GAO-07-362SP January 2007

United States Government Accountability Office

Fiscal Stewardship:

A Critical Challenge 

Facing Our Nation

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ii Fiscal Stewardship GAO-07-362SP

The U.S. government is the largest, most diverse, most complex, and arguably the most 

important entity on earth today. The United States is also a great nation. It has much to be proud of 

and much to be thankful for. However, our nation is not well positioned to meet the challenges and 

capitalize on the opportunities of the 21st Century. We are also failing to properly discharge one of 

our biggest stewardship responsibilities to our children, grandchildren, and generations of unborn 

Americans: fiscal responsibility. The purpose of this publication is to assist both the Congress 

and American citizens in understanding and evaluating the federal government’s current financial 

condition and long-term fiscal outlook.

The federal government’s financial condition and fiscal outlook are worse than many may 

understand. Despite an increase in revenues in fiscal year 2006 of about $255 billion, the federal 

government reported that its costs exceeded its revenues by $450 billion (i.e., net operating cost) 

and that its cash outlays exceeded its cash receipts by $248 billion (i.e., unified budget deficit). 

Further, as of September 30, 2006, the U.S. government reported that it owed (i.e., liabilities) 

more than it owned (i.e., assets) by almost $9 trillion. In addition, the present value1 of the federal 

government’s major reported long-term “fiscal exposures”—liabilities (e.g., debt), contingencies 

(e.g., insurance), and social insurance and other commitments and promises (e.g., Social Security, 

Medicare)—rose from $20 trillion to about $50 trillion in the last 6 years. 

The federal government faces large and growing structural deficits in the future due primarily 

to known demographic trends and rising health care costs. These structural deficits—which are 

virtually certain given the design of our current programs and policies—will mean escalating 

and ultimately unsustainable federal deficits and debt levels. Based on various measures—and 

using reasonable assumptions—the federal government’s current fiscal policy is unsustainable. 

Continuing on this imprudent and unsustainable path will gradually erode, if not suddenly 

damage, our economy, our standard of living, and ultimately our domestic tranquility and national 

security.

This publication brings together selected financial statement information from the fiscal year 

2006 Financial Report of the United States Government (Financial Report) and certain fiscal year 

2006 budget information reported by the Department of the Treasury.2 This budget information will 

also be included in the President’s Budget proposal for fiscal year 2008, which will be released in 

February 2007. The Department of the Treasury, in coordination with the Office of Management 

and Budget, annually prepares the Financial Report and submits it to the President and the 

Congress. The Financial Report is the federal government’s annual overall report of accountability 

to the American public and provides a comprehensive overview of the financial condition of the 

federal government, the cost of the federal government’s operations, the revenue sources used to 

finance them, and the implications of various long-term federal obligations and commitments.3

The President’s Budget includes information on revenues and spending for previous fiscal years 

and presents the President’s proposals for revenue and spending for the next fiscal year. It also 

contains additional analytical material.

Preface

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Fiscal Stewardship GAO-07-362SP iii

GAO is responsible for auditing the financial statements included in the Financial Report, but 

we have been unable to express an opinion on them for the 10th year in a row because the federal 

government could not demonstrate the reliability of significant portions of the financial statements, 

especially in connection with major financial management challenges at the Department of Defense. 

Accordingly, amounts reported in this publication taken from the Financial Report may not be 

reliable. GAO also reported that the federal government did not maintain effective internal control 

over financial reporting (including safeguarding assets) and compliance with significant laws 

and regulations as of September 30, 2006. Further, GAO’s audit report also included an emphasis 

paragraph for the 3rd consecutive year noting that the nation’s current fiscal path is unsustainable 

and that tough choices by the President and the Congress are necessary to address the nation’s 

large and growing long-term fiscal imbalance.

This publication was prepared under the direction of Gary T. Engel, Director, Financial 

Management and Assurance, who may be reached at (202) 512-3406 or engelg@gao.gov and Susan J. 

Irving, Director, Federal Budget Analysis, Strategic Issues, who may be reached at (202) 512-9142 or 

irvings@gao.gov if there are any questions. Contact points for our Offices of Congressional Relations 

and Public Affairs may be found on the last page of this publication. Copies of this publication are 

available upon request. In addition, this document will be available at no charge on the GAO Web 

site at http://www.gao.gov.

David M. Walker

Comptroller General of the United States

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This is a work of the U.S. government and is not subject to copyright protection in the United States. 

The published product may be reproduced and distributed in its entirety without further permission 

from GAO. However, because this work may contain copyrighted images or other material, permission 

from the copyright holder may be necessary if you wish to reproduce this material separately.

Contents

Preface ii

The Federal Government’s Current Financial Condition—Fiscal Year 2006 1

Where the Money Came From (i.e., Federal Revenue) 1

Where the Money Went (i.e., Federal Cost) 2

The Federal Government’s Financial and Budget Reporting 2

What We Own and What We Owe (i.e., the Balance Sheet) 4

Gross Federal Debt 6

The Long-Term Fiscal Outlook 8

Statement of Social Insurance 9

Major Reported Long-Term Fiscal Exposures 10

Long-Term Fiscal Simulations 11

A Way Forward 14

Endnotes 15

Related GAO Products 16

Ordering Information 17

Contacts 18

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The federal government’s current financial condition as shown in the consolidated financial 

statements considers the results of the current fiscal year’s activities including sources of federal 

revenue and where that money went, as well as the status of what the federal government owns 

and owes at the end of the fiscal year.

Where the Money Came From (i.e., Federal Revenue)

For the fiscal year ended September 30, 2006, the federal government reported total revenue4—

principally tax receipts––of about $2,441 billion. Figure 1 provides a breakout of the various 

sources of this revenue. Certain revenues (e.g., Social Security and Medicare payroll taxes and 

unemployment taxes) are classified in the Financial Report as earmarked revenue, which are 

required to be used for designated activities, benefits, or purposes.5

Figure 1: Where the Money Came From in Fiscal Year 2006

14%

Nonearmarked

corporation

income taxes

4%

Earmarked other

tax revenues 7%

Earmarked Medicare

tax revenues

25%

Earmarked

Social

Security

tax

revenues

6%

Nonearmarked

other revenues

44%

Nonearmarked

individual

income

taxes

Source: The Department of the Treasury.

Revenue source Dollars in billions

Earmarked Medicare tax revenues $180

Earmarked other tax revenues $108

Earmarked Social Security tax revenues $620

Nonearmarked corporation income taxes $350

Nonearmarked individual income taxes $1,046

Nonearmarked other revenues $137

Total $2,441

Earmarked

Nonearmarked

Note: Data are from the fiscal year 2006 Financial Report.

The Federal Government’s Current Financial 

Condition—Fiscal Year 2006

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Where the Money Went (i.e., Federal Cost)

For the fiscal year ended September 30, 2006, the federal government reported total net cost of 

about $2,901 billion.6 Figure 2 provides a breakout of the net cost.

Figure 2: Where the Money Went in Fiscal Year 2006

4%

18%

12%

10%

18% 2%

9%

15%

22%

Defense

22%

Health &

Human

Services

20%

Social Security

Administration

24%

Other federal

agencies

4%

Veterans

Affairs

8%

Treasury

Source: The Department of the Treasury.

Federal agency Earmarked

Dollars in billions

Nonearmarked Total

Defense $121 $513 $634

Other federal

agencies

$264 $447 $711

Treasury - Interest on

Treasury securities

held by the public

- $222 $222

Veterans Affairs $1 $113 $114

Total $1,266 $1,635 $2,901

Social Security

Administration

$543 $50 $593

Health & Human

Services

$337 $290 $627 a

Earmarked

Nonearmarked

a

 Medicaid costs represent $180 billion or 62 percent of Health and Human Services’s $290 billion of nonearmarked funds net costs.

Note: Data are from the fiscal year 2006 Financial Report.

The Federal Government’s Financial and Budget Reporting

The federal government produces two types of measures––budget and financial––which further 

break down into three different numbers that can be seen as indicators of our current financial 

condition: the unified budget deficit, the on-budget deficit, and the net operating cost. Table 1

shows the reported amounts of these for the fiscal year ended September 30, 2006.

Table 1: Fiscal Year 2006 Budget Deficits and Net Operating Cost

Source: The Department of the Treasury.

Dollars in billions

On-budget deficit ($434)

Unified budget deficit ($248)

Net operating costa ($450)

a

 For fiscal year 2006, there was a significant decrease in certain actuarial costs primary due to changes in interest rates and other assumptions.

Note: Data are from the Monthly Treasury Statement as of the fiscal year end 2006 and the fiscal year 2006 Financial Report.

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The most commonly reported measure is the unified budget deficit. This is a largely cash-based 

number that represents the difference between revenues and outlays––recorded in the period that 

cash is received or paid––for the government as a whole. It is an important measure since it is 

indicative of the government’s draw on today’s credit markets––and its claim on today’s economy. 

The unified budget is a comprehensive measure of all federal activities, including those that are 

on-budget and off-budget. By law the Postal Service and Social Security trust funds are designated 

as off-budget. All other budget accounts are on-budget.

Net operating cost is the amount by which costs exceed revenue. Costs are recorded on an 

accrual basis—namely, in the period when goods are used or services are performed as opposed 

to when the resulting cash payments are made. Most revenues, on the other hand, are recorded 

on a modified cash basis—that is, they are essentially recorded when collected. For fiscal year 

2006, the net operating cost of the federal government was comprised of earmarked funds net 

operating revenue7 of approximately $172 billion (e.g., Social Security) and nonearmarked funds 

net operating cost of about $622 billion.8

Table 2 shows the relationship between these numbers.

Table 2: Relationship between Fiscal Year 2006 Budget Deficits and Net Operating Cost

Source: The Department of the Treasury.

On-budget deficit

Dollars in billions

$ (434)

Add: Off-budget surplus

a 186 

Unified budget deficit (248)

Add: Operating costs not in unified budget deficit (accrual basis)b

Less: Budget outlays not in net operating cost (cash basis)c

(318)

116 

Net operating cost $ (450)

a Comprised of $185 billion in Social Security surplus and $1 billion for Postal Service surplus.

b

 For example, increase in accrued Federal Employee and Veteran Benefits.

c

 For example, purchase of capital assets (e.g., property, plant, and equipment).

Note: Data are from the Monthly Treasury Statement as of the fiscal year end 2006 and the fiscal year 2006 Financial Report.

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What We Own and What We Owe (i.e., the Balance Sheet)

What We Own (i.e., Federal Assets)

Assets represent items of economic value owned by the federal government. Figure 3 provides 

a breakout of the assets that are reported with dollar values in the Balance Sheet in the Financial 

Report. As of September 30, 2006, the federal government reported total federal assets of about 

$1,497 billion. In addition to these assets, certain federal assets are instead reported in physical 

quantities: stewardship land (e.g., national parks and forests) and heritage assets (e.g., national 

memorials, historic structures, and museum collections).9

Figure 3: Components of Total Federal Assets Reported as of September 30, 2006

15%

Loans

receivable

19%

Inventories

and

related

property

20%

All other assets

46%

Property,

plant, and

equipment

Source: The Department of the Treasury.

Asset Dollars in billions

Total $1,497

Loans receivable $221

Inventories and related property $281

All other assets $306

Property, plant, and equipment $689

Note: Data are from the fiscal year 2006 Financial Report. 

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What We Owe (i.e., Federal Liabilities)

As of September 30, 2006, the federal government reported total federal liabilities of about 

$10,413 billion. These liabilities represent a financial obligation, debt, claim or probable potential 

loss that is reported in the Balance Sheet in the Financial Report. Figure 4 shows the components 

of these liabilities.

Figure 4: Components of Total Federal Liabilities Reported as of September 30, 2006

8%

All other liabilities

45%

Federal

employee and

veteran benefits

payable

47%

Federal debt

securities held

by the public

and accrued

interest

Source: The Department of the Treasury.

Liability Dollars in billions

Federal debt securities held by the public

and accrued interesta $4,868

Federal employee and veteran

benefits payable

$4,679

All other liabilities $866

Total $10,413

a This consists of $4,866 billion of gross federal debt minus $40 billion of net unamortized discounts plus $42 billion of accrued interest payable.

Note: Data are from the fiscal year 2006 Financial Report.

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Gross Federal Debt

As shown in Figure 5, gross federal debt, which totaled about $8,530 billion as of September 30, 

2006, consists of debt held by the public—$4,866 billion—and debt held by government accounts 

(referred to as intragovernmental debt holdings)—$3,664 billion.10 The federal government 

borrows excess cash receipts from earmarked (e.g., Social Security) and certain other activities to 

finance general government operations and, in exchange, issues special U.S. Treasury securities. 

Of the $3,664 billion of intragovernmental debt holdings, $1,995 billion or 54 percent is held 

by the Social Security Trust Funds and $335 billion or 9 percent is held by the Medicare Trust 

Funds. Intragovernmental debt holdings are not reported in the federal government’s Balance 

Sheet because under accounting principles they are treated as loans from one part of the federal 

government to another part of the federal government.11

Figure 5: Components of Gross Federal Debt as of September 30, 2006

Source: The Department of the Treasury.

Debt held by

the public $4,866

billion

$3,664

billion

Intragovernmental

debt holdings

Federal debt held by individual or institutional investors in the 

United States or abroad, state and local governments, and the 

Federal Reserve banking system.

Federal debt held by the federal government itself. Most of 

this debt is held by trust funds, such as Social Security and 

Medicare.

Note: Data are from the fiscal year 2006 Financial Report. 

As shown in Figure 6, debt held by the public is composed of debt held by the Federal Reserve 

banking system (Federal Reserve), by state and local governments, by domestic investors in the 

United States and by foreign and international investors abroad. Over the last several years, there 

has been an upward trend in the amount of Treasury securities held by foreign and international 

investors. The United States benefits from purchases of Treasury securities by foreign investors 

because such investors fill part of the U.S. government’s borrowing needs. However, the interest 

paid on this debt is sent abroad, which adds to the incomes of residents of other countries rather 

than to the incomes of U.S. residents. In addition, this increasing reliance on foreign investors to 

finance the deficits of the U.S. government presents potential risk to the U.S. economy, especially 

since the U.S. gross national saving rate is low by U.S. historical standards.

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Figure 6: Components of Debt Held by the Public as of September 30, 2006

16%

Federal

Reserve 44%

Foreign and

international

investors

40%

Domestic investors

and state and local

governments

Source: The Department of the Treasury.

Debt component Dollars in billions

Total $4,866

Federal Reserve $765

Domestic investors and state and local governments $1,961

Foreign and international investorsa $2,140

a

 Excluding the $765 billion of debt held by the Federal Reserve, foreign and international investors hold 52 percent of the remaining $4,101 billion of 

debt held by the public.

Note: Data are from the fiscal year 2006 Financial Report and the December 2006 Treasury Bulletin.

Historically, the Congress and the President have enacted laws to establish a limit on the amount 

of public debt that can be outstanding—referred to as the debt ceiling.12 The debt ceiling does not 

determine federal borrowing needs: these needs result from all of the revenue received and spending 

decisions the government makes as well as the performance of the economy. Whenever the federal 

government approaches the debt ceiling, the Congress and the President must eventually raise the 

ceiling to pay the government’s bills as they come due. As of September 30, 2006, the debt ceiling 

was $8,965 billion and the debt subject to the ceiling was $8,420 billion.13

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In addition to considering the federal government’s current financial condition, it is critical to 

look at other measures of the long-term fiscal outlook of the federal government. An evaluation of 

the nation’s long-term fiscal outlook should include not only liabilities included in the Financial 

Report but also the implicit promises embedded in current policy and the timing of these longer-term 

obligations and commitments in relation to the resources available under various assumptions.

Over the next few decades, the nation’s fiscal outlook will be shaped largely by known 

demographic trends and rising health care costs. As the baby-boom generation retires, federal 

spending on current retirement and health care programs—Social Security, Medicare, and 

Medicaid—will grow dramatically. A range of other federal fiscal commitments, some explicit and 

some representing implicit public expectations, also bind the nation’s fiscal future. Absent policy 

changes, a growing imbalance between expected federal spending and tax revenues will mean 

escalating and ultimately unsustainable federal deficits and debt levels.

There are various ways to consider and assess the long-term fiscal outlook. In this regard, 

information included in the Financial Report, and other information and analyses, can be used to 

more fully understand the nation’s long-term fiscal outlook, including

the Statement of Social Insurance,

major reported long-term fiscal exposures, and

long-term fiscal simulations.

•

•

•

The Long-Term Fiscal Outlook

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Statement of Social Insurance

The Statement of Social Insurance in the Financial Report displays the present value of 

projected revenues and expenditures for scheduled benefits of certain benefit programs that are 

referred to as social insurance (e.g., Social Security, Medicare). For these programs, projected 

expenditures for scheduled benefits exceed earmarked revenues by approximately $39 trillion 

in present value terms over the next 75 years. Stated differently, one would need approximately 

$39 trillion invested today to deliver on the currently promised benefits for the next 75 years. Table 3 

shows a simplified version of the Statement of Social Insurance by its primary components.

Table 3: Simplified Statement of Social Insurance as of January 1, 2006

Dollars in trillions

Source: The Department of the Treasury.

Present value of future revenue

(earmarked contributions,

taxes, and premiums)

Total

$50 

Present value of expenditures

for scheduled future

benefitsa (89)

Present value of future

expenditures in excess

of future revenueb ($39)

Medicare

Supplementary

Medical

Insurance – Part B

$5 

(18)

($13)

Medicare

Supplementary

Medical

Insurance – Part D

$2 

(10)

($8)

Medicare

Hospital

Insurance (Part A)

$11 

(22)

($11)

Social

Security

$32 

(39)

($7)

a These amounts include administrative expenses for the programs.

b Under current law, Social Security and Federal Hospital Insurance (Medicare Part A) payments are limited to amounts available to the respective trust funds.

Note: Data are from the fiscal year 2006 Financial Report. 

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Major Reported Long-Term Fiscal Exposures

GAO developed the concept of “fiscal exposures” to provide a framework for considering the 

wide range of responsibilities, programs, and activities that explicitly or implicitly expose the 

federal government to future spending.

The concept of fiscal exposures is meant to provide a broader perspective on long-term costs. 

Major reported long-term fiscal exposures in fiscal year 2006 with a present value totaling about 

$50 trillion consisted of $10 trillion of liabilities reported on the Balance Sheet, $1 trillion of other 

commitments and contingencies, and the $39 trillion of social insurance responsibilities, the 

last two of which are reported elsewhere in the Financial Report. This $50 trillion compares to 

$20 trillion in fiscal year 2000.

These large numbers are difficult to comprehend. Table 4 seeks to translate them into several 

figures and ratios that are more understandable.

Table 4: Understanding the Size of Major Reported Fiscal Exposures

Sources: GAO analysis of data from the Department of the Treasury, Federal Reserve Board, U.S. Census Bureau, and Bureau of Economic Analysis.

Major fiscal exposures

Percentage increase

147%

Per person 132%

Median household income 10%

Disposable personal income per capita 25%

Per full-time worker 143%

Per household 134%

Total household net worth 27%

 Ratio of fiscal exposures to net worth 94%

2006

$50.5 trillion

$170,000

$46,326

$31,519

$400,000

$440,000

$53.3 trillion

95 percent

2000

$20.4 trillion

$70,000

$41,990

$25,127

$165,000

$190,000

$42.0 trillion

Ratio of household burden to median income 4.5 9.5 112%

49 percent

Burden

Income

Note: Percentage increases reflect actual data and may differ from calculation of rounded numbers presented in table.

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Long-Term Fiscal Simulations

Another way to assess the U.S. government’s long-term fiscal outlook and the sustainability of 

federal programs is to run simulations of future revenues and costs for all federal programs, based 

on a continuation of current or proposed policy. The simulations GAO has published since 1992 

are designed to do that. As shown in Figure 7, GAO’s long-term simulations—which are neither 

forecasts nor predictions—continue to show ever-increasing long-term deficits resulting in a federal 

debt level that ultimately spirals out of control. The timing of deficits and the resulting debt buildup 

varies depending on the assumptions used, but under either optimistic (“Baseline extended”) or 

more realistic assumptions, the federal government’s current fiscal policy is unsustainable.

Figure 7: Unified Surpluses and Deficits as a Share of Gross Domestic Product (GDP) under Alternative 

Fiscal Policy Simulations

Percent of GDP

Source: GAO’s August 2006 analysis.

Fiscal year

-20

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

-15

-10

-5

0

5

Baseline Discretionary spending extended

grows with the economy

and all expiring tax

provisions extended

Note: Assumes currently scheduled Social Security benefits are paid in full throughout the simulation period.

Over the long term, the nation’s growing fiscal imbalance stems primarily from the aging 

of the population and rising health care costs. Absent significant changes on the spending or 

revenue sides of the budget or both, these long-term deficits will encumber a growing share of 

federal resources and test the capacity of current and future generations to afford both today’s 

and tomorrow’s commitments. Continuing on this unsustainable path will gradually erode, if not 

suddenly damage, our economy, our standard of living, and ultimately our domestic tranquility and 

national security.

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If, for example, as shown in Figure 8, it is assumed that recent tax reductions are made 

permanent and discretionary spending keeps pace with the growth of our economy, our longterm simulations suggest that by 2040 federal revenues may be adequate to pay little more than 

interest on debt held by the public and some Social Security benefits. Neither slowing the growth 

in discretionary spending nor allowing the tax provisions, including the tax cuts enacted in 2001 

and 2003, to expire—nor both together—would eliminate the imbalance.

Figure 8: Composition of Spending as a Share of GDP Assuming Discretionary Spending Grows with GDP 

after 2006 and All Expiring Tax Provisions Are Extended

0

10

20

30

40

50

2005 2015 2030 2040

Percent of GDP

Fiscal years

Source: GAO’s August 2006 analysis.

Net interest

Social Security

Medicare and Medicaid

All other spending

Revenue

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At some point, action will need to be taken to change the nation’s fiscal course. The sooner 

appropriate actions are taken, the sooner the miracle of compounding will begin to work for the 

federal budget rather than against it. Conversely, the longer that action to deal with the nation’s 

long-term fiscal outlook is delayed, the greater the risk that the eventual changes will be disruptive 

and destabilizing. Acting sooner rather than later will give us more time to phase in gradual 

changes, while also providing more time for those likely to be most affected to make compensatory 

changes.

The “fiscal gap” is a quantitative measure of long-term fiscal imbalance. Under GAO’s more 

realistic simulation, even if the federal government continued to borrow money from the public 

at the current share of the economy (i.e., GDP), closing the fiscal gap would require spending cuts 

or tax increases equal to 8 percent of the entire economy each year over the next 75 years, or a 

total of about $61 trillion in present value terms. To put this in perspective, closing the gap would 

require an immediate and permanent increase in federal tax revenues of more than 40 percent or 

an equivalent reduction in federal program spending (i.e., in all spending except for interest on the 

debt held by the public, which cannot be directly controlled).

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Although the long-term fiscal outlook is driven by rising health care costs and known 

demographics, we cannot ignore other government programs and activities. There is a need to 

engage in a fundamental review, reprioritization, and reengineering of the base of government. 

Aligning the federal government to meet the challenges and capitalize on the opportunities of 

the 21st century will require a fundamental review of what the federal government does, how 

it does it, and how it is financed. Many of the federal government’s current policies, programs, 

functions, and activities are based on conditions that existed decades ago, are not results-based, 

and are not well aligned with 21st century realities. We need to address the growing costs of the 

major entitlement programs and also review and reexamine all other major programs, policies, 

and activities on both the spending and the revenue side of the budget. Programs that run through 

the tax code—sometimes referred to as tax expenditures14—must be reexamined along with those 

that run through the spending side. As we move forward, the federal government needs to start 

making tough choices in setting priorities and linking resources and activities to results. Meeting 

our nation’s large, growing, and structural fiscal imbalance will require a multipronged approach:

increasing transparency in financial and budget reporting and in budget and legislative 

processes to highlight our long-term fiscal challenges;

reinstituting and strengthening budget controls for both spending and tax policies to deal 

with both near-term and longer-term deficits;

strengthening oversight of programs and activities including creating approaches to better 

facilitate the discussion of integrated solutions to crosscutting issues; and

reengineering and reprioritizing the federal government’s existing programs, policies, and 

activities to address 21st century challenges and capitalize on related opportunities.

In order to effectively address our long-term fiscal imbalance, fundamental reform of existing 

entitlement programs is essential. However, entitlement reform alone will not get the job done. 

We also need to reprioritize and constrain other federal government spending and generate more 

revenues—hopefully through a reformed tax system.

In November 2006, the Comptroller General of the United States provided the congressional 

leadership15 with recommendations, based on the work of GAO, for consideration for the agenda 

of the 110th Congress. These recommendations focused on three areas: (1) targets for near-term 

oversight, (2) policies and programs that are in need of fundamental reform and reengineering, 

and (3) governance issues. In addition, GAO’s 21st Century Challenges: Reexamining the Base of 

the Federal Government contains a suggested list of specific federal activities for reexamination, 

illustrative reexamination questions, and perspectives on various strategies, processes, and 

approaches, for congressional consideration stemming from our audit and evaluation work that 

can be used in reexamining the federal base.16Answers to these questions may draw on the work 

of GAO and others; however, only elected officials can and should decide which issues to address 

as well as how and when to address them. Addressing these problems will require tough choices, 

and our fiscal clock is ticking. As a result, the time to start is now, to help save our future.

•

•

•

•

A Way Forward

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Fiscal Stewardship GAO-07-362SP 15

1 Present value is the discounted value of a payment or stream of payments to be received or paid in the future, taking into 

consideration a specific interest or discount rate.

2 The consolidated financial statements are prepared based on generally accepted accounting principles which differ from 

budgetary reporting. Generally accepted accounting principles are based on accrual accounting whereas the budget is 

primarily cash-based. These differences are discussed in the Financial Report and in GAO, Understanding Similarities 

and Differences between Accrual and Cash Deficits, GAO-07-117SP (Washington, D.C.: December 2006). The Financial 

Report can be found at www.fms.treas.gov/fr/index.html.

3 For a guide to understanding the Financial Report, see GAO, Understanding the Primary Components of the Annual 

Financial Report of the United States Government, GAO-05-958SP (Washington, D.C.: September 2005).

4

 Revenues are reported in the Statement of Operations and Changes in Net Position in the Financial Report.

5

 As used in the Financial Report, earmarked funds are financed by specifically identified revenues and other financing 

sources (earmarked revenue) that remain available over time; are required by statute to be used for designated activities, 

benefits, or purposes (e.g., Social Security, Medicare, Unemployment, and Transportation trust funds); and must be accounted 

for separately from the federal government’s nonearmarked funds (i.e., general revenues). Earmarked funds revenue in 

the Financial Report includes $185 billion of intragovernmental interest, that is eliminated for consolidated reporting 

purposes. Earmarked funds are different from the budget terms “earmarked collections” and “earmarking”. Earmarked 

collections include trust fund receipts, special fund receipts, intragovernmental receipts, and offsetting collections credited 

to appropriation accounts. Earmarking refers to designating any portion of a lump-sum amount for particular purposes by 

means of legislative language or language included in congressional committee reports.

6

 Net Cost is reported in the Statement of Net Cost in the Financial Report. Nonearmarked funds net cost in the Financial 

Report includes $185 billion of intragovernmental interest, that is eliminated for consolidated reporting purposes.

7

 While the net operating cost and the unified budget deficit are based on the same underlying activities, in addition to the 

different bases of accounting, “Earmarked Funds Net Operating Revenue” includes programs (e.g., Medicare) in addition 

to those included in the “Off-budget surplus” (i.e., Social Security and Postal Service). Although earmarked funds in the 

aggregate run surpluses, some funds (e.g., Military Retirement Fund) run deficits.

8

 The Earmarked Funds Net Operating Revenue is the excess of revenues and of transfers from nonearmarked funds over 

net costs. The nonearmarked funds net operating cost is the excess of net costs and of transfers to earmarked funds over 

revenues.

9

 Stewardship land includes federally-owned land that is set aside for the use and enjoyment of current and future 

generations and land on which military bases are located. Heritage assets are federal government-owned assets that have 

one or more of the following characteristics—historical or natural significance, cultural, educational, or artistic importance, 

and significant architectural characteristics. Such assets are described in the Financial Report in Notes 24 and 25 to the 

Financial Statements.

10 Approximately $3,555 billion or 97 percent of intragovernmental debt holdings is held by earmarked funds.

11 For in-depth discussions on debt held by the public and intragovernmental debt holdings, see GAO, Financial Audit: 

Bureau of the Public Debt’s Fiscal Years 2006 and 2005 Schedules of Federal Debt, GAO-07-127 (Washington, D.C.: Nov. 

7, 2006) and GAO, Federal Debt: Answers to Frequently Asked Questions, An Update, GAO-04-485SP (Washington, D.C.: 

August 2004).

12 The public debt limit is established by 31 U.S.C. § 3101 (2000) as amended by Pub. L. No. 107-199, § 1, 116 Stat. 734 (2002), 

Pub. L. No. 108-24, 117 Stat. 710 (2003), Pub. L. No. 108-415, § 1, 118 Stat. 2337 (2004), and Pub. L. No. 109-182, 120 Stat. 289 

(2006).

13 Not all of the obligations issued by federal government agencies are subject to the debt ceiling because either they are 

not issued under chapter 31 of title 31, U.S.C., or their principal and interest are not guaranteed by the U.S. government 

(e.g., obligations issued by the Tennessee Valley Authority (TVA) under authority of section 15d(a) of the TVA Act of 1933, 

16 U.S.C. 831n-4(a) [2000]).

14 In addition to the reported net cost, the federal government foregoes tax revenues as a result of preferential provisions, 

such as tax exclusions, credits, and deductions. These revenue losses are referred to as tax expenditures.

15 GAO, Suggested Areas for Oversight for the 110th Congress, GAO-07-235R (Washington, D.C.: November 17, 2006).

16 GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, GAO-05-325SP (Washington, D.C.: 

February 2005).

Endnotes

198501-interior layout v15.indd 15 1/19/2007 8:38:09 AM
16 Fiscal Stewardship GAO-07-362SP

The Nation’s Long-Term Fiscal Outlook: September 2006 Update. GAO-06-1077R. Washington, 

D.C.: September 2006.

Understanding Similarities and Differences between Accrual and Cash Deficits. GAO-07-117SP. 

Washington, D.C.: December 2006.

Understanding Similarities and Differences between Accrual and Cash Deficits: Update for 

Fiscal Year 2006. GAO-07-341SP. Washington, D.C.: January 2007.

Understanding the Primary Components of the Annual Financial Report of the United States 

Government. GAO-05-958SP. Washington, D.C.: September 2005.

Financial Audit: Bureau of the Public Debt’s Fiscal Years 2006 and 2005 Schedules of Federal 

Debt. GAO-07-127. Washington, D.C.: November 7, 2006.

Federal Debt: Answers to Frequently Asked Questions, An Update. GAO-04-485SP. Washington, 

D.C.: August 2004.

21st Century Challenges: Reexamining the Base of the Federal Government. GAO-05-325SP. 

Washington, D.C.: February 2005.

Suggested Areas for Oversight for the 110th Congress. GAO-07-235R. Washington, D.C.: 

November 17, 2006.

(198501)

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Fiscal Stewardship GAO-07-362SP 17

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