and 

interest on the public debt:

B The Federal Credit Reform Act of 1990 requires the 

present value of expected future cash flows from new 

direct loans and loan guarantees to be recognized in 

the budget when the loans are disbursed rather than 

over the life of the loans.5 That approach was 

intended to place those credit programs on a more 

equal footing with one another and with other programs in the budget. The financial statements have 

also adopted that approach for credit programs.

4. Significant amendments to that law were made by the Balanced 

Budget and Emergency Deficit Control Act of 1985, the Budget 

Enforcement Act of 1990, and the Unfunded Mandates Reform 

Act of 1995. See House Committee on the Budget, Compilation of 

Laws and Rules Relating to the Congressional Budget Process, Serial 

No. CP-4 (May 2000). See also Senate Committee on the Budget, 

The Congressional Budget Process: An Explanation, S. Prt. 105-67 

(Revised December 1998). A number of those provisions have 

expired in recent years. 

5. For details on credit reform accounting, see Congressional Budget 

Office, Estimating the Value of Subsidies for Federal Loans and Loan 

Guarantees (August 2004) and Credit Subsidy Reestimates, 1993-

1999 (September 2000).
COMPARING BUDGET AND ACCOUNTING MEASURES OF THE FEDERAL GOVERNMENT’S FISCAL CONDITION 3

Table 1.

The Federal Government’s Budget Surplus or Deficit and Net Operating Cost

(Billions of dollars)

Source: Congressional Budget Office based in part on data from Department of the Treasury, Financial Report of the U.S. Government (1995 

to 2005).

Note: The Department of the Treasury published the first audited financial statements in 1997; data for 1995 and 1996 are from prototype 

reports.

B Interest on federal debt is also included in the budget 

as an outlay when the expense is incurred rather than 

when it is paid. Most debt requires periodic interest 

payments, so over the course of a year, accruing interest costs is usually not substantially different from 

reporting interest on a cash basis. But in instances in 

which interest payments are deferred—as with Treasury savings bonds, other zero-coupon debt,6

 and 

Treasury Inflation-Protected Securities (TIPS)—the 

timing differences can be significant.

The budget’s summary measures include total receipts, 

total outlays, and the difference, which is the surplus or 

deficit.7,8 In 2005, the budget deficit was $319 billion, or 

2.6 percent of gross domestic product (GDP) (see Table 1 

and Figure 1).9

When the government spends more than it collects, it 

must borrow from the public. If it collects more than it 

spends, it reduces the debt. In general, government debt 

held by the public is the cumulative sum of budgetary 

imbalances over time—that is, the sum of all past budget 

surpluses and deficits adjusted for small changes in other 

sources of financing.10 At the end of fiscal year 2005, that 

debt totaled $4.6 trillion, or 37.4 percent of GDP (see 

Figure 2).11

Long-Term Budget Projections

To enable policymakers to see projected budgets over a 

longer planning horizon, both OMB and CBO prepare 

long-term budget projections, including some with 50- 

to 100-year spans.12 Those projections are based on

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Budget Surplus or Deficit (-) -164 -107 -22 69 126 236 128 -158 -378 -413 -319

Net Operating Cost -255 -198 -3 -110 101 53 -515 -365 -668 -616 -760

Difference 91 91 -19 179 25 183 643 207 290 203 441

6. Zero-coupon bonds, which are sold at a discount to par value, 

provide a single payment at maturity. Interest payments are, therefore, implicit in the bonds’ appreciation over time.

7. The Social Security trust funds and the cash flow of the Postal Service are designated “off budget,” while the rest of the budget is “on 

budget.” For many purposes, those two categories are combined 

to yield a total, or unified, surplus or deficit. In 2005, the unified 

budget deficit of $319 billion comprised an on-budget deficit of 

$494 billion and an off-budget surplus of $175 billion. 

8. Another set of accounts—the national income and product 

accounts (NIPAs), which are maintained by the Department of 

Commerce’s Bureau of Economic Analysis—also records the federal government’s transactions but with different objectives. The 

NIPAs are intended to provide a comprehensive measure of current production and related income generated by the U.S. economy. Because the aims of the NIPAs differ from those of the 

budget, the two accounting systems treat some government transactions differently. Receipts and expenditures in the NIPAs usually differ slightly from those in the budget. For details, see 

Congressional Budget Office, The Treatment of Federal Receipts 

and Expenditures in the National Income and Product Accounts

(September 2006). 

9. See Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2007 to 2016 (January 2006). 

10. In addition to borrowing from the public, the deficit is financed 

by some other means, including drawdowns of the government’s 

holdings of coins, currency, and bank deposits and net cash 

inflows to credit-financing accounts. 

11. Another measure that some analysts emphasize is gross federal 

debt, which is debt held by the public plus debt held by government accounts (including those for Social Security), some of 

which constitutes amounts that the government owes to itself. 

Gross federal debt was $7.9 trillion in 2005, or 64 percent of 

GDP. Of that amount, $3.3 trillion was debt held by government 

accounts.

12. For the latest such projections, see Congressional Budget Office, 

The Long-Term Budget Outlook (December 2005); and Budget of 

the United States Government, Fiscal Year 2007: Analytical Perspectives, pp. 184-194. See also Government Accountability Office, 

The Nation’s Long-Term Fiscal Outlook, GAO-06-1077R (September 2006), available at www.gao.gov/special.pubs/longterm/.
4 COMPARING BUDGET AND ACCOUNTING MEASURES OF THE FEDERAL GOVERNMENT’S FISCAL CONDITION

assumptions about the continuation of current laws and 

policies; long-run rates of productivity growth and 

growth of the labor force; and alternative paths for several 

variables, including health care costs, spending on Social 

Security, and defense spending. 

Long-term projections help to illustrate the uncertainty 

about the budget because several factors that are difficult 

to predict—especially the growth of health spending relative to overall GDP—have major implications for the 

budget over time. Long-term projections can highlight 

that uncertainty by showing outcomes under various 

assumptions for those variables. Also, long-term budget 

projections show the path of potential future fiscal imbalances, which is useful in identifying the timing for remedial policies.

The Federal Government’s Financial 

Statements

The Financial Report of the of the United States Government—like the financial statements of private companies—consists of a balance sheet, an income statement,

Figure 1.

The Budget Surplus or Deficit and Net

Operating Cost

(Percentage of gross domestic product)

Source: Congressional Budget Office based in part on data from 

the Department of Treasury, Financial Report of the 

United States Government (1995 to 2005).

Note: The Department of the Treasury began publishing audited 

financial statements in 1997; data for 1995 and 1996 are 

from prototype reports.

Figure 2.

The Federal Government’s Debt, 

Assets, Liabilities, and Net Position

(Percentage of gross domestic product)

Source: Congressional Budget Office based in part on data from 

the Department of Treasury, Financial Report of the 

United States Government (1995 to 2005).

Note: The Department of the Treasury began publishing audited 

financial statements in 1997; data for 1995 and 1996 are 

from prototype reports. 

a cash flow statement, and notes to those financial statements. The Department of the Treasury consolidates the 

financial reports of individual federal agencies and now 

issues the governmentwide report each December. 

In particular, the consolidated report includes a balance 

sheet showing assets, liabilities, and net position (assets 

minus liabilities), and statements of government operations and changes in net position, showing revenues, 

expenses, and net operating cost (tax revenues minus the 

net cost of government operations). Those statements 

follow accounting standards developed by the Federal 

Accounting Standards Advisory Board (FASAB) (see 

Box 1). The financial report also includes numerous 

notes and substantial supplementary information on 

long-term projections for social insurance programs.13

1995 1997 1999 2001 2003 2005

-8

-6

-4

-2

0

2

4

Budget Surplus (Deficit)

Net Operating Cost

13. Since 1997, the report has been subject to audit—by what is now 

the Government Accountability Office—but it has yet to receive 

an unqualified opinion because of a number of deficiencies. See 

Financial Report of the United States Government (2005), pp. 135–

154. 

1995 1997 1999 2001 2003 2005

0

10

20

30

40

50

60

70

80

90

Debt Held by the Public

Assets

Negative Net Position

Liabilities
COMPARING BUDGET AND ACCOUNTING MEASURES OF THE FEDERAL GOVERNMENT’S FISCAL CONDITION 5

Box 1.

The Role of the Federal Accounting Standards Advisory Board

The Department of the Treasury, the Office of Management and Budget, and what is now the Government Accountability Office created the Federal 

Accounting Standards Advisory Board (FASAB) as a 

federal advisory committee in 1990 to develop federal accounting principles. FASAB’s three sponsors 

have authority under various laws to establish 

accounting and financial reporting standards for the 

government.

Through a series of legislative acts, the Congress 

sought to improve the financial management and 

accountability of the federal government by requiring 

agencies to produce audited financial statements tied 

to performance reports. The Chief Financial Officers 

Act of 1990 required some agencies to produce 

audited financial statements, and the Government 

Management Reform Act of 1994 extended that 

requirement to all agencies and to governmentwide, 

or consolidated, financial statements. In addition, the 

Government Performance and Results Act of 1993 

required agencies to submit performance reports 

comparing performance measures and related costs. 

FASAB promulgates what are termed generally 

accepted accounting principles (GAAP) for the federal government.1

 Its role is thus similar to that of the 

Financial Accounting Standards Board, which promulgates private-sector accounting standards, and the 

Governmental Accounting Standards Board, which 

promulgates standards for state and local governments. FASAB’s standards and concepts affect only 

financial accounting and have no effect on budgetary 

accounting. 

FASAB must follow certain procedures before issuing 

final accounting standards. Proposed standards typically are first issued as “exposure drafts” in order to 

solicit public comments, which come from the 

accounting community and federal agencies. (In 

some cases, proposals are first issued as “preliminary 

views” for public comment and then as exposure 

drafts.) Standards are issued only after a majority vote 

of the 10 members. Six of the 10 board members are 

now from outside the federal government because 

independence is a requirement of FASAB’s status as a 

GAAP-setting body. Two of the three founding government members, the Office of Management and 

Budget and the Government Accountability Office, 

effectively retain veto power over standards because 

the heads of those agencies may prevent the issuance 

of a standard by objecting during a 90-day review 

period. The Department of the Treasury voluntarily 

gave up that power. In addition to the three founding 

government members, a representative from the 

Congressional Budget Office sits on the board. 

FASAB continues to issue new accounting standards—most recently for fiduciary activities, which 

cover reporting on the Indian trust funds.2

 Its current 

projects include statements for federal oil and natural 

gas resources, and revisions to accounting for social 

insurance. FASAB also issues concept statements, 

which are lower in the GAAP hierarchy than standards. For example, FASAB recently issued a draft 

concept statement on proposed new definitions of 

assets and liabilities. Finally, FASAB issues interpretations and guidance on existing accounting standards, 

and white papers.

1. The American Institute of Certified Public Accountants designated FASAB as a GAAP-setting body in 1999. 

2. See Federal Accounting Standards Advisory Board, Accounting for Fiduciary Activities, Statement of Federal Financial 

Accounting Standards 31, October 24, 2006, available at 

www.fasab.gov/pdffiles/sffas_31.pdf. 
6 COMPARING BUDGET AND ACCOUNTING MEASURES OF THE FEDERAL GOVERNMENT’S FISCAL CONDITION

The Balance Sheet

The Department of the Treasury’s governmentwide balance sheet indicates the government’s financial position 

in terms of the assets it owns or controls as well as the liabilities it owes at the reporting date (see Table 2). The list 

of reportable assets and liabilities for the federal government depends on the federal financial accounting standards as issued by FASAB. As noted, those standards are 

still in the process of being developed and, in some cases, 

revised.

Currently, the balance sheet includes as assets these categories of holdings: 

B Property, plant, and equipment. This category includes 

buildings, structures, computer software, and other 

assets used to provide goods and services. Items are 

reported at original cost minus accumulated depreciation. Military equipment—ships, aircraft, combat 

vehicles, and weapons—is the biggest single 

component. 

B Inventories and related property. This category encompasses tangible property either held for sale or held for 

use in the production of goods or services. Operating 

materials and supplies held by the Department of 

Defense are a major component. 

B Loans. This category reports the face value of outstanding direct loans minus allowances for losses. For 

direct loans issued after 1991, the allowance recorded 

in the financial statements is the cumulative total of 

the subsidy cost, as calculated under the procedures of 

the Credit Reform Act and reported in the budget, 

and subsequent adjustments, such as loan modifications, reestimates, and write-offs of uncollectible 

loans. The largest source of net loan receivables is 

outstanding direct student loans, valued at $96 billion 

in 2005. 

B Cash, securities, and other investments. This category 

includes cash balances, international monetary assets 

(including official reserves of foreign currency and 

gold), and securities held by the Pension Benefit Guaranty Corporation and the Railroad Retirement Investment Trust.14

The balance sheet currently excludes the government’s 

vast holdings of public lands and other natural resources 

because FASAB has tentatively concluded that the value 

Table 2.

The Federal Government’s Balance 

Sheet, 2004 and 2005

(Billions of dollars)

Source: Congressional Budget Office based on Department of 

Treasury, Financial Report of the U.S. Government (2005), 

p. 40.

Note: The balance sheets are figures as of September 30, the end 

of the government’s fiscal year. 

a. Reported on a net basis. 

b. Includes assets held by the Pension Benefit Guaranty Corporation and the National Railroad Investment Trust.

c. Includes federal civilian and military personnel’s benefits. 

d. The amounts that are “due and payable” are about one month 

of benefits for Social Security, and payments due to health care 

providers for services already provided. 

of those resources cannot be reliably estimated. However, 

FASAB will soon propose reporting the value of federally 

owned oil and gas resources on the balance sheet, as measured by the expected stream of royalty payments to the 

14. Federal gold holdings (258,713,310 troy ounces) are carried on 

the books at a price of $42.22 per ounce, as specified by statute, 

but the market price of gold is higher: $473 on September 30, 

2005. See Financial Report of the United States Government (2005), 

p. 85.

2004 2005

653 678

262 272

221 222

Cash, securities, and other investmentsb 154 161

108 123 _____ _____

 Total Assets 1,397 1,456

Liabilities

4,329 4,624

4,062 4,492

249 260

 due and payabled 103 117

62 93

43 48

258 281 _____ _____

 Total Liabilities 9,107 9,915

Net Position (Assets minus liabilities) -7,710 -8,459 _____ _____

 Total Liabilities and Net Position 1,397 1,456

Assets

Property, plant, and equipment

Inventories and related propertya

Loansa

Other 

Debt held by the public (And accrued interest)

Federal employees’ and veterans’ benefitsc

Environmental and disposal liabilities

Social insurance and other benefits

Insurance program liabilities

Loan guarantee liabilities

Other liabilities
COMPARING BUDGET AND ACCOUNTING MEASURES OF THE FEDERAL GOVERNMENT’S FISCAL CONDITION 7

government, and will consider adding other federal 

resources.15 The balance sheet also excludes the income 

expected from future taxes under current law. One consideration favoring that exclusion is the absence of a 

legally enforceable claim to taxes until the taxable income 

is earned. 

Six main categories of liabilities are recognized on the balance sheet: 

B Debt held by the public (and accrued interest). This is 

federal debt held outside the government and excludes 

debt held by government trust funds. The largest item 

on the balance sheet, this is a legal obligation of the 

government.

B Federal employees’ and veterans’ benefits. This category 

includes actuarial estimates of the present value of 

pension benefits and health care benefits earned to 

date that are to be provided to federal civilian employees and military personnel in their retirement and of 

compensation for disabled veterans and their survivors. Those benefits are the second largest liabilities on 

the balance sheet. Although those benefits are not 

legal obligations of the government and could be 

modified by future legislation, they are recognized 

because they are part of the compensation costs for 

federal personnel—a practice consistent with the private sector’s. 

B Environmental and disposal liabilities. This category 

includes the expected cleanup costs of hazardous and 

radioactive wastes that the government generated and 

is required to remediate by law or regulation. Only 

costs for remediable conditions that can be reasonably 

estimated and cleaned up using today’s technology are 

reported. Most of the liabilities are attributable to the 

Department of Energy—which is responsible for 

managing the cleanup of contamination caused by the 

production, storage, and disposal of nuclear weapons—and to the Department of Defense—which is 

responsible for disposing of nuclear-powered vessels 

and cleaning up contamination at defense sites. 

B Social insurance and other benefits that are due and payable. This category includes amounts for social insurance programs, including Social Security and 

Medicare, and other mandatory benefit programs, 

including grants to states for Medicaid. The amounts 

that are “due and payable” are about one month of 

benefits for Social Security, and payments due to 

health care providers for services already provided. 

Those amounts are reported as liabilities because they 

are legal obligations of the government. 

B Insurance program liabilities. The balance sheet reports 

unpaid insurance claims that have already been 

incurred. At the end of 2005, the amounts included 

$70 billion in insurance liabilities for the Pension Benefit Guaranty Corporation and the Federal Emergency 

Management Agency’s estimate of $23 billion for the 

National Flood Insurance Program, mostly for claims 

arising from Hurricane Katrina.

B Loan guarantee liabilities. The long-term cost of outstanding guaranteed loans is measured by the subsidy 

cost at disbursement, with adjustments for modifications, reestimates, amortization, and write-offs. Guaranteed student loans constitute an estimated $30 

billion in liabilities.

The balance sheet does not include the present value of 

future benefit payments for Social Security and Medicare 

until they are due and payable because those anticipated 

payments for entitlements do not represent a current liability under existing accounting principles. Also excluded 

are future outlays for veterans’ health services because 

those services are provided on an “as available” basis, that 

is, subject to space limitations and annual appropriations. 

Nor does the balance sheet report contingent liabilities 

for expected future losses on risks assumed in federal 

insurance programs. Those amounts are disclosed in the 

notes to the financial statements. 

At the end of fiscal year 2005 (September 30, 2005), the 

government reported liabilities in excess of assets, or a 

negative net position, of $8.5 trillion (or 68.8 percent of 

GDP), largely reflecting the government’s borrowing to 

finance deficits and its liabilities for federal employees’ 

and veterans’ postemployment benefits.16 That measure

15. See Federal Accounting Standards Advisory Board, “Statement of 

Federal Financial Accounting Standards: Accounting for Federal 

Oil and Gas Resources” (exposure draft, forthcoming in 2007). 

16. The Office of Management and Budget releases an unaudited 

statement of assets and liabilities that reports a smaller negative 

net position, of $5.7 trillion, mainly because it reports estimated 

values for federal land and mineral rights as assets. OMB’s presentation does not follow all FASAB standards (see the appendix). See

Budget of the United States Government, Fiscal Year 2007: Analytical Perspectives, pp. 181-183. 
8 COMPARING BUDGET AND ACCOUNTING MEASURES OF THE FEDERAL GOVERNMENT’S FISCAL CONDITION

is about twice as large as the public debt. Both liabilities 

and the negative net position have been rising steadily as 

a percentage of GDP (and faster than debt as a percentage 

of GDP) since 2000. 

The government’s net position and the corresponding 

measure for a private firm, its net equity, differ significantly in meaning. A negative net position for the federal 

government provides an indication of the extent to which 

the cost of past government activities will have to be paid 

in the future. It is not a measure of solvency, however, 

because the government has the power to tax and can 

reduce spending. Moreover, the government can borrow 

to pay off its liabilities as they come due, even with a negative net position. Nevertheless, an ever-growing burden 

of federal debt—as indicated by the debt-to-GDP ratio—

would have a detrimental and potentially contractionary 

effect on the economy. At some point, the economy 

would be unable to provide enough resources for the government to pay interest on the debt.17

Net Operating Cost

The “Statement of Net Cost” and “Statement of Operations and Changes in Net Position” depict the effect of 

operations during the reporting period on the government’s financial position.18 In 2005, the government’s 

cost of operations exceeded revenues by $760 billion, 

resulting in a negative net operating cost of 6.2 percent of 

GDP (see Table 1 on page 3 and Figure 1 on page 4).19

Just as the budget deficit affects changes in the debt held 

by the public, the government’s net operating cost for a 

particular year corresponds to the change in the government’s net position.20 A loss approximates the increase in 

liabilities minus the increase in assets.21

Net operating cost includes as current expenses the cost 

of deferred compensation for federal military and civilian 

employees earned during the reporting period, as well as 

interest on existing liabilities for federal pensions and 

retirement health benefits, increases in liabilities for federal insurance programs and for environmental cleanup, 

and the depreciation of assets. However, net operating 

cost is not a comprehensive accrual measure. For example, it does not include revenues from taxes on income 

earned in the period that are not yet owed. Nor does it 

include costs for future expected losses on insurance

programs.22

Comparing the Measures

The federal budget is used to plan and control the allocation of fiscal resources. Financial reporting—with its 

requirements for audited statements and internal 

accounting and administrative controls—imposes a different method of accountability. Such audits and controls 

may improve the reliability of the numbers in the budget. 

The financial report includes a more comprehensive list 

of liabilities than the budget. At the agency level, financial reporting is also used to support management by 

matching programmatic expenses with outputs.23 For 

example, decisions such as whether to contract out work 

or to offer buyouts or early retirements require a full 

cost accounting of labor resources—including salaries, 

expenses for pensions and retirees’ health care—that budgetary accounting is not as well designed to accomplish.24

17. Congressional Budget Office, The Long-Term Budget Outlook 

(December 2005), p. 2. 

18. Agencies’ statements of net cost arrive at that measure by starting 

with their gross costs and subtracting any earned revenues. 

19. In years in which revenues exceed the net cost of government 

operations, such as 2000, a positive net cost is reported. 

20. The government’s net position at the beginning of 2005 was 

-$7,710 billion and -$8,459 billion at the end of the year—a 

change of $749 billion. The $11 billion difference between that 

change and the net operating cost of $760 billion results from 

$3.6 billion attributable to a change in accounting principles and 

$7.5 billion in adjustments for prior periods. 

21. More generally, net operating cost is the change in assets minus 

the change in liabilities. Since the audited financial reports were 

first issued in 1997, liabilities have increased every year except 

1999 and 2000. Assets declined only in 1998, but that decline 

derived solely from the removal of the Department of Defense’s 

property, plant, and equipment from the balance sheet.

22. See Congressional Budget Office, The Risk Exposure of the Pension 

Benefit Guaranty Corporation (September 2005). 

23. See Federal Accounting Standards Advisory Board, FASAB’s Strategic Directions: Clarifying FASAB’s Near-Term Role in Achieving the 

Objectives of Federal Financial Reporting (November 2006), available at www.fasab.gov/pdffiles/stratobjectivesnov2006.pdf. 

24. Federal agencies currently pay the accrual charges for federal 

pensions (but not for civilian employees’ health care in retirement). The payments to the government’s retirement accounts 

are intragovernmental and do not affect total budget outlays or, 

therefore, the budget surplus or deficit, but they do require 

appropriations and are recognized as agencies’ obligations. See 

Congressional Budget Office, The President’s Proposal to Accrue 

Retirement Costs for Federal Employees (June 2002).
COMPARING BUDGET AND ACCOUNTING MEASURES OF THE FEDERAL GOVERNMENT’S FISCAL CONDITION 9

Reconciling Net Operating Cost and the 

Budget Deficit

The net operating cost reported in the financial statements for 2005 of $760 billion differs from the budget 

deficit of $319 billion largely because it reflects liabilities 

that the budget does not include (see Table 3). Those 

additional items in net cost include the following: 

B Accruals for federal civilian and military employees’ benefits. The difference between the accrued expenses in 

the financial statements and the payments of benefits 

recorded in the budget is the increase in estimated liabilities incurred over the course of the fiscal year for 

veterans’ compensation ($198 billion) and for military 

personnel’s pensions and retirement health benefits 

($170 billion) and federal civilian employees’ pensions 

and retirement health benefits ($62 billion) (see 

Figure 3). Those factors account for $430 billion of 

the difference between the budget deficit and the net 

operating cost.

B Accruals for insurance costs and environmental cleanup 

and disposal. Environmental liabilities increased in 

2005 by $11 billion, and insurance liabilities increased 

by $31 billion. The single biggest factor that year was 

the $22 billion jump in the National Flood Insurance 

Program’s estimated unpaid claims resulting from 

Hurricanes Katrina and Rita. In contrast, the Pension 

Benefit Guaranty Corporation’s net position (its assets 

minus its liabilities) improved by $430 million in 

2005, while the budget reported net outlays of $94 

million.25 Those factors account for $42 billion of the 

difference between the budget deficit and the net 

operating cost.

B Depreciation. The budget reports the cost of property, 

plant, and equipment at the time of purchase, while 

the financial report’s operating statement reports the

Table 3.

Reconciling the Federal Government’s 

Budget Deficit and Net Operating Cost, 

2004 and 2005

(Billions of dollars)

Source: Congressional Budget Office based on Department of the 

Treasury, Financial Report of the United States Government (2005), p. 38.

cost as those items are consumed. Depreciation 

expenses—not counted in the budget—added $80 billion to the net operating cost, while purchases of fixed 

assets added $147 billion to the budget deficit. Those 

factors reduced the difference between the deficit and 

the net operating cost by $67 billion in 2005.

In general, the accruals left out of the budget make it 

likely that in most years, the shortfall in the financial 

report’s statement of operations will be larger than the 

budget deficit.26 In fact, the net loss in the financial 

statements has exceeded the budget deficit in all but one 

year since 1995 (see Table 1 on page 3). The accrued 

expenses for federal employees’ retirement, a big part of 

which is the increase in the present value of the liabilities 

as the date of the future payments nears, are likely to 

exceed the cash payments to retirees as long as the federal 

25. The Pension Benefit Guaranty Corporation’s assets increased more workforce is large relative to the number of retired federal 

than its liabilities did in 2005, which resulted in an improvement 

in its net worth. Changes in interest rates had favorable effects on 

revaluations of assets and liabilities, and the agency’s investment 

returns were strong. See Pension Benefit Guaranty Corporation, 

Performance and Accountability Report: Fiscal Year 2005, November 15, 2005, pp. 4 and 18-19, available at www.PBGC/docs/

2005par.pdf. See also Congressional Budget Office, A Guide to 

Understanding the Pension Benefit Guaranty Corporation (September 2005). 

26. The shortfall in the statement of operations could be less than the 

budget deficit in years in which liabilities declined. Drops in liabilities could occur, for example, because of a rise in interest rates, 

which would reduce the present value of future benefit payments, 

or reductions in federal retirement benefits.

2004 2005

Budget Deficit (-) -412 -319

Increase in Retirement Liabilities 

 Military Health and Pension Benefits -143 -170

 Veterans’ Compensation 30 -198

 Federal Civilian Health and Pension Benefits -69 -62

Increase in Insurance Liabilities -37 -31

Increase in Environmental Liabilities 1 -11

Property, Plant, and Equipment

 Depreciation expense -90 -80

 Purchases of fixed assets 112 147

All Other Factors -7 -37

Net Operating Cost -616 -760
10 COMPARING BUDGET AND ACCOUNTING MEASURES OF THE FEDERAL GOVERNMENT’S FISCAL CONDITION

Figure 3.

Accrued Expenses and Outlays for 

Federal Employees’ Pensions and 

Retirement Health Benefits

(Billions of dollars)

Source: Congressional Budget Office based on data from the 

Department of the Treasury, Financial Report of the 

United States Government (1997 to 2005); and Budget of 

the U.S. Government, Fiscal Year 2007: Historical Tables, 

Table 11.3.

Note: Costs for pensions and retirement health benefits are for 

both federal civilian and miliary personnel. Those costs were 

accrued as expenses in the financial report beginning in 

1997.

employees.27 That may not always be the case, however. 

Other factors could also narrow or reverse the gap 

between the net operating cost and the budget deficit. 

Capital expenditures depend on investment flows, so the 

treatment of capital assets can have varying effects over 

time. The extent of insurance liabilities depends on 

events—flood losses, bank and thrift failures, and bankruptcies of corporations with underfunded pension plans. 

Because of such contingencies, the budget deficit could 

exceed the net operating cost in the future.

Sources of Change

Several factors must be taken into account in comparing 

the budget deficit with the net operating cost over time. 

Changes in accounting, policies, and actuarial assumptions can lead to big swings in any given year.

Accounting Changes. Both the budget and the financial 

statements are subject to changes in accounting. For 

example, the Federal Credit Reform Act of 1990 significantly changed the budgetary accounting for direct loans 

and loan guarantees. However, major changes in budgetary accounting are infrequent. In contrast, financial 

accounting standards are still being developed and added. 

FASAB has recently proposed new definitions for assets 

and liabilities, which could affect what is reported on the 

balance sheet in the future.28

1997 1998 1999 2000 2001 2002 2003 2004 2005

0

50

100

150

200

250

Accrued

Expenses

Outlays

Pensions

1997 1998 1999 2000 2001 2002 2003 2004 2005

0

50

100

150

200

250

300

350

400

450

Accrued Expenses

Outlays

Retirement Health Benefits

27. Accrued expenses include three main components: the accruing 

liabilities to workers derived from their current year’s work, the 

effect of changes in benefit plans, and interest on preexisting 

retirement liabilities for payment in future years. (The accrued 

expenses differ from the change in liabilities because the latter 

subtracts out benefits paid in the current year.) Interest costs arise 

because the preexisting liabilities for payment in future years are 

one year closer to being paid than they were the previous year. The 

resulting change in their discounted present value is labeled 

“interest.” In 2005, such interest amounted to $189 billion—just 

over half of the total accrued expense.

28. See Federal Accounting Standards Advisory Board, “Proposed 

Statement of Federal Financial Accounting Concepts: Definitions 

and Recognition of Elements of Accrual-Basis Financial Statements” (exposure draft, June 7, 2006), available at www.fasab.gov/

pdffiles/elementsed06072006.pdf. 
COMPARING BUDGET AND ACCOUNTING MEASURES OF THE FEDERAL GOVERNMENT’S FISCAL CONDITION 11

The government’s net position depends on the comprehensiveness of the balance sheet. For example, the prototype financial statements issued before 1997 did not 

report the future cost of federal retirees’ health benefits as 

an expense or a liability. In addition, $655 billion in 

national defense assets were taken off the balance sheet in 

1998, causing a jump in the negative net position, before 

such assets were restored to the balance sheet in 2003 (see 

Figure 2 on page 4).29

A number of new financial accounting initiatives will or 

could affect the balance sheet. FASAB recently issued a 

new interpretation of reporting for asbestos-related 

cleanup costs.30 The board is currently debating whether 

to recognize greater liabilities for Social Security and 

Medicare and other social insurance programs and 

whether to recognize federal oil and gas resources as an 

asset.31 The outcome of those debates could have significant effects on the government’s reported liabilities, 

assets, net position, and net operating cost, but changes 

in the balance sheet would not alter the budget’s treatment of the federal programs. 

Policy Changes. Policy changes can affect the budget and 

financial statements differently. For example, the 

National Defense Authorization Act of 2001 extended 

benefits from TRICARE—the Department of Defense’s 

health insurance program for the military—to military 

retirees and their survivors and dependents even if they 

were eligible for Medicare, enhanced drug benefits, and 

reduced the cap on participants’ out-of-pocket payments. 

Financial statements recognized all of the increase in liabilities of $293 billion—the present value of the benefits 

earned to date and to be paid out over coming years—

and a corresponding increase in net operating cost (see 

Figure 3).32 However, for the cash-based budget, which 

recognizes increased costs as they are paid, CBO estimated those costs as about $200 million in 2001, $1.8 

billion in 2002, and $40 billion over 10 years.33

Changes in Actuarial Assumptions. Unlike the budget, 

the financial statements are sensitive to changes in actuarial assumptions. The divergence that occurred between 

the budget deficit and the net operating cost from 2004 

to 2005—as the former measure declined and the latter 

measure grew—was caused partly by changes in actuarial 

assumptions. Specifically, estimates of liabilities for veterans’ compensation increased by $198 billion in 2005 following a $30 billion decline in 2004: changes in interest 

rates and other actuarial assumptions, including ones 

about the number of veterans and dependents receiving 

payments, did not affect the budget but did affect the net 

operating cost.34 In addition, changes in assumptions 

about the costs of military retirees’ health benefits 

increased that liability by over $50 billion in 2005.35

29. National defense assets, which had been reported as property, 

plant, and equipment, were taken off the balance sheet in 1998 

and reported instead as “stewardship assets” in the notes to the 

statements. See Department of the Treasury, Financial Report of 

the United States Government (1998), pp. 68 and 75, available at 

www.fms.treas.gov/fr/98frusg/98notes.pdf. Beginning in 2003, 

FASAB required the Department of Defense to report the value of 

its military equipment, which added $325 billion to the amount 

of property, plant, and equipment reported that year.

30. Federal Accounting Standards Advisory Board, Recognition and 

Measurement of Asbestos-Related Clean Up Costs, Technical Bulletin 

2006-1, September 28, 2006, available at www.fasab.gov/pdffiles/

techbulletin_2006.pdf. 

31. Federal Accounting Standards Advisory Board, “Accounting for 

Social Insurance” (revised preliminary view, October 23, 2006), 

available at www.fasab.gov/pdffiles/socialinsurance_pv.pdf.

32. Department of Treasury, Financial Report of the United States Government (updated March 30, 2003), p. 110. 

33. That estimate included the costs for the new benefit and increased 

costs in existing programs, including Medicare. CBO also projected an increase of $59 billion over 10 years in intragovernmental accrual payments by the Department of Defense to a fund for 

retirees’ health care. See Congressional Budget Office, cost estimate for H.R. 4205, National Defense Authorization Act for Fiscal Year 2001 (Health Care for Military Retirees), October 11, 

2000. 

34. See Department of the Treasury, Financial Report of the United 

States Government (2005), p. 101. 

35. Ibid., p. 96. 

Appendix: Comparing the Department of the 

Treasury’s Balance Sheet and OMB’s Asset and 

Liability Presentation

The Office of Management and Budget (OMB) has 

issued an annual statement of federal assets and liabilities 

since 1993 (see Table A-1).1 That presentation of assets 

and liabilities—which is not audited—includes “best estimates” that might not be reliable enough for an audited 

balance sheet. OMB does not call the presentation a balance sheet because its presentation does not exclusively 

use generally accepted accounting principles to measure 

assets and liabilities. The agency does not calculate the 

annual change in net assets, which would correspond to 

the net operating cost in the Department of the Treasury’s 

Financial Report of the United States Government, but a 

general understanding of OMB’s presentation helps illustrate the strengths and weaknesses of the government’s 

official audited accounting report prepared in accordance 

with standards by the Federal Accounting Standards 

Advisory Board (FASAB). 

For 2005, OMB reported federal assets of $3,736 billion, 

liabilities of $9,481 billion, and a negative net position 

(assets minus liabilities) of $5,745 billion. In contrast, the 

Treasury Department reported federal assets of $1,456 

billion, liabilities of $9,915 billion, and a negative net 

position of $8,459 billion.

While there is much overlap in reporting in the two documents, OMB’s presentation of assets and liabilities differs from the Treasury Department’s presentation in several respects. Some of the differences relate to scope, but 

some relate to the use of different valuation measures. 

The differences are most apparent in the reporting of 

assets: OMB includes values for federal land ($729 billion) and mineral rights ($1,045 billion) that the Treasury Department does not report. Those estimates do not 

meet generally accepted accounting principles but indicate how important the items are to the asset side of the 

balance sheet.2 The difference illustrates the lack of comprehensiveness on the asset side of the Treasury Department’s balance sheet and has motivated FASAB’s work to 

develop new standards for valuing oil and natural gas. 

OMB also has an estimate of property, plant, and equipment that is more than $425 billion higher than the Treasury Department’s because OMB bases its estimate on the 

current replacement value of the stock of plant and 

equipment rather than its original cost. In general, using 

a fair-market estimate of replacement value may provide a 

more relevant estimate but also one more subject to judgment than an estimate based on cost. 

1. OMB does not, however, separately report operating costs on an 

accrual basis. See Budget of the U.S. Government, Fiscal Year 2007: 

Analytical Perspectives, Table 13-1, p. 182. 

2. Estimates for those two categories are based on earlier published 

estimates by researchers. The estimates are adjusted each year as 

market prices change for oil, natural gas, and land. The mineral 

rights include both proven and unproven reserves; however, OMB 

does not adjust quantities of those reserves either for depletion of 

existing stocks of reserves over time or new discoveries. Personal 

communication to the Congressional Budget Office by a staff 

member of the Office of Management and Budget, July 11, 2006. 

See Michael J. Boskin, Marc S. Robinson, and Alan M. Huber, 

Government Saving, Capital Formation and Wealth in the United 

States, 1947-1985, Working Paper No. 2352 (Cambridge, Mass.: 

National Bureau of Economic Research, August 1987), pp. 28-35. 
14 COMPARING THE BUDGET AND ACCOUNTING MEASURES OF CHANGES IN THE U.S. GOVERNMENT’S FINANCIAL BALANCE

Table A-1.

OMB’s Presentation of the Federal 

Government’s Assets and Liabilities, 

2004 and 2005

(Billions of dollars)

Source: Congressional Budget Office based on Budget of the U.S. 

Government, Fiscal Year 2007: Analytical Perspectives,

Table 13-1, p. 182, and revised information from the 

Office of Management and Budget.

Note: OMB = Office of Management and Budget; GDP = gross 

domestic product.

a. Reported net of expected loan losses.

b. Trade payables include amounts owed for goods and property 

ordered and received and for services rendered by contractors.

On the liability side, the biggest difference is that the 

Treasury Department reports $260 billion of environmental and disposal liabilities, while OMB reports no 

such liabilities. However, OMB may reconsider its treatment of those liabilities.3 The two documents have similar estimates for federal employees’ and veterans’ benefits, 

insurance programs, and social insurance and other benefits that are due and payable. The Treasury Department 

also includes $35 billion of accrued interest payable on 

debt held by the public, while OMB does not.

Figure A-1.

Debt, Treasury’s Estimate of Negative 

Net Position, and OMB’s Estimate of 

Negative Net Position

(Percentage of gross domestic product)

Source: Congressional Budget Office based in part on data from 

the Department of the Treasury, Financial Report of the 

United States Government (1995 to 2005) and Budget of 

the U.S. Government, Fiscal Year 2007: Analytical Perspectives, Table 13-1, p. 182, with revisions from OMB staff.

Notes: OMB = Office of Management and Budget.

The Department of the Treasury began publishing audited 

financial statements in 1997; data for 1995 and 1996 are 

from prototype reports.

The reporting differences result in OMB’s showing a 

smaller negative net position relative to GDP (45.6 percent) than the Treasury Department does (68.8 percent). 

That difference has persisted for several years (see 

Figure A-1). 

2004 2005

1,049 1,106

800 1,045

594 729

352 335

Inventories 262 272

Loansa 243 249 _____ _____

Total Assets 3,301 3,736

4,296 4,592

3,984 4,416

 due and payable 103 117

105 99

43 48

195 208 _____ _____

 Total Liabilities 8,725 9,481

-5,425 -5,745

-45.9 -45.6

Net Assets (Assets minus liabilities)

Memorandum:

Ratio of Net Assets to GDP (Percent)

Social insurance and other benefits

Insurance program liabilities

Loan guarantee liabilities

Trade payables and miscellaneousb

Cash, securities, and other investments

Liabilities

Debt held by the public

Federal employees’ and veterans’ benefits

Property, plant, and equipment

Assets

Mineral rights

Land

3. When OMB originally set up its framework for reporting assets 

and liabilities—well before FASAB was established, there were no 

estimates of the federal government’s environmental and disposal 

liabilities. OMB is considering adding FASAB’s estimates in its 

future presentations of stewardship activities. Personal communication to the Congressional Budget Office by a staff member of 

the Office of Management and Budget, July 11, 2006. 

1995 1997 1999 2001 2003 2005

0

10

20

30

40

50

60

70

80

OMB's Negative

Net Position

Treasury's Negative Net Position

Debt Held by the Public