MANAGEMENT’S DISCUSSION AND ANALYSIS 8

MANAGEMENT’S DISCUSSION AND 

ANALYSIS

Introduction 

The Fiscal Year 2018 Financial Report of the United States Government (Financial Report) provides the President, 

Congress, and the American people with a comprehensive view of the federal government’s financial position and condition, 

and discusses important financial issues and significant conditions that may affect future operations, including the need to 

achieve fiscal sustainability over the medium and long term.

Pursuant to 31 United States Code (U.S.C.) § 331(e)(1), the Department of the Treasury (Treasury), in cooperation with 

the Office of Management and Budget (OMB), must submit an audited (by the Government Accountability Office or GAO) 

financial statement for the preceding fiscal year, covering all accounts and associated activities of the executive branch of the 

United States (U.S.) government1 to the President and Congress no later than six months after the September 30 fiscal yearend. 

The Financial Report is prepared from the financial information provided by 158 federal consolidation entities (see 

organizational chart on the next page and Appendix A). As it has for the past 21 years, GAO issued a disclaimer of opinion 

on the accrual-based, consolidated financial statements for the fiscal years ended September 30, 2018 and 2017. GAO also 

issued a disclaimer of opinion on the sustainability financial statements, which consist of the 2018 and 2017 Statements of 

Long-Term Fiscal Projections (SLTFP); the 2018, 2017, 2016, 2015, and 2014 Statements of Social Insurance (SOSI); and 

the 2018 and 2017 Statements of Changes in Social Insurance Amounts (SCSIA). A disclaimer of opinion indicates that 

sufficient information was not available for the auditors to determine whether the reported financial statements were fairly 

presented in accordance with U.S. Generally Accepted Accounting Principles (GAAP). In fiscal year 2018, 352 of the 40 

most significant entities earned unmodified (“clean”) opinions on their financial statements.

The fiscal year 2018 Financial Report consists of: 

x Management’s Discussion and Analysis (MD&A), which provides management’s perspectives on and analysis 

of information presented in the Financial Report, such as financial and performance trends;

x Principal financial statements and the related notes to the financial statements;

x Required Supplementary Information (RSI), Required Supplementary Stewardship Information (RSSI), and 

Other Information; and

x GAO’s audit report. 

This Financial Report addresses the government’s financial activity and results as of and for the fiscal years ended 

September 30, 2018 and 2017. Note 26, Subsequent Events discusses events that occurred after the end of the fiscal year

which may affect the government’s financial position and condition.

In addition, the Results in Brief and Executive Summary to this Financial Report provides a quick reference to the key 

issues in the Financial Report and an overview of the government's financial position and condition.

Mission & Organization

The government’s fundamental mission is derived from the Constitution: “...to form a more perfect union, establish 

justice, insure domestic tranquility, provide for the common defense, promote the general welfare and secure the blessings of

liberty to ourselves and our posterity.” The government’s functions have evolved over time to include health care, income 

security, veterans benefits and services, housing and transportation, security, and education. Exhibit 1 provides an overview 

of how the U.S. government is organized.

1 The Government Management Reform Act of 1994 has required such reporting, covering the executive branch of the Government, beginning with financial 

statements prepared for fiscal year 1997. The consolidated financial statements include the legislative and judicial branches. 2 The 35 entities include the Department of Health and Human Services, which received disclaimers of opinion on its 2018, 2017, 2016, 2015, and 2014 

SOSI and on its 2018 and 2017 SCSIA.
9 MANAGEMENT’S DISCUSSION AND ANALYSIS

Exhibit 1 

THE UNITED STATES GOVERNMENT

EXECUTIVE BRANCH

THE PRESIDENT

THE VICE PRESIDENT

EXECUTIVE OFFICE OF THE PRESIDENT

White House Office

Office of the Vice President

Council of Economic Advisers

Council on Environmental Quality

National Security Council

Office of Administration

Office of Management and Budget

Office of National Drug Control Policy

Office of Policy Development

Office of Science and Technology Policy

Office of the U.S. Trade Representative

LEGISLATIVE BRANCH

THE CONGRESS

SENATE HOUSE

Architect of the Capitol

U.S. Botanic Garden

Government Accountability Office

Government Publishing Office

Library of Congress

Congressional Budget Office

U.S. Capitol Police

JUDICIAL BRANCH

THE SUPREME COURT 

OF THE U.S.

U.S. Courts of Appeals

U.S. District Courts

Territorial Courts

U.S. Court of International Trade

U.S. Court of Federal Claims

Administrative Office of the U.S. Courts

Federal Judicial Center

U.S. Sentencing Commission

OTHER SIGNIFICANT CONSOLIDATION ENTITIES 

ENVIRONMENTAL PROTECTION AGENCY FEDERAL COMMUNICATIONS COMMISSION

GENERAL SERVICES ADMINISTRATION FEDERAL DEPOSIT INSURANCE CORPORATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION GENERAL FUND OF THE U.S. GOVERNMENT

NATIONAL SCIENCE FOUNDATION MILLENNIUM CHALLENGE CORPORATION

OFFICE OF PERSONNEL MANAGEMENT NATIONAL CREDIT UNION ADMINISTRATION

SMALL BUSINESS ADMINISTRATION NATIONAL RAILROAD RETIREMENT INVESTMENT TRUST

SOCIAL SECURITY ADMINISTRATION OVERSEAS PRIVATE INVESTMENT CORPORATION

U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT PENSION BENEFIT GUARANTY CORPORATION

U.S. NUCLEAR REGULATORY COMMISSION RAILROAD RETIREMENT BOARD

SECURITY ASSISTANCE ACCOUNTS SECURITIES AND EXCHANGE COMMISSION

EXPORT-IMPORT BANK OF THE U.S. SMITHSONIAN INSTITUTION

FARM CREDIT SYSTEM INSURANCE CORPORATION TENNESSEE VALLEY AUTHORITY

U.S. POSTAL SERVICE

OTHER CONSOLIDATION ENTITIES ARE LISTED IN APPENDIX A OF THIS FINANCIAL REPORT

DEPARTMENT

OF

VETERANS

AFFAIRS

DEPARTMENT

OF THE

TREASURY 

DEPARTMENT

OF

TRANSPORTATION

DEPARTMENT

OF

STATE

DEPARTMENT

OF

LABOR

DEPARTMENT

OF HOUSING

AND URBAN 

DEVELOPMENT

DEPARTMENT

OF THE

INTERIOR

DEPARTMENT

OF

JUSTICE

DEPARTMENT

OF HOMELAND 

SECURITY 

DEPARTMENT

OF HEALTH

AND HUMAN 

SERVICES

DEPARTMENT

OF

DEFENSE

DEPARTMENT

OF

EDUCATION

DEPARTMENT

OF

ENERGY 

DEPARTMENT

OF

COMMERCE

DEPARTMENT

OF

AGRICULTURE

SIGNIFICANT CONSOLIDATION ENTITIES

THE CONSTITUTION
MANAGEMENT’S DISCUSSION AND ANALYSIS 10

The Government’s Financial Position and Condition 

This Financial Report presents the government’s financial position at the end of the fiscal year, explains how and why 

the financial position changed during the year, and discusses the government’s financial condition and how it may change in 

the future.
11 MANAGEMENT’S DISCUSSION AND ANALYSIS

Table 1 on the previous page and the following summarize the federal government’s financial position:

x During fiscal year 2018, the budget deficit increased by 17.0 percent and gross cost increased by 4.4 percent, while 

net cost, tax and other revenues, and net operating cost each increased by less than one percent. 

x The government’s gross costs of $4.8 trillion, less $392.8 billion in revenues earned for goods and services provided 

to the public (e.g., Medicare premiums, national park entry fees, and postal service fees), plus $125.2 billion in net 

losses from changes in assumptions (e.g., interest rates, inflation, disability claims rates) yields the government’s net 

cost of $4.5 trillion, a slight increase of $10.1 billion or 0.2 percent over fiscal year 2017.

x Deducting $3.4 trillion in tax and other revenues, with some adjustment for unmatched transactions and balances, 

results in a “bottom line” net operating cost of $1.2 trillion for fiscal year 2018, an increase of $5.4 billion or 0.5 

percent over fiscal year 2017.

x Comparing total 2018 government assets of $3.8 trillion to total liabilities of $25.4 trillion (comprised mostly of 

$15.8 trillion in federal debt held by the public and accrued interest payable3

, and $8.0 trillion of federal employee 

and veterans benefits payable) yields a negative net position of $21.5 trillion. 

x The budget deficit is primarily financed through borrowing from the public. As of September 30, 2018, debt held by 

the public, excluding accrued interest, was $15.8 trillion. This amount, plus intragovernmental debt ($5.8 trillion) 

equals gross federal debt, which, with some adjustments, is subject to the statutory debt limit. As of September 30, 

2018, the government’s total debt subject to the debt limit was $21.5 trillion. The statutory debt limit was most 

recently suspended through March 1, 2019.

This Financial Report also contains information about projected impacts on the government’s future financial condition. 

Under federal accounting rules, social insurance amounts as reported in both the SLTFP and in the SOSI are not considered 

liabilities of the government. From Table 1:

x The SLTFP shows that the present value (PV)4 of total non-interest spending, including Social Security, Medicare, 

Medicaid, defense, and education, etc.), over the next 75 years, under current policy, is projected to exceed the PV 

of total receipts by $46.2 trillion (total federal non-interest net expenditures from Table 1). 

x The SOSI shows that the PV of the government’s expenditures for Social Security and Medicare Parts A, B and D, 

and other social insurance programs over 75 years is projected to exceed social insurance revenues5 by about $53.8 

trillion, a $4.8 trillion increase over 2017 social insurance projections.

x The two sustainability measures in Table 1 differ primarily because total non-interest net expenditures from the 

SLTFP include the effects of general revenues and non-social insurance spending, neither of which is included in the 

SOSI. 

The government’s current financial position and long-term financial condition can be evaluated both in dollar terms and 

in relation to the economy as a whole. Gross Domestic Product (GDP) is a measure of the size of the nation’s economy in 

terms of the total value of all final goods and services that are produced in a year. Considering financial results relative to 

GDP is a useful indicator of the economy’s capacity to sustain the government’s many programs. For example:

x The budget deficit (i.e., including the consolidated receipts and outlays from federal funds and the Social Security 

Trust Fund) increased from $665.7 billion in fiscal year 2017 to $779.0 billion in fiscal year 2018. The deficit-toGDP ratio in 2018 was 3.9 percent, an increase from 3.5 percent in fiscal year 2017 and above the 3.2 percent 

average over the past 40 years.6

x The budget deficit is primarily financed through borrowing from the public. As of September 30, 2018, the $15.8 

trillion in debt held by the public, excluding accrued interest, equates to approximately 78 percent of GDP.

x The 2018 SOSI projection of $53.8 trillion net PV excess of expenditures over receipts over 75 years represents 

about 4.0 percent of the PV of GDP over 75 years. The excess of total projected non-interest spending over receipts 

of $46.2 trillion from the SLTFP represents 3.3 percent of GDP over 75 years. As discussed in this Financial 

Report, changes in these projections can, in turn, have a significant impact on projected debt as a percent of GDP. 

x To prevent the debt-to-GDP ratio from rising over the next 75 years, a combination of non-interest spending 

reductions and receipts increases that amounts to 4.1 percent of GDP on average is needed (2.0 percent of GDP on 

average in the 2017 projections). The fiscal gap represents 21.9 percent of 75-year present value receipts and 18.6

percent of 75-year present value non-interest spending.

3 On the government’s Balance Sheet, debt held by the public and accrued interest payable consists of Treasury securities, net of unamortized discounts and 

premiums, and accrued interest payable. The “public” consists of individuals, corporations, state and local governments, Federal Reserve Banks, foreign 

governments, and other entities outside the federal government.

4 Present values recognize that a dollar paid or collected in the future is worth less than a dollar today because a dollar today could be invested and earn 

interest. To calculate a present value, future amounts are thus reduced using an assumed interest rate, and those reduced amounts are summed. 5 Social Security is funded by the payroll taxes and revenue from taxation of benefits. Medicare Part A is funded by the payroll taxes, revenue from taxation 

of benefits, and premiums that support those programs. Medicare Parts B and D are primarily financed by general revenues and premiums. By accounting 

convention, these general revenues are eliminated in consolidation at the governmentwide level and, as such, are not included in the SOSI. For the fiscal year 

2018 and 2017 SOSI, the amounts eliminated totaled $32.9 trillion and $30.0 trillion, respectively. 6 Final Monthly Treasury Statement (as of September 30, 2018 and 2017), Joint Statement of Treasury Secretary Steven T. Mnuchin and OMB Director 

Mick Mulvaney on Budget Results for Fiscal Year 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS 12

Fiscal Year 2018 Financial Statement Audit Results

For fiscal year 2018, GAO issued a disclaimer of audit opinion on the accrual-based, governmentwide financial 

statements, as it has for the past 21 years, due to certain material weaknesses in internal control over financial reporting and 

other limitations on the scope of its work. In addition, GAO issued a disclaimer of opinion on the sustainability financial 

statements due to significant uncertainties primarily related to the achievement of projected reductions in Medicare cost 

growth and certain other limitations. GAO’s audit report on page 226 of this Financial Report, discusses GAO’s findings.

22 of the 24 entities required to issue audited financial statements under the Chief Financial Officers (CFO) Act

received unmodified audit opinions, as did 13 of 16 additional significant reporting entities (see Table 10 and Appendix A).7

The Governmentwide Reporting Entity

This Financial Report includes the financial status and activities of the executive, legislative, and judicial branches of 

the federal government. Statement of Federal Financial Accounting Standards (SFFAS) No. 47, Reporting Entity, provides 

criteria for identifying organizations that are consolidation entities, disclosure entities, and related parties. Such criteria are 

summarized in Note 1A and in Appendix A, which lists the entities included in this Financial Report by these categories. The

assets, liabilities, results of operations, and related activity for consolidation entities are consolidated in the financial 

statements.

The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie 

Mac) meet the criteria for disclosure entities and, consequently, are not consolidated into the government’s financial 

statements. However, the values of the investments in such entities, changes in value, and related activity with these entities 

are included in the consolidated financial statements. The Federal Reserve System (FR System) is a disclosure entity and is 

not consolidated into the government’s financial statements. See Note 1A—Significant Accounting Policies, Reporting Entity 

and Note 25—Disclosure Entities and Related Parties for additional information. In addition, per SFFAS No. 31, Accounting 

for Fiduciary Activities, fiduciary funds are not consolidated in the government financial statements.8

Most significant reporting entities prepare financial reports that include financial and performance related information, 

as well as Annual Performance Reports. More information may be obtained from entities’ websites indicated in Appendix A 

and at www.performance.gov.

The following pages contain a more detailed discussion of the government’s financial results for fiscal year 2018, the 

budget, the economy, the debt, and a long-term perspective about fiscal sustainability, including the government’s ability to 

meet its social insurance benefits obligations. The information in this Financial Report, when combined with the Budget of 

the U.S. Government (Budget), collectively presents information on the government’s financial position and condition.

Accounting Differences Between the Budget and the Financial 

Report

Each year, the Administration issues two reports that detail the government’s financial results: the Budget and this 

Financial Report. The exhibit on the following page provides the key characteristics and differences between the two 

documents.

Treasury generally prepares the financial statements in this Financial Report on an accrual basis of accounting as 

prescribed by GAAP for federal entities.9 These principles are tailored to the government’s unique characteristics and 

circumstances. For example, entities prepare a uniquely structured “Statement of Net Cost,” which is intended to present net 

government resources used in its operations. Also, unique to government is the preparation of separate statements to 

reconcile differences and articulate the relationship between the budget and financial accounting results.

7 The 22 entities include the Department of Health and Human Services, which received disclaimers of opinions on its 2018, 2017, 2016, 2015, and 2014, 

SOSI and its 2018 and 2017 SCSIA. The 13 entities include the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration 

(NCUA), and the Farm Credit System Insurance Corporation (FCSIC), which operate on a calendar year basis (December 31 year-end). Statistic reflects 

2017 audit results for these organizations if 2018 results are not available. 8 See Note 21—Fiduciary Activities

9 Under GAAP, most U.S. government revenues are recognized on a ‘modified cash’ basis, (see Financial Statement Note 1.B). The Statement of Social 

Insurance presents the present value of the estimated future revenues and expenditures for scheduled benefits over the next 75 years for the Social Security, 

Medicare, Railroad Retirement programs; and 25 years for the Black Lung program. The Statement of Long-Term Fiscal Projections presents the present 

value of the projected future receipts and non-interest spending for the federal government. 
13 MANAGEMENT’S DISCUSSION AND ANALYSIS

Budget of the U.S. Government Financial Report of the U.S. Government

Prepared primarily on a “cash basis”

x Initiative-based and prospective: focus on 

current and future initiatives planned and 

how resources will be used to fund them.

x Receipts (“cash in”), taxes and other 

collections recorded when received.

x Outlays (“cash out”), largely recorded when 

payment is made. 

Prepared on an “accrual and modified cash basis”

x Entity-based and retrospective – prior and present 

resources used to implement initiatives.

x Revenue: Tax revenue (more than 90 percent of total 

revenue) recognized on modified cash basis (see Financial 

Statement Note 1.B). Remainder recognized when earned, 

but not necessarily received.

x Costs: recognized when incurred, but not necessarily paid.

Budget Deficit vs. Net Operating Cost

The budget deficit is measured as the excess of outlays, or payments made by the government, over receipts, or cash 

received by the government. Net operating cost, on an accrual basis, is the excess of costs (what the government has incurred,

but has not necessarily paid) over revenues (what the government has collected and expects to collect, but has not necessarily

received). As shown in Chart A, net operating cost typically exceeds the budget deficit due largely to the inclusion of cost 

accruals associated with increases in estimated liabilities for the government’s postemployment benefit programs for its 

military and civilian employees and veterans as well as environmental liabilities. 

The government’s primarily cash-based10 budget deficit increased by $113.3 billion (about 17.0 percent) from 

approximately $665.7 billion in fiscal year 2017 to about $779.0 billion in fiscal year 2018 due to lower growth in receipts 

compared to the increase in outlays in fiscal year 2018. The $13.8 billion (0.4 percent) increase in receipts can be attributed 

primarily to higher net individual income tax receipts, excise taxes, social insurance and retirement receipts, and customs 

duties. Outlays increased $127.1 billion (3.2 percent). Contributing to the increase over fiscal year 2017 were higher outlays 

for Defense, Medicaid, Social Security, disaster relief and flood insurance, Refundable Premium Tax Credits and cost sharing 

reductions, interest on the Treasury debt held by the public (public debt), and lower government-sponsored enterprises’ 

(GSE) receipts (i.e., dividends from Fannie Mae and Freddie Mac), which are an offset to outlays.11

The Treasury Department’s September 2018 Monthly Treasury Statement (MTS) is the source of receipts, spending, 

and deficit information for this Report. The MTS presents primarily cash-based spending, or outlays, for the fiscal year in a 

number of ways, including by month, by entity, and by budget function classification. The federal budget is divided into 

approximately 20 categories – or budget functions - as a means of organizing federal spending by primary purpose (e.g., 

National Defense, Transportation, Health). Multiple entities may contribute to one or more budget functions, and a single 

10 Interest outlays on Treasury debt held by the public are recorded in the budget when interest accrues, not when the interest payment is made. For federal 

credit programs, outlays are recorded when loans are disbursed, in an amount representing the present value cost to the government, commonly referred to as 

credit subsidy cost. Credit subsidy cost excludes administrative costs. 11 10/15/18 press release -- Joint Statement of Treasury Secretary Steven T. Mnuchin and OMB Director Mick Mulvaney on Budget Results for Fiscal Year 

2018.
MANAGEMENT’S DISCUSSION AND ANALYSIS 14

budget function may be associated with only one entity. For example, the Department of Defense (DOD), Department of 

Homeland Security (DHS), the Department of Energy (DOE), and multiple other entities administer programs that are critical 

to the broader functional classification of National Defense. DOD, the Office of Personnel Management (OPM), and many 

other entities also administer Income Security programs (e.g., retirement benefits, housing, financial assistance). By 

comparison, the Medicare program is a budget function category unto itself and is administered exclusively at the federal 

level by the Department of Health and Human Services (HHS). Federal spending information by budget function and other 

categorizations may be found in the September 2018 MTS.12

The government’s largely accrual-based net operating cost remained largely unchanged at $1.2 trillion increasing by 

$5.4 billion (0.5 percent) during fiscal year 2018. As explained below, net operating costs are affected by both changes in 

revenues and costs.

Table 2 provides a summary of the items reported in the Reconciliation of Net Operating Cost and Budget Deficit,

which articulates the relationship between the government’s accrual-based net operating cost and the primarily cash-based 

budget deficit. From Table 2, the $380.0 billion net difference between the government’s budget deficit and net operating 

cost for fiscal year 2018, is mostly attributable to: (1) a $282.2 billion net increase in liabilities for federal employee and 

veteran benefits payable, (2) a $112.8 billion increase in environmental and disposal liabilities; and (3) several offsetting 

items, including, but not limited to a $32.3 billion decrease in insurance and guarantee program liabilities and a $15.9 billion 

increase in Accounts Payable. These affect net operating cost, but not the budget deficit.

12 Final Monthly Treasury Statement for Fiscal Year 2018 through September 30, 2018 and Other Periods.
15 MANAGEMENT’S DISCUSSION AND ANALYSIS

The Government’s Net Position: “Where We Are”

The government’s financial position and condition have traditionally been expressed through the Budget, focusing on 

surpluses, deficits, and debt. However, this primarily cash-based discussion of the government’s net outlays (deficit) or net 

receipts (surplus) tells only part of the story. The government’s accrual-based net position, (the difference between its assets 

and liabilities), and its “bottom line” net operating cost (the difference between its revenues and costs) are also key financial 

indicators. 

Costs and Revenues 

The government’s Statement of Operations and Changes in Net Position, much like a corporation’s income statement, 

shows the government’s “bottom line” and its impact on net position (i.e., assets net of liabilities). To derive the 

government’s “bottom line” net operating cost, the Statement of Net Cost first shows how much it costs to operate the federal 

government, recognizing expenses when incurred, regardless of when payment is made (accrual basis). It shows the 

derivation of the government’s net cost or the net of: (1) gross costs, or the costs of goods produced and services rendered by

the government, (2) the earned revenues generated by those goods and services during the fiscal year, and (3) gains or losses 

from changes in actuarial assumptions used to estimate certain liabilities. This amount, in turn, is offset against the 

government’s taxes and other revenue reported in the Statement of Operations and Changes in Net Position to calculate the 

“bottom line” or net operating cost. 13

Table 3 shows that the government’s “bottom line” net operating cost remained largely unchanged during 2018 at $1.2 

trillion increasing only $5.4 billion (0.5 percent), during the fiscal year. This slight increase is due mostly to a $10.1 billion 

(0.2 percent) increase in entity net costs, which slightly more than offset a $9.7 billion (0.3 percent) increase in tax and other 

revenues over the past fiscal year as discussed in the following.

Gross Cost and Net Cost 

The Statement of Net Cost starts with the government’s total gross costs of $4.8 trillion, subtracts revenues earned for 

goods and services provided (e.g., Medicare premiums, national park entry fees, and postal service fees), and adjusts the 

balance for gains or losses from changes in actuarial assumptions used to estimate certain liabilities, including federal 

employee and veterans benefits to derive its net cost of $4.5 trillion (See Chart C), a $10.1 billion (0.2 percent) increase over 

fiscal year 2017.

Typically, the annual change in the government’s net cost is impacted by a variety of offsetting increases and decreases 

across entities. For example, offsetting changes in net cost during fiscal year 2018 included: 

x Entities administering federal employee and veterans benefits programs employ a complex series of assumptions, 

including but not limited to interest rates, beneficiary eligibility, life expectancy, and medical cost levels, to make 

actuarial projections of their long-term benefits liabilities. Changes in these assumptions can result in either losses 

(net cost increases) or gains (net cost decreases). Across the government, these net losses from changes in 

assumptions amounted to $125.2 billion in fiscal year 2018, a loss decrease (and a corresponding net cost decrease) 

of $231.3 billion compared to fiscal year 2017. The primary entities that administer programs impacted by these 

assumptions – typically federal employee pension and benefit programs – are the OPM, Department of Veterans 

Affairs (VA), and DOD. These entities recorded losses from changes in assumptions in the amounts of $26.2 billion, 

$79.2 billion, and $16.8 billion, respectively – all decreased amounts compared to 2017.

13 As shown in Table 3, net operating cost includes an adjustment for unmatched transactions and balances, which represent unreconciled differences in 

intragovernmental activity and balances between federal entities. These amounts are described in greater detail in the Other Information section of this 

Financial Report.
MANAGEMENT’S DISCUSSION AND ANALYSIS 16

o These actuarial estimates and the resulting gains or losses from changes in assumptions can sometimes 

cause significant swings in total entity costs from year to year. For example, for fiscal year 2018, changes 

in net cost at VA ($132.8 billion decrease), OPM ($66.2 billion decrease), and DOD ($33.0 billion 

increase), were impacted by the corresponding changes in gains or losses from assumption changes at these 

entities. 

x At DOD, the $33.0 billion net cost 

increase includes the net effect of a $39.2 

billion decrease in earned revenues across 

the department, as well as increases in the 

net costs of procurement, military 

personnel and research and development 

(R&D). These increases were partially 

offset by a decrease in losses from 

changes in assumptions referenced above 

(net cost decrease), and a decrease in costs 

of military operations, readiness, and 

support; 

x $56.4 billion and $39.5 billion net cost 

increases at HHS and the Social Security 

Administration (SSA), respectively, were 

primarily due to cost increases of the 

benefits programs that these entities 

administer (HHS – Medicare and 

Medicaid programs, SSA – Old-Age, 

Survivors, and Disability Insurance 

(OASDI) programs);

x A $99.6 billion net cost increase at DOE

largely due to refined environmental 

liability estimates, including those for 

Waste Treatment and Immobilization 

Plant construction, operating costs, tank 

farm retrieval, and closure costs at DOE’s 

Hanford site; 

x A $20.2 billion net cost decrease at the 

Pension Benefit Guaranty Corporation 

(PBGC) stems mostly from higher interest 

rate factors used to measure liabilities for 

the single- and multi-employer programs; 

and

x A $61.0 billion cost increase in interest on 

debt held by the public due largely to an 

increase in the debt and average interest rates, as well as inflation adjustments on certain Treasury securities. Interest 

costs have increased by 20.6 percent in 2018 from 2017 and by 37.4 percent over the past five years.

Chart B shows the composition of the government’s net cost. In fiscal year 2018, nearly three fourths of total net 

cost came from HHS, SSA, DOD, and VA. Interest on Treasury securities (i.e., debt) held by the public contributed an 

additional 8 percent, and the other entities included in the government’s fiscal year 2018 Statement of Net Cost 

accounted for a combined 21 percent of the government’s total net cost for fiscal year 2018. Chart C shows the five-year 

trend in these costs. These entities have consistently incurred the largest entity shares of the government’s total net cost 

in recent years. As indicated above, HHS and SSA net costs for fiscal year 2018 ($1.1 trillion and $1.0 trillion, 

respectively) are attributable to major social insurance programs administered by these entities. DOD net costs of $698.4 

billion relate primarily to operations, readiness, and support; personnel; research; procurement; and retirement and health 

benefits. VA costs of $346.9 billion support health, education and other benefits programs for our nation’s veterans. The 

$132.8 billion decrease in VA net cost during fiscal year 2018 is primarily due to the decrease in losses from changes in 

actuarial assumptions as referenced earlier. From Chart C, over the past five years, HHS, SSA, and Interest costs have 

increased 20.1 percent, 14.6 percent, and 37.4 percent, respectively.

B
17 MANAGEMENT’S DISCUSSION AND ANALYSIS

Tax and Other Revenues 

As noted earlier, tax and other revenues from the Statement of Operations and Changes in Net Position are deducted 

from total net cost to derive the government’s 

“bottom line” net operating cost. Chart D shows 

that total tax and other revenue increased slightly 

by $9.7 billion or 0.3 percent to $3.4 trillion for 

fiscal year 2018. This increase is attributable 

mainly to an overall growth in individual income 

tax collections, partially offset by reduced estate 

and corporate income tax collections and deposit of 

earnings from the FR System.14 Earned revenues 

from Table 3 are not considered “taxes and other 

revenue” and, thus, are not shown in Chart D. 

Individual income tax and tax withholdings and 

corporate income taxes accounted for about 82.5 

percent and 6.2 percent of total revenue, 

respectively in fiscal year 2018; other revenues 

from Chart D include Federal Reserve earnings, 

excise taxes, unemployment taxes, and customs 

duties.

As previously shown in Table 3, the increases in net cost and tax and revenues almost entirely offset each other, 

resulting in the government’s bottom line net operating cost remaining largely unchanged at $1.2 trillion for fiscal year 2018.

Tax Expenditures

Tax and other revenues reported reflect the effects of tax expenditures, which are special exclusions, exemptions,

deductions, tax credits, preferential tax rates, and tax deferrals that allow individuals and businesses to reduce taxes they may

otherwise owe. Tax expenditures may be viewed as alternatives to other policy instruments, such as spending or regulatory 

programs. For example, the government supports college attendance through both spending programs and tax expenditures. 

The government uses Pell Grants to help low- and moderate-income students afford college and allows certain funds used to 

meet college expenses to grow tax free in special college savings accounts. Tax expenditures may include deductions and 

exclusions which reduce the amount of income subject to tax (e.g., deductions for personal residence mortgage interest). Tax 

credits, which reduce tax liability dollar for dollar for the amount of credit (e.g., child tax credit), are also considered tax

expenditures. Tax expenditures may also allow taxpayers to defer tax liability.

Receipts in the calculation of surplus or deficit, and tax revenues in the calculation of net position, reflect the effect of

tax expenditures. As discussed in more detail in the Other Information section of this Financial Report, tax expenditures will 

generally lower federal government receipts although tax expenditure estimates do not necessarily equal the increase in 

Federal revenues (or the change in the budget balance) that would result from repealing these special provisions.

Tax expenditures are reported annually in the Analytical Perspectives of the Budget. In addition, current and past tax 

expenditure estimates and descriptions can be found at the following location from the U.S. Treasury’s Office of Tax Policy: 

https://home.treasury.gov/policy-issues/tax-policy/tax-expenditures.

14 Fiscal year 2018 Department of the Treasury Agency Financial Report, p. 37
MANAGEMENT’S DISCUSSION AND ANALYSIS 18

Assets and Liabilities 

The government’s net position at the end of the year is derived by netting the government’s assets against its liabilities, 

as presented in the Balance Sheet (summarized in Table 4). The Balance Sheet does not include the financial value of the

government’s sovereign powers to tax, regulate commerce, or set monetary policy or value of nonoperational resources of the 

government, such as national and natural resources, for which the government is a steward. In addition, as is the case with the 

Statement of Operations and Changes in Net Position, the Balance Sheet includes a separate presentation of the portion of net 

position related to funds from dedicated collections. Moreover, the government’s exposures are broader than the liabilities 

presented on the Balance Sheet. The government’s future social insurance exposures (e.g., Medicare and Social Security) as 

well as other fiscal projections, commitments and contingencies, are reported in separate statements and disclosures. This 

information is discussed later in this MD&A section, the financial statements, and RSI sections of this Financial Report.

Assets 

As of September 30, 2018, the government’s $3.8 trillion in assets are comprised mostly of net loans receivable ($1.4 

trillion) and net property, plant, and equipment (PP&E) ($1.1 trillion).15 From Financial Statement Note 4, The Department 

of Education’s (Education’s) Federal Direct Student Loan Program accounted for $1.1 trillion (78.6 percent) of total net loans 

receivable. Education’s direct student loan program receivables balances have grown by more than 190 percent since fiscal 

year 2011 largely due to increased direct loan disbursements, attributable to the continued effect of 2010 legislation requiring 

a transition for new loans from guaranteed student loans to full direct lending by Education.16

15 For financial reporting purposes, other than multi-use heritage assets, stewardship assets of the government are not recorded as part of Property, Plant, and 

Equipment. Stewardship assets are comprised of stewardship land and heritage assets. Stewardship land consists of public domain land (e.g., national parks, 

wildlife refuges). Heritage assets include national monuments and historical sites that among other characteristics are of historical, natural, cultural, 

educational, or artistic significance. See Note 24 – Stewardship Land and Heritage Assets. 16 With the enactment of the SAFRA Act, which was included as part of the Health Care and Education Reconciliation Act of 2010 (HCERA) (P. L. 111-

152), no new loans were originated under the Federal Family Education Loan (FFEL) Program (guaranteed loan program) since July 1, 2010. See

Department of Education fiscal year 2018 Agency Financial Report p. 50.
19 MANAGEMENT’S DISCUSSION AND ANALYSIS

Liabilities 

As indicated in Table 4 and Chart E, of the 

government’s $25.4 trillion in total liabilities, the 

largest liability is federal debt securities held by the 

public and accrued interest, the balance of which 

increased by $1.1 trillion (7.4 percent) to $15.8 

trillion as of September 30, 2018.

The other major component of the 

government’s liabilities is federal employee and 

veteran benefits payable (i.e., the government’s 

pension and other benefit plans for its military and 

civilian employees), which increased $282.2 billion 

(3.7 percent) during fiscal year 2018, to about $8.0 

trillion. This total amount is comprised of $2.5 

trillion in benefits payable for the current and 

retired civilian workforce, and $5.4 trillion for the 

military and veterans. OPM administers the largest 

civilian pension plan, covering nearly 2.7 million 

current employees and 2.6 million annuitants and 

survivors. The military pension plan covers about 

2.1 million current military personnel (including active service, reserve, and National Guard) and approximately 2.3 million 

retirees and survivors.

Federal Debt

The budget surplus or deficit is the difference between total federal spending and receipts (e.g., taxes) in a given year. 

The government borrows from the public (increases federal debt levels) to finance deficits. During a budget surplus (i.e., 

when receipts exceed spending), the government typically uses those excess funds to reduce the debt held by the public. The 

Statement of Changes in Cash Balance from Budget and Other Activities reports how the annual budget surplus or deficit 

relates to the federal government’s borrowing and changes in cash and other monetary assets. It also explains how a budget 

surplus or deficit normally affects changes in debt balances. 

The government’s publicly-held debt, or federal debt held by the public, and accrued interest (Balance Sheet liability)

totaled $15.8 trillion as of September 30, 2018. It is comprised of Treasury securities, such as bills, notes, and bonds, net of

unamortized discounts and premiums; and accrued interest payable. The “public” consists of individuals, corporations, state 

and local governments, Federal Reserve Banks (FRBs), foreign governments, and other entities outside the federal 

government. As indicated above, budget surpluses have typically resulted in borrowing reductions, and budget deficits have 

conversely yielded borrowing increases. However, the government’s debt operations are generally much more complex. Each 

year, trillions of dollars of debt mature and new debt is issued to take its place. In fiscal year 2018, new borrowings were 

$10.1 trillion, and repayments of maturing debt held by the public were $9.0 trillion, both increases from fiscal year 2017.
MANAGEMENT’S DISCUSSION AND ANALYSIS 20

Prior to 1917, Congress approved each debt 

issuance. In 1917, to facilitate planning in World 

War I, Congress and the President established a 

dollar ceiling for federal borrowing. With the 

Public Debt Act of 1941 (Public Law [P.L.] 77-7), 

Congress and the President set an overall limit of 

$65 billion on Treasury debt obligations that 

could be outstanding at any one time. Since then, 

Congress and the President have enacted a 

number of measures affecting the debt limit, 

including several in recent years. Congress and 

the President most recently suspended the debt 

limit from February 9, 2018 through March 1, 

2019. It is important to note that increasing or 

suspending the debt limit does not increase 

spending or authorize new spending; rather, it 

permits the United States to continue to honor 

pre-existing commitments to its citizens, 

businesses, and investors domestically and around 

the world. 

In addition to debt held by the public, the government has 

about $5.8 trillion in intragovernmental debt outstanding, which 

arises when one part of the government borrows from another. It

represents debt issued by the Treasury and held by government 

accounts, including the Social Security ($2.9 trillion) and 

Medicare ($301.0 billion) trust funds. Intragovernmental debt is 

primarily held in government trust funds in the form of special

nonmarketable securities by various parts of the government. 

Laws establishing government trust funds generally require 

excess trust fund receipts (including interest earnings) over 

disbursements to be invested in these special securities. Because 

these amounts are both liabilities of the Treasury and assets of 

the government trust funds, they are eliminated as part of the 

consolidation process for the governmentwide financial 

statements (see Note 11). When those securities are redeemed, 

e.g., to pay Social Security benefits, the government will need

to obtain the resources necessary to reimburse the trust funds.

The sum of debt held by the public and intragovernmental debt 

equals gross federal debt, which (with some adjustments), is 

subject to a statutory ceiling (i.e., the debt limit). At the end of 

fiscal year 2018, debt subject to the statutory limit (DSL) was

$21.5 trillion17 (see sidebar).

The federal debt held by the public measured as a percent of GDP (debt-to-GDP ratio) (Chart F) compares the country’s 

debt to the size of its economy, making this 

measure sensitive to changes in both. Over time, 

the debt-to-GDP ratio has varied widely:

x For most of the nation’s history, 

through the first half of the 20th century, 

the debt-to-GDP ratio has tended to 

increase during wartime and decline 

during peacetime.

x Chart F shows that wartime spending 

and borrowing pushed the debt-to-GDP 

ratio to an all-time high of 106 percent 

in 1946, soon after the end of World 

War II, but it decreased rapidly in the 

post-war years, 

x The ratio grew rapidly from the mid1970s until the early 1990s. Strong 

economic growth and fundamental 

fiscal decisions, including measures to 

reduce the federal deficit and 

implementation of binding "Pay As You 

Go" (PAYGO) rules (which require that 

new tax or spending laws not add to the deficit), generated a significant decline in the debt-to-GDP ratio, from a 

peak of 48 percent in 1993-1995, to 31 percent in 2001.

x During the first decade of the 21st century, PAYGO rules were allowed to lapse, significant tax cuts were 

implemented, entitlements were expanded, and spending related to defense and homeland security increased. By 

September 2008, the debt-to-GDP ratio was 39 percent of GDP. 

x PAYGO rules were reinstated in 2010, but the extraordinary demands of the last economic and fiscal crisis and the 

consequent actions taken by the federal government, combined with slower economic growth in the wake of the 

crisis, pushed the debt-to-GDP ratio up to 74 percent by the end of fiscal year 2014.

x The debt was 78.0 percent of GDP at the end of fiscal year 2018 (compared to 76 percent at the end of fiscal year 

2017).18 From Chart F, since 1940, the average debt-to-GDP ratio is 47.4 percent.

17Effective March 2, 2019, the statutory debt limit was set at $22.0 trillion, and on March 4, 2019, the Secretary of the Treasury notified the Congress that 

the statutory debt limit would be reached on or after that day. When delays in raising the debt limit occur, Treasury must often deviate from its normal debt 

management operations and take a number of extraordinary measures to meet the government’s obligations as they come due without exceeding the debt 

limit. Treasury began taking these extraordinary actions on March 4, 2019. 1810/15/2018 press release: Joint Statement of OMB Director, Mick Mulvaney and Treasury Secretary, Steven T. Mnuchin.
21 MANAGEMENT’S DISCUSSION AND ANALYSIS

The Economy in Fiscal Year 2018 

The U.S. economy’s performance 

provides a useful backdrop against which 

to evaluate the government’s financial 

results. U.S. economic growth 

accelerated during fiscal year 2018 due 

to the Tax Cuts and Jobs Act and 

deregulation. Net jobs increased from an 

average of 168,000 jobs per month in 

fiscal year 2017 to 219,000 jobs per 

month in fiscal year 2018, and by the end 

of the fiscal year, the unemployment rate 

had declined to a 49-year low of 3.7 

percent. Headline inflation (as measured 

by the Consumer Price Index, or CPI) was relatively stable, while core inflation, which excludes food and energy,

accelerated. In fiscal year 2018, growth in after-tax personal income as well as productivity held steady at the solid paces 

seen in the previous fiscal year.

Buoyed by the first major tax reform in three decades, as well as other pro-growth policies, real (i.e., inflation-adjusted) 

GDP growth accelerated to 3.0 percent in fiscal year 2018, after growing in the previous fiscal year by 2.3 percent. A marked 

acceleration in consumption, as well as faster growth in business fixed investment and a significant contribution from net 

exports, drove growth. Growth of consumer spending strengthened to 2.9 percent in fiscal year 2018, up from 2.4 percent 

during the previous fiscal year, while business fixed investment accelerated for the second consecutive year, growing by 6.8

percent in the latest fiscal year after increasing at a 5.0 percent pace during fiscal year 2017.

During fiscal year 2018, for the first time in the history of the Job Openings and Labor Turnover Survey (JOLTS), the 

number of available job openings exceeded the number of unemployed persons. After the economy created 2.0 million 

payroll jobs during fiscal year 2017, an additional 2.6 million jobs were added during fiscal year 2018, and the average 

monthly pace of job creation also stepped up from 168,000 during fiscal year 2017 to 219,000 per month in the latest fiscal 

year. By the end of fiscal year 2018, the number of unemployed persons in the economy had declined by 805,000 to 6.0 

million as of September 2018. The unemployment rate declined 0.5 percentage points, from 4.2 percent in September 2017 to 

3.7 percent in September 2018, its lowest level since December 1969. During fiscal year 2018, other notable labor market 

developments included the decline in the unemployment rate for adult women to 3.3 percent, for African Americans to 6.0 

percent, and for Hispanics to 4.5 percent, rates that are historically low. Declining unemployment rates are associated with 

faster economic growth rates and rising incomes.

During fiscal year 2018, headline inflation edged up, while core inflation accelerated more noticeably. The CPI rose 2.3 

percent during fiscal year 2018, slightly faster than the 2.2 percent during fiscal year 2017, while core inflation accelerated to

2.2 percent, higher than the 1.7 percent reading during fiscal year 2017. The increase in the Federal Reserve’s preferred 

measure of inflation, the Personal Consumption Expenditure (PCE) price index, was also relatively stable at the headline 

level, ticking up to 2.0 percent in fiscal year 2018 from 1.8 percent in fiscal year 2017. Over the course of the fiscal year, 

however, inflation by this measure decelerated later in the year. The PCE price index rose by 1.85 percent headline and 1.7

percent core in the last six months of fiscal year 2018 at a compound annual rate, and, in the final three months, rose by 1.5 

headline and 1.4 percent core at a compound annual rate.

Growth of nominal disposable personal income (DPI) held steady during fiscal year 2018, which helped to stabilize 

purchasing power in real terms. Real DPI grew 2.8 percent in fiscal year 2018, matching the 2.8 percent rate during fiscal 

year 2017. Towards the end of fiscal year 2018, growth of nominal average hourly earnings also accelerated, helping to boost 

wages in real terms. Real average hourly earnings increased 0.5 percent during fiscal year 2018, after rising only 0.2 percent 

the previous fiscal year.

The housing market showed signs of slowing during fiscal year 2018, partly reflecting the marked rise in mortgage rates 

over the fiscal year. Residential investment grew by 0.5 percent, after a 3.0 percent advance during the previous fiscal year.

Home price growth began to slow towards the end of the fiscal year. Existing home sales declined throughout fiscal year 

2018, while new home sales tailed off at the very end of the fiscal year. However, the monthly average level of new 

residential construction spending was a bit higher during 2018 compared to 2017. Other indicators that drive housing demand 

are strong, such as labor force participation and household formation.

Growth of labor productivity held relatively steady during fiscal year 2018. Productivity growth rose 1.3 percent during 

fiscal year 2018, after increasing by 1.4 percent during fiscal year 2017. Growth in these two fiscal years contrasted sharply 

with the 0.1 percent decline in productivity growth during fiscal year 2016.
MANAGEMENT’S DISCUSSION AND ANALYSIS 22

An Unsustainable Fiscal Path 

An important purpose of the Financial Report is to help citizens understand current fiscal policy and the importance and 

magnitude of policy reforms necessary to make it sustainable. This Financial Report includes the SLTFP and a related Note 

Disclosure (Note 23). The Statements display the present value of 75-year projections of the federal government’s receipts 

and non-interest spending19 for fiscal year 2018 and fiscal year 2017. 

Fiscal Sustainability 

A sustainable fiscal policy is one where the debt-to-GDP ratio is stable or declining over the long term. The projections 

in this Financial Report indicate that current policy is not sustainable. As discussed below, if current policy is left unchanged, 

the debt-to-GDP ratio is projected to rise from its current level of 78 percent in 2018 to 84 percent by 2022, to over 100 

percent by 2030, and to 530 percent in 2093 and to even higher levels, thereafter. Preventing the debt-to-GDP ratio from 

rising over the next 75 years is estimated to require some combination of spending reductions and revenue increases that 

amount to 4.1 percent of GDP over the period. While this estimate of the “75-year fiscal gap” is highly uncertain, it is 

nevertheless nearly certain that current fiscal policies cannot be sustained indefinitely.

Delaying action to reduce the fiscal gap increases the magnitude of spending and/or revenue changes necessary to 

stabilize the debt-to-GDP ratio. For example, the magnitude of spending cuts and/or revenue increases necessary to close the 

gap rises about 20 percent if reforms are delayed ten years, and about 46 percent if reform is delayed 20 years.

The estimates of the cost of policy delay assume policy does not affect GDP or other economic variables. Delaying 

fiscal adjustments for too long raises the risk that growing federal debt would increase interest rates, which would, in turn,

reduce investment and ultimately economic growth.

The projections discussed here assume current policy20 remains unchanged, and hence, are neither forecasts nor 

predictions. Nevertheless, policy changes must be enacted so that actual financial outcomes will be different than those 

projected.

The Primary Deficit, Interest, and Debt

The primary deficit – the difference between non-interest spending and receipts – is the determinant of the debt-to-GDP 

ratio over which the government has the greatest control (the other determinants include interest rates and growth in GDP). 

Chart H shows receipts, non-interest spending, and the difference – the primary deficit – expressed as a share of GDP. The 

primary deficit-to-GDP ratio spiked during 2009 through 2012 due to the 2008-09 financial crisis and the ensuing severe 

recession, as well as the increased spending and temporary tax reductions enacted to stimulate the economy and support 

recovery. These elevated primary deficits resulted in a sharp increase in the ratio of debt to GDP, which rose from 39 percent

at the end of 2008 to 70 percent at the end of 2012. As an economic recovery took hold, the primary deficit ratio fell, 

averaging 1.9 percent of GDP over 2013 through 2018. This primary deficit ratio was still high enough that the debt-to-GDP 

ratio increased further, ending 2018 at 78 percent. The primary deficit ratio is projected to rise to 2.9 percent in 2019 and then 

shrink slightly through 2024 as the economy grows. After 2024, however, increased spending for Social Security and health 

programs due to the ongoing retirement of the baby boom generation and increases in the price of health care services is 

projected to result in increasing primary deficit ratios that reach 3.0 percent of GDP in 2028. The primary deficit ratio peaks 

at 4.1 percent in 2039, gradually decreases beyond that point as aging of the population continues at a slower pace, and 

reaches 2.5 percent of GDP in 2093.

Primary deficit trends are heavily influenced by tax receipts. Receipts as a share of GDP were markedly depressed in 

2009 through 2012 because of the recession and tax reductions enacted as part of the American Recovery and Reinvestment 

Act of 2009 (ARRA) and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The share 

subsequently increased to 18 percent of GDP by 2015, then decreased to 16.5 percent in 2018, following enactment of the 

Tax Cuts and Jobs Act of 2018 (TCJA), below its 30-year average of 17.3 percent.

19 For the purposes of the Statement of Long-Term Fiscal Projections and this analysis, spending is defined in terms of outlays. In the context of federal 

budgeting, spending can either refer to: (1) budget authority – the authority to commit the government to make a payment; (2) obligations – binding 

agreements that will result in either immediate or future payment; or (3) outlays, or actual payments made. 20 Current policy in the projections is based on current law, but includes certain adjustments, such as extension of certain policies that expire under current 

law but are routinely extended or otherwise expected to continue (e.g., reauthorization of the Supplemental Nutrition Assistance Program).
23 MANAGEMENT’S DISCUSSION AND ANALYSIS

Receipts are projected to grow slightly 

more rapidly than GDP over the projection 

period as increases in real incomes cause 

more taxpayers and a larger share of 

income to fall into the higher individual 

income tax brackets.

Non-interest spending as a share of 

GDP is projected to rise gradually from

18.7 percent in 2018 to 21.0 percent in 

2029, and ends at 22.6 percent in 2093.

Beginning in 2020, these increases are 

principally due to faster growth in 

Medicare, Medicaid, and Social Security 

spending (see Chart G). Over the next 25 

years, the aging of the baby boom 

generation is projected to increase the 

Social Security, Medicare, and Medicaid 

spending shares of GDP by about 1.0

percentage points, 1.7 percentage points, 

and 0.6 percentage points, respectively. 

After 2035, the Social Security spending 

share of GDP remains relatively stable,

while the combined Medicare and Medicaid spending share of GDP continues to increase, albeit at a slower rate, due to 

projected increases in health care costs. 

One of the most important assumptions underlying the projections is the future growth of health care costs. As 

discussed in Note 22, these future growth rates – both for health care costs in the economy generally and for Federal health 

care programs such as Medicare, Medicaid, and Affordable Care Act (ACA) exchange subsidies – are highly uncertain. In 

particular, enactment of the ACA in 2010 and the Medicare Access and CHIP Reauthorization Act (MACRA) in 2015 

established cost controls for Medicare hospital and physician payments whose long-term effectiveness is still to be 

demonstrated. The Medicare spending projections in the long-term fiscal projections are based on the projections in the 2018 

Medicare trustees’ report, which assume the ACA and MACRA cost control measures will be effective in producing a 

substantial slowdown in Medicare cost growth. As discussed in Note 22, the Medicare projections are subject to much 

uncertainty about the ultimate effects of these provisions to reduce health care cost growth. For the long-term fiscal 

projections, that uncertainty also affects the projections for Medicaid and exchange subsidies, because the cost per 

beneficiary in these programs is assumed to grow at the same reduced rate as Medicare cost growth per beneficiary.

As discussed in Note 23, the primary deficit projections reported in the Fiscal Year 2018 Financial Report increased 

compared to those reported in the Fiscal Year 2017 Financial Report. These increases are attributable to a number of factors,

but in great part to: (1) use of fiscal year 2018 actual budget results that differed from projections made in prior years, 

including lower corporate and individual income tax receipts, and higher non-defense discretionary spending as a result of the

increased discretionary spending caps in the Bipartisan Budget Act of 2018 (BBA 2018); and (2) revised assumptions, 

including those related to corporate income taxes to reflect enactment of the TCJA, and to growth in discretionary spending. 

For the Fiscal Year 2018 Financial Report, corporate income tax receipts are assumed to be the same share of GDP as 

projected in the 2018 Midsession Review, which incorporates the expected effects of the TCJA. In addition, the projections 

assume that individual income and estate and gift tax provisions of the TCJA are permanently extended; Congressional action 

is required to make this change. With regard to discretionary spending, previous statements assumed that it followed the caps 

established by the Budget Control Act of 2011 (BCA) and then grew with nominal GDP in the years after caps expired. 

However, discretionary spending has not been limited to the caps established in the BCA. Instead, budget deals in 2013, 

2015, and 2018 raised the caps in each of the years 2014 through 2019. Therefore, as a reasonable representation of current 

policy, the 2018 projections assume that discretionary spending grows at the same rate as nominal GDP beyond 2019, rather 

than being limited to the statutory caps, subject to Joint Committee on Deficit Reduction spending controls. Congressional 

action is required to make this change. GDP, interest, and other economic and demographic assumptions are the same as 

those that underlie the most recent Social Security and Medicare trustees’ report projections, adjusted for historical revisions 

that occur annually. See Note 23—Long-Term Fiscal Projections for more information about the assumptions used in this 

analysis.
MANAGEMENT’S DISCUSSION AND ANALYSIS 24

The primary deficit-to-GDP projections in Chart G, projections for interest rates, and projections for GDP together

determine the debt-to-GDP ratio projections shown in Chart H. That ratio was 78 percent at the end of fiscal year 2018 and

under current policy is projected to be 

84 percent by 2022, over 100 percent by

2030, and 530 percent in 2093. The 

change in debt held by the public from 

one year to the next is approximately 

equal to the budget deficit, the 

difference between total spending and 

total receipts. The debt-to-GDP ratio 

rises continually in great part because 

higher levels of debt lead to higher net 

interest expenditures, and higher net 

interest expenditures lead to higher 

debt.21 The continuous rise of the debtto-GDP ratio indicates that current 

policy is unsustainable.

These debt-to-GDP projections are 

higher than the corresponding 

projections in both the fiscal year 2017 

and fiscal year 2016 Financial Reports.

For example, the last year of the 75-year 

projection period used in the fiscal year 

2016 Financial Report is 2091. In the 

fiscal year 2018 Financial Report, the debt-to-GDP ratio for 2091 is projected to be 513 percent, which compares with 293 

and 252 percent projected for that same year in the fiscal year 2017 Financial Report and the fiscal year 2016 Financial 

Report, respectively.22

The Fiscal Gap and the Cost of Delaying Policy Reform

The 75-year fiscal gap is one measure of the degree to which current policy is unsustainable. It is the amount by which 

primary surpluses over the next 75 years must, on average, rise above current-policy levels in order for the debt-to-GDP ratio 

in 2093 to remain at its level in 2018 (78 percent). The projections show that projected primary deficits average 3.2 percent of 

GDP over the next 75 years under current policy. If policies were adopted to eliminate the fiscal gap, the average primary 

surplus over the next 75 years would be 0.8 percent of GDP, 4.1 percentage points higher than the projected present value of 

receipts less non-interest spending shown in the basic financial statement. Hence, the 75-year fiscal gap is estimated to equal 

4.1 percent of GDP. This gap represents 21.9 percent of 75-year present value receipts and 18.6 percent of 75-year present 

value non-interest spending. The fiscal gap was estimated at 2.0 percent in the 2017 Financial Report, 2.1 percentage points 

lower than estimated in this Report.

In these projections, closing the fiscal gap requires running substantially positive primary surpluses, rather than simply 

eliminating the primary deficit. The primary reason is that the projections assume future interest rates will exceed the growth 

rate of GDP. Achieving primary balance (that is, running a primary surplus of zero) implies that the debt grows each year by 

the amount of interest spending, which under these assumptions would result in debt growing faster than GDP.

Table 6 shows the 

cost of delaying policy

reform to close the fiscal 

gap by comparing policy 

reforms that begin in 

three different years.

Immediate reform would 

require increasing 

primary surpluses by 4.1

percent of GDP on 

average between 2019

21 The change in debt each year is also affected by certain transactions not included in the budget deficit, such as changes in Treasury’s cash balances and the 

nonbudgetary activity of Federal credit financing accounts. These transactions are assumed to hold constant at about 0.4 percent of GDP each year, with the 

same effect on debt as if the primary deficit was higher by that amount. 22 See the Note 23 of the Fiscal Year 2017 Financial Report of the U.S. Government for more information about changes in the long term fiscal projections 

between fiscal years 2016 and 2017.
25 MANAGEMENT’S DISCUSSION AND ANALYSIS

and 2093 (i.e., some combination of reducing spending and increasing revenue by a combined 4.1 percent of GDP on average

over the 75-year projection period). Table 6 shows that delaying policy reform forces larger and more abrupt policy reforms 

over shorter periods. For example, if policy reform is delayed by 10 years, closing the fiscal gap requires increasing the 

primary surpluses by 4.9 percent of GDP on average between 2029 and 2093. Similarly, delaying reform by 20 years requires

primary surplus increases of 6.0 percent of GDP on average between 2039 and 2093. The differences between the required 

primary surplus increases that start in 2029 and 2039 (4.9 and 6.0 percent of GDP, respectively) and that which starts in 2019

(4.1 percent of GDP) is a measure of the additional burden that delay would impose on future generations. Future generations 

are harmed by policy reform delay, because the higher the primary surplus is during their lifetimes the greater the difference 

is between the taxes they pay and the programmatic spending from which they benefit.

Conclusion

The past 11 years saw the national debt nearly double as a share of GDP, bringing it to a level not seen since shortly 

after World War II. The debt-to-GDP ratio is projected to rise over the 75-year projection period and beyond if current policy

is unchanged, which implies that current policy is not sustainable and must ultimately change. If policy changes are not so 

abrupt as to hinder economic growth, then the sooner policies are adopted to avert these trends, the smaller the changes to 

revenue and/or spending that would be required to achieve sustainability over the long term. While the estimated magnitude 

of the fiscal gap is subject to a substantial amount of uncertainty, there is little doubt that current policy is not sustainable.

These long-term fiscal projections and the topic of fiscal sustainability are discussed in further detail in Note 23 and the 

RSI section of this Financial Report.

Social Insurance 

The long-term fiscal projections reflect government receipts and spending as a whole. The SOSI focuses on the 

government’s “social insurance” programs: Social Security, Medicare, Railroad Retirement, and Black Lung. 23 For these 

programs, the SOSI reports: (1) the actuarial present value of all future program revenue (mainly taxes and premiums) -

excluding interest - to be received from or on behalf of current and future participants; (2) the estimated future scheduled 

expenditures to be paid to or on behalf of current and future participants; and (3) the difference between (1) and (2). Amounts 

reported in the SOSI and in the RSI section in this Financial Report are based on each program’s official actuarial 

calculations.

Table 7 summarizes amounts reported in the SOSI, showing that net social insurance expenditures are projected to be 

$53.8 trillion over 75 years as of January 1, 2018 for the “Open Group,” an increase of $4.8 trillion over net expenditures of

$49.0 trillion projected in the 2017 Financial Report.

24 The current-law 2018 amounts reported for Medicare reflect the 

physician payment levels expected under the MACRA payment rules and the ACA-mandated reductions in other Medicare 

payment rates, but not the payment reductions and/or delays that would result from trust fund depletion.25 Similarly, currentlaw projections for Social Security do not reflect benefit payment reductions and/or delays that would result from fund 

depletion. By accounting convention, the transfers of general revenues are eliminated in the consolidation of the SOSI at the

governmentwide level and as such, the general revenues that are used to finance Medicare Parts B and D are not included in 

these calculations. For the fiscal year 2018 and 2017 SOSI, the amounts eliminated totaled $32.9 trillion and $30.0 trillion,

respectively. SOSI programs and amounts are included in the broader fiscal sustainability analysis in the previous section, 

although on a slightly different basis (as described in Note 23). 

The amounts reported in the SOSI provide perspective on the government’s long-term estimated exposures for social 

insurance programs. These amounts are not considered liabilities in an accounting context. Future benefit payments will be 

recognized as expenses and liabilities as they are incurred based on the continuation of the social insurance programs' 

provisions contained in current law. The social insurance trust funds account for all related program income and expenses. 

Medicare and Social Security taxes, premiums, and other income are credited to the funds; fund disbursements may only be 

made for benefit payments and program administrative costs. Any excess revenues are invested in special non-marketable 

U.S. government securities at a market rate of interest. The trust funds represent the accumulated value, including interest, of 

all prior program surpluses, and provide automatic funding authority to pay cover future benefits.

23 The Black Lung Benefits Act (BLBA) provides for monthly payments and medical benefits to coal miners totally disabled from pneumoconiosis (black 

lung disease) arising from their employment in or around the nation's coal mines. See http://www.dol.gov/owcp/regs/compliance/ca_main.htm 24'Closed' Group and 'Open' Group differ by the population included in each calculation. From the SOSI, the 'Closed' Group includes: (1) participants who 

have attained eligibility and (2) participants who have not attained eligibility. The 'Open' Group adds future participants to the 'Closed' Group. See ‘Social 

Insurance’ in the Required Supplementary Information section in this Financial Report for more information. 25 MACRA permanently replaces the sustainable growth rate (SGR) formula, which was used to determine payment updates under the Medicare physician 

fee schedule with specified payment updates through 2025. The changes specified in MACRA also establish differential payment updates starting in 2026 

based on practitioners’ participation in eligible alternative payment models; payments are also subject to adjustments based on the quality of care provided, 

resource use, use of certified electronic health records, and clinical practice improvement.
MANAGEMENT’S DISCUSSION AND ANALYSIS 26

Table 8 identifies the principal reasons for the changes in projected social insurance amounts during 2018 and 2017.

The following briefly 

summarizes the significant changes for 

the current valuation (as of January 1, 

2018) as disclosed in Note 22, Social 

Insurance. Note 22 is compiled from 

disclosures included in the financial 

reports of those entities administering 

these programs, including SSA and 

HHS. See Note 22 for additional 

information.

x Change in valuation period (affects 

both Social Security and 

Medicare): This change replaces a 

small negative net cash flow for 

2017 with a much larger negative 

net cash flow for 2092. As a result, 

the present value of the estimated 

future net cash flows decreased 

(became more negative) by $1.9

trillion. 

x Changes in demographic data, assumptions, and methods (affects both Social Security and Medicare): For the current 

valuation, the only change to the ultimate demographic assumptions was a small decrease of 10,000 Lawful Permanent 

Resident (LPR) immigrants per annum in the future. However, the starting demographic values and the way these values 

transition to the ultimate assumptions were changed. These changes included, but were not limited to lower birth rates 

than originally assumed, the observed persistent drop in the total fertility rate in recent years is now assumed to be a loss

of potential births rather than just a deferral to this period, and higher death rates than projected in prior valuations for 

Medicare experience ages 65 and older. Overall, changes to these assumptions caused the present value of the estimated 

future net cash flows to increase (become less negative) by $700 billion.

x Changes in economic data and assumptions (affects Social Security only): The ultimate economic assumptions for the 

current valuation period are the same as those for the prior year valuation. However, the starting economic values and the 

way these values transition to the ultimate assumptions were changed. These changes included: the estimated level of 
27 MANAGEMENT’S DISCUSSION AND ANALYSIS

potential GDP was reduced by about 1 percent in 2017 and throughout the projection period, meaning that cumulative 

growth in actual GDP is 1 percent less over the remainder of the projected recovery than assumed in the prior valuation; 

near-term interest rates were decreased, and lower than expected ratios of and assumed extended recoveries for labor 

compensation to GDP and taxable payroll to GDP. Overall, changes to these assumptions caused the present value of the 

estimated future net cash flows to decrease (become more negative) by $500 billion.

x Changes in Law or Policy: Between the prior and current valuation periods, no new laws, regulations, or policies were 

enacted that are expected to have significant effects on the OASDI or Medicare programs. However, the current 

valuations for each program do incorporate some notable changes with negligible effects on the present value of estimated 

cash flows: 

o For Social Security, the 2012 Deferred Action for Childhood Arrivals (DACA) program is assumed to be phased 

out over the next two years (the prior valuation assumed that the 2012 DACA program would continue 

indefinitely); and the TCJA includes the elimination of the individual mandate penalty of the Patient Protection 

and Affordable Care Act, which is expected to cause some individuals to drop employer-sponsored health 

insurance, increase OASDI-covered wages, and taxable payroll slightly. 

o For Medicare, legislation that affected the present value of estimated cash flows includes but is not limited to: 

The Disaster Tax Relief and Airport and Airway Extension Act of 2017 and the Bipartisan Budget Act of 2018 

(BBA).

Overall, these changes to these assumptions caused the present value of the estimated future net cash flows to decrease 

(become more negative) by $1.0 trillion.

x Changes in economic and other healthcare assumptions (affects Medicare only): The economic assumptions used in the 

Medicare projections are the same as those used for the OASDI (described above) and are prepared by the Office of the 

Chief Actuary at SSA. In addition to the economic assumptions changes described above, the healthcare assumptions are 

specific to the Medicare projections. Changes to these assumptions in the current valuation include: utilization rate 

assumptions for inpatient hospital use and utilization rate and case mix assumptions for skilled nursing facilities were 

decreased; payment rates to private health plans are higher than projected in last year’s report; higher projected 

manufacturer rebates. The net impact of these changes caused the present value of the estimated future net cash flows to 

decrease (become more negative) by $1.5 trillion. 

x Change in Projection Base (affects Medicare only): Actual income and expenditures in 2017 were different than what was 

anticipated when the 2017 Medicare Trustees Report projections were prepared. Part A payroll tax income was lower and 

expenditures were higher than anticipated, based on actual experience. Part B total income and expenditures were higher 

than estimated based on actual experience. For Part D, actual income and expenditures were both lower than prior 

estimates. The net impact of the Part A, B, and D projection base changes is a decrease (become less negative) in the 

estimated future net cash flow by $900 billion.

Projected net expenditures for Medicare Parts A and B declined significantly between fiscal year 2009 and fiscal year 

2010 reflecting provisions of the ACA. As reported in Note 22, uncertainty remains about whether the projected cost savings 

and productivity improvements will be sustained in a manner consistent with the projected cost growth over time. Note 22

includes an alternative projection to illustrate the uncertainty of projected Medicare costs. As indicated earlier, GAO 

disclaimed opinions on the 2018, 2017, 2016, 2015 and 2014 SOSI because of these significant uncertainties.

Costs as a percent of GDP of both Medicare and Social Security, which are analyzed annually in the Medicare and 

Social Security Trustees’ Reports, are projected to increase substantially through the mid-2030s because: (1) the number of 

beneficiaries rises rapidly as the baby-boom generation retires and (2) the lower birth rates that have persisted since the baby 

boom cause slower growth in the labor force and GDP.26 According to the Medicare Trustees’ Report, spending on Medicare 

is projected to rise from its current level of 3.7 percent of GDP to 5.9 percent in 2042 and to 6.2 percent in 2092.27 As for 

Social Security, combined spending is projected to generally increase from its current level of 4.9 percent of GDP to about 

6.1 percent by 2038, declining to 5.9 percent by 2052 and then generally increase to 6.1 percent by 2092. The government 

collects and maintains funds supporting the Social Security and Medicare programs in Trust Funds. A scenario where 

projected funds expended exceed projected funds received, as reported in the SOSI, will cause the balances in those Trust 

Funds to deplete over time. Table 9 summarizes additional current status and projected trend information, including years of 

projected depletion, for the Medicare and Social Security Trust Funds.

26A Summary of the 2018 Annual Social Security and Medicare Trust Fund Reports, p. 1-2 and the 2017 Medicaid Actuarial Report 27 Percent of GDP amounts are expressed in gross terms (including amounts financed by premiums and state transfers).
MANAGEMENT’S DISCUSSION AND ANALYSIS 28

As previously discussed and as noted in the Trustees’ Reports, it is apparent that these programs are on a fiscally 

unsustainable path. Additional information from the Trustees Reports may be found in the RSI section of this Financial 

Report.
29 MANAGEMENT’S DISCUSSION AND ANALYSIS

Financial Management 

Results-Oriented Accountability for Grants

Approximately $700 billion is spent annually on grants and cooperative agreements. Grants managers, both internal and 

external to the government, report that approximately 40 percent of their time is spent using antiquated processes to monitor

compliance rather than using data analytics to monitor results. The President’s Management Agenda (PMA) Cross Agency 

Priority (CAP) Goal #8, Results-Oriented Accountability for Grants, provides a comprehensive roadmap for improving grants 

management and reducing recipient reporting burden. Increased efficiencies in the grant-making process will provide 

recipients more time to perform work associated with the grant, thereby helping agencies28 more effectively achieve their 

missions. 

The CAP Goal strategy focuses on standardizing grants data, modernizing digital tools, and using data to promote 

decision making that is based on risk and performance. In support of the CAP goal, OMB issued “Strategies to Reduce Grant 

Recipient Reporting Burden,” M-18-24, which requires agencies to increase grant program efficiency, promote evaluation of 

grant programs, and reduce reporting burden.

M-18-24 requires agencies to use the System for Award Management (SAM) information to comply with award 

requirements, reducing the recipient burden and government cost of having multiple agencies request the same information 

(except under limited circumstances) from the grant recipient. M-18-24 also requires agencies to evaluate all systems and 

other methods used to collect information from recipients to determine if the same data is being collected by the agency 

multiple times and to develop a strategy to eliminate any duplicative requests.

OMB is leading an agency-wide Grants Management Data Standards Work Group, and in September 2018, the Group 

completed an initial set of draft grants management data standards. In November 2018, a Draft Grants Management Data 

Standards Feedback website was set up to gather public input on the data standards. Input from the public will be used in 

finalizing the data standards that will allow inter-agency grants data to be created, reduce the number of grants management 

systems, and promote a risk-based, data-driven approach to managing federal grants.

Getting Payments Right

Preventing improper payments within the federal government is a priority for the Administration and OMB. In March 

2018, OMB released the PMA CAP Goal #9, Getting Payments Right. In addition to the historical focus on identifying and 

addressing improper payment issues after they occur, the CAP goal has a renewed focus on systemic enhancements to 

preventing improper payments from occurring at all. This CAP Goal has resulted in exceptional collaboration across the CFO 

community to identify the causes of improper payments through two main strategies: (1) reducing monetary loss and (2) 

clarifying and streamlining reporting requirements. For agencies with programs reporting more than $100 million in 

monetary loss in fiscal year 2018, a scorecard must be completed quarterly and posted on paymentaccuracy.gov. These 

scorecards provide information on the actions taken and progress made on preventing improper payments that would result in 

monetary loss to the government. 

Just as it did in fiscal year 2018, in fiscal year 2019, OMB will continue to work with agencies to improve the 

identification of the root causes of improper payments that result in monetary loss and to promote data analytic methods that 

take a comprehensive view of an agency’s payment lifecycle. In addition, OMB will continue to work with Treasury on 

outreach related to the Do Not Pay Business Center and the services they provide to agencies to ensure payment integrity. In 

June 2018, OMB released Circular A-123, Appendix C (M-18-20), Requirements for Payments Integrity Improvement to 

create a unified, comprehensive, and less burdensome set of requirements. 

In fiscal year 2018, program performance was mixed, with some programs experiencing significant increases in 

improper payment estimates and others showing signs of improvement. As in the past, agencies recovered approximately $20

billion in overpayments through payment recapture audits and other methods. The estimated amount of improper payments

increased in general across programs in fiscal year 2018, roughly in line with increases in program outlays. More details on 

fiscal year 2018 improper payment data can be found at PaymentAccuracy.gov.

In fiscal year 2019, OMB will continue to work with agencies, the Chief Financial Officers Council (CFOC), and other 

stakeholders as part of the Getting Payments Right CAP Goal. In addition, OMB will continue to rely on agency inspector 

general (IG) recommendations for additional program-specific improvements. OMB will also continue to improve 

communications with the public about improper payment rates and amounts.

28The term “agency” is used in the Financial Management section of the Management’s Discussion and Analysis rather than the term “entity,” which is used 

throughout the rest of the Financial Report. SFFAS No. 47, Reporting Entity, defines the term “entity” for federal financial reporting purposes and addresses 

both component and governmentwide financial reporting. The term entity is generally broader than “agency” because it refers to agencies, components of 

agencies, and the federal government as a whole. The term “agency” is used in this section because the laws, policies, and plans discussed in this section 

apply to “agencies” as defined in particular laws or policy guidance documents and because the laws, policies, and plans discussed in this section do not 

generally define the term “entity.”
MANAGEMENT’S DISCUSSION AND ANALYSIS 30

Leveraging Data as a Strategic Asset

The Digital Accountability and Transparency Act of 2014 (DATA Act), signed on May 9, 2014, established a vision for 

the future of federal spending transparency. The Act amended the Federal Funding Accountability and Transparency Act of 

2006 by requiring that all federal spending be displayed on a website in searchable, downloadable, and machine-readable 

formats and by requiring publication of agency financial data.

The improved and expanded USAspending.gov website was launched on April 2, 2018. The new website allows 

taxpayers to examine nearly $4 trillion in federal spending and observe how this money flows from Congressional 

appropriations to local communities and businesses. The data from over 100 federal agencies is compiled by Treasury and 

will continue to be published on a quarterly basis. The new site allows users to explore information and download reports that

are catered to their specific interests. The new site also includes a new feature, the Data Lab, which provides additional use

cases, data visualizations, and analysis with insights into federal spending and trends. 

In November 2017, GAO and many agency Offices of Inspector General published audits of the quality of the data as 

required under the DATA Act. As a result of these audits, in June 2018, OMB issued guidance to improve data quality, M18-16, Management of Reporting Data Integrity Risk, Appendix A to OMB Circular A-123. The guidance requires agencies

to develop and implement a Data Quality Plan for fiscal years 2019 through 2021 at a minimum. Agencies are required to 

integrate Enterprise Risk Management (ERM) processes and internal controls and agencies are also required to consider in 

their assurance statements all internal controls (including financial and non-financial controls, and controls over DATA Act, 

financial, and all other reporting). The CFOC and key stakeholders from the procurement and financial assistance 

communities developed a DATA Act Data Quality Playbook as a resource tool for management and the audit communities.

As the quality of this data improves, OMB will work with Treasury and agencies to find additional data sources that 

could be linked to the DATA Act to better inform the public about the purpose and results of spending.

Sharing Quality Financial Management Services

The federal financial management infrastructure exists in a complex environment of legacy information technology, 

customized tools built to unique requirements, and business processes that do not fully leverage modern technology. The 

sharing of financial technology and services has been successful for smaller agencies, but has not met expectations for larger

agencies. A cross-agency subgroup of the CFOC developed the core business framework for financial management that was 

used in the fall of 2017 to explore industry capabilities for smarter use of technology in federal financial management. This 

information is being used to develop and implement recommendations to improve financial management across the 

government. Results of ongoing efforts to support PMA CAP Goal #5, Sharing Quality Services, will be provided in fiscal 

year 2019. Please visit https://www.performance.gov/CAP/CAP_goal_5.html for additional information regarding CAP Goal 

#5.
31 MANAGEMENT’S DISCUSSION AND ANALYSIS

Audit 

Since the passage of the CFO Act of 1990, the federal financial community has made significant progress in financial 

accounting and reporting. As shown in Table 10, for fiscal year 2018, 22 of the 24 CFO Act agencies obtained an opinion 

from the independent auditors on their financial statements.29 In addition, 40 auditor-identified material weaknesses were 

reported at the end of both fiscal years 2017 and 2018. For 2018, half of these are associated with DOD, which just 

completed its first full-scope financial statement audit. The other half are associated with non-DOD agencies, which 

experienced a 25 percent reduction in material weaknesses, overall, from 27 at the end of fiscal year 2017 to 20 at the end of

2018. These results demonstrate that an increasing number of federal agencies have adopted and maintained disciplined 

financial reporting operations, implemented effective internal controls over financial reporting, and integrated transaction 

processing with accounting records. However, weaknesses in financial management practices continue to prevent two of the 

CFO Act agencies and the government as a whole from achieving an audit opinion.

29 The 22 entities include HHS, which received an unmodified (“clean”) opinion on all statements except the SOSI and the SCSIA.
MANAGEMENT’S DISCUSSION AND ANALYSIS 32

Agency Financial Management Systems

Federal agencies improved, but continue to face challenges, in implementing financial management systems that meet 

federal requirements. The number of CFO Act agencies reporting lack of substantial compliance with one or more of the 

three Section 803(a) requirements of the Federal Financial Management Improvement Act (FFMIA) fell to seven in fiscal 

year 2018 from eight in fiscal year 2017, and the number of auditors reporting lack of substantial compliance with one or 

more of the three Section 803(a) FFMIA requirements fell to nine in fiscal year 2018 from ten in fiscal year 2017.

As suggested in the “Sharing Quality Financial Management Services” section above, because of the federal 

government’s size and diversity, its financial management infrastructure consists of both legacy and modernized systems and 

standardized and customized systems. As the government’s fiscal agent, Treasury has systems for collecting and disbursing 

the government’s cash and financing disbursements when necessary, recording and reporting on those collections and 

disbursements, and reporting on all government revenues, expenses, assets, and liabilities. 

The first four sections above30 summarize what OMB and agencies have been doing and plan to do to improve financial 

management, including financial management systems. In addition, Treasury has financial management improvements plans 

that will have governmentwide implications, which are described in its fiscal year 2018 agency financial report 

(https://home.treasury.gov/about/budget-financial-reporting-planning-and-performance/agency-financial-report) and its fiscal 

year 2020 budget request and performance plan (https://home.treasury.gov/about/budget-financial-reporting-planning-andperformance/budget-requestannual-performance-plan-and). Also, other agencies have plans to improve their financial 

management and financial reporting systems described in their financial reports, budget requests, and performance plans. 

Most significantly, DOD has plans to address its material weaknesses in financial reporting, and is bringing its financial 

systems into compliance with federal financial management systems requirements, including the FFMIA; all of these plans 

can be found in the agency financial report (https://comptroller.defense.gov/odcfo/afr2018.aspx). In addition to focusing on 

financial systems, DOD’s audit remediation efforts include issues related to real property, inventory, operating materials and

supplies (OM&S), government property in the possession of contractors, information technology, and reconciling the 

Department’s fund balance with Treasury. 

Agency Internal Controls 

Federal managers are responsible for developing and maintaining effective internal controls. Internal controls help to 

ensure effective and efficient operations, reliable financial reporting, and compliance with applicable laws and regulations. 

Safeguarding assets is a goal of each of these three objectives.

In response to major management challenges to achieving their mission and goals, agencies continue to recognize the 

utility of ERM as a tool to identify, assess, mitigate, manage and prepare for risk. ERM contributes to risk-informed decisionmaking, encouraging a proactive rather than reactive approach to risk, and fostering a risk-aware culture. It also allows 

agencies to make better decisions in a resource-constrained environment and focus more on performance than compliances in 

various areas, including grants management. Under ERM, internal controls are not limited to compliance and financial 

reporting. Rather, internal controls are a means to address management challenges that cut across multiple agency functions

and reduce the risk to an acceptable level. OMB has promoted ERM as a management tool, and the 2016 update to OMB 

Circular A-123, Management’s Responsibility for Enterprise Risk Management and Internal Control, explains ERM and the 

importance of integrating ERM with internal control processes.

OMB Circular No. A-123 implements the requirements of 31 U.S.C. 3512 (c) and (d) (commonly known as the Federal 

Managers’ Financial Integrity Act) by providing agencies a framework for assessing and managing risks strategically and 

tactically. The Circular reflects changes incorporated in GAO’s updated Standards for Internal Control in the Federal 

Government and contains multiple appendices that address one or more of the objectives of effective internal control. 

x Appendix A provides for agencies to use a risk-based approach to assess, document, test, and report on 

internal controls over reporting and data integrity; 

x Appendix B requires agencies to maintain internal controls that reduce the risk of fraud, waste, and error in 

government charge card programs; 

x Appendix C implements the requirements for effective estimation and remediation of improper payments; and 

x Appendix D defines new requirements for determining compliance with the FFMIA that are intended to reduce

the cost, risk, and complexity of financial system modernizations.

As noted above, the total number of reported material weaknesses for the CFO Act agencies as of the issuance of this 

Financial Report was 40 for fiscal years 2018 and 2017. Effective internal controls are a challenge at the agency level and at 

the governmentwide level, with GAO reporting that at the governmentwide level, material weaknesses resulted in ineffective 

internal control over financial reporting. While progress is being made at many agencies and across the government in 

identifying and resolving internal control deficiencies, continued work is needed.

30 These sections are “Results-Oriented Accountability for Grants,” “Getting Payments Right,” “Leveraging Data as a Strategic Asset,” and “Sharing Quality 

Financial Management Services.”
33 MANAGEMENT’S DISCUSSION AND ANALYSIS

Agency Legal Compliance

Federal agencies are required to comply with a wide range of laws and regulations, including appropriations, 

employment, health and safety, among others. Responsibility for compliance rests with agency management and compliance 

is addressed as part of agency financial statement audits. Agency auditors test for compliance with selected laws and 

regulations related to financial reporting and certain individual agency audit reports contain instances of noncompliance. 

None of these instances were material to the governmentwide financial statements; however, GAO reported that its work on 

compliance with laws and regulations was limited by the material weaknesses and scope limitations discussed in its report.

Efficient Use of Real Property Assets 

The federal government owns a significant amount of real property assets worldwide, with a majority of its holdings 

located in the U.S. These real property holdings include assets that are classified by property type in the Federal Real 

Property Profile (FRPP) as: land, buildings, and structures. The FRPP defines land as acreage and a building as a constructed 

asset that is enclosed with walls and a roof that provides space for agencies to perform activities, store materials, or provide 

space for people to live or work. A structure is defined as any constructed asset that does not meet the building definition 

above (i.e., fence, tower, parking structure). Further information can be found in the FRPP Data Dictionary available at 

https://www.gsa.gov/.

Land

The federal government owns roughly 640 million acres, about 28 percent, of the 2.27 billion acres of land in the United 

States. Four major federal land management agencies administer 610.1 million acres, or 95 percent, of this land. They are the 

Bureau of Land Management, Fish and Wildlife Service, and National Park Service in the Department of Interior (DOI); and 

the Forest Service in the U.S. Department of Agriculture (USDA). These lands are managed for many purposes, primarily 

related to conservation, preservation, recreation, and the extraction of natural resources such as timber, minerals, oil, and gas.

Much of the land managed by DOI and USDA is public domain land and is generally intended to be retained by the 

government for use by future generations. This and other land that qualifies as stewardship land is not valued on the 

governmentwide Balance Sheet, but is discussed in Note 24 and in agency financial reports. In addition, DOD (excluding the 

Army Corps of Engineers) administers 11.4 million acres of land in the United States (as of September 30, 2014), consisting 

of military bases, training ranges, and more. Numerous other agencies administer the remaining federal acreage.

Structures

The government owns structures that are affixed to the land and in many instances cannot easily be physically separated 

from the land; these include parking structures, power plants, power generating stations, dams, and space exploration 

structures. These structures are managed by agencies such as DOE, the Army Corps of Engineers, and NASA. The federal 

government charges fees for the use of some of these structures, which defray some of the costs of the assets. The receipt of

such user fees (e.g., sales of electrical power) is recorded as revenue. Structures are generally reflected on the Balance Sheet 

at cost, net of depreciation, and any environmental or other liabilities associated with structures are reflected on the Balance 

Sheet in accordance with generally accepted accounting principles.

Buildings

A large portion of the government’s real property inventory includes federal owned buildings, with the majority in the 

custodial care of DOD. In general, agencies hold and manage buildings for administrative use to achieve their mission. The 

government does not hold buildings or any real property assets for investment or land banking purposes. Buildings owned by 

the government (and the land associated with the buildings) are generally reflected on the Balance Sheet at cost, net of 

depreciation. As noted above with structures, any environmental or other liabilities associated with buildings (and the land 

underneath the buildings) are also reflected on the Balance Sheet in accordance with generally accepted accounting 

principles. Any buildings (or structures, including the land underneath the buildings or structures) that are not in service are 

included on the Balance Sheet at net realizable value. After the government identifies buildings or other real property for 

disposal, it carries out public or negotiated sales, demolitions, public benefit conveyances, and, on occasion, property 

exchanges.

The federal domestic building inventory is diverse and, as of 2016, contains 252,000 buildings reflecting 2.6 billion 

square feet of space. The domestic portfolio requires approximately $18.8 billion in annual operation and maintenance 

expenditures, including approximately $7.3 billion in annual lease costs. The replacement value for the government’s 

232,000 owned buildings is approximately $1 trillion, and the repair costs are $115 billion. It should be noted, however, that

replacement value is not synonymous with fair market value. Within both the owned and leased inventories, there are 

opportunities to use space more effectively and efficiently. Several initiatives are discussed below.
MANAGEMENT’S DISCUSSION AND ANALYSIS 34

Transformation Efforts to Optimize the Use of Federal Real Property

On July 12, 2018, OMB issued Memorandum M-18-21 to require all federal entities to designate senior real property 

officers with the authority to coordinate all aspects of their real property programs and to serve on the Federal Real Property 

Council (FRPC). The reconstituted FRPC seeks to provide comprehensive governmentwide strategic direction that optimizes 

the federal real property portfolio to achieve statutory missions while managing costs over the short, mid, and long-term. The

FRPC will address current challenges such as the lack of a comprehensive strategic approach to asset management, funding 

challenges, poor data quality, and the burden of legislative requirements by creating a governance structure to include an 

Executive Steering Committee (ESC) and working groups. Led by direction from the ESC, the working groups will map their 

outputs to the FRPC strategic direction to revise the national strategy’s policy framework, standardize the business processes

and data, and diagnose and address root causes.

The new strategic direction will build on the results of the Reduce the Footprint (RTF) policy, which was issued in 2015 

and requires the CFO Act agencies to reduce the size of their federal real property portfolios by improving the use of 

government-owned buildings and by reducing the amount of leased space and the number of excess and underutilized 

properties. In addition, under the RTF policy, the CFO Act agencies developed and annually update five-year Real Property 

Efficiency Plans to identify reductions to their portfolios over a five-year time-period. In fiscal years 2016 and 2017, the CFO 

Act agencies reduced their fiscal year 2015 RTF baselines (which is the amount of space the CFO Act agencies held/occupied 

in 2015) by 12.4 million square feet, resulting in an annual estimated cost avoidance of $125 million. Under the RTF policy, 

the CFO Act agencies will continue to validate square footage and operations and maintenance costs in their Performance and 

Accountability Reports (PARs) or AFRs to show that they are continuing to reduce their real property footprint over time.

Additionally, governmentwide real property management will be improved by implementation of the Federal Assets 

Sale and Transfer Act of 2016 (FASTA) and the Federal Property Management Reform Act of 2016 (FPMRA). To date, 

OMB has met, by the required deadlines, all of its responsibilities under FASTA (with a yearly data call to all federal 

agencies for recommendations to the to-be-established Real Property Reform Board) and under FPMRA (with the 

establishment of the FRPC and the issuance of a yearly report).

Finally, to support increased reduction targets, the General Services Administration (GSA) and OMB developed a new 

management tool within the FRPP database that enables the CFO Act agencies to fully analyze the efficiency of their 

portfolios and to collocate with other agencies. In addition, GSA issued technical guidance in fiscal year 2017 to establish 

mandatory FRPP data validation and verification requirements that will enhance agencies’ abilities to implement data driven 

decision making when developing their annual RTF reduction targets.

Together with the newly constituted FRPC, OMB will continue to work to optimize its use of federal real property.

Conclusion 

The federal government has seen significant progress in financial management since the passage of the CFO Act more 

than 25 years ago; yet significant challenges remain. The issues that the federal government faces today require financial 

managers to move beyond the status quo and improve both the efficiency and effectiveness of financial management 

activities. The steps outlined above build on tools and capabilities that are in place today, and refocus energies on critical and 

emerging priorities – cutting wasteful spending, improving the efficiency of operations and information technology, and 

laying a foundation for improved data quality and collaboration.

Additional Information

This Financial Report’s Appendix contains the names and websites of the significant government agencies included in 

the Financial Report’s financial statements. Details about the information in this Financial Report can be found in these 

agencies’ financial statements included in their Performance and Accountability and Agency Financial Reports. This 

Financial Report, as well as those from previous years, is also available at the Treasury, OMB, and GAO websites at: 

http://www.fiscal.treasury.gov/reports-statements/; https://www.whitehouse.gov/omb/management/office-federal-financialmanagement/; and http://www.gao.gov/financial.html, respectively. Other related government publications include, but are 

not limited to the: 

x Budget of the United States Government,

x Treasury Bulletin,

x Monthly Treasury Statement of Receipts and Outlays of the United States Government,

x Monthly Statement of the Public Debt of the United States,

x Economic Report of the President, and 

x Trustees’ Reports for the Social Security and Medicare Programs.