Financial 

Report

OF the United States

 Government

 
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Contents

A Message from the Secretary of the Treasury 

Results in Brief................................................................................................... i

Executive Summary........................................................................................... 1

Management’s Discussion and Analysis .......................................................... 8

Statement of the Comptroller General of the United States.......................... 36

Financial Statements

 Introduction ....................................................................................................... 46

 Statement of Net Cost........................................................................................ 53

 Statement of Operations and Changes in Net Position ...................................... 55

Reconciliations of Net Operating Cost and Budget Deficit............................... 57

 Statements of Changes in Cash Balance from Budget and Other

 Activities............................................................................................................ 58

 Balance Sheets................................................................................................... 59

 Statements of Long-Term Fiscal Projections..................................................... 60

 Statements of Social Insurance.......................................................................... 61

 Statement of Changes in Social Insurance Amounts......................................... 64

Notes to the Financial Statements

 Note 1. Summary of Significant Accounting Policies....................................... 66

 Note 2. Cash and Other Monetary Assets.......................................................... 78

 Note 3. Accounts and Taxes Receivable, Net.................................................... 80

 Note 4. Loans Receivable and Loan Guarantee Liabilities, Net ........................ 82

 Note 5. Inventories and Related Property, Net .................................................. 85

 Note 6. Property, Plant, and Equipment, Net..................................................... 86

 Note 7. Debt and Equity Securities.................................................................... 87

 Note 8. Investments in Government-Sponsored Enterprises ............................. 90

 Note 9. Other Assets.......................................................................................... 93

 Note 10. Accounts Payable................................................................................ 94

 Note 11. Federal Debt Securities Held by the Public and Accrued Interest ...... 95

 Note 12. Federal Employee and Veteran Benefits Payable ............................... 99

 Note 13. Environmental and Disposal Liabilities.............................................. 109

 Note 14. Benefits Due and Payable ................................................................... 111

 Note 15. Insurance and Guarantee Program Liabilities..................................... 112

 Note 16. Other Liabilities.................................................................................. 113

 Note 17. Collections and Refunds of Federal Revenue ..................................... 115

 Note 18. Contingencies...................................................................................... 118

 Note 19. Commitments...................................................................................... 123

 Note 20. Funds from Dedicated Collections...................................................... 126

 Note 21. Fiduciary Activities............................................................................. 132

 Note 22. Social Insurance .................................................................................. 134

 Note 23. Long-Term Fiscal Projections............................................................ 151
 Note 24. Stewardship Land and Heritage Assets............................................... 157

 Note 25. Disclosure Entities and Related Parties............................................... 158

 Note 26. Subsequent Events ............................................................................. 163

Required Supplementary Information (Unaudited)

 The Sustainability of Fiscal Policy .................................................................... 164

 Social Insurance................................................................................................. 175

 Social Security and Medicare .......................................................................... 175

 Railroad Retirement, Black Lung, and Unemployment Insurance .................. 198

 Deferred Maintenance and Repairs.................................................................... 201

 Other Claims for Refunds.................................................................................. 201

 Tax Assessments................................................................................................ 202

 Federal Oil and Gas Resources.......................................................................... 203

 Federal Natural Resources Other than Oil and Gas.......................................... 205

Other Information (Unaudited)

 Tax Burden ....................................................................................................... 206

 Tax Gap ............................................................................................................. 207

 Tax Expenditures............................................................................................... 208

 Unmatched Transactions and Balances ............................................................. 210

Required Supplementary Stewardship Information (Unaudited)

 Stewardship Investments................................................................................... 212

 Non-Federal Physical Property........................................................................ 213

 Human Capital................................................................................................. 213

 Research and Development ............................................................................. 213

Appendices

 Appendix A: Reporting Entity........................................................................... 216

 Appendix B: Acronyms..................................................................................... 220

U.S. Government Accountability Office Independent Auditor’s Report...... 226
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 i Results in Brief – 2018 Financial Report of U.S. Government 

RESULTS IN BRIEF

Highlights of the Fiscal Year 2018 Financial Report of the U.S. 

Government

Where We Are Now 

The government’s net cost before taxes 

and other revenues for fiscal year 2018

was $4.5 trillion - an increase of $10.1

billion (0.2 percent) from fiscal year

2017.

Net cost equals gross costs of $4.8 

trillion, less earned program revenues 

(e.g., Medicare premiums, national 

park entry fees), and then adjusted for 

gains or losses from assumption 

changes used to estimate future federal 

employee and veterans benefits 

payments.

The increase in net cost is the

combined effect of many offsetting 

increases and decreases across the 

government.

Total government tax and other 

revenues grew by $9.7 billion (0.3

percent) to about $3.4 trillion for fiscal 

year 2018.

The government deducts $3.4 trillion 

in tax and other revenues from its $4.5 

trillion net cost (with some 

adjustments) to derive its fiscal year

2018 “bottom line” net operating cost 

of $1.2 trillion, which is largely 

unchanged compared to fiscal year 

2017.

By comparison, the government’s 

budget deficit for fiscal year 2018 

was $779.0 billion – an increase of 

$113.3 billion (about 17.0 percent) over fiscal year 2017. The $380.0 billion difference between the budget deficit 

and net operating cost is primarily due to accrued costs (incurred but not necessarily paid) that are included in net 

operating cost, but not the budget deficit. These include but are not limited to estimated future costs of federal 

employee and veterans benefits.
 Results in Brief – 2018 Financial Report of the U.S. Government ii 

An Unsustainable Fiscal Path 

The long-term fiscal projections indicate that the government’s debt-to-GDP ratio will rise from 78 percent in 

2018 to 530 percent over the 75-year projection period, and will continue to rise thereafter, if current policy is 

kept in place. The projections in this Financial Report show that current policy is not sustainable. These 

projections assume that current policy will continue indefinitely, and are, therefore, neither forecasts nor 

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

projected. 

The primary deficit is the difference between non-interest spending and receipts. As a ratio relative to gross 

domestic product (GDP), (the primary deficit-to-GDP ratio), it is useful for gauging long-term fiscal 

sustainability. This ratio spiked from 2009 through 2012 due to the financial crisis of 2008-09, the ensuing severe 

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

recovery. As the economic recovery took hold, the primary deficit-to-GDP ratio fell, averaging 1.9 percent from 

2013-2018. The ratio is projected to rise to 2.9 percent in 2019 and then shrink slightly through 2024 as the 

economy grows. After 2024, increased spending for Social Security and health programs is projected to result in 

increasing primary deficits that peak in 2039 at 4.1 percent. This is due to the continued retirement of the baby 

boom generation and increases in health care costs. After 2039, the ratio gradually decreases to 2.5 percent in 

2093 as the aging of the population slows. The primary deficit projections, along with those for interest rates and 

GDP, determine the debt-to-GDP ratio projections.

These projections assume the individual income and estate and gift tax provisions of the TCJA are permanently 

extended and discretionary spending grows at the same rate as nominal GDP beyond 2019. Congressional action 

is required to make these changes. 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 for more information.

If changes in policy are not so abrupt as to slow economic growth, then the sooner policy changes are adopted, the 

smaller the changes to revenue and/or spending will be required to return the government to a sustainable fiscal 

path.
1 Executive Summary to the 2018 Financial Report of U.S. Government 
 Executive Summary to the 2018 Financial Report of the U.S. Government 2

Executive Summary to the Fiscal Year 2018 

Financial Report of the United States Government

The Fiscal Year 2018 Financial Report of the United States Government (Financial Report) presents the U.S. 

government’s current financial position and condition, and discusses key financial topics and trends. The 

Financial Report is produced by the U.S. Department of the Treasury (Treasury) in coordination with the Office 

of Management and Budget (OMB) of the Executive Office of the President. The table on the preceding page 

presents several key indicators of the government’s financial position and condition, which are discussed in this 

Summary and, in greater detail, in the Financial Report. The Secretary of the Treasury, Director of OMB, and the 

Comptroller General of the United States at the Government Accountability Office (GAO) believe that the 

information discussed in this Financial Report is important to all Americans.

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.

Where We Are Now 

Comparing the Budget and the Financial Report 

The Budget of the United States Government (Budget) and the Financial Report present complementary 

perspectives on the government’s financial position and condition.

• The Budget is the government’s primary financial planning and control tool. It accounts for past government 

receipts and spending, and includes the President’s proposed receipts and spending plan. Receipts are cash 

received by the U.S. government and spending is measured as outlays, or payments made by the government 

to the public. Receipts greater than outlays creates a budget surplus; and outlays greater than receipts creates a 

budget deficit.

• The Financial Report includes the government’s costs and revenues, assets and liabilities, and other important 

financial information. It compares the government’s revenues (amounts earned, but not necessarily collected), 

with costs (amounts incurred, but not necessarily paid) to derive net operating cost.

Chart 1 compares the government’s budget deficit (receipts vs. outlays) and net operating cost (revenues vs. 

costs) for fiscal years 2014 - 2018. During 

fiscal year 2018:

• A $127.1 billion increase in outlays was 

offset in part by a $13.8 billion increase in 

receipts to increase the budget deficit by 

$113.3 billion (about 17.0 percent) to 

$779.0 billion. 

• Net operating cost remained largely 

unchanged during fiscal year 2018 at $1.2 

trillion, increasing by $5.4 billion or 0.5 

percent. This is due mostly to a $10.1 

billion or 0.2 percent increase in net cost 

which slightly more than offset a $9.7 

billion or 0.3 percent increase in tax and 

other revenues.

• The $380.0 billion difference between the 

budget deficit and net operating cost is primarily due to accrued costs (incurred but not necessarily paid) 

related to increases in estimated federal employee and veteran benefits liabilities and certain other liabilities 

that are included in net operating cost, but not the budget deficit.
3 Executive Summary to the 2018 Financial Report of U.S. Government 

Costs and Revenues 

The government’s “bottom line” net operating cost remained largely unchanged at $1.2 trillion during fiscal year 

2018, increasing by $5.4 billion (0.5 percent). It is calculated 

as follows:

• Starting with total gross costs of $4.8 trillion, the 

government subtracts earned program revenues (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 

future federal employee and veterans benefits payments 

to derive its net cost before taxes and other revenues of 

$4.5 trillion (see Chart 2), an increase of $10.1 billion 

(0.2 percent) from fiscal year 2017. This net increase is 

the combined effect of many offsetting increases and 

decreases across the government. For example:

o Entities administering federal employee and veterans 

benefits programs, including the Office of Personnel Management (OPM), Department of Veterans Affairs 

(VA), and Department of Defense (DOD) 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.

o The Department of Energy’s (DOE) net cost increased by $99.6 billion, predominantly due changes in 

estimated environmental remediation costs.

o Department of Health and Human Services (HHS) and Social Security Administration (SSA) net costs 

increased $56.4 billion and $39.5 billion, respectively, largely due to increases in benefit expenses from the 

social insurance programs administered by those entities (e.g., Medicare, Social Security). 

o At DOD, a $33.0 billion net cost increase includes a $39.2 billion decrease in earned revenues across the 

Department, as well as increases in the costs of procurement, personnel, and research and development. 

These increases were partially offset by a decrease in losses from changes in assumptions referenced 

above and a decrease in costs of military operations, readiness, and support.

o Interest costs related to the federal debt held by the public increased by $61.0 billion due largely to an increase 

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

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

• The government deducts tax and other revenues from net cost (with some adjustments) to derive its fiscal year 

2018 “bottom line” net operating cost of $1.2 trillion.

o From Chart 3, total government tax and other 

revenues grew by $9.7 billion (0.3 percent) to about 

$3.4 trillion for fiscal year 2018.

o Together, individual income tax and tax 

withholdings, and corporate taxes accounted for 

about 88.7 percent of total tax and other revenues in 

fiscal year 2018. Other revenues include Federal 

Reserve earnings, excise taxes, and customs duties.
 Executive Summary to the 2018 Financial Report of the U.S. Government 4

Assets and Liabilities

Chart 4 summarizes the assets and liabilities that the government reports on its Balance Sheet. As of 

September 30, 2018:

• Total assets ($3.8 trillion) consist mostly 

of $1.4 trillion in net loans receivable 

(primarily student loans) and $1.1 trillion 

in net property, plant, and equipment).

o Other significant government 

resources not reported on the Balance 

Sheet include stewardship assets, 

natural resources, and the 

government’s power to tax and set 

monetary policy.

• Total liabilities ($25.4 trillion) consist 

mostly of: (1) $15.8 trillion in federal debt 

securities held by the public and accrued 

interest and (2) $8.0 trillion in federal 

employee and veteran benefits payable.

o The “public” consists of individuals, corporations, state and local governments, Federal Reserve Banks, 

foreign governments, and other entities outside the federal government.

• The government also reports about $5.8 trillion of intragovernmental debt outstanding, which arises when one 

part of the government borrows from another.

o For example, government funds (e.g., Social Security and Medicare trust funds) typically must invest 

excess annual receipts, including interest earnings, in Treasury-issued federal debt securities. Although 

not reflected in Chart 4, these securities are included in the calculation of federal debt subject to the debt 

limit.

• Debt held by the public plus intragovernmental debt equals gross federal debt, which, with some adjustments, 

is subject to a statutory debt ceiling (“debt limit”).

o At the end of fiscal year 2018, debt subject to the statutory limit was $21.5 trillion. Increasing or 

suspending the debt limit does not increase spending or authorize new spending; rather, it permits the 

government to continue to honor pre-existing commitments.

o Legislation most recently suspended the debt limit from February 9, 2018 through March 1, 2019. 

Effective 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 implements “extraordinary measures” on 

a temporary basis, to enable the government to protect the full faith and credit of the United States by 

continuing to pay its bills. Treasury began taking these extraordinary measures on March 4, 2019.

Key Economic Trends

An examination of key macroeconomic indicators is essential to the discussion of the government’s financial 

performance. During fiscal year 2018, economic growth and the pace of job creation each accelerated, and the 

unemployment rate declined to a 49-year low. These and other economic and financial developments are 

discussed in greater detail in the Financial Report.
5 Executive Summary to the 2018 Financial Report of U.S. Government 

An Unsustainable Fiscal Path 

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

importance and magnitude of policy reforms necessary to make it sustainable. A sustainable fiscal policy is one 

where the ratio of debt held by the public to GDP (the debt-to-GDP ratio) is stable or declining over the long 

term. GDP measures 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.

The current fiscal path is unsustainable. To determine if current fiscal policy is sustainable, the projections 

discussed in the Financial Report assume current policy will continue indefinitely.1 The projections are therefore 

neither forecasts nor predictions. Nevertheless, policy changes must be enacted so that actual financial outcomes 

will be different than those projected.

Receipts, Spending, and the Debt 

Chart 5 shows historical and current policy projections for receipts, non-interest spending by major category, 

net interest, and total spending expressed 

as a percent of GDP.

• The primary deficit is the difference 

between non-interest spending and 

receipts. The primary deficit 

expressed as a ratio relative to GDP 

(the primary deficit-to-GDP ratio) is 

useful for gauging long-term fiscal 

sustainability.

• The primary deficit-to-GDP ratio 

spiked during 2009 through 2012 due 

to the financial crisis of 2008-09 and 

the ensuing severe recession, as well 

as increased spending and temporary 

tax reductions enacted to stimulate the 

economy and support recovery. As an 

economic recovery took hold, the 

primary deficit-to-GDP ratio fell, 

averaging 1.9 percent from 2013-2018. The 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 programs2 due to the continued retirement of the baby boom generation and increases in health care 

costs is projected to result in increasing primary deficits that peak in 2039, when the primary deficit-to-GDP 

ratio reaches 4.1 percent. After 2039, the ratio gradually decreases as the aging of the population continues at 

a slower pace, and reaches 2.5 percent in 2093.

• These projections assume the individual income and estate and gift tax provisions of the TCJA are 

permanently extended and discretionary spending grows at the same rate as nominal GDP beyond 2019. 

Congressional action is required to make these changes. 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 for more information.

 1Current policy in the projections is based on current law, but includes extension of certain policies that expire under current law but are routinely extended 

or otherwise expected to continue.

2 See the 2018 Trustees Report for Medicare (pp 4-5) and Social Security (pp 4-23) and the 2017 Medicaid Actuarial Report
 Executive Summary to the 2018 Financial Report of the U.S. Government 6

• The persistent long-term gap between projected receipts and total spending shown in Chart 5 occurs despite 

the projected effects of the Affordable Care Act (ACA)3 on long-term deficits.

o 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.

o There is uncertainty about the extent to which these projections can be achieved and whether the 

ACA’s provisions that reduce Medicare cost growth will be overridden by new legislation. 

Table 1 summarizes the status and projected trends of the government’s Social Security and Medicare Trust 

Funds.

The primary deficit projections in Chart 5, along with those for interest rates and GDP, determine the debtto-GDP ratio projections in Chart 6.

• The debt-to-GDP ratio was 78 percent 

at the end of fiscal year 2018, and 

under current policy is projected to 

exceed 100 percent by 2030, and 

reach 530 percent in 2093.

• The debt-to-GDP ratio rises 

continuously mainly because higher 

levels of debt lead to higher net 

interest expenditures, which lead to 

higher deficits and debt. The 

continuous rise of the debt-to-GDP 

ratio indicates that current fiscal 

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.

 3 The ACA refers to P.L. 111-148, as amended by P.L. 111-152. The ACA expands health insurance coverage, provides health insurance subsidies for lowincome individuals and families, includes many measures designed to reduce health care cost growth, and significantly reduces Medicare payment rates 

relative to the rates that would have occurred in the absence of the ACA. (See Note 22 and the Required Supplementary Information section of the Financial 

Report, and the 2018 Medicare Trustees Report for more information).
7 Executive Summary to the 2018 Financial Report of U.S. Government 

The Fiscal Gap and the Cost of Delaying Fiscal Policy Reform

• The 75-year fiscal gap is a measure of how much primary deficits must be reduced over the next 75 years in 

order to make fiscal policy sustainable. That estimated fiscal gap for 2018 is 4.1 percent of GDP (compared to 

2.0 percent for 2017). 

• This estimate implies that making fiscal policy sustainable over the next 75 years would require some 

combination of spending reductions and receipt increases that equals 4.1 percent of GDP on average over the 

next 75 years. 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.

• The timing of policy changes to make fiscal policy sustainable has important implications for the well-being 

of future generations as is shown in Table 2.

o Table 2 shows that, if action is delayed by 10 years, the estimated magnitude of primary surplus 

increases necessary to close the 75-year fiscal gap increases by nearly 20 percent from 4.1 percent of 

GDP on average over 75 years to 4.9 percent on average over 65 years); if action is delayed by 20 

years, the magnitude of reforms necessary increases by about 46 percent. 

o Future generations are harmed by a policy delay because the higher the primary surpluses are during 

their lifetimes, the greater is the difference between the taxes they pay and the programmatic 

spending from which they benefit.

Conclusion

• Projections in the Financial Report indicate that the government’s debt-to-GDP ratio is projected to rise over 

the 75-year projection period and beyond if current policy is kept in place. The projections in this Financial 

Report show that current policy is not sustainable.

• If changes in fiscal policy are not so abrupt as to slow economic growth and the sooner those policy changes 

are adopted, the smaller the changes to revenue and/or spending will be required to return the government to a 

sustainable fiscal path.

Find Out More

The 2018 Financial Report and other information about the nation’s finances are available at:

• U.S. Department of the Treasury, http://www.fiscal.treasury.gov/fsreports/rpt/finrep/fr/fr_index.htm;

• OMB’s Office of Federal Financial Management, https://www.whitehouse.gov/omb/management/office-federalfinancial-management/; and

• GAO, http://www.gao.gov/financial.html

The Government Accountability Office’s (GAO) audit report on the U.S. government’s consolidated financial 

statements can be found beginning on page 226 of the full Financial Report. GAO was unable to express an 

opinion (disclaimed) on these consolidated financial statements for the reasons discussed in the audit report.
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: 

• 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;

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

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

Other Information; and

• 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: 

• 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. 

• 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.

• 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.

• 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. 

• 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:

• 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). 

• 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.

• 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:

• 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

 

• 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.

• 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. 

• 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”

• Initiative-based and prospective: focus on 

current and future initiatives planned and 

how resources will be used to fund them.

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

collections recorded when received.

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

payment is made. 

Prepared on an “accrual and modified cash basis”

• Entity-based and retrospective – prior and present 

resources used to implement initiatives.

• 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.

• 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: 

• 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. 

• 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; 

• $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);

• 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; 

• 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

• 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:

• 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.

• 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, 

• 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.

• 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. 

• 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.

• 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.

• 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. 

• 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.

• 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.

• 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.

• 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. 

• 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. 

• 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; 

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

government charge card programs; 

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

• 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: 

• Budget of the United States Government, 

• Treasury Bulletin, 

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

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

• Economic Report of the President, and 

• Trustees’ Reports for the Social Security and Medicare Programs.
35 MANAGEMENT’S DISCUSSION AND ANALYSIS

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STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 36

March 28, 2019

The President

The President of the Senate

The Speaker of the House of Representatives

To operate as effectively and efficiently as possible, Congress, the administration, and federal 

managers must have ready access to reliable and complete financial and performance information—

both for individual federal entities and for the federal government as a whole. Our report on the U.S. 

government’s consolidated financial statements for fiscal years 2018 and 2017 underscores that much 

work remains to improve federal financial management and that the federal government continues to 

face an unsustainable long-term fiscal path.

Our audit report on the U.S. government’s consolidated financial statements is enclosed. In summary, 

we found the following: 

• Certain material weaknesses1 in internal control over financial reporting and other limitations 

resulted in conditions that prevented us from expressing an opinion on the accrual-based 

consolidated financial statements as of and for the fiscal years ended September 30, 2018, and 

2017.2 About 31 percent of the federal government’s reported total assets as of September 30, 

2018, and approximately 17 percent of the federal government’s reported net cost for fiscal year 

2018 relate to significant federal entities that received disclaimers of opinion3 on their fiscal year 

2018 financial statements or whose fiscal year 2018 financial information was unaudited.

4

• Significant uncertainties (discussed in Note 22 to the consolidated financial statements), primarily 

related to the achievement of projected reductions in Medicare cost growth, prevented us from 

 1A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there 

is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected 

and corrected, on a timely basis. A deficiency in internal control exists when the design or operation of a control does not allow 

management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, 

misstatements on a timely basis.

2The accrual-based consolidated financial statements as of and for the fiscal years ended September 30, 2018, and 2017, 

consist of the (1) Statements of Net Cost, (2) Statements of Operations and Changes in Net Position, (3) Reconciliations of 

Net Operating Cost and Budget Deficit, (4) Statements of Changes in Cash Balance from Budget and Other Activities, and (5) 

Balance Sheets, including the related notes to these financial statements. Most revenues are recorded on a modified cash 

basis. 

3A disclaimer of opinion arises when the auditor is unable to obtain sufficient appropriate audit evidence to provide a basis for 

an audit opinion and accordingly does not express an opinion on the financial statements.

4The Department of Defense, the Department of Housing and Urban Development, and the Railroad Retirement Board each 

received a disclaimer of opinion on their respective fiscal year 2018 financial statements. Also, for fiscal year 2018, the 

financial information for Security Assistance Accounts was unaudited.
37 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES

expressing an opinion on the sustainability financial statements,5 which consist of the 2018 and 

2017 Statements of Long-Term Fiscal Projections;6 the 2018, 2017, 2016, 2015, and 2014 

Statements of Social Insurance;7 and the 2018 and 2017 Statements of Changes in Social 

Insurance Amounts. About $37.7 trillion, or 70 percent, of the reported total present value of future 

expenditures in excess of future revenue presented in the 2018 Statement of Social Insurance 

relates to Medicare programs reported in the Department of Health and Human Services’ 2018 

Statement of Social Insurance, which received a disclaimer of opinion. A material weakness in 

internal control also prevented us from expressing an opinion on the 2018 and 2017 Statements of 

Long-Term Fiscal Projections. 

• Material weaknesses resulted in ineffective internal control over financial reporting for fiscal year 

2018.

• Material weaknesses and other scope limitations, discussed above, limited tests of compliance with 

selected provisions of applicable laws, regulations, contracts, and grant agreements for fiscal year 

2018.

Overall, significant progress has been made in improving federal financial management since key 

federal financial management reforms were enacted in the 1990s. Twenty-two of the 24 Chief Financial 

Officers Act of 1990 (CFO Act) agencies received unmodified (“clean”) opinions on their respective 

entities’ fiscal year 2018 financial statements, up from six CFO Act agencies that received clean audit 

opinions for fiscal year 1996.8 In addition, accounting and financial reporting standards have continued 

to evolve to provide greater transparency and accountability over the federal government’s operations, 

financial condition, and fiscal outlook. 

While the U.S. government's consolidated financial statements provide a high-level summary of the 

financial position, financial condition, and operating results for the federal government as a whole, the 

annual preparation and audit of individual federal entity financial statements continue to be critical, 

among other things, to

• provide individual federal entity accountability to Congress and citizens, including 

(1) independent assurance, shortly after the end of the fiscal year, of the reliability of reported 

financial information and (2) association of program costs with related program performance and 

results;

 5The sustainability financial statements are based on projections of future receipts and spending, while the accrual-based 

consolidated financial statements are based on historical information, including the federal government’s assets, liabilities, 

revenue, and net cost.

6The 2018 and 2017 Statements of Long-Term Fiscal Projections present, for all the activities of the federal government, the 

present value of projected receipts and non-interest spending under current policy without change, the relationship of these 

amounts to projected gross domestic product (GDP), and changes in the present value of projected receipts and non-interest 

spending from the prior year. These statements also present the fiscal gap, which is the combination of non-interest spending 

reductions and receipts increases necessary to hold debt held by the public as a share of GDP at the end of the projection 

period to its value at the beginning of the period. The valuation date for the Statements of Long-Term Fiscal Projections is 

September 30. 

7Statements of Social Insurance are presented for the current year and each of the 4 preceding years as required by U.S. 

generally accepted accounting principles. For the Statements of Social Insurance, the valuation date is 

January 1 for the Social Security and Medicare programs, October 1 for the Railroad Retirement program (January 1 for 2014 

and 2015), and September 30 for the Black Lung program.

8The 22 agencies include the Department of Health and Human Services, which received an unmodified (“clean”) opinion on 

all statements except the Statements of Social Insurance and the Statements of Changes in Social Insurance Amounts.
STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 38

• facilitate reliable, useful, and timely financial management information at the individual federal entity 

and program levels for effective management decision-making;

• assess the reliability and effectiveness of systems and related internal controls, including identifying 

control deficiencies that could lead to fraud, waste, and abuse; and

• deliver early warnings of emerging financial management issues.

Further, annual audits along with congressional and executive oversight provide significant incentives 

for individual federal entities to maintain reliable financial management information and effective 

systems and controls.

The preparation and audit of individual federal entities’ financial statements have also identified 

numerous deficiencies, leading to corrective actions to strengthen federal entities’ internal controls, 

processes, and systems. For instance, the U.S. Department of Agriculture took corrective actions to 

address deficiencies identified during its audits that enabled it to obtain an unmodified audit opinion on 

its full set of financial statements after 2 years of only receiving an opinion on its balance sheet. Also, 

management of the Department of Housing and Urban Development (HUD) has developed plans to 

address the multiple material weaknesses identified by HUD’s Office of Inspector General. 

However, since the federal government began preparing consolidated financial statements over 20 

years ago, three major impediments have continued to prevent us from rendering an opinion on the 

federal government’s accrual-based consolidated financial statements over this period: (1) serious 

financial management problems at the Department of Defense (DOD) that have prevented its financial 

statements from being auditable, (2) the federal government’s inability to adequately account for 

intragovernmental activity and balances between federal entities, and (3) the federal government’s 

ineffective process for preparing the consolidated financial statements. 

DOD’s financial management continues to face long-standing issues. Following years of unsuccessful 

financial improvement efforts at DOD and consistently being unable to receive an audit opinion on its 

financial statements, in 2005, the DOD Comptroller established the Financial Improvement and Audit 

Readiness Directorate to develop, manage, and implement a strategic approach for addressing internal 

control weaknesses and for achieving auditability, and to integrate those efforts with other improvement 

activities, such as the department’s business systems modernization efforts.

DOD’s strategy for achieving a clean opinion on its financial statements and improving overall financial 

management has shifted from preparing for audit readiness to undergoing financial statement audits 

and remediating audit findings. In a positive development, DOD underwent an audit of its entity-wide 

fiscal year 2018 financial statements, which resulted in a disclaimer of opinion issued by the DOD 

Office of Inspector General (OIG). The disclaimer of opinion was partially based on the disclaimers of 

opinion for multiple DOD components, including the Army, Navy, Air Force, U.S. Marine Corps, 

Defense Health Program, Defense Logistics Agency, U.S. Transportation Command, and U.S. Special 

Operations Command. The DOD OIG also reported 20 material weaknesses in internal control over 

financial reporting, contributing to its disclaimer of opinion. 

DOD has stated that undergoing financial statement audits is valuable for a number of reasons, such as 

audit remediation efforts, improvements in its operations and readiness, and in the reliability of financial 

management information used in decision-making. For example, the Army created an application for 

storing and analyzing its financial data for audit, which also provided Army management with 

information used to determine funding priorities. Also, the Navy enhanced internal controls over its 

obligation management process, which resulted in identifying funds available for important activities, 
39 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES

such as over $4 million for ship repair costs. In several instances, auditors found inaccurate inventory 

records that could affect readiness. For example, auditors found that certain Blackhawk helicopter parts 

included in inventory records were in fact unavailable or unusable. 

DOD has acknowledged that achieving a clean audit opinion will take time. However, it stated that over 

the next several years, the resolution of audit findings will serve as an objective measure of progress 

toward that goal. DOD will need to develop and effectively monitor corrective action plans to 

appropriately address audit findings in a timely manner. DOD recently developed a centralized 

database to track the audit findings, recommendations, and related corrective action plans.

Various efforts are also under way to address the other two major impediments to an audit of the 

consolidated financial statements. For example, during fiscal year 2018, the Department of the 

Treasury (Treasury) continued to actively work with significant federal entities9 to resolve differences in 

intragovernmental activity and balances between federal entities through its quarterly scorecard 

process.10 This process highlights differences needing the entities’ attention, identifies differences that 

need to be resolved through a formal dispute resolution process,11 and reinforces the entities’ 

responsibilities to resolve intragovernmental differences. Treasury also made significant progress in 

developing and implementing procedures to improve the accounting for and reporting of General Fund 

of the U.S. Government (General Fund) transactions and balances,12 and working to resolve significant 

differences between the General Fund and federal entity trading partners. 

In recent years, Treasury’s corrective actions have included improving systems used for compiling the 

consolidated financial statements, enhancing guidance for collecting data from component entities, and 

implementing procedures to address certain internal control deficiencies detailed in our previously 

issued management report.13 Treasury also continued to develop its process for preparing the 

Reconciliation Statements14 by documenting its rationale for the reconciling items currently presented 

on the Reconciliation Statements. In addition to continued leadership by Treasury and the Office of 

Management and Budget (OMB), federal entities’ strong and sustained commitment is critical to fully 

address these issues. 

 9The Office of Management and Budget and Treasury have identified 40 federal entities that are significant to the U.S. 

government’s fiscal year 2018 consolidated financial statements, including the 24 CFO Act agencies. See app. A of the Fiscal 

Year 2018 Financial Report of the United States Government for a list of the 40 entities.

10For each quarter, Treasury produces a scorecard for each significant entity, as well as any other component entity reporting 

significant intragovernmental balances or differences, that reports various aspects of the entity’s intragovernmental differences 

with its trading partners, including the composition of the differences by trading partner and category. Pursuant to Treasury

guidance, entities are expected to resolve, with their respective trading partners, the differences identified in their scorecards.

11When an entity and its respective trading partner cannot resolve an intragovernmental difference, Treasury guidance directs 

the entity to request that Treasury resolve the dispute. Treasury will review the dispute and issue a decision on how to resolve 

the difference, which the entities must follow.

12The General Fund is a component of Treasury’s central accounting function. It is a stand-alone reporting entity that 

comprises the activities fundamental to funding the federal government (e.g., issued budget authority, cash activity, and debt 

financing activities). 

13GAO, Management Report: Continued Improvements Needed in Controls over the Processes Used to Prepare the U.S. 

Consolidated Financial Statements, GAO-18-540 (Washington, D.C.: July 16, 2018). 

14The Reconciliations of Net Operating Cost and Budget Deficit and Statements of Changes in Cash Balance from Budget and 

Other Activities (Reconciliation Statements) reconcile (1) the accrual-based net operating cost to the primarily cash-based 

budget deficit and (2) the budget deficit to changes in cash balances.
STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 40

The material weaknesses underlying these three major impediments have continued to (1) hamper the 

federal government’s ability to reliably report a significant portion of its assets, liabilities, costs, and 

other related information; (2) affect the federal government’s ability to reliably measure the full cost, as 

well as the financial and nonfinancial performance, of certain programs and activities; (3) impair the 

federal government’s ability to adequately safeguard significant assets and properly record various 

transactions; and (4) hinder the federal government from having reliable, useful, and timely financial 

information to operate effectively and efficiently. Over the years, we have made a number of 

recommendations to OMB, Treasury, and DOD to address these issues.15 These entities have taken or 

plan to take actions to address these recommendations.

In addition to the material weaknesses referred to above, we identified three other material 

weaknesses. These are the federal government’s inability to (1) determine the full extent to which 

improper payments occur and reasonably assure that appropriate actions are taken to reduce them, (2) 

identify and resolve information security control deficiencies and manage information security risks on 

an ongoing basis, and (3) effectively implement internal controls over estimating the cost of credit 

programs and determining the value of loans receivable and loan guarantee liabilities. Our audit report 

presents additional details concerning these material weaknesses and their effect on the accrual-based 

consolidated financial statements and managing federal government operations. Until the problems 

outlined in our audit report are adequately addressed, they will continue to have adverse implications 

for the federal government and the American people.

Resolving the problems outlined in our audit report is of utmost importance given the federal 

government’s reported fiscal path. The 2018 Statement of Long-Term Fiscal Projections and related 

information in Note 23 and in the unaudited Required Supplementary Information section of the Fiscal 

Year 2018 Financial Report of the United States Government (2018 Financial Report) show that absent 

policy changes, the federal government continues to face an unsustainable long-term fiscal path. GAO 

and the Congressional Budget Office (CBO) also prepare long-term federal fiscal simulations, using 

different sets of assumptions, which continue to show federal debt held by the public rising as a share 

of gross domestic product (GDP) in the long term.16 This situation—in which debt grows faster than 

GDP—means the current federal fiscal path is unsustainable. 

GAO, CBO, and the 2018 Financial Report all project that debt held by the public as a share of GDP 

will surpass its historical high (106 percent in 1946) within the next 13 to 20 years. Health care 

spending is a key driver of spending in the long-term projections. Eventually, however, spending on net 

interest (primarily interest on debt held by the public) is projected to grow such that over the long term it 

surpasses Social Security and becomes the largest category of spending in both the 2018 Financial 

Report and GAO’s simulations.17 Reliable and complete financial information for federal entities will be 

needed for making policy changes that effectively address the unsustainable long-term fiscal path. 

 15See GAO-18-540. In addition, see GAO, DOD Financial Management, accessed March 20, 2019, 

https://www.gao.gov/highrisk/dod_financial_management/why_did_study. Further, other auditors have made 

recommendations to DOD for improving its financial management.

16For more information on GAO’s simulations, see GAO, America’s Fiscal Future: Fiscal Forecast, accessed on March 20, 

2019, https://www.gao.gov/americas_fiscal_future?t=fiscal_forecast. For more information on CBO’s simulations, see 

Congressional Budget Office, The 2018 Long-Term Budget Outlook (Washington, D.C.: June 26, 2018). 

17CBO’s projections in its 2018 long-term budget outlook report also show net interest growing as a percentage of total 

spending. However, since CBO’s 2018 extended baseline projections only go out to 2048, the cost of net interest does not 

quite overtake other categories in the projection period.
41 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES

GAO plans to issue its annual report on the fiscal health of the federal government in the coming 

weeks.18

In taking action to change the federal government’s long-term fiscal path, it will be important for 

Congress to consider alternative approaches for managing the level of debt. As currently structured, the 

debt limit—a legal limit on the total amount of federal debt that can be outstanding at one time19—does 

not restrict Congress’s ability to enact spending and revenue legislation that affects the level of federal 

debt, nor does it otherwise constrain fiscal policy. Rather, the debt limit is an after-the-fact measure; the 

spending and tax laws that result in debt have already been enacted. The debt limit restricts Treasury’s 

authority to borrow to finance the decisions already enacted by Congress and the President.

One cannot overstate the importance of preserving the confidence that investors have that debt backed 

by the full faith and credit of the United States will be honored. Failure to increase (or suspend) the debt 

limit in a timely manner could have serious negative consequences for the Treasury market and 

increase borrowing costs. The Bipartisan Budget Act of 2018 temporarily suspended the debt limit from 

February 9, 2018, through March 1, 2019.20 On Monday, March 4, 2019, Treasury began to take 

extraordinary actions to continue funding government activities. It will continue taking these actions until 

the debt limit is raised or suspended.21 With these extraordinary actions in place, CBO estimates that 

Treasury will have sufficient cash to make its usual payments until late into fiscal year 2019. 

As we have previously reported, delays in raising the debt limit can create uncertainty in the Treasury 

market.22 To avoid such uncertainty and the disruption to the Treasury market that it creates, as well as 

to help inform the fiscal policy debate in a timely way, we have suggested that Congress should 

consider ways to better link decisions about the debt limit with decisions about spending and revenue at 

the time those decisions are made.23 We identified three potential approaches for Congress to consider 

regarding delegating borrowing authority:

• Option 1: Link action on the debt limit to the budget resolution.

• Option 2: Provide the administration with the authority to propose a change in the debt limit that 

would take effect absent enactment of a joint resolution of disapproval within a specified time frame.

• Option 3: Delegate broad authority to the administration to borrow as necessary to fund enacted 

laws. 

 18GAO, The Nation’s Fiscal Health: Action Is Needed to Address the Federal Government’s Fiscal Future, GAO-18-299SP 

(Washington, D.C.: June 21, 2018). 

19The debt limit is codified at 31 U.S.C. § 3101(b), as amended, and applies to federal debt issued pursuant to the authority of 

31 U.S.C. chapter 31. A very small amount of total federal debt is not subject to the debt limit. This amount primarily comprises 

unamortized discounts on Treasury bills and Zero Coupon Treasury bonds; debt securities issued by agencies other than 

Treasury, such as the Tennessee Valley Authority; and debt securities issued by the Federal Financing Bank.

20Section 30301 of Division C of the Bipartisan Budget Act of 2018, Pub. L. No. 115-123, div. C, tit. III, § 30301, 132 Stat. 64, 

132 (Feb. 9, 2018), temporarily suspended the debt limit.

21Extraordinary actions are actions that Treasury takes as it nears the debt limit to avoid exceeding that limit. These actions 

are not part of Treasury’s normal cash and debt management operations.

22GAO, Debt Limit: Analysis of 2011-2012 Actions Taken and Effect of Delayed Increase on Borrowing Costs, GAO-12-701 

(Washington, D.C.: July 23, 2012), and Debt Limit: Delays Create Debt Management Challenges and Increase Uncertainty in 

the Treasury Market, GAO-11-203 (Washington, D.C.: Feb. 22, 2011). 

23GAO, Debt Limit: Market Response to Recent Impasses Underscores Need to Consider Alternative Approaches, GAO-15-

476 (Washington, D.C.: July 9, 2015). 
STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 42

All of these options maintain congressional control and oversight over federal borrowing.

Further, there are financial and other risks that could affect the federal government’s financial position 

and condition and its financial management in the future. Financial risk factors that could affect the 

federal government’s financial condition in the future include the following:

• The Pension Benefit Guaranty Corporation’s (PBGC) financial future is uncertain because of longterm challenges related to its funding and governance structure. PBGC’s liabilities exceeded its 

assets by about $51 billion as of the end of fiscal year 2018—an increase of about $16 billion from 

the end of fiscal year 2013. PBGC estimated that its exposure to potential further losses for 

underfunded plans in both the single and multiemployer programs was nearly $185 billion.

24

• Federal support of the housing finance market remains significant even though the market has 

largely recovered since the 2007 to 2009 financial crisis. In 2008, the federal government placed 

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

Corporation (Freddie Mac) under conservatorship and entered into preferred stock purchase 

agreements with these government-sponsored enterprises (GSE) to help ensure their financial 

stability. These agreements could affect the federal government’s financial condition. At the end of 

fiscal year 2018, the federal government reported about $113 billion of investments in the GSEs, 

which is net of about $91 billion in valuation losses. The GSEs paid Treasury cash dividends of $9.9 

billion and $25.3 billion during fiscal years 2018 and 2017, respectively. The reported maximum 

remaining contractual commitment to the GSEs, if needed, is $254.1 billion. The ultimate role of the 

GSEs could affect the federal government’s financial position and the financial condition of federal 

entities, including the Federal Housing Administration (FHA), which in the past expanded its lending 

role in distressed housing and mortgage markets. Specifically, as of the end of fiscal year 2018, 

FHA’s insured portfolio exceeded $1.2 trillion. The Government National Mortgage Association 

(Ginnie Mae) guarantees the performance of almost $2 trillion in securities backed by federally 

insured mortgages—of which $1.2 trillion were insured by FHA and $0.8 trillion by other federal 

entities, such as the Department of Veterans Affairs. 

We have reported on the need for Congress to consider legislation making changes to the future 

federal role in housing finance that addresses the structure of the GSEs; establishes clear, specific, 

and prioritized goals; and considers all relevant federal entities, such as FHA and Ginnie Mae.25

• The U.S. Postal Service (USPS) continues to be in poor financial condition. USPS cannot fund its 

current level of services and meet its financial obligations from its existing revenues. The fiscal year 

2018 net loss of $3.9 billion marked its 11th consecutive year of net losses—totaling $69 billion. In 

addition, USPS has missed $48.2 billion in required payments for postal retiree health and pension 

benefits through fiscal year 2018, including $42.6 billion in missed payments for retiree health 

benefits since fiscal year 2010 and $5.6 billion in missed payments for pension benefits since fiscal 

year 2014. USPS has stated that it missed these payments to minimize the risk of running out of 

 24The Bipartisan Budget Act of 2018 established the Joint Select Committee on Solvency of Multiemployer Pension Plans, 

which was tasked with voting on a report that was to include any findings, conclusions, and recommendations (as well as 

proposed legislative language to carry out such recommendations) to significantly improve the solvency of multiemployer 

pension plans and PBGC by November 30, 2018. Pub. L. No. 115-123, div. C, tit. IV, subtit. A, § 30422, 132 Stat. 64, 133-37 

(Feb. 9, 2018). However, even though the joint committee did not vote on a report and was statutorily set to terminate no later 

than December 31, 2018, its co-chairmen released a statement committing to working to solve the multiemployer pension 

crisis past the November 30 deadline. 

25GAO, Housing Finance: Prolonged Conservatorships of Fannie Mae and Freddie Mac Prompt Need for Reform, GAO-19-

239 (Washington, D.C.: Jan. 18, 2019).
43 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES

cash, citing its precarious financial condition and the need to cover current and anticipated costs 

and any contingencies.26

• Some government insurance programs have not collected sufficient premiums or do not have 

sufficient dedicated resources to cover expected costs without borrowing from Treasury.27 For 

example, as of September 2018, the Federal Emergency Management Agency (FEMA), which 

administers the National Flood Insurance Program, owed $20.5 billion to Treasury for money 

borrowed to pay claims and other expenses. We have reported that FEMA was unlikely to collect 

enough in premiums in the future to repay this debt.28 The amount owed is net of $16 billion of debt 

that was canceled in October 2017 by the Additional Supplemental Appropriations for Disaster 

Relief Requirements Act, 2017.29

• Also, large events, such as natural disasters, pandemics, cyberattacks, military engagements, or 

economic crises, are not considered in the Statements of Long-Term Fiscal Projections. To the 

extent that such large events occur, the actual future spending may be greater than spending in 

these projections.

Every 2 years, GAO provides Congress with an update on its High-Risk Series, which highlights federal 

entities and program areas that are at high risk because of their vulnerabilities to fraud, waste, abuse, 

and mismanagement or are most in need of broad reform. We issued our most recently updated HighRisk Series on March 6, 2019.30 GAO’s High-Risk Series includes most of the above-noted issues, 

such as DOD financial management, ensuring the cybersecurity of the nation, the PBGC insurance 

programs, resolving the federal role in housing finance, USPS financial viability, and the National Flood 

Insurance Program.

_________________________

Our audit report on the U.S. government’s consolidated financial statements would not be possible 

without the commitment and professionalism of inspectors general throughout the federal government 

who are responsible for annually auditing the financial statements of individual federal entities. We also 

appreciate the cooperation and assistance of Treasury and OMB officials as well as the federal entities’ 

chief financial officers. We look forward to continuing to work with these individuals, the administration, 

and Congress to achieve the goals and objectives of federal financial management reform.

Our audit report begins on page 226. Our guide, Understanding the Financial Report of the United 

States Government, is intended to help those who seek to obtain a better understanding of the financial 

report and is available on GAO’s website at http://www.gao.gov.31

 26GAO, High-Risk Series: Substantial Efforts Needed to Achieve Greater Progress on High-Risk Areas, GAO-19-157SP 

(Washington, D.C.: Mar. 6, 2019). 

27We have suggested an alternative way to record insurance commitments in the budget such that the federal government’s 

commitment would be more fully recognized. See GAO, Fiscal Exposures: Improving Cost Recognition in the Federal Budget, 

GAO-14-28 (Washington, D.C.: Oct. 29, 2013).

28GAO, Flood Insurance: Comprehensive Reform Could Improve Solvency and Enhance Resilience, GAO-17-425 

(Washington, D.C.: Apr. 27, 2017).

29Additional Supplemental Appropriations for Disaster Relief Requirements Act, 2017, Pub. L. No. 115-72, § 308, 131 Stat. 

1224, 1228-29 (Oct. 26, 2017).

30GAO-19-157SP.

31GAO, Understanding the Financial Report of the United States Government, GAO-18-239SP (Washington, D.C.: February 

2018).
STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 44

Our audit report was prepared under the direction of Robert F. Dacey, Chief Accountant; and Dawn 

Simpson, Director, Financial Management and Assurance. If you have any questions, please contact 

me on (202) 512-5500 or them on (202) 512-3406.

Gene L. Dodaro

Comptroller General

of the United States

cc: The Majority Leader of the Senate

The Minority Leader of the Senate

The Majority Leader of the House of Representatives

The Minority Leader of the House of Representatives
45 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES

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FINANCIAL STATEMENTS 46

Financial Statements

of the United States Government

for the Fiscal Years Ended September 30, 

2018, and 2017

The consolidated financial statements of the U.S. government were prepared using GAAP. The consolidated financial 

statements include the accrual-based financial statements and the sustainability financial statements, which are discussed in 

more detail below, and the related notes to the consolidated financial statements. Collectively, the accrual-based financial 

statements, the sustainability financial statements, and the notes represent basic information that is deemed essential for the 

consolidated financial statements to be presented in conformity with GAAP. 

ACCRUAL-BASED FINANCIAL STATEMENTS

The accrual-based financial statements present historical information on what the federal government owns (assets) and

owes (liabilities) at the end of the year, what came in (revenues) and what went out (net costs) during the year, and how 

accrual-based net operating costs of the federal government reconcile to the budget deficit and changes in its cash balance 

during the year. The following sections discuss each of the accrual-based financial statements.

Statements of Net Cost 

These statements present the net cost of the government operations for fiscal years 2018 and 2017, including the 

operations related to funds from dedicated collections. Costs and earned revenues are categorized on the Statement of Net 

Cost by significant entity, providing greater accountability by showing the relationship of the entities’ net cost to the 

governmentwide net cost. Costs and earned revenues are presented in this Financial Report on an accrual basis, while the 

budget presents outlays and receipts, generally on a cash basis. The focus of the budget of the U.S. is by entity. Budgets are 

prepared, defended, and monitored by entity. In reporting by entity, we are assisting the external users in assessing the budget 

integrity, operating performance, stewardship, and systems and controls of the government.

The Statements of Net Cost contain the following four components:

• Gross cost—is the full cost of all the departments and entities excluding (gain)/loss from changes in assumptions. 

These costs are assigned on a cause-and-effect basis, or reasonably allocated to the corresponding entities.

• Earned revenue—is exchange revenue resulting from the government providing goods and services to the public at a 

price.

• (Gain)/loss from changes in assumptions—is the gain or loss from changes in long-term assumptions used to 

measure the liabilities reported for federal civilian and military employee pensions, other post-employment benefits, 

and other retirement benefits, including veterans’ compensation.

• Net cost—is computed by subtracting earned revenue from gross cost, adjusted by the (gain)/loss from changes in 

assumptions.

Individual entity net cost amounts will differ from the entity’s financial statements primarily because of reallocations 

completed at the governmentwide level which are listed below. 

• Employee benefit costs.

• Intragovernmental eliminations, as adjusted for buy/sell costs and related revenues.

• Imputed costs.

Because of its specific function, most of the employee benefit costs originally associated with the OPM have been 

reallocated to the user entities for governmentwide reporting purposes. The remaining costs for OPM on the Statements of 

Net Cost are the administrative operating costs, the expenses from prior costs from health and pension plan amendments, and 

the actuarial gains and losses, if applicable. 
47 FINANCIAL STATEMENTS

GSA is the primary provider of goods and services to federal entities. GSA’s net cost is adjusted for its 

intragovernmental buy/sell costs and related revenues. The remaining costs for GSA on the Statements of Net Cost are 

administrative operating costs. With regard to intragovernmental buy/sell costs and related revenues, the amounts recognized 

by each entity are added to, and subtracted from, respectively, the individual entity non-federal net cost amounts. 

In addition, the intragovernmental imputed costs recognized for the receipt of goods and services, financed in whole or 

part by the providing entities, are added to the individual entity non-federal net cost amounts. The most significant types of 

imputed costs that are recorded relate to post-retirement and health benefits, FECA, and the Treasury Judgment Fund. The 

consolidated Statements of Net Cost is intended to show the full cost for each entity, therefore, the amount of these imputed 

costs are added back to the reporting entities’ gross cost line item and subtracted from the applicable administering entities’ 

gross cost line item. These imputed costs have a net effect of zero on the Statements of Net Cost in the Financial Report.

The interest on securities issued by the Treasury and held by the public is reported on Treasury’s financial statements, 

but, because of its importance and the dollar amounts involved, it is reported separately in these statements.

Statements of Operations and Changes in Net Position

These statements report the results of government operations, net operating costs, which include the results of

operations for funds from dedicated collections. They include non-exchange revenues, which are generated from transactions

that do not require a government entity to give value directly in exchange for the inflow of resources. The government does

not “earn” the non-exchange revenue. These are generated principally by the government’s sovereign power to tax, levy

duties, and assess fines and penalties. These statements also include the net cost reported in the Statements of Net Cost. They

further include certain adjustments and unreconciled transactions that affect the net position.

Revenue

Inflows of resources to the government that the government demands or that it receives by donations are identified as

non-exchange revenue. The inflows that it demands include individual income tax and tax withholdings, excise taxes,

corporate income taxes, unemployment taxes, custom duties, and estate and gift taxes. The non-exchange revenue is

recognized when collected and adjusted for the change in net measurable and legally collectable amounts receivable.

Individual income tax and tax withholdings include Federal Insurance Contributions Act (FICA)/Self-Employment

Contributions Act (SECA) taxes and other taxes.

Excise taxes consist of taxes collected for various items, such as airline tickets, gasoline products, distilled spirits and

imported liquor, tobacco, firearms, and other items.

Other taxes and receipts include FRBs earnings, tax related fines, penalties and interest, and railroad retirement taxes.

Miscellaneous earned revenues consist of earned revenues received from the public with virtually no associated cost.

These revenues include rents and royalties on the Outer Continental Shelf Lands resulting from the leasing and development

of mineral resources on public lands.

Generally, funds from dedicated collections are financed by specifically identified revenues, provided to the

government by non-federal sources, often supplemented by other financing sources, which remain available over time. These

specifically identified revenues and other financing sources are required by statute to be used for designated activities,

benefits or purposes, and must be accounted for separately from the government’s general revenue. See Note 20—Funds

from Dedicated Collections for detailed information.

Intragovernmental interest represents interest earned from the investment of surplus dedicated collections, which

finance the deficit spending of all other fund’s non-dedicated operations. These investments are recorded as

intragovernmental debt holdings and are included in Note 11—Federal Debt Securities Held by the Public and Accrued

Interest, in the table titled Intragovernmental Debt Holdings: Federal Debt Securities Held as Investments by Government

Accounts. These interest earnings and the associated investments are eliminated in the consolidation process.
FINANCIAL STATEMENTS 48

Net Cost of Government Operations

The net cost of government operations—gross cost (including gains/losses from changes in assumptions) less earned

revenue—flows through from the Statements of Net Cost. The net cost and intragovernmental net cost associated with funds

from dedicated collections activities are separately reported.

Intragovernmental Transfers

Intragovernmental transfers reflect budgetary and other financing sources for funds from dedicated collections,

excluding financing sources related to non-exchange revenues, intragovernmental interest, and miscellaneous revenues.

These intragovernmental transfers include appropriations, transfers, and other financing sources. These amounts are labeled

as “other changes in fund balance” in Note 20—Funds from Dedicated Collections. Some transfers reflect amounts required

by statute to be transferred from the General Fund of the U.S. Government (General Fund) to funds from dedicated

collections. For Supplementary Medical Insurance (SMI), transfers from the General Fund financed 72 percent and 70

percent of 2018 program costs to Part B and D, respectively.

Unmatched Transactions and Balances

Unmatched transactions and balances are adjustments needed to bring the change in net position into balance due

primarily to unreconciled intragovernmental differences. See Note 1.R—Unmatched Transactions and Balances for detailed

information.

The unmatched transactions and balances are included in net operating cost to make the sum of net operating costs and

adjustments to beginning net position for the year equal to the change in the net position balance.

Net Operating Cost

The net operating cost equals revenue less net cost of government operations (that flows from the Statement of Net

Cost) adjusted by unmatched transactions and balances. See Note 1.R—Unmatched Transactions and Balances for detailed

information.

Net Position, Beginning of Period

The net position, beginning of period, reflects the amount reported on the prior year’s Balance Sheet as of the end of

that fiscal year. The net position for funds from dedicated collections is shown separately.

Adjustments to beginning net position may include corrections of material errors or changes in accounting principles.

See Note 1.S—Adjustments to Beginning Net Position for detailed information.

Net Position, End of Period

The net position, end of period, reflects the amount as of the end of the fiscal year. The net position for funds from

dedicated collections is separately shown.
49 FINANCIAL STATEMENTS

Reconciliations of Net Operating Cost and Budget Deficit

These statements reconcile the results of operations (net operating cost) on the Statements of Operations and Changes in

Net Position to the budget deficit (result of outlays exceeding receipts during a particular fiscal year). The premise of the

reconciliation is that the accrual and budgetary accounting basis share transaction data.

Receipts and outlays in the budget are measured primarily on a cash basis and differ from the accrual basis of

accounting used in the Financial Report. Refer to Note 1.B—Basis of Accounting and Revenue Recognition for details.

These statements begin with the net results of operations (net operating cost) and report activities where the basis of

accounting for the components of net operating cost and the budget deficit differ.

Some presentations of the budget deficit make the distinction between on-budget and off-budget totals. On-budget totals

reflect the transactions of all government entities, except those excluded from the budget by law. Off-budget totals reflect the

transactions of government entities that are excluded from the on-budget totals by law. Under current law, the off-budget

totals include the Social Security trust funds and the United States Postal Service (USPS). The budget deficit, as presented in

the Financial Report, combines the on-budget and off-budget totals to derive consolidated totals for federal activity.

In fiscal year 2018, additional lines were included in the presentation of these statements to provide a further breakdown

of certain categories of transactions.

Components of Net Operating Cost Not Part of the Budget Deficit

This information includes the operating components, such as the changes in benefits payable for veterans, military and

civilian employees, environmental and disposal liabilities, and depreciation expense, not included in the budget results.

Components of the Budget Deficit Not Part of Net Operating Cost

This information includes the budget components, such as capitalized fixed assets (that are recorded as outlays in the

budget when purchased and reflected in net operating cost through depreciation expense over the useful life of the asset) and

increases in other assets that are not included in the operating results.

Statements of Changes in Cash Balance from Budget and Other

Activities

The primary purpose of these statements is to report how the annual budget deficit relates to the change in the

government’s cash and other monetary assets, as well as debt held by the public. It explains why the budget deficit normally

would not result in an equivalent change in the government’s cash and other monetary assets.

These statements reconcile the budget deficit to the change in cash and other monetary assets during the fiscal year.

They also serve to explain how the budget deficits were financed. These statements show the adjustments for non-cash

outlays included in the budget, and items affecting the cash balance not included in the budget, to explain the change in cash

and other monetary assets.

The budget deficit is primarily financed through borrowings from the public. When receipts exceed outlays, the

difference is a surplus. The budget treats borrowing and debt repayment as a means of financing, not as receipts and

outlays. The budget records outlays for the interest on the public issues of Treasury debt securities as the interest accrues,

not when the cash is paid.

Non-cash flow amounts in the budget related to loan financing account activity also reflect intragovernmental

transactions such as interest expense paid or interest revenue received from Treasury, agency year-end credit reform

subsidy reestimates, and the receipt of subsidy expense from program accounts. Cash flow from non-budget activities

related to loan financing account activity includes all cash flows to and from the public, including direct loan

disbursements/default payments to lenders, fees collected, principal and interest repayments, collections on defaulted

guarantee loans, and sale proceeds of foreclosed property. The budget totals exclude the transactions of the financing
FINANCIAL STATEMENTS 50

accounts because they are not a cost to the government. However, since loan financing accounts record all credit cash

flows to and from the public, they affect the means of financing a budget deficit.

In fiscal year 2018, additional lines were included in the presentation of these statements to provide a further breakdown

of certain categories of transactions.

Balance Sheets

The Balance Sheets show the government’s assets, liabilities, and net position. When combined with stewardship

information, this information presents a more comprehensive understanding of the government’s financial position. The net

position for funds from dedicated collections is shown separately.

Assets

Assets included on the Balance Sheets are resources of the government that remain available to meet future needs. The

most significant assets that are reported on the Balance Sheets are loans receivable, net; PP&E, net; inventories and related

property, net; and cash and other monetary assets. There are, however, other significant resources available to the government

that extend beyond the assets presented in these Balance Sheets. Those resources include Stewardship Land and Heritage

Assets in addition to the government’s sovereign powers to tax and set monetary policy.

Liabilities and Net Position

Liabilities are obligations of the government resulting from prior actions that will require financial resources. The most

significant liabilities reported on the Balance Sheets are federal debt securities held by the public and accrued interest, and

federal employee and veteran benefits payable. Liabilities also include environmental and disposal liabilities, benefits due

and payable, as well as insurance and guarantee program liabilities.

As with reported assets, the government’s responsibilities, policy commitments, and contingencies are much broader

than these reported Balance Sheet liabilities. They include the social insurance programs reported in the Statements of Social

Insurance and disclosed in the unaudited RSI—Social Insurance section, fiscal long-term projections of non-interest spending

reported in the Statements of Long-Term Fiscal Projections, and a wide range of other programs under which the government

provides benefits and services to the people of this nation, as well as certain future loss contingencies.

The government has entered into contractual commitments requiring the future use of financial resources and has

unresolved contingencies where existing conditions, situations, or circumstances create uncertainty about future losses.

Contingencies and commitments that do not meet the criteria for recognition as liabilities on the Balance Sheets, but for

which there is at least a reasonable possibility that losses have been incurred, are disclosed in Note 18—Contingencies and

Note 19—Commitments.

The collection of certain taxes and other revenue is credited to the corresponding funds from dedicated collections that

will use these funds to meet a particular government purpose. If the collections from taxes and other sources exceed the

payments to the beneficiaries, the excess revenue is invested in Treasury securities or deposited in the General Fund;

therefore, the trust fund balances do not represent cash. An explanation of the trust funds for social insurance is included in

Note 20—Funds from Dedicated Collections. That note also contains information about trust fund receipts, disbursements,

and assets.

Due to its sovereign power to tax and borrow, and the country’s wide economic base, the government has unique access

to financial resources through generating tax revenues and issuing federal debt securities. This provides the government with

the ability to meet present obligations and those that are anticipated from future operations, and are not reflected in net

position.

The net position is the residual difference between assets and liabilities and is the cumulative results of operations since

inception. For detailed components that comprise the net position, refer to the section “Statement of Operations and Changes

in Net Position.”
51 FINANCIAL STATEMENTS

SUSTAINABILITY FINANCIAL STATEMENTS

The sustainability financial statements are comprised of the Statements of Long-Term Fiscal Projections, covering all

federal government programs, and the Statements of Social Insurance and the Statement of Changes in Social Insurance

Amounts, covering social insurance programs (Social Security, Medicare, Railroad Retirement, and Black Lung programs).

The sustainability financial statements are designed to illustrate the relationship between projected receipts and expenditures

if current policy is continued over a 75 year time horizon.1 In preparing the sustainability financial statements, management

selects assumptions and data that it believes provide a reasonable basis to illustrate whether current policy is sustainable.

Current policy is based on current law, but includes several adjustments. In the Statement of Long-Term Fiscal Projections,

notable adjustments to current law are: (1) projected spending, receipts, and borrowing levels assume raising or suspending

the current statutory limit on Federal debt, (2) continued discretionary appropriations are assumed throughout the projections

period, (3) scheduled Social Security and Medicare Part A benefit payments are assumed to occur beyond the projected point

of trust fund depletion, (4) discretionary spending after 2019 is assumed to not be limited by caps established by the BCA, (5)

many mandatory programs with expiration dates prior to the end of the 75-year projection period are assumed to be

reauthorized, and (6) tax changes under the TCJA of 2017 are assumed to continue beyond 2025. In the Statement of Social

Insurance, the one adjustment to current law is that scheduled Social Security and Medicare part A benefit payments are

assumed to occur beyond the projected point of trust fund depletions. Assumptions underlying such sustainability information

do not consider changes in policy or all potential future events that could affect future income, future expenditures, and,

hence, sustainability. The projections do not reflect any adverse economic consequences resulting from continuously rising

debt levels. A large number of factors affect the sustainability financial statements and future events and circumstances

cannot be estimated with certainty. Therefore, even if current policy is continued, there will be differences between the

estimates in the sustainability financial statements and actual results, and those differences may be material. The unaudited

Required Supplementary Information section of this report includes present value projections using different assumptions to

illustrate the sensitivity of the sustainability financial statements to changes in certain assumptions. The sustainability

financial statements are intended to help citizens understand current policy and the importance and magnitude of policy

reforms necessary to make it sustainable.

By accounting convention, the Statements of Social Insurance do not include projected general revenues that, under

current law, would be used to finance the remainder of the expenditures in excess of revenues for Medicare Parts B and D

reported in the Statements of Social Insurance. The Statements of Long-Term Fiscal Projections include all revenues

(including general revenues) of the federal government.

Statements of Long-Term Fiscal Projections

The Statements of Long-Term Fiscal Projections are intended to assist readers of the government’s financial statements

in assessing the financial condition of the federal government and how the government’s financial condition has changed

(improved or deteriorated) during the year and may change in the future. They are also intended to assist readers in assessing

whether future budgetary resources of the government will likely be sufficient to sustain public services and to meet

obligations as they come due, assuming that current policy for federal government public services and taxation is continued

without change.

The Statements of Long-Term Fiscal Projections display the present value of 75-year projections by major category of

the federal government’s receipts and non-interest spending. These projections show the extent to which future receipts of the

government exceed or fall short of the government’s non-interest spending. The projections are presented both in terms of

present value dollars and in terms of present value dollars as a percent of present value GDP. The projections are on the basis

of policies currently in place and are neither forecasts nor predictions. These projections are consistent with the projections

for Social Security and Medicare presented in the Statements of Social Insurance and are based on the same economic and

demographic assumptions as underlie the Statements of Social Insurance. These statements also display the fiscal gap, which

is a summary measure of the change in receipts or non-interest spending necessary to hold the ratio of debt held by the public

to GDP at the end of the projection period to its value at the beginning of the period. Note 23—Long-Term Fiscal

Projections, further explains the methods used to prepare these projections and provides additional information. Unaudited

 1 With the exception of the Black Lung program, which has a rolling 25-year projection period that begins on the September 30 valuation date each year.
FINANCIAL STATEMENTS 52

required supplementary information further assesses the sustainability of current fiscal policy and provides results based on

alternative assumptions to those used in the basic statement.

As discussed further in Note 23, a sustainable policy is one where the debt-to-GDP ratio is stable or declining over the

long term. GDP measures 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.

Statements of Social Insurance and Changes in Social Insurance

Amounts

The Statements of Social Insurance provide estimates of the status of the most significant social insurance programs:

Social Security, Medicare, Railroad Retirement, and Black Lung2

. They are administered by SSA, HHS, the Railroad

Retirement Board (RRB), and DOL, respectively. The SSA and HHS projections are based on the economic and

demographic assumptions representing the Trustees’ reasonable estimates of likely future economic and demographic

conditions, as set forth in the applicable Social Security and Medicare Trustees’ reports as well as in the agency financial

reports of HHS and SSA. RRB’s projections are based on assumptions from the 27th Valuation on the Assets and Liabilities

Under the Railroad Retirement Acts of December 31, 2016 with Technical Supplement, which was published in September

2018, as well as in RRB’s performance and accountability report. DOL’s (Black Lung) projections are based on assumptions

included in its agency financial report. The SOSI projections, with one exception related to Medicare Part A and OASDI, are

based on current law; that is, they assume that scheduled social insurance benefit payments would continue after related trust

funds are projected to be depleted, contrary to current law. By law, once assets are depleted, expenditures cannot be made

except to the extent covered by ongoing tax receipts and other trust fund income.

Note 22—Social Insurance describes the social insurance programs, reports long-range estimates that can be used to

assess the financial condition of the programs, and explains some of the factors that impact the various programs. The

Statements of Changes in Social Insurance Amounts show two reconciliations: (1) change from the period beginning on

January 1, 2017 to the period beginning on January 1, 2018; and (2) change from the period beginning on January 1, 2016 to

the period beginning on January 1, 2017.

 2 In relation to the amounts presented in the Statements of Social Insurance and Changes in Social Insurance Amounts, the combined Railroad Retirement

and Black Lung programs account for less than a quarter of one percent of the statement totals, and therefore, are not material from the consolidated

perspective.
53 FINANCIAL STATEMENTS

United States Government

Statement of Net Cost

for the Year Ended September 30, 2018 (Gain)/Loss

from

Gross Earned Changes in Net

(In billions of dollars) Cost Revenue Subtotal Assumptions Cost

Department of Health and Human Services ............. 1,252.6 110.5 1,142.1 0.4 1,142.5

Social Security Administration............................... 1,038.5 0.2 1,038.3 - 1,038.3

Department of Defense ....................................... 719.8 38.2 681.6 16.8 698.4

Interest on Treasury Securities Held by the Public .... 357.3 - 357.3 - 357.3

Department of Veterans Affairs ............................. 272.5 4.8 267.7 79.2 346.9

Department of Energy ......................................... 147.0 6.1 140.9 - 140.9

Department of Agriculture .................................... 137.0 6.6 130.4 - 130.4

Department of the Treasury.................................. 150.5 21.9 128.6 - 128.6

Office of Personnel Management .......................... 101.3 23.4 77.9 26.2 104.1

Department of Transportation ............................... 79.0 1.1 77.9 - 77.9

Department of Homeland Security ......................... 78.3 14.8 63.5 1.1 64.6

Department of Education ..................................... 79.2 31.4 47.8 - 47.8

Department of Housing and Urban Development ...... 43.3 1.8 41.5 - 41.5

Department of Labor........................................... 41.1 - 41.1 - 41.1

Security Assistance Accounts ............................... 37.9 - 37.9 - 37.9

Department of Justice ......................................... 35.4 1.9 33.5 - 33.5

Department of State ........................................... 32.3 4.8 27.5 1.5 29.0

National Aeronautics and Space Administration........ 20.3 0.2 20.1 - 20.1

Department of the Interior .................................... 20.4 2.9 17.5 - 17.5

U.S. Agency for International Development ............. 13.1 - 13.1 - 13.1

Railroad Retirement Board................................... 13.1 - 13.1 - 13.1

Federal Communications Commission.................... 10.8 0.4 10.4 - 10.4

Department of Commerce.................................... 11.8 3.6 8.2 - 8.2

Environmental Protection Agency .......................... 8.3 0.4 7.9 - 7.9

National Science Foundation................................ 7.3 - 7.3 - 7.3

U.S. Postal Service ............................................ 71.4 69.7 1.7 - 1.7

Smithsonian Institution ........................................ 1.5 0.5 1.0 - 1.0

Millennium Challenge Corporation ......................... 0.8 - 0.8 - 0.8

Small Business Administration.............................. 0.7 0.3 0.4 - 0.4

National Credit Union Administration...................... 0.9 0.6 0.3 - 0.3

U.S. Nuclear Regulatory Commission..................... 0.9 0.7 0.2 - 0.2

Farm Credit System Insurance Corporation ............. 0.2 0.2 - - -

Overseas Private Investment Corporation ............... - 0.1 (0.1) - (0.1)

Export-Import Bank of the U.S. ............................. - 0.5 (0.5) - (0.5)

Securities and Exchange Commission.................... 1.8 2.3 (0.5) - (0.5)

General Services Administration ........................... - 0.8 (0.8) - (0.8)

Tennessee Valley Authority.................................. 9.9 11.2 (1.3) - (1.3)

National Railroad Retirement Investment Trust......... 0.1 1.9 (1.8) - (1.8)

Federal Deposit Insurance Corporation................... 1.3 10.8 (9.5) - (9.5)

Pension Benefit Guaranty Corporation.................... (7.8) 16.7 (24.5) - (24.5)

All other entities ................................................. 18.7 1.5 17.2 - 17.2

Total................................................................ 4,808.5 392.8 4,415.7 125.2 4,540.9

The accompanying notes are an integral part of these financial statements.
FINANCIAL STATEMENTS 54

United States Government

Statement of Net Cost

for the Year Ended September 30, 2017 (Restated) (Gain)/Loss

from

Gross Earned Changes in Net

(In billions of dollars) Cost Revenue Subtotal Assumptions Cost

Department of Health and Human Services ............. 1,186.8 101.1 1,085.7 0.4 1,086.1

Social Security Administration............................... 999.1 0.3 998.8 - 998.8

Department of Defense ....................................... 718.7 77.4 641.3 24.1 665.4

Interest on Treasury Securities Held by the Public .... 296.3 - 296.3 - 296.3

Department of Veterans Affairs ............................. 254.8 4.8 250.0 229.7 479.7

Department of Energy ......................................... 46.9 5.6 41.3 - 41.3

Department of Agriculture .................................... 142.9 8.1 134.8 - 134.8

Department of the Treasury.................................. 179.5 37.9 141.6 - 141.6

Office of Personnel Management .......................... 90.1 22.3 67.8 102.5 170.3

Department of Transportation ............................... 79.6 0.9 78.7 - 78.7

Department of Homeland Security ......................... 77.3 12.3 65.0 (0.5) 64.5

Department of Education ..................................... 84.4 30.6 53.8 - 53.8

Department of Housing and Urban Development ...... 69.1 1.7 67.4 - 67.4

Department of Labor........................................... 43.5 - 43.5 - 43.5

Security Assistance Accounts ............................... 36.7 - 36.7 - 36.7

Department of Justice ......................................... 34.2 1.6 32.6 - 32.6

Department of State ........................................... 31.3 4.8 26.5 0.3 26.8

National Aeronautics and Space Administration........ 19.6 0.2 19.4 - 19.4

Department of the Interior .................................... 20.2 2.7 17.5 - 17.5

U.S. Agency for International Development ............. 13.2 - 13.2 - 13.2

* Railroad Retirement Board................................. 13.0 3.8 9.2 - 9.2

Federal Communications Commission.................... 20.7 0.4 20.3 - 20.3

Department of Commerce.................................... 12.9 3.3 9.6 - 9.6

Environmental Protection Agency .......................... 8.8 0.4 8.4 - 8.4

National Science Foundation................................ 7.1 - 7.1 - 7.1

U.S. Postal Service ............................................ 71.9 68.7 3.2 - 3.2

Smithsonian Institution ........................................ 0.9 - 0.9 - 0.9

Millennium Challenge Corporation ......................... 0.7 - 0.7 - 0.7

Small Business Administration.............................. 0.1 0.3 (0.2) - (0.2)

National Credit Union Administration...................... (0.1) 0.7 (0.8) - (0.8)

U.S. Nuclear Regulatory Commission..................... 0.9 0.8 0.1 - 0.1

Farm Credit System Insurance Corporation ............. - 0.4 (0.4) - (0.4)

Overseas Private Investment Corporation ............... - 0.1 (0.1) - (0.1)

Export-Import Bank of the U.S. ............................. 0.4 1.2 (0.8) - (0.8)

Securities and Exchange Commission.................... 1.9 2.1 (0.2) - (0.2)

General Services Administration ........................... 0.2 0.6 (0.4) - (0.4)

Tennessee Valley Authority.................................. 9.9 10.7 (0.8) - (0.8)

Federal Deposit Insurance Corporation................... 1.5 10.6 (9.1) - (9.1)

Pension Benefit Guaranty Corporation.................... 9.8 14.1 (4.3) - (4.3)

All other entities ................................................. 21.4 1.4 20.0 - 20.0

Total................................................................ 4,606.2 431.9 4,174.3 356.5 4,530.8

* Includes amounts from National Railroad Retirement Investment Trust (NRRIT) in 2017. In 2018, NRRIT amounts are reported separately.

The accompanying notes are an integral part of these financial statements.
55 FINANCIAL STATEMENTS

United States Government

Statement of Operations and Changes in Net Position

for the Year Ended September 30, 2018

Funds other than Funds from

those from Dedicated

Dedicated Collections

Collections (Note 20)

(Combined) (Combined) Eliminations Consolidated

(In billions of dollars) 2018

Revenue (Note 17):

Individual income tax and tax withholdings ........ 1,655.5 1,137.7 - 2,793.2

Corporate income taxes ................................ 208.9 - - 208.9

Excise taxes ............................................... 31.9 64.9 - 96.8

Unemployment taxes.................................... - 43.2 - 43.2

Customs duties ........................................... 41.5 - - 41.5

Estate and gift taxes..................................... 23.0 - - 23.0

Other taxes and receipts ............................... 133.4 30.7 - 164.1

Miscellaneous earned revenues...................... 9.2 4.4 - 13.6

Intragovernmental interest ............................. - 98.5 (98.5) -

Total Revenue ............................................ 2,103.4 1,379.4 (98.5) 3,384.3

Net Cost of Government Operations:

Net cost ..................................................... 2,838.4 1,702.5 - 4,540.9

Intragovernmental net cost ............................ (9.8) 9.8 - -

Intragovernmental interest ............................. 98.5 - (98.5) -

Total net cost .............................................. 2,927.1 1,712.3 (98.5) 4,540.9

Intragovernmental transfers........................... (372.8) 372.8 - -

Unmatched transactions and balances

(Note 1.R) ................................................. (2.4) - - (2.4)

Net operating (cost)/revenue.......................... (1,198.9) 39.9 - (1,159.0)

Net position, beginning of period.................... (23,781.4) 3,419.5 - (20,361.9)

Adjustments to beginning net position

(Note 1.S) ............................................... (2.5) 2.6 - 0.1

Net operating (cost)/revenue.......................... (1,198.9) 39.9 - (1,159.0)

Net position, end of period............................. (24,982.8) 3,462.0 - (21,520.8)

The accompanying notes are an integral part of these financial statements.
FINANCIAL STATEMENTS 56

United States Government

Statement of Operations and Changes in Net Position

for the Year Ended September 30, 2017 (Restated)

Funds other than Funds from

those from Dedicated

Dedicated Collections

Collections (Note 20)

(Combined) (Combined) Eliminations Consolidated

(In billions of dollars) 2017

Revenue (Note 17):

Individual income tax and tax withholdings ........ 1,560.1 1,127.8 - 2,687.9

Corporate income taxes ................................ 299.1 - - 299.1

Excise taxes ............................................... 24.7 62.6 - 87.3

Unemployment taxes.................................... - 44.1 - 44.1

Customs duties ........................................... 33.2 - - 33.2

Estate and gift taxes..................................... 22.8 - - 22.8

Other taxes and receipts ............................... 135.9 36.2 - 172.1

Miscellaneous earned revenues...................... 24.0 4.1 - 28.1

Intragovernmental interest ............................. - 99.6 (99.6) -

Total Revenue ............................................ 2,099.8 1,374.4 (99.6) 3,374.6

Net Cost of Government Operations:

Net cost ..................................................... 2,882.7 1,648.1 - 4,530.8

Intragovernmental net cost ............................ (8.5) 8.5 - -

Intragovernmental interest ............................. 99.6 - (99.6) -

Total net cost .............................................. 2,973.8 1,656.6 (99.6) 4,530.8

Intragovernmental transfers........................... (327.2) 327.2 - -

Unmatched transactions and balances

(Note 1.R) ................................................. 2.6 - - 2.6

Net operating (cost)/revenue.......................... (1,198.6) 45.0 - (1,153.6)

Net position, beginning of period.................... (22,619.9) 3,374.3 - (19,245.6)

Adjustments to beginning net position

(Note 1.S) ............................................... 37.1 0.2 - 37.3

Net operating (cost)/revenue.......................... (1,198.6) 45.0 - (1,153.6)

Net position, end of period............................. (23,781.4) 3,419.5 - (20,361.9)

The accompanying notes are an integral part of these financial statements.
57 FINANCIAL STATEMENTS

United States Government

Reconciliations of Net Operating Cost and Budget Deficit

for the Years Ended September 30, 2018, and 2017

Restated

(In billions of dollars) 2018 2017

Net operating cost ...................................................................................................... (1,159.0) (1,153.6)

Components of net operating cost not part of the budget deficit

Excess of accrual-basis expenses over budget outlays

* Federal employee and veteran benefits payable

Pension and accrued benefits ............................................................................... 88.4 180.5

Veterans compensation and burial benefits .............................................................. 146.3 313.7

Post-retirement health and accrued benefits............................................................. 33.0 5.3

Other benefits .................................................................................................... 14.5 (8.8)

Subtotal - federal employee and veteran benefits payable ........................................ 282.2 490.7

* Insurance and guarantee program liabilities ............................................................... (32.3) 15.5

* Environmental and disposal liabilities......................................................................... 112.8 17.9

* Accounts payable ................................................................................................. 15.9 8.4

* Benefits due and payable ....................................................................................... (7.7) 0.6

* Other liabilities ..................................................................................................... 5.9 4.4

Subtotal - excess of accrual-basis expenses over budget outlays ............................... 376.8 537.5

Amortized expenses not included in budget outlays

Property, plant, and equipment depreciation expense .................................................. 72.7 33.6

Other expenses that are not reported as budget outlays

Property, plant, and equipment disposals and revaluations ........................................... (4.0) (10.0)

Excess of accrual-basis revenue over budget receipts

Accounts receivable, net ........................................................................................ 6.2 (7.3)

Taxes receivable, net ............................................................................................. (7.8) (2.8)

Other losses/(gains) and cost/(revenue) that are not budget receipts

* Investments in government-sponsored enterprises ...................................................... (20.6) 16.0

Subtotal - components of net operating cost not part of budget deficit ......................... 423.3 567.0

Components of the budget deficit that are not part of net operating cost

Budget receipts not included in net operating cost

Credit reform and other loan activities ....................................................................... 5.0 (9.5)

Budget outlays not included in net operating cost

Acquisition of capital assets..................................................................................... (72.2) (79.9)

* Debt and equity securities ...................................................................................... 5.9 (8.0)

* Inventories and related property .............................................................................. (10.8) (12.4)

* Other assets ........................................................................................................ 34.0 (2.2)

Subtotal - components of the budget deficit that are not part of net operating cost ......... (38.1) (112.0)

Adjustments to beginning net position 0.1 37.3

Other

All other reconciling items ....................................................................................... (5.3) (4.4)

Budget deficit............................................................................................................. (779.0) (665.7)

* The amounts represent the year over year net change in the Balance Sheet line items. 

The accompanying notes are an integral part of these financial statements. 
FINANCIAL STATEMENTS 58

United States Government

Statements of Changes in Cash Balance from Budget and Other Activities

for the Years Ended September 30, 2018, and 2017

Reclassed

(In billions of dollars) 2018 2017

Cash flow from budget activities

Total budget receipts .......................................................................................... 3,328.7 3,314.9

Total budget outlays .......................................................................................... (4,107.7) (3,980.6)

Budget deficit.................................................................................................... (779.0) (665.7)

Adjustments for non-cash outlays included in the budget

Non-cash flow amounts in the budget related to federal debt securities

Accrued interest ................................................................................................ 268.5 248.4

Net amortization ................................................................................................ 41.9 19.0

Other .............................................................................................................. 1.1 22.1

Subtotal - adjustments for non-cash flow amounts in the budget related to federal debt 

securities ......................................................................................................... 311.5 289.5

Non-cash flow amounts in the budget related to loan financing account activity

Interest revenue on uninvested funds..................................................................... 7.9 8.4

Interest expense on entity borrowings .................................................................... (42.1) (41.6)

Entities' downward reestimates/negative subsidy payments........................................ (37.3) (34.6)

Entities' subsidy expense/upward reestimates ......................................................... 35.8 84.9

Subtotal - adjustments for non-cash flow amounts in the budget related to loan financing 

account activity ................................................................................................. (35.7) 17.1

Total of adjustments for non-cash outlays included in the budget ................................... 275.8 306.6

Cash flow from activities not included in the budget

Cash flow from non-budget activities related to federal debt securities

Interest paid ..................................................................................................... (260.4) (240.0)

Subtotal - cash flow from non-budget activities related to federal debt securities ............. (260.4) (240.0)

Cash flow from non-budget activities related to loan financing account activity

Loan disbursements/default payments ................................................................... (194.9) (213.2)

Fees ............................................................................................................... 25.0 26.3

Principal & interest repayments ............................................................................ 117.7 121.0

Other collections on defaulted loans receivable and sale of foreclosed property.............. 5.7 8.1

Other loan financing account activities ................................................................... 0.6 -

Subtotal - cash flow from non-budget activities related to loan financing account activity... (45.9) (57.8)

Cash flow from financing federal debt securities

Borrowings ....................................................................................................... 10,080.1 8,700.8

Repayments ..................................................................................................... (8,993.5) (8,222.9)

Discount/premium.............................................................................................. (54.7) (24.0)

Subtotal - cash flow from financing federal debt securities .......................................... 1,031.9 453.9

Total cash flow from activities not included in the budget .............................................. 725.6 156.1

Other

Total other .......................................................................................................... 13.9 6.3

Change in cash and other monetary assets balance ................................................... 236.3 (196.7)

Beginning cash and other monetary assets balance .................................................... 271.2 467.9

Ending cash and other monetary assets balance ....................................................... 507.5 271.2

The accompanying notes are an integral part of these financial statements.
59 FINANCIAL STATEMENTS

United States Government

Balance Sheets

as of September 30, 2018, and 2017

Restated

(In billions of dollars) 2018 2017

Assets:

Cash and other monetary assets (Note 2).......................................................... 507.5 271.2

Accounts and taxes receivable, net (Note 3)....................................................... 144.9 143.3

Loans receivable, net (Note 4)......................................................................... 1,419.1 1,350.2

Inventories and related property, net (Note 5) ..................................................... 337.5 326.7

Property, plant and equipment, net (Note 6) ....................................................... 1,090.5 1,087.0

Debt and equity securities (Note 7)................................................................... 110.3 116.2

Investments in government-sponsored enterprises (Note 8)................................... 113.2 92.6

Other assets (Note 9) .................................................................................... 113.7 147.7

Total assets .............................................................................................. 3,836.7 3,534.9

Stewardship land and heritage assets (Note 24)

Liabilities:

Accounts payable (Note 10)............................................................................ 86.7 70.8

Federal debt securities held by the public and accrued interest (Note 11) ................. 15,812.7 14,724.1

Federal employee and veteran benefits payable (Note 12) .................................... 7,982.3 7,700.1

Environmental and disposal liabilities (Note 13)................................................... 577.3 464.5

Benefits due and payable (Note 14).................................................................. 211.1 218.8

Insurance and guarantee program liabilities (Note 15) .......................................... 170.2 202.5

Loan guarantee liabilities (Note 4) .................................................................... 38.2 42.9

Other liabilities (Note 16)................................................................................ 479.0 473.1

Total liabilities............................................................................................ 25,357.5 23,896.8

Contingencies (Note 18) and Commitments (Note 19)

Net Position:

Funds from Dedicated Collections (Note 20)....................................................... 3,462.0 3,419.5

Funds other than those from Dedicated Collections ............................................. (24,982.8) (23,781.4)

Total net position........................................................................................ (21,520.8) (20,361.9)

Total liabilities and net position...................................................................... 3,836.7 3,534.9

The accompanying notes are an integral part of these financial statements.
FINANCIAL STATEMENTS 60

United States Government

Statements of Long-Term Fiscal Projections (Note 23)

Present Value of 75-Year Projections as of September 30, 2018 and 20171

In trillions of dollars Percent of GDP2

2018 2017 Change 2018 2017 Change

Receipts:

Social Security payroll taxes ................. 60.6 58.0 2.6 4.3 4.3 -

Medicare payroll taxes......................... 20.3 19.4 0.9 1.4 1.4 -

Individual income taxes ....................... 143.8 141.9 1.9 10.2 10.5 (0.3)

Corporate income taxes....................... 18.8 -

 3 - 3 1.3 - 3 - 3

Other receipts3................................... 18.5 49.0 (11.7) 1.3 3.6 (1.0)

Total receipts.......................................... 262.0 268.4 (6.4) 18.6 19.9 (1.3)

Non-interest spending:

Social Security................................... 82.5 78.7 3.9 5.9 5.8 -

Medicare Part A4 ................................ 29.1 26.6 2.5 2.1 2.0 0.1

Medicare Parts B & D5......................... 35.7 32.3 3.4 2.5 2.4 0.1

Medicaid........................................... 34.1 32.1 2.0 2.4 2.4 -

Other mandatory ................................ 41.0 40.5 0.4 2.9 3.0 (0.1)

Defense discretionary.......................... 42.9 39.1 3.8 3.0 2.9 0.1

Non-defense discretionary ................... 42.9 35.3 7.6 3.1 2.6 0.4

Total non-interest spending ....................... 308.2 284.6 23.6 21.9 21.1 0.8

Receipts less non-interest spending........ (46.2) (16.2) (30.0) (3.3) (1.2) (2.1)

Fiscal gap6.................................................................................................. (4.1) (2.0) (2.1)

1

75-year present value projections for 2018 are as of 9/30/2018 for fiscal years 2019-2093; projections for 2017 are as of 9/30/2017 for fiscal

years 2018-2092. 2

The 75-year present value of nominal Gross Domestic Product (GDP), which drives the calculations above is $1,406.3 trillion starting in fiscal

year 2019, and was $1,347.0 trillion starting in fiscal year 2018. 3

In fiscal year 2017, Corporate Income Taxes were included as part of Other Receipts. To incorporate the effects of the Tax Cuts and Jobs Act

of 2017, Corporate Income Taxes are modeled separately in fiscal year 2018. Directly comparable data are not available for fiscal year 2017.

The $11.7 trillion decrease in Other Receipts is the total of 2018 Corporate Income Taxes ($18.8 trillion) and Other Receipts ($18.5 trillion)

less the 2017 Other Receipts ($49.0 trillion). 4

Represents portions of Medicare supported by payroll taxes. 5

Represents portions of Medicare supported by general revenues. Consistent with the President's Budget, outlays for Parts B & D are

presented net of premiums. 6

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 2017). See Note 23—Long-Term Fiscal

Projections.

Totals may not equal the sum of components due to rounding. 

The accompanying notes are an integral part of these financial statements.
61 FINANCIAL STATEMENTS

United States Government

Statements of Social Insurance (Note 22)

Present Value of Long-Range (75 Years, except Black Lung) Actuarial Projections

(In trillions of dollars) 2018 2017 2016 2015 2014

Federal Old-Age, Survivors and Disability Insurance (Social 

Security):11

Revenue (Contributions and Dedicated Taxes) from:

Participants who have attained eligibility age (age 62 and over) .. 1.5 1.4 1.3 1.2 1.0

Participants who have not attained eligibility age...................... 31.8 30.3 29.3 27.8 25.4

Future participants............................................................. 31.8 30.5 29.7 26.6 24.6

All current and future participants ......................................... 65.1 62.1 60.3 55.5 51.0

Expenditures for Scheduled Future Benefits for:

Participants who have attained eligibility age (age 62 and over) .. (15.9) (14.7) (13.6) (12.8) (11.9)

Participants who have not attained eligibility age...................... (52.2) (50.2) (48.4) (45.3) (42.4)

Future participants............................................................. (13.0) (12.6) (12.4) (10.9) (10.0)

All current and future participants ......................................... (81.1) (77.5) (74.4) (69.0) (64.3)

Present value of future expenditures in excess of future

revenue ............................................................................. (16.1)1 (15.4)2 (14.1)3 (13.4)4 (13.3)5

Federal Hospital Insurance (Medicare Part A):11

Revenue (Contributions and Dedicated Taxes) from:

Participants who have attained eligibility age (age 65 and over) .. 0.5 0.5 0.5 0.4 0.3

Participants who have not attained eligibility age...................... 11.3 10.7 10.3 9.1 8.4

Future participants............................................................. 11.0 10.6 10.0 8.4 7.8

All current and future participants ......................................... 22.8 21.7 20.7 17.9 16.5

Expenditures for Scheduled Future Benefits for:

Participants who have attained eligibility age (age 65 and over) .. (5.0) (4.5) (4.3) (3.8) (3.5)

Participants who have not attained eligibility age...................... (18.6) (17.2) (16.8) (14.5) (14.1)

Future participants............................................................. (3.9) (3.5) (3.4) (2.8) (2.8)

All current and future participants ......................................... (27.5) (25.3) (24.5) (21.1) (20.4)

Present value of future expenditures in excess of future 

revenue ............................................................................. (4.7)1 (3.5)2 (3.8)3 (3.2)4 (3.8)5

Federal Supplementary Medical Insurance (Medicare Part B):11

Revenue (Premiums) from:

Participants who have attained eligibility age (age 65 and over) .. 1.3 1.1 1.0 0.9 0.8

Participants who have not attained eligibility age...................... 6.6 5.9 5.3 4.6 4.5

Future participants............................................................. 1.5 1.4 1.2 1.0 1.1

All current and future participants ......................................... 9.4 8.4 7.5 6.5 6.5

Expenditures for Scheduled Future Benefits for:

Participants who have attained eligibility age (age 65 and over) .. (5.2) (4.5) (4.0) (3.6) (3.2)

Participants who have not attained eligibility age...................... (23.8) (21.4) (19.2) (16.8) (17.0)

Future participants............................................................. (5.4) (4.9) (4.3) (3.5) (4.1)

All current and future participants ......................................... (34.4) (30.8) (27.5) (24.0) (24.3)

Present value of future expenditures in excess of future 

revenue 6 ........................................................................... (25.0)1 (22.4)2 (20.0)3 (17.5)4 (17.9)5

Totals may not equal the sum of components due to rounding.

The accompanying notes are an integral part of these financial statements.
FINANCIAL STATEMENTS 62

United States Government

Statements of Social Insurance (Note 22), continued

Present Value of Long-Range (75 Years, except Black Lung) Actuarial Projections

(In trillions of dollars) 2018 2017 2016 2015 2014

Federal Supplementary Medical Insurance (Medicare Part D):11

Revenue (Premiums and State Transfers) from:

Participants who have attained eligibility age (age 65 and over) .. 0.3 0.3 0.3 0.3 0.2

Participants who have not attained eligibility age...................... 2.1 2.0 2.2 1.8 1.6

Future participants............................................................. 0.8 0.8 1.0 0.8 0.7

All current and future participants ......................................... 3.2 3.1 3.5 2.9 2.5

Expenditures for Scheduled Future Benefits for:

Participants who have attained eligibility age (age 65 and over) .. (1.0) (1.0) (1.0) (0.9) (0.8)

Participants who have not attained eligibility age...................... (7.2) (6.9) (7.7) (6.4) (5.9)

Future participants............................................................. (2.9) (2.9) (3.6) (2.8) (2.6)

All current and future participants ......................................... (11.1) (10.8) (12.2) (10.2) (9.3)

Present value of future expenditures in excess of future 

revenue 6 ........................................................................... (7.9)1 (7.6)2 (8.7)3 (7.3)4 (6.8)5

Other:7

Present value of future expenditures in excess of future 

revenues 8, 9, 10.................................................................. (0.1) (0.1) (0.1) (0.1) (0.1)

Total present value of future expenditures in excess of future 

revenue ............................................................................. (53.8) (49.0) (46.7) (41.5) (41.9)

Totals may not equal the sum of components due to rounding.

The accompanying notes are an integral part of these financial statements.
63 FINANCIAL STATEMENTS

United States Government

Statements of Social Insurance (Note 22), continued

Present Value of Long-Range (75 Years, except Black Lung) Actuarial Projections

(In trillions of dollars) 2018 2017 2016 2015 2014

Social Insurance Summary11

Participants who have attained eligibility age:

Revenue (e.g., contributions and dedicated taxes) ................. 3.6 3.3 3.1 2.8 2.3

Expenditures for scheduled future benefits ........................... (27.1) (24.7) (22.9) (21.3) (19.4)

Present value of future expenditures in excess of 

future revenue.............................................................. (23.5) (21.4) (19.8) (18.5) (17.1)

Participants who have not attained eligibility age:

Revenue (e.g., contributions and dedicated taxes) ................. 51.8 48.9 47.1 43.4 40.0

Expenditures for scheduled future benefits ........................... (101.8) (95.7) (92.2) (83.1) (79.6)

Present value of future expenditures in excess of 

future revenue.............................................................. (50.0) (46.8) (45.1) (39.7) (39.6)

Closed-group - Total present value of future expenditures 

in excess of future revenue............................................. (73.5) (68.2) (64.9) (58.2) (56.7)

Future participants:

Revenue (e.g., contributions and dedicated taxes) ................. 45.1 43.3 41.9 36.8 34.3

Expenditures for scheduled future benefits ........................... (25.2) (24.0) (23.7) (20.1) (19.6)

Present value of future revenue in excess of future 

expenditure ................................................................. 19.9 19.3 18.2 16.8 14.8

Open-group - Total present value of future expenditures in 

excess of future revenue ..................................................... (53.8) (49.0) (46.7) (41.5) (41.9)

1 The projection period for Social Security and Medicare is 1/1/2018-12/31/2092 and the valuation date is 1/1/2018. 2 The projection period for Social Security and Medicare is 1/1/2017-12/31/2091 and the valuation date is 1/1/2017. 3 The projection period for Social Security and Medicare is 1/1/2016-12/31/2090 and the valuation date is 1/1/2016. 4 The projection period for Social Security and Medicare is 1/1/2015-12/31/2089 and the valuation date is 1/1/2015. 5 The projection period for Social Security and Medicare is 1/1/2014-12/31/2088 and the valuation date is 1/1/2014. 6 These amounts represent the present value of the future transfers from the General Fund to the SMI Trust 

Fund. These future intragovernmental transfers are included as income in both HHS’ and the Centers for Medicare and Medicaid Services’ 

Financial Reports but, by accounting convention, are not income from the governmentwide perspective of this report.

7 Includes Railroad Retirement and Black Lung. 8 These amounts do not include the present value of the financial interchange between the railroad retirement and social security systems, 

which is included as income in the Railroad Retirement Financial Report, but is not included from the governmentwide perspective of this 

report. (See discussion of Railroad Retirement Program in the unaudited required supplementary information section of this report). 9 Does not include interest expense accruing on the outstanding debt of the Black Lung Disability Trust Fund. 10 For information on the projection periods and valuation dates for the Railroad Retirement and Black Lung programs, refer to the financial

statements of RRB and DOL, respectively. 11 Current participants for the Social Security and Medicare programs are assumed to be the “closed-group” of individuals who are at least

15 years of age at the start of the projection period, and are participating as either taxpayers, beneficiaries, or both.

Totals may not equal the sum of components due to rounding.

The accompanying notes are an integral part of these financial statements.
FINANCIAL STATEMENTS 64

United States Government

Statement of Changes in Social Insurance Amounts

for the Year Ended September 30, 2018 (Note 22)

Social Medicare Medicare

(In trillions of dollars) Security1 HI1 SMI1 Other2 Total

Net present value (NPV) of future revenue less 

future expenditures for current and future

participants (the “open group”) over the next 75 

years, beginning of the year ................................. (15.4) (3.5) (30.0) (0.1) (49.0)

Reasons for changes in the NPV during the year:

Changes in valuation period.................................. (0.6) (0.2) (1.1) - (1.9)

Changes in demographic data, assumptions, and 

methods ........................................................... 0.1 0.4 0.2 - 0.7

Changes in economic data, assumptions, and 

methods ........................................................... (0.5) - - - (0.5)

Changes in law or policy ...................................... - (0.5) (0.5) - (1.0)

Changes in methodology and programmatic data ...... 0.2 - - - 0.2

Changes in economic and other health care 

assumptions ................................................... - - (1.5) - (1.5)

Change in projection base .................................... - (0.9) - - (0.9)

Net change in open group measure........................ (0.8) (1.2) (2.9) - (4.8)

Open group measure, end of year............................. (16.1) (4.7) (32.9) (0.1) (53.8)

1

 Amounts represent changes between valuation dates 1/1/2017 and 1/1/2018.

2

 Includes Railroad Retirement changes between valuation dates 10/1/2016 and 10/1/2017 and Black Lung changes between 9/30/2017 and 

9/30/2018.

Totals may not equal the sum of components due to rounding. 

The accompanying notes are an integral part of these financial statements. 
65 FINANCIAL STATEMENTS

United States Government

Statement of Changes in Social Insurance Amounts

for the Year Ended September 30, 2017 (Note 22)

Social Medicare Medicare

(In trillions of dollars) Security1 HI1 SMI1 Other2 Total

Net present value (NPV) of future revenue less 

future expenditures for current and future 

participants (the “open group”) over the next 75 

years, beginning of the year ................................. (14.1) (3.8) (28.7) (0.1) (46.7)

Reasons for changes in the NPV during the year:

Changes in valuation period.................................. (0.6) (0.2) (1.2) - (2.0)

Changes in demographic data, assumptions, and

methods ........................................................... (0.1) (0.1) - - (0.2)

Changes in economic data, assumptions, and ..........

methods ........................................................... (0.6) - - - (0.6)

Changes in law or policy ...................................... - - - - -

Changes in economic and other health care 

assumptions ..................................................... - 0.2 (0.5) - (0.3)

Change in projection base .................................... - 0.3 0.4 - 0.7

Net change in open group measure........................ (1.2) 0.3 (1.4) - (2.3)

Open group measure, end of year............................. (15.4) (3.5) (30.0) (0.1) (49.0)

1

 Amounts represent changes between valuation dates 1/1/2016 and 1/1/2017.

2

 Includes Railroad Retirement changes between valuation dates 10/1/2015 and 10/1/2016 and Black Lung changes between 9/30/2016 and 

9/30/2017.

Totals may not equal the sum of components due to rounding.

The accompanying notes are an integral part of these financial statements.
NOTES TO THE FINANCIAL STATEMENTS 66

United States Government

Notes to the Financial Statements

for the Fiscal Years Ended September 30,

2018, and 2017

Note 1. Summary of Significant Accounting Policies

A. Reporting Entity

The government includes the executive branch, the legislative branch, and the judicial branch. This Financial Report

includes the financial status and activities related to the operations of the government. SFFAS No. 47, Reporting Entity,

effective for fiscal year 2018, provides criteria for identifying organizations that are included in the Financial Report as

“consolidation entities” and “disclosure entities.” Consolidation entities are consolidated into the government’s financial

statements. For disclosure entities, information is disclosed in the notes to the financial statements concerning (a) the nature

of the federal government’s relationship with the disclosure entities, (b) the nature and magnitude of relevant activity with the

disclosure entities during the period and balances at the end of the period, and (c) a description of financial and non-financial

risks, potential benefits and, if possible, the amount of the federal government’s exposure to gains and losses from the past or

future operations of the disclosure entity or entities.

Disclosure entities have a greater degree of autonomy than consolidation entities. Disclosure entities may maintain a

separate legal identity, have a governance structure that vests most decision-making authorities in a governing body to

insulate the organization from political influence, and/or have relative financial independence. These entities may include,

but are not limited to, quasi-governmental and/or financially independent entities and organizations owned and/or controlled

by the federal government as a result of (a) regulatory actions (such as organizations in receivership or conservatorship) or

(b) other federal government intervention actions if the relationship with such entities is not expected to be permanent.

SFFAS No. 47 also provides guidance for identifying related parties and in determining what information to provide

about related party relationships of such significance that it would be misleading to exclude such information. (See Appendix

A—Reporting Entity, for a more detailed discussion.)

Based on the criteria in GAAP for federal entities, the assets, liabilities, and results of operations of Fannie Mae and

Freddie Mac are not consolidated into the government's consolidated financial statements. However, the values of the

investments in such entities, changes in value, and related activity with these entities are included in the government's

consolidated financial statements. Although federal investments in Fannie Mae and Freddie Mac are significant, these entities

do not meet the GAAP criteria for consolidation entities.

For fiscal year 2018, under SFFAS No. 47 criteria, Fannie Mae and Freddie Mac were owned or controlled by the

federal government as a result of (a) regulatory actions (such as organizations in receivership or conservatorship) or (b) other

federal government intervention actions. Under the regulatory or other intervention actions, the relationship with the federal

government is not expected to be permanent. These entities are classified as disclosure entities based on their characteristics

as a whole. For fiscal year 2017, these entities met the criteria of paragraph 50 of Statement of Federal Financial Accounting

Concepts (SFFAC) No. 2, Entity and Display and do not appear in the federal budget section “Federal Programs by Agency

and Account." SFFAS No. 47 replaced reporting entity criteria in SFFAC No. 2 (see Note 25—Disclosure Entities and

Related Parties for additional information on these disclosure entities).

Also, under GAAP criteria, the FR System is not consolidated into the government's consolidated financial statements

(see Note 25—Disclosure Entities and Related Parties for further information concerning the Federal Reserve System).

Implementation of SFFAS No. 47, as of October 1, 2017, did not have a significant impact on the composition of the

entities consolidated in the Financial Report as compared to entities consolidated under SFFAC No. 2, for fiscal year 2017

(see Note 1.S—Adjustments to Beginning Net Position for information on the changes in accounting principles). For further

information regarding Reporting Entity, see Appendix A—Reporting Entity.
67 NOTES TO THE FINANCIAL STATEMENTS

B. Basis of Accounting and Revenue Recognition

Consolidated Financial Statements

The consolidated financial statements of the government were prepared using GAAP, primarily based on Federal 

Accounting Standards Advisory Board’s (FASAB’s) SFFAS. Intragovernmental transactions are eliminated in consolidation, 

except as described in the Other Information– Unmatched Transactions and Balances. See Note 1.R—Unmatched 

Transactions and Balances for detailed information. The consolidated financial statements include accrual-based financial 

statements and sustainability financial statements, which are discussed in more detail below, and the related notes to the 

consolidated financial statements. Collectively, the accrual-based financial statements, the sustainability financial statements, 

and the notes represent basic information that is deemed essential for the financial statements and notes to be presented in 

conformity with GAAP.

Accounting standards allow certain presentations and disclosures to be modified, if needed, to prevent the disclosure of 

classified information. Accordingly, modifications may have been made to certain presentations and disclosures.

Accrual-Based Financial Statements

The accrual-based financial statements were prepared under the following principles:

• Expenses are generally recognized when incurred.

• Non-exchange revenue, including taxes, duties, fines, and penalties, are recognized when collected and adjusted for 

the change in net measurable and legally collectible amounts receivable (modified cash basis). Related refunds and 

other offsets, including those that are measurable and legally payable, are netted against non-exchange revenue.

• Exchange (earned) revenue is recognized when the government provides goods and services to the public for a price. 

Exchange revenue includes user charges such as admission to federal parks and premiums for certain federal 

insurance.

The basis of accounting used for budgetary purposes, which is primarily on a cash basis (budget deficit) and follows 

budgetary concepts and policies, differs from the basis of accounting used for the financial statements which follow GAAP. 

See the Reconciliations of Net Operating Cost and Budget Deficit in the Financial Statements section.

Sustainability Financial Statements

The sustainability financial statements were prepared based on the projected present value of the estimated future 

revenue and estimated future expenditures, primarily on a cash basis, for a 75 year period.1 They include the SLTFP, 

covering all federal government programs, and the Statements of Social Insurance and the Statements of Changes in Social 

Insurance Amounts, covering social insurance programs (Social Security, Medicare, Railroad Retirement, and Black Lung 

programs). These estimates are based on economic as well as demographic assumptions presented in Notes 22 and 23. The 

sustainability financial statements are not forecasts or predictions. The sustainability financial statements are designed to 

illustrate the relationship between receipts and expenditures, if current policy is continued. For this purpose, the projections 

assume, among other things, that scheduled social insurance benefit payments would continue after related trust funds are 

projected to be depleted, contrary to current law, and that debt could continue to rise indefinitely without severe economic 

consequences.

By accounting convention, the Statements of Social Insurance do not include projected general revenues that, under 

current law, would be used to finance the remainder of the expenditures in excess of revenues for Medicare Parts B and D 

that is reported in the Statements of Social Insurance. The SLTFP include all revenues (including general revenues) of the 

federal government.

New Standards Issued in Prior and Current Years and Implemented in Current Year

Beginning in fiscal year 2018, the government implemented, or began to implement, the requirements of new standards 

for: Reporting Entity, Tax Expenditures, Budget and Accrual Reconciliation, Assigning Assets to Component Reporting 

Entities, Amending Inter-Entity Cost Provisions, and Classified Activities. The new standards implemented are:

• SFFAS No. 47, Reporting Entity. SFFAS No. 47 established principles to identify organizations for which elected 

officials are accountable. The standard also guides preparers of general purpose federal financial reports (GPFFRs) 

in determining what organizations to report upon, whether such organizations are considered “consolidation entities” 

or “disclosure entities,” and what information should be presented about those organizations. The standard also 

requires information to be provided about related party relationships of such significance that it would be misleading 

 1 With the exception of the Black Lung program, which has a rolling 25-year projection period that begins on the September 30 valuation date each year.
NOTES TO THE FINANCIAL STATEMENTS 68

to exclude information. Note 25— Disclosure Entities and Related Parties has been added to the Financial Report to 

capture additional information required under SFFAS No. 47. Refer to Note 25—Disclosure Entities and Related 

Parties and Appendix A for detailed information. SFFAS No. 47 became effective in fiscal year 2018.

• SFFAS No. 52, Tax Expenditures. SFFAS No. 52 requires certain information on tax expenditures to be included in 

the Financial Report to assist users in understanding the existence, purpose, and impact of tax expenditures. 

Disclosures within the notes to the financial statements should include a “plain language” definition, examples of 

types, and a description of how tax expenditures affect non-exchange revenue, tax collections and refunds, as well as 

whether tax expenditure amounts are presented in the basic financial statements. The MD&A should include a “plain 

language” definition, the general purpose, and examples of types of tax expenditures. The MD&A should also 

include information about other factors that may affect tax collections in order to place tax expenditure information 

in an appropriate context, a description of how tax expenditures are treated for budgetary and financial reporting 

purposes, and a statement regarding the availability of published information on tax expenditures, such as the 

Treasury Office of Tax Policy’s unaudited annual report on tax expenditures, and how that information can be 

obtained. SFFAS No. 52 also encourages presentation of tax expenditures as unaudited other information (OI) in the 

Financial Report. SFFAS No. 52 became effective in fiscal year 2018.

• In October 2017, FASAB issued SFFAS No. 53, Budget and Accrual Reconciliation; Amending SFFAS No. 7, and 

24 and Rescinding SFFAS No. 22. SFFAS No. 53 amends component entity requirements for a reconciliation 

between budgetary and financial accounting information established by SFFAS No. 7, Accounting for Revenue and 

Other Financing Sources and Concepts for Reconciling Budgetary and Financial Accounting. To increase 

informational value and usefulness, and to support the governmentwide financial statement reconciling net operating 

cost to the budget deficit, this Statement provides for the budget and accrual reconciliation (BAR) to replace the 

statement of financing. The BAR explains the relationship between the entity’s net outlays on a budgetary basis and 

the net cost of operations during the reporting period. The BAR starts with net cost of operations and is adjusted by 

components of net cost that are not part of net outlays, components of net outlays that are not part of net cost, and 

other temporary timing differences, which reflect some special adjustments. SFFAS No. 53 is effective in 2019 and 

early implementation is permitted. During fiscal year 2018, USDA, VA, HHS, HUD, and Millennium Challenge 

Corporation (MCC) adopted this standard. 

• Technical Bulletin (TB) 2017-2, Assigning Assets to Component Reporting Entities. TB 2017-2 provides guidance to 

address areas not directly covered in existing Statements and clarifies existing standards. The TB provides that 

assets may be assigned by a reporting entity to its component reporting entities on a rational and consistent basis. 

The TB provides that assets may only be assigned by a component reporting entity to its own sub-component 

reporting entities (such as bureaus, components, or responsibility segments within the same larger reporting entity or 

department). This TB facilitates reporting for large and complex organizations so that reporting is better aligned 

with their operations and results in less costly financial reporting by permitting the reporting entity to align reporting 

with established funding and governance structures. Component reporting entities should describe the policies used 

to assign significant assets. This TB also reduces barriers to and cost of adopting GAAP. TB 2017-2 became 

effective in fiscal year 2018.

• In May 2018, FASAB issued SFFAS No. 55, Amending Inter-Entity Cost Provisions. SFFAS No. 55 revises SFFAS 

No. 4, Managerial Cost Accounting Standards and Concepts (including Interpretation 6, Accounting for Imputed 

Intra-departmental Costs: An Interpretation of SFFAS No. 4). SFFAS No. 4 required component reporting entities 

to recognize the full costs of services received from other federal reporting entities even if there was no requirement 

to reimburse the providing entity for the full cost of such services. This Statement revises SFFAS No. 4 to provide 

for the continued recognition of significant inter-entity costs by business-type activities and rescinds the following: 

a) SFFAS No. 30, Inter-Entity Cost Implementation: Amending SFFAS No. 4, Managerial Cost Accounting 

Standards and Concepts and b) Interpretation 6, Accounting for Imputed Intra-departmental Costs: An 

Interpretation of SFFAS No. 4. Recognition of inter-entity costs by activities that are not business-type activities is 

not required with the exception of inter-entity costs for personnel benefits and the Treasury Judgment Fund 

settlements unless otherwise directed by the OMB. Notwithstanding the absence of a requirement, non-business-type 

activities may elect to recognize imputed cost and corresponding imputed financing for other types of inter-entity 

costs. Component reporting entities should disclose that only certain inter-entity costs are recognized for goods and 

services that are received from other federal entities at no cost or at a cost less than the full costs. SFFAS No. 55 is 

effective in 2019 and early implementation is permitted. During fiscal year 2018, DOD adopted this standard.

• SFFAS No. 56, Classified Activities. SFFAS No. 56 permits financial statement modifications that do not affect net 

results of operations or net position to prevent the disclosure of classified national security information or activities. 

In addition, this Statement allows a component reporting entity to be excluded from one reporting entity and 

consolidated into another reporting entity, and the effect of the modification may change the net results of operations 
69 NOTES TO THE FINANCIAL STATEMENTS

and/or net position. Further, interpretations of this Statement, which may themselves contain classified information, 

will address the requirements of this and other standards and permit other modifications when needed to prevent the 

disclosure of classified information. Modifications permitted by this Statement and future interpretations may affect 

the net results of operations and/or net position of those entities applying the interpretations. This standard may be 

implemented for fiscal year 2018.

In fiscal year 2016, the government began implementing the requirements of new standards related to the reporting for: 

Inventories and Related Property and Property, Plant, and Equipment. The standards being implemented are:

• FASAB issued SFFAS No. 48, Opening Balances for Inventory, Operating Materials and Supplies, and Stockpile 

Materials. SFFAS No. 48 permits a reporting entity to apply an alternative valuation method in establishing opening 

balances and applies when a reporting entity is presenting financial statements or one or more line items addressed 

by this statement. This standard can be applied for the first time or after a period during which existing systems 

could not provide the information necessary for producing GAAP-based financial statements without use of the 

alternative valuation methods. This is intended to provide an alternative method to adoption of GAAP when 

historical records and systems do not provide a basis for valuation of opening balances in accordance with SFFAS 

No. 3, Accounting for Inventory and Related Property. This application is available to each reporting entity only 

once per line item addressed in this statement. Reporting entities that meet either condition and elect to apply this 

statement should follow the guidance in SFFAS No. 21, Reporting Corrections of Errors and Changes in 

Accounting Principles. SFFAS No. 48 was effective beginning in fiscal year 2017. Early implementation was 

permitted. DOD did partially implement in 2016 and select component entities have continued to implement in 2017 

and 2018. DOD has not declared full implementation yet.

• FASAB issued SFFAS No. 50, Establishing Opening Balances for General Property, Plant and Equipment. SFFAS 

No. 50 permits a reporting entity to apply an alternative valuation method in establishing opening balances and

applies when a reporting entity is presenting financial statements or one or more line items addressed by this 

statement. This standard can be applied for the first time or after a period during which existing systems could not 

provide the information necessary for producing GAAP-based financial statements without use of the alternative 

valuation methods. This is intended to provide an alternative method to adoption of GAAP when historical records 

and systems do not provide a basis for valuation of opening balance in accordance with SFFAS No. 6, Accounting 

for Property, Plant, and Equipment. This application is available to each reporting entity only once per line item 

addressed in this statement. Reporting entities meeting the conditions and electing to apply this statement should 

follow the guidance in SFFAS No. 21, Reporting Corrections of Errors and Changes in Accounting Principles.

SFFAS No. 50 was effective beginning in fiscal year 2017. Early implementation was permitted. DOD did partially 

implement in 2016 and select component entities have continued to implement in 2017 and 2018. DOD has not 

declared full implementation yet.

New Standards Issued and Not Yet Implemented

FASAB issued the following new standards that are applicable to the Financial Report, but are not yet implemented at 

the governmentwide level for fiscal year 2018:

• In April 2016, FASAB issued SFFAS No. 49, Public-Private Partnerships Disclosure Requirements. SFFAS No. 49 

establishes principles to ensure disclosure about Public-Private Partnerships (P3s) are presented in the reporting 

entity’s GPFFRs. P3s are defined as “risk sharing” arrangements or transactions lasting more than five years 

between public and private sector entities. Disclosure requirements comprise quantitative and qualitative 

information to assist users in understanding the nature of P3s. P3 disclosures help achieve the operating performance 

and budgetary integrity objectives outlined in SFFAC No. 1. P3s are a form of investments. They should be 

adequately disclosed in order to assist report users in determining: (a) the important assets of the U.S. government 

and how effectively they are being managed and (b) the identification of risks. SFFAS No. 49 is effective for periods 

beginning after September 30, 2018 and early implementation is permitted; however, it is not being early 

implemented in fiscal year 2018.

• In January 2017, FASAB issued SFFAS No. 51, Insurance Programs. SFFAS No. 51 establishes accounting and 

financial reporting standards to ensure that insurance programs are adequately defined and report consistent 

information about the liabilities for losses incurred and claimed as well as expected losses during remaining 

coverage. These will replace the insurance guarantee program standards provided in paragraphs 97-121 of SFFAS 

No. 5, Accounting for Liabilities of the Federal Government. To support consistency, it identifies three categories: 

1) exchange transaction insurance programs other than life insurance, 2) non-exchange transaction insurance 

programs and 3) life insurance programs. Insurance programs are categorized based upon the type of revenue 

received as defined by SFFAS No. 7, Accounting for Revenue and Other Financing and Concepts for Reconciling 

Budgetary and Financial Accounting, as amended. SFFAS No. 51 provides guidance as to how and when insurance 
NOTES TO THE FINANCIAL STATEMENTS 70

programs should recognize revenue, expenses and liabilities according to the aforementioned categories. The 

recognition measurement, and disclosure guidance provides for concise, meaningful and transparent information 

regarding the operating performance of insurance programs. SFFAS No. 51 is effective for periods beginning after 

September 30, 2018 and early implementation is not permitted. 

• In April 2018, FASAB issued SFFAS No. 54, Leases: An Amendment of SFFAS No. 5, Accounting for Liabilities of 

the Federal Government, and SFFAS No. 6, Accounting for Property, Plant, and Equipment. SFFAS No. 54 revises 

the financial reporting standards for federal lease accounting. It provides a comprehensive set of lease accounting 

standards to recognize federal lease activities in the reporting entity’s GPFFRs and includes appropriate disclosures. 

This Statement requires that federal lessees recognize a lease liability and a leased asset at the commencement of the 

lease term, unless it meets any of the scope exclusions or the definition/criteria of short-term leases, or contracts or 

agreements that transfer ownership, or intragovernmental leases. A federal lessor would recognize a lease receivable 

and deferred revenue, unless it meets any of the scope exclusions or the definition/criteria or short-term leases, 

contracts or agreements that transfer ownership, or intragovernmental leases. SFFAS No. 54 is effective in 2021 and 

early adoption is not permitted. 

C. Accounts and Taxes Receivable

Accounts receivable represent claims to cash or other assets from entities outside the government that arise from the

sale of goods or services, duties, fines, certain license fees, recoveries, or other provisions of the law. Accounts receivable are

reported net of an allowance for uncollectible amounts. An allowance is established when it is more likely than not the

receivables will not be totally collected. The allowance method varies among the entities in the government and is usually

based on past collection experience and is reestimated periodically as needed. Methods include statistical sampling of

receivables, specific identification and intensive analysis of each case, aging methodologies, and percentage of total

receivables based on historical collection.

Taxes receivable consist primarily of uncollected tax assessments, penalties, and interest when taxpayers have agreed or

a court has determined the assessments are owed. Taxes receivable do not include unpaid assessments when taxpayers or a

court have not agreed that the amounts are owed (compliance assessments) or the government does not expect further

collections due to factors such as the taxpayer’s death, bankruptcy, or insolvency (write-offs). Taxes receivable are reported

net of an allowance for the estimated portion deemed to be uncollectible. The majority of the allowance for uncollectible

amounts is based on projections of collectible amounts from a statistical sample of unpaid assessments.

D. Loans Receivable and Loan Guarantee Liabilities

Direct loans obligated and loan guarantees committed after fiscal year 1991 are reported based on the present value of

the net cash flows estimated over the life of the loan or guarantee. The difference between the outstanding principal of the

direct loans and the present value of their net cash inflows is recognized as a subsidy cost allowance. The present value of

estimated net cash flows of the loan guarantees is recognized as a liability for loan guarantees.

The subsidy expense for direct or guaranteed loans disbursed during a fiscal year is the present value of estimated net

cash flows for those loans or guarantees. For the fiscal year during which new direct or guaranteed loans are disbursed, the

components of the subsidy expense of those new direct loans and loan guarantees are recognized separately among interest

subsidy costs, default costs, fees and other collections, and other subsidy costs. Credit programs reestimate the subsidy cost

allowance for outstanding direct loans and the liability for outstanding loan guarantees, by taking into account all factors that

may have affected the estimated cash flows. Any adjustment resulting from the reestimates is recognized as a subsidy

expense (or a reduction in subsidy expense).

Direct loans obligated and loan guarantees committed before fiscal year 1992 are valued under two different

methodologies within the government: the allowance-for-loss method and the present-value method. Under the allowancefor-loss method, the outstanding principal of direct loans is reduced by an allowance for uncollectible amounts; the liability

for loan guarantees is the amount the entity estimates would more likely than not require future cash outflow to pay default

claims. Under the present-value method, the outstanding principal of direct loans is reduced by an allowance equal to the

difference between the outstanding principal and the present value of the expected net cash flows. The liability for loan

guarantees is the present value of expected net cash outflows due to the loan guarantees.
71 NOTES TO THE FINANCIAL STATEMENTS

E. Inventories and Related Property

Inventory is tangible personal property that is (1) held for sale, principally to federal entities, (2) in the process of

production for sale, or (3) to be consumed in the production of goods for sale or in the provision of services for a fee. SFFAS

No. 3, Accounting for Inventory and Related Property, requires inventories held for sale and held in reserve for future sale

within the government to be valued using either historical cost or a method that reasonably approximates historical cost.

Historical cost methods include first-in-first-out, weighted average, and moving average. Any other valuation method may be

used if the results reasonably approximate one of the historical cost methods. FASAB issued additional guidance SFFAS No.

48, which permits a reporting entity to apply an alternative valuation method in establishing opening balances for inventory,

OM&S, and stockpile materials and is intended to provide an alternative valuation method when historical records and

systems do not provide a basis for valuation of opening balances in accordance with SFFAS No. 3.

As the largest contributor of inventories and related property, DOD values approximately 99 percent of its resale

inventory using the moving average cost method as of September 30, 2018. DOD reports the remaining 1 percent of resale

inventories at an approximation of historical cost using latest acquisition cost adjusted for holding gains and losses. OM&S

are valued using various methods including moving average cost, standard price, historical cost, replacement price, and direct

method. DOD uses both the consumption method (expensed when issued to an end user for consumption in normal

operations) and the purchase method (expensed when purchased) of accounting for OM&S. Stockpile Materials are

accounted for using actual cost or the lower of cost or market method. DOD continues to implement SFFAS No. 48,

permitting alternative methods in establishing opening balances.

F. Property, Plant, and Equipment

Property, Plant, and Equipment (PP&E) consists of tangible assets that have an estimated useful life of two or more

years, are not intended for sale in the ordinary course of business, and are intended to be used or available for use by the

entity. These tangible assets may include land, land rights, assets acquired through capital leases, buildings and structures,

furniture and fixtures, equipment, and vehicles.

SFFAS No. 6, Accounting for Property, Plant, and Equipment requires general PP&E to be recorded at cost. Cost shall

include all costs incurred to bring the PP&E to a form and location suitable for its intended use. PP&E used in government

operations are carried at acquisition cost, with the exception of some DOD equipment. FASAB issued additional guidance,

SFFAS No. 50, Establishing Opening Balances for General Property, Plant, and Equipment which states that a reporting

entity may choose alternative methods for establishing an opening balance for land and land rights. The entity may exclude

land and land rights from the opening balance of general PP&E. In so doing, future land and land right acquisitions should be

expensed. An entity electing to exclude land and land rights from its general PP&E opening balances must disclose, with a

reference on the balance sheet to the related disclosure, the number of acres held at the beginning of each reporting period,

the number of acres added during the period, the number of acres disposed of during the period, and the number of acres held

at the end of each reporting period. DOD generally records PP&E at the estimated historical cost. However, when applicable

DOD will continue to adopt SFFAS No. 50.

Costs to acquire PP&E, extend the useful life of existing PP&E, or enlarge or improve its capacity, that exceed federal

entities’ capitalization thresholds should be capitalized and depreciated or amortized. Depreciation and amortization expense

should be recognized on all capitalized PP&E, except land and land rights of unlimited duration. In the case of constructed

PP&E, the PP&E shall be recorded as construction work in process until it is placed in service, at which time the balance is

transferred to PP&E.

For financial reporting purposes, heritage assets (excluding multi-use heritage assets) and stewardship land are not

recorded as part of PP&E. Since heritage assets are intended to be preserved as national treasures, it is anticipated that they

will be maintained in reasonable repair and that there will be no diminution in their usefulness over time. Many assets are

clearly heritage assets. For example, the National Park Service manages the Washington Monument, the Lincoln Memorial

and the Mall. Heritage assets that are predominantly used in general government operations are considered multi-use heritage

assets and are included in PP&E. Stewardship land is also consistent with the treatment of heritage assets in that much of the

government’s land is held for the general welfare of the nation and is intended to be preserved and protected. Stewardship

land is land owned by the government but not acquired for or in connection with general PP&E. Because most federal land is

not directly related to general PP&E, it is deemed to be stewardship land and accordingly, it is not reported on the Balance

Sheet. Examples of stewardship land include national parks and forests. For more details on stewardship assets, see Note

24—Stewardship Land and Heritage Assets.
NOTES TO THE FINANCIAL STATEMENTS 72

G. Debt and Equity Securities

Debt and equity securities are classified as held-to-maturity, available-for-sale, and trading. Held-to-maturity debt and

equity securities are reported at cost, net of unamortized premiums and discounts. Available-for-sale debt and equity

securities are reported at fair value. Trading debt and equity securities are reported at fair value.

H. Investments in Government-Sponsored Enterprises

The senior preferred stock and associated warrants for the purchase of common stock in the GSEs (Fannie Mae and

Freddie Mac) are presented at their fair value. Senior Preferred Stock Purchase Agreements (SPSPAs), which Treasury

entered into with each GSE when they were placed under conservatorship, can result in payments to the GSEs when, at the

end of any quarter, the Federal Housing Finance Agency (FHFA), acting as the conservator, determines that the liabilities of

either GSE exceed its respective assets. Such payments result in an increase to the investment in the GSEs’ senior preferred

stock, with a corresponding decrease to cash held by Treasury.

The valuation to estimate the investment’s fair value incorporates forecasts, projections, and cash flow analyses.

Changes in valuation, including impairments, are deemed usual and recurring and thus are recorded as exchange transactions

on the Statement of Net Cost and investments in GSEs on the Balance Sheet. The government also records dividends related

to these investments as exchange transactions and accrues when declared.

The potential liabilities to the GSEs, if any, are assessed annually and recorded at the gross estimated amount. For more

detailed information on investments in GSEs, refer to Note 8—Investments in Government-Sponsored Enterprises.

I. Federal Debt

Accrued interest on Treasury securities held by the public is recorded as an expense when incurred, instead of when

paid. Certain Treasury securities are issued at a discount or premium. These discounts and premiums are amortized over the

term of the security using an interest method for all long-term securities and the straight line method for short-term securities.

Treasury also issues Treasury Inflation-Protected Securities (TIPS). The principal for TIPS is adjusted daily over the life of

the security based on the Consumer Price Index for all Urban Consumers (CPI-U).

J. Federal Employee and Veteran Benefits Payable

Generally, federal employee and veteran benefits payable are recorded during the time employee services are rendered.

The related liabilities for defined benefit pension plans, veterans’ compensation, burial and education benefits, postretirement health benefits, and post-retirement life insurance benefits, are recorded at estimated present value of future

benefits, less any estimated present value of future normal cost contributions. Normal cost is the portion of the actuarial

present value of projected benefits allocated as an expense for employee services rendered in the current year. Actuarial gains

and losses (as well as prior service cost, if any) are recognized immediately in the year they occur without amortization.

VA also provides certain veterans and/or their dependents with pension benefits, based on annual eligibility reviews, if

the veteran died or was disabled for nonservice-related causes. The actuarial present value of the future liability for these VA

pension benefits is a non-exchange transaction and is not required to be recorded on the Balance Sheet. These benefits are

recognized as expenses when benefits are paid rather than when employee services are rendered.

The liabilities for Federal Employees’ Compensation Act (FECA) benefits are recorded at estimated present value of

future benefits for injuries and deaths that have already been incurred.

Gains and losses from changes in long-term assumptions used to estimate federal employee pensions, Other Retirement

Benefits (ORB), and Other Postemployment Benefits (OPEB) liabilities are reflected separately on the Statement of Net Cost

and the components of the expense related to federal employee pension, ORB, and OPEB liabilities are disclosed in Note

12—Federal Employee and Veteran Benefits Payable as prescribed by SFFAS No. 33, Pensions, Other Retirement Benefits,

and Other Postemployment Benefits: Reporting the Gains and Losses from Changes in Assumptions and Selecting Discount

Rates and Valuation Dates. In addition, SFFAS No. 33 also provides a standard for selecting the discount rate assumption for

present value estimates of federal employee pension, ORB, and OPEB liabilities.
73 NOTES TO THE FINANCIAL STATEMENTS

K. Environmental and Disposal Liabilities

Environmental and disposal liabilities are recorded at the estimated current cost of the cleanup plan, including the level

of restoration to be performed, the current legal or regulatory requirements, and the current technology. Cleanup costs are the

costs of removing, containing or disposing of hazardous waste. Hazardous waste is a solid, liquid, or gaseous waste that,

because of its quantity or concentration, presents a potential hazard to human health or the environment. Cleanup costs

include, but are not limited to, decontamination, decommissioning, site restoration, site monitoring, closure, and post-closure

costs. Where technology does not exist to clean up radioactive or hazardous waste, only the estimable portion of the liability

(typically monitoring and safe containment) is recorded.

L. Insurance and Guarantee Program Liabilities

Insurance and guarantee programs (such as Federal Crop Insurance Program and Benefit Pension Plans Program) are

authorized by law to financially compensate a designated population of beneficiaries by accepting all or part of the risk for

losses incurred as a result of an insured event. Programs excluded from this category include social insurance, loan guarantee,

and federal employee and veteran benefit programs. Insurance and guarantee program funds are commonly held in revolving

funds in the government and losses sustained by participants are paid from these funds. Many of these programs receive

appropriations to pay excess claims or have authority to borrow from the Treasury. The values of insurance and guarantee

program liabilities are particularly sensitive to changes in underlying estimates and assumptions. Insurance and guarantee

programs with recognized liabilities in future periods (i.e., liabilities that extend beyond one year) are reported at their net

present value.

M. Deferred Maintenance and Repairs

Deferred maintenance and repairs are maintenance and repairs that were not performed when they should have been or

scheduled maintenance and repairs that were delayed or postponed. Maintenance is the act of keeping fixed assets in

acceptable condition, including preventative maintenance, normal repairs, and other activities needed to preserve the assets,

so they continue to provide acceptable service and achieve their expected life. Maintenance and repairs exclude activities

aimed at expanding the capacity of assets or otherwise upgrading them to serve needs different from those originally

intended. Deferred maintenance and repairs are not expensed in the Statements of Net Cost or accrued as liabilities on the

Balance Sheet. However, deferred maintenance and repairs information is disclosed in the unaudited RSI section of this

report. Please see unaudited RSI, Deferred Maintenance and Repairs for additional information including measurement

methods.

N. Contingencies

Liabilities for contingencies are recognized on the Balance Sheet when both:

• A past transaction or event has occurred, and

• A future outflow or other sacrifice of resources is probable and measurable.

The estimated contingent liability may be a specific amount or a range of amounts. If some amount within the range is a 

better estimate than any other amount within the range, then that amount is recognized. If no amount within the range is a 

better estimate than any other amount, then the minimum amount in the range is recognized and the range and a description 

of the nature of the contingency is disclosed.

Contingent liabilities that do not meet the above criteria for recognition, but for which there is at least a reasonable 

possibility that a loss may be incurred, are disclosed in Note 18—Contingencies. 
NOTES TO THE FINANCIAL STATEMENTS 74

O. Commitments

In the normal course of business, the government has a number of unfulfilled commitments that may require the use of

its financial resources. Note 19—Commitments describes the components of the government’s actual commitments that are

disclosed due to their nature and/or their amount. They include long-term leases, undelivered orders, and other commitments.

P. Social Insurance

A liability for social insurance programs (Social Security, Medicare, Railroad Retirement, Black Lung, and

Unemployment) is recognized for any unpaid amounts currently due and payable to beneficiaries or service providers as of

the reporting date. No liability is recognized for future benefit payments not yet due. For further information, see Note 22—

Social Insurance and the unaudited RSI—Social Insurance section.

Q. Funds from Dedicated Collections

Generally, funds from dedicated collections are financed by specifically identified revenues, provided to the 

government by non-federal sources, often supplemented by other financing sources that remain available over time. These 

specifically identified revenues and other financing sources are required by statute to be used for designated activities, 

benefits, or purposes, and must be accounted for separately from the government’s general revenues. The three required 

criteria for a fund from dedicated collections are:

• A statute committing the government to use specifically identified revenues and/or other financing sources that are 

originally provided to the government by a non-federal source only for designated activities, benefits, or purposes;

• Explicit authority for the fund to retain revenues and/or other financing sources not used in the current period for 

future use to finance the designated activities, benefits, or purposes; and

• A requirement to account for and report on the receipt, use, and retention of the revenues and/or other financing 

sources that distinguishes the fund from the government’s general revenues.

For more details on funds from dedicated collections, see Note 20—Funds from Dedicated Collections.

R. Unmatched Transactions and Balances

The reconciliation of the change in net position requires that the difference between ending and beginning net position 

equals the difference between revenue and cost, plus or minus prior-period adjustments.

The unmatched transactions and balances are needed to bring the change in net position into balance. The primary 

factors affecting this out of balance situation are:

• Unmatched intragovernmental transactions and balances between federal entities; and

• Errors and restatements in federal entities reporting.

As intragovernmental transactions and balances reduce to immaterial amounts, the corresponding individual lines in the 

Unmatched Transactions and Balances table are adjusted to remove the differences for the fiscal year. Please refer to the table 

of Unmatched Transactions and Balances in Other Information (Unaudited) for examples of the individual lines. Materiality 

for these adjustments is considered in the absolute value, when at or below $0.1 billion.

Refer to the Other Information (unaudited)—Unmatched Transactions and Balances for detailed information.

S. Adjustments to Beginning Net Position

During fiscal years 2017 and 2018, DOD reported adjustments to beginning net position impacting the financial

statements. DOD reported a decrease of $2.5 billion and an increase of over $37 billion in fiscal years 2018 and 2017,

respectively, to beginning net position due to continuing implementation of SFFAS No. 48, Opening Balances for Inventory,

Operating Materials and Supplies, and Stockpile Materials and SFFAS No. 50, Establishing Opening Balances for General

Property, Plant, and Equipment.
75 NOTES TO THE FINANCIAL STATEMENTS

SFFAS No. 47, Reporting Entity, was implemented in fiscal year 2018. The standard requires that consolidation entities

be consolidated in their entirety. Prior to fiscal year 2018, only the federal portion of Smithsonian Institution was

consolidated. For fiscal year 2018, all activities (federal and non-federal portions) of Smithsonian Institution were

consolidated, resulting in a $2.6 billion adjustment to the fiscal year 2018 beginning net position.

In fiscal year 2017, Note 20—Funds from Dedicated Collections included $0.2 billion in adjustments to beginning net

position for Gulf Coast Ecosystem Restoration Council and HUD. In fiscal year 2018, the adjustments to beginning net

position for Smithsonian Institution of $2.6 billion related to dedicated collection funds.

T. Reclassifications

Certain fiscal year 2017 amounts were reclassified to conform to the fiscal year 2018 presentation. For example,

reclassifications were made to certain line items presented on the Reconciliation of Net Operating Cost and Budget Deficit

and the Statement of Changes in Cash Balance from Budget and Other Activities to provide a further breakdown of certain

categories of transactions. Also, a review was done to enhance the format and readability of the Financial Report leading to

consolidation of immaterial lines within tables, removal of information not required by FASAB, and be more in line with

entity reporting requirements. In fiscal year 2018, the presentation of Note 4—Loans Receivable and Loan Guarantee

Liabilities, Net for fiscal year 2017 was reclassified to mirror entity financial reporting reducing the need for manual

calculations. The presentations of Note 5—Inventories and Related Property, Net, Note 6—Property, Plant, and Equipment,

Net, and Note 13—Environmental and Disposal Liabilities removed the breakout of DoD for fiscal years 2017 and 2018.

U. Restatements

In fiscal year 2018, HUD recognized material misstatements that were due to (1) a discounting error in the Federal

Housing Administration (FHA) cash flow model used to calculate the recovery rate applied to the annual financial statement

re-estimate and (2) FHA not accounting for a contingency paid by the Treasury Judgment Fund. The corrections resulted in

the restatement of certain prior year amounts reported on the Balance Sheet, Statement of Net Cost, Statement of Operations

and Changes in Net Position, Reconciliations of Net Operating Cost and Budget Deficit, Note 4—Loans Receivable and

Loans Guarantee Liabilities, Net (understated by $1.7 billion), and Note 16—Other Liabilities (overstated by $0.1 billion).

In fiscal year 2018, HUD made re-estimate presentation changes to subsidy expense (income) ($3.5 billion decrease),

principal amount of loans under guarantee ($3.2 billion increase), and principal amount guaranteed by the United States ($2.6

billion increase) presented in Note 4—Loans Receivable and Loans Guarantee Liabilities fiscal year 2017 tables. HUD also

changed the presentation of Note 20—Funds from Dedicated Collections from consolidation (includes eliminations) to

combined (excludes eliminations) adjusting the ending net position by $0.1 billion in fiscal year 2017.

Also, in fiscal year 2018 errors were noted in the presentation of Note 19—Commitments for undelivered orders and

other commitments that required correction of balances reported in fiscal year 2017. The corrections resulted in the

restatement of prior year amounts for DOJ’s undelivered orders ($13.9 billion increase) and Treasury’s all other

commitments ($10.8 billion increase).

Fiscal year 2017 beginning net position was restated by $51.2 billion due to compilation errors in the presentation of the

Balance Sheet and Note 6—Property, Plant, and Equipment, Net. In addition, the related activity caused a restatement on the

Statement of Net Cost in the amount of $1.3 billion.

V. Fiduciary Activities

Fiduciary activities are the collection or receipt, as well as the management, protection, accounting, investment and

disposition by the government of cash or other assets in which non-federal individuals or entities have an ownership interest

that the government must uphold. Fiduciary cash and other fiduciary assets are not assets of the government and are not

recognized on the Balance Sheet. See Note 21—Fiduciary Activities, for further information.
NOTES TO THE FINANCIAL STATEMENTS 76

W. Use of Estimates

The government has made certain estimates and assumptions relating to the reporting of assets, liabilities, revenues,

expenses, and the disclosure of contingent liabilities to prepare these financial statements. There are a large number of factors

that affect these assumptions and estimates, which are inherently subject to substantial uncertainty arising from the likelihood

of future changes in general economic, regulatory, and market conditions. As such, actual results will differ from these

estimates and such differences may be material.

Significant transactions subject to estimates are included in the balance of loans and credit program receivables, federal

employee and veteran benefits payable, credit reform subsidy costs, investments in GSEs, and other non-federal securities

and related impairment, tax receivables, loan guarantees, depreciation, imputed costs, other actuarial liabilities, cost and

earned revenue allocations, as well as contingencies and any related recognized liabilities.

The government recognizes the sensitivity of credit reform modeling to slight changes in some model assumptions and

uses regular review of model factors, statistical modeling, and annual reestimates to reflect the most accurate cost of the

credit programs to the U.S. government. Federal Credit Reform Act of 1990 (FCRA) loan receivables and loan guarantees are

disclosed in Note 4—Loans Receivable and Loan Guarantee Liabilities, Net.

The forecasted future cash flows used to determine credit reform amounts are sensitive to slight changes in model

assumptions, such as general economic conditions, specific stock price volatility of the entities in which the government has

an equity interest, estimates of expected default, and prepayment rates. Therefore, forecasts of future financial results have

inherent uncertainty.

The annual valuation performed as of September 30 on the senior preferred stock and warrants comprising the

Investments in GSEs line item on the Balance Sheets incorporates various forecasts, projections, and cash flow analyses to

develop an estimate of the asset’s fair value. The value of the senior preferred stock is estimated by first estimating the fair

value of the total equity of each GSE (which, in addition to the senior preferred stock, is comprised of other equity

instruments including common stock, common stock warrants, and junior preferred stock). The fair value of the total equity

is based on a discounted cash flow valuation methodology, whereby the primary input is the present value of the projected

quarterly dividend payments. The fair value of the GSEs’ other equity instruments are then deducted from its total equity,

with the remainder representing the fair value of the senior preferred stock. The primary input into the warrants valuation is

the market value of the shares of common stock of the GSEs which, along with the junior preferred stock, are traded on the

over-the-counter (OTC) Bulletin Board. Treasury evaluates the need for adjusting the OTC market-based valuation of the

warrants for the effects, if any, of significant events occurring after the close of the market but before the end of the

measurement date. Treasury records any changes in valuation, including impairment, on the Statement of Net Cost and the

Balance Sheet. Since the valuation is an annual process, Treasury deems changes in valuation of the senior preferred stock

and warrants as usual and recurring.

Treasury performs annual calculations, as of September 30, to assess the need for recording an estimated liability in

accordance with SFFAS No. 5, Accounting for Liabilities of The Federal Government, related to the government’s funding

commitment to the GSEs under the SPSPAs. Liability recognition is predicated on the probable future occurrence of an

excess of liabilities and minimum capital reserve amounts, as defined, over the assets of either GSE at the end of any

reporting quarter. The occurrence of future GSE deficits, which ultimately determines the liability to the GSEs, is most

sensitive to future changes in the housing price index and, to a lesser extent, future changes in guarantee fees received by the

GSEs on single family mortgages and interest rates. For more detailed information on investments in GSEs and the amended

SPSPAs, see Note 8—Investments in Government-Sponsored Enterprises.

The government offers its employees’ pension and other post-employment retirement benefits, as well as life and health

insurance. OPM administers the largest civilian plan and DOD and VA administer the military plans. Generally the benefits

payable are recorded during the time employee services are rendered. The related liabilities for defined benefit pension plans,

veterans’ compensation and burial benefits, post-retirement health benefits, life insurance benefits, education benefits, and

FECA benefits are recorded at estimated present value of future benefits, less any estimated present value of future normal

cost contributions. See Note 12—Federal Employee and Veteran Benefits Payable for additional information.

X. Credit Risk

Credit risk is the potential, no matter how remote, for financial loss from a failure of a borrower or counterparty to

perform in accordance with underlying contractual obligations. The government takes on credit risk when it makes direct
77 NOTES TO THE FINANCIAL STATEMENTS

loans or guarantees to non-federal entities, provides credits to foreign entities, or becomes exposed to institutions which

engage in financial transactions with foreign countries.

The government also takes on credit risk related to committed, but undisbursed direct loans, funding commitments to

GSEs, and other activities. These activities generally focus on the underlying problems in the credit markets. These programs

were developed to provide credit where borrowers are not able to get access to credit with reasonable terms and conditions.

Because these programs attempt to correct for a market imperfection, it can expose the government to potential costs and

losses. The extent of the risk assumed is described in more detail in the notes to the financial statements, and where

applicable, is factored into credit reform models and reflected in fair value measurements.

Y. Treaties and Other International Agreements

For accounting purposes, treaties and other international agreements may be understood as falling into three broad 

categories:

• No commitment to spend money,

• Commitment to spend money, or

• Potential obligation to spend money.

The proper financial reporting of treaties and other international agreements depends on the probable future outflow or 

other sacrifice of resources as a result of entering into the agreement.

In many cases, treaties and other international agreements establish frameworks that govern cooperative activities with 

other countries, but leave to the discretion of the parties whether to engage in any such activities. In other cases, the 

agreements may contemplate specific cooperative activities, but obligations to engage in them are made subject to the 

availability of funds. Cooperative activities relevant to these treaties and other international agreements fall under the first 

category, which does not result in the U.S. government incurring any financial liability. Since these treaties and other 

international agreements have no financial impact, they are not reported or disclosed in this Financial Report. 

Some treaties and other international agreements fall under the second category, involving specific obligations by the 

U.S. government to pay money to other countries or international organizations. Examples of such agreements include those 

that establish international organizations under which the U.S. government undertakes obligations to pay assessed dues to the 

organization; grant agreements under which the U.S. government provides foreign assistance funds to other countries; and 

claims settlement agreements under which the U.S. government agrees to pay specific sums of money to settle claims. For 

further information related to treaties and other international agreements that fall under the second category, refer to Note

19—Commitments.

The last category encompasses those treaties or other international agreements that may result in contingent liabilities 

arising from litigation or claims. Information relevant to contingent liabilities stemming from the U.S. government’s 

involvement in treaties or other international agreements is captured in the annual legal representation letter process, and, if 

applicable, reported on the Balance Sheet or disclosed in Note 18—Contingencies.
NOTES TO THE FINANCIAL STATEMENTS 78

Note 2. Cash and Other Monetary Assets

Cash and Other Monetary Assets as of September 30, 2018, and 2017

(In billions of dollars) 2018 2017

Unrestricted cash:

Cash held by Treasury for governmentwide operations ................................. 378.5 153.3

Other......................................................................................................... 4.9 3.7

Restricted..................................................................................................... 31.6 26.1

Total cash ............................................................................................... 415.0 183.1

International monetary assets ........................................................................ 66.7 63.3

Gold and silver ............................................................................................. 11.1 11.1

Foreign currency........................................................................................... 14.7 13.7

Total cash and other monetary assets ....................................................... 507.5 271.2

Unrestricted cash includes cash held by Treasury for governmentwide operations (Operating Cash) and all other

unrestricted cash held by the federal entities. Operating Cash represents balances from tax collections, federal debt receipts,

and other various receipts net of cash outflows for federal debt repayments and other payments. Treasury checks outstanding

are netted against Operating Cash until they are cleared by the FR System. Other unrestricted cash not included in Treasury’s

Operating Cash balance includes balances representing cash, cash equivalents, and other funds held by entities, such as

undeposited collections, deposits in transit, demand deposits, amounts held in trust, and imprest funds. Operating Cash held

by the Treasury increased by $225.2 billion (an increase of approximately 147 percent) in fiscal year 2018 due to Treasury’s

investment and borrowing decisions to manage the balance and timing of the government’s cash position.

Restrictions on cash are due to the imposition on cash deposits by law, regulation, or agreement. Restricted cash is

primarily composed of cash held by the Security Assistance Accounts (SAA), which execute Foreign Military Sales. The

SAA included $26.3 billion and $21.3 billion as of September 30, 2018, and 2017, respectively.

International monetary assets include the U.S. reserve position in the International Monetary Fund (IMF) and U.S.

holdings of Special Drawing Rights (SDRs). The U.S. reserve position in the IMF is an interest-bearing claim on the IMF

that includes the reserve asset portion of the financial subscription that the U.S. has paid in as part of its participation in the

IMF as well as any amounts drawn by the IMF from a letter of credit made available by the U.S. as part of its financial

subscription to the IMF. The IMF promotes international monetary cooperation and a stable payments system to facilitate

growth in the world economy. Its primary activities are surveillance of members’ economies, financial assistance, as

appropriate, and technical assistance.

Only a portion of the U.S. financial subscription to the IMF is made in the form of reserve assets; the remainder is

provided in the form of a letter of credit from the U.S. to the IMF. The balance available under the letter of credit totaled

$100.0 billion and $105.3 billion as of September 30, 2018, and 2017 respectively. The U.S. reserve position in the IMF had

a U.S. dollar equivalent of $15.4 billion and $11.5 billion as of September 30, 2018, and 2017, respectively.

The SDR is an international reserve asset created by the IMF to supplement the existing reserve assets of its members.

These interest-bearing assets can be obtained by IMF allocations, transactions with IMF member countries, or in the form of

interest earnings on SDR holdings and reserve positions in the IMF. U.S. SDR holdings are an interest-bearing asset of

Treasury’s Exchange Stabilization Fund (ESF). The total amount of SDR holdings of the U.S. was the equivalent of $51.0

billion and $51.5 billion as of September 30, 2018, and 2017, respectively.

The IMF allocates SDRs to its members in proportion to each member’s quota in the IMF. The SDR Act, enacted in

1968, authorized the Secretary of the Treasury to issue SDR Certificates (SDRCs) to the Federal Reserve in exchange for

dollars. The amount of SDRCs outstanding cannot exceed the dollar value of SDR holdings. The Secretary of the Treasury

determines when Treasury will issue or redeem SDRCs. SDRCs outstanding totaled $5.2 billion as of September 30, 2018,

and 2017, and are included in Note 16—Other Liabilities.
79 NOTES TO THE FINANCIAL STATEMENTS

As of September 30, 2018, and 2017, other liabilities included $49.3 billion and $49.9 billion, respectively, of interestbearing liability to the IMF for SDR allocations. The SDR allocation item represents the cumulative total of SDRs distributed

by the IMF to the U.S. in allocations. The U.S. has received no SDR allocations since 2009.

Gold is valued at the statutory price of $42.2222 per fine troy ounce. The number of fine troy ounces of gold was

261,498,927 as of September 30, 2018, and 2017. The market value of gold on the London Fixing was $1,187 and $1,283 per

fine troy ounce as of September 30, 2018, and 2017, respectively. In addition, silver is valued at the statutory price of

$1.2929 per fine troy ounce. The number of fine troy ounces of silver was 16,000,000 as of September 30, 2018, and 2017.

The market value of silver on the London Fixing was $14.31 and $16.86 per fine troy ounce as of September 30, 2018, and

2017, respectively. Gold totaling $11.0 billion as of September 30, 2018, and 2017, was pledged as collateral for gold

certificates issued and authorized to the FRBs by the Secretary of the Treasury. Gold certificates were valued at $11.0 billion

as of September 30, 2018, and 2017, which are included in Note 16—Other Liabilities. Treasury may redeem the gold

certificates at any time. Foreign currency is translated into U.S. dollars at the exchange rate at fiscal year-end. The foreign

currency is maintained by the ESF and various U.S. federal entities as well as foreign banks.
NOTES TO THE FINANCIAL STATEMENTS 80

Note 3. Accounts and Taxes Receivable, Net

Accounts and Taxes Receivable as of September 30, 2018, and 2017

(In billions of dollars) 2018 2017

Accounts receivable:

Gross accounts receivable.......................................................................... 112.4 117.9

Allowance for uncollectible amounts ............................................................ (30.5) (29.8)

Accounts receivable, net............................................................................. 81.9 88.1

Taxes receivable:

Gross taxes receivable ............................................................................... 226.7 203.8

Allowance for uncollectible amounts ............................................................ (163.7) (148.6)

Taxes receivable, net.................................................................................. 63.0 55.2

Total accounts and taxes receivable, net ................................................... 144.9 143.3

Gross accounts receivable include related interest receivable of $3.6 billion and $3.4 billion as of September 30, 2018, 

and 2017, respectively.

Treasury comprises approximately 41.1 percent of the government’s reported accounts and taxes receivable, net, as of 

September 30, 2018. The following list of entities comprise 98.3 percent of the government’s accounts and taxes receivable, 

net, of $144.9 billion as of September 30, 2018. Please refer to the following entities financial statements for details on gross 

accounts and taxes receivable and the related allowance for uncollectible amounts:

• Treasury

• HHS

• SSA

• DOI

• DHS

• DOD

• PBGC

• DOE

• Federal Deposit Insurance Corporation (FDIC)

• VA

• Tennessee Valley Authority (TVA)

• OPM

• DOL

• USDA

• USPS

• Federal Communications Commission (FCC)

• HUD

• Federal Trade Commission (FTC)

• Environmental Protection Agency (EPA)

 
81 NOTES TO THE FINANCIAL STATEMENTS

Accounts and Taxes receivable, net include amounts related to criminal restitution owed to the government. In fiscal year 

2018, accounts and taxes receivable, net included $7.9 billion of gross receivable related to criminal restitution orders 

monitored by responsible entities, of which $0.7 billion is determined to be collectible. Of this gross receivable amount, 

Treasury and HHS collectively accounts for $5.7 billion of which $0.5 billion is determined to be collectible as of September 

30, 2018. In fiscal year 2017, this balance included $8.8 billion of gross receivables related to criminal restitution orders, of 

which $0.6 billion is determined to be collectible. Of this gross receivable amount, Treasury, HHS, and SSA collectively 

account for $8.0 billion of which $0.5 billion is determined to be collectible as of September 30, 2017.
NOTES TO THE FINANCIAL STATEMENTS 82

Note 4. Loans Receivable and Loan Guarantee Liabilities, Net

Loans Receivable as of September 30, 2018

(In billions of dollars)

Loans 

Receivable, 

gross

Interest 

Receivable

Foreclosed 

Property

Allowance 

for Subsidy

Net Loans 

Receivable

Subsidy 

Expense 

(Income) 

for the 

Fiscal Year

Federal Direct Student Loans -

Education ................................. 1,083.7 72.0 - (40.7) 1,115.0 4.4

Federal Family Education Loans 

- Education ............................... 95.1 21.1 - (23.3) 92.9 2.4

Electric Loans - USDA............... 49.3 0.3 - (2.2) 47.4 (0.1)

Rural Housing Services - USDA . 24.4 0.2 0.1 (2.1) 22.6 0.1

Export-Import Bank Loans ......... 19.4 0.2 - (2.0) 17.6 -

Housing and Urban 

Development Loans................... 30.6 9.3 1.3 (15.1) 26.1 (0.2)

All other programs ..................... 108.9 3.8 1.2 (16.4) 97.5 1.7

Total loans receivable

1,411.4 106.9 2.6 (101.8) 1,419.1 8.3

Loans Receivable as of September 30, 2017 (Restated)

(In billions of dollars)

Loans 

Receivable, 

gross

Interest 

Receivable

Foreclosed 

Property

Allowance 

for Subsidy

Net Loans 

Receivable

Subsidy 

Expense 

(Income) 

for the 

Fiscal Year

Federal Direct Student Loans -

Education ................................. 998.8 59.5 - (16.8) 1,041.5 5.3

Federal Family Education Loans 

- Education ............................... 101.6 19.3 - (18.5) 102.4 2.4

Electric Loans - USDA............... 48.2 0.3 - (2.1) 46.4 -

Rural Housing Services - USDA . 24.7 0.3 0.1 (2.3) 22.8 0.1

Export-Import Bank Loans ......... 21.7 0.2 - (1.6) 20.3 0.1

Housing and Urban 

Development Loans................... 26.3 6.5 1.6 (13.9) 20.5 -

All other programs ..................... 107.1 3.2 1.3 (15.3) 96.3 (0.1)

Total loans receivable ............. 1,328.4 89.3 3.0 (70.5) 1,350.2 7.8
83 NOTES TO THE FINANCIAL STATEMENTS

Loan Guarantee Liabilities as of September 30, 2018, and 2017

Principal Amount 

of Loans Under 

Guarantee

Principal Amount 

Guaranteed by the 

United States

Loan Guarantee 

Liabilities

Subsidy Expense 

(Income) for the 

Fiscal Year

Restated Restated

(In billions of dollars) 2018 2017 2018 2017 2018 2017 2018 2017

Federal Housing Administration 

Loans - HUD.............................. 1,470.8 1,409.5 1,326.8 1,277.4 19.1 20.6 (8.9) 13.0

Veterans Housing Benefit 

Programs - VA ........................... 663.7 596.5 167.9 151.9 8.7 10.4 (2.8) (0.6)

Rural Housing Services - USDA .. 123.0 120.4 110.6 108.3 (0.2) 0.1 (0.2) (0.5)

Small Business Loans - SBA....... 128.8 121.0 105.6 99.5 2.7 2.6 (1.1) (0.9)

Federal Family Education Loans 

- Education ................................ 157.1 176.4 153.8 172.7 2.6 3.7 (1.2) 1.0

All other guaranteed loan 

programs ................................... 99.8 114.3 95.6 109.3 5.3 5.5 (0.1) 0.5

Total loan guarantee liabilities... 2,643.2 2,538.1 1,960.3 1,919.1 38.2 42.9 (14.3) 12.5

The government has two types of loan programs: direct loans and loan guarantees. One major type of loan is direct

loans such as the Education Federal Direct Student Loans. The second type is loan guarantee programs, such as the HUD’s

FHA Loans program.

Direct loans and loan guarantee programs are used to promote the nation’s welfare by making financing available to

segments of the population not served adequately by non-federal institutions, or otherwise providing for certain activities or

investments. For those unable to afford credit at the market rate, federal credit programs provide subsidies in the form of

direct loans offered at an interest rate lower than the market rate. For those to whom non-federal financial institutions are

reluctant to grant credit because of the high risk involved, federal credit programs guarantee the payment of these non-federal

loans and absorb the cost of defaults.

The amount of the long-term cost of post-1991 direct loans and loan guarantees outstanding equals the subsidy cost

allowance for direct loans and the liability for loan guarantees (including defaulted guaranteed loans) as of September 30.

The amount of the long-term cost of pre-1992 direct loans and loan guarantees equals the allowance for subsidy amounts (or

present value allowance) for direct loans and the liability for loan guarantees. The long-term cost is based on all direct loans

and guaranteed loans disbursed in this fiscal year and previous years that are outstanding as of September 30. It includes the

subsidy cost of these loans and guarantees estimated as of the time of loan disbursement and subsequent adjustments such as

modifications, reestimates, amortizations, and write-offs.

Net loans receivable includes related interest and foreclosed property. Foreclosed property is property that is transferred

from borrowers to a federal credit program, through foreclosure or other means, in partial or full settlement of post-1991

direct loans or as a compensation for losses that the government sustained under post-1991 loan guarantees. Please refer to

the financial statements of the USDA, VA, and HUD for significant detailed information regarding foreclosed property. The

total subsidy expense/(income) is the cost of direct loans and loan guarantees recognized during the fiscal year. It consists of

the subsidy expense/(income) incurred for direct and guaranteed loans disbursed during the fiscal year, for modifications

made during the fiscal year of loans and guarantees outstanding, and for upward or downward reestimates as of the end of the

fiscal year of the cost of loans and guarantees outstanding. This expense/(income) is included in the Statements of Net Cost.
NOTES TO THE FINANCIAL STATEMENTS 84

Loan Programs

The majority of the loan programs are provided by Education, HUD, USDA, Small Business Administration (SBA),

VA, and Export-Import (EXIM) Bank. For significant detailed information regarding the direct and guaranteed loan

programs listed in the tables above, please refer to the financial statements of the entities.

Education has two major loan programs, authorized by Title IV of the Higher Education Act of 1965. The first program

is the William D. Ford Federal Direct Loan Program, (referred to as the Direct Loan Program) that was established in fiscal

year 1994. The Direct Loan Program offered four types of educational loans: Stafford, Unsubsidized Stafford, PLUS for

parents and/or graduate or professional students, and consolidation loans. With this program, the government makes loans

directly to students and parents through participating institutions of higher education. Direct loans are originated and serviced

through contracts with private vendors. Education disbursed approximately $134.1 billion in Direct Loans to eligible

borrowers in fiscal year 2018 and approximately $142.5 billion in fiscal year 2017. The second program is the FFEL

Program. This program was established in fiscal year 1965, and is a guaranteed loan program. Like the Direct Loan Program,

it offered four types of loans: Stafford, Unsubsidized Stafford, PLUS for parents and/or graduate or professional students, and

consolidation loans. The Student Aid and Fiscal Responsibility Act (SAFRA), which was enacted as part of the Health Care

Education and Reconciliation Act of 2010 (P.L. 111-152), eliminated the authority to guarantee new FFEL after June 30,

2010. During fiscal year 2018, Education net loans receivable increased by $64.1 billion, largely the result of increased

Direct Loan Program disbursements for new loan originations and FFEL consolidations, net of borrower principal and

interest collections.

HUD’s Office of Housing plays a vital role for the nation’s homebuyers, homeowners, renters, and communities

through its nationally administered programs. It includes FHA, the largest mortgage insurer in the world. FHA provides over

$1.3 trillion in mortgage insurance on mortgages for Single Family homes, Multifamily properties, and Healthcare facilities.

In fiscal year 2018, HUD recognized material misstatements that resulted in corrections to certain prior year amounts

reported on the Balance Sheet and Loans Receivable and Loans Guarantee Liabilities, Net (understated by $1.7 billion).

Please refer to the Note 1 Restatements section for more information.

USDA’s Rural Development offers both direct and guaranteed loans with unique missions to bring prosperity and

opportunity to rural areas. The Rural Housing programs provide affordable, safe, and sanitary housing and essential

community facilities to rural communities. Rural Utility programs help improve the quality of life in rural areas through a

variety of loan programs for electric energy, telecommunications, and water and environmental projects.

The EXIM Bank aids in financing and promoting U.S. exports. Loans and guarantees extended under the medium-term

loan program typically have repayment terms of one to seven years, while loans and guarantees extended under the long-term

program usually have repayment terms in excess of seven years. Generally, both the medium-term and the long-term loan and

guarantee programs cover up to 85 percent of the U.S. contract value of shipped goods.

The SBA provides guarantees that help small businesses obtain bank loans and licensed companies to make investments

in qualifying small businesses. The SBA also makes loans to microloan intermediaries and provides a direct loan program

that assists homeowners, renters and businesses recover from disasters.

VA operates the following direct loan and loan guarantee programs: Vendee Loans, Acquired Loans, Native American

Direct Loans, Housing Guaranteed Loans, Vocational Rehabilitation and Employment Loans, Insurance Loans, and Loan

Sale Guarantees. The VA Home Loans program is the largest of the VA loan guarantee programs. The Home Loans program

provides loan guarantees and direct loans to veterans, service members, qualifying dependents, and limited non-veterans to

purchase homes and retain homeownership with favorable market terms. During fiscal year 2018, the face value of

outstanding principal on loans guaranteed by the VA increased by $67.2 billion. This increase was primarily due to $146.3

billion in new loans guaranteed by the VA, partially offset by $77.7 billion in guaranteed loan terminations.
85 NOTES TO THE FINANCIAL STATEMENTS

Note 5. Inventories and Related Property, Net

Inventories and Related Property, Net as of September 30, 2018, and 2017

Reclass

(In billions of dollars) 2018 2017

Inventory purchased for resale ............................................................................... 68.0 61.8

Inventory and operating material and supplies held for repair .................................... 71.1 67.1

Inventory—excess, obsolete, and unserviceable ..................................................... 0.8 0.9

Operating materials and supplies held for use ......................................................... 124.7 143.8

Operating materials and supplies held in reserve for future use ................................ 13.8 0.2

Operating materials and supplies-excess, obsolete, and unserviceable ..................... 2.9 2.5

Stockpile materials held in reserve for future use...................................................... 51.9 49.3

Stockpile materials held for sale ............................................................................. 4.6 5.1

Other related property ............................................................................................ 8.6 3.8

Allowance for loss ................................................................................................. (8.9) (7.8)

Total inventories and related property, net.............................................................. 337.5 326.7

Beginning in fiscal year 2018, all entities are now reported together in each line item total for Inventories and Related 

Property, Net. DOD comprises approximately 81.7 percent of the government’s inventories and related property, net, as of 

September 30, 2018. DOD continues to implement SFFAS No. 48 which permits alternative methods in establishing opening 

balances for inventories and related property.

The following entities comprise over 98 percent of the government’s reported inventories and related property, net of 

$337.5 billion as of September 30, 2018. Refer to each entities’ financial statements for details.

• DOD

• DOE

• HHS
NOTES TO THE FINANCIAL STATEMENTS 86

Note 6. Property, Plant, and Equipment, Net

Property, Plant, and Equipment as of September 30, 2018, and 2017

Accumulated 

Depreciation/ 

Amortization

Accumulated 

Depreciation/ 

Cost Net Cost Amortization Net

(In billions of dollars) 2018 2017 Restated

Buildings, structures, and facilities.................. 728.4 431.1 297.3 692.6 406.9 285.7

Furniture, fixtures, and equipment ..................1,363.9 782.7 581.2 1,320.6 752.6 568.0

Construction in progress................................ 159.5 N/A 159.5 168.2 N/A 168.2

Land............................................................. 21.5 N/A 21.5 24.0 N/A 24.0

Other property, plant, and equipment ............. 87.4 56.4 31.0 84.1 43.0 41.1

Total property, plant, and equipment, net...2,360.7 1,270.2 1,090.5 2,289.5 1,202.5 1,087.0

Beginning in fiscal year 2018, all entities are now reported together in each line item total for PP&E. DOD comprises 

approximately 69.6 percent of the government’s reported property, plant, and equipment, net, as of September 30, 2018. 

DOD continues to implement SFFAS No. 50, Establishing Opening Balances for General Property, Plant, and Equipment

which permits alternative methods in establishing opening balances for general PP&E. The total acreage of land and land 

rights excluded in this manner was 20,926,485 as of September 30, 2018.

In fiscal year 2017, restatements due to compilation errors in the presentation of the Balance Sheet and PP&E, net 

totaled $52.5 billion. 

The following entities comprise over 90 percent of the government’s reported PP&E net of $1,090.5 billion as of 

September 30, 2018. Please refer to the entities’ financial statements for details.

• DOD

• DOE

• GSA

• VA

• TVA

• DOI

• State

• DOT

• USPS

• DHS

• NASA

• DOC

• DOJ

• HHS

Certain PP&E are multi-use heritage assets, see Note 24—Stewardship Land and Heritage Assets for additional 

information on multi-use heritage assets.
87 NOTES TO THE FINANCIAL STATEMENTS

Note 7. Debt and Equity Securities

Debt and Equity Securities as of September 30, 2018

Book 

(In billions of dollars) Cost Adjustment Value

Held-To Maturity

Debt securities:

Non-U.S. government....................... - - -

Mortgage/asset backed .................... 0.2 - 0.2

Equity Securities:

All other equity securities .................. 3.5 - 3.5

Total Held-To-Maturity (Net Investment) 3.7 - 3.7

Available-for-Sale:

Debt Securities: 3.5 0.2 3.7

Total Available-for-Sale (Fair Value) 3.5 0.2 3.7

Trading Securities:

Debt Securities:

Non-U.S. government....................... 12.9 (0.2) 12.7

Commercial .................................... 0.2 - 0.2

Mortgage/asset backed..................... 3.8 (0.1) 3.7

Corporate and other bonds ............... 15.9 (0.2) 15.7

All other debt securities..................... 2.5 (1.0) 1.5

Equity Securities:

Unit Trust......................................... 16.3 9.5 25.8

Common Stocks............................... 2.0 0.3 2.3

All other equity securities .................. 14.3 0.9 15.2

Total Trading Securities (Fair Value) 67.9 9.2 77.1

Total

Total debt and equity securities categorized

as held-to-maturity, available-for-sale or trading........................................................................... 84.5

Total NRRIT debt and equity securities (Fair Value) ..................................................................... 25.8

Total debt and equity securities................................................................................................... 110.3
NOTES TO THE FINANCIAL STATEMENTS 88

Debt and Equity Securities as of September 30, 2017 

Book 

(In billions of dollars) Cost Adjustment Value

Held-To Maturity

Debt securities:

Non-U.S. government....................... - - -

Mortgage/asset backed .................... 0.2 - 0.2

Equity Securities:

All other equity securities .................. 3.6 - 3.6

Total Held-To-Maturity (Net Investment) 3.8 - 3.8

Available-for-Sale:

Debt Securities: 5.4 0.2 5.6

Total Available-for-Sale (Fair Value) 5.4 0.2 5.6

Trading Securities:

Debt Securities:

Non-U.S. government....................... 12.2 0.6 12.8

Commercial .................................... 0.2 - 0.2

Mortgage/asset backed .................... 3.9 - 3.9

Corporate and other bonds ............... 16.4 0.6 17.0

All other debt securities..................... 4.0 (0.1) 3.9

Equity Securities:

Unit Trust......................................... 18.0 8.2 26.2

Common Stocks............................... 2.1 0.1 2.2

All other equity securities .................. 15.2 (0.1) 15.1

Total Trading Securities (Fair Value) 72.0 9.3 81.3

Total

Total debt and equity securities categorized

as held-to-maturity, available-for-sale or trading.......................................................................... 90.7

*Total RRB debt and equity securities (Fair Value)...................................................................... 25.5

Total debt and equity securities.................................................................................................. 116.2

*Includes amounts from NRRIT in 2017. In 2018, NRRIT amounts are reported separately.

These debt and equity securities do not include nonmarketable Treasury securities that have been eliminated in

consolidation. Held-to-maturity debt and equity securities are reported as total net investment, net of unamortized discounts

and premiums. Available-for-sale debt and equity securities are reported at fair value, net of unrealized gain or loss. Trading

debt and equity securities are reported at fair value, net of unrealized gain or loss.

NRRIT on behalf of the RRB, manages and invests railroad retirement assets that are to be used to pay retirement

benefits to the nation’s railroad workers under the Railroad Retirement Program. As an investment company, NRRIT is

subject to different accounting standards that do not require the classifications presented above. Please refer to NRRIT’s

financial statements for more detailed information concerning this specific investment.

Certain significant consolidation entities apply financial accounting and reporting standards issued by the Financial

Accounting Standards Board (FASB) (FASB standards), and such entities, as permitted by SFFAS No.47, are consolidated

into the U.S. government’s consolidated financial statements without conversion to financial and reporting standards issued

by the FASAB (FASAB standards). PBGC, NRRIT, and TVA debt and equity securities are recorded at fair value and have

been categorized based upon a fair value hierarchy, in accordance with FASB ASC Section 820, Fair Value Measures and

Disclosures, in their respective financial statements.
89 NOTES TO THE FINANCIAL STATEMENTS

Debt and Equity Securities as of September 30, 2018, and 2017

(In billions of dollars) 2018 2017

Pension Benefit Guaranty Corporation....................................... 62.0 66.7

National Railroad Retirement Investment Trust........................... 25.8 -

Tennessee Valley Authority....................................................... 11.5 11.4

*Railroad Retirement Board...................................................... - 25.5

All other................................................................................... 11.0 12.6

Total securities and investments ............................................. 110.3 116.2

*Includes amounts from NRRIT in 2017. In 2018, NRRIT amounts are reported separately.

PBGC and TVA invest primarily in fixed maturity and equity securities, classified as trading. PBGC reported an

unrealized loss related to trading securities as of September 30, 2018 of $1.2 billion, and an unrealized gain related to trading

securities as of September 30, 2017 of $3.3 billion. TVA reported gains related to trading securities held as of September 30,

2018 and 2017 of $1.6 billion and $1.2 billion, respectively. The TVA balance includes $8.4 billion and $8.5 billion as of

September 30, 2018, and 2017, respectively, for the Tennessee Valley Authority Retirement System (TVARS). TVARS

includes unrealized gains of $0.8 billion as of both September 30, 2018 and 2017. PBGC, NRRIT, and TVA base market

values on the last sale of a listed security, on the mean of the “bid-and-ask” for nonlisted securities, or on a valuation model

in the case of fixed income securities that are not actively traded. These valuations are determined as of the end of each fiscal

year. Purchases and sales of securities are recorded on the trade date. Please refer to the individual financial statements of

PBGC, NRRIT, and TVA for more detailed information related to debt and equity securities. These entities comprise 90.0

percent of the total reported debt and equity securities of $110.3 billion as of September 30, 2018.
NOTES TO THE FINANCIAL STATEMENTS 90

Note 8. Investments in Government-Sponsored Enterprises

Congress established Fannie Mae and Freddie Mac as GSEs to support mortgage lending. A key function of the GSEs is

to purchase mortgages, package those mortgages into securities, which are subsequently sold to investors, and guarantee the

timely payment of principal and interest on these securities.

Leading up to the financial crisis, increasingly difficult conditions in the housing market challenged the soundness and

profitability of the GSEs, thereby threatening to undermine the entire housing market. In response Congress passed Housing

and Economic Recovery Act of 2008 (HERA) (P.L.110-289) in July 2008. This act created FHFA, with enhanced regulatory

authority over the GSEs, and provided the Secretary of the Treasury with certain authorities intended to ensure the financial

stability of the GSEs, if necessary. In September 2008, FHFA placed the GSEs under conservatorship and Treasury invested

in the GSEs by entering into a SPSPA with each GSE. These actions were taken to preserve the GSEs’ assets, ensure a sound

and solvent financial condition, and mitigate systemic risks that contributed to market instability.

The purpose of such actions is to maintain the solvency of the GSEs so they can continue to fulfill their vital roles in the

home mortgage market while the Administration and Congress determine what structural changes should be made to the

housing finance system. Draws under the SPSPAs result in an increased investment in the GSEs as further discussed below.

For fiscal year 2018, under SFFAS No. 47 criteria Fannie Mae and Freddie Mac were owned or controlled by the federal

government only as a result of (a) regulatory actions (such as organizations in receivership or conservatorship) or (b) other

federal government intervention actions. Under the regulatory or other intervention actions, the relationship with the federal

government was and is not expected to be permanent. These entities are classified as disclosure entities based on their

characteristics as a whole. Accordingly, these entities are not consolidated into the financial statements of the government;

however, the value of the investments in these entities, changes in value, and related activity with these entities are included

in the consolidated financial statements. This treatment is consistent with how these entities were reported prior to fiscal year

2018 under SFFAC No. 2, Entity and Display.

Senior Preferred Stock Purchase Agreements

Under the SPSPAs, Treasury initially received from each GSE: 1) 1,000,000 shares of non-voting variable liquidation

preference senior preferred stock with a liquidation preference value of $1,000 per share and 2) a non-transferable warrant for

the purchase, at a nominal cost, of 79.9 percent of common stock on a fully-diluted basis. The warrants expire on September

7, 2028. Under the amended SPSPAs, the quarterly dividend payment changed from a 10.0 percent per annum fixed rate

dividend on the total liquidation preference (as discussed below) to an amount equivalent to the GSE’s positive net worth

above a capital reserve amount. The capital reserve amount, which was initially set at $3.0 billion for calendar year 2013,

declined by $600 million at the beginning of each calendar year thereafter, and was scheduled to reach zero by calendar year

2018. On December 21, 2017, Treasury and the FHFA agreed to modify the SPSPAs between Treasury and the GSEs to

increase the capital reserve amount for each GSE back to $3 billion, effective with the December 2017 dividend payment. In

exchange for the increase in the capital reserve, Treasury’s liquidation preference in each GSE increased by $3 billion on

December 31, 2017. The GSEs will not pay a quarterly dividend if their positive net worth is below the required capital

reserve threshold. Cash dividends of $9.9 billion and $25.3 billion were received during fiscal years ended September 30,

2018, and 2017, respectively.

The SPSPAs, which have no expiration date, require that Treasury will disburse funds to the GSEs if at the end of any

quarter, the FHFA determines that the liabilities of either GSE exceed its assets. Draws from Treasury under the SPSPAs are

designed to ensure that the GSEs maintain positive net worth, with a fixed maximum amount available to each GSE under

this agreement established as of December 31, 2012 (refer to the “Contingent Liability to GSEs” section below and Note 18

—Contingencies). Draws against the funding commitment of the SPSPAs do not result in the issuance of additional shares of

senior preferred stock; instead, it increases the liquidation preference of the initial 1,000,000 shares by the amount of the

draw. The combined cumulative liquidation preference totaled $199 billion and $189 billion as of September 30, 2018 and

2017, respectively. Actual payments of $4.0 billion were made to the GSEs for the fiscal year ended September 30, 2018.

There were no payments to the GSEs for the fiscal year ended September 30, 2017.

Senior Preferred Stock and Warrants for Common Stock

In determining the fair value of the senior preferred stock and warrants for common stock, Treasury relied on the GSEs’

public filings and press releases concerning their financial statements, as well as non-public, long-term financial forecasts,

monthly summaries, quarterly credit supplements, independent research regarding preferred stock trading, independent

research regarding the GSEs’ common stock trading on the OTC Bulletin Board, discussions with each of the GSEs and

FHFA, and other information pertinent to the valuations. Because the instruments are not publicly traded, there is no
91 NOTES TO THE FINANCIAL STATEMENTS

comparable trading information available. The fair valuations rely on significant unobservable inputs that reflect assumptions

about the expectations that market participants would use in pricing.

The fair value of the senior preferred stock considers the amount of forecasted dividend payments. The fair valuations

assume that a hypothetical buyer would acquire the discounted dividend stream as of the transaction date. The fair value of

the senior preferred stock increased as of September 30, 2018 when compared to September 30, 2017, reflecting higher

forecasted GSE net income, mainly driven by the reduction in the U.S. corporate tax rate resulting from the December 22,

2017 enactment of the Tax Cuts and Jobs Act (P.L. 115-97), a lower discount rate driven by lower volatility among

comparable companies, as well as a reduction in the market value of the GSEs’ other equity securities that comprise their

total equity value.

Factors impacting the fair value of the warrants include the nominal exercise price and the large number of potential

exercise shares, the market trading of the common stock that underlies the warrants as of September 30, the principal market,

and the market participants. Other factors impacting the fair value include, among other things, the holding period risk related

directly to the assumption of the amount of time that it will take to sell the exercised shares without depressing the market.

The fair value of the warrants decreased at the end of fiscal year 2018, when compared to 2017, primarily due to decreases in

the market price of the underlying common stock of each GSE.

Contingent Liability to GSEs

As part of the annual process undertaken by Treasury, a series of long-term financial forecasts are prepared to assess, as

of September 30, the likelihood and magnitude of future draws to be required by the GSEs under the SPSPAs within the

forecast time horizon. Treasury used 25-year financial forecasts prepared through years 2043 and 2042 in assessing if a

contingent liability was required as of September 30, 2018 and 2017, respectively. If future payments under the SPSPAs are

deemed to be probable within the forecast horizon, and Treasury can reasonably estimate such payment, they will accrue a

contingent liability to the GSEs to reflect the forecasted equity deficits of the GSEs. This accrued contingent liability will be

undiscounted and will not take into account any of the offsetting dividends that could be received, as the dividends, if any,

would be owed directly to the General Fund. Such recorded accruals will be adjusted in subsequent years as new information

develops or circumstances change. If future payments are reasonably possible, they are disclosed but not recorded as an

accrued contingent liability.

Based on the annual forecasts as of September 30, 2018 and 2017, Treasury estimated there was no probable future

funding draws. As of September 30, 2018, it is reasonably possible that market volatility or non-recurring events—for

instance, changes to accounting policies that impact credit loss provisions—could potentially cause the GSEs to generate

quarterly losses and, therefore, result in future funding draws against the funding commitment. Due to challenges quantifying

future market volatility or the timing, magnitude, and likelihood of non-recurring events, the total amount of this reasonably

possible future funding liability could not be estimated as of September 30, 2018.

P.L. 115-97 caused each GSE to reduce the value of its deferred tax assets in the quarter in which the legislation was

enacted. The reduction of the GSEs deferred tax assets resulted in $4.0 billion in actual payments made to the GSEs to ensure

they maintained positive net worth, which reduced the remaining funding commitment. At September 30, 2018 and 2017, the

maximum remaining funding commitment to the GSEs for the remaining life of the SPSPAs was $254.1 billion and $258.1

billion, respectively. Subsequent funding draws will reduce the remaining commitments. Refer to Note 19—Commitments

for a full description of other commitments and risks.

In assessing the need for an estimated contingent liability, Treasury relied on the GSEs’ public filings and press releases

concerning their financial statements, monthly summaries, and quarterly credit supplements, as well as non-public, long-term

financial forecasts, the FHFA House Price Index, discussions with each of the GSEs and FHFA, and other information

pertinent to the liability estimates. The forecasts prepared in assessing the need for an estimated contingent liability as of

September 30, 2018 include three potential wind-down scenarios, with varying assumptions regarding the timing as to when

the GSEs would cease new business activities, including purchasing mortgage loans and issuing new guaranteed mortgagebacked securities. The forecasts also assume a continued gradual wind-down of the retained portfolios (and corresponding net

interest income) through 2018, as directed under the amended SPSPAs for each GSE to reduce the maximum balance of its

retained mortgage portfolio by 15.0 percent per annum beginning December 31, 2013. The maximum balance of each GSE’s

retained mortgage portfolio was initially set at $650 billion as of December 31, 2012, and the amended SPSPAs requires that

each GSE reduce this maximum balance to $250 billion by December 31, 2018.

Estimation Factors

Treasury’s forecasts concerning the GSEs may differ from actual experience. Estimated senior preferred values and

future draw amounts will depend on numerous factors that are difficult to predict including, but not limited to, changes in

government policy with respect to the GSEs, the business cycle, inflation, home prices, unemployment rates, interest rates,
NOTES TO THE FINANCIAL STATEMENTS 92

changes in housing preferences, home financing alternatives, availability of debt financing, market rates of guarantee fees,

outcomes of loan refinancings and modifications, new housing programs, and other applicable factors.

Regulatory Environment

To date, Congress has not approved a plan to address the future of the GSEs, thus the GSEs continue to operate under

the direction of their conservator, the FHFA, whose stated strategic goals for the GSEs are to: (1) maintain, in a safe and

sound manner, foreclosure prevention activities and credit availability for new and refinanced mortgages to foster liquid,

efficient, competitive, and resilient national housing finance markets; (2) reduce taxpayer risk through increasing the role of

private capital in the mortgage market, and (3) build a new single-family securitization infrastructure for use by the GSEs and

adaptable for the use by other participants in the secondary market in the future.

 The Temporary Payroll Tax Cut Continuation Act of 2011(P.L. 112-78) was funded by an increase of ten basis points in

the GSEs’ guarantee fees (referred to as “the incremental fees”) which began in April 2012 and is effective through October

1, 2021. The incremental fees are to be remitted to Treasury and not retained by the GSEs and, thus, do not affect the

profitability of the GSEs. For fiscal years 2018 and 2017, the GSEs remitted to Treasury the incremental fees totaling $3.6

billion and $3.2 billion, respectively.

As of September 30, 2018, and 2017, GSEs investments consisted of the following:

Investments in GSEs as of September 30, 2018

Cumulative

Gross Valuation Fair

(In billions of dollars) Investments Gain/(Loss) Value

Fannie Mae senior preferred stock ................................. 123.7 (64.5) 59.2

Freddie Mac senior preferred stock ................................ 75.4 (31.2) 44.2

Fannie Mae warrants common stock .............................. 3.1 3.2 6.3

Freddie Mac warrants common stock ............................. 2.3 1.2 3.5

Total investments in GSEs ......................................... 204.5 (91.3) 113.2

Investments in GSEs as of September 30, 2017

Cumulative

Gross Valuation Fair

(In billions of dollars) Investments Gain/(Loss) Value

Fannie Mae senior preferred stock ................................. 117.0 (74.5) 42.5

Freddie Mac senior preferred stock ................................ 72.1 (41.0) 31.1

Fannie Mae warrants common stock .............................. 3.1 9.2 12.3

Freddie Mac warrants common stock ............................. 2.3 4.4 6.7

Total investments in GSEs.......................................... 194.5 (101.9) 92.6
93 NOTES TO THE FINANCIAL STATEMENTS

Note 9. Other Assets

Other Assets as of September 30, 2018, and 2017

(In billions of dollars) 2018 2017

Advances and prepayments................................................................... 70.0 97.4

Regulatory assets.................................................................................. 17.3 20.0

Investments in Multilateral Development Banks....................................... 7.7 7.7

FDIC receivable from resolution activity, net............................................ 3.0 9.3

Other.................................................................................................... 15.7 13.3

Total other assets ............................................................................... 113.7 147.7

Advances and prepayments are assets that represent funds disbursed in contemplation of the future performance of

services, receipt of goods, the incurrence of expenditures, or the receipt of other assets. These include advances to contractors

and grantees, travel advances, and prepayments for items such as rents, taxes, insurance, royalties, commissions, and

supplies.

With regard to regulatory assets, the DOE’s Power Marketing Administrations (PMAs) and TVA record certain

amounts as assets in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification

(ASC) Topic 980, Regulated Operations. The provisions of FASB ASC Topic 980 require that regulated enterprises reflect

rate actions of the regulator in their financial statements, when appropriate. These rate actions can provide reasonable

assurance of the existence of an asset, reduce or eliminate the value of an asset, or impose a liability on a regulated enterprise.

In order to defer incurred costs under FASB ASC Topic 980, a regulated entity must have the statutory authority to establish

rates that recover all costs, and those rates must be charged to and collected from customers. If the PMAs’ or TVA’s rates

should become market-based, FASB ASC Topic 980 would no longer be applicable, and all of the deferred costs under that

standard would be expensed.

On behalf of the U.S., Treasury invests in certain Multilateral Development Banks (MDB), through subscriptions to

capital, which allows the MDBs to issue loans at market-based rates to middle-income developing countries. These paid-in

capital investments are non-marketable equity investments valued at cost.

The FDIC has the responsibility for resolving failed institutions in an orderly and efficient manner. The resolution

process involves valuing a failing institution, marketing it, soliciting and accepting bids for the sale of the institution,

determining which bid is least costly to the insurance fund, and working with the acquiring institution through the closing

process. FDIC records receivables for resolutions that include payments by the Deposit Insurance Fund (DIF) to cover

obligations to insured depositors, advances to receiverships and conservatorships for working capital, and administrative

expenses paid on behalf of receiverships and conservatorships.

Other items included in “other” are contract financing payments and estimated future payments to contractors,

purchased power generating capacity, deferred nuclear generating units, derivative assets, the balance of assets held by the

experience rated carriers participating in the Health Benefits and Life Insurance Program (pending disposition on behalf of

OPM), and the cost contribution to buildout the Nationwide Public Safety Broadband.
NOTES TO THE FINANCIAL STATEMENTS 94

Note 10. Accounts Payable

Accounts Payable as of September 30, 2018, and 2017

(In billions of dollars) 2018 2017

Department of Defense ............................................................................................... 29.2 26.4

Department of Veterans Affairs .................................................................................... 13.5 3.6

Department of Justice ................................................................................................. 5.1 6.0

Department of the Treasury ......................................................................................... 3.8 3.9

Department of Education............................................................................................. 3.8 4.2

Department of Energy ................................................................................................. 3.7 3.7

Department of State.................................................................................................... 3.6 2.7

General Services Administration .................................................................................. 3.1 2.8

Department of Homeland Security................................................................................ 2.5 2.3

U.S. Agency for International Development................................................................... 2.4 1.8

Department of Commerce ........................................................................................... 2.0 0.4

Department of Agriculture............................................................................................ 1.9 1.8

U.S. Postal Service ..................................................................................................... 1.8 1.6

Tennessee Valley Authority ......................................................................................... 1.8 1.8

All other...................................................................................................................... 8.5 7.8

Total accounts payable ............................................................................................. 86.7 70.8

 Accounts payable includes amounts due for goods and property ordered and received, services rendered by other than 

federal employees, cancelled appropriations for which the U.S. government has contractual commitments for payment, and 

non-debt related interest payable. 
95 NOTES TO THE FINANCIAL STATEMENTS

Note 11. Federal Debt Securities Held by the Public and Accrued

Interest

Federal Debt Securities Held by the Public and Accrued Interest

Net

Change

During

Balance Fiscal Balance Average Interest

September 30, Year September 30, Rate

(In billions of dollars) 2017 2018 2018 2018 2017

Treasury securities (public):

Marketable securities:

Treasury bills ............................ 1,799.6 439.9 2,239.5 2.1% 1.1%

Treasury notes ......................... 8,798.9 351.4 9,150.3 2.0% 1.8%

Treasury bonds ........................ 1,948.4 166.6 2,115.0 4.1% 4.2%

Treasury inflation-protected 

securities (TIPS) ....................... 1,286.1 90.1 1,376.2 0.8% 0.8%

Treasury floating rate notes 

(FRN) ....................................... 342.6 26.5 369.1 2.2% 1.2%

Total marketable Treasury 

securities ................................... 14,175.6 1,074.5 15,250.1

Nonmarketable securities............. 497.8 13.3 511.1 2.8% 2.3%

Net unamortized 

premiums/(discounts) ................ (39.2) (5.6) (44.8)

Total Treasury securities, net 

(public) ......................................... 14,634.2 1,082.2 15,716.4

Agency securities:

Tennessee Valley Authority.......... 23.9 (1.5) 22.4

All other agencies ........................ 0.1 - 0.1

Total agency securities, net of 

unamortized premiums and 

discounts ...................................... 24.0 (1.5) 22.5

Accrued interest payable ............. 65.9 7.9 73.8

Total federal debt securities held 

by the public and accrued 

interest ....................................... 14,724.1 1,088.6 15,812.7

Types of marketable securities:

Bills–Short-term obligations issued with a term of 1 year or less.

Notes–Medium-term obligations issued with a term of 2-10 years. 

Bonds–Long-term obligations of more than 10 years.

TIPS–Term of more than 5 years.

FRN–Term of 2 years.
NOTES TO THE FINANCIAL STATEMENTS 96

Federal debt securities held by the public outside the government are held by individuals, corporations, state or local 

governments, FRBs, foreign governments, and other nonfederal entities. The above table details government borrowing 

primarily to finance operations and shows marketable and nonmarketable securities at face value less net unamortized 

premiums and discounts including accrued interest.

Securities that represent federal debt held by the public are issued primarily by the Treasury and include:

• Interest-bearing marketable securities (bills, notes, bonds, inflation-protected, and floating rate notes).

• Interest-bearing nonmarketable securities (government account series held by fiduciary and certain deposit funds, 

foreign series, state and local government series, domestic series, and savings bonds).

• Non-interest-bearing marketable and nonmarketable securities (matured and other).

Gross federal debt (with some adjustments) is subject to a statutory ceiling (i.e., the debt limit). Prior to 1917, Congress 

approved each debt issuance. In 1917, to facilitate planning in World War I, Congress and the President first enacted a 

statutory dollar ceiling for federal borrowing. With the Public Debt Act of 1941 (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 debt limit increases. 

During fiscal years 2018 and 2017, Treasury faced two delays in raising the statutory debt limit that required it to depart 

from its normal debt management procedures and to invoke legal authorities to avoid exceeding the statutory debt limit. 

During these periods, extraordinary actions taken by Treasury have resulted in federal debt securities not being issued to 

certain federal government accounts with the securities being restored including lost interest to the affected federal 

government accounts subsequent to the end of the delay period. The first delay occurred from March 16, 2017 through 

September 7, 2017. On Friday, September 8, 2017 the Continuing Appropriations Act, 2018 and Supplemental 

Appropriations for Disaster Relief Requirements Act, 2017 (P.L. 115-56) was enacted suspending the statutory debt limit 

through December 8, 2017. The second delay in raising the statutory debt limit occurred from December 9, 2017 through 

February 8, 2018. On Friday, February 9, 2018, the Bipartisan Budget Act (BBA) of 2018 (P.L. 115-123) was enacted 

suspending the statutory debt limit through March 1, 2019.

As of September 30, 2018, and 2017, debt subject to the statutory debt limit was $21,474.8 billion and $20,208.6 

billion, respectively. The debt subject to the limit includes Treasury securities held by the public and government guaranteed 

debt of federal agencies (shown in the table above) and intragovernmental debt holdings (shown in the following table). See 

Note 26─Subsequent Events for additional information.
97 NOTES TO THE FINANCIAL STATEMENTS

Intragovernmental Debt Holdings: Federal Debt Securities

Held as Investments by Government Accounts as of September 30, 2018, and 2017

Net

Change

During

Balance Fiscal Year Balance

(In billions of dollars) 2017 2018 2018

Social Security Administration, Federal Old-Age 

and Survivors Insurance Trust Fund ....................... 2,820.2 (18.9) 2,801.3

Office of Personnel Management, Civil Service 

Retirement and Disability Fund............................... 905.1 17.9 923.0

Department of Defense, Military Retirement Fund.... 661.0 82.4 743.4

Department of Defense, Medicare-Eligible Retiree 

Health Care Fund.................................................. 225.8 14.4 240.2

Department of Health and Human Services, 

Federal Hospital Insurance Trust Fund ................... 197.8 5.0 202.8

Department of Health and Human Services, 

Federal Supplementary Medical Insurance Trust 

Fund .................................................................... 70.6 27.6 98.2

Federal Deposit Insurance Corporation, Deposit 

Insurance Fund ..................................................... 80.2 16.2 96.4

Social Security Administration, Federal Disability 

Insurance Trust Fund ............................................ 69.7 23.7 93.4

Department of Labor, Unemployment Trust Fund ... 60.7 11.9 72.6

Department of Energy, Nuclear Waste Disposal 

Fund..................................................................... 53.0 0.4 53.4

Office of Personnel Management, Postal Service 

Retiree Health Benefits Fund ................................. 49.5 (2.4) 47.1

Office of Personnel Management, Employees Life 

Insurance Fund .................................................... 45.7 0.9 46.6

Department of Transportation, Highway Trust Fund . 52.3 (11.1) 41.2

Pension Benefit Guaranty Corporation ................... 28.4 3.3 31.7

Office of Personnel Management, Employees 

Health Benefits Fund ............................................. 26.0 1.4 27.4

Department of Housing and Urban Development, 

FHA, Mutual Mortgage Insurance Capital Reserve 

Account ............................................................... 30.9 (3.9) 27.0

Department of the Treasury, Exchange 

Stabilization Fund ................................................. 22.1 0.2 22.3

Department of State, Foreign Service Retirement 

and Disability Fund ............................................... 18.8 0.4 19.2

Department of Housing and Urban Development, 

Guarantees of Mortgage-Backed Securities Capital 

Reserve Account................................................... 17.1 (0.9) 16.2

National Credit Union Share Insurance Fund........... 13.1 1.8 14.9

Department of Transportation, Airport and Airway 

Trust Fund ............................................................ 13.4 0.8 14.2

U.S. Postal Service, Postal Service Fund................ 11.0 (0.5) 10.5

All other programs and funds ................................. 99.1 12.9 112.0

Subtotal ............................................................. 5,571.5 183.5 5,755.0

Total net unamortized premiums/(discounts) for 

intragovernmental.................................................. 72.2 (2.3) 69.9

Total intragovernmental debt holdings, net ......... 5,643.7 181.2 5,824.9
NOTES TO THE FINANCIAL STATEMENTS 98

Intragovernmental debt holdings represent the portion of the gross federal debt held as investments by government

entities such as trust funds, revolving funds, and special funds.

Government entities that held investments in Treasury securities include trust funds that have funds from dedicated

collections. For more information on funds from dedicated collections, see Note 20─Funds from Dedicated Collections.

These intragovernmental debt holdings are eliminated in the consolidation of these financial statements.
99 NOTES TO THE FINANCIAL STATEMENTS

Note 12. Federal Employee and Veteran Benefits Payable

Federal Employee and Veteran Benefits Payable as of September 30, 2018, and 2017

Civilian Military Total

Reclass Reclass

(In billions of dollars) 2018 2017 2018 2017 2018 2017

Pension and accrued benefits ................... 2,048.9 2,013.8 1,621.3 1,568.0 3,670.2 3,581.8

Veterans compensation and burial 

benefits.................................................... N/A N/A 2,956.3 2,810.0 2,956.3 2,810.0

Post-retirement health and accrued 

benefits ................................................... 403.3 375.7 787.0 781.6 1,190.3 1,157.3

Veterans education benefits...................... N/A N/A 65.7 50.7 65.7 50.7

Life insurance and accrued benefits........... 54.9 53.1 6.3 6.9 61.2 60.0

FECA benefits.......................................... 27.3 28.8 8.3 8.3 35.6 37.1

Liability for other benefits .......................... 1.2 1.2 1.8 2.0 3.0 3.2

Total federal employee and veteran 

benefits payable .................................... 2,535.6 2,472.6 5,446.7 5,227.5 7,982.3 7,700.1

Change in Pension and Accrued Benefits

Civilian Military Total

(In billions of dollars) 2018 2017 2018 2017 2018 2017

Actuarial accrued pension liability, 

beginning of fiscal year ............................. 2,013.8 1,910.7 1,568.0 1,490.6 3,581.8 3,401.3

Pension expense:

Prior (and past) service costs from plan 

amendments or new plans...................... - - 8.9 (0.9) 8.9 (0.9)

Normal costs ......................................... 42.3 38.8 34.2 27.4 76.5 66.2

Interest on liability .................................. 68.7 69.5 57.5 57.6 126.2 127.1

Actuarial (gains)/losses (from 

experience) ........................................... (2.0) (12.0) 9.6 (1.6) 7.6 (13.6)

Actuarial (gains)/losses (from 

assumption changes)............................. 15.8 94.3 2.1 52.9 17.9 147.2

Other .................................................... 0.1 - - - 0.1 -

Total pension expense ........................... 124.9 190.6 112.3 135.4 237.2 326.0

Less benefits paid .................................... (89.8) (87.5) (59.0) (58.0) (148.8) (145.5)

Actuarial accrued pension liability, end of 

fiscal year ................................................ 2,048.9 2,013.8 1,621.3 1,568.0 3,670.2 3,581.8
NOTES TO THE FINANCIAL STATEMENTS 100

Change in Post-Retirement Health and Accrued Benefits

Civilian Military Total

(In billions of dollars) 2018 2017 2018 2017 2018 2017

Actuarial accrued post-retirement health 

benefits liability, beginning of fiscal year..... 375.7 352.3 781.6 799.7 1,157.3 1,152.0

Post-Retirement health benefits 

expense: 

Prior (and past) service costs from plan 

amendments or new plans...................... - - (20.9) - (20.9) -

Normal costs ......................................... 15.8 13.4 20.5 20.5 36.3 33.9

Interest on liability .................................. 14.1 13.9 30.0 32.3 44.1 46.2

Actuarial (gains)/losses (from 

experience) ........................................... 0.7 4.5 (17.2) (20.6) (16.5) (16.1)

Actuarial (gains)/losses (from 

assumption changes)............................. 12.9 7.5 14.7 (28.8) 27.6 (21.3)

Total post-retirement health benefits 

expense ................................................ 43.5 39.3 27.1 3.4 70.6 42.7

Less claims paid....................................... (15.9) (15.9) (21.7) (21.5) (37.6) (37.4)

Actuarial accrued post-retirement health 

benefits liability, end of fiscal year.............. 403.3 375.7 787.0 781.6 1,190.3 1,157.3

The government offers its employees retirement and other benefits, as well as health and life insurance. The liabilities

for these benefits, which include both actuarial amounts and amounts due and payable to beneficiaries and health care

carriers, apply to current and former civilian and military employees. Large fluctuations in actuarial amounts can result from

changes in estimates to future outflows for benefits based on complex assumptions and cost models.

OPM administers the largest civilian plan. DOD and VA administer the largest military plans. Other significant pension

plans with more than $10 billion in actuarial accrued liability include those of the Coast Guard (DHS), Foreign Service

(State), TVA, and HHS’s Public Health Service Commissioned Corps Retirement System. Please refer to the financial

statements of the entities listed for further details regarding their pension plans and other benefits.

Change in Civilian Life Insurance and Accrued Benefits

(In billions of dollars) 2018 2017

Actuarial accrued life insurance benefits liability, beginning of fiscal year .... 53.1 50.9

Life insurance benefits expense:

New entrant expense ............................................................................ 0.6 0.4

Interest on liability ................................................................................. 1.9 1.9

Actuarial (gains)/losses (from experience) .............................................. (0.6) (0.4)

Actuarial (gains)/losses (from assumption changes)................................ 0.5 0.9

Total life insurance benefits expense ................................................... 2.4 2.8

Less costs paid ....................................................................................... (0.6) (0.6)

Actuarial accrued life insurance benefits liability, end of fiscal year ............. 54.9 53.1
101 NOTES TO THE FINANCIAL STATEMENTS

Significant Long-Term Economic Assumptions Used in Determining Pension 

Liability and the Related Expense

Civilian Military

2018 2017 2018 2017

FERS CSRS FERS CSRS

Rate of interest .............................. 3.60% 3.00% 3.80% 3.20% 3.50% 3.70%

Rate of inflation.............................. 1.60% 1.60% 1.80% 1.80% 1.50% 1.70%

Projected salary increases.............. 1.30% 1.30% 1.50% 1.50% 2.00% 2.10%

Cost of living adjustment ............... 1.40% 1.60% 1.40% 1.80% N/A N/A

Significant Long-Term Economic Assumptions Used in Determining 

Post-Retirement Health Benefits and the Related Expense

Civilian Military

2018 2017 2018 2017

Rate of interest ............................................. 3.60% 3.80% 3.60% 3.80%

Single equivalent medical trend rate............... 4.50% 4.80% 4.16% 4.12%

Ultimate medical trend rate............................ 3.20% 3.40% 4.00% 4.20%

Significant Long-Term Economic Assumptions Used in Determining Life Insurance 

Benefits and the Related Expense

Civilian

2018 2017

Rate of interest ............................................. 3.40% 3.60%

Rate of increase in salary .............................. 1.30% 1.50%

In accordance with SFFAS No. 33, Pension, Other Retirement Benefits, and Other Postemployment Benefits: Reporting 

the Gains and Losses from Changes in Assumptions and Selecting Discount Rates and Valuation Dates, entities are required 

to separately present gains and losses from changes in long-term assumptions used to estimate liabilities associated with 

pensions, ORB, and OPEB on the Statement of Net Cost. SFFAS No. 33 also provides a standard for selecting the discount 

rate assumption for present value estimates of federal employee pension, ORB, and OPEB liabilities. The SFFAS No. 33

standard for selecting the discount rate assumption requires it be based on a historical average of interest rates on marketable

Treasury securities consistent with the cash flows being discounted. Additionally, SFFAS No. 33 provides a standard for 

selecting the valuation date for estimates of federal employee pension, ORB, and OPEB liabilities that establishes a 

consistent method for such measurements. 

To provide a sustainable, justifiable data resource for the affected entities, Treasury developed a new model and 

methodology for developing these interest rates in fiscal year 2014. The new method that was developed is based on 

methodology used to produce the High Quality Market (HQM) Yield Curve pursuant to the Pension Protection Act of 

2006.

2 As of July 2014, Treasury began releasing interest rate yield curve data using this new U.S. Department of the 

Treasury’s Yield Curve for Treasury Nominal Coupon Issues (TNC yield curve), which is derived from Treasury notes

 2 Treasury’s HQM resource is available at: https://www.treasury.gov/resource-center/economic-policy/corp-bond-yield/Pages/Corp-Yield-Bond-CurvePapers.aspx.
NOTES TO THE FINANCIAL STATEMENTS 102

and bonds. The TNC yield curve provides information on Treasury nominal coupon issues and the methodology extrapolates 

yields beyond 30 years through 100 years maturity. The TNC yield curve is used to produce a Treasury spot yield curve (a 

zero coupon curve), which provides the basis for discounting future cash flows.

Civilian Employees

Pensions

OPM administers the largest civilian pension plan, which covers substantially all full-time, permanent civilian federal 

employees. This plan includes two components of defined benefits, the Civil Service Retirement System (CSRS) and the 

Federal Employees’ Retirement System (FERS). The basic benefit components of the CSRS and the FERS are financed and 

operated through the Civil Service Retirement and Disability Fund (CSRDF), a trust fund. CSRDF monies are generated 

primarily from employees’ contributions, federal entity contributions, payments from the General Fund, and interest on 

investments in Treasury securities. As of September 30, 2018, USPS has accrued, but not paid OPM, $5.6 billion in CSRS 

and FERS retirement benefit expenses since 2014.

The Federal Retirement Thrift Investment Board (FRTIB) administers the Thrift Savings Plan (TSP). The TSP 

investment options include two fixed income funds (the G and F Funds), three stock funds (the C, S, and I Funds) and five 

lifecycle funds (L 2050, L 2040, L 2030, L 2020, and L Income). The L Funds diversify participant accounts among the G, F, 

C, S, and I Funds, using professionally determined investment mixes (allocations) that are tailored to different time horizons. 

Treasury securities held in the G Fund are included in federal debt securities held by the public and accrued interest on the 

Balance Sheet. The G Fund held $245.5 billion and $217.9 billion in nonmarketable Treasury securities as of September 30, 

2018, and 2017, respectively. 

The liability for civilian pension and accrued benefits payable increased $35.1 billion. This increase is partly 

attributable to changes in actuarial assumptions. The assumption loss results primarily from decreases to the assumed rates of 

interest, which was partly offset by a modest gain from changes in demographic assumptions. 

Post-Retirement Health Benefits

The post-retirement civilian health benefit liability is an estimate of the government’s future cost of providing postretirement health benefits to current employees and retirees. Although active and retired employees pay insurance premiums 

under the Federal Employees Health Benefits Program, these premiums cover only a portion of the costs. The OPM actuary 

applies economic and demographic assumptions to historical cost information to estimate the liability. 

The Postal Accountability and Enhancement Act of 2006 (Postal Act of 2006) (P.L. No 109-435, Title VIII), made 

significant changes in the funding of future retiree health benefits for employees of the USPS, including the requirement for 

the USPS to make scheduled payments to the Postal Service Retiree Health Benefits (PSRHB) Fund. Various legislation 

required the USPS to make scheduled payments to the PSRHB Fund ranging from $5.4 billion to $5.8 billion per year from 

fiscal year 2007 through fiscal year 2016. Thereafter, the law required USPS to make annual payments in the amount of the 

normal cost plus or minus an amount to amortize the unfunded liability or surplus. USPS currently owes the PSRHB Fund a 

total of $42.6 billion consisting of $38.2 billion for fiscal years 2011 through 2017 and $4.4 billion for fiscal year 2018. As of 

September 30, 2018, USPS has indicated payment of the total $42.6 billion due will remain open. At this time, Congress has 

not taken further action on these payments due to the PSRHB Fund from USPS. The cost for each year’s payment, including 

any defaulted payment, along with all other benefit program costs, are included in USPS’ net cost for that year in the 

consolidated Statements of Net Cost. The liability is not included on the governmentwide balance sheet due to the USPS 

liability being eliminated with the OPM receivable.

The post-retirement civilian health benefit liability increased $27.6 billion. This increase is due to the accruing cost of 

benefits, interest on the existing liability and an actuarial loss primarily attributable to updated demographic assumptions 

used in the fiscal year 2018 calculation. 

Life Insurance Benefits

One of the other significant employee benefits is the Federal Employees’ Group Life Insurance (FEGLI) Program. 

Employee and annuitant contributions and interest on investments fund a portion of this liability. The actuarial life insurance 

liability is the expected present value of future benefits to pay to, or on behalf of, existing FEGLI participants, less the 

expected present value of future contributions to be collected from those participants. The OPM actuary uses salary increase 

and interest rate yield curve assumptions that are generally consistent with the pension liability.
103 NOTES TO THE FINANCIAL STATEMENTS

Workers’ Compensation Benefits

The DOL determines both civilian and military entities’ liabilities for future workers’ compensation benefits for civilian 

federal employees, as mandated by the FECA, for death, disability, medical, and miscellaneous costs for approved 

compensation cases, and a component for incurred, but not reported, claims. The FECA liability is determined annually using 

historical benefit payment patterns related to injury years to predict the future payments. 

The actuarial methodology provides for the effects of inflation and adjusts historical payments to constant dollars by 

applying wage inflation factors (cost-of-living adjustments or COLA) and medical inflation factors (consumer price indexmedical or CPIM) to the calculation of projected benefits. 

DOL selects the COLA factors, CPIM factors, and discount rate by averaging the COLA rates, CPIM rates, and interest 

rates for the current and prior four years. Using averaging renders estimates that reflect historical trends over five years 

instead of conditions that exist in one year. 

The COLAs and CPIMs used in the projections for fiscal year 2018 are listed below in the table. 

DOL selected the interest rate assumptions whereby projected annual payments were discounted to present value based

on interest rate assumptions on the TNC Yield Curve to reflect the average duration of income payments and medical

payments. The average durations for income payments and medical payments were 14.7 years and 9.6 years, respectively.

Based on averaging the TNC Yield Curves for the current and prior four years, the interest rate assumptions for income

payments and medical payments were 2.72% and 2.38%, respectively.

For the COLAs, CPIMs, average durations, and interest rate assumptions used in the projections for fiscal year 2017,

refer to the fiscal year 2017 Financial Report.

Military Employees (Including Veterans)

Pensions

The Military Retirement System consists of a funded, noncontributory, defined benefit plan for military personnel

(Services of Army, Navy, Air Force, and the Marine Corps) with an entry date prior to January 1, 2018 and the Blended

Retirement System (BRS), generally for military personnel with an entry date on or after January 1, 2018. The defined

benefit plan includes non-disability retired pay, disability retired pay, survivor annuity programs, and Combat-Related

Special Compensation. The Service Secretaries may approve immediate non-disability retired pay at any age with credit of at

least 20 years of active duty service. Reserve retirees must be at least 60 years old and have at least 20 qualifying years of

service before retired pay commences; however, in some cases, the age can be less than 60 if the reservist performs certain

types of active service. P.L. 110-181 provides for a 90-day reduction in the reserve retirement age from age 60 for every 3

months of certain active duty service served within a fiscal year for service after January 28, 2008 (not below age 50). There

is no vesting of defined benefits before non-disabled retirement. There are distinct non-disability benefit formulas related to

four populations within the Military Retirement System: Final Pay, High-3, Career Status Bonus/Redux, and the BRS enacted

in the National Defense Authorization Act for Fiscal Year 2016, effective January 1, 2018. The BRS is a new retirement

benefit merging aspects of both a defined benefit annuity with a defined contribution account, through the TSP. The date an

individual enters the military generally determines which retirement system they would fall under and if they have the option

to select, via a one-time irrevocable election, their retirement system. Military personnel with a start date on or after January

1, 2018 are automatically enrolled in BRS. Although all members serving as of December 31, 2017 were grandfathered under

the prior retirement system, Active Duty, National Guard and Reserve personnel meeting established criteria may opt into

BRS during calendar year 2018. Under the BRS, retiring members are given the option to receive a portion of their retired
NOTES TO THE FINANCIAL STATEMENTS 104

pay annuity in the form of a lump sum distribution. For more information on these benefits, see DOD’s Office of Military

Compensation website https://militarypay.defense.gov.

The DOD Military Retirement Fund was established by P.L. 98-94 (currently Chapter 74 of Title 10, U.S.C.) and

accumulates funds to finance, on an accrual basis, the liabilities of DOD military retirement and survivor benefit programs.

This Fund receives income from three sources: monthly normal cost payments from the Services to pay for DOD’s portion of

the current year’s service cost; annual payments from the Treasury to amortize the unfunded liability and pay for the increase

in the normal cost attributable to Concurrent Receipt (certain beneficiaries with combat-related injuries who are receiving

payments from the VA) per P.L. 108-136; and investment income.

The $53.3 billion increase in the Military Retirement Pension liability is attributable to the increase from expected

normal and interest costs offset by benefit payments, with additional impacts due to assumption and benefit changes and

actuarial experience. Liabilities in the future will depend on interest costs and benefit accruals, future benefit changes,

assumption changes, and actuarial experience.

Post-Retirement Health Benefits

Military retirees who are not yet eligible for Medicare (and their eligible non-Medicare eligible dependents) are eligible

for post-retirement medical coverage provided by DOD. Depending on the benefit plan selected, retirees and their eligible

dependents may receive care from military treatment facilities (MTFs) on a space-available basis or from civilian providers.

This TRICARE coverage is available as Select ( a preferred provider organization – a health plan that contracts with medical

providers to create a network of participating providers; member cost-shares are typically higher for services received out-ofnetwork) and PRIME (a health maintenance organization- a health plan that limits services to a specific network of medical

personnel and facilities and usually by requiring referral by a primary-care physician for specialty care; coverage is also

available for non-referred and out-of-network care, subject to higher cost-sharing). These postretirement medical benefits are

paid by the Defense Health Agency on a pay-as-you-go basis.

Since fiscal year 2002, DOD has provided medical coverage to Medicare-eligible retirees (and their eligible Medicareeligible dependents). This coverage, called TRICARE for Life (TFL), is a Medicare Supplement plan which includes

inpatient, outpatient and pharmacy coverage. Enrollment in Medicare Part B is required to maintain eligibility in TFL.

Retirees with TFL coverage can obtain care from MTFs on a space-available basis or from civilian providers.

10 U.S.C., Chapter 56 created the DOD Medicare-Eligible Retiree Health Care Fund (MERHCF), which became

operative on October 1, 2002. The purpose of this fund is to account for and accumulate funds for the health benefit costs of

Medicare-eligible military retirees, and their dependents and survivors who are Medicare eligible. The Fund receives

revenues from three sources: interest earnings on MERHCF assets, Uniformed Services normal cost contributions, and

Treasury contributions. The DOD Medicare-Eligible Retiree Health Care Board of Actuaries (the MERHCF Board) approves

the methods and assumptions used in actuarial valuations of the MERHCF for the purpose of calculating the per capita

normal cost rates (to fund the annual accrued benefits) and determining the unfunded liability amortization payment (the U.S.

Treasury contribution). The Secretary of Defense directs the Secretary of Treasury to make DOD’s normal cost payments.

The MERHCF pays for medical costs incurred by Medicare-eligible beneficiaries at MTFs and civilian providers (including

payments to U.S. Family Health Plans for grandfathered beneficiaries), plus the costs associated with claims administration.

DOD’s actuaries calculate the actuarial liabilities annually using assumptions and experience (e.g., mortality and

retirement rates, health care costs, medical trend rates, and the discount rate). Actuarial liabilities are calculated for all DOD

retiree medical benefits, including both the benefits funded through the MERHCF as well as the benefits for pre-Medicare

retirees who are paid on a pay-as-you-go basis. Military post-retirement health and accrued benefits payable increased $5.4

billion. This increase is due primarily to changes in actuarial assumptions and expected normal and interest costs, offset by

changes due to plan amendments and favorable recent claims experience. The $20.9 billion reduction in the liability due to

plan amendments reflects the estimated savings resulting from change to pharmacy copays enacted in the National Defense

Authorization Act for Fiscal Year 2018, effective February 1, 2018.

In addition to the health care benefits the federal government provides for civilian and military retirees and their

dependents, the VA also provides medical care to veterans on an “as available” basis, subject to the limits of the annual

appropriations. In accordance with 38 CFR 17.36 (c), VA’s Secretary makes an annual enrollment decision that defines the

veterans, by priority, who will be treated for that fiscal year subject to change based on funds appropriated, estimated

collections, usage, the severity index of enrolled veterans, and changes in cost. While VA expects to continue to provide

medical care to veterans in future years, an estimate of such future benefits cannot be reasonably made. Accordingly, medical

care expenses are recognized in the period the medical care services are provided and included on the Statement of Net Cost.

For the fiscal years 2014 through 2018, the average medical care cost per year was $63.2 billion.
105 NOTES TO THE FINANCIAL STATEMENTS

Veterans Compensation and Burial Benefits

The government compensates disabled veterans and their survivors. Veterans’ compensation is payable as a disability

benefit or a survivor’s benefit. Entitlement to compensation depends on the veteran’s disabilities having been incurred in, or

aggravated during, active military service; death while on duty; or death resulting from service-connected disabilities, if not

on active duty.

Eligible veterans who die or are disabled during active military service-related causes, as well as their dependents, and

dependents of service members who died during active military service, receive compensation benefits. In addition, service

members who die during active military service and veterans who separated under other than dishonorable conditions are

provided with a burial flag, headstone/marker, and grave liner for burial in a VA national cemetery or are provided a burial

flag, headstone/marker and a plot allowance for burial in a private cemetery. These benefits are provided under 38 U.S.C.,

Part 2, Chapter 23 in recognition of a veteran’s military service and are recorded as a liability in the period the requirements

are met.

The liability for veterans’ compensation and burial benefits payable is based on an actuarial estimate of future

compensation and burial payments. It increased by $146.3 billion in fiscal year 2018. The $146.3 billion increase is primarily

attributable to assumption changes and experience. The major impact from experience changes was from veterans who first

became eligible for benefits during fiscal year 2018. The major impact from assumption changes was from a decrease in the

discount rate. Several significant actuarial assumptions were used in the valuation of compensation and burial benefits to

calculate the present value of the liability. A liability was recognized for the projected benefit payments to: 1) those

beneficiaries, including veterans and survivors, currently receiving benefit payments; 2) current veterans who will in the

future become beneficiaries of the compensation program; and 3) a proportional share of those in active military service as of

the valuation date who are expected to be future veterans. Future benefit payments to survivors of those veterans in classes 1,

2, and 3 above are also incorporated into the projection. The projected liability does not include any administrative costs.

The veterans’ compensation and burial benefits liability is developed on an actuarial basis. It is impacted by interest on

the liability balance, experience gains or losses, changes in actuarial assumptions, prior service costs, and amounts paid for

costs included in the liability balance.

Change in Veterans Compensation and Burial Benefits

Compensation Burial Total

(In billions of dollars) 2018 2017 2018 2017 2018 2017

Actuarial accrued liability, beginning of

fiscal year ............................................... 2,805.1 2,491.4 4.9 4.9 2,810.0 2,496.3

Current year expense:

Interest on the liability balance................ 102.7 97.9 0.2 0.2 102.9 98.1

Prior (and past) service costs from 

program amendments or new programs 

during the period.................................... 14.3 - - - 14.3 -

Actuarial (gains)/losses (from 

experience) .......................................... 45.5 50.7 (0.1) (0.2) 45.4 50.5

Actuarial (gains)/losses (from 

assumption changes)............................. 66.8 244.3 2.4 0.2 69.2 244.5

Total current year expense................... 229.3 392.9 2.5 0.2 231.8 393.1

Less benefits paid ................................... (85.3) (79.2) (0.2) (0.2) (85.5) (79.4)

Actuarial accrued liability, end of fiscal 

year ....................................................... 2,949.1 2,805.1 7.2 4.9 2,956.3 2,810.0
NOTES TO THE FINANCIAL STATEMENTS 106

Significant Economic Assumptions Used in Determining Veterans Compensation and 

Burial Benefits as of September 30, 2018, and 2017

2018 2017

Rate of interest.................................................................... 3.52% 3.66%

Rate of inflation ................................................................... 2.28% 2.28%

Veterans Education Benefits

For eligible Veterans and their dependents, the VA provides four education/retraining type programs: 

• Post 9/11 GI Bill

• Montgomery GI Bill-Active Duty 

• Vocational Rehabilitation and Employment 

• Dependent Education Assistance 

The total liability for the four education/training programs is based on actuarial estimates of future payments and 

increased by $15.0 billion in fiscal year 2018. The $15.0 billion increase is primarily attributable to assumption changes and 

experience. The major impact from experiences changes was from veterans who first became eligible for benefits during 

fiscal year 2018. The major impact from assumption changes was from a $12.0 billion adjustment made outside of the model 

to account for potential new enrollees in the next year. This adjustment was based on the number of new enrollees who began 

to use their Post-9/11 GI Bill benefits in 2018. The actuarial modeling estimates are based on beneficiaries who have already 

started to use those benefits. Currently, these models do not include assumptions for expected future new beneficiaries as an 

input to calculate the estimated liability. However, based on experience, it is probable that new beneficiaries will enroll in 

these programs in the future. As of September 30, 2018, VA has not developed a practical way to estimate the future number 

of new beneficiaries in its models, in accordance to SFFAS No. 5. Since these models have only been placed in operation for 

the past two years, enhancements and studies such as assumption revisions and possibility of inclusion of multiple years of 

future enrollees in the models will be examined. Results of these enhancements and studies may lead to significant changes in

the future liabilities.

In fiscal year 2016, VA reported an estimated liability for the Post 9/11 GI Bill of $59.6 billion. This was the first time 

VA had reported this estimated liability and the models and assumptions used were conservative with limited experience 

studies or assumptions. At that time, VA had not developed models or estimates for the other three programs listed; however, 

it was management’s assertion that the amount recorded for the Post 9/11 GI Bill was large enough to include any liability for 

the other three programs. In fiscal year 2017, VA broke out each program and developed individual estimates based on 

actuarial standards. While not reported in 2016, VA developed an estimate for fiscal year 2016 for each of the new programs 

to be used for comparisons only in 2017. This estimate reflected an increase in the liability of $8.7 billion. This amount is 

presented as "Other" for fiscal year 2017 in the schedule of "Changes in Veterans Education Benefits" provided below. 

The fiscal year 2017 Actuarial (gains)/losses from assumption changes included the impacts of refinements to the 

modeling of the Post 9/11 GI Bill program (liability decrease of $29.3 billion); prior service costs associated with the 

“Forever GI Bill of 2017,” which eliminated the 15-year limitation for using the benefit (liability increase of $8.2 billion); 

and other assumption changes (liability increase of $6.3 billion).

For details regarding actuarial assumptions and the four education/retraining type programs, please refer to VA’s 

financial statements.
107 NOTES TO THE FINANCIAL STATEMENTS

Change in Veterans Education Benefits

(In billions of dollars) 2018 2017

Actuarial accrued liability, beginning of fiscal year...................................... 50.7 59.6

Current year expense:

Interest on liability ................................................................................. 1.3 0.7

Actuarial (gains)/losses (from experience) .............................................. 14.6 9.3

Actuarial (gains)/losses (from assumption changes)................................ 10.0 (14.8)

Other ................................................................................................... - 8.7

Total current year expense.................................................................. 25.9 3.9

Less benefits paid ................................................................................... (10.9) (12.8)

Actuarial accrued liability, end of fiscal year .............................................. 65.7 50.7

Life Insurance Benefits

The largest veterans’ life insurance programs consist of the following:

• National Service Life Insurance (NSLI) covers policyholders who served during World War II.

• Veterans’ Special Life Insurance (VSLI) was established in 1951 to meet the insurance needs of veterans who 

served during the Korean Conflict and through the period ending January 1, 1957.

• Service-Disabled Veterans Insurance (S-DVI) program was established in 1951 to meet the insurance needs of 

veterans who received a service-connected disability rating.

The components of veteran life insurance liability for future policy benefits are presented below:

Veterans Life Insurance Liability as of September 30, 2018, and 2017

(In billions of dollars) 2018 2017

Insurance death benefits:

NSLI....................................................................................................... 2.3 2.8

VSLI....................................................................................................... 1.1 1.2

S-DVI ..................................................................................................... 0.7 0.7

Other...................................................................................................... 0.3 0.3

Total death benefits .............................................................................. 4.4 5.0

Death benefit annuities .............................................................................. - -

Disability income & waiver.......................................................................... 0.8 0.8

Insurance dividends payable ...................................................................... 0.9 1.1

Unpaid policy claims .................................................................................. 0.2 -

Total veterans life insurance liability ......................................................... 6.3 6.9

Insurance dividends payable consists of dividends left on deposit with VA, related interest payable, and dividends

payable to policyholders. Unpaid policy claims consists of insurance claims that are pending at the end of the reporting

period, an estimate of claims that have been incurred but not yet reported, and disbursements in transit.

The VA supervises Service members Group Life Insurance (SGLI) and Veterans Group Life Insurance programs that

provide life insurance coverage to members of the uniformed armed services, reservists, and post-Vietnam Veterans as well

as their families. VA has entered into a group policy with the Prudential Insurance Company of America to administer and

provide the insurance payments under these programs. All SGLI insureds are automatically covered under the Traumatic
NOTES TO THE FINANCIAL STATEMENTS 108

Injury Protection program, which provides for insurance payments to veterans who suffer a serious traumatic injury in

service.

Pension Benefits

The VA also provides certain veterans and/or their dependents with pension benefits, based on annual eligibility

reviews. The pension program for veterans is not accounted for as a “federal employee pension plan” under SFFAS No. 5 due

to differences between its eligibility conditions and those of federal employee pensions. Therefore, a future liability for

pension benefits is not recorded. VA pension liabilities are recognized when due and payable. The projected amounts of

future payments for pension benefits (presented for informational purposes only) as of September 30, 2018, and 2017, was

$104.8 billion and $87.6 billion, respectively.
109 NOTES TO THE FINANCIAL STATEMENTS

Note 13. Environmental and Disposal Liabilities

Environmental and Disposal Liabilities as of September 30, 2018, and 2017

(In billions of dollars) 2018 2017

Department of Energy........................................................................................ 494.0 383.8

Department of Defense...................................................................................... 70.4 68.3

All other entities ................................................................................................ 12.9 12.4

Total environmental and disposal liabilities ....................................................... 577.3 464.5

During World War II and the Cold War, DOE (or predecessor entities) developed a massive industrial complex to

research, produce, and test nuclear weapons. This included nuclear reactors, chemical-processing buildings, metal machining

plants, laboratories, and maintenance facilities that manufactured tens of thousands of nuclear warheads and conducted more

than 1,000 nuclear tests.

At all sites where these activities took place, some environmental contamination occurred. This contamination was

caused by the production, storage, and use of radioactive materials and hazardous chemicals, which resulted in contamination

of soil, surface water, and groundwater. The environmental legacy of nuclear weapons production also includes thousands of

contaminated buildings and large volumes of waste and special nuclear materials requiring treatment, stabilization, and

disposal.

Estimated cleanup costs at sites for which there are no current feasible remediation approaches, such as the Nevada

nuclear test site, are excluded from the estimates, although applicable stewardship and monitoring costs for these sites are

included. DOE has not been required through regulation to establish remediation activities for these sites.

Estimating DOE’s environmental cleanup liability requires making assumptions about future activities and is inherently

uncertain. The future course of DOE’s environmental cleanup and disposal will depend on a number of fundamental technical

and policy choices, many of which have not been made. The sites and facilities could be restored to a condition suitable for

any desirable use, or could be restored to a point where they pose no near-term health risks. Achieving the former conditions

would have a higher cost but may (or may not) warrant the costs, or be legally required. The environmental and disposal

liability estimates include contingency estimates intended to account for the uncertainties associated with the technical

cleanup scope of the program. Congressional appropriations at lower than anticipated levels or unplanned delays in project

completion would cause increases in life-cycle costs.

DOE’s environmental and disposal liabilities also include the estimated cleanup and post-closure responsibilities,

including surveillance and monitoring activities, soil and groundwater remediation, and disposition of excess material for

sites. The Department is responsible for the post-closure activities at many of the closure sites as well as other sites. The costs

for these post-closure activities are estimated for a period of 75 years after the balance sheet date, i.e., through 2093 in fiscal

year 2018 and through 2092 in fiscal year 2017. While some post-cleanup monitoring and other long-term stewardship

activities post-2093 are included in the liability, there are others DOE expects to continue beyond 2093 for which the costs

cannot reasonably be estimated.

A portion of DOE’s environmental and disposal liabilities at various field sites includes anticipated costs for facilities

managed by DOE’s ongoing program operations which will ultimately require stabilization, deactivation, and

decommissioning. The estimate is largely based upon a cost-estimating model. Site specific estimates are used in lieu of the

cost-estimating model, when available. Cost estimates for ongoing program facilities are updated each year. For facilities

newly contaminated since fiscal year 1997, cleanup costs allocated to future periods and not included in environmental and

disposal liabilities amounted to $0.9 billion for both fiscal years 2018 and 2017.

The predominant change in the DOE's environmental liabilities estimates in fiscal year 2018 resulted from Waste

Treatment and Immobilization Plant (WTP) construction and operating costs, and the updated tank farm retrieval and closure

cost. Other changes resulted from inflation adjustments to reflect constant dollars for the current year; improved and updated

estimates for the same scope of work, including changes resulting from deferral or acceleration of work; revisions in

technical approach or scope, including additional contamination; updated estimates of projected waste volumes; changes in

the DOE's allocable percentage share of future costs; legal and regulatory changes; and cleanup activities performed.
NOTES TO THE FINANCIAL STATEMENTS 110

On October 9, 2018, the U.S. Court of Appeals for the Fourth Circuit lifted the Preliminary Injunction, allowing DOE to

move forward with termination of construction of the Mixed Oxide (MOX) facility. With termination of the MOX facility,

which was the fiscal year 2018 approach for plutonium disposition, DOE will pursue a Dilute and Dispose approach in fiscal

year 2019. The lower cost of the Dilute and Dispose approach is expected to reduce the program liability. DOE remains

committed to disposing of 34 metric tons of plutonium.

Please refer to the financial statements of DOE for detailed information regarding DOE’s environmental and disposal

liabilities, including cleanup costs.

Beginning in fiscal year 2018, DOD’s individual amounts are reported together as a single line total for its portion of

Environmental and Disposal Liabilities. DOD must restore active installations, installations affected by base realignment and

closure, and other areas formerly used as DOD sites. DOD also bears responsibility for disposal of chemical weapons and

environmental costs associated with the disposal of weapons systems (primarily nuclear powered aircraft carriers and

submarines).

DOD follows the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), Superfund

Amendments and Reauthorization Act, Resource Conservation and Recovery Act (RCRA) and other applicable federal or

state laws to clean up contamination. The CERCLA and RCRA require the DOD to clean up contamination in coordination

with regulatory entities, current owners of property damaged by the Department, and third parties that have a partial

responsibility for the environmental restoration. Failure to comply with agreements and legal mandates puts the DOD at risk

of incurring fines and penalties.

DOD uses engineering estimates and independently validated models to estimate environmental costs. The engineering

estimates are used after obtaining extensive data during the remedial investigation/feasibility phase of the environmental

project.

For general PP&E placed into service after September 30, 1997, DOD expenses associated environmental costs

systematically over the life of the asset using two methods: physical capacity for operating landfills and life expectancy in

years for all other assets. DOD expenses the full cost to clean up contamination for stewardship PP&E at the time the asset is

placed into service. DOD has expensed the costs for cleanup associated with general PP&E placed into service before

October 1, 1997, except for costs intended to be recovered through user charges; for those costs, DOD has expensed cleanup

costs associated with that portion of the asset life that has passed since it was placed into service. DOD systematically

recognizes the remaining cost over the remaining life of the asset. The unrecognized portion of the estimated total cleanup

costs associated with disposal of general PP&E as of September 30, 2018 was $4.8 billion; this amount was unknown as of

September 30, 2017.

DOD is unable to estimate and report a liability for environmental restoration and corrective action for buried chemical

munitions and agents, because the extent of the buried chemical munitions and agents is unknown at this time. DOD is also

unable to provide a complete estimate for the Formerly Utilized Sites Remedial Action Program. DOD has ongoing studies

and will update its estimate as additional liabilities are identified. DOD has the potential to incur costs for restoration

initiatives in conjunction with returning overseas DOD facilities to host nations. However, DOD is unable to provide a

reasonable estimate at this time because the extent of required restoration is unknown.

Please refer to the financial statements of DOD for further information regarding DOD’s environmental and disposal

liabilities, including cleanup costs.
111 NOTES TO THE FINANCIAL STATEMENTS

Note 14. Benefits Due and Payable

Benefits Due and Payable as of September 30, 2018, and 2017

(In billions of dollars) 2018 2017

Federal Old-Age and Survivors Insurance.................................................. 75.1 71.3

Grants to States for Medicaid.................................................................... 35.6 34.1

Federal Supplementary Medical Insurance (Medicare Parts B and D).......... 30.7 30.6

Federal Hospital Insurance (Medicare Part A) ............................................ 31.5 30.0

Federal Disability Insurance...................................................................... 24.6 26.9

All other benefits programs ....................................................................... 13.6 25.9

Total benefits due and payable............................................................... 211.1 218.8

Benefits due and payable are amounts owed to program recipients or medical service providers as of September 30 that

have not been paid. Most of the benefits due and payable relate to programs administered by HHS and SSA. For a description

of the programs, see Note 22—Social Insurance and the unaudited RSI—Social Insurance section.
NOTES TO THE FINANCIAL STATEMENTS 112

Note 15. Insurance and Guarantee Program Liabilities

Insurance and Guarantee Program Liabilities as of September 30, 2018, and 2017

(In billions of dollars) 2018 2017

Insurance and Guarantee Program Liabilities:

Pension Benefit Guaranty Corporation - Benefit Pension Plans ................... 158.0 178.6

Department of Agriculture - Federal Crop Insurance ................................... 10.3 11.3

Department of Homeland Security - National Flood Insurance Programs ..... 1.7 12.3

National Credit Union Administration - Share Insurance Fund ..................... 0.2 0.3

Total insurance and guarantee program liabilities .................................... 170.2 202.5

Insurance and guarantee program liabilities are recognized for known losses and contingent losses to the extent that the

underlying contingency is deemed probable and a loss amount is reasonably measurable. Please see Note 18—Contingencies

for discussion on the meaning of “probable” depending on the accounting framework used by each significant consolidation

entity.

As of September 30, 2018, and 2017, $158.0 billion and $178.6 billion, respectively, pertain to the PBGC singleemployer and multiemployer pension plans. PBGC insures pension benefits for participants in covered defined benefit

pension plans. The total decrease of $20.6 billion in PBGC’s liability for insured pension plans includes decreases of $9.5

billion and $11.1 billion for single-employer and multiemployer plans, respectively. For both single-employer and

multiemployer plans, the decreases were primarily driven by changes in actuarial assumptions related to changes in interest

factors. As of September 30, 2018, and 2017, PBGC had total liabilities of $163.7 billion and $184.4 billion, and its total

liabilities exceeded its total assets by $51.4 billion and $76.0 billion, respectively. Refer to PBGC’s financial statements for

more information.

As of September 30, 2018, and 2017, $10.3 billion and $11.3 billion, respectively, pertain to the USDA’s Federal Crop

Insurance Program. The Federal Crop Insurance Program is administered by the Federal Crop Insurance Corporation, whose

mission is to provide an actuarially sound risk management program to reduce agricultural producers’ economic losses due to

natural disasters.

As of September 30, 2018, and 2017, $1.7 billion and $12.3 billion, respectively, pertain to the DHS National Flood

Insurance Program (NFIP). The NFIP insurance liability represents an estimate based on the loss and loss adjustment expense

factors inherent to the NFIP Insurance Underwriting Operations, including trends in claim severity and frequency. The

estimate is driven primarily by flooding activity in the U.S. and can vary significantly year over year depending on the timing

and severity of flooding activity. A reduced estimated insurance liability for disaster relief efforts for the significant

hurricanes in fiscal year 2018 is the primary driver of the $10.6 billion decrease from fiscal year 2017.

As of September 30, 2018, and 2017, $0.2 billion and $0.3 billion, respectively, pertain to NCUA’s National Credit

Union Share Insurance Fund (NCUSIF). The NCUSIF is administered by the NCUA, and protects members’ accounts in

insured credit unions in the event of a credit union failure.

Certain significant consolidation entities apply FASB standards, and such entities, as permitted by SFFAS No. 47, are

consolidated into the U.S. government’s consolidated financial statements without conversion to FASAB standards.
113 NOTES TO THE FINANCIAL STATEMENTS

Note 16. Other Liabilities

Other Liabilities as of September 30, 2018, and 2017 Restated

(In billions of dollars) 2018 2017

Unearned revenue and assets held for others:

Unearned fees for nuclear waste disposal (DOE) and other unearned 

revenue .................................................................................................... 59.5 60.0

Assets held on behalf of others ................................................................... 117.3 111.4

Subtotal .................................................................................................. 176.8 171.4

Employee-related liabilities:

Accrued federal employees' wages and benefits........................................... 42.1 37.4

Selected DOE contractors' and D.C. employees' pension benefits ................. 53.7 51.5

Subtotal .................................................................................................. 95.8 88.9

International monetary liabilities and gold certificates:

Exchange Stabilization Fund....................................................................... 54.5 55.1

Gold certificates ........................................................................................ 11.0 11.0

Subtotal .................................................................................................. 65.5 66.1

Subsidies and grants:

Farm and other subsidies............................................................................ 9.4 13.2

Grant payments due to state and local governments and others .................... 21.3 22.1

Subtotal .................................................................................................. 30.7 35.3

Miscellaneous liabilities:

Legal and other contingencies..................................................................... 52.4 56.5

Non-federal power projects and capital lease liabilities, and disposal 

liabilities .................................................................................................... 11.4 12.1

Other miscellaneous................................................................................... 46.4 42.8

Subtotal .................................................................................................. 110.2 111.4

Total..................................................................................................... 479.0 473.1

Other liabilities represent liabilities that are not separately identified on the Balance Sheet and are presented on a

comparative basis by major category.
NOTES TO THE FINANCIAL STATEMENTS 114

Unearned Revenue and Assets Held for Others

The government recognizes a liability when it receives money in advance of providing goods and services or assumes

custody of money belonging to others. Advances and prepayments include USPS customer deposits used for future mailings.

The government’s unearned revenue from fees DOE has collected from utility companies for the future cost of managing the

disposal of nuclear waste and interest income received is about $41.9 billion and $40.3 billion as of September 30, 2018, and

2017, respectively. Other unearned revenue includes USPS income for prepaid postage and prepaid P.O. Box rentals. Assets

held on behalf of others include funds collected in advance for such things as outstanding postal money orders and

undelivered Defense articles. SAA holds $89.1 billion and $85.6 billion as of September 30, 2018, and 2017, respectively for

articles and services for future delivery to foreign governments.

Employee-Related Liabilities

This category includes amounts owed to employees at year-end and actuarial liabilities for certain non-federal

employees. Actuarial liabilities for federal employees and veteran benefits are included in Note 12–Federal Employee and

Veteran Benefits Payable. The largest liability in the employee-related liabilities category is the amount owed at the end of

the fiscal year to federal employees for wages and benefits (including accrued annual leave). In addition, DOE is liable to

certain contractors for contractor employee pension and postretirement benefits, which is about $21.3 billion and $23.1

billion as of September 30, 2018 and 2017, respectively. Also, the government owed about $8.4 billion and $8.7 billion as of

September 30, 2018, and 2017 respectively, for estimated future pension benefits of the District of Columbia’s judges, police,

firefighters, and teachers.

International Monetary Liabilities and Gold Certificates

Consistent with U.S. obligations in the IMF on orderly exchange arrangements and a stable system of exchange rates,

the Secretary of the Treasury, with the approval of the President, may use the ESF to deal in gold, foreign exchange, and

other instruments of credit and securities. As of September 30, 2018, and 2017, other liabilities includes $49.3 billion and

$49.9 billion, respectively, of interest-bearing liability to the IMF for SDR allocations.

Gold certificates are issued in nondefinitive or book-entry form to the Federal Reserve Bank of New York (FRBNY).

The government’s liability incurred by issuing the gold certificates, as reported on the Balance Sheet, is limited to the gold

being held by Treasury at the standard value established by law. Upon issuance of gold certificates to the FRBNY, the

proceeds from the certificates are deposited into the operating cash of the U.S. government. All of the Treasury certificates

issued are payable to the FRBNY. Gold certificates were valued at $11.0 billion as of September 30, 2018, and 2017,

respectively.

See Note 2—Cash and Other Monetary Assets for additional information.

Subsidies and Grants

The government supports the public good through a wide variety of subsidy and grant programs in such areas as

agriculture, medical and scientific research, education, and transportation. USDA programs such as Conservation Reserve,

and Agricultural Risk Coverage and Price Loss Coverage account for the majority of the subsidies due, about $4.8 billion and

$8.9 billion as of September 30, 2018 and 2017, respectively.

The government awards hundreds of billions of dollars in grants annually. These include project grants that are

competitively awarded for entity-specific projects, such as HHS grants to fund projects to “enhance the independence,

productivity, integration, and inclusion into the community of people with developmental disabilities.” Other grants are

formula grants, such as matching grants. Formula grants go to state governments for such things as education and

transportation programs. These grants are paid in accordance with distribution formulas that have been provided by law or

administrative regulations. Of the total liability reported for grants as of September 30, 2018, and 2017, DOT, Education,

HHS and USDA collectively owed their grantees about $20.4 billion and $20.6 billion, respectively. Refer to the financial

statements of the respective entities for additional information.

Miscellaneous Liabilities

Some of the more significant liabilities included in this category are for (1) legal and other contingencies (see Note 18—

Contingencies), (2) Bonneville Power Administration liability to pay annual budgets of several power projects for its

electrical generating capacity, (3) payables upon return of securities loaned and (4) September 11th Victim Compensation

Fund. Certain HUD amounts have been restated. Refer to Note 1.U—Restatements for more information.

In addition, many federal entities reported relatively small amounts of miscellaneous liabilities that are not otherwise

classified.
115 NOTES TO THE FINANCIAL STATEMENTS

Note 17. Collections and Refunds of Federal Revenue

Collections of Federal Tax Revenue for the Year Ended September 30, 2018

Federal Tax Year to Which Collections Relate

Tax

Revenue Prior

(In billions of dollars) Collections 2018 2017 2016 Years

Individual income tax and tax 

withholdings ................................. 3,089.8 1,932.6 1,096.7 33.5 27.0

Corporate income taxes ................. 262.7 150.3 99.7 1.7 11.0

Excise taxes .................................. 98.5 73.3 24.9 0.1 0.2

Unemployment taxes ..................... 43.4 34.1 9.1 0.1 0.1

Customs duties .............................. 43.4 43.4 - - -

Estate and gift taxes ....................... 23.9 0.1 20.9 1.1 1.8

Railroad retirement taxes ................ 6.3 4.9 1.4 - -

Fines, penalties, interest, and other 

revenue ......................................... 7.2 7.1 0.1 - -

Subtotal 3,575.2 2,245.8 1,252.8 36.5 40.1

Less: amounts collected for nonfederal entities ............................... (0.5)

Total............................................ 3,574.7

Treasury is the government’s principal revenue-collecting entity. Collections of individual income and tax withholdings

include FICA/SECA and individual income taxes. These taxes are characterized as non-exchange revenue.

Excise taxes, also characterized as non-exchange revenue, consist of taxes collected for various items, such as airline

tickets, gasoline products, distilled spirits and imported liquor, tobacco, firearms, and others.

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. The Congressional Budget Act of 1974 (P.L. 93-344 or Budget Act) requires that a list of tax expenditures be

included in the annual Budget. 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 include deductions and exclusions which reduce the amount of income subject to tax. Examples are

the deduction for mortgage interest on personal residences and the exclusion of interest on state and local bonds. Tax

expenditures also include tax credits, which reduce tax liability dollar for dollar for the amount of credit. For example, the

child tax credit reduces liability by $2,000 per child for taxpayers eligible to use it fully. Other credits are targeted at business

activity, such as credits for producing electricity from renewable energy or the research and experimentation credit, which

encourages businesses in the U.S. to increase investment in research activities. In addition, tax expenditures include some

provisions that allow taxpayers to defer tax liability. Examples include provisions that allow immediate expensing or

accelerated depreciation of certain capital investments, and others that allow taxpayers to defer their tax liability, such as the

deferral of recognition of income on contributions to and income accrued within qualified retirement plans.

The Total Revenues reported in the Statement of Operations and Changes in Net Position and the related information

reported in this note, do not include explicit line items for tax expenditures, but the total revenue amounts and budget results

reflect the effect of these expenditures. Tax expenditures are discussed in this note, the unaudited MD&A, and in the

unaudited Other Information section of the Financial Report.
NOTES TO THE FINANCIAL STATEMENTS 116

Federal Tax Refunds Disbursed for the Year Ended September 30, 2018

Tax Year to Which Refunds Relate

Refunds Prior

(In billions of dollars) Disbursed 2018 2017 2016 Years

Individual income tax and tax 

withholdings .......................................... 401.4 54.4 307.9 29.8 9.3

Corporate income taxes.......................... 60.1 4.8 25.9 9.2 20.2

Excise taxes .......................................... 1.6 0.5 0.6 0.1 0.4

Unemployment taxes .............................. 0.1 - 0.1 - -

Customs duties ...................................... 1.9 1.1 0.3 0.2 0.3

Estate and gift taxes ............................... 1.0 - 0.3 0.4 0.3

Total ................................................... 466.1 60.8 335.1 39.7 30.5

Reconciliation of Revenue to Tax Collections for the Year

Ended September 30, 2018, and 2017

(In billions of dollars) 2018 2017

Consolidated revenue per the Statement of Operations and Changes in Net 

Position ............................................................................................................ 3,384.3 3,374.6

Tax refunds ....................................................................................................... 466.1 439.1

Earned income tax and child tax credit imputed revenue ...................................... (77.2) (79.1)

Other tax credits and accrual adjustments ........................................................... (56.8) (49.0)

Federal Insurance Contributions Act - Tax ........................................................... 22.7 21.9

Federal Reserve earnings .................................................................................. (70.8) (81.3)

Nontax-related fines and penalties reported by entities......................................... (79.8) (78.4)

Nontax-related earned revenue........................................................................... (13.8) (28.4)

Collections of federal tax revenue ....................................................................... 3,574.7 3,519.4

Consolidated revenue in the Statement of Operations and Changes in Net Position is presented on a modified cash basis,

net of tax refunds, and includes other non-tax related revenue. Earned Income Tax Credit, Child Tax Credit, and other tax

credits amounts (unaudited) are included in gross cost in the Statements of Net Cost. The FICA – Tax paid by federal

agencies is included in the Individual income and tax withholdings line in the Collections of federal tax revenue; however, it

is not reported on the Statement of Operations and Changes in Net Position as these collections are intragovernmental

revenue and eliminated in consolidation. The table above reconciles total revenue to federal tax collections.
117 NOTES TO THE FINANCIAL STATEMENTS

Collections of Federal Revenue for the Year Ended September 30, 2017

Federal Tax Year to Which Collections Relate

Tax

Revenue Prior

(In billions of dollars) Collections 2017 2016 2015 Years

Individual income tax and tax 

withholdings ..................................... 2,976.3 1,930.0 988.6 32.3 25.4

Corporate income taxes ...................... 338.6 218.6 108.9 1.8 9.3

Excise taxes ....................................... 89.4 66.7 22.5 - 0.2

Unemployment taxes .......................... 44.2 31.4 12.7 - 0.1

Customs duties................................... 34.9 34.9 - - -

Estate and gift taxes ........................... 23.8 0.2 20.9 1.0 1.7

Railroad retirement taxes .................... 6.0 4.6 1.4 - -

Fines, penalties, interest and other 

revenue ............................................. 6.6 6.5 0.1 - -

Subtotal........................................... 3,519.8 2,292.9 1,155.1 35.1 36.7

Less: amounts collected for nonfederal entities .................................... (0.4)

Total................................................ 3,519.4

Federal Tax Refunds Disbursed for the Year Ended September 30, 2017

Tax Year to Which Refunds Relate

Refunds Prior

(In billions of dollars) Disbursed 2017 2016 2015 Years

Individual income tax and tax 

withholdings ....................................... 389.2 46.3 306.4 27.8 8.7

Corporate income taxes ........................ 44.9 5.2 14.4 7.8 17.5

Excise taxes ......................................... 2.1 0.4 1.0 0.2 0.5

Unemployment taxes ............................ 0.1 - 0.1 - -

Customs duties..................................... 1.7 1.1 0.3 0.1 0.2

Estate and gift taxes ............................. 1.1 - 0.2 0.4 0.5

Total.................................................. 439.1 53.0 322.4 36.3 27.4
NOTES TO THE FINANCIAL STATEMENTS 118

Note 18. Contingencies

Financial Treatment of Loss Contingencies

Loss contingencies are existing conditions, situations, or set of circumstances involving uncertainty as to possible loss 

to an entity. The uncertainty will ultimately be resolved when one or more future events occur or fail to occur. The reporting 

of loss contingencies depends on the likelihood that a future event or events will confirm the loss or impairment of an asset or 

the incurrence of a liability. When a loss contingency exists, the likelihood that the future event or events will confirm the 

loss or the incurrence of a liability can range from probable to remote. SFFAS No. 5, Accounting for Liabilities of the 

Federal Government, identifies the probability classifications used to assess the range for the likelihood of loss as probable, 

reasonably possible, and remote. Loss contingencies where a past event or exchange transaction has occurred, and where a 

future outflow or other sacrifice of resources is assessed as probable and measurable are accrued in the financial statements. 

Loss contingencies that are assessed to be at least reasonably possible are disclosed in this note and loss contingencies that 

are assessed as remote are not reported in the financial statements, nor disclosed in the notes. The following table provides 

criteria for how federal entities are to account for loss contingencies, based on the likelihood of the loss and measurability.3

Likelihood of future 

outflow or other 

sacrifice of resources

Loss amount can be 

reasonably measured

Loss range can be

reasonably measured

Loss amount or range 

cannot be reasonably 

measured

Probable

Future confirming 

event(s) are more likely 

to occur than not.4

Accrue the liability. 

Report on Balance Sheet 

and Statement of Net 

Cost.

Accrue liability of best 

estimate or minimum 

amount in loss range if 

there is no best estimate, 

and disclose nature of 

contingency and range of 

estimated liability.

Disclose nature of 

contingency and include 

a statement that an 

estimate cannot be 

made.

Reasonably possible

Possibility of future 

confirming event(s) 

occurring is more than 

remote and less than likely.

Disclose nature of 

contingency and 

estimated amount.

Disclose nature of 

contingency and 

estimated loss range.

Disclose nature of 

contingency and include 

a statement that an 

estimate cannot be 

made.

Remote

Possibility of future 

event(s) occurring is 

slight.

No action is required. No action is required. No action is required.

 3 In addition, a third condition must be met to be a loss contingency: a past event or an exchange transaction must occur. 4 For pending or threatened litigation and unasserted claims, the future confirming event or events are considered “probable” if such events are likely to 

occur.
119 NOTES TO THE FINANCIAL STATEMENTS

The government is subject to loss contingencies that include insurance and litigation cases. These loss contingencies 

arise in the normal course of operations and their ultimate disposition is unknown. Based on information currently available,

however, it is management’s opinion that the expected outcome of these matters, individually or in the aggregate, will not 

have a material adverse effect on the financial statements, except for the insurance and litigation described in the following 

section, which could have a material adverse effect on the financial statements.

Certain significant consolidation entities apply financial accounting and reporting standards issued by FASB, and such 

entities, as permitted by SFFAS No. 47, are consolidated into the U.S. government’s consolidated financial statements 

without conversion to financial and reporting standards issued by FASAB.5 Generally, under FASAB standards, a 

contingency is considered “probable” if the future event or events are more likely than not to occur. Under FASB standards, a

contingency is considered “probable” if the future event or events are likely to occur. “Likely to occur” is considered to be 

more certain than “more likely than not to occur.” Under both accounting frameworks, a contingency is considered 

“reasonably possible” if occurrence of the future event or events is more likely than remote, but less likely than “probable” 

(“probable” as defined within each corresponding accounting framework).

Insurance Contingencies

At the time an insurance policy is issued, a contingency arises. The contingency is the risk of loss assumed by the 

insurer, that is, the risk of loss from events that may occur during the term of the policy. The government has insurance 

contingencies that are reasonably possible in the amount of $185.4 billion as of September 30, 2018, and $253.1 billion as of

September 30, 2017. The major programs are identified below:

• PBGC reported $184.8 billion and $252.2 billion as of September 30, 2018, and 2017, respectively, for the estimated 

aggregate unfunded vested benefits exposure to the PBGC for private-sector single-employer and multiemployer 

defined benefit pension plans that are classified as a reasonably possible exposure to loss. The decrease in single 

employer program contingencies is primarily due to the decline in the number of companies with lower than 

investment grade bond ratings and/or credit scores, while the primary reason for the decrease in multiemployer 

program contingencies is due to 14 plans that are no longer classified as reasonably possible. Of these 14 plans, 12 

were removed due to improvements in the plans’ financial conditions, and the 2 remaining plans were reclassified to 

other categories. Please refer to the PBGC financial statements for further details.

• FDIC reported $0.3 billion and $0.6 billion as of September 30, 2018, and 2017, respectively, for identified 

additional risk in the financial services industry that could result in additional loss to the DIF should potentially 

vulnerable insured institutions ultimately fail. Actual losses, if any, will largely depend on future economic and 

market conditions.

Deposit Insurance

Deposit insurance covers all types of deposits received at insured financial institutions, including deposits in checking 

accounts, negotiable order of withdrawal accounts, savings accounts, money market deposit accounts, time deposits such as 

certificates of deposit, and official items issued by banks, such as cashier’s checks or money orders. The insurance covers the

balance of depositors’ accounts, dollar-for-dollar, including principal and any accrued interest through the date of the insured 

financial institution’s closing, up to the insurance limit. As a result, the government has the following exposure from 

federally-insured financial institutions:

• FDIC has estimated insured deposits of $7,376.6 billion as of September 30, 2018, and $7,092.0 billion as of 

September 30, 2017, for the DIF.

• NCUA has estimated insured shares of $1,132.5 billion as of September 30, 2018, and $1,080.9 billion as of 

September 30, 2017, for the NCUSIF.

 5 Significant consolidation entities that apply FASB standards without conversion to FASAB standards are FDIC, NCUA, PBGC, FCSIC, TVA, Smithsonian 

Institution, NRRIT, and USPS.
NOTES TO THE FINANCIAL STATEMENTS 120

Legal Contingencies

Legal contingencies as of September 30, 2018, and 2017, are summarized in the table below:

2018 2017

Estimated Range of Loss Estimated Range of Loss

for Certain Cases 2 for Certain Cases 2

Accrued Accrued

(In billions of dollars) Liabilities 1 Lower End Upper End Liabilities 1 Lower End Upper End

Legal contingencies:

Probable ............................ 11.0 10.5 12.4 7.4 6.8 8.6

Reasonably possible............ - 7.0 26.3 - 3.1 12.6

1 Accrued liabilities are recorded and presented in other liabilities on the Balance Sheet.

2 Does not reflect the total range of loss; many cases assessed as reasonably possible of an unfavorable outcome did not include 

estimated losses that could be determined.

The government is party in various administrative proceedings, legal actions, and tort claims which may ultimately 

result in settlements or decisions adverse to the government.

Management and legal counsel have determined that it is “probable” that some of these actions will result in a loss to 

the government and the loss amounts are reasonably measurable. The estimated liabilities for “probable” cases against the 

government are $11.0 billion and $7.4 billion as of September 30, 2018, and 2017, respectively, and are included in “Other 

Liabilities” on the Balance Sheet. For example, the U.S. Supreme Court decision in Salazar v. Ramah Navajo Chapter, dated 

June 18, 2012, and subsequent cases related to contract support costs have resulted in increased claims against the Indian 

Health Service, which is a component within HHS. As a result of this decision, many tribes have filed claims. Some claims 

have been paid and others have been asserted but not yet settled. It is expected that some tribes will file additional claims for 

prior years.

There are also administrative claims and legal actions pending where adverse decisions are considered by management 

and legal counsel as “reasonably possible” with an estimate of potential loss or a range of potential loss. The estimated 

potential losses reported for such claims and actions range from $7.0 billion to $26.3 billion as of September 30, 2018, and 

from $3.1 billion to $12.6 billion as of September 30, 2017. For example, as of September 30, 2018, EPA has received 

approximately 403 total claims under the Federal Tort Claims Act from individuals and businesses situated on or near 

waterways affected by acid mine water released by Colorado’s Gold King Mine in August of 2015. The claims allege lost 

wages, loss of business income, agricultural and livestock losses, property damage, diminished property value, and personal 

injury. In addition, EPA has received claims from individuals under the Federal Tort Claims Act for alleged injuries and 

property damages caused by EPA’s alleged negligence related to the water health crisis in Flint, Michigan. The estimated 

losses related to the Gold King Mine and the water health crisis are $2.1 billion and $2.8 billion, respectively. EPA has 

determined there is a reasonably possible likelihood of unfavorable outcome for these cases. 

Numerous litigation cases are pending where the outcome is uncertain or it is reasonably possible that a loss has been 

incurred and where estimates cannot be made. There are other litigation cases where the plaintiffs have not made claims for 

specific dollar amounts, but the settlement may be significant. The ultimate resolution of these legal actions for which the 

potential loss could not be determined may materially affect the U.S. government’s financial position or operating results. An 

example of a specific case is summarized below:

• A number of plaintiffs filed claims in the U.S. Court of Federal Claims requesting that Treasury redeem matured 

savings bonds not possessed by the applicable states, but which have registered owners with last known addresses in 

those states. Treasury informed the applicable states it would not redeem these savings bonds since those states are 

not registered owners of the bonds. On August 20, 2015, the U.S. Court of Federal Claims partially dismissed one 

claim and denied the U.S. government’s motion to dismiss with respect to other claims. On August 8, 2017, the 

court ruled in favor of two states, and the U.S. government has appealed. At this time, the government is unable to 

determine the likelihood of an unfavorable outcome or make an estimate of potential loss.
121 NOTES TO THE FINANCIAL STATEMENTS

Environmental and Disposal Contingencies

Environmental and disposal contingencies as of September 30, 2018, and 2017, are summarized in the table below:

2018 2017

Estimated Range of Loss Estimated Range of Loss

for Certain Cases 2 for Certain Cases 2

Accrued Accrued

(In billions of dollars) Liabilities 1 Lower End Upper End Liabilities 1 Lower End Upper End

Environmental and 

disposal contingencies:

Probable ............................ 30.2 29.5 31.4 28.4 27.7 29.5

Reasonably possible............ - 0.6 0.8 - 0.7 1.5

1 Accrued liabilities are recorded and presented in other liabilities on the Balance Sheet.

2 Does not reflect the total range of loss; many cases assessed as reasonably possible of an unfavorable outcome did not include 

estimated losses that could be determined.

The government is subject to loss contingencies for a variety of environmental cleanup costs for the storage and 

disposal of hazardous material as well as the operations and closures of facilities at which environmental contamination may 

be present.

Management and legal counsel have determined that it is “probable” that some of these actions will result in a loss to 

the government and the loss amounts are reasonably measurable. The estimated liabilities for these cases are $30.2 billion 

and $28.4 billion as of September 30, 2018, and 2017, respectively, and are included in “Other Liabilities” on the Balance 

Sheet.

In accordance with the Nuclear Waste Policy Act of 1982 (NWPA), DOE entered into more than 68 standard contracts 

with utilities in which, in return for payment of fees into the Nuclear Waste Fund, DOE agreed to begin disposal of spent 

nuclear fuel (SNF) by January 31, 1998. Because DOE has no facility available to receive SNF under the NWPA, it has been 

unable to begin disposal of the utilities’ SNF as required by the contracts. Therefore, DOE is subject to significant SNF 

litigation claiming damages for partial breach of contract as a result of this delay. Based on settlement estimates, the total 

liability estimate as of September 30, 2018 is $35.5 billion. After deducting the cumulative amount paid of $7.4 billion as of 

September 30, 2018 under settlements, and as a result of final judgments, the remaining liability is estimated to be 

approximately $28.1 billion, compared to approximately $27.2 billion as of September 30, 2017. In addition to its SNF 

litigation, a number of class action and/or multiple plaintiff tort suits have been filed against current and former DOE 

contractors in which the plaintiffs seek damages for alleged exposures to radioactive and/or toxic substances as a result of the 

historic operations of DOE’s nuclear facilities. Collectively, damages in excess of $1.1 billion are currently being sought in 

these cases. 

Other Contingencies

DOT, HHS, and Treasury reported the following other contingencies:

• The Federal Highway Administration (FHWA) preauthorizes states to establish construction budgets without having 

received appropriations from Congress for such projects. FHWA has authority to approve projects using advance 

construction under 23 U.S.C. 115(a). FHWA does not guarantee the ultimate funding to the states for these “advance 

construction” projects and, accordingly, does not obligate any funds for these projects. When funding becomes 

available to FHWA, the states can then apply for reimbursement of costs that they have incurred on such projects, at 

which time FHWA can accept or reject such requests. As of September 30, 2018, and 2017, FHWA has preauthorized $60.8 billion and $55.2 billion, respectively, under these arrangements. Congress has not provided 

appropriations for these projects and no liability is accrued in the DOT consolidated financial statements.

• Contingent liabilities have been established as a result of Medicaid audit and program disallowances that are 

currently being appealed by the states. The Medicaid amounts are $6.3 billion and $12.2 billion for fiscal years 

ending September 30, 2018, and 2017, respectively. The states could return the funds through payments to HHS, or 
NOTES TO THE FINANCIAL STATEMENTS 122

HHS could recoup the funds by reducing future grant awards to the states. Conversely, if the appeals are decided in 

favor of the states, HHS will be required to pay these amounts. In addition, certain amounts for payment have been 

deferred under the Medicaid program when there is reasonable doubt as to the legitimacy of expenditures claimed by 

a state. There are also outstanding reviews of the state expenditures in which a final determination has not been 

made.

• As part of an annual process, Treasury assesses the need to estimate and accrue a contingent liability to the GSEs to 

reflect the forecasted equity deficits of the GSEs. Based on this assessment, it was estimated there were no probable 

future funding draws as of September 30, 2018, and 2017, and therefore, no contingent liability was accrued. 

However, as of September 30, 2018, it is reasonably possible that market volatility or non-recurring events—for 

instance, changes to accounting policies that impact credit loss provisions—could potentially cause the GSEs to 

generate quarterly losses and, therefore, result in future funding draws against Treasury’s funding commitment. Due 

to challenges quantifying future market volatility or the timing, magnitude, and likelihood of non-recurring events, 

an estimate of the total amount of this reasonably possible future funding liability could not be made as of 

September 30, 2018. See Note 8—Investments in Government-Sponsored Enterprises for further information.

Treaties and Other International Agreements

The government is a party to treaties and other international agreements. These treaties and other international 

agreements address various issues including, but not limited to, trade, commerce, security, and law enforcement that may 

involve financial obligations or give rise to possible exposure to losses. When a contingency originates from the U.S. 

government’s involvement in a treaty or other international agreement, the responsible reporting entity must establish a 

contingent liability, include a required note disclosure to its financial statements, or both, in accordance with guidance in

SFFAS No. 5, as amended. A review of potential contingent liabilities arising from litigation related to treaties and other 

international agreements has been conducted by U.S. government entities. This entity-level review, along with any resulting 

relevant information, is captured and reported in the annual legal representation letter process and, if applicable, disclosed in 

the Legal Contingencies section of this note. 
123 NOTES TO THE FINANCIAL STATEMENTS

Note 19. Commitments

Long-Term Operating Leases as of September 30, 2018, and 2017

(In billions of dollars) 2018 2017

General Services Administration ................................................................. 21.6 22.4

U.S. Postal Service .................................................................................... 3.5 7.6

Department of State................................................................................... 1.4 1.6

Department of Defense .............................................................................. 0.9 1.0

Department of Health and Human Services ................................................. 0.8 1.0

Other operating leases ............................................................................... 3.9 3.5

Total long-term operating leases ............................................................. 32.1 37.1

The government has entered into contractual commitments that require future use of financial resources. It has

significant amounts of long-term lease obligations.

Undelivered Orders and Other Commitments as of September 30, 2018, and 2017

Restated

(In billions of dollars) 2018 2017

Undelivered Orders:

Department of Defense .............................................................................. 319.8 263.8

Security Assistance Accounts..................................................................... 168.4 140.8

Department of Education............................................................................ 132.7 128.1

Department of Health and Human Services ................................................. 122.7 114.2

Department of Transportation..................................................................... 110.5 103.7

Department of Agriculture .......................................................................... 58.3 62.0

Department of Housing and Urban Development ......................................... 48.9 39.1

Department of Homeland Security .............................................................. 42.3 37.9

Department of Energy................................................................................ 27.0 22.8

Department of State................................................................................... 24.0 21.8

U.S. Agency for International Development ................................................. 17.4 17.9

All other entities......................................................................................... 126.6 126.0

Total undelivered orders .......................................................................... 1,198.6 1,078.1

Other Commitments:

GSE Senior Preferred Stock Purchase Agreements..................................... 254.1 258.1

U.S. Participation in the International Monetary Fund ................................... 154.9 157.0

Callable Capital Subscriptions for Multilateral Development Banks................ 121.1 120.6

All other commitments ............................................................................... 22.4 30.0

Total other commitments ......................................................................... 552.5 565.7
NOTES TO THE FINANCIAL STATEMENTS 124

Undelivered Orders and Other Commitments 

Undelivered Orders

Undelivered orders represent the value of goods and services ordered that have not yet been received. As of September 

30, 2018, and 2017, DOD reported undelivered orders of $319.8 billion and $263.8 billion, respectively. The $56.0 billion 

increase primarily resulted from an increase in activity (available budgetary resources) and continued refinement of 

estimation methods used in the classification of non-federal undelivered orders. 

Certain amounts related to DOJ have been restated. Refer to Note 1.U—Restatements for more information.

GSE Senior Preferred Stock Purchase Agreements

At September 30, 2018 and 2017, the maximum remaining potential commitment to the GSEs for the remaining life of 

the SPSPAs was $254.1 billion and $258.1 billion, respectively, which was established on December 31, 2012. Refer to Note 

8—Investments in Government-Sponsored Enterprises for a full description of the SPSPAs related commitments and 

contingent liability, if any, as well as additional information.

U.S. Participation in the International Monetary Fund

The government participates in the IMF through a quota subscription and certain borrowing arrangements that 

supplement IMF resources. As of September 30, 2018, and 2017, the financial commitment under the U.S. quota and 

borrowing arrangements was $154.9 billion and $157.0 billion, respectively. Refer to Note 2—Cash and Other Monetary 

Assets for more information regarding the U.S. participation in the IMF.

Callable Capital Subscriptions for Multilateral Development Banks

The government has callable subscriptions in certain MDBs, which are international financial institutions that finance 

economic and social development projects in developing countries. Callable capital in the MDBs serves as a supplemental 

pool of resources that may be redeemed and converted into ordinary paid in shares, if the MDB cannot otherwise meet certain 

obligations through its other available resources. MDBs are able to use callable capital as backing to obtain favorable 

financing terms when borrowing from international capital markets. To date, there has never been a call on this capital at any 

MDBs and none is anticipated. As of September 30, 2018, and 2017, the capital commitment to MDBs was $121.1 billion 

and $120.6 billion, respectively. 

All Other Commitments

Certain amounts related to Treasury have been restated. Refer to Note 1.U—Restatements for more information.

Other Risks

Terrorism Risk Insurance Program

Congress originally enacted the Terrorism Risk Insurance Act in November 2002 to address market disruptions 

resulting from terrorist attacks on September 11, 2001. Most recently, the Terrorism Risk Insurance Program 

Reauthorization Act of 2015 extended the Terrorism Risk Insurance Program (TRIP) until December 31, 2020. The TRIP 

helps to ensure available and affordable commercial property and casualty insurance for terrorism risk, and simultaneously 

allows private markets to stabilize. The authority to pay claims under the TRIP Program is activated when the Secretary of 

the Treasury (in consultation with the Secretary of the Department of Homeland Security and the U.S. Attorney General) 

certifies an “act of terrorism.” In the event of certification of an “act of terrorism” insurers may be eligible to receive 

reimbursement from the U.S. government for associated insured losses assuming an aggregate insured loss threshold 

(“program trigger”) has been reached once a particular insurer has satisfied its designated deductible amount. For calendar 

years 2018 and 2017, the program trigger amount was $160.0 million and $140.0 million, respectively. This amount will 

increase by $20.0 million annually through calendar year 2020. Insured losses above insurer deductibles will be shared 

between insurance companies and the U.S. government. The TRIP includes both mandatory and discretionary authority for 

Treasury to recoup federal payments made under the TRIP through policyholder surcharges under certain circumstances, and 

contains provisions designed to manage litigation arising from or relating to a certified act of terrorism. There were no claims 

under the TRIP as of September 30, 2018 or 2017.
125 NOTES TO THE FINANCIAL STATEMENTS

U.S. Contributions to International Organizations

The U.S. government enters into agreements to pay future contributions to international organizations in which it 

participates as a member. These contributions may include financial and in-kind support, including assessed contributions, 

voluntary contributions, grants, and other assistance to international organizations. Following are examples of international

organizations and their underlying missions which are supported by U.S. contributions:

• Office of the United Nations High Commissioner for Refugees, which supports annual and supplementary appeals 

for Africa, East Asia, Europe, Near East, South Asia, and the Western Hemisphere, as well as protection activities, 

refugee resettlement, and the global HIV/AIDS initiative;

• International Committee of the Red Cross, which aids in annual emergency and budget extension appeals for Africa, 

East Asia, Europe, Near East, South Asia, and the Western Hemisphere to support protection and assistance for 

conflict-affected populations;

• International Organization for Migration, which supports migration programs and the U.S. Refugee Assistance 

Program;

• North Atlantic Treaty Organization, which promotes conflict prevention and peaceful resolution of disputes;

• United Nations, which enables the world’s nations to work together toward freedom, democracy, peace, and human

rights;

• World Food Program, which provides emergency nutrition programming;

• Global Environment Facility, which is a multilateral trust fund that provides grants for global environmental 

projects;

• Green Climate Fund, established to support the efforts of developing countries to respond to the challenge of climate 

change;

• United Nations Children’s Fund, which promotes humanitarian and developmental assistance to children and 

mothers in developing countries; and

• World Health Organization, which provides support for collaborative efforts in a wide range of health-related 

activities, including infectious diseases, maternal and child health, family planning, safe motherhood, newborn 

health, reproductive health, environmental health, and HIV/AIDS. 
NOTES TO THE FINANCIAL STATEMENTS 126

Note 20. Funds from Dedicated Collections

Funds from Dedicated Collections as of September 30, 20181

Federal Federal

Hospital Supplementary

Federal Insurance Federal Medical All Other Total 

Old-Age and Trust Disability Insurance Funds Funds from 

Survivors Fund Insurance Trust Fund from Dedicated

Insurance (Medicare Trust (Medicare Dedicated Collections 

(In billions of dollars) Trust Fund Part A) Fund Parts B and D) Collections (Combined)

Assets:

Cash and other monetary assets........ - - - - 65.9 65.9

Fund balance with Treasury ............. (0.2) 1.6 (0.3) 25.8 149.9 176.8

Investments in U.S. Treasury 

securities, net of unamortized 

premiums/discounts ...................... 2,801.3 202.8 93.4 98.2 272.1 3,467.8

Other federal assets ..................... 19.9 38.7 0.7 35.9 24.6 119.8

Non-federal assets ....................... 2.6 1.2 5.1 17.4 110.9 137.2

Total assets ............................. 2,823.6 244.3 98.9 177.3 623.4 3,967.5

Liabilities and net position:

Due and payable to beneficiaries ....... 75.3 31.5 25.1 30.7 2.1 164.7

Other federal liabilities ................... 5.6 39.6 0.9 42.6 66.5 155.2

Other non-federal liabilities .............. - 1.1 - 0.8 183.7 185.6

Total liabilities ........................... 80.9 72.2 26.0 74.1 252.3 505.5

Total net position ....................... 2,742.7 172.1 72.9 103.2 371.1 3,462.0

Total liabilities and net position .... 2,823.6 244.3 98.9 177.3 623.4 3,967.5

Change in net position:

Beginning net position ................... 2,766.6 178.4 46.3 98.6 329.6 3,419.5

Adjustments to beginning net position . - - - - 2.6 2.6

Beginning net position, adjusted ..... 2,766.6 178.4 46.3 98.6 332.2 3,422.1

Investment revenue....................... 81.1 7.2 2.4 2.4 5.4 98.5

Individual income taxes .................. 706.1 264.6 167.0 - - 1,137.7

Other taxes and miscellaneous earned 

revenue..................................... - 0.6 - 4.1 138.5 143.2

Other changes in fund balance (e.g., 

appropriations, transfers) ................ 26.3 23.5 (1.6) 312.8 11.8 372.8

Total financing sources ................ 813.5 295.9 167.8 319.3 155.7 1,752.2

Program gross costs and non-program 

expenses................................... 837.4 306.2 141.2 411.0 171.5 1,867.3

Less: program revenue................... - (4.0) - (96.3) (54.7) (155.0)

Net cost.................................. 837.4 302.2 141.2 314.7 116.8 1,712.3

Ending net position ................. 2,742.7 172.1 72.9 103.2 371.1 3,462.0

1By law, certain expenses (costs), revenues, and other financing sources related to the administration of the above funds are not charged

to the funds and are therefore financed and/or credited to other sources.
127 NOTES TO THE FINANCIAL STATEMENTS

Funds from Dedicated Collections as of September 30, 2017 (Restated)1

Federal Federal

Hospital Supplementary

Federal Insurance Federal Medical All Other Total

Old-Age and Trust Disability Insurance Funds Funds from

Survivors Fund Insurance Trust Fund from Dedicated

Insurance (Medicare Trust (Medicare Dedicated Collections

(In billions of dollars) Trust Fund Part A) Fund Parts B and D) Collections (Combined)

Assets:

Cash and other monetary assets........ - - - - 65.0 65.0

Fund balance with Treasury ............. (0.1) 0.8 (0.2) 27.5 139.2 167.2

Investments in U.S. Treasury 

securities, net of unamortized 

premiums/discounts ...................... 2,820.2 197.8 69.7 70.6 271.6 3,429.9

Other federal assets ...................... 20.4 37.9 0.5 36.0 18.5 113.3

Non-federal assets........................ 2.5 11.7 4.8 39.0 112.1 170.1

Total assets ............................. 2,843.0 248.2 74.8 173.1 606.4 3,945.5

Liabilities and net position: 

Due and payable to beneficiaries ....... 71.3 30.1 27.4 30.6 14.8 174.2

Other federal liabilities.................... 5.1 38.6 1.1 43.2 72.6 160.6

Other non-federal liabilities .............. - 1.1 - 0.7 189.4 191.2

Total liabilities ........................... 76.4 69.8 28.5 74.5 276.8 526.0

Total net position ....................... 2,766.6 178.4 46.3 98.6 329.6 3,419.5

Total liabilities and net position..... 2,843.0 248.2 74.8 173.1 606.4 3,945.5

ok

Change in net position: 

Beginning net position .................... 2,746.4 174.1 20.8 94.5 338.5 3,374.3

Adjustments to beginning net position.. - - - - 0.2 0.2

Beginning net position, adjusted...... 2,746.4 174.1 20.8 94.5 338.7 3,374.5

Investment revenue....................... 84.1 7.4 1.7 2.4 4.0 99.6

Individual income taxes .................. 702.1 259.7 166.0 - - 1,127.8

Other taxes and miscellaneous earned 

revenue..................................... - 0.5 - 4.2 142.3 147.0

Other changes in fund balance (e.g., 

appropriations, transfers)................. 27.7 23.4 (0.8) 278.0 (1.1) 327.2

Total financing sources ................ 813.9 291.0 166.9 284.6 145.2 1,701.6

Program gross cost and non-program 

expenses................................... 793.7 290.8 141.4 366.1 205.4 1,797.4

Less: program revenue .................. - (4.1) - (85.6) (51.1) (140.8)

Net cost.................................. 793.7 286.7 141.4 280.5 154.3 1,656.6

Ending net position................... 2,766.6 178.4 46.3 98.6 329.6 3,419.5

1By law, certain expenses (costs), revenues, and other financing sources related to the administration of the above funds are not charged

to the funds and are therefore financed and/or credited to other sources. 

Generally, funds from dedicated collections are financed by specifically identified revenues, often supplemented by 

other financing sources, provided to the government by non-federal sources, which remain available over time. These 

specifically identified revenues and other financing sources are required by statute to be used for designated activities, 

benefits, or purposes and must be accounted for separately from the government’s general revenues. Funds from dedicated 

collections generally include trust funds, public enterprise revolving funds (not including credit reform financing funds), and 
NOTES TO THE FINANCIAL STATEMENTS 128

special funds. Funds from dedicated collections specifically exclude any fund established to account for pensions, ORB, 

OPEB, or other benefits provided for federal employees (civilian and military). In the federal budget, the term “trust fund” 

means only that the law requires a particular fund be accounted for separately, used only for a specified purpose, and 

designated as a trust fund. A change in law may change the future receipts and the terms under which the fund’s resources are

spent. In the private sector, trust fund refers to funds of one party held and managed by a second party (the trustee) in a 

fiduciary capacity. The activity of funds from dedicated collections differs from fiduciary activities primarily in that assets 

within funds from dedicated collections are government-owned. For further information related to fiduciary activities, see 

Note 21—Fiduciary Activities.

Public enterprise revolving funds include expenditure accounts authorized by law to be credited with offsetting 

collections, mostly from the public, that are generated by and dedicated to finance a continuing cycle of business-type 

operations. Some of the financing for these funds may be from appropriations.

Special funds are federal funds dedicated by law for a specific purpose. Special funds include the special fund receipt 

account and the special fund expenditure account.

The tables above depict major funds from dedicated collections chosen based on their significant financial activity and 

importance to taxpayers. All other government funds from dedicated collections not shown separately are aggregated as “all 

other.”

Total assets represent the unexpended balance from all sources of receipts and amounts due to the funds from dedicated 

collections, regardless of source, including related governmental transactions. These are transactions between two different 

entities within the government (for example, monies received by one entity of the government from another entity of the 

government).

The intragovernmental assets are comprised of fund balances with Treasury, investments in Treasury securities—

including unamortized amounts, and other assets that include the related accrued interest receivable on federal investments. 

These amounts were eliminated in preparing the principal financial statements. The non-federal assets represent only the 

activity with individuals and organizations outside of the government.

Most of the assets within funds from dedicated collections are invested in intragovernmental debt holdings. The 

government does not set aside assets to pay future benefits or other expenditures associated with funds from dedicated 

collections. The cash receipts collected from the public for funds from dedicated collections are deposited in the General 

Fund, which uses the cash for general government purposes. Treasury securities are issued to federal entities as evidence of 

its receipts. Treasury securities are an asset to the federal entities and a liability to the U.S. Treasury and, therefore, they do 

not represent an asset or a liability in the Financial Report. These securities require redemption if a fund’s disbursements 

exceeds its receipts. Redeeming these securities will increase the government’s financing needs and require more borrowing 

from the public (or less repayment of debt), or will result in higher taxes than otherwise would have been needed, or less 

spending on other programs than otherwise would have occurred, or some combination thereof. See Note 11—Federal Debt 

Securities Held by the Public and Accrued Interest for further information related to the investments in federal debt securities.

Depicted below is a description of the major funds from dedicated collections shown in the above tables, which also 

identifies the government entities that administer each particular fund. For detailed information regarding these funds from 

dedicated collections, please refer to the financial statements of the corresponding administering entities. For information on 

the benefits due and payable liability associated with certain funds from dedicated collections, see Note 14—Benefits Due 

and Payable.

Federal Old-Age and Survivors Insurance Trust Fund

The Federal Old-Age and Survivors Insurance (OASI) Trust Fund, administered by the SSA, provides retirement and 

survivors benefits to qualified workers and their families.

Payroll and self-employment taxes primarily fund the OASI Trust Fund. Interest earnings on Treasury securities, federal 

entities’ payments for the Social Security benefits earned by military and federal civilian employees, and Treasury payments for 

a portion of income taxes collected on Social Security benefits provide the fund with additional income. The law establishing the 

OASI Trust Fund and authorizing the depositing of amounts to the credit of the fund is set forth in 42 U.S.C. § 401.
129 NOTES TO THE FINANCIAL STATEMENTS

Federal Hospital Insurance Trust Fund

(Medicare Part A)

The Federal Hospital Insurance (HI) Trust Fund, administered by HHS, finances the HI (Medicare Part A). This 

program funds the cost of inpatient hospital and related care for individuals age 65 or older who meet certain insured status 

requirements and individuals younger than age 65 with certain disabilities. 

The HI Trust Fund is financed primarily by payroll taxes, including those paid by federal entities. It also receives 

income from interest earnings on Treasury securities, a portion of income taxes collected on Social Security benefits, 

premiums paid by, or on behalf of, aged uninsured beneficiaries, and receipts from fraud and abuse control activities. Section 

1817 of the Social Security Act established the Medicare Hospital Trust Fund.

Federal Disability Insurance Trust Fund

The Federal Disability Insurance (DI) Trust Fund, administered by SSA, provides assistance and protection against the 

loss of earnings due to a wage earner’s disability in form of monetary payments. 

Like the OASI Trust Fund, payroll taxes primarily fund the DI Trust Fund. The fund also receives income from interest 

earnings on Treasury securities, federal entities’ payments for the Social Security benefits earned by military and federal 

civilian employees, and Treasury payments for a portion of income taxes collected on Social Security benefits. The law 

establishing the DI Trust Fund and authorizing the depositing of amounts to the credit of the fund is set forth in 42 U.S.C. § 

401.

Federal Supplementary Medical Insurance Trust Fund

(Medicare Parts B and D)

The Federal SMI Trust Fund, administered by HHS, finances the SMI Program (Medicare Part B) and the Medicare 

Prescription Drug Benefit Program (Medicare Part D). These programs provide supplementary medical insurance for enrolled 

eligible participants to cover physician and outpatient services not covered by Medicare Part A and to obtain qualified 

prescription drug coverage, respectively. Medicare Part B financing is not based on payroll taxes; it is primarily based on 

monthly premiums, income from the General Fund, and interest earnings on Treasury securities. The Medicare SMI Trust 

Fund was established by Section 1841 of the Social Security Act.

Medicare Part D was created by the Medicare Modernization Act of 2003 (P.L. No. 108-173). Medicare Part D 

financing is similar to Part B; it is primarily based on monthly premiums and income from the General Fund, not on payroll 

taxes. The fund also receives transfers from states. 

All Other Funds from Dedicated Collections

The government is responsible for the management of numerous funds from dedicated collections that serve a wide 

variety of purposes. The funds from dedicated collections presented on an individual basis in the above tables represent the 

majority of the government’s net position attributable to funds from dedicated collections. All other activity attributable to 

funds from dedicated collections is aggregated in accordance with SFFAS No. 27, Identifying and Reporting Funds from 

Dedicated Collections, as amended by SFFAS No. 43, Funds from Dedicated Collections: Amending Statement of Federal 

Financial Accounting Standards 27, Identifying and Reporting Earmarked Funds. The funds from dedicated collections 

within the “all other” aggregate, along with the entities that administer them, include the following:

• Highway Trust Fund and Airport and Airway Trust Fund—administered by DOT.

• Unemployment Trust Fund (UTF) and Black Lung Disability Trust Fund (BLDTF)—administered by DOL.

• Land and Water Conservation Fund, Reclamation Fund, and Water and Related Resources Fund—administered by 

DOI.

• ESF—administered by Treasury.

• NFIP—administered by DHS. 
NOTES TO THE FINANCIAL STATEMENTS 130

• Railroad Retirement Trust Fund—administered by RRB. 

• Uranium Enrichment Decontamination and Decommissioning Fund—administered by DOE.

• Government National Mortgage Association—administered by HUD.

• Crime Victims Fund—administered by DOJ.

• Harbor Maintenance Trust Fund—administered by DOD.

In accordance with SFFAS No. 43, any funds established to account for pension, other retirement, or other postemployment benefits to civilian or military personnel are excluded from the reporting requirements related to funds from 

dedicated collections. 

Smithsonian Institution comprised the $2.6 billion adjustment to beginning net position for fiscal year 2018. Gulf Coast 

Ecosystem Restoration Council and HUD contributed to the $0.2 billion in adjustments to beginning net position for fiscal 

year 2017. Refer to Note 1.S—Adjustments to Beginning Net Position for more information. Certain amounts related to HUD 

have been restated. Refer to Note 1.U—Restatements for more information.

Other Taxes and Miscellaneous Earned Income

Unemployment Taxes

The UTF, within the “all other” aggregate, represents all the unemployment tax revenues attributable to funds from 

dedicated collections shown on the consolidated Statement of Operations and Changes in Net Position.

The UTF provides temporary assistance to workers who lose their jobs. The program is administered through a unique 

system of federal and state partnerships, established in federal law, but executed through conforming state laws by state 

officials. DOL administers the federal operations of the program. 

Employer taxes provide the primary funding source for the UTF and constitute the largest portion of unemployment tax 

revenues attributable to funds from dedicated collections as shown on the consolidated Statement of Operations and Changes 

in Net Position. However, interest earnings on Treasury securities also provide income to the fund. For the years ending 

September 30, 2018, and 2017, UTF unemployment tax revenues were $43.2 billion and $44.1 billion, respectively. 

Appropriations have supplemented the fund’s income during periods of high and extended unemployment. The UTF was 

established under the authority of Section 904 of the Social Security Act of 1935.

Excise Taxes

There are 9 funds from dedicated collections within the “all other” aggregate that represent 94 percent of the dedicated 

excise tax revenue attributable to funds from dedicated collections shown on the consolidated Statement of Operations and 

Changes in Net Position. The Highway Trust Fund and the Airport and Airway Trust Fund, combined, represent 96 percent 

of the “all other” dedicated excise tax revenues. Both of these funds are administered by the DOT. For more information, 

please refer to DOT’s financial statements.

The Highway Trust Fund was established to promote domestic interstate transportation and to move people and goods. 

The fund provides federal grants to states for highway construction, certain transit programs, and related transportation 

purposes. The Highway Trust Fund was created by the Highway Revenue Act of 1956. Funding sources include designated 

excise taxes on gasoline and other fuels, the initial sale of heavy trucks, and highway use by commercial motor vehicles. For 

the years ending September 30, 2018, and 2017, Highway Trust Fund excise tax revenues were $42.6 billion and $41.0 

billion, respectively. As funds are needed for payments, the Highway Trust Fund corpus investments are liquidated and funds 

are transferred to the FHWA, the Federal Transit Administration, or other DOT entities, for payment of obligations.

The Airport and Airway Trust Fund provides for airport improvement and airport facilities maintenance. It also funds 

airport equipment, research, and a portion of the Federal Aviation Administration’s administrative operational support. The 

Airport and Airway Trust Fund was authorized by the Airport and Airway Revenue Act of 1970. Funding sources include 

aviation-related excise tax collections from:

• Passenger tickets,

• Passenger flight segments,

• International arrival/departures,

• Cargo waybills, and 

• Aviation fuels. 

For the years ending September 30, 2018, and 2017, Airport and Airway Trust Fund excise tax revenues were $15.8 billion 

and $15.1 billion, respectively.
131 NOTES TO THE FINANCIAL STATEMENTS

Miscellaneous Earned Revenues

Miscellaneous earned revenues due to activity attributable to funds from dedicated collections primarily related to 

royalties retained by various funds within DOI.
NOTES TO THE FINANCIAL STATEMENTS 132

Note 21. Fiduciary Activities

Fiduciary activities are the collection or receipt, and the management, protection, accounting, investment and

disposition by the government of cash or other assets in which non-federal individuals or entities have an ownership interest

that the government must uphold. Fiduciary cash and other assets are not assets of the government and are not recognized on

the consolidated Balance Sheet. Examples of the government’s fiduciary activities include the TSP, which is administered by

the FRTIB, and the Indian Tribal and individual Indian Trust Funds, which are administered by the DOI.

Schedule of Fiduciary Net Assets as of September 30, 2018, and 2017

(In billions of dollars) 2018 2017

Thrift Savings Plan ..................................................................................... 589.0 531.5

Department of the Interior ........................................................................... 5.4 5.2

All other ..................................................................................................... 5.2 6.6

Total fiduciary net assets .......................................................................... 599.6 543.3

In accordance with the requirements of SFFAS No. 31, Accounting for Fiduciary Activities, fiduciary investments in

Treasury securities and fund balance with Treasury held by fiduciary funds are to be recognized on the Balance Sheet as debt

held by the public and a liability for fiduciary fund balance with Treasury, respectively.

As of September 30, 2018, total fiduciary investments in Treasury securities and in non-Treasury securities are $250.3

billion and $363.0 billion, respectively. As of September 30, 2017, total fiduciary investments in Treasury securities and in

non-Treasury securities were $223.7 billion and $317.9 billion, respectively. Refer to Note 11—Federal Debt Securities Held

by the Public and Accrued Interest for more information on the Treasury securities.

As of September 30, 2018, and 2017, the total fiduciary fund balance with Treasury is $1.8 billion and $1.2 billion,

respectively. A liability for this fiduciary fund balance with Treasury is reflected as other miscellaneous liabilities in Note

16—Other Liabilities.

As of September 30, 2018, and 2017, collectively, the fiduciary investments in Treasury securities and fiduciary fund

balance with Treasury held by all government entities represent $6.6 billion and $7.0 billion, respectively, of unrestricted

cash included within cash held by Treasury for governmentwide operations shown in Note 2—Cash and Other Monetary

Assets.

Thrift Savings Plan

The Thrift Savings Fund (TSF) maintains and holds in trust the assets of the TSP. The TSP is administered by an

independent government entity, the FRTIB, which is charged with operating the TSP prudently and solely in the interest of

the participants and their beneficiaries.

The TSP is a retirement savings and investment plan for federal employees and members of the uniformed services. It

was authorized by the U.S. Congress in the Federal Employees’ Retirement System Act of 1986. The Plan provides federal

employees and members of the uniformed services with a savings and tax benefit similar to what many private sector

employers offer their employees under 401(k) plans. The Plan was primarily designed to be a key part of the retirement

package (along with a basic annuity benefit and Social Security) for employees who are covered by FERS.

As of September 30, 2018, and 2017, the TSP held $589.0 billion and $531.5 billion, respectively, in net assets, which

included $245.5 billion and $217.9 billion, respectively, of Treasury securities. The TSF combines the net assets of the TSP

and the FRTIB in its financial statements. Only the TSP net assets of the TSF financial statements are disclosed in this note.

The most recent audited financial statements for the TSF are as of December 31, 2017, and 2016. For further information

about FRTIB and the TSP, please refer to the FRTIB website at https://www.frtib.gov.
133 NOTES TO THE FINANCIAL STATEMENTS

DOI–Indian Trust Funds

As stated above, DOI has responsibility for the assets held in trust on behalf of American Indian Tribes and individuals. 

DOI maintains accounts for Tribal and Other Trust Funds (including the Alaska Native Escrow Fund) and Individual Indian

Monies (IIM) Trust Funds in accordance with the American Indian Trust Fund Management Reform Act of 1994. The

fiduciary balances that have accumulated in these funds have resulted from land use agreements, royalties on natural resource

depletion, other proceeds derived directly from trust resources, judgment awards, settlements of claims, and investment

income. These funds are maintained for the benefit of individual Native Americans as well as for designated Indian tribes.

DOI maintains separate financial statements for these trust funds, which are prepared using a cash or modified cash basis of

accounting, a comprehensive basis of accounting other than GAAP. The independent auditors’ reports on the Tribal and

Other Trust Funds were qualified as it was not practical to extend audit procedures sufficiently to satisfy themselves as to the

fairness of the trust fund balances. The IIM Trust Funds received an unmodified opinion from the auditors. As of September

30, 2018, and 2017, the DOI held $5.4 billion and $5.2 billion, respectively, in net assets. For further information related to

these assets, please refer to the DOI website at https://www.doi.gov.

All Other Entities with Fiduciary Activities

The government is responsible for the management of other fiduciary net assets on behalf of various non-federal

entities. The component entities presented individually in the table on the previous page represent the vast majority of the

government’s fiduciary net assets. All other component entities with fiduciary net assets are aggregated in accordance with

SFFAS No. 31. As of September 30, 2018, and 2017, including TSP and DOI, there are a total of 19 and 20 federal entities,

respectively, with fiduciary activities at a grand total of 65 and 67 fiduciary funds, respectively. SBA and Library of

Congress (LOC) are the significant entities relating to the fiduciary activities of the remaining component entities within the

“all other” aggregate balance. As of September 30, 2018, “all other” fiduciary net assets were $5.2 billion, compared to $6.6

billion as of September 30, 2017.
NOTES TO THE FINANCIAL STATEMENTS 134

Note 22. Social Insurance

SOSI presents the projected actuarial present value of the estimated future revenue and estimated future expenditures of

the Social Security, Medicare, Railroad Retirement, and Black Lung social insurance programs which are administered by the

SSA, HHS, RRB, and DOL, respectively. These estimates are based on the intermediate economic and demographic

assumptions presented later in this note as set forth in the relevant Social Security and Medicare trustees’ reports and in the

agency financial reports of HHS, SSA, and DOL, as well as in the relevant entity performance and accountability report for

RRB. Due to a change in the presentation of the consolidated SOSI and this note from billions of dollars to trillions of dollars

beginning in fiscal year 2016, some amounts in the narrative will not be traceable to the corresponding entity financial

statements. The SOSI projections, with one exception related to Medicare Part A and OASDI, are based on current law; that

is, they assume that scheduled social insurance benefit payments would continue after related trust funds are projected to be

depleted, contrary to current law. By law, once assets are depleted, expenditures cannot be made except to the extent covered

by ongoing tax receipts and other trust fund income. The estimates in the consolidated SOSI of the open group measures are

for persons who are participants or eventually will participate in the programs as contributors (workers) or beneficiaries

(retired workers, survivors, dependents, and disabled) during the 75-year projection period. To enhance comparability of the

BLDTF social insurance information and continue to illustrate the fund’s long-term condition and sustainability, DOL

revised its projection period from a fixed terminus of September 30, 2040 to a rolling 25-year projection period that begins

on the September 30 valuation date each year. The revised projection period became effective for the September 30, 2017

valuation date and continued for fiscal year 2018.

Contributions consist of: payroll taxes from employers, employees, and self-employed persons; revenue from federal

income taxation of OASDI and railroad retirement benefits; excise tax on the domestic sale of coal (Black Lung); premiums

from, and state transfers on behalf of, participants in Medicare; and reimbursements from the General Fund to the OASDI

Trust Funds to make up for reductions in payroll tax revenue due to temporary payroll tax rate reductions. Income for all

programs is presented from a consolidated perspective. Future interest payments and other future intragovernmental transfers

have been excluded upon consolidation. By accounting convention, intragovernmental transactions are eliminated in the

consolidation process, and accordingly, the Statements of Social Insurance do not include projected general revenues that,

under current law, would be used to finance the remainder of the expenditures in excess of revenues for Medicare Parts B and

D that is reported in the Statements of Social Insurance. Expenditures include benefit payments scheduled under current law

and administrative expenses. Current Social Security and Medicare law provides for full benefit payments only to the extent

that there are sufficient balances in the trust funds. Expenditures reflect full benefit payments even after the point at which

assets are projected to be depleted.

Actuarial present values of estimated future income (excluding interest) and estimated future expenditures for the Social

Security and Medicare social insurance programs are presented for three different groups of participants: (1) current

participants who have not yet attained eligibility age; (2) current participants who have attained eligibility age; and (3) new

entrants, who are expected to become participants in the future. Current participants in the Social Security and Medicare

programs are the “closed group” of taxpayers and/or beneficiaries who are at least age 15 years at the start of the projection

period. Since the projection period for the Social Security, Medicare, and Railroad Retirement social insurance programs

consists of 75 years, the period covers virtually all of the current participants’ working and retirement years, a period that

could be greater than 75 years in a relatively small number of instances. Future participants for Social Security and Medicare

include births during the projection period and individuals below age 15 as of January 1 of the valuation year. Railroad

Retirement’s future participants are the projected new entrants as of October 1 of the valuation year. For fiscal year 2015 and

years prior, future participants for Railroad Retirement were the projected new entrants as of January 1 of the valuation year6

.

The present values of estimated future expenditures in excess of estimated future revenue are calculated by subtracting

the actuarial present values of future scheduled contributions as well as dedicated tax income by and on behalf of current and

future participants from the actuarial present value of the future scheduled benefit payments to them or on their behalf. To

determine a program’s funding shortfall over any given period of time, the starting trust fund balance is subtracted from the

present value of expenditures in excess of revenues over the period.

The trust fund balances as of the valuation date for the respective programs, including interest earned, are shown in the

table below7

. Substantially all of the OASDI, HI, and SMI Trust Fund balances consist of investments in special

nonmarketable Treasury securities that are backed by the full faith and credit of the U.S. government. For more information,

see Note 20—Funds from Dedicated Collections.

 6 Beginning with the fiscal year 2016 reporting period, the valuation date for the Railroad Retirement program was changed from calendar year to fiscal year. 7 Trust fund balances for the Railroad Retirement and Black Lung programs are not included, as these balances are less than $50 billion.
135 NOTES TO THE FINANCIAL STATEMENTS

Social Insurance Programs Trust Fund Balances 1

(In trillions of dollars) 2018 2017 2016 2015 2014

Social Security .................................... 2.9 2.8 2.8 2.8 2.8

Medicare ............................................ 0.3 0.3 0.3 0.3 0.3

1 As of the valuation date of the respective programs.

Social Security

The OASI Trust Fund, established on January 1, 1940, and the DI Trust Fund, established on August 1, 1956,

collectively referred to as OASDI or “Social Security,” provides cash benefits for eligible U.S. citizens and residents.

Eligibility and benefit amounts are determined under the laws applicable for the period. Current law provides that the amount

of the monthly benefit payments for workers and their eligible dependents or survivors is based on the workers’ lifetime

earnings histories.

The primary financing of the OASDI Trust Funds are taxes paid by workers, their employers, and individuals with selfemployment income, based on work covered by the OASDI Program. Refer to the Unaudited RSI—Social Insurance section

for additional information on Social Security program financing.

That portion of each trust fund not required to pay benefits and administrative costs is invested, on a daily basis, in interestbearing obligations of the U.S. government. The Social Security Act authorizes the issuance by the Treasury of special

nonmarketable, intragovernmental debt obligations for purchase exclusively by the trust funds. Although the special issues

cannot be bought or sold in the open market, they are redeemable at any time at face value and thus bear no risk of fluctuation in

principal value due to changes in market yield rates. Interest on the bonds is credited to the trust funds and becomes an asset to

the funds and a liability to the General Fund. These Treasury securities and related interest are eliminated in consolidation at the

governmentwide level.

Medicare

The Medicare Program, created in 1965, has two separate trust funds: the HI (Medicare Part A) and SMI (Medicare

Parts B and D) Trust Funds. HI helps pay for inpatient hospital stays, home health care following a hospital stay, and skilled

nursing facility and hospice care. SMI helps pay for hospital outpatient services, physician services, and assorted other

services and products through Part B and for prescription drugs through Part D. Though the events that trigger benefit

payments are similar, HI and SMI have different dedicated financing structures. Similar to OASDI, HI is financed primarily

by payroll contributions. Other income to the HI Trust Fund includes a small amount of premium income from voluntary

enrollees, receipts from fraud and abuse control activities, a portion of the federal income taxes that beneficiaries pay on

Social Security benefits and interest credited on Treasury securities held in the HI Trust Fund. These Treasury securities and

related interest are eliminated in the consolidation at the governmentwide level.

For SMI, transfers from the General Fund represent the largest source of income for both Parts B and D. Generally,

beneficiaries finance the remainder of Parts B and D costs via monthly premiums to these programs. With the introduction of

Part D drug coverage, Medicaid is no longer the primary payer of drug costs for full-benefit dually eligible beneficiaries of

Medicare and Medicaid. For those beneficiaries, states are subject to a contribution requirement and must pay a portion of

their estimated foregone drug costs into the Part D account (referred to as state transfers). The estimated foregone drug costs

is the estimated difference between the drug costs that used to be fully covered by Medicaid for full-benefit dually eligible

beneficiaries (i.e., for Medicare and Medicaid) prior to the introduction of Part D, and the drug cost that is now covered for

such dually eligible beneficiaries by Medicare Part D. Fees related to brand-name prescription drugs, required by the ACA,

are included as income for Part B of SMI. As with HI, interest received on Treasury securities held in the SMI Trust Fund is

credited to the fund and these Treasury securities as well as related interest are eliminated in consolidation at the

governmentwide level. 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 years 2018 and 2017 SOSI, the amounts eliminated totaled $33.0 trillion and

$30.0 trillion, respectively. Refer to Unaudited RSI—Social Insurance section for additional information on Medicare

program financing.
NOTES TO THE FINANCIAL STATEMENTS 136

The financial projections for the Medicare program reflect substantial, but very uncertain, cost savings deriving from

provisions of the ACA and the MACRA that lowered increases in Medicare payment rates to most categories of health care

providers.

The ACA became law in fiscal year 2010 and provided funding for the establishment by the Centers for Medicare and

Medicaid Services (CMS) of a Center for Medicare and Medicaid Innovation to test innovative payment and service delivery

models to reduce program expenditures while preserving or enhancing the quality of care furnished to individuals. It also

allowed for the establishment of a Center for Consumer Information and Insurance Oversight (CCIIO). One of the main

programs under CCIIO is the Affordable Insurance Exchanges (the “Exchanges”). A brief description of these programs is

presented below.

Health Insurance Exchanges. Grants have been provided to the states to establish Health Insurance Exchanges. The

initial grants were made by HHS to the states “not later than one year after the date of enactment.” Thus, HHS made the

initial grants by March 23, 2011. Subsequent grants were issued by CMS through December 31, 2014, after which time no

further grants could be made. All Exchanges were launched on October 1, 2013.

Risk Adjustment Program. The Risk Adjustment Program is a permanent program. It applies to non-grandfathered

individuals and small group plans inside and outside the Exchanges. It provides payments to health insurance issuers that

disproportionately attract higher-risk populations (such as individuals with chronic conditions) and transfers funds from plans

with relatively lower risk enrollees to plans with relatively higher risk enrollees to protect against adverse selection. States

that operate a state-based Exchange are eligible to establish a risk adjustment program. States operating a risk adjustment

program may have an entity other than the Exchange perform this function. CMS operates a risk adjustment program for each

state that does not operate its own.

It is important to note that the Medicare projections depend in part on the long-range feasibility of the various costsaving measures in the ACA–most importantly, the reductions in the annual payment rate updates for most categories of

Medicare providers by the growth in economy-wide private nonfarm business multifactor productivity and the specified

physician updates put in place by MACRA. Without fundamental changes in the current delivery system, these productivityrelated adjustments to Medicare payment rates would probably not be viable indefinitely. However, this outcome is

achievable if health care providers are able to realize productivity improvements at a faster rate than experienced historically.

On the other hand, if the health sector cannot transition to more efficient models of care delivery and achieve productivity

increases commensurate with economy-wide productivity, and if the provider reimbursement rates paid by commercial

insurers continue to be based on the same negotiated process used to date, then the availability and quality of health care

received by Medicare beneficiaries would, under current law, fall over time compared to that received by those with private

health insurance.

A transformation of health care in the U.S., affecting both the means of delivery and the method of paying for care, is

also a possibility. Private health insurance and Medicare take important steps in this direction by initiating programs of

research into innovative payment and service delivery models, such as accountable care organizations, patient-centered

medical homes, improvement in care coordination for individuals with multiple chronic health conditions, better coordination

of post-acute care, payment bundling, pay for performance, and assistance for individuals in making informed health choices.

Such changes have the potential to reduce health care costs as well as cost growth rates and could, as a result, help lower

health care spending to levels compatible with the lower price updates payable under current law.

The ability of new delivery and payment methods to lower cost growth rates is uncertain at this time. Preliminary

indications are that some of these delivery reforms have had modest levels of success in lowering costs, but at this time it is

too early to tell if these reductions in spending will continue, or if they will grow to the magnitude needed to align with the

statutory Medicare price updates. For those providers affected by the productivity adjustments and the specified updates to

physician payments, sustaining the price reductions will be challenging, as the best available evidence indicates that most

providers cannot improve their productivity to this degree for a prolonged period given the labor-intensive nature of these

services and that physician costs will grow at a faster rate than the specified updates. As a result, actual Medicare

expenditures are highly uncertain for reasons apart from the inherent difficulty in projecting health care cost growth over

time.

The specified rate updates could be an issue in years when levels of inflation are high and would be problematic when

the cumulative gap between the price updates and physician costs becomes large. The gap will continue to widen throughout

the projection, and it is estimated that physician payment rates under current law will be lower than they would have been

under the SGR formula by 2048. Absent a change in the delivery system or level of update by subsequent legislation, access

to Medicare-participating physicians may become a significant issue in the long term under current law. Overriding the price

updates in current law, as lawmakers repeatedly did in the case of physician payment rates, would lead to substantially higher

costs for Medicare in the long range than those projected in this report.

To help illustrate and quantify the potential magnitude of the cost understatement, the Trustees asked the Office of

the Actuary at CMS to prepare an illustrative Medicare Trust Fund projection under a hypothetical alternative. This
137 NOTES TO THE FINANCIAL STATEMENTS

scenario illustrates the impact that would occur if the payment updates that are affected by the productivity adjustments

transition from current law to the payment updates assumed for private health plans over the period 2028 to 2042. It also

reflects physician payment updates that transition from current law to the increase in the Medicare Economic Index over

the same period. Finally, the scenario assumes the continuation of the 5 percent bonuses for physicians in advanced

alternative payment models (APMs) and of the $500-million payments for physicians in the merit-based incentive

payment system, which are set to expire in 2025. This alternative was developed for illustrative purposes only; the

calculations have not been audited; no endorsement of the policies underlying the illustrative alternative by the Trustees,

CMS, or the Office of the Actuary should be inferred; and the examples do not attempt to portray likely or recommended

future outcomes. Thus, the illustrations are useful only as general indicators of the substantial impacts that could result

from future legislation affecting the productivity adjustments and physician updates under Medicare and of the broad

range of uncertainty associated with such impacts. The table on the following page contains a comparison of the Medicare

75-year present values of estimated future income and estimated future expenditures under current law with those under

the illustrative alternative scenario.
NOTES TO THE FINANCIAL STATEMENTS 138

Medicare Present Values (in trillions) (Unaudited)

2018 Consolidated Illustrative

SOSI Alternative

Current Law Scenario 1, 2

Income:

 Part A .................................................. $22.8 $22.9

 Part B 3 ................................................ $9.4 $11.1

 Part D 4 ................................................ $3.2 $3.2

 Total income ..................................... $35.4 $37.2

Expenditures: 

 Part A ................................................. $27.5 $32.6

 Part B ................................................. $34.4 $40.9

 Part D ................................................. $11.1 $11.1

 Total expenditures ............................. $73.0 $84.6

Income less expenditures:

 Part A ................................................. $4.7 $9.7

 Part B .................................................. $25.0 $29.8

 Part D ................................................. $7.9 $7.9

 Excess of expenditures over income $37.6 $47.4

1These amounts are not presented in the 2018 Trustees' Report.

2At the request of the Trustees, the Office of the Actuary at CMS has prepared an illustrative set of Medicare Trust Fund projections 

that differ from current law. No endorsement of the illustrative alternative to current law by the Trustees, CMS, or the Office of the 

Actuary should be inferred.

3Excludes $25.0 trillion and $29.8 trillion of General Revenue Contributions from the 2018 Consolidated SOSI Current Law projection 

and the Illustrative Alternative Scenario's projection, respectively; i.e., to reflect Part B income on a consolidated governmentwide 

basis.

4Excludes $7.9 trillion of General Revenue Contributions from both the 2018 Consolidated SOSI Current Law projection and the 

Illustrative Alternative projection; i.e., to reflect Part D income on a consolidated governmentwide basis.

Note: Totals may not equal the sum of components due to rounding.
139 NOTES TO THE FINANCIAL STATEMENTS

The difference between the current-law and illustrative alternative projections is substantial for Parts A and B. All Part

A fee-for-service providers and roughly half of Part B fee-for-service providers are affected by the productivity adjustments,

so the current-law projections reflect an estimated 1.1 percent reduction in annual cost growth each year for these providers.

If the payment updates that are affected by the productivity adjustments were to gradually transition from current law to the

payment updates assumed for private health plans, the physician updates transitioned to the Medicare Economic Index, and

the 5 percent bonuses paid to physicians in advanced APMs did not expire, as illustrated under the alternative scenario, the

estimated present values of Part A and Part B expenditures would each be higher than the current-law projections by roughly

18 and 19 percent, respectively. As indicated above, the present value of Part A income is basically unaffected under the

alternative scenario.

The Part D values are the same under each projection because the services are not affected by the productivity

adjustments or the physician updates. The extent to which actual future Part A and Part B costs exceed the projected amounts

due to changes to the productivity adjustments and physician updates depends on what specific changes might be legislated

and whether Congress would pass further provisions to help offset such costs. As noted, these examples reflect only

hypothetical changes to provider payment rates.

Social Security and Medicare–Demographic and Economic Assumptions

The Boards of Trustees8 of the OASDI and Medicare Trust Funds provide in their annual reports to Congress shortrange (10-year) and long-range (75-year) actuarial estimates of each trust fund. Significant uncertainty surrounds the

estimates, especially for a period as long as 75 years. To illustrate the range of uncertainty, the Trustees use three alternative

scenarios (low-cost, intermediate, and high-cost) that use specific assumptions. These assumptions include fertility rates,

rates of change in mortality, LPR and other-than-LPR immigration levels, emigration levels, changes in real GDP, changes in

the CPI, changes in average real wages, unemployment rates, trust fund real yield rates, and disability incidence and recovery

rates. The assumptions used for the most recent set of projections shown in Table 1A (Social Security) and Table 1B

(Medicare) are generally referred to as the “intermediate assumptions,” and reflect the trustees’ reasonable estimate of

expected future experience. For further information on Social Security and Medicare demographic and economic

assumptions, refer to SSA’s and HHS’s Agency Financial Reports.

 8 The boards are composed of six members. Four members serve by virtue of their positions in the federal government: the Secretary of the Treasury, who is

the Managing Trustee; the Secretary of Labor; the Secretary of Health and Human Services; and the Commissioner of Social Security. The President

appoints and the Senate confirms the other two members to serve as public representatives. These two positions are currently vacant.
NOTES TO THE FINANCIAL STATEMENTS 140

Table 1A

Social Security – Demographic and Economic Assumptions

Demographic Assumptions

Age-Sex

Adjusted

Death

Rate

(per 100,000)2 

Net Annual

Immigration

(persons per 

year)3 

Period Life

Expectancy

at Birth4 Total 

Fertility 

Rate Year 1 Male Female

2018 1.81 776.4 1,678,000 76.9 81.5

2020 1.84 762.4 1,498,000 77.2 81.7

2030 2.00 697.7 1,321,000 78.4 82.7

2040 2.00 641.1 1,272,000 79.5 83.6

2050 2.00 591.5 1,247,000 80.5 84.5

2060 2.00 547.9 1,233,000 81.5 85.3

2070 2.00 509.4 1,225,000 82.4 86.0

2080 2.00 475.2 1,221,000 83.2 86.7

2090 2.00 444.7 1,218,000 84.0 87.3

Economic Assumptions

Real

Wage

Differential

(percent 

change)5 

Average

Annual Wage

In Covered

Employment

(percent

change)6 

Total

Employment

(percent

change)9 

Average

Annual

Interest

Rate

(percent)10 

Real

GDP

(percent

change)8 

CPI

(percent

change) Year 7 

2018 1.59 3.82 2.23 2.7 1.1 2.7

2020 1.95 4.55 2.60 2.6 0.8 3.9

2030 1.28 3.88 2.60 2.1 0.5 5.3

2040 1.22 3.82 2.60 2.1 0.5 5.3

2050 1.23 3.83 2.60 2.1 0.5 5.3

2060 1.22 3.82 2.60 2.1 0.4 5.3

2070 1.15 3.75 2.60 2.1 0.4 5.3

2080 1.13 3.73 2.60 2.1 0.5 5.3

2090 1.15 3.75 2.60 2.1 0.4 5.3

1

The total fertility rate for any year is the average number of children that would be born to a woman in her lifetime if she were to experience, at each age of 

her life, the birth rate observed in, or assumed for, the selected year, and if she were to survive the entire childbearing period. 2

The age-sex-adjusted death rate is based on the enumerated total population as of April 1, 2010, if that population were to experience the death rates by age 

and sex observed in, or assumed for, the selected year. It is a summary measure and not a basic assumption; it summarizes the basic assumptions from 

which it is derived.

3

Net annual immigration is the number of persons who enter during the year (both as lawful permanent residents and otherwise) minus the number of persons 

who leave during the year. It is a summary measure and not a basic assumption; it summarizes the effects of the basic assumptions from which it is derived. 4

The period life expectancy at birth for a given year is the average number of years expected prior to death for a person born on January 1 in that year, using 

the mortality rates for that year over the course of his or her remaining life. It is a summary measure and not a basic assumption; it summarizes the effects of 

the basic assumptions from which it is derived.

5

The real-wage differential is the annual percentage change in the average annual wage in covered employment less the annual percentage change in the 

CPI for Urban Wage Earners and Clerical Workers (CPI-W). Values are rounded after all computations. 6

The average annual wage in covered employment is the total amount of wages and salaries for all employment covered by the OASDI program in a year, 

divided by the number of employees with any such earnings during the year. It is a summary measure and not a basic assumption; it summarizes the basic 

assumptions from which it is derived.

7

The CPI is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

8

The real GDP is the value of total output of goods and services in 2009 dollars. It is a summary measure and not a basic assumption; it summarizes the 

effects of the basic assumptions from which it is derived. 

9

Total employment is total U.S. military and civilian employment. It is a summary measure and not a basic assumption; it summarizes the basic 

assumptions from which it is derived. 10The average annual interest rate is the average of the nominal interest rates, which compound semiannually, for special public-debt obligations issuable 

to the OASI and DI Trust Funds in each of the 12 months of the year. It is a summary measure and not a basic assumption; it summarizes the basic 

assumptions from which it is derived.
141 NOTES TO THE FINANCIAL STATEMENTS

Table 1B

Medicare – Demographic and Economic Assumptions

Demographic Assumptions

Age-Sex

Adjusted

Death

Rate

(per 100,000)2 

Net Annual

Immigration

(persons per 

year)3 

Total

Fertility

Rate1 Year

2018 1.81 776.4 1,678,000

2020 1.84 762.4 1,498,000

2030 2.00 697.7 1,321,000

2040 2.00 641.1 1,272,000

2050 2.00 591.5 1,247,000

2060 2.00 547.9 1,233,000

2070 2.00 509.4 1,225,000

2080 2.00 475.2 1,221,000

2090 2.00 444.7 1,218,000

Economic Assumptions

Average

Annual Wage

In Covered

Employment

(percent

change) 5

Per Beneficiary Cost8

Real

Wage

Differential

(percent 

change)4 

(percent change)

Real

GDP

(percent

change)7 

Real

Interest

Rate

(percent)9 

CPI

(percent

change)6

SMI

Year HI Part B Part D

2018 1.59 3.82 2.23 2.7 1.4 5.3 0.5 0.1 

2020 1.95 4.55 2.60 2.6 3.3 4.7 6.0 0.8 

2030 1.28 3.88 2.60 2.1 4.4 5.3 5.3 2.7 

2040 1.22 3.82 2.60 2.1 4.6 4.2 4.7 2.7 

2050 1.23 3.83 2.60 2.1 3.8 3.8 4.7 2.7 

2060 1.22 3.82 2.60 2.1 3.6 3.7 4.5 2.7 

2070 1.15 3.75 2.60 2.1 3.8 3.6 4.4 2.7 

2080 1.13 3.73 2.60 2.1 3.9 3.7 4.4 2.7 

2090 1.15 3.75 2.60 2.1 3.4 3.5 4.3 2.7 

1

Average number of children per woman.

2

The age-sex-adjusted death rate per 100,000 that would occur in the enumerated population as of April 1, 2010, if that population were to experience the 

death rates by age and sex observed in, or assumed for, the selected year. 

3

Includes legal immigration, net of emigration, as well as other, non-legal, immigration.

4

Difference between percentage increases in wages and the CPI.

5

Average annual wage in covered employment.

6

Consumer price index represents a measure of the average change in prices over time in a fixed group of goods and services.

7

Total dollar value of all goods and services produced in the United States, adjusted to remove the impact of assumed inflation growth.

8

These increases reflect the overall impact of more detailed assumptions that are made for each of the different types of service provided by the Medicare 

program (for example, hospital care, physician services, and pharmaceutical costs). These assumptions include changes in the payment rates, utilization, and 

intensity of each type of service.

9

Average rate of interest earned on new trust fund securities, above and beyond rate of inflation.
NOTES TO THE FINANCIAL STATEMENTS 142

Railroad Retirement

The Railroad Retirement and Survivor Benefit program pays full retirement annuities at age 60 to railroad workers with

30 years of service. The program pays disability annuities based on total or occupational disability. It also pays annuities to

spouses and divorced spouses of retired workers and to widow(er)s, surviving divorced spouses, remarried widow(er)s,

children, and parents of deceased railroad workers. Medicare covers qualified railroad retirement beneficiaries in the same

way as it does Social Security beneficiaries.

The RRB and the SSA share jurisdiction over the payment of retirement and survivor benefits. The RRB has

jurisdiction over the payment of retirement benefits if the employee has at least 10 years of railroad service, or five years if

performed after 1995. For survivor benefits, RRB requires that the employee’s last regular employment before retirement or

death be in the railroad industry. If a railroad employee or his or her survivors do not qualify for railroad retirement benefits,

the RRB transfers the employee’s railroad retirement credits to SSA, where they are treated as social security credits.

Payroll taxes paid by railroad employers and their employees are a primary source of funding for the Railroad

Retirement and Survivor Benefit Program. By law, railroad retirement taxes are coordinated with Social Security taxes.

Employees and employers pay Tier I taxes at the same rate as Social Security taxes and Tier II taxes to finance railroad

retirement benefit payments that are higher than Social Security levels.

Revenues in excess of benefit payments are invested to provide additional trust fund income. Legislation enacted in

2001 allowed for Railroad Retirement Account funds transferred to the NRRIT to be invested in non-governmental assets, as

well as in governmental securities. Funds transferred from the Social Security Equivalent Benefit (SSEB) Account to the

NRRIT are allowed to be invested only in governmental securities. Under the financial interchange provisions, the Railroad

Retirement program’s SSEB Account and the trust funds interchange amounts on an annual basis so that each trust fund is in

the same position it would have been had railroad retirement always been covered under Social Security.

Since its inception, NRRIT has received $21.3 billion from RRB (including $19.2 billion in fiscal year 2003, pursuant

to the Railroad Retirement and Survivors’ Improvement Act of 2001) and returned $22.9 billion. During fiscal year 2018, the

NRRIT made net transfers of $1.8 billion to the RRB to pay retirement benefits. Administrative expenses of the trust are paid

out of trust assets. The balance as of September 30, 2018, and 2017, of non-federal securities and investments of the NRRIT

are disclosed in Note 7—Debt and Equity Securities.

Another major source of income to the Railroad Retirement and Survivor Benefit program consists of financial

transactions with the Social Security and Medicare Trust Funds. The RRB, SSA, and CMS are parties to a financing

arrangement, the “financial interchange”, which is intended to put the OASDI and Medicare HI Trust Funds in the same

positions they would have been had railroad employment been covered under the Social Security and FICAs.

Other sources of program income include revenue resulting from federal income taxes on railroad retirement benefits, and

appropriations provided after 1974 as part of a phase out of certain vested dual benefits. From a governmentwide perspective,

these future financial interchanges and transactions are intragovernmental transfers and are eliminated in consolidation.

The estimated future revenues and expenditures reflected in the SOSI are based on various economic, employment, and

other actuarial assumptions, and assume that the Railroad Retirement program will continue as presently constructed. The

calculations assume that all future transfers required by current law under the financial interchange will be made. For further

details on actuarial assumptions related to the Railroad Retirement program and how these assumptions affect amounts

presented on the SOSI and SCSIA, consult the Technical Supplement to the 27th Actuarial Valuation of the Assets and

Liabilities Under the Railroad Retirement Acts as of December 31, 2016 and RRB’s financial statements.

Black Lung–Disability Benefit Program

The Black Lung Disability Benefit Program provides for compensation, medical, and survivor benefits for eligible coal 

miners who are totally disabled due to pneumoconiosis (black lung disease) arising out of their coal mine employment, and 

the BLDTF provides benefit payments when no responsible mine operator (RMO) can be assigned the liability or when the 

liability is adjudicated to the BLDTF, which may occur as a result of, among other things, bankruptcy of the RMO. DOL 

operates the Black Lung Disability Benefit Program. 

Black lung disability benefit payments are funded by excise taxes from coal mine operators based on the domestic sale 

of coal, as are the fund’s administrative costs. These taxes are collected by the Internal Revenue Service (IRS) and transferred 

to the BLDTF, which was established under the authority of the Black Lung Benefits Revenue Act, and administered by the 

Treasury. 

P.L. 110-343, Division B-Energy Improvement and Extension Act of 2008, enacted on October 3, 2008, among other 

things, restructured the BLDTF debt by refinancing the outstanding high interest rate repayable advances with low interest 

rate discounted debt instruments similar in form to zero-coupon bonds, plus a one-time appropriation. This Act also allowed 

that any subsequent debt issued by the BLDTF may be used to make benefit payments, other authorized expenditures, or to 

repay debt and interest from the initial refinancing.
143 NOTES TO THE FINANCIAL STATEMENTS

The significant assumptions used in the projections for the SOSI are the coal excise tax revenue estimates, the tax rate 

structure, number of beneficiaries, life expectancy, federal civilian pay raises, medical cost inflation, and interest rates used to 

discount future cash flows. These assumptions affect the amounts reported on the SOSI and the SCSIA. The program’s 

valuation date is September 30 for each year of information presented in the SOSI and the SCSIA. Refer to DOL’s financial 

statements for further details on significant assumptions related to the Black Lung Disability Benefit Program, and how these 

assumptions affect amounts presented on the SOSI and SCSIA.

Statement of Changes in Social Insurance Amounts

The SCSIA reconciles the change (between the current valuation and the prior valuation) in the present value of 

estimated future revenue less estimated future expenditures for current and future participants (the open group measure) over 

the next 75 years (except Black Lung which has a rolling 25-year projection period through September 30, 2043). The 

reconciliation identifies several components of the changes that are significant and provides reasons for the changes. The 

following disclosures relate to the SCSIA including the reasons for the components of the changes in the open group measure 

during the reporting period from the end of the previous reporting period for the government’s social insurance programs.

Social Security

The SCSIA shows two reconciliations for Social Security: (1) changes from the period beginning on January 1, 2017, to 

the period beginning on January 1, 2018, and (2) changes from the period beginning on January 1, 2016, to the period 

beginning on January 1, 2017. All estimates relating to the Social Security Program in the SCSIA represent values that are 

incremental to the prior change. As an example, the present values shown for economic data, assumptions, and methods 

represent the additional effect of these new data, assumptions, and methods after considering the effects from demography 

and the change in the valuation period. In general, an increase in the present value of net cash flows represents a positive 

change (improving financing), while a decrease in the present value of net cash flows represents a negative change 

(worsening financing).

Assumptions Used for the Components of the Changes for the Social Security Program

The present values included in the SCSIA are for the current and prior years and are based on various economic as well 

as demographic assumptions used for the intermediate assumptions in the Social Security Trustees Reports for these years. 

Table 1A summarizes these assumptions for the current year.

From the period beginning on January 1, 2017 to the period beginning on January 1, 2018

Present values as of January 1, 2017 are calculated using interest rates from the intermediate assumptions of the 2017 

Social Security Trustees Report. All other present values in this part of the SCSIA are calculated as a present value as of 

January 1, 2018. Estimates of the present value of changes in social insurance amounts due to changing the valuation period 

and changing demographic data, assumptions, and methods are presented using the interest rates under the intermediate 

assumptions of the 2017 Social Security Trustees Report. Because interest rates are an economic estimate and all estimates in

the table are incremental to the prior change, all other present values in this part of the SCSIA are calculated using the interest 

rates under the intermediate assumptions of the 2018 Social Security Trustees Report.

From the period beginning on January 1, 2016 to the period beginning on January 1, 2017

Present values as of January 1, 2016 are calculated using interest rates from the intermediate assumptions of the 2016 

Social Security Trustees Report. All other present values in this part of the SCSIA are calculated as a present value as of 

January 1, 2017. Estimates of the present value of changes in social insurance amounts due to changing the valuation period 

and changing demographic data, assumptions, and methods are presented using the interest rates under the intermediate 

assumptions of the 2016 Social Security Trustees Report. Because interest rates are an economic estimate and all estimates in

the table are incremental to the prior change, all other present values in this part of the SCSIA are calculated using the interest 

rates under the intermediate assumptions of the 2017 Social Security Trustees Report.
NOTES TO THE FINANCIAL STATEMENTS 144

Changes in Valuation Period

From the period beginning on January 1, 2017 to the period beginning on January 1, 2018

The effect on the 75-year present values of changing the valuation period from the prior valuation period (2017-2091) to 

the current valuation period (2018-2092) is measured by using the assumptions for the prior valuation and extending them to 

cover the current valuation. Changing the valuation period removes a small negative net cash flow for 2017, replaces it with a 

much larger negative net cash flow for 2092, and measures the present values as of January 1, 2018, one year later. Thus, the

present value of estimated future net cash flows (excluding the combined OASI and DI Trust Fund asset reserves at the start 

of the period) decreased (became more negative) when the 75-year valuation period changed from 2017-2091 to 2018-2092. 

In addition, the effect on the level of asset reserves in the combined OASI and DI Trust Funds of changing the valuation 

period is measured by assuming all values projected in the prior valuation for the year 2017 are realized. The change in 

valuation period increased the starting level of asset reserves in the combined OASI and DI Trust Funds. As a result, the 

present value of the estimated future net cash flows decreased by $0.6 trillion.

From the period beginning on January 1, 2016 to the period beginning on January 1, 2017

The effect on the 75-year present values of changing the valuation period from the prior valuation period (2016-2090) to 

the current valuation period (2017-2091) is measured by using the assumptions for the prior valuation and extending them to 

cover the current valuation. Changing the valuation period removes a small negative net cash flow for 2016, replaces it with a 

much larger negative net cash flow for 2091, and measures the present values as of January 1, 2017, one year later. Thus, the

present value of estimated future net cash flows (excluding the combined OASI and DI Trust Fund asset reserves at the start 

of the period) decreased (became more negative) when the 75-year valuation period changed from 2016-2090 to 2017-2091. 

In addition, the effect on the level of asset reserves in the combined OASI and DI Trust Funds of changing the valuation 

period is measured by assuming all values projected in the prior valuation for the year 2016 are realized. The change in 

valuation period increased the starting level of asset reserves in the combined OASI and DI Trust Funds. As a result, the 

present value of the estimated net cash flows decreased by $0.6 trillion.

Changes in Demographic Data, Assumptions, and Methods

From the period beginning on January 1, 2017 to the period beginning on January 1, 2018

The ultimate demographic assumptions for the current valuation (beginning on January 1, 2018), with the exception of a 

small decrease of 10,000 LPR immigrants per annum in the future, are the same as those for the prior valuation. However, the 

starting demographic values and the way these values transition to the ultimate assumptions were changed.

• Final birth rate data for 2016 indicated slightly lower birth rates than were assumed in the prior valuation.

• Recent fertility data suggests that the short-term increase in the total fertility rate used in the prior valuation to 

account for an assumed deferral in childbearing (resulting from the recent economic downturn) was no longer 

warranted. 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 for this period.

• Incorporating 2015 mortality data obtained from the National Center for Health Statistics (NCHS) for ages 

under 65 and preliminary 2015 mortality data from Medicare experience for ages 65 and older resulted in higher 

death rates for all future years than were projected in the prior valuation.

• More recent LPR and other-than-LPR immigration data and historical population data were included.

Inclusion of the recent birth rate data, eliminating the short-term increase in fertility, and immigration data decreased the 

present value of estimated future net cash flows, while the inclusion of the recent mortality data and historical population data 

increased the present value of estimated future net cash flows.

There was one notable change in demographic methodology:

• Improved the method for projecting mortality rates by marital status by utilizing recent data from NCHS and the 

American Community Survey.

Inclusion of this new method increased the present value of estimated future net cash flows. Overall, changes to these 

assumptions caused the present value of the estimated future net cash flows to increase by $0.1 trillion.

From the period beginning on January 1, 2016 to the period beginning on January 1, 2017

The ultimate demographic assumptions for the current valuation (beginning on January 1, 2017) are the same as those 

for the prior valuation. However, the starting demographic values and the way these values transition to the ultimate 

assumptions were changed.

• Final birth rate data for 2015 indicated slightly lower birth rates than were assumed in the prior valuation. 
145 NOTES TO THE FINANCIAL STATEMENTS

• Incorporating 2014 mortality data obtained from NCHS at ages under 65 and preliminary 2014 mortality data from 

Medicare experience at ages 65 and older resulted in higher death rates for all future years than were projected in the 

prior valuation.

• More recent legal and other-than-legal immigration data and historical population data were included.

Inclusion of the recent birth rate data and immigration data decreased the present value of estimated future net cash 

flows, while the inclusion of the recent mortality data increased the present value of estimated future net cash flows.

There were no notable changes in demographic methodology. Overall, changes to these assumptions caused the present 

value of the estimated net cash flows to decrease by $0.1 trillion.

Changes in Economic Data, Assumptions, and Methods

From the period beginning on January 1, 2017 to the period beginning on January 1, 2018

The ultimate economic assumptions for the current valuation (beginning on January 1, 2018), are the same as those for 

the prior valuation. However, the starting economic values and the way these values transition to the ultimate assumptions 

were changed.

• The estimated level of potential GDP was reduced by about 1 percent in 2017 and throughout the projection period, 

primarily due to the slow growth in labor productivity for 2010 through 2017 and low unemployment rates in 2017. 

This lower estimated level of potential GDP means that cumulative growth in actual GDP is 1 percent less over the 

remainder of the projected recovery than was assumed in the prior valuation.

• Near-term interest rates were decreased, reflecting a more gradual path for the rise to the ultimate real interest rate 

than was assumed in the prior valuation.

• New data from the Bureau of Economic Analysis (BEA) indicated lower-than-expected ratios of labor compensation 

to GDP for 2016 and 2017, while new data from the IRS indicated lower-than-expected ratios of taxable payroll to 

GDP for 2016 and 2017. This new data led to assumed extended recoveries in these ratios to the unchanged ultimate 

ratios.

The changes in near-term interest rates and GDP decreased the present value of estimated future net cash flows. The 

new data from BEA and IRS and the resulting extended recovery in the ratios of labor compensation to GDP and taxable 

payroll to GDP increased the present value of estimated future net cash flows.

There was one notable change in economic methodology:

• Improved the method for projecting educational attainment among women in age groups 45-49 and 50-54 in the 

labor force participation model.

Inclusion of this new method increased the present value of estimated future net cash flows. Overall, changes to these 

assumptions caused the present value of the estimated future net cash flows to decrease by $0.5 trillion.

From the period beginning on January 1, 2016 to the period beginning on January 1, 2017

For the current valuation (beginning on January 1, 2017), there was one change to the ultimate economic assumptions.

• The ultimate average real-wage differential is assumed to be 1.20 percent in the current valuation, which is close to a 

0.01 percent decrease relative to the previous valuation (even though both ultimate average real-wage differentials 

are 1.20 when rounded to two decimal places).

In addition to this change in ultimate assumption, the assumed path of the real-wage differential in the first 10 years of 

the projection period was also lower than in the previous valuation. This led to 0.05 percent lower annual growth in the 

average annual wage in covered employment in the first 10 years. The lower long-term and near-term real-wage differential 

assumptions are based on new projections by the CMS of faster growth in employer sponsored group health insurance 

premiums. Because these premiums are not subject to the payroll tax, faster growth in these premiums means that a smaller 

share of employee compensation will be in the form of wages that are subject to the payroll tax. The lower real-wage 

differential decreased the present value of estimated future net cash flows.

Otherwise, the ultimate economic assumptions for the current valuation are the same as those for the prior valuation. 

However, the starting economic values and the way these values transition to the ultimate assumptions were changed. The 

most notable change was updating the near-term interest rates. Also notable was an assumed weaker recovery from the recent 

recession than previously expected, which led to a reduction in the ultimate level of actual and potential GDP of about 1.0 

percent for all years after the short-range period. The changes in near-term interest rates and GDP decreased the present value 

of estimated future net cash flows. Other, smaller changes in starting values and near-term growth assumptions combined to 

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

of the estimated future net cash flows to decrease by $0.6 trillion.
NOTES TO THE FINANCIAL STATEMENTS 146

Changes in Law or Policy

From the period beginning on January 1, 2017 to the period beginning on January 1, 2018

The monetary effect of the changes in law or policy on the present value of estimated future net cash flows of the 

OASDI program was not significant at the consolidated level. Please refer to SSA’s financial statements for further 

information related to the impact of the changes in law or policy on the present value of estimated future net cash flows of the 

OASDI program.

From the period beginning on January 1, 2016 to the period beginning on January 1, 2017

The monetary effect of the changes in law or policy on the present value of estimated future net cash flows of the 

OASDI program was not significant at the consolidated level. Please refer to SSA’s financial statements for further 

information related to the impact of the changes in law or policy on the present value of estimated future net cash flows of the 

OASDI program.

Changes in Methodology and Programmatic Data

From the period beginning on January 1, 2017 to the period beginning on January 1, 2018

Several methodological improvements and updates of program-specific data are included in the current valuation 

(beginning on January 1, 2018). The most significant are identified below.

• The prior valuation assumed 99.0 percent of fully insured women (excluding those who are receiving a disability or 

widow benefit) were in receipt of a retired-worker benefit at age 70. The current valuation increases this percentage 

to 99.5 which is equivalent to the assumption for men.

• For the current valuation, a 10 percent sample of newly-entitled worker beneficiaries in 2015 was used to project 

average benefit levels of retired-worker and disabled-worker beneficiaries. This sample was updated from the 2013 

sample used for the prior valuation. In addition, the method used to estimate earnings histories for retired-worker 

beneficiaries becoming newly entitled in each year after 2017 has been expanded to better match targeted average 

taxable earnings levels for each of nine birth cohorts (those becoming entitled at ages 62 through 70 in a year).

• Recent data and estimates provided by the Office of Tax Analysis (OTA) at the Treasury were incorporated, which 

indicate higher ultimate levels of revenue from taxation of OASDI benefits than assumed in the prior valuation. 

These higher levels are primarily due to changes OTA made in their modeling, resulting in a larger share of benefits 

being subject to income tax.

• The current valuation incorporates both a better data source for determining the total number of months of 

retroactive benefits for newly awarded disabled-worker beneficiaries and a new adjustment factor which better 

aligns projected months of disabled-worker retroactive benefit entitlement with observed historical experience.

Increasing the percentage of fully insured women who are in receipt of a retired-worker benefit at age 70 decreased the 

present value of estimated cash flows. Updating the sample year for average benefit level calculations, increasing the ultimate 

taxation of benefits ratios, and the changes to estimates of retroactive benefit payments increased the present value of 

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

cash flows to increase by $0.2 trillion.

From the period beginning on January 1, 2016 to the period beginning on January 1, 2017

The monetary effect of the changes in methodology and programmatic data on the present value of estimated future net 

cash flows was not significant at the consolidated level. Please refer to SSA’s financial statements for further information 

related to the impact of changes in methodology and programmatic data on the present value of estimated future net cash 

flows of the OASDI program.

Medicare

The SCSIA shows two reconciliations for Medicare: (1) changes from the period beginning on January 1, 2017, to the 

period beginning on January 1, 2018, and (2) changes from the period beginning on January 1, 2016, to the period beginning 

on January 1, 2017. All estimates relating to the Medicare program in the SCSIA represent values that are incremental to the 

prior change. As an example, the present values shown for demographic data, assumptions, and methods represent the 

additional effect that these assumptions have, once the effects from the change in the valuation period and projection base 

have been considered. In general, an increase in the present value of net cash flows represents a positive change (improving 

financing), while a decrease in the present value of net cash flows represents a negative change (worsening financing).
147 NOTES TO THE FINANCIAL STATEMENTS

Assumptions Used for the Components of the Changes for the Medicare Program

The present values included in the SCSIA are for the current and prior years and are based on various economic and 

demographic assumptions used for the intermediate assumptions in the Medicare Trustees Reports for these years. Table 1B 

summarizes these assumptions for the current year.

From the period beginning on January 1, 2017 to the period beginning on January 1, 2018

Present values as of January 1, 2017 are calculated using interest rates from the intermediate assumptions of the 2017 

Medicare Trustees Report. All other present values in this part of the SCSIA are calculated as a present value as of January 1, 

2018. Estimates of the present value of changes in social insurance amounts due to changing the valuation period, projection 

base, demographic assumptions, and law are presented using the interest rates under the intermediate assumptions of the 2017 

Medicare Trustees Report. Since interest rates are an economic estimate and all estimates in the table are incremental to the

prior change, the estimates of the present values of changes in economic and health care assumptions are calculated using the 

interest rates under the intermediate assumptions of the 2018 Medicare Trustees Report.

From the period beginning on January 1, 2016 to the period beginning on January 1, 2017

Present values as of January 1, 2016 are calculated using interest rates from the intermediate assumptions of the 2016 

Medicare Trustees Report. All other present values in this part of the SCSIA are calculated as a present value as of January 1, 

2017. Estimates of the present value of changes in social insurance amounts due to changing the valuation period, projection 

base, demographic assumptions, and law are presented using the interest rates under the intermediate assumptions of the 2016 

Medicare Trustees Report. Since interest rates are an economic estimate and all estimates in the table are incremental to the 

prior change, the estimates of the present values of changes in economic and health care assumptions are calculated using the

interest rates under the intermediate assumptions of the 2017 Medicare Trustees Report.

Changes in Valuation Period

From the period beginning on January 1, 2017 to the period beginning on January 1, 2018

The effect on the 75-year present values of changing the valuation period from the prior valuation period (2017-2091) to 

the current valuation period (2018-2092) is measured by using the assumptions for the prior valuation period and extending 

them, in the absence of any other changes, to cover the current valuation period. Changing the valuation period removes a 

small negative net cash flow for 2017, replaces it with a much larger negative net cash flow for 2092, and measures the 

present values as of January 1, 2018, one year later. Thus, the present value of estimated future net cash flow (including or 

excluding the combined Medicare Trust Fund assets at the start of the period) decreased (became more negative) when the 

75-year valuation period changed from 2017-2091 to 2018-2092. In addition, the effect on the level of assets in the combined 

Medicare Trust Funds of changing the valuation period is measured by assuming all values projected in the prior valuation 

for the year 2017 are realized. The change in valuation period resulted in a very slight increase in the starting level of assets 

in the combined Medicare Trust Funds. As a result, the present value of the estimated future net cash flows decreased by $1.3

trillion.

From the period beginning on January 1, 2016 to the period beginning on January 1, 2017

The effect on the 75-year present values of changing the valuation period from the prior valuation period (2016-2090) to 

the current valuation period (2017-2091) is measured by using the assumptions for the prior valuation period and extending 

them, in the absence of any other changes, to cover the current valuation period. Changing the valuation period removes a 

small negative net cash flow for 2016, replaces it with a much larger negative net cash flow for 2091, and measures the 

present values as of January 1, 2017, one year later. Thus, the present value of estimated future net cash flow (including or 

excluding the combined Medicare Trust Fund assets at the start of the period) decreased (became more negative) when the 

75-year valuation period changed from 2016-2090 to 2017-2091. In addition, the effect on the level of assets in the combined 

Medicare Trust Funds of changing the valuation period is measured by assuming all values projected in the prior valuation 

for the year 2016 are realized. The change in valuation period increased the starting level of assets in the combined Medicare 

Trust Funds. As a result, the present value of the estimated net cash flows decreased by $1.4 trillion.

Changes in the Demographic Data, Assumptions, and Methods

From the period beginning on January 1, 2017 to the period beginning on January 1, 2018

The demographic assumptions used in the Medicare projections are the same as those used for OASDI and are prepared 

by the Office of the Chief Actuary at SSA.
NOTES TO THE FINANCIAL STATEMENTS 148

The ultimate demographic assumptions for the current valuation (beginning on January 1, 2018), with the exception of a 

small decrease of 10,000 LPR immigrants per annum in the future, are the same as those for the prior valuation. However, the 

starting demographic values and the way these values transition to the ultimate assumptions were changed.

• Final birth rate data for 2016 indicated slightly lower birth rates than were assumed in the prior valuation.

• Recent fertility data suggests that the short-term increase in the total fertility rate used in the prior valuation to 

account for an assumed deferral in childbearing (resulting from the recent economic downturn) was no longer 

warranted. 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 for this period.

• Incorporating 2015 mortality data obtained from the NCHS at ages under 65 and preliminary 2015 mortality data 

from Medicare experience at ages 65 and older resulted in higher death rates for all future years than were projected 

in the prior valuation.

• More recent LPR and other-than-LPR immigration data and historical population data were included.

There was one notable change in demographic methodology:

• Improved the method for projecting mortality rates by marital status by utilizing recent data from NCHS and the 

American Community Survey.

These changes lowered overall Medicare enrollment for the current valuation period and resulted in an increase in the 

estimated future net cash flow. The present value of estimated income and expenditures are both lower for Part A and Part B 

but higher for Part D. Overall, changes to these assumptions caused the present value of the estimated future net cash flows to 

increase by $0.6 trillion.

From the period beginning on January 1, 2016 to the period beginning on January 1, 2017 

The demographic assumptions used in the Medicare projections are the same as those used for the OASDI and are 

prepared by the Office of the Chief Actuary at SSA.

The ultimate demographic assumptions for the current valuation (beginning on January 1, 2017 are the same as those for 

the prior valuation. However, the starting demographic values and the way these values transition to the ultimate assumptions

were changed.

• Final birth rate data for 2015 indicated slightly lower birth rates than were assumed in the prior valuation. 

• Incorporating 2014 mortality data obtained from the NCHS at ages under 65 and preliminary 2014 mortality data 

from Medicare experience at ages 65 and older resulted in higher death rates for all future years than were projected 

in the prior valuation.

• More recent legal and other-than-legal immigration data and historical population data were included.

There were no consequential changes in demographic methodology.

These changes slightly lowered overall Medicare enrollment for the current valuation period and resulted in a decrease 

in the estimated future net cash flow. The present value of estimated expenditures is lower for Part A but slightly higher for 

Parts B and D; and the present value of estimated income is also higher for Parts B and D but lower for Part A. Overall, 

changes to these assumptions caused the present value of the estimated future net cash flows to decrease by $0.1 trillion.

Changes in Economic and Other Health Care Assumptions

From the period beginning on January 1, 2017 to the period beginning on January 1, 2018

The economic assumptions used in the Medicare projections are the same as those used for the OASDI and are prepared 

by the Office of the Chief Actuary at SSA.

The ultimate economic assumptions for the current valuation (beginning on January 1, 2018) are the same as those for 

the prior valuation. However, the starting economic values and the way these values transition to the ultimate assumptions 

were changed.

• The estimated level of potential GDP was reduced by about 1 percent in 2017 and throughout the projection period, 

primarily due to the slow growth in labor productivity for 2010 through 2017 and low unemployment rates in 2017. 

This lower estimated level of potential GDP means that cumulative growth in actual GDP is 1 percent less over the 

remainder of the projected recovery than was assumed in the prior valuation. 

• Near-term interest rates were decreased, reflecting a more gradual path for the rise to the ultimate real interest rate 

than was assumed in the prior valuation.

• New data from the BEA indicated lower-than-expected ratios of labor compensation to GDP for 2016 and 2017, 

while new data from the IRS indicated lower-than-expected ratios of taxable payroll to GDP for 2016 and 2017.

• This new data led to assumed extended recoveries in these ratios to the unchanged ultimate ratios.

There was one notable change in economic methodology:
149 NOTES TO THE FINANCIAL STATEMENTS

• Improved the method for projecting educational attainment among women in age groups 45-49 and 50-54 in the 

labor force participation model.

The health care assumptions are specific to the Medicare projections. The following health care assumptions were 

changed in the current valuation.

• Utilization rate assumptions for inpatient hospital services were decreased.

• Utilization rate and case mix for skilled nursing facilities services were decreased. Payment rates to private health 

plans are higher than projected in last year’s report primarily due to higher risk scores and increased coding by 

plans. 

• Higher projected drug manufacturer rebates.

The net impact of these changes resulted in a decrease in the estimated future net cash flow for total Medicare. For Part 

A, these changes resulted in an overall decrease in the estimated future net cash flow. For Part B, these changes increased the 

present value of estimated future expenditures (and also income). For Part D, these changes decreased the present value of 

estimated expenditures (and also income). Overall, the net impact of these changes caused the present value of estimated 

future net cash flows to decrease by $1.5 trillion.

From the period beginning on January 1, 2016 to the period beginning on January 1, 2017

The economic assumptions used in the Medicare projections are the same as those used for the OASDI and are prepared 

by the Office of the Chief Actuary at SSA.

For the current valuation (beginning on January 1, 2017), there was one change to the ultimate economic assumptions.

• The ultimate average real-wage differential is assumed to be 1.20 percent in the current valuation period, which is 

close to a 0.01 percent decrease relative to the previous valuation (even though both ultimate average real-wage 

differentials are 1.20 when rounded to two decimal places).

In addition to this change in assumption, the assumed real-wage differential for the first ten years of the projection 

period averaged 0.05 percent lower than in the previous valuation. The lower long-term and near-term real-wage differential 

assumptions are based on new projections of faster growth in employer sponsored group health insurance premiums. Because 

these premiums are not subject to the payroll tax, faster growth in these premiums means that a smaller share of employee 

compensation will be in the form of wages that are subject to the payroll tax.

Otherwise, the ultimate economic assumptions for the current valuation are the same as those for the prior valuation. 

However, the starting economic values and the way these values transition to the ultimate assumptions were changed. Most 

significantly, an assumed weaker recovery from the recent recession than previously expected led to a reduction in the 

ultimate level of actual and potential GDP of about 1.0 percent for all years after the short-range period.

The health care assumptions are specific to the Medicare projections. The following health care assumptions were 

changed in the current valuation.

• Utilization rate assumptions for inpatient hospital and skilled nursing facilities services were decreased.

• The number of beneficiaries enrolled in Medicare Advantage plans and their relative costs are slightly different from 

last year’s assumptions.

• Lower productivity increases through 2025, resulting in higher provider payment updates.

• Higher projected drug rebates.

• Change in projection methodology of drug spending for Part B patients with end-stage renal disease.

The net impact of these changes resulted in an increase in the estimated future net cash flow for total Medicare. For Part 

A, these changes resulted in an increase to the present value of estimated future expenditures and income, with an overall 

increase in the estimated future net cash flow. For Part B, these changes increased the present value of estimated future 

expenditures (and also income). For Part D, these changes decreased the present value of estimated expenditures (and also 

income). Overall, the net impact of these changes caused the present value of the estimated future net cash flows to decrease

by $0.3 trillion. 

Changes in Law

From the period beginning on January 1, 2017 to the period beginning on January 1, 2018

Most of the provisions enacted as part of Medicare legislation since the prior valuation date had little or no impact on 

the program. The following provisions did have a financial impact on the present value of the 75-year estimated future 

income, expenditures, and net cash flow.

• The Disaster Tax Relief and Airport and Airway Extension Act of 2017 (P.L. 115-63, enacted on September 29, 

2017) included one provision that affects the HI and SMI Part B programs.
NOTES TO THE FINANCIAL STATEMENTS 150

• An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for 

Fiscal Year 2018 (P.L. 115-97, enacted on December 22, 2017, and also referred to as the Tax Cuts and Jobs Act of 

2017) included three provisions that affect the HI program.

• An Act Making Further Continuing Appropriations for the Fiscal Year Ending September 30, 2018, and for Other 

Purposes (P.L. 115-120, enacted on January 22, 2018) included one provision that affects the HI and SMI programs.

• The BBA of 2018 (P.L. 115-123, enacted on February 9, 2018) included provisions that affect the HI and SMI 

programs.

Overall, these provisions resulted in a decrease in the estimated future net cash flow for total Medicare. For Part A,

these changes resulted in an increase to the present value of estimated future expenditures and a slight decrease to the present 

value of estimated future income, with an overall net decrease in the estimated future net cash flow. For Part B and Part D,

these changes increased the present value of estimated future expenditures (and also income). Overall, these changes to these 

assumptions caused the present value of the estimated future net cash flows to decrease by $1.0 trillion.

From the period beginning on January 1, 2016 to the period beginning on January 1, 2017

The monetary effect of the changes in law or policy on the present value of estimated future net cash flows of the 

Medicare programs was not significant at the consolidated level. Please refer to HHS’s financial statements for further 

information related to the impact of the changes in law or policy on the present value of estimated future net cash flows of the 

Medicare programs.

Change in Projection Base

From the period beginning on January 1, 2017 to the period beginning on January 1, 2018

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 in 2017 was lower attributable to lowered wages 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 in the estimated future net cash flow. Actual 

experience of the Medicare Trust Funds between January 1, 2017 and January 1, 2018 is incorporated in the current valuation 

and is less than projected in the prior valuation. Overall, the net impact of the Part A, B, and D projection base changes is a 

decrease in the estimated future net cash flows by $0.9 trillion.

From the period beginning on January 1, 2016 to the period beginning on January 1, 2017 

Actual income and expenditures in 2016 were different than what was anticipated when the 2016 Medicare Trustees 

Report projections were prepared. Part A payroll tax income in 2017 was lower attributable to lowered wages, 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 an increase in the estimated future net cash flow. Actual 

experience of the Medicare Trust Funds between January 1, 2016 and January 1, 2017 is incorporated in the current valuation 

and is slightly more than projected in the prior valuation. Overall, the net impact of the Part A, B, and D projection base 

changes is an increase in the estimated future net cash flows by $0.7 trillion.

Other

The present values included in the SCSIA for the Railroad Retirement program are for the current and prior valuation 

and are based on various employment, demographic, and economic assumptions that reflect the RRB’s reasonable estimate of 

expected future financial and actuarial status of the trust funds. For a more detailed description of the primary reasons for the 

changes in the 2018 and 2017 SCSIA, refer to RRB’s financial statements.

The significant assumptions used in the projections of the Black Lung social insurance program, referenced earlier in 

this note, affect the amounts reported on the SCSIA, which presents the net change in the open group measure of the BLDTF 

for the years ended September 30, 2018 and 2017, and provide information about the change. For a more detailed description 

of the primary reasons for the changes in the 2018 and 2017 SCSIA, refer to DOL’s financial statements.
151 NOTES TO THE FINANCIAL STATEMENTS

Note 23. Long-Term Fiscal Projections

The SLTFP are prepared pursuant to SFFAS No. 36, Comprehensive Long-Term Projections for the U.S. Government, 

as amended. The basic financial statement, Note 23, and related unaudited required supplementary information (RSI) provide 

information to aid readers of the Financial Report in assessing whether current policies for federal spending and taxation can 

be sustained and the extent to which the cost of public services received by current taxpayers will be shifted to future 

taxpayers. This assessment requires prospective information about receipts and spending, the resulting debt, and how these 

amounts relate to the size of the economy. A sustainable policy is defined as one where the ratio of federal debt held by the 

public to GDP (the debt-to-GDP ratio) is ultimately stable or declining. The Financial Report does not address the 

sustainability of State and local government fiscal policy.

The projections and analysis presented here are extrapolations based on an array of assumptions described in detail 

below. A fundamental assumption is that current federal policy will not change. This assumption is made so as to inform the 

question of whether current fiscal policy is sustainable and, if it is not sustainable, the magnitude of needed reforms to make 

fiscal policy sustainable. The projections are therefore neither forecasts nor predictions. If policy changes are implemented, 

perhaps in response to projections like those presented here, then actual financial outcomes will be different than those 

projected. The methods and assumptions underlying the projections are subject to continuing refinement.

The projections focus on future cash flows, and do not reflect either the accrual basis or the modified-cash basis of 

accounting. These cash-based projections reflect receipts or spending at the time cash is received or when a payment is made 

by the government. In contrast, accrual-based projections would reflect amounts in the time period in which income is earned 

or when an expense or obligation is incurred. The cash basis accounting underlying the long-term fiscal projections is 

consistent with methods used to prepare the SOSI and the generally cash-based federal budget. 

The basic financial statement, Long-Term Fiscal Projections for the U.S. Government, displays the present value of 75-

year projections for various categories of the federal government’s receipts and non-interest spending.9 The projections for 

fiscal years 2018 and 2017 are expressed in present value dollars and as a percent of the present value of GDP10 as of 

September 30, 2018 and September 30, 2017, respectively. The present value of a future amount, for example $1 billion in 

October 2093, is the amount of money that if invested on September 30, 2018 in an account earning the government 

borrowing rate would have a value of $1 billion in October 2093.11 

The present value of a receipt or spending category over 75 years is the sum of the annual present value amounts. When 

expressing a receipt or spending category over 75 years as a percent of GDP, the present value dollar amount is divided by 

the present value of GDP over 75 years. Measuring receipts and spending as a percent of GDP is a useful indicator of the 

economy’s capacity to sustain federal government programs. 

Fiscal Projections

Receipt categories in the long-term fiscal projections include individual and corporate income taxes, Social Security and 

Medicare payroll taxes, and a residual remaining category of “other receipts.” Non-interest spending categories include 

discretionary spending that is funded through annual appropriations, such as spending for national security; and mandatory 

(entitlement) spending that is generally funded with permanent or multi-year appropriations, such as spending for Social 

Security and Medicare. This year’s projections for Social Security and Medicare are based on the same economic and 

demographic assumptions that underlie the 2018 Social Security and Medicare trustees’ reports and the 2018 SOSI, while 

comparative information presented from last year’s report is based on the 2017 Social Security and Medicare trustees’ reports

and the 2017 SOSI12. Projections for the other categories of receipts and spending are consistent with the economic and 

demographic assumptions in the trustees’ reports. The projections assume the continuance of current policy which, as is 

explained below, can be different than current law in cases where lawmakers have in the past periodically changed the law in 

a consistent way. 

The projections shown in the basic statement are made over a 75-year time frame, consistent with the time frame 

featured in the Social Security and Medicare trustees’ reports. However, these projections are for fiscal years starting on 

 9 For the purposes of this analysis, spending is defined in terms of outlays. In the context of federal budgeting, spending can either refer to budget authority –

the authority to commit the government to make a payment; to obligations – binding agreements that will result in payments, either immediately or in the 

future; or to outlays – actual payments made. 10 GDP is a standard measure of the overall size of the economy and represents the total market value of all final goods and services produced domestically

during a given period of time. The components of GDP are: private sector consumption and investment, government consumption and investment, and net 

exports (exports less imports). Equivalently, GDP is a measure of the gross income generated from domestic production over the same time period. 11 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. 12 Social Security and Medicare Trustees’ Reports can be found at https://www.ssa.gov/OACT/TR/.
NOTES TO THE FINANCIAL STATEMENTS 152

October 1, whereas the trustees’ reports feature calendar-year projections. Using fiscal years allows the projections to start 

from the actual budget results from fiscal years 2018 and 2017.

This year’s estimate of the 75-year present value imbalance of receipts less non-interest spending is 3.3 percent of the 

75-year present value of GDP, compared to 1.2 percent as was projected in last year’s Financial Report.

13 The above table 

reports the effects of various factors on the updated projections.

• The largest factor, increasing the imbalance by 1.1 percent of the 75-year present value of GDP ($15.4 trillion), is 

attributable to actual budget results for fiscal year 2018 and the budgetary estimates published in the 2019 

Midsession Review. This includes lower corporate and individual income tax receipts resulting from the TCJA of 

2017, and higher non-defense discretionary outlays as a result of the increased discretionary spending caps in the 

BBA.

• The second largest factor is the effect of adjustments to the model’s technical assumptions, which increases the 

imbalance by 0.8 percent of the 75-year present value of GDP ($11.5 trillion). As discussed below in the section on 

assumptions used in the projections, corporate income tax receipts are held to their proportion of the budget’s share 

of GDP to reflect enactment of the TCJA of 2017. Discretionary spending is assumed to grow from the 2019 cap 

levels established in the BBA, subject to Joint Select Committee on Deficit Reduction (Joint Committee) 

sequestration enforcement14.

• The third largest factor, increasing the imbalance by 0.3 percent of the 75-year present value of GDP ($3.8 trillion) 

is due to changes in Social Security, Medicare and Medicaid actuarial assumptions15.

• The next largest change in the table – decreasing the imbalance by 0.1 percent of GDP ($1.2 trillion) – is attributable 

to changes in economic and demographic assumptions. Higher near-term wage and GDP projections increased 

individual income tax and social insurance receipts.

The penultimate row in the basic financial statement shows that this year’s estimate of the overall 75-year present value 

of receipts less non-interest spending is -3.3 percent of the 75-year present value of GDP (negative $46.2 trillion, as 

compared to GDP of $1,406.3 trillion). This imbalance can be broken down by funding source. Spending exceeded receipts 

by 1.7 percent of GDP ($24.2 trillion) among programs funded by the government’s general revenues, and there is an 

imbalance of 1.6 percent of GDP ($22.1 trillion16) for the combination of Social Security (OASDI) and Medicare Part A, 

 13 More information on the projections in last year’s Financial Report can be found in Note 23 to the Financial Statements here: 

https://fiscal.treasury.gov/reports-statements/# 14 For further discussion of spending assumptions, see the section “Assumptions Used and Relationship to Other Financial Statements” below. 15 For more information on Social Security, Medicare and Medicaid actuarial estimates, refer to Note 22—Social Insurance. 16 The 75-year present value imbalance for Social Security and Medicare Part A of $22.1 trillion is comprised of several line items from the SLTFP – Social 

Security outlays net of Social Security payroll taxes ($22.0 trillion) and Medicare Part A outlays net of Medicare payroll taxes ($8.8 trillion) – as well as 

subcomponents of these programs not presented separately in the statement. These subcomponents include Social Security and Medicare Part A 

administrative costs that are classified as non-defense discretionary spending ($0.7 trillion) and Social Security and Medicare Part A income other than 

payroll taxes: taxation of benefits (-$4.4 trillion), federal employer share (-$1.3 trillion), and other income (-$3.7 trillion). 
153 NOTES TO THE FINANCIAL STATEMENTS

which under current law are funded with payroll taxes and not in any material respect with general revenues.17, 18 By 

comparison, the fiscal year 2017 projections showed that programs funded by the government’s general revenues had an 

excess of receipts over spending of 0.2 percent of GDP ($3.3 trillion) while the payroll tax-funded programs had an 

imbalance of spending over receipts of 1.5 percent of GDP ($19.6 trillion).

Sustainability and the Fiscal Gap

As discussed further in the unaudited RSI, the projections in this report indicate that current policy is not sustainable. If 

current policy is left unchanged, the projections show the debt-to-GDP ratio will rise about 6 percentage points to a level of 

84 percent by 2022, exceed 100 percent by 2030, and reach 530 percent in 2093. Moreover, if the trends that underlie the 75-

year projections were to continue, the debt-to-GDP ratio would continue to rise beyond the 75-year window.

The fiscal gap measures how much the primary surplus (receipts less non-interest spending) must increase in order for 

fiscal policy to achieve a target debt-to-GDP ratio in a particular future year. In these projections, the fiscal gap is estimated 

over a 75-year period, from 2019 to 2093, and the target debt-to-GDP ratio is equal to the ratio at the beginning of the 

projection period, in this case the debt-to-GDP ratio at the end of fiscal year 2018. 

The 75-year fiscal gap under current policy is estimated at 4.1 percent of GDP, which is 21.9 percent of the 75-year 

present value of projected receipts and 18.6 percent of the 75-year present value of non-interest spending. This estimate of the 

fiscal gap is 2.1 percentage points larger than was estimated in 2017 (2.0 percent of GDP).

The projections show that projected primary deficits average 3.2 percent of GDP over the next 75 years under current 

policy. If policies were put in place that would result in a zero 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. In these projections, closing the fiscal gap requires running a substantially 

positive level of primary surplus, 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 held by the public grows each year by the amount of interest spending, which 

under these assumptions would result in debt growing faster than GDP.

Assumptions Used and Relationship to Other Financial Statements

A fundamental assumption underlying the projections is that current federal policy (defined below) does not change. 

The projections are therefore neither forecasts nor predictions, and do not consider large infrequent events such as natural 

disasters, military engagements, or economic crises. By definition, they do not build in future changes to policy, such as 

recent proposals to repeal the ACA or increase border infrastructure and security. If policy changes are enacted, perhaps in 

response to projections like those presented here, then actual fiscal outcomes will be different than those projected.

Even if policy does not change, actual spending and receipts could differ materially from those projected here. Longrange projections are inherently uncertain and are necessarily based on simplifying assumptions. For example, one key 

simplifying assumption is that interest rates paid on debt held by the public remain unchanged, regardless of the amount of 

debt outstanding. To the contrary, it is likely that future interest rates would increase if the debt-to-GDP ratio rises as shown 

in these projections. To help illustrate this uncertainty, projections that assume higher and lower interest rates are presented in 

the “Alternative Scenarios” discussion in the unaudited RSI section of this Financial Report.

As is true for prior long-term fiscal projections for the Financial Report, the assumptions for GDP, interest rates, and 

other economic and demographic variables underlying this year’s projections are the same assumptions that underlie the most 

recent Social Security and Medicare trustees’ report projections, adjusted for historical revisions that occur annually. The use 

 17 Social Security and Medicare Part A expenditures can exceed payroll tax revenues in any given year to the extent that there are sufficient balances in the 

respective trust funds; these balances derive from past excesses of payroll tax revenues over expenditures and interest earned on those balances and represent 

the amount the General Fund owes the respective trust fund programs. When spending does exceed payroll tax revenues, as has occurred each year since 

2008 for Medicare Part A and 2010 for Social Security, the excess spending is financed first with interest due from the General Fund and secondly with a 

drawdown of the trust fund balance; in either case, the spending is ultimately supported by general revenues or borrowing. Under current law, benefits for 

Social Security and Medicare Part A can be paid only to the extent that there are sufficient balances in the respective trust funds. In order for the long-term 

fiscal projections to reflect the full size of these program’s commitments to pay future benefits, the projections assume that all scheduled benefits will be 

financed with borrowing to the extent necessary after the trust funds are depleted.

18 The fiscal imbalances reported in the long-term fiscal projections are limited to future outlays and receipts. They do not include the initial level of 

publicly-held debt, which was $15.8 trillion in 2018 and $14.7 trillion in 2017, and therefore they do not by themselves answer the question of how large 

fiscal reforms must be to make fiscal policy sustainable, or how those reforms divide between reforms to Social Security and Medicare Part A and to other 

programs. Other things equal, past cash flows (primarily surpluses) for Social Security and Medicare Part A reduced federal debt at the end of 2018 by $3.1 

trillion (the trust fund balances at that time); the contribution of other programs to federal debt at the end of 2018 was therefore $18.9 trillion. Because the 

$22.1 trillion imbalance between outlays and receipts over the next 75 years for Social Security and Medicare Part A does not take account of the Social 

Security and Medicare Part A trust fund balances, it overstates the magnitude of reforms necessary to make Social Security and Medicare Part A solvent 

over 75 years by $3.1 trillion. The $3.1 trillion combined Social Security and Medicare Part A trust fund balance represents a claim on future general 

revenues.
NOTES TO THE FINANCIAL STATEMENTS 154

of discount factors consistent with the Social Security trustees’ rate allows for consistent present value calculations over 75 

years between the SLTFP and the SOSI. 

The following bullets summarize the key assumptions used for the categories of receipts and spending presented in the 

basic financial statement and the disclosures:

• Social Security: Projected Social Security (OASDI) spending excludes administrative expenses, which are 

classified as discretionary spending, and is based on the projected expenditures in the 2018 Social Security trustees’ 

report for benefits and for the Railroad Retirement interchange. The projections of Social Security payroll taxes and 

Social Security spending are based on future spending and payroll taxes projected in the 2018 Social Security 

trustees’ report, adjusted for presentational differences and converted to a fiscal year basis. More information about 

the assumptions for Social Security cost growth can be found in Note 22 and the unaudited RSI discussion of Social 

Insurance.

• Medicare: Projected Medicare spending also excludes administrative expenses, which are classified as other 

mandatory spending, and is based on projected incurred expenditures from the 2018 Medicare trustees’ report. The 

projections here make some adjustments to the trustees’ report projections. Medicare Part B and D premiums, as 

well as State contributions to Part D, are subtracted from gross spending in measuring Part B and Part D spending, 

just as they are subtracted from gross cost to yield net cost in the financial statements.19 Here, as in the federal 

budget, premiums are treated as “negative spending” rather than receipts since they represent payment for a service 

rather than payments obtained through the government’s sovereign power to tax. This is similar to the financial 

statement treatment of premiums as “earned” revenue as distinct from all other sources of revenue, such as taxes. 

The projections are based on Medicare spending in the Medicare trustees’ report, adjusted for presentational 

differences and converted to a fiscal year basis. Medicare Part A payroll taxes are projected similarly. More 

information about the assumptions for Medicare cost growth can be found in Note 22 and the unaudited RSI 

discussion of Social Insurance. As discussed in Note 22, there is uncertainty about whether the reductions in health 

care cost growth projected in the Medicare trustees’ report will be fully achieved. Note 22 illustrates this uncertainty 

by considering Medicare cost growth assumptions under varying policy assumptions. 

• Medicaid: The Medicaid spending projections start with the projections from the 2017 Medicaid Actuarial Report

prepared by CMS’s Office of the Actuary20. These projections are based on recent trends in Medicaid spending; the 

demographic, economic, and health cost growth assumptions in the 2017 Medicare Trustees’ Report; and projections 

of the effect of the ACA on Medicaid enrollment. The projections, which end in 2026, are adjusted to accord with 

the actual Medicaid expenditures in fiscal year 2018. After 2026, the projections assume no further change in State 

Medicaid coverage under the ACA, and the numbers of old-age beneficiaries (65-plus years) and non-old-age 

beneficiaries (less than 65 years) are expected to grow at the same rates as the old-age and non-old-age populations, 

respectively. Medicaid costs per beneficiary are assumed to grow at the same rate as Medicare benefits per 

beneficiary, as is generally consistent with the experience since 1987. Between 1987 and 2017, the average annual 

growth rate of spending per beneficiary for Medicaid and Medicare were within 0.3 percentage point of each other. 

Projections of Medicaid spending are subject to added uncertainty related to: (1) assumed reductions in health care 

cost growth discussed above in the context of Medicare, (2) the projected size of the Medicaid enrolled population,

which depends on a variety of factors, including future State actions regarding the ACA Medicaid expansion, and 

(3) certain limitations relating to the data used to generate the projected per enrollee expenditures in the 2017 

Medicaid actuarial report. 

• Other Mandatory Spending: Other mandatory spending, which includes federal employee retirement, veterans’ 

disability benefits, and means-tested entitlements other than Medicaid, is projected in two steps. First, spending prior 

to the automatic spending cuts called for by the enforcement provisions of the BCA is projected and, second, the 

effect of the BCA enforcement is projected through its statutory expiration in 2027. With regard to pre-BCA 

spending: (1) current mandatory spending components that are judged permanent under current policy are assumed 

to increase by the rate of growth in nominal GDP starting in 2019, implying that such spending will remain constant 

as a percent of GDP21; and (2) projected spending for insurance exchange subsidies starting in 2019 grows with 

growth in the non-elderly population and with the National Health Expenditure (NHE) projected per enrollee cost 

growth for other private health insurance for the NHE projection period (through 2026 for the fiscal year 2018 

projections), and with growth in per enrollee health care costs as projected for the Medicare program after that 

period. As discussed in Note 22, there is uncertainty about whether the reductions in health care cost growth 

 19 Medicare Part B and D premiums and State contributions to Part D are subtracted from the Part B and D spending displayed in the SLTFP. The total 75-

year present value of these subtractions is $13.6 trillion, or 1.0 percent of GDP. 20 Christopher J. Truffer, Christian J. Wolfe, and Kathryn E. Rennie, 2017 Actuarial Report on the Financial Condition for Medicaid, Office of the Actuary, 

Centers for Medicare and Medicaid Services, United States Department of Health and Human Services, September 2017. 21 This assumed growth rate for other mandatory programs exceeds the growth rate in the most recent OMB and CBO 10-year budget baselines.
155 NOTES TO THE FINANCIAL STATEMENTS

projected in the Medicare trustees’ report will be fully achieved. Projected exchange subsidy spending as a percent 

of GDP remains below the failsafe provision in the ACA that limits this spending to 0.504 percent of GDP. 

• Defense and Non-defense Discretionary Spending: Prior to 2018, the projections assumed discretionary spending 

followed the caps established by the BCA of 2011, as later amended, and then grew with nominal GDP in the years 

after the 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 discretionary spending is grown at the 

same rate as nominal GDP beginning after 2019, rather than being limited to the statutory caps, subject to Joint 

Committee spending controls22. Projected OCO spending, which is not subject to the caps, is assumed to grow from 

the level in the most recent year at the same rate as nominal GDP. To illustrate sensitivity to different assumptions, 

present value calculations under alternative discretionary growth scenarios are presented in the unaudited 

“Alternative Scenarios” RSI section.

• Receipts (Other than Social Security and Medicare Payroll Taxes): Individual income taxes equal the same 

share of wages and salaries as in the current law baseline projection in the President’s fiscal year 2019 Budget. That 

baseline accords with current policy as defined above, including the continuation of the individual income, estate, 

and gift tax provisions of the TCJA of 201723 and the tendency of effective tax rates to increase as growth in income 

per capita outpaces inflation (also known as “bracket creep”). After reaching about 20 percent of wages and salaries 

in 2024, individual income taxes increase gradually to 27 percent of wages and salaries in 2093 as real taxable 

incomes rise over time and an increasing share of total income is taxed in the higher tax brackets. Through the first 

10 years of the projections, corporate tax receipts as a percent of GDP reflect the economic and budget assumptions 

used in developing the 2019 Midsession Review’s ten-year advance budgetary estimates24. After this time, corporate 

tax receipts grow at the same rate as nominal GDP. All other receipts also reflect 2019 Midsession Review levels as 

a share of GDP throughout the budget window and grow with GDP outside of the budget window. Corporate tax 

receipts peak at 1.6 percent of GDP in 2025 before falling to 1.3 percent of GDP in 2028, where they stay for the 

remainder of the projection period. The ratio of all other receipts combined, excluding corporate tax receipts, to 

GDP is estimated to be 1.5 percent in 2019, after which it gradually declines to 1.3 percent of GDP, where it remains 

through the projection period. To illustrate uncertainty, present value calculations under higher and lower receipts 

growth scenarios are presented in the “Alternative Scenarios” section.

• Debt and Interest Spending: Interest spending is determined by projected interest rates and the level of outstanding 

debt held by the public. The long-run interest rate assumptions accord with those in the 2018 Social Security 

trustees’ report.25 The average interest rate over the projection period is 5.0 percent. These rates are also used to 

convert future cash flows to present values as of the start of fiscal year 2019. Debt at the end of each year is 

projected by adding that year’s deficit and other financing requirements to the debt at the end of the previous year.

The methods described above include two significant revisions from those used to produce the fiscal year 2017 

projections. Corporate tax receipts are now projected separately from all other receipts to incorporate the effects of the TCJA

of 2017. In prior years, corporate income tax receipts were not modeled independently, they were included in “Other 

Receipts26.” To project corporate income tax receipts, the model uses their implied share of GDP over the years 2019 through 

2028 from the 2019 Midsession Review to determine receipts in those years, and then grows receipts with nominal GDP 

thereafter. “Other Receipts” are now projected similarly; instead of using their 30-year historical average share of GDP, the 

receipts’ implied share of GDP over the years 2019 to 2028, as presented in the 2019 Midsession Review, are used to 

determine receipts over this period. Afterward, receipts grow with GDP. The second significant revision is that discretionary

spending no longer follows the caps established under the BCA through 2021. Instead, discretionary spending starts from the 

outlays implied by BBA 2018’s cap level for 2019, and grows with GDP thereafter (subject to Joint Committee enforcement). 

 22 The BCA of 2011 established statutory caps on discretionary spending for fiscal years 2012 through 2021, and established a Joint Committee tasked with 

identifying $1.2 trillion in deficit reduction. The failure of the Joint Committee to propose, and Congress to enact, legislation sufficient to reduce the deficit 

triggers automatic spending reductions through adjustments to the discretionary spending limits and sequestration of mandatory spending. Mandatory 

sequestration has been extended in various statutes and currently extends through 2027. After 2027, the projections assume the automatic reductions 

continue as a constant share of projected GDP.

23 The expiring individual income and estate and gift tax provisions of the TCJA are assumed to continue past their legal expiration on December 31, 2025 

because of the recent historical pattern of such tax rates being extended; additional discussion may be found in the last section of this note. 24 The Midsession Review is an annual report to the Congress, delivered on or before July 15th, that contains revised budget estimates resulting from changes 

in economic assumptions, Presidential initiatives, and enacted legislation that have occurred since transmittal of the President’s Budget. 25 As indicated in the more detailed discussion of Social Insurance in Note 22 to the financial statements. 26 “Other receipts”, which included corporate income tax receipts prior to 2018, were modeled by assuming they maintain their 30-year historical average 

share of GDP throughout the modeling period.
NOTES TO THE FINANCIAL STATEMENTS 156

Departures of Current Policy from Current Law 

The long-term fiscal projections are made on the basis of current policy, which in some cases is different from current 

law. The notable differences between current policy that underlies the projections and current law are: (1) discretionary 

spending is assumed to not be limited by caps established by the BCA; (2) projected spending, receipts, and borrowing levels 

assume raising or suspending the current statutory limit on federal debt; (3) continued discretionary appropriations are 

assumed throughout the projection period; (4) scheduled Social Security and Medicare benefit payments are assumed to 

occur beyond the projected point of trust fund depletion; (5) many mandatory programs with expiration dates prior to the end 

of the 75-year projection period are assumed to be reauthorized; and (6) tax changes under the TCJA are assumed to continue 

beyond 2025. The last difference aligns with the historical pattern of such legislation being routinely extended or made 

permanent. As is true in the Medicare trustees’ report and in the SOSI, the projections incorporate programmatic changes 

already scheduled in law, such as the ACA productivity adjustment for non-physician Medicare services and the expiration of 

certain physician bonus payments in 2025.
157 NOTES TO THE FINANCIAL STATEMENTS

Note 24. Stewardship Land and Heritage Assets

Stewardship PP&E consists of items whose physical properties resemble those of general PP&E traditionally capitalized 

in financial statements. However, stewardship PP&E differs from general PP&E in that their values may be indeterminable or 

may have little meaning (for example, museum collections, monuments, assets acquired in the formation of the nation) or that 

allocating the cost of such assets to accounting periods that benefit from the ownership of such assets is meaningless. 

Stewardship PP&E includes stewardship land (land not acquired for or in connection with general property, plant, and 

equipment) and heritage assets (for example, federal monuments and memorials and historically or culturally significant 

property). The majority of stewardship land was acquired by the government during the first century of the nation’s 

existence.

Investments in stewardship land are reported on a non-financial basis. For example, measurement may be based on 

physical units, such as acres of land. National forests, parks, and historic sites are examples of stewardship land. 

Additional detailed information concerning stewardship land, such as entity stewardship policies, physical units by 

major categories, and the condition of stewardship land, can be obtained from the financial statements of DOI, DOD, TVA, 

and USDA.

Heritage assets are government-owned assets that have one or more of the following characteristics:

• Historical or natural significance;

• Cultural, educational, or artistic importance; or

• Significant architectural characteristics.

Like stewardship land, heritage assets are also reported on a non-financial basis. Measurement may be reported by the 

total units, such as the total number of National Parks reported by DOI. The public entrusts the government with these assets 

and holds it accountable for their preservation. Examples of heritage assets include the Declaration of Independence, the U.S. 

Constitution, and the Bill of Rights preserved by the National Archives. Also included are national monuments/structures 

such as the Washington Monument, the Lincoln Memorial and the LOC. Many other sites such as battlefields, historic 

structures, and national historic landmarks are placed in this category, as well.

Heritage assets are classified into two categories: collection and non-collection. Collection type heritage assets include 

objects gathered and maintained for exhibition, for example, museum collections, art collections, and library collections. 

Non-collection type heritage assets include parks, memorials, monuments, and buildings. In some cases, heritage assets may 

serve two purposes: a heritage function and general government operations. In those cases, the heritage asset should be 

considered a multi-use heritage asset if the predominant use of the asset is in general government operations (e.g., the main 

Treasury building used as an office building). The cost of acquisition, improvement, reconstruction, or renovation of multiuse heritage assets should be capitalized as general PP&E and depreciated over its estimated useful life. 

This discussion of the government’s heritage assets is not exhaustive. Rather, it highlights significant heritage assets 

reported by federal entities. Please refer to the individual financial statements of the DOC, VA, DOT, State, DOD, as well as 

websites for the LOC (https://loc.gov), the Smithsonian Institution (https://si.edu), and the Architect of the Capitol 

(https://aoc.gov) for additional information on multi-use heritage assets, entity stewardship policies, and physical units by 

major categories. 
NOTES TO THE FINANCIAL STATEMENTS 158

Note 25. Disclosure Entities and Related Parties

SFFAS No. 47, Reporting Entity provides criteria for identifying organizations that are consolidation entities, disclosure 

entities and related parties, and how such organizations are reported within the Financial Report. For consolidation entities, 

the assets, liabilities, results of operations, and related activity are consolidated into the government’s financial statements. 

For disclosure entities and related parties, balances and transactions with such entities are included in the financial statements 

and certain information about their relationship with the federal government is disclosed in the notes to the consolidated 

financial statements. Disclosure entities and related parties are important to the Financial Report but are not consolidated into 

the government’s financial statements. 

Disclosure Entities 

Disclosure entities are organizations similar to consolidation entities in that they are either (a) in the budget, (b) majority 

owned by the government, (c) controlled by the government, or (d) would be misleading to exclude. Disclosure entities have 

a greater degree of autonomy with the government than consolidation entities. In addition, organizations may be owned or 

controlled by the government as a result of (a) regulatory actions (such as organizations in receivership or conservatorship) or 

(b) other government intervention actions. Under such regulatory or other intervention actions, if the relationship with the 

government is not expected to be permanent, such entities generally would be classified as disclosure entities based on their

characteristics taken as a whole. 

Based on the criteria in GAAP for federal entities, the disclosure entities in the Financial Report are FR System, Fannie 

Mae, Freddie Mac, and National Railroad Passenger Corporation (more commonly referred to as Amtrak). In addition, there 

are additional disclosure entities reported by component reporting entities that do not meet the qualitative or quantitative 

criteria in SFFAS No. 47 to be reported in the Financial Report.

Federal Reserve System

Congress, under the Federal Reserve Act of 1913 (Federal Reserve Act), created the FR System. The FR System 

includes the Federal Reserve Board of Governors (Board), the FRBs, and Federal Open Market Committee (FOMC). 

Collectively, the FR System serves as the nation’s central bank and is responsible for formulating and conducting monetary 

policy, issuing and distributing currency (Federal Reserve Notes), supervising and regulating financial institutions, providing 

nationwide payment systems (including large-dollar transfers of funds, Automated Clearing House (ACH) operations, and 

check collections), providing certain financial services to federal entities and fiscal principals, and serving as the U.S. 

government’s bank. Monetary policy includes actions undertaken by the FR System that influence the availability and cost of 

money and credit as a means of helping to promote national economic goals. The FR System also conducts operations in 

foreign markets in order to counter disorderly conditions in exchange markets or to meet other needs specified by the FOMC 

to carry out its central bank responsibilities. The FR System is considered an independent central bank, and the executive 

branch of the government does not ratify its decisions. 

The 12 FRBs are chartered under the Federal Reserve Act, which requires each member bank to own the capital stock of 

its FRB. Each FRB has a board of directors that exercises supervision and control of each FRB, with three members 

appointed by the Board, and six board members elected by their member banks. The FRBs participate in formulating and 

conducting monetary policy, distributing currency and coin, and serving as the government’s fiscal agent, as well as the fiscal 

agent for other federal entities and fiscal principals. Fiscal principals, generally speaking, relate to banks, credit unions, 

savings and loans institutions. Additionally, the FRBs provide short-term loans to depository institutions and loans to 

participants in programs or facilities with broad-based eligibility in unusual and crucial circumstances when approved by the 

Board and the Secretary of the Treasury. 

The government interacts with FRBs in a variety of ways, including the following:

• The FRBs serve as the government’s fiscal agent and depositary, executing banking and other financial transactions 

on the government’s behalf. The government reimburses the FRBs for these services, the cost of which is included 

on the Statements of Net Cost;

• The FRBs hold Treasury and other federal securities in the FRBs’ System Open Market Account (SOMA) for the 

purpose of conducting monetary policy (see Note 11—Federal Debt Securities Held by the Public and Accrued 

Interest);

• The FRBs hold gold certificates issued by the government in which the certificates are collateralized by gold (see 

Note 2—Cash and Other Monetary Assets);

• The FRBs hold SDR certificates issued by the government which are collateralized by SDRs (see Note 2—Cash and 

Other Monetary Assets); and,
159 NOTES TO THE FINANCIAL STATEMENTS

• The FRBs are required by Board policy to transfer their excess earnings to the government, which are included in

Other Taxes and Receipts on the Statements of Operations and Changes in Net Position.

• Federal Reserve System Structure

The Board is an independent organization governed by seven members who are appointed by the President and 

confirmed by the Senate. The full term of a Board member is 14 years, and the appointments are staggered so that one 

term expires on January 31 of each even-numbered year. The Board has a number of supervisory and regulatory 

responsibilities for institutions including, among others, state-chartered banks that are members of the FR System, bank 

holding companies, and savings and loan holding companies. In addition, the Board has general supervisory 

responsibilities for the 12 FRBs, and issues currency (Federal Reserve Notes) to the FRBs for distribution.

The FOMC is comprised of the seven Board members and five of the 12 FRB presidents, and is charged with 

formulating and conducting monetary policy primarily through open market operations (the purchase and sale of certain 

securities in the open market), the principal tool of national monetary policy. These operations affect the amount of 

reserve balances available to depository institutions, thereby influencing overall monetary and credit conditions. 

The 12 FRBs are chartered under the Federal Reserve Act, which requires each member bank to own the capital 

stock of its FRB. Supervision and control of each FRB is exercised by a board of directors, of which three are appointed 

by the Board of the FR System, and six are elected by their member banks. The FRBs participate in formulating and 

conducting monetary policy, distribute currency and coin, and serve as fiscal agents for the government, and other 

federal entities. Additionally, the FRBs provide short-term loans to depository institutions and loans to participants in 

programs or facilities with broad-based eligibility in unusual and exigent circumstances when approved by the Board 

and the Secretary of the Treasury.

• Federal Reserve Monetary Policy Action

During fiscal year 2018, the Federal Reserve FOMC gradually raised its target range for the federal funds rate and 

gradually reduced its securities in the SOMA. The Federal Reserve raised its target range for the federal funds rate from 

1.0 – 1.25 percent in September 2017, to 2.0 – 2.25 percent in September 2018. The Federal Reserve reduced its U.S. 

Treasury and federal agency and government-sponsored enterprise mortgage-backed securities in the SOMA on its 

balance sheet from approximately $4.4 trillion as of September 30, 2017, to approximately $4.1 trillion as of September 

30, 2018.

• Federal Reserve System Assets, Liabilities, Revenues, Expenses, Gains, and Losses

The FRBs hold Treasury and other securities in the SOMA for the purpose of conducting monetary policy. As of 

September 30, 2018, Treasury securities held by the FRBs totaled $1,782.5 billion, which excludes $531.8 billion in 

Treasury Securities used in overnight reverse repurchase transactions. As of September 30, 2017, Treasury securities 

held by the FRBs totaled $1,964.7 billion, which excludes $502.0 billion in Treasury securities used in overnight 

reverse repurchase transactions. Such securities are included in federal debt securities held by the public and accrued 

interest (see Note 11—Federal Debt Securities Held by the Public and Accrued Interest). For fiscal years ended 

September 30, 2018, and 2017, Treasury incurred interest cost relating to the FRB’s U.S. Treasury holdings amounting 

to $64.1 billion and $63.8 billion, respectively, which is included in interest on Treasury securities held by the public on 

the Statement of Net Cost. Unrestricted Cash held on deposit at the FRBs as of September 30, 2018, and 2017, was 

$378.5 billion and $153.3 billion, respectively, and are included in cash and other monetary assets. In addition, 

restricted cash as of September 30, 2018, and 2017, was $31.6 billion and $26.1 billion, respectively; a significant 

portion is held on deposit at the FRBs (see Note 2—Cash and Other Monetary Assets). 

Treasury securities are generally subject to the same market (principally interest-rate) and credit risks as other 

financial instruments. In the open market, the FRBs purchase and sell Treasury securities as a mechanism for 

controlling the money supply.

Financial and other information concerning the FR System, including financial statements for the Board and the 

FRBs, may be obtained at https://federalreserve.gov.

• FRB Residual Earnings Transferred to the Government

FRBs generate income from interest earned on securities, reimbursable services provided to federal entities, and 

the provision of priced services to depository institutions, as specified by the Monetary Control Act of 1980. Although 

the FRBs generate earnings from carrying out open market operations (via the earnings on securities held in the SOMA 

account), their execution of these operations is for the purpose of accomplishing monetary policy rather than generating 

earnings. Each FRB is required by Board policy to transfer to the government its residual (or excess) earnings, after 

providing for the cost of operations, payment of dividends, and surplus funds not to exceed an FRB’s allocated portion 
NOTES TO THE FINANCIAL STATEMENTS 160

of an aggregate of $7.5 billion for all FRBs. These residual earnings may vary due to, among other things, changes in 

the SOMA balance levels that may occur in conducting monetary policy. If an FRB’s earnings for the year are not 

sufficient to provide for the cost of operations, payment of dividends, or allocated portion of $7.5 billion aggregate 

surplus funds limitation, an FRB will suspend its payments to the government until such earnings become sufficient.

These funds are part of restricted cash at the Federal Reserve (see Note 2—Cash and Other Monetary Assets). The FRB 

residual earnings of $70.8 billion and $81.3 billion for fiscal years ended September 30, 2018, and 2017, respectively, 

are reported as other taxes and receipts on the Statements of Operations and Changes in Net Position. Accounts and 

taxes receivables, net, includes a receivable for FRB’s residual earnings which represents the earnings due to the 

General Fund as of September 30, but not collected by the General Fund until after the end of the month. As of 

September 30, 2018, and 2017, accounts receivable on FRB’s residual earnings are $0.4 billion and $0.3 billion, 

respectively (see Note 3—Accounts and Taxes Receivables, Net).

Fannie Mae and Freddie Mac

In 2008, during the financial crisis, the government placed Fannie Mae and Freddie Mac under conservatorship to help 

ensure their financial stability. For fiscal year 2018, these entities meet the criteria in SFFAS No. 47, for disclosure entities as 

both (a) “receiverships and conservatorships,” and, (b) as entities wherein “federal government intervention actions resulted

in control or ownership” with intervention actions not expected to be permanent. Accordingly, these entities are not 

consolidated into the Financial Report. This treatment is consistent with the reporting for these entities in fiscal year 2017 

under SFFAC No. 2, Entity and Display (see Note 8—Investments in Government-Sponsored Enterprises for additional 

information).

Amtrak

Amtrak was incorporated in 1971 pursuant to the Rail Passenger Service Act of 1970 and is authorized to operate a 

nationwide system of passenger rail transportation. Amtrak is a private, for-profit corporation under 49 U.S.C. § 24301 and 

District of Columbia law. It is not a department, entity, or instrumentality of the federal government. Amtrak’s classification 

as a disclosure entity is attributed to (a) being listed in the budget, (b) is financed mostly by sources other than taxes, and (c) 

governed by an independent Board of Directors comprised of 10 directors. The Secretary of Transportation (Secretary), who 

is a director by statute, and eight of the other Amtrak directors, are appointed by the President with the advice and consent of 

the U.S. Senate. The 10th board member, appointed by the board, is the President and Chief Executive Officer of Amtrak. 

Amtrak does not take actions on behalf of the government but benefits the national economy by providing a transportation 

option in 46 states and the District of Columbia.

The government (through the DOT) owns 100% of Amtrak’s preferred stock (109,396,994 shares of $100 par value). 

Each share of preferred stock is convertible into ten shares of common stock. The common stockholders have voting rights 

for “amendments to Amtrak’s Articles of Incorporation proposed by the Board of Directors and for certain other 

extraordinary events.” Although Section 4.02(g) of the Amtrak Articles of Incorporation allow for the conversion of preferred 

stock to common stock, the government would not convert its holdings without Congressional authorization. The government 

does not recognize the Amtrak preferred stock in its financial statements because, under the corporation’s current financial 

structure, the preferred shares do not have a liquidation preference over the common shares, the preferred shares do not have

any voting rights, and dividends are neither declared nor in arrears.

In addition to the purchase/ownership of the Amtrak preferred stock, the government has provided funding to Amtrak, 

since 1972, primarily through grants and loans. Amtrak receives grants from the government that cover a portion of the 

corporation’s annual operating expenses and capital investments. Funding provided to Amtrak through grant agreements are 

included in the government’s annual budget. Amtrak has a history of recurring operating losses and is dependent on subsidies 

from the government to operate. Amtrak’s ability to continue operating in its current form is dependent upon the continued 

receipt of subsidies from the government. 

The government has possession of two long-term notes with Amtrak. The first note is for $4.0 billion and matures in 

2975 and, the second note is for $1.1 billion and matures in 2082 with renewable 99-year terms. Interest is not accruing on 

these notes as long as the current financial structure of Amtrak remains unchanged. If the financial structure of Amtrak 

changes, both principal and accrued interest are due and payable. The government does not recognize the long-term notes in 

its financial statements since the notes, with maturity dates of 2975 and 2082, are considered fully uncollectible due to the

lengthy terms, Amtrak’s history of operating losses, and ability to generate funds for repayment. 

Financial and other information concerning Amtrak including financial statements may be obtained at 

https://www.amtrak.com/reports-documents.
161 NOTES TO THE FINANCIAL STATEMENTS

Related Parties

Related parties exist if the existing relationship, or one party to the existing relationship, has the ability to exercise 

significant influence over the party’s policy decisions. Related parties do not meet the principles for inclusion, but are 

reported in the Financial Report if they maintain relationships of such significance that it would be misleading to exclude.

Based on the criteria in SFFAS No. 47, the related parties reported in the Financial Report are Federal Home Loan 

Banks (FHLBanks), IMF, Multilateral Banks, and Private Export Funding Corporation (PEFCO). In addition, there are 

additional related parties reported by component reporting entities that do not meet the criteria to be reported in the Financial

Report.

Federal Home Loan Banks

The government is empowered with supervisory and regulatory oversight of the 11 FHLBanks. The government is 

responsible for ensuring that each regulated entity operates in a safe and sound manner, including maintenance of adequate 

capital and internal control, and carries out its housing and community development finance missions. Each FHLBank 

operates as a separate federally chartered corporation with its own board of directors, management, and employees. The 

FHLBanks were organized under the Federal Home Loan Bank Act of 1932 and are GSEs. The FHLBanks are not 

government entities and do not receive financial support from taxpayers. The government does not guarantee, directly or 

indirectly, the debt securities or other obligations of FHLBanks. The FHLBanks are regulated by the FHFA, an independent 

federal entity.

By law, in the event of certain adverse circumstances, Treasury is authorized to purchase up to $4.0 billion of 

obligations of the FHLBanks. Treasury has not used such authority. Also, in accordance with the Government Corporations 

Control Act, Treasury prescribes certain terms concerning the FHLBanks issuance of obligation to the public. Financial and 

other information concerning FHLBanks including financial statements may be obtained at http://www.fhlbanks.com/.

International Monetary Fund and Multilateral Development Banks

The government currently maintains related party relationships with the IMF and the MDBs. The IMF is an 

international organization of 189 member countries that works to foster global monetary cooperation, secure financial 

stability, sustain economic growth, and reduce poverty around the world. The government holds the largest quota 

subscription of any member. The government’s quota subscription serves as the key determinant for the government’s 16.5 

percent share of voting rights in various IMF decisions for which the government has a substantial voice. Since certain key 

IMF determinations require approval by at least 85 percent of the total voting power, the government (represented by the 

Secretary of the Treasury) exercises significant influence via its 16.5 percent voting share. The government’s holdings in the 

IMF are in the form of highly liquid and interest-bearing instruments. The government has a liability due to the IMF, as well 

as an additional commitment (see Note 16—Other Liabilities and Note 19—Commitments for additional information). 

Historically, the government has not experienced a loss of value on its IMF holdings and management does not believe it is 

likely that the government will experience future losses on its holdings or as a result of its additional commitments. 

Additionally, the government invests in and provides funding to the MDBs to support poverty reduction and promote 

sustainable economic growth in developing countries. The MDBs provide financial and technical support to foster economic 

growth and entrepreneurship, strengthen institutions, address the root causes of instability in fragile and conflict-affected 

countries, and respond to global crisis. The government’s participation in the MDBs is in the form of financial contributions

used to ensure the effectiveness and impact of the MDBs’ global development agenda. The U.S. has voting power in each of 

the MDBs to which it contributes, ranging from approximately 6 percent to 50 percent (see Note 19—Commitments for 

additional information).

Private Export Funding Corporation 

The financial statements reflect the results of agreements with PEFCO. PEFCO, which is owned by a consortium of 

private-sector banks, industrial companies and financial services institutions, makes and purchases from private sector 

lenders, medium-term and long-term fixed-rate and variable-rate loans guaranteed by EXIM Bank to foreign borrowers to 

purchase U.S. made equipment “export loans.”

EXIM Bank’s credit and guarantee agreement with PEFCO provides that EXIM Bank will guarantee the due and 

punctual payment of interest on PEFCO’s secured debt obligations which EXIM Bank has approved, and grants to EXIM 

Bank a broad measure of supervision over PEFCO's major financial management decisions, including the right to have 

representatives be present in all meetings of PEFCO’s board of directors, advisory board, and exporters’ council, and to 

review PEFCO’s financials and other records. However, EXIM Bank does not have voting rights and does not influence 

normal operations. This agreement extends through December 31, 2020.

In addition, PEFCO has an agreement with EXIM Bank which provides that EXIM Bank will generally provide PEFCO 

with an unconditional guarantee covering the due and punctual payment of principal and interest on export loans PEFCO 
NOTES TO THE FINANCIAL STATEMENTS 162

makes and purchases. PEFCO’s guarantees on the export loans plus the guarantees on the secured debt obligations 

aggregating to $5,196.6 million at September 30, 2018 and $6,120.0 million at September 30, 2017, are included by EXIM 

Bank in the total for guarantee, insurance and undisbursed loans and the allowance related to these transactions.

EXIM Bank received fees totaling $40.8 million in fiscal year 2018 and $60.7 million in fiscal year 2017 for the 

agreements.
163 NOTES TO THE FINANCIAL STATEMENTS

Note 26. Subsequent Events

Disaster Relief

In September and October 2018, Hurricanes Florence and Michael struck the continental United States. While the full

future effect of these disasters is still unknown, there will be an impact on some federal government entities as a result of

assisting these areas as they strive to recover. The fiscal year 2018 Financial Report did not reflect any liabilities for

additional disaster relief amounts that may be authorized by legislation enacted after September 30, 2018. The SBA has

begun to increase its rate of administrative spending as it conducts its disaster response. This spending is consistent with

SBA’s experience in responding to prior disasters. The SBA could experience future variations in the performance of existing

disaster and business loan portfolios as businesses in the affected areas strive to recover.

Statutory Debt Limit

As of September 30, 2018, debt subject to the statutory debt limit was $21,474.8 billion. However, per P.L. 115-56, the

statutory debt limit was temporarily suspended through March 1, 2019. Effective March 2, 2019, the statutory debt limit was

set at $21,987.7 billion 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 often must deviate from its

normal cash and debt management operations and take a number of what it calls “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.
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 164

United States Government

Required Supplementary Information 

(Unaudited) For the Fiscal Years Ended

September 30, 2018, and 2017

The Sustainability of Fiscal Policy

One of the important purposes of the Financial Report is to help citizens and policymakers assess whether current fiscal 

policy is sustainable and, if it is not, the urgency and magnitude of policy reforms necessary to make fiscal policy 

sustainable. A sustainable policy is one where the ratio of debt held by the public to GDP (the debt-to-GDP ratio) is 

ultimately stable or declining. 

As discussed below, the projections in this report indicate that current policy is not sustainable. If current policy is left

unchanged, the projections show the debt-to-GDP ratio will rise from 78 percent in 2018 to 84 percent by 2022, to over 100 

percent by 2030, and to 530 percent in 2093. For comparison, under the 2017 projections, the debt-to-GDP ratio fell about 4 

percentage points between 2017 and 2023 before commencing a steady rise, exceeding its 2017 level by 2029, exceeding 100 

percent by 2037, and reaching 297 percent in 2092.

These conclusions are rooted in the projected trends in receipts, spending, and deficits in the context of current law and 

policy, although, as described in the following pages, there is considerable uncertainty surrounding these projections. The 

projections are on the basis of policies currently in place and are neither forecasts nor predictions. Changes in policy – from 

repealing the ACA and increasing border security and infrastructure, to more routine developments such as changes in 

aggregate funding for discretionary program – could have a significant effect on eventual fiscal outcomes.
 165 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)

Current Policy Projections for Primary Deficits

A key determinant of growth in the debt-to-GDP ratio and hence fiscal sustainability is the ratio of the primary deficitto-GDP. The primary deficit is the difference between non-interest spending and receipts, and the primary deficit-to-GDP 

ratio is the primary deficit expressed as a percent of GDP. As shown in Chart 1, 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 deficit level was still high enough that the debt held by the public increased further relative to GDP, 

ending 2018 at 78 percent. The primary deficit ratio is projected to rise to 2.9 percent in 2019 and then shrink slightly as the 

economy grows. After 2024, however, increased spending for Social Security and health programs due in part to the 

continued retirement of the baby boom generation is projected to result in increasing primary deficits that reach 3.0 percent of 

GDP in 2028. The primary deficit peaks at 4.1 percent of GDP in 2039, gradually decreases beyond that point as the aging of 

the population continues at a slower pace, and reaches 2.5 percent in 2093. 

Trends in the primary deficit are heavily influenced by tax receipts. The receipt share of GDP was markedly depressed 

in 2009 through 2012 because of the recession and tax reductions enacted as part of the 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 by 2018, after enactment of the TCJA of 2018 and below its 30-year average of 

17.3 percent. Receipts are projected to grow slightly more rapidly than GDP over the projection period as increases in real 

(i.e., inflation-adjusted) incomes cause more taxpayers and a larger share of income to fall into the higher individual income 

tax brackets. Other possible paths for the receipts-to-GDP ratio and the implications for projected debt held by the public are 

analyzed in the “Alternative Scenarios” section. 

On the spending side, the non-interest spending share of GDP is projected to rise gradually from 18.7 percent in 2018 to 

21.0 percent of GDP in 2029 and ends at 22.6 percent in 2093, the end of the projection period. Beginning in 2020, these 

increases are principally due to faster growth in Medicare, Medicaid, and Social Security spending (see Chart 1). The aging 

of the baby boom generation over the next 25 years, among other factors, 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 and Medicaid spending shares of GDP remain relatively stable, while the 

Medicare spending share of GDP continues to increase, albeit at a slower rate, due to projected increases in health care costs 

and population aging.

Current Policy Projections for Debt and Interest Payments

The primary deficit projections in Chart 1, along with projections for interest rates and GDP, determine the projections 

for the debt-to-GDP ratio shown in Chart 2. 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 continuous rise of the debt-toGDP ratio indicates that current policy is unsustainable.
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 166

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.1 Total spending is non-interest spending plus interest spending. Chart 3 

shows that the rapid rise in total spending and the unified deficit (Total Receipts less Total Spending) is almost entirely due 

to projected net interest, which results from the growing debt. As a percent of GDP, interest spending was 1.6 percent in 

2018, and under current policy is projected to reach 7.4 percent in 2038 and 26.9 percent in 2093. 

 1 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 

non-budgetary 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.
 167 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)

Another way of viewing the change in the financial outlook in this year’s report relative to previous years’ reports is in 

terms of the projected debt-to-GDP ratio in 2091, the last year of the 75-year projection period used in the fiscal year 2016 

report. This ratio is projected to reach 513 percent in the fiscal year 2018 projections, which compares with 293 percent 

projected in the fiscal year 2017 projections and 252 percent projected in the fiscal year 2016 projections.2

The Cost of Delay in Closing the 75-Year Fiscal Gap

The longer policy action to close the fiscal gap3 is delayed, the larger the post-reform primary surpluses must be to 

achieve the target debt-to-GDP ratio at the end of the 75-year period. This can be illustrated by varying the years in which 

reforms closing the fiscal gap are initiated while holding the target ratio of debt to GDP in 2093 equal to the 2018 ratio (78 

percent). Three timeframes for reforms are considered, each one beginning in a different year, and each one increasing the 

primary surplus relative to current policy by a fixed percent of GDP starting in the reform year. The analysis shows that the

longer policy action is delayed, the larger the post-reform primary surplus must be to bring the debt-to-GDP ratio to 78 

percent of GDP in 2093. Future generations are burdened by delays in policy changes because delay necessitates higher 

primary surpluses during their lifetimes, and those higher primary surpluses must be achieved through some combination of 

lower spending and higher taxes and other receipts.

As previously shown in Chart 1, under current policy, primary deficits occur throughout the projection period. Table 1 

shows primary surplus changes necessary to make the debt-to-GDP ratio in 2093 equal to its level in 2018 under each of the 

three timeframes. If reform begins in 2019, then it is sufficient to raise the primary surplus share of GDP by 4.1 percentage

 2 For further information on changes from the 2016 projections, see the unaudited RSI in the 2017 Financial Report. 3 The fiscal gap reflects how much the primary surplus (receipts less non-interest spending) must increase to maintain the debt-to-GDP ratio at the 2018 level 

of 78 percent. See Note 23 for a more complete discussion of the fiscal gap.
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 168

points in every year between 2019 and 2093 in order for the debt-to-GDP ratio in 2093 to equal its level in 2018 (78 percent). 

This policy raises the average 2019-2093 primary surplus-to-GDP ratio from -3.5 percent to +0.8 percent.

In contrast to a reform that begins immediately, if reform begins in 2029 or 2039, then the primary surpluses must be 

raised by 4.9 percent and 6.0 percent of GDP, respectively, in order for the debt-to-GDP ratio in 2093 to equal 78 percent. 

The difference between the primary surplus increase necessary if reform begins in 2029 or 2039 and the increase necessary if 

reform begins in 2019, an additional 0.8 and 1.9 percentage points, respectively, is a measure of the additional burden policy 

delay would impose on future generations. The costs of delay are due to the additional debt that accumulates between 2018 

and the year reform is initiated, in comparison to the scenario in which reform begins immediately. 

Alternative Scenarios 

The long-run projections are highly uncertain. This section illustrates this inherent uncertainty by presenting alternative 

scenarios for the growth rate of health care costs, interest rates, discretionary spending, and receipts. (Not considered here are 

the effects of alternative assumptions for long-run trends in birth rates, mortality, and immigration.) 

The population is aging rapidly and will continue to do so over the next several decades, which puts pressure on 

programs such as Social Security, Medicare, and Medicaid. A shift in projected fertility, mortality, or immigration rates could 

have important effects on the long-run projections. Higher-than-projected immigration, fertility, or mortality rates would 

improve the long-term fiscal outlook. Conversely, lower-than-projected immigration, fertility, or mortality rates would result 

in deterioration in the long-term fiscal outlook. 

Effect of Changes in Health Care Cost Growth

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

growth rates – both for health care costs in the economy generally and for federal health care programs such as Medicare, 

Medicaid, and ACA exchange subsidies – are highly uncertain. In particular, enactment of the ACA in 2010 and the 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—Social Insurance, 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 grows at the same reduced rate as Medicare cost growth per beneficiary. 

As an illustration of the dramatic effect of variations in health care cost growth rates, Table 2 shows the effect on the 

size of reforms necessary to close the fiscal gap of per capita health care cost growth rates that are one percentage point 

higher or two percentage points higher than the growth rates in the base projection, as well as the effect of delaying closure of 

the fiscal gap.4 As indicated earlier, if reform is initiated in 2019, eliminating the fiscal gap requires that the 2019-2093 

primary surplus increase by an average of 4.1 percent of GDP in the base case. However, that figure increases to 7.3 percent 

of GDP if per capita health cost growth is assumed to be 1.0 percentage point higher, and 12.5 percent of GDP if per capita 

 4 The base case health cost growth rates are derived from the projections in the 2018 Medicare trustees’ report. These projections are summarized and 

discussed in Note 22 (see Table 1B in particular) and the “Medicare Projections” section of the unaudited RSI for the SOSI.
 169 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)

health cost growth is 2.0 percentage points higher. The cost of delaying reform is also increased if health care cost growth is 

higher, due to the fact that debt accumulates more rapidly during the period of inaction. For example, the lower part of Table 

2 shows that delaying reform initiation from 2019 to 2029 requires that 2029-2093 primary surpluses be higher by an average 

of 0.8 percent of GDP in the base case, 1.4 percent of GDP if per capita health cost growth is 1.0 percentage point higher, and 

2.4 percent of GDP if per capita health cost growth is 2.0 percentage points higher. The dramatic deterioration of the long-run 

fiscal outlook caused by higher health care cost growth shows the critical importance of managing health care cost growth.

Effects of Changes in Interest Rates

A higher debt-to-GDP ratio is likely to increase the interest rate on government debt, making it more costly for the 

government to service its debt. Table 3 displays the effect of several alternative scenarios using different nominal (and real) 

interest rates than assumed in the base case on the size of reforms to close the fiscal gap as well as the effect of delaying 

closure of the fiscal gap. If reform is initiated in 2019, eliminating the fiscal gap requires that the 2019-2093 primary surplus 

increase by an average of 4.1 percent of GDP in the base case, 4.7 percent of GDP if the interest rate is 1.0 percentage point 

higher in every year, and 3.4 percent of GDP if the interest rate is 1.0 percentage point lower in every year. The cost of 

delaying reform is also increased if interest rates are higher, due to the fact that interest paid on debt accumulates more 

rapidly during the period of inaction. For example, the lower part of Table 3 shows that delaying reform initiation from 2019

to 2029 requires that 2029-2093 primary surpluses be higher by an average of 0.8 percent of GDP in the base case, 1.2 

percent of GDP if the interest rate is 1.0 percentage point higher in every year, and 0.5 percent of GDP if the interest rate is 

1.0 percentage point lower in every year. 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 170

Effects of Changes in Discretionary Spending Growth

The growth of discretionary spending has a large impact on long-term fiscal sustainability. The current base projection 

for discretionary spending assumes that spending stays within the statutory caps that apply through 2019 under the BBA, 

grows with GDP from the cap level after that point, and remains subject to the reductions required by the Joint Committee5

. 

The implications of two alternative scenarios are shown in Table 4. The first alternative scenario allows discretionary 

spending to grow with inflation and population after 2019 so as to hold discretionary spending constant on a real per capita 

basis. (This growth rate assumption is slower than growth with GDP but is still higher than the standard 10-year budget

baseline assumption, which assumes that discretionary spending grows with inflation but not with population.) The second 

alternative scenario sets discretionary spending from 2019 onward to statutory cap levels prior to Joint Committee reductions

and grows with GDP from that point forward. As shown in Table 4, if discretionary spending grows with inflation and 

population, eliminating the fiscal gap requires that the 2019-2093 primary surplus increase by an average of 1.9 percent of 

GDP. If discretionary spending rises to the levels prior to Joint Committee sequestration and grows with GDP, the fiscal gap 

increases to 4.4 percent of GDP. The cost of delaying reform is greater when discretionary spending levels are higher. 

Initiating reforms in 2029 requires that the primary surplus increase by an average of 0.9 percent of GDP per year in the base 

case, and increase by 0.9 percent of GDP if discretionary levels return to pre-Joint Committee sequestration levels in 2020. If 

delayed until 2039, the primary surplus must increase by an average of 2.0 percent of GDP in the base case, and increase by 

2.1 percent of GDP at pre-sequestration levels.

 5 The BCA of 2011 established statutory caps on discretionary spending for fiscal years 2012 through 2021 and established a Joint Committee tasked with 

identifying $1.2 trillion in deficit reduction. The failure of the Joint Committee to propose and Congress to enact legislation sufficient to reduce the deficit 

triggers automatic spending reductions through adjustments to the discretionary spending limits and sequestration of mandatory spending. Mandatory 

sequestration has been extended in various statutes and currently extends through 2027. After 2027, the projections assume the automatic reductions 

continue as a constant share of projected GDP. 
 171 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)

Effects of Changes in Individual Income Receipt Growth

The growth rate of receipts, specifically individual income taxes, is another key determinant of long-term sustainability. 

The base projections assume growth in individual income taxes over time to account primarily for the slow shift of 

individuals into higher tax brackets due to real wage growth (“real bracket creep”). This assumption approximates the longterm historical growth in individual income taxes relative to wages and salaries and is consistent with current policy without 

change, as future legislation would be required to prevent real bracket creep. As an illustration of the effect of variations in 

individual income tax growth, Table 5 shows the effect on the size of reforms necessary to close the fiscal gap and the effect 

of delaying closure of the fiscal gap if long-term receipt growth as a share of wages and salaries is 0.1 percentage point 

higher than the base case, as well as 0.1 percentage point lower than the base case. If reform is initiated in 2019, eliminating 

the fiscal gap requires that the 2019-2093 primary surplus increase by an average of 4.1 percent of GDP in the base case, only 

3.0 percent of GDP if receipt growth is 0.1 percentage point higher, but 5.2 percent of GDP if receipt growth is 0.1 

percentage point lower. The cost of delaying reform is also affected if receipt growth assumptions change, much as was the 

case in the previous alternative scenarios. 
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Fiscal Projections in Context

In this report, a sustainable fiscal policy has been defined as one where the federal debt-to-GDP ratio is stable or 

declining. However, this definition does not indicate what a sustainable debt-to-GDP ratio might be. Any particular debt ratio 

is not the ultimate goal of fiscal policy. Rather, the goals of fiscal policy are many. They include financing public goods, such 

as infrastructure and government services; promoting a strong and growing economy; and managing the debt so that it is not 

a burden on future generations. These goals are interrelated, and readers should consider how policies intended to affect one

might depend on or affect another. 

This report shows that current policy is not sustainable. In evaluating policies that could make policy sustainable, note 

that debt may play roles in both facilitating and hindering a healthy economy. For example, government deficit spending 

supports demand and allows economies to emerge from recessions more quickly. Debt may also be a cost-effective means of 

financing capital investment that promotes future economic growth, which may in turn make future debt levels more 

manageable. However, economic theory also suggests that high levels of debt may contribute to higher interest rates, leading 

to lower private investment and a smaller capital stock which the economy can use to grow. Unfortunately, it is unclear what 

debt-to-GDP ratio would be sufficiently high to produce these negative outcomes, or whether the key concern is the level of 

debt per se, or a trend that shows debt increasing over time. 

While several empirical studies have attempted to discern a definite relationship between debt and economic growth 

from the past experience of countries, the evidence is mixed. One study suggested that as advanced countries’ debt-to-GDP 

ratios exceeded 90 percent it had significant negative consequences for real GDP growth through rising interest rates, 

crowding out of private investment, and reduced capital formation.6 Real GDP growth is generally lower by about 1 percent 

when the countries’ debt-to-GDP ratios are above 90 percent relative to the times when they are below 90 percent.7 However, 

 6 Reinhart, Carmen M., and Kenneth S. Rogoff. 2010. “Growth in a Time of Debt.” American Economic Review, 100(2): 573-78. 7 Errata: “Growth in a Time of Debt,” Carmen M. Reinhart and Kenneth S. Rogoff. Harvard University, 2013.
 173 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)

after removing sample countries with very high indebtedness – those with debt-to-GDP ratios of more than 120 percent – and 

very low indebtedness – those with debt-to-GDP ratios of less than 30 percent – the negative relationship between growth 

and debt is difficult to determine. Another study reports that differences in average GDP growth in countries with debt-toGDP ratios between 30-60 percent, 60-90 percent, and 90-120 percent cannot be statistically distinguished.8 Some countries 

with high debt-to-GDP ratios have been observed to experience lower-than-average growth, while other countries with 

similarly high debt ratios have continued to enjoy robust growth. Analogously, low debt-to-GDP ratios are no guarantee of 

strong economic growth. Moreover, the direction of causality is unclear. High debt may undermine growth through increased 

interest rates and lower business confidence, or low growth may contribute to high debt by depressed tax revenues and 

increased deficit spending on social safety net programs.

Nevertheless, to put the current and projected debt-to-GDP ratios in context, it is instructive to examine how the United 

States experience compares with that of other countries. The U.S. government’s debt as a percent of GDP is relatively large 

compared with central government debt of other countries, but far from the largest among developed countries. Based on 

historical data as reported by the International Monetary Fund (IMF) for 28 advanced economies, the debt-to-GDP ratio in 

2016 ranged from 6.3 percent of GDP to 192.2 percent of GDP.9 The United States is not included in this set of statistics, 

which underscores the difficulty in calculating debt ratios under consistent definitions, but the projections in this report show 

the 2018 debt-to-GDP ratio as 78 percent. Despite using consistent definitions where available, these debt measures are not 

strictly comparable due to differences in the share of government debt that is debt of the central government, how 

government responsibilities are shared between central and local governments, how current policies compare with the past 

policies that determine the current level of debt, and how robustly each economy grows. 

The historical experience of the U.S. may also provide some perspective. As Chart 4 shows, the debt-to-GDP ratio was 

highest in the 1940s, following the debt buildup during World War II. In the projections in this report, the U.S. would reach

the previous peak debt ratio in 2030. However, the origins of current and future federal debt are quite different from the 

wartime debt of the 1940s, which limits the pertinence of past experience.

 8 Herndon, Thomas, Michael Ash, and Robert Pollard, “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff,” 

Cambridge Journal of Economics, 2013. 9 Government Finance Statistics Yearbook, Main Aggregates and Balances, available at https://data.imf.org. Data is for D1 debt liabilities for the central 

government, excluding social security funds, for Advanced Economies.
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 174

As the cross-country and historical comparisons suggest, there is a very imperfect relationship between the current level 

of central government debt and the sustainability of overall government policy. Past accrual of debt is certainly important, but 

current policies and their implications for future debt accumulation are as well. 

Conclusion

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

shortly after World War II. The projections in this Financial Report indicate that if policy remains unchanged, the debt-toGDP ratio will steadily increase and soon far exceed historical levels, which implies current policy is not sustainable and 

must ultimately change. Subject to the important caveat that policy changes are not so abrupt that they slow economic 

growth, the sooner policies are put in place to avert these trends, the smaller are the adjustments necessary to return the nation 

to a sustainable fiscal path, and the lower the burden of the debt will be to future generations.
 175 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)

Social Insurance

The social insurance programs consisting of Social Security, Medicare, Railroad Retirement, Black Lung, and

Unemployment Insurance (UI) were developed to provide income security and health care coverage to citizens under specific

circumstances as a responsibility of the government. Because taxpayers rely on these programs in their long-term planning,

social insurance program information should indicate whether the current statutory provisions of the programs can be

sustained, and more generally what effect these provisions likely have on the government’s financial condition. The resources

needed to run these programs are raised through taxes and fees. Eligibility for benefits depends in part on earnings and time

worked by the individuals. Social Security benefits are generally redistributed intentionally toward lower-wage workers (i.e.,

benefits are progressive). In addition, each social insurance program has a uniform set of eligibility events and schedules that

apply to all participants.

Social Security and Medicare

Social Security

The OASI Trust Fund was established on January 1, 1940, as a separate account in the Treasury. The DI Trust Fund, 

another separate account in the Treasury, was established on August 1, 1956. The OASI fund pays cash retirement benefits to 

eligible retirees and their eligible dependents and survivors, and the much smaller DI fund pays cash benefits to eligible 

individuals who are unable to work because of medical conditions and certain family members of such eligible individuals. 

Though the events that trigger benefit payments are quite different, both trust funds have the same dedicated financing 

structure: primarily payroll taxes and income taxes on benefits. All financial operations of the OASI and DI Programs are 

handled through these respective funds. The two funds are often referred to as the combined OASDI Trust Funds. At the end 

of calendar year 2017, OASDI benefits were paid to approximately 62 million beneficiaries.

The primary financing source for these two funds are taxes paid by workers, their employers, and individuals with selfemployment income, based on work covered by the OASDI Program. Currently, employers and employees each pay 6.2 

percent of taxable earnings, and the self-employed pay 12.4 percent of taxable earnings. Payroll taxes are levied on wages 

and net earnings from self-employment up to a specified maximum annual amount, referred to as maximum taxable earnings 

($128,400 in 2018), that increases each year with economy-wide average wages.

Legislation passed in 1984 subjected up to half of OASDI benefits to income tax and allocated the revenue to the 

OASDI Trust Funds. In 1993 legislation increased the potentially taxed portion of benefits to 85 percent and allocated the 

additional revenue to the Medicare’s HI Trust Fund.

Medicare

The Medicare Program, created in 1965, has two separate trust funds: the HI Trust Fund (otherwise known as Medicare 

Part A) and the SMI Trust Funds (which consists of the Medicare Part B and Part D10 accounts). HI helps pay for inpatient 

hospital stays, home health care following a hospital stay, and skilled nursing facility and hospice care. SMI helps pay for 

hospital outpatient services, physician services, and assorted other services and products through Part B and for prescription 

drugs through Part D.

Though the events that trigger benefit payments are similar, HI and SMI have different dedicated financing structures. 

Similar to OASDI, HI is financed primarily by payroll contributions. Currently, employers and employees each pay 1.45 

percent of earnings, while self-employed workers pay 2.9 percent of their net earnings. Beginning in 2013, employees and 

self-employed individuals with earnings above certain thresholds pay an additional HI tax of 0.9 percent on earnings above 

those thresholds. Other income to the HI Trust Fund includes a small amount of premium income from voluntary enrollees, a 

portion of the federal income taxes that beneficiaries pay on Social Security benefits (as explained above), and interest 

credited on Treasury securities held in the HI Trust Fund. As is explained in the next section, these Treasury securities and

related interest have no effect on the consolidated statement of governmentwide finances.

For SMI, direct transfers from the General Fund financed 72 percent and 70 percent of 2018 program costs for Parts B 

and D, respectively. Premiums paid by beneficiaries and, for Part D state transfers, generally financed the remainder of 

 10 Medicare legislation in 2003 created the new Part D account in the SMI Trust Fund to track the finances of a new prescription drug benefit that began in 

2006. As is the case for Medicare Part B, a little more than three-quarters of revenues to the Part D account will come from future transfers from the General 

Fund. Consequently, the nature of the relationship between the SMI Trust Fund and the Federal Budget described below is largely unaffected by the 

presence of the Part D account though the magnitude will be greater.
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 176

Surplus 

Borrowed

Interest 

Credited

Benefit 

Taxes

Interest 

Credited

Surplus 

Borrowed

E

X

P

E

N

D

I

T

U

R

E

S

General

Government

Expenditures,

Net Interest

SMI Trust

Fund 

Account

Other

Government

Accounts

HI, OASDI

Trust Fund 

Accounts

M

E

A

N

S

O

F

F

I

N

A

N

C

I

N

G

SMI

Premiums and 

State Transfers

Income Taxes,

Benefit Taxes, 

Other Revenues,

Borrowing from

the Public

Payroll Taxes and

Hospital 

Insurance

Premiums

HI, OASDI, SMI

Benefits

Other 

Government 

Transfers

expenditures. For beneficiaries dually eligible for Medicare and Medicaid, states must pay the Part D account a portion of 

their estimated foregone drug costs for this population (referred to as state transfers). As with HI, interest received on 

Treasury securities held in the SMI Trust Fund is credited to the fund. These Treasury securities and related interest have no 

effect on the consolidated statement of governmentwide finances. See Note 22—Social Insurance, for additional information 

on Medicare program financing.

Figure 1

Social Security, Medicare, and Governmentwide Finances

Social Security, Medicare, and Governmentwide Finances

The current and future financial status of the separate OASDI, HI, and SMI Trust Funds is the focus of the Social 

Security and Medicare Trustees’ Reports, a focus that may appropriately be referred to as the “trust fund perspective.” In 

contrast, the government primarily uses the budget concept as the framework for budgetary analysis and presentation. It 

represents a comprehensive display of all federal activities, regardless of fund type or on- and off-budget status, and has a 

broader focus than the trust fund perspective that may appropriately be referred to as the “budget perspective” or the 

“governmentwide perspective.” Social Security and Medicare are among the largest expenditure categories of the U.S. 

federal budget. This section describes in detail the important relationship between the trust fund perspective and the 

governmentwide perspective.

Figure 1 is a simplified depiction of the interaction of the Social Security and Medicare Trust Funds with the rest of the 

federal budget.11 The boxes on the left show sources of funding, those in the middle represent the trust funds and other 

government accounts, which include the General Fund into which that funding flows, and the boxes on the right show 

simplified expenditure categories. The figure is intended to illustrate how the various sources of program revenue flow 

through the budget to beneficiaries. The general approach is to group revenues and expenditures that are linked specifically to 

Social Security and/or Medicare separately from those for other government programs.

 11 The federal budget encompasses all government financing and is synonymous with a governmentwide perspective.
 177 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)

Each of the trust funds has its own sources and types of revenue. With the exception of General Fund transfers to SMI, 

each of these revenue sources represents revenue from the public that is dedicated specifically for the respective trust fund

and cannot be used for other purposes. In contrast, personal and corporate income taxes as well as other revenue go into the 

General Fund and are drawn down for any government program for which Congress has approved spending.12 The arrows 

from the boxes on the left represent the flow of the revenues into the trust funds and other government accounts.

The heavy line between the top two boxes in the middle of Figure 1 represents intragovernmental transfers to the SMI 

Trust Fund from other government accounts. The Medicare SMI Trust Fund is shown separately from the two Social Security 

Trust Funds (OASI and DI) and the Medicare HI Trust Fund to highlight the unique financing of SMI. Currently, SMI is the 

only one of the programs that is funded through transfers from the General Fund, which is part of the other government 

accounts (the SMI Part D account also receives transfers from the states). The direct transfers finance roughly three-fourths of 

SMI Program expenses. The transfers are automatic; their size depends on how much the program requires, not on how much 

revenue comes into the Treasury. If General Fund revenues become insufficient to cover both the mandated transfer to SMI 

and expenditures on other general government programs, Treasury has to borrow to make up the difference. In the longer run, 

if transfers to SMI increase beyond growth in general revenues—and as shown in the Medicare Trustees Report and Chart 5 

later in this section, they are projected to increase significantly in coming years—then Congress must either raise taxes, cut 

other government spending, reduce SMI benefits, or borrow even more.

The dotted lines between the middle boxes of Figure 1 also represent intragovernmental transfers but those transfers 

arise in the form of “borrowing/lending” between the government accounts. Interest credited to the trust funds arises when 

the excess of program income over expenses is loaned to the General Fund. The vertical lines labeled Surplus Borrowed

represent these flows from the trust funds to the other government accounts. These loans reduce the amount the General Fund 

has to borrow from the public to finance a deficit (or likewise increase the amount of debt paid off if there is a surplus). 

However, the General Fund has to credit interest on the loans from the trust fund programs, just as if it borrowed the money 

from the public. The credits lead to future obligations for the General Fund (which is part of the other government accounts). 

These transactions are indicated in Figure 1 by the vertical arrows labeled Interest Credited. The credits increase trust fund 

income exactly as much as they increase credits (future obligations) in the General Fund. From the governmentwide 

standpoint, at least in an accounting sense, these interest credits are a wash.

When the trust funds get the receipts that they loan to the General Fund, these receipts provide additional authority to 

spend on benefits and other program expenses. The General Fund, in turn, has taken on the obligation of paying interest on 

these loans every year and repaying the principal when trust fund income from other sources falls below expenditures.

How loans from the trust funds to the General Fund and later repayments of those loans affect tax income and 

expenditures of the General Fund is uncertain. Two extreme cases encompass the possibilities. At one extreme, each dollar 

the trust funds loan to the General Fund might reduce borrowing from the public by a dollar at the time the loan is extended,

in which case the General Fund could repay all trust fund loans by borrowing from the public without raising the level of 

public debt above the level that would have occurred in the absence of the loans. At the other extreme, each dollar the trust

funds loan to the General Fund might result in some combination of higher General Fund spending and lower General Fund 

revenues amounting to one dollar at the time the loans are extended, in which case General Fund loan repayments to the trust 

funds might initially be financed with borrowing from the public but must at some point be financed with a combination of 

higher General Fund taxes and lower General Fund spending than would have occurred in the absence of the loans. In this 

latter extreme, trust fund loans result in additional largess (i.e., higher spending and/or lower taxes) in General Fund 

programs at the time the loans are extended, but ultimately that additional largess is financed with additional austerity (i.e., 

lower spending and/or higher taxes) in General Fund programs at later dates. The actual impact of trust fund loans to the 

General Fund and their repayment on General Fund programs is at one of these two extremes or somewhere in between.

Actual dollar amounts roughly corresponding to the flows presented in Figure 1 are shown in Table 1 for fiscal year 

2018. In Table 1, revenues from the public (left side of Figure 1) and expenditures to the public (right side of Figure 1) are 

shown separately from transfers between government accounts (middle of Figure 1). Note that the transfers ($318.3 billion) 

and interest credits ($93.5 billion) received by the trust funds appear as negative entries under “All Other” and are thus 

offsetting when summed for the total budget column. These two intragovernmental transfers are the key to the differences 

between the trust fund and budget perspectives.

From the governmentwide perspective, only revenues received from the public (and states in the case of Medicare, Part 

D) and expenditures made to the public are important for the final balance. Trust fund revenue from the public consists of 

 12 Other programs also have dedicated revenues in the form of taxes and fees (and other forms of receipt) and there are a large number of dedicated trust 

funds in the federal budget. Total trust fund receipts account for about 40 percent of total government receipts with the Social Security and Medicare Trust 

Funds accounting for about two-thirds of trust fund receipts. For further discussion, see the report issued by the Government Accountability Office, Federal 

Trust and Other Earmarked Funds, GAO-01-199SP, January 2001. In the figure and the discussion that follows, all other programs, including these other 

dedicated trust fund programs, are grouped under “Other government Accounts” to simplify the description and maintain the focus on Social Security and 

Medicare.
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 178

payroll taxes, benefit taxes, and premiums. For HI, the difference between total expenditures made to the public ($297.2 

billion) and revenues ($293.9 billion) was $3.3 billion in 2018, indicating that HI had a relatively small negative effect on the 

overall budget outcome in that year. For the SMI account, revenues from the public (primarily premiums) fell short of total 

expenditures made to the public by $291.6 billion in 2018, which resulted in a net draw on the overall budget balance in that

year. For OASDI, the difference between total expenditures made to the public ($988.0 billion) and revenues from the public 

($908.9 billion) was $79.1 billion in 2018, indicating that OASDI had a negative effect on the overall budget outcome in that

year. Combined OASDI payroll and benefit tax revenues were increased by $3.5 billion in fiscal year 2018.

The trust fund perspective is captured in the bottom section of each of the three trust fund columns. For HI, total 

revenues exceeded total expenditures by $5.7 billion in 2018, as shown at the bottom of the first column. For SMI, total 

revenues exceeded total expenditures by $27.5 billion. The total revenue for SMI is $441.6 billion ($122.5 + $319.1), which 

includes $319.1 billion transferred from other government accounts (General Fund). Transfers to the SMI Program from 

other government accounts (the General Fund), amounting to about 76.5 percent of program costs, are obligated under 

current law and, therefore, appropriately viewed as revenue from the trust fund perspective. For OASDI, total revenues of 

$992.7 billion ($908.9 + $83.8) exceeded total expenditures of $988.0 billion by $4.7 billion. Total revenues for OASDI 

included $83.8 billion in transfers from the General Fund, made up of interest credits of $83.8 billion.
 179 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)

Table 1

Revenues and Expenditures for Medicare and Social Security Trust Funds and the Total

Federal Budget for the Fiscal Year ended September 30, 2018

Trust Funds

(In billions of dollars) HI SMI OASDI Total All Other Total1

Payroll taxes and other public 

revenues:

Payroll and benefit taxes ..................... 288.8 - 908.9 1,197.7 - 1,197.7

Premiums........................................... 5.1 106.7 - 111.8 - 111.8

Other taxes and fees........................... - 15.8 - 15.8 2,003.4 2,019.2

Total .................................................. 293.9 122.5 908.9 1,325.3 2,003.4 3,328.7

 Total expenditures to the public2 ........ 297.2 414.1 988.0 1,699.3 2,408.4 4,107.7

Net results for budget perspective3..... (3.3) (291.6) (79.1) (374.0) (405.0) (779.0)

Revenues from other Government 

accounts:

Transfers ........................................... 1.6 316.7 - 318.3 (318.3)

Interest credits.................................... 7.3 2.4 83.8 93.5 (93.5)

Total ................................................. 9.0 319.1 83.8 411.8 (411.8)

Net results for trust fund 

perspective3 ........................................ 5.7 27.5 4.7 37.8 N/A N/A

1 This column is the sum of the preceding two columns and shows data for the total federal budget. The figure $779 was the total federal 

deficit in fiscal year 2018.

2 The OASDI figure includes $4.9 billion transferred to the Railroad Retirement Board for benefit payments and is therefore an expenditure 

to the public.

3 Net results are computed as revenues less expenditures.

Notes: Totals may not equal the sum of components due to rounding.

 "N/A" indicates not applicable.

Cash Flow Projections

Background

Economic and Demographic Assumptions. The Boards of Trustees13 of the OASDI and Medicare Trust Funds provide

in their annual reports to Congress short-range (10-year) and long-range (75-year) actuarial estimates of each trust fund.

Because of the inherent uncertainty in estimates for 75 years into the future, the boards use three alternative sets of economic

and demographic assumptions to show a range of possibilities. The economic and demographic assumptions used for the

most recent set of intermediate projections for Social Security and Medicare are shown in the “Social Security” and

“Medicare” sections of Note 22—Social Insurance.

 13 There are six trustees: the Secretaries of the Treasury (managing trustee), Health and Human Services, and Labor; the Commissioner of the Social Security

Administration; and two public trustees who are appointed by the President and confirmed by the Senate for a 4-year term. By law, the public trustees cannot both

be members of the same political party.
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 180

Worker-to-Beneficiary Ratio. The expenditure projections for both the OASDI and Medicare Programs reflect the aging 

of the large baby-boom generation, born in the years 1946 to 1964, and its ultimate passing. Under the intermediate 

assumptions, cost rates are projected to rise rapidly between 2018 and 2035, primarily because the number of beneficiaries 

rises much more rapidly than the number of covered workers as the baby-boom generation retires. For the most part, current 

workers pay for current benefits. Due to the lower fertility rates of the baby-boom generation as compared to those of their 

parents’ generation, and the expected low fertility rates of all future generations, there is a relatively smaller number of 

persons born after the baby boom who will then finance the retirement of the baby-boom generation. Chart 1 shows that in 

2017, every OASDI beneficiary had 2.8 workers to pay for his or her benefit. In 2030, however, after the last baby boomer 

turns 65, there will be only about 2.3 workers per beneficiary. The projected ratio continues to decline until there are just 2.0 

workers per beneficiary by 2092. A similar demographic pattern confronts the Medicare Program. The number of workers per 

HI beneficiary declines from 3.1 in 2017 to 2.4 in 2030, and continues to decline throughout the projection period to 2092, 

when there are just 2.1 workers per HI beneficiary.

Chart 1—Number of Covered Workers per OASDI Beneficiary

1970-2092
 181 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)

Social Security Projections

Income and Expenditures. Chart 2 shows historical values and actuarial estimates of combined OASDI annual 

noninterest income and expenditures for 1970-2092. The estimates are for the open-group population of all workers and 

beneficiaries projected to be alive in each year. The expenditure projections in Chart 2 and all subsequent charts assume all 

scheduled benefits are paid regardless of whether the income and assets are available to finance them.

Chart 2—OASDI Income (Excluding Interest) and Expenditures

1970-2092

(In billions of dollars)

Annual OASDI cost exceeded noninterest income in 2010 for the first time since 1983. It is projected that cost will 

continue to exceed noninterest income throughout the 75-year valuation period. Projected OASDI cost increases more rapidly 

than projected noninterest income through 2039 primarily because the retirement of the baby-boom generation will increase 

the number of beneficiaries much faster than the number of covered workers increases, as subsequent lower-birth-rate 

generations replace the baby-boom generation at working ages. From 2040 to 2052, the cost rate (the ratio of program cost to 

taxable payroll) generally declines because the aging baby-boom generation is gradually replaced at retirement ages by 

subsequent low-birth-rate generations. Thereafter, increases in life expectancy cause OASDI cost to increase generally 

relative to noninterest income, but more slowly than between 2010 and 2039. Beginning in 2018, cost exceeds total income, 

and combined OASI and DI Trust Fund reserves diminish until they become depleted in 2034. After trust fund reserve 

depletion, continuing income is sufficient to support expenditures at a level of 79 percent of program cost for the rest of 

2034, declining to 74 percent for 2092. To meet all OASDI cost on a timely basis, the combined OASI and DI Trust Funds 

will need to redeem Treasury securities. OASDI cost is projected to exceed total income (including interest) in 2018 for the 

first time since 1982, and remain higher throughout the 75-year valuation period. Therefore, the combined OASI and DI 

Trust Funds will be net borrowers from the General Fund going forward, rather than net lenders. The government could 

finance increased redemptions by increasing its borrowing from the public, raising taxes (other than OASDI payroll taxes), 

and/or reducing expenditures (other than OASDI cost).
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 182

Income and Expenditures as a Percent of Taxable Payroll. Chart 3 shows annual noninterest income and expenditures 

expressed as percentages of taxable payroll, commonly referred to as the income rate and cost rate, respectively. Under the 

intermediate assumptions, demographic factors would by themselves cause the projected cost rate to rise rapidly for the next 

two decades before leveling off in about 2035. However, the recent recession temporarily depressed taxable earnings and 

increased the number of beneficiaries, which in turn sharply, but temporarily, increased the cost rate starting in 2009. From a 

peak in 2013, the cost rate generally declines through 2017 under the economic recovery and thereafter returns to a gradually 

rising trend. The projected income rate is stable at about 13 percent throughout the 75-year period.

Chart 3—OASDI Income (Excluding Interest) and Expenditures

as a Percent of Taxable Payroll

1970-2092
 183 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)

Income and Expenditures as a Percent of GDP. Chart 4 shows estimated annual noninterest income and expenditures, 

expressed as a percent of GDP, which is the total value of goods and services produced in the U.S. This alternative 

perspective shows the size of the OASDI Program in relation to the capacity of the national economy to sustain it. In calendar 

year 2017, OASDI cost was about $952 billion, which was about 4.9 percent of GDP. The cost of the program (based on 

current law) rises rapidly to 6.1 by 2038, then declines to 5.9 percent by 2052, and then generally increases to 6.1 percent by 

2092. The rapid increase from 2018 to 2035 is projected to occur as baby boomers become eligible for OASDI benefits, 

lower birth rates result in fewer workers per beneficiary, and beneficiaries continue to live longer. In 2092, expenditures are 

projected to exceed income by approximately 1.50 percent of GDP. Social Security’s noninterest income is projected to drop 

to 4.5 percent in 2018, then increase to about 4.8 percent of GDP by 2028. Thereafter, noninterest income as a percent of 

GDP declines gradually, to about 4.6 percent by 2092, because the Trustees expect the share of employee compensation 

provided as non-covered fringe benefits to increase gradually.

Chart 4—OASDI Income (Excluding Interest) and Expenditures

as a Percent of GDP

1970-2092
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 184

Sensitivity Analysis. Projections of the future financial status of the OASDI program depend on many demographic and 

economic assumptions, including fertility, mortality, net immigration, average wages, inflation, and interest rates on Treasury 

securities. The income will depend on how these factors affect the size and composition of the working population and the 

level and distribution of wages and earnings. Similarly, the cost will depend on how these factors affect the size and 

composition of the beneficiary population and the general level of benefits.

Because perfect long-range projections of these factors are impossible and actual experience is likely to differ from the 

estimated or assumed values of these factors, this section is included to illustrate the sensitivity of the long-range projections 

to changes in assumptions by analyzing six key assumptions: total fertility rate, average annual reduction in death rates, net 

immigration, real-wage differential, CPI change, and real interest rate. For this analysis, the intermediate assumptions are 

used as the reference point, and each selected assumption is varied individually. The variation used for each individual 

assumption reflects the levels used for that assumption in the low-cost (Alternative I) and high-cost (Alternative III) 

projections. For example, when analyzing sensitivity with respect to variation in real wages, income, and expenditure 

projections using the intermediate assumptions are compared to the outcome when projections are done by changing only the 

real wage assumption to either low-cost or high-cost alternatives.

The low-cost alternative is characterized by assumptions that improve the financial status of the program (relative to the 

intermediate assumption) such as slower improvement in mortality (beneficiaries die younger). In contrast, assumptions 

under the high-cost alternative worsen the financial outlook. All present values are calculated as of January 1, 2018 and are 

based on estimates of income and cost during the 75-year projection period 2018-2092.

Table 2 shows the effects of changing individual assumptions on the present value of estimated OASDI expenditures in 

excess of income (the shortfall of income relative to expenditures in present value terms). The assumptions are shown in 

parentheses. For example, if the annual reduction in death rates were changed from 0.77 percent, the intermediate 

assumption, to 0.41 percent, meaning that people die younger, the shortfall for the period of estimated OASDI income 

relative to cost would decrease to $13,574 billion from $16,057 billion; if the annual reduction were changed to 1.15 percent, 

meaning that people live longer, the shortfall would increase to $18,761 billion.

A higher fertility rate means more workers relative to beneficiaries over the projection period, thereby lowering the 

shortfall relative to the intermediate assumption. Table 2 demonstrates that if the ultimate total fertility rate were changed 

from 2.0 children per woman, the intermediate assumption, to 1.8 children per woman, the shortfall for the period of 

estimated OASDI income relative to cost would increase to $17,591 billion from $16,057 billion; if the ultimate rate were 

changed to 2.2 children per woman, the shortfall would decrease to $14,509 billion.

The annual real-wage differential is the difference between the percentage increases in: (1) the average annual wage in 

OASDI covered employment; and (2) the average annual CPI. Higher real wage growth results in faster income growth 

relative to expenditure growth. As shown in Table 2, if the ultimate real-wage differential were changed from 1.20 percentage 

points, the intermediate assumption, to 0.58 percentage points, the shortfall for the period of estimated OASDI income 

relative to cost would increase to $18,489 billion from $16,057 billion; if the ultimate real-wage differential were changed 

from 1.20 to 1.82 percentage points, the shortfall would decrease to $12,378 billion.

Table 2 demonstrates that if the ultimate annual increase in the CPI were changed from 2.6 percent, the intermediate 

assumption, to 2.0 percent, the shortfall for the period of estimated OASDI income relative to cost would increase to $16,535

billion from $16,057 billion; if the ultimate annual increase in the CPI were changed to 3.2 percent, the shortfall would 

decrease to $15,551 billion. The seemingly counter-intuitive result that higher CPI increases result in decreased shortfalls 

(and vice versa) is explained by the time lag between the effects of the CPI changes on taxable payroll and on benefit 

payments. The effect on taxable payroll due to a greater increase in average wages is experienced immediately, while the 

effect on benefits is experienced with a lag of about one year. For this reason, larger increases in the CPI cause earnings and 

income to increase sooner and, therefore, by more each year, than benefits and cost.

Immigration generally occurs at relatively young adult ages, so there is no significant effect on beneficiaries (and, 

therefore, on benefits) in the early years of the projection period, but the effect on the numbers of workers (and, therefore, on 

payroll tax income) is immediate. Therefore, even in the early years, the present values, year by year, are generally higher (less 

negative in later years) for higher net annual immigration. However, the increased payroll taxes for a given year are eventually 

offset by benefits paid in that year to earlier immigrant cohorts. Therefore, the present values based on the three assumptions 

about net annual immigration become more similar at the end of the projection period. Table 2 shows that if the intermediate 

immigration assumptions were changed so that the average level for the 75-year period decreased from 1,272,000 persons to 

952,000 persons, the present value of the shortfall for the period of estimated OASDI income relative to cost would increase to 

$16,914 billion from $16,057 billion. If, instead, the immigration assumptions were changed so that net annual immigration 

would be expected to average 1,607,000 persons, the present value of the shortfall would decrease to $15,274 billion.

Finally, Table 2 shows the sensitivity of the shortfall to variations in the real interest rate or, in present value 

terminology, the sensitivity to alternative discount rates assuming a higher discount rate results in a lower present value. If 

the ultimate real interest rate were changed from 2.7 percent, the intermediate assumption, to 2.2 percent, the shortfall for the 
 185 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)

period of estimated OASDI income relative to cost, when measured in present-value terms would increase to $18,999 billion 

from $16,057 billion; if the ultimate annual real interest rate were changed to 3.2 percent, the present-value shortfall would 

decrease to $13,713 billion.

Table 2

Present Values of Estimated OASDI Expenditures in Excess of Income

Under Various Assumptions, 2018-2092

(Dollar values in billions; values of assumptions shown in parentheses)

Financing Shortfall Range

Assumption Low Intermediate High

Average annual reduction in death rates .................................... 13,574 16,057 18,761 

(0.41) (0.77) (1.15)

Total fertility rate....................................................................... 14,509 16,057 17,591 

(2.2) (2.0) (1.8)

Real-wage differential............................................................... 12,378 16,057 18,489 

(1.82) (1.20) (0.58)

CPI change.............................................................................. 15,551 16,057 16,535 

(3.2) (2.6) (2.0)

Net immigration1 ....................................................................... 15,274 16,057 16,914 

(1,607,000) (1,272,000) (952,000)

Real interest rate...................................................................... 13,713 16,057 18,999 

(3.2) (2.7) (2.2)

1 Amounts represent the average annual net immigration over the 75-year projection period.

Source: 2018 OASDI Trustees Report and SSA.

Medicare Projections

Medicare Legislation. The projections in this year’s report include the enactment of the MACRA, which was enacted in

2015 and repealed the SGR formula that set physician fee schedule payments. While the physician payment updates and new

incentives put in place by MACRA avoid the significant short-range physician payment issues that would have resulted from

the SGR system approach, they nevertheless raise important long-range concerns. In particular, additional payments of $500

million per year for one group of physicians and 5 percent annual bonuses for another group are scheduled to expire in 2025,

resulting in a significant one-time payment reduction for most physicians. In addition, the law specifies the physician

payment update amounts for all years in the future, and these amounts do not vary based on underlying economic conditions,

nor are they expected to keep pace with the average rate of physician cost increases. The specified rate updates could be an

issue in years when levels of inflation are high and would be problematic when the cumulative gap between the price updates

and physician costs becomes large. The gap will continue to widen throughout the projection, and it is estimated that

physician payment rates under current law will be lower than they would have been under the SGR formula by 2048. Absent

a change in the delivery system or level of update by subsequent legislation, access to Medicare-participating physicians may

become a significant issue in the long term under current law.
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 186

Incorporated in these projections is the sequestration of non-salary Medicare expenditures as required by the following

laws:

• Budget Control Act of 2011 (P.L. 112-25, enacted on August 2, 2011), as amended by the American Taxpayer Relief

Act of 2012 (P.L. 112-240, enacted on January 2, 2013);

• Continuing Appropriations Resolution, 2014 (P.L. 113-67, enacted on December 26, 2013);

• Sections 1 and 3 of P.L. 113-82, enacted on February 15, 2014;

• Protecting Access to Medicare Act of 2014 (P.L. 113-93, enacted on April 1, 2014);

• BBA of 2015 (P.L. 114-74, enacted on November 2, 2015); and

• BBA of 2018 (P.L. 115-123, enacted on February 9, 2018).

The sequestration reduces benefit payments by 2 percent from April 1, 2013 through March 31, 2027, and by 4 percent

from April 1, 2027 through September 30, 2027. Due to sequestration, non-salary administrative expenses are reduced by an

estimated 5 to 7 percent from March 1, 2013 through September 30, 2027.

These projections also incorporate the effects of the Patient Protection and Affordable Care Act, as amended by the

HCERA of 2010. This legislation, referred to collectively as the Affordable Care Act or ACA, was enacted in 2010 and

contains roughly 165 provisions affecting the Medicare program by reducing costs, increasing revenues, improving benefits,

combating fraud and abuse, and initiating a major program of R&D to identify alternative provider payment mechanisms,

health care delivery systems, and other changes intended to improve the quality of health care and reduce costs.

The 2018 Medicare Trustees’ Report warns that the financial projections for the Medicare program reflect substantial, 

but very uncertain, cost savings deriving from provisions of the ACA and MACRA that lower increases in Medicare payment 

rates to most categories of health care providers. Without fundamental change in the current delivery system, these 

adjustments would probably not be viable indefinitely. It is conceivable that providers could improve their productivity,

reduce wasteful expenditures, and take other steps to keep their cost growth within the bounds imposed by the Medicare price

limitations. For such efforts to be successful in the long range, however, providers would have to generate and sustain

unprecedented levels of productivity gains—a very challenging and uncertain prospect. In view of the factors described 

above, it is important to note that Medicare’s actual future costs are highly uncertain for reasons apart from the inherent

challenges in projecting health care cost growth over time. 

Changes in Projection Methods. The projections in this year’s report, with one exception related to Part A, are based on 

current law; that is, it is assumed that laws on the books will be implemented and adhered to with respect to scheduled taxes, 

premium revenues, and payments to providers and health plans. The one exception is that the projections disregard payment 

reductions that would result from the projected depletion of the HI Trust Fund. Under current law, payments would be 

reduced to levels that could be covered by incoming tax and premium revenues when the HI Trust Fund was depleted.
 187 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)

Total Medicare. Chart 5 shows expenditures and current-law noninterest revenue sources for HI and SMI combined as a 

percent of GDP. Under the ACA, beginning in 2013 the HI Trust Fund receives an additional 0.9 percent tax on earnings in 

excess of $250,000 for joint tax return filers and $200,000 for individual tax return filers. As a result of this provision, it is 

projected that payroll taxes will grow slightly faster than GDP. After 2018, HI revenue from income taxes on Social Security 

benefits will gradually increase as a share of GDP as the share of benefits subject to such taxes increases. Beginning in 2009, 

as HI payroll tax receipts declined due to the recession and general revenue transfers increased, the latter income source 

became the largest single source of income to the Medicare program as a whole. General revenue transfers to the Part B 

account increased significantly in 2016, as required by the BBA of 2015 to compensate for premium revenue that was not 

received in 2016 due to the hold harmless provision, which limited the Part B premium increase for a majority of 

beneficiaries. After decreasing from 2016 to 2017, general revenues will gradually increase as a share of Medicare financing 

from 2018 through 2032 and grow to about 49 percent, stabilizing thereafter. SMI premiums will also grow in proportion to 

general revenue transfers, placing a growing burden on beneficiaries. High-income beneficiaries have paid an income-related 

premium for Part B since 2007 and for Part D since 2011. SMI general revenues equal 1.5 percent of GDP in 2017 and will 

increase to an estimated 2.8 percent in 2092 under current law.

Chart 5—Total Medicare (HI and SMI) Expenditures and Noninterest Income

as a Percent of GDP

1970-2092
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 188

Medicare, Part A (Hospital Insurance)─ Income and Expenditures. Chart 6 shows historical and actuarial estimates of 

HI annual income (excluding interest) and expenditures for 1970-2092 in nominal dollars. The estimates are for the opengroup population.

Chart 6—Medicare Part A Income (Excluding Interest) and Expenditures

1970-2092

(In billions of dollars)
 189 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)

Medicare, Part A Income and Expenditures as a Percent of Taxable Payroll. Chart 7 illustrates income (excluding 

interest) and expenditures as a percentage of taxable payroll over the next 75 years. The projected HI cost rates shown in the 

2018 report are higher than those from the 2017 report for all years largely due to higher spending and lower taxable payroll 

in all projected years. The standard HI payroll tax rate is scheduled to remain constant at 2.90 percent (for employees and 

employers, combined). In addition, starting in 2013, high-income workers pay an additional 0.9 percent of their earnings 

above $200,000 (for single workers) or $250,000 (for married couples filing joint income tax returns). Since these income 

thresholds are not indexed, over time an increasing proportion of workers and their earnings will become subject to the 

additional HI tax rate. (By the end of the long-range projection period, an estimated 79 percent of workers would be subject 

to this tax.) Thus, HI payroll tax revenues will increase steadily as a percentage of taxable payroll. Similarly, after 2019, HI 

income from taxation of Social Security benefits will also increase faster than taxable payroll because the income thresholds

determining taxable benefits are not indexed for price inflation. The cost rate has mostly been declining since 2010, and it is 

projected to continue to decline in 2018, largely due to (i) expenditure growth that was constrained in part by low utilization 

and low payment updates, and (ii) a rebound of taxable payroll growth from 2007-2009 recession levels. After 2018 the cost 

rate is projected to rise primarily due to retirements of those in the baby-boom generation and partly due to a projected return 

to modest health services cost growth. This cost rate increase is moderated by the accumulating effect of the productivity 

adjustments to provider price updates, which are estimated to reduce annual HI per capita cost growth by an average of 0.8 

percent through 2027 and 1.1 percent thereafter. The noninterest income is projected to decrease from 91 percent in 2026 to 

78 percent in 2042, and then to increase to about 85 percent by the end of the projection period.

Chart 7—Medicare Part A Income (Excluding Interest) and Expenditures

as a Percent of Taxable Payroll

1970-2092
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 190

Medicare, Part A Income and Expenditures as a Percent of GDP. Chart 8 shows estimated annual noninterest income 

and expenditures, expressed as a percent of GDP, the total value of goods and services produced in the U.S. This alternative 

perspective shows the size of the HI Program in relation to the capacity of the national economy to sustain it. Under the 

intermediate and high-cost assumptions, the HI annual balance is negative for all years of the projection period. Under the 

intermediate assumptions, annual deficits generally increase through 2045, and then generally decline thereafter. The gap 

between expenditure and income shares of GDP widens to 0.50 percent in 2045, and then commences a slight decline, 

reaching 0.33 percent of GDP in 2092.

Chart 8—Medicare Part A Income (Excluding Interest) and Expenditures

as a Percent of GDP

1970-2092
 191 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)

Medicare, Parts B and D SMI. Chart 9 shows historical and actuarial estimates of Medicare Part B and Part D premiums 

(and Part D state transfers) as well as expenditures for each of the next 75 years, in dollars. Beneficiary premiums and general 

revenue contributions for both Part B and Part D are established annually to cover the expected costs for the upcoming year. 

Should actual costs exceed those anticipated when the financing is determined, future financing rates can include adjustments 

to recover the shortfall. Likewise, should actual costs be less than those anticipated, the savings would result in lower future 

financing rates. The gap between program expenditures and revenues from premiums, drug fees, and state transfers grows 

throughout the projection period. This gap will need to be filled with general revenue transfers.

Chart 9—Medicare Part B and Part D Premium and State

Transfer Income and Expenditures

1970-2092

(In billions of dollars)
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 192

Medicare Part B and Part D Premium as well as State Transfer Income and Expenditures as a Percent of GDP. Chart 

10 shows expenditures for the SMI Program over the next 75 years expressed as a percent of GDP, providing a perspective 

on the size of the SMI Program in relation to the capacity of the national economy to sustain it. SMI costs are projected to 

continue to outpace growth in GDP but at a slower rate compared to the last 10 years. Total SMI expenditures amounted to 

2.1 percent of GDP in 2017 and are projected to grow to about 3.7 percent of GDP within 25 years and to 3.9 percent by the 

end of the projection period. The relatively high growth during the period 2018-2027 is due to the continuing retirement of 

the baby-boom generation and modest increases in cost trends. Growth rates are projected to decline during the 2028-2042 

period primarily as a result of a deceleration in beneficiary population growth. For the last 50 years of the projection period, 

cost growth moderates further due to the continued deceleration in beneficiary population growth and lower health care cost 

growth rate assumptions. To match the faster growth rates for SMI expenditures, beneficiary premiums, along with general 

revenue contributions, would increase more rapidly than GDP over time but at a slower rate compared to the last 10 years. 

Average per beneficiary costs for Part B and Part D benefits are projected to increase after 2017 by about 4.3 percent 

annually. The associated beneficiary premiums—and general revenue financing—would increase by approximately the same 

rate.

Chart 10—Medicare Part B and Part D Premium and State Transfer

Income and Expenditures as a Percent of GDP

1970-2092

Medicare Sensitivity Analysis. This section illustrates the sensitivity of long-range cost and income estimates for the 

Medicare Program to changes in selected individual assumptions. As with the OASDI analysis, the intermediate assumption 

is used as a reference point, and each selected assumption is varied individually to produce three scenarios. The variation 

used for each individual assumption reflects the levels used for that assumption in the low-cost and high-cost projections (see 

description of sensitivity analysis for OASDI). All present values are calculated as of January 1, 2018 and are based on 

estimates of income and expenditures during the 75-year projection period.

Table 3 shows the net present value of cash flow during the 75-year projection period under three alternative 

assumptions for the annual growth rate in the aggregate cost of providing covered health care services to beneficiaries. These 

assumptions are that the ultimate annual growth rate in such costs, relative to taxable payroll, will be 1 percent slower than 
 193 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)

the intermediate assumptions, the same as the intermediate assumptions, and 1 percent faster than the intermediate 

assumptions. The assumptions are shown in parentheses. The table demonstrates that if the ultimate growth rate assumption 

is 1 percentage point lower than the intermediate assumption, the deficit decreases by $7,812 billion. On the other hand, if the 

ultimate growth rate assumption is 1 percentage point higher than the intermediate assumption, the deficit increases 

substantially by $12,472 billion. This assumption has a dramatic impact on projected HI cash flow. The present value of the 

net cash flow under the ultimate growth rate assumption of 1 percentage point lower than the intermediate assumption 

actually becomes a surplus due to the improved financial outlook for the HI trust fund as a result of the ACA. Several factors, 

such as the utilization of services by beneficiaries or the relative complexity of services provided, can affect costs without 

affecting tax income. As the table indicates, the financial status of the HI Trust Fund is extremely sensitive to the relative 

growth rates for health care service costs.

The fertility rate assumption has a substantial impact on projected HI cash flows. As demonstrated by Table 3, for an 

increase of 0.2 in the assumed ultimate fertility rate, the projected present value of the HI deficit decreases by approximately 

$562 billion, and for a decrease of 0.2 in the assumed ultimate fertility rate, the projected present value of the HI deficit

increases by approximately $557 billion. Under the higher fertility rate assumptions, there will be additional workers in the 

labor force after 20 years, and many will become subject to the additional HI tax, thereby lowering the deficit proportionately 

more on a present-value-dollar basis. On the other hand, under the lower fertility rate assumptions, there will be fewer 

workers in the workforce with a smaller number subject to the additional tax, in turn raising the HI deficit. It is important to 

point out that if a longer projection period were used, the impact of a fertility rate change would be more pronounced.

Relative to the intermediate case, for an increase in the ultimate real-wage differential assumption of 0.6 percentage 

points, the deficit—expressed in present-value dollars—decreases by approximately $2,394 billion. Conversely, for a 

decrease in the ultimate real-wage differential assumption of 0.6 percentage points, the deficit increases by about $1,271 

billion. When expressed in present-value dollars, faster real-wage growth results in smaller HI cash flow deficits. A higher 

real-wage differential immediately increases both HI expenditures for health care and wages for all workers. There is a full 

effect on wages and payroll taxes, but the effect on benefits is only partial, since not all health care costs are wage-related. In 

practice, faster real-wage growth always improves the financial status of the HI trust fund, regardless of whether there is a 

small or large imbalance between income and expenditures.

As Table 3 indicates, the change in CPI inflation has an impact when the cash flow is expressed as present values. If the 

ultimate CPI-increase assumption is changed from 2.6 percent, the intermediate assumption, to 3.2 percent, the deficit 

decreases by $1,060 billion. On the other hand, if the ultimate CPI-increase is changed from 2.6 percent, the intermediate 

assumption, to 2.0 percent, the deficit increases by $1,375 billion. The projected present values of HI cash flow are relatively 

insensitive to the assumed level of general price inflation because price inflation has about the same proportionate effect on 

income as it does on costs. In present value terms, a smaller deficit results under high-inflation conditions because the present 

values of HI expenditures are not significantly different under the various CPI scenarios, but under high-inflation conditions 

the present value of HI income increases as more people become subject to the additional 0.9 percent HI tax rate required by 

the ACA for workers with earnings above $200,000 or $250,000 (for single and joint income-tax filers, respectively). Since 

the thresholds are not indexed, additional workers become subject to the additional tax more quickly under conditions of 

faster inflation, and vice versa.

Higher net immigration results in smaller HI cash flow deficits. Since immigration tends to occur most often among 

people at working ages, who work and pay taxes into the HI system, a change in the net immigration assumption affects 

revenues from payroll taxes almost immediately. However, the impact on expenditures occurs later as those individuals age 

and become beneficiaries.

Table 3 also shows that the present value of net HI expenditures is approximately 15 percent lower if the real interest 

rate is 3.2 percent rather than 2.7 percent, and approximately 18 percent higher if the real interest rate is 2.2 percent rather 

than 2.7 percent.
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 194

Table 3

Present Values of Estimated Medicare Part A Expenditures in Excess of Income

Under Various Assumptions, 2018-2092

(Dollar values in billions; values of assumptions shown in parentheses)

Financing Shortfall Range

Assumption1 Low Intermediate High

Average annual growth in health costs2 ..................................... (3,104) 4,708 17,180 

(2.7) (3.7) (4.7)

Total fertility rate3 ..................................................................... 4,146 4,708 5,265 

(2.2) (2.0) (1.8)

Real wage differential .............................................................. 2,314 4,708 5,979 

(1.8) (1.2) (0.6)

CPI change ............................................................................. 3,648 4,708 6,083 

(3.2) (2.6) (2.0)

Net immigration4....................................................................... 4,503 4,708 4,973 

(1,607,000) (1,272,000) (952,000)

Real interest rate ..................................................................... 4,018 4,708 5,542 

(3.2) (2.7) (2.2)

1 The sensitivity of the projected HI net cash flow to variations in future mortality rates also is of interest. At this time, however,

relatively little is known about the relationship between improvements in life expectancy and the associated changes in health 

status and per beneficiary health expenditures. As a result, it is not possible at present to prepare meaningful estimates of the 

Part A, mortality sensitivity.

2 Annual growth rate is the aggregate cost of providing covered health care services to beneficiaries. The low-cost and high-cost 

alternatives assume that costs increase 1 percent slower or faster, respectively, than the intermediate assumption, relative to

growth in taxable payroll.

3 The total fertility rate for any year is the average number of children who would be born to a woman in her lifetime if she were 

to experience the birth rates by age observed in, or assumed for, the selected year and if she were to survive the entire 

childbearing period.

4 Amount represents the average annual net immigration over the 75-year projection period.

Source: CMS

Table 4 shows the effects of various assumptions about the growth in health care costs on the present value of estimated

SMI (Medicare Parts B and D) expenditures in excess of income. As with HI, net SMI expenditures are very sensitive to

changes in the health care cost growth assumption. For the low-cost alternative, the slower assumed growth in health costs

reduces the governmentwide resources needed for Part B from $25,079 billion to $18,175 billion and in Part D from $7,902

billion to $5,587 billion, about a 28 percent and 29 percent difference for Part B and Part D, respectively. The high-cost

assumption increases governmentwide resources needed to $35,846 billion for Part B and to $11,585 billion for Part D, about

a 43 percent and a 47 percent difference for Part B and Part D, respectively.
 195 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)

Table 4

Present Values of Estimated Medicare Parts B and D Future Expenditures 

Less Premium Income and State Transfers Under Three Health Care Cost

Growth Assumptions, 2018-2092

(In billions of dollars)

Governmentwide Resources Needed

Low Intermediate High

Medicare Program1 (3.3) (4.3) (5.3)

Part B........................................................................................... 18,175 25,079 35,846

Part D........................................................................................... 5,587 7,902 11,585

1 Annual growth rate is the aggregate cost of providing covered health care services to beneficiaries. The low and high scenarios

assume that costs increase one percent slower or faster, respectively, than the intermediate assumption.

Source: CMS

Sustainability of Social Security and Medicare

75-Year Horizon

According to the 2018 Medicare Trustees Report, the HI Trust Fund is projected to remain solvent until 2026 and,

according to the 2018 Social Security Trustees Report, the OASI and DI Trust Funds are projected to have sufficient asset

reserves to pay full benefits on time until 2034 and 2032, respectively. In each case, some general revenues must be used to

satisfy the authorization of full benefit payments until the year of trust fund depletion. This occurs when the trust fund

interest income and balances accumulated during prior years are needed to pay benefits, which leads to a transfer from

general revenues to the trust funds. Moreover, under current law, General Fund transfers to the SMI Trust Fund will occur

into the indefinite future and will continue to grow with the growth in health care expenditures.

The potential magnitude of future financial obligations under these three social insurance programs is, therefore,

important from a budget perspective as well as for understanding generally the growing resource demands of the programs on

the economy. A common way to present future cash flows is in terms of their present value. This approach recognizes that a

dollar paid or collected next year is worth less than a dollar today because a dollar today could be saved and earn a year’s

worth of interest. From the 75-year budget perspective, the present value of the additional resources that would be necessary

to meet projected expenditures, for the three programs combined, is $53.7 trillion. To put this figure in perspective, it would

represent 4.1 percent of the present value of projected GDP over the same period ($1,298 trillion). These resource needs

would be in addition to the payroll taxes, benefit taxes, and premium payments. Asset redemptions and SMI general revenue

transfers represent formal budget commitments, but no provision exists for covering the HI and OASDI Trust Fund deficits

once assets are depleted.

Table 5 shows the magnitudes of the primary expenditures and sources of financing for the three trust funds computed

on an open-group basis for the next 75 years and expressed in present values. The data are consistent with the SOSI included

in the principal financial statements. For HI, revenues from the public are projected to fall short of total expenditures by

$4,708 billion in present value terms which is the additional amount needed in order to pay scheduled benefits over the next

75 years.14 From the trust fund perspective, the amount needed is $4,506 billion in present value after subtracting the value of

the existing trust fund balances (an asset to the trust fund account but an intragovernmental transfer to the overall budget).

For SMI, revenues from the public for Part B and D combined are estimated to be $32,981 billion less than total expenditures

for the two accounts, an amount that, from a budget perspective, will be needed to keep the SMI program solvent for the next

75 years. From the trust fund perspective, however, the present values of total revenues and total expenditures for the SMI

Program are roughly equal due to the annual adjustment of revenue from other government accounts to meet program costs.15

 14 Interest income is not a factor in this table as dollar amounts are in present value terms. 15 The SMI Trust Fund has $88 billion of existing assets.
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 196

For OASDI, projected revenues from the public fall short of total expenditures by $16,057 billion in present value dollars,

and by $13,166 billion from the trust fund perspective.

From the governmentwide perspective, the present value of the total resources needed for the Social Security and

Medicare Programs over and above current-law funding sources (payroll taxes, benefit taxes, and premium payments from

the public) is $53,747 billion. From the trust fund perspective, which counts the trust funds ($3,182 billion in present value)

and the general revenue transfers to the SMI Program ($32,981 billion in present value) as dedicated funding sources,

additional resources needed to fund the programs are $17,584 billion in present value.

Table 5

Present Values of Costs Less Revenues of 75-Year Open Group Obligations

HI, SMI, and OASDI

SMI

(In billions of dollars, as of January 1, 2018) HI Part B Part D OASDI Total

Revenues from the public:

Taxes ..................................................................... 22,807 - - 65,088 87,895

Premiums and state transfers................................... - 9,374 3,222 - 12,596

Total....................................................................... 22,807 9,374 3,222 65,088 100,491

Total costs to the public ........................................... 27,515 34,453 11,124 81,146 154,238

Net results - budget perspective1 .............................. 4,708 25,079 7,902 16,057 53,746

Revenues from other government accounts ............. - 25,079 7,902 - 32,981

Trust fund balances as of 1/1/2018........................... 202 80 8 2,892 3,182

Net results - trust fund perspective1 .......................... 4,506 (80) (8) 13,166 17,584

1Net results are computed as costs less revenues and trust fund balances. Negative values are indicative of surpluses.

Note: Totals may not equal the sum of components due to rounding.

Source: 2018 OASDI and Medicare Trustees' Reports

Infinite Horizon

The 75-year horizon represented in Table 5 is consistent with the primary focus of the Social Security and Medicare

Trustees’ Reports. For the OASDI Program, for example, an additional $16.1 trillion in present value will be needed above

currently scheduled taxes to pay for scheduled benefits ($13.2 trillion from the trust fund perspective). Experts have noted

that limiting the projections to 75 years understates the magnitude of the long-range unfunded obligations because summary

measures (such as the actuarial balance and open-group unfunded obligations) reflect the full amount of taxes paid by the

next two or three generations of workers, but not the full amount of their benefits. One approach to addressing the limitations

of 75-year summary measures is to extend the projection horizon indefinitely, so that the overall results reflect the projected

costs and revenues after the first 75 years. Such extended projections can also help indicate whether the financial imbalance

would be improving or continuing to worsen beyond the normal 75-year period. The open-group infinite horizon net

obligation is the present value of all expected future program outlays less the present value of all expected future program tax

and premium revenues. Such a measure is provided in Table 6 for the three trust funds represented in Table 5.

From the budget or governmentwide perspective, the values in line 1 plus the values in line 4 of Table 6 represent the

value of resources needed to finance each of the programs into the infinite future. The sums are shown in the last line of the

table (also equivalent to adding the values in the second and fifth lines). The total resources needed for all the programs sums

to $101.0 trillion in present value terms. This need can be satisfied only through increased borrowing, higher taxes, reduced

program spending, or some combination.

The second line shows the value of the trust fund at the beginning of 2018. For the HI and OASDI Programs this

represents, from the trust fund perspective, the extent to which the programs are funded. From that perspective, when the
 197 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)

trust fund is subtracted, an additional $34.3 trillion is needed to sustain the OASDI program into the infinite future, while the

HI program reflects a projected surplus of $2.2 trillion over the infinite horizon. However, looking just at present values

ignores timing differences in the underlying projected cash flows; the HI Trust Fund is projected to remain solvent only until

2029. As described above, from the trust fund perspective, the SMI Program is fully funded; from a governmentwide basis,

the substantial gap that exists between premiums, state transfer revenue, and program expenditures in the SMI Program

($46.3 trillion and $19.3 trillion for Parts B and D, respectively) represents future general revenue obligations of the federal

budget.

In comparison to the analogous 75-year number in Table 5, extending the calculations beyond 2092, captures the full

lifetime benefits, plus taxes and premiums of all current and future participants. The shorter horizon understates the total

financial needs by capturing relatively more of the revenues from current and future workers and not capturing all of the

benefits that are scheduled to be paid to them.

Table 6

Present Values of Costs Less Tax, Premium and State Transfer Revenue

through the Infinite Horizon, HI, SMI, OASDI

SMI

(in trillions of dollars as of January 1, 2018) HI Part B Part D OASDI Total

Present value of future costs less future taxes, 

premiums, and state transfers for current 

participants ............................................................. 11.8 21.0 5.8 35.3 73.9

Less current trust fund balance ................................ 0.2 0.1 - 2.9 3.2

Equals net obligations for past and current 

participants ............................................................. 11.6 20.9 5.8 32.4 70.7

Plus net obligations for future participants ................. (13.7) 25.4 13.5 1.9 27.1

Equals net obligations through the infinite future for 

all participants ......................................................... (2.2) 46.3 19.3 34.3 97.7

Present values of future costs less the present 

values of future income over the infinite horizon ........ (1.9) 46.4 19.3 37.2 101.0

Note: Totals may not equal the sum of components due to rounding.

Source: 2018 OASDI and Medicare Trustees' Reports
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 198

Railroad Retirement, Black Lung, and Unemployment Insurance

Railroad Retirement

The RRB was created in the 1930s to establish a retirement benefit program for the nation’s railroad workers. As the

Social Security Program legislated in 1935 would not give railroad workers credit for service performed prior to 1937,

legislation was enacted in 1934, 1935, and 1937 (collectively the Railroad Retirement Acts of the 1930s) to establish a

railroad retirement system separate from the Social Security Program.

As was discussed previously in this report, railroad retirement pays full retirement annuities at age 60 to railroad

workers with 30 years of service. The program pays disability annuities based on total or occupational disability. It also pays

annuities to spouses, divorced spouses, widow(er)s, remarried widow(er)s, surviving divorced spouses, children, and parents

of deceased railroad workers. Medicare covers qualified railroad retirement beneficiaries in the same way as it does Social

Security beneficiaries.

Payroll taxes paid by railroad employers and their employees provide a primary source of income for the Railroad

Retirement and Survivors’ Benefit Program. Other sources of program income include: the RRB-SSA-CMS Financial

Interchanges with the Social Security and Medicare Trust Funds, earnings on investments, federal income taxes on railroad

retirement benefits, and appropriations.

For further detail related to Railroad Retirement Program financing and actuarial assumptions, see Note 22—Social

Insurance.

Cash Flow Projections

Income and Expenditures. Railroad retirement cash flow projections are based on the intermediate set of assumptions

used in the RRB’s actuarial valuation of the program. The estimates are for the open-group population, which includes all

persons projected to participate in the Railroad Retirement Program as railroad workers or beneficiaries during the period.

Thus, the estimates include payments from, and on behalf of, those who will be employed by the railroads during the period

as well as those already employed at the beginning of the period. They also include expenditures made to, and on behalf of,

such workers during that period. Estimated railroad retirement expenditures are expected to exceed estimated income

(excluding interest and financial interchange income), in dollars, for the entire projection period (2018-2092).

Sensitivity Analysis. The projections of the future financial status of the Railroad Retirement Program depend on many

economic and demographic assumptions. For further information on the sensitivity of the long-range projections of the

Railroad Retirement Program and how the projections are impacted by changes in certain key assumptions, refer to RRB’s

financial statements.

Sustainability of Railroad Retirement

Consistent with SOSI the primary expenditures and sources of financing for the Railroad Retirement Program are

computed on an open-group basis for the next 75 years and are expressed in present values as of October 1, 2017. From a

governmentwide perspective, revenues are expected to fall short of expenditures by approximately $108.5 billion, which

represents the present value of resources needed to sustain the Railroad Retirement Program. From a trust fund perspective,

when the trust fund balance ($27.9 billion) and the financial interchange and transfers ($81.9 billion) are included, the

combined balance of the NRRIT, the Railroad Retirement Account, and the SSEB Account show a slight surplus ($1.3

billion). For further detail related to the sustainability of the Railroad Retirement Program, refer to RRB’s financial

statements.
 199 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)

Black Lung

The Federal Coal Mine Health and Safety Act of 1969 created the Black Lung Disability Benefit Program to provide

compensation, medical, and survivor benefits for eligible coal miners who are totally disabled due to pneumoconiosis (black

lung disease) arising out of their coal mine employment and the BLDTF provides benefit payments when no RMO can be

assigned the liability.

As was stated in the note to Social Insurance earlier in this report, black lung disability benefit payments are funded by

excise taxes from coal mine operators based on the domestic sale of coal, as are the program’s administrative costs. These

taxes are collected by the IRS and transferred to the BLDTF.

P.L. 110-343, Division B-Energy Improvement and Extension Act of 2008, enacted on October 3, 2008, among other

things, restructured the BLDTF debt by refinancing the outstanding high interest rate repayable advances with low interest

rate discounted debt instruments similar in form to zero-coupon bonds, plus a one-time appropriation. This Act also allowed

that any subsequent debt issued by the BLDTF may be used to make benefit payments, other authorized expenditures, or to

repay debt and interest from the initial refinancing. For more information on Black Lung Disability Benefit Program

financing and actuarial assumptions, see Note 22—Social Insurance.

Cash Flow Projections

Projected Cash Inflows and Outflows, in Constant Dollars, for the Open Group. Effective for fiscal year 2017

reporting, DOL revised its projection period from a fixed terminus of fiscal year 2040 to a rolling 25-year period beginning

on the valuation date. In order to be consistent with Executive Branch policy on regulations pursuant to the Clean Power Plan

(CPP), DOL’s estimates of future excise tax income were based on Energy Information Administration (EIA) projections of

future coal production that do not reflect CPP regulation. The EIA projections reflect the continuing trend of lower coal

production which would lead to lower future excise tax income. The projections, in constant dollars for the open group, made

over the 25-year period ending September 30, 2043, indicate that cash outflows for benefit payments and administrative

expenses will exceed cash inflows from excise taxes for all years in the projection period.

Sensitivity Analysis. For the projected cash inflows and outflows with sensitivity analysis, in constant dollars for the

open group, the significant assumption for medical cost inflation was increased by one percent. For the sensitivity analysis,

the other significant assumptions (coal excise tax revenue estimates, tax rate structure, number of beneficiaries, life

expectancy, federal civilian pay raises, interest rate on new debt issued by the BLDTF, and CPI-U for goods and services)

were left unchanged. Cash projections depend on the assumptions used and actual experience may differ materially from the

projections. These projections with sensitivity analysis, in constant dollars for the open group, made over the 25-year period

ending September 30, 2043, indicate cash outflows for benefit payments and administrative expenses will exceed cash

inflows from excise taxes for all years in the projection period. For further information on the sensitivity of the projections of

the Black Lung Disability Benefit Program and how the projections are impacted by changes in assumptions, refer to DOL’s

financial statements.

Sustainability of Black Lung

On September 30, 2018, total liabilities of the BLDTF exceeded assets by $5.6 billion. This net position deficit

represents the accumulated shortfall of excise taxes necessary to meet benefit payments, administrative costs, and interest

expense incurred prior to and subsequent to the debt refinancing pursuant to P.L. 110-343. Prior to the enactment of P.L. 110-

343, this shortfall was funded by repayable advances to the BLDTF, which were repayable with interest. Pursuant to P.L.

110-343, any shortfall will be financed with debt instruments similar in form to zero-coupon bonds, with a maturity date of

one year and bear interest at the Treasury 1-year rate. For further detailed information on the sustainability of the Black Lung

Disability Benefit Program, refer to DOL’s financial statements.

Unemployment Insurance

The UI Program was created in 1935 to provide income assistance to unemployed workers who lose their jobs generally

through no fault of their own, and are unemployed due to a lack of suitable work. The program protects workers during

temporary periods of unemployment through the provision of unemployment compensation benefits. The program is

administered through a unique system of federal and state partnerships established in federal law but executed through

conforming state laws by state entities. The federal government provides broad policy guidance and program direction

through the oversight of DOL, while program details are established through individual state UI statutes, administered

through state UI entities.

The UI Program is financed through the collection of federal and state unemployment taxes levied on subject employers

and deposited in the UTF and federal appropriations. The fund was established to account for the receipt, investment, and

disbursement of unemployment taxes. Federal unemployment taxes are used to pay for the administrative costs of the UI
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 200

Program, including grants to each state to cover the costs of state UI operations and the federal share of extended UI benefits.

Federal unemployment taxes are also used to fund an account within the UTF to make advances to state UI accounts when a

state’s UI account balance has been exhausted and the state is unable to make benefit payments.

The UI Program provides regular and extended benefit payments to eligible unemployed workers. Regular UI program

benefits are established under state law and are payable for a period not to exceed a maximum duration. In 1970 federal law

began to require states to extend this maximum period of benefit duration by 50 percent during periods of high

unemployment. These extended benefit payments are paid equally from federal and state accounts.

Cash Flow Projections

The significant assumptions used in the cash flow projections of the UTF include total unemployment rates, civilian

labor force levels, percent of unemployed receiving benefits, total wages, distribution of benefit payments by state, state tax

rate structures, state taxable wage bases, interest rates on UTF investments, and the CPI-U for goods and services. Cash

projections depend on the assumptions used and actual experience may differ materially from the projections. Under expected

economic conditions, total cash inflows, excluding interest earnings, are projected to exceed total cash outflows through the

end of the projection period.

Sensitivity Analysis. The effect on the accumulated UTF assets of projected total cash inflows and cash outflows of the

UTF, in constant dollars, over the ten-year period ending September 30, 2028, are demonstrated in two sensitivity analyses.

Each sensitivity analysis uses an open group, which includes current and future participants in the UI Program. Sensitivity

Analysis I assumes higher rates of unemployment and Sensitivity Analysis II assumes even higher rates of unemployment

compared to expected economic conditions. In Sensitivity Analysis I, which uses a higher unemployment rate of 5.5 percent

beginning in fiscal year 2019, net cash inflows are negative in fiscal years 2019 through 2024, but become positive in fiscal

year 2025, and continue to be positive through 2028. In Sensitivity Analysis II, net cash outflows, including interest earnings

and expenses, are projected in fiscal years 2019 through 2024, but inflows exceed outflows in fiscal years 2025 through 2028.

Net cash inflows are reestablished in fiscal year 2025 and peak in fiscal year 2027, with a drop in the unemployment rate to

8.3 percent in fiscal year 2023, and then steadily downward for fiscal years 2024 through 2028. The example of expected

economic conditions and two sensitivity analyses, in constant dollars, demonstrate the counter cyclical nature of the UI

Program, which experiences net cash inflows during periods of low unemployment that are depleted by net cash outflows

during periods of increased unemployment. For further detail on the sensitivity of the projections of the UI Program, refer to

DOL’s financial statements.

Sustainability of Unemployment Insurance

The ability of the UI Program to meet a participant’s future benefit payment needs depends on the availability of

accumulated taxes and earnings within the UTF. The effect of projected benefit payments on the accumulated net assets of

the UTF is measured, under an open group scenario, which includes current and future participants in the UI Program. As of

September 30, 2018, total assets within the UTF exceeded total liabilities by $72.5 billion. At the present time there is a

surplus; any surplus of tax revenues and earnings on these revenues over benefit payment expenses is available to finance

benefit payments in future periods when tax revenues may be insufficient. For more information on the sustainability of the

UI Program, refer to DOL’s financial statements.

Unemployment Trust Fund Solvency

Each state’s accumulated UTF net assets or reserve balance should provide a defined level of benefit payments over a

defined period. To be minimally solvent, a state’s reserve balance should provide for one year’s projected benefit payment

needs based on the highest levels of benefit payments experienced by the state over the last 20 years. A ratio of 1.0 or greater

indicates that the state UTF account balance is minimally solvent. States below this level are vulnerable to exhausting their

funds in a recession. States exhausting their reserve balance must borrow funds from the Federal Unemployment Account

(FUA) to make benefit payments. In fiscal year 2018, there were no FUA borrowings.

The results of DOL’s state by state analysis indicate 23 state funds plus the fund of the Virgin Islands were below the

minimal solvency ratio of 1.0 at September 30, 2018.
 201 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)

Deferred Maintenance and Repairs

Deferred maintenance and repairs result from maintenance not being performed on a timely basis and is the estimated 

cost to bring government-owned PP&E to an acceptable condition. Deferred maintenance and repairs exclude the cost of 

expanding the capacity of assets or upgrading them to serve needs different from those originally intended. The consequences 

of not performing regular maintenance and repairs could include increased safety hazards, poor service to the public, higher 

costs in the future, and inefficient operations. Estimated deferred maintenance and repairs costs are not accrued in the 

Statements of Net Cost or recognized as a liability on the Balance Sheets.

The amounts disclosed for deferred maintenance and repairs are allowed to be measured using one of the following 

three methods:

• Condition assessment surveys which are periodic inspections of government-owned property to determine the 

current condition and estimated cost to bring the property to an acceptable condition.

• Life-cycle cost forecast that is an acquisition or procurement technique that considers operation, maintenance, and 

other costs in addition to the acquisition cost of assets.

• Any other method of choice that is similar to the condition assessment survey or life-cycle costing methods.

The table below of deferred maintenance and repairs is presented as a single estimate in accordance with SFFAS No. 

42, Deferred Maintenance and Repairs: Amending Statements of Federal Financial Accounting Standards 6, 14, 29, and 32.

These amounts were all measured using the condition assessment survey method. Please refer to the individual financial 

statements of DOI, DOD, USDA, DOE, HHS, NASA, and VA for detailed significant information on deferred maintenance 

and repairs. 

Deferred Maintenance and Repairs as of September 30, 2018, and 2017

(In billions of dollars) 2018 2017

Asset category:

General property, plant, and equipment ........................................................................ 147.3 151.6

Heritage assets ........................................................................................................... 18.9 18.1

Stewardship land......................................................................................................... 0.4 0.5

Total deferred maintenance and repairs ..................................................................... 166.6 170.2

Other Claims for Refunds

Management has estimated amounts that may be paid out as other claims for tax refunds. This estimate represents an

amount (principal and interest) that may be paid for claims pending judicial review by the federal courts or, internally, by

appeals. The total estimated payout (including principal and interest) for claims pending judicial review by the federal courts

is $11.1 billion and $8.2 billion for fiscal years 2018 and 2017, respectively. For those under appeal, the estimated payout is

$1.8 billion and $2.2 billion for fiscal years 2018 and 2017, respectively. Although these refund claims have been deemed to

be probable, they do not meet the criteria in SFFAS No. 5, Accounting for Liabilities of the Federal Government, for

reporting the amounts in the Balance Sheets or for disclosure in the notes to the financial statements. However, they meet the

criteria in SFFAS No. 7, Accounting for Revenue and Other Financing Sources and Concepts for Reconciling Budgetary and

Financial Accounting, as amended, for inclusion as required supplementary information. To the extent judgments against the

government for these claims prompt other similarly situated taxpayers to file similar refund claims, these amounts could

become significantly greater.
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 202

Tax Assessments

The government is authorized and required to make inquiries, determinations, and assessments of all taxes that have not

been duly paid. Unpaid assessments result from taxpayers filing returns without sufficient payment, as well as enforcement

programs such as examination, under-reporter, substitute for return, and combined annual wage reporting. Under federal

accounting standards, unpaid assessments are categorized as taxes receivable if taxpayers agree or a court has determined the

assessments are owed. If neither of these conditions are met, the unpaid assessments are categorized as compliance

assessments. Assessments with little or no future collection potential are called write-offs. Although compliance assessments

and write-offs are not considered receivables under federal accounting standards, they represent legally enforceable claims of

the government. There is, however, a significant difference in the collection potential between compliance assessments and

receivables.

Compliance assessments and pre-assessment work in process are $67.5 billion and $75.8 billion for fiscal years 2018

and 2017, respectively. The amount of allowance for uncollectible amounts pertaining to compliance assessments cannot be

reasonably estimated, and thus the net realizable value of the pre-assessment work-in-process cannot be determined. The

amount of assessments that entities have statutory authority to collect at the end of the period but that have been written off

and excluded from accounts receivable are $115.0 billion and $111.0 billion for fiscal years 2018 and 2017, respectively.
 203 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)

Federal Oil and Gas Resources

The DOI is responsible for managing the nation’s oil and natural gas resources and the mineral revenues on federal

lands, both onshore and on the Outer Continental Shelf. This management process can be broken down into six essential

analysis components: pre-leasing, post-leasing and pre-production, production and post-production, revenue collection, fund

disbursement, and compliance.

Federal Oil and Gas Resources as of September 30, 2018, and 2017

(In billions of dollars) Offshore Onshore Total

2018 2017 2018 2017 2018 2017

Oil and lease condensate.................. 20.9 23.7 11.6 12.2 32.5 35.9

Natural gas, wet after lease 

separation........................................ 1.9 1.8 11.3 9.3 13.2 11.1

Total ............................................. 22.8 25.5 22.9 21.5 45.7 47.0

The above table presents the estimated present value of future federal royalty receipts on estimated proved reserves16 as

of September 30, 2018 and 2017. The federal government’s estimated petroleum royalties have as their basis the DOE’s EIA

estimates of proved reserves. The EIA provides such estimates directly for federal offshore areas and they are adjusted to

extract the federal subset of onshore proved reserves. The federal proved reserves were then further adjusted to correspond

with the effective date of the actual production for calendar year 2016, the most recently published EIA proved reserves

report and then are projected, separately for oil and natural gas, over time to simulate a schedule of when the reserves would

be produced. Future royalties are then calculated from these production streams by applying future price estimates by the

OMB, and effective royalty rates, adjusted for transportation allowances and other allowable deductions. The valuation

method used for gas captures royalties from three products–dry gas, wet gas, and natural gas liquids–which collectively are

reported as natural gas, wet after lease separation. The present value of these royalties are then determined by discounting the

revenue stream back to the effective date at a public discount rate assumed to be equal to the OMB’s estimates of future 30-

year Treasury bill rates. The 30-year rate was chosen because this maturity life most closely approximates the productive

lives of the proved reserves estimates.

 16 Per the EIA, lease condensate is a mixture consisting primarily of pentanes and heavier hydrocarbons which is recovered as a liquid from natural gas in

lease separation facilities. This category excludes natural gas plant liquids, such as butane and propane, which are recovered at downstream natural gas

processing plants or facilities. Also per the EIA, natural gas, wet after lease separation, is the volume of natural gas remaining after removal of lease

condensate in lease and/or field separation facilities, if any, and after exclusion of nonhydrocarbon gases where they occur in sufficient quantity to render the

gas unmarketable. Natural gas liquids may be recovered from volume of natural gas, wet after lease separation, and at natural gas processing plants

(https://www.eia.gov/naturalgas/data.cfm).
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 204

Estimated Federal Oil and Gas Petroleum Royalties (Proved Reserves)

As of September 30, 2018, and 2017

Average Purchase Average Royalty

Quantity (in millions) Price ($) Rate (%)

Petroleum Category 2018 2017 2018 2017 2018 2017

Oil and lease condensate (Bbl):

Offshore ......................................... 3,491.3 4,022.4 65.41 46.86 12.96 13.06 

Onshore ......................................... 2,361.0 2,278.0 60.16 45.20 12.19 12.12 

Total ............................................. 5,852.3 6,300.4

Natural gas, wet after lease 

separation (Mcf):

Offshore ......................................... 5,370.3 5,946.4 3.50 3.28 11.89 11.99 

Onshore ......................................... 37,828.7 39,877.7 2.94 3.07 10.36 10.58 

Total ............................................. 43,199.0 45,824.1

Bbl = barrels

Mcf = 1,000 cubic feet

The table above provides the estimated quantity, a weighted average purchase price, and a weighted average royalty rate

by category of estimated federal petroleum royalties at the end of fiscal years 2018 and 2017.17 The estimated quantities,

average purchase prices and royalty rates vary by region; the above table reflects an overall weighted average purchase price

and royalty rate, and is not presented on a regional basis, but is instead calculated based on regional averages. The prices and

royalty rates are based upon historical (or estimated) averages, excluding prior-period adjustments, if any, and are affected by

such factors as accounting adjustments and transportation allowances, resulting in effective average prices and royalty rates.

Prices are valued at the lease rather than at the market center, and differ from those used to compute the asset estimated

present values, which are forecasted and discounted based upon OMB economic assumptions. For further details on federal

oil and gas resources, refer to the financial statements of DOI. In addition to the oil and gas resources discussed above, the

federal government also owns oil and gas resources that are not currently under lease.

 17 Gulf of Mexico proved reserves are royalty bearing volumes. In the Gulf of Mexico, an additional 860.6 million Bbl for fiscal year 2018 and 689.7 million

Bbl for fiscal year 2017 of proved oil reserves, and 739.9 million Mcf for fiscal year 2018 and 1,180.3 million Mcf for fiscal year 2017 of proved gas

reserves are not reflected in these totals as they are estimated to be producible royalty free under various royalty relief provisions. The net present value of

the royalty value of the royalty free proved reserves volumes in the Gulf of Mexico is estimated to be $5.4 billion for fiscal year 2018 and $4.4 billion for

fiscal year 2017.
 205 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)

Federal Natural Resources Other than Oil and Gas

Federal Natural Resources Other than Oil and Gas as of September 30, 2018, and 2017

(in billions of dollars)

Natural Resource Category 2018 2017

Coal royalties .......................................................................................... 8.8 9.0

Total..................................................................................................... 8.8 9.0

The Office of Natural Resources Revenue (ONRR) within DOI is responsible for the management and collection of

revenues associated with federal coal leases which are managed by the Bureau of Land Management (BLM) within DOI. The

ONRR achieves optimal value by ensuring that all natural resource revenues are efficiently and accurately collected as well

as disbursed to recipients in a timely manner by performing audit and revenue compliance activities.

The Mineral Leasing Act of 1920, as amended, and the Mineral Leasing Act for Acquired Lands of 1947, as amended,

gives DOI the responsibility for coal leasing on approximately 700 million acres of federal mineral estate which includes 570

million of acres where coal development is allowed. The surface estate of these lands may be under the control of BLM, the

U.S. Forest Service (within USDA), private or state land owners, or other federal entities.

Public lands are available for coal leasing after the lands have been evaluated through a multiple-use planning process.

The Mineral Leasing Act, as amended by the Federal Coal Leasing Amendments Act of 1976, generally requires that coal be

leased competitively and that the federal government must receive a fair market value for land leased for coal development.

Once a lease is issued, federal coal leasing laws and lease terms determine the federal government’s share of production from

coal leasing operations.

DOI receives coal leasing revenues from a bonus paid at the time of the lease, an annual rent payment of $3.00 per acre,

and royalties paid on the value of the coal after it has been mined. A portion of the total federal coal royalties will be

distributed to other non-federal entities. The royalty rate for surface-mining methods is 12.5 percent and is 8.0 percent for

underground mining, and the BLM can approve reduced royalty rates based on maximum economic recovery. Regulations

that govern BLM’s coal leasing program are contained in Title 43, Groups 3000 and 3400 of the Code of Federal

Regulations.

The above table presents the estimated present value of federal coal royalties under lease contract or other long-term

arrangements as of September 30, 2018 and 2017. The federal government’s estimated coal royalties have as their basis the

DOI’s BLM estimates of recoverable reserves. The federal recoverable reserves are then further adjusted to correspond with

the effective date of the analysis and then are projected over time to simulate a schedule of when the reserves would be

produced. Future royalties are then calculated by applying future price estimates and effective royalty rates, adjusted for

transportation allowances and other allowable deductions. The present value of these royalties are then determined by

discounting the revenue stream back to the effective date at a public discount rate assumed to be equal to the OMB’s

estimates of future 30-year Treasury bill rates. The 30-year rate was chosen because this maturity life most closely

approximates the productive lives of the recoverable reserves estimates.

In addition to the coal resources discussed above, the federal government has other natural resources under lease

contract whereby the lessee is required to pay royalties on the sale of the natural resource. These natural resources include

soda ash, potash muriates of potash and langbeinite phosphate, lead concentrate, copper concentrate, and zinc concentrate.

Soda ash and potash have the largest estimated present value of future royalties. The federal government also owns coal

resources and certain other natural resources that are not currently under lease. For further details on federal natural

resources-other than oil and gas, refer to the financial statements of DOI.
OTHER INFORMATION (UNAUDITED) 206

United States Government

Other Information (Unaudited) for the

Years Ended September 30, 2018, and 2017

Tax Burden

The Internal Revenue Code provides for progressive tax rates, whereby higher earned income is generally subject to

higher tax rates. The following tables present the latest available information on income tax and related income, deductions,

and credit: for individuals by income level, and for corporations by size of assets.

Individual Income Tax Liability for Tax Year 2016

Average

Total Average Income

Number of Income AGI Per Tax per Income

Taxable AGI Tax Return Return Tax as a

Adjusted Gross Income Returns (in millions (in millions (in whole (in whole Percentage

(AGI) (In thousands) of dollars) of dollars) dollars) dollars) of AGI

Under $15,000 .................... 34,916 55,654 1,903 1,594 55 3.4%

$15,000 under $30,000........ 29,646 655,110 18,587 22,098 627 2.8%

$30,000 under $50,000........ 26,753 1,047,405 58,168 39,151 2,174 5.6%

$50,000 under $100,000...... 33,199 2,367,475 209,856 71,312 6,321 8.9%

$100,000 under $200,000 .... 18,858 2,552,481 321,564 135,353 17,052 12.6%

$200,000 under $500,000 .... 5,583 1,588,349 308,249 284,497 55,212 19.4%

$500,000 or more................ 1,318 1,959,465 527,721 1,486,696 400,395 26.9%

 Total ............................... 150,273 10,225,939 1,446,048
207 OTHER INFORMATION (UNAUDITED)

Corporate Income Tax Liability for Tax Year 2015

Percentage of

Income Subject Total Income Tax Income Tax After

Total Assets to Tax After Credits Credits to 

(In thousands of dollars) (in millions of dollars) (in millions of dollars) Taxable Income

Zero Assets ................................ 21,291 6,627 31.1%

$1 under $500............................. 8,606 1,619 18.8%

$500 under $1,000 ...................... 3,942 974 24.7%

$1,000 under $5,000 ................... 13,667 4,273 31.3%

$5,000 under $10,000.................. 8,581 2,793 32.5%

$10,000 under $25,000................ 13,120 4,306 32.8%

$25,000 under $50,000................ 12,890 4,210 32.7%

$50,000 under $100,000.............. 15,296 4,948 32.3%

$100,000 under $250,000 ............ 25,377 8,017 31.6%

$250,000 under $500,000 ............ 27,404 8,477 30.9%

$500,000 under $2,500,000 ......... 110,454 32,281 29.2%

$2,500,000 or more ..................... 1,114,453 251,097 22.5%

 Total ...................................... 1,375,081 329,622

Tax Gap

The tax gap is the difference between what taxpayers should pay and what they actually pay on time. The most recent

estimate of the annual gross tax gap, based on a study released in 2016, is about $458.0 billion for the Tax Year 2008-2010

timeframe. This amount represents the amount of noncompliance with tax laws. This study also estimated that $52.0 billion

of the gross tax gap would eventually be collected, resulting in a net tax gap of $406.0 billion. The IRS remains committed to

finding ways to increase compliance and reduce the tax gap, while minimizing the burden on the vast majority of taxpayers

who pay their taxes accurately and on time.

The tax gap is the aggregate amount of tax (excluding interest and penalties) that is imposed by the tax laws for any

given tax year but is not paid voluntarily and timely. The tax gap arises from three types of noncompliance: not filing

required tax returns on time or at all (the nonfiling gap), underreporting the correct amount of tax on timely filed returns (the

underreporting gap), and not paying on time the full amount reported on timely filed returns (the underpayment gap).

Underreporting of income tax, employment taxes, and other taxes represents 84.5 percent of the gross tax gap. Each instance

of noncompliance by a taxpayer contributes to the tax gap, whether or not the IRS detects it, and whether or not the taxpayer

is even aware of the noncompliance. Some of the tax gap arises from intentional (willful) noncompliance, and some of it

arises from unintentional mistakes.

The collection gap is the cumulative amount of assessed tax, penalties, and interest that has been assessed over many

years, but has not been paid by a certain point in time and which the IRS expects to remain uncollectible. In essence, it

represents the difference between the total balance of unpaid assessments and the net taxes receivable reported on IRS’s

balance sheet. The tax gap and the collection gap are related and overlapping concepts, but they have significant differences.

The collection gap is a cumulative balance sheet concept for a particular point in time, while the tax gap is like an income

statement item for a single year. Moreover, the tax gap estimates include all noncompliance, while the collection gap includes

only amounts that have been assessed (a small portion of all non-compliance).
OTHER INFORMATION (UNAUDITED) 208

Tax Expenditures

As discussed in greater detail in Note 17—Collections and Refunds of Federal Revenue, tax and other revenues 

reported reflect the effects of tax expenditures, which are special exclusions, exemptions, or deductions or which provide tax 

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

otherwise owe. 

The figures reported in the following table are estimates of tax expenditures using data from previous years and 

economic forecast from the fiscal year 2018 Midsession Review. The largest tax expenditures in fiscal year 2018 are the 

following (and see the table below):

• The exclusion from workers’ taxable income of employers’ contributions for health care, health insurance 

premiums, and premiums for long-term care insurance; 

• The exclusion of contributions to and the earnings of employer defined benefit and defined contribution pension 

funds (minus pension benefits that are included in taxable income); 

• Preferential tax rates on long-term capital gains; 

• Imputed rental income forms part of the total value of goods and services produced in a country. But unlike returns 

from other investments, the return on homeownership “imputed rent” is excluded from taxable income. In contrast, 

landlords must count as income the rent they receive, and renters may not deduct the rent they pay. A homeowner is 

effectively both landlord and renter, but the tax code treats homeowners the same as renters while ignoring their 

simultaneous role as their own landlords and exempting potential rent they would have paid themselves; and 

• Accelerated depreciation of machinery and equipment.

Largest Income Tax Expenditures

(In billions of dollars) 2018

Exclusion of employer contributions for medical insurance premiums & health care.................. 205.1

Defined benefit & defined contribution pension funds ............................................................. 142.2

Preferential tax rates on long-term capital gains..................................................................... 118.6

Exclusion of net imputed rental income ................................................................................. 116.6

Accelerated depreciation of machinery and equipment ........................................................... 67.8

Generally, identifying and measuring a tax expenditure requires defining a baseline tax system against which identified 

tax provisions are exceptions. The tax expenditures prepared for the Budget are estimated relative to a simplified 

comprehensive income tax, which defines income as the sum of consumption and the change in net wealth in a given period 

of time. 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, for the following reasons: 

• Eliminating a tax expenditure may have incentive effects that alter economic behavior, which can affect the resulting 

magnitudes of the activity or of other tax provisions or government programs. For example, if capital gains were 

taxed at ordinary rates, capital gain realizations would be expected to decline, resulting in lower tax receipts. Such 

behavioral effects are not reflected in the estimates. 

• Tax expenditures are interdependent even without incentive effects. Repeal of a tax expenditure provision can 

increase or decrease the tax revenue effect of other provisions. For example, even if behavior does not change, 

repeal of an itemized deduction could increase revenue costs from other deductions as some taxpayers move into 

higher tax brackets. Alternatively, an itemized deduction repeal could lower the revenue foregone from other 

deductions if taxpayers choose to claim the standard deduction over itemizing. Similarly, if two provisions were 

repealed simultaneously, the tax liability increase could be greater or less than the sum of the two separate tax 

expenditures, because each is estimated assuming that the other remains in force. 

• Repeal effects may depend on concurrent tax rate changes. Lowering or raising tax rates can decrease or increase the 

estimated revenues from a particular provision. A $10,000 charitable contributions deduction is worth $3,500 in 

corporate tax revenues at a 35 percent tax rate, but only $2,100 at a 21 percent tax rate. 
209 OTHER INFORMATION (UNAUDITED)

The President’s fiscal year 2006 Budget provided a presentation of the Department of the Treasury’s review of the tax 

expenditure budget. It focused on potential alternative baselines to a comprehensive income tax, including using a 

consumption tax, and defining negative tax expenditures (provisions that cause taxpayers to pay too much tax). Relative to a 

consumption tax baseline, a number of current tax provisions would be negative tax expenditures. More specifically, a 

consumption tax will not extend to saving or capital income. As an example, the exclusion for contributions to and earnings 

from retirement accounts would not be treated as a tax expenditure. Some of these also may not necessarily be negative tax 

expenditures under a comprehensive income tax as a baseline; the current reference law and normal law baselines represent a 

simplified version of comprehensive income. As an example, some medical expenditures may not be discretionary and 

perhaps should be excluded from income. 

A more comprehensive ranking, including rankings over a 10 year period, and descriptions of tax expenditures can be 

found at the following location from the Treasury’s Office of Tax Policy https://home.treasury.gov/policy-issues/taxpolicy/tax-expenditures. 
OTHER INFORMATION (UNAUDITED) 210

Unmatched Transactions and Balances

Restated

Fiscal Year Fiscal Year

(in millions of dollars) 2018 2017

Change in intragovernmental unmatched balances:

Debt/investment..................................................................... - (4,145.3)

Benefit program contributions payable/receivable..................... 0.5 10.6

Accounts payable/receivable ................................................ 58.6 (574.9)

Advances from/to others & deferred credits/prepayments ......... (406.8) 61.2

Transfers payable/receivable .................................................. - (50.2)

Other assets/liabilities............................................................. - (61.0)

Fund balance with Treasury.................................................... 640.1 399.0

292.4 (4,360.6)

Unmatched intragovernmental transactions:

Borrowings interest revenue/expense-exchange ...................... 62.0 -

Non-expenditure transfers-in/out ............................................. (475.1) (438.4)

Expenditure transfers-in/out .................................................... 605.3 688.2

Transfers-in/out without reimbursement................................... 7.1 (89.5)

Benefit program revenue/cost ................................................. 339.7 (896.3)

Non-reciprocating................................................................... 4,884.5 8,914.8

Revenue and other financing sources...................................... - 297.4

Other non-budgetary financing sources for debt 

accruals/amortization.............................................................. - 61.0

Appropriations expended........................................................ (92.7) 342.4

Appropriations used ............................................................... 92.7 (342.4)

Appropriations received/warrants issued.................................. 154.3 (390.1)

Custodial and non-entity collections transferred out/in .............. (6,450.7) (6,865.6)

Other..................................................................................... 2,959.2 501.4

2,086.3 1,782.9

Unmatched transactions and balances, net ................................ 2,378.7 (2,577.7)

( ) Parentheses indicate a decrease to Net Position.
211 OTHER INFORMATION (UNAUDITED)

The Statement of Operations and Changes in Net Position includes an amount for unmatched transactions and balances

that result from the consolidation of federal reporting entities. Transactions between federal entities must be eliminated in

consolidation to calculate the financial position of the government. Many of the amounts included in the table represent

intragovernmental activity and balances that differed between federal entity trading partners and often totaled significantly

more in the absolute than the net amounts shown. The table also reflects other consolidating adjustments and other

adjustments that contributed to the unmatched transactions and balances amount. In fiscal year 2017, a number of lines in the

unmatched transactions and balances table were adjusted to zero after intragovernmental difference analysis determined they

were immaterial at or below $0.1 billion. The adjustments were added to, or subtracted from, gross cost in the Statement of

Net Cost.

Unmatched transactions and balances between federal entities impact not only in the period in which differences

originate but also in the periods where differences are resolved. As a result, it would not be proper to conclude that increases

or decreases in the unmatched amounts shown in the “Unmatched Transactions and Balances” table reflect improvements or

deteriorations in the government’s ability to resolve intragovernmental transactions. The federal community considers the

identification and accurate reporting of intragovernmental activity a priority.
REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION (UNAUDITED) 212

United States Government

Required Supplementary Stewardship

Information (Unaudited) for the Years

Ended September 30, 2018, and 2017

Stewardship Investments

Stewardship investments focus on government programs aimed at providing long-term benefits by improving the

nation’s productivity and enhancing economic growth. These investments can be provided through direct federal spending or

grants to state and local governments for certain education and training programs, R&D, and federally financed but not

federally owned property, such as bridges and roads. When incurred, these investments are included as expenses in

determining the net cost of operations. Stewardship investments for the current year and for the immediately preceding four

years are shown in the table below.

Stewardship Investments for the Years Ended

September 30, 2014, through 2018

(In billions of dollars) 2018 2017 2016 2015 2014

Investments in non-federal physical property... 66.3 65.0 65.1 64.8 65.6

Investments in human capital ......................... 107.7 111.6 131.1 97.8 108.5

Research and development:

Investments in basic research...................... 40.1 36.5 35.5 29.4 34.0

Investments in applied research................... 38.2 32.7 32.5 28.8 28.1

Investments in development ........................ 75.0 68.2 64.9 63.3 61.8

Total investments ..................................... 327.3 314.0 329.1 284.1 298.0
213 REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION (UNAUDITED)

Non-Federal Physical Property

The government makes grants and provides funds for the purchase, construction, and/or major renovation of state and

local government physical properties. Costs for non-federal physical property programs are included as expenses in the

Statements of Net Cost and are reported as investments in the table. They are measured on the same accrual basis of

accounting used in the Financial Report. DOT, HUD, EPA, and DOD had $57.9 billion (87.3 percent), $3.4 billion (5.1

percent), $2.9 billion (4.4 percent), and $1.2 billion (1.8 percent), respectively, of the total non-federal physical property

investments in fiscal year 2018. Within DOT, the FHWA invested $42.8 billion during fiscal year 2018, primarily via

reimbursement from the Highway Trust Fund, for states’ construction costs on projects related to the federal highway system.

The main programs in which the states participate are the National Highway System, Interstate Systems, Surface

Transportation, and Congestion Mitigation/Air Quality Improvement programs. The states’ contribution is 10 percent for the

Interstate System and 20 percent for most other programs.

Human Capital

The government runs several programs that invest in human capital. Those investments go toward increasing and

maintaining a healthy economy by educating and training the general public. Costs do not include training expenses for

federal workers.

Education, VA, DOL, and HHS had $78.4 billion (72.8 percent), $17.0 billion (15.8 percent), $6.1 billion (5.7 percent),

and $2.1 billion (1.9 percent), respectively, of the total human capital investments in fiscal year 2018. Historically, the

changes in Education’s annual human capital investments have been primarily attributable to fluctuations in the loan program

subsidy estimate and loan modification costs.

Education administers a wide variety of programs related to general public education and training programs that are

intended to increase or maintain national economic productive capacity. The Office of Federal Student Aid administers needbased financial assistance programs for students pursuing postsecondary education and makes available federal grants, direct

loans, and work-study funding to eligible undergraduate and graduate students.

The significant human capital programs administered by VA include veterans rehabilitation and employment programs

which are provided to service disabled veterans; they are designated to improve employability and promote independence for

the disabled. They also include education and training programs intended to provide higher education to dependents that

might not be able to participate otherwise.

The significant human capital programs administered by DOL relate to grants for job training and employment

programs. Investments in human capital administered by HHS primarily relate to National Institutes of Health (NIH) research

training and career development programs and Health Resources and Services Administration Health Workforce programs.

Research and Development

Federal investments in R&D comprise those expenses for basic research, applied research, and development that are 

intended to increase or maintain national economic productive capacity or yield other future benefits.

• Investments in basic research are for systematic studies to gain knowledge or understanding of the fundamental 

aspects of phenomena and of observable facts without specific applications toward processes or products in mind.

• Investments in applied research are for systematic studies to gain knowledge or understanding necessary for 

determining the means by which a recognized and specific need may be met.

• Investments in development are the systematic use of the knowledge and understanding gained from research for the 

production of useful materials, devices, systems, or methods, including the design and development of prototypes 

and processes.

With regard to basic research, HHS, NASA, DOE, and DOD had $18.7 billion (46.6 percent), $5.5 billion (13.6

percent), $5.1 billion (12.7 percent), and $2.3 billion (5.8 percent), respectively, of the total basic research investments in

fiscal year 2018. Further, HHS, DOD, DOE, and NASA had $17.5 billion (45.8 percent), $6.4 billion (16.7 percent), $5.9

billion (15.4 percent), and $2.5 billion (6.5 percent), respectively, of the total applied research investments in fiscal year

2018. The DOD and NASA had $67.0 billion (89.3 percent) and $4.5 billion (6.0 percent), respectively, of total development 

investments in fiscal year 2018. 
REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION (UNAUDITED) 214

Within HHS, NIH-supported research focuses on spurring advances in discovery along the biomedical research 

continuum, spanning basic, translational, and clinical research. NIH researchers undertake a wide array of research activities 

in pursuit of the NIH mission, including studying biology in heath and disease states, undertaking observational and 

population-based research approaches, assessing new treatments or comparing different treatment approaches to provide new 

options for patients, and supporting a variety of health services research activities to inform medical practice. NIH regards the 

expeditious transfer of the results of its medical research for further development and commercialization of products an 

immediate benefit to improved health and an important mandate.

NASA R&D programs include activities to extend the knowledge of Earth, its space environment, and the universe, and 

to invest in new aeronautics and advanced space transportation technologies that support the development and application of 

technologies critical to the economic, scientific, and technical competitiveness of the U.S.

DOE R&D programs facilitate the creation, advancement, and deployment of new technologies and support the 

Department’s mission to ensure America’s security and prosperity by addressing its energy, environmental, and nuclear 

challenges through transformative science and technology solutions.

Major outputs of DOD R&D are scientific studies, investigations, research papers, hardware components, software 

codes, or limited construction of a weapon system component, to include non-system-specific development efforts. 

Development takes what has been discovered or learned from basic research and uses it to establish technological feasibility, 

assessment of operability, and production capability. Development is comprised of five stages: 1) advanced technology 

development, 2) advanced component development and prototypes, 3) system development and demonstration, 4) research, 

development, test and evaluation management support, and 5) operational systems development.
215 REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION (UNAUDITED)

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APPENDIX A 216

Appendix A: Reporting Entity

This appendix lists the entities (consolidation or disclosure entities) included in the U.S. government’s Financial 

Report, as well as related parties. SFFAS No. 47, Reporting Entity, provides guidance for identifying entities that are 

consolidation entities, disclosure entities, and related parties. 

The Financial Report includes all organizations meeting the inclusion principles of (a) budgeted for by elected officials 

of the government, (b) owned by the government, and (c) controlled by the government with risk of loss or expectation of 

benefits. In addition, the Financial Report includes organizations where it would be misleading to exclude even though the 

organization does not meet any of the three inclusion principles. If an organization meets the inclusion principles, a 

determination of consolidation or disclosure is made.

SFFAS No. 47 identifies consolidation entities as organizations that should be consolidated in the financial statements 

based on the assessment of the following characteristics as a whole, the organization: (a) is financed through taxes and other 

non-exchange revenues, (b) is governed by the Congress or the President, (c) imposes or may impose risks and rewards to the 

government, and (d) provides goods and services on a non-market basis. It also includes organizations that would result in 

misleading or incomplete financial statements, if excluded. 

The federal government has relationships with organizations that meet the inclusion criteria in SFFAS No. 47, but are 

afforded a greater degree of autonomy than consolidation entities. These entities are referred to as disclosure entities. 

Disclosure entities may maintain a separate legal identity, have a governance structure that vests most decision-making 

authorities in a governing body to insulate the organization from political influence, and/or have relative financial 

independence. Other organizations that are owned or controlled by the government as a result of regulatory actions, or other 

government intervention actions are, generally, deemed to be disclosure entities if the relationship with the government is not 

expected to be permanent. 

Related parties exist if the existing relationship, or one party to the existing relationship, has the ability to exercise 

significant influence over the other party’s policy decisions. Related parties do not meet the principles for inclusion, but are 

reported in the Financial Report, if they maintain relationships of such significance that it would be misleading to exclude.

1. Consolidation Entities included in the Financial Report:

There are a total of 159 entities that meet the consolidation criteria, and as such are included in the Financial Report. 

The lists below describe three groups of consolidation entities that comprise the consolidated governmentwide reporting 

entity for the Financial Report and include entities from all three branches of government.

Twenty-Four Chief Financial Officer Act Consolidation Entities

Department of Agriculture

www.usda.gov

Department of Labor

www.dol.gov

Department of Commerce

www.doc.gov

Department of State

www.state.gov

Department of Defense

www.defense.gov

Department of Transportation

www.dot.gov

Department of Education

www.ed.gov

Department of the Treasury

www.treasury.gov

Department of Energy

www.energy.gov

Department of Veterans Affairs

www.va.gov

Department of Health and Human Services

www.hhs.gov

Environmental Protection Agency

www.epa.gov

Department of Homeland Security

www.dhs.gov

General Services Administration

www.gsa.gov

Department of Housing and Urban Development

www.hud.gov

National Aeronautics and Space Administration

www.nasa.gov

Department of the Interior

www.doi.gov

National Science Foundation

www.nsf.gov

Department of Justice

www.usdoj.gov

Office of Personnel Management

www.opm.gov
217 APPENDIX A

Small Business Administration

www.sba.gov

U.S. Agency for International Development

www.usaid.gov

Social Security Administration

www.ssa.gov

U.S. Nuclear Regulatory Commission

www.nrc.gov

Sixteen Additional Significant Consolidation Entities

Export-Import Bank of the U.S. 

www.exim.gov

Farm Credit System Insurance Corporation

www.fcsic.gov

Federal Communications Commission

www.fcc.gov

Federal Deposit Insurance Corporation

www.fdic.gov

General Fund of the U.S. Government

www.fiscal.treasury.gov

Millennium Challenge Corporation

www.mcc.gov

National Credit Union Administration

www.ncua.gov

National Railroad Retirement Investment Trust

www.rrb.gov

Overseas Private Investment Corporation

www.opic.gov

Pension Benefit Guaranty Corporation

www.pbgc.gov

Railroad Retirement Board 

www.rrb.gov

Securities and Exchange Commission

www.sec.gov

Security Assistance Accounts

www.dsca.mil

Smithsonian Institution

www.si.edu

Tennessee Valley Authority

www.tva.gov

U.S. Postal Service

www.usps.com

One Hundred Nineteen Additional Consolidation Entities

Access Board Congressional-Executive Commission on the People’s 

Administrative Conference of the U.S. Republic of China

Advisory Council on Historic Preservation Consumer Product Safety Commission

African Development Foundation Corporation for National and Community Service

American Battle Monuments Commission Council of the Inspector General on Integrity and

Appalachian Regional Commission Efficiency

Architect of the Capitol Court of Appeals for Veterans Claims

Armed Forces Retirement Home Court Services and Offender Supervision Agency for DC

Barry Goldwater Scholarship and Excellence in DC Courts

 Education Foundation DC Courts–Defender Services

Broadcasting Board of Governors Defense Nuclear Facilities Safety Board

Bureau of Consumer Financial Protection Delta Regional Authority

Central Intelligence Agency Denali Commission

Chemical Safety and Hazard Investigation Board Dwight D. Eisenhower Memorial Commission

Christopher Columbus Fellowship Foundation Election Assistance Commission

Commission for the Preservation of America’s Environmental Dispute Resolution Fund

 Heritage Abroad Equal Employment Opportunity Commission

Commission on Civil Rights Executive Office of the President

Commission of Fine Arts Farm Credit Administration

Commission on International Religious Freedom Federal Election Commission

Commission on Security and Cooperation in Europe Federal Financial Institutions Examination Council

Commission to Eliminate Child Abuse and Neglect Appraisal Subcommittee

 Fatalities* Federal Housing Finance Agency

Committee for Purchase from People Who Are Blind Federal Labor Relations Authority

 or Severely Disabled Federal Maritime Commission

Commodity Futures Trading Commission Federal Mediation and Conciliation Service

Congressional Budget Office Federal Mine Safety and Health Review Commission
APPENDIX A 218

Federal Trade Commission Neighborhood Reinvestment Corporation

Government Accountability Office Northern Border Regional Commission

Government Publishing Office Nuclear Waste Technical Review Board

Gulf Coast Ecosystem Restoration Council Occupational Safety and Health Review Commission

Harry S. Truman Scholarship Foundation Office of Compliance

House of Representatives Office of Government Ethics

Indian Law and Order Commission* Office of Navajo and Hopi Indian Relocation

Institute of Museum and Library Services Office of Nuclear Waste Negotiator*

Intelligence Community Management Account Office of Special Counsel

Inter-American Foundation Office of the Federal Coordination for Alaska Natural

International Trade Commission Gas Transportation Projects*

James Madison Memorial Fellowship Foundation Open World Leadership Center

Japan-U.S. Friendship Commission Patient Centered Outcomes Research Trust Fund

John C. Stennis Center for Public Service Peace Corps

 Training and Development Presidio Trust

John F. Kennedy Center for the Performing Arts Privacy and Civil Liberties Oversight Board

Judiciary Public Building Reform Board

Library of Congress Public Defender Service

Marine Mammal Commission Recovery Act Accountability and Transparency Board*

Medicaid and Children’s Health Insurance Program Selective Service System

 Payment and Access Commission Senate Preservation Fund

Medicare Payment Advisory Commission St. Lawrence Seaway Development Corporation

Merit Systems Protection Board State Justice Institute

Military Compensation and Retirement Modernization Surface Transportation Board

 Commission* Thrift Savings Fund

Morris K. Udall and Stewart L. Udall U.S. Capitol Police

 Foundation U.S. Capitol Preservation Commission

National Archives and Records Administration U.S. China Economic and Security Review Commission

National Capital Planning Commission U.S. Holocaust Memorial Museum

National Commission on Military, National and Public U.S. Institute of Peace

 Service U.S. Interagency Council on the Homeless

National Council on Disability U.S. Senate

National Endowment for the Arts U.S. Supreme Court

National Endowment for the Humanities U.S. Tax Court

National Gallery of Art U.S. Trade and Development Agency

National Labor Relations Board Vietnam Education Foundation

National Mediation Board Women’s Suffrage Centennial Commission

National Railroad Passenger Corporation, Office of the Woodrow Wilson International Center for Scholars

 Inspector General WWI Centennial Commission

National Transportation Safety Board

*These entities are no longer active and have either returned all remaining fund balances to Treasury during fiscal year 2018 

or have remaining fund balances pending final return to Treasury as of September 30, 2018.

2. Disclosure Entities and Related Parties of the Financial Report

The entities included below, after considering various factors including quantitative and qualitative materiality, meet the 

criteria of SFFAS No. 47 to be reported as disclosure entities or related parties in the Financial Report. Information about the 

government’s relationship with these entities is disclosed in Note 25—Disclosure Entities and Related Parties. The 

component entity of each disclosure entity is provided in the brackets below. Additionally, component entities have also

identified additional disclosure entities and related parties that do not meet the qualitative or quantitative criteria in SFFAS 

No. 47 to be reported in the Financial Report. Refer to the financial reports of the component entities for more information 

on these disclosure entities and related parties.
219 APPENDIX A

Disclosure Entities

Amtrak (National Railroad Passenger Service Corp) [DOT]

Federal Home Loan Mortgage Corp (Freddie Mac) [Treasury]/[FHFA] 

Federal National Mortgage Association (Fannie Mae) [Treasury]/[FHFA]

Federal Reserve System [Treasury]

There are additional disclosure entities within the government that can be found on the component entities financial 

statements.

Related Parties 

Federal Home Loan Banks [FHFA]

International Monetary Fund and Multilateral Development Banks [Treasury]

Private Export Funding Corporation [EXIM]

There are additional related parties within the government that can be found on the component entities financial statements.
APPENDIX B 220

Appendix B: Acronyms

This appendix lists the acronyms used in the MD&A, Financial Statements, Notes to the Financial Statements, RSI, 

RSSI, and Other Information sections of this Financial Report. 

ACA Affordable Care Act

AGI Adjusted Gross Income

APM Alternative Payment Models

ARRA American Recovery and Reinvestment Act of 2009

ASC Accounting Standards Codification

BAR

BBA

Budget and Accrual Reconciliation

Bipartisan Budget Act

Bbl Barrel

BCA

BEA

Budget Control Act

Bureau of Economic Analysis

BLDTF Black Lung Disability Trust Fund

BLM Bureau of Land Management

Board

BRS

Budget

CAP

CCIIO

Federal Reserve Board of Governors

Blended Retirement System

Budget of the U.S. Government

Cross Agency Priority

Center for Consumer Information and Insurance Oversight

CERCLA Comprehensive Environmental Response, Compensation, and Liability Act

CFO Chief Financial Officers

CFO Act

CFOC

Chief Financial Officers Act of 1990

Chief Financial Officers Council

CHIP Children’s Health Insurance Program

CMS Centers for Medicare and Medicaid Services

COLA Cost of Living Adjustments

CPI Consumer Price Index

CPI-U Consumer Price Index for All Urban Consumers

CPIM Consumer Price Index–Medical

CPI-W Consumer Price Index for Urban Wage Earners and Clerical Workers

CPP Clean Power Plan

CSRDF Civil Service Retirement and Disability Fund

CSRS Civil Service Retirement System

DACA

DATA Act

Deferred Action for Childhood Arrivals

Digital Accountability and Transparency Act of 2014

DHS Department of Homeland Security

DI Disability Insurance

DIF Deposit Insurance Fund

DOC Department of Commerce

DOD Department of Defense

DOE Department of Energy
221 APPENDIX B

DOI Department of the Interior

DOJ Department of Justice

DOL Department of Labor

DOT Department of Transportation

DSL Debt Subject to the Statutory Limit

Education

EIA

Department of Education

Energy Information Administration

ERM Enterprise Risk Management

ESF Exchange Stabilization Fund

EXIM Bank Export-Import Bank of the U.S.

Fannie Mae Federal National Mortgage Association

FASAB Federal Accounting Standards Advisory Board

FASB Financial Accounting Standards Board

FCRA

FCSIC

Federal Credit Reform Act of 1990

Farm Credit System Insurance Corporation

FDIC Federal Deposit Insurance Corporation

FECA Federal Employees’ Compensation Act

FEGLI Federal Employees’ Group Life Insurance

FERS Federal Employees’ Retirement System

FFEL Federal Family Education Loan

FFMIA Federal Financial Management Improvement Act of 1996

FHA Federal Housing Administration

FHFA

FHLBanks

Federal Housing Finance Agency

Federal Home Loan Banks

FHWA Federal Highway Administration

FICA

Financial Report

Federal Insurance Contribution Act

Financial Report of the U.S. Government

FOMC

FPMRA

FRPC

Federal Open Market Committee

Federal Property Management Reform Act of 2016

Federal Real Property Council

FR System Federal Reserve System

FRBNY Federal Reserve Bank of New York

FRBs Federal Reserve Banks

Freddie Mac

FRPP

Federal Home Loan Mortgage Corporation

Federal Real Property Profile

FRTIB Federal Retirement Thrift Investment Board

FUA Federal Unemployment Account

GAAP U.S. Generally Accepted Accounting Principles

GAO Government Accountability Office

GDP Gross Domestic Product

General Fund

GPFFR

General Fund of the U.S. Government

General Purpose Federal Financial Reports

GSA General Services Administration

GSE Government-Sponsored Enterprises
APPENDIX

B 222

HCERA Health Care and Education Reconciliation Act

HERA Housing and Economic Recovery Act of 2008

HHS Department of Health and Human Services

HI Hospital Insurance

HQM High Quality Market

HUD

IG

IMF

Department of Housing and Urban Development

Inspector General

International Monetary Fund

IRS

JOLTS

Internal Revenue Service

Job Openings and Labor Turnover Survey

LOC Library of Congress

LPR Lawful Permanent Resident

MACRA Medicare Access and CHIP Reauthorization Act

MDBs Multilateral Development Banks

MERHCF

MOX

Medicare Eligible Retiree Health Care Fund

Mixed Oxide

MTFs

MTS

Military Treatment Facilities

Monthly Treasury Statement

NASA

NCHS

National Aeronautics and Space Administration

National Center for Health Statistics

NCUA

NCUSIF

National Credit Union Administration

National Credit Union Share Insurance Fund

NFIP National Flood Insurance Program

NIH National Institutes of Health

NRRIT National Railroad Retirement Investment Trust

NSLI National Service Life Insurance

NWPA Nuclear Waste Policy Act of 1982

OASDI Old-Age, Survivors, and Disability Insurance

OASI Old-Age and Survivors Insurance

OMB

OM&S

Office of Management and Budget

Operating Materials and Supplies

ONRR Office of Natural Resources Revenue

OPEB Other Postemployment Benefits

OPM Office of Personnel Management

ORB

OTA

Other Retirement Benefits

Office of Tax Analysis

P3s Public-Private Partnerships

PAR

PAYGO

Performance and Accountability Reports

Pay As You Go

PBGC

PCE

Pension Benefit Guaranty Corporation

Personal Consumption Expenditure

PEFCO

PMA

Private Export Funding Corporation

President’s Management Agenda

PMAs Power Marketing Administrations

PP&E Property, Plant, and Equipment
223 APPENDIX B

PSRHB Postal Service Retiree Health Benefits

PV Present Value

R&D Research and Development

RCRA Resource Conservation and Recovery Act

RMO Responsible Mine Operator

RRB Railroad Retirement Board

RSI Required Supplementary Information

RSSI Required Supplementary Stewardship Information

RTF

SAA

SAFRA

SAM

Reduce the Footprint

Security Assistance Accounts

Student Aid and Fiscal Responsibility Act

System for Award Management

SBA Small Business Administration

SCSIA Statements of Changes in Social Insurance Amounts

SDRs Special Drawing Rights

SDRCs

S-DVI

SDR Certificates

Service-Disabled Veterans Insurance

SECA Self-Employment Contributions Act

SFFAC Statement of Federal Financial Accounting Concept

SFFAS Statement of Federal Financial Accounting Standards

SGLI Service Members Group Life Insurance

SGR Sustainable Growth Rate

SLTFP Statements of Long-Term Fiscal Projections

SMI

SNF

Supplementary Medical Insurance

Spent Nuclear Fuel

SOMA System Open Market Account

SOSI Statements of Social Insurance

SPSPA Senior Preferred Stock Purchase Agreements

SSA Social Security Administration

SSEB

State

Social Security Equivalent Benefit

Department of State

TCJA Tax Cuts and Jobs Act of 2018

TFL TRICARE for Life

TIPS

TNC yield curve

Treasury Inflation-Protected Securities

Yield Curve for Treasury Nominal Coupon Issues

Treasury Department of the Treasury

TRIP

TSF

Terrorism Risk Insurance Program

Thrift Savings Fund

TSP Thrift Savings Plan

TVA Tennessee Valley Authority

TVARS

UI

Tennessee Valley Authority Retirement System

Unemployment Insurance

U.S.C. United States Code

USDA U.S. Department of Agriculture
APPENDIX

B 224

USPS United States Postal Service

UTF Unemployment Trust Fund

VA Department of Veterans Affairs

VSLI Veterans’ Special Life Insurance
225 APPENDIX B

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U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 226

Independent Auditor’s Report

The President

The President of the Senate

The Speaker of the House of Representatives

In our audits of the U.S. government’s consolidated financial statements as of and for the fiscal years 

ended September 30, 2018, and 2017, we found the following:

• Certain material weaknesses1 in internal control over financial reporting and other limitations on the 

scope of our work resulted in conditions that continued to prevent us from expressing an opinion on 

the accompanying accrual-based consolidated financial statements as of and for the fiscal years 

ended September 30, 2018, and 2017.2

• Significant uncertainties (discussed in Note 22 to the consolidated financial statements), primarily 

related to the achievement of projected reductions in Medicare cost growth, prevented us from 

expressing an opinion on the sustainability financial statements,3 which consist of the 2018 and 

2017 Statements of Long-Term Fiscal Projections;4 the 2018, 2017, 2016, 2015, and 2014 

Statements of Social Insurance;5 and the 2018 and 2017 Statements of Changes in Social 

 1A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there 

is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected 

and corrected, on a timely basis. A deficiency in internal control exists when the design or operation of a control does not allow 

management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, 

misstatements on a timely basis.

2The accrual-based consolidated financial statements as of and for the fiscal years ended September 30, 2018, and 2017, 

consist of the (1) Statements of Net Cost, (2) Statements of Operations and Changes in Net Position, (3) Reconciliations of 

Net Operating Cost and Budget Deficit, (4) Statements of Changes in Cash Balance from Budget and Other Activities, and (5) 

Balance Sheets, including the related notes to these financial statements. Most revenues are recorded on a modified cash 

basis. We previously reported that certain material weaknesses and, for some years, other limitations on the scope of our work 

prevented us from expressing an opinion on the accrual-based consolidated financial statements of the U.S. government for 

fiscal years 1997 through 2017.

3The sustainability financial statements are based on projections of future receipts and spending, while the accrual-based 

consolidated financial statements are based on historical information, including the federal government’s assets, liabilities, 

revenue, and net cost.

4The 2018 and 2017 Statements of Long-Term Fiscal Projections present, for all the activities of the federal government, the 

present value of projected receipts and non-interest spending under current policy without change, the relationship of these 

amounts to projected gross domestic product (GDP), and changes in the present value of projected receipts and non-interest 

spending from the prior year. These statements also present the fiscal gap, which is the combination of non-interest spending 

reductions and receipts increases necessary to hold debt held by the public as a share of GDP at the end of the projection 

period to its value at the beginning of the period. The valuation date for the Statements of Long-Term Fiscal Projections is 

September 30.

5Statements of Social Insurance are presented for the current year and each of the 4 preceding years as required by U.S. 

generally accepted accounting principles. For the Statements of Social Insurance, the valuation date is January 1 for the 

Social Security and Medicare programs, October 1 for the Railroad Retirement program (January 1 for 2014 and 2015), and 

September 30 for the Black Lung program. 
227 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

Insurance Amounts. A material weakness in internal control also prevented us from expressing an 

opinion on the 2018 and 2017 Statements of Long-Term Fiscal Projections.

• Material weaknesses resulted in ineffective internal control over financial reporting for fiscal year 

2018.

• Material weaknesses and other scope limitations, discussed above, limited tests of compliance with 

selected provisions of applicable laws, regulations, contracts, and grant agreements for fiscal year 

2018.

This audit report discusses the following in more detail.

• Our report on the accompanying consolidated financial statements, which includes (1) two 

emphasis of matters—equity investments in the Federal National Mortgage Association (Fannie 

Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) and long-term fiscal 

challenges; (2) required supplementary information (RSI),6 required supplementary stewardship 

information (RSSI),7 and other information8 included with the consolidated financial statements in 

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

and (3) information on Chief Financial Officers Act of 1990 (CFO Act) agency financial management 

systems.

• Our report on internal control over financial reporting. 

• Our report on compliance with laws, regulations, contracts, and grant agreements. 

• The Department of the Treasury’s (Treasury) and the Office of Management and Budget’s (OMB) 

comments on a draft of this audit report.

Appendix I discusses our audit objectives, scope, and methodology. 

Report on the Consolidated Financial Statements 

The Secretary of the Treasury, in coordination with the Director of OMB, is required to annually submit 

audited financial statements for the U.S. government to the President and Congress. GAO is required 

to audit these statements.9 As noted above, the consolidated financial statements consist of the 

accrual-based consolidated financial statements as of and for the fiscal years ended September 30, 

2018, and 2017, and the sustainability financial statements, consisting of the 2018 and 2017 

Statements of Long-Term Fiscal Projections; the 2018, 2017, 2016, 2015, and 2014 Statements of 

 6The RSI consists of Management’s Discussion and Analysis and information in the Required Supplementary Information 

section of the Fiscal Year 2018 Financial Report of the United States Government. 

7The RSSI consists of information on stewardship investments in the Required Supplementary Stewardship Information 

section of the Fiscal Year 2018 Financial Report of the United States Government. 

8Other information consists of information in the Fiscal Year 2018 Financial Report of the United States Government other 

than the consolidated financial statements, RSI, RSSI, auditor’s report, and Statement of the Comptroller General of the 

United States.

9The Government Management Reform Act of 1994 has required such reporting, covering the executive branch of 

government, beginning with financial statements prepared for fiscal year 1997. 31 U.S.C. § 331(e). The consolidated financial

statements include the legislative and judicial branches.
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 228

Social Insurance; the 2018 and 2017 Statements of Changes in Social Insurance Amounts; and the 

related notes to the financial statements. 

We performed sufficient audit work to provide this report on the consolidated financial statements. We 

considered the limitations on the scope of our work regarding the accrual-based consolidated financial 

statements and the sustainability financial statements in forming our conclusions. We performed our 

work in accordance with U.S. generally accepted government auditing standards.

Management’s Responsibility

Management of the federal government is responsible for (1) the preparation and fair presentation of 

annual consolidated financial statements of the U.S. government in accordance with U.S. generally 

accepted accounting principles; (2) preparing, measuring, and presenting the RSI and RSSI in 

accordance with U.S. generally accepted accounting principles; (3) preparing and presenting other 

information included in documents containing the consolidated financial statements and auditor’s 

report, and ensuring the consistency of that information with the consolidated financial statements, RSI, 

and RSSI; and (4) maintaining effective internal control over financial reporting, including the design, 

implementation, and maintenance of internal control relevant to the preparation and fair presentation of 

financial statements that are free from material misstatement, whether due to fraud or error. 

Auditor’s Responsibility

Our responsibility is to express opinions on these consolidated financial statements based on 

conducting the audit in accordance with U.S. generally accepted government auditing standards. We 

are also responsible for applying certain limited procedures to the RSI, RSSI, and other information 

included with the consolidated financial statements. Because of the matters discussed below, we were 

unable to obtain sufficient appropriate evidence to provide a basis for audit opinions on the 

consolidated financial statements.

Basis for Disclaimers of Opinion on the Consolidated Financial Statements

Accrual-Based Consolidated Financial Statements 

The federal government is not able to demonstrate the reliability of significant portions of the 

accompanying accrual-based consolidated financial statements as of and for the fiscal years ended 

September 30, 2018, and 2017, principally because of limitations related to certain material 

weaknesses in internal control over financial reporting and other limitations affecting the reliability of 

these financial statements and the scope of our work as discussed below.10 As a result of these 

limitations, readers are cautioned that amounts reported in the accrual-based consolidated financial 

statements and related notes may not be reliable.

The federal government did not maintain adequate systems or have sufficient appropriate evidence to 

support certain material information reported in the accompanying accrual-based consolidated financial 

statements. The underlying material weaknesses in internal control, which have existed for years, 

contributed to our disclaimer of opinion on the accrual-based consolidated financial statements. 

Specifically, these weaknesses concerned the federal government’s inability to

 10Such limitations include (1) the Department of Defense, the Department of Housing and Urban Development, and the 

Railroad Retirement Board each received a disclaimer of opinion on their respective fiscal year 2018 and 2017 financial 

statements and (2) for fiscal year 2018 and 2017, the financial information for Security Assistance Accounts and the General 

Fund of the U.S. Government was unaudited.
229 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

• satisfactorily determine that property, plant, and equipment, inventories and related property, and 

accounts receivable, primarily held by the Department of Defense (DOD), were properly reported in 

the accrual-based consolidated financial statements; 

• reasonably estimate or adequately support amounts reported for certain liabilities, such as 

environmental and disposal liabilities, or determine whether commitments and contingencies were 

complete and properly reported; 

• support significant portions of the reported total net cost of operations, most notably related to DOD, 

and adequately reconcile disbursement activity at certain federal entities;

• adequately account for intragovernmental activity and balances between federal entities; 

• reasonably assure that the consolidated financial statements are (1) consistent with the underlying 

audited entities’ financial statements, (2) properly balanced, and (3) in accordance with U.S. 

generally accepted accounting principles; and 

• reasonably assure that the information in the (1) Reconciliations of Net Operating Cost and Budget 

Deficit and (2) Statements of Changes in Cash Balance from Budget and Other Activities is 

complete, properly supported, and consistent with the underlying information in the audited entities’ 

financial statements and other financial data. 

These material weaknesses continued to (1) hamper the federal government’s ability to reliably report a 

significant portion of its assets, liabilities, costs, and other related information; (2) affect the federal 

government’s ability to reliably measure the full cost, as well as the financial and nonfinancial 

performance, of certain programs and activities; (3) impair the federal government’s ability to 

adequately safeguard significant assets and properly record various transactions; and (4) hinder the 

federal government from having reliable, useful, and timely financial information to operate effectively 

and efficiently. Because of these material weaknesses and other limitations on the scope of our work 

discussed below, additional issues may exist that were not identified and could affect the accrual-based 

consolidated financial statements. Appendix II describes these material weaknesses in more detail and 

highlights the primary effects of these material weaknesses on the accompanying accrual-based 

consolidated financial statements and on the management of federal government operations.

Sustainability Financial Statements

Significant uncertainties (discussed in Note 22 to the consolidated financial statements), which primarily 

relate to the achievement of projected reductions in Medicare cost growth, affect the sustainability 

financial statements. In addition, the material weakness related to the Reconciliations of Net Operating 

Cost and Budget Deficit and the Statements of Changes in Cash Balance from Budget and Other 

Activities, discussed above, hampers the federal government’s ability to demonstrate the reliability of 

historical budget information used for certain key inputs to the 2018 and 2017 Statements of Long-Term 

Fiscal Projections. As a result of these significant uncertainties and this material weakness, readers are 

cautioned that amounts reported in the 2018 and 2017 Statements of Long-Term Fiscal Projections; the 

2018, 2017, 2016, 2015, and 2014 Statements of Social Insurance; the 2018 and 2017 Statements of 

Changes in Social Insurance Amounts; and the related notes to these financial statements may not 

fairly present, in all material respects, the sustainability information for those years in accordance with 

U.S. generally accepted accounting principles.
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 230

These significant uncertainties primarily relate to the following.

• Medicare projections in the 2018 and 2017 Statements of Long-Term Fiscal Projections and the 

2018, 2017, 2016, and 2015 Statements of Social Insurance were based on benefit formulas under 

current law and included a significant reduction in Medicare payment rate updates for productivity 

improvements for most categories of Medicare providers,11 based on full implementation of the 

provisions of the Patient Protection and Affordable Care Act, as amended (ACA),12 and physician 

payment updates specified by the Medicare Access and CHIP Reauthorization Act of 2015 

(MACRA).13

• Management has noted that actual future costs for Medicare are likely to exceed those shown by 

the current law projections presented in the 2018, 2017, 2016, and 2015 Statements of Social 

Insurance because of, for example, the likelihood of modifications to the scheduled reductions in 

Medicare payment rate updates for productivity adjustments relating to most categories of Medicare 

providers and the specified physician payment updates. The extent to which actual future costs 

exceed the current law amounts because of changes to the scheduled reductions in Medicare 

payment rate updates for productivity adjustments and specified physician payment updates 

depends on both the specific changes that might be enacted and whether enacted legislation would 

include further provisions to help offset such costs. Consequently, there are significant uncertainties 

concerning the achievement of these projected reductions in Medicare payment rate updates.

• Management has developed an illustrative alternative projection intended to provide additional 

context regarding the long-term sustainability of the Medicare program and to illustrate the 

uncertainties in the Statement of Social Insurance projections. The present value of future 

estimated expenditures in excess of future estimated revenue for Medicare, included in the 

illustrative alternative projection in Note 22, exceeds the $37.6 trillion estimate in the 2018 

Statement of Social Insurance by $9.8 trillion. 

• Management noted that these significant uncertainties about projected reductions in health care 

cost growth also affect the projected Medicare and Medicaid costs reported in the 2018 and 2017 

Statements of Long-Term Fiscal Projections.

 11Under the Patient Protection and Affordable Care Act’s productivity adjustment provisions, productivity improvements are 

expected to result in lower overall Medicare spending because of smaller annual increases in the Medicare payment rates paid 

to many health care providers. This is often referred to as a reduction in Medicare payment rate updates. The health care 

provider categories affected include, but are not limited to, inpatient/outpatient hospital services, skilled nursing facilities, home 

health care, ambulance, ambulatory surgical centers, durable medical equipment, and prosthetics.

12ACA, Pub. L. No. 111-148, 124 Stat. 119 (Mar. 23, 2010), as amended by the Health Care and Education Reconciliation Act 

of 2010, Pub. L. No. 111-152, 124 Stat. 1029 (Mar. 30, 2010). In this report, references to the ACA include any amendments 

made by the Health Care and Education Reconciliation Act of 2010.

13MACRA, Pub. L. No. 114-10, title I, § 101, 129 Stat. 87, 89 (Apr. 16, 2015). MACRA included many provisions that affect 

Medicare, including the repeal of the sustainable growth rate formula for calculating annual updates to Medicare 

reimbursement payment rates to physicians and certain nonphysician medical providers, and established an alternative set of 

annual updates.
231 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

• The 2014 Statement of Social Insurance was affected by significant uncertainties, primarily related 

to the achievement of projected reductions in Medicare payment rate updates for productivity 

improvements. Specifically, the 2014 Statement of Social Insurance reflected a projected baseline

that assumed that the physician payment rate reductions would not occur and that physician 

payment rates would annually increase at a rate equal to the average sustainable growth rate 

override that occurred over the 10-year period ending on March 31, 2015. For 2014, management 

noted that actual future costs for Medicare were likely to exceed those shown by the current law 

projections presented in the 2014 Statement of Social Insurance because of, for example, the 

likelihood of modifications to the scheduled reductions in Medicare payment rates for productivity 

adjustments.

Projections of Medicare costs are sensitive to assumptions about future policymaker decisions and 

about consumer, employer, and health care provider behavioral responses as policy, incentives, and 

the health care sector change over time. Such secondary effects are not fully reflected in the 

sustainability financial statements but could be expected to influence the excess cost growth rate used 

in the projections.14 Key drivers of uncertainty about the excess cost growth rate include the future 

development and deployment of medical technology, the evolution of personal income, and the cost 

and availability of insurance, as well as federal policy changes, such as the implementation of the ACA. 

As discussed in the RSI section of the 2018 Financial Report, the projections are very sensitive to 

changes in the health care cost growth assumption.

As discussed in Notes 22 and 23 to the financial statements, the sustainability financial statements are 

based on management’s assumptions. These sustainability financial statements present the present 

value of the U.S. government’s estimated future receipts and future spending using a projection period 

sufficient to illustrate long-term sustainability.15 The sustainability financial statements are intended to 

aid users in assessing whether future resources will likely be sufficient to sustain public services and to 

meet obligations as they come due. 

In preparing the sustainability financial statements, management selects assumptions and data that it 

believes provide a reasonable basis to illustrate whether current policy is sustainable. As discussed in 

the 2018 Financial Report, current policy is based on current law but includes several adjustments. In 

the Statements of Long-Term Fiscal Projections, notable adjustments to current law include (1) 

projected spending, receipts, and borrowing levels assume raising or suspending the current statutory 

limit on federal debt; (2) continued discretionary appropriations are assumed throughout the projection 

period; (3) scheduled Social Security and Medicare Part A benefit payments are assumed to occur 

beyond the projected point of trust fund depletion; and (4) many mandatory programs with expiration 

dates prior to the end of the 75-year projection period are assumed to be reauthorized. In the 

Statements of Social Insurance, the one adjustment to current law is that scheduled Social Security and 

Medicare Part A benefit payments are assumed to occur beyond the projected point of trust fund 

depletion. Assumptions underlying such sustainability information do not consider changes in policy or 

all potential future events that could affect future income, expenditures, and hence sustainability. Also, 

the projections assume that debt could continuously rise without severe economic consequences. The 

RSI section of the 2018 Financial Report includes unaudited information on how changes in various 

assumptions would affect the Statements of Long-Term Fiscal Projections and Statements of Social 

Insurance. The sustainability financial statements are not forecasts or predictions. 

 14The excess cost growth rate is the increase in health care spending per person relative to the growth of GDP per person 

after removing the effects of demographic changes on health care spending.

15The projection period used for the Social Security, Medicare, and Railroad Retirement social insurance programs is 75 years. 

Beginning in fiscal year 2017, the Black Lung program has a rolling 25-year projection period. For fiscal years 2014 through 

2016, the Black Lung program projection period was through September 30, 2040.
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 232

As discussed in the unaudited RSI section of the 2018 Financial Report, the Social Security and 

Medicare Hospital Insurance (Part A) trust funds are, based on the achievement of the cost growth 

reductions discussed above, projected to be depleted in 2034 and 2026, respectively, at which time 

they would be unable to pay the full amount of scheduled future benefits.16 For Social Security, future 

revenues were projected to be sufficient to pay 79 percent of scheduled benefits in 2034, the year of 

projected trust funds (combined) depletion, and decreasing to 74 percent of scheduled benefits in 2092. 

For Medicare Hospital Insurance (Part A), future revenues were projected to be sufficient to pay 91 

percent of scheduled benefits in 2026, the year of projected trust fund depletion, declining to 78 percent 

by 2042, and then gradually increasing to 85 percent of scheduled benefits in 2092.

Because of the large number of factors that affect the sustainability financial statements and the fact 

that future events and circumstances cannot be estimated with certainty, even if current policy is 

continued, there will be differences between the estimates in the sustainability financial statements and 

the actual results, and those differences may be material.

Other Limitations on the Scope of Our Work

For fiscal years 2018 and 2017, there were other limitations on the scope of our work, in addition to the 

material weaknesses and significant uncertainties noted above, that contributed to our disclaimers of 

opinion on the consolidated financial statements. Such limitations primarily relate to our ability to obtain 

adequate representations from management. Treasury and OMB depend on representations from 

certain federal entities to provide their representations to us regarding the U.S. government’s 

consolidated financial statements. Treasury and OMB were unable to provide us with adequate 

representations regarding the U.S. government’s accrual-based consolidated financial statements for 

fiscal years 2018 and 2017, primarily because certain federal entities provided them insufficient or no 

representations. In addition, the Department of Justice, on behalf of the federal government, was 

unable to provide us with adequate legal representations regarding the U.S. government’s accrualbased consolidated financial statements for fiscal year 2018.

Disclaimers of Opinion on the Consolidated Financial Statements

Accrual-Based Consolidated Financial Statements 

Because of the significance of the related matters described in the Basis for Disclaimers of Opinion on 

the Consolidated Financial Statements above, we were not able to obtain sufficient appropriate audit 

evidence to provide a basis for an audit opinion on the accrual-based consolidated financial statements. 

Accordingly, we do not express an opinion on the accrual-based consolidated financial statements as of 

and for the fiscal years ended September 30, 2018, and 2017.

Sustainability Financial Statements

Because of the significance of the related matters described in the Basis for Disclaimers of Opinion on 

the Consolidated Financial Statements above, we were not able to obtain sufficient appropriate audit 

evidence to provide a basis for an audit opinion on the Statements of Long-Term Fiscal Projections for 

2018 and 2017; the Statements of Social Insurance for 2018, 2017, 2016, 2015, and 2014; and the 

 16The combined Social Security trust funds consist of the Federal Old-Age and Survivors Insurance trust fund and the Federal 

Disability Insurance trust fund. For the Federal Old-Age and Survivors Insurance trust fund, future revenues were projected to 

be sufficient to pay 77 percent of scheduled benefits in 2034, the year of projected trust fund depletion, decreasing to 73 

percent in 2092. For the Federal Disability Insurance trust fund, future revenues were projected to be sufficient to pay 96 

percent of scheduled benefits in 2032, the year of projected trust fund depletion, decreasing to 83 percent in 2092.
233 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

Statements of Changes in Social Insurance Amounts for 2018 and 2017. Accordingly, we do not 

express an opinion on these sustainability financial statements.

Emphasis of Matters

The following key items deserve emphasis in order to put the information in the consolidated financial 

statements and the Management’s Discussion and Analysis section of the 2018 Financial Report into 

context. However, our disclaimers of opinion noted above are not modified with respect to these 

matters.

Equity Investments in Fannie Mae and Freddie Mac

In 2008, during the financial crisis, the federal government placed Fannie Mae and Freddie Mac under 

conservatorship and entered into preferred stock purchase agreements with these governmentsponsored enterprises (GSE) to help ensure their financial stability. The agreements with the GSEs 

could affect the federal government’s financial position. As of September 30, 2018, the federal 

government reported about $113 billion of investments in the GSEs, which is net of about $91 billion in 

valuation losses. 

In valuing these equity investments, management considered and selected assumptions and data that 

it believed provided a reasonable basis for the estimated values reported in the accrual-based 

consolidated financial statements. However, as discussed in Note 1 to the consolidated financial 

statements, there are many factors affecting these assumptions and estimates that are inherently 

subject to substantial uncertainty arising from the uniqueness of the transactions and the likelihood of 

future changes in general economic, regulatory, and market conditions. As such, there will be 

differences between the estimated values as of September 30, 2018, and the actual results, and such 

differences may be material. Also, as discussed in Note 1 to the consolidated financial statements, the 

assets, liabilities, and results of operations of Fannie Mae and Freddie Mac are not consolidated into 

the government’s consolidated financial statements. Treasury and OMB have determined that these 

entities do not meet the criteria for consolidation.17

Long-Term Fiscal Challenges

The 2018 Statement of Long-Term Fiscal Projections and related information in Note 23 and in the 

unaudited RSI section of the 2018 Financial Report show that absent policy changes, the federal 

government continues to face an unsustainable long-term fiscal path. For the 2018 projections, debt-togross domestic product (GDP) at the end of the 75-year projection period (530 percent) was higher 

than debt-to-GDP at the end of the 75-year projection period in the 2017 (297 percent) and 2016 (252 

percent) projections. The budget deficit increased for the third consecutive year in fiscal year 2018 and 

is projected to continue to grow in almost all of the next 75 years. Over the long term, the imbalance 

between spending and revenue that is built into current policy and law is projected to lead to continued 

growth of the deficit and debt held by the public as a share of GDP. This situation—in which debt grows 

faster than GDP—means the current federal fiscal path is unsustainable. 

Under the 2018 Financial Report projections, spending for the major health and retirement programs 

will increase more rapidly than GDP in the coming decades, in part because of an aging population and 

projected continued increases in health care costs. These projections for Social Security and Medicare 

are based on the same assumptions underlying the information presented in the Statement of Social 

 17For additional information on the criteria used to determine which federal entities are included in the reporting entity for the 

consolidated financial statements, as well as the reasons for not including certain entities, such as Fannie Mae and Freddie 

Mac, see app. A of the 2018 Financial Report. 
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 234

Insurance and assume that the provisions enacted in the ACA designed to slow the growth of Medicare 

costs are sustained and remain effective throughout the projection period.18 The projections also reflect 

the effects of MACRA, which, among other things, revised the methodology for determining physician 

payment rates. If, however, the Medicare cost containment measures and physician payment rate 

methodology are not sustained over the long term—concerns expressed by the Trustees of the 

Medicare trust funds, the Centers for Medicare & Medicaid Services’ Chief Actuary, the Congressional 

Budget Office (CBO), and others—spending on federal health care programs will grow more rapidly 

than assumed in the projections. In addition, under the 2018 Financial Report projections, spending on 

net interest (primarily interest on debt held by the public) is projected to grow such that over the long 

term it surpasses Social Security and becomes the largest category of spending in 2034. Net interest is 

projected to increase from 1.6 percent of GDP in fiscal year 2018 to 7.4 percent in fiscal year 2038 to 

26.9 percent in fiscal year 2093. 

GAO and CBO also prepare long-term federal fiscal simulations, using different sets of assumptions, 

which continue to show federal debt held by the public rising as a share of GDP in the long term.19

GAO, CBO, and the 2018 Financial Report all project that debt held by the public as a share of GDP 

will surpass its historical high (106 percent in 1946) within the next 13 to 20 years. Each of these longterm projections uses somewhat different assumptions, but their overall conclusions are the same: 

absent policy changes, the federal government’s fiscal path is unsustainable.

At the end of fiscal year 2018, debt held by the public reached about 78 percent of GDP, far above the 

post–World War II (since 1946) average of 46 percent. Debt held by the public at these high levels 

could limit the federal government’s flexibility to address emerging issues and unforeseen challenges, 

such as another economic downturn or large-scale disaster. These unforeseen events, also known as 

fiscal risks or fiscal exposures, place additional pressure on the federal budget. They result in 

responsibilities, programs, and activities that may legally commit or create expectations for future 

federal spending based on current policy, past practices, or other factors. A more complete 

understanding of them can help policymakers anticipate changes in future spending and can enhance 

oversight of federal resources.

Other Matters

Required Supplementary Information and Required Supplementary Stewardship Information

U.S. generally accepted accounting principles issued by the Federal Accounting Standards Advisory 

Board (FASAB) require that the RSI and RSSI be presented in the 2018 Financial Report to 

supplement the financial statements. Although the RSI and RSSI are not a part of the financial 

statements, FASAB considers this information to be an essential part of financial reporting for placing 

the financial statements in appropriate operational, economic, or historical context. We were unable to 

apply certain limited procedures to the RSI and RSSI in accordance with U.S. generally accepted 

government auditing standards because of the material weaknesses and other scope limitations 

discussed in this audit report. We did not audit and do not express an opinion or provide any assurance 

on the RSI or RSSI. 

 18ACA, Pub. L. No. 111-148, 124 Stat. 119 (Mar. 23, 2010), as amended by the Health Care and Education Reconciliation Act 

of 2010, Pub. L. No. 111-152, 124 Stat. 1029 (Mar. 30, 2010).

19For more information on GAO’s simulations, see GAO, America’s Fiscal Future: Fiscal Forecast, accessed on March 20, 

2019, https://www.gao.gov/americas_fiscal_future?t=fiscal_forecast. For more information on CBO’s simulations, see 

Congressional Budget Office, The 2018 Long-Term Budget Outlook (Washington, D.C.: June 26, 2018). 
235 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

Other Information

Other information included in the 2018 Financial Report contains a wide range of information, some of 

which is not directly related to the consolidated financial statements. This information is presented for 

purposes of additional analysis and is not a required part of the consolidated financial statements, RSI, 

or RSSI. We read the other information included with the consolidated financial statements in order to 

identify material inconsistencies, if any, with the consolidated financial statements. We did not audit and 

do not express an opinion or provide any assurance on the other information in the 2018 Financial 

Report.

Readers are cautioned that the material weaknesses, significant uncertainties, and other scope 

limitations discussed in this audit report may affect the reliability of certain information contained in the 

RSI, RSSI, and other information that is taken from the same data sources as the accrual-based 

consolidated financial statements and the sustainability financial statements.

CFO Act Agency Financial Management Systems

The federal government’s ability to efficiently and effectively manage and oversee its day-to-day 

operations and programs relies heavily on the ability of entity financial management systems to 

produce complete, reliable, timely, and consistent financial information for use by executive branch 

agencies and Congress.20 The Federal Financial Management Improvement Act of 1996 (FFMIA) was 

designed to lead to system improvements that would result in CFO Act agency managers routinely 

having access to reliable, useful, and timely financial information with which to measure performance 

and increase accountability throughout the year. 

The 24 CFO Act agencies are responsible for implementing and maintaining financial management 

systems that substantially comply with FFMIA requirements. FFMIA requires auditors, as part of the 24 

CFO Act agencies’ financial statement audits, to report whether those agencies’ financial management 

systems substantially comply with (1) federal financial management systems requirements, (2) 

applicable federal accounting standards, and (3) the federal government’s U.S. Standard General 

Ledger at the transaction level. 

For fiscal year 2018, auditors of nine of the 24 CFO Act agencies reported that the agencies’ financial 

management systems did not substantially comply with one or more of the three FFMIA requirements. 

For fiscal year 2017, auditors of 10 of the 24 CFO Act agencies reported that the agencies’ financial 

management systems did not substantially comply with one or more of the three FFMIA requirements. 

Agency management at the 24 CFO Act agencies also annually report on FFMIA compliance. For fiscal 

year 2018, agency management of seven of the 24 CFO Act agencies reported that their agencies’ 

financial management systems did not substantially comply with one or more of the three FFMIA 

requirements. For fiscal year 2017, agency management of eight of the 24 CFO Act agencies reported 

that their agencies’ financial management systems did not substantially comply with one or more of the 

three FFMIA requirements. Based on agency financial reports, differences in the assessments of 

substantial compliance between the auditors and agency management reflect differences in 

management’s and auditors’ views regarding the effect of reported deficiencies on agencies’ financial 

management systems. 

 20The Federal Financial Management Improvement Act of 1996, which is reprinted in 31 U.S.C. § 3512 note, defines “financial 

management systems” to include the financial systems and the financial portions of mixed systems necessary to support 

financial management, including automated and manual processes, procedures, controls, data, hardware, software, and 

support personnel dedicated to the operation and maintenance of system functions.
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 236

Long-standing financial management systems weaknesses at several large CFO Act agencies, along 

with the size and complexity of the federal government, continue to present a formidable management 

challenge in providing accountability and have contributed significantly to certain of the material 

weaknesses and other limitations discussed in this audit report.

Report on Internal Control over Financial Reporting

Management’s Responsibility

Management of the federal government is responsible for (1) maintaining effective internal control over 

financial reporting, including the design, implementation, and maintenance of internal control relevant to 

the preparation and fair presentation of financial statements that are free from material misstatement, 

whether due to fraud or error, and (2) evaluating the effectiveness of internal control over financial 

reporting, based on criteria established under the Federal Managers’ Financial Integrity Act (FMFIA).21

Auditor’s Responsibility

The purpose of an audit of financial statements is to express an opinion on the financial statements. An 

audit of financial statements includes considering internal control over financial reporting to design audit 

procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion 

on the effectiveness of internal control over financial reporting. Accordingly, we do not express an 

opinion on the effectiveness of internal control over financial reporting. We did not consider all internal 

controls relevant to operating objectives as broadly established under FMFIA, such as those controls 

relevant to preparing performance information and ensuring efficient operations. 

Our responsibility is to report any material weaknesses or significant deficiencies in internal control over 

financial reporting for fiscal year 2018 that come to our attention as a result of our audit.22 Based on the 

scope of our work and the effects of the other limitations on the scope of our audit noted throughout this 

audit report, our internal control work was not designed to, and would not necessarily, identify all 

deficiencies in internal control, including those that might be material weaknesses or significant 

deficiencies. Therefore, additional material weaknesses or significant deficiencies may exist that were 

not identified. We performed our work in accordance with U.S. generally accepted government auditing 

standards.

Definitions and Inherent Limitations of Internal Control over Financial Reporting

An entity’s internal control over financial reporting is a process effected by those charged with 

governance, management, and other personnel, the objectives of which are to provide reasonable 

assurance that (1) transactions are properly recorded, processed, and summarized to permit the 

preparation of financial statements in accordance with U.S. generally accepted accounting principles, 

and assets are safeguarded against loss from unauthorized acquisition, use, or disposition, and (2) 

transactions are executed in accordance with provisions of applicable laws (including those governing 

the use of budget authority), regulations, contracts, and grant agreements, noncompliance with which 

could have a material effect on the financial statements.

 2131 U.S.C. § 3512 (c), (d) (commonly referred to as FMFIA). This act requires executive agency heads to evaluate and report 

annually to the President and Congress on the adequacy of their internal control and accounting systems and on actions to 

correct significant problems. 

22A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less 

severe than a material weakness yet important enough to merit attention by those charged with governance. 
237 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

Because of its inherent limitations, internal control over financial reporting may not prevent, or detect 

and correct, misstatements due to fraud or error.

Material Weaknesses Resulted in Ineffective Internal Control over Financial Reporting 

The material weaknesses discussed in this audit report resulted in ineffective internal control over 

financial reporting. Consequently, the federal government’s internal control did not provide reasonable 

assurance that a material misstatement of the consolidated financial statements would be prevented, or 

detected and corrected, on a timely basis. 

In addition to the material weaknesses that contributed to our disclaimers of opinion on the accrualbased consolidated financial statements and the sustainability financial statements, which were 

discussed previously, we found three other material weaknesses in internal control. These other 

material weaknesses were the federal government’s inability to 

• determine the full extent to which improper payments occur and reasonably assure that appropriate 

actions are taken to reduce them, 

• identify and resolve information security control deficiencies and manage information security risks 

on an ongoing basis, and

• effectively implement internal controls over estimating the cost of credit programs and determining 

the value of loans receivable and loan guarantee liabilities.

These material weaknesses are discussed in more detail in appendix III, including the primary effects of 

the material weaknesses on the accrual-based consolidated financial statements and on the 

management of federal government operations.

We also found three significant deficiencies in the federal government’s internal control related to 

implementing effective internal controls at certain federal entities for the following areas:

• taxes receivable,

• federal grants management, and 

• Medicare social insurance information.

These significant deficiencies are discussed in more detail in appendix IV.

Further, individual federal entity financial statement audit reports identified additional control 

deficiencies that the entities’ auditors reported as either material weaknesses or significant deficiencies 

at the individual entity level. We do not consider these additional deficiencies to represent material 

weaknesses or significant deficiencies with respect to the U.S. government’s consolidated financial 

statements.

Intended Purpose of Report on Internal Control over Financial Reporting

The purpose of this report on internal control over financial reporting is solely to describe the scope of 

our consideration of internal control over financial reporting, and the results of our procedures, and not 

to provide an opinion on the effectiveness of internal control over financial reporting. This report on 

internal control over financial reporting is an integral part of an audit performed in accordance with U.S. 

generally accepted government auditing standards. Accordingly, this report on internal control over 

financial reporting is not suitable for any other purpose.
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 238

Report on Compliance with Laws, Regulations, Contracts, and Grant Agreements

Management’s Responsibility

Management of the federal government is responsible for the federal government’s compliance with 

laws, regulations, contracts, and grant agreements. 

Auditor’s Responsibility

An audit of federal financial statements includes testing compliance with selected provisions of 

applicable laws, regulations, contracts, and grant agreements that have a direct effect on the 

determination of material amounts and disclosures in the financial statements, and performing certain 

other limited procedures. Accordingly, we did not test the federal government’s compliance with all 

laws, regulations, contracts, and grant agreements. Because of the limitations discussed below and the 

scope of our procedures, noncompliance may occur and not be detected by these tests. 

Our objective was not to provide an opinion on the federal government’s compliance with laws, 

regulations, contracts, and grant agreements. Accordingly, we do not express such an opinion. We 

performed our work in accordance with U.S. generally accepted government auditing standards.

Results of Tests for Compliance with Laws, Regulations, Contracts, and Grant Agreements

Our work to test compliance with selected provisions of applicable laws, regulations, contracts, and 

grant agreements was limited by certain of the material weaknesses and other scope limitations 

discussed in this audit report. U.S. generally accepted government auditing standards and OMB 

guidance require auditors to report on entities’ compliance with selected provisions of applicable laws, 

regulations, contracts, and grant agreements. Certain component entity audit reports contain instances 

of noncompliance. None of these instances were deemed to be reportable noncompliance with regard 

to the accompanying U.S. government’s consolidated financial statements.

Intended Purpose of Report on Compliance with Laws, Regulations, Contracts, and Grant Agreements

The purpose of this report on compliance with laws, regulations, contracts, and grant agreements is 

solely to describe the scope of our testing of compliance with selected provisions of applicable laws, 

regulations, contracts, and grant agreements, and the results of that testing, and not to provide an 

opinion on compliance. This report on compliance with laws, regulations, contracts, and grant 

agreements is an integral part of an audit performed in accordance with U.S. generally accepted 

government auditing standards in considering compliance. Accordingly, this report on compliance with 

laws, regulations, contracts, and grant agreements is not suitable for any other purpose.
239 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

Agency Comments

We provided a draft of this audit report to Treasury and OMB officials, who provided technical 

comments that we have incorporated as appropriate. Treasury and OMB officials expressed their 

continuing commitment to addressing the problems this report outlines.

Robert F. Dacey

Chief Accountant

U.S. Government Accountability Office

March 20, 2019
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 240

Appendix I

Objectives, Scope, and Methodology

Our objectives were to audit the consolidated financial statements consisting of the (1) accrual-based 

consolidated financial statements as of and for the fiscal years ended September 30, 2018, and 2017, 

and (2) sustainability financial statements, which consist of the 2018 and 2017 Statements of LongTerm Fiscal Projections; the 2018, 2017, 2016, 2015, and 2014 Statements of Social Insurance; and 

the 2018 and 2017 Statements of Changes in Social Insurance Amounts. Our objectives also included 

reporting on internal control over financial reporting and on compliance with selected provisions of 

applicable laws, regulations, contracts, and grant agreements. 

The Chief Financial Officers Act of 1990 (CFO Act), as expanded by the Government Management 

Reform Act of 1994 (GMRA), requires the inspectors general of the 24 CFO Act agencies to be 

responsible for annual audits of agency-wide financial statements prepared by these agencies.23

GMRA requires GAO to be responsible for the audit of the U.S. government’s consolidated financial 

statements.24 The Accountability of Tax Dollars Act of 2002 (ATDA) requires most other executive 

branch entities to prepare financial statements annually and have them audited.25 The Office of 

Management and Budget and the Department of the Treasury (Treasury) have identified 40 federal 

entities that are significant to the U.S. government’s fiscal year 2018 consolidated financial statements, 

including the 24 CFO Act agencies.26 We consider these 40 entities to be significant component entities 

for purposes of our audit of the consolidated financial statements. We performed our work in 

coordination and cooperation with the inspectors general and independent public accountants for these 

significant component entities to achieve our respective audit objectives. Our audit approach regarding 

the accrual-based consolidated financial statements primarily focused on determining the current status 

of the material weaknesses that contributed to our disclaimer of opinion on the accrual-based 

consolidated financial statements and the other material weaknesses affecting internal control that we 

reported in our report on the consolidated financial statements for fiscal year 2017.27 We also 

separately audited the financial statements of certain component entities, and parts of a significant 

component entity, including the following. 

• We audited and expressed an unmodified opinion on the Internal Revenue Service’s (IRS) financial 

statements as of and for the fiscal years ended September 30, 2018, and 2017.28 In fiscal years 

2018 and 2017, IRS collected about $3.5 trillion and $3.4 trillion, respectively, in tax payments and 

paid about $464 billion and $437 billion, respectively, in refunds to taxpayers. For fiscal year 2018, 

we also reported that although internal controls could be improved, IRS maintained, in all material 

respects, effective internal control over financial reporting. As a result of IRS’s efforts to address 

many of the deficiencies we previously found in its internal control over unpaid assessments, we 

concluded that long-standing deficiencies related to unpaid assessments no longer represented a 

 2331 U.S.C. § 3521(e). GMRA authorized the Office of Management and Budget to designate agency components that also 

must report financial statements and have them audited. See 31 U.S.C. § 3515(c).

24GMRA, Pub. L. No. 103-356, § 405(c), 108 Stat. 3410, 3416-17 (Oct. 13, 1994), codified at 31 U.S.C. § 331(e)(2). 

25ATDA, Pub. L. No. 107-289, 116 Stat. 2049 (Nov. 7, 2002), codified at 31 U.S.C. § 3515.

26See app. A of the Fiscal Year 2018 Financial Report of the United States Government for a list of the 40 entities.

27GAO, Financial Audit: Fiscal Years 2017 and 2016 Consolidated Financial Statements of the U.S. Government, GAO-18-

316R (Washington, D.C.: Feb. 15, 2018). 

28GAO, Financial Audit: IRS’s Fiscal Years 2018 and 2017 Financial Statements, GAO-19-150 (Washington, D.C.: Nov. 9, 

2018). 
241 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

material weakness; however, we considered these remaining issues affecting IRS’s internal control 

over unpaid assessments collectively to be a significant deficiency in internal control. In addition, we 

continued to report a significant deficiency in IRS’s internal control over financial reporting systems. 

We also reported that we found no reportable noncompliance for fiscal year 2018 with provisions of 

applicable laws, regulations, contracts, and grant agreements we tested. 

• We audited and expressed an unmodified opinion on the Schedules of Federal Debt managed by 

Treasury’s Bureau of the Fiscal Service (Fiscal Service) for the fiscal years ended September 30, 

2018, and 2017.29 For these 2 fiscal years, the schedules reported (1) approximately $15.8 trillion 

(2018) and $14.7 trillion (2017) of federal debt held by the public,30 (2) about $5.7 trillion (2018) and 

$5.6 trillion (2017) of intragovernmental debt holdings,31 and (3) about $357 billion (2018) and $296 

billion (2017) of interest on federal debt held by the public. We also reported that although internal 

controls could be improved, Fiscal Service maintained, in all material respects, effective internal 

control over financial reporting relevant to the Schedule of Federal Debt as of September 30, 2018. 

In addition, we reported that we found no reportable noncompliance for fiscal year 2018 with 

provisions of applicable laws, regulations, contracts, and grant agreements we tested related to the 

Schedule of Federal Debt.

• We audited and expressed unmodified opinions on the U.S. Securities and Exchange 

Commission’s (SEC) and its Investor Protection Fund’s (IPF) financial statements as of and for the 

fiscal years ended September 30, 2018, and 2017.32 We also reported that SEC maintained, in all 

material respects, effective internal control over financial reporting for both the entity as a whole and 

IPF as of September 30, 2018. In addition, we reported that we found no reportable noncompliance 

for either SEC or IPF for fiscal year 2018 with provisions of applicable laws, regulations, contracts, 

and grant agreements we tested. 

• We audited and expressed an unmodified opinion on the Federal Housing Finance Agency’s 

(FHFA) financial statements as of and for the fiscal years ended September 30, 2018, and 2017.33

We also reported that FHFA maintained, in all material respects, effective internal control over 

financial reporting as of September 30, 2018. In addition, we reported that we found no reportable 

noncompliance for fiscal year 2018 with provisions of applicable laws, regulations, contracts, and 

grant agreements we tested.

 29GAO, Financial Audit: Bureau of the Fiscal Service’s Fiscal Years 2018 and 2017 Schedules of Federal Debt, GAO-19-113 

(Washington, D.C.: Nov. 8, 2018). 

30Debt held by the public on the Schedules of Federal Debt represents federal debt that Treasury issued and that is held by 

investors outside of the federal government, including individuals, corporations, state or local governments, the Federal 

Reserve, and foreign governments.

31Intragovernmental debt holdings represent federal debt that Treasury owes to federal government accounts, primarily federal 

trust funds, such as those established for Social Security and Medicare.

32GAO, Financial Audit: Securities and Exchange Commission’s Fiscal Years 2018 and 2017 Financial Statements, GAO-19-

182R (Washington, D.C.: Nov. 15, 2018).

33GAO, Financial Audit: Federal Housing Finance Agency’s Fiscal Years 2018 and 2017 Financial Statements, GAO-19-183R 

(Washington, D.C.: Nov. 15, 2018). 
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 242

• We audited and expressed an unmodified opinion on the Office of Financial Stability’s (OFS) 

financial statements for the Troubled Asset Relief Program (TARP) as of and for the fiscal years 

ended September 30, 2018, and 2017.34 We also reported that OFS maintained, in all material 

respects, effective internal control over financial reporting for TARP as of September 30, 2018. In 

addition, we reported that we found no reportable noncompliance for fiscal year 2018 with 

provisions of applicable laws, regulations, contracts, and grant agreements we tested.

• We audited and expressed an unmodified opinion on the Bureau of Consumer Financial 

Protection’s (BCFP)35 financial statements as of and for the fiscal years ended September 30, 2018, 

and 2017.36 We also reported that BCFP maintained, in all material respects, effective internal 

control over financial reporting as of September 30, 2018. In addition, we reported that we found no 

reportable noncompliance for fiscal year 2018 with provisions of applicable laws, regulations, 

contracts, and grant agreements we tested. 

In addition, we considered the significant entities’ fiscal years 2018 and 2017 financial statements and 

the related auditors’ reports that the inspectors general or contracted independent public accountants 

prepared. Financial statements and audit reports for these entities provide information about the 

entities’ operations. Each entity audit report also contains details about any identified material 

weaknesses or significant deficiencies and related recommendations for the respective entity. We did 

not audit, and we do not express an opinion on, any of these individual federal entity financial 

statements. 

Our audit approach included performing work over Treasury processes and controls used to prepare 

the consolidated financial statements. We also considered our ongoing audit work on the General Fund 

of the U.S. Government.37

The Department of Defense (DOD) underwent an audit of its entity-wide fiscal year 2018 financial 

statements, which resulted in a disclaimer of opinion issued by the DOD Office of Inspector General 

(OIG). The disclaimer of opinion was partially based on the disclaimers of opinion for multiple DOD 

components, including the Army, Navy, Air Force, U.S. Marine Corps, Defense Health Program, 

Defense Logistics Agency, U.S. Transportation Command, and U.S. Special Operations Command. 

The DOD OIG also reported 20 material weaknesses in internal control over financial reporting, 

including those related to (1) property, plant, and equipment; (2) inventory and related property; (3) 

accounts receivable; (4) environmental and disposal liabilities; (5) reconciliations of disbursement 

activity; (6) intragovernmental eliminations; (7) financial statement compilation; and (8) financial 

management systems and information technology. 

 34GAO, Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Years 2018 and 2017 Financial 

Statements, GAO-19-152R (Washington, D.C.: Nov. 9, 2018). 

35The Bureau of Consumer Financial Protection (BCFP), which was established by the Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Pub. L. No. 111-203, Title X, § 1011(a), 124 Stat. 1376, 1964 (July 21, 2010), codified at 12 U.S.C. 

§ 5491(a), is often referred to as the Consumer Financial Protection Bureau (CFPB).

36GAO, Financial Audit: Bureau of Consumer Financial Protection’s Fiscal Years 2018 and 2017 Financial Statements, GAO19-184R (Washington, D.C.: Nov. 15, 2018). 

37The General Fund of the U.S. Government is a component of Treasury’s central accounting function. It is a stand-alone

reporting entity that comprises the activities fundamental to funding the federal government (e.g., issued budget authority, 

cash activity, and debt financing activities). 
243 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

Our audit approach for the 2018 and 2017 Statements of Long-Term Fiscal Projections focused 

primarily on assuring that the information relating to the Statements of Social Insurance is properly 

reflected therein and testing the methodology used as well as evaluating key assumptions. We also 

evaluated whether the internal control deficiencies related to the accrual-based consolidated financial 

statements affected certain key inputs used in generating the projections.

Because of the significance of the amounts presented in the Statements of Social Insurance and 

Statements of Changes in Social Insurance Amounts related to the Social Security Administration 

(SSA) and the Department of Health and Human Services (HHS), our audit approach regarding these 

statements focused primarily on these two agencies. For each federal entity preparing a Statement of 

Social Insurance and Statement of Changes in Social Insurance Amounts,38 we considered the entity’s 

2018, 2017, 2016, 2015, and 2014 Statements of Social Insurance and the 2018 and 2017 Statements 

of Changes in Social Insurance Amounts, as well as the related auditor’s reports that the inspectors 

general or contracted independent public accountants prepared. 

We performed sufficient audit work to provide our reports on (1) the consolidated financial statements; 

(2) internal control over financial reporting; and (3) compliance with selected provisions of applicable 

laws, regulations, contracts, and grant agreements. We considered the limitations on the scope of our 

work regarding the accrual-based consolidated financial statements and the sustainability financial 

statements in forming our conclusions. We performed our work in accordance with U.S. generally 

accepted government auditing standards. 

 38These entities are SSA, HHS, the Railroad Retirement Board, and the Department of Labor.
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 244

Appendix II

Material Weaknesses Contributing to Our Disclaimer of Opinion on the Accrual-Based 

Consolidated Financial Statements

The material weaknesses discussed below contributed to our disclaimer of opinion on the federal 

government’s accrual-based consolidated financial statements.39 The federal government did not have 

sufficient appropriate evidence to support information reported in the accompanying accrual-based 

consolidated financial statements, as described below. 

Property, Plant, and Equipment; Inventories and Related Property; and Accounts Receivable 

The federal government could not satisfactorily determine that property, plant, and equipment (PP&E); 

inventories and related property, and accounts receivable were properly reported in the accrual-based 

consolidated financial statements. Most of the PP&E and inventories and related property are the 

responsibility of the Department of Defense (DOD). As in past years, DOD did not maintain adequate 

systems or have sufficient records to provide reliable information on these assets. Certain other entities’ 

auditors reported continued deficiencies in internal control procedures and processes related to PP&E. 

In addition, DOD could not adequately support its accounts receivable balance. 

Deficiencies in internal control over PP&E and inventories and related property could affect the federal 

government’s ability to fully know the assets it owns, including their location and condition. They can 

also affect the government’s ability to effectively (1) safeguard assets from physical deterioration, theft, 

or loss; (2) account for acquisitions and disposals of such assets and reliably report asset balances; (3) 

ensure that the assets are available for use when needed; (4) prevent unnecessary storage and 

maintenance costs or purchase of assets already on hand; and (5) determine the full costs of programs 

that use these assets. In addition, deficiencies in internal control over accounts receivable could affect 

the federal government’s ability to identify, record, and collect amounts owed to it.

Liabilities and Commitments and Contingencies 

The federal government could not reasonably estimate or adequately support amounts reported for 

certain liabilities. For example, DOD was not able to estimate with assurance key components of its 

environmental and disposal liabilities. In addition, DOD could not support a significant amount of its 

estimated military postretirement health benefits liabilities included in federal employee and veteran 

benefits payable. These unsupported amounts relate to the cost of direct health care that DODmanaged military treatment facilities provided. Further, the federal government could not determine 

whether commitments and contingencies, including any related to treaties and other international 

agreements entered into to further the federal government’s interests, were complete and properly 

reported. 

Problems in accounting for liabilities affect the determination of the full cost of the federal government’s 

current operations and the extent of its liabilities. Also, deficiencies in internal control supporting the 

process for estimating environmental and disposal liabilities could result in improperly stated liabilities, 

and could adversely affect the federal government’s ability to determine priorities for cleanup and 

disposal activities and to appropriately consider future budgetary resources needed to carry out these 

activities. In addition, to the extent disclosures of commitments and contingencies are incomplete or 

incorrect, reliable information is not available about the extent of the federal government’s obligations.

 39The material weakness related to the Reconciliations of Budget Deficit to Net Operating Cost and Changes in Cash Balance 

also contributed to our disclaimer on the 2018 and 2017 Statements of Long-Term Fiscal Projections.
245 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

Cost of Government Operations and Disbursement Activity 

Reported net costs were affected by the previously discussed material weaknesses in reporting assets 

and liabilities; material weaknesses in financial statement preparation, as discussed below; and the lack 

of adequate disbursement reconciliations at certain federal entities. As a result, the federal government 

was unable to support significant portions of the reported total net cost of operations, most notably 

those related to DOD. 

With respect to disbursements, auditors of DOD and certain other federal entities reported continued 

control deficiencies in reconciling disbursement activity. For fiscal years 2018 and 2017, inadequate 

reconciliations of disbursement activity included (1) unreconciled differences between federal entities’ 

and the Department of the Treasury’s (Treasury) records of disbursements and (2) unsupported federal 

entity adjustments, which could also affect the balance sheet.

Unreliable cost information affects the federal government’s ability to control and reduce costs, assess 

performance, evaluate programs, and set fees to recover costs where required or authorized. If 

disbursements are improperly recorded, this could result in misstatements in the financial statements 

and in certain data that federal entities provide for inclusion in The Budget of the United States 

Government (President’s Budget) concerning obligations and outlays. 

Intragovernmental Activity and Balances 

Significant progress has been made over the past few years, but the federal government continues to 

be unable to adequately account for intragovernmental activity and balances between federal entities. 

Federal entities are responsible for properly accounting for and reporting their intragovernmental 

activity and balances in their entity financial statements. When preparing the consolidated financial 

statements, intragovernmental activity and balances between federal entities should be in agreement 

and must be subtracted out, or eliminated, from the financial statements. If the two federal entities 

engaged in an intragovernmental transaction do not both record the same intragovernmental 

transaction in the same year and for the same amount, the intragovernmental transactions will not be in 

agreement, and if not properly resolved, would result in errors (i.e., differences or unmatched amounts) 

in the consolidated financial statements. The Office of Management and Budget (OMB) and Treasury 

have issued guidance directing component entities to reconcile intragovernmental activity and balances 

with their trading partners and resolve identified differences. In addition, the guidance directs the chief 

financial officers (CFO) of significant component entities to report to Treasury, their respective 

inspectors general, and GAO on the extent and results of intragovernmental activity and balance 

reconciliation efforts as of the end of the fiscal year.

To support this process during fiscal year 2018, Treasury continued to actively work with significant 

component entities to provide information and assistance to aid them in resolving intragovernmental 

differences. Treasury’s quarterly scorecard process40 highlights differences needing the entities’ 

attention, identifies differences that need to be resolved through a formal dispute resolution process,41

and reinforces the entities’ responsibilities to resolve intragovernmental differences. Treasury continued 

to perform procedures for identifying and monitoring systemic root causes of intragovernmental 

 40For each quarter, Treasury produces a scorecard for each significant entity, as well as any other component entity reporting 

significant intragovernmental balances or differences, that reports various aspects of the entity’s intragovernmental differences 

with its trading partners, including the composition of the differences by trading partner and category. Pursuant to Treasury 

guidance, entities are expected to resolve, with their respective trading partners, the differences identified in their scorecards. 

41When an entity and its respective trading partner cannot resolve an intragovernmental difference, Treasury guidance directs 

the entity to request that Treasury resolve the dispute. Treasury will review the dispute and issue a decision on how to resolve 

the difference, which the entities must follow.
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 246

differences and related corrective action plans to address the root causes. As a result of these and 

other actions, a significant number of intragovernmental differences were identified and resolved. 

While progress was made, we continued to note that amounts reported by federal entity trading 

partners to Treasury were not in agreement by material amounts. Reasons for the differences that 

several CFOs cited included differing accounting methodologies, accounting errors, and timing 

differences. Auditors reported that several significant component entities did not have effective 

processes for reconciling intragovernmental activity and balances with their trading partners. For 

example, DOD components, which contribute significantly to the unresolved amounts, could not 

accurately identify, provide supporting documentation, or fully reconcile their intragovernmental 

transactions, which may have resulted in a material misstatement in amounts reported by DOD. 

Further, a significant portion of intragovernmental differences are related to unresolved transactions 

between the General Fund of the U.S. Government (General Fund)42 and federal entity trading partners 

related to appropriations and other intragovernmental transactions, which amount to over $100 billion. 

Over the past few years, Treasury has made progress by (1) developing and implementing procedures 

to improve the accounting for and reporting of General Fund transactions and balances, (2) working to 

resolve significant differences between the General Fund and federal entity trading partners, and (3) 

including differences involving General Fund activity and balances in the quarterly scorecard process. 

However, further improvements are needed to adequately support and reconcile intragovernmental 

activity and balances reported by the General Fund with federal entity trading partners. 

As a result of the above-noted circumstances, the federal government’s ability to determine the effect of 

these unresolved differences on the amounts reported in the accrual-based consolidated financial 

statements is significantly impaired. Addressing the intragovernmental transactions problem remains a 

difficult challenge and will require federal entities’ strong and sustained commitment to resolving 

differences with their trading partners timely, as well as Treasury’s and OMB’s continued strong 

leadership.

Preparation of Consolidated Financial Statements

Treasury, in coordination with OMB, has implemented several corrective actions during the past few 

years related to the preparation of the consolidated financial statements. Corrective actions included 

improving systems used for compiling the consolidated financial statements, enhancing guidance for 

collecting data from component entities, and implementing procedures to address certain internal 

control deficiencies detailed in our previously issued management report.43 However, the federal 

government’s systems, controls, and procedures were not adequate to reasonably assure that the 

consolidated financial statements are consistent with the underlying audited entity financial statements, 

properly balanced, and in accordance with U.S. generally accepted accounting principles (U.S. GAAP). 

During our fiscal year 2018 audit, deficiencies in the preparation of the consolidated financial 

statements included the following.

 42The General Fund is a component of Treasury’s central accounting function. It is a stand-alone reporting entity that 

comprises the activities fundamental to funding the federal government (e.g., issued budget authority, cash activity, and debt 

financing activities).

43Most of the issues we identified in fiscal year 2018 existed in fiscal year 2017, and many have existed for a number of years. 

In past years, we reported the issues we identified to Treasury and OMB and provided recommendations for corrective action. 

Most recently, in July 2018, we reported on the status of the open recommendations. See GAO, Management Report: 

Continued Improvements Needed in Controls over the Processes Used to Prepare the U.S. Consolidated Financial 

Statements, GAO-18-540 (Washington, D.C.: July 16, 2018). 
247 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

• For fiscal year 2018, auditors reported internal control deficiencies at several component entities 

regarding their entity-level controls, including the control environment, risk assessment, information 

and communication, and monitoring components of internal control, that could affect Treasury’s 

ability to obtain reliable financial information from federal entities for consolidation. For example, 

DOD did not have sufficient entity-level controls to establish an internal control system that will 

produce reliable financial reporting, Also, the Department of Veterans Affairs (VA) lacked an 

effective entity-level control system, which, coupled with a decentralized reporting structure and 

legacy system issues, has led to systemic and pervasive control deficiencies that impede VA’s 

ability to process, summarize and report reliable financial information in a timely manner.

• For fiscal year 2018, auditors reported internal control deficiencies at several component entities 

related to the entities’ financial reporting processes that could affect information in those entities’ 

closing packages.44 For example, DOD could not demonstrate that its financial statements were 

consistent with underlying records. Also, the Department of Housing and Urban Development’s 

internal controls did not reasonably assure that all necessary information was included in its 

consolidated financial statements. To reasonably assure consistency of underlying entity 

information and financial data with the U.S. government’s consolidated financial statements, 

Treasury guidance directs entity auditors to separately audit and report on the financial information 

that the significant component entities send to Treasury through closing packages. As in past years, 

Treasury had to record significant adjustments to correct errors found in federal entities’ audited 

closing package information. As with the last several years, these errors primarily related to 

intragovernmental activity and balances and totaled tens of billions of dollars. 

• While progress has been made, Treasury is unable to properly balance the accrual-based 

consolidated financial statements because of its inability to fully eliminate intragovernmental activity 

and balances. To make the fiscal years 2018 and 2017 consolidated financial statements balance, 

Treasury recorded a net increase of $2.4 billion and a net decrease of $2.6 billion, respectively, to 

net operating cost on the Statements of Operations and Changes in Net Position, which were 

identified as “Unmatched transactions and balances.”45 Treasury recorded an additional net $1.3 

billion and $2.0 billion of unmatched transactions in the Statements of Net Cost for fiscal years 2018 

and 2017, respectively. The material weakness in the federal government’s ability to account for 

intragovernmental activity and balances, discussed above, significantly contributes to this issue.

• Over the past several years, Treasury has taken significant actions to help ensure that financial 

information is reported or disclosed in the consolidated financial statements in accordance with U.S. 

GAAP. For example, Treasury has developed and implemented U.S. GAAP compliance operating 

procedures and checklists. Also, Treasury worked with entities to improve reporting of commitments 

and contingencies related to treaties and other international agreements. However, Treasury’s 

reporting of certain financial information required by U.S. GAAP continues to be impaired. Because 

of certain control deficiencies noted in this audit report—for example, commitments and 

contingencies related to treaties and other international agreements—Treasury is precluded from 

determining if U.S. GAAP requires additional disclosure in the consolidated financial statements, 

and we are precluded from determining whether the omitted information is material. Further, 

Treasury’s ability to report information in accordance with U.S. GAAP will also remain impaired until 

 44The closing package methodology links federal significant component entities’ audited financial statements to certain line 

items, note disclosures, and other information on the U.S. government’s consolidated financial statements.

45Although Treasury was unable to determine how much of the unmatched transactions and balances relates to net operating 

cost, it reported this amount as a component of net operating cost in the accompanying consolidated financial statements. 
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 248

federal entities, such as DOD, can provide Treasury with the complete and reliable information 

required to be reported in the consolidated financial statements.

In fiscal year 2018, Treasury continued to make progress with corrective actions intended to resolve 

internal control deficiencies in the processes used to prepare the consolidated financial statements. For 

example, Treasury designed and implemented an internal control review process for monitoring and 

assessing the effectiveness of internal controls over the processes used to prepare the consolidated 

financial statements.

However, until these internal control deficiencies have been fully addressed, the federal government’s 

ability to reasonably assure that the consolidated financial statements are consistent with the 

underlying audited federal component entities’ financial statements, properly balanced, and in 

accordance with U.S. GAAP will be impaired. In recent years, Treasury has continued to improve its 

systems and processes for preparing the consolidated financial statements. It is important that Treasury 

(1) continues to improve its systems and (2) remains committed to maintaining the progress that has 

been made in this area and building on that progress to make needed improvements that fully address 

the magnitude of the financial reporting challenges it faces. Resolving the remaining internal control 

deficiencies continues to be a difficult challenge and will require a strong and sustained commitment 

from Treasury, OMB, and federal entities.

Reconciliations of Budget Deficit to Net Operating Cost and Changes in Cash Balance 

The Reconciliations of Net Operating Cost and Budget Deficit and the Statements of Changes in Cash 

Balance from Budget and Other Activities (Reconciliation Statements) reconcile (1) the accrual-based 

net operating cost to the primarily cash-based budget deficit and (2) the budget deficit to changes in 

cash balances. The budget deficit is calculated by subtracting actual budget outlays (outlays) from 

actual budget receipts (receipts).46 The outlays and receipts are key inputs to the Statements of LongTerm Fiscal Projections. 

Treasury continued to develop its process for preparing the Reconciliation Statements. For example, 

during fiscal year 2018, Treasury documented its rationale for the reconciling items currently presented 

on the Reconciliation Statements. Specifically, Treasury documented its detailed analyses related to 

the accrual-based and cash-based effects of federal entities’ transactions included in net operating cost 

and the budget deficit. Also, Treasury’s significant efforts to develop and implement procedures to 

improve the accounting for and reporting of General Fund transactions and balances, if effective, 

should support the reconciliation of the records that Treasury uses to compute the budget deficit 

reported in the consolidated financial statements and Treasury’s records of cash transactions 

processed through its central accounting function. However, as of the end of fiscal year 2018, 

processes and procedures were not effective in (1) identifying and reporting all the items in the 

Reconciliation Statements, (2) properly supporting amounts used in calculating the budget deficit, and 

(3) reasonably assuring that the information in these statements was fully consistent with the underlying 

information in the significant component entities’ audited financial statements and other financial data. 

Consequently, there may be misstatements in the Reconciliation Statements.

 46The budget deficit, receipts, and outlays amounts are reported in Treasury’s Monthly Treasury Statement and the President’s 

Budget.
249 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

In fiscal year 2018, we again noted that several entities’ auditors reported internal control deficiencies 

related to monitoring, accounting, and reporting of budgetary transactions. These control deficiencies 

could affect the reporting and calculation of the net outlay amounts in the entities’ Statements of 

Budgetary Resources. In addition, such deficiencies may also affect the entities’ ability to report reliable 

budgetary information to Treasury and OMB and may affect the budget deficit reported in the accrualbased consolidated financial statements. Treasury also reports the budget deficit in its Combined 

Statement of Receipts, Outlays, and Balances and in other federal government publications.47

 47Treasury’s Combined Statement of Receipts, Outlays, and Balances presents budget results and cash-related assets and 

liabilities of the federal government with supporting details. According to Treasury, this report is the recognized official 

publication of receipts and outlays of the federal government based on entity reporting.
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 250

Appendix III

Other Material Weaknesses

Material weaknesses in internal control discussed in this audit report resulted in ineffective controls 

over financial reporting. In addition to the material weaknesses discussed in appendix II that contributed 

primarily to our disclaimer of opinion on the accrual-based consolidated financial statements, we found 

the following three other material weaknesses in internal control. 

Improper Payments 

The federal government is unable to determine the full extent to which improper payments occur and 

reasonably assure that appropriate actions are taken to reduce them. Reducing improper payments is 

critical to safeguarding federal funds.48 The Improper Payments Information Act of 2002 (IPIA), as 

amended by the Improper Payments Elimination and Recovery Act of 2010 (IPERA) and the Improper 

Payments Elimination and Recovery Improvement Act of 2012 (IPERIA),49 requires federal executive 

agencies (agencies)50 to do the following: 

1. Review all programs and activities. 

2. Identify those that may be susceptible to significant improper payments. 

3. Estimate the annual amount of improper payments for those programs and activities identified as 

risk susceptible. 

4. Implement actions to reduce improper payments and set reduction targets with respect to the risksusceptible programs and activities. 

5. Report on the results of addressing the foregoing requirements. 

Agency improper payment estimates totaled about $151 billion for fiscal year 2018, based on improper 

payment estimates reported by federal program or activity.51 The government-wide total of reported 

estimated improper payments, among programs and activities that reported estimates, increased by 

about $10 billion from the prior year estimate of about $141 billion. While decreases in estimated 

improper payments were reported for several programs and activities, these were offset by increases 

 48Under the Improper Payments Information Act of 2002, as amended, an improper payment is statutorily defined as any 

payment that should not have been made or that was made in an incorrect amount (including overpayments and 

underpayments) under statutory, contractual, administrative, or other legally applicable requirements. It includes any payment 

to an ineligible recipient, any payment for an ineligible good or service, any duplicate payment, any payment for a good or 

service not received (except for such payments where authorized by law), and any payment that does not account for credit for 

applicable discounts. Office of Management and Budget guidance also provides that when an agency's review is unable to 

discern whether a payment was proper as a result of insufficient or lack of documentation, this payment must also be 

considered an improper payment.

49IPIA, Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002), as amended by IPERA, Pub. L. No. 111-204, 124 Stat. 2224 (July 

22, 2010), and IPERIA, Pub. L. No. 112-248, 126 Stat. 2390 (Jan. 10, 2013), and reprinted in 31 U.S.C. § 3321 note. 

50IPIA, as amended, statutorily defines agencies as executive agencies as that term is defined under 31 U.S.C. § 102 to mean 

departments, agencies, or instrumentalities in the executive branch of the United States.

51The Fiscal Year 2018 Financial Report of the United States Government did not include a government-wide improper 

payment estimate or error rate. From fiscal year 2003 through fiscal year 2016, a government-wide estimate and error rate had 

been reported in financial reports based on the programs and activities that reported estimates. 
251 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

for certain other programs and activities.52 For example, the Department of Agriculture (USDA) reported 

estimated improper payments for its Supplemental Nutrition Assistance Program in excess of $4 billion 

for fiscal year 2018. USDA did not report estimated improper payments for this program for fiscal year 

2017. It is important to note that pursuant to Office of Management and Budget (OMB) implementing 

guidance, reported improper payment estimates include overpayments, underpayments, and payments 

for which the agency could not find sufficient documentation, and may also be based on payment data 

and sampling drawn from periods that do not coincide with the fiscal year for which the estimates are 

reported.

The specific programs and activities included in the government-wide total of reported improper 

payment estimates may change from year to year. For example, six agencies did not report fiscal year 

2018 estimated improper payment amounts for 10 programs and activities that were identified by the 

agency or OMB as risk-susceptible, including the Department of Health and Human Services’ (HHS) 

Temporary Assistance for Needy Families (TANF).53 Further, various inspectors general reported 

deficiencies related to compliance with the criteria listed in IPERA for fiscal year 2017 at their 

respective agencies,54 including risk-susceptible programs and activities that did not report improper 

payment estimates, estimation methodologies that may not produce reliable estimates, and risk 

assessments that may not accurately assess the risk of improper payment. For example, the 

Department of Defense (DOD) Office of Inspector General reported that DOD did not ensure that all 

required payments were included in certain programs’ improper payment estimates, and as a result, 

DOD published unreliable estimates of improper payments for fiscal year 2017.55

 52For fiscal year 2018, agencies reported decreases in total estimated improper payments in excess of $1 billion for one 

program and increases in total estimated improper payments in excess of $1 billion for five programs and activities. The one 

program with a decrease in excess of $1 billion was the Department of Health and Human Services’ (HHS) Medicare Fee-forService program. The five programs and activities with increases in excess of $1 billion were the Department of Veterans 

Affairs’ (VA) Community Care; the Department of Agriculture’s Supplemental Nutrition Assistance Program; the Social Security 

Administration’s (SSA) Old Age, Survivors, and Disability Insurance; the Department of the Treasury’s (Treasury) Earned 

Income Tax Credit (EITC), and HHS’s Medicare Advantage (Part C).

53The 10 programs and activities were (1) the Federal Communications Commission’s (FCC) Universal Service Fund Rural 

Health Care, (2) HHS's TANF, (3) HHS's Advance Premium Tax Credit, (4) the Department of Housing and Urban 

Development’s (HUD) Office of Multifamily Housing Project-Based Rental Assistance, (5) Treasury’s Advance Child Tax 

Credit, (6) Treasury’s Additional Opportunity Tax Credit, (7) Treasury’s Premium Tax Credit, (8) USDA’s Child and Adult Care 

Food Program, (9) USDA’s Risk Coverage and Price Loss Coverage, and (10) VA’s Dependency and Indemnity 

Compensation.

54IPERA established a requirement for agency inspectors general to report annually on agencies’ compliance with criteria 

listed in section 3 of IPERA. The six criteria are that the agency has (1) published an annual financial statement and 

accompanying materials in the form and content that OMB requires for the most recent fiscal year and posted that report on 

the agency website; (2) conducted a risk assessment for each specific program or activity that conforms with IPIA, as 

amended; (3) published estimates of improper payments for all programs and activities identified as susceptible to significant 

improper payments under the agency’s risk assessment; (4) published corrective action plans for programs and activities 

assessed to be at risk for significant improper payments; (5) published and met annual reduction targets for all programs and 

activities assessed to be at risk for significant improper payments; and (6) reported a gross improper payment rate of less than 

10 percent for each program and activity for which an improper payment estimate was obtained and published. The most 

recent inspector general reports on compliance with the criteria listed in IPERA were issued in 2018 for fiscal year 2017. 

Pursuant to the OMB implementing guidance in OMB Memorandum M-18-20, appendix C to OMB Circular No. A-123, 

Requirements for Payment Integrity Improvement (June 26, 2018), inspector general reports are due by May 15 of the 

following year (or the next business day if May 15 falls on a weekend). Therefore, inspector general reports on fiscal year 2018 

compliance with the criteria listed in IPERA are expected to be issued no later than May 15, 2019.

55Department of Defense, Office of Inspector General, The DoD Did Not Comply with the Improper Payment Elimination and 

Recovery Act in FY 2017, Report No. DODIG-2018-115 (Alexandria, Va.: May 9, 2018).
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 252

For fiscal year 2018, agencies reported estimated improper payment rates of 10 percent or greater for 

20 risk-susceptible programs and activities,56 accounting for about 25 percent of the government-wide 

total of reported estimated improper payments.57 Under IPERA, if an agency’s inspector general 

determines that the entity is not in compliance with the criteria listed in IPERA, such as reporting an 

improper payment rate of 10 percent or greater for any risk-susceptible program or activity, that agency 

must submit a plan to Congress describing the actions that it will take to come into compliance. 

Further, agency auditors continued to report internal control deficiencies over financial reporting in their 

fiscal year 2018 financial statement audit reports, such as financial system limitations and information 

system control weaknesses. Such deficiencies could significantly increase the risk that improper 

payments may occur and not be detected promptly. 

The President’s fiscal years 2018 and 2019 budgets included program integrity proposals at multiple 

agencies aimed at reducing improper payments. Also, efforts continue to implement requirements 

established by IPERIA, which was enacted in January 2013, to intensify efforts to identify, prevent, and 

recover payment error, waste, fraud, and abuse in federal spending. Among other things, IPERIA 

established the statutory Do Not Pay initiative, requiring agencies to review prepayment and pre-award 

procedures and ensure a thorough review of available databases to determine program or award 

eligibility before the release of any federal funds. IPERIA also directs OMB to annually identify a list of 

high-priority federal programs for greater levels of oversight and review and requires each agency 

responsible for administering one of these high-priority programs to annually submit a program report to 

its inspector general and make the report available to the public.58

Until the federal government has implemented effective processes to determine the full extent to which 

improper payments occur and has taken appropriate actions across agencies and programs and 

activities to effectively reduce improper payments, it will not have reasonable assurance that the use of 

federal funds is adequately safeguarded. 

Information Security 

GAO has reported information security as a high-risk area across government since February 1997. 

During our fiscal year 2018 audit, we found that serious and widespread information security control 

deficiencies continued to place federal assets at risk of inadvertent or deliberate misuse, financial 

information at risk of unauthorized modification or destruction, sensitive information at risk of 

 56The improper payment rate reflects the estimated improper payments as a percentage of total annual outlays.

57The 20 programs and activities that reported estimated improper payment rates of 10 percent or greater for fiscal year 2017 

were (1) VA’s Community Care; (2) VA’s Purchased Long-Term Services and Supports; (3) VA’s Communications, Utilities, 

and Other Rent; (4) VA’s Medical Care Contracts and Agreements; (5) VA’s Prosthetics; (6) VA’s Supplies and Materials; (7) 

Corporation for National and Community Service’s (CNCS) Senior Companion; (8) Treasury’s EITC; (9) VA’s Beneficiary 

Travel; (10) HUD’s Ginnie Mae Contractor Payments; (11) CNCS’s Foster Grandparent; (12) FCC’s Universal Service Fund 

Lifeline; (13) CNCS’s Retired and Senior Volunteer; (14) CNCS's AmeriCorps; (15) USDA’s Farm Service Agency (FSA) 

Noninsured Crop Disaster Assistance; (16) the Department of Labor’s Unemployment Insurance; (17) USDA’s FSA Livestock 

Forage Disaster; (18) USDA’s School Breakfast; (19) the Railroad Retirement Board’s Railroad Medicare; and (20) the 

Consumer Product Safety Commission’s Non-Payroll.

58OMB has designated high-priority programs as those programs and activities with improper payment estimates that exceed 

$2 billion annually. The 12 programs and activities with reported improper payment estimates greater than $2 billion in fiscal 

year 2018 were (1) HHS’s Medicaid; (2) HHS’s Medicare Fee-for-Service; (3) Treasury’s EITC; (4) HHS’s Medicare 

Advantage; (5) VA’s Community Care; (6) SSA’s Old Age, Survivors, and Disability Insurance; (7) SSA’s Supplemental 

Security Income; (8) USDA’s Supplemental Nutrition Assistance Program; (9) the Department of Education’s (Education) 

Direct Loan; (10) the Department of Labor’s Unemployment Insurance; (11) Education’s Pell Grant; and (12) VA’s Purchased 

Long-Term Services and Support.
253 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

inappropriate disclosure, and critical operations at risk of disruption.59 Specifically, control deficiencies 

were identified related to (1) security management; (2) access to computer resources (data, equipment, 

and facilities); (3) changes to and configuration of information system resources; (4) segregation of 

incompatible duties; and (5) contingency planning. 

Such information security control deficiencies unnecessarily increase the risk that data recorded in or 

transmitted by federal financial management systems are not reliable and available. A primary reason 

for these deficiencies is that federal entities generally have not yet fully institutionalized comprehensive 

security management programs, which are critical to identifying information security control 

deficiencies, resolving information security problems, and managing information security risks on an 

ongoing basis. Until entities identify and resolve these deficiencies and effectively manage information 

security risks on an ongoing basis, federal data and systems, including financial information, will remain 

at risk.

Loans Receivable and Loan Guarantee Liabilities

Internal control deficiencies were identified at certain federal entities that accounted for a majority of the 

reported balances of loans receivable and loan guarantee liabilities.60 The deficiencies related to credit 

program cost estimation, associated control activities, and financial reporting processes. These 

deficiencies and complexities associated with estimating the costs of loan and loan guarantee 

programs and related financing activities significantly increase the risk that misstatements in federal 

entity and government-wide financial statements could occur and go undetected. Further, these 

deficiencies can adversely affect the entities’ ability to support annual budget requests for these 

programs, make future budgetary decisions, manage program costs, and measure the performance of 

lending activities.

 59Eighteen of the 24 agencies covered by the Chief Financial Officers Act of 1990 reported information security as a material 

weakness or significant deficiency for fiscal year 2018.

60Entities contributing to the material weakness for loans receivable and loan guarantee liabilities include the Departments of

Education, Housing and Urban Development, Transportation, and Veteran Affairs.
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 254

Appendix IV

Significant Deficiencies

In addition to the material weaknesses discussed in appendixes II and III, we found three significant 

deficiencies in the federal government’s internal control related to maintaining effective internal controls 

at certain federal entities, as described below. 

Taxes Receivable

During fiscal year 2018, a significant deficiency, previously reported as a material weakness until this 

fiscal year, continued to affect the federal government’s ability to manage its taxes receivable 

effectively. While the Department of the Treasury’s Internal Revenue Service (IRS) made necessary 

and appropriate adjustments derived from a statistical estimation process to correct its financial 

statements, IRS’s underlying records did not always reflect the correct amount of taxes owed by the 

public to the federal government at interim periods and year-end because of financial system limitations 

and other control deficiencies that led to errors in taxpayers’ accounts. Such inaccurate tax records 

impair management’s ability to effectively manage taxes receivable throughout the year and place an 

undue burden on taxpayers who may be compelled to respond to IRS inquiries caused by errors in their 

accounts. Further, IRS did not clearly document several key management decisions regarding the 

design and use of the statistical estimation process used to derive the reported taxes receivable 

balance. This increases the risk that the process could be implemented in a manner contrary to 

management intent, potentially rendering the resultant estimates statistically invalid.

Collectively, these deficiencies indicate that internal controls were not effective in (1) ensuring that 

reported amounts of taxes receivable and other unpaid assessments were accurate on an ongoing 

basis and could be relied upon by management as a tool to aid in making and supporting resource 

allocation decisions and (2) supporting timely and reliable financial statements, accompanying notes, 

required supplementary information, and other information without extensive supplemental procedures 

and adjustments.

Federal Grants Management

In fiscal year 2018, several federal entities’ auditors continued to identify internal control deficiencies 

related to grants management.61 Reported deficiencies primarily related to monitoring of grant activities, 

accounting for grants, and estimating grant accruals. These internal control deficiencies could 

adversely affect the federal government’s ability to provide reliable financial statements as well as 

reasonable assurance that grants are awarded properly, recipients are eligible, and federal grant funds 

are used as intended. 

Medicare Social Insurance Information

In fiscal year 2018, auditors for the Department of Health and Human Services (HHS) identified internal 

control deficiencies in certain controls related to HHS’s preparation of its Statement of Social Insurance 

for the Medicare program. The models HHS used for its Statement of Social Insurance are complex, 

75-year projections, including spreadsheets and macros that actuaries, auditors, and others heavily 

review. The reviewers check input into the spreadsheets against original data sources and check output 

data by comparing the outputs to the results of the prior year and by testing the formulas included in the 

spreadsheets or macros. The underlying data remains critical to the accuracy of the models. In fiscal 

 61Key entities contributing to the significant deficiency for federal grants management include the Department of Homeland 

Security, Department of Housing and Urban Development, and Millennium Challenge Corporation.
255 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

year 2018, two formula errors in certain spreadsheets that HHS used to prepare its Statement of Social 

Insurance for the Medicare program were not detected by HHS’s monitoring and review function. HHS 

contributes the majority of the amounts reported on the consolidated Statement of Social Insurance. 

Such control deficiencies could result in misstatements to the Statement of Social Insurance.