FINANCIAL

REPORT

FISCAL Year

FINANCIAL

REPORT

FISCAL Year

of the

United States Government

of the

United States Government

of the

United States Government


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Contents

A Message from the Secretary of the Treasury

A Citizen’s Guide ............................................................................................................................ i

Management’s Discussion and Analysis ........................................................................................ 1 

Statement of the Comptroller General of the United States ...................................................... 25 

Financial Statements 

Introduction .................................................................................................................................. 35 

 Statements of Net Cost ................................................................................................................. 42 

 Statements of Operations and Changes in Net Position................................................................ 44 

 Reconciliations of Net Operating Cost and Unified Budget Deficit ............................................. 46 

 Statements of Changes in Cash Balance from Unified Budget and Other Activities ................... 47 

 Balance Sheets .............................................................................................................................. 48 

 Statements of Social Insurance ..................................................................................................... 49 

 Statement of Changes in Social Insurance Amounts .................................................................... 52 

Notes to the Financial Statements 

 Note 1. Summary of Significant Accounting Policies .................................................................. 55 

 Note 2. Cash and Other Monetary Assets ..................................................................................... 67 

 Note 3. Accounts and Taxes Receivable, Net ............................................................................... 69 

 Note 4. Loans Receivable and Loan Guarantee 

 Liabilities, Net ................................................................................................................. 70 

 Note 5. Troubled Asset Relief Program (TARP) – Direct Loans 

 and Equity Investments, Net ............................................................................................ 74 

 Note 6. Inventories and Related Property, Net ............................................................................. 77

 Note 7. Property, Plant, and Equipment, Net ............................................................................... 79

 Note 8. Debt and Equity Securities .............................................................................................. 81 

 Note 9. Investments in Government-Sponsored Enterprises ........................................................ 84 

 Note 10. Other Assets ................................................................................................................... 87 

 Note 11. Accounts Payable ........................................................................................................... 88 

 Note 12. Federal Debt Securities Held by the Public and Accrued Interest ................................. 89 

 Note 13. Federal Employee and Veteran Benefits Payable .......................................................... 93 

 Note 14. Environmental and Disposal Liabilities ....................................................................... 101 

 Note 15. Benefits Due and Payable ............................................................................................ 103 

 Note 16. Insurance and Guarantee Program Liabilities .............................................................. 104 

 Note 17. Other Liabilities ........................................................................................................... 105 

 Note 18. Collections and Refunds of Federal Revenue .............................................................. 108 

 Note 19. Prior-Period Adjustments ............................................................................................ 111 

 Note 20. Contingencies .............................................................................................................. 112 

 Note 21. Commitments ............................................................................................................... 117 

 Note 22. Funds from Dedicated Collections ............................................................................... 120 

 Note 23. Fiduciary Activities...................................................................................................... 126 

 Note 24. Social Insurance ........................................................................................................... 128 

 Note 25. Stewardship Land and Heritage Assets ........................................................................ 149 

 Note 26. Subsequent Events ....................................................................................................... 150 
Required Supplementary Information (Unaudited) 

 Fiscal Projections for the U.S. Government – Fiscal Year 2014 ................................................ 151 

 Statement of Long Term Fiscal Projections............................................................................. 151 

 The Sustainability of Fiscal Policy .......................................................................................... 154 

 Alternative Scenarios ............................................................................................................... 159 

 Fiscal Projections in Context ................................................................................................... 163 

 Conclusion ............................................................................................................................... 164 

 Social Insurance ......................................................................................................................... 165 

 Social Security and Medicare .................................................................................................. 165 

 Railroad Retirement, Black Lung, and Unemployment Insurance .......................................... 187 

 Deferred Maintenance and Repairs ............................................................................................ 198 

 Other Claims for Refunds ........................................................................................................... 199 

 Tax Assessments ........................................................................................................................ 199 

 Risk Assumed ............................................................................................................................. 200 

 Federal Oil and Gas Resources ................................................................................................... 201 

 Federal Natural Resources Other than Oil and Gas .................................................................... 203 

Other Information (Unaudited) 

 Unexpended Balances of Budget Authority ............................................................................... 205 

 Tax Burden ................................................................................................................................. 205 

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

 Unmatched Transactions and Balances ...................................................................................... 208

Required Supplementary Stewardship Information (Unaudited)

 Stewardship Investments ............................................................................................................ 211 

 Non-federal Physical Property ................................................................................................. 212 

 Human Capital ......................................................................................................................... 212 

 Research and Development ..................................................................................................... 212 

Appendices 

 Appendix A. Reporting Entity .................................................................................................... 215 

 Appendix B. Acronyms .............................................................................................................. 219 

U.S. Government Accountability Office Independent Auditor’s Report ............................... 225 

 
List of Social Insurance Charts 

Chart 1 OASDI Beneficiaries per 100 Covered Workers, 1970-2088 .................................... 170 

Chart 2 OASDI Income (Excluding Interest) and Expenditures, 1970-2088 ......................... 171 

Chart 3 OASDI Income (Excluding Interest) and Expenditures 

 as a Percent of Taxable Payroll, 1970-2088 ............................................................ 172 

Chart 4 OASDI Income (Excluding Interest) and Expenditures 

 as a Percent of GDP, 1970-2088 .............................................................................. 173 

Chart 5 Total Medicare (HI and SMI) Expenditures and Noninterest Income 

 as a Percent of GDP, 1970-2088 .............................................................................. 177 

Chart 6 Medicare Part A Income (Excluding Interest) and Expenditures, 1970-2088 ........... 178 

Chart 7 Medicare Part A Income (Excluding Interest) and Expenditures 

 as a Percent of Taxable Payroll, 1970-2088 ............................................................ 179 

Chart 8 Medicare Part A Income (Excluding Interest) and Expenditures 

 as a Percent of GDP, 1970-2088 .............................................................................. 180 

Chart 9 Medicare Part B and Part D Premium and State Transfer Income and Expenditures, 

 1970-2088 ................................................................................................................ 181 

Chart 10 Medicare Part B and Part D Premium and State Transfer Income and Expenditures 

 as a Percent of GDP, 1970-2088 .............................................................................. 182 

Chart 11 Estimated Railroad Retirement Income (Excluding Interest and 

 Financial Interchange Income) and Expenditures, 2014-2088 ................................ 188 

Chart 12 Estimated Railroad Retirement Income (Excluding Interest and 

 Financial Interchange Income) and Expenditures as a Percent of 

 Tier II Taxable Payroll, 2014-2088 ......................................................................... 189 

Chart 13 Estimated Black Lung Income and Expenditures (Excluding Interest) in Constant 

 (or Inflation-Adjusted) Dollars, 2015-2040 ............................................................. 193 

Chart 14 Estimated Unemployment Trust Fund Cashflow Using Expected Economic 

 Conditions in Constant (or Inflation-Adjusted) Dollars, 2015-2024 ....................... 195 

Chart 15 Unemployment Trust Fund Solvency as of September 30, 2014 ............................... 197 
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Citizen’s

Guide

to the Fiscal

Year

Citizen’s

Guide

to the Fiscal

Year

Financial Report of the

United States Government

Financial Report of the

United States Government

Financial Report of the

United States Government
A Citizen's Guide to the 2014 Financial Report of the U.S. Government 

ii 

Citizen’s Guide to the Fiscal Year 2014

Financial Report of the United States Government 

The Citizen’s Guide to the Fiscal Year 2014 Financial Report of the U.S. Government (Financial 

Report) summarizes the U.S. Government’s current financial position and condition and discusses key 

financial topics, including fiscal sustainability. This Guide and the Financial Report are produced by the 

U.S. Department of the Treasury in cooperation with the Office of Management and Budget (OMB) of the 

Executive Office of the President. The Secretary of the Treasury, Director of OMB, and Comptroller 

General of the United States at the Government Accountability Office believe that the information 

discussed in this Guide is important to all Americans. 

Where We Are Now 

Comparing the Budget and the Financial Report 

Together, the Budget of the United States Government (Budget) and the Financial Report of the 

U.S. Government (Financial Report) present complementary perspectives on the Government’s financial 

position and condition. 

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

Government receipts and spending, and presents the President’s proposed receipt and spending plan. 

The Budget focuses on receipts, or cash received by the U.S. Government (Government) and outlays, 

or payments made by the Government to the public. An excess of receipts over outlays is called a 

budget surplus; an excess of outlays over receipts is called a budget deficit. 

x The Financial Report focuses on the Government’s costs and revenues (what went out and what came 

in), assets and liabilities (what it owns and owes), and other important financial information. The 

Financial Report compares the Government’s revenues (amounts earned, but not necessarily 

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

Chart 1 compares the Government’s budget deficit and net operating cost for Fiscal Years (FY) 

2010-2014. During FY 2014: 

x Increased receipts and 

stable outlays combined to 

reduce the budget deficit 

by $196.9 billion (28.9 

percent) to $483.4 billion. 

x Net operating cost 

decreased $13.8 billion 

(1.7 percent) to $791.3 

billion, due largely to a 

$223.6 billion increase in 

taxes and other revenues, 

partially offset by a $180.4 

billion increase in net cost. 

x The $307.9 billion 

difference between the 

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

paid) associated with 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. 
A Citizen's Guide to the 2014 Financial Report of the U.S. Government 

iii 

What Went Out and What Came In 

The Government’s “bottom line” net operating cost of $791.3 billion in FY 2014 is calculated as 

follows: 

x Starting with total gross costs of 

$4.3 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 liabilities for federal 

employee and veterans benefits 

to derive its net cost of $3.8 

trillion, a $180.4 billion (4.9 

percent) increase over FY 2013. 

This increase is the combined effect of many offsetting increases and decreases. 

o For example, a $127.7 billion net decrease in losses from changes in certain actuarial cost 

estimates for federal employee and veteran benefits, especially at the Department of Veterans 

Affairs and the Office of Personnel Management was more than offset by combined net cost 

increases at the Departments of the Treasury (Treasury), Defense (DOD), Health and Human 

Services (HHS); and the Social Security Administration (SSA). 

o Chart 2, shows that the largest shares of the Government’s FY 2014 net cost came from HHS, 

SSA, and DOD. Social insurance programs administered by HHS (e.g., Medicare) and SSA (e.g., 

Social Security) account for most of those agencies’ costs; DOD costs are attributable largely to 

military operations and personnel, and benefits. 

x The government deducts taxes and other revenues from its net cost (with some adjustments) to derive 

its “bottom line” net operating cost of $791.3 billion. From Chart 3, total Government taxes and 

other revenues grew by $223.6 billion 

(7.9 percent) to nearly $3.1 trillion for 

FY 2014. 

o This increase can be attributed to a 

stronger economy and growth in 

wages and salaries, as well as the 

expiration of the temporary 

payroll tax cut and the increase in 

tax rates on income above certain 

thresholds, effective in January 

2013. 

o Together, individual income tax 

and tax withholdings, and corporation taxes accounted for about 87 percent of total revenues in 

FY 2014. Other revenues include excise and unemployment taxes, and customs duties. 
A Citizen's Guide to the 2014 Financial Report of the U.S. Government 

iv 

What We Own and What We Owe 

Chart 4 summarizes what the Government owns in assets and what it owes in liabilities. As of 

September 30, 2014: 

x The Government held 

about $3.1 trillion in 

assets (mostly $1.1 

trillion in net loans 

receivable (primarily 

student loans) and $878.3 

billion in net property, 

plant, and equipment). 

o Beyond these assets, 

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. 

x Total liabilities ($20.8 trillion) consist mostly of: (1) $12.8 trillion in federal debt securities held by 

the public and accrued interest and (2) $6.7 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. 

x The Government also reports about $5.1 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 in Treasury-issued federal debt securities, creating trust fund assets 

and Treasury liabilities. These amounts are included in investing agencies’ and Treasury’s 

financial statements, respectively, but offset each other when consolidated into the 

governmentwide financial statements. Thus, they are not reflected in Chart 4. 

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

adjustments, is subject to a statutory debt ceiling (i.e., “debt limit”). 

x When delays in raising the debt limit occur, as they did in October 2013 and February 2014, 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 the Nation’s bills. 

o 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 Congress twice suspended the debt limit during FY 2014: from October 17, 2013 through 

February 7, 2014; and again from February 15, 2014 through March 15, 2015. The debt limit was 

last raised to $17.2 trillion in February 2014. 

As budget deficits continue to occur, the Government will have to continue to borrow from the 

public. Instances where the debt held by the public increases faster than the economy for extended 

periods can pose challenges to the sustainability of current fiscal policy. 

Considering key macroeconomic indicators can help place the discussion of the Government’s 

financial results in a broader context. During FY 2014, the economy continued to grow, job growth 

accelerated, and the unemployment rate declined. These and other economic and financial developments 

are discussed in greater detail in the Financial Report. 
A Citizen's Guide to the 2014 Financial Report of the U.S. Government 

v 

Where We Are Headed 

An important purpose of this Guide and the 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 policy is one where the ratio of debt held by the public to Gross Domestic Product (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. 

To determine if current fiscal policy is sustainable, the projections discussed in this Guide assume 

current policy will continue indefinitely and draw out the implications for the growth of the debt-to-GDP 

ratio.1

 The projections (i.e., mathematical extrapolations of current policy) are therefore neither forecasts 

nor predictions. As policy changes are enacted, 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, and total spending expressed as a percent of GDP. 

o The difference between the receipts and non-interest spending shares of GDP (the primary deficit-toGDP ratio) grew rapidly in 2009 due to the financial crisis, the recession, and the policies pursued to 

combat both. The ratio 

remained high from 2010 to 

2012, despite shrinking in 

each successive year, and 

fell significantly in 2013 and 

2014. 

o The primary deficit is 

projected to shrink in the 

next few years as spending 

limits called for in the 

Budget Control Act (BCA) 

continue and the economy 

continues to recover, 

becoming a surplus starting 

in 2017 that peaks at 1.2 

percent of GDP in 2021. 

o Between 2022 and 2037, 

however, increased spending for Social Security and health programs2

 due to the continued retirement 

of the baby boom generation and increases in the price of health care services is expected to cause 

primary surpluses to steadily deteriorate and become a primary deficit starting in 2030 that reaches 

 1

 Current 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

 The 2014 Medicare Trustees Report projects that the Hospital Insurance (HI) Trust Fund will remain solvent until 2030 (four years later 

than reported last year). Under the projected baseline, tax revenue would be sufficient to pay 85 percent of estimated HI cost in 2030 and 77 

percent by 2088. These projections are made based on the “projected baseline” scenario as described in footnote 3 of this Citizen’s Guide. As for 

Social Security, under current law, the Old-Age, Survivors, and Disability Insurance (OASDI) Trust Fund reserves, considered on a theoretical 

combined basis, are projected to be depleted in 2033 (unchanged from last year), at which time the projected share of scheduled benefits payable 

from trust fund income is 77 percent, declining to 72 percent in 2088. However, the DI Trust Fund alone is expected to deplete by the end of 

2016, at which time 81 percent of scheduled benefits would be payable. The projections assume full Social Security and Medicare benefits are 

paid after the corresponding trust funds are exhausted. See http://www.ssa.gov/oact/trsum/index.html pp 3, 10, 11
A Citizen's Guide to the 2014 Financial Report of the U.S. Government 

vi 

0.7 percent of GDP by 2039. After 2039, increasing longevity and slowing in the pace of health care 

price increases cause the primary deficit-to-GDP ratio to rise slowly to 1.1 percent of GDP in 2071 

before falling back to 0.9 percent by 2089. 

o In these projections, the Affordable Care Act (ACA) 3 provision of health insurance subsidies and 

expanded Medicaid coverage boost federal spending, and other ACA provisions significantly 

reduce per-beneficiary Medicare cost growth. 

o Overall, the ACA is projected to substantially reduce the cost growth rate of federal expenditures 

for Medicare over the next 75 years. However, as noted in the Financial Report, there is 

uncertainty about the extent to which the ACA’s provisions will result in reduced health care cost 

growth. Even if those provisions work as intended and as assumed in these projections, Chart 5 

still shows a persistent gap between projected receipts and total non-interest spending. 

The primary deficit 

projections in Chart 5, along with 

those for interest rates and GDP, 

determine the debt-to-GDP ratio 

projections shown in Chart 6 

(right axis). 

x The debt-to-GDP ratio was 74 

percent at the end of FY 2014, 

and under current policy is 

projected to be 70 percent in 

2024, 117 percent in 2044, 

and 321 percent in 2089. The 

debt-to-GDP ratio rises at an 

accelerating rate despite 

primary deficits that flatten 

out because higher levels of 

debt lead to higher net interest 

expenditures, and higher net interest expenditures lead to higher debt. The continuous rise of the 

debt-to-GDP ratio after 2024 indicates that current policy is unsustainable. 

x These debt projections are generally higher than the corresponding projections in the FY 2013 

Financial Report, but still lower than those made in the FY 2012 Financial Report. For example, the 

debt-to-GDP projection for 2087 (the final projection year for the 2012 report) is 309 percent in this 

year’s Financial Report, 272 percent in the FY 2013 Financial Report, and 395 percent in the FY 

2012 Financial Report.

4

The Fiscal Gap and the Cost of Delaying Policy Reform 

x It is estimated that preventing the debt-to-GDP ratio from rising over the next 75 years would require 

some combination of spending reductions and receipt increases that amount to 2.1 percent of GDP on 

average over the next 75 years. 

 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 low-income 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. The Medicare Part B projections in the 2014 

Trustees report are made under the “projected baseline” scenario, which assumes that lawmakers will continue to override certain provisions of 

current law relating to Medicare physician payment rates. (See Note 24 and the Required Supplementary Information section of the Financial 

Report and the 2014 Medicare Trustees Report for more information). 4

 See the Required Supplementary Information section of the FY 2013 Financial Report of the U.S. Government for more information 

about changes from the long term fiscal projections for FY 2012. 
A Citizen's Guide to the 2014 Financial Report of the U.S. Government 

vii 

x The timing of changes to non-interest spending and receipts that close this “75-year fiscal gap” has 

important implications for the well-being of future generations. 

o For example, relative to a policy that begins immediately, if action is delayed by 10 years, it is 

estimated that the magnitude of reforms necessary to close the 75-year fiscal gap will increase by 

nearly 20 percent; if action is delayed by 20 years, the magnitude of reforms necessary will 

increase by nearly 50 percent. 

o Future generations are harmed by a policy delay of this sort because the higher are the primary 

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

programmatic spending from which they benefit. 

Conclusion 

x The Government took significant steps towards fiscal sustainability by enacting the ACA in 2010, the 

BCA in 2011, and the American Taxpayer Relief Act (ATRA) in 2013. The ACA holds the prospect 

of lowering long-term per beneficiary spending growth for Medicare and Medicaid, the BCA 

significantly curtails discretionary spending, and ATRA increased revenues. Together, these three 

laws substantially reduce the estimated long-term fiscal gap. 

x But even with these laws, the Government’s debt-to-GDP ratio is projected to remain relatively flat 

over the next ten years, and then commence a continuous rise over the remaining projection period 

and beyond if current policy is kept in place. This trend implies that current policy is not sustainable. 

x Subject to the important caveat that changes in policy are not so abrupt that they slow the economy’s 

recovery, the sooner policies are put in place to avert these trends, the smaller the revenue increases 

and/or spending decreases will need to be to return the Government to a sustainable fiscal path. 

The Nation By The Numbers 

The Financial Report provides the President, Congress, and the American people a comprehensive 

view of how the Government is managing taxpayer dollars. It discusses the Government’s financial 

position and condition, its revenues and costs, assets and liabilities, and other responsibilities and 

commitments, as well as important financial issues that affect the nation and its citizens both now and in 

the future. The table on the following page presents several key indicators of the Government’s financial 

position and condition, which are summarized in this Guide and discussed in greater detail in the 

Financial Report.

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

financial statements can be found beginning on page 225 of the full Financial Report. For the reasons 

discussed below, GAO was prevented from expressing (disclaimed) an opinion on these consolidated 

financial statements. GAO disclaimed an opinion on the 2014, 2013, 2012, 2011, and 2010 Statements of 

Social Insurance (SOSI) and the 2014 and 2013 Statements of Changes in Social Insurance Amounts 

because of significant uncertainties (discussed in Note 24 in the Financial Report) primarily related to the 

achievement of projected reductions in Medicare cost growth reflected in the 2014, 2013, 2012, 2011, and 

2010 SOSI. In addition, GAO disclaimed an opinion on the remaining FY 2014 and 2013 financial 

statements in the Financial Report due to certain material financial reporting control weaknesses and 

other limitations on the scope of its work. 
A Citizen's Guide to the 2014 Financial Report of the U.S. Government 

viii 

Dollars in Billions 2014 2013

Gross Costs (4,251.4) $ (3,940.9) $ 

Less: Earned Revenues 417.9 $ 415.5 $ 

 Gain/(Loss) from Changes in Assumptions (3.5) $ (131.2) $ 

Net Cost (3,837.0) $ (3,656.6) $ 

Less: Total Taxes and Other Revenues 3,066.1 $ 2,842.5 $ 

Unmatched Transactions and Balances1 $ 9.0 (20.4) $ 

Net Operating Cost (791.3) $ (805.1) $ 

Assets: 3,065.3 $ 2,968.3 $ 

Less: Liabilities, comprised of:

Debt Held By the Public & Accrued Interest (12,833.6) $ (12,028.4) $ 

Federal Employee & Veteran Benefits (6,672.6) $ (6,538.3) $ 

Other (1,259.8) $ (1,310.9) $ 

Total Liabilities (20,766.0) $ (19,877.6) $

Net Position (Assets Less Liabilities) (17,700.7) $ (16,909.3) $

Social Insurance Net Expenditures2 $ (39,698) (41,916) $ 

Total Non-Interest Net Expenditures3 $ (4,000) (4,700) $ 

Sustainability Measures as Percent of Gross Domestic Product (GDP)4

:

Social Insurance Net Expenditures (4.0%) (4.0%)

Total Federal Government Non-Interest Net Expenditures (0.4%) (0.4%)

Unified Budget Deficit (483.4) $ (680.3) $ 

3 Represents the 75-year projection of the Federal Government's receipts less non-interest spending as reported 

in the 'Statement of Long Term Fiscal Projections' in the Required Supplementary Information section of the 

Financial Report of the U.S. Government.

4 GDP values used represent the average of 75-year present value of nominal GDP for 2014 and 2013 based on 

the Social Security and Medicare Trustees Reports.

NATION BY THE NUMBERS

A Snapshot of 

The Government's Financial Position & Condition

Sustainability Measures: 

Budget Results

2 Source: Statement of Social Insurance. Amounts equal present value of projected revenues and expenditures 

for scheduled benefits over the next 75 years of certain benefit programs that are referred to as Social Insurance 

(e.g., Social Security, Medicare). Amounts represent 'open group' population (all current and future 

beneficiaries). These amounts are not considered liabilities on the balance sheet. 

1 Reflects adjustments made to bring certain accounts into balance for such items as restatements and errors in 

federal agency reporting and unreconciled intragovernmental transactions and balances among agencies.

Find Out More 

The 2014 Financial Report of the United States Government and other information about the 

nation’s finances are available at: 

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

x OMB’s Office of Federal Financial Management, 

http://www.whitehouse.gov/omb/financial/index.html; and 

x GAO, http://www.gao.gov/financial.html. 
 MANAGEMENT’S DISCUSSION AND ANALYSIS 1 

 

MANAGEMENT’S DISCUSSION AND 

ANALYSIS 

Introduction

The Fiscal Year (FY) 2014 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 finances, i.e., 

its financial position and condition, its revenues and costs, assets and liabilities, and other obligations and 

commitments. The Financial Report also 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 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 Government1

 – the central component of the Financial Report – to the President and 

Congress no later than six months after the September 30 fiscal year end. To encourage timely and relevant 

reporting, OMB accelerated both individual agency and governmentwide reporting deadlines. 

The Financial Report is prepared from the audited financial statements of specifically designated federal 

agencies, including the Cabinet departments and many smaller, independent agencies (see organizational chart on 

the next page). As it has for the past seventeen years, GAO issued a “disclaimer” of opinion on the accrual-based, 

consolidated financial statements for the fiscal years ended September 30, 2014 and 2013. GAO also issued 

disclaimers of opinion on the 2014, 2013, 2012, 2011 and 2010 Statements of Social Insurance (SOSI), and 

disclaimers of opinion on the 2014 and 2013 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 Generally Accepted Accounting 

Principles (GAAP). In FY 2014, 332

 of the 37 most significant agencies earned unmodified opinions on their 

financial statement audits.3

 

The FY 2014 Financial Report consists of: 

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

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

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

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

(RSSI), and Other Information; and 

x GAO’s audit report. 

 In addition, a Citizen’s Guide is included to provide the American taxpayer with 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 Congress authorizes and agencies implement 

programs as missions and initiatives evolve over time in pursuit of key public services and objectives, such as 

providing for national defense, promoting affordable health care, fostering income security, boosting agricultural 

 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 FY 1997. Treasury and OMB have elected to include certain financial information on the 

legislative and judicial branches in consolidated financial statements as well. 2

 The 33 agencies include the Department of Health and Human Services, which received disclaimers of opinion on its 2014, 2013, 2012, 

2011, and 2010 SOSI and on its 2014 and 2013 SCSIA. The audit opinion for the Department of Housing and Urban Development (HUD) was 

not available as of the issuance of this Financial Report. 3

 The Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Farm Credit System 

Insurance Corporation (FCSIC) are among the 37 significant entities. However, because these entities operate on a calendar year basis 

(December 31 year end), their 2014 audits are not yet complete. Statistic reflects 2013 audit results for these organizations.
2 MANAGEMENT’S DISCUSSION AND ANALYSIS 

 

productivity, providing veterans benefits and services, facilitating commerce, supporting housing and the 

transportation systems, protecting the environment, contributing to the security of energy resources, and helping 

States provide education. Exhibit 1 provides an overview of how the U.S. Government (Government) is organized. 

Exhibit 1

THE CONSTITUTION

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 

United States Botanic Garden 

Government Accountability Office 

Government Printing Office 

Library of Congress 

Congressional Budget Office 

U.S. Capitol Police 

THE UNITED STATES GOVERNMENT

JUDICIAL BRANCH 

THE SUPREME COURT OF THE 

UNITED STATES 

United States Courts of Appeals 

United States District Courts 

Territorial Courts 

United States Court of International Trade 

United States Court of Federal Claims 

Administrative Office of the United States 

Courts 

Federal Judicial Center 

United States Sentencing Commission 

OTHER SIGNIFICANT REPORTING ENTITIES 

ENVIRONMENTAL PROTECTION AGENCY 

GENERAL SERVICES ADMINISTRATION 

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION 

NATIONAL SCIENCE FOUNDATION 

OFFICE OF PERSONNEL MANAGEMENT 

SMALL BUSINESS ADMINISTRATION 

SOCIAL SECURITY ADMINISTRATION 

U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT 

U.S. NUCLEAR REGULATORY COMMISSION 

EXPORT-IMPORT BANK OF THE UNITED STATES 

FARM CREDIT SYSTEM INSURANCE CORPORATION 

FEDERAL COMMUNICATIONS COMMISSION 

FEDERAL DEPOSIT INSURANCE CORPORATION 

MILLENIUM CHALLENGE CORPORATION 

NATIONAL CREDIT UNION ADMINISTRATION 

OVERSEAS PRIVATE INVESTMENT CORPORATION 

PENSION BENEFIT GUARANTY CORPORATION 

RAILROAD RETIREMENT BOARD 

SECURITIES AND EXCHANGE COMMISSION 

SMITHSONIAN INSTITUTION 

TENNESSEE VALLEY AUTHORITY 

U.S. POSTAL SERVICE 

OTHER 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 REPORTING ENTITIES 
 MANAGEMENT’S DISCUSSION AND ANALYSIS 3 

 

$ %

Gross Cost (4,251.4) $ (3,940.9) $ $ 7.9% 310.5

Less: Earned Revenue 417.9 $ 415.5 $ 2.4 $ 0.6%

Gain/(Loss) from Changes in Assumptions (3.5) $ (131.2) $ 127.7 $ 97.3%

Net Cost1 $ (3,656.6) (3,837.0) $ 180.4 $ 4.9%

Less: Taxes and Other Revenue: 3,066.1 $ 2,842.5 $ 223.6 $ 7.9%

Unmatched Transactions & Balances (20.4) $ 9.0 $ 29.4 $ 326.7%

Net Operating Cost2 $ (805.1) (791.3) $ (13.8) $ (1.7% )

Assets3

:

Cash & Other Monetary Assets 264.9 $ 206.3 $ 58.6 $ 28.4%

Loans Receivable, Net 1,123.5 $ 1,022.3 $ 101.2 $ 9.9%

Inventories & Related Property, Net 318.4 $ 311.1 $ 7.3 $ 2.3%

Property, Plant & Equipment, Net 878.3 $ 896.7 $ (18.4) $ (2.1%)

Other 480.2 $ 531.9 $ (51.7) $ (9.7%)

Total Assets 3,065.3 $ 2,968.3 $ 97.0 $ 3.3%

Liabilities3

 :

Federal Debt Held by the Public & Accrued Interest (12,833.6) $ (12,028.4) $ 805.2 $ 6.7%

Federal Employee & Veterans Benefits (6,672.6) $ (6,538.3) $ 134.3 $ 2.1%

Other (1,259.8) $ (1,310.9) $ (51.1) $ (3.9%)

Total Liabilities (20,766.0) $ (19,877.6) $ 888.4 $ 4.5%

Net Position (Assets minus Liabilities) (17,700.7) $ (16,909.3) $ (791.4) $ (4.7% )

Social Insurance Net Expenditures4

:

Social Security (OASDI) (13,330) $ (12,294) $ 1,036 $ 8.4%

Medicare (Parts A, B, & D) (28,483) $ (27,302) $ 1,181 $ 4.3%

Other (103) $ (102) $ 1 $ 0.6%

Total Social Insurance Net Expenditures (41,916) $ (39,698) $ 2,218 $ 5.6%

Total Federal Government Noninterest Net Expenditures5 $ (4,000) (4,700) $ 700 $ 17.5%

Unified Budget Deficit6 $ (680.3) (483.4) $ (196.9) $ (28.9% )

FINANCIAL MEASURES

Table 1

The Federal Government's Financial Position and Condition

Dollars in Billions 2014 2013 Increase / (Decrease)

SUSTAINABILITY MEASURES

3 Source: Balance Sheet.

4 Source: Statements of Social Insurance (SOSI). Amounts equal estimated present value of projected revenues and expenditures for 

scheduled benefits over the next 75 years of certain 'Social Insurance' programs (Social Security, Medicare Parts A, B, & D, Railroad 

Retirement - Black Lung is projected through 2040). Amounts reflect 'Open Group' totals (all current and projected program 

participants during the 75-year projection period). 

Note: Totals may not equal sum of components due to rounding.

5 Represents the 75-year projection of the Federal Government's receipts less non-interest spending as reported in the Statement of 

Long-Term Fiscal Projections in the Required Supplementary Information section of the Financial Report .

BUDGET DEFICIT

1 Source: Statements of Net Cost.

2 Source: Statements of Operations and Changes in Net Position. 

6 Source: Final Monthly Treasury Statement (as of 9/30/2014 and 9/30/2013).

The Government’s Financial Position and Condition 

 A complete assessment of the Government’s financial or fiscal condition requires analysis of historical results, 

projections of future revenues and expenditures, and an assessment of the Government's long-term fiscal 

sustainability. This Financial Report discusses the Government’s financial position at the end of the fiscal year, 

explains how and why the financial position changed during the year, and provides insight into how the 

Government’s financial condition may change in the future. 
4 MANAGEMENT’S DISCUSSION AND ANALYSIS 

 

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

x The Government’s gross costs increased by $310.5 billion (7.9 percent) to $4.3 trillion. Deducting $417.9 

billion in revenues earned for goods and services provided to the public (e.g., Medicare premiums, national 

park entry fees, and postal service fees) and adding $3.5 billion in net losses from changes in assumptions 

(e.g., interest rates, inflation, disability claims rates) results in the Government’s net cost of $3.8 trillion in 

FY 2014, an increase of $180.4 billion (4.9 percent) as compared to FY 2013. 

x Taxes and other revenues increased $223.6 billion (7.9 percent) to $3.1 trillion, which, when offset against 

the Government’s net cost, with some adjustment for unmatched transactions and balances, results in a 

“bottom line” net operating cost of $791.3 billion for FY 2014, as compared to $805.1 billion for FY 2013. 

x Comparing total 2014 Government assets of $3.1 trillion to total liabilities of $20.8 trillion (comprised 

mostly of $12.8 trillion in federal debt held by the public and accrued interest payable4

, and $6.7 trillion of 

federal employee and veterans benefits payable) yields a negative net position of $17.7 trillion. 

x The sum of debt held by the public ($12.8 trillion) and intragovernmental debt ($5.1 trillion) equals gross 

federal debt, which, with some adjustments is subject to the statutory debt limit. As of September 30, 2014, 

the Government’s total debt subject to the debt limit was $17.8 trillion. Congress suspended the debt limit 

twice during FY 2014: first, from October 17, 2013 through February 7, 2014; and again from February 15, 

2014 through March 15, 2015. 

This Financial Report also contains information about potential impacts on the Government’s future financial 

condition. Under federal accounting rules, social insurance expenditures, as reported in the Statement of Social 

Insurance (SOSI) and the Statement of Long-Term Fiscal Projections (included in the RSI section of the Financial 

Report) are not considered liabilities of the Government. They can, however, provide a valuable perspective on the 

sustainability of the Government’s fiscal path: 

x The SOSI compares the actuarial present value5

 of the Government’s projected expenditures for scheduled 

benefits for Social Security, Medicare Parts A, B and D, and other social insurance programs over 75 years6

to a subset of the revenues7

 supporting these programs. For 2014, these projected expenditures exceeded 

projected revenues by about $41.9 trillion, a $2.2 trillion increase over 2013 social insurance projections. 

x Total projected expenditures, including other major programs (e.g., defense, Medicaid, and education) and 

tax revenues provide another perspective of the Government’s projected fiscal condition. Over the next 75 

years, under current policy, the present value (PV) of the Government’s total non-interest expenditures 

(including its social insurance programs) is projected to exceed the PV of total receipts by $4.7 trillion. 

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) 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. 

For example: 

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

Social Security Trust Fund) decreased from $680.3 billion or 4.1 percent of GDP in FY 2013 to $483.4 

billion or 2.8 percent of GDP in FY 2014, the lowest deficit-to-GDP level since 2007 and less than the 

average of the last 40 years.8

x The budget deficit is primarily financed through borrowing from the public. As of September 30, 2014, 

debt held by the public, excluding interest payable, was $12.8 trillion (74 percent of GDP). 

 4

 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. 5

 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. 6

 The Black Lung Program is projected through September 30, 2040. 

7

 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, general revenues transferred to Medicare Parts B and D are eliminated in consolidation at 

the governmentwide level and, as such, are not included in the SOSI. 8 Final Monthly Treasury Statement (as of September 30, 2014 and 2013), 10/15/14 press release – Joint Statement of Treasury Secretary 

Jacob J. Lew and OMB Director Shaun Donovan on Budget Results for Fiscal Year 2014. 
 MANAGEMENT’S DISCUSSION AND ANALYSIS 5 

 

Chief Financial Officers (CFO) Act Agency Audit Opinion

Department of Agriculture (USDA) Unmodified

Department of Commerce (DOC) Unmodified

Department of Defense (DOD) Disclaimer

Department of Education (Education) Unmodified

Department of Energy (DOE) Unmodified

Department of Health and Human Services (HHS) Unmodified1

Department of Homeland Security (DHS) Unmodified

Department of Housing and Urban Development (HUD) Pending

Department of the Interior (DOI) Unmodified

Department of Labor (DOL) Unmodified

Department of Justice (DOJ) Unmodified

Department of State (State) Unmodified

Department of Transportation (DOT) Unmodified

Department of the Treasury (Treasury) Unmodified

Department of Veterans Affairs (VA) Unmodified

Agency for International Development (USAID) Disclaimer

Environmental Protection Agency (EPA) Unmodified

General Services Administration (GSA) Unmodified

National Aeronautics and Space Administration (NASA) Unmodified

National Science Foundation (NSF) Unmodified

Nuclear Regulatory Commission (NRC) Unmodified

Office of Personnel Management (OPM) Unmodified

Small Business Administration (SBA) Unmodified

Social Security Administration (SSA) Unmodified

Export-Import Bank of the United States Unmodified

Farm Credit System Insurance Corportation (FCSIC) Unmodified2

Federal Communications Commission (FCC) Unmodified

Federal Deposit Insurance Corporation (FDIC) Unmodified2

Millenium Challenge Corporaton (MCC) Unmodified

National Credit Union Administration (NCUA) Unmodified2

Overseas Private Investment Corporation (OPIC) Unmodified

Pension Benefit Guaranty Corporation (PBGC) Unmodified

Railroad Retirement Board (RRB) Disclaimer

Securities and Exchange Commission (SEC) Unmodified

Smithsonian Institution Unmodified3

Tennessee Valley Authority (TVA) Unmodified

U.S. Postal Service (USPS) Unmodified

2 Entities operate under calendar year (CY)-end. Opinions reflect CY 2013 audit results.

3 Opinion on the most recent annual report, covering FY 2013.

Other Significant Reporting Entities

Table 2: FY 2014 Agency Financial Statement Audit Results 

1 Recieved disclaimer of opinion on Statement of Social Insurance and Statement of 

Changes in Social Insurance Amounts.

x The projected $41.9 trillion net present value excess of expenditures over receipts over 75 years for the 

programs reported in the 2014 SOSI represents about 4.0 percent of the present value of GDP over 75 

years. The excess of total projected non-interest spending over receipts of $4.7 trillion discussed in the 

‘Statement of Long Term Fiscal Projections’ in the RSI section of the Financial Report represents 0.4 

percent of GDP. As discussed in this Financial Report, these projections can, in turn, have a significant 

impact on projected debt as a percent of GDP. 

Fiscal Year 2014 Financial Statement Audit Results 

 For FY 2014, GAO issued an eighteenth 

consecutive disclaimer of audit opinion on the 

accrual-based, governmentwide financial 

statements. In addition, GAO issued disclaimers of 

opinion on the 2014, 2013, 2012, 2011 and 2010 

SOSI, and disclaimers of opinion on the 2014 and 

2013 Statement of Changes in Social Insurance 

Amounts (SCSIA). The SOSI and SCSIA 

disclaimers stem from significant uncertainties 

(discussed in Note 24, Social Insurance), primarily 

related to the achievement of projected reductions 

in Medicare cost growth as reflected in the SOSI. 

Twenty-one of the 24 agencies required to 

issue audited financial statements under the Chief 

Financial Officers (CFO) Act received unmodified 

audit opinions (the audit opinion for the Department 

of Housing and Urban Development (HUD) was 

not available as of the release of this Financial 

Report), as did 12 of 13 additional significant 

reporting agencies (see Table 2 and Appendix A).9

 

The Governmentwide Reporting 

Entity 

These financial statements cover the three 

branches of the Government (legislative, executive, 

and judicial). Legislative and judicial branch 

reporting focuses primarily on budgetary activity. 

Most executive branch entities, as well as certain 

legislative branch agencies are required, by law, to 

prepare audited financial statements. Some other 

legislative branch entities voluntarily produce 

audited financial reports. 

A number of entities and organizations are 

excluded due to the nature of their operations, 

including the Federal Reserve System (considered 

to be an independent central bank under the general 

oversight of Congress), all fiduciary funds, and 

Government-Sponsored Enterprises (GSEs), 

including the Federal Home Loan Banks, the 

Federal National Mortgage Association (Fannie 

Mae), and the Federal Home Loan Mortgage 

Corporation (Freddie Mac). The Emergency 

Economic Stabilization Act (EESA) of 2008 gave the Secretary of the Treasury temporary authority to purchase and 

 9

 The 21 agencies include the Department of Health and Human Services, which received disclaimers of opinions on its 2014, 2013, 2012 

2011, and 2010 SOSI and its 2014 and 2013 SCSIA. 
6 MANAGEMENT’S DISCUSSION AND ANALYSIS 

 

guarantee assets from a wide range of financial institutions through the Troubled Asset Relief Program (TARP). 

Following U.S. GAAP for federal entities, the Government has not consolidated into its financial statements the 

assets, liabilities, or results of operations of any financial organization or commercial entity in which Treasury holds 

either a direct, indirect, or beneficial majority equity investment. Under Statement of Federal Financial Accounting 

Concepts (SFFAC) No. 2, these entities meet the criteria of paragraph 50 and do not appear in the Federal Budget 

section “Federal Programs by Agency and Account.” As such, these entities are not consolidated into the financial 

reports of the Government. However, the values of the investments in and any related liabilities to such entities are 

presented on the balance sheet. Appendix A includes a list of the agencies and entities contributing to this Financial 

Report.

10

The following pages contain a more detailed discussion of the Government’s financial results for FY 2014, 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, 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 of 

the U.S. Government (Budget), prepared primarily on a “cash basis”, and which provides a plan for future initiatives 

and the resources needed to support them, as well as prior year fiscal and performance results; and this Financial 

Report, which provides the President, Congress, and the American people a broad, comprehensive overview of the 

cost on an “accrual basis” of the Government’s operations, the sources used to finance them, its balance sheet, and 

the overall financial outlook. 

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

as prescribed by U.S. GAAP for federal entities.11 These principles are tailored to the Government’s unique 

characteristics and circumstances. For example, agencies 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. 

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

Prepared primarily on a “cash basis” 

x Initiative-based and prospective: focus on 

current and future initiatives planned and 

how resources will be used to fund them. 

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

collections recorded when received. 

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

payment is made. 

Prepared on an “accrual and modified cash basis” 

x Agency-based and retrospective – prior and present 

resources used to implement initiatives. 

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

revenue) recognized on modified cash basis (see 

Financial Statement Note 1.B). Remainder recognized 

when earned, but not necessarily received. 

x Costs: recognized when incurred, but not necessarily 

paid. 

 10 Since programs are not administered at the governmentwide level, performance goals and measures for the federal government, as a 

whole, are not reported here. The outcomes and results of those programs are addressed at the individual agency level and can be found in each 

agency’s financial report. Go to www.performance.gov for more information about Government performance. 11 Under U.S. GAAP, most U.S. Government revenues are recognized on a ‘modified cash’ basis, or when they become measurable. 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 through September 30, 2040 for the Black Lung program. 
 MANAGEMENT’S DISCUSSION AND ANALYSIS 7 

 

Dollars in Billions 2014 2013

Net Operating Cost $ (791.3) $ (805.1)

Change in: 

Federal Employee and Veteran Benefits Payable $ 134.3 $ 264.3 

Environmental and Disposal Liabilities $ 20.0 $ 10.1 

Property, Plant, and Equipment, Net1 $ 18.4 $ (41.7)

Investments in Government-Sponsored Enterprises (GSEs) $ 44.4 $ (30.9)

Insurance and Guarantee Program Liabilities $ 28.3 $ (26.4)

Yearend Upward/(Downward) Credit Reform Subsidy Reestimates, Net2 $ (23.1) 22.9 $ 

Other, Net 39.6 $ (27.5) $ 

Subtotal - Net Difference: $ 307.9 $ 124.8 

Budget Deficit $ (483.4) $ (680.3)

1 Net effect of: capitalized fixed assets, depreciation expense, and asset disposals and revaluations

2 Net effect of: yearend upward/(downward) credit reform subsidy reestimates and effect of prior year 

(upward)/downward credit reform subsidy reestimates.

Table 3: Net Operating Cost vs. Budget Deficit

Budget Deficit vs. Net Operating Cost 

The Government’s primarily cash-based12 budget deficit decreased nearly 29 percent ($197 billion) from 

approximately $680.3 billion in FY 2013 to about $483.4 billion in FY 2014 (the lowest since 2008) due to a 

combination of higher receipts and stable outlays in FY 2014. The $246.9 billion (8.9 percent) increase in receipts 

can be attributed to a stronger economy and the expiration of certain tax provisions. Growth in wages and salaries 

made collections of individual and payroll taxes strong throughout the year. Another contributor to the increase was 

the expiration of the temporary cut in payroll taxes and the increase in tax rates on income above certain thresholds, 

which went into effect in January 2013. Outlays increased 1 percent ($50 billion). The comparatively small 

increase was due to the net effect of: (1) spending decreases across many agencies and programs, including the 

Department of Defense, the unemployment insurance program, and the Federal Deposit Insurance Corporation; and 

(2) spending increases for Social Security, Medicare, Medicaid, and student loans, along with lower dividend 

receipts from the GSEs, Fannie Mae and Freddie Mac which are recorded as offsets to spending.13 The 

Government’s largely accrual-based net operating cost also decreased, but only slightly by $13.8 billion (1.7 

percent) from $805.1 billion to $791.3 billion during FY 2014. As explained below, net operating costs are affected 

by both changes in revenues and costs. 

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). 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. Similarly, the difference 

between the budget deficit and net operating cost can also be affected by changes in certain asset valuations, such as 

investments, and in other liabilities, such as estimated insurance and guarantee program liabilities. The longer-term 

estimated costs of these programs are included in the Government’s net operating cost, calculated on an accrual 

basis as described above, but are not included in the largely cash-based budget deficit. In addition, the costs of 

certain assets, such as property plant and equipment, are recorded in the budget as outlays when purchased but are 

capitalized as assets and included in net operating cost as depreciation expense (an accrual cost) as they are used 

over the useful life of the asset. Significant changes in the Government’s net operating cost, including those related 

to the aforementioned longer-term estimated costs, are discussed in the next section. 

 The Reconciliation 

of Net Operating Cost and 

Unified Budget Deficit 

Statement, as summarized 

in Table 3, shows how the 

Government’s net 

operating cost from the 

primarily accrual-based 

financial statements relates 

to the more widely-known 

and primarily cash-based 

budget deficit. Table 3 

shows how many of the 

elements described above 

contribute to the $307.9 

billion net difference 

between the Government’s 

budget deficit and net 

operating cost for FY 2014, more than half of which is attributable to: (1) a $134.3 billion increase in liabilities for 

Federal employee and veteran benefits payable, and (2) a $44.4 billion decrease in the value of Treasury’s 

 12 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 (excluding administrative costs), or the credit subsidy cost. Credit programs record cash payments to and from the public in 

nonbudgetary financing accounts. 13 10/15/14 press release -- Joint Statement of Treasury Secretary Jacob J. Lew and OMB Director Shaun Donovan on Budget Results for 

Fiscal Year 2014. 
8 MANAGEMENT’S DISCUSSION AND ANALYSIS 

 

$ %

Gross Cost (4,251.4) $ (3,940.9) $ 310.5 $ 7.9%

Less: Earned Revenue 417.9 $ 415.5 $ 2.4 $ 0.6%

Gain/(Loss) from Changes in Assumptions (3.5) $ (131.2) $ 127.7 $ 97.3%

Net Cost (3,837.0) $ (3,656.6) $ 180.4 $ 4.9%

Less: Taxes and Other Revenue 3,066.1 $ 2,842.5 $ 223.6 $ 7.9%

Unmatched Transactions and Balances (20.4) $ 9.0 $ 29.4 $ 326.7%

Net Operating Cost (791.3) $ (805.1) $ (13.8) $ (1.7% )

Table 4: Gross Cost, Revenues, Net Cost, and Net Operating Cost 

Dollars in Billions 2014 2013 Increase / (Decrease)

investments in two GSEs – Fannie Mae and Freddie Mac.14 These and most of the other “Change in” amounts 

summarized in Table 3 affect net operating cost, but not the budget deficit. 

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: "What Went Out & What Came In"

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.

 15 

Table 4 shows that the Government’s “bottom line” net operating cost decreased slightly from $805.1 billion in 

FY 2013 to $791.3 billion in FY 2014. This $13.8 billion (1.7 percent) decrease is attributable to a number of 

offsetting revenue and cost changes over the past fiscal year as summarized in the following. 

Gross Cost and Net Cost 

 The Statement of Net Cost, starts with the Government’s total gross costs of $4.3 trillion dollars, 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 $3.8 trillion, a $180.4 

billion increase (4.9 percent) over FY 2013. 

Typically, the Government’s net cost is impacted by a variety of offsetting increases and decreases. The more 

significant drivers affecting the change in net cost during FY 2014 were: 

x The loss on changes in assumptions associated with the Government’s civilian and military benefits 

programs amounted to $3.5 billion in FY 2014 as compared to $131.2 billion in FY 2013, representing a 

$127.7 billion decrease in net cost. Agencies administering these types of programs employ a complex 

series of assumptions, including but not limited to interest rates, beneficiary eligibility, life expectancy, 

medical cost levels, compensation levels, disability claims rates, and cost of living to make annual actuarial 

 14 Department of the Treasury FY 2014 Agency Financial Report, p. 27 15 As shown in Table 4, net operating cost includes an adjustment for unmatched transactions and balances, which represent unreconciled 

differences in intragovernmental activity and balances between Federal agencies. These amounts are described in greater detail in the Other 

Information section of this Financial Report. 
 MANAGEMENT’S DISCUSSION AND ANALYSIS 9 

 

projections of their long-term benefits liabilities. The Department of Veterans Affairs (VA) and the Office 

of Personnel Management (OPM) reported significant decreases in losses from changes in these 

assumptions for FY 2014; 

x Most of the Department of the Treasury’s (Treasury’s) $131.2 billion net cost increase is attributable to the 

effect of changes in the fair value of Treasury’s investments in two GSEs – Fannie Mae and Freddie Mac – 

and to the decrease in dividend receipts from the GSEs16; 

x $55.8 billion and $39.4 billion net cost increases at the Department of Health and Human Services (HHS) 

and the Social Security Administration 

(SSA), respectively, primarily due to 

cost increases of the benefits programs 

that these agencies administer (HHS – 

Medicare and Medicaid programs, 

SSA – Old Age Survivors and 

Disability Insurance (OASDI) 

programs); 

x a $46.4 billion cost increase at the 

Department of Education, largely 

associated with increases in the 

projected long-term costs of its direct 

student loan programs due to changes 

in the types and availability of 

repayment plans and increases in 

default rates17; and 

x a $26.5 billion decrease at the 

Department of Labor, primarily due to 

decreases in unemployment benefits 

provided under existing legislation 

and lower levels of unemployment as 

compared to FY 2013.18 

Chart A shows the composition of the 

Government’s net cost. In FY 2014, two-thirds 

of total net cost came from DOD, the Social 

Security Administration (SSA), and the 

Department of Health and Human Services 

(HHS). These three agencies have consistently 

incurred the largest agency shares of the 

Government’s total net cost in recent years 

(Chart B). As indicated above, HHS and SSA 

net costs for FY 2014 ($951.5 billion and $906.4 billion, respectively) are attributable to major social insurance 

programs administered by these agencies. The Statement of Social Insurance (SOSI) and the related information in 

this Financial Report, including the broader discussion of the Government’s long-term fiscal projections, discuss the 

projected future revenues, expenditures, and sustainability of these programs in greater detail. DOD’s net costs of 

$662.3 billion relate primarily to operations, readiness, and support; personnel; research; procurement; and 

retirement and health benefits. Chart A shows that the Department of Veterans Affairs (VA) as well as interest on 

debt held by the public contributed an additional combined 12 percent, and the other agencies included in the 

Government’s FY 2014 Statement of Net Cost accounted for a combined 22 percent of the Government’s total net 

cost for FY 2014. 

 16 Department of the Treasury FY 2014 Agency Financial Report, p. 22-23. See also Note 9 – Investments in GSEs – of this Financial 

Report. 

17 Department of Education FY 2014 Agency Financial Report, p. 30 18 Department of Labor FY 2014 Agency Financial Report, p. 27 
10 MANAGEMENT’S DISCUSSION AND ANALYSIS 

 

$ %

Assets

Cash & Other Monetary Assets 264.9 $ 206.3 $ 58.6 $ 28.4%

Loans Receivable, Net 1,123.5 $ 1,022.3 $ 101.2 $ 9.9%

Inventories & Related Property, Net 318.4 $ 311.1 $ 7.3 $ 2.3%

Property, Plant & Equipment, Net 878.3 $ 896.7 $ (18.4) $ (2.1%)

Other 480.2 $ 531.9 $ (51.7) $ (9.7%)

Total Assets 3,065.3 $ 2,968.3 $ 97.0 $ 3.3%

Less: Liabilities, comprised of:

Federal Debt Held by the Public & 

Accrued Interest $ (12,028.4) (12,833.6) $ 805.2 $ 6.7%

Federal Employee & Veteran Benefits (6,672.6) $ (6,538.3) $ 134.3 $ 2.1%

Other (1,259.8) $ (1,310.9) $ (51.1) $ (3.9%)

Total Liabilities (20,766.0) $ (19,877.6) $ 888.4 $ 4.5%

Net Position (Assets Minus Liabilities) (17,700.7) $ (16,909.3) $ (791.4) $ (4.7% )

Table 5: Assets and Liabilities

Net Position 

Dollars in Billions 

2014 2013 Increase (Decrease)

Taxes and Other Revenues - Getting to the “Bottom Line” 

As noted earlier, taxes 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 C shows that 

increases in each of the three taxes and other revenue categories shown - individual income tax and withholdings, 

corporation income taxes, and other revenue - combined to increase total Government taxes and other revenues by 

$223.6 billion (7.9 percent) to nearly $3.1 

trillion for FY 2014. This change is primarily 

attributed to an overall increase in individual 

and corporation income tax collections.19 As 

noted in the earlier discussion of budget 

receipts, these increases largely stem from a 

stronger economy and growth in wages and 

salaries, as well as and the expiration of certain 

tax provisions. Earned revenues from Table 4 

are not considered “taxes and other revenue” 

and, thus, are not shown in Chart C. Individual 

income tax and tax withholdings and 

corporation income taxes accounted for about 

77 percent and 10 percent of total revenue, 

respectively in FY 2014; other revenues from 

Chart C include excise taxes, unemployment 

taxes, and customs duties. 

As previously shown in Table 4, the increase in taxes and other revenues more than offset the increase in net 

costs, resulting in a slight total net decrease of $13.8 billion (1.7 percent) in the Government’s net operating cost 

from $805.1 billion for FY 2013 to $791.3 billion for FY 2014. 

Assets and Liabilities: "What We Own and What We Owe" 

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 5). It 

is important to note that the 

balance sheet does not 

include the financial value of 

the Government’s sovereign 

powers to tax, regulate 

commerce, and set monetary 

policy. It also excludes its 

control over nonoperational 

resources, including 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, when such 

items as the Government’s future social insurance exposures (namely, Medicare and Social Security), as well as 

other fiscal projections, commitments and contingencies, are taken into account. These exposures are discussed 

later in this Management Discussion and Analysis (MD&A) section as well as in the required supplementary 

disclosures of this Financial Report. 

 19 Department of the Treasury FY 2014 Agency Financial Report, p. 28 
 MANAGEMENT’S DISCUSSION AND ANALYSIS 11 

 

Assets – “What We Own”

As of September 30, 2014, the Government held about $3.1 trillion in assets, an increase of $97.0 billion (3.3 

percent). The Government’s assets are comprised mostly of net loans receivable ($1,123.5 billion) and net property, 

plant, and equipment ($878.3 billion).20 From Note 4, the Department of Education’s (Education’s) Federal Direct 

Student Loan Program accounted for $778.6 billion (69.3 percent) of total net loans receivable. Education’s credit 

program receivables balances increased by more than a third over the past two fiscal years largely due to increased 

direct loan disbursements, attributable to the continued effect of 2011 legislation requiring a transition for new loans 

from guaranteed student loans to full direct lending by Education.21 

Beyond the assets reported on the Government’s balance sheet, other significant resources are available to the 

Government, including stewardship assets, natural resources, and the Government’s power to tax and set monetary 

policy. 

Liabilities – “What We Owe” 

As indicated in Table 5 and Chart D, of the 

Government’s $20.8 trillion in total liabilities, the 

largest liability is federal debt securities held by the 

public and accrued interest, the balance of which 

increased $805.2 billion (6.7 percent) to $12.8 

trillion as of September 30, 2014. 

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 $134.3 billion 

(2.1 percent) during FY 2014, to $6,672.6 billion. 

OPM administers the largest civilian pension plan, 

covering nearly 2.7 million current employees and 2.5 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 2.7 million retirees and annuitants. 

Federal Debt 

The unified 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 Unified Budget and Other Activities

reports how the annual unified 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, which is reported 

on the Government’s balance sheet as a liability, 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, foreign governments, and other entities outside 

the federal government. Federal debt held by the public and accrued interest totaled $12.8 trillion as of September 

30, 2014. 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 than this would imply. Each year, trillions of dollars of debt mature and new debt is issued to take its 

place. In FY 2014, new borrowings were $7.5 trillion and repayments of maturing debt held by the public were $6.7 

trillion. Both represented decreases over new borrowings and debt repayments as compared to FY 2013. 

 20 For financial reporting purposes, other than multi-use heritage assets, stewardship assets 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 25 – Stewardship Land and Heritage Assets. 21 With the enactment of the SAFRA Act, formerly known as the Student Aid and Fiscal Responsibility Act, which was included as part of 

the Health Care and Education Reconciliation Act of 2010 (HCERA) (Pub. L. 111-152), beginning in July 2010, no new loans were originated 

under the Federal Family Education Loan (FFEL) Program (FY 2014 Federal Student Aid Financial Report ). See also: U.S. Department of 

Education FY 2014 Agency Financial Report p. 25. 
12 MANAGEMENT’S DISCUSSION AND ANALYSIS 

 

In addition to debt held by the public, the Government has about $5.1 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 ($2.8 trillion) and Medicare ($270.6 

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 12). 

When those securities are redeemed, e.g., to pay future 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 FY 2014, debt subject to the statutory limit (DSL) was $17.8 trillion. 

Prior to 1917, the Congress approved 

each debt issuance. In 1917, to facilitate 

planning in World War I, Congress 

established a dollar ceiling for federal 

borrowing. With the Public Debt Act of 1941 

(Public Law 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. In February 2013, 

with the enactment of the No Budget, No Pay 

Act of 2013 (Public Law 113-3), Congress 

suspended the debt limit, enabling the debt to 

increase as needed through May 18, 2013. In 

accordance with provisions of the Act, the 

debt limit was reinstated on May 19, 2013 at a 

level of $16.699 trillion. Because the new debt limit was set at the level of then outstanding debt, Treasury began 

implementing “extraordinary measures”, on a temporary basis, which were still in effect on September 30, 2013, to 

keep the DSL under the statutory limit. 22 On October 17, 2013, P.L. 113-46 again suspended the debt limit, this 

time through February 7, 2014, after which the limit was re-instated at a level of $17.212 trillion. P.L. 113-83 again 

suspended the debt limit, this time from February 15, 2014 through March 15, 2015. 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. 

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

country’s debt to the size of its economy, making this measure sensitive to changes in both. Over time, the debt-toGDP ratio has varied widely. For most of the nation’s history, the debt-to-GDP ratio has tended to increase during 

wartime and decline during peacetime. That pattern continued to hold following World War II until the 1970s. As 

shown in Chart E, wartime spending and borrowing had pushed the debt-to-GDP ratio to an all-time high of 106 

percent in 1946, but it decreased rapidly in the post-war years, falling to 79 percent by 1950, 44 percent in 1960, and 

the postwar low point of 23 percent in 1974. Since then, the ratio has increased, growing rapidly from the mid1970s until the early 1990s. In the 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, generated a 

significant decline in the debt-to-GDP ratio over the course of the 1990s, from a peak of 48 percent in 1993-1995, to 

31 percent in 2001. During the last decade, much of this progress was undone as PAYGO rules were allowed to 

 22A delay in raising the statutory debt limit existed as of September 30, 2013. When delays in raising the statutory debt limit occur, 

Treasury often must 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. Extraordinary measures taken by Treasury during the period of May 20, 2013, 

through October 16, 2013 resulted in federal debt securities not being issued to certain federal government accounts. As a result of Treasury 

securities not being issued to the Government Securities Investment Fund (G Fund) of the Thrift Savings Plan (TSP) of the Federal Retirement 

Thrift Investment Board (FRTIB), Treasury reported miscellaneous liabilities in the amount of $120.4 billion that represent uninvested principal 

of and related interest for the G Fund that would have been reported as Federal Debt Securities Held by the Public and Accrued Interest had there 

not been a delay in raising the statutory debt limit as of September 30, 2013, and had the securities been issued. Treasury fully repaid its 

obligation to the G Fund by restoring them with accumulated uninvested principal and related interest through October 16, 2013. See Note 17, 

Other Liabilities for more information. 
 MANAGEMENT’S DISCUSSION AND ANALYSIS 13 

 

FY 2014 FY 2013

Real GDP Growth 2.7% 2.3%

Residential Investment Growth -0.7% 14.4%

Average monthly payroll job change (thousands) 233 201

Unemployment rate (percent, end of period) 5.9% 7.2%

Consumer Price Index (CPI) 1.7% 1.2%

CPI, excluding food and energy 1.7% 1.7%

Treasury constant maturity 10-year rate (end of period) 2.52% 2.64%

Moody's Baa bond rate (end of period) 4.81% 5.39%

Table 6: National Economic Indicators*

* Some FY2013 data may differ from the FY2013 Financial Report due to updates and revisions.

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. 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 about 74 

percent as of September 30, 2014. 

The Economy in Fiscal Year 2014 

A review of the nation’s key 

macroeconomic indicators can help 

place the discussion of the 

Government’s financial results in a 

broader context. As summarized in 

Table 6, the economy continued to 

expand at a moderate pace during FY 

2014. Job growth picked up. The 

unemployment rate declined during FY 

2014 to its lowest level in six years, but 

remained a bit above the 5.5 percent 

average that prevailed in the 1990s and 

2000s. 

Real (i.e., inflation-adjusted) GDP expanded 2.7 percent during FY 2014, accelerating from the increase 

recorded over the four quarters of FY 2013. Consumer spending also rose 2.7 percent during FY 2014, faster than 

the increase during the previous fiscal year. The recovery in the housing sector slowed in FY 2014 and residential 

fixed investment declined by 0.7 percent, compared with a surge of 14.4 percent during FY 2013. Growth of 

nonresidential fixed investment strengthened, accelerating to 7.6 percent during FY 2014 from 3.0 percent during 

the previous fiscal year. 

Labor market conditions improved further during FY 2014, with the pace of job growth picking up and the 

unemployment rate declining as the fiscal year progressed. The economy added 2.8 million nonfarm payroll jobs 

during FY 2014, exceeding the 2.4 million jobs created during the previous fiscal year. On a monthly basis, 

nonfarm payroll employment advanced at an average rate of 233,000 jobs, faster than the average monthly increase 

of 201,000 in FY 2013. The number of unemployed persons fell from 11.3 million in September 2013 to 9.2 million 

in September 2014. The unemployment rate declined 1.3 percentage points, from 7.2 percent in September 2013 to 

5.9 percent in September 2014. At the end of FY 2014, the unemployment rate was 4.1 percentage points lower 

than the peak of 10.0 percent, reached in October 2009. 

Inflation trended higher in the latest fiscal year, largely reflecting higher food price inflation, but remained at a 

moderate level. The headline consumer price index (CPI) rose 1.7 percent during FY 2014, up from 1.2 percent in 

FY 2013. Underlying core inflation (the CPI excluding food and energy) was stable at 1.7 percent during FY 2014, 

the same as during the previous fiscal year. Both headline and core inflation in FY 2014 remained low by historical 

standards. 

Growth of real disposable personal income accelerated during FY 2014, to more than double the rate seen in 

the previous fiscal year as stronger growth in nominal disposable personal income slightly offset a pickup in 

inflation. The level of corporate profits rose 1.4 percent during FY 2014, compared with a gain of 4.9 percent during 

the previous fiscal year. 

The solid performance of the U.S. economy in FY 2014 occurred against a backdrop of generally stable 

conditions in financial markets. Yields on corporate bonds of moderate risk were about 275 basis points above the 

rate on 10-year Treasury securities at the end of FY 2013. This spread decreased early in the fiscal year and 

remained below that level throughout the year, ending FY 2014 at 229 basis points. The difference between the 3-

month London Interbank Offered Rate (LIBOR) and the 3-month Treasury rate stood at 23 basis points at the end of 

FY 2013. This spread generally narrowed over the course of the latest fiscal year, before edging back up more 

recently, ending FY 2014 at 22 basis points. 
14 MANAGEMENT’S DISCUSSION AND ANALYSIS 

 

The Long-Term Fiscal Outlook: “Where We Are Headed” 

While the Government’s immediate priority is to continue to foster economic recovery, there are longer-term 

fiscal challenges that must ultimately be addressed. Persistent growth of health care costs and the aging of the 

population due to the retirement of the “baby boom” generation23, increasing longevity, and lower birth rates will 

make it increasingly difficult to fund critical social programs, including Medicare, Medicaid, and Social Security. 

Fiscal Sustainability 

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. A sustainable policy is one where the 

debt-to-GDP ratio is stable or declining over the long term. 

To determine if current fiscal policies are sustainable, the projections discussed here assume current policy will 

continue indefinitely and draw out the implications for the growth of debt held by the public as a share of GDP.24 

The projections are therefore neither forecasts nor predictions. As policy changes are enacted, actual financial 

outcomes will be different than those projected. 

The projections in this Financial Report indicate that current policy is not sustainable. The debt-to-GDP ratio 

is projected to reach 321 percent in 2089 and to rise continuously 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 2.1 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. 

It is important to address the Government’s fiscal imbalances soon. Delaying action increases the magnitude 

of spending reductions and/or revenue increases necessary to stabilize the debt-to-GDP ratio. For example, it is 

estimated that the magnitude of reforms necessary to close the 75-year fiscal gap is more than 20 percent larger if 

reforms are delayed by just ten years, and more than 50 percent larger if reform is delayed 20 years. 

The estimates of the cost of policy delay in this Financial Report assume policy does not affect GDP or other 

economic variables. Reducing deficits too abruptly would be counterproductive if it slows the economy’s recovery. 

Conversely, delaying fiscal adjustments for too long raises the risk that growing federal debt would increase interest 

rates and slow economic growth. In the near term, it is crucial to strike the proper balance between deficit reduction 

and economic growth. 

The Primary Deficit, Interest, and Debt 

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

the debt-to-GDP ratio that the Government controls directly. (The other determinants are interest rates and growth 

in GDP). Chart F shows receipts, non-interest spending, and the difference – the primary deficit – expressed as a 

share of GDP (primary deficit-to-GDP ratio). The primary deficit-to-GDP ratio grew rapidly in 2009 due to the 

financial crisis and the recession and the policies pursued to combat both. The ratio remained high from 2010 to 

2012 despite shrinking in each successive year, and fell significantly in 2013 and 2014. The primary deficit is 

projected to shrink in the next few years as spending reductions called for in the Budget Control Act (BCA) continue 

and the economy continues to recover, becoming a primary surplus in 2017 that peaks at 1.2 percent of GDP in 

2021. Between 2022 and 2037, however, increased spending for Social Security and health programs due to the 

continued retirement of the baby boom generation and increases in the price of health care services is expected to 

cause the primary surplus to steadily deteriorate and become a primary deficit starting in 2030 that reaches 0.7 

percent of GDP by 2039. After 2039, increasing longevity and slowing in the pace of health care price increases 

cause the primary deficit to GDP ratio to rise slowly to 1.1 percent in 2071, before falling back to 0.9 percent by 

2089. 

 23 Refers to the segment of the population born during the post-World War II era during which time birth rates in the U.S. were higher than 

normal. 24 Current 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, such as reauthorization of the Supplemental Nutrition Assistance Program. 
 MANAGEMENT’S DISCUSSION AND ANALYSIS 15 

 

The receipt share of GDP fell substantially in 2009 and 2010 and remained low in 2011 and 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 rose to 

17.4 percent in 2014 and is projected to return to near its long-run average as the economy fully recovers and as a 

result of the higher tax rates 

enacted under the American 

Taxpayer Relief Act (ATRA). 

After 2020, receipts are 

projected to grow slightly more 

rapidly than GDP as increases in 

real incomes cause more 

taxpayers and a larger share of 

income to fall into the higher 

individual income tax brackets. 

The non-interest spending 

share of GDP is projected to stay 

at or below its current level of 

about 19 percent until 2028, and 

to then rise gradually to 20.8 

percent of GDP in 2042 and 22.0 

percent of GDP in 2089. The 

reductions in the non-interest 

spending share of GDP over the 

next few years are mostly due to 

the expected reductions in 

spending for overseas 

contingency operations, caps on 

discretionary spending, and the 

automatic spending cuts 

mandated by the BCA; the 

subsequent increases are 

principally due to growth in 

Medicare, Medicaid, and Social 

Security spending (see Chart F). 

The aging of the baby boom 

generation over the next 25 years 

is projected to increase the 

Social Security, Medicare, and 

Medicaid spending shares of 

GDP by about 1.2 percentage 

points, 1.7 percentage points, 

and 0.6 percentage points, 

respectively. After 2039, the 

Social Security spending share 

of GDP gradually declines and 

then returns to 2039 levels, while 

the Medicare and Medicaid 

spending share of GDP continues to increase, albeit at a slower rate, due to projected increases in health care costs. 

The Affordable Care Act (ACA)25 provision of health insurance subsidies and expanded Medicaid coverage boost 

federal spending and other ACA provisions significantly reduce per-beneficiary Medicare cost growth. On net, the 

ACA is projected to substantially reduce the cost growth rate of federal expenditures for Medicare over the next 75 

years. However, as discussed in Note 24, there is uncertainty about whether the projected cost savings, productivity 

improvements, and reductions in physician payment rates will be sustained in a manner consistent with the projected 

cost growth over time. 

 25 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 reduces the annual increases in 

Medicare payment rates. 
16 MANAGEMENT’S DISCUSSION AND ANALYSIS 

 

Period of Delay

No Delay: Reform in 2015......... 2.1 percent of GDP between 2015 and 2089

Ten Years: Reform in 2025........ 2.5 percent of GDP between 2025 and 2089

Twenty Years: Reform in 2035.. 3.1 percent of GDP between 2035 and 2089

Change in Average Primary Surplus

Note: Reforms taking place in 2014, 2024, and 2034 from the 2013 Financial Report were 1.7, 2.1, and 

2.6 percent of GDP.

Table 7

Costs of Delaying Fiscal Reform

The primary deficit-to-GDP projections in Chart F, along with projections for interest rates, determine the 

debt-to-GDP ratio projections shown in Chart G (right axis) on the previous page. That ratio was 74 percent at the 

end of FY 2014 and under current policy is projected to be 70 percent in 2024, 117 percent in 2044, and 321 percent 

in 2089. The debt-to-GDP ratio rises at an accelerating rate despite primary deficits that flatten out because higher 

levels of debt lead to higher net interest expenditures, and higher net interest expenditures lead to higher debt. The 

continuous rise of the debt-to-GDP ratio after 2024 indicates that current policy is unsustainable. 

These debt projections are generally higher than the corresponding projections in the FY 2013 Financial 

Report, but still lower than those made in the FY 2012 Financial Report. For example, the debt-to-GDP projection 

for 2087 (the final projection year for the 2012 report) is 309 percent in this year’s Financial Report, 272 percent in 

the FY 2013 Financial Report, and 395 percent in the FY 2012 Financial Report.

26 

The Fiscal Gap and the Cost of Delaying Policy Reform 

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

amount by which primary surpluses over the next 75 years must rise above current-policy levels in order to prevent 

the debt-to-GDP ratio from rising. It is estimated that running primary surpluses that average 1.6 percent of GDP 

over the next 75 years would result in the 2089 debt-to-GDP ratio equaling its level in fiscal year 2014, which 

compares with primary deficits that average 0.4 percent of GDP under current policies. The 75-year fiscal gap is 

therefore 2.1 percent of GDP, which is 10.3 percent of the 75-year present value of projected receipts and 10.0 

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

It is noteworthy that preventing the debt-to-GDP ratio from rising over the next 75 years requires that primary 

surpluses be substantially positive on average. This is true because projected GDP growth rates are, on average, 

smaller than the projected government borrowing rate over the next 75 years. The implication is that debt would 

grow faster than GDP if primary surpluses were zero on average. For example, if the primary surplus was precisely 

zero in every year, then debt would grow at the rate of interest in every year, which would be faster than GDP 

growth. 

Table 7 illustrates the cost of 

delaying policy to close the fiscal gap 

by comparing three policies that begin 

on different dates. The first policy 

begins immediately and calls for 

increasing primary surpluses by 2.1 

percent of GDP in every year between 

2015 and 2089. This is accomplished 

by invoking some combination of spending reductions and revenue increases that amount to 2.1 percent of GDP in 

every year over the 75-year projection period. The second policy in Table 7 begins in 2025. Because the same 

fiscal consolidation must be compressed into ten fewer years, this policy change is more abrupt, calling for primary 

surplus increases amounting to 2.5 percent of GDP in every year between 2025 and 2089. Similarly, if debt is 

allowed to accumulate unabated for 20 years, then closing the 75-year fiscal gap would require even more abrupt 

primary surplus increases amounting to 3.1 percent of GDP in every year between 2035 and 2089. The differences 

between the primary surplus boost starting in 2025 and 2035 (2.5 and 3.1 percent of GDP, respectively) and the 

primary surplus boost starting in 2015 (2.1 percent of GDP) is a measure of the additional burden policy delay 

would impose on future generations. Future generations are harmed by a policy delay of this sort 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 Government took significant steps towards a sustainable fiscal policy by enacting the ACA in 2010, the 

BCA in 2011, and ATRA in 2013. The ACA holds the prospect of lowering long-term per-beneficiary spending 

growth for Medicare and Medicaid, the BCA significantly curtails discretionary spending, and ATRA increases 

revenues. Together, these three laws substantially reduce the estimated long-term fiscal gap. But even with these 

laws, the debt-to-GDP ratio is projected to remain relatively flat over the next ten years and then commence a 

continuous rise over the remaining projection period and beyond if current policies are kept in place. This trend 

implies that current policies are not sustainable. Subject to the important caveat that changes in policy are not so 

 26 See the Required Supplementary Information section of the FY 2013 Financial Report of the U.S. Government for more information 

about changes from the long term fiscal projections for FY 2012. 
 MANAGEMENT’S DISCUSSION AND ANALYSIS 17 

 

$ %

Open Group (Net):

 Social Security (OASDI) (13,330) $ (12,294) $ 1,036 $ 8.4%

Medicare (Parts A, B, & D) (28,483) $ (27,302) $ 1,181 $ 4.3%

Other (103) $ (102) $ 1 $ 0.6%

Total Social Insurance Expenditures, Net 

(Open Group) $ (39,698) (41,916) $ $ 5.6% 2,218

Total Social Insurance Expenditures, Net 

(Closed Group) $ (53,974) (56,680) $ $ 5.0% 2,706

Open Group

 Social Security (OASDI) (1.2%) (1.2%)

Medicare (Parts A, B, & D) (2.9%) (3.0%)

Other 0.0% 0.0%

Total (Open Group) (4.0% ) (4.0% )

Total (Closed Group) (5.4% ) (5.5% )

Note - some totals may not equal sum of components due to rounding.

Table 8: Social Insurance Future Expenditures in Excess of Future Revenues

2013

* GDP values used are from the 2014 & 2013 Social Security and Medicare Trustees Reports and represent 

the present value of GDP over the 75-year projection period. As the GDP used for Social Security and 

Medicare differ slightly in the Trust Fund Reports, the two values are averaged to estimate the 'Other' and 

Total Net Social Insurance Expenditures as % of GDP.

Dollars in Billions

Social Insurance Net Expenditures as a % of Gross Domestic Product (GDP)*

Increase / (Decrease)

Source: Statement of Social Insurance (SOSI). Amounts equal estimated present value of projected revenues 

and expenditures for scheduled benefits over the next 75 years of certain 'Social Insurance' programs (e.g., 

Social Security, Medicare). 'Open Group' totals reflect all current and projected program participants during 

the 75-year projection period. 'Closed Group' totals reflect only current participants.

2014

abrupt that they slow the economy’s recovery, the sooner policies are put in place to avert these trends, the smaller 

the revenue increases and/or spending decreases will need to be to return the Government to a sustainable fiscal path 

over the long term. 

While this Financial Report’s projections of expenditures and receipts under current policy are highly 

uncertain, it is nevertheless nearly certain that current policy cannot be sustained indefinitely. 

These and other issues concerning fiscal sustainability are discussed in further detail in the Required 

Supplementary Information section of this Financial Report. 

Social Insurance

The preceding analysis of the Government’s long-term fiscal projections considered Government receipts and 

spending as a whole. The Statement of Social Insurance (SOSI) provides a more focused perspective of the 

Government’s “social insurance” programs: Social Security, Medicare, Railroad Retirement, and Black Lung. 27 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. 

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 even though the 

expenditures on these 

programs are included. For 

the FY 2014 and 2013 SOSI, 

the amounts eliminated 

totaled $24.7 trillion and 

$22.5 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 the RSI section of this Financial Report). 

 The SOSI provides perspective on the Government’s long-term estimated exposures and costs for social 

insurance programs. While these expenditures are not considered Government liabilities, they do have the potential 

to become expenses and liabilities in the future, 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 

 27 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/compliance/topics/benefits-comp-blacklung.htm 
18 MANAGEMENT’S DISCUSSION AND ANALYSIS 

 

Dollars in Billions 2014 2013

Net Present Value (NPV) - Open Group 

(Beginning of the Year) (39,698) $ (38,554) 

Changes In:

Valuation Period (1,769) $ (1,813) $ 

Demographic data and assumptions (54) $ (285) $ 

Economic data and assumptions1 $ (273) (605) $ 

Law or policy 29 $ (520) $ 

Methodology and programmatic data1 $ 1,034 (90) $ 

Economic and other healthcare assumptions2 $ (94) (318) $ 

Change in projection base2 $ 807 589 $ 

Net Change in Open Group measure (2,218) $ (1,144) $ 

NPV - Open Group (End of the Year) (41,916) $ (39,698) $

1 Relates to SSA.

2 Relates to HHS.

Note - totals may not equal sum of components due to rounding. 

Table 9: Changes in Social Insurance Projections

the accumulated value, including interest, of all prior program surpluses, and provide automatic funding authority to 

pay for future benefits.

Table 8 on the previous page summarizes amounts reported in the SOSI, showing that net social insurance 

expenditures are projected to be $41.9 trillion as of January 1, 2014 for the “Open Group,” an increase of $2.2 

trillion over net expenditures of $39.7 trillion projected in the 2013 Financial Report.

28 The 2014 amounts reported 

for Medicare reflect the “projected baseline scenario” for Part B.29 

Table 9 summarizes the principal 

reasons for the changes in projected 

social insurance amounts during 2014 

and 2013. The following briefly 

summarizes the significant changes for 

the current valuation (as of January 1, 

2014) as disclosed in Note 24, Social 

Insurance. See Note 24 for additional 

information. 

x Change in valuation period: This 

change replaces a small negative 

net cash flow for 2013 and 

replaces it with a much larger 

negative net cash flow for 2088. 

As a result, the present value of 

the estimated future net cash 

flows decreased (became more 

negative) by $1.8 trillion. 

x Changes in economic data and 

assumptions: for both Social Security and Medicare, the ultimate annual rate of change in the CPI for 

Urban Wage Earners and Clerical Workers (CPI-W) is assumed to be 2.7 percent per year, compared to 2.8 

percent per year in the prior period, making the ultimate average increase in the CPI-W more comparable to 

recent historical annual increases. Otherwise, the ultimate economic assumptions for the current valuation 

are the same as those for the prior valuation. However, starting economic values and the way these values 

transition to the ultimate assumptions were changed. 

o The ratio of average taxable earnings to the average wage index is lower by 1.9 percent in 2012 and 

1.5 percent in 2013, compared to the previous valuation period. 

In addition, there were two main changes in economic methodology: 

o Projected labor force participation rates for the older population are slightly lower for the current 

valuation in order to better reflect the participation rates between never-married and married 

populations and the improvement in life expectancy. 

o Different earnings levels are assigned to three distinct groups of the other immigrant population 

supplied by demography. 

These changes decreased (made more negative) the present value of the estimated future cash flows by 

$605 billion. 

x Changes in economic and other healthcare assumptions: The assumption changes, specific to the Medicare 

projections, included, but were not limited to: 

o The projections emphasized in the 2014 Medicare Trustees Report were changed to reflect the 

projected baseline scenario. This scenario assumes that the physician payment updates required under 

the current-law sustainable growth rate formula will be permanently overridden by lawmakers. The 

use of these projections increases the present value of estimated future expenditures, compared to the 

current law projections, for Part B by roughly 11 percent and for Total Medicare by about 5 percent. 

 28 '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. 29 The projected baseline scenario includes the assumption that the current-law physician updates will be legislatively overridden and that 

physician updates will be 0.6 percent each year starting with 2016. (2014 Medicare Trustees Report, p. 8/footnote 5) 
 MANAGEMENT’S DISCUSSION AND ANALYSIS 19 

 

o Utilization rate assumptions for inpatient hospital services were decreased and case mix increase 

assumptions for skilled nursing facilities and home health agencies were decreased. 

These and other related changes decreased (made more negative) the present value of the estimated future 

cash flows by $318 billion. 

Projected net expenditures for Medicare Parts A and B declined significantly between FY 2009 and FY 2010 

reflecting provisions of the ACA. As reported in Note 24, there continues to be uncertainty about whether the 

projected cost savings and productivity improvements will be sustained in a manner consistent with the projected 

cost growth over time. Note 24 includes an alternative projection to illustrate the uncertainty of projected Medicare 

costs. As indicated earlier, GAO disclaimed opinions on the 2014, 2013, 2012, 2011 and 2010 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 2035 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.30 According to the Medicare Trustees’ 

Report, spending on Medicare is projected to rise from approximately 3.5 percent of GDP in 2013 to 6.9 percent in 

2088 (based on the projected baseline under the Trustees intermediate set of assumptions, as noted earlier). The 

Hospital Insurance (HI) Trust Fund is now expected to remain solvent until 2030, (four years later than projected in 

last year’s report). Under the projected baseline, scheduled HI tax revenue would be sufficient to pay 85 percent of 

HI costs in 2030 and 77 percent by 2088. 

As for Social Security, combined spending is projected to increase gradually from its current level of 4.9 

percent of GDP to about 6.2 percent by 2035, declining to 6.0 percent by 2050 and remaining between 6.0 and 6.1 

percent through 2088. The Social Security Trustees’ Report indicates that annual OASDI income, considered on a 

theoretical basis, including interest on trust fund assets, will exceed annual cost and trust fund assets will increase 

every year until 2020, at which time it will be necessary to begin drawing down on trust fund assets to cover part of 

expenditures until asset reserves become depleted in 2033 (unchanged from last year’s Report). Continuing tax 

income would be sufficient to pay 77 percent of scheduled benefits in 2033 and 72 percent of scheduled benefits in 

2088. However, the DI Trust Fund alone is expected to deplete much sooner, by the end of 2016, at which time 81 

percent of scheduled benefits would be payable.31 The projections assume that full Social Security and Medicare 

benefits are paid after the corresponding trust fund assets are depleted. 

As noted earlier, it is apparent that these programs are on a fiscally unsustainable path (as was previously 

discussed and as noted in the Trustees’ Reports). Additional information from the Trustees Reports may be found in 

the RSI section of this Financial Report. 

Systems, Controls, and Legal Compliance

Systems

As federal agencies demonstrate success in obtaining opinions on their audited financial statements, the federal 

government continues to face challenges in implementing financial 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) was 10 in FY 2014 and 9 in FY 

2013, and the number of auditors reporting lack of substantial compliance with one or more of the three Section 

803(a) FFMIA requirements was 11 in both FY 2014 and FY 2013. These results underscore the importance of 

current initiatives to standardize the financial management practices across the federal government. 

Controls

Federal managers have a fundamental responsibility to develop and maintain effective internal controls. 

Effective internal controls help to ensure that programs are managed with integrity and resources are used efficiently 

and effectively through three objectives: effective and efficient operations, reliable financial reporting, and 

compliance with applicable laws and regulations. The safeguarding of assets is a subcomponent of each objective. 

 30 2014 Annual Trustees Reports on Social Security and Medicare (Summary), pp. 3, 11. 31 2014 Annual Trustees Reports on Social Security and Medicare (Summary), pp. 3, 10. 
20 MANAGEMENT’S DISCUSSION AND ANALYSIS 

 

OMB Circular No. A-123, Management’s Responsibility for Internal Control, is the policy document that 

implements the requirements of 31 U.S.C. 3512 (c), (d) (commonly known as the Federal Managers’ Financial 

Integrity Act or FMFIA). Circular No. A-123 primarily focuses on providing agencies with a framework for 

assessing and managing risks more strategically and effectively. The Circular is currently being revised to reflect 

changes incorporated in GAO’s recently updated Standards for Internal Control in the federal government. The 

revised Circular will be available to the Agencies in the near future. The Circular contains multiple appendices that 

address, at a more detailed level, one or more of the objectives of effective internal control. Appendix A provides a 

methodology for agency management to assess, document, test, and report on internal controls over financial 

reporting. 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. Appendix D defines new requirements for determining compliance with the 

FFMIA and will contribute to efforts to reduce the cost, risk, and complexity of financial system modernizations. 

The total number of reported material weaknesses for the CFO Act agencies was 27and 29 for FYs 2014 and 

2013, respectively.32 Effective internal controls are a challenge not only at the agency level, but also at the 

governmentwide level. GAO reported 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 diligence and commitment are needed. 

In FY 2015, HHS and Treasury will begin to perform comprehensive risk assessments to determine areas that 

might affect payment accuracy in the Marketplaces and related programs created under the Affordable Care Act. 

The status of these risk assessments will be reported in the agencies’ FY 2015 Agency Financial Reports (AFR). In 

the interim, both agencies have established internal controls to provide for effective program operations, reliable 

financial reporting, and compliance with laws and regulations. 

Legal Compliance

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

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

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

selected laws and regulations related to financial reporting. 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. 

Financial Management Progress and Priorities

Since the passage of the CFO Act of 1990, the federal financial community has made important strides in 

instilling strong accounting and financial reporting practices. This year, 21 of the 24 CFO Act agencies obtained an 

opinion from the independent auditors on their financial statements as of the issuance of this Financial Report. Out 

of the 24 major CFO Act agencies, there were 21 clean opinions and two disclaimers in FY 201433. In addition, 25 

auditor-identified material weaknesses were reported in FY 2014, an approximately 59 percent decline from the 61 

material weaknesses that were identified at the start of this past decade. An increasing number of federal agencies 

have initiated and sustained disciplined and consistent financial reporting operations, implemented effective internal 

controls around financial reporting, and have successfully integrated transaction processing and accounting records. 

These efforts have resulted in improved results on financial statement audits. However, weaknesses in basic 

financial management practices and other limitations continue to prevent two of the CFO Act agencies, and the 

Government as a whole, from achieving an audit opinion. 

Today, accountability means providing transparent information to the public about where and how federal 

dollars are being spent. It means protecting against fraud. It means avoiding wasteful or excessive use of taxpayer 

funds. It means ensuring that the federal government is not only responsible stewards of taxpayer dollars, but frugal 

stewards as well, looking for every opportunity to save money and create greater efficiencies. 

 32 FY 2014 material weaknesses do not include audit results for HUD. HUD’s audit results were not available as of the date of this report. 

The audit results are expected to be reported in March 2015. HUD’s FY 2013 four material weaknesses are included in the governmentwide FY 

2013 audit results. 33 The 21 agencies include HHS, which received a clean opinion on all statements except the Statement of Social Insurance and the

Statement of Changes in Social Insurance, both of which received a disclaimer of opinion. The audit opinion for the Department of Housing and 

Urban Development (HUD) was not available as of the release of this Financial Report. 
 MANAGEMENT’S DISCUSSION AND ANALYSIS 21 

 

The federal government has come a long way since the passage of the CFO Act in 1990. Today, the federal 

financial management community is focused on three important improvement initiatives: 

x Improving the quality, utility, and transparency of financial information; 

x Protecting against waste, fraud, and abuse; and 

x Helping agencies maximize the impact of their limited financial resources. 

Improve the Quality, Utility, and Transparency of Federal Financial Information 

DATA Act 

The Digital Accountability and Transparency Act (DATA Act), signed on May 9, 2014, sets forth a clear 

vision for the future of Federal spending transparency. The Act primarily amends the Federal Funding 

Accountability and Transparency Act (FFATA) by requiring that all federal spending be displayed on a website in a 

searchable, downloadable, and machine-readable format. This includes information on obligations, outlays, 

budgetary authority, unobligated balances, and other budgetary resources for each appropriations account. It also 

expands award reporting to include all award spending and requires that OMB and Treasury issue data definition 

and exchange standards by May 2015. By 2017, all agencies must report this data to a centralized website and 

adhere to the data standards and guidance issued by OMB and Treasury. This will expand Federal spending 

transparency and unlock spending data for use by the public and agencies. Posting this financial information will 

allow spending comparisons across and within agencies that have never been possible before. 

Since the DATA Act was signed into law, OMB and Treasury have been partnering to lead governmentwide 

implementation. They have established a robust governance structure with representatives from agencies and 

functional communities fostering collaboration on data standards, policy changes, USAspending.gov improvements, 

and agency implementation. The implementation project plan was developed to be collaborative, iterative, 

incremental, and agile, with a data centric focus. This approach sets the foundation for future success with shorter 

term and intermediate deliverables. 

USASpending.gov

USAspending.gov was established to provide clear information on federal award spending. Continuing to 

improve the quality, utility and transparency of this federal spending information is a foundational Administration 

commitment to open government, as identified in the U.S. Government’s National Action Plan for Open 

Government. To continue its efforts to improve the quality of spending data, OMB will issue additional policy 

guidance to adjust USAspending.gov reporting requirements and procedures pursuant to the DATA Act. To align 

our federal spending and financial management transparency efforts, the Administration has transferred 

responsibility for USAspending.gov from GSA to Treasury. Treasury’s leadership in executing a governmentwide 

federal spending transparency vision enables the federal government to move forward in achieving the objective of 

making spending data more useful, accurate, and timely – consistent with the agency’s other work through financial 

reporting, work on improper payments, among other priority areas. Over the next year, USAspending.gov will 

reflect improvements in both website usability and functionality, leveraging the lessons and successes learned from 

Recovery Act reporting and data display. 

Moving forward, in concert with Treasury, OMB will continue to collaborate with the Government 

Accountability & Transparency Board and both federal and non-federal stakeholders to evolve the Administration’s 

governmentwide spending transparency framework to effectively provide the public with transparent information 

about how federal dollars are being spent. 

Protect Against Waste, Fraud, and Abuse 

Improper Payments 

Addressing improper payments is a central component of the Administration’s overall efforts to eliminate 

waste, fraud, and abuse. When the President took office in 2009, the improper payment error rate was 5.42%, an alltime high. Since then, the Administration, working together with Congress, has made progress by strengthening 

accountability and transparency through annual reviews by agency inspectors general, and expanded requirements 

for high-priority programs. As a result of this concerted effort, in FY 2013 the Administration reported an improper 

payment rate of 3.53%. Over FY 2014, the federal government experienced improper payment rate increases in 

major programs including Medicare Fee for Service, Earned Income Tax Credit, Medicaid, Unemployment 

Insurance, and Supplemental Security Income. Other major programs experienced a decrease in improper payment 
22 MANAGEMENT’S DISCUSSION AND ANALYSIS 

 

rates, including Medicare Part C, Supplemental Nutrition and Assistance, and Public Housing/Rental Assistance. 

On net, these changes resulted in a governmentwide improper payment rate of 4.02%34. Additionally, DOD has 

taken steps to improve its improper payment sampling and estimation plan for the Defense Finance and Accounting 

Service’s (DFAS) Commercial Payments to implement recommendations made by the Government Accountability 

Office (GAO)35. Furthermore, agencies recovered roughly $20 billion in overpayments through the payment 

recapture audits and other methods in FY 2014. 

The Administration continues to use the Budget to build on congressional and Administration action to reduce 

improper payments. For example, the President's FY 2016 Budget includes a number of program integrity proposals 

aimed at reducing improper payments and improving government efficiency. In addition, the Administration 

recently provided agencies with new tools in a revised OMB Circular No. A-123, Appendix C to tackle improper 

payments. OMB A-123, Appendix C provides guidance to agencies and Inspectors General on key improper 

payment activities, including risk assessments, estimating and reporting, recoveries, and compliance reviews. The 

enactment of the Improper Payments Elimination and Recovery Improvement Act (IPERIA) of 2012 provided an 

opportunity for OMB to re-examine Appendix C to ensure agencies are able to more efficiently reduce their 

improper payment rates, while also complying with multiple legislative and administrative requirements. The goal 

of this overhauled version of Appendix C is to transform the improper payment compliance framework to create a 

more unified, comprehensive, and less burdensome set of requirements. Appendix C accomplishes the following, 

among other things: 

x Consolidates and streamlines reporting requirements so agencies can spend less time producing compliance 

reports and more time focusing on game-changing solutions for achieving payment accuracy; 

x Establishes new reporting categories to provide more granularity on improper payment estimates to inform 

more effective corrective actions and more focused strategies for reducing improper payments; 

x Introduces a new internal control framework to ensure that payments are made in the right amount, to the 

right entity, and for the right purpose; and 

x Provides guidance to help strengthen the statistical validity of agency improper payment estimates and 

includes payments to Federal employees in the definition of improper payments. 

The Government is also advancing data analytics and improved technologies to prevent improper payments 

before they happen. In doing so, as part of the President’s Do Not Pay Initiative, the Administration established a 

Do Not Pay System of Records at the Department of the Treasury and the Administration looks forward to 

continuing the Administration’s work with the new Congress on the Improper Payments Agency Cooperation 

Enhancement Act (IPACE Act), which includes many of the Administration priorities on sharing death data to 

prevent improper payments. Another significant improper payment data analytics effort includes the Centers for 

Medicare & Medicaid Services’ (CMS) Fraud Prevention System (FPS), a state-of-the-art predictive analytics 

technology to identify and prevent fraud in the program. Finally, the Department of Labor continued a Federal-State 

partnership with state governments through the Unemployment Insurance (UI) Integrity Center for Excellence to 

facilitate the development and implementation of UI integrity tools by the States and to share best practices in the 

detection and reduction of improper payments. 

Combating improper payments within the federal government is a top priority for the Administration and it 

will continue to explore new and innovative ways to address the problem. Every dollar paid in error represents an 

unacceptable waste of public resources, and this Administration is committed to keeping up the fight to reduce 

waste, fraud, and abuse and continuing to attack this challenge with every tool at its disposal. 

Improving Grants Management 

On December 26, 2013, OMB published final guidance to better target risk and reduce waste, fraud, and abuse 

(2 CFR Part 200—Uniform Administrative Requirements, Cost Principles, And Audit Requirements for Federal 

Awards). This final guidance was developed by the interagency Council on Financial Assistance Reform (COFAR) 

to improve effectiveness for the approximately $600 billion awarded annually in federal financial assistance. 

Representing a two-year collaborative effort across the federal government and its partners -- State and local 

governments, Indian tribes, research and higher education institutions, nonprofit organizations, and the audit 

community -- the guidance rethinks and reforms the rules that govern our stewardship of federal dollars. It 

streamlines eight existing OMB Circulars on financial management into one consolidated set of guidance in the 

 34 The Department of Housing and Urban Development (HUD) received an Annual Financial Reporting extension to March 1, 2015. 

When HUD payments are excluded from the governmentwide figures, the improper payment rate is 4.03 percent. DOD's Commercial Payments 

were first included in the governmentwide rate in FY 2013. When the DOD commercial payments are excluded from the governmentwide 

figures, the FY 2013 rate is 4.00 percent and the FY 2014 rate is 4.46 percent. 35 Significant Improvements Needed in Efforts to Address Improper Payment Requirements, GAO-13-227. 
 MANAGEMENT’S DISCUSSION AND ANALYSIS 23 

 

CFR. Specifically, the revised policies emphasize risk-based decision making to reduce administrative burden and 

waste, fraud, and abuse by: 

• Eliminating duplicative and conflicting guidance; 

• Focusing on performance over compliance for accountability; 

• Encouraging efficient use of information technology and shared services; 

• Providing for consistent and transparent treatment of costs; 

• Limiting allowable costs to make the best use of federal resources; 

• Setting standard business processes using data definitions; 

• Encouraging non-federal entities to have family-friendly policies; 

• Strengthening oversight; and 

• Targeting audit requirements on risk of waste, fraud, and abuse. 

The COFAR worked closely with federal agencies to develop, issue, and implement regulations for the new 

guidance in the Code of Federal Regulations by the effective date of December 26, 2014. The COFAR has 

established metrics that will measure the effectiveness of the new policies and is working with federal and nonfederal stakeholders to develop additional training and outreach resources. In addition, OMB and its partners are 

continuing complementary work to strengthen program outcomes through innovative and effective use of grantmaking models, performance metrics, and evaluation, as described in OMB Memorandum M-13-17 on Next Steps in 

the Evidence and Innovation Agenda. In September 2014, OMB issued Memorandum M-14-17, Metrics for 

Uniform Guidance (2 C.F.R. 200, which required agencies to report required baseline data for administrative metrics 

to OMB. 

Help Agencies Maximize the Impact of their Limited Financial Resources 

Benchmarking 

Federal agencies lack a complete set of tools and reliable data to measure their performance in key 

administrative areas. This discourages agency executives from taking necessary steps to reduce costs, efficiently 

deploy resources, and improve quality of service. In addition, agencies are often hesitant to adopt shared services 

for mission-support functions without “apples-to-apples” data that allows them to compare options, quantify 

potential savings, and ensure equal (or better) service quality. Finally, the absence of governmentwide benchmarks 

can hamper the identification and sharing of effective management practices, because OMB and agencies lack full 

visibility into which agencies or shared service providers are the top performers in a given function. 

The federal government’s efforts to improve the efficiency of the Government aim to increase the quality and 

value of core administrative operations and enhance productivity to achieve cost savings. Establishing cost and 

quality benchmarks for these operations will create the tools the federal government needs to measure its 

performance in key mission-support areas, including human resources, finance, acquisition, IT and real property. 

OMB met with agencies and then issued customized memos to each of the 24 CFO Act Agencies, summarizing 

takeaways from the meetings and agreed-upon follow-up actions based on noteworthy benchmark results. The 

federal government is currently working with agencies on preparing for the next round of collection by (1) 

Improving the data quality, consistency and relevance of the Efficiency metrics collected earlier in 2014; and (2) 

Developing a set of Effectiveness metrics to capture operational quality and customer satisfaction with missionsupport services. 

Improving Effectiveness and Efficiency in Financial Operations and Systems 

The Administration continues to make significant progress in the effort to minimize the costs and risks 

associated with agency financial systems modernization. In 2013, OMB issued M-13-08: Improving Financial 

Systems Through Shared Services. This new guidance directs all executive agencies to use, with limited exceptions, 

a shared service solution for future modernizations of core accounting or mixed systems and names the Office of 

Financial Innovation and Transformation (FIT) at the Department of the Treasury as OMB’s partner in evaluating 

shared service providers and agency modernization plans. In 2014, two cabinet level Departments began working 

with Federal Shared Service Providers (FSSPs) to plan migration to shared services. 

In addition, OMB and FIT built on these efforts by: 

x Identifying and formally designating four FSSPs at the Treasury Department, USDA, DOI, and DOT; 

x Developing performance and cost information for all FSSPs through a product services catalog; 
24 MANAGEMENT’S DISCUSSION AND ANALYSIS 

 

Limitations of the Financial Statements 

The principal financial statements have been prepared to report the financial position and 

results of operations of the federal government, and the financial condition and changes in 

financial condition of its social insurance programs, pursuant to the requirements of 31 U.S.C. 

§ 331(e)(1). These statements are in addition to the financial reports used to monitor and 

control budgetary resources that are prepared from the same books and records. 

x Developing meaningful benchmarks and metrics in support of the President’s Management Agenda to 

measure the cost, quality, and performance of financial operations throughout the Government; and 

x Developing a sound governance model to support greater use of shared services by agencies while ensuring 

adequate input on major decisions by customer agencies. 

Driving Real Property Efficiencies through Better Data and Data Analytics 

The federal domestic building inventory is diverse and contains 300,000 buildings requiring approximately $21 

billion of annual operation and maintenance expenditures, including approximately $6.8 billion of annual lease 

costs. Within the inventory, there are opportunities to realize cost savings by utilizing space more efficiently and 

reducing the portfolio. In 2013, the “Freeze the Footprint” Policy (OMB Management Procedures Memorandum 

2013-02) was issued, requiring agencies to freeze their real property footprint. As a result, agencies reduced their 

federal domestic office and warehouse space by 10.2 million square feet in FY 2013. To improve the quality of 

federal real property data in FY 2014 Performance and Accountability Reports (PARs)/AFRs, agencies were 

required to validate and report “Freeze the Footprint” square footage and associated operations and maintenance 

costs in their 2014 financial statements. 

In FY 2015, the Government will issue a real property framework that provides operational guidelines for 

agencies to manage its real property to improve efficiency. Over time, the framework will improve utilization of 

government-owned buildings to reduce reliance on leasing, lower the number of excess and underutilized properties, 

and improve the cost effectiveness and efficiency of the federal real property portfolio. 

Conclusion

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

Act more than 20 years ago. Yet significant challenges remain. The issues that the federal government faces in the 

Government today require our financial managers to move beyond the status quo and to generate a higher return on 

investment for our financial management activities. The steps outlined above leverage the tools and capacities in 

place today, and refocus energies on critical and emerging priorities – cutting wasteful spending, improving the 

efficiency of our operations and information technology, and laying a foundation for data quality and collaboration 

as the federal government enters a new era of transparency and open Government. 

Additional Information 

This Financial Report’s Appendix contains the names and websites of the significant Government entities 

included in the Financial Report’s financial statements. Details about the information in this Financial Report can 

be found in these entities’ 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/fsreports/fs_reports_publications.htm; 

http://www.whitehouse.gov/omb/financial/index.html; and http://www.gao.gov/financial.html, respectively. Other 

related Government publications include, but are not limited to the: 

x Budget of the United States Government, 

x Treasury Bulletin, 

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

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

x Economic Report of the President, and 

x Trustees’ Reports for the Social Security and Medicare Programs. 
 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 25 

 

February 26, 2015 

The President 

The President of the Senate 

The Speaker of the House of Representatives 

The federal government reported a unified budget deficit of approximately $483 billion for fiscal 

year 2014, a decrease of about $197 billion from fiscal year 2013. However, the federal 

government continues to face an unsustainable long-term fiscal path. To operate as effectively 

and efficiently as possible and to make difficult decisions to address the federal government’s 

fiscal challenges, 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. Further, when fully and effectively 

implemented, the Digital Accountability and Transparency Act of 2014 (DATA Act) will help 

promote transparency to the public and address ongoing government management challenges 

by enhancing the quality and expanding the availability of federal spending data. Having better 

data also will help federal entities make fully informed decisions about how federal resources 

should be allocated, and provide federal entities and the audit community with additional data 

analytic tools for detecting and preventing improper payments and fraudulent spending. Overall, 

significant progress has been made since the enactment of key federal financial management 

reforms in the 1990s; however, our report on the U.S. government’s consolidated financial 

statements underscores that much work remains to improve federal financial management and 

these improvements are urgently needed. 

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

summary, we found the following: 

x Certain material weaknesses1

 in internal control over financial reporting and other limitations 

on the scope of our work 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, 2014, and 2013.2

 About 32 percent of the federal government’s 

reported total assets as of September 30, 2014, and approximately 19 percent of the federal 

government’s reported net cost for fiscal year 2014 relate to three Chief Financial Officers 

(CFO) Act agencies that as of the date of our audit report, either received disclaimers of 

 

1

A material weakness is a deficiency, or a 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. 

2

The accrual-based consolidated financial statements as of and for the fiscal years ended September 30, 2014, and 

2013, consist of the (1) Statements of Net Cost, (2) Statements of Operations and Changes in Net Position, 

(3) Reconciliations of Net Operating Cost and Unified Budget Deficit, (4) Statements of Changes in Cash Balance 

from Unified 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. The 2014, 2013, 2012, 2011, and 2010 

Statements of Social Insurance and the 2014 and 2013 Statements of Changes in Social Insurance Amounts, 

including the related notes, are also included in the consolidated financial statements. 
26 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 

 

opinion on their fiscal year 2014 financial statements or had not issued their audited fiscal 

year 2014 financial statements.3

 

x Significant uncertainties, primarily related to the achievement of projected reductions in 

Medicare cost growth reflected in the 2014, 2013, 2012, 2011, and 2010 Statements of 

Social Insurance, prevented us from expressing an opinion on those statements as well as 

on the 2014 and 2013 Statements of Changes in Social Insurance Amounts. About 

$28.5 trillion, or 68.0 percent, of the reported total present value of future expenditures in 

excess of future revenue presented in the 2014 Statement of Social Insurance relates to 

Medicare programs reported in the Department of Health and Human Services’ (HHS) 2014 

Statement of Social Insurance, which received a disclaimer of opinion.4

 

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

year 2014. 

x Material weaknesses and other scope limitations discussed in our audit report limited our 

tests of compliance with selected provisions of applicable laws, regulations, contracts, and 

grant agreements for fiscal year 2014. 

While significant progress has been made in improving federal financial management since the 

federal government began preparing consolidated financial statements 18 years ago, three 

major impediments 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 and reconcile intragovernmental activity and balances between federal entities, and 

(3) the federal government’s ineffective process for preparing the consolidated financial 

statements. 

Importantly, while almost all of the 24 CFO Act agencies received unmodified (“clean”) opinions 

on their respective entities’ fiscal year 2014 financial statements, DOD has consistently been 

unable to receive such an audit opinion on its financial statements. Following years of 

unsuccessful financial improvement efforts, the DOD Comptroller established the Financial 

Improvement and Audit Readiness (FIAR) 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 current FIAR strategy and methodology focus 

on two priorities—budgetary information and asset accountability—with an overall goal of 

 

3

Of the 24 CFO Act agencies, the agencies that as of the date of our audit report, received disclaimers of opinion on 

all of their fiscal year 2014 financial statements were the Department of Defense and the U.S. Agency for

International Development. As of the date of our audit report, the Department of Housing and Urban Development’s 

audited financial statements for fiscal year 2014 had not been issued. 

4

Statements of Social Insurance are presented for the current year and each of the 4 preceding years in accordance 

with U.S. generally accepted accounting principles. Also, both the Statements of Social Insurance and the 

Statements of Changes in Social Insurance Amounts do not interrelate with the accrual-based consolidated financial 

statements. 
 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 27 

 

financial statement auditability department-wide by September 30, 2017.5 Because budgetary 

information is widely and regularly used for management, one of DOD’s highest interim priorities 

is to improve its budgetary information and processes underlying its Statement of Budgetary 

Resources (SBR). 

Based on difficulties encountered in preparing for an audit of the SBR, DOD made a significant 

change to its FIAR Guidance that will limit the scope of the first-year SBR audits for all DOD 

components.6

 As outlined in the November 2014 FIAR Plan Status Report and the November 

2013 revised FIAR Guidance, the scope of initial SBR audits beginning in fiscal year 2015 will 

be on current-year budget activity, to be reported on a Schedule of Budgetary Activity (SBA).7

This would be an interim step toward achieving the audit of multiple-year budget activity 

required for an audit of the SBR. In making this strategic change, DOD officials concluded—

based on the difficulties encountered in obtaining documentation for prior year transactions on 

the U.S. Marine Corps SBR audit—that the most effective path to an audit of the SBR would be 

to start with reporting and auditing only current-year activity for fiscal year 2015 appropriations 

and expanding subsequent audits to include current-year appropriations and prior 

appropriations going back to fiscal year 2015. Consequently, DOD has acknowledged that it did 

not meet the September 30, 2014 target date in the National Defense Authorization Act for 

Fiscal Year 2013, for validating the audit readiness of the SBR.8

 In addition, with regard to 

meeting its goal of financial statement auditability department-wide by September 30, 2017, the 

department has not, among other things, fully developed a strategy for (1) consolidating 

individual component financial statements into department-wide financial statements, and 

(2) accurately reporting certain assets and liabilities (e.g., Fund Balance with Treasury and 

Environmental and Disposal Liabilities). 

 

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 2014, 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 

 

5

Section 1003 of the National Defense Authorization Act for Fiscal Year 2010, Pub. L. No. 111-84, 123 Stat. 2190, 

2439-41 (Oct. 28, 2009), made the development and maintenance of the FIAR Plan a statutory requirement. Under 

the act, the FIAR Plan must describe specific actions to be taken and the costs associated with ensuring that DOD’s 

financial statements are validated as ready for audit by September 30, 2017. In addition, section 1005 of the National 

Defense Authorization Act for Fiscal Year 2013, Pub. L. No. 112-239, 126 Stat. 1632, 1904-05 (Jan. 2, 2013), 

enacted a requirement for DOD’s FIAR Plan to describe specific actions to be taken and the costs associated with 

ensuring that one of DOD’s financial statements, the Statement of Budgetary Resources, would be validated as ready 

for audit by September 30, 2014. More recently, section 1003 of the National Defense Authorization Act for Fiscal 

Year 2014, Pub. L. No. 113-66, 127 Stat. 672, 842 (Dec. 26, 2013) (reprinted in 10 U.S.C. § 2222 note), mandated an 

audit of DOD’s fiscal year 2018 financial statements and that the audit results be submitted to Congress by March 31, 

2019. 

6

The FIAR Guidance was first issued by the DOD Comptroller in May 2010 and provides a standardized methodology 

for DOD components to follow for achieving financial management improvements and auditability. The DOD 

Comptroller periodically updates this guidance. 

7

Certain DOD components, including the Army, Navy, and Air Force, are undergoing audits of their fiscal year 2015 

SBAs. Unlike the SBR, which reflects multiple-year budget activity, the SBA will reflect the balances and associated 

activity related only to funding approved on or after October 1, 2014. As a result, the SBAs will exclude unobligated 

and unexpended amounts carried over from prior years’ funding as well as information on the status and use of such 

funding in subsequent years (e.g., obligations incurred and outlays). 8

Pub. L. No. 112-239, § 1005(a), 126 Stat. 1632, 1904 (Jan. 2, 2013) (reprinted in 10 U.S.C. § 2222 note). 9

The Office of Management and Budget and Treasury have identified 37 federal entities that are significant to the 

U.S. government’s consolidated financial statements, consisting of the 24 CFO Act agencies, several other federal 

executive branch agencies, and some government corporations. 
28 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 

 

quarterly scorecard process.10 This process highlights differences requiring 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 incorporated activity and balances between federal entities and the General Fund 

of the U.S. Government (General Fund)12 into the quarterly scorecards and began issuing a 

scorecard to the General Fund. Further, Treasury has implemented new systems to collect 

certain additional data from entities and to compile the consolidated financial statements, and 

implemented new procedures to address certain internal control deficiencies detailed in our 

previously issued report.13 To help address the magnitude of the issues in these areas, it will be 

important that Treasury (1) has adequate systems and personnel and (2) continues to address 

our recommendation that Treasury, working in coordination with the Office of Management and 

Budget (OMB), include all key elements for preparing well-defined corrective action plans from 

the CFO Council’s Implementation Guide for OMB Circular A-123, Management’s 

Responsibilities for Internal Control—Appendix A, Internal Control over Financial Reporting, in 

Treasury’s and OMB’s corrective action plans. In addition to continued leadership by Treasury 

and OMB, strong and sustained commitment by federal entities is critical to fully address these 

issues. 

The material weaknesses underlying these three major impediments 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 financial information to operate in an efficient and effective 

manner. 

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 payments14 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 manage its tax collection 

activities. Additional details concerning these material weaknesses and their effect on the 

accrual-based consolidated financial statements and on the management of federal government 

operations are presented in our audit report. Until the problems outlined in our audit report are 

adequately addressed, they will continue to have adverse implications for the federal 

government and American taxpayers. 

 

10For each quarter, Treasury produces a scorecard for each significant entity 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. Entities are expected to resolve, with their respective trading partners, the differences identified 

in their scorecards. 

11When an entity and respective trading partner cannot resolve an intragovernmental difference, the entity must 

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

difference, which the entity must follow. 

12The General Fund is a central reporting entity that tracks activities fundamental to funding the federal government 

(e.g., issued budget authority, operating cash, and debt financing activities). 13GAO, Management Report: Improvements Needed in Controls over the Processes Used to Prepare the U.S. 

Consolidated Financial Statements, GAO-14-543 (Washington, D.C.: June 19, 2014). 14Federal entity reported estimates of improper payments totaled $124.7 billion in fiscal year 2014, an increase from 

the prior year estimate of $105.8 billion. This increase was mostly attributable to increased error rates in three 

programs: HHS’s Medicare Fee-for Service, HHS’s Medicaid, and Treasury’s Earned Income Tax Credit programs.
 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 29 

 

The federal government reported a net operating cost of about $791 billion for fiscal year 2014 

compared to the approximately $805 billion reported for fiscal year 2013. Increases in reported 

taxes and other revenues were almost fully offset by increases in reported net costs, resulting in 

the slight decrease in net operating cost. The reported unified budget deficit of approximately 

$483 billion for fiscal year 2014 was down from the approximately $680 billion reported for fiscal 

year 2013. The federal government’s reported assets totaled about $3.1 trillion as of 

September 30, 2014, which was about $97 billion greater than the amount reported as of 

September 30, 2013. Its reported liabilities totaled about $20.8 trillion as of September 30, 2014, 

which was about $888 billion greater than the amount reported as of September 30, 2013. Most 

of the net increase in the federal government‘s reported assets and liabilities was due to student 

loans made by the Department of Education and a net increase in federal debt held by the 

public, respectively. As of September 30, 2014, federal debt held by the public totaled about 74 

percent of gross domestic product (GDP). Additional details regarding the above-noted 

fluctuations and the federal government’s financial condition can be found in the Management’s 

Discussion and Analysis section of the Fiscal Year 2014 Financial Report of the United States 

Government (2014 Financial Report).

Importantly, there are risks that certain factors could affect the federal government’s financial 

condition in the future, including the following: 

x The U.S. Postal Service (USPS) continues to be in a serious financial crisis as it has 

reached its borrowing limit of $15 billion and finished fiscal year 2014 with a reported net 

loss of $5.5 billion. 

x The Federal Housing Administration’s (FHA) mortgage insurance portfolio totaled about 

$1.2 trillion as of September 30, 2014. Distressed housing and mortgage markets expanded 

FHA’s role in the mortgage market, while leading to deterioration in the agency’s financial 

condition. Its Mutual Mortgage Insurance Fund has been out of compliance with the fund’s 

2 percent statutory capital requirement since fiscal year 2009. FHA’s financial condition may 

be further affected by the ultimate roles of the Federal National Mortgage Association 

(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) in the 

mortgage market. 

x The Pension Benefit Guaranty Corporation’s (PBGC) financial future is uncertain because of 

long-term challenges related to PBGC’s governance and funding structure. PBGC’s 

liabilities exceeded its assets by about $62 billion as of September 30, 2014—an increase of 

over $26 billion from the end of fiscal year 2013. PBGC reported that it is subject to further 

losses if plan terminations that are considered reasonably possible occur. 

x Several initiatives undertaken during the last 6 years by the Board of Governors of the 

Federal Reserve System to stabilize the financial markets have led to a significant change in 

the composition and size of reported securities on the Federal Reserve’s balance sheet. The 

value of these securities, which include Treasury securities and mortgage-backed securities 

guaranteed by Fannie Mae, Freddie Mac, and the Government National Mortgage 

Association (Ginnie Mae), is subject to interest rate risk and may decline or increase 

depending on interest rate changes. If the Federal Reserve sells these securities at a loss, 

future payments of Federal Reserve earnings to the federal government may be reduced.15

 

15Under Federal Reserve System policy, excess Federal Reserve Bank earnings are paid to the federal government. 

The federal government reported such net earnings of about $99 billion for fiscal year 2014, still well above its 

historical levels. 
30 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 

 

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

federal entities and program areas that are high risk due to their vulnerabilities to fraud, waste, 

abuse, and mismanagement or are most in need of broad reform. We issued our updated HighRisk Series on February 11, 2015.16 GAO’s High-Risk Series includes several of the abovenoted issues, such as DOD financial management, information security, USPS’s business 

model, FHA, and the PBGC insurance programs. 

While the near-term outlook improved, the comprehensive long-term fiscal projections 

presented in the unaudited Required Supplementary Information section of the 2014 Financial 

Report show that absent policy changes, the federal government continues to face an 

unsustainable long-term fiscal path. In the near term, deficits are expected to continue to decline 

from the recent historic highs as the economy further recovers and actions taken by Congress 

and the President continue to take effect. Over the long term, the imbalance between spending 

and revenue that is built into current law and policy will lead to continued growth of 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 these projections, spending for the major health and retirement programs will increase in 

coming decades more rapidly than GDP as more members of the baby boom generation 

become eligible for benefits. These projections, with regard to Social Security and Medicare, are 

based on the same assumptions underlying the information presented in the Statement of 

Social Insurance and assume that the provisions enacted in the Patient Protection and 

Affordable Care Act, as amended (ACA) designed to slow the growth of Medicare costs are 

sustained and remain effective throughout the projection period.17 If, however, the Medicare 

cost containment measures are not sustained over the long term—a concern expressed by the 

Trustees of the Medicare trust funds, the Centers for Medicare & Medicaid Services’ (CMS) 

Chief Actuary, the Congressional Budget Office, and others—spending on federal health care 

programs will grow more rapidly. 

GAO also prepares long-term federal fiscal simulations, which continue to show debt rising as a 

share of GDP.18 Under GAO’s Alternative simulation,19 using the CMS Office of the Actuary’s 

alternative health care cost projections, future spending in excess of receipts would be greater 

and debt held by the public as a share of GDP would grow more quickly than the projections in 

the 2014 Financial Report. 

 

16GAO, High-Risk Series: An Update, GAO-15-290 (Washington, D.C.: Feb. 11, 2015). 17Pub. 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). 

18GAO, Fiscal Outlook: Federal Fiscal Outlook (Spring 2014) (Washington, D.C.: 2014), accessed on February 19, 

2015, http://www.gao.gov/fiscal_outlook/federal_fiscal_outlook/overview. 19GAO’s Spring 2014 Alternative simulation, the most recent one available as of the date of our audit report, 

incorporates the CMS Office of the Actuary’s 2013 alternative projections for health care cost growth, which assume 

physician payments are not reduced as specified under current law and certain cost controls are not maintained over 

the long term. Also, in this simulation, expiring tax provisions, such as the research and experimentation tax credit, 

are extended to 2024. In the Alternative simulation, discretionary spending follows the original discretionary spending 

caps set by the Budget Control Act of 2011, but not the lower caps triggered by the automatic enforcement 

procedures. Over the long term, discretionary spending and revenue are held at their historical average share of 

GDP. 
 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 31 

 

Both the projections in the 2014 Financial Report and our long-term simulations follow the 

spending limits previously enacted in the Budget Control Act of 2011 (BCA).20 Under these 

limits, discretionary spending will continue to decline as a share of the economy and in fiscal 

year 2021 will be lower as a share of GDP than any level seen in the last 50 years. At the same 

time, revenues are projected to rise in the near term as the economy continues to recover. 

Debt held by the public as a share of GDP, however, remains well above historical averages. At 

the end of fiscal year 2014, debt held by the public reached 74 percent of GDP—the highest it 

has been as a share of GDP since 1950. 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 natural disaster. Further, our past work has also 

identified a variety of fiscal exposures—responsibilities, programs, and activities that explicitly or 

implicitly expose the federal government to future spending.21 Fiscal exposures vary widely as 

to source, extent of the government’s legal commitment, and magnitude. Over the past decade, 

some fiscal exposures have grown due to events and trends and the government’s response to 

them. Increased attention to these fiscal exposures will be important for understanding risks to 

the federal fiscal outlook and enhancing oversight of federal resources. 

During fiscal year 2014, delays in raising the debt limit occurred for a total of 16 business days. 

During the delays, Treasury deviated from its normal debt management operations and took a 

number of extraordinary actions—consistent with relevant laws and regulations—to avoid 

exceeding the debt limit.22 Also, the debt limit was suspended for the periods of (1) October 17, 

2013, through February 7, 2014, by the Continuing Appropriations Act, 2014,23 and 

(2) February 15, 2014, through March 15, 2015, by the Temporary Debt Limit Extension Act.24 If 

an increase in the debt limit is not enacted before the end of the current suspension period, 

consistent with the Temporary Debt Limit Extension Act, the debt limit will be increased to the 

amount of qualifying federal debt outstanding on March 16, 2015. 

 

20The BCA, Pub. L. No. 112-25, 125 Stat. 240 (Aug. 2, 2011), which enacted changes to the Balanced Budget and 

Emergency Deficit Control Act, as amended (BBEDCA), imposed discretionary spending limits for fiscal years 2012 

through 2021 to reduce projected spending by about $1 trillion. The BCA also established the Joint Select Committee 

on Deficit Reduction, which was tasked with proposing legislation to reduce the deficit by an additional $1.2 trillion 

through fiscal year 2021. The Joint Committee did not report a proposal, and Congress and the President did not 

enact legislation. This triggered the sequestration process in section 251A of BBEDCA. Section 251A also provides 

for an annual reduction of the discretionary spending limits and a sequestration of direct spending from fiscal years 

2014 through 2021. The Bipartisan Budget Act of 2013 (budget agreement), which enacted further changes to 

BBEDCA, as amended, established new (higher) limits on defense and nondefense discretionary appropriations for 

fiscal years 2014 and 2015, extended sequestration for direct spending programs by 2 years through fiscal year 

2023, and made other changes to direct spending and revenue. Pub. L. No. 113-67, div. A, tit. I, § 101,127 Stat. 

1165, 1166-69 (Dec. 26, 2013). In all, BBEDCA, as amended through December 2013, reduced deficits over the next 

10 years in our Spring 2014 Baseline Extended simulation without significantly changing the long-term federal budget 

outlook. In 2014, sequestration for direct spending programs was extended by 1 year to fiscal year 2024. Pub. L. No. 

113-82, § 1, 128 Stat. 1009 (Feb. 15, 2014). The Consolidated and Further Continuing Appropriations Act, 2015, Pub. 

L. No. 113-235, 128 Stat. 2130 (Dec. 16, 2014), enacted discretionary appropriations for fiscal year 2015 consistent 

with BBEDCA. Our updated simulations for 2015 will incorporate the effects of more recently enacted amendments to 

BBEDCA. 

21GAO, Fiscal Outlook: Federal Fiscal Outlook (Washington, D.C.: 2015), accessed on February 19, 2015, 

http://www.gao.gov/fiscal_outlook/federal_fiscal_outlook/overview#t=3 and Fiscal Exposures: Improving Cost 

Recognition in the Federal Budget, GAO-14-28 (Washington, D.C.: Oct. 29, 2013). 22Treasury considers actions that are not part of its normal cash and debt management operations to be 

“extraordinary actions.” 

23Pub. L. No. 113-46, § 1002, 127 Stat. 558, 566-67 (Oct. 17, 2013). 24Pub. L. No. 113-83, § 2, 128 Stat. 1011 (Feb. 15, 2014). 
32 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 

 

As we have previously reported, the debt limit does not restrict Congress’s ability to enact 

spending and revenue legislation that affects the level of federal debt or otherwise constrain 

fiscal policy; it restricts Treasury’s authority to borrow to finance the decisions already enacted 

by Congress and the President.25 The United States benefits from the confidence investors 

have that debt backed by the full faith and credit of the United States will be honored. Because 

Treasury securities are viewed as one of the safest assets in the world, they are broadly held by 

individuals—often in pension funds or mutual funds—and by institutions and central banks for 

use in everyday transactions. Treasury securities are also the cheapest and one of the most 

widely used forms of collateral for financial transactions. In many ways U.S. Treasury securities 

are the underpinning of the world financial system. As we have also previously reported, delays 

in raising the debt limit can create uncertainty in the Treasury market. 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 in our February 2011 and July 2012 reports 

related to the debt limit 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.26

_________________________ 

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 225. Our guide to the Financial Report of the United States 

Government (Financial Report) is intended to help those who seek to obtain a better 

understanding of the Financial Report and is available on GAO’s website at www.gao.gov.

27 In 

addition, the website includes a guide to understanding the differences between accrual and 

cash measures of the deficit and provides a useful perspective on the different purposes that 

cash and accrual measures serve in providing a comprehensive picture of the federal 

government’s fiscal condition today and over time.28

 

25GAO, Debt Limit: Analysis of 2011-2012 Actions Taken and Effect of Delayed Increase on Borrowing Costs, GAO12-701 (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). 26GAO-12-701, GAO-11-203. 27GAO, Understanding the Primary Components of the Annual Financial Report of the United States Government, 

GAO-09-946SP (Washington, D.C.: September 2009). 

28See http://www.gao.gov/fiscal_outlook/overview, which is based on information in GAO, Understanding Similarities 

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

January 2007 and 2008, we issued updates to this guide for fiscal years 2006 and 2007; see GAO-07-341SP 

(Washington, D.C.: January 2007) and GAO-08-410SP (Washington, D.C.: January 2008).
 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 33 

 

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

Gary T. Engel, 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 
34 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 

 

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 FINANCIAL STATEMENTS 35 

 

Financial Statements 

of the United States Government 

for the Years Ended September 30, 2014, 

and 2013 

Statements of Net Cost 

These statements present the net cost of the United States Government (Government)1 operations for fiscal years 2014 

and 2013, including the operations related to funds from dedicated collections (funds financed by specifically identified 

revenues, often supplemented by other financing sources, which remain available over time). The Government’s fiscal year 

begins October 1 and ends September 30. Costs and earned revenues are categorized on the Statement of Net Cost by 

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

governmentwide net cost. Costs and earned revenues are presented in this Financial Report by significant entity on an 

accrual basis, while the budget presents costs and revenues by obligations and receipts, generally on a cash basis. The focus 

of the budget of the United States is by agency. Budgets are prepared, defended, and monitored by agency. In reporting by 

agency, we are assisting the external users in assessing the budget integrity, operating performance, stewardship, and systems 

and controls of the Government. 

These statements contain the following four components: 

x 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 departments and 

entities. 

x Earned revenue—is exchange revenue resulting from the Government providing goods and services to the public at 

a price. 

x (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. 

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

assumptions. 

Individual agency net cost amounts will differ from the agency’s financial statements primarily because of allocations 

of Office of Personnel Management (OPM) benefit program costs and intragovernmental eliminations, as adjusted for 

buy/sell cost, buy/sell revenues, and imputed costs. Because of its specific function, most of the costs originally associated 

with OPM have been allocated to their user agencies 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. With regard to intragovernmental buy/sell costs and 

related revenues, the amounts recognized by each agency are added to, and subtracted from, respectively, the individual 

agency non-federal net cost amounts. Because of the specific functions of the General Services Administration (GSA), as the 

primary provider of goods and services to federal agencies, once 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 its administrative operating costs. 

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

by the providing agencies, are added to the individual agency non-federal net cost amounts. The interest on securities issued 

by the Department of the Treasury (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. 

 

 1 For purposes of this document, “Government” refers to the U.S. Government. 
36 FINANCIAL 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 nonexchange 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 nonexchange 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 Statement 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 

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

corporation income taxes, unemployment taxes, custom duties, and estate and gift taxes. The nonexchange 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 Federal Reserve Banks (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 22—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 12—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. 

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 associated with funds from dedicated collections 

activities is separately reported. 

Intragovernmental Transfers 

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

excluding financing sources related to nonexchange 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 22—Funds from Dedicated Collections. Some transfers reflect amounts required by 

statute to be transferred from the General Fund of the Treasury to funds from dedicated collections. For Supplementary 

Medical Insurance (SMI), transfers from the General Fund of the Treasury financed 75 percent and 73 percent of 2014 

program costs to Part B and D, respectively. 
 FINANCIAL STATEMENTS 37 

 

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 and unreconciled General Fund differences. See Note 1.T—

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 

prior period adjustments 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.T). 

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. 

Prior-period adjustments are revisions to the beginning net position presented on the prior year financial statements due 

to corrections of material errors or certain changes in accounting principles. See Note 19—Prior Period Adjustments 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 shown separately.

Reconciliations of Net Operating Cost and Unified Budget 

Deficit

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

Net Position to the unified budget deficit. The premise of the reconciliation is that the accrual and budgetary accounting bases 

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 bases of 

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

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. 
38 FINANCIAL STATEMENTS 

 

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 Unified Budget 

and Other Activities 

The primary purpose of these statements is to report how the annual unified 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 unified budget deficit 

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

These statements reconcile the unified 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. A budget deficit is the result of outlays (expenditures) 

exceeding receipts (revenue) during a particular fiscal year. 

The budget deficit is primarily financed through borrowings from the public. Other transactions, such as the payment 

of interest on debt held by the public, also require cash disbursements and are not part of the deficit. Additionally, the 

budget deficit includes certain amounts that are recognized in the budget, but will be disbursed in a future period, or are 

adjustments that did not affect the cash balance. These amounts include interest accrued on debt issued by Treasury and 

held by the public, as well as subsidy income related to direct and guaranteed loans. 

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.

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; property, plant, and equipment 

(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. 
 FINANCIAL STATEMENTS 39 

 

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 Required Supplementary Information (RSI) —Social Insurance section, the fiscal long-term 

projections of non-interest spending disclosed in the RSI—Statement of Fiscal Projections for the United States Government 

section, 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. 

Commitments and contingencies 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 20—Contingencies and Note 

21—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 Treasury’s General Fund; 

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

Note 22—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.

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 Lung. They are administered by the Social Security 

Administration (SSA), U.S. Department of Health and Human Services (HHS), the Railroad Retirement Board (RRB), and 

the Department of Labor (DOL), respectively. The estimates are actuarial present values2

 of the projections and are based on 

the economic and demographic assumptions representing the trustees’ reasonable estimates as set forth in the relevant Social 

Security and Medicare trustees’ reports as well as in the agency financial reports of HHS, SSA, and DOL (Black Lung) and 

in the relevant agency performance and accountability report for the RRB. The projections are based on the continuation of 

program provisions contained in current law, with exceptions in regard to (1) the sustainable growth rate (SGR) formula for 

physician fee schedule payment under Medicare Part B, where current law requires implementation of a 21 percent reduction 

in Medicare payment rates for physician services in April 2015, and (2) payment reductions that would result from the 

projected depletion of the Social Security and Medicare Hospital Insurance (Part A) trust funds; under current law, payments 

would be reduced to levels that could be covered by tax revenues when the Social Security and Medicare Hospital Insurance 

(Part A) trust funds are depleted. It is a virtual certainty that lawmakers will override the required reduction in Medicare 

physician payment rates as they have for every year beginning with 2003. For this reason, the income, expenditures, and 

assets for Medicare Part B reflect a projected baseline, which includes an override of the provisions of the SGR, and an 

assumed annual increase in the physician fee schedule equal to the average SGR override over the 10-year period ending 

March 31, 2015. The projections do not represent either a policy recommendation or a prediction of legislative outcomes. 

The magnitude and complexity of social insurance programs, coupled with the extreme sensitivity of projections 

relating to the many assumptions of the programs, produce a wide range of possible results. In preparing the Statements of 

Social Insurance, Government management considers and selects assumptions and data that it believes provide a reasonable 

basis for the assertions in the statements. However, because of the large number of factors that affect the Statements of Social 

 

 2 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. 
40 FINANCIAL STATEMENTS 

 

Insurance plus the fact that such assumptions are inherently subject to substantial uncertainty (arising from the likelihood of

future events, significant uncertainties, and contingencies), there will be differences between the estimates in the Statements

of Social Insurance and the actual results, and those differences may be material. Note 24—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 

reconcile the change between the current valuation period and the prior valuation period 
 FINANCIAL STATEMENTS 41 

 

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42 FINANCIAL STATEMENTS 

 

United States Government

Statement of Net Cost

for the Year Ended September 30, 2014 (Gain)/Loss

from 

Gross Earned Changes in Net 

(In billions of dollars) Cost Revenue Subtotal Assumptions Cost 

 

 Department of Health and Human Services ............ 1,029.5 78.1 951.4 0.1 951.5

Social Security Administration ................................ 906.8 0.4 906.4 - 906.4

Department of Defense ........................................... 716.9 61.5 655.4 6.9 662.3

Interest on Treasury Securities Held by the Public . 260.0 - 260.0 - 260.0

Department of Veterans Affairs ............................... 207.4 4.3 203.1 (22.1) 181.0

Department of Agriculture ....................................... 150.5 9.3 141.2 - 141.2

Department of the Treasury .................................... 182.9 79.9 103.0 - 103.0

Office of Personnel Management............................ 85.3 19.5 65.8 21.3 87.1

Department of Transportation ................................. 77.2 0.9 76.3 - 76.3

Department of Education ........................................ 80.9 24.8 56.1 - 56.1

Department of Labor ............................................... 53.6 - 53.6 - 53.6

Department of Energy ............................................. 57.0 5.0 52.0 - 52.0

Department of Homeland Security .......................... 58.1 10.3 47.8 (1.3) 46.5

Department of Housing and Urban Development ... 44.4 1.6 42.8 - 42.8

Department of Justice ............................................. 33.0 1.7 31.3 - 31.3

Pension Benefit Guaranty Corporation ................... 38.5 11.2 27.3 - 27.3

Department of State ................................................ 30.6 3.8 26.8 (1.4) 25.4

National Aeronautics and Space Administration ..... 18.4 0.2 18.2 - 18.2

Department of the Interior ....................................... 18.7 2.4 16.3 - 16.3

Agency for International Development .................... 11.7 - 11.7 - 11.7

Federal Communications Commission ................... 9.3 0.4 8.9 - 8.9

Department of Commerce ....................................... 12.0 3.2 8.8 - 8.8

Environmental Protection Agency ........................... 8.9 0.5 8.4 - 8.4

Railroad Retirement Board ..................................... 13.9 5.6 8.3 - 8.3

National Science Foundation .................................. 7.2 - 7.2 - 7.2

U.S. Postal Service ................................................. 73.6 66.9 6.7 - 6.7

Millennium Challenge Corporation .......................... 1.0 - 1.0 - 1.0

Smithsonian Institution ............................................ 0.7 - 0.7 - 0.7

U.S. Nuclear Regulatory Commission ..................... 1.0 0.8 0.2 - 0.2

General Services Administration ............................. 0.7 0.6 0.1 - 0.1

Export-Import Bank of the United States ................. 1.1 1.1 - - - 

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

Overseas Private Investments Corporation ............ (0.3) 0.1 (0.4) - (0.4)

Securities and Exchange Commission .................... 1.4 1.9 (0.5) - (0.5)

Tennessee Valley Authority .................................... 10.5 11.1 (0.6) - (0.6)

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

National Credit Union Administration ...................... (1.2) 0.1 (1.3) - (1.3)

Federal Deposit Insurance Corporation .................. (4.4) 8.8 (13.2) - (13.2)

All other entities ...................................................... 54.9 1.3 53.6 - 53.6

 Total ................................................................... 4,251.4 417.9 3,833.5 3.5 3,837.0

 

 The accompanying notes are an integral part of these financial statements. 
 FINANCIAL STATEMENTS 43 

 

United States Government

 Statement of Net Cost

 for the Year Ended September 30, 2013 (Gain)/Loss

 from 

 Gross Earned Changes in Net 

 (In billions of dollars) Cost Revenue Subtotal Assumptions Cost 

 

 Department of Health and Human Services ............... 968.4 72.9 895.5 0.2 895.7 

 Social Security Administration .................................... 867.4 0.4 867.0 - 867.0 

 Department of Defense ............................................... 685.1 44.9 640.2 (62.8) 577.4 

 Interest on Treasury Securities Held by the Public ..... 247.6 - 247.6 - 247.6 

 Department of Veterans Affairs ................................... 243.3 4.5 238.8 114.1 352.9 

 Department of Agriculture ........................................... 147.6 7.5 140.1 - 140.1 

 Department of the Treasury ........................................ 75.3 103.5 (28.2) - (28.2)

 Office of Personnel Management ............................... 67.3 19.2 48.1 81.9 130.0 

 Department of Transportation ..................................... 77.3 0.9 76.4 - 76.4 

 Department of Education ............................................ 32.9 23.2 9.7 - 9.7 

 Department of Labor ................................................... 80.1 - 80.1 - 80.1 

 Department of Energy ................................................. 38.5 4.3 34.2 - 34.2 

 Department of Homeland Security .............................. 70.7 9.7 61.0 (2.4) 58.6 

 Department of Housing and Urban Development ....... 42.6 1.5 41.1 - 41.1 

 Department of Justice ................................................. 31.8 1.3 30.5 - 30.5 

 Pension Benefit Guaranty Corporation ....................... 9.1 9.4 (0.3) - (0.3)

 Department of State .................................................... 29.4 4.2 25.2 0.4 25.6 

 National Aeronautics and Space Administration ......... 18.1 0.2 17.9 - 17.9 

 Department of the Interior ........................................... 16.9 2.7 14.2 - 14.2 

 Agency for International Development ........................ 10.6 0.2 10.4 - 10.4 

 Federal Communications Commission ....................... 9.9 0.4 9.5 - 9.5 

 Department of Commerce........................................... 11.1 2.9 8.2 - 8.2 

 Environmental Protection Agency ............................... 9.8 0.5 9.3 - 9.3 

 Railroad Retirement Board ......................................... 13.5 4.2 9.3 - 9.3 

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

 U.S. Postal Service ..................................................... 72.4 66.3 6.1 - 6.1 

 Millennium Challenge Corporation .............................. 1.7 - 1.7 - 1.7 

 Smithsonian Institution ................................................ 0.8 - 0.8 - 0.8 

 U.S. Nuclear Regulatory Commission ........................ 1.0 0.8 0.2 - 0.2 

 General Services Administration ................................. 0.1 0.7 (0.6) - (0.6)

 Export-Import Bank of the United States .................... 1.1 1.0 0.1 - 0.1 

 Farm Credit System Insurance Corporation................ - 0.1 (0.1) - (0.1)

 Overseas Private Investments Corporation ................ 0.3 0.1 0.2 - 0.2 

 Securities and Exchange Commission ....................... 1.3 1.8 (0.5) - (0.5)

 Tennessee Valley Authority ........................................ 10.7 11.0 (0.3) (0.2) (0.5)

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

 National Credit Union Administration .......................... (1.8) 0.9 (2.7) - (2.7)

 Federal Deposit Insurance Corporation ...................... (2.9) 12.7 (15.6) - (15.6)

 All other entities .......................................................... 44.1 1.2 42.9 - 42.9 

 Total .................................................................. 3,940.9 415.5 3,525.4 131.2 3,656.6 

 

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

 

United States Government

Statement of Operations and Changes in Net Position 

for the Year Ended September 30, 2014 

 

 Funds other than Funds from 

 those from Dedicated 

 Dedicated Collections

 Collections (Note 22)

 (Combined) (Combined) Eliminations Consolidated

(In billions of dollars) 2014 

 

Revenue (Note 18): 

Individual income tax and tax 

withholdings ............................................... 1,374.0 979.0 - 2,353.0 

Corporation income taxes .......................... 317.8 - - 317.8 

Excise taxes ............................................... 38.6 56.3 - 94.9 

Unemployment taxes ................................. - 52.6 - 52.6 

Customs duties .......................................... 32.9 - - 32.9 

Estate and gift taxes .................................. 19.3 - - 19.3 

Other taxes and receipts ............................ 125.8 50.8 - 176.6 

Miscellaneous earned revenues ................ 14.0 5.0 - 19.0 

Intragovernmental interest ......................... - 113.8 (113.8) - 

Total Revenue ............................................ 1,922.4 1,257.5 (113.8) 3,066.1 

Net Cost of Government Operations:

Net cost ...................................................... 2,333.2 1,503.8 - 3,837.0 

Intragovernmental interest ......................... 113.8 - (113.8) - 

Total net cost ............................................. 2,447.0 1,503.8 (113.8) 3,837.0 

 

Intragovernmental transfers ...................... (299.9) 299.9 - - 

Unmatched transactions and balances 

 (Note 1.T) .................................................. (20.4) - - (20.4)

Net operating (cost)/revenue ..................... (844.9) 53.6 - (791.3)

Net position, beginning of period ............. (20,053.0) 3,143.7 - (16,909.3)

Prior period adjustments–changes in 

 accounting principles (Note 19 and 22) . (0.4) 0.3 - (0.1)

Net operating (cost)/revenue ..................... (844.9) 53.6 - (791.3)

Net position, end of period ........................ (20,898.3) 3,197.6 - (17,700.7)

 

The accompanying notes are an integral part of these financial statements.
 FINANCIAL STATEMENTS 45 

 

United States Government

Statement of Operations and Changes in Net Position 

for the Year Ended September 30, 2013 

 

 Funds other than Funds from 

 those from Dedicated 

 Dedicated Collections

 Collections (Note 22)

 (Combined) (Combined) Eliminations Consolidated

(In billions of dollars) 2013 

 

Revenue (Note 18): 

Individual income tax and tax withholdings .. 1,294.0 902.4 - 2,196.4 

Corporation income taxes ............................ 270.4 - - 270.4 

Excise taxes ................................................. 32.8 52.8 - 85.6 

Unemployment taxes ................................... - 54.0 - 54.0 

Customs duties ............................................ 30.6 - - 30.6 

Estate and gift taxes .................................... 18.8 - - 18.8 

Other taxes and receipts .............................. 139.7 36.4 (0.6) 175.5 

Miscellaneous earned revenues .................. 7.0 4.2 - 11.2 

Intragovernmental interest ........................... - 119.6 (119.6) - 

Total Revenue .............................................. 1,793.3 1,169.4 (120.2) 2,842.5 

Net Cost of Government Operations:

Net cost ........................................................ 2,175.2 1,482.0 (0.6) 3,656.6 

Intragovernmental interest ........................... 119.6 - (119.6) - 

Total net cost ............................................... 2,294.8 1,482.0 (120.2) 3,656.6 

 

Intragovernmental transfers ........................ (307.6) 307.6 - - 

 

Unmatched transactions and balances 

 (Note 1.T) .................................................... 9.0 - - 9.0 

Net operating (cost)/revenue ....................... (800.1) (5.0) - (805.1)

Net position, beginning of period ............... (19,248.8) 3,147.8 - (16,101.0)

Prior period adjustments–changes in 

 accounting principles (Note 19 and 22) ... (4.1) 0.9 - (3.2)

Net operating (cost)/revenue ....................... (800.1) (5.0) - (805.1)

Net position, end of period .......................... (20,053.0) 3,143.7 - (16,909.3)

 

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

 

United States Government

Reconciliations of Net Operating Cost and Unified Budget Deficit 

for the Year Ended September 30, 2014, and 2013 

 

(In billions of dollars) 2014 2013

Net operating cost .......................................................................................................... (791.3) (805.1)

Components of net operating cost not part of the budget deficit:

Increase/(Decrease) in liability for military employee benefits (Note 13): 

 Military pension liabilities ............................................................................................. 40.9 42.2 

 Military health liabilities ............................................................................................... 12.9 (85.7)

 Other military benefits ................................................................................................. (0.9) (0.4)

 Liability for military employee benefits ........................................................................ 52.9 (43.9)

Increase/(Decrease) in liability for veteran's compensation (Note 13) ..................... 32.3 213.2 

Increase/(Decrease) in liabilities for civilian employee benefits (Note 13):

Civilian pension liabilities ............................................................................................ 37.3 95.6 

Civilian health liabilities ............................................................................................... 10.1 (1.4)

Other civilian benefits .................................................................................................. 1.7 0.8 

Liabilities for civilian employee benefits ...................................................................... 49.1 95.0 

Increase/(Decrease) in environmental and disposal liabilities (Note 14):

Energy's environmental and disposal liabilities ........................................................... 19.6 11.8 

All others' environmental and disposal liabilities ......................................................... 0.4 (1.7)

Environmental and disposal liabilities ......................................................................... 20.0 10.1 

Property, plant, and equipment depreciation expense ..................................................... 67.7 62.1 

Property, plant, and equipment disposals and revaluations ............................................ 4.8 (36.2)

Increase/(Decrease) in benefits due and payable ............................................................ 17.3 8.1 

Increase/(Decrease) in insurance and guarantee program liabilities ............................... 28.3 (26.4)

Increase/(Decrease) in other liabilities ............................................................................. 7.3 (20.9)

Increase/(Decrease) in accounts payable ........................................................................ 2.8 1.0 

(Increase)/Decrease in net accounts and taxes receivable ............................................. (0.8) 8.0 

Agencies year end upward/(downward) credit reform subsidy re-estimates .................... 24.5 1.6 

Increase/(Decrease) in liabilities to Government-Sponsored Enterprises (GSEs) ........... - (9.0)

Unrealized Valuation Loss/(Gain) on investments in GSEs ............................................. 44.4 (30.9)

Components of the budget deficit that are not part of 

net operating cost: 

Capitalized property, plant, and equipment: 

Department of Defense .................................................................................................. (27.7) (37.0)

All other agencies .......................................................................................................... (26.4) (30.6)

 Total capitalized property, plant, and equipment ........................................................ (54.1) (67.6)

Effect of prior year agencies (upward)/downward credit reform subsidy re-estimates .... (1.6) (24.6)

(Increase)/Decrease in inventory ...................................................................................... (7.3) (12.1)

(Increase)/Decrease in debt and equity securities ........................................................... (7.6) 2.4 

(Increase)/Decrease in other assets ................................................................................. - (5.2)

Credit reform and other loan activities .............................................................................. 13.1 (1.4)

All other reconciling items ................................................................................................. 14.8 1.5 

Unified budget deficit (483.4) (680.3)

The accompanying notes are an integral part of these financial statements. 
 FINANCIAL STATEMENTS 47 

 

United States Government

Statements of Changes in Cash Balance from Unified Budget and Other Activities 

for the Years Ended September 30, 2014, and 2013 

 

(In billions of dollars) 2014 2013

 

Unified budget deficit ................................................................ (483.4) (680.3)

 

Adjustments for Noncash Outlays Included in the budget: 

Interest accrued by Treasury on debt held by the public .......... 255.5 242.7 

Agencies year end credit reform subsidy re-estimates .............. (22.9) 23.0 

Subsidy (income) (Notes 4 and 5) ............................................. (10.3) (75.3) 

 Subtotal ................................................................................... 222.3 190.4 

Items Affecting the Cash Balance Not Included in the budget: 

Net Transactions from financing activity: 

Borrowings from the public ....................................................... 7,475.8 8,145.4 

Repayment of debt held by the public ...................................... (6,672.0) (7,444.0)

Agency securities ....................................................................... (1.2) 0.7 

Effect of Uninvested principal from the Thrift Savings Plan 

(TSP) G Fund on Financing Activity .......................................... (119.9) 119.9 

Subtotal ................................................................................... 682.7 822.0 

Transactions from monetary and other activity:

Interest paid by Treasury on debt held by the public ................ (252.9) (248.7) 

Net loan receivable and equity investments activity .................. (104.3) (93.9) 

Allocations of special drawing rights .......................................... (1.8) (0.2) 

Other .......................................................................................... (4.0) 10.8 

Subtotal ................................................................................... (363.0) (332.0)

 

Cash and other monetary assets: (Note 2)

Increase in Cash and other monetary assets ............................ 58.6 0.1 

Balance, beginning of period ..................................................... 206.3 206.2 

Balance, end of period ............................................................... 264.9 206.3 

 

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

 

For budgetary purposes, the effect of the year end downward re-estimates (reduction of net outlays) and upward re-estimates 

(increase of net outlays) is not recognized until the subsequent fiscal year. 
48 FINANCIAL STATEMENTS 

 

United States Government 

Balance Sheets 

as of September 30, 2014, and 2013 

 

 

(In billions of dollars) 2014 2013

Assets: 

 Cash and other monetary assets (Note 2) ...................................................... 264.9 206.3 

 Accounts and taxes receivable, net (Note 3) .................................................. 104.0 103.2 

 Loans receivable, net (Note 4) ........................................................................ 1,123.5 1,022.3 

 TARP direct loans and equity investments, net (Note 5) ................................ 2.2 17.9 

 Inventories and related property, net (Note 6) ................................................ 318.4 311.1 

 Property, plant and equipment, net (Note 7) ................................................... 878.3 896.7 

 Debt and equity securities (Note 8) ................................................................ 115.4 107.8 

 Investments in GSEs (Note 9) ........................................................................ 95.8 140.2 

 Other assets (Note 10) .................................................................................... 162.8 162.8 

 Total assets .................................................................................................. 3,065.3 2,968.3 

 Stewardship land and heritage assets (Note 25) 

Liabilities: 

 Accounts payable (Note 11)............................................................................ 69.0 66.2 

 Federal debt securities held by the public and accrued interest (Note 12) .... 12,833.6 12,028.4 

 Federal employee and veteran benefits payable (Note 13) ............................ 6,672.6 6,538.3 

 Environmental and disposal liabilities (Note 14) ............................................. 369.1 349.1 

 Benefits due and payable (Note 15) ............................................................... 191.6 174.3 

 Insurance and guarantee program liabilities (Note 16) .................................. 168.2 139.9 

 Loan guarantee liabilities (Note 4) .................................................................. 52.8 59.2 

 Other liabilities (Note 17) ................................................................................ 409.1 522.2 

 Total liabilities ............................................................................................... 20,766.0 19,877.6 

 Contingencies (Note 20) and Commitments (Note 21) 

Net Position: 

 Funds from Dedicated Collections (Note 22) .................................................. 3,197.6 3,143.7 

 Funds other than those from Dedicated Collections ....................................... (20,898.3) (20,053.0)

 Total net position .......................................................................................... (17,700.7) (16,909.3)

 Total liabilities and net position .................................................................... 3,065.3 2,968.3 

 

The accompanying notes are an integral part of these financial statements. 
 FINANCIAL STATEMENTS 49 

 

United States Government

Statements of Social Insurance (Note 24) 

Present Value of Long-Range (75 Years, except Black Lung) Actuarial Projections 

(In billions of dollars) 2014 2013 2012 2011 2010

 

Federal Old-age, Survivors and Disability Insurance (Social 

Security):14 

Revenue (Contributions and Dedicated Taxes) from: 

 Participants who have attained eligibility age (age 62 and over) ......... 984 908 847 726 672 

 Participants who have not attained eligibility age ................................ 25,391 24,591 22,703 20,734 19,914 

 Future participants ............................................................................... 24,594 23,419 21,649 20,144 19,532 

 All current and future participants ..................................................... 50,969 48,918 45,198 41,603 40,118 

 Expenditures for Scheduled Future Benefits for: 

 Participants who have attained eligibility age (age 62 and over) ......... (11,852) (11,021) (9,834) (8,618) (8,096)

 Participants who have not attained eligibility age ................................ (42,419) (40,591) (37,753) (34,042) (32,225)

 Future participants ............................................................................... (10,028) (9,600) (8,890) (8,100) (7,744)

 All current and future participants ..................................................... (64,299) (61,212) (56,477) (50,760) (48,065)

 Present value of future expenditures in excess of future 

 revenue ............................................................................................ (13,330)1 (12,294)2 (11,278)3 (9,157)4 (7,947)5

Federal Hospital Insurance (Medicare Part A):14 

 Revenue (Contributions and Dedicated Taxes) from:

 Participants who have attained eligibility age (age 65 and over) ......... 332 301 302 262 248 

Participants who have not attained eligibility age ................................ 8,398 8,147 7,929 7,581 7,216 

Future participants ............................................................................... 7,812 7,744 7,367 7,260 6,944 

 All current and future participants ..................................................... 16,542 16,192 15,598 15,104 14,408 

Expenditures for Scheduled Future Benefits for:

Participants who have attained eligibility age (age 65 and over) ......... (3,484) (3,422) (3,369) (2,923) (2,648)

Participants who have not attained eligibility age ................................ (14,117) (14,629) (14,919) (12,887) (12,032)

Future participants ............................................................................... (2,764) (2,913) (2,891) (2,546) (2,411)

 All current and future participants ..................................................... (20,365) (20,964) (21,179) (18,356) (17,091)

Present value of future expenditures in excess of future 

revenue ............................................................................................ (3,823)1 (4,772)2 (5,581)3 (3,252)4 (2,683)5

Federal Supplementary Medical Insurance (Medicare Part B):14 

 Revenue (Premiums) from:

 Participants who have attained eligibility age (age 65 and over) ......... 763 701 635 570 538 

Participants who have not attained eligibility age ................................ 4,548 4,073 3,826 3,651 3,460 

Future participants ............................................................................... 1,145 944 884 865 839 

 All current and future participants ..................................................... 6,456 5,718 5,344 5,086 4,836 

Expenditures for Scheduled Future Benefits for:

Participants who have attained eligibility age (age 65 and over) ......... (3,171) (2,887) (2,646) (2,343) (2,166)

Participants who have not attained eligibility age ................................ (17,003) (15,075) (14,303) (13,489) (12,587)

Future participants ............................................................................... (4,137) (3,415) (3,211) (3,108) (2,984)

 All current and future participants ..................................................... (24,311) (21,377) (20,159) (18,940) (17,737)

Present value of future expenditures in excess of future 

revenue 6 .......................................................................................... (17,856)1 (15,659)2 (14,815)3 (13,854)4 (12,901)5

 

Totals may not equal the sum of components due to rounding. 

 

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

 

United States Government

Statements of Social Insurance (Note 24), continued 

Present Value of Long-Range (75 Years, except Black Lung) Actuarial Projections 

(In billions of dollars) 2014 2013 2012 2011 2010

 

Federal Supplementary Medical Insurance (Medicare Part D):14

Revenue (Premiums and State Transfers) from:

Participants who have attained eligibility age (age 65 and over) ..... 209 184 179 173 165

Participants who have not attained eligibility age ............................ 1,596 1,491 1,510 1,608 1,626

Future participants ........................................................................... 703 665 661 703 694

 All current and future participants ................................................. 2,508 2,340 2,349 2,484 2,486

Expenditures for Scheduled Future Benefits for:

Participants who have attained eligibility age (age 65 and over) ..... (775) (722) (694) (695) (646)

Participants who have not attained eligibility age ............................ (5,928) (5,871) (5,866) (6,438) (6,355)

Future participants ........................................................................... (2,609) (2,617) (2,568) (2,817) (2,714)

 All current and future participants ................................................. (9,312) (9,211) (9,128) (9,950) (9,715)

Present value of future expenditures in excess of future 

 revenue 6

 .................................................................................................. (6,804)1 (6,871)2 (6,778)3 (7,466)4 (7,229)5

 

Railroad Retirement:

Revenue (Contributions and Dedicated Taxes) from:

Participants who have attained eligibility ......................................... 8 7 7 6 5

Participants who have not attained eligibility ................................... 63 60 56 46 47

Future participants ........................................................................... 78 79 78 65 66

 All current and future participants ................................................. 149 146 141 117 118

Expenditures for Scheduled Future Benefits for:

Participants who have attained eligibility ......................................... (126) (123) (119) (109) (105)

Participants who have not attained eligibility ................................... (97) (96) (95) (86) (88)

Future participants ........................................................................... (34) (34) (34) (28) (27)

 All current and future participants ................................................. (257) (253) (248) (223) (220)

Present value of future expenditures in excess of future 

revenue 7 .................................................................................................. (108)1 (107)2 (107)3 (106)4 (103)5

 

Black Lung (Part C):

Present value of future revenue in excess of future 

expenditures 8 ............................................................................................. 59 510 511 512 613

 

Total present value of future expenditures in excess of future 

revenue .............................................................................................. (41,916) (39,698) (38,554) (33,830) (30,857)

Totals may not equal the sum of components due to rounding.

 

The accompanying notes are an integral part of these financial statements.
 FINANCIAL STATEMENTS 51 

 

United States Government

Statements of Social Insurance (Note 24), continued

Present Value of Long-Range (75 Years, except Black Lung) Actuarial Projections

 

(In billions of dollars) 2014 2013 2012 2011 2010 

Social Insurance Summary14 

Participants who have attained eligibility age: 

Revenue (e.g., contributions and dedicated taxes) ......................... 2,296 2,101 1,970 1,737 1,628 

Expenditures for scheduled future benefits ..................................... (19,408) (18,175) (16,662) (14,688) (13,661)

 Present value of future expenditures in excess of future revenue ........................................................................... (17,112) (16,074) (14,692) (12,951) (12,033)

Participants who have not attained eligibility age: 

Revenue (e.g., contributions and dedicated taxes) ......................... 39,996 38,362 36,024 33,620 32,263 Expenditures for scheduled future benefits ..................................... (79,564) (76,262) (72,936) (66,942) (63,287) Present value of future expenditures in excess of future revenue ........................................................................... (39,568) (37,900) (36,912) (33,322) (31,024) 

 Closed-group – Total present value of future expenditures in excess of future revenue ....................................................... (56,680) (53,974) (51,604) (46,272) (43,057) 

 Future participants: Revenue (e.g., contributions and dedicated taxes) ......................... 34,332 32,851 30,639 29,037 28,075 Expenditures for scheduled future benefits ..................................... (19,567) (18,575) (17,589) (16,594) (15,875) Present value of future revenue in excess of future expenditure................................................................................ 14,765 14,276 13,050 12,443 12,200 

Open-group – Total present value of future expenditures in 

excess of future revenue ................................................................. (41,916) (39,698) (38,554) (33,830) (30,857)

1 The projection period is 1/1/2014-12/31/2088 and the valuation date is 1/1/2014.

2 The projection period is 1/1/2013-12/31/2087 and the valuation date is 1/1/2013.

3 The projection period is 1/1/2012-12/31/2086 and the valuation date is 1/1/2012.

4 The projection period is 1/1/2011-12/31/2085 and the valuation date is 1/1/2011.

5 The projection period is 1/1/2010-12/31/2084 and the valuation date is 1/1/2010.

6 These amounts represent the present value of the future transfers from the General Fund of the Treasury to the Supplementary Medical Insurance Trust 

Fund. These future intragovernmental transfers are included as income in both HHS’ and the Centers for Medicare & Medicaid Services’ Financial Reports 

but are not income from the governmentwide perspective of this report.

7 These amounts approximate the present value of the future financial interchange and the future advances from the General Fund of the Treasury to the 

Social Security Equivalent Benefit Account and future repayments from the Social Security Equivalent Benefit Account to the General Fund (see discussion 

of Railroad Retirement Program in the unaudited required supplementary information section of this report). They are included as income in the Railroad 

Retirement Financial Report but are not income from the governmentwide perspective of this report.

8 Does not include interest expense accruing on the outstanding debt.

9 The projection period is 9/30/2014-9/30/2040 and the valuation date is 9/30/2014.

10 The projection period is 9/30/2013-9/30/2040 and the valuation date is 9/30/2013. 11 The projection period is 9/30/2012-9/30/2040 and the valuation date is 9/30/2012. 12 The projection period is 9/30/2011-9/30/2040 and the valuation date is 9/30/2011. 13 The projection period is 9/30/2010-9/30/2040 and the valuation date is 9/30/2010. 14 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.
52 FINANCIAL STATEMENTS 

 

United States Government

Statement of Changes in Social Insurance Amounts 

for the Year Ended September 30, 2014 (Note 24) 

Social Medicare Medicare 

(In billions 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 ........................................... (12,294) (4,772) (22,530) (102) (39,698)

Reasons for changes in the NPV during the year: 

Changes in valuation period ............................................ (540) (239) (988) (2) (1,769)

Changes in demographic data and assumptions ............. 235 (139) (152) 2 (54)

Changes in economic data and assumptions .................. (604) - - (1) (605)

Changes in law or policy .................................................. (37) 108 (42) - 29 

Changes in methodology and 

programmatic data ....................................................... (90) - - - (90)

Changes in economic and other health care 

assumptions ................................................................ - 772 (1,090) - (318)

Change in projection base ............................................... - 447 142 - 589 

Net change in open group measure ................................ (1,036) 949 (2,130) (1) (2,218)

Open group measure, end of year ....................................... (13,330) (3,823) (24,660) (103) (41,916)

Totals may not equal the sum of components due to rounding. 

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

1 Amounts represent changes between valuation dates 1/1/2013 and 1/1/2014. 

2 Includes Railroad Retirement changes between valuation dates 1/1/2013 and 1/1/2014 and Black Lung changes between 9/30/2013 and 9/30/2014.
 FINANCIAL STATEMENTS 53 

 

United States Government

Statement of Changes in Social Insurance Amounts 

for the Year Ended September 30, 2013 (Note 24) 

 

 

 Social Medicare Medicare 

(In billions 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 ......................................... (11,278) (5,581) (21,593) (102) (38,554)

Reasons for changes in the NPV during the year: 

Changes in valuation period .......................................... (543) (285) (983) (2) (1,813)

Changes in demographic data and assumptions .......... (681) 724 (330) 2 (285)

Changes in economic data and assumptions ................ (273) - - (273)

Changes in law or policy ............................................... (553) 31 2 - (520)

Changes in methodology and programmatic data ......... 1,034 - - - 1,034 

Changes in economic and other health care 

 assumptions ................................................................. - 31 (125) - (94)

Change in projection base ............................................. - 308 499 - 807 

Net change in open group measure .............................. (1,016) 809 (937) - (1,144)

Open group measure, end of year ................................... (12,294) (4,772) (22,530) (102) (39,698)

 Totals may not equal the sum of components due to rounding. 

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

1 Amounts represent changes between valuation dates 1/1/2012 and 1/1/2013. 2 Includes Railroad Retirement changes between valuation dates 1/1/2012 and 1/1/2013 and Black Lung changes between 9/30/2012 and

9/30/13. 

 

 

 
54 FINANCIAL STATEMENTS 

 

This page is intentionally blank. 
 NOTES TO THE FINANCIAL STATEMENTS 55 

 

United States Government 

Notes to the Financial Statements 

for the Years Ended September 30, 2014, 

and 2013 

Note 1. Summary of Significant Accounting Policies 

A. Reporting Entity 

This Financial Report includes the financial status and activities of the executive branch, the legislative branch (the 

U.S. Senate and the U.S. House of Representatives are included on a cash basis), and the judicial branch (which is primarily 

included on a cash basis) of the government. The financial reporting period ends September 30 and is the same as used for 

the annual budget. The legislative and judicial branches are included on a limited basis and are not required by law to submit 

financial statement information to Treasury. Appendix A of this report lists the organizations and agencies (entities) included 

in the U.S. Government’s consolidated reporting entity for the Financial Report, as well as some entities not included in the 

reporting entity. Federal Accounting Standards Advisory Board’s (FASAB) Statement of Federal Financial Accounting 

Concepts (SFFAC) No. 2, Entity and Display, provides criteria for determining which entities are included in the reporting 

entity. Such criteria is summarized in Appendix A. Also, as discussed further in Appendix A, certain entities are excluded 

from the Financial Report because they do not meet the criteria, such as the Thrift Savings Fund, or were specifically 

excluded from the consolidated reporting entity in accordance with SFFAC No. 2, such as the Board of Governors of the 

Federal Reserve System and bailout entities. Examples of bailout entities include the Federal Home Loan Mortgage 

Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae). 

During fiscal year 2008, the government began a number of emergency economic measures relating to the economy that 

involved various financing programs. Key initiatives beginning in fiscal year 2008 involved programs concerning Fannie 

Mae and Freddie Mac (Government-Sponsored Enterprises [GSEs]), provision of a credit facility for GSEs and Federal 

Home Loan Banks, purchase of Mortgage-Backed Securities (MBSs), and setup of a Money Market Guarantee Program (see 

Note 1.I—Investments in Government-Sponsored Enterprises and Note 9—Investments in Government-Sponsored 

Enterprises). The Emergency Economic Stabilization Act of 2008 (EESA) gave the Secretary of the Treasury temporary 

authority to purchase and guarantee assets from a wide range of financial institutions through the Troubled Asset Relief 

Program (TARP) (see Note 5—TARP Direct Loans and Equity Investments, Net). 

Following U.S. Generally Accepted Accounting Principles (GAAP) for federal entities, the government has not 

consolidated into its financial statements the assets, liabilities, or results of operations of any financial organization or 

commercial entity in which Treasury holds either a direct, indirect, or beneficial equity investment. Even though some of the 

equity investments are significant, under Statement of Federal Financial Accounting Concepts (SFFAC) No. 2, these entities 

meet the criteria of paragraph 50 and do not appear in the federal budget section “Federal Programs by Agency and 

Account.” As such, these entities are not consolidated into the financial reports of the government. However, the values of 

the investment in such entities are presented on the balance sheet. 

Material intragovernmental transactions are eliminated in consolidation, except as described in the Other Information—

Unmatched Transactions and Balances (see Note 1.T). 

 
56 NOTES TO THE FINANCIAL STATEMENTS 

 

B. Basis of Accounting and Revenue Recognition 

These financial statements were prepared using U.S. GAAP, primarily based on Statement of Federal Financial 

Accounting Standards (SFFAS). Under these principles: 

x Expenses are generally recognized when incurred. 

x Nonexchange revenue, including taxes, duties, fines, and penalties, are recognized when collected and adjusted 

for the change in net measurable and legally collectible amounts receivable. Related refunds and other offsets, 

including those that are measurable and legally payable, are netted against nonexchange revenue. 

x Exchange (earned) revenue are recognized when the government provides goods and services to the public for 

a price. Exchange revenue include 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 and obligation basis and follows 

budgetary concepts and policies, differs from the basis of accounting used for the financial statements which follow U.S. 

GAAP. See the Reconciliations of Net Operating Cost and Unified Budget Deficit in the Financial Statements section. 

The basis of accounting used and the detail of the basis for the Statement of Social Insurance (SOSI) and the Statement 

of Changes in Social Insurance Amounts (SCSIA) are covered in Note 24—Social Insurance. 

New Standards Issued and Implemented 

Beginning in fiscal year 2014, the government implemented the requirements of a new standard related to the reporting 

for Federal Natural Resources Other than Oil and Gas. The new standard being implemented is: 

x Technical Bulletin 2011-1, Accounting for Federal Natural Resources Other than Oil and Gas. TB 2011-1 clarifies 

that the government should report the value of its estimated royalties and other revenue from federal natural 

resources other than oil and gas, e.g., coal, that are (1) under lease, contract, or other long-term agreement, and (2) 

reasonably estimable as of the reporting date in RSI, consistent with the guidance contained in SFFAS No. 38. TB 

2011-1 became effective in fiscal year 2014. 

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 2014: 

x In April 2012, FASAB issued SFFAS No. 42, Deferred Maintenance and Repairs, Amending SFFAS No. 6, 14, 29, 

and 32. SFFAS No. 42 replaces the definition, measurement, and reporting requirements for deferred maintenance 

and repairs established in SFFAS No. 6. In addition, SFFAS No. 42, paragraph 19 rescinds the current 

governmentwide disclosures required for deferred maintenance established in SFFAS 32 paragraph 24. SFFAS 42 

paragraph 16 requires the governmentwide financial statements to disclose as RSI a description of what constitutes 

deferred maintenance and repairs (DM&R) and how it was measured; amounts of DM&R for each major category of 

property, plant, and equipment; and a general reference to specific component entity reports for additional 

information. SFFAS No. 42 becomes effective in fiscal year 2015. The specific impact of implementing the new 

standard has not yet been determined. 

x In January 2013, FASAB issued SFFAS No. 44, Accounting for Impairment of General Property, Plant, and 

Equipment Remaining in Use which provides accounting and reporting requirements for partial impairments of 

general property, plant, and equipment (G-PP&E) remaining in use and construction work-in-process. SFFAS No. 

44 requires description of what constitutes G-PP&E impairment and the disclosure of related losses, if material. 

SFFAS No. 44 becomes effective in fiscal year 2015. The specific impact of implementing the new standard has not 

yet been determined. 

x In October 2014, FASAB issued SFFAS No. 46, Deferral of the Transition to Basic Information for Long-Term 

Projections; Amending SFFAS No. 36 and 45. Issued on September 2009, SFFAS No. 36, Comprehensive LongTerm Projections for the U.S. Government required that certain information currently included as RSI be presented 

as basic information starting in fiscal year 2013. This included the statement of long-term fiscal projections and 

related disclosures on the assumptions underlying the projections. Issued in July of 2013, SFFAS No. 45 amended 

the effective date for the transition to a basic financial statement for fiscal year 2014. SFFAS No. 46 amends the 

effective date for the transition to a basic financial statement for fiscal year 2015. 
 NOTES TO THE FINANCIAL STATEMENTS 57 

 

x In December 2014, FASAB issued SFFAS No. 47, Reporting Entity. SFFAS 47 establishes principles to identify 

organizations for which elected officials are accountable. The standard also guides preparers of general purpose 

federal financial reports 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 to exclude information. SFFAS 47 is effective for periods beginning after 

September 30, 2017 and early implementation 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 accounts. An allowance is established when it is more likely than not the 

receivables will not be totally collected. The allowance method varies among the agencies in the government and is usually 

based on past collection experience and is re-estimated 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 allowance for doubtful accounts is based on 

projections of collectibles from a statistical sample of unpaid tax assessments. 

D. Loans Receivable and Loan Guarantee Liabilities, Net 

Direct loans obligated and loan guarantees committed after fiscal year 1991 are reported based on the present value of 

the net cashflows 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 cashflows 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 

cashflows for those loans or guarantees. A subsidy expense also is recognized for modifications made during the year to 

loans and guarantees outstanding and for re-estimates made as of the end of the fiscal year to the subsidy allowances or loan 

guarantee liability for loans and guarantees outstanding. 

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 agency 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 cashflows. The liability for loan 

guarantees is the present value of expected net cash outflows due to the loan guarantees. 

E. TARP Direct Loans and Equity Investments, Net 

TARP equity investments are accounted for at fair value, which is defined as the estimated amount of proceeds that 

would be received if the equity investments were sold to a market participant in an orderly transaction. Consistent with the 

present value accounting concepts embedded in SFFAS No. 2, Accounting for Direct Loans and Loan Guarantees, TARP 

direct loans and equity investments, net, disbursed and outstanding are recognized as assets at the net present value of their 

estimated future cashflows and outstanding asset guarantees are recognized as liabilities or assets at the net present value of

their estimated future cashflows. Market risk is considered in the calculation and determination of the estimated net present 

values. 
58 NOTES TO THE FINANCIAL STATEMENTS 

 

The subsidy allowance for TARP’s direct loans and equity investments represents the difference between the face value 

of the outstanding direct loan and equity investment balance and the net present value of the expected future cashflows. The 

subsidy allowance is reported as an adjustment to the face value of the direct loan or equity investment. 

The recorded subsidy allowance for a direct loan or equity investment is based on a set of assumptions regarding 

estimated future cashflows. 

The government used the following methodologies for valuation of the TARP direct loans and equity investments: 

x The estimated future cashflows for TARP direct loans were derived using analytical models that estimate the cashflows to 

and from the government over the life of the loan. These cashflows include the scheduled principal, interest, and other 

payments to the government, including estimated proceeds from equity interest obtained or additional notes. These models 

also include estimates of default and recoveries, incorporating the value of any collateral provided by the contract. The 

probability and timing of default, as well as losses relating to a default, are estimated by using applicable historical data 

when available, or publicly available proxy data, including credit rating agency historical performance data. The models 

include an adjustment for market risk which is intended to capture the risk of unexpected losses, but are not intended to 

represent fair value, i.e., the proceeds that would be expected to be received if the loans were sold to a market participant. 

x TARP preferred stock cashflows are projected using an analytical model developed to incorporate the risk of losses 

associated with adverse events, such as failure of the institution or increases in market interest rates. The model estimates 

how cashflows vary depending on: (1) current interest rates, which may affect the decision whether to repay the preferred 

stock; and (2) the strength of a financial institution’s assets. Inputs to the model include institution specific accounting data 

obtained from regulatory filings, an institution’s stock price volatility, and historical bank failure information. The 

government estimates the values and projects the cashflows of warrants using an option-pricing approach based on the 

current stock price and its volatility. Investments in common stock which are exchange traded are valued at the market 

price. The result of using market prices, either quoted prices for the identical asset or quoted prices for comparable assets, 

is that the equity investments are recorded at estimated fair value. 

For more details on TARP, see Note 5—TARP Direct Loans and Equity Investments, Net. 

F. Inventories and Related Property

Inventory is tangible personal property that is (1) held for sale, principally to federal agencies, (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 latest acquisition cost (LAC). Historical cost methods 

include first-in-first-out, weighted average, and moving average. When LAC methods are used, the inventory is revalued 

periodically and an allowance account should be established for unrealized holding gains and losses. 

The Department of Defense (DOD) holds the majority of the inventories within the government and uses standard price 

and moving average cost methods for valuing most of its inventory. To a lesser degree, DOD also uses first-in-first-out 

methods and LAC methods adjusted for holding gains and losses to approximate the historical cost of resale inventory items 

remaining in its legacy system. The latest acquisition cost method is used because legacy inventory systems were designed 

for material management rather than accounting. Although these systems provide visibility and accountability over inventory 

items, they do not maintain historical cost data necessary to comply with SFFAS No. 3, Accounting for Inventory and Related 

Property. DOD is continuing to transition inventories currently accounted for under the LAC methods, to be accounted for 

under the moving average cost methods. 

When using historical cost valuation, estimated repair costs reduce the value of inventory held for repair. Excess, 

obsolete, and unserviceable inventories are valued at estimated net realizable value. When LAC is used to value inventory 

held for sale, it is adjusted for holding gains and losses in order to approximate historical cost. 

Related property includes commodities, seized monetary instruments, forfeited and foreclosed property, raw materials 

and work in process. Operating materials and supplies are valued at historical cost, LAC, and standard price using the 

purchase and consumption method of accounting. Operating materials and supplies that are valued at latest acquisition cost 

and standard pricing are not adjusted for holding gains and losses. 
 NOTES TO THE FINANCIAL STATEMENTS 59 

 

G. Property, Plant, and Equipment 

Property, Plant, and Equipment (PP&E) consists of tangible assets including buildings, equipment, construction in 

progress, internal use software, assets acquired through capital leases (including leasehold improvements), and other assets 

used to provide goods and services. 

PP&E used in government operations are carried at acquisition cost, with the exception of some DOD equipment. In 

some instances, DOD equipment is valued at estimated historical costs, which are calculated using internal DOD records. To 

establish a baseline, DOD accumulated information relating to program funding and associated equipment, equipment useful 

life, program acquisitions, as well as disposals. The equipment baseline is updated using expenditure information and 

information related to acquisitions and disposals. 

All PP&E is capitalized if the acquisition costs (or estimated acquisition cost for DOD) are in excess of capitalization 

thresholds that vary considerably between the federal entities. Depreciation and amortization expense applies to PP&E 

reported on the balance sheets except for land, unlimited duration land rights, and construction in progress. Depreciation and 

amortization are recognized using the straight-line method over the estimated useful lives of the assets. All PP&E are 

assigned useful lives depending on their category. The cost of acquisition, betterment, or reconstruction of all multi-use 

heritage assets is capitalized as general PP&E and is depreciated. Construction in progress is used for the accumulation of the 

cost of construction or major renovation of fixed assets during the construction period. The assets are transferred out of 

construction in progress when the project is substantially completed. Internal use software includes purchased commercial offthe-shelf software, contractor-developed software, and software internally developed. 

For financial reporting purposes, other than multi-use heritage assets, stewardship assets are not recorded as part of PP&E. 

Stewardship Assets consist of public domain land (Stewardship Land) and Heritage Assets. Examples of stewardship land include 

national parks, wildlife refuges, national forests, and other lands of national and historical significance. Heritage assets include 

national monuments, and historical sites that among other characteristics are of historical, natural, cultural, educational, or artistic 

significance. Stewardship land and most heritage assets are considered priceless and irreplaceable, and as such they are measured in 

physical units with no financial value assigned to them. Some heritage assets have been designated as multi-use heritage assets, for 

example the White House, the predominant use of which is in government operations. For more details on stewardship assets, see 

Note 25—Stewardship Land and Heritage Assets. 

H. 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 amortized 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. 

I. Investments in Government-Sponsored Enterprises 

The senior preferred stock and associated common stock warrants in GSEs are presented at their fair value. The 

annual valuation to estimate the asset’s fair value incorporates various forecasts, projections, and cashflow analyses. 

These valuations are performed on the senior preferred stock and warrants and any changes in valuation, including 

impairment, are recorded and disclosed in accordance with SFFAS No. 7, Accounting for Revenue and Other Financing 

Sources. Since the valuation is an annual process, the changes in valuation of the senior preferred stock and warrants are 

deemed usual and recurring. Accordingly, changes in valuation are recorded as an exchange transaction which is either an 

expense or revenue. Since the costs of the senior preferred stock and warrants are reflected in exchange transactions, any 

change in valuation is also recorded as an exchange transaction. 

The Housing and Economic Recovery Act of 2008 (HERA) established the Federal Housing Finance Agency (FHFA), 

which was created to enhance authority over the GSEs, and provide the Secretary of the Treasury with certain authorities to 

support the financial stability of the GSEs. In September 2008, Treasury entered into a Senior Preferred Stock Purchase 

Agreement (SPSPA) with each GSE. Based on U.S. GAAP, these commitments, predicated on the future occurrence of any 

stockholders’ equity net deficits of the GSEs, at the end of any reporting quarter are potential liabilities of Treasury. 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 9—Investments in Government-Sponsored Enterprises. 
60 NOTES TO THE FINANCIAL STATEMENTS 

 

J. 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). 

K. 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 and burial benefits, post-retirement 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. 

The Department of Veterans Affairs (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 nonexchange transaction and is not required to be recorded on 

the Balance Sheet. These benefits are expenses when benefits are paid rather than when employee services are rendered. 

The liabilities for Federal Employees’ Compensation Act (workers compensation) 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 

13—Federal Employee and Veteran Benefits Payable as prescribed by SFFAS No. 33. 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. 

L. Environmental and Disposal Liabilities 

Environmental and disposal liabilities are recorded at the estimated current cost of removing, containing, treating, 

and/or disposing of radioactive waste, hazardous waste, chemical and nuclear weapons, as well as other environmental 

contaminations (including asbestos), assuming the use of current technology. 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. 

Remediation consists of removal, decontamination, decommissioning, site restoration, site monitoring, closure as well as 

post-closure cost, treatment, and/or safe containment. 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. 

M. Insurance and Guarantee Program Liabilities 

Insurance and guarantee programs (such as Deposit Insurance Fund Program, Federal Crop Insurance Program and 

Benefit Pension Plans Program) provide protection to individuals or entities against specified risks except for those 

specifically covered by federal employee and veteran benefits, social insurance, and loan guarantee 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 and/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 actuarial present value. 
 NOTES TO THE FINANCIAL STATEMENTS 61 

 

N. 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 expenses are not accrued in the Statements of Net Cost or recognized as 

liabilities on the Balance Sheet. However, deferred maintenance and repairs information is disclosed in the unaudited 

Required Supplementary Information section of this report. 

O. Contingent Liabilities 

Liabilities for contingencies are recognized on the Balance Sheet when both: 

x A past transaction or event has occurred, and 

x 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 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 20—Contingencies. 

P. 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 21—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. 

Q. 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 as of the reporting date. No liability is recognized for 

future benefit payments not yet due. For further information, see the unaudited RSI—Social Insurance section, and Note 24—

Social Insurance. 

R. 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: 

x 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; 

x 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 

x 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 22—Funds from Dedicated Collections. 
62 NOTES TO THE FINANCIAL STATEMENTS 

 

S. Related Party Transactions 

Federal Reserve System 

The Federal Reserve System (FR System) was created by Congress under the Federal Reserve Act of 1913. The FR 

System consists of the Federal Reserve Board of Governors (Board), the Federal Open Market Committee (FOMC), and the 

Federal Reserve Banks (FRBs). 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 payments systems (including large-dollar transfers of funds, 

Automated Clearing House operations, as well as check processing and settlement), and providing certain financial services 

to federal agencies and fiscal principals. 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 not included in the federal budget. It is 

considered an independent central bank, and its decisions are not ratified by the executive branch of the federal government. 

The government interacts with the FRBs in a variety of ways, including the following: 

x 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; 

x The FRBs hold Treasury and other federal securities in the FRBs’ System Open Market Account (SOMA) for the 

purpose of conducting monetary policy (Note 12—Federal Debt Securities Held by the Public and Accrued 

Interest); 

x The FRBs hold gold certificates issued by the government in which the certificates are collateralized by gold (Note 

2—Cash and Other Monetary Assets); 

x The FRBs hold Special Drawing Rights (SDR) certificates issued by the government which are collateralized by 

SDRs (see Note 2—Cash and Other Monetary Assets); and, 

x 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. 

The government also consults with the FR System on matters affecting the economy and certain financial stability 

activities (Note 4—Loans Receivable and Loan Guarantee Liabilities, Net, and Note 5—Troubled Asset Relief Program 

(TARP)—Direct Loans and Equity Investments, Net). The above financial activities involving the government are accounted 

for and disclosed in the government consolidated financial statements. In accordance with SFFAC No. 2, Entity and Display, 

the FR System’s assets, liabilities, and operations are not consolidated into the government’s financial statements, and are, 

therefore, not a part of the reporting entity. 

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, 

plus 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 Governors 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, other federal agencies, and fiscal principals. 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. 
 NOTES TO THE FINANCIAL STATEMENTS 63 

 

Federal Reserve System Assets and Liabilities 

The FRBs hold Treasury and other securities in the SOMA for the purpose of conducting monetary policy. Treasury 

securities held by the FRBs totaled $1,919.4 billion and $1,930.2 billion at September 30, 2014 and 2013, respectively (Note 

12—Federal Debt Securities Held by the Public and Accrued Interest). These assets are generally subject to the same market 

(principally interest-rate) and credit risks as other financial instruments. In the open market, the FR System purchases and 

sells Treasury securities as a mechanism for controlling the money supply. 

The FRBs have deposit liabilities with Treasury and depository institutions. The FRBs issue Federal Reserve Notes, the 

circulating currency of the United States, which are collateralized by the Treasury securities and other assets held by the 

FRBs. Financial and other information concerning the FR System, including financial statements for the Board and the FRBs, 

may be obtained at http://www.federalreserve.gov. 

FRB Residual Earnings Transferred to the Government 

FRBs generate income from interest earned on securities, reimbursable services provided to federal agencies, 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 reservation of an amount necessary to equate surplus with paid-in capital. These 

residual earnings may vary due to, among other things, changes in the SOMA balance levels that may occur in conducting 

monetary policy. The FRB residual earnings of $99.2 billion and $75.8 billion for fiscal years ended September 30, 2014 and 

2013, 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 Treasury General Fund as of September 30, but not collected by the Treasury General Fund until after the end of the 

month. As of September 30, 2014 and 2013, interest receivable on FRB’s residual earnings are $1.7 billion and $3.1 billion, 

respectively (Note 3—Accounts and Taxes Receivables, Net). 

Other Related Parties 

The federal government, through the Federal Housing Finance Agency (FHFA) is the conservator for Fannie Mae and 

Freddie Mac. See Note 9—Investments in Government-Sponsored Enterprises. 

The Secretary of Transportation has possession of two long term notes with the National Railroad Passenger Service 

Corporation (more commonly referred to as Amtrak). The first note is for $4 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 Department of Transportation (DOT) does not record the notes in its financial statements 

because the present value of the notes was immaterial at September 30, 2014. These notes were discounted according to rates 

published in OMB M-14-5, Appendix C, Discount Rates for Cost Effectiveness Lease Purchase and Related Analyses with 

maturity dates of 2975 and 2082. 

In addition, DOT has possession of all the preferred stock shares (109.4 million) of Amtrak. Congress, through DOT, has 

continued to fund Amtrak since approximately 1972; originally through grants, then, beginning in 1981, through the purchase 

of preferred stock, and then through grants again after 1997. The Amtrak Reform and Accountability Act of 1997 changed the 

structure of the preferred stock by rescinding the voting rights with respect to the election of the Board of Directors and by 

eliminating the preferred stock’s liquidation preference over the common stock. The Act also eliminated further issuance to 

DOT of preferred stock. DOT does not record 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. 

Amtrak is not a department, agency, or instrumentality of the government or DOT. The nine members of Amtrak’s 

Board of Directors are appointed by the President of the United States and are subject to confirmation by the U.S. Senate. 

Once appointed, Board members, as a whole, act independently without the consent of the government or any of its officers 

to set Amtrak policy, determine its budget and decide operational issues. The Secretary of Transportation is statutorily 

appointed to the nine-member Board. Traditionally, the Secretary of Transportation has designated the Administrator of the 

Federal Railroad Administration to represent the Secretary at Board meetings. 

The Export-Import Bank of the United States (Ex-Im Bank) has contractual agreements with the Private Export Funding 

Corporation (PEFCO). PEFCO, which is owned by a consortium of private-sector banks, industrial companies, and financial 

services institutions, makes medium-term and long-term fixed-rate and variable-rate loans to foreign borrowers to purchase 

U.S.-made equipment when such loans are not available from traditional private sector lenders on competitive terms. Ex-Im 

Bank’s credit and guarantee agreement with PEFCO extends through December 31, 2020. Through its contractual 
64 NOTES TO THE FINANCIAL STATEMENTS 

 

agreements with PEFCO, Ex-Im Bank exercises a broad measure of supervision over PEFCO’s major financial management 

decisions, including approval of both the terms of individual loan commitments and the terms of PEFCO’s long-term debt 

issues, and is entitled to representation at all meetings of PEFCO’s board of directors, advisory board, and its exporters’ 

council. 

The contractual agreements provide that Ex-Im Bank will (1) guarantee the due and punctual payment of principal, as 

well as interest on export loans made by PEFCO, and (2) guarantee the due and punctual payment of interest on PEFCO’s 

long-term secured debt obligations when requested by PEFCO. Related to the amounts for Ex-Im Bank as shown in Note 4—

Loans Receivable and Loan Guarantee Liabilities, Net, these guarantees to PEFCO, aggregating $10.0 billion and $7.5 billion 

at September 30, 2014, and 2013, respectively, are included within the principal amounts guaranteed by the United States. 

The allowance related to these transactions is included within the guaranteed loan liability. Ex-Im Bank received fees for the 

agreements totaling $0.04 billion for both fiscal years 2014 and 2013, which are included as earned revenue on the 

Statements of Net Cost. 

T. 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: 

x Unmatched intragovernmental transactions and balances between federal agencies; 

x Unmatched intragovernmental transactions and balances between federal agencies and General Fund; and 

x Errors and restatements in federal agencies’ reporting. 

Refer to the Other Information (unaudited) —Unmatched Transactions and Balances for detailed information. 

U. Reclassifications 

Certain amounts were reclassified in fiscal year 2014 and affect the fiscal year 2013 Statement of Net Cost, 

Reconciliations of Net Operating Cost and Unified Budget Deficit, Statement of Changes in Cash Balance from Unified 

Budget and Other Activities, and Notes to the Balance Sheet – Other Liabilities and Insurance Guarantee Program Liabilities. 

For fiscal year 2014, Millennium Challenge Corporation (MCC) and Overseas Private Investment Corporation (OPIC), which 

were previously identified as non-significant entities, are now being reported as significant entities required to provide 

audited fiscal year end data to prepare the Financial Report. They both are now separately identified on the Statement of Net 

Cost and their fiscal year 2013 net cost amounts were reclassified out of “All other entities.” 

In previous years only TARP year end re-estimates were reflected as a separate line on the Reconciliation of Net 

Operating Cost and Unified Budget Deficit and the Statement of Changes in Cash Balance from Unified Budget and Other 

Activities. These statements now reflect all agencies year end credit reform subsidy re-estimates as a separate line, thus the

fiscal year 2013 amounts for the other agencies were reclassified out of the “Other” line. 

It has been determined that for fiscal year 2013 Pension Benefit Guaranty Corporation (PBGC) obligations for future 

financial assistance to multiemployer plans for $9.9 billion be reclassified from Other Liabilities to Insurance and Guarantee 

Programs. PBGC will report in future years obligations to the financial assistance multiemployer plans in Insurance and 

Guarantee Programs.

V. Restatements

There were no material restatements to fiscal year 2013 reported amounts. 
 NOTES TO THE FINANCIAL STATEMENTS 65 

 

W. 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 23—Fiduciary Activities, for further information. 

X. 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 include 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 re-estimates 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. Additionally, all TARP credit activity, 

including investments in common and preferred stock, as well as loans and asset guarantees, are also subject to credit reform 

accounting (see Note 5—TARP Direct Loans and Equity Investments, Net). 

The forecasted future cashflows used to determine credit reform amounts as of September 30, 2014, and 2013, 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. Forecasts of 

future financial results have inherent uncertainty and the TARP Direct Loans and Equity Investments, Net line item as of 

September 30, 2014, and 2013, is reflective of relatively illiquid, troubled assets whose values are particularly sensitive to 

future economic conditions and other assumptions. 

The GSE senior preferred stock purchase agreements (SPSPAs) provide that the government will fund the GSEs, if 

needed at the end of any quarter. The FHFA, acting as the conservator, determines whether the liabilities of either GSE, 

individually, exceed its respective assets. The annual valuation performed as of September 30 on the 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. A key input into the investment valuation for the senior 

preferred stock is the present value of the projected quarterly dividend payments, and a key input for the warrants is the 

market value of the shares of common stock of the GSEs which are traded on the over-the-counter (OTC) Bulletin Board. 

Treasury performs annual calculations, as of September 30, to assess the need for recording an estimated liability in 

accordance with SFFAS No. 5, related to the government’s funding commitment to the GSEs under the SPSPAs. As part of 

the fiscal year 2014 assessment process, Treasury used 25-year financial forecasts prepared through year 2039 and 2038 in 

assessing if a contingent liability was required as of September 30, 2014 and 2013, respectively, to determine the implied 

amount of total liability. In fiscal year 2012, the SPSPAs were amended. For more detailed information on investments in 

GSEs and the amended SPSPAs, see Note 9—Investments in Government-Sponsored Enterprises. 

The government offers its employees pension and other post-employment retirement benefits, as well as life and health 

insurance. The Office of Personnel Management administers the largest civilian plan and the Department of Defense and 

Department of Veterans Affairs 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, and Federal Employees’ Compensation Act benefits are 

recorded at estimated present value of future benefits, less any estimated present value of future normal cost contributions. 

See Note—13 Federal Employee and Veteran Benefits Payable for additional information. 
66 NOTES TO THE FINANCIAL STATEMENTS 

 

Y. Credit Risk 

Credit risk is the potential, no matter how remote, for financial loss from a failure of a borrower or a counterparty to 

perform in accordance with underlying contractual obligations. The government takes on credit risk when it makes direct 

loans or 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, investments, loans, and asset guarantees of the TARP, guarantee of money market funds, and the Terrorism Risk 

Insurance Program. Except for the Terrorism Risk Insurance Program, these activities focus on the underlying problems in 

the credit markets, and the ongoing instability in those markets exposes the government to potential unknown 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. 
 NOTES TO THE FINANCIAL STATEMENTS 67 

 

Note 2. Cash and Other Monetary Assets 

 

 Cash and Other Monetary Assets as of September 30, 2014, and 2013 

 

 (In billions of dollars) 2014 2013

 

 Unrestricted cash: 

 Cash held by Treasury for Governmentwide operations ....................... 153.2 82.8 

 Other ...................................................................................................... 7.2 6.3 

 Restricted cash ................................................................................ 21.5 21.5 

 Total Cash ........................................................................................... 181.9 110.6 

 

 International Monetary assets .................................................................. 66.0 72.9 

 Gold and silver ......................................................................................... 11.1 11.1 

 Foreign Currency ..................................................................................... 5.9 11.7 

 Total cash and other monetary assets ................................................... 264.9 206.3 

 

Unrestricted cash includes cash held by Treasury for Governmentwide operations (Operating Cash) and all other 

unrestricted cash held by the federal agencies. Operating Cash represents balances from tax collections, other revenue, federal

debt receipts, and other various receipts net of cash outflows for budget outlays and other payments. Treasury checks 

outstanding are netted against Operating Cash until they are cleared by the Federal Reserve System. Other unrestricted cash 

not included in Treasury’s Operating Cash balance includes balances representing cash, cash equivalents, and other funds 

held by agencies, such as undeposited collections, deposits in transit, demand deposits, amounts held in trust, and imprest 

funds. Operating Cash held by the Treasury increased by $70.4 billion (an increase of approximately 85 percent) in fiscal 

year 2014 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 Executive Office of the President (EOP) Foreign Military Sales program. The 

Foreign Military Sales program included $20.5 billion and $20.6 billion as of September 30, 2014, and 2013, 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 United States 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 United States 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 United States to the IMF. The balance available under the letter of credit 

totaled $47.6 billion and $44.6 billion as of September 30, 2014, and 2013 respectively. The U.S. reserve position in the IMF 

has a U.S. dollar equivalent of $14.7 billion and $19.8 billion as of September 30, 2014, and 2013, 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 United States was the equivalent of 

$53.2 billion and $55.0 billion as of September 30, 2014, and 2013, 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 
68 NOTES TO THE FINANCIAL STATEMENTS 

 

determines when Treasury will issue or redeem SDRCs. SDRCs outstanding totaled $5.2 billion as of September 30, 2014, 

and 2013, and are included in Note 17—Other Liabilities. 

As of September 30, 2014, and 2013, other liabilities included $52.4 billion and $54.2 billion of interest-bearing 

liability to the IMF for SDR allocations. The SDR allocation item represents the cumulative total of SDRs distributed by the 

IMF to the United States in allocations that occurred in 1970, 1971, 1972, 1979, 1980, 1981, and 2009. The United States 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, 2014 and 2013. The market value of gold on the London Fixing was $1,217 and $1,327 per 

fine troy ounce as of September 30, 2014, and 2013, 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, 2014, and 2013. 

The market value of silver on the London Fixing was $17.11 and $21.68 per fine troy ounce as of September 30, 2014, and 

2013, respectively. Gold totaling $11.0 billion as of September 30, 2014, and 2013, 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, 2014, and 2013, which are included in Note 17—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 agencies as well as foreign banks. 
 NOTES TO THE FINANCIAL STATEMENTS 69 

 

Note 3. Accounts and Taxes Receivable, Net 

 

Accounts and Taxes Receivable as of September 30, 2014, and 2013 

(In billions of dollars) 2014 2013

 

 Accounts receivable: 

 Gross accounts receivable .................................................................... 87.0 89.1 

 Allowance for uncollectible accounts ..................................................... (26.0) (23.6)

 Accounts receivable, net ........................................................................ 61.0 65.5 

 

 Taxes receivable: 

 Gross taxes receivable .......................................................................... 161.7 164.0 

 Allowance for doubtful accounts ............................................................ (118.7) (126.3)

 Taxes receivable, net ............................................................................. 43.0 37.7 

 

 Total accounts and taxes receivable, net ............................................ 104.0 103.2 

 

Accounts receivable include related interest receivable of $5.0 billion and $8.1 billion as of September 30, 2014, and 

2013, respectively. 

Treasury comprises approximately 40.9 percent of the Government’s reported accounts and taxes receivable, net, as of 

September 30, 2014. Refer to the financial statements of the Department of the Treasury, the Social Security Administration, 

the Department of Health and Human Services, the Department of Defense, the Department of Homeland Security, the 

Pension Benefit Guaranty Corporation, the Department of Energy, the Department of Veterans Affairs, the Federal Deposit 

Insurance Corporation, the Department of the Interior, the Department of Housing and Urban Development, and the 

Department of Labor for details on gross accounts and taxes receivable and the related allowance for doubtful accounts. 

These agencies comprise 91.7 percent of the Government’s accounts and taxes receivable, net, of $104.0 billion as of 

September 30, 2014. 
70 NOTES TO THE FINANCIAL STATEMENTS 

 

Note 4. Loans Receivable and Loan Guarantee Liabilities, Net 

Direct Loan and Defaulted Guaranteed Loan Programs as of September 30, 2014, and 2013

Face Value of 

Loans

Outstanding

Long-term Cost 

of (Income 

from) Direct 

Loans and 

Defaulted 

Guaranteed 

Loans

Outstanding 

Loans

Receivable, Net 

Subsidy 

Expense

(Income) for the 

Fiscal Year 

(In billions of dollars) 2014 2013 2014 2013 2014 2013 2014 2013

 

Federal Direct Student Loans – 

Education............................... 731.2 613.9 (47.4) (65.3) 778.6 679.2 8.1 (39.7)

Federal Family Education Loans 

– Education............................ 139.8 143.6 (3.1) (2.1) 142.9 145.7 (2.0) (0.9)

Electric Loans – USDA............. 51.2 49.5 2.2 2.2 49.0 47.3 (0.1) 0.2

Rural Housing Services - USDA 31.9 31.8 3.6 3.4 28.3 28.4 0.2 0.4

Export-Import Bank Loans......... 22.9 19.7 3.4 3.0 19.5 16.7 (0.5) (0.9)

International Monetary Fund 

Program – Treasury.................. 16.2 15.8 0.7 0.2 15.5 15.6 0.2 - 

Housing and Urban 

Development Loans................. 18.1 15.7 5.5 3.9 12.6 11.8 (0.6) (0.3)

Water and Environmental Loans 

– USDA................................. 12.6 12.3 0.3 0.2 12.3 12.1 0.1 (0.1)

All other programs.................. 81.8 82.9 17.0 17.4 64.8 65.5 0.7 2.9

Total direct loans and defaulted 

guaranteed loans................... 1,105.7 985.2 (17.8) (37.1) 1,123.5 1,022.3 6.1 (38.4)

 
 NOTES TO THE FINANCIAL STATEMENTS 71 

 

Loan Guarantees as of September 30, 2014, and 2013

 

 Principal Amount of 

Loans Under 

Guarantee 

Principal Amount 

Guaranteed by the 

United States 

Loan Guarantee 

Liabilities 

Subsidy Expense 

(Income) for the 

Fiscal Year 

 (In billions of dollars) 2014 2013 2014 2013 2014 2013 2014 2013

Federal Housing Administration 

Loans – HUD......................... 1,290.6 1,282.9 1,185.7 1,191.9 33.5 41.5 (10.5) (18.4)

Veterans Housing Benefit 

Programs – VA....................... 389.3 339.2 101.5 89.2 8.9 7.9 0.4 1.5

Rural Housing Services - USDA 102.9 90.2 92.6 82.5 4.5 3.8 0.7 0.6

Small Business Loans – SBA.... 99.0 93.1 83.5 79.1 2.0 3.0 (1.3) (0.5)

Export-Import Bank Guarantees 78.1 79.5 78.1 79.5 1.6 1.6 (0.3) (0.3)

Israel Loan Guarantee Program – 

AID....................................... 10.5 10.9 10.5 10.9 1.0 1.2 - (0.2)

Federal Family Education Loans – 

Education.............................. 241.6 264.0 236.5 258.4 - - (4.6) (7.8)

All other guaranteed loan 

programs.............................. 

 42.8 47.4 38.3 42.9 1.3 0.2 0.7 0.1

Total loan guarantees.............. 2,254.8 2,207.2 1,826.7 1,834.4 52.8 59.2 (14.9) (25.0)

The Government has two types of loan programs: direct loans and loan guarantees. One major type of loan is direct 

loans such as the Department of Education’s (Education) Federal Direct Student Loans. The second type is loan guarantee 

programs, such as the Department of Housing and Urban Development’s (HUD’s) Federal Housing Administration 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 as of September 30. The amount of the long-term cost of pre1992 direct loans and loan guarantees equals the allowance for uncollectible 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, re-estimates, 

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 United States Department of Agriculture (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 re-estimates as 
72 NOTES TO THE FINANCIAL STATEMENTS 

 

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.

Loan Programs 

The majority of the loan programs are provided by Education, HUD, USDA, Treasury, Small Business Administration 

(SBA), VA, Export-Import Bank and United States Agency for International Development (USAID). For significant detailed 

information regarding the direct and guaranteed loan programs listed in the tables above, please refer to the financial 

statements of the agencies. 

Education has two major loan programs, authorized by Title IV of the Higher Education Act of 1965 (HEA). The first 

program is the William D. Ford Federal Direct Student Loan Program, (referred to as the Direct Loan Program) that was 

established in fiscal year 1994. The Direct Loan Program offers 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 $134.0 billion in 

Direct Loans to eligible borrowers in fiscal year 2014 and approximately $130.0 billion in fiscal year 2013. The second 

program is the Federal Family Education Loan (FFEL) Program. This program was established in fiscal year 1965, and is a 

guaranteed loan program. Like the William D. Ford Federal Direct Student Loan Program, it offers 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 (Public Law 111-152), eliminated the authority to guarantee new FFEL after June 30, 2010. 

During fiscal year 2014, Education net loans receivable increased by $99.4 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 Federal Housing Administration (FHA) provides mortgage insurance to encourage lenders to make credit 

available to expand home ownership. FHA serves many borrowers that the conventional market does not serve adequately. 

This includes first-time homebuyers, minorities, low-income, and other underserved households to realize the benefit of 

home ownership. Borrowers obtain an FHA insured mortgage and pay an upfront premium as well as an annual premium to 

FHA. The proceeds from those premiums are used to fund FHA program costs, including claims on defaulted mortgages and 

holding costs, property management fees, property sales, and other associated costs. The possibility of a sizable volume of 

delinquencies remains a significant risk for the housing market and for FHA in the near term. The number of FHA mortgages 

has risen dramatically. FHA has taken a number of steps to help improve its financial health and reduce its market share, 

including fee increases and underwriting changes. 

In 2009, Congress passed the Supplemental Appropriations Act of 2009 which authorized an increase in the U.S. quota 

in the IMF, as well as an increase in U.S. participation in the New Arrangements to Borrow, one of the IMF’s supplemental 

borrowing arrangements. The legislation applied FCRA to both program increases and, thus, the program increases are 

treated as direct loans to the IMF. 

USDA offers direct and guaranteed loans through credit programs in the Farm and Foreign Agricultural Services 

(FFAS) mission area through the Farm Service Agency (FSA), and the Commodity Credit Corporation (CCC), and in the 

Rural Development (RD) mission area. The FFAS delivers commodity, credit, conservation, disaster, and emergency 

assistance programs that help strengthen and stabilize the agricultural economy. The FSA offers direct and guaranteed 

loans to farmers who are temporarily unable to obtain private, commercial credit. Through this supervised credit offered 

by FSA, the goal is to graduate its borrowers to commercial credit. The CCC offers both credit guarantee and direct credit 

programs for buyers of U.S. exports, suppliers, and sovereign countries in need of food assistance. The RD provides 

affordable housing and essential community facilities to rural communities through its rural housing loan and grant 

programs. The Rural Utilities Program helps to improve the quality of life in rural America through a variety of loan 

programs for electric energy, telecommunications, and water and environmental projects. 

The Export-Import Bank aids in financing and promoting U.S. exports. The average repayment term for these loans is 

approximately seven years. 

The SBA’s Disaster Assistance Loan Program makes direct loans to disaster victims primarily for homes and personal 

property. 

VA operates the following direct loan and loan guaranty programs: Vocational Rehabilitation and Employment, Home 

Loans, and Insurance. The VA Home Loans program is the largest of the VA loan programs. The Home Loan 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 2014, the VA principal amount 

of loans under guarantee increased by $50.1 billion. This increase was primarily due to new loans under guarantee with a 

principal totaling $86.8 billion, partially offset by guaranteed loan terminations with a principal amount of $36.7 billion. 
 NOTES TO THE FINANCIAL STATEMENTS 73 

 

USAID’s Israel Loan Guarantee Program guarantees the repayment of loans made from commercial sources that cover 

the costs for immigrants resettling to Israel from the former Soviet Union, Ethiopia, and other countries. As of fiscal year 

2014, $6.8 billion in loan guarantees remains outstanding. The program also guarantees the repayment of loans that support 

Israel’s comprehensive economic plan to overcome economic difficulties and create conditions for higher and sustainable 

growth, of which $3.7 billion in loan guarantees remains outstanding as of September 30, 2014. 
74 NOTES TO THE FINANCIAL STATEMENTS 

 

Note 5. Troubled Asset Relief Program (TARP) — Direct Loans 

and Equity Investments, Net 

The TARP was authorized by the Emergency Economic Stabilization Act of 2008 (EESA). This Act gave the Secretary 

of the Treasury broad flexible authority to establish the TARP to purchase and guarantee mortgages, mortgage related 

securities, and other troubled assets from financial institutions. This permitted the Secretary of the Treasury to inject capital 

into, and receive equity interests in, banks and other financial institutions. Treasury established several programs under the 

TARP designed to help stabilize the financial system, restore the flow of credit to consumers and businesses, and help 

prevent avoidable foreclosures. Under the TARP programs, Treasury made direct loans, equity investments, and entered into 

other credit programs. This authority to make new commitments to purchase or guarantee troubled assets expired in October 

2010. Since then, the Department of Treasury has focused its efforts on winding down the various TARP programs through 

recoveries of investments in the form of repayments, sales, dividends, interest, and other income. The Treasury also continues 

to implement the housing programs under TARP to help struggling homeowners avoid foreclosure. 

The following table lists the TARP programs and types:

Program Program Type 

 

 Automotive Industry Financing Program Equity Investment and Direct Loan 

 Capital Purchase Program Equity Investments/Subordinated Debentures 

 Other Investment Programs Equity Investments/Subordinated Debentures/ 

 Direct Loans 

 Housing Programs under TARP* Expenditure and Loss Sharing 

 

*Housing Programs under TARP are not designed to recoup money spent on loan modifications or payments on the loss sharing agreement. As such, 

these programs do not include direct loans and equity investments as well as the related amounts are not included in this line item.

 
 NOTES TO THE FINANCIAL STATEMENTS 75 

 

 The table below is a summary of TARP - Direct Loans and Equity Investments, Net of Allowance

 

Troubled Asset Relief Program Direct Loans and Equity Investments

 

Direct Loans 

and 

Equity 

Investments 

Subsidy 

Cost

Allowance 

Net Direct Loans

and 

Equity 

Investments 

Subsidy 

Expense 

(Income) for the 

Fiscal Year 

 (In billions of dollars) 2014 2013 2014 2013 2014 2013 2014 2013 

 

Automotive Industry Financing 

Program ...................................... 1.8 19.9 (0.3) (4.3) 1.5 15.6 (1.4) (10.2)

Capital Purchase Program .......... 0.6 3.1 (0.3) (1.3) 0.3 1.8 (0.1) (1.1)

Other Investment Programs ........ 0.5 0.5 (0.1) - 0.4 0.5 - (0.6)

Total Troubled Asset Relief 

Program 2.9 23.5 (0.7) (5.6) 2.2 17.9 (1.5) (11.9)

 

Automotive Industry Financing Program 

The Automotive Industry Financing Program was designed to help prevent a significant disruption of the American 

automotive industry, which could have had a negative effect on the economy of the United States. The various activities 

undertaken by Treasury in the automotive industry include: 

 

General Motors (GM)—In fiscal year 2009, Treasury provided $51.0 billion to General Motors Corporation (Old GM) 

through various loan agreements while Old GM was in bankruptcy. During fiscal year 2009, General Motors Company (New 

GM) was created and, through various sales and restructuring of its investment, by September 30, 2012, Treasury held 500 

million shares of New GM common stock, or 31.9 percent of New GM’s total outstanding common shares. All 500 million 

shares of the New GM common stock were sold during the fiscal years 2013 and 2014. Treasury sold 399 million shares in 

fiscal year 2013 for $12.0 billion resulting in net proceeds less than cost of $5.4 billion. The remaining 101 million shares, 

valued at $3.6 billion at September 30, 2013, were sold in fiscal year 2014 for $3.8 billion resulting in net proceeds less than 

cost of $639 million. 

Ally Financial Inc. (formerly known as GMAC Inc.)—Between December 2008 and December 2009, Treasury invested a 

total of $16.3 billion in GMAC Inc. to help support its ability to originate new loans to GM and Chrysler dealers and 

consumers, and to help address GMAC’s capital needs. GMAC changed its corporate name to Ally Financial, Inc. (Ally) in 

May 2010. As of September 30, 2013, Treasury held 981,971 shares of Ally’s outstanding common stock (or 73.8 percent) 

and 119 million shares of Series F-2 Mandatorily Convertible Preferred Securities, with a stated dividend rate of 9.0 percent. 

Per an August 2013 agreement, Ally repurchased all the Series F-2 from Treasury in November 2013 for $5.2 billion and 

Treasury received an additional $0.7 billion for the elimination of certain rights under the original agreement. During fiscal 

year 2014, Treasury sold 410,000 (pre-split) shares of Ally common stock in January 2014, and an additional 113 million 

(post-split after considering a 310-for-1 common stock split of Ally common shares in April 2014) shares of Ally common, 

for a combined total of $5.8 billion in cash proceeds, resulting in net proceeds less than cost of $1.4 billion. Treasury’s 

remaining investment in Ally at September 30, 2014 consisted of 64.1 million shares of common stock, representing 13.4 

percent of Ally’s outstanding common stock. As of September 30, 2014 and 2013, Treasury’s investment was valued at $1.5 

billion and $12.0 billion, respectively. 

Capital Purchase Program 

In October 2008, Treasury began implementation of the Capital Purchase Program (CPP), designed to help stabilize the 

financial system by assisting in building the capital base of certain viable U.S. financial institutions to increase the capacity 

of those institutions to lend to businesses and consumers as well as support the economy. Under this program, Treasury 

purchased senior perpetual preferred stock with a stated dividend rate of 5.0 percent through year five, increasing to 9.0 
76 NOTES TO THE FINANCIAL STATEMENTS 

 

percent in subsequent years, from qualifying U.S. controlled banks, savings associations, plus certain bank and savings and 

loan holding companies (Qualified Financial Institution or QFI). The dividends are cumulative for bank holding companies 

as well as subsidiaries of bank holding companies and non-cumulative for others. These are payable when and if declared by 

the institution’s board of directors. In addition to the senior preferred stock, Treasury received warrants, with a ten-year term, 

from public QFIs to purchase shares of common stock. Treasury invested a total of $204.9 billion under the CPP program. 

For fiscal years 2014 and 2013, repayments and sales totaled $1.5 billion and $4.8 billion, respectively. As of September 30, 

2014, and 2013, Treasury’s investment was valued at $0.3 billion and $1.8 billion, respectively. 

Other Investment Programs 

Treasury implemented the Community Development Capital Initiative (CDCI) program under TARP to help unlock the 

flow of credit to consumers and small businesses. The CDCI provided additional low-cost capital to Community 

Development Financial Institutions (CDFI) to encourage more lending to small businesses. Under the terms of the initiatives, 

Treasury purchased senior preferred stock (or subordinated debt) from eligible CDFI financial institutions with an initial 

dividend rate of 2.0 percent, increasing up to a maximum rate of 9.0 percent after eight years. Treasury invested a total of 

$0.6 billion in 84 institutions under the CDCI. This program is included in the “All other” row of the table within this note. 

Housing Programs under TARP 

Housing programs under TARP are not designed to recoup money spent on loan modifications or payments on the loss 

sharing agreement. As such, these programs do not include direct loans and equity investments as well as the related amounts 

are not included in this line item. 

Housing programs under TARP are designed to help prevent avoidable foreclosures. These programs provide incentives 

for mortgage modifications and other types of assistance in order to enable homeowners who are experiencing financial 

hardships to remain in their homes until their financial position improves or they relocate to more sustainable living 

situations. 

As of September 30, 2014, and 2013, Treasury had committed up to $38.5 billion for these programs. Payments made 

under the housing programs under TARP for fiscal years 2014 and 2013, amounted to $4.3 billion and $3.9 billion, 

respectively. As of September 30, 2014, Treasury had $24.4 billion in total commitments outstanding for future payments 

under the housing programs. 

For more details on the TARP, please see the Treasury’s Annual Financial Report. 
 NOTES TO THE FINANCIAL STATEMENTS 77 

 

Note 6. Inventories and Related Property, Net

Inventories and Related Property, Net as of September 30, 2014, and 2013

Defense

 

All

Others Total Defense

 

All

Others Total 

 (In billions of dollars) 2014 2013 

 

Inventory purchased for resale ................................. 63.2 0.4 63.6 57.1 0.5 57.6 

Inventory and operating material and supplies 

held for repair ........................................................ 60.8 1.4 62.2 59.6 1.5 61.1 

Inventory—excess, obsolete, and unserviceable ..... 0.5 - 0.5 7.0 - 7.0 

Operating materials and supplies held for use ......... 138.5 3.5 142.0 142.8 3.5 146.3 

Operating materials and supplies held in 

reserve for future use ............................................ - 0.2 0.2 - 0.2 0.2 

Operating materials and supplies—excess,

obsolete, and unserviceable .................................. 2.4 - 2.4 2.1 - 2.1 

Stockpile materials ................................................... 0.3 50.8 51.1 0.1 50.9 51.0 

Stockpile materials held for sale .............................. 0.2 0.1 0.3 0.4 0.1 0.5 

Other related property .............................................. 1.5 1.1 2.6 1.5 1.0 2.5 

Allowance for loss .................................................... (5.9) (0.6) (6.5) (16.6) (0.6) (17.2)

Total inventories and related property, net ............ 261.5 56.9 318.4 254.0 57.1 311.1 

 

Inventory purchased for resale is the cost or value of tangible personal property purchased by an agency for resale. As 

of September 30, 2014, DOD values approximately 87 percent of its resale inventory using the moving average cost (MAC) 

method. An additional 11 percent (fuel inventory) is reported using the first-in-first-out method. DOD reports the remaining 2 

percent of resale inventories at an approximation of historical cost using LAC adjusted for holding gains and losses. The 

LAC method is used because DOD’s legacy inventory systems do not maintain historical cost data. DOD developed a 

methodology to determine the net realizable value of inventory-excess, obsolete, and unserviceable that resulted in a major 

decrease in the amount reported for fiscal year 2014. Please refer to the individual financial statements of DOD for 

significant detailed information regarding its inventories. 

Inventory and operating materials and supplies held for repair are damaged inventory that require repair to make them 

suitable for sale (inventory) or is more economical to repair than to dispose of (operating materials and supplies). Excess, 

obsolete, and unserviceable inventory is reported at net realizable value. Inventory—excess, obsolete, and unserviceable 

consists of: 

x Excess inventory that exceeds the demand expected in the normal course of operations and which does not meet 

management’s criteria to be held in reserve for future sale. 

x Obsolete inventory that is no longer needed due to changes in technology, laws, customs, or operations. 

x Unserviceable inventory that is damaged beyond economic repair. 

Operating materials and supplies held for use are tangible personal property to be consumed in normal operations. 

Operating materials and supplies held in reserve for future use are materials retained because they are not readily available in 

the market or because they will not be used in the normal course of operations, but there is more than a remote chance they 
78 NOTES TO THE FINANCIAL STATEMENTS 

 

will eventually be needed. DOD, which accounts for most of the reported operating materials and supplies held for use, uses 

LAC, MAC, and Standard Price and expenses a significant amount when purchased instead of when consumed. 

Operating materials and supplies—excess, obsolete, and unserviceable consists of: 

x Excess operating materials and supplies are materials that exceed the demand expected in the normal course of 

operations, and do not meet management’s criteria to be held in reserve for future use. 

x Obsolete operating materials and supplies are materials no longer needed due to changes in technology, laws, customs, or 

operations. 

x Unserviceable operating materials and supplies are materials damaged beyond economic repair. 

DOD, which accounts for most of the reported excess, obsolete, and unserviceable operating materials and supplies, 

revalues it to a net realizable value of zero through the allowance account. Please refer to the individual financial statements 

of DOD for significant detailed information regarding operating materials and supplies. Stockpile materials include strategic 

and critical materials held in reserve for use in national defense, conservation, or national emergencies due to statutory 

requirements; for example, nuclear materials and oil, as well as stockpile materials that are authorized to be sold. The 

majority of the amount reported by DOD is stockpile materials held for sale. The amount reported by others is stockpile 

materials held in reserve, with the majority of it being reported by the Department of Energy (DOE). Please refer to their 

financial statements for more information on stockpile materials. 

Other related property consists of the following: 

x Commodities include items of commerce or trade that have an exchange value used to stabilize or support market 

prices. Please refer to the financial statements of the USDA for detailed information regarding commodities. 

x Seized monetary instruments are comprised only of monetary instruments that are awaiting judgment to determine 

ownership. The related liability is included in other liabilities. Other property seized by the Government, such as 

real property and tangible personal property, is not considered a Government asset. It is accounted for in agency 

property-management records until the property is forfeited, returned, or otherwise liquidated. Please refer to the 

financial statements of the Department of Justice (DOJ), Treasury, and the Department of Homeland Security 

(DHS) for detailed information regarding seized property. 

x Forfeited property is comprised of monetary instruments, intangible property, real property, and tangible personal 

property acquired through forfeiture proceedings; property acquired by the Government to satisfy a tax liability; 

and/or unclaimed/abandoned merchandise. Please refer to the financial statements of DOJ, Treasury, and DHS for 

detailed information regarding forfeited property. 

x Foreclosed property is comprised of assets received in satisfaction of a loan receivable or as a result of payment of 

a claim under a guaranteed or insured loan (excluding commodities acquired under price support programs). All 

properties included in foreclosed property are assumed to be held for sale. Please refer to the financial statements of 

USDA and HUD for detailed information regarding foreclosed property. 
 NOTES TO THE FINANCIAL STATEMENTS 79 

 

Note 7. Property, Plant, and Equipment, Net

Property, Plant, and Equipment as of September 30, 2014

Accumulated

Depreciation/

Cost Amortization Net

 

(In billions of dollars) Defense

All

Others Defense

All

Others Defense

All

Others

Buildings, structures, and facilities ............................. 271.7 259.2 130.7 137.3 141.0 121.9 

Furniture, fixtures, and equipment ............................. 992.0 166.2 571.6 105.4 420.4 60.8 

Construction in progress ............................................ 42.1 41.3 N/A N/A 42.1 41.3 

Land ........................................................................... 10.8 12.6 N/A N/A 10.8 12.6 

Internal use software .................................................. 11.8 28.5 8.4 16.4 3.4 12.1 

Assets under capital lease ......................................... 0.6 3.3 0.5 1.7 0.1 1.6 

Leasehold improvements ........................................... 0.5 9.4 0.2 5.0 0.3 4.4 

Other property, plant, and equipment ........................ 0.8 9.5 - 4.8 0.8 4.7 

Subtotal ................................................................... 1,330.3 530.0 711.4 270.6 618.9 259.4 

 Total property, plant, and equipment, net ............. 1,860.3 982.0 878.3 

Property, Plant, and Equipment as of September 30, 2013

Accumulated

Depreciation/

Cost Amortization Net

 

(In billions of dollars) Defense

All

Others Defense

All

Others Defense

All

Others

Buildings, structures, and facilities ............................. 269.8 249.7 127.9 130.0 141.9 119.7

Furniture, fixtures, and equipment ............................. 983.6 165.1 547.5 102.5 436.1 62.6

Construction in progress ............................................ 46.6 41.6 N/A N/A 46.6 41.6

Land ........................................................................... 10.8 12.5 N/A N/A 10.8 12.5

Internal use software .................................................. 11.0 25.0 8.0 14.2 3.0 10.8

Assets under capital lease ......................................... 0.6 3.3 0.4 1.7 0.2 1.6

Leasehold improvements ........................................... 0.4 8.6 0.2 4.5 0.2 4.1

Other property, plant, and equipment ........................ 1.0 7.6 - 3.6 1.0 4.0

Subtotal ................................................................... 1,323.8 513.4 684.0 256.5 639.8 256.9

 Total property, plant, and equipment, net ............. 1,837.2 940.5 896.7

 
80 NOTES TO THE FINANCIAL STATEMENTS 

 

See Note 25—Stewardship Land and Heritage Assets for additional information on multi-use heritage assets. 

DOD comprises approximately 70.5 percent of the Government’s reported property, plant, and equipment, net, as of 

September 30, 2014. Refer to the financial statements of DOD, DOE, the Tennessee Valley Authority (TVA), GSA, VA, the 

Department of Interior (DOI), DHS, and the Department of State, for detailed information on the useful lives and related 

capitalization thresholds for property, plant, and equipment. These agencies comprise 90.4 percent of the Government’s total 

cost of property, plant, and equipment net of $878.3 billion as of September 30, 2014. 
 NOTES TO THE FINANCIAL STATEMENTS 81 

 

Note 8. Debt and Equity Securities 

 

Debt and Equity Securities as of September 30, 2014 

By Category 

 Held-To-Maturity Available-for-Sale Trading Securities 

 Unamor- Unreal- Unreal-

 tized Net ized ized

 Cost Premium/ Invest- Cost Gain Fair Cost Gain Fair

(In billions of dollars) Basis Discount ment Basis (Loss) Value Basis (Loss) Value Total

 

 Debt Securities: 

 Non-U.S. Government ........... 0.2 - 0.2 19.0 (1.1) 17.9 11.4 (0.1) 11.3 29.4

 Commercial ........................... - - - - - - - - - - 

 Mortgage/asset backed ......... 0.3 - 0.3 - - - 3.0 - 3.0 3.3

 Corporate and other bonds ... - - - - - - 10.6 0.6 11.2 11.2

 All other debt securities ......... - - - - - - 2.6 (0.1) 2.5 2.5

 

 Equity Securities: 

 Common stocks ..................... - - - - - - 2.0 0.6 2.6 2.6

 Unit trust ................................ - - - - - - 15.3 5.7 21.0 21.0

 All other equity securities ...... 0.1 - 0.1 - - - 2.3 (0.2) 2.1 2.2

 Other ...................................... 3.6 - 3.6 - - - 14.2 0.2 14.4 18.0

 Total debt and equity 

 securities categorized 

 as held-to-maturity, 

 available-for-sale or 

 trading ............................ 4.2 - 4.2 19.0 (1.1) 17.9 61.4 6.7 68.1 90.2

 Total RRB debt and 

 equity securities .............. 25.2

 Total debt and equity 

 securities ......................... 115.4

 
82 NOTES TO THE FINANCIAL STATEMENTS 

 

 

Debt and Equity Securities as of September 30, 2013 

By Category 

 Held-To-Maturity Available-for-Sale Trading Securities 

 Unamor- Unreal- Unreal- 

 tized Net ized ized

 Cost Premium/ Invest- Cost Gain Fair Cost Gain Fair

(In billions of dollars) Basis Discount ment Basis (Loss) Value Basis (Loss) Value Total

 

 Debt securities: 

 Non-U.S. Government .......... 0.2 - 0.2 14.2 (0.1) 14.1 10.1 (0.1) 10.0 24.3

 Commercial .......................... - - - - - - 0.1 - 0.1 0.1

 Mortgage/asset backed ........ - - - - - - 3.0 0.1 3.1 3.1

 Corporate and other bonds .. - - - - - - 10.0 0.4 10.4 10.4

 All other debt securities ........ - - - - - - 2.0 (0.1) 1.9 1.9

 

 Equity securities: 

 Common stocks .................... - - - - - - 2.2 0.6 2.8 2.8

 Unit trust ............................... - - - - - - 12.0 7.1 19.1 19.1

 All other equity securities ..... 0.1 - 0.1 - - - 2.8 0.1 2.9 3.0

 Other ..................................... 3.7 - 3.7 - - - 15.1 - 15.1 18.8

 Total debt and equity 

 securities categorized 

 as held-to-maturity, 

 available-for-sale or 

 trading ............................ 4.0 - 4.0 14.2 (0.1) 14.1 57.3 8.1 65.4 83.5

 Total RRB debt and 

 equity securities .............. 24.3

 Total debt and equity 

 securities ......................... 107.8

 

 
 NOTES TO THE FINANCIAL STATEMENTS 83 

 

Debt and Equity Securities as of September 30, 2014, and 2013

 By Agency

(In billions of dollars) 2014 2013

 

Debt and Equity Securities: 

 Pension Benefit Guaranty Corporation ..................................... 58.0 54.7 

 Railroad Retirement Board ....................................................... 25.2 24.3 

 Department of the Treasury ..................................................... 17.9 14.1 

 Tennessee Valley Authority ...................................................... 10.0 10.6 

 All Other ................................................................................. 4.3 4.1 

 Total Securities and Investments ........................................ 115.4 107.8 

 

These debt and equity securities do not include nonmarketable Treasury securities, which have been eliminated in 

consolidation. Held-to-maturity debt and equity securities are reported at amortized cost, net of unamortized discounts and 

premiums. Available-for-sale debt and equity securities are reported at fair value. Trading debt and equity securities are 

reported at fair value. The Pension Benefit Guaranty Corporation (PBGC) and the TVA invest primarily in fixed maturity and 

equity securities, classified as trading. Treasury invests primarily in fixed maturity and equity securities, classified as 

available-for-sale securities. Treasury’s Exchange Stabilization Fund invests primarily in foreign fixed maturity debt, with a 

fair value of $17.9 billion and $14.1 billion as of September 30, 2014, and 2013, respectively. The National Railroad 

Retirement Investment Trust (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. 

NRRIT’s total debt and equity securities are presented as a separate line item. Please refer to NRRIT’s financial statements 

for more detailed information concerning this specific investment. The TVA balance includes $7.6 billion and $7.4 billion as 

of September 30, 2014, and 2013, respectively, for the Tennessee Valley Authority Retirement System. Please refer to the 

individual financial statements of PBGC, NRRIT, Treasury, and TVA for more detailed information related to debt and 

equity securities. These agencies comprise 96.3 percent of the total reported debt and equity securities of $115.4 billion as of 

September 30, 2014. 
84 NOTES TO THE FINANCIAL STATEMENTS 

 

Note 9. Investments in Government-Sponsored Enterprises 

Congress established Fannie Mae and Freddie Mac as GSEs to support the supply of mortgage loans. A key function of 

the GSEs is to package purchased 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 undermining the entire housing market. This led Congress to pass the HERA. This Act 

created the 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 entered 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

SPSPAs were amended in August 2012 (the amended SPSPAs) and changed, among other things, the basis for determining 

quarterly dividends that are paid by the GSEs to the U.S. Government. The dividend change in the amended SPSPAs became 

operationally effective commencing with the quarter ending March 31, 2013. 

The actions taken by Treasury, as authorized by section 1117 of HERA, thus far are temporary and are intended to 

provide financial stability. The purpose of Treasury’s 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. Draws under the SPSPAs are designed to enable the GSEs to maintain a positive net worth. The 

SPSPAs were structured to ensure any draws result in an increased investment as further discussed below. Per SFFAC No. 2, 

Entity and Display, these entities meet the criteria of “bailed out” entities. Accordingly, the government has not consolidated 

them into the financial statements, but included disclosure of the relationship(s) with the bailed out entities and any actual or 

potential material costs or liabilities in the consolidated financial statements. 

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 to an amount equivalent to the GSE’s positive net worth above a capital reserve amount. The capital 

reserve amount was initially set at $3.0 billion for calendar year 2013, declined to $2.4 billion on January 1, 2014, and will 

continue to decline by $600 million at the beginning of each calendar year thereafter until it reaches zero by calendar year 

2018. The GSEs will not pay a quarterly dividend if their positive net worth is below the required capital reserve threshold. 

Cash dividends of $72.5 billion and $95.7 billion were received during fiscal years ended September 30, 2014, and 

2013, respectively. Dividends received in fiscal years 2014 and 2013 were primarily attributable to a federal income tax 

benefit that was recognized in the earnings of one GSE in fiscal year 2014 and the earnings of the other GSE in fiscal year 

2013. 

The SPSPAs, which have no expiration date, provide 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. The maximum amount available to each 

GSE under this agreement was previously based on a formulaic cap which ended December 31, 2012, at which time, the 

maximum amount became fixed. Draws against the funding commitment of the SPSPAs do not result in the issuance of 

additional shares of senior preferred stock; instead the liquidation preference of the initial 1,000,000 shares is increased by

the amount of the draw. There were no payments to the GSEs for the fiscal years ended September 30, 2014 and 2013. 

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 fair valuations. Because of the nature of the senior preferred stock and warrants,

which are not publicly traded and for which there is no 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 
 NOTES TO THE FINANCIAL STATEMENTS 85 

 

the senior preferred stock decreased at September 30, 2014 when compared to 2013 primarily due to lower forecasted 

dividends as a result of lower forecasted GSE earnings to be derived from guarantee fees, coupled with one-time benefits 

recognized in the GSEs’ historical earnings that contributed to the higher fair value of these investments at the end of 2013 

but which did not recur at the end of 2014. 

The fair value of the warrants is impacted by 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 increased at the end of fiscal year 2014 when compared to 2013 primarily due to increases 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 under the SPSPAs. Treasury used financial forecasts prepared 

through 2039 and 2038 in assessing if a contingent liability was required as of September 30, 2014 and 2013, respectively. If 

future payments under the SPSPAs are deemed to be probable within the forecast time horizon, Treasury will estimate and 

accrue a contingent liability to the GSEs to reflect the forecasted equity deficits of the GSEs. 

Based on the annual assessment, Treasury estimated no probable future funding draws as of September 30, 2014 and 

2013, and thereby accrued no contingent liability. During fiscal year 2013, the accrued contingent liability decreased by $9.0

billion. Such recorded accruals will be adjusted as new information develops or circumstances change. 

Treasury forecasts of potential future draws by the GSEs may differ from actual experience. Potential future actual 

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, 

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. As of September 30, 

2014 and 2013, the maximum remaining contractual commitment to the GSEs for the remaining life of the SPSPAs was 

$258.1 billion, which was established at a fixed amount as of December 31, 2012. 

Regulatory Environment 

A provision within the Dodd Frank Act required the Secretary of the Treasury to conduct a study and develop 

recommendations regarding the options for ending the conservatorship of the two GSEs. In 2011, the President delivered to 

Congress a report from the Secretary of the Treasury that provided recommendations regarding the options for ending the 

conservatorship and plans to wind down the GSEs. To date, Congress has not approved a plan to address the future of the 

GSEs, and 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 foreclosure prevention activities and credit availability; (2) reduce taxpayer risk through 

increasing the role of private capital in the mortgage market; and (3) build a new single-family securitization infrastructure.

The Temporary Payroll Tax Cut Continuation Act of 2011 (TPTCCA) was funded by an increase of 10-basis points in 

the GSEs’ guarantee fees which began in April 2012, and is effective through October 1, 2021. The increased fees are to be 

remitted to Treasury and not retained by the GSEs. 

Accordingly, the increased fees do not affect the profitability of the GSEs. For fiscal years 2014 and 2013, the GSEs 

remitted to the Treasury the increased fees totaling $1.9 billion and $946 million, respectively. 
86 NOTES TO THE FINANCIAL STATEMENTS 

 

 As of September 30, 2014, and 2013, GSEs investments consisted of the following:

 

Investments in GSEs as of September 30, 2014

 

 Gross Cumulative 9/30/14 

 Investments Valuation Fair

(In billions of dollars) as of 9/30/14 Gain/(Loss) Value

 

 Fannie Mae Senior Preferred Stock ................................... 117.0 (64.3) 52.7 

 Freddie Mac Senior Preferred Stock .................................. 72.1 (40.7) 31.4 

 Fannie Mae Warrants Common Stock ................................ 3.1 4.6 7.7 

 Freddie Mac Warrants Common Stock ............................... 2.3 1.7 4.0 

 Total Investments in GSEs ............................................... 194.5 (98.7) 95.8 

Investments in GSEs as of September 30, 2013

 

 Gross Cumulative 9/30/13 

 Investments Valuation Fair

(In billions of dollars) as of 9/30/13 Gain/(Loss) Value

 

 Fannie Mae Senior Preferred Stock ................................... 117.0 (40.4) 76.6 

 Freddie Mac Senior Preferred Stock .................................. 72.1 (16.3) 55.8 

 Fannie Mae Warrants Common Stock ................................ 3.1 2.0 5.1 

 Freddie Mac Warrants Common Stock ............................... 2.3 0.4 2.7 

 Total Investments in GSEs ............................................... 194.5 (54.3) 140.2 

 
 NOTES TO THE FINANCIAL STATEMENTS 87 

 

Note 10. Other Assets

 

 Other Assets as of September 30, 2014, and 2013

 

(In billions of dollars) 2014 2013

 

Advances and prepayments ......................................................................... 106.6 106.0 

FDIC receivable from resolution activity ...................................................... 15.2 17.0 

Regulatory assets ........................................................................................ 21.1 21.6 

Other ............................................................................................................ 19.9 18.2 

 Total Other Assets .................................................................................. 162.8 162.8 

 

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. 

The Federal Deposit Insurance Corporation (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 to cover obligations to insured depositors, advances to receiverships and conservatorships for working 

capital, and administrative expenses paid on behalf of receiverships and conservatorships. 

With regard to regulatory assets, the DOE’s Power Marketing Authorities (PMAs) and the 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. Other items included in “other” are purchased power generating capacity, deferred nuclear generating 

units, nonmarketable equity investments in international financial institutions, derivatives assets, and 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).

Payable
88 NOTES TO THE FINANCIAL STATEMENTS 

 

Note 11. Accounts Payable

 

Accounts Payable as of September 30, 2014, and 2013

 

(In billions of dollars) 2014 2013

 

Department of Defense .................................................................................................. 17.9 20.2 

 Department of Veterans Affairs ...................................................................................... 11.7 10.8 

 Department of the Treasury ........................................................................................... 6.4 3.9 

 Department of Justice .................................................................................................... 5.9 4.2 

 Department of Education ............................................................................................... 4.0 4.1 

 Department of State ....................................................................................................... 2.7 2.8 

 Department of Agriculture .............................................................................................. 2.3 2.1 

 Department of Homeland Security ................................................................................. 2.3 2.1 

 General Services Administration .................................................................................... 2.1 2.1 

 U.S. Postal Service ........................................................................................................ 1.9 1.8 

 Agency for International Development ........................................................................... 1.7 1.6 

 Department of Energy .................................................................................................... 1.5 1.5 

 National Aeronautics and Space Administration ............................................................ 1.5 1.3 

 Tennessee Valley Authority ........................................................................................... 1.4 1.9 

 Department of the Interior .............................................................................................. 0.9 1.0 

 All other .......................................................................................................................... 4.8 4.8 

 Total accounts payable ............................................................................................. 69.0 66.2 

 

 

 Accounts payable includes amounts due for goods and property ordered and received, services rendered by

other than federal employees, accounts payable for cancelled appropriations, and non-debt related interest payable. 
 NOTES TO THE FINANCIAL STATEMENTS 89 

 

Note 12. 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) 2013 2014 2014 2014 2013

Treasury securities (public): 

Marketable securities: 

 Treasury bills ............................... 1,527.9 (118.3) 1,409.6 0.1% 0.1% 

 Treasury notes ........................... 7,750.3 409.9 8,160.2 1.8% 1.8% 

 Treasury bonds .......................... 1,363.1 171.0 1,534.1 4.9% 5.1% 

 Treasury inflation-protected 

 securities (TIPS) ...................... 936.1 108.6 1,044.7 0.9% 1.1% 

 Treasury floating rate notes 

(FRN) ..........................................

 - 123.0 123.0 0.1% - 

Total marketable Treasury 

 securities .................................... 11,577.4 694.2 12,271.6 

 

Nonmarketable securities .............. 398.9 114.5 513.4 2.3% 2.4% 

 Net unamortized premiums/ 

 (discounts) ............................... (24.5) (4.9) (29.4) 

Total Treasury securities, net 

(public) .......................................... 11,951.8 803.8 12,755.6 

 

Agency securities: 

Tennessee Valley Authority ........... 24.8 (1.2) 23.6 

All other agencies .......................... 0.2 - 0.2 

Total agency securities, net of 

unamortized premiums and 

 discounts .................................... 25.0 (1.2) 23.8 

 

Accrued interest payable ............... 51.6 2.6 54.2 

 

Total federal debt securities 

held by the public and 

accrued interest .................. . 12,028.4 805.2 12,833.6 

 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. 
90 NOTES TO THE FINANCIAL STATEMENTS 

 

Federal debt securities held by the public outside the Government are held by individuals, corporations, state or local 

governments, FRBs, foreign governments, and other entities outside the federal government. 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: 

x Interest-bearing marketable securities (bills, notes, bonds, inflation-protected, and floating rate notes). 

x Interest-bearing nonmarketable securities (government account series held by deposit and fiduciary funds, foreign 

series, state and local government series, domestic series, and savings bonds). 

x Non-interest-bearing marketable and nonmarketable securities (matured and other). 

Section 3111 of Title 31, United States Code (U.S.C.) authorizes the Secretary of the Treasury to use money received 

from the sale of an obligation and other money in the General Fund of the Treasury to buy, redeem, or refund, at or before 

maturity, outstanding bonds, notes, certificates of indebtedness, Treasury bills, or savings certificates of the Government. 

There were no buyback operations in fiscal years 2014 and 2013. 

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 (Public Law No. 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. 

Most recently, Treasury faced two delays in raising the statutory debt limit that required it to depart from its normal debt 

management operations and to invoke legal authorities to avoid exceeding the statutory debt limit. During each of these 

periods, extraordinary measures taken by Treasury resulted in federal debt securities not being issued to certain federal 

accounts. The first occurred from May 20, 2013 through October 16, 2013. As such, a delay in raising the statutory debt limit 

existed as of September 30, 2013. The $120.4 billion of uninvested principal of and related interest for the Thrift Saving Plan 

(TSP) G Fund that would have been reported as Federal Debt Securities Held by the Public and Accrued Interest had there 

not been a delay in raising the statutory debt limit as of September 30, 2013, and had the securities been issued, were reported 

as miscellaneous liabilities. On October 17, 2013, the Continuing Appropriations Act, 2014 (Public Law No. 113-46) was 

enacted which temporarily suspended the statutory debt limit through February 7, 2014. Treasury subsequently restored the 

uninvested principal and related interest, resulting in an increase in federal debt securities held by the public from 2013 to 

2014. See Note 17, Other Liabilities for more information. On February 8, 2014, the debt limit was raised to $17,211.6 

billion. The second occurred from February 10, 2014, through February 14, 2014. On February 15, 2014 Congress enacted 

the Temporary Debt Limit Extension Act (Public Law No. 113-83) which temporarily suspended the debt limit through March 

15, 2015. 

As of September 30, 2014, and 2013, debt subject to the statutory debt limit was $17,781.1 billion and $16,699.4 

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 17—Other Liabilities and Note 23—Fiduciary Activities for additional information.
 NOTES TO THE FINANCIAL STATEMENTS 91 

 

 

Intragovernmental Debt Holdings: Federal Debt Securities

Held as Investments by Government Accounts as of September 30, 2014, and 2013

 

 Net 

 Change 

 During 

 Balance Fiscal Year Balance 

(In billions of dollars) 2013 2014 2014

Social Security Administration, Federal Old-Age 

and Survivors Insurance Trust Fund 2,655.6 57.2 2,712.8 

 Office of Personnel Management, Civil Service 

Retirement and Disability Fund 719.4 137.8 857.2 

 Department of Defense, Military Retirement Fund 421.3 61.8 483.1 

 Department of Health and Human Services, 

Federal Hospital Insurance Fund 

 

 206.0 (3.8) 202.2 

 Department of Defense, Medicare-Eligible Retiree 

Health Care Fund 188.7 11.7 200.4 

 Social Security Administration, Federal Disability 

Insurance Trust Fund 100.8 (30.7) 70.1 

 

Department of Health and Human Services, 

Federal Supplementary Medical Insurance Trust 

Fund 

 

 67.4 1.0 68.4 

 Department of Energy, Nuclear Waste Disposal 

Fund 50.6 0.9 51.5 

 Federal Deposit Insurance Corporation Funds 37.7 11.9 49.6 

 Office of Personnel Management, Postal Service 

Retiree Health Benefits Fund 42.3 6.2 48.5 

 Office of Personnel Management, Employees Life 

Insurance Fund 42.0 1.2 43.2 

 Department of Labor, Unemployment Trust Fund 29.5 6.4 35.9 

 Office of Personnel Management, Employees 

Health Benefits Fund 23.4 0.2 23.6 

 Department of the Treasury, Exchange 

Stabilization Fund 22.7 (0.1) 22.6 

 Department of State, Foreign Service Retirement 

and Disability Fund 17.4 0.4 17.8 

 Pension Benefit Guaranty Corporation Fund 22.6 (5.2) 17.4 

 Department of Transportation, Airport and Airway 

Trust Fund 11.8 1.0 12.8 

 National Credit Union Share Insurance Fund 10.6 0.4 11.0 

 Department of Transportation, Highway Trust Fund 2.0 8.7 10.7 

 All other programs and funds 90.1 10.2 100.3 

 Subtotal 4,761.9 277.2 5,039.1 

 Total Net Unamortized Premiums/(Discounts) for 

 Intragovernmental 69.4 (1.6) 67.8 

 Total intragovernmental debt holdings, net 4,831.3 275.6 5,106.9 

 

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. As noted above, the delay in raising the debt limit still existed 
92 NOTES TO THE FINANCIAL STATEMENTS 

 

as of September 30, 2013. On October 17, 2013, the Continuing Appropriations Act, 2014 (Public Law No. 113-46) was 

enacted which temporarily suspended the statutory debt limit through February 7, 2014. Treasury subsequently restored 

uninvested principal and related interest, resulting in an increase to the Civil Service Retirement and Disability Fund from 

2013 to 2014. 

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 22ņFunds from Dedicated Collections. 

These intragovernmental debt holdings are eliminated in the consolidation of these financial statements. 
 NOTES TO THE FINANCIAL STATEMENTS 93 

 

Note 13. Federal Employee and Veteran Benefits Payable 

 

Federal Employee and Veteran Benefits Payable as of September 30, 2014 and 2013

 

 Civilian Military Total 

 (In billions of dollars) 2014 2013 2014 2013 2014 2013

 

Pension and accrued benefits ............ 1,905.2 1,867.9 1,565.1 1,524.2 3,470.3 3,392.1 

Post-retirement health and accrued 

benefits ........................................... 336.8 326.7 760.5 747.6 1,097.3 1,074.3 

Veterans compensation and burial 

benefits ............................................ N/A N/A 2,007.1 1,974.8 2,007.1 1,974.8 

Life insurance and accrued benefits... 48.3 47.6 9.1 9.9 57.4 57.5 

FECA benefits .................................... 28.3 27.4 8.8 9.0 37.1 36.4 

Liability for other benefits ................... 0.9 0.8 2.5 2.4 3.4 3.2 

Total federal employee and veteran 

benefits payable .............................. 2,319.5 2,270.4 4,353.1 4,267.9 6,672.6 6,538.3 

 

Change in Pension and Accrued Benefits 

 Civilian Military Total 

 (In billions of dollars) 2014 2013 2014 2013 2014 2013

Actuarial accrued pension 

 liability, beginning of 

 fiscal year ..................................... 1,867.9 1,772.3 1,524.2 1,482.0 3,392.1 3,254.3 

Pension Expense: 

 Normal costs .................................. 38.4 38.1 32.6 32.0 71.0 70.1 

 Interest on liability .......................... 77.2 76.7 64.9 67.5 142.1 144.2 

 Actuarial (gains)/losses (from 

 experience) .................................... (12.9) (19.4) (22.6) (14.7) (35.5) (34.1) 

 Actuarial (gains)/losses (from 

 assumption changes) ..................... 17.6 80.8 21.6 11.9 39.2 92.7 

 Total pension expense................ 120.3 176.2 96.5 96.7 216.8 272.9 

 Less benefits paid .......................... (83.0) (80.6) (55.6) (54.5) (138.6) (135.1) 

Actuarial accrued pension 

 liability, end of fiscal year .......... 1,905.2 1,867.9 1,565.1 1,524.2 3,470.3 3,392.1 

 

 

 
94 NOTES TO THE FINANCIAL STATEMENTS 

 

Change in Post-Retirement Health and Accrued Benefits

 Civilian Military Total 

 (In billions of dollars) 2014 2013 2014 2013 2014 2013

Actuarial accrued post-

 retirement health benefits 

 liability, beginning of fiscal 

 year .................................................. 326.7 328.1 747.6 833.3 1,074.3 1,161.4 

Post-Retirement health 

 benefits expense:

 Prior (and past) service costs from 

 plan amendments or new plans .... - - - (46.8) - (46.8)

 Normal costs .................................... 11.7 11.8 21.8 22.1 33.5 33.9 

 Interest on liability ............................ 14.2 15.1 33.3 38.8 47.5 53.9 

 Actuarial (gains)/losses (from 

 experience) .................................... (3.1) (14.7) (8.0) (3.8) (11.1) (18.5)

Actuarial (gains)/losses (from 

 assumption changes) .................... 1.3 - (14.7) (74.8) (13.4) (74.8)

 Total post-retirement health 

 benefits expense......................... 24.1 12.2 32.4 (64.5) 56.5 (52.3)

Less claims paid ............................... (14.0) (13.6) (19.5) (21.2) (33.5) (34.8)

Actuarial accrued postretirement health benefits

liability, end of fiscal year ............. 336.8 326.7 760.5 747.6 1,097.3 1,074.3 

The Government offers its employees life and health insurance, as well as retirement and other benefits. 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 accrued benefits payable include those of the Coast Guard (DHS), Foreign Service 

(Department of State), TVA, and HHS’s Public Health Service Commissioned Corps Retirement System. Please refer to the 

financial statements of the agencies listed for further details regarding their pension plans and other benefits. 

Change in Civilian Life Insurance and Accrued Benefits

(In billions of dollars) 2014 2013

Actuarial accrued life insurance benefits liability, 

beginning of fiscal year............................................................................. 47.6 47.2 

Life insurance benefits expense: 

 New entrant expense ................................................................................... 0.2 0.4 

 Interest on liability ........................................................................................ 2.0 2.1 

 Actuarial (gains)/losses (from experience) .................................................. (0.7) (0.7)

 Actuarial (gains)/losses (from assumption changes) ................................... (0.2) (0.9)

 Total life insurance benefits expense........................................................ 1.3 0.9 

 Less costs paid ............................................................................................ (0.6) (0.5)

 Actuarial accrued life insurance benefits liability, 

 end of fiscal year ....................................................................................... 48.3 47.6 
 NOTES TO THE FINANCIAL STATEMENTS 95 

 

Significant Long-Term Economic Assumptions Used in Determining Pension 

Liability and the Related Expense

 Civilian Military 

 2014 2013 2014 2013

 FERS CSRS FERS CSRS 

Rate of interest ................................. 4.30% 3.90% 4.40% 4.10% 4.30% 4.30% 

 Rate of inflation ................................. 2.50% 2.50% 2.50% 2.50% 2.40% 2.40% 

 Projected salary increases ............... 1.90% 1.90% 2.20% 2.20% 2.50% 2.80% 

 Cost of living adjustment ................. 1.90% 2.50% 2.00% 2.50% - - 

 

Significant Long-Term Economic Assumptions Used in Determining 

Post-Retirement Health Benefits and the Related Expense

 

 Civilian Military 

 2014 2013 2014 2013

 Rate of interest ................................................. 4.30% 4.40% 4.30% 4.40% 

 Single equivalent medical trend rate ................ 5.30% 5.20% 4.92% 4.80% 

 Ultimate medical trend rate .............................. 4.20% 4.20% 5.15% 5.15% 

 

Significant Long-Term Economic Assumptions Used in Determining Life Insurance 

Benefits and the Related Expense

 

 Civilian

 2014 2013

 Rate of interest ................................................. 4.20% 4.30% 

 Rate of increase in salary ................................. 1.90% 2.20% 

 

With the implementation of 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, agencies 

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. In 

addition, SFFAS No. 33 provides a standard for selecting the valuation date for estimates of federal employee pension, ORB, 

and OPEB liabilities that will establish a consistent method for such measurements. The SFFAS 33 standard for selecting 

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. 

In fiscal year 2014, Treasury developed a new model and methodology for developing these rates to provide a 

sustainable, justifiable data resource for the affected agencies. As of July 2014, Treasury began releasing interest rate 

yield curve data using this new Yield Curve for Treasury Nominal Coupon Issues (TNC yield curve), which is derived 

from Treasury notes 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. The new method 

is based on methodology used to produce the High Quality Market (HQM) Yield Curve pursuant to the Pension Protection 
96 NOTES TO THE FINANCIAL STATEMENTS 

 

Act of 2006.1 Generally, for FY 2014, the data from the new yield curve was implemented in full in one single year (i.e., 

replace the historical rate series used under the legacy method with those produced under the new TNC method). 

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, agency contributions, payments from the 

General Fund, and interest on investments in Treasury securities. See Note 22—Funds from Dedicated Collections. 

The Federal Retirement Thrift Investment Board administers the TSP Fund. The TSP Fund 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 $183.7 billion and $52.5 billion in nonmarketable Treasury securities as of September 30, 2014, and 2013, 

respectively. The increase in nonmarketable Treasury securities held in the G Fund relates to the delay in raising the debt 

limit that was ongoing as of September 30, 2013. The Secretary of the Treasury has authority to take extraordinary measures 

to stay within the statutory debt limit imposed by Congress. 

One such measure involves the suspension of the issuance of securities to the G Fund if the issuance cannot be made 

without causing the debt limit to be exceeded. Please see Note 17— Other Liabilities for additional information. 

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 (FEHB), these premiums cover only a portion of the costs. The OPM 

actuary applies economic assumptions to historical cost information to estimate the liability. The Postal Accountability and 

Enhancement Act of 2006 (Postal Act of 2006) (Public Law 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 third Health Benefits Program (HBP) fund, the Postal Service Retiree Health Benefits (PSRHB) Fund. Public Law No. 109-

435 requires the USPS to make scheduled payment contributions to the PSRHB Fund ranging from $5.4 billion to $5.8 billion 

per year from fiscal year 2007 through fiscal year 2016. (The fiscal year 2009 payment was subsequently reduced to $1.4 

billion.) Thereafter, the USPS will make annual payments in the amount of the normal cost payment plus or minus an amount to 

amortize the unfunded liability or surplus. The payment originally due by September 30, 2011, was deferred by Public Law No. 

112-74, resulting in two payments due in fiscal year 2012, one for $5.5 billion due by August 1, 2012, and a second payment of 

$5.6 billion due by September 30, 2012, a total of $11.1 billion. Both were defaulted upon by USPS. In addition, there was a 

$5.6 billion and a $5.7 billion payment due by September 30, 2013 and September 30, 2014, respectively, which USPS also did 

not make. At this time, Congress has not taken further action on these payments due to the PSRHB from USPS. The cost for 

these annual payments, including any defaulted payments, along with all its other benefit program costs, are included in USPS’ 

net cost in the consolidated Statements of Net Cost. 

Life Insurance Benefits 

One of the largest other employee benefits is the Federal Employee 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. 

 

 1 Treasury’s HQM resource is available at: http://www.treasury.gov/resource-center/economic-policy/corp-bond-yield/Pages/Corp-Yield-BondCurve-Papers.aspx. 
 NOTES TO THE FINANCIAL STATEMENTS 97 

 

Workers’ Compensation Benefits 

The DOL determines both civilian and military agencies’ liabilities for future workers’ compensation benefits for 

civilian federal employees, as mandated by the Federal Employees’ Compensation Act (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. 

DOL refined the approach for selecting the interest rate assumptions used to discount projected future payments. For FY 

2014, projected annual payments were discounted to present value based on interest rate assumptions from the Treasury’s 

Yield Curve for Treasury Nominal Coupon Issues to reflect the average duration for income payments of 15.1 years and 

medical payments of 9.9 years. For 2014, a 3.46 percent interest rate was assumed in years one, two, and thereafter for 

income payments and 2.86 percent for years one, two, and thereafter for medical payments. 

For FY 2013, projected annual payments were discounted to present value based on OMB’s interest rate assumptions 

which were interpolated to reflect the average duration for income payments of 14.7 years and medical payments of 9.6 

years. For FY 2013, interest rate assumptions were 2.73 percent in year one and 3.13 percent in year two and thereafter for 

income payments and 2.33 percent in year one and 2.87 percent in year two and thereafter for medical payments. 

The actuarial methodology provides for the effects of inflation and adjusts historical payments to current year constant 

dollars by applying wage inflation factors (cost-of-living adjustments or COLA) and medical inflation factors (consumer 

price index-medical or CPIM) to the calculation of projected benefits. The COLAs and CPIMs used in the projections for FY 

2014 were as follows. For the COLAs and CPIMs used in the projections for FY 2013, refer to the Fiscal Year 2013 

Financial Report of the U.S. Government. 

Fiscal Year COLA CPIM 

 2015 1.73% 2.93% 

 2016 2.17% 3.76% 

 2017 2.13% 3.86% 

 2018 2.23% 3.90% 

 2019+ 2.30% 3.90% 

Military Employees (Including Veterans) 

Pensions

The DOD Military Retirement Fund accumulates funds to finance, on an accrual basis, the liabilities of DOD military 

retirement and survivor benefit programs. The increase in the Military Retirement Pension liability is due to additional 

benefit accruals (normal cost), interest on the pension liability, and assumption changes, offset somewhat by reductions due 

to experience gains and benefits paid out. Liabilities in the future will depend on expected changes due to interest and benefit 

accruals, future benefit changes, assumption changes, and actuarial experience. 

This Fund receives income from three sources: monthly normal cost payments from the Services and Treasury to pay 

for the current years’ 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 per Public Law 108-136; and investment income. 

The military retirement system consists of a funded, noncontributory, defined benefit plan. It applies to military 

personnel (Departments of Army, Navy, Air Force, and the Marine Corps). This system 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. There are three distinct nondisability benefit formulas related to three populations within the Military Retirement System: Final Pay, High-3, and Career 

Status Bonus/Redux. The date an individual enters the military determines which retirement system they would fall under and 
98 NOTES TO THE FINANCIAL STATEMENTS 

 

if they have the option to pick their retirement system. For more information on these benefits, see DOD’s website 

http://www.dfas.mil/retiredmilitary/plan/estimate/csbredux.html. 

Post-Retirement Health Benefits 

Military retirees and their dependents are entitled to health care in military medical facilities if a facility can provide the

needed care. Prior to becoming Medicare eligible, military retirees and other eligible beneficiaries are entitled to participate 

in TRICARE (now managed by the Defense Health Agency)2

, which reimburses (net of beneficiary copay and deductible 

requirements) for the cost of health care from civilian providers. TRICARE options are available in indemnity, preferred 

provider organization, and health maintenance organization (HMO) designs. 

Since fiscal year 2002, TRICARE, as second payer to Medicare, covers military retirees and other eligible beneficiaries 

after they become Medicare eligible. This TRICARE coverage for Medicare eligible beneficiaries requires that the 

beneficiary enroll in Medicare Part B (unless the beneficiary that is Medicare eligible is the spouse of an Active Duty Service

Member) and is referred to as TRICARE for Life (TFL). Health care under TFL can be obtained from military medical 

facilities on an “as available” basis or from civilian providers. Military retiree health care actuarial liabilities are calculated 

annually using assumptions and actual experience. Military retiree health care liability figures include costs incurred in 

military medical facilities, as well as claims paid to civilian providers and certain administrative costs. Costs paid to civilian 

providers are net of Medicare’s portion of the cost. 

10 U.S.C., Chapter 56 created the DOD Medicare-Eligible Retiree Health Care Fund, which became operative on 

October 1, 2002. The purpose of this fund is to account for the health benefits of Medicare-eligible military retirees, their 

dependents, and survivors who are Medicare eligible. The Fund receives contributions from the Uniformed Services and 

Treasury, as well as interest earnings on its investments and pays costs incurred in military medical facilities, as well as 

claims for care provided by civilian providers under TFL, administration costs associated with processing the TFL claims, 

and capitated payments for coverage provided by U.S. Family Health Plans. The actuaries calculate the actuarial liabilities 

annually using assumptions and actual experience (e.g., mortality and retirement rates, direct care costs, purchased care). The

current year actuarial present value of projected plan benefits rolls forward from the prior year’s results. 

In addition to the health care benefits 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, VA recognizes the medical care expenses in the 

period the medical care services are provided. For the fiscal years 2010 through 2014, the average medical care cost per year 

was $41.0 billion. 

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 from military service-related causes, as well as their dependents, receive 

compensation benefits. Also, veterans are provided with burial flags, headstones/markers, and grave liners 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 and increased by $32.3 billion in fiscal year 2014. The $32.3 billion increase in the 

Federal Employee and Veterans Benefits Liabilities represents a small increase of 1.6 percent which consists of several 

component changes, none of which is significant. 

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 will become veterans in the future. Future benefits 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. 

 

 2 On October 1, 2013, the Department of Defense established the Defense Health Agency (DHA) to manage the activities of the Military Health 

System. These activities include those previously managed by TRICARE Management Activity (TMA), which was disestablished on the same date. 2013, 
 NOTES TO THE FINANCIAL STATEMENTS 99 

 

The veterans compensation and burial benefits liability is developed on an actuarial basis. It is impacted by interest on 

the liability balance, changes in experience, 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) 2014 2013 2014 2013 2014 2013

Actuarial accrued liability beginning 

of fiscal year ........................................... 1,970.2 1,757.1 4.6 4.5 1,974.8 1,761.6 

Current Year Expenses: 

Interest on the liability balance ............... 82.7 75.7 0.2 0.2 82.9 75.9 

Prior (and past) service costs from 

program amendments or new 

programs during the period ................. - 1.2 - - - 1.2 

Actuarial (gain)/losses (from 

experience) ........................................... 36.8 86.8 - (0.1) 36.8 86.7 

Actuarial (gain)/losses 

(from assumption changes) .................. (22.0) 113.9 (0.1) 0.2 (22.1) 114.1 

Total current year expense .................. 97.5 277.6 0.1 0.3 97.6 277.9 

Less benefits paid ..................................... (65.1) (64.5) (0.2) (0.2) (65.3) (64.7)

Actuarial accrued liability, end of 

fiscal year .............................................. 2,002.6 1,970.2 4.5 4.6 2,007.1 1,974.8 

Significant Economic Assumptions Used in Determining Veterans Compensation and 

Burial Benefits as of September 30, 2014, and 2013

2014 2013

Rate of interest .................................................................... 4.29% 4.20%

Rate of inflation .................................................................... 2.61% 2.57%

 

Life Insurance Benefits 

The largest veterans’ life insurance programs consist of the following: 

x National Service Life Insurance (NSLI) covers policyholders who served during World War II. 

x 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. 

x 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. 
100 NOTES TO THE FINANCIAL STATEMENTS 

 

 The components of veteran life insurance liability for future policy benefits are presented below.

 

 Veterans Life Insurance Liability as of September 30, 2014, and 2013

 

 (In billions of dollars) 2014 2013

Insurance death benefits: 

NSLI ................................................................................................................ 4.4 5.0 

VSLI ................................................................................................................ 1.4 1.5 

S-DVI .............................................................................................................. 0.6 0.5 

Other ............................................................................................................... 0.3 0.4 

 Total death benefits .................................................................................... 6.7 7.4 

Death benefit annuities ..................................................................................... 0.1 0.1 

Disability income & waiver ................................................................................ 0.8 0.8 

Insurance dividends payable ............................................................................. 1.4 1.5 

Unearned premiums .......................................................................................... 0.1 0.1 

Total veterans life insurance liability ............................................................... 9.1 9.9 

 

Insurance dividends payable consists of dividends left on a deposit with VA, related interest payable, and dividends 

payable to policyholders. 

The VA supervises Servicemembers Group Life Insurance 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. 

Pension Benefits 

The 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. VA pension benefits are recognized as a 

nonexchange transaction due to the nature of the VA pension plan. Therefore, the actuarial present value of these future 

benefits is not required to be recorded on the Balance Sheet. The projected amounts of future payments for pension benefits 

(presented for informational purposes only) as of September 30, 2014, and 2013, was $102.8 billion and $97.5 billion, 

respectively. 
 NOTES TO THE FINANCIAL STATEMENTS 101 

 

Note 14. Environmental and Disposal Liabilities 

 

Environmental and Disposal Liabilities as of September 30, 2014, and 2013

 

(In billions of dollars) 2014 2013

 

Department of Energy: 

 Environmental and Disposal Liabilities ........................................................... 299.8 280.2 

 Department of Defense: 

 Environmental Restoration ............................................................................. 27.0 26.6 

 Disposal of Weapon Systems Program .......................................................... 21.2 21.8 

 Environmental Corrective Other ..................................................................... 6.2 5.7 

 Base Realignment and Closure ...................................................................... 4.2 4.3 

 Total Department of Defense........................................................................ 58.6 58.4 

 All other agencies ............................................................................................ 10.7 10.5 

 Total environmental and disposal liabilities 369.1 349.1 

 

During World War II and the Cold War, DOE (or predecessor agencies) 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. 

DOE’s environmental and disposal liabilities estimates are dependent on annual funding levels and achievement of 

work as scheduled. 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 2089 in fiscal 

year 2014 and through 2088 in fiscal year 2013. While some post-cleanup monitoring and other long-term stewardship 

activities post-2089 are included in the liability, there are others the Department expects to continue beyond 2089 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 
102 NOTES TO THE FINANCIAL STATEMENTS 

 

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 $710.0 million and $766.0 million for fiscal years 2014 and 2013, respectively. 

Please refer to the financial statements of the DOE for significant detailed information regarding DOE’s environmental 

and disposal liabilities, including cleanup costs. 

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 agencies, 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 must restore active installations, installations affected by base realignment and closure, and other areas formerly 

used as Defense 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 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. The Department expenses the full cost to clean up contamination for stewardship property, plant, 

and equipment at the time the asset is placed into service. DOD has expensed the costs for cleanup associated with general 

property, plant, and equipment 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 cleanup cost associated with general property, plant, and equipment is $3.1 billion and $3.2

billion for fiscal years 2014 and 2013, respectively. Not all components of DOD are able to compile the necessary 

information for this disclosure, thus the amount reported may not accurately reflect DOD’s total unrecognized costs 

associated with general property, plant, and equipment. DOD is implementing procedures to address these deficiencies. 

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 Defense 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 the DOD for further detailed information regarding DOD’s environmental and 

disposal liabilities, including cleanup costs. 

In addition, due to the implementation of TB 2006-1 in fiscal year 2013, agencies recorded an environmental and 

disposal liability for asbestos-related cleanup costs totaling $3.6 billion and $4.0 billion as of September 30, 2014, and 2013, 

respectively. 
 NOTES TO THE FINANCIAL STATEMENTS 103 

 

Note 15. Benefits Due and Payable 

Benefits Due and Payable as of September 30, 2014, and 2013

 

(In billions of dollars) 2014 2013

 

Federal Old-Age and Survivors Insurance ........................................................ 62.9 60.0 

 Grants to States for Medicaid ............................................................................ 32.3 27.6 

 Federal Supplementary Medical Insurance (Medicare Parts B and D) ............. 31.9 27.8 

 Federal Disability Insurance .............................................................................. 25.8 24.2 

 Federal Hospital Insurance (Medicare Part A) .................................................. 25.7 20.8 

 Supplemental Security Income .......................................................................... 5.2 5.2 

 Unemployment Insurance ................................................................................. 1.0 2.4 

 All other benefits programs ............................................................................... 6.8 6.3 

 Total benefits due and payable .................................................................... 191.6 174.3 

 

Benefits due and payable are amounts owed to program recipients or medical service providers as of September 30 that 

have not been paid. HHS and the SSA administer the majority of the medical service programs and the DOL administers the 

Unemployment Insurance program. For a description of the programs, see Note 24—Social Insurance and the Unaudited 

Required Supplementary Information—Social Insurance section. 
104 NOTES TO THE FINANCIAL STATEMENTS 

 

Note 16. Insurance and Guarantee Program Liabilities 

 

Insurance and Guarantee Program Liabilities as of September 30, 2014, and 2013

 

(In billions of dollars) 2014 2013

 

Insurance and Guarantee Program Liabilities: 

Pension Benefit Guaranty Corporation - Benefit Pension Plans .................... 146.9 114.9 

Federal Deposit Insurance Corporation Funds ............................................... 13.2 16.9 

Department of Agriculture - Federal Crop Insurance ..................................... 7.3 6.9 

All other insurance and guarantee programs ................................................. 0.8 1.2 

 Total insurance and guarantee program liabilities ....................................... 168.2 139.9 

 

PBGC insures pension benefits for participants in covered defined benefit pension plans. As a wholly-owned 

corporation of the Government, PBGC’s financial activity and balances are included in the consolidated financial statements 

of the Government. However, under current law, PBGC’s liabilities may be paid only from PBGC’s assets and not from the 

General Fund of the Treasury or assets of the Government in general. As of September 30, 2014, and 2013, PBGC had total 

liabilities of $151.6 billion and $120.6 billion, and its total liabilities exceeded its total assets by $61.8 billion and $35.6 

billion, respectively. In addition, as discussed in Note 20—Contingencies, PBGC reported reasonably possible contingent 

losses of about $184.4 billion and $328.9 billion as of September 30, 2014, and 2013, respectively. 

Of the total FDIC amount as of September 30, 2014, and 2013, $1.9 billion and $1.2 billion, respectively, represents the 

recorded contingent liability and loss provision for institutions insured by the Deposit Insurance Fund that are likely to fail. In 

addition, $11.3 billion and $15.8 billion pertain to liabilities due to resolutions of failed or failing institutions and to pending 

depositor claims as of September 30, 2014, and 2013, respectively. 

As of September 30, 2014, and 2013, $7.3 billion and $6.9 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. 
 NOTES TO THE FINANCIAL STATEMENTS 105 

 

Note 17. Other Liabilities 

 Other Liabilities as of September 30, 2014, and 2013

(In billions of dollars) 2014 2013

 

 Unearned revenue and assets held for others: 

 Unearned fees for nuclear waste disposal (DOE) and other unearned 

 revenue ......................................................................................................... 50.6 48.5 

 Assets held on behalf of others ........................................................................ 81.9 79.5 

 Subtotal ......................................................................................................... 132.5 128.0 

 

 Employee-related liabilities: 

 Accrued federal employees' wages and benefits ............................................. 38.3 38.2 

 Selected DOE contractors' and D.C. employees' pension benefits .................. 48.6 46.5 

 Subtotal ......................................................................................................... 86.9 84.7 

 

 International monetary liabilities and gold certificates: 

 Exchange Stabilization Fund ............................................................................ 57.6 59.4 

 Gold Certificates (see Note 2) .......................................................................... 11.0 11.0 

 Subtotal ......................................................................................................... 68.6 70.4 

 

 Subsidies and grants: 

 Farm and other subsidies ................................................................................. 9.8 10.6 

 Grant payments due to state and local governments and others ..................... 16.9 15.6 

 Subtotal ......................................................................................................... 26.7 26.2 

 

 Miscellaneous liabilities: 

 Legal and other contingencies .......................................................................... 46.1 43.4 

 Non-federal power projects and 

 capital lease liabilities, and disposal liabilities .............................................. 13.1 12.8 

 Liability for restoration of federal debt principal and interest ........................... - 120.4 

 Other miscellaneous ......................................................................................... 35.2 36.3 

 Subtotal ......................................................................................................... 94.4 212.9 

 Total other liabilities .................................................................................... 409.1 522.2 

 

 

 Other liabilities represent liabilities that are not separately identified on the Balance Sheet and are presented on a

comparative basis by major category. 

 
106 NOTES TO THE FINANCIAL STATEMENTS 

 

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. The government’s unearned revenue from fees DOE has collected from utility 

companies for the future cost of managing the disposal of nuclear waste is about $36.0 billion and $34.1 billion as of 

September 30, 2014, and 2013, respectively. Other unearned revenue includes USPS income for such things as prepaid 

postage, outstanding money orders, and prepaid P.O. Box rentals. FDIC collected prepaid assessments from the financial 

institutions to address the Deposit Insurance Fund (DIF) liquidity needs to pay for projected near-term failures and to ensure 

that the deposit insurance system remains industry-funded. The prepaid collection was based on maintaining assessment rates 

at their current levels through the end of 2010 and adopting a uniform three basis point increase in assessment rates effective

January 1, 2011. An institution’s quarterly risk-based deposit insurance assessment thereafter is offset by the amount prepaid 

until that amount is exhausted or until June 30, 2013, when any amount remaining would be returned to the institution. The 

final offset of prepaid assessments occurred for the period ending March 31, 2013, and in June 2013, as required by 

regulation, the DIF refunded $5.8 billion of unused prepaid assessments to Insured Depository Institutions. Assets held on 

behalf of others include funds collected in advance and undelivered Defense articles. The Foreign Military Sales program 

holds $68.0 billion and $67.0 billion as of September 30, 2014, and 2013, 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 13–Federal Employee and 

Veteran Benefits Payable and are reported on another line on the Balance Sheet. 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 such as the University of California, which operates 

the Lawrence Livermore National Laboratory, for contractor employee pension and post-retirement benefits, which is about 

$23.4 billion and $21.3 billion as of September 30, 2014, and 2013, respectively. Also, the government owed about $9.2 

billion as of both September 30, 2014, and 2013, 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 Exchange Stabilization Fund to deal in gold, 

foreign exchange, and other instruments of credit and securities. 

Gold certificates are issued in nondefinitive or book-entry form to the Federal Reserve Banks. The government’s 

liability incurred by issuing the gold certificates, as reported on the Balance Sheet, is limited to the gold being held by the

Department of the Treasury at the standard value established by law. Upon issuance of gold certificates to the FRBs, the 

proceeds from the certificates are deposited into the operating cash of the U.S. Government. All of the Department of the 

Treasury’s certificates issued are payable to the FRBs. 

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, 

Tobacco Transition Payment, Disaster Assistance and Direct and Counter-Cyclical Payment Programs account for the 

majority of the subsidies due, about $5.3 billion and $6.8 billion as of September 30, 2014, and 2013, respectively. 

 The government awards hundreds of billions of dollars in grants annually. These include project grants that are 

competitively awarded for agency-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, 2014, and 2013, DOT, Education, and 

HHS collectively owed their grantees about $12.3 billion and $12.7 billion, respectively. Refer to the financial statements and

footnotes of the respective agencies for additional information. 
 NOTES TO THE FINANCIAL STATEMENTS 107 

 

Miscellaneous Liabilities 

 Some of the more significant liabilities included in this category are for (1) legal and other contingencies (see Note

20—Contingencies), (2) Bonneville Power Administration liability to pay annual budgets of several power projects for its 

electrical generating capacity, (3) payables due to the purchases of securities, and (4) other liabilities reported by Treasury as 

a result of the occurrence of a delay in raising the statutory debt limit as of September 30, 2013. When delays in raising the 

statutory debt limit occur, Treasury often must 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. Many 

extraordinary measures taken by Treasury during the period of May 20, 2013, through September 30, 2013, resulted in 

federal debt securities not being issued to certain federal government accounts. As a result of Treasury securities not being 

issued to the G Fund, Treasury reported miscellaneous liabilities in the amount of $120.4 billion that represent uninvested 

principal of and related interest for the Thrift Savings Plan’s (TSP) G Fund that would have been reported in Note 12—

Federal Debt Securities Held by the Public and Accrued Interest had there not been a delay in raising the statutory debt limit 

as of September 30, 2013, and had the securities been issued. These extraordinary measures ended when Congress enacted 

legislation which temporarily suspended the debt limit, therefore resulting in an increase of Federal Debt Securities Held by 

the Public and Accrued Interest from fiscal years 2013 to 2014. For further information on this, see Note 12—Federal Debt 

Securities Held by the Public and Accrued Interest and Note 23—Fiduciary Activities. 

 In addition, many federal agencies reported relatively small amounts of miscellaneous liabilities that are not otherwise 

classified. 
108 NOTES TO THE FINANCIAL STATEMENTS 

 

Note 18. Collections and Refunds of Federal Revenue 

 

 Collections of Federal Tax Revenue for the Year Ended September 30, 2014

 

 

 Federal Tax Year to Which Collections Relate 

 Tax

 Revenue Prior

(In billions of dollars) Collections 2014 2013 2012 Years 

 Individual income tax and tax 

 withholdings ..................................... 2,605.0 1,691.1 864.3 24.3 25.3 

 Corporation income taxes .................... 353.1 252.9 87.9 1.2 11.1 

 Excise taxes ......................................... 96.7 74.4 22.1 0.1 0.1 

 Unemployment taxes ............................ 52.7 27.1 15.3 10.2 0.1 

 Customs duties ..................................... 34.2 34.2 - - - 

 Estate and gift taxes ............................. 20.2 - 7.0 0.9 12.3 

 Railroad retirement taxes ..................... 6.0 4.6 1.4 - - 

 Fines, penalties, interest, and 

 other revenue ..................................... 6.7 6.5 0.1 0.1 - 

 Subtotal .............................................. 3,174.6 2,090.8 998.1 36.8 48.9 

 Less: amounts collected for 

 non-federal entities ....................... (0.3) 

 Total .............................................. 3,174.3 

 

Treasury is the Government’s principal revenue-collecting agency. 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. 

 
 NOTES TO THE FINANCIAL STATEMENTS 109 

 

 

Federal Tax Refunds Disbursed for the Year Ended September 30, 2014

 

 Tax Year to Which Refunds Relate 

 Refunds Prior

 (In billions of dollars) Disbursed 2014 2013 2012 Years 

 

Individual income tax and tax 

 withholdings .......................................... 335.8 13.7 290.8 24.0 7.3 

 Corporation income taxes ........................ 35.3 4.4 10.9 6.7 13.3 

 Excise taxes ............................................. 1.8 0.5 0.9 0.2 0.2 

 Unemployment taxes ................................ 0.1 - 0.1 - - 

 Customs duties ......................................... 1.3 0.7 0.3 0.1 0.2 

 Estate and gift taxes ................................. 0.9 - 0.2 0.5 0.2 

 Total ..................................................... 375.2 19.3 303.2 31.5 21.2 

 

 

Reconciliation of Revenue to Tax Collections for the Year

Ended September 30, 2014, and 2013

 

(In billions of dollars) 2014 2013

 

 Consolidated revenue per the Statements of Operations and 

 Changes in Net Position ........................................................................................ 3,066.1 2,842.5 

 Tax refunds ................................................................................................................ 375.2 365.9 

 Earned income tax and child tax credit imputed revenue ......................................... (81.6) (79.1) 

 Other tax credits and accrual adjustments ................................................................ (21.9) (9.5) 

 Federal Insurance Contributions Act - Tax ................................................................ 19.8 20.3 

 Federal Reserve earnings ......................................................................................... (99.2) (75.8) 

 Nontax-related fines and penalties reported by agencies ......................................... (65.1) (87.2) 

 Nontax-related earned revenue ................................................................................. (19.0) (11.2) 

 Collections of federal tax revenue ............................................................................. 3,174.3 2,965.9 

Consolidated revenue in the SOCNP is presented on a modified cash basis, net of tax refunds, and includes other nontax 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 Federal Insurance Contributions Act – Tax is included in the Individual income 

and tax withholdings line in the Collections of Federal tax revenue; however, it is not reported on the SOCNP as these 

collections are intragovernmental revenue and eliminated in consolidation. The table above reconciles total revenue to federal 

tax collections. 

 
110 NOTES TO THE FINANCIAL STATEMENTS 

 

 

Collections of Federal Revenue for the Year Ended September 30, 2013

 

 

 Federal Tax Year to Which Collections Relate 

 Tax

 Revenue Prior

(In billions of dollars) Collections 2013 2012 2011 Years 

 

Individual income tax and tax 

 withholdings ..................................... 2,448.5 1,580.4 821.5 22.3 24.3 

 Corporation income taxes ..................... 312.0 217.6 83.6 2.0 8.8 

 Excise taxes .......................................... 87.1 64.0 22.9 0.1 0.1 

 Unemployment taxes ............................. 54.1 28.0 15.3 10.7 0.1 

 Customs duties ...................................... 31.8 31.8 - - - 

 Estate and gift taxes .............................. 19.8 - 10.3 0.6 8.9 

 Railroad retirement taxes ...................... 5.5 4.2 1.3 - - 

 Fines, penalties, interest, and 

 other revenue ..................................... 7.5 7.2 0.2 0.1 - 

 Subtotal .............................................. 2,966.3 1,933.2 955.1 35.8 42.2 

 Less: amounts collected for ................ 

 non-federal entities ........................... (0.4) 

 Total ................................................ 2,965.9 

 

 

Federal Tax Refunds Disbursed for the Year Ended September 30, 2013

 

 Tax Year to Which Refunds Relate 

 Refunds Prior

(In billions of dollars) Disbursed 2013 2012 2011 Years 

 

Individual income tax and tax 

 withholdings ....................................... 320.4 0.7 287.1 21.9 10.7 

 Corporation income taxes ....................... 41.6 5.4 12.9 6.7 16.6 

 Excise taxes ............................................ 1.6 0.6 0.8 0.1 0.1 

 Unemployment taxes ............................... 0.1 - 0.1 - - 

 Customs duties ........................................ 1.2 1.2 - - - 

 Estate and gift taxes ................................ 1.0 - 0.2 0.3 0.5 

 Total ...................................................... 365.9 7.9 301.1 29.0 27.9 

 
 NOTES TO THE FINANCIAL STATEMENTS 111 

 

Note 19. Prior-Period Adjustments 

 

Prior-Period Adjustments for the Year Ended September 30, 2014, and 2013

 Changes to Net Position

 (In billions of dollars) 2014 2013

 

Prior-period adjustments 

 Department of Justice ........................................................................................ (0.1) (0.3) 

 General Services Administration ....................................................................... - (1.8) 

 Department of the Interior .................................................................................. - (0.5) 

 Other prior-period adjustments .......................................................................... - (0.6) 

 Total prior-period adjustments ........................................................................ (0.1) (3.2) 

 

For fiscal years 2013 and 2014, DOJ applied a change in accounting principle to certain components based on the 

implementation of their Financial Management Policy Memorandum (FMPM) 13-12, Capitalization of General Property, 

Plant, and Equipment and Internal Use Software. The primary impact of the policy change was an increase in the thresholds 

for capitalizing and reporting real property, including leasehold improvements; personal property; and internal use software. 

The change in accounting principle caused a $0.1 billion and $0.3 billion reduction in the overall PP&E balance for fiscal 

years 2014 and 2013, respectively. 

For fiscal year 2013, GSA and DOI applied a change in accounting principle for the recognition of environmental 

liabilities related to asbestos, as required by FASAB Technical Bulletin 2006-1. GSA recognized a total asbestos liability of 

$1.8 billion attributable to prior years’ amortized cost. This was recognized as a prior-period adjustment in fiscal year 2013.

The DOI recognized a liability and an adjustment to ending net position for the total estimated asbestos cleanup cost of $0.5 

billion. The other prior-period adjustment line includes Department of Commerce, Department of Agriculture, and 

Department of State reporting. The Departments of Commerce, Agriculture, and State also implemented FASAB Technical 

Bulletin 2006-1. 

As discussed in Note 22 — Funds from Dedicated Collections, five independent agencies were erroneously reported as 

funds from dedicated collections for fiscal year 2013. In addition, the Patient Centered Outcome Research Trust Fund 

erroneously did not report as a fund from dedicated collections for fiscal year 2013. These errors were corrected in fiscal year 

2014 and resulted in a prior-period adjustment amount of $0.3 billion. 
112 NOTES TO THE FINANCIAL STATEMENTS 

 

Note 20. Contingencies 

Financial Treatment of Loss Contingencies 

Loss contingencies that are assessed to be at least reasonably possible are disclosed in this note. Loss contingencies 

involve situations where there is an uncertainty of a possible loss. 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. Terms 

used to assess the range for the likelihood of loss are probable, reasonably possible, and remote. Loss contingencies that are 

assessed as probable and measurable are accrued in the financial statements. Loss contingencies that are assessed as remote 

are not reported in the financial statements, nor disclosed in the notes. All other material loss contingencies are disclosed in 

this note. The following table provides criteria for how federal agencies 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 the 

best estimate or (if there 

is no best estimate) 

minimum amount in loss 

range, 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 loss 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 disclosure. No disclosure. No disclosure. 

 

 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 loss contingencies related to litigation, probable is defined as the future confirming event or events that are more likely than not to occur, with the 

exception of pending or threatened litigation and unasserted claims. For the pending or threatened litigation and unasserted claims, the future confirming 

event or events are likely to occur. 
 NOTES TO THE FINANCIAL STATEMENTS 113 

 

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. 

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 $186.4 billion as of September 30, 2014, and $332.8 billion as of 

September 30, 2013. The major programs are identified below: 

x PBGC reported $184.4 billion and $328.9 billion as of September 30, 2014, and 2013, respectively, for the estimated 

aggregate unfunded vested benefits exposure to the PBGC for private-sector single-employer and multi-employer 

defined benefit pension plans that are classified as a reasonably possible exposure to loss. 

x FDIC reported $1.7 billion and $3.6 billion as of September 30, 2014, and 2013, 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 deposit accounts such as checking, Negotiable Order of Withdrawal and savings 

accounts, money market deposit accounts, and certificates of deposit received at an insured bank, savings association, or 

credit union. The insurance covers the balance of each depositor’s account and shares, dollar-for-dollar, up to the insurance 

limit, including principal and any accrued interest through the date of the insured financial institution’s closing. As a result, 

the Government has the following exposure from federally-insured financial institutions: 

x FDIC has estimated insured deposits of $6,131.9 billion as of September 30, 2014, and $5,969.0 billion as of 

September 30, 2013, for the DIF.

x National Credit Union Administration (NCUA) has estimated insured shares of $895.7 billion as of September 30, 

2014, and $869.0 billion as of September 30, 2013, for the National Credit Union Share Insurance Fund. 
114 NOTES TO THE FINANCIAL STATEMENTS 

 

Legal Contingencies

Legal contingencies as of September 30, 2014, and 2013, are summarized in the table below: 

 

 2014 2013 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 ....................... 7.1 7.1 8.5 7.2 7.2 9.2

 Reasonably 

 possible ..................... - 9.9 13.5 - 9.2 15.1 

1 Accrued liabilities are recorded and presented in the related line items of 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 to various administrative claims and legal actions brought against it, some of which may 

ultimately result in settlements or decisions against 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 these cases are $7.1 billion and 

$7.2 billion as of September 30, 2014, and 2013, respectively, and are included in “Other Liabilities” on the Balance Sheet. 

For example, HHS is subject to various claims and contingencies related to lawsuits. For cases in which payment has been 

deemed probable and for which the amount of potential liability has been estimated, about $2.9 billion and $2.8 billion has 

been accrued in the financial statements as of September 30, 2014, and 2013, respectively. The U.S. Supreme Court decision 

in Salazar v. Ramah Navajo, dated June 18, 2012 is likely to result in increased claims against the Indian Health Service, a 

component within HHS. Tribes are expected to file claims for prior years and seek to consolidate their claims in a class 

action lawsuit. It is not clear if these will be filed as administrative cases or filed in Federal District Court. In fiscal year 

2014, in DOI’s case of Navajo Nation v. United States, in which an Indian tribe seeks damages relating to management of 

tribal trust funds and assets, the federal government settled the case for $554 million, an amount representing the largest 

settlement with a single Indian tribe. The $554 million was not recorded as a liability in fiscal year 2013 as the settlement 

negotiation was ongoing. 

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 for such claims and actions range from $9.9 billion to $13.5 billion as of September 30, 2014, and from $9.2 

billion to $15.1 billion as of September 30, 2013. 

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. 

Examples of specific cases are summarized below: 

x In the case, Starr International Co., Inc. v. United States, the plaintiffs’ principal class claim in this case, filed 

in the U.S. Court of Federal Claims, arises out of the receipt by the United States of a 79.9 percent equity 

interest in American International Group, Inc. (AIG) as part of the consideration for the extension of an $85 

billion, two-year revolving credit facility to AIG by the Federal Reserve Bank of New York in September 2008 

and prior to the passage of the Emergency Economic Stabilization Act of 2008. Plaintiffs claim that the 

transfer of the equity interest, which was in the form of Series C preferred stock held by a trust for the benefit 

of the U.S. government, was an illegal exaction under Section 13(3) of the Federal Reserve Act or constituted a 

taking of AIG shareholders’ property for which just compensation is due under the Fifth Amendment to the 

United States Constitution. In a separate class claim, plaintiffs allege that an illegal exaction or taking for 

which just compensation is due occurred when the U.S. government allegedly caused AIG to conduct a reverse 
 NOTES TO THE FINANCIAL STATEMENTS 115 

 

stock split in June 2009 without a separate class vote of the then outstanding common shareholders. Plaintiffs 

seek compensatory damages from the Government, including an amount related to the exchange of Series E 

and F preferred shares for common shares of AIG in January 2011 that were previously held by TARP, which 

common shareholders allegedly could have blocked had the reverse stock split not occurred. The federal 

government is unable to determine the likelihood of an unfavorable outcome or make an estimate of potential 

loss at this time. 

Environmental and Disposal Contingencies 

 Environmental and disposal contingencies as of September 30, 2014, and 2013, are summarized in the table below: 

 

 2014 2013 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 ........................ 23.1 22.9 23.1 24.0 24.0 24.1 

 Reasonably 

 possible ....................... - 0.7 0.7 - 0.5 0.5 

1

 Accrued liabilities are recorded and presented in the related line items of 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 $23.1 billion 

and $24.0 billion as of September 30, 2014, and 2013, respectively, and are included in “Other Liabilities” on the Balance 

Sheet. DOE is subject to Spent Nuclear Fuel litigation for damages suffered by all utilities as a result of the delay in 

beginning disposal of spent nuclear fuel and also damages for alleged exposure to radioactive and/or toxic substances. 

Significant claims for partial breach of contract and a large number of class action and/or multiple plaintiff tort suits have 

been filed with estimated liability amounts of $22.6 billion and $21.4 billion as of September 30, 2014, and 2013, 

respectively. 

Other Contingencies 

DOT and HHS reported the following other contingencies: 

x The Federal Highway Administration (FHWA) reimburses states for construction costs on projects related to the 

Federal Highway System of roads. FHWA has pre-authorized $46.0 billion and $45.9 billion to the states to 

establish budgets for its construction projects for fiscal years ending September 30, 2014, and 2013, respectively. 

Congress has not provided appropriations for these projects and no liability is accrued in the DOT consolidated 

financial statements. 

x Contingent liabilities have been accrued as a result of Medicaid audit and program disallowances that are currently 

being appealed by the states and for reimbursement of state plan amendments. The Medicaid amounts are $8.4 

billion and $6.1 billion for fiscal years ending September 30, 2014, and 2013, respectively. In all cases, the funds 

have been returned to HHS. 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 
116 NOTES TO THE FINANCIAL STATEMENTS 

 

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. 

Treaties

The U.S. Government is a party to major treaties and other international agreements. These treaties and other 

international agreements address various issues including, but not limited to trade, commerce, security, and arms that may 

involve financial obligations or give rise to possible exposure to losses. A comprehensive analysis to determine any such 

financial obligations or possible exposure to loss and their related effect on the consolidated financial statements of the U.S. 

Government has not yet been performed. 
 NOTES TO THE FINANCIAL STATEMENTS 117 

 

Note 21. Commitments 

 

Long-Term Operating Leases as of September 30, 2014, and 2013

(In billions of dollars) 2014 2013

 

General Services Administration ....................................................................... 24.4 23.6 

 U.S. Postal Service ............................................................................................ 6.8 6.7 

 Department of State .......................................................................................... 1.4 1.3 

 Department of Health and Human Services ...................................................... 0.9 0.9 

 Department of Agriculture ................................................................................. 0.8 0.8 

 Department of Defense ..................................................................................... 0.7 1.3 

 Department of the Treasury .............................................................................. 0.6 0.7 

 Other operating leases ...................................................................................... 2.8 4.1 

 Total long-term operating leases ................................................................... 38.4 39.4 

 

The Government has entered into contractual commitments that require future use of financial resources. It has 

significant amounts of long-term lease obligations and undelivered orders. Undelivered orders represent the value of goods 

and services ordered that have not yet been received. 

The Government has other commitments that may require future use of financial resources. For example, the 

Government has callable subscriptions in certain Multilateral Development Banks (MDBs), which are international financial 

institutions that finance economic and social development projects in developing countries. Callable capital stock shares in 

the MDBs serve 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 very favorable financing terms when borrowing from world capital markets. To date, there has never 

been a call on this capital for any of the major MDBs and none are anticipated. 

 
118 NOTES TO THE FINANCIAL STATEMENTS 

 

 

 Undelivered Orders and Other Commitments as of September 30, 2014, and 2013

 (In billions of dollars) 2014 2013

 

 Undelivered Orders: 

 Department of the Treasury ............................................................................ 164.4 171.3 

 EOP Foreign Military Sales Program .............................................................. 160.9 153.9 

 Department of Defense ................................................................................... 136.2 201.8 

 Department of Education ................................................................................ 130.2 215.6 

 Department of Health and Human Services ................................................... 110.6 88.4 

 Department of Transportation ......................................................................... 107.8 101.5 

 Department of Agriculture ............................................................................... 43.6 46.4 

 Department of Housing and Urban Development .......................................... 40.7 45.7 

 Department of Homeland Security ................................................................. 30.4 31.2 

 Department of Energy ..................................................................................... 25.5 21.8 

 Department of State ........................................................................................ 19.5 20.0 

 Agency for International Development ........................................................... 18.6 17.2 

 Department of Veterans Affairs ...................................................................... 13.9 13.9 

 Export-Import Bank of the United States ........................................................ 12.6 15.9 

 National Science Foundation .......................................................................... 11.1 11.2 

 Department of Labor ....................................................................................... 9.8 9.6 

 All other agencies ........................................................................................... 27.6 36.8 

 Total undelivered orders ............................................................................. 1,063.4 1,202.2 

 

Other Commitments: 

 GSE Senior Preferred Stock Purchase Agreement ........................................ 258.1 258.1 

 Callable Capital Subscriptions for Multilateral Development Banks ............... 102.3 90.8 

 Agriculture Direct Loans and Guarantees ...................................................... 5.8 5.4 

 Fuel Purchase Obligations .............................................................................. 5.3 6.3 

 Power Purchase Obligations .......................................................................... 4.5 4.4 

 Conservation Reserve Program ..................................................................... 1.7 2.0 

 Long-term Satellite and Systems .................................................................... 1.5 3.6 

 All other commitments .................................................................................... 6.0 6.3 

 Total other commitments ............................................................................. 385.2 376.9 

 
 NOTES TO THE FINANCIAL STATEMENTS 119 

 

Other Commitments and Risks 

Commitments to GSEs 

At September 30, 2014, and 2013, the maximum remaining potential commitment to the GSEs for the remaining life of 

the SPSPAs was $258.1 billion, which was established on December 31, 2012. Refer to Note 9—Investments in 

Government-Sponsored Enterprises for a full description of the SPSPA agreements, related commitments, and contingent 

liability, if any, as well as additional information. 

Terrorism Risk Insurance Program 

The Terrorism Risk Insurance Act of 2002 (TRIA or the Act), which established the Terrorism Risk Insurance Program 

(Program) first was enacted on November 26, 2002. On January 12, 2015, the Terrorism Risk Insurance Program 

Reauthorization Act of 2015 (the “Reauthorization Act”), amended the termination date of the Program to December 31, 

2020. This program could create claims on government resources in the future. The purpose of the Act is to address market 

disruptions and ensure the continued widespread availability and affordability of commercial property and casualty insurance 

for terrorism risk. If the Secretary of the Treasury, in consultation with the Secretary of Homeland Security and the Attorney

General, certifies an act as an “act of terrorism,” insurers may be eligible to receive payments from the government partially 

reimbursing insured losses above a designated deductible amount. The Act also gives Treasury authority to recoup federal 

payments made under the Program through policyholder surcharges under certain circumstances and contains provisions 

designed to manage litigation arising from or relating to certified acts of terrorism. The Secretary of the Treasury has never 

certified an “act of terrorism” under TRIA, and therefore, there have been no payments under the Program. 
120 NOTES TO THE FINANCIAL STATEMENTS 

 

Note 22. Funds from Dedicated Collections 

Funds from Dedicated Collections as of September 30, 20141

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 ............ - - - - 58.0 58.0 Fund balance with Treasury .................. (0.1) 0.7 (0.2) 18.4 119.5 138.3 Investments in U.S. Treasury securities, net of unamortized premiums/discounts ........................... 2,712.8 202.2 70.1 68.4 182.4 3,235.9 Other federal assets .............................. 23.3 32.9 0.8 35.6 16.6 109.2 Non-federal assets ................................. 2.2 1.2 4.2 5.4 112.8 125.8 Total assets ........................................ 2,738.2 237.0 74.9 127.8 489.3 3,667.2 

 Liabilities and net position: Due and payable to beneficiaries ........... 63.0 25.7 26.0 31.9 2.5 149.1 Other federal liabilities ........................... 4.6 31.0 1.2 36.4 79.8 153.0 Other non-federal liabilities .................... - 0.5 - 2.3 164.7 167.5 Total liabilities ..................................... 67.6 57.2 27.2 70.6 247.0 469.6 Total net position ................................ 2,670.6 179.8 47.7 57.2 242.3 3,197.6 Total liabilities and net position ....... 2,738.2 237.0 74.9 127.8 489.3 3,667.2 

 Change in net position: Beginning net position ........................... 2,616.3 190.0 79.5 52.7 205.2 3,143.7 Prior-period adjustment ......................... - - - - 0.3 0.3 Beginning net position, adjusted ............ 2,616.3 190.0 79.5 52.7 205.5 3,144.0 Investment revenue ................................ 95.6 8.8 3.7 2.4 3.3 113.8 Individual income taxes .......................... 642.3 227.6 109.1 - - 979.0 Unemployment and excise taxes ........... - - - - 108.9 108.9 Other taxes and receipts ....................... - 9.7 0.1 5.5 35.5 50.8 Miscellaneous earned revenue ............... - - - - 5.0 5.0 Other changes in fund balance (e.g., appropriations, transfers) ................... 18.0 10.5 (1.9) 247.9 25.4 299.9 Program gross cost and non- program expenses ............................... 701.6 270.4 142.8 320.2 177.9 1,612.9 

 Less: program revenue ...................... - 3.6 - 68.9 36.6 109.1 Net cost ............................................... 701.6 266.8 142.8 251.3 141.3 1,503.8 Ending net position ............................ 2,670.6 179.8 47.7 57.2 242.3 3,197.6 1

By 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.
 NOTES TO THE FINANCIAL STATEMENTS 121 

 

Funds from Dedicated Collections as of September 30, 20131

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 .................. - - - - 65.4 65.4 

 Fund balance with Treasury ......................... (0.3) 2.0 (0.4) 7.5 104.1 112.9 

 Investments in U.S. Treasury 

 securities, net of unamortized 

 premiums/discounts ................................. 2,655.6 206.0 100.8 67.4 163.8 3,193.6 

 Other federal assets ..................................... 24.0 30.8 1.1 45.6 17.4 118.9 

 Non-federal assets........................................ 2.0 - 3.8 - 108.4 114.2 

 Total assets ............................................. 2,681.3 238.8 105.3 120.5 459.1 3,605.0 

 Liabilities and net position: 

 Due and payable to beneficiaries ................. 60.1 20.8 24.4 27.8 3.7 136.8 

 Other federal liabilities .................................. 4.9 27.3 1.4 38.0 89.3 160.9 

 Other non-federal liabilities ........................... - 0.7 - 2.0 160.9 163.6 

 Total liabilities ............................................... 65.0 48.8 25.8 67.8 253.9 461.3 

 Total net position .......................................... 2,616.3 190.0 79.5 52.7 205.2 3,143.7 

 Total liabilities and net position ............... 2,681.3 238.8 105.3 120.5 459.1 3,605.0 

 Change in net position: 

 Beginning net position .................................. 2,551.6 212.3 111.3 70.1 202.5 3,147.8 

 Prior-period adjustment ................................ - - - - 0.9 0.9 

 Beginning net position, adjusted ................... 2,551.6 212.3 111.3 70.1 203.4 3,148.7 

 Investment revenue ...................................... 99.1 9.5 5.1 2.4 3.5 119.6 

 Individual income taxes ............................... 589.4 212.9 100.1 - - 902.4 

 Unemployment and excise taxes .................. - - - - 106.8 106.8 

 Other taxes and receipts .............................. - 1.3 0.1 3.4 31.6 36.4 

 Miscellaneous earned revenue - - - - 4.2 4.2 

 Other changes in fund balance (e.g., 

 appropriations, transfers) .......................... 43.2 15.4 2.4 213.9 32.7 307.6 

 Program gross cost and non- program expenses ..................................... 667.0 265.2 139.5 302.6 211.2 1,585.5 

 Less: program revenue ................................ - 3.8 - 65.5 34.2 103.5 

 Net cost ..................................................... 667.0 261.4 139.5 237.1 177.0 1,482.0 Ending net position ................................ 2,616.3 190.0 79.5 52.7 205.2 3,143.7 

 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

special funds. Funds from dedicated collections specifically exclude any fund established to account for pensions, other 
122 NOTES TO THE FINANCIAL STATEMENTS 

 

retirement benefits, other postemployment 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 23—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 securitiesincluding 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 U.S. 

Treasury, which uses the cash for general government purposes. Treasury securities are issued to federal agencies as evidence 

of its receipts. Treasury securities are an asset to the federal agencies 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 12—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 agencies that administer each particular fund. For detailed information regarding these funds from 

dedicated collections, please refer to the financial statements of the corresponding administering agencies. For information on

the benefits due and payable liability associated with certain funds from dedicated collections, see Note 15—Benefits Due 

and Payable. 

Federal Old-Age and Survivors Insurance Trust Fund 

The Federal Old-Age and Survivors Insurance 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 Federal Old-Age and Survivors Insurance Trust Fund. Interest 

earnings on Treasury securities, federal agencies’ 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 Federal Old-Age and Survivors Insurance Trust Fund and authorizing the 

depositing of amounts to the credit of the fund is set forth in 42 U.S.C. § 401. 
 NOTES TO THE FINANCIAL STATEMENTS 123 

 

Federal Hospital Insurance Trust Fund 

(Medicare Part A) 

The Federal Hospital Insurance Trust Fund, administered by HHS, finances the Hospital Insurance Program (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 eligible disabled people. 

The Federal Hospital Insurance Trust Fund is financed primarily by payroll taxes, including those paid by federal 

agencies. It also receives income from interest earnings on Treasury securities and a portion of income taxes collected on 

Social Security benefits. Section 1817 of the Social Security Act established the Medicare Hospital Trust Fund. 

Federal Disability Insurance Trust Fund 

The Federal Disability Insurance Trust Fund provides financial assistance and protection against the loss of earnings 

due to a wage earner’s disability. The SSA administers this fund. 

Like the Federal Old-Age and Survivors Insurance Trust Fund, payroll taxes primarily fund the Federal Disability 

Insurance Trust Fund. The fund also receives income from interest earnings on Treasury securities, federal agencies’ 

payments for the Social Security benefits earned by military and federal civilian employees, and a portion of income taxes 

collected on Social Security benefits. The law establishing the Federal Disability Insurance 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 Supplementary Medical Insurance Trust Fund, administered by HHS, finances the Supplementary Medical 

Insurance 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 of the 

Treasury, and interest earnings on Treasury securities. Medicare Supplementary Medical Insurance Trust Fund was 

established by Section 1841 of the Social Security Act. 

Medicare Part D was created by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Public 

Law 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 of the Treasury, not on payroll taxes. The fund also receives transfers from States. The law creating 

the Medicare prescription drug account within the Federal Supplementary Medical Insurance Trust Fund and authorizing the 

depositing of amounts to the credit of the fund is set forth in 42 U.S.C. § 1395w-116. 

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, as amended by SFFAS No. 43. For the 

years ending September 30, 2014, and 2013, there were approximately 641 and 648 funds from dedicated collections, 

respectively. The funds from dedicated collections within the “all other” aggregate, along with the agencies that administer 

them, include the following: 

x Exchange Stabilization Fund—administered by Treasury. 

x Land and Water Conservation Fund, Reclamation Fund, and Water and Related Resources Fund—administered 

by DOI. 

x Railroad Retirement Trust Fund—administered by RRB. 
124 NOTES TO THE FINANCIAL STATEMENTS 

 

x National Flood Insurance Program—administered by DHS. 

x Highway Trust Fund and Airport and Airway Trust Fund—administered by DOT. 

x Government National Mortgage Association—administered by HUD. 

x Decommissioning and Decontamination Fund—administered by DOE. 

x Crime Victims Fund—administered by DOJ. 

x Harbor Maintenance Trust Fund—administered by DOD. 

x Unemployment Trust Fund (UTF) and Black Lung Disability Trust Fund (BLDTF)—administered by DOL. 

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. 

Five independent agencies were erroneously reported as funds from dedicated collections for fiscal year 2013. In 

addition, the Patient Centered Outcome Research Trust Fund erroneously did not report as a fund from dedicated collections 

for fiscal year 2013. These errors were corrected in fiscal year 2014 and resulted in a prior-period adjustment of $0.3 billion. 

Unemployment and Excise Taxes 

Unemployment Taxes 

 The Unemployment Trust Fund (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. 

 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 all the 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, 2014, and 2013, UTF unemployment tax revenues were $52.6 billion and $54.0 billion, respectively. Appropriations have 

supplemented the fund’s income during periods of high and extended unemployment. UTF was established under the 

authority of Section 904 of the Social Security Act of 1935.

Excise Taxes 

There are 11 funds from dedicated collections within the “all other” aggregate that represent all 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 more than 90 percent 

of all 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, certain tires, the initial sale of heavy trucks, and highway use by commercial motor 

vehicles. For the years ending September 30, 2014, and 2013, Highway Trust Fund excise tax revenues were $39.0 billion 

and $36.5 billion, respectively. As funds are needed for payments, the Highway Trust Fund corpus investments are liquidated 

and funds are transferred to the Federal Highway Administration, 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: 

x Taxes received from transportation of persons and property in the air, as well as fuel used in commercial and 

general aviation. 

x International departure taxes. 

x Interest earnings on Treasury securities. 

For the years ending September 30, 2014, and 2013, Airport and Airway Trust Fund excise tax revenues were $13.5 billion 

and $12.9 billion, respectively. 
 NOTES TO THE FINANCIAL STATEMENTS 125 

 

Miscellaneous Earned Revenues 

Miscellaneous earned revenues due to activity attributable to funds from dedicated collections primarily relate to 

royalties retained by various funds within DOI. 
126 NOTES TO THE FINANCIAL STATEMENTS 

 

Note 23. 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 accordingly are not 

recognized on the consolidated Balance Sheet. Examples of the Government’s fiduciary activities include the Thrift Savings 

Plan (the Plan), which is administered by the Federal Retirement Thrift Investment Board, and the Indian Tribal and 

individual Indian Trust Funds, which are administered by the DOI. 

 Schedule of Fiduciary Net Assets as of September 30, 2014, and 2013

(In billions of dollars) 2014 2013

 FRTIB-Thrift Savings Plan ................................................................................. 416.1 374.3 

 Department of the Interior ................................................................................. 5.1 4.7 

 All other ............................................................................................................. 5.9 (0.4) 

 Total fiduciary net assets ................................................................................ 427.1 378.6 

 

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. Refer to Note 12—Federal Debt 

Securities Held by the Public and Accrued Interest for more information on Treasury securities. 

As of September 30, 2014, total fiduciary investments in Treasury securities and in non-Treasury securities are $187.1 

billion and $241.9 billion, respectively. As of September 30, 2013, total fiduciary investments in Treasury securities and in 

non-Treasury securities were $176.8 billion and $206.0 billion, respectively. As of September 30, 2014, and 2013, the total 

fiduciary fund balance with Treasury is $1.0 billion and $1.1 billion, respectively. A liability for this fiduciary fund balance 

with Treasury is reflected as other miscellaneous liabilities in Note 17—Other Liabilities. 

As of September 30, 2014, and 2013, collectively, the fiduciary investments in Treasury securities and fiduciary fund 

balance with Treasury held by all Government entities represent $3.4 billion and $4.0 billion, respectively, of unrestricted 

cash included within cash held by Treasury for Governmentwide Operations shown in Note 2—Cash and Other Monetary 

Assets. 

Federal Retirement Thrift Investment Board 

(FRTIB)-Thrift Savings Plan 

The TSP is administered by an independent Government agency, the FRTIB, which is charged with operating the TSP 

prudently and solely in the interest of the participants and their beneficiaries. Assets of the TSP are maintained in the Thrift 

Savings Fund. 

The TSP is a retirement savings and investment plan for federal employees and members of the uniformed services. It 

was authorized by the United States 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. 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. 

Federal employees, who are participants of FERS, the CSRS, or equivalent retirement systems, as provided by statute, 

and members of the uniformed services, are eligible to join the Plan immediately upon being hired. Generally, FERS 

employees are those employees hired on or after January 1, 1984, while CSRS employees are employees hired before January 

1, 1984, who have not elected to convert to FERS. Each group has different rules that govern contribution rates. As of 

December 31, 2013, and 2012, there were approximately 4.6 million participants in the TSP, with approximately 2.9 million 

contributing their own money. For further information about FRTIB and the TSP, please refer to the FRTIB website at 

http://www.frtib.gov. 
 NOTES TO THE FINANCIAL STATEMENTS 127 

 

As of September 30, 2014, and 2013, the TSP held $416.1 billion and $374.3 billion, respectively, in net assets, which 

included $183.7 billion and $52.5 billion, respectively, of U.S. Government Securities (amounts are unaudited). The most 

recent audited financial statements for the TSP are as of December 31, 2013, and 2012. As of December 31, 2013, and 2012, 

the TSP held $394.5 billion and $334.9 billion, respectively, in net assets, which included $172.7 billion and $158.5 billion, 

respectively, of U.S. Government Securities. These unaudited amounts above are included to enhance comparability of the 

TSP net assets with the remainder of the Government’s fiduciary net assets as of September 30, 2014, and 2013. The increase 

from fiscal year 2013 to fiscal year 2014 was due to debt suspension in fiscal year 2013 as discussed in the Intragovernmental 

Section of Note 12 — Federal Debt Securities Held by the Public. 

DOI–Indian Trust Funds 

As stated above, DOI has responsibility for the assets held in trust on behalf of American Indian Tribes and individuals, 

and these account for all of DOI’s fiduciary net assets. DOI maintains accounts for Tribal and Other Trust Funds (including 

the Alaska Native Escrow Fund and Individual Indian Money 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 

were prepared using the cash or modified cash basis of accounting, a comprehensive basis of accounting other than GAAP. 

The independent auditors’ reports were qualified as it was not practical to extend audit procedures sufficiently to satisfy 

themselves as to the fairness of the trust fund balances. For further information related to these assets, see the financial 

statements of the DOI. 

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, 2014, and 2013, including FRTIB and DOI, there are a total of 15 and 20 federal 

entities, respectively, with fiduciary activities at a grand total of 50 and 66 fiduciary funds, respectively. SBA and LOC are 

the significant agencies relating to the fiduciary activities of the remaining component entities within the “all other” 

aggregate balance. As of September 30, 2014, “all other” fiduciary net assets were $0.8 billion, compared to $(0.4) billion as 

of September 30, 2013. 
128 NOTES TO THE FINANCIAL STATEMENTS 

 

Note 24. Social Insurance 

The Statement of Social Insurance 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 

economic as well as 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 agency 

performance and accountability report for RRB. The projections are based on the continuation of program provisions 

contained in current law, with exceptions in regard to (1) the sustainable growth rate formula for physician fee schedule 

payment under Medicare Part B, which is further described in the next paragraph, and (2) payment reductions that would 

result from the projected depletion of the Social Security and Medicare Hospital Insurance (Part A) trust funds; under current 

law, payments would be reduced to levels that could be covered by tax revenues when the Social Security and Medicare 

Hospital Insurance (Part A) trust funds are depleted. 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, and disabled) during the 75-year projection period (Black Lung is projected only through 

September 30, 2040, because the program will terminate on that date). 

Contributions and dedicated taxes consist of payroll taxes from employers, employees, and self-employed persons; 

revenue from federal income taxation of Old-Age Survivors and Disability Insurance (OASDI) and railroad retirement 

benefits; excise tax on coal (Black Lung); premiums from, and state transfers on behalf of, participants in Medicare; and 

reimbursements from the General Fund of the Treasury 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. Expenditures 

include scheduled benefit payments and administrative expenses. Scheduled benefits are projected based on the benefit 

formulas under current law, with an exception in regard to the Sustainable Growth Rate (SGR) formula for physician fee 

schedule payment under Medicare Part B. Current law requires a reduction in Medicare payment rates for physician services 

of 21 percent in April 2015. It is a virtual certainty that lawmakers will override the required reduction in Medicare physician 

payment rates as they have for every year beginning with 2003. For this reason, the income, expenditures, and assets for Part 

B reflect a projected baseline, which includes an override of the provisions of the SGR and an assumed annual increase in the 

physician fee schedule equal to the average SGR override over the 10-year period ending March 31, 2015. Current Social 

Security and Medicare law also 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, Medicare, and Railroad Retirement 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 January 1 of the valuation year.

The present values of future expenditures in excess of 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. 
 NOTES TO THE FINANCIAL STATEMENTS 129 

 

The trust fund balances as of the valuation date for the respective programs, including interest earned, are shown in the 

table below. Substantially all of the Social Security (OASDI), Medicare Hospital Insurance (HI), and Supplementary Medical 

Insurance (SMI) trust fund balances consist of investments in special nonmarketable U.S. Treasury securities that are backed 

by the full faith and credit of the U.S. Government.

 

Social Insurance Programs Trust Fund Balances 1

(In billions of dollars) 2014 2013 2012 2011 2010

Social Security ...................................... 2,764 2,732 2,678 2,609 2,540 

Medicare ............................................... 

HI ........................................................ 205 220 244 272 304 

SMI Part B ........................................... 74 66 80 71 76 

SMI Part D .......................................... 1 1 1 1 1 

Railroad Retirement .............................. 28 26 24 26 25 

Black Lung ............................................ (6) (6) (6) (6) (6)

1

 As of the valuation date of the respective programs.

Social Security 

The Old-Age and Survivors Insurance (OASI) program, created in 1935, and the Disability Insurance (DI) program, 

created in 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, or 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 Required Supplementary 

Information—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 of the Treasury. 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 pays for inpatient acute hospital services and major alternatives to hospitals (skilled nursing 

services, for example), and SMI pays for hospital outpatient services, physician services, and assorted other services and 

products through the Part B account and pays for prescription drugs through the Part D account. 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, 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. 
130 NOTES TO THE FINANCIAL STATEMENTS 

 

For SMI, transfers from the General Fund of the Treasury 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 for beneficiaries dually eligible for Medicare 

and Medicaid. For those beneficiaries, states must pay a portion of their estimated foregone drug costs into the Part D account

(referred to as state transfers). 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 even though the expenditures on these programs are included. For the fiscal year 2014 and 2013 SOSI, the 

amounts eliminated totaled $24.7 trillion and $22.5 trillion, respectively. Refer to Unaudited Required Supplementary 

Information—Social Insurance section for additional information on Medicare program financing. 

The Medicare Prescription Drug, Improvement, and Modernization Act (MMA), enacted on December 8, 2003, created 

the Part D account in the SMI Trust Fund to account for the prescription drug benefit that began in 2006. The MMA 

established within SMI two Part D accounts related to prescription drug benefits: the Medicare Prescription Drug Account 

and the Transitional Assistance Account. The Medicare Prescription Drug Account was used in conjunction with the broad, 

voluntary prescription drug benefits that commenced in 2006. The Transitional Assistance Account was used to provide 

transitional assistance benefits, beginning in 2004 and extending through 2005, for certain low-income beneficiaries prior to 

the start of the new prescription drug benefit. 

Affordable Care Act (ACA) 

The financial projections for the Medicare program reflect substantial, but very uncertain, cost savings deriving from 

provisions of the ACA. However, it is important to note that the improved results for HI and SMI Part B since 2010 depend 

in part on the long-range feasibility of the various cost-saving measures in the ACA–in particular, the lower increases in 

Medicare payment rates to most categories of health care providers. Under the ACA, the rate of increase of Medicare 

payment rates is equal to the prior law rate of increase (equal to the rate of increase in the prices of inputs used to produce

Medicare services) less the rate of increase of total economy multifactor productivity. Without fundamental change in the 

current delivery system, these productivity-related adjustments to Medicare payment rates would probably not be viable 

indefinitely. It is possible that health care 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, providers would have to generate and sustain unprecedented levels of productivity gains–a very 

challenging and uncertain prospect. 

A transformation of health care in the United States, affecting both the means of delivery and the method of paying for 

care, is also a possibility. The ACA takes 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, improvement in coordination of post-acute care, 

payment bundling, pay for performance, and assistance for individuals in making informed health choices. If researchers and 

policy makers can demonstrate that the new approaches developed through these initiatives will improve the quality of health 

care and/or reduce costs, then the Secretary of HHS can adopt them for Medicare without further legislation. Such changes 

have the potential to reduce health care costs as well as cost growth rates and could, as a result, help lower Medicare cost 

growth rates to levels compatible with the lower price updates payable under current law. 

The ability of new delivery and payment methods to significantly lower cost growth rates is uncertain at this time, since 

specific changes have not yet been designed, tested, or evaluated. Hopes for success are high, but at this time there is 

insufficient evidence to support an assumption that improvements in efficiency can occur of the magnitude needed to align 

with the statutory Medicare price updates. The ability of health care providers to sustain these productivity-related 

adjustments 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. 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 reduction in provider payment updates, if implemented for all future years as required under current law, could 

have secondary impacts on provider participation, beneficiary access to care; quality of services; and other factors. These 

possible impacts are very speculative and at present there is no consensus among experts as to their potential scope. Further 

research and analysis will help to better inform this issue and may enable the development of specific projections of 

secondary effects under current law in the future. 

The SOSI projections are based on current law, with exceptions in regard to (1) the sustainable growth rate (SGR) 

formula for physician fee schedule payment under Part B, where current law requires a reduction in Medicare payment rates 

for physician services of 21 percent in April 2015, and (2) payment reductions that would result from the projected depletion 
 NOTES TO THE FINANCIAL STATEMENTS 131 

 

of the Medicare Hospital Insurance (Part A) trust fund; under current law, payments would be reduced to levels that could be 

covered by tax revenues when the Medicare Hospital Insurance (Part A) trust funds are depleted. It is a virtual certainty that 

lawmakers will override the required reduction in Medicare physician payment rates as they have for every year beginning 

with 2003. For this reason, the income, expenditures, and assets for Part B reflect a projected baseline, which includes an 

override of the provisions of the SGR and an assumed annual increase in the physician fee schedule equal to the average SGR 

override over the 10-year period ending with March 31, 2015. 

The extent to which actual future Part A and Part B costs exceed the projected amounts due to changes to the 

productivity adjustments depends on what specific changes might be legislated and whether Congress would pass further 

provisions to help offset such costs. However, absent an unprecedented change in health care delivery systems and payment 

mechanisms, the prices paid by Medicare for health services will fall increasingly short of the costs of providing these 

services. By the end of the long-range projection period, Medicare prices for many services would be less than half of their 

level without consideration of the productivity price reductions. Before such an outcome would occur, lawmakers would 

likely intervene to prevent the withdrawal of providers from the Medicare market and the severe problems with beneficiary 

access to care that would result. Overriding the productivity adjustments, as lawmakers have done repeatedly 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. As noted, these examples reflect only hypothetical changes to provider payment rates. 

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 that assumes 

that, starting in 2020, the economy-wide productivity adjustments gradually phase down to 0.4 percent. 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 

under Medicare and of the broad range of uncertainty associated with such impacts. The table below contains a 

comparison of the Medicare 75-year present values of estimated future income and estimated future expenditures under 

the projected baseline with those under current law—including the 21 percent scheduled reduction in physician payment 

rates under the SGR formula—and the illustrative alternative scenario. 

 
132 NOTES TO THE FINANCIAL STATEMENTS 

 

Medicare Present Values (in billions) (Unaudited)

 

 2014 Consolidated 2014 Consolidated Illustrative SOSI SOSI Alternative Projected Baseline Current Law Scenario 1, 2

 

Income 

 Part A ..................................................... $16,542 $16,542 $16,550

 Part B 3 ................................................... $6,456 $5,797 $7,249

 Part D 4................................................... $2,508 $2,512 $2,542

 Total Income ...................................... $25,506 $24,851 $26,341

 

 Expenditures 

 Part A .................................................... $20,365 $20,396 $24,848

 Part B .................................................... $24,311 $21,847 $27,286

 Part D .................................................... $9,312 $9,327 $9,440

 Total Expenditures .............................. $53,988 $51,570 $61,574

 

 

 Part A ...................................................... $3,823 $3,854 $8,297

 Part B ....................................................... $17,856 $16,050 $20,037

 Part D ...................................................... $6,804 $6,815 $6,898

 Excess of Expenditures over Income $28,483 $26,719 $35,232

 

 

1

These amounts are not presented in the 2014 Trustees' Report. 

 2

At 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. 

 3

Excludes $17,856 billion, $16,050 billion, and $20,037 billion of General Revenue Contributions from the 2014 Consolidated SOSI 

 Projected Baseline projection, the 2014 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. 

 4

Excludes $6,804 billion, $6,815 billion, and $6,898 billion of General Revenue Contributions from the 2014 Consolidated SOSI 

 Projected Baseline projection, the 2014 Consolidated SOSI Current Law projection, and the Illustrative Alternative Scenario's 

 projection, respectively; i.e., to reflect Part D income on a consolidated governmentwide basis. 

 Note: Amounts may not add up due to rounding.

 
 NOTES TO THE FINANCIAL STATEMENTS 133 

 

As expected, the projected baseline and current-law projections differ most markedly for Part B, since the physician fee 

reductions do not affect Part A and Part D directly. The present values of estimated future income and expenditures under 

current law are roughly 10 percent lower than under the projected baseline projections. The difference between the projected 

baseline 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 projected baseline and 

current-law projections reflect an estimated 1.1 percent reduction in annual cost growth each year. If the productivity 

adjustments were gradually phased out, as illustrated under the alternative scenario, the estimated present value of Part A and

Part B expenditures would be higher than the projected baseline projections by roughly 22 percent and 12 percent, 

respectively. As indicated above, the present value of Part A income is basically unaffected under the alternative scenario; 

and the present value of Part B income is also 12 percent higher under the illustrative alternative scenario, since income is set 

each year to mirror expenditures. 

The Part D values are similar under each projection because the services are not affected by the productivity 

adjustments or the physician fee schedule reductions. The very minor impact is the result of a slight change in the discount 

rates that are used to calculate the present values. 

Social Security and Medicare–Demographic and Economic Assumptions 

The Boards of Trustees5 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. 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. Assumptions are made about many economic and demographic factors, including Gross 

Domestic Product (GDP)6

, disability incidence and terminations, earnings, the Consumer Price Index (CPI), the 

unemployment rate, the fertility rate, immigration, mortality, and for the Medicare projections health care cost growth. 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’ Agency Financial Reports. 

 

 5 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 generally appointed by the President and confirmed by the Senate for a 4-year term. By law, the 

public trustees are members of two different political parties. 

 6

In July 2013, the Bureau of Economic Analysis (BEA) revised upward the historical values for GDP beginning with estimates for 1929. 
134 NOTES TO THE FINANCIAL STATEMENTS 

 

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 

Rate1 Year Male Female 

2014 1.91 779.8 1,345,000 76.7 81.4

2020 2.06 730.2 1,345,000 77.6 82.1

2030 2.03 667.6 1,155,000 78.8 83.1

2040 2.00 614.6 1,100,000 79.9 84.0

2050 2.00 568.1 1,080,000 80.9 84.8

2060 2.00 527.1 1,070,000 81.8 85.5

2070 2.00 490.8 1,065,000 82.7 86.2

2080 2.00 458.4 1,060,000 83.5 86.9

Economic Assumptions

Real

Wage 

Differential 

(percent)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)7 Year

2014 2.18 3.78 1.61 3.1 1.3 2.9

2020 1.42 4.12 2.70 2.6 1.0 5.5

2030 1.24 3.94 2.70 2.1 0.4 5.6

2040 1.15 3.85 2.70 2.2 0.6 5.6

2050 1.11 3.81 2.70 2.1 0.5 5.6

2060 1.10 3.80 2.70 2.1 0.4 5.6

2070 1.09 3.79 2.70 2.1 0.5 5.6

2080 1.13 3.83 2.70 2.1 0.4 5.6

 

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 legally and otherwise) less 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 a given age for a given year is the average remaining number of years expected prior to death for a person at that exact age, born on 

January 1, 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. Values 

are rounded after 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 produced in the U.S. 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. 

10 The 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 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. 

 
 NOTES TO THE FINANCIAL STATEMENTS 135 

 

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

2014 1.91 779.8 1,345,000 

2020 2.06 730.2 1,350,000 

2030 2.03 667.6 1,160,000 

2040 2.00 614.6 1,105,000 

2050 2.00 568.1 1,085,000 

2060 2.00 527.1 1,070,000 

2070 2.00 490.8 1,065,000 

2080 2.00 458.4 1,060,000 

Economic Assumptions

Average

Annual Wage 

In Covered 

Employment 

(percent 

change) 5

Per Beneficiary Cost8

Real

Wage 

Differential 

(percent)4

(percent change)

Real

GDP

(percent 

change) 7

Real

Interest 

Rate 

(percent) 9

CPI

(percent 

change)6

SMI

Year HI Part B Part D 

2014 2.18 3.78 1.61 3.1 (2.9) 3.4 0.2 0.3

2020 1.42 4.12 2.70 2.6 4.0 5.6 6.3 2.7

2030 1.24 3.94 2.70 2.1 4.5 5.1 5.3 2.9

2040 1.15 3.85 2.70 2.2 5.2 4.9 5.2 2.9

2050 1.11 3.81 2.70 2.1 4.1 4.5 5.0 2.9

2060 1.10 3.80 2.70 2.1 3.8 4.3 4.7 2.9

2070 1.09 3.79 2.70 2.1 4.0 4.2 4.6 2.9

2080 1.13 3.83 2.70 2.1 3.8 4.1 4.4 2.9

 

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 legally and otherwise) less 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 real-wage differential is the annual percentage change in the average annual wage in covered employment less the annual percentage change in CPI. Values 

are rounded after computations.

5 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.

6 The CPI is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). 

7 The real GDP is the value of total output of goods and services produced in the U.S. 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. 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 The real interest rate is the average rate of interest earned on new trust fund securities, above and beyond the rate of inflation. 

 
136 NOTES TO THE FINANCIAL STATEMENTS 

 

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, partitioned surviving spouses, partitioned surviving 

divorced spouses, 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. The 

Railroad Retirement and Survivors’ Improvement Act of 2001 (RRSIA) liberalized benefits for 30-year service employees 

and their spouses, eliminated a cap on monthly benefits for retirement and disability benefits, lowered minimum service 

requirements from 10 to 5 years if performed after 1995, and provided for increased benefits for widow(er)s. 

The RRB and the SSA share jurisdiction over the payment of retirement and survivor benefits. RRB has jurisdiction if 

the employee has at least 10 years (5 if performed after 1995) of railroad service. 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.

Payroll taxes paid by railroad employers and their employees are a primary source of income 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. 

Other sources of program income include: financial transactions with the Social Security and Medicare Trust Funds, 

earnings on investments, federal income taxes on railroad retirement benefits, and appropriations (provided after 1974 as part of 

a phase out of certain vested dual benefits). The financial interchange between RRB’s Social Security Equivalent Benefit 

(SSEB) Account, the Federal Old-Age and Survivors Insurance Trust Fund, the Disability Insurance Trust Fund, and the Federal 

Hospital Insurance Trust Fund is intended to put the latter three trust funds in the same position they would have been had 

railroad employment been covered under the Social Security Act. From a governmentwide perspective, these future financial 

interchanges and transactions are intragovernmental transfers and are eliminated in consolidation. 

Railroad Retirement–Employment, Demographic, and Economic Assumptions 

The most recent set of projections are prepared using employment, demographic, and economic assumptions reflecting 

the Board Members’ reasonable estimate of expected future experience. 

Three employment assumptions were used in preparing the projections and reflect optimistic, moderate, and pessimistic 

future passenger rail as well as freight employment. The average railroad employment is assumed to be 232,000 in 2014 

under the moderate employment assumption. This employment assumption, based on a model developed by the Association 

of American Railroads, assumes that (1) passenger service employment will remain at the level of 46,000 and (2) the 

employment base, excluding passenger service employment, will decline at a constant 2.0 percent annual rate for 25 years, at 

a falling rate over the next 25 years, and remain level thereafter. All the projections are based on an open-group (i.e., future 

entrants) population. 

The moderate (middle) economic assumptions include a long-term cost of living increase of 2.8 percent, an interest rate 

of 7.0 percent, and a wage increase of 3.8 percent. The cost of living assumption reflects the expected level of price inflation. 

The interest (or investment) rate assumption reflects the expected rate of return on NRRIT investments. The wage increase 

reflects the expected increase in railroad employee earnings. 

Sources of the demographic assumptions (including mortality rates and total termination rates, remarriage rates for 

widow(er)s, retirement rates, and withdrawal rates) are listed in Table 2. For further details on the employment, demographic, 

economic and all other assumptions, refer to the Annual Report of the Railroad Retirement System Required by Section 502 of 

the Railroad Retirement Solvency Act of 1983, and the 25th Actuarial Valuation of the Assets and Liabilities under the 

Railroad Retirement Acts (Valuation Report) as of December 31, 2010, with Technical Supplement. 
 NOTES TO THE FINANCIAL STATEMENTS 137 

 

 Table 2

 Railroad Retirement Demographic Actuarial Assumptions (Sources) 

Mortality Rates 1

 Mortality after age 2010 RRB Annuitants Mortality Table 

 retirement 

 2010 RRB Disabled Mortality Table for 

 Mortality after disability Annuitants with Disability Freeze 

 retirement 2010 RRB Disabled Mortality Table for 

 Annuitants without Disability Freeze 

 Mortality during active 2006 RRB Active Service Mortality Table service

 Mortality of widowed 1995 RRB Mortality Table for Widows annuitants

Total Termination Termination for spouses 2010 RRB Spouse Total Termination Table 

Rates 2 Termination for disabled 2004 RRB Total Termination Table for 

 children Disabled Children 

Widow Remarriage 1997 RRB Remarriage Table Rates 3

Retirement Rates 4 Age retirement See the Valuation Report. 

 Disability retirement See the Valuation Report. 

Withdrawal Rates 5 See the Valuation Report.

 1 These mortality tables are used to project the termination of eligible employee benefit payments within the population. 2 Total termination rates are used to project the termination of dependent benefits to spouses and disabled children. 

 3 This rate is used to project the termination of spousal survivor benefits. 

 4 The retirement rates are used to determine the expected annuity to be paid based on age and years of service for both age and disability 

 retirees. 

 5 The withdrawal rates are used to project all withdrawals from the railroad industry and resultant effect on the population and 

 accumulated benefits to be paid. 

 

 
138 NOTES TO THE FINANCIAL STATEMENTS 

 

Black Lung–Disability Benefit Program

The Black Lung Disability Benefit Program provides for compensation and medical benefits for eligible coal miners 

who are totally disabled due to pneumoconiosis (black lung disease) attributed to their coal mine employment. The same 

program also provides for survivor benefits for eligible survivors of coal miners who died due to pneumoconiosis. 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 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. 

Black Lung–Demographic and Economic Assumptions 

The demographic assumptions used for the most recent set of projections are the number of beneficiaries and their life 

expectancy. The beneficiary population data is updated from information supplied by the program. The beneficiary 

population is a nearly closed universe in which attrition by death exceeds new entrants by a ratio of more than ten to one. 

SSA Life Tables are used to project the life expectancies of the beneficiary population. 

The economic assumptions used for the most recent set of projections are coal excise tax revenue estimates, the tax rate 

structure, federal civilian pay raises, and medical cost inflation. 

Estimates of future receipts of the black lung excise tax are based on projections of future coal production and sale 

prices prepared by the Energy Information Agency of DOE. Treasury’s Office of Tax Analysis provides the first 10 years of 

tax receipt estimates. The remaining years are estimated using a growth rate based on both historical tax receipts and 

Treasury’s estimated tax receipts. The coal excise tax rate structure is $1.10 per ton of underground-mined coal and $0.55 per 

ton of surface-mined coal sold, with a cap of 4.4 percent of sales price until the earlier of December 31, 2018, or the first 

December 31, in which there exist no (1) balance of repayable debt described in section 9501 of the Internal Revenue Code 

and (2) unpaid interest on the debt. At that time, the tax rates revert to $0.50 per ton of underground-mined coal and $0.25 

per ton of surface-mine coal sold, and a limit of 2.0 percent of sales price. 

OMB supplies assumptions for future monthly benefit rate increases based on increases in the federal pay scale and 

future medical cost inflation based on increases in the CPIM, which are used to calculate future benefit costs. During the 

current projection period, the future benefit rate increases 3.56 percent in 2015, 3.49 percent in 2016, 3.20 percent in 2017 

and 2018, and approximately 3.10 percent in each year thereafter, and medical cost increases 3.3 percent in 2015, 3.8 percent 

in 2016, and 3.9 percent in each year thereafter. Estimates for administrative costs for the first 10 years of the projection are 

supplied by DOL’s Budget Office, based on current year enacted amounts, while later years are based on the number of 

projected beneficiaries. 

Statement of Changes in Social Insurance Amounts 

The Statement of Changes in Social Insurance Amounts reconciles the change (between the current valuation and the 

prior valuation) in the present value of future revenue less future expenditures for current and future participants (the open 

group measure) over the next 75 years (except Black Lung is projected only through September 30, 2040). The reconciliation 

identifies several components of the changes that are significant and provides reasons for the changes. The following 

disclosures relate to the Statement of Changes in Social Insurance Amounts 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. The Statement of Changes in Social Insurance Amounts shows two reconciliations: 

(1) changing from the period beginning on January 1, 2013, to the period beginning on January 1, 2014, and (2) changing 

from the period beginning on January 1, 2012, to the period beginning on January 1, 2013. 

Social Security 

All estimates relating to the Social Security Program in the Statement of Changes in Social Insurance Amounts 

represent values that are incremental to the prior change. As an example, the present values shown for economic data, 
 NOTES TO THE FINANCIAL STATEMENTS 139 

 

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. 

Assumptions Used for the Components of the Changes for the Social Security Program 

The present values included in the Statement of Changes in Social Insurance Amounts 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. 

Period Beginning on January 1, 2013, and Ending January 1, 2014

Present values as of January 1, 2013, are calculated using interest rates from the intermediate assumptions of the 2013 

Social Security Trustees Report. All other present values in this part of the Statement of Changes in Social Insurance 

Amounts are calculated as a present value as of January 1, 2014. 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 2013 Social Security Trustees Report. Since 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 

Statement of Changes in Social Insurance Amounts are calculated using the interest rates under the intermediate assumptions 

of the 2014 Social Security Trustees Report. 

Period Beginning on January 1, 2012, and Ending January 1, 2013 

Present values as of January 1, 2012, are calculated using interest rates from the intermediate assumptions of the 2012 

Social Security Trustees Report. All other present values in this part of the Statement of Changes in Social Insurance 

Amounts are calculated as a present value as of January 1, 2013. 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 2012 Social Security Trustees Report. Since 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 

Statement of Changes in Social Insurance Amounts are calculated using the interest rates under the intermediate assumptions 

of the 2013 Social Security Trustees Report. 

Changes in Valuation Period 

Period Beginning on January 1, 2013, and Ending January 1, 2014 

The effect on the 75-year present values of changing the valuation period from the prior valuation period (2013-2087) 

to the current valuation period (2014-2088) 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 cashflow for 2013, replaces it 

with a much larger negative net cashflow for 2088, and measures the present values as of January 1, 2014, one year later. 

Thus, the present value of future net cashflows (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 2013-2087 to 2014-2088. 

Period Beginning on January 1, 2012, and Ending January 1, 2013 

The effect on the 75-year present values of changing the valuation period from the prior valuation period (2012-2086) to 

the current valuation period (2013-2087) 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 cashflow for 2012, replaces it with a 

much larger negative net cashflow for 2087, and measures the present values as of January 1, 2013, one year later. Thus, the 

present value of future net cashflows (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 2012-2086 to 2013-2087. 

Changes in Demographic Data, Assumptions, and Methods 

Period Beginning on January 1, 2013, and Ending January 1, 2014 

The ultimate demographic assumptions for the current valuation (beginning on January 1, 2014) 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.

x Preliminary birth rate data for 2012 indicated lower birth rates than were expected in the prior valuation. During 

the period of transition to their ultimate values, the birth rates in the current valuation are generally lower than 

they were in the prior valuation. 
140 NOTES TO THE FINANCIAL STATEMENTS 

 

x New detailed historical divorce data along with revisions in the assumed path of the age-sex-adjusted divorce 

rate in the period of transition to the ultimate were used in the current valuation. 

x New historical data since 2001 along with smoothing to the historical distribution of the married population by 

age of husband and wife was used in the current valuation period. 

The effect of including the new birth rate data was a decrease in the present value of future net cashflows, while the 

inclusion of the remaining data increased the present value of future net cashflows. 

There was one change in demographic methodology. 

x The modeling of the other immigrant population was divided into three distinct groups for the current valuation: 

(1) those with temporary legal status; (2) those never authorized to be in the country; and (3) those that had 

temporary legal status previously but are no longer authorized to be in the country. 

The effect of this new valuation methodology was an increase in the present value of future net cashflows. 

Period Beginning on January 1, 2012, and Ending January 1, 2013 

For the current valuation (beginning on January 1, 2013), changes in ultimate assumptions and recent data for 

immigration have significant but largely offsetting effects. 

x The assumed ultimate annual immigration of “other immigrants,” that is, those entering the country without legal 

permanent resident (LPR) status, is 1.4 million in the current valuation, compared with 1.5 million assumed for the 

prior valuation. 

x The assumed ultimate annual number of persons attaining LPR status is 1.05 million for the current valuation, 

compared with 1.00 million assumed for the prior valuation. The distribution of the ultimate number between those 

entering the country with LPR status and those adjusting status after having already entered the country was also 

revised. 

Reasons for these changes include: (1) the expectation of continued tighter border control in the future; (2) the assumed 

continuation of a recent increase in the number attaining LPR status as immediate relatives; and (3) the assumed continuation 

of a recent increase in the proportion of persons attaining LPR status upon entering the country (rather than adjusting status 

after entry). 

The effect of the changes to immigration assumptions was an increase in the present value of future cashflows. 

Otherwise, the ultimate demographic assumptions for the current valuation are the same as those for the prior valuation. 

However, the starting demographic values, plus the way these values transition to the ultimate assumptions, were changed. 

x Final mortality data for 2008 and 2009 show substantially larger reductions in death rates for the current valuation 

than were expected in the prior valuation. The new data show a lower starting level of death rates and a faster rate of 

decline in death rates over the next 25 years. 

x Final fertility (birth) data for 2009 and 2010, and preliminary data for 2011, indicate lower birth rates for these years 

than were assumed in the prior valuation. 

x New historical data for marital status, for the number of new marriages, for “other immigration,” and for the size of 

the population (based on the 2010 Census) were used in the current valuation. 

The effect of including the new mortality and fertility data was a decrease in the present value of future net cashflows, 

while the inclusion of the remaining data increased the present value of future net cashflows. 

Changes in Economic Data, Assumptions, and Methods 

Period Beginning on January 1, 2013, and Ending January 1, 2014 

For the current valuation (beginning on January 1, 2014), there was one change to the ultimate economic assumptions. 

x The ultimate annual rate of change in the Consumer Price Index for Urban Wage Earners and Clerical Workers 

(CPI-W) is assumed to be 2.7 percent per year in the current valuation period, compared to 2.8 percent per year 

in the previous valuation period. 

Lowering the ultimate average annual increase in the CPI-W makes it more comparable to recent historical annual 

increases. This change to the CPI-W assumption decreased the present value of future cashflows.
 NOTES TO THE FINANCIAL STATEMENTS 141 

 

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.

x The ratio of average taxable earnings to the average wage index is lower by 1.9 percent in 2012 and 1.5 percent 

in 2013, compared to the previous valuation period. 

This change to the ratio of average taxable earnings to the average wage index decreased the present value of future 

cashflows. 

There were two main changes in the economic methodology. 

x Projected labor force participation rates for the older population are slightly lower for the current valuation in 

order to better reflect the difference in participation rates between never-married and married populations and 

the projected improvement in life expectancy. 

x Different earnings levels are assigned to the three distinct groups of the other immigrant population supplied by 

demography. (This change decreased the present value of estimated future net cashflows by about the same 

amount as the related change in the demography methodology increased the present value of estimated future 

net cashflows.) 

The effect of including these changes in methodology decreased the present value of estimated future net cashflows. 

Period Beginning on January 1, 2012, and Ending January 1, 2013 

The ultimate economic assumptions for the current valuation (beginning on January 1, 2013) are the same as those for 

the prior valuation. Other changes include the following. 

x The real interest rate is projected to be lower over the first ten years of the current valuation. 

x The starting economic values and near-term economic growth rate assumptions were updated. 

The projection of lower real interest rates decreased the present value of future net cashflows, while the changes to 

starting economic values and near-term economic growth rates increased the present value of future net cashflows. 

Two changes in economic methods were made for this valuation. 

x The alignment of projected labor force participation rates with future trends in disability, longevity, and 

population levels was altered. Future changes in disability prevalence now affect labor force participation, and 

the starting year for longevity changes used in the participation rate projections is now consistent with the 

starting year for those projections. 

x Ultimate age-sex specific unemployment rates based on the relative levels of long-term historical patterns were 

developed through the most recent historical year. This improvement is expected to substantially reduce the 

volatility in projected levels of these rates between valuations. 

Both changes increased the present value of estimated future net cashflows. 

Changes in Law or Policy 

Period Beginning on January 1, 2013, and Ending January 1, 2014 

In the current valuation period (beginning on January 1, 2014) no laws were enacted that are expected to have 

significant effects on the long-range cost of the OASDI program. However, the Supreme Court’s decision in the United 

States v. Windsor repealed parts of the Defense of Marriage Act, which affects the payment of federal benefits based on 

same-sex marriages. The extent to which OASDI benefits based on marriage will be available to same-sex couples is still not 

completely clear. The agency has issued guidelines, approved by the Department of Justice, for certain benefits for same-sex 

couples who were legally married when the insured accountholder resided in a state or jurisdiction that recognized same-sex 

marriages at the time of application or death. For estimates in this valuation, it is assumed that the agency will expand its 

guidelines to recognize all auxiliary beneficiaries for such marriages and that same-sex marriage will eventually be 

recognized in all states. 

This expected expansion of benefits decreased the present value of future net cashflows. 

Period Beginning on January 1, 2012, and Ending January 1, 2013 

The current valuation (beginning on January 1, 2013) reflects the enactment of one law and the implementation of one 

policy change. 

x The American Taxpayer Relief Act of 2012 (ATRA) was enacted on January 2, 2013. The Act reduces federal 

marginal income tax rates for most beneficiaries and thus lowers projected revenue from taxation of benefits. 
142 NOTES TO THE FINANCIAL STATEMENTS 

 

x The Deferred Action for Childhood Arrivals (DACA) policy was implemented on June 15, 2012. DACA 

provides protection from deportation and an opportunity to work legally for many unauthorized immigrants who 

entered the country before age 16 and were under age 31 on June 15, 2012. 

Inclusion of the ATRA decreased the present value of future net cashflows, while inclusion of DACA increased the 

present value of future net cashflows. 

Changes in Methodology and Programmatic Data 

Period Beginning on January 1, 2013, and Ending January 1, 2014 

Several methodological improvements and updates of program-specific data are included in the current valuation 

(beginning on January 1, 2014). The most significant are identified below. 

x The ultimate projected ratio of income from taxation of benefits to total benefits was increased for this valuation 

period. 

x There were also updates to programmatic data, method changes for projecting beneficiaries and benefit levels 

over the first 10 years of the projection period, other small methodological improvements, and interactions. 

The change to taxation of benefits increased the present value of future net cashflows, while updates of programspecific data decreased the present value of future net cashflows. Taken together, these changes decreased the present value 

of future net cashflows. 

Period Beginning on January 1, 2012, and Ending January 1, 2013 

Several methodological improvements and updates of program-specific data are included in the current valuation 

(beginning on January 1, 2013). The most significant are identified below. 

x The modeling of the number of workers insured under the programs was separated into two groups by residency 

status: (1) citizens and immigrants with legal permanent resident status; and (2) other immigrants. Separate modeling 

for these groups is important because their relative sizes in the total population have been changing and will continue 

to do so. 

x The historical sample of earnings histories for new beneficiaries was updated to reflect new benefit entitlements in 

2008 for the current valuation. The prior valuation used a sample, which reflected new benefit entitlements in 2007. 

x The projections of revenue from taxation of benefits were better aligned between the first 10 years and the remaining 

years of the projection period. 

x There were also minor updates to programmatic data, method changes for projecting beneficiaries and benefit levels 

over the first 10 years of the projection period, other small methodological improvements, and interactions. 

Inclusion of each of these methodological improvements and updates of program-specific data increased the present 

value of future net cashflows. 

Medicare

All estimates relating to the Medicare program in the Statement of Changes in Social Insurance Amounts represent 

values that are incremental to the prior change. As an example, the present values shown for demographic assumptions, 

represent the additional effect that these assumptions have, once the effects from the change in the valuation period and 

projection base have been considered. 

Assumptions Used for the Components of the Changes for the Medicare Program 

The present values included in the Statement of Changes in Social Insurance Amounts 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.
 NOTES TO THE FINANCIAL STATEMENTS 143 

 

Period Beginning on January 1, 2013, and Ending January 1, 2014 

Present values as of January 1, 2013 are calculated using interest rates from the intermediate assumptions of the 2013 

Medicare Trustees Report. All other present values in this part of the Statement of Changes in Social Insurance Amounts are 

calculated as a present value as of January 1, 2014. Estimates of the present value of changes in social insurance amounts due 

to changing the valuation period, projection base, demographic assumptions, and law are determined using the interest rates 

under the intermediate assumptions of the 2013 Medicare Trustees Report. Since interest rates are economic assumptions, the 

estimates of the present values of changes in economic and health care assumptions are presented using the interest rates 

under the intermediate assumptions of the 2014 Medicare Trustees Report. 

Period Beginning on January 1, 2012, and Ending January 1, 2013 

Present values as of January 1, 2012, are calculated using interest rates from the intermediate assumptions of the 2012 

Medicare Trustees Report. All other present values in this part of the Statement of Changes in Social Insurance Amounts are 

calculated as a present value as of January 1, 2013. Estimates of the present value of changes in social insurance amounts due 

to changing the valuation period, projection base, demographic assumptions, and law are determined using the interest rates 

under the intermediate assumptions of the 2012 Medicare Trustees Report. Since interest rates are economic assumptions, the 

estimates of the present values of changes in economic assumptions are presented using the interest rates under the 

intermediate assumptions of the 2013 Medicare Trustees Report. 

Changes in Valuation Period 

Period Beginning on January 1, 2013, and Ending January 1, 2014 

The effect on the 75-year present values of changing the valuation period from the prior valuation period (2013-2087) to 

the current valuation period (2014-2088) is measured by using the assumptions for the prior valuation period and applying 

them, in the absence of any other changes, to the current valuation period. Changing the valuation period removes a small 

negative net cashflow for 2013 and replaces it with a much larger negative net cashflow for 2088. The present value of 

estimated future net cashflow (including or excluding the combined Medicare Trust Fund assets at the start of the period) was 

therefore decreased (made more negative) when the 75-year valuation period changed from 2013-2087 to 2014-2088. 

Period Beginning on January 1, 2012, and Ending January 1, 2013 

The effect on the 75-year present values of changing the valuation period from the prior valuation period (2012-2086) to 

the current valuation period (2013-2087) is measured by using the assumptions for the prior valuation period and applying 

them, in the absence of any other changes, to the current valuation period. Changing the valuation period removes a small 

negative net cashflow for 2012 and replaces it with a much larger negative net cashflow for 2087. The present value of future 

net cashflow (including or excluding the combined Medicare Trust Fund assets at the start of the period) was therefore 

decreased (made more negative) when the 75-year valuation period changed from 2012-2086 to 2013-2087. 

Changes in Demographic Data, Assumptions, and Methods 

Period Beginning January 1, 2013, and Ending January 1, 2014 

The demographic assumptions used in the Medicare projections are the same as those used for the Old-Age, Survivors 

and Disability Insurance (OASDI) and are prepared by the Office of the Chief Actuary at the SSA. 
144 NOTES TO THE FINANCIAL STATEMENTS 

 

The ultimate demographic assumptions for the current valuation (beginning on January 1, 2014) 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. 

x Preliminary birth rate data for 2012 indicated lower birth rates than were expected in the prior valuation. During 

the period of transition to their ultimate values, the birth rates in the current valuation are generally lower than 

they were in the prior valuation. 

There was one change in demographic methodology: 

x The modeling of the other immigrant population was divided into three distinct groups for the current valuation: 

(1) those with temporary legal status; (2) those never authorized to be in the country; and (3) those who had 

temporary legal status previously but are no longer authorized to be in the country. 

These changes slightly lowered overall Medicare enrollment for the current valuation period resulting in a decrease in 

the estimated future net cashflow. These changes had a very minor impact on the present value of estimated income and 

estimated expenditures for Part A, as well as a very minor impact on the present value of estimated expenditures for Part B 

and Part D. 

A further assumption change was made that resulted in higher Part D enrollment for the current valuation period. The 

participation rate represents the percentage of beneficiaries assumed to enroll in a Part D plan out of all eligible and, in prior 

years, was assumed to stay relatively constant at the same rate as the recent historical period. However, since actual 

participation has consistently been higher than expected, it was decided to increase the participation rate by 1 percent per year 

for the first 3 years of the projection period, before leveling out. This results in an assumed 62.4 percent participation rate, 

prior to adjustments for beneficiaries who have retiree drug subsidy coverage and those who are assumed to drop out because 

they are required to pay an income-related premium, for 2017 and later, which is higher than the 57.2 percent that was 

assumed for all years in the prior valuation period. This assumption change resulted in an increase in the present value of 

estimated future expenditures for Part D, and had no impact on the Part A and Part B present values. 

Period Beginning January 1, 2012, and Ending January 1, 2013 

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 the SSA. 

For the current valuation (beginning on January 1, 2013), changes in ultimate assumptions and recent data for 

immigration have significant effects. 

x The assumed ultimate annual immigration of “other immigrants,” that is, those entering the country without legal 

permanent resident (LPR) status, is 1.4 million in the current valuation, compared with 1.5 million assumed for the 

prior valuation. 

x The assumed ultimate annual number of persons attaining LPR status is 1.05 million for the current valuation, 

compared with 1.00 million assumed for the prior valuation. The distribution of the ultimate number between those 

entering the country with LPR status and those adjusting status after having already entered the country was also 

revised. 

Otherwise, the ultimate demographic assumptions for the current valuation period are the same as those for the prior 

valuation period. However, the starting demographic values, and the way these values transition to the ultimate assumptions, 

were changed. 

x Final mortality data for 2008 and 2009 show substantially larger reductions in death rates for the current valuation 

than were expected in the prior valuation. The new data show a lower starting level of death rates and a faster rate of 

decline in death rates over the next 25 years. 

x Final fertility (birth) data for 2009 and 2010, and preliminary data for 2011, indicate lower birth rates for these years 

than were assumed in the prior valuation. 

x New historical data for marital status, for the number of new marriages, for “other immigration,” and for the size of 

the population (based on the 2010 Census) were used in the current valuation. 

These changes increased the Part A present values of future expenditures and income. Since overall population 

projections are higher compared to the prior valuation, these changes increase the Part B and Part D present values of 

expenditures. 
 NOTES TO THE FINANCIAL STATEMENTS 145 

 

Changes in Economic and Other Health Care Assumptions

Period Beginning January 1, 2013, and Ending January 1, 2014

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 the SSA. For the current valuation (beginning on January 1, 2014), there was one 

change to the ultimate economic assumptions: 

x The ultimate annual rate of change in the Consumer Price Index for Urban Wage Earners and Clerical Workers 

(CPI-W) is assumed to be 2.7 percent per year in the current valuation period, compared to 2.8 percent per year 

in the previous valuation period. Lowering the ultimate average annual increase in the CPI-W makes it more 

comparable to recent historical annual increases. 

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 ratio of average taxable earnings to the average wage index is lower by 1.9 percent in 2012 and 1.5 percent in 2013, 

compared to the previous valuation period. 

There were two main changes in the economic methodology: 

x Projected labor force participation rates for the older population are slightly lower for the current valuation in 

order to better reflect the difference in participation rates between never-married and married populations and 

the projected improvement in life expectancy. 

x Different earnings levels are assigned to the three distinct groups of the other immigrant population supplied by 

demography. (This change decreased the present value of future cashflows by about the same amount as the 

related change in the demography methodology increased the present value of future cashflows.) 

The health care assumptions are specific to the Medicare projections. The following health care assumptions were 

changed in the current valuation. 

x The projections emphasized in the 2014 Medicare Trustees Report were changed to reflect the projected 

baseline scenario. This scenario assumes that the physician payment updates required under the current-law 

sustainable growth rate formula will be permanently overridden by lawmakers. The use of these projections 

increases the present value of estimated future expenditures, compared to the current law projections, for Part B 

by roughly 11 percent, and for total Medicare by about 5 percent. 

x Utilization rate assumptions for inpatient hospital services were decreased. 

x Case mix increase assumptions for skilled nursing facilities and home health agencies were decreased. 

x Market basket differential for skilled nursing facilities was lowered. 

x Higher assumed enrollment in Medicare Advantage plans where benefits are more costly. 

x Higher increases in productivity rates, resulting in lower payment updates. 

x The methodology used to transition from the short-range projections to the long-range projections was refined, 

resulting in smaller increases during this transition period. 

x Lower projected prescription drug trend rates. 

x Higher assumed rebates from drug manufacturers. 

The net impact of these changes resulted in an increase in the estimated future net cashflow for total Medicare. For Part 

A, these changes resulted in a decrease to the present value of estimated future expenditures and income, with an overall 

increase in the estimated future net cashflow. For Part B, these changes increased the present value of estimated future 

expenditures. On the other hand, the above-mentioned changes lowered the present value of estimated future expenditures for 

Part D. 

Period Beginning January 1, 2012, and Ending January 1, 2013 

The economic 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. 

The ultimate economic assumptions for the current valuation (beginning on January 1, 2013) are the same as those for 

the prior valuation. Other changes include the following. 

x The real interest rate is projected to be lower over the first ten years of the current valuation. 

x The starting economic values and near-term economic growth rate assumptions were updated. 

The health care assumptions are specific to the Medicare projections. The following health care assumptions were 

changed in the current valuation. 

x Utilization rate and case mix increase assumptions for skilled nursing facilities were decreased. 

x Lower projected Medicare Advantage program costs that reflect recent data suggesting that certain provisions of the 

Affordable Care Act will reduce growth in these costs by more than was previously projected. 
146 NOTES TO THE FINANCIAL STATEMENTS 

 

x Administrative action that increased Medicare Advantage payment rates beginning in 2014 to reflect assumed future 

legislative overrides of the physician payment reductions. 

x Larger than previously projected impact from patent expiration of several major prescription drugs in 2012. 

x Lower projected prescription drug trend for 2013. 

The net impact of these changes resulted in a slight increase in the future net cashflow for total Medicare. For Part A, 

these changes resulted in a decrease to the present value of expenditures and income, with an overall slight increase in the 

future net cashflow. For Part B, these changes increased the present value of expenditures. On the other hand, the abovementioned changes lowered the present value of expenditures for Part D. 

Changes in Law or Policy 

Period Beginning January 1, 2013, and Ending January 1, 2014

Although Medicare legislation was enacted since the prior valuation date, many of the provisions have a negligible 

impact on the present value of the 75-year estimated future income, expenditures, and net cashflow. The Continuing 

Appropriations Resolution of 2014 included several provisions that had an impact on the Medicare program, including a 0.5 

percent physician payment update for January through March of 2014, extension of the Medicare sequester to fiscal years 

2022 and 2023, and payment reform for long-term care hospitals. Further, sections 1 and 3 of Public Law 113-82 included a 

further extension of the Medicare sequester to fiscal year 2024. Lastly, the Protecting Access to Medicare Act of 2014 

extended the 0.5 percent physician update through December 2014, enacted a 0 percent update for January through March of 

2015, improved payment policy for clinical diagnostic lab tests, made revisions to the end-stage renal disease (ESRD) 

prospective payment system and physician fee schedule, and realigned the Medicare sequester in fiscal year 2024. Overall 

these provisions resulted in an increase in the estimated future net cashflow for total Medicare. For Part A, these changes 

resulted in an increase to the present value of estimated future expenditures, with an overall increase in the estimated future

net cashflow. For Part B, these changes lowered the present value of estimated future expenditures only very slightly. For 

Part D, the above-mentioned changes increased the present value of estimated future expenditures also very slightly. 

Period Beginning January 1, 2012, and Ending January 1, 2013 

Although Medicare legislation was enacted since the prior valuation date, many of the provisions have a negligible 

impact on the present value of the 75-year revenue, expenditures, and net cashflow. The ATRA included several provisions 

that had an impact on the Medicare program. These include the extension of the 0 percent physician payment update through 

2013, which slightly increases the present value of Part B expenditures; payments for inpatient hospital services in 2014-2017 

are reduced in order to recoup $11 billion in overpayments associated with documentation and coding adjustments during 

2008-2010 that were not previously recovered, which lowers the present value of Part A expenditures; reductions to the endstage renal disease (ESRD) bundled payment rate to reflect changes in the utilization of certain drugs and biological plus a 

delay in the inclusion of oral-only ESRD drugs in the rate, which reduces the present value of Part B expenditures and 

increases the present value of Part D expenditures; and the coding intensity adjustment used in determining payments to 

Medicare Advantage plans was revised, which decreases the present value of Part A and Part B expenditures.

Change in Projection Base 

Period Beginning January 1, 2013, and Ending January 1, 2014 

Actual income and expenditures in 2013 were different than what was anticipated when the 2013 Medicare Trustees 

Report projections were prepared. Part A income was slightly higher and expenditures were lower than anticipated, based on 

actual experience. Part B total income and expenditures were also lower than estimated based on actual experience. For Part 

D, actual income and expenditures were both slightly higher on an incurred basis than prior estimates. The net impact of the 

Part A, B, and D projection base changes is an increase in the estimated future net cashflow. Actual experience of the 

Medicare Trust Funds between January 1, 2013 and January 1, 2014 is incorporated in the current valuation and is slightly 

more than projected in the prior valuation. 

Period Beginning January 1, 2012, and Ending January 1, 2013 

Actual revenue and expenditures in 2012 were different than what was anticipated when the 2012 Medicare Trustees 

Report projections were prepared. Part A revenue and expenditures were lower than anticipated, based on actual experience. 

Part B total revenue and expenditures were also lower than estimated based on actual experience. For Part D, actual revenue 

and expenditures were both slightly lower than prior estimates. The net impact of the Part A, B, and D projection-base 

changes is an increase in the future net cashflow. Actual experience of the Medicare Trust Funds between January 1, 2012, 
 NOTES TO THE FINANCIAL STATEMENTS 147 

 

and January 1, 2013, is incorporated in the current valuation and is slightly more than projected in the prior valuation. 

Railroad Retirement 

The present values included in the Statement of Changes in Social Insurance Amounts are for the current and prior years 

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. Selected economic assumptions were updated in 2014 along 

with the following other components of changes in the open group measure. 

Changes in Valuation Period 

Period Beginning January 1, 2013, and Ending January 1, 2014 

The effect on the 75-year present values of changing the valuation period from the prior valuation period (2013-2087) 

to the current valuation period (2014-2088) was a $1.7 billion decrease (became more negative) on the open group measure 

between January 1, 2013, and January 1, 2014.

Period Beginning January 1, 2012, and Ending January 1, 2013 

 The effect on the 75-year present values of changing the valuation period from the prior valuation period (2012-2086) 

to the current valuation period (2013-2087) was a $1.5 billion decrease (became more negative) on the open group measure 

between January 1, 2012, and January 1, 2013.

Changes in Demographic Data and Assumptions 

Period Beginning January 1, 2013, and Ending January 1, 2014 

Demographic assumptions were not changed between the Statement of Social Insurance as of January 1, 2013, and the 

Statement of Social Insurance as of January 1, 2014. Changes in demographic data resulted in an increase of $2.3 billion in 

the open group measure between January 1, 2013, and January 1, 2014.

Period Beginning January 1, 2012, and Ending January 1, 2013 

Demographic assumptions were not changed between the Statement of Social Insurance as of January 1, 2012, and the 

Statement of Social Insurance as of January 1, 2013. Changes in demographic data resulted in an increase of $1.5 billion in 

the open group measure between January 1, 2012, and January 1, 2013. 

Changes in Economic Data and Assumptions 

Period Beginning January 1, 2013, and Ending January 1, 2014 

Ultimate economic assumptions were not changed between the Statement of Social Insurance as of January 1, 2013, and 

the Statement of Social Insurance as of January 1, 2014, but select economic assumptions were. The actual COLA of 1.5 

percent was used for 2014 in place of the 1.8 percent COLA assumed for 2014 in the prior year’s report. A 1.7 percent COLA 

was assumed for 2015 instead of a 2.3 percent COLA, and a 2.2 percent COLA was assumed for 2016 instead of a 2.8 

percent COLA. Also, the actual 2013 investment return of 16.0 percent was higher than the assumed 7.0 percent investment 

return used for 2013 in the prior year’s report. Economic data and assumptions resulted in a change of about ($1.2) billion 

from January 1, 2013, to January 1, 2014.

Period Beginning January 1, 2012, and Ending January 1, 2013 

Ultimate economic assumptions were not changed between the Statement of Social Insurance as of January 1, 2012 and 

the Statement of Social Insurance as of January 1, 2013, but selected economic assumptions were. The actual COLA of 1.7 

percent was used for 2013 in place of the 2.0 percent COLA assumed for 2013 in the prior year’s report. A 1.8 percent COLA 

was assumed for 2014 instead of a 2.4 percent COLA, and a 2.3 percent COLA was assumed for 2015 instead of a 2.8 

percent COLA. Also, the actual 2012 interest rate (investment return) of 13.9 percent was higher than the assumed 7.0 

percent interest rate used for 2012 in the prior year’s report. Changes in economic data and assumptions had a relatively 

small effect of a $0.5 billion decrease in the open group measure between January 1, 2012, and January 1, 2013. 
148 NOTES TO THE FINANCIAL STATEMENTS 

 

Changes in Methodology and Programmatic Data 

Period Beginning January 1, 2013, and Ending January 1, 2014 

There were no changes in methodology and programmatic data. 

Period Beginning January 1, 2012, and Ending January 1, 2013 

There were no changes in methodology and programmatic data. 

Changes in Law or Policy 

Period Beginning January 1, 2013, and Ending January 1, 2014 

There were no changes in law or policy. 

Period Beginning January 1, 2012, and Ending January 1, 2013 

There were no changes in law or policy.

Black Lung 

The significant assumptions used in the projections of the Black Lung social insurance program presented in the 

Statement of Social Insurance are the number of beneficiaries, life expectancy, coal excise tax revenue estimates, the tax rate

structure, federal civilian pay raises and medical cost inflation. These assumptions also affect the amounts reported on the 

Statement of Changes in Social Insurance Amounts. 

During fiscal year 2014, the decrease in the open and closed group measures was primarily due to projected lower coal 

excise tax revenues, offset in part due to lower beneficiary costs, and the change in interest rates used to discount the cash 

flows from between 2.79 and 2.95 percent in fiscal year 2013 to 2.5 percent for income payments, and 2.63 percent for 

medical payments, administrative expenses, and coal excise tax collections in fiscal year 2014. In fiscal year 2014, DOL 

further refined the approach for selecting the interest rate assumptions to enhance matching between the timing of cash flows 

and interest rates and increase comparability. For fiscal year 2014, projected annual cash flows were discounted to present 

value based on Treasury rates that reflect the average duration of cash flows between 10.4 and 12.2 years for income 

payments, medical payments, administrative expenses, and coal excise tax collections. The interest rates used to discount 

fiscal year 2014 projections were 2.5 percent for income payments, and 2.63 percent for medical payments, administrative 

expenses, and coal excise tax collections. 

During fiscal year 2013, the decrease in the open group measure was primarily due to projected lower coal excise tax 

revenues and changes in the interest rates used to discount cashflows from 2.75 percent in fiscal year 2012 to between 2.79 

and 2.95 percent in fiscal year 2013 offset in part due to lower beneficiary costs. In fiscal year 2013, the matching between 

the timing of cashflows and interest rates was enhanced and the approach for selecting the interest rate assumptions was 

refined by selecting discount rates based on OMB’s interest rate assumptions which were interpolated to reflect the average 

duration of payments between 21.3 and 25.4 years for income payments, medical payments, administrative expenses and coal 

excise tax collections. For fiscal years 2009 to 2012, the projections were discounted using an interest rate published by 

Treasury as of the start of the projection period for Treasury loans to government agencies for loans with a duration that 

approximated the projection period. 
 NOTES TO THE FINANCIAL STATEMENTS 149 

 

Note 25. Stewardship Land and Heritage Assets 

Stewardship land is federally-owned land that is set aside for the use and enjoyment of present and future generations, 

and land on which military bases are located. Except for military bases, this land is not used or held for use in general 

government operations. Stewardship land is land that the government does not expect to use to meet its obligations, unlike 

the assets listed in the Balance Sheets. Stewardship land is measured in non-financial units such as acres of land and lakes, 

and a number of National Parks and National Marine Sanctuaries. Examples of stewardship land include national parks, 

national forests, wilderness areas, and land used to enhance ecosystems to encourage animal and plant species, and to 

conserve nature. This category excludes lands administered by the Bureau of Indian Affairs and held in trust. 

The majority of public lands that are under the management of DOI were acquired by the government during the first 

century of the Nation’s existence between 1781 and 1867. 

Stewardship land is used and managed in accordance with the statutes authorizing acquisition or directing use and 

management. Additional detailed information concerning stewardship land, such as agency stewardship policies, physical 

units by major categories, and the condition of stewardship land, can be obtained from the financial statements of DOI, DOD, 

DOE, HHS, TVA, and USDA. 

Heritage assets are government-owned assets that have one or more of the following characteristics: 

x Historical or natural significance; 

x Cultural, educational, or artistic importance; and/or 

x Significant architectural characteristics 

The cost of heritage assets often is not determinable or relevant to their significance. Like stewardship land, the 

government does not expect to use these assets to meet its obligations. The most relevant information about heritage assets is 

non-financial. The public entrusts the government with these assets and holds it accountable for their preservation. Examples 

of heritage assets include the Mount Rushmore National Memorial and Yosemite National Park. Other 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 Vietnam Veterans Memorial, the Jefferson Memorial, 

and the Washington Monument, as well as the Library of Congress. Many other sites such as battlefields, historic structures, 

and national historic landmarks are placed in this category, as well. 

Many laws and regulations govern the preservation and management of heritage assets. Established policies by 

individual federal agencies for heritage assets ensure the proper care and handling of the assets under their control and 

preserve these assets for the benefit of the American public. 

Some heritage assets are used both to remind us of our heritage and for day-to-day operations. These assets are referred 

to as multi-use heritage assets. One typical example is the White House. The cost of acquisition, betterment, or reconstruction

of all multi-use heritage assets is capitalized as general Property, Plant, and Equipment (PP&E) and is depreciated. 

The government classifies heritage assets into two broad categories: collection type and non-collection type. Collection 

type heritage assets include objects gathered and maintained for museum and library collections. Non-collection type heritage 

assets include national wilderness areas, wild and scenic rivers, natural landmarks, forests, grasslands, historic places and 

structures, memorials and monuments, buildings, national cemeteries, and archeological sites. 

This discussion of the government’s heritage assets is not exhaustive. Rather, it highlights significant heritage assets 

reported by federal agencies. Please refer to the individual financial statements of the DOC, VA, DOT, State, DOD, as well 

as websites for the Library of Congress (http://loc.gov), the Smithsonian Institution (http://si.edu), and the Architect of the

Capitol (http://aoc.gov) for additional information on multi-use heritage assets, agency stewardship policies, and physical 

units by major categories and conditions.
150 NOTES TO THE FINANCIAL STATEMENTS 

Note 26. Subsequent Events 

Updates to Troubled Asset Relief Program 

(TARP) Investments 

Ally Financial, Inc. 

 In October and December 2014, the U.S. Department of the Treasury sold the remaining shares of Ally Financial Inc. 

(Ally) common stock. This ends the last major Troubled Asset Relief Program (TARP) investment and winds down the Auto 

Industry Financing Program. The remaining 64.1 million shares were sold for approximately $1.5 billion. 

See Note 5 – Troubled Asset Relief Program (TARP) – Direct Loans and Equity Investments, Net for further 

information on TARP investments related to Ally. 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 151 

United States Government 

Required Supplementary Information 

(Unaudited) For the Years Ended 

September 30, 2014, and 2013

Fiscal Projections for the U.S. 

Government – Fiscal Year 2014 

This section of the Financial Report of the U.S. Government (Financial Report) is prepared pursuant to Statement of 

Federal Financial Accounting Standard (SFFAS) 36, Reporting Comprehensive Long-Term Fiscal Projections for the U.S. 

Government, as amended. It assesses 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 under sustainable

policies. This assessment requires prospective information about receipts and spending, the resulting debt, and how these 

amounts relate to the economy. A sustainable policy is defined here 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 assess 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 of course be different than 

those projected. The methods and assumptions underlying the projections are still evolving. 

Statement of Long Term Fiscal Projections 

Table 1 on the following page reports the present value of 75-year projections for various categories of the federal 

government’s receipts and non-interest spending1

. Projections from last year’s Financial Report are included in Table 1 for 

comparison. The Table 1 projections for fiscal years 2014 and 2013 are expressed in present value dollars and as a percentage 

of the present value of Gross Domestic Product (GDP)2

 as of September 30, 2014 and September 30, 2013, respectively. The 

present value of a future amount, for example $1 billion in October 2089, is the amount of money that if invested on 

September 30, 2014 in an account earning the government borrowing rate would have a value of $1 billion in October 2089.3

 

The present value of a receipt or expenditure category over 75 years is the sum of the annual present value amounts. 

When expressing a receipt or expenditure 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 expenditures as a percentage of GDP is a useful 

indicator of the economy’s capacity to sustain federal government programs. 

 

 1 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. 

 2

 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. 

 3

 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. 
152 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

As is true for prior Financial Reports, the assumptions for GDP, interest rates, and other economic factors underlying 

this year’s projections are the same assumptions that underlie the most recent Social Security and Medicare trustees’ report 

projections. The use of discount factors consistent with the Social Security trustees’ rate allows for consistent present value

budget calculations over 75 years between this report and the trustees’ reports. Present value calculations under higher and 

lower interest rate scenarios are presented in the “Alternative Scenarios” section. 

Receipt categories in Table 1 include individual income taxes, Social Security and Medicare payroll taxes, and the 

residual “other receipts.” On the spending side, categories include: (1) discretionary spending that is funded through annual 

appropriations, such as spending for national security, and (2) mandatory (entitlement) spending that is generally financed 

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 2014 Social 

Security and Medicare trustees’ reports and the 2014 Statement of Social Insurance, while comparative information presented 

from last year’s report is based on the 2013 Social Security and Medicare trustees’ reports and the 2013 Statement of Social 

Insurance. Projections for the other categories of receipts and spending are consistent with the economic and demographic 

assumptions used from 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 Table 1 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 October 1, whereas 

the trustees’ reports feature calendar-year projections. This difference allows the projections to start from the actual budget

results from fiscal years 2014 and 2013. 

The last row of Table 1 shows that this year’s estimate of the overall 75-year present value net excess of non-interest 

spending over receipts is 0.4 percent of the 75-year present value of GDP ($4.7 trillion, as compared to GDP of $1,117.2 

trillion). This imbalance can be broken down by funding source. There is a surplus of receipts over spending of 1.2 percent of 

GDP ($13.5 trillion) among programs funded by the government’s general revenues, but an imbalance of 1.6 percent of GDP 

($18.2 trillion4

) for the combination of Social Security (OASDI) and Medicare Part A, which under current law are funded 

 

 4 The 75-year present value earmarked imbalance of $18.2 trillion is comprised of several line items from Table 1 – Social Security outlays net of 

Social Security Payroll Taxes ($17.6 trillion) and Medicare Part A outlays net of Medicare Payroll Taxes ($6.8 trillion) – as well as subcomponents of these 

programs not presented separately in the table. These subcomponents include Social Security and Medicare Part A administrative costs that are classified as 

non-defense discretionary spending ($0.6 trillion) and Social Security and Medicare Part A revenue other than payroll taxes: taxation of benefits (-$3.1 

trillion), Federal employer share (-$1.0 trillion), and other income (-$2.6 trillion). 

2014 2013 Change 2014 2013 Change

 Social Security Payroll Taxes....................... 47.9 46.1 1.8 4.3 4.2 0.1

 Medicare Payroll Taxes................................ 16.1 15.4 0.7 1.4 1.4 0.0

 Individual Income Taxes............................... 117.1 113.2 3.9 10.5 10.4 0.1

 Other Receipts............................................ 42.5 41.5 1.0 3.8 3.8 0.0

Total Receipts............................................... 223.6 216.2 7.5 20.0 19.8 0.2

 Social Security............................................ 65.5 62.4 3.0 5.9 5.7 0.1

 Medicare Part A3

......................................... 23.0 23.5 -0.5 2.1 2.2 -0.1

 Medicare Parts B&D4

................................... 27.8 24.4 3.3 2.5 2.2 0.2

 Medicaid..................................................... 26.0 25.2 0.7 2.3 2.3 0.0

 Other Mandatory......................................... 31.1 34.0 -2.8 2.8 3.1 -0.3

 Defense Discretionary.................................. 26.9 23.1 3.8 2.4 2.1 0.3

 Non-defense Discretionary............................ 28.1 27.4 0.7 2.5 2.5 0.0

 Total Non-interest Spending......................... 228.4 220.2 8.2 20.4 20.2 0.3

Non-interest Spending less Receipts............. 4.7 4.0 0.7 0.4 0.4 0.1

Non-interest Spending:

Receipts:

3

 Represents portions of Medicare supported by payroll taxes.

4

 Represents portions of Medicare supported by general revenues. Consistent with the President's Budget, outlays for Parts B & D are 

presented net of premiums. 

NOTE: Totals may not equal the sum of components due to rounding.

Table 1: Long-Term Fiscal Projections of Federal Receipts and Non-interest Spending

75-Year Present Values1

Dollars in Trillions % GDP2

1 75-year present value projections for 2014 are as of 9/30/2014 for the period FY 2015-2089; projections for 2013 are as of 9/30/2013 

for the period FY 2014-2088.

2 The 75-year present value of nominal GDP, which drives the calculations above is $1,117.2 trillion starting in FY 2015, and was

$1,091.8 trillion starting in FY 2014.
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 153 

with payroll taxes and not in any material respect with general revenues.5, 6 By comparison, last year’s projections showed 

that programs funded by the government’s general revenues had an excess of receipts over spending of 1.3 percent of GDP 

($14.5 trillion) while the payroll tax-funded programs had an imbalance of spending over receipts of 1.7 percent of GDP 

($18.5 trillion). 

This year’s estimate of the 75-year present value imbalance of spending over receipts expressed as a share of the 75-

year present value of GDP is the same percentage as was projected in last year’s Financial Report. Table 2 reports the effects 

of various factors on the updated projections. The largest such factor, increasing the imbalance by 0.5 percent of GDP ($5.1 

trillion), was due to changes in economic and demographic assumptions and program-specific actuarial assumptions. 

Changes in GDP and interest rates that affect present value calculations increased the present value of discretionary spending 

and other mandatory spending, accounting for about half of the increase; the other half is attributable to changes in economic,

demographic, and programmatic assumptions for Social Security, Medicare, and Medicaid that increase the present value of 

outlays less payroll taxes for those programs. The next largest change noted in Table 2 –lowering the imbalance by 0.4 

percent of GDP ($4.6 trillion), is attributable to actual budget results for fiscal year 2014 and other budget data used in 

formulating the projection, which increased individual income tax collections and decreased other mandatory outlays. 

Compared to the FY 2012 projections, the 75-year present value fiscal imbalance as a share of GDP is 1.3 percentage points 

lower, largely as a result of lower projected health spending.7

 

 

 5 The OASDI trust fund received general fund transfers, primarily in 2011 and 2012, to account for lost payroll taxes resulting from enactment of the 

temporary 2 percent reduction of the employee payroll taxes. 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, balances that 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 general fund’s loan 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 projections here 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 exhausted. 

 6

 The fiscal imbalances reported in Table 1 are limited to future outlays and receipts. They do not include the initial level of publicly-held debt, which 

was $12.8 trillion in 2014 and $12.0 trillion in 2013, 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 cashflows (primarily surpluses) for Social Security and Medicare Part A reduced federal debt at the end of 2014 by $3.0 trillion (the trust fund 

balances at that time); the contribution of other programs to federal debt at the end of 2014 was therefore $15.8 trillion. Because the $18.2 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 $3.0 trillion. 

The $3.0 trillion combined Social Security and Medicare Part A trust fund balance represents a claim on future general revenues. 

 7

 For further information on changes from the 2012 projections, see the Required Supplementary Information in the 2013 Financial Report. 

Trillions of $

% of 75-Year 

PV of GDP

Non-Interest Spending Less Receipts: FY 2013.............................. 4.0 0.4

Components of Change:

Change due to Program-Specific Actuarial Assumptions 

and Economic and Demographic Assumptions............................ 5.1 0.5

Change due to Enacted Legislation............................................... 0.0 0.0

Change due to Updated Budget Data............................................ -4.6 -0.4

Change in Reporting Period.......................................................... 0.2 0.0

Change in Model Technical Assumptions...................................... 0.0 0.0

Total............................................................................................... 0.7 0.1

Non-Interest Spending Less Receipts: FY 2014.......................... 4.7 0.4

NOTE: Totals may not equal the sum of components due to rounding.

75-Year Present Values (PV)

Table 2: Changes in Long-Term Fiscal Projections
154 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

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 fall about 4 percentage points between 2014 and 2024 before 

commencing a steady rise, exceeding its 2014 level (74 percent) by 2028, exceeding 100 percent by 2039, and reaching 321 

percent in 2089. 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. 

These conclusions are rooted in the projected trends in receipts, spending, and surpluses/deficits in the context of 

current law and policy, although, as described in the following pages, there is considerable uncertainty surrounding these 

projections. For comparison, under the 2013 projections, the debt-to-GDP ratio fell by nearly 5 percentage points between 

2014 to 2024 before beginning a rise that took the ratio to the 2013 level (70 percent) by 2025, 100 percent in 2039, and 277 

percent in 2088. 

Current Policy Projections for Primary Deficits

A key determinant of growth in the debt-to-GDP ratio and hence fiscal sustainability is the primary deficit-to-GDP 

ratio. 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 grew rapidly in 

2009 due to the financial crisis and the recession and the policies pursued to combat both. The ratio remained high from 2010 

to 2012 despite shrinking in each successive year, and fell significantly in 2013 and 2014. The primary deficit is projected to

shrink in the next few years as spending reductions called for in the Budget Control Act of 2011 (BCA) remain in effect and 

the economy continues to recover, becoming a primary surplus starting in 2017 that peaks at 1.2 percent of GDP in 2021. 

Between 2022 and 2037, however, increased spending for Social Security and health programs due to the continued 

retirement of the baby boom generation is expected to cause the primary surplus to steadily deteriorate and become a primary 

deficit in 2030 that reaches 0.7 percent of GDP in 2039. The primary deficit increases more gradually beyond that point to 

1.1 percent of GDP in 2071 and 0.9 percent of GDP in 2089 as the aging of the population continues at a slower pace. 

The receipt share of GDP fell substantially in 2009 and 2010 and remained low in 2011 and 2012 because of the 

recession and tax reductions enacted as part of the 2009 American Recovery and Reinvestment Act (ARRA) and the Tax 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 155 

Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The share rose to 17.4 percent in 2014 and 

is projected to return to near its long-run average, as the economy fully recovers and as a result of the higher tax rates enacted 

under the American Tax Relief Act (ATRA) of 2012. After 2020, receipts are projected to grow slightly more rapidly than 

GDP 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 are analyzed in the “Alternative Scenarios” section. 

On the spending side, the non-interest spending share of GDP is projected to stay at or below its current level of about 

19 percent until 2028, and to then rise gradually to 20.8 percent of GDP in 2042 and 22.0 percent of GDP in 2089. The 

reductions in the non-interest spending share of GDP over the next few years are mostly due to the expected reductions in 

spending for overseas contingency operations (OCO), caps on discretionary spending and the automatic spending cuts 

mandated by the BCA, and the subsequent 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 is projected to increase the 

Social Security, Medicare, and Medicaid spending shares of GDP by about 1.2 percentage points, 1.7 percentage points, and 

0.6 percentage points, respectively. After 2039, the Social Security spending share of GDP gradually declines and then 

returns to 2039 levels, while the Medicare and Medicaid spending share of GDP continues to increase, albeit at a slower rate, 

due to projected increases in health care costs. 

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 

2010 (ACA) significantly affects projected spending for both Medicare and Medicaid. That legislation expands health 

insurance coverage, including Medicaid, includes many measures designed to reduce health care cost growth, and 

significantly reduces Medicare payment rates. On net, the ACA is projected to substantially reduce the growth rate of 

Medicare expenditures over the next 75 years. The Medicare spending projections in Table 1 are based on the projections in 

the 2014 Medicare trustees’ report, and those projections show a substantial slowdown in Medicare cost growth. The 

projections assume that Medicaid enrollment increases and that Medicaid cost per beneficiary grows at the same reduced rate 

as Medicare cost growth per beneficiary. As discussed in Note 24 to the U.S. Government’s Financial Statements, these 

projections are subject to much uncertainty about the ultimate effects of the ACA’s provisions to reduce health care cost 

growth. Such effects could be larger or smaller than what is reflected here. Even if those provisions work as intended and as 

assumed in this projection, Chart 1 shows that there is still a long-term gap between projected receipts and projected total 

non-interest spending. 

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 that are shown in Chart 2 (right axis). That ratio was 74 percent at the end of fiscal year 2014, and

under current policy is projected to be 70 percent in 2024, 117 percent in 2044, and 321 percent in 2089. The continuous rise 

of the debt-to-GDP ratio after 2024 indicates that current policy is unsustainable. 

The change in debt held by the public from one year to the next is approximately equal to the unified budget deficit, the 

difference between total spending and total receipts.8

 Total spending is non-interest spending plus interest spending. Chart 2 

(left axis) shows that the rapid rise in total spending and the unified deficit is almost entirely due to projected interest 

payments on the debt. As a percent of GDP, interest spending was 1.3 percent in 2014, and under current policy is projected 

to reach 4.7 percent in 2034 and 17.1 percent in 2089. 

 

 8 Debt held by the public is also affected by certain transactions not included in the unified 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 1.1 percent of GDP. 
156 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 2087, the last year of the projection period in the FY 2012 report. This ratio is 

projected to reach 309 percent in this year's report, which compares with 272 percent projected in last year's report and 395 

percent projected in the FY 2012 report.9

The Fiscal Gap 

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 2015 to 2089, 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 2014 (74 percent of GDP). 

Table 3 reports that the 75-year fiscal gap under current policy is estimated at 2.1 percent of GDP, which is 10.3 percent 

as large as the 75-year present value of projected receipts and 10.0 percent as large as the 75-year present value of noninterest spending. This estimate of the fiscal gap is 0.4 percentage points larger than was estimated in 2013 (1.7 percent of 

GDP). 

Table 1 shows that projected primary deficits average 0.4 percent of GDP over the next 75 years under current policies. 

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 1.6 percent of GDP, 2.1 percentage points higher than the projected present value net excess of non-interest spending over 

receipts shown in Table 1. Closing the fiscal gap requires that primary surpluses be substantially positive because the 

projections assume that interest rates will exceed the growth rate of GDP, so merely achieving primary balance would result 

in debt growing faster than GDP. 

The Cost of Delay in Closing the 75-Year Fiscal Gap

The longer policy action to close the fiscal gap 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 2089 equal to the 2014 ratio (74 

percent). Three 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 74 percent of GDP in 

2089. Future generations are harmed by delays in policy changes because delay necessitates higher primary surpluses during 

 

 9 For further information on changes from the 2012 projections, see the Required Supplementary Information in the 2013 Financial Report. 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 157 

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 in much of the projection period. Table 3 

shows primary surplus changes necessary to make the debt-to-GDP ratio in 2089 equal to its level in 2014 under each of the 

three policies. If reform begins in 2015, then it is sufficient to raise the primary surplus share of GDP by 2.1 percentage 

points in every year between 2015 and 2089 in order for the debt-to-GDP ratio in 2089 to equal its level in 2014 (74 percent). 

This policy raises the average 2015-2089 primary surplus-to-GDP ratio from -0.4 percent to +1.6 percent. 

In contrast to a reform that begins immediately, if reform begins in 2025 or 2035, then the primary surpluses must be 

raised by 2.5 percent and 3.1 percent of GDP, respectively, in order for the debt-to-GDP ratio in 2089 to equal 74 percent. 

The difference between the primary surplus increase necessary if reform begins in 2025 and 2035 (2.5 and 3.1 percent of 

GDP, respectively) and the increase necessary if reform begins in 2015 (2.1 percent of GDP) 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 2014 and the year reform is initiated, in comparison to the scenario in which reform begins immediately. 

These projections likely understate the cost of lengthy policy delays because they assume interest rates will not rise as 

the debt-to-GDP ratio grows. Under the current projections, the debt-to-GDP ratio is stable through 2027 and then grows 

rapidly. If a higher debt-to-GDP ratio causes the interest rate on government borrowing to rise, thus making it more costly 

for the government to service its debt and simultaneously slowing private investment, then the primary surplus required to 

return the debt-to-GDP ratio to its 2014 level would also increase. This dynamic may accelerate with higher ratios of debt to 

GDP, potentially resulting in there being no feasible level of taxes and spending that would reduce the debt-to-GDP ratio to 

its 2014 level. The potential impact on the projections of interest rates rising as the debt-to-GDP ratio rises is explored in the 

“Alternative Scenarios” section. 

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. If policy changes are enacted, perhaps in response to 

projections like those presented here, then actual fiscal outcomes will of course be different than those projected. 

Even if policy does not change, actual expenditures and receipts could differ materially from those projected here. 

Long-range 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 in these 

projections. To help illustrate this uncertainty, projections that assume higher and lower interest rate scenarios are presented 

in the “Alternative Scenarios” section. 

The projections in this section focus on future cashflows, 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 this section is consistent with 

methods used to prepare the Statement of Social Insurance (SOSI) and the generally cash-based federal budget. 

The following bullets summarize the assumptions used for the key categories of receipts and spending presented in 

Table 1 and in the related analysis: 

x Social Security: Projected Social Security (OASDI) spending is net of administrative expenses, which are 

classified as discretionary spending, and is based on the projected expenditures in the 2014 Social Security trustees’ 

Change in Average Primary Surplus

No Delay: Reform in 2015.................. 2.1 percent of GDP between 2015 and 2089

Ten Years: Reform in 2025................ 2.5 percent of GDP between 2025 and 2089

Twenty Years: Reform in 2035........... 3.1 percent of GDP between 2035 and 2089

Period of Delay

Table 3

Costs of Delaying Fiscal Reform

Note: Reforms taking place in 2014, 2024, and 2034 from the 2013 Financial Report were 1.7, 2.1, 

and 2.6 percent of GDP.
158 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

report for benefits and for the Railroad Retirement interchange. The projections of Social Security payroll taxes and 

future Social Security spending begin with actual budget data for FY 2014, and assume the same growth rates for 

future spending and for payroll taxes as are projected in the 2014 Social Security trustees’ report. More information 

about the assumptions for Social Security cost growth can be found in Note 24 and the Required Supplementary 

Information for Social Insurance. 

x Medicare: Projected Medicare spending is also net of administrative expenses and is based on projected incurred 

expenditures under the projected baseline from the 2014 Medicare trustees’ report. In a change from previous years, 

the projected baseline in the trustees’ report include the assumption that the current-law reductions to physician 

payment rates will be legislatively overridden and that physician payment rates will increase 0.6 percent each year 

starting with 2016. 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 outlays, just as they are subtracted from gross cost to yield net cost in the financial statements.10 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 start with actual FY 2014 Medicare spending and assume spending growth accords with the 

growth rates projected in the Medicare trustees’ report. Medicare Part A payroll taxes are projected similarly. More 

information about the assumptions for Medicare cost growth can be found in Note 24 and the Required 

Supplementary Information for Social Insurance. As discussed in Note 24, there is uncertainty about whether the 

reductions in health care cost growth projected in the Medicare trustees’ report will be fully achieved. Note 24 

illustrates this uncertainty by considering Medicare cost growth assumptions under varying policy assumptions. 

x Medicaid: The Medicaid spending projections start with the projections from the 2013 Actuarial Report on the 

Financial Outlook for Medicaid prepared by the Office of the Actuary, Centers for Medicare & Medicaid Services 

(CMS).11 These projections are based on recent trends in Medicaid spending, the demographic, economic, and health 

cost growth assumptions in the 2013 Medicare Trustees’ Report, and projections of the effect of the ACA on 

Medicaid enrollment. The projections, which end in 2022, are adjusted to accord with the latest actual budget data. 

After 2022, the number of Medicaid beneficiaries is expected to grow at the same rate as total population, and 

Medicaid costs per beneficiary are assumed to grow at the same rate as Medicare benefits per beneficiary, as is 

consistent with the experience since 1987. Between 1987 and 2012, the average annual growth rate of outlays per 

beneficiary for Medicaid and Medicare were within 0.2 percentage points of each other. 

x Other Mandatory Spending: Other mandatory spending, which includes means-tested entitlements other than 

Medicaid, Federal employee retirement, and veterans disability benefits, is projected in two steps. First, spending 

prior to the automatic spending cuts called for by the BCA is projected and, second, the effect of the BCA is 

projected. With regard to pre-BCA spending: (a) 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 2015, 

implying that such spending will remain constant as a percentage of GDP12; (b) Special assumptions are made for 

temporary mandatory spending authorized by ARRA and other stabilization measures, including temporary 

expansions in unemployment insurance benefits, and the Troubled Asset Relief Program (TARP) – the 75-year 

present value of projected spending for this category totals $0.1 trillion; and (c) Projected spending for insurance 

exchange subsidies starting in 2015 follows the most recent Budget projections until 2024, and then grows in 

accordance with growth in the projected non-elderly population and growth in health care costs as projected for the 

Medicare program. 

x Defense and Non-defense Discretionary Spending: Through 2021, discretionary spending other than for OCO is 

dictated by the spending caps and automatic spending cuts called for by the BCA. After 2021, this spending is 

assumed to grow at the same rate as nominal GDP, and thus plateaus at a long-term level of 4.9 percent of GDP. 

The BCA is projected to reduce the present value of spending by $0.5 trillion through 2021, and by an additional 

$3.6 trillion between 2022 and 2089 because of the lower base spending in 2021. Projected OCO spending steadily 

declines and is fully phased out by 2025, and amounts to $0.3 trillion in present value. To illustrate uncertainty, 

 

 10 Medicare Part B and D premiums and State contributions to Part D are subtracted from the Part B and D spending displayed in Table 1. The total 75-

year present value of these subtractions is $10.2 trillion, or 0.9 percent of GDP. 

 11 Christopher J. Truffer, John D. Klemm, Christian J. Wolfe, Kathryn E. Rennie, and Jessica F. Shuff, 2013 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, 

December 2013. 

 12 This assumed growth rate for other mandatory programs exceeds the growth rate in the most recent OMB and CBO 10-year budget baselines. 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 159 

present value calculations under alternative discretionary growth scenarios are presented in the “Alternative 

Scenarios” section. 

x Receipts (Other than Social Security and Medicare): It is assumed that individual income taxes will equal the 

same share of wages and salaries as in the Administration’s latest Budget current law baseline projection. That 

baseline accords with current policy as defined above, and incorporates the effects of the economic recovery and 

bracket creep. After reaching about 22 percent of wages and salaries in 2024, individual income taxes increase 

gradually to 29 percent of wages and salaries in 2089 as real taxable incomes rise over time and an increasing share 

of total income is taxed in the higher tax brackets. The ratio of all other receipts combined to GDP is projected to 

remain at 3.8 percent of GDP, based on a long-run historical average. To illustrate uncertainty, present value 

calculations under higher and lower receipts growth scenarios are presented in the “Alternative Scenarios” section. 

x 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 2014 Social Security trustees’ report13. 

The average interest rate over the projection period is 5.4 percent. These rates are also used to convert future 

cashflows to present values as of the start of fiscal year 2015. 

Departures of Current Policy from Current Law 

The long-term fiscal projections are made on the basis of current Federal 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) projected 

spending and receipts imply violation of the current statutory limit on Federal debt, (2) continued discretionary 

appropriations are assumed throughout the projection period, (3) scheduled Social Security and Medicare benefit payments 

are assumed to occur beyond the projected point of trust fund exhaustion, (4) Medicare physician payments are assumed to 

increase throughout the projection period, rather than being reduced sharply in April 2015 as scheduled under current law, 

and (5) many mandatory programs with expiration dates prior to the end of the 75-year projection period are assumed to be 

reauthorized. As is true in the Medicare trustees’ report and in the Statement of Social Insurance,14 the projections 

incorporate programmatic changes already scheduled in law, such as the implementation of ACA exchange subsidies and the 

ACA productivity adjustment for non-physician Medicare services. 

Alternative Scenarios

The long-run outlook for the budget is extremely uncertain. This section illustrates this inherent uncertainty by 

presenting alternative scenarios for the growth rate of health care costs, offsetting the cost of legislative overrides of the 

scheduled Medicare physician payment rate reductions, 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 nursing care. A shift in projected fertility, mortality, or 

immigration rates could have important long-run effects on the 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 projected growth of health care costs. 

Enactment of the ACA in 2010 reduced the projected long-run growth rates of health care costs, but these growth rates are 

still highly uncertain. As an illustration of the dramatic effect of variations in health care cost growth rates, Table 4 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 

 

 13 As indicated in the more detailed discussion of Social Insurance in Note 24 to the financial statements. 

 14 To prevent the reductions in Medicare physician fees that would have otherwise taken place, since 2003 Congress has repeatedly enacted statutes with 

temporary overrides of sustainable growth rate (SGR) provisions, which increase health care expenditures. Since 2003, the majority of these statutes have 

also included other provisions that would reduce expenditures associated with Medicare or other types of health care (“health care cost savings provisions”). 

In the 2014 Medicare trustees’ report, the Medicare trustees began presenting a projected baseline that assumes continued override of the provisions of the 

SGR and an assumed annual increase in the physician fee schedule equal to the average SGR override over the 10-year period ending March 31, 2015, rather 

than the sharp reductions scheduled under current law. The projections here follows those in the Medicare trustees’ report for consistency. They do not 

assume the offsetting reductions in other spending that has generally accompanied legislation overriding the SGR provisions. However, an alternative 

scenario is shown later to illustrate the effects of such offsetting reductions on the long-range fiscal outlook. 
160 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

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. As indicated earlier, if reform is initiated in 2015, eliminating the fiscal gap requires that 

the 2015-2089 primary surplus increase by an average of 2.1 percent of GDP in the base case. However, that figure increases 

to 5.1 percent of GDP if per capita health cost growth is assumed to be 1 percentage point higher, and 10.0 percent of GDP if 

per capita health cost growth is 2 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 4 shows that delaying reform initiation from 2015 to 2025 requires that 2025-2089 primary surpluses be higher by 

an average of 0.4 percent of GDP in the base case, 1.1 percent of GDP if per capita health cost growth is 1 percentage point 

higher, and 2.1 percent of GDP if per capita health cost growth is 2 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, including through effective implementation of the ACA. 

Effects of Offsetting the Cost of Overriding Medicare Physician Payment Rate 

Reductions

The current policy projections here assume continued legislative action to override the sharp reductions in Medicare 

physician payments scheduled under current law. If such overriding legislation includes offsetting reductions in other 

spending, as has generally been the case in enacted overrides since 2003, the increase in spending would be slower than 

under the base projection. This scenario is similar in effect to the assumptions in the base projections of the 2013 Financial 

Report, because those projections did not reflect any cost for overrides of the reductions in Medicare physician payments. 

Table 5 shows the impact of this alternative assumption on the 75-year fiscal gap. If reform is initiated in 2015, eliminating

the fiscal gap requires that the 2015-2089 primary surplus increase by an average of 2.1 percent of GDP in the base case, and 

1.9 percent of GDP if the cost of overriding the Medicare physician payment rate reductions is offset by reductions in other 

spending. 

2015 2025 2035

Base Case................................................................ 2.1 2.5 3.1

1% pt. higher per person health cost growth................. 5.1 6.2 7.8

2% pt. higher per person health cost growth................. 10.0 12.1 15.3

2025 2035

Base Case................................................................ 0.4 1.1

1% pt. higher per person health cost growth................. 1.1 2.7

2% pt. higher per person health cost growth................. 2.1 5.3

NOTE: Increments may not equal the subtracted difference of the components due to rounding.

Change in Primary Surplus Increase if 

Reform is Delayed From 2015 to:

Table 4

Impact of Alternative Health Cost Scenarios on Cost of Delaying Fiscal Reform

Primary Surplus Increase (% of GDP) 

Starting in:

Scenario

2015 2025 2035

Base Case...................................................................... 2.1 2.5 3.1

Offsetting overrides with reductions in other spending.......... 1.9 2.3 2.9

2025 2035

Base Case...................................................................... 0.4 1.1

Offsetting overrides with reductions in other spending.......... 0.4 1.0

NOTE: Increments may not equal the subtracted difference of the components due to rounding.

Table 5

Impact of Offsetting the Cost of Overriding Medicare Physician Payment Rate Reductions

Primary Surplus Increase (% of GDP) 

Starting in:

Change in Primary Surplus Increase if 

Reform is Delayed From 2015 to:

Scenario
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 161 

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 6 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 2015, eliminating the fiscal gap requires that the 2015-2089 primary surplus 

increase by an average of 2.1 percent of GDP in the base case, 2.3 percent of GDP if the interest rate is 0.5 percentage point 

higher in every year, and 1.8 percent of GDP if the interest rate is 0.5 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 6 shows that delaying reform initiation from 2015 

to 2025 requires that 2025-2089 primary surpluses be higher by an average of 0.4 percent of GDP in the base case, 0.6 

percent of GDP if the interest rate is 0.5 percentage point higher in every year, and 0.3 percent of GDP if the interest rate is 

0.5 percentage point lower in every year. 

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 after 2021, discretionary spending keeps pace with the economy and grows with 

GDP. The implications of two alternative scenarios are shown in Table 7. The first alternative scenario allows discretionary 

spending to grow with inflation and population after 2021 so as to hold discretionary spending constant on a real per capita 

basis. (This growth rate assumption is still larger 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 in 2022 to levels consistent with the path established prior to the sequestration required by the failure of the Joint

Select Committee on Deficit Reduction, and then grows discretionary spending with GDP from that point forward. As shown 

in Table 7, the fiscal gap decreases significantly if discretionary spending grows with inflation and population, from 2.1 

percent of GDP to 0.5 percent of GDP. Conversely, if discretionary spending rises to the levels prior to pre-Joint Committee 

sequestration in 2022 and then grows with GDP, the fiscal gap increases from 2.1 percent of GDP to 2.4 percent of GDP. The 

cost of delaying reform is greater when discretionary spending levels are higher. Initiating reforms in 2025 requires that the 

primary surplus increase by an average of 0.4 percent of GDP per year in the base case, and 0.5 percent of GDP if 

discretionary levels return to pre-Joint Committee sequestration levels. If delayed until 2035, the primary surplus must 

increase by an average of 1.1 percent of GDP in the base case, and 1.2 percent of GDP at pre-sequestration levels. 

2015 2025 2035

Base Case: Average of 5.4 percent over 75 years............ 2.1 2.5 3.1

0.5 percent higher interest rate in each year................... 2.3 2.8 3.7

0.5 percent lower interest rate in each year.................... 1.8 2.1 2.6

2025 2035

Base Case: Average of 5.4 percent over 75 years............ 0.4 1.1

0.5 percent higher interest rate in each year................... 0.6 1.4

0.5 percent lower interest rate in each year.................... 0.3 0.8

NOTE: Increments may not equal the subtracted difference of the components due to rounding.

Change in Primary Surplus Increase if 

Reform is Delayed From 2014 to:

Table 6

Impact of Alternative Interest Rate Scenarios on Cost of Delaying Fiscal Reform

Primary Surplus Increase (% of GDP) 

Starting in:

Scenario

2015 2025 2035

Base Case: Discretionary spending growth with GDP after 2021............................ 2.1 2.5 3.1

Growth with inflation and population..................................................................... 0.5 0.6 0.8

Reversion in 2022 to pre-Joint Committee sequester levels and growth with GDP..... 2.4 2.9 3.6

2025 2035

Base Case: Discretionary spending growth with GDP after 2021............................ 0.4 1.1

Growth with inflation and population..................................................................... 0.1 0.3

Reversion in 2022 to pre-Joint Committee sequester levels and growth with GDP..... 0.5 1.2

NOTE: Increments may not equal the subtracted difference of the components due to rounding.

Table 7

Impact of Alternative Discretionary Spending Growth Scenarios on Cost of Delaying Fiscal Reform

Primary Surplus Increase (% of GDP) 

Starting in:

Change in Primary Surplus Increase if 

Reform is Delayed From 2014 to:

Scenario

==
162 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 for the slow shift of individuals into 

higher tax brackets due to real wage growth (“real bracket creep”). This assumption approximates the long-term historical 

growth in individual income taxes relative to wages and salaries and is consistent with current tax code policy without 

change, as future legislation would be required to prevent real bracket creep from allowing individual income taxes to rise. 

As an illustration of the effect of variations in individual income tax growth, Table 8 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 allowed to be even more rapid than the base case as well as if no bracket creep is assumed. If reform is 

initiated in 2015, eliminating the fiscal gap requires that the 2015-2089 primary surplus increase by an average of 2.1 percent

of GDP in the base case, only 1.0 percent of GDP if real bracket creep is higher, but 3.1 percent of GDP if no real bracket 

creep is assumed. The cost of delaying reform is also affected if receipt growth assumptions change, much as was the case in 

the previous alternative scenarios. 

2015 2025 2035

Base Case: Individual income tax bracket creep of 0.1% of wages and salaries per year.... 2.1 2.5 3.1

0.2% of wages and salaries per year............................................................................. 1.0 1.3 1.6

0.0% of wages and salaries per year (no bracket creep).................................................. 3.1 3.7 4.7

2025 2035

Base Case: Individual income tax bracket creep of 0.1% of wages and salaries per year.... 0.4 1.1

0.2% of wages and salaries per year............................................................................. 0.2 0.5

0.0% of wages and salaries per year (no bracket creep).................................................. 0.6 1.6

NOTE: Increments may not equal the subtracted difference of the components due to rounding.

Table 8

Impact of Alternative Revenue Growth Scenarios on Cost of Delaying Fiscal Reform

Primary Surplus Increase (% of GDP) 

Starting in:

Change in Primary Surplus Increase if 

Reform is Delayed From 2014 to:

Scenario
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 163 

Fiscal Projections in Context 

In this report, a sustainable 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, including: financing public goods, such as 

infrastructure and government services; a strong and growing economy; and managing the national debt so that it is not a 

burden to 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 alter that trajectory, note that 

national debt may play roles in both facilitating and hindering a healthy economy. For example, Government deficit spending 

may support demand and allow economies to emerge from recessions more quickly. Debt may also be a cost-effective means 

of financing capital investment, promoting economic growth, which may in turn make debt levels more manageable in the 

future. However, economic theory also suggests that high levels of national debt may contribute to higher interest rates, 

leading to lower investment and a smaller capital stock which the economy can use to grow. Unfortunately, it is unclear what 

debt 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. 

Whether the actual experience of countries supports a relationship between national debt and economic growth remains 

an open research question. It is not possible to perform randomized experiments on economies, and historical experience, 

while valuable, is filled with confounding events and circumstances. 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 continue 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; low growth may contribute to high debt. 

Nevertheless, to put the current and projected debt-to-GDP ratios in context, it is instructive to examine the experiences 

of other countries as well as that of the United States. The United States Government’s debt as a percentage of GDP is 

relatively large compared with central government debt of other countries, but far from the largest among the countries in the 

Organization for Economic Co-operation and Development (OECD). Based on historical data as reported by the OECD for 

all of its 34 member countries, the debt-to-GDP ratio in 2010 ranged from 3 percent of GDP to 148 percent of GDP15, with 

the United States in the higher echelon. 16However each country is different in how it finances its sovereign debt, how 

robustly its economy grows, how government responsibilities are shared between central and local governments, and how 

current policies compare with the past policies that determine the current level of debt. 

The historical experience of the U.S. may also provide some perspective. As Chart 3 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 2041. However, the origins of current and future Federal debt are quite different from the 

wartime debt of the 1940s, limiting the pertinence of past experience. 

 

 15 Central government debt was not yet reported to the OECD for the country of Japan for the year 2010, but based on its 2009 level of 184 percent of 

GDP, its 2010 number will exceed 148 percent reported for Greece, which is the highest level of the countries that have reported thus far. 

 16 Central government debt, OECD National Accounts Statistics available at http://stats.oecd.org/Index.aspx?DatasetCode=GOV_DEBT
164 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

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 United States took a potentially significant step towards fiscal sustainability in 2010 by reforming its system of 

health insurance through enactment of the ACA. The legislated changes for Medicare, Medicaid, and other health coverage 

hold the prospect of lowering the long-term growth trend for health care costs and significantly reducing the long-term fiscal 

gap. Furthermore, enactment of the BCA in August 2011 placed limits on future discretionary spending, while enactment of 

ATRA in January 2013 increased receipts under current policy. But even with these laws, the projections in this Financial 

Report indicate that if policy remains unchanged the debt-to-GDP ratio will continually increase over the next 75 years and 

beyond, which implies current policies are not sustainable and must ultimately change. Subject to the important caveat that 

policy changes are not so abrupt that they slow the economic recovery, the sooner policies are put in place to avert these 

trends, the smaller are the receipt increases and/or spending decreases necessary to return the Nation to a sustainable fiscal 

path, and the lower the burden of the national debt will be to future generations. 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 165 

Social Insurance 

The social insurance programs consisting of Social Security, Medicare, Railroad Retirement, and Black Lung 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. OASI 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 2013, OASDI benefits were paid to approximately 58 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. Since 1990, with the exception of calendar years 2011 

and 2012, employers and employees have each paid 6.2 percent of taxable earnings and the self-employed paid 12.4 percent 

of taxable earnings. In 2011 and 2012, payroll tax rates paid by employees and the self-employed were each reduced by 2 

percentage points and the General Fund of the Treasury reimbursed the OASDI trust fund for the resulting reduction in 

payroll tax revenues. 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 ($117,000 in 2014), 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 Hospital Insurance Trust Fund. 

Medicare

The Medicare Program, created in 1965, has two separate trust funds: the Hospital Insurance (HI) Trust Fund (otherwise 

known as Medicare Part A) and the Supplementary Medical Insurance (SMI) Trust Funds (which consists of the Medicare 

Part B and Part D17accounts). HI pays for inpatient acute hospital services and major alternatives to hospitals (skilled nursing 

services, for example). SMI pays for hospital outpatient services, physician services, and assorted other services and products

through the Part B account and for prescription drugs through the Part D account. 

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. 

 

 17 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 in the case of Medicare Part B, approximately three-quarters of revenues to the Part D account will come from future transfers from the General 

Fund of the Treasury. Consequently, the nature of the relationship between 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. 
166 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

For SMI, transfers from the General Fund of the Treasury financed 75 percent and 73 percent of 2014 program costs for 

Parts B and D, respectively. Premiums paid by beneficiaries and, for Part D state transfers, generally financed the remainder 

of expenditures. With the introduction of Part D drug coverage, Medicaid is no longer the primary payer of drug benefits for 

beneficiaries dually eligible for Medicare and Medicaid. For those beneficiaries, 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 24—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 unified 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. Together, they now account for more than a third of all federal spending and the percentage is projected to 

rise dramatically for the reasons discussed below. 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.18 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. 

 

 18 The federal unified budget encompasses all Government financing and is synonymous with a governmentwide perspective. 

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

Supplementary 

Medical Insurance 

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 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 167 

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 of the Treasury and are drawn down for any Government program for which Congress has approved 

spending.19 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 only one of the programs that is funded through transfers from the General Fund of the Treasury, which is part of the other 

Government accounts (the SMI Part D account also receives transfers from the states). The transfers finance roughly threefourths 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 as shown below, 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 

2014. 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 ($247.2 billion) 

and interest credits ($111.7 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. 

 

 19 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. 
168 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

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 

payroll taxes, benefit taxes, and premiums. For HI, the difference between total expenditures made to the public ($266.9 

billion) and revenues ($251.2 billion) was $15.7 billion in 2014, 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 (premiums) were relatively small, 

representing about 27 percent of total expenditures made to the public in 2014. The difference ($242.8 billion) resulted in a 

net draw on the overall budget balance in that year. For OASDI, the difference between total expenditures made to the public 

($850.3 billion) and revenues from the public ($777 billion) was $73.3 billion in 2014, 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 

$62.7 billion in fiscal year 2014. 

The trust fund perspective is captured in the bottom section of each of the three trust fund columns. For HI, total 

expenditures exceeded total revenues by $4.2 billion in 2014, as shown at the bottom of the first column. This cash deficit 

was made up by calling in past loans made to the General Fund (i.e., by redeeming trust fund assets). For SMI, total revenues 

exceeded total expenditures by $4.1 billion. The total revenue for SMI is $337.5 billion ($90.6 + $246.9), which includes 

$246.9 billion transferred from other Government accounts (the General Fund). Transfers to the SMI Program from other 

Government accounts (the General Fund), amounting to about 73.3 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 $877.5 billion 

exceeded total expenditures of $850.3 billion by $27.2 billion. Total revenues for OASDI included $100.5 billion in transfers 

from the General Fund, made up of interest credits of $100.3 billion and transfers of $0.2 billion called for by Public Laws 

111-147, 111-312, 112-78, and 112-96 to make up for the reduction in payroll tax revenues attributable to the temporary 

payroll tax rate reductions. 

 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 169 

Table 1

Revenues and Expenditures for Medicare and Social Security

Trust Funds and the Total Federal Budget

for the Fiscal Year Ended September 30, 2014

 

Trust Funds 

(In billions of dollars) HI SMI OASDI Total All Other Total 1

 

Payroll taxes and other public 

 revenues: 

 Payroll and benefit taxes ....................... 245.6 - 777.0 1,022.6 - 1,022.6 

 Premiums .............................................. 5.6 76.1 - 81.7 - 81.7 

 Other taxes and fees ............................. - 14.5 - 14.5 1,902.2 1,916.7 

 Total ...................................................... 251.2 90.6 777.0 1,118.8 1,902.2 3,021.0 

Total expenditures to the public2............... 266.9 333.4 850.3 1,450.6 2,053.7 3,504.3 

Net results for budget perspective3 ...... (15.7) (242.8) (73.3) (331.8) (151.5) (483.4) 

Revenues from other Government 

 accounts:

 Transfers ............................................... 2.6 244.4 0.2 247.2 (247.2)

 Interest credits ....................................... 8.9 2.5 100.3 111.7 (111.7)

 Total .................................................... 11.5 246.9 100.5 358.9 (358.9)

Net results for trust fund

 perspective3 ......................................... (4.2) 4.1 27.2 27.1 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 $483.4 was the

total federal deficit in fiscal year 2014.

2 The OASDI figure includes $4.7 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: Amounts may not add due to rounding.

 "N/A" indicates not applicable.

Cashflow Projections 

Background 

Economic and Demographic Assumptions. The Boards of Trustees20 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

 

 20 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. 
170 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

most recent set of intermediate projections for Social Security and Medicare are shown in the “Social Security” and 

“Medicare” sections of Note 24—Social Insurance.

Beneficiary-to-Worker 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. Chart 1 shows that the number of 

OASDI beneficiaries per 100 covered workers is projected to grow rapidly from 36 in 2014 to 48 in 2035 as the baby boom 

generation enters their retirement years and receives benefits. After 2035 the baby boom’s influence will have dissipated, and 

it is projected that the beneficiary-worker ratio will continue to rise but at a slower pace due to increasing longevity, reaching 

51 beneficiaries per 100 workers in 2088. (In rough terms, the beneficiary-to-worker ratio at any point in time reflects the 

birth rates experienced by the generations who are retired; the birth rates of the baby boom generations’ parents were much 

higher than those of the baby boomer generations and the generations to follow them.) A similar demographic pattern 

confronts the Medicare Program. 

Chart 1—OASDI Beneficiaries per 100 Covered Workers 

1970-2088 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 171 

Social Security Projections 

Income and Expenditures. Chart 2 shows historical values and actuarial estimates of combined OASDI annual 

noninterest income and expenditures for 1970-2088. 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 

1970-2088 

(In billions of dollars) 

Social Security’s surplus of noninterest income over expenditures was positive every year between 1984 and 2009, 

became negative in 2010, and is projected to grow ever more negative over the next 75 years. This pattern reflects the aging 

of the population documented in Chart 1, as well as growth of the economy and growth in the price level. As described 

above, surpluses that occurred prior to 2010 were “loaned” to the General Fund and accumulated, with interest, increasing 

reserve spending authority for the trust fund. The reserve spending authority represents an obligation for the General Fund. 
172 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

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. Dividing 

noninterest income and expenditures by taxable payroll serves to isolate the effect of demographics on Social Security 

finances, and usefully gauges Social Security’s financial imbalances against the size of the Social Security tax base. The time

path of the cost rate in Chart 3 closely parallels that of the beneficiary-to-worker ratio in Chart 1. Social Security began using 

interest credits to meet full benefit obligations in 2010, and is projected to begin drawing down trust fund asset reserves 

starting in 2020 and to deplete those reserves in 2033. After trust fund asset reserves are depleted, noninterest income will 

continue to flow into the fund and will be sufficient to finance 77 percent of scheduled benefits in 2033 and 72 percent of 

scheduled benefits in 2088. 

Chart 3—OASDI Income (Excluding Interest) and Expenditures 

as a Percent of Taxable Payroll 

1970-2088 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 173 

Income and Expenditures as a Percent of GDP. Chart 4 shows estimated annual noninterest income and expenditures, 

expressed as percentages of GDP, which is the total value of goods and services produced in the United States. This 

alternative perspective shows the size of the OASDI Program in relation to the capacity of the national economy to sustain it. 

The gap between expenditures and income generally widens with expenditures generally growing as a share of GDP and 

income declining slightly relative to GDP. Social Security’s expenditures are projected to grow from 4.92 percent of GDP in 

2014 to 6.12 percent in 2088. In 2088, expenditures are projected to exceed income by 1.65 percent of GDP. 

Chart 4—OASDI Income (Excluding Interest) and Expenditures 

as a Percent of GDP 

1970-2088 
174 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

Sensitivity Analysis. Actual future income from OASDI payroll taxes and other sources and actual future expenditures 

for scheduled benefits and administrative expenses will depend upon a large number of factors: the size and composition of 

the population that is receiving benefits, the level of monthly benefit amounts, the size and characteristics of the work force

covered under OASDI, and the level of workers’ earnings. These factors will depend, in turn, upon future marriage and 

divorce rates, birth rates, death rates, migration rates, labor force participation and unemployment rates, disability incidence 

and termination rates, retirement age patterns, productivity gains, wage increases, cost-of-living increases, and many other 

economic as well as demographic factors. 

This section presents estimates that illustrate the sensitivity of long-range expenditures and income for the OASDI 

Program to changes in selected individual assumptions. In this analysis, the intermediate assumption is used as the reference 

point, and one assumption at a time is varied. 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. 

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, the intermediate assumption for the annual rate of reduction in age-sex-adjusted death rates is 0.79 

percent. For the low-cost alternative, a slower reduction rate (0.41 percent) is assumed as it means that beneficiaries die at a 

younger age relative to the intermediate assumption, resulting in lower expenditures. Under the low-cost assumption, the 

shortfall drops from $13,330 billion to $11,454 billion, a 14 percent smaller shortfall. The high-cost death rate assumption 

(1.20 percent) results in an increase in the shortfall, from $13,330 billion to $15,318 billion, a 15 percent increase in the 

shortfall. Clearly, alternative death rate assumptions have a substantial impact on estimated future cashflows in the OASDI 

Program. 

A higher fertility rate means more workers relative to beneficiaries over the projection period, thereby lowering the 

shortfall relative to the intermediate assumption. An increase in the rate from 2.0 to 2.3 percent results in a 9 percent smaller 

shortfall (i.e., expenditures less income), from $13,330 billion to $12,158 billion. 

Higher real wage growth results in faster income growth relative to expenditure growth. Table 2 shows that a real wage 

differential that is 0.63 percentage points greater than the intermediate assumption of 1.13 causes the shortfall to drop from 

$13,330 billion to $10,730 billion, a 20 percent decline. Decreasing the real wage differential by 0.62 percentage points 

results in a 13 percent increase in the shortfall from $13,330 billion to $15,051 billion. 

The CPI change assumption operates in a somewhat counterintuitive manner, as seen in Table 2. A higher rate of 

change results in a lower shortfall. This arises as a consequence of holding the real wage assumption constant while varying 

the CPI so that wages (the income base) are affected sooner than benefits. If the rate is assumed to be 3.4 percent rather than

2.7 percent, the shortfall decreases about 3 percent, from $13,330 billion to $12,878 billion. 

The effect of net immigration is similar to fertility in that, over the 75-year projection period, higher immigration results in 

proportionately more workers (taxpayers) than beneficiaries. The low-cost assumption for net immigration results in a 4 percent

drop in the shortfall, from $13,330 billion to $12,793 billion, relative to the intermediate case; and the high-cost assumption

results in a 4 percent higher shortfall. 

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. The shortfall is 15 

percent lower, decreasing from $12,294 billion to $10,487 billion, when the real interest rate is 3.4 percent rather than 2.9 

percent. The shortfall is 18 percent higher, increasing to $14,556 billion, when the real interest rate is 2.4 percent rather than 2.9 

percent. 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 175 

Table 2

Present Values of Estimated OASDI Expenditures in Excess of Income

Under Various Assumptions, 2014-2088 

(Dollar values in billions; values of assumptions shown in parentheses)

Financing Shortfall Range

Assumption Low Intermediate High 

 

Average annual reduction in death rates .................. 11,454 13,330 15,318 

 (0.41) (0.79) (1.20) 

Total fertility rate ....................................................... 12,158 13,330 14,486 

 (2.3) (2.0) (1.7) 

Real wage differential ............................................... 10,730 13,330 15,051 

 (1.76) (1.13) (0.51) 

CPI change ............................................................... 12,878 13,330 13,797 

 (3.4) (2.7) (2.0) 

Net immigration ......................................................... 12,793 13,330 13,897 

 (1,430,000)1 (1,125,000)1 (830,000)1

 

Real interest rate ...................................................... 11,389 13,330 15,756 

 (3.4) (2.9) (2.4) 

1 Amounts represent the average annual net immigration over the 75-year projection period. 

Source: 2014 OASDI Trustees Report and SSA.

 

Medicare Projections 

Medicare Legislation. The Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 

2010 (the “Affordable Care Act” or ACA) significantly improves projected Medicare finances. The most important cost 

saving provision in the ACA is a revision in payment rate updates for Parts A and B services other than for physicians’ 

services. Relative to payment rates made under prior law that were generally based on the rate at which prices for inputs used 

to provide Medicare services increase, the ACA reduces those payment rate updates by the rate at which productive 

efficiency in the overall economy increases, which is projected to average 0.9 percent per year through 2030 and 1.1 percent 

per year thereafter. The ACA also achieves substantial cost savings by benchmarking payment rates for private health plans 

providing Parts A and B services (Part C or Medicare Advantage) to more closely match per beneficiary costs. Partly 

offsetting these changes was an increase in prescription drug coverage. In addition, the ACA increases Part A revenues by: 

(a) taxing high-cost employer-provided health care plans and thereby giving employers incentives to increase the share of 

compensation paid as taxable earnings, and (b) imposing a new 0.9 percent surtax on earnings in excess of $200,000 

(individual tax return filers) or $250,000 (joint tax return filers) starting in 2013. 

The ACA substantially reduces the Medicare cost projections. Growth in Medicare cost per beneficiary in excess of 

growth in per capita GDP is referred to as “excess cost growth.” In the 2009 Financial Report, the last report released prior to 
176 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

the passage of the ACA, excess cost growth was assumed to average one percentage point over the last 50 years of the 75-

year projection period—that is, Medicare expenditures per beneficiary were assumed to grow, on average, about one 

percentage point faster than per capita GDP over the long range. That assumption for excess cost growth in Medicare was 

optimistic in the sense that it is smaller than in recent history; excess cost growth averaged 1.6 percentage points between 

1990 and 2007.21 In this year’s Financial Report, as in the 2012 and 2013 reports, long-term excess cost growth is essentially 

zero. As a result, the long-term projected Medicare spending share of GDP in this Financial Report is driven primarily by the 

same demographic trends that drive the OASDI spending share of GDP. 

The 2014 Medicare Trustees’ Report warns that the actual future costs for Medicare could exceed those shown by the 

current-law projections that underlie both the Trustees’ Report and this Financial Report. This concern reflects the fact that 

statutory adjustments to payment rates for Medicare physicians’ services mandated by a 1997 Medicare reform have been 

consistently overridden by new law, and also the possibility that the new productivity-based downward adjustments to 

Medicare payment rate updates may not be sustainable. 

Changes in Projection Methods. For 2014 the Medicare Trustees Report and this Report features a projection for 

Medicare costs that assumes legislative overrides of the sustainable growth rate (SGR) formula for physician fee schedule 

payment under Medicare Part B. Current law requires a reduction in Medicare payment rates for physician services of 21 

percent in April 2015. It is a virtual certainty that lawmakers will override the required reduction in Medicare physician 

payment rates as they have for every year beginning with 2003, the Medicare Board of Trustees feature a projected baseline

cost projection, which assumes an annual increase in the physician fee schedule equal to the average SGR override over the 

10-year period ending with March 31, 2015. Since 2008 legislation overriding physician fee reductions has included 

provisions offsetting the 10-year cost of the overrides, but the division of those offsets between Medicare savings and savings

in other parts of the budget has varied. Because it is difficult to predict the extent to which policy makers will finance future 

overrides with other Medicare savings, the projected Medicare baseline does not include any offsets, which may result in 

overstating program costs. 

 

 21 Congressional Budget Office, the Long-Term Budget Outlook, June 2011. 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 177 

Total Medicare. Chart 5 shows expenditures and current-law noninterest revenue sources for HI and SMI combined as a 

percentage of GDP. The total expenditure line shows Medicare costs rising to 6.9 percent of GDP by 2088. Revenues from 

taxes and premiums (including state transfers under Part D) are expected to increase from 1.9 percent of GDP in 2014 to 3.11 

percent of GDP in 2088. Payroll tax income increases gradually as a percent of GDP because the new tax on earnings in 

excess of $250,000 for joint tax return filers and $200,000 for individual tax return filers applies to an increasing share of 

earnings because the $250,000 and $200,000 thresholds are not indexed for price changes. Premiums combined for Parts B 

and D of SMI are approximately fixed as a share of Parts B and D costs, so they also increase as a percent of GDP. General 

revenue contributions for SMI, as determined by current law, are projected to rise as a percent of GDP from 1.43 percent to 

3.33 percent over the same period. Thus, revenues from taxes and premiums (including state transfers) will fall substantially 

as a share of total noninterest Medicare income (from 57 percent in 2014 to 48 percent in 2088) while general revenues will 

rise (from 43 percent to 52 percent). The gap between total noninterest Medicare income (including general revenue 

contributions) and expenditures begins around 2009 and then steadily continues to widen after 2022, reaching 0.45 percent of 

GDP by 2088. 

Chart 5—Total Medicare (HI and SMI) Expenditures and Noninterest Income 

as a Percent of GDP 

1970-2088 
178 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

Medicare, Part A (Hospital Insurance)ņ Income and Expenditures. Chart 6 shows historical and actuarial estimates of 

HI annual income (excluding interest) and expenditures for 1970-2088 in nominal dollars. The estimates are for the opengroup population. 

Chart 6—Medicare Part A Income (Excluding Interest) and Expenditures 

1970-2088 

(In billions of dollars) 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 179 

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 chart shows that beginning in 2023, 

the expenditure rate exceeds the income rate, and cash deficits continue thereafter. The projected initial decline in 

expenditures is due to the expected continuation of the economic recovery, the savings provisions of the Affordable Care Act, 

and the sequestration of Medicare expenditures for 2013-2024. Subsequent to 2024, the cost rate increases significantly due 

to retirements of those in the baby boom generation and continuing health services cost growth. The effect of these factors 

will be somewhat offset by the accumulating effect of the reduction in provider price updates, which will reduce annual HI 

cost growth by an estimated 1.1 percent per year. Trust fund interest earnings and assets provide enough resources to pay full

benefit payments until 2030 with general revenues used to finance interest and loan repayments to make up the difference 

between cash income and expenditures during that period. Pressures on the federal budget will thus emerge well before 2030. 

Present tax rates would be sufficient to pay 85 percent of scheduled benefits after trust fund exhaustion in 2030 and 77 

percent of scheduled benefits in 2088. 

Chart 7—Medicare Part A Income (Excluding Interest) and Expenditures 

as a Percent of Taxable Payroll 

1970-2088
180 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

Medicare, Part A Income and Expenditures as a Percent of GDP. Chart 8 shows estimated annual noninterest income 

and expenditures, expressed as percentages of GDP, the total value of goods and services produced in the United States. This 

alternative perspective shows the size of the HI Program in relation to the capacity of the national economy to sustain it. 

Medicare Part A’s expenditures are projected to grow from 1.50 percent of GDP in 2014, to 2.25 percent in 2046, and then 

remain fairly level throughout the rest of the 75-year period, as the accumulated effects of the price update reductions are 

realized. The gap between expenditure and income shares of GDP widens to 0.56 percent in 2046, remains fairly stable 

through 2080, and then commences a slight decline, reaching 0.54 percent of GDP in 2088. 

Chart 8—Medicare Part A Income (Excluding Interest) and Expenditures 

as a Percent of GDP 

1970-2088 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 181 

Medicare, Parts B and D (Supplementary Medical Insurance). 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. The gap between premiums, drug fees, and state transfer revenues plus program expenditures, a gap that will need to 

be filled with transfers from general revenues, grows throughout the projection period. 

Chart 9—Medicare Part B and Part D Premium and State 

Transfer Income and Expenditures 

1970-2088 

(In billions of dollars) 
182 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

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 Supplementary Medical Insurance Program over the next 75 years expressed as a percentage 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 expenditures as a share of GDP are expected to grow rapidly from 1.94 percent in 2014 to 3.30 percent in 2035, and then 

grow more slowly reaching 4.54 in 2088. This growth pattern reflects growth in Medicare spending per beneficiary that is 

positive for the first half of the projection period (through 2035) as the baby boom generation moves into their advanced 

years and then slows to a modest pace consistent with increasing longevity. As a share of GDP, premium and state transfer 

income grows from about 0.50 percent in 2014 to 1.22 percent of GDP in 2088. The portion of SMI expenditures financed by 

General Fund transfers to SMI is projected to be about 74 percent throughout the projections period. 

Chart 10—Medicare Part B and Part D Premium and State Transfer 

Income and Expenditures as a Percent of GDP 

1970-2088 

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 one assumption at a time is varied. 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). 

Table 3 shows the effects of changing various assumptions on the present value of estimated HI expenditures in excess 

of income (the shortfall of income relative to expenditures in present value terms). The assumptions are shown in 

parentheses. Clearly, net HI expenditures are extremely sensitive to alternative assumptions about the growth in health care 

cost. For the low-cost alternative, the slower growth in health costs causes the shortfall to drop from $3,823 billion to a 

surplus of $1,996 billion, a 152 percent change. The high-cost assumption results in more than tripling of the shortfall, from 

$3,823 billion to $13,090 billion. 

The low and high real wage growth rate scenarios result in about a -45 and +25 percent, respectively, change in the 

shortfall relative to the intermediate case. Wages are a key cost factor in the provision of health care. Higher wages also result 

in greater payroll tax income. CPI inflation, fertility, and net immigration changes have very little effect on net HI 

expenditures. (When CPI inflation is varied, the real interest rate is held constant, which implies that the nominal interest 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 183 

changes one for one with the assumed rate of CPI inflation.) Higher immigration decreases the net shortfall modestly as the 

75-year projection period captures a higher share of additional immigrants’ tax payments than it does of their benefits. 

Table 3 also shows that the present value of net HI expenditures is 16 percent lower if the real interest rate is 3.4 percent 

rather than 2.9 percent and 21 percent higher if the real interest rate is 2.4 percent rather than 2.9 percent. 

Table 3

Present Values of Estimated Medicare Part A Expenditures in Excess of Income

Under Various Assumptions, 2014-2088 

(Dollar values in billions; values of assumptions shown in parentheses)

Financing Shortfall Range

Assumption1 Low Intermediate High 

 

Average annual growth in health costs 2 .................. (1,996) 3,823 13,090 

 (3.5) (4.5) (5.5) 

Total fertility rate 3 ..................................................... 3,426 3,823 4,211 

 (2.3) (2.0) (1.7) 

Real wage differential .............................................. 2,101 3,823 4,777 

 (1.8) (1.1) (0.1) 

CPI change .............................................................. 4,780 3,823 3,055 

 (2.0) (2.7) (3.4) 

Net immigration ........................................................ 3,654 3,823 4,039 

 (1,430,000)4 (1,125,000)4 (830,000)4

 

Real interest rate ..................................................... 3,204 3,823 4,626 

 (3.4) (2.9) (2.4) 

1 The sensitivity of the projected HI net cashflow 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: Center for Medicare & Medicaid Services. 

 
184 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

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 $17,856 billion to $12,802 billion and in Part D from $6,804 

billion to $4,815 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 $25,795 billion for Part B and to $9,956 billion for Part D, about a 

44 percent and a 46 percent difference for Part B and Part D, respectively. 

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, 2014-2088

(In billions of dollars)

Governmentwide Resources Needed

Low Intermediate High 

Medicare Program1 (3.3) (4.3) (5.3) 

Part B ........................................................................ 12,802 17,856 25,795

Part D ........................................................................ 4,815 6,804 9,956

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: Centers for Medicare & Medicaid Services.

Sustainability of Social Security and Medicare 

75-Year Horizon 

According to the 2014 Medicare Trustees Report, the HI Trust Fund is projected to remain solvent until 2030 and, 

according to the 2014 Social Security Trustees Report, the OASI and DI Trust Funds are projected to have asset reserves 

until 2034 and 2016, 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 unified budget perspective as well as for understanding generally the growing resource demands of the 

programs on the economy. A common way to present future cashflows 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. 

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 Statements of 

Social Insurance included in the principal financial statements. For HI, revenues from the public are projected to fall short of

total expenditures by $3,823 billion in present value terms which is the additional amount needed in order to pay scheduled 

benefits over the next 75 years.22 From the trust fund perspective, the amount needed is $3,618 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 $24,659 billion less 

 

 22 Interest income is not a factor in this table as dollar amounts are in present value terms. 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 185 

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.23 For OASDI, projected revenues from the public fall short of total expenditures by $13,330 

billion in present value dollars, and, from the trust fund perspective, by $10,565 billion. 

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 $41,812 billion. From the trust fund perspective, which counts the trust funds ($3,044 billion in present value)

and the general revenue transfers to the SMI Program ($24,660 billion in present value) as dedicated funding sources, 

additional resources needed to fund the programs are $14,108 billion in present value. 

Table 5

Present Values of Costs Less Revenues of 75-Year Open Group Obligations

HI, SMI, and OASDI

 

(In billions of dollars, as of January 1, 2014)

 SMI 

 HI Part B Part D OASDI Total 

Revenues from the public: 

Taxes ............................................................. 16,542 - - 50,969 67,511 

Premiums, state transfers ............................. - 6,456 2,508 - 8,964 Total ............................................................ 16,542 6,456 2,508 50,969 76,475 

Total costs to the public ............................... 20,365 24,311 9,312 64,299 118,287 

Net results - budget perspective* ................ 3,823 17,855 6,804 13,330 41,812 

Revenues from other Government accounts . - 17,856 6,804 - 24,660 

Trust fund balances as of 1/1/2014 ................. 205 74 1 2,764 3,044 

Net results - trust fund perspective* ........... 3,618 (75) (1) 10,565 14,108 

 

*Net results are computed as costs less revenues and trust fund balances. Negative values are indicative of surpluses.

 

 Note: Details may not add to totals due to rounding.

 

 Source: 2014 OASDI and Medicare Trustees' Report

 

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 $13.3 trillion in present value will be needed above 

currently scheduled taxes to pay for scheduled benefits ($10.6 trillion from the trust fund perspective). Yet, a 75-year 

projection can be a misleading indicator of all future financial flows. For example, when calculating unfunded obligations, a 

75-year horizon includes revenue from some future workers but only a fraction of their future benefits. In order to provide a 

more complete estimate of the long-run unfunded obligations of the programs, estimates can be extended to the infinite 

horizon. 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 

 

 23 The SMI Trust Fund has $75 billion of existing assets. 
186 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

to $75.5 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 2014. 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 

trust fund is subtracted, an additional $24.9 trillion is needed to sustain the OASDI Program into the infinite future, while an 

additional $1.9 trillion is needed to sustain the HI Program. However, looking just at present values ignores timing 

differences in the underlying projected cashflows; the HI Trust Fund is projected to remain solvent only until 2030. 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 ($31.4 

trillion and $14.2 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 2088, 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

 

(In trillions of dollars, as of January 1, 2014)

 SMI 

 HI Part B Part D OASDI Total 

Present value of future costs less 

future taxes, premiums, and state 

transfers for current participants ................... 8.9 14.7 4.9 28.3 56.8 

Less current trust fund balance ..................... 0.2 0.1 - 2.8 3.1 

Equals net obligations for past and 

current participants ........................................ 8.7 14.6 4.9 25.5 53.7 

Plus net obligations for future 

participants .................................................... (6.8) 16.8 9.3 (0.6) 18.7 

Equals net obligations through the 

infinite future for all participants .................... 1.9 31.4 14.2 24.9 72.4 

 

Present values of future costs less the 

present values of future income over 

the infinite horizon ......................................... 2.1 31.5 14.2 27.7 75.5 

 

 Note: Detail may not add to totals due to rounding.

 

 Source: 2014 OASDI and Medicare Trustees’ Reports.

 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 187 

Railroad Retirement, Black Lung, and Unemployment 

Insurance

Railroad Retirement 

The Railroad Retirement Board (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 program separate from the Social Security Program. 

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. 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. Tier II taxes finance railroad retirement 

benefit payments that are higher than Social Security levels. 

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 

(provided after 1974 as part of a phase out of certain vested dual benefits). See Note 24—Social Insurance, for additional 

information on railroad retirement program financing. 

The RRSIA liberalized benefits for 30-year service employees and their spouses, eliminated a cap on monthly benefits 

for retirement and disability benefits, lowered minimum service requirements from 10 to 5 years, and provided for increased 

benefits for widow(er)s. Per the RRSIA, amounts in the Railroad Retirement Account and the SSEB Account that are not 

needed to pay current benefits and administrative expenses may be transferred to the NRRIT or used to offset transfers from 

the NRRIT to the Railroad Retirement Account. The NRRIT’s sole purpose is to manage and invest railroad retirement 

assets. NRRIT’s Board of Trustees is empowered to invest trust assets in nongovernmental assets, such as equities and debt, 

as well as in Government securities. Prior to RRSIA, all investments were limited to Government securities. 

Since its inception, NRRIT has received $21.3 billion from RRB (including $19.2 billion in fiscal year 2003, 

pursuant to RRSIA) and returned $16.6 billion. During fiscal year 2014, the NRRIT made net transfers of $1.4 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, 2014, and 2013, of non-federal securities and investments of the NRRIT are disclosed in Note 8—Debt and 

Equity Securities. 

Cashflow Projections 

Economic and Demographic Assumptions. The economic and demographic assumptions used for the most recent set of 

projections are shown in the “Railroad Retirement” section of Note 24—Social Insurance.

Income and Expenditures. Chart 11 shows, in dollars, estimated railroad retirement income (excluding interest and 

financial interchange income) and expenditures for the period 2014-2088 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 are projected to 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. 
188 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

Chart 11—Estimated Railroad Retirement Income 

(Excluding Interest and Financial Interchange Income) and Expenditures 

2014-2088 

(In billions of dollars) 

As Chart 11 shows, expenditures are expected to exceed tax income for the entire projection period. The imbalance 

generally grows at a moderate amount until about 2078 when it begins to grow more rapidly.
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 189 

Income and Expenditures as a Percent of Taxable Payroll. Chart 12 shows estimated expenditures and income as a 

percent of Tier II taxable payroll. Expenditures as a percentage of payroll increase from 2014 through 2019 primarily due to 

the anticipated retirement of a large percentage of the current workforce combined with the projected decline in railroad 

employment. 

Chart 12—Estimated Railroad Retirement Income 

(Excluding Interest and Financial Interchange Income) and Expenditures 

as a Percent of Tier II Taxable Payroll 

2014-2088 

 
190 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

Sensitivity Analysis. Actual future income from railroad payroll taxes and other sources and actual future expenditures 

for scheduled benefits and administrative expenses will depend upon a large number of factors as mentioned above. Two 

crucial assumptions are employment growth and the interest rate. The interest rate assumption reflects the expected rate of 

return on NRRIT investments. Table 7 shows the sensitivity of the shortfall in the Railroad Retirement Program to variations 

in these two assumptions. The low-cost employment scenario has a 6.9 percent smaller shortfall of income to expenditures, 

and the high-cost scenario has a 6.2 percent higher shortfall. A higher discount rate reduces future values relative to a lower

rate. As seen in the table, the shortfall is 26.4 percent lower if the interest rate is 10.0 percent rather than 7.0 percent and 63.5 

percent higher when the interest rate is 4.0 percent rather than 7.0 percent. 

Table 7

Present Values of Railroad Retirement Expenditures in Excess of Income

Under Various Employment and Interest Rate Assumptions, 2014-2088 

(Dollar values in billions; values of assumptions shown in parentheses)

Assumption Low Middle High 

 

Employment1............................................................. 100.5 107.9 114.6 

 (-0.5%) (-2.0%) (-3.5%)

 

Interest rate ............................................................... 79.4 107.9 176.4 

 (10.0%) (7.0%) (4.0%) 

1 The low and middle employment scenarios have passenger service employment remaining at 46,000 workers per year and the

remaining employment base declining at 0.5 percent and 2.0 percent, respectively, for 25 years, at a reducing rate over the next 25

years, and remaining level thereafter. The high-cost scenario has passenger service employment declining by 500 workers per 

year until a level of 35,000 is reached with the remaining employment base declining by 3.5 percent per year for 25 years, at a

reducing rate over the next 25 years, and remaining level thereafter. 

Source: Railroad Retirement Board 

Sustainability of Railroad Retirement 

Table 8 shows the magnitudes of the primary expenditures and sources of financing for the Railroad Retirement 

Program computed on an open-group basis for the next 75 years and expressed in present values as of January 1, 2014. The 

data are consistent with the Statements of Social Insurance. 

From a governmentwide perspective, revenues are expected to fall short of expenditures by approximately $107.9 

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 and the financial interchange and transfers are included, the combined balance of the 

NRRIT, the Railroad Retirement Account, and the SSEB Account show a slight surplus. 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 191 

 Table 8

Present Values of 75-Year Projections of Revenues and Expenditures for the 

Railroad Retirement Program1,2

 

 (In billions of present-value dollars as of January 1, 2014) 

 

 Estimated future income (excluding interest) received from or on behalf of: 3 

 Current participants who have attained retirement age ........................................................... 7.9 

 Current participants not yet having attained retirement age ..................................................... 63.0 

 Those expected to become participants ................................................................................... 78.3 

 All participants .......................................................................................................................... 149.2 Estimated future expenditures: 4 

 Current participants who have attained retirement age ............................................................ 125.8 

 Current participants not yet having attained retirement age .................................................... 96.8 

 Those expected to become participants ................................................................................... 34.5 

 All participants .......................................................................................................................... 257.1 Net obligations from budget perspective (expenditures less income) 107.9 Railroad retirement program assets (mostly investments stated at market) 5 27.6 Financial interchange from Social Security Trust 81.9 Net obligations from trust fund perspective (1.6) 

 

 

 1 Represents combined values for the Railroad Retirement Account, SSEB Account, and NRRIT, based on 

 middle employment assumption. 

 2 The data used reflect the provisions of RRSIA of 2001. 

 3 Future income (excluding interest) includes Tier I taxes, Tier II taxes, and income taxes on benefits. 

 4 Future expenditures include benefits and administrative expenditures. 

 5 The value of the fund reflects the 7.0 percent interest rate assumption. The RRB uses the relatively high rate due to 

 investments in private securities. 

 Note: Detail may not add to totals due to rounding. Employee and beneficiary status are determined as of 

 1/1/2013, whereas present values are as of 1/1/2014. 

 

 Source: Railroad Retirement Board 

 

 

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 to eligible survivors of coal miners who died due to 

pneumoconiosis. DOL operates the Black Lung Disability Benefit Program. The beneficiary population is a nearly closed 

universe in which attrition by death exceeds new entrants by a ratio of more than ten to one. 

Excise taxes on coal mine operators, based on the domestic sale of coal, are the primary source of financing black lung 

disability payments and related administrative costs. The Black Lung Benefits Revenue Act provided for repayable advances 

to the BLDTF from the General Fund of the Treasury, in the event that BLDTF resources were not adequate to meet program 

obligations. Prior to legislation enacted in 2008 that allowed for the restructuring of BLDTF debt, the trust fund had 

accumulated large liabilities from significant and growing shortfalls of excise taxes relative to benefit payments and interest

expenses. 
192 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

The Energy Improvement and Extension Act of 2008 (Public Law 110-343), enacted on October 3, 2008, contained 

several provisions that significantly improved the BLDTF’s financial position, including: 

x Continuation of a previously-enacted increase in coal excise tax rates for an additional 5 years, through 

December 2018; 

x Provision for the restructuring of BLDTF debt by refinancing the outstanding repayable advances with proceeds 

from issuing new debt instruments with lower interest rates; and 

x Establishment of a one-time appropriation that significantly reduced the outstanding debt of the BLDTF. 

This Act also allowed that any debt issued by the BLDTF subsequent to the refinancing may be used to make benefit 

payments, other authorized expenditures, or to repay debt and interest from the initial refinancing. All debt issued by the 

BLDTF was effected as borrowing from the Treasury’s Bureau of the Fiscal Service. 

On September 30, 2014, total liabilities of the BLDTF exceeded assets by $5.8 billion. Prior to the enactment of Public 

Law 110-343, this shortfall was funded by repayable advances to the BLDTF, which were repayable with interest. Pursuant 

to Public Law 110-343, these repayable advances were restructured as zero coupon bonds and any future shortfall is financed 

with one-year borrowing from Treasury. 

From the budget or consolidated financial perspective, Chart 13 shows projected black lung expenditures (excluding 

interest) and excise tax collections for the period 2015-2040 in constant dollars. The significant assumptions used in the most

recent set of projections are coal excise tax revenue estimates, the tax rate structure, the number of beneficiaries, life 

expectancy, federal civilian pay raises, medical cost inflation, the interest rate on new debt issued by the BLDTF, and the 

CPI-U for goods and services. The projected decrease in cash inflows in the year 2019 and, thereafter, is the result of a 

scheduled reduction in the tax rate on the sale of coal. This rate reduction is projected to result in a 38.4 percent decrease in 

the amount of excise taxes collected between the years 2018 and 2019. 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 193 

Chart 13—Estimated Black Lung Income and Expenditures (Excluding Interest) 

In Constant (or Inflation-Adjusted) Dollars 

2015-2040 

(In millions of dollars) 

 
194 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

 

 Table 9

Present Values of 26-Year Projections of Expenditures and Revenues 

for the Black Lung Disability Benefit Program

 

 (In billions of present value dollars as of September 30, 2014)

 

 Projected future expenditures ...................................................................................................... 2.8 

 Projected future tax income ......................................................................................................... 7.3 

 Net obligations from budget perspective (expenditures less income) ........................................ (4.5)

 Accumulated balance due General Fund .................................................................................... 5.8 

 Net obligations from trust fund perspective .......................................................................... 1.3 

 Note: Detail may not add to totals due to rounding.

 Source: Department of Labor 

 

Table 9 shows present values of 26-year projections of expenditures and revenues for the Black Lung Disability Benefit 

Program computed as of September 30, 2014. Cashflows were discounted using rates that ranged from 2.50 percent to 2.63 

percent. From a governmentwide (budget) perspective, the present value of expenditures is expected to be less than the 

present value of income by $4.5 billion (a surplus). From a trust fund perspective, a large balance ($5.8 billion) is owed to the 

General Fund. From that perspective, when that accumulated balance is combined with the cashflow surplus, the program has 

a shortfall of $1.3 billion in present value dollars, which matches last year’s shortfall. 

Unemployment Insurance 

The Unemployment Insurance Program was created in 1935 to provide temporary partial wage replacement to workers 

who lost their jobs. The program is administered through a unique system of federal and state partnerships established in 

federal law but administered through conforming state laws by state agencies. The program includes the 50 states and Puerto 

Rico, U.S. Virgin Islands, and the District of Columbia. DOL interprets and enforces federal law requirements and provides 

broad policy guidance and program direction, while program details such as benefit eligibility, duration, and amount of 

benefits are established through individual state unemployment insurance statutes and administered through state 

unemployment insurance agencies. 

The program is financed through the collection of federal and state unemployment taxes that are credited to the UTF 

and reported as federal tax revenue. The fund was established to account for the receipt, investment, and disbursement of 

unemployment taxes. Federal unemployment taxes are used to pay for federal and state administration of the Unemployment 

Insurance Program, veterans’ employment services, state employment services, and the federal share of extended 

unemployment insurance benefits. Federal unemployment taxes also are used to maintain a loan account within the UTF, 

from which insolvent state accounts may borrow funds to pay unemployment insurance benefits. 

Chart 14 shows the projected cash contributions and expenditures over the next 10 years under expected economic 

conditions (described below) in constant dollars. The significant assumptions used in the projections 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 Consumer 

Price Index for goods and services. These projections, excluding interest earnings, indicate a positive net cashflow in fiscal 

year 2015 through fiscal year 2024. 

The Federal/State Extended Unemployment Compensation Act of 1970 provides for the extension of the duration of 

unemployment insurance benefits during periods of high unemployment to individuals who have exhausted their regular 

unemployment benefits. When the insured unemployment level within a state, or in some cases total unemployment, reaches 

certain specified levels, the state must extend benefit duration by 50 percent, up to a combined maximum of 39 weeks; 

certain states voluntarily extended the benefit duration up to a combined maximum of 46 weeks. These extended benefits are 

financed one-half by state unemployment taxes and one-half by federal unemployment taxes. However, the ARRA of 2009 

began temporary 100 percent federal funding of extended benefits. Subsequent legislation, most recently P.L. No. 112-240, 

the American Taxpayer Relief Act of 2012, authorized continuing 100 percent federal funding of extended unemployment 

benefits to December 31, 2013. 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 195 

During prolonged periods of high unemployment, Congress may authorize the payment of emergency unemployment 

benefits to supplement extended Unemployment Insurance (UI) benefit payments. Emergency benefits began in July 2008, 

authorized under the Supplemental Appropriations Act, 2008. This emergency program was temporarily extended and 

additionally funded by the ARRA of 2009 and has been subsequently modified several times, most recently by P.L. No. 112-

240, the American Taxpayer Relief Act of 2012, which extended the emergency unemployment insurance program to January 

1, 2014. The DOL’s appropriations decreased $43.2 billion, or 42.1 percent, in fiscal year 2014 primarily due to decreases in 

transfers to the UTF for Emergency Unemployment Compensation after the period of extension ended in January 2014. An 

$18.4 billion dollar decrease in benefit outlays from the prior year also resulted in part due to the discontinuance of the 

federally funded Emergency Unemployment Compensation program, as well as a decline in the number of new claims, and 

the absence of states meeting the trigger thresholds required to pay extended benefits.

Chart 14—Estimated Unemployment Trust Fund Cashflow 

Using Expected Economic Conditions 

In Constant (or Inflation-Adjusted) Dollars 

2015-2024 

(In billions of dollars) 

Table 10 shows 10-year projections of revenues and expenditures for the Unemployment Insurance Program in constant 

dollars. Three sets of numbers are presented in order to show the effects of varying economic conditions as reflected in 

different assumptions about the unemployment rate. For expected economic conditions, the estimates are based on an 

unemployment rate of 5.85 percent during fiscal year 2015, decreasing steadily to 5.40 percent in fiscal year 2018 and 

thereafter. Under Scenario One, which utilizes a higher than expected unemployment rate of 6.84 percent in fiscal year 2015, 

net cash inflows peak in fiscal year 2015 and continue to be positive through 2024. Under Scenario Two, which utilizes an 

even higher than expected unemployment rate of 7.81 percent in fiscal year 2015, net cash inflows, including interest 

earnings and expenses, are projected in fiscal year 2015, but outflows exceed inflows by $10.2 billion in 2016. Net cash 

inflows are reestablished in fiscal year 2017 and peak in fiscal year 2021 with a drop in the unemployment rate below 6.0 

percent and then about 5.4 percent for fiscal years 2022 through 2024. 

Each scenario uses an open group that includes current and future participants of the Unemployment Insurance 

Program. Table 10 shows the impact on the UTF projections of varying projected unemployment rates. For example, in 

Scenario Two, while tax income is projected to increase as higher layoffs result in higher employer taxes, benefit outlays 

increase even more. From the Governmentwide (budget) perspective, under expected conditions, future cash income exceeds 

future expenditures by $86.0 billion. From the same perspective, under Scenario Two, future cash income exceeds future 

expenditures by $49.9 billion. From a trust fund perspective, which takes into account the $14.7 billion trust fund balance, the 

program has a surplus of $85.3 billion under the economic conditions for Scenario One. 
196 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

 

 Table 10

10-Year Projections of Expenditures and Revenues for

Unemployment Insurance in Constant (or Inflation-Adjusted) Dollars

Under Three Alternative Scenarios for Economic Conditions

 

 (In billions as of September 30, 2014)

 Economic Conditions

 

 Scenario Scenario 

 Expected One Two 

 

 

 Projected future expenditures .................................................... 425.9 441.4 506.8 

 Projected future cash income ..................................................... 511.9 512.0 556.7 

 Net obligations from budget perspective (expenditures 

 less income) ............................................................................. (86.0) (70.6) (49.9)

 Trust fund assets ........................................................................ 14.7 14.7 14.7 

 Net obligations from trust fund perspective 1 .............................. (100.7) (85.3) (64.6) 

1

 Net obligations from the trust fund perspective equals net obligations from the budget perspective minus trust fund 

 assets. The negative values in this line are indicative of surpluses. 

 

 Note: Data may not add to totals due to rounding. 

 

 Source: Department of Labor. 

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 a state is minimally solvent. States below this level are vulnerable to exhausting their funds in a recession. States

exhausting their reserve balance borrow funds from the Federal Unemployment Account to make benefit payments. 

Chart 15 presents the state by state results of this analysis as of September 30, 2014. As the Chart illustrates, 33 state 

funds plus the funds of the District of Columbia, Puerto Rico, and U.S Virgin Islands were below the minimal solvency ratio 

of 1.0 at September 30, 2014. 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 197 

Chart 15—Unemployment Trust Fund Solvency as of September 30, 2014 
198 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 property, plant, and equipment 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: 

x 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. 

x 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. 

x Management analysis method that is founded on inflation-adjusted reductions in maintenance funding since the 

base year. 

The amounts disclosed in the table below have all been measured using the condition assessment survey method. The 

standards for acceptable operating condition, the changes in these standards, and changes in asset condition vary widely 

between federal entities. 

Some deferred maintenance and repairs have been deemed critical. Such amounts and conditions are defined by the 

individual agencies with responsibility for the safekeeping of these assets. The critical maintenance amount is not included in

the low or high estimates amounts and is reported separately. Low and high estimates are based on materiality of the 

estimated cost of returning the asset to the acceptable condition versus the total value of the corresponding asset. 

 

 Deferred Maintenance and Repairs as of September 30, 2014, and 2013

Deferred Maintenance and Repairs 

Cost Range 

 Low High Critical

 Estimate Estimate Maintenance

 2014 2013 2014 2013 2014 2013

 (In billions of dollars) Restated Restated Restated

 

 Asset category: 

 Buildings, structures and facilities .... 27.4 29.5 31.2 32.3 103.7 99.5 

 Furniture, fixtures, and equipment ... 0.2 0.1 0.2 0.1 1.8 2.3 

 Other general property, plant, and 

 equipment ...................................... 7.7 5.9 7.7 6.0 0.9 0.9 

 Heritage assets ................................ 6.2 6.4 8.6 8.9 5.0 3.6 

 Total deferred maintenance ........... 41.5 41.9 47.7 47.3 111.4 106.3 

Deferred maintenance and repairs previously reported in fiscal year 2013 for stewardship land are now included under 

heritage assets. 

 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 199 

Please refer to the individual financial statements of DOI, DOD, USDA, DOE, HHS, and VA for detailed significant 

information on deferred maintenance and repairs, including the standards used for acceptable operating condition and 

changes in asset condition. 

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 

$3.1 billion and $0.8 billion for fiscal years 2014 and 2013, respectively. For those under appeal, the estimated payout is $4.7 

billion and $3.5 billion for fiscal years 2014 and 2013, respectively. There are also unasserted claims for refunds of certain 

excise taxes. Although these refund claims have been deemed to be probable, they do not meet the criteria in SFFAS No. 5 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 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. 

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 standard, 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 $88.8 billion and $87.3 billion for fiscal years 2014 

and 2013, respectively. The amount of allowance for uncollectible amounts pertaining to compliance assessments cannot be 

reasonably estimated, and thus the net realizable value of the value of the pre-assessment work-in-process cannot be 

determined. The amount of assessments that agencies have statutory authority to collect at the end of the period but that have 

been written off and excluded from accounts receivable are $138.0 billion and $130.3 billion for fiscal years 2014 and 2013, 

respectively. 
200 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

Risk Assumed 

Risk assumed information is important for all federal insurance and guarantee programs (i.e., USDA-Federal Crop 

Insurance Corporation programs, DHS-National Flood Insurance Program, NCUA-Credit Unions), except social insurance, 

life insurance, and loan guarantee programs. Risk assumed is generally measured by the present value of unpaid losses net of 

associated premiums, based on the risk inherent in the insurance or guarantee coverage in force. In addition to the liability for 

unpaid insurance claims included in Note 16ņInsurance and Guarantee Program Liabilities, for events that have already 

occurred, the Government also is required to report as supplementary information risk assumed amounts and the periodic 

changes in those amounts. 

The assessments of losses using the risk assumed are made by actuarial or financial methods that include information 

and assumptions applicable to the economic, legal, and policy environment in force at the time the assessments are made. 

Management has estimated the loss amounts based on the risk assumed as well as the periodic changes. 

Fiscal year 2013 amounts have been restated to exclude PBGC, as amounts presented for PBGC are reasonably possible 

contingent losses. Please refer to Note 16—Insurance and Guarantee Program Liabilities and Note 20—Contingencies, 

Insurance Contingencies section for details. In addition, amounts for USDA and OPIC have been restated as a result of 

revisions made by USDA and OPIC to correct prior year reporting errors. 

 Please refer to the individual financial statements of the USDA, DHS, and NCUA for further detailed information, 

including information as to the indicators of the range of uncertainty around expected estimates and the indicators of the 

sensitivity of the estimates to changes in major assumptions. The table does not include all federal insurance and guarantee 

programs. 

 

 

 Risk Assumed Information as of September 30, 2014, and 2013

 

(In billions of dollars) 2014 2013

 (Restated) 

 

Present value of unpaid losses, 

net of associated premiums: 

 

Department of Agriculture - Federal Crop Insurance Corporation 

programs ............................................................................................. 7.6 4.9 

Department of Homeland Security - National Flood Insurance 

program ............................................................................................... 0.4 0.6 

National Credit Union Administration - Credit Unions ......................... 0.2 0.2 

 Total .................................................................................................. 8.2 5.7 

 

Period changes in risk assumed amounts: 

 

Department of Agriculture ................................................................... 2.7 (13.4) 

National Credit Union Administration .................................................. - (3.2) 

Department of Homeland Security ...................................................... (0.2) - 

 Total .................................................................................................. 2.5 (16.6) 

 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 201 

Federal Oil and Gas Resources

DOI plays an integral part in the implementation of the President’s Blueprint for a Clean and Secure Energy Future, 

designed to build a safe, secure energy future by using cleaner, alternative fuels to power our homes and economy, producing 

more oil and gas domestically, and improving energy efficiency. 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, 2014 and September 30, 2013

 

(In billions of dollars) Offshore Onshore Total 

 2014 2013 2014 2013 2014 2013

 

Oil and Lease Condensate ... 39.6 36.4 15.5 15.0 55.1 51.4 

Natural Gas, Wet After Lease 

 Separation ..................... 4.5 4.6 19.2 25.8 23.7 30.4 

 Total .................................... 44.1 41.0 34.7 40.8 78.8 81.8 

The above table presents the estimated present value of future federal royalty receipts on estimated proved reserves24 as 

of September 30, 2014 and 2013. The federal government’s estimated petroleum royalties have as their basis the DOE’s 

Energy Information Administration (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 2012, 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. 

 

 

 24 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 

(http://www.eia.gov/naturalgas/data.cfm). 
202 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

 

 Estimated Federal Oil and Gas Petroleum Royalties (Proved Reserves) 

 As of September 30, 2014 and of September 30, 2013 

 

 Average Purchase Average Royalty 

 Quantity (in millions) Price ($) Rate (%) 

 Petroleum Category 2014 2013 2014 2013 2014 2013

 

 Oil and Lease Condensate (Bbl): 

 Offshore .............................................. 4,917.4 4,412.1 99.17 105.89 13.60 13.82 

 Onshore .............................................. 2,147.1 1,984.4 90.03 89.92 12.15 12.11 

 Total ................................................... 7,064.5 6,396.5 

 

 Natural Gas, Wet After Lease 

 Separation (Mcf): 

 Offshore .............................................. 8,587.3 8,443.3 4.93 4.12 13.52 13.66 

 Onshore .............................................. 48,098.6 57,563.5 4.80 3.94 10.63 10.40 

 Total ................................................... 56,685.9 66,006.8 

 

 

 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 year 2014 and 201325. 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. 

 

 25 Gulf of Mexico proved reserves are royalty bearing volumes. In the Gulf of Mexico, an additional 564.1 million Bbl for fiscal year 2014 and 964.8 

million Bbl for fiscal year 2013 of proved oil reserves, and 728.0 million Mcf for fiscal year 2014 and 1,798.2 million Mcf for fiscal year 2013 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 $5.3 billion for fiscal year 2014 and $8.8 billion for 

fiscal year 2013. 
 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 203 

Federal Natural Resources Other than Oil and Gas 

Federal Natural Resources Other than Oil and Gas as of September 30, 2014

(in billions of dollars)

 

 Natural Resource Category 2014 

 

 Coal Royalties .............................................................................. 12.0 

 Total ........................................................................................... 12.0 

 

 DOI plays an integral part in the implementation of the President’s Blueprint for a Clean and Secure Energy Future

which is designed to build a safe, secure energy future by using cleaner, alternative fuels to power our homes and economy, 

producing more oil and gas domestically and improving energy efficiency. DOI is responsible for managing the Nation’s coal 

resources and revenues on federal lands. 

 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 agencies. 

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, regulations, and lease terms determine all requirements a coal lessee must 

follow to be in compliance with lease terms. 

DOI receives coal leasing revenues from a bonus paid at the time of the lease (1/5 due at the time of the lease sale and 

the remaining deferred bonus to be paid over the next four years), an annual rent payment of $3.00 per acre, and royalties 

paid on the value of the coal sold. 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 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, 2014. 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. 

Futures 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. For further details on federal natural resources-other than oil and gas, refer to the 

financial statements of DOI. In addition to the coal resources discussed above, the federal government owns coal resources 

that are not currently under lease and certain other natural resources. 
204 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

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 OTHER INFORMATION (UNAUDITED) 205 

United States Government 

Other Information (Unaudited) for the

Years Ended September 30, 2014, and 2013 

Unexpended Balances of Budget Authority 

The President’s budget and the federal budget process largely use a distinct administrative process of accounting, 

through which federal agencies control, monitor, and report on the status of funds at their disposal. Government agencies can 

be granted authority to enter into obligations that result in immediate or future outlays by law; this authority is known as 

budget authority. Unexpended balances of budget authority consist of the unobligated and obligated, but unliquidated 

balances. 

Unobligated balances, including amounts for trust funds, are the cumulative amount of budgeted balances that are not 

contractually committed or bound legally by the government and that remain available for obligation. At the end of each 

fiscal year, unobligated balances that are still available for new obligations are carried forward to the start of the next fiscal 

year. Unobligated balances that are expiring (i.e., are not available for new obligation) are canceled and not carried forward 

to the start of the next fiscal year. The total unobligated balances as of September 30, 2014, and 2013, are $871.6 billion and

$834.9 billion, respectively. 

Obligated balances refer to the balances where there have been legally binding action but for which payment has not 

yet been made; however, payment will be required in the future. By law, obligated balances are either no-year, or available to 

pay unpaid expenses (normally for five expired years, after which the obligated balances are canceled). In no-year accounts, 

the unobligated balance is carried forward until specifically rescinded by law, or the head of the agency concerned determines 

that the purposes for which it was provided have been accomplished and disbursements have not been made against the 

appropriation for two consecutive years. Therefore, the obligated balances that are still available are carried forward to the 

start of the next fiscal year. The total obligated balances as of September 30, 2014, and 2013, are $1,399.5 billion and 

$1,373.8 billion, respectively. 

The President’s Fiscal Year 2016 Budget (issued on February 2, 2015) is located at www.whitehouse.gov/omb and 

includes the actual unexpended balances of budget authority for fiscal year 2014 in the supplemental materials section under 

“Balances of Budget Authority.” 

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. 
206 OTHER INFORMATION (UNAUDITED) 

 

 Individual Income Tax Liability for Tax Year 2012

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...................... 37,096 82,510 2,290 2,224 62 2.8%

 $15,000 under $30,000 ........ 30,519 670,097 18,787 21,957 616 2.8%

 $30,000 under $50,000 ........ 25,325 989,413 54,739 39,069 2,161 5.5%

 $50,000 under $100,000 ...... 31,089 2,215,015 192,091 71,248 6,179 8.7%

 $100,000 under $200,000 .... 15,647 2,100,003 265,391 134,211 16,961 12.6%

 $200,000 under $500,000 .... 4,154 1,186,751 231,596 285,689 55,753 19.5%

 $500,000 or more ................. 1,098 1,856,342 423,133 1,690,658 385,367 22.8%

 Total .................................... 144,928 9,100,131 1,188,027 

 

 

 

 Corporation Income Tax Liability for Tax Year 2011

 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 ................................... 14,156 4,889 34.5% 

 $1 under $500 ............................... 6,264 1,181 18.9% 

 $500 under $1,000 ........................ 3,243 752 23.2% 

 $1,000 under $5,000 ..................... 10,715 3,061 28.6% 

 $5,000 under $10,000 ................... 6,834 2,217 32.4% 

 $10,000 under $25,000 ................. 10,493 3,417 32.6% 

 $25,000 under $50,000 ................. 10,425 3,385 32.5% 

 $50,000 under $100,000 ............... 12,413 4,029 32.5% 

 $100,000 under $250,000 ............. 23,342 7,308 31.3% 

 $250,000 under $500,000 ............. 26,194 7,945 30.3% 

 $500,000 under $2,500,000 .......... 109,134 31,542 28.9% 

 $2,500,000 or more ....................... 761,180 151,168 19.9% 

 Total ............................................ 994,393 220,894 

 

 
 OTHER INFORMATION (UNAUDITED) 207 

Tax Gap 

The tax gap is the difference between what taxpayers should pay and what they actually pay due to not filing tax 

returns, not paying their reported tax liability on time, or failing to report their correct tax liability. The tax gap, about $450.0 

billion based on updated fiscal year 2006 estimates, represents the amount of noncompliance with the tax laws. 

Underreporting of income tax, employment taxes, and other taxes represents 84 percent of the gross tax gap. 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 (i.e., 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). Of 

these three components, only the underpayment gap is observed; the nonfiling gap and the underreporting gap must be 

estimated. 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. Obviously, 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 the IRS’ 

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 noncompliance). 
208 OTHER INFORMATION (UNAUDITED) 

Unmatched Transactions and Balances 

 Fiscal Year Fiscal Year 

 (in millions of dollars) 2014 2013

 Change in intragovernmental unmatched balances: 

 Debt/investment .......................................................................... 25.2 5.5 

 Interest payable/receivable ......................................................... 0.7 4.9 

 Loans payable/receivable ........................................................... (8.7) (9.0) 

 Benefit program contributions payable/receivable ..................... 106.3 (207.3) 

 Accounts payable/receivable ...................................................... (318.6) 831.2 

 Advances from/to others & deferred credits/prepayments ......... 209.4 506.6 

 Transfers payable/receivable ..................................................... 10.2 (178.7) 

 24.5 953.2 

 Unmatched intragovernmental transactions: 

 Federal securities interest revenue/expenseņinvestment 

 exchange ................................................................................ 73.5 8.8 

 Borrowings interest revenue/expense-exchange ....................... (31.4) 9.4 

 Borrowings gains/losses ............................................................. 583.0 (19.7) 

 Nonexpenditure transfers-in/out ................................................. 1,473.1 123.1 

 Expenditure transfers-in/out ....................................................... (131.4) 110.3 

 Transfers-in/out without reimbursement ..................................... 127.2 (537.2) 

 Imputed financing source/cost .................................................... (18.7) (25.7) 

 Benefit program revenue/cost .................................................... (1,277.7) (240.1) 

 797.6 (571.1) 

 General fund transactions: 

(2,935.2) 

 

 Fund balance with Treasury ....................................................... (5,980.5) 

 Appropriations of unavailable special or trust fund receiptsņ 

 transfers-out/in ....................................................................... 0.9 (48.0) 

 Appropriations received/warrants issued ................................... 55,219.0 19,010.9 

 Other taxes and receipts/trust fund warrants ............................. (19,053.9) (16,672.0) 

 Custodial and non-entity collections transferred out/in .............. (7,431.5) 19,767.2 

 Other General Fund transactions ............................................... (3,218.2) (29,326.9) 

 19,535.8 (10,204.0) 

 Net intra-agency reporting errors and restatements* ...................... - 801.6 

 Unmatched transactions and balances, net .................................... 20,357.9 (9,020.3) 

 ( ) Parentheses indicate a decrease to Net Position. 

 * Beginning in fiscal year 2014, amounts have been reflected above in the applicable lines.

 
 OTHER INFORMATION (UNAUDITED) 209 

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 agency trading partners and often totaled 

significantly more in the absolute than the net amounts shown. In addition, included in the “General Fund Transactions” 

section are certain intragovernmental accounts, primarily related to agency unreconciled transactions with the General Fund. 

The table also reflects other consolidating adjustments and other adjustments that contributed to the unmatched transactions 

and balances amount. 

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 reconciled. 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 reconcile intragovernmental transactions. The federal 

community considers the identification and accurate reporting of intragovernmental activity a priority. 
210 OTHER INFORMATION (UNAUDITED) 

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 REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION (UNAUDITED) 211 

United States Government 

Required Supplementary Stewardship 

Information (Unaudited) for the Years Ended 

September 30, 2014, and 2013 

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, research and development, 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 below in Table 11. 

 

 Table 11

 Stewardship Investments for the Years Ended

 September 30, 2010, through 2014

 Fiscal Fiscal Fiscal Fiscal Fiscal 

 Year Year Year Year Year 

 (In billions of dollars) 2014 2013 2012 2011 2010

 

 Investment in non-federal physical 

 property ......................................................... 65.6 66.1 68.1 69.9 66.7 

 Investments in human capital ........................... 108.5 58.7 87.1 91.9 122.3 

 Research and development: 

 Investments in basic research ....................... 34.0 35.2 34.2 35.7 31.5 

 Investments in applied research .................... 28.1 28.0 29.1 28.8 26.2 

 Investments in development .......................... 61.8 64.1 67.0 71.7 77.3 

 Total investments ........................................ 298.0 252.1 285.5 298.0 324.0 

 

 
212 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 Table 11. They are measured on the same accrual basis of 

accounting used in the Financial Report statements. DOT, HUD, and EPA had $56.7 billion (86 percent), $3.4 billion (5 

percent), and $3.4 billion (5 percent), respectively, of the total non-federal physical property investments in fiscal year 2014 

as shown in Table 11. Within DOT, the Federal Highway Administration invested $42.1 billion during fiscal year 2014, 

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, and DOL had $81.3 billion (75 percent), $14.7 billion (14 percent), and $6.2 billion (6 percent), 

respectively, of the total human capital investments in fiscal year 2014 as shown in Table 11. In comparison over the past 

five years, Education had an increase in human capital investments in fiscal year 2014 primarily due to the acquisition of the 

Health Education Assistance Loan Program (HEAL). As of July 1, 2014, all HEAL program loans were transferred to 

Education by HHS. In FY 2013, Education had a decrease in human capital due to a significant decrease in direct loan 

subsidies related to its Federal Student Aid Expense. Prior to that, Education had an increase in human capital investments in

fiscal year 2010, due to an increase in the net cost for the Federal Family Education Loan, Direct Loan, Grant Programs, and 

Other Programs, including the American Recovery and Reinvestment Act of 2009; while VA increased in fiscal years 2010 

through 2012 due to implementation of the Post 9/11 GI Bill. 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 need-based 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 DOL relate to grants for job training and employment 

programs. 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. 

Research and Development 

Federal investments in Research and Development (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. 

x 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. 

x 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. 

x 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 and applied research, HHS had $16.9 billion (50 percent) and $11.6 billion (41 percent), of the 

total basic and applied research investments, respectively, in fiscal year 2014 as shown in Table 11. HHS also had similar 

R&D investment amounts (and percentage contributions) in each of the preceding four years. 
 REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION (UNAUDITED) 213 

Within HHS, the National Institutes of Health (NIH) conducts almost all (97 percent) of the Department’s basic and 

applied research. The NIH Research Program includes all aspects of the medical research continuum, including basic and 

disease-oriented research, observational and population-based research, behavioral research, and clinical research, including 

research to understand both health and disease states, to move laboratory findings into medical applications, to assess new 

treatments or compare different treatment approaches; and health services research. 

The NIH regards the expeditious transfer of the results of its medical research for further development and 

commercialization of products of immediate benefit to improved health as an important mandate. 

With regard to development, the DOD and NASA had $53.3 billion (86 percent) and $5.4 billion (9 percent), 

respectively, of total development investments in fiscal year 2014, as shown in Table 11. Major outputs of DOD development 

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. 

NASA development includes 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 United States. 
214 REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION (UNAUDITED) 

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 APPENDIX A 215 

Appendix A: Reporting Entity 

This appendix lists the organizations and agencies (entities) included in the U.S. Government’s consolidated reporting 

entity for the Financial Report, as well as some entities not included in the reporting entity. Federal Accounting Standards 

Advisory Board’s (FASAB) Statement of Federal Financial Accounting Concept (SFFAC) No. 2, Entity and Display, 

provides criteria for determining which entities are included in the reporting entity. 

Under the first, conclusive criterion, any entity appearing in the “Federal Programs by Agency and Account” section of 

the federal budget is included in the consolidated reporting entity. Also, based on a consideration of the indicative criteria in 

the aggregate, certain entities not meeting the conclusive criteria are also included in the consolidated reporting entity, as the 

general purpose financial statements might be misleading or incomplete if the organization were not included therein. 

Indicative criteria are that an entity: (1) exercises government sovereign power to carry out federal functions, (2) is owned by 

the federal government, particularly if the ownership is of the organization and not just the property, (3) is subject to the 

direct or continuing administrative control of the reporting entity, (4) carries out federal missions and objectives, (5) 

determines the outcome or disposition of matters affecting recipients of services that the federal government provides, and (6)

has a fiduciary relationship with a reporting entity. 

1. Entities included in the Reporting Entity for the Financial Report:

 

There are a total of 151 entities that met either the conclusive or indicative criteria, and as such are included in the 

Financial Report. The lists below describe three groups of entity types that comprise the reporting entity for the Financial 

Report and include entities from all three branches of government. 

Twenty-Four Chief Financial Officer Act Agencies 

Department of Agriculture 

 www.usda.gov 

Department of Transportation 

 www.dot.gov 

Department of Commerce 

 www.doc.gov 

Department of the Treasury 

 www.treasury.gov 

Department of Defense 

 www.defense.gov 

Department of Veterans Affairs 

www.va.gov 

Department of Education 

www.ed.gov 

Environmental Protection Agency 

www.epa.gov 

Department of Energy 

 www.energy.gov 

General Services Administration 

www.gsa.gov 

Department of Health and Human Services 

 www.hhs.gov 

National Aeronautics and Space Administration 

 www.nasa.gov 

Department of Homeland Security 

 www.dhs.gov 

National Science Foundation 

www.nsf.gov 

Department of Housing and Urban Development 

 www.hud.gov 

Office of Personnel Management 

www.opm.gov 

Department of the Interior 

 www.doi.gov 

Small Business Administration 

www.sba.gov 

Department of Justice 

 www.usdoj.gov 

Social Security Administration 

www.ssa.gov 

Department of Labor 

 www.dol.gov 

U.S. Agency for International Development 

www.usaid.gov 

Department of State 

 www.state.gov 

U.S. Nuclear Regulatory Commission 

www.nrc.gov 
216 APPENDIX A 

Thirteen Additional Significant Entities 

Export-Import Bank of the United States 

www.exim.gov 

Farm Credit System Insurance Corporation 

 www.fcsic.gov 

Federal Communications Commission 

 www.fcc.gov 

Federal Deposit Insurance Corporation 

 www.fdic.gov 

Millennium Challenge Corporation 

 www.mcc.gov 

National Credit Union Administration 

 www.ncua.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 

Smithsonian Institution 

 www.si.edu 

Tennessee Valley Authority 

 www.tva.gov 

U.S. Postal Service 

 www.usps.gov 

One Hundred Fourteen Additional Entities/Funds 

Abraham Lincoln Bicentennial Commission* 

Administrative Conference of the United States 

Congressional-Executive Commission on the People’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 

Appalachian Regional Commission 

Council of the Inspector General on Integrity and 

 Efficiency 

Architect of the Capitol Court of Appeals for Veterans Claims 

Architectural and Transportation Barriers Compliance Court Services and Offender Supervision Agency for DC 

 Board DC Courts 

Armed Forces Retirement Home 

Barry Goldwater Scholarship and Excellence in 

DC Courts–Defender Services 

Defense Nuclear Facilities Safety Board 

 Education Foundation 

Broadcasting Board of Governors 

Delta Regional Authority 

Denali Commission 

Bureau of Consumer Financial Protection Dwight D. Eisenhower Memorial Commission 

Central Intelligence Agency Election Assistance Commission 

Chemical Safety Hazard Investigation Board Environmental Dispute Resolution Fund 

Christopher Columbus Fellowship Foundation 

Commission for the Preservation of America’s 

Equal Employment Opportunity Commission 

Executive Office of the President 

 Heritage Abroad 

Commission of Fine Arts 

Commission of Civil Rights 

Farm Credit Administration 

Federal Election Commission 

Federal Financial Institutions Examination Council 

Commission on International Religious Freedom 

Commission on Security and Cooperation in Europe 

 Appraisal Subcommittee 

Federal Housing Finance Agency

Commission to Eliminate Child Abuse and Neglect 

 Fatalities 

Federal Labor Relations Authority 

Federal Maritime Commission 

Committee for Purchase from People Who Are Blind 

 or Severely Disabled 

Commodity Futures Trading Commission 

Federal Mediation and Conciliation Service 

Federal Mine Safety and Health Review Commission 

Federal Retirement Thrift Investment Board 

Congressional Budget Office Federal Trade Commission 
 APPENDIX A 217 

Financial Crisis Inquiry Commission* 

Foreign Military Financing Program 

Foreign Military Sales Program 

Government Accountability Office 

Government Printing Office 

Gulf Coast Ecosystem Restoration Council 

Harry S. Truman Scholarship Trust Fund 

Indian Law and Other Commission 

Institute of Museum and Library Services 

Intelligence Community Management Account 

Interagency Council on the Homeless 

Inter-American Foundation 

International Trade Commission 

James Madison Memorial Fellowship Foundation 

Japan-United States Friendship Commission 

John C. Stennis Center 

John F. Kennedy Center for the Performing Arts 

Library of Congress 

Marine Mammal Commission 

Medicaid and Children’s Health Insurance Program 

 Payment and Access Commission 

Medicare Payment Advisory Commission 

Merit Systems Protection Board 

Military Compensation and Retirement Modernization 

 Commission 

Morris K. Udall Scholarship Foundation 

National Archives and Records Administration 

National Capital Planning Commission 

National Council on Disability 

National Endowment for the Arts 

National Endowment for the Humanities 

National Gallery of Art 

National Labor Relations Board 

National Mediation Board 

National Railroad Passenger Corporation, Office of the 

 Inspector General 

National Railroad Retirement Investment Trust 

National Transportation Safety Board 

Neighborhood Reinvestment Corporation 

Northern Border Regional Commission 

Nuclear Waste Technical Review Board 

Occupational Safety and Health Review Commission 

Office of Compliance 

Office of Government Ethics 

Office of Navajo and Hopi Indian Relocation 

Office of Special Counsel 

Office of the Federal Coordination for Alaska Natural 

 Gas Transportation Projects 

Open World Leadership Center 

Patient Centered Outcomes Research Trust Fund 

Peace Corps 

Presidio Trust 

Privacy and Civil Liberties Oversight Board 

Public Defender Service 

Recovery Act Accountability and Transparency Board 

Ronald Reagan Centennial Commission* 

Selective Service System 

Senate Preservation Fund 

St. Lawrence Seaway Development Corporation 

State Justice Institute 

U.S. Capitol Preservation Commission 

U.S. China Security Review Commission 

U.S. Holocaust Memorial Museum 

U.S. Institute of Peace 

U.S. Trade and Development Agency 

Vietnam Education Foundation 

Woodrow Wilson International Center for Scholars 

WWI Centennial Commission 

*These entities are no longer active and have either returned all remaining fund balances to Treasury during fiscal year 2014 

or have remaining fund balances pending final return to Treasury as of September 30, 2014. 

 
218 APPENDIX A 

Legislative and Judicial Branches

 There are no legal or other requirements for the legislative or judicial branches to prepare consolidated audited financial 

statements or to provide accrual-based accounting data for inclusion in the governmentwide financial statements. However, 

certain legislative and judicial branch entities voluntarily prepare accrual-based financial statements (e.g., Government 

Accountability Office, Government Printing Office, and Library of Congress) and are included in the 151 entities listed 

above. In addition to the 151 entities, the Financial Report includes cash-based outlay data for the remainder of the 

legislative and judicial branches. 

2. Entities not Included in the Reporting Entity of the Financial Report 

 The entities discussed below either do not meet the conclusive criteria or indicative criteria or were specifically 

excluded from the consolidated reporting entity in accordance with SFFAC No. 2. Information about the federal 

government’s relationship with and investments in or liabilities to certain of these entities are disclosed in the notes to the

financial statements. 

Entities that Did not Meet the Conclusive or Indicative Criteria 

 The following entities are examples of entities with which the federal government has business relationships but did not 

meet the above mentioned conclusive or indicative criteria: 

Federal Home Loan Banks 

National Railroad Passenger Corporation (does business as Amtrak) 

Resolution Funding Corporation 

Student Loan Marketing Association 

The Financing Corporation 

Thrift Savings Plan

Entities Specifically Excluded From the Consolidated Reporting Entity 

 SFFAC 2 specifically excludes the Federal Reserve System—the Board of Governors of the Federal Reserve System and 

the Federal Reserve Banks. The Federal Reserve System could be considered as functioning consistent with the indicative 

criteria presented above since it establishes and monitors monetary policy. However, in the United States, the organization 

and functions pertaining to monetary policy are traditionally separated from and independent of the other central government 

organizations and functions in order to achieve more effective monetary and fiscal policies and economic results. Therefore, 

the Federal Reserve System is not considered part of the governmentwide reporting entity. 

 SFFAC 2 also excludes bailout entities. The federal government may guarantee or pay debt for a privately owned entity 

whose failure could have an adverse impact on the nation's economy, commerce, national security, etc. As a condition of the 

bailout, the federal government may obtain rights similar to the authorities associated with the indicative criteria presented 

above. However, the existence of these rights does not make the bailed out entity part of the governmentwide reporting 

entity. 

Examples of bailout entities are: 

Federal Home Loan Mortgage Corporation (Freddie Mac) 

Federal National Mortgage Association (Fannie Mae) 
 APPENDIX B 219 

Appendix B: Acronyms 

This appendix lists the acronyms used in the Financial Statements and Notes to the Financial Statements section of this 

Financial Report. 

ABS Asset-Backed Securities 

ACA Affordable Care Act 

ACH Automated Clearinghouse 

AFR Agency Financial Reports 

AIG American International Group, Inc. 

Ally Ally Financial, Inc. 

AMT Alternative Minimum Tax 

ARRA American Recovery and Reinvestment Act of 2009 

ASC Accounting Standards Codification 

ATDA Accountability of Tax Dollars Act of 2002 

ATRA American Taxpayer Relief Act of 2012 

BBEDCA Balanced Budget and Emergency Deficit Control Act 

Bbl Barrel 

BCA Budget Control Act 

BLDTF Black Lung Disability Trust Fund 

BLM Bureau of Land Management 

Board Federal Reserve Board of Governors 

CCC Commodity Credit Corporation 

CDCI Community Development Capital Initiative 

CDFI Community Development Financial Institutions 

CERCLA Comprehensive Environmental Response, Compensation, and Liability Act 

CFO Chief Financial Officers 

CFO Act Chief Financial Officers Act of 1990 

CFPB Bureau of Consumer Financial Protection 

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 Capital Purchase Program 

CSRDF Civil Service Retirement and Disability Fund 

CSRS Civil Service Retirement System 

DACA Deferred Action for Childhood Arrivals 

DFAS Defense Finance and Accounting Service 

DHS Department of Homeland Security 

DI Disability Insurance 

DIF Deposit Insurance Fund 
220 APPENDIX B 

DIP Debtor in Possession 

DOC Department of Commerce 

DOD Department of Defense 

DOE Department of Energy 

DOI Department of the Interior 

DOJ Department of Justice 

DOL Department of Labor 

DOT Department of Transportation 

DM&R Deferred Maintenance and Repairs 

Education Department of Education 

EESA Emergency Economic Stabilization Act of 2008 

EPA Environmental Protection Agency 

EOP Executive Office of the President 

ESF Exchange Stabilization Fund 

EUC Unemployment Account 

FAA Federal Aviation Administration 

Fannie Mae Federal National Mortgage Association 

FASAB Federal Accounting Standards Advisory Board 

FASB Financial Accounting Standards Board 

FCC Federal Communications Commission 

FCRA Federal Credit Reform Act of 1991 

FCSIC Farm Credit System Insurance Corporation 

FDIC Federal Deposit Insurance Corporation 

FECA Federal Employees’ Compensation Act 

FEGLI Federal Employees’ Group Life Insurance 

FEHB Federal Employees Health Benefits Program 

FERS Federal Employees Retirement System 

FERSA Federal Employees’ Retirement System Act of 1986 

FFAS Farm and Foreign Agricultural Services 

FFEL Federal Family Education Loan 

FFMIA Federal Financial Management Improvement Act of 1996 

FHA Federal Housing Administration 

FHFA Federal Housing Financing Agency 

FHWA Federal Highway Administration 

FICA Federal Insurance Contribution Act 

FMFIA Federal Managers’ Financial Integrity Act 

FOMC Federal Open Market Committee 

FR Financial Report 

FR System Federal Reserve System 

FRBNY Federal Reserve Bank of New York 

FRBs Federal Reserve Banks 

Freddie Mac Federal Home Loan Mortgage Corporation 

FRTIB Federal Retirement Thrift Investment Board 
 APPENDIX B 221 

FSA Farm Service Agency 

FUA Federal Unemployment Account 

FUTA Federal Unemployment Tax Act 

GAAP U.S. Generally Accepted Accounting Principles 

GAO U.S. Government Accountability Office 

GDP Gross Domestic Product 

General Fund General Fund of the U.S. Government 

Ginnie Mae Government National Mortgage Association 

GM General Motors 

GMRA Government Management Reform Act of 1994 

G-PP&E General Property, Plant, and Equipment 

GSA General Services Administration 

GSE Government-Sponsored Enterprises 

HBP Health Benefits Program 

HEA Higher Education Act of 1965 

HERA Housing and Economic Recovery Act of 2008 

HFA Housing Financing Agencies 

HHS Department of Health and Human Services 

HI Hospital Insurance 

HMO Health Maintenance Organization 

HUD Department of Housing and Urban Development 

IPERIA Improper Payments Elimination and Recovery Improvement Act of 2012 

IPIA Improper Payments Information Act of 2002 

IRS Internal Revenue Service 

LAC Latest Acquisition Cost 

LOC Library of Congress 

LPR Legal Permanent Resident 

MAC Moving Average Cost 

MBS Mortgage-Backed Securities 

MCC Millennium Challenge Corporation 

Mcf The volume of 1,000 cubic feet of natural gas 

MDBs Multilateral Development Banks 

MERHCF Medicare Eligible Retiree Health Care Fund 

MMA Medicare Prescription Drug, Improvement, and Modernization Act 

MRF Military Retirement Fund 

NAB New Arrangement to Borrow 

NASA National Aeronautics and Space Administration 

NCUA National Credit Union Administration 

NIH National Institutes of Health 

NRC U.S. Nuclear Regulatory Commission 

NRRIT National Railroad Retirement Investment Trust 

NSF National Science Foundation 

NSLI National Service Life Insurance 
222 APPENDIX B 

NTIA National Telecommunications and Information Administration 

NYSE New York Stock Exchange 

OASDI Old-Age, Survivors, and Disability Insurance 

OASI Old-Age and Survivors Insurance 

OCO Overseas Contingency Operations 

OECD Organization for Economic Co-operation and Development 

OFS Office of Financial Stability 

OMB Office of Management and Budget 

ONRR Office of Natural Resources Revenue 

OPEB Other Postemployment Benefits 

OPIC Overseas Private Investment Corporation 

OPM Office of Personnel Management 

ORB Other Retirement Benefits 

PAR Performance and Accountability Reports 

PBGC Pension Benefit Guaranty Corporation 

PCF Periodic Commitment Fee 

PEFCO Private Export Funding Corporation 

PMAs Power Marketing Authorities 

PP&E Property, Plant, and Equipment 

PPACA Patient Protection and Affordable Care Act 

PPIF Public Private Investment Funds 

PPIP Public Private Investment Program 

PPO Preferred Provider Organization 

PSRHB Postal Service Retiree Health Benefits 

QFI Qualified Financial Institution 

R&D Research and Development 

RCRA Resource Conservation and Recovery Act 

RD Rural Development 

REDUX Military Retirement Reform Act of 1986 

RRB Railroad Retirement Board 

RRSIA Railroad Retirement and Survivors Improvement Act 

RSI Required Supplementary Information 

RSSI Required Stewardship Supplementary Information 

SAFETEA-LU Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users 

SBA Small Business Administration 

SCSIA Statement of Changes in Social Insurance Amounts 

SDRs Special Drawing Rights 

SDRCs SDR Certificates 

SEC Securities and Exchange Commission 

SECA Self-Employment Contributions Act 

SFFAC Statement of Federal Financial Accounting Concept 

SFFAS Statement of Federal Financial Accounting Standards 

SFP Supplementary Financing Program 
 APPENDIX B 223 

SGR Sustainable Growth Rate 

SI Smithsonian Institution 

SLMA Student Loan Marketing Association 

SMI Supplementary Medical Insurance 

SOCNP Statements of Operations and Changes in Net Position 

SOMA System Open Market Account 

SOSI Statement of Social Insurance 

SPSPA Senior Preferred Stock Purchase Agreements 

SSA Social Security Administration 

SSEB Social Security Equivalent Benefit 

TALF Term Asset-Backed Loan Facility 

TARP Troubled Asset Relief Program 

TFL TRICARE for Life 

TIP Targeted Investment Program 

TIPS Treasury Inflation-Protected Securities 

TPTCCA Temporary Payroll Tax Cut Continuation Act of 2011 

Treasury Department of the Treasury 

TRIA Terrorism Risk Insurance Act 

TSP Thrift Savings Plan 

TVA Tennessee Valley Authority 

TVARS Tennessee Valley Authority Retirement System 

U.S.C. United States Code 

USAID U.S. Agency for International Development 

USDA United States Department of Agriculture 

U.S. GAAP U.S. Generally Accepted Accounting Principles 

USPS United States Postal Service 

UTF Unemployment Trust Fund 

VA Department of Veterans Affairs 

VRI Veterans Reopened Insurance 

VSLI Veterans Special Life Insurance 

 
224 APPENDIX B 

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 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 225 

 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, 2014, and 2013, we found the following: 

x 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 statements2

 as of and 

for the fiscal years ended September 30, 2014, and 2013.3

x Significant uncertainties (discussed in Note 24 to the consolidated financial statements), 

primarily related to the achievement of projected reductions in Medicare cost growth 

reflected in the 2014, 2013, 2012, 2011, and 2010 Statements of Social Insurance, 

prevented us from expressing an opinion on those statements as well as on the 2014 and 

2013 Statements of Changes in Social Insurance Amounts.4

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

year 2014. 

x Material weaknesses and other scope limitations discussed in this audit report limited our 

tests of compliance with selected provisions of applicable laws, regulations, contracts, and 

grant agreements for fiscal year 2014. 

 

1

A 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. 

2

The accrual-based consolidated financial statements as of and for the fiscal years ended September 30, 2014, and 

2013, consist of the (1) Statements of Net Cost, (2) Statements of Operations and Changes in Net Position, 

(3) Reconciliations of Net Operating Cost and Unified Budget Deficit, (4) Statements of Changes in Cash Balance 

from Unified 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. The 2014, 2013, 2012, 2011, and 2010 

Statements of Social Insurance and the 2014 and 2013 Statements of Changes in Social Insurance Amounts, 

including the related notes, are also included in the consolidated financial statements. 

3

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 2013. 

4

Statements of Social Insurance are presented for the current year and each of the 4 preceding years in accordance 

with U.S. generally accepted accounting principles. Also, both the Statements of Social Insurance and the 

Statements of Changes in Social Insurance Amounts do not interrelate with the accrual-based consolidated financial 

statements. In addition, the valuation date is January 1 for all social insurance programs except the Black Lung 

program, which has a valuation date of September 30.

441 G St. N.W. 

Washington, DC 20548 
226 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

The following sections of this audit report discuss in more detail (1) our report on the 

accompanying consolidated financial statements, which includes (a) two emphasis of matters—

equity investments related to the federal government’s actions to stabilize financial markets and 

to promote economic recovery and long-term fiscal challenges, (b) required supplementary 

information (RSI),5

 required supplementary stewardship information (RSSI),6 and other 

information7 included with the consolidated financial statements in the Fiscal Year 2014 

Financial Report of the United States Government (2014 Financial Report), and (c) information 

on Chief Financial Officers (CFO) Act agency financial management systems; (2) our report on 

internal control over financial reporting; (3) our report on compliance with laws, regulations, 

contracts, and grant agreements; and (4) 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.8

 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, 2014, and 2013; the 2014, 2013, 2012, 2011, and 2010 

Statements of Social Insurance; the 2014 and 2013 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; the 2014, 2013, 2012, 2011, and 2010 Statements of Social 

Insurance; and the 2014 and 2013 Statements of Changes in Social Insurance Amounts in 

forming our conclusions. Our work was performed 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; and 

(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. This includes maintaining 

effective internal control over financial reporting, including the design, implementation, and 

 

5

RSI consists of Management’s Discussion and Analysis and information in the Required Supplementary Information 

section of the Fiscal Year 2014 Financial Report of the United States Government. 6

RSSI consists of information on stewardship investments in the Required Supplementary Stewardship Information 

section of the Fiscal Year 2014 Financial Report of the United States Government. 7

Other information consists of information in the Fiscal Year 2014 Financial Report of the United States Government 

other than the consolidated financial statements, RSI, RSSI, the auditor’s report, and the Statement of the 

Comptroller General of the United States. 

8

The 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). Treasury and 

OMB have elected to include certain financial information on the legislative and judicial branches in the consolidated 

financial statements as well.
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 227 

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 as of and for the Fiscal Years Ended 

September 30, 2014, and 2013 

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, 2014, and 2013, principally resulting from 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.9

 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 

x satisfactorily determine that property, plant, and equipment and inventories and related 

property, primarily held by the Department of Defense (DOD), were properly reported in the 

accrual-based consolidated financial statements; 

x 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; 

x 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; 

x adequately account for and reconcile intragovernmental activity and balances between 

federal entities; 

 

9

In addition to the limitations discussed in this audit report, as of the date of this audit report, the Department of 

Housing and Urban Development‘s (HUD) audited financial statements for fiscal year 2014 had not been issued. It is 

possible that additional recordkeeping by HUD and auditing procedures by its Office of Inspector General will result in 

changes in HUD’s financial statements. Based on the audit procedures we have performed, we believe that any such 

changes will not significantly affect our findings and conclusions in this audit report. 
228 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

x 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 

x reasonably assure that the information in the Reconciliation of Net Operating Cost and 

Unified Budget Deficit and the Statement of Changes in Cash Balance from Unified Budget 

and Other Activities is complete 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 financial information to operate in an 

efficient and effective manner. Due to these material weaknesses and to other limitations on the 

scope of our work discussed below, additional issues may exist that could affect the accrualbased consolidated financial statements that were not identified. 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. 

Statements of Social Insurance for 2014, 2013, 2012, 2011, and 2010 and the 

Statements of Changes in Social Insurance Amounts for 2014 and 2013 

Significant uncertainties (discussed in Note 24 to the consolidated financial statements), that 

primarily relate to the achievement of projected reductions in Medicare cost growth, affect the 

2014, 2013, 2012, 2011, and 2010 Statements of Social Insurance. As a result of these 

significant uncertainties, readers are cautioned that amounts reported in the 2014, 2013, 2012, 

2011, and 2010 Statements of Social Insurance; the 2014 and 2013 Statements of Changes in 

Social Insurance Amounts; and the related notes to such financial statements may not fairly 

present, in all material respects, the financial condition and changes in the financial condition of 

the federal government’s social insurance programs for those years, in accordance with U.S. 

generally accepted accounting principles. 

For the 2014 Statement of Social Insurance, these significant uncertainties primarily relate to 

the following. 

x Medicare projections in the 2014 Statement of Social Insurance were based on benefit 

formulas under the Medicare Trustees’ projected baseline and included a significant 

reduction in Medicare payment rates for productivity improvements relating to most 

categories of Medicare providers,10 based on full implementation of the provisions of the 

Patient Protection and Affordable Care Act, as amended (ACA).11 

 

10These categories 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. 

11Pub. 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 ACA include any 

amendments made by the Health Care and Education Reconciliation Act of 2010.
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 229 

x Management has noted that actual future costs for Medicare are likely to exceed those 

shown by the projected baseline projections presented in the 2014 Statement of Social 

Insurance due, for example, to the likelihood of modifications to the scheduled reductions in 

Medicare payment rates for productivity adjustments relating to most categories of Medicare 

providers. The extent to which actual future costs exceed the projected baseline amounts 

due to changes to the scheduled reductions in Medicare payment rates for productivity 

adjustments depends on both the specific changes that might be legislated and whether 

such 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 rates. 

x 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, exceeds the $28.5 trillion estimate in the 

2014 Statement of Social Insurance by $6.7 trillion. 

The 2014 Statement of Social Insurance reflects a change from the assumption regarding 

scheduled reductions in Medicare payment rates for physician services that was used in the 

2013, 2012, 2011, and 2010 Statements of Social Insurance. Specifically, the 2014 Statement 

of Social Insurance reflects a projected baseline that assumes that the physician payment rate 

reductions will not occur and that physician payment rates will annually increase at a rate equal 

to the average sustainable growth rate (SGR) override that occurred over the 10-year period 

ending on March 31, 2015. This revised assumption is based on a similar change in assumption 

in the 2014 Medicare Trustees Report, which noted that since the scheduled reductions under 

the SGR formula for updating the physician fee schedule have been overridden by lawmakers 

each year beginning with 2003, it is a virtual certainty that lawmakers will override this 

reduction.12 Because it is difficult to predict the extent to which policymakers will finance future 

SGR overrides with other Medicare savings, the Medicare projections do not include any such 

savings. As discussed in Note 24, the projected baseline included in the 2014 Statement of 

Social Insurance exceeded management’s projection based on current law, which included the 

reductions in payment rates for physician services, by about $1.8 trillion. 

The 2013, 2012, 2011, and 2010 Statements of Social Insurance were affected by significant 

uncertainties primarily related to the achievement of projected reductions in Medicare payment 

rates for productivity improvements as well as for physician services. Specifically, the Medicare 

projections in the 2013, 2012, 2011, and 2010 Statements of Social Insurance were based on 

benefit formulas in current law and included significant reductions in Medicare payment rates for 

productivity improvements and physician services. Further, for these years, management noted 

that actual future costs for Medicare were likely to exceed those shown by the current-law 

projections presented in the 2013, 2012, 2011, and 2010 Statements of Social Insurance due, 

for example, to the likelihood of modifications to the scheduled reductions in Medicare payment 

rates for productivity adjustments and physician services. 

 

12Statutes have been enacted with provisions that prevented scheduled reductions in Medicare payment rates for 

physician services from taking effect from 2003 through March 2015, including the most recent provision enacted in 

the Protecting Access to Medicare Act of 2014, which prevented the scheduled reductions in Medicare payment rates 

for the period of April 1, 2014, through March 31, 2015. Pub. L. No. 113-93, § 101, 128 Stat. 1040, 1041 (Apr. 1, 

2014), which is classified at 42 U.S.C. § 1395w-4(d)(15)-(16). 
230 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

Projections of Medicare costs are sensitive to assumptions about future decisions by 

policymakers and about the behavioral responses of consumers, employers, and health care 

providers as policy, incentives, and the health care sector change over time. Such secondary 

impacts are not fully reflected in the Statement of Social Insurance projections but could be 

expected to influence the excess cost growth rate used in the projections.13 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. 

Readers are cautioned that the uncertainties discussed previously also affect the projected 

Medicare and Medicaid costs reported in the Fiscal Projections for the U.S. Government and 

Social Insurance information included in the unaudited Required Supplementary Information 

section of the 2014 Financial Report and summarized in Management’s Discussion and 

Analysis. The Required Supplementary Information section of the 2014 Financial Report

includes unaudited information concerning how changes in various assumptions would change 

the present value of future estimated expenditures in excess of future estimated revenue. As 

discussed in that section, Medicare projections are very sensitive to changes in the health care 

cost growth assumption. 

The Statement of Social Insurance presents the actuarial present value of the federal 

government’s estimated future revenue to be received from or on behalf of participants and 

estimated future expenditures to be paid to or on behalf of participants, based on benefit 

formulas in current law (except for the 2014 Medicare projections which use the projected 

baseline) and using a projection period sufficient to illustrate the long-term sustainability of the 

social insurance programs.14 In preparing the Statements of Social Insurance, management 

considers and selects assumptions and data that it believes provide a reasonable basis for the 

assertions in the statement. However, because of the large number of factors that affect the 

Statement of Social Insurance and the fact that such assumptions are inherently subject to 

substantial uncertainty (arising from the likelihood of future events, significant uncertainties, and 

contingencies), there will be differences between the estimates in the Statement of Social 

Insurance and the actual results, and those differences may be material. 

The scheduled future benefits presented in the Statement of Social Insurance are based on 

benefit formulas in current law (except for the 2014 Medicare projections which use the 

projected baseline). However, consistent with the respective annual Trustees Reports, the 

Social Security and Medicare programs are not projected to be sustainable under current 

financing arrangements. Also, the law concerning these programs can be changed at any time. 

Payment of Social Security and Medicare Hospital Insurance (Part A) benefits is limited by law 

to the balances in the respective trust funds. Consequently, future scheduled benefits are 

limited to future revenues plus existing trust fund assets. 

As discussed in the unaudited Required Supplementary Information section of the 2014 

Financial Report, the Social Security and Medicare Hospital Insurance (Part A) trust funds are, 

based on achievement of the cost reductions discussed above, projected to be exhausted in 

2033 and 2030, respectively, at which time they would be unable to pay the full amount of 

 

13The excess cost growth rate is the increase in health care spending per person relative to the growth of gross 

domestic product per person after removing the effects of demographic changes on health care spending. 14The projection period used for the Social Security, Medicare, and Railroad Retirement social insurance programs is 

75 years. For the Black Lung program, the projections are through September 30, 2040.
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 231 

scheduled future benefits.15 For Social Security, future revenues were projected to be sufficient 

to pay 77 percent of scheduled benefits in 2033, the year of projected trust funds (combined) 

exhaustion, and decreasing to 72 percent of scheduled benefits in 2088. For Medicare Hospital 

Insurance (Part A), future revenues were projected to be sufficient to pay 85 percent of 

scheduled benefits in 2030, the year of projected trust fund exhaustion, and then decreasing to 

77 percent of scheduled benefits in 2088. 

Other Limitations on the Scope of Our Work 

For fiscal years 2014 and 2013, 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 accrualbased consolidated financial statements for fiscal years 2014 and 2013 primarily because of 

insufficient or no representations provided to them by certain federal entities, including DOD.16

Disclaimers of Opinion on the Consolidated Financial Statements 

Accrual-Based Consolidated Financial Statements as of and for the Fiscal Years Ended 

September 30, 2014, and 2013 

Because of the significance of the related matters described in the Basis for Disclaimer of 

Opinion paragraphs 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, 2014, and 2013. 

Statements of Social Insurance for 2014, 2013, 2012, 2011, and 2010 and the 

Statements of Changes in Social Insurance Amounts for 2014 and 2013 

Because of the significance of the related matters described in the Basis for Disclaimer of 

Opinion paragraphs above, we were not able to obtain sufficient appropriate audit evidence to 

provide a basis for an audit opinion on the Statements of Social Insurance for 2014, 2013, 2012, 

2011, and 2010 as well as on the Statements of Changes in Social Insurance Amounts for 2014 

and 2013. Accordingly, we do not express an opinion on the 2014, 2013, 2012, 2011, or 2010 

Statements of Social Insurance or on the 2014 and 2013 Statements of Changes in Social 

Insurance Amounts. 

 

 

15The combined Social Security trust funds consist of the Federal Old-Age and Survivors Insurance (OASI) trust fund 

and the Federal Disability Insurance (DI) trust fund. The OASI and DI trust funds’ assets are projected to be 

exhausted in 2034 and 2016, respectively. 

16For fiscal year 2014, HUD had not provided representations to Treasury and OMB by the date that they provided us 

with representations regarding the U.S. government’s consolidated financial statements because the audit report on 

HUD’s financial statements was not yet issued as of such date.
232 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

Emphasis of Matters 

The following key items deserve emphasis in order to put the information contained in the 

consolidated financial statements and the Management’s Discussion and Analysis section of the 

2014 Financial Report into context. However, our disclaimers of opinion noted above are not 

modified with respect to these matters. 

Equity Investments Related to the Federal Government’s Actions to Stabilize Financial 

Markets and to Promote Economic Recovery 

The last economic recession and the federal government’s actions to stabilize financial markets 

and promote economic recovery, among other factors, significantly affected the federal 

government’s financial condition, including the addition of significant assets and liabilities. While 

the federal government has significantly reduced the assets and liabilities related to such 

actions, the accrual-based consolidated financial statements, as of September 30, 2014, 

continue to include significant equity investments in the Federal National Mortgage Association 

(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) totaling about 

$96 billion (reported net of about $99 billion in valuation reserves). 

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, 2014, and the actual results, and such differences may be material. Also, as 

discussed in Note 1 to the consolidated financial statements, the financial statements do not 

include the assets, liabilities, or results of operations of entities in which Treasury holds either a 

direct, indirect, or beneficial equity interest. Treasury and OMB have determined that none of 

the entities meet the criteria for a federal entity.17

Long-Term Fiscal Challenges 

While the near-term outlook has improved, the comprehensive long-term fiscal projections 

presented in the unaudited Required Supplementary Information section of the 2014 Financial 

Report show that absent policy changes, the federal government continues to face an 

unsustainable long-term fiscal path. In the near term, deficits are expected to continue to decline 

from the recent historic highs as the economy further recovers and actions taken by Congress 

and the President continue to take effect. Over the long term, the imbalance between spending 

and revenue that is built into current law and policy will lead to continued growth of debt held by 

the public as a share of gross domestic product (GDP). This situation—in which debt grows 

faster than GDP—means the current federal fiscal path is unsustainable. 

Under these projections, spending for the major health and retirement programs will increase in 

coming decades more rapidly than GDP as more members of the baby boom generation 

become eligible for benefits. These projections, with regard to Social Security and Medicare, are 

 

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 Appendix A: Reporting Entity of the 2014 Financial Report. 
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 233 

based on the same assumptions underlying the information presented in the Statement of 

Social 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. If, 

however, the Medicare cost containment measures are not sustained over the long term—a 

concern expressed by the Trustees of the Medicare trust funds, the Centers for Medicare & 

Medicaid Services’ (CMS) Chief Actuary, the Congressional Budget Office, and others—

spending on federal health care programs will grow more rapidly. 

GAO also prepares long-term federal fiscal simulations, which continue to show debt rising as a 

share of GDP.18 Under GAO’s Alternative simulation,19 using the CMS Office of the Actuary’s 

alternative health care cost projections, future spending in excess of receipts would be greater 

and debt held by the public as a share of GDP would grow more quickly than the projections in 

the 2014 Financial Report. 

Both the projections in the 2014 Financial Report and our long-term simulations follow the 

spending limits previously enacted in the Budget Control Act of 2011 (BCA).20 Under these 

limits, discretionary spending will continue to decline as a share of the economy and in fiscal 

year 2021 will be lower as a share of GDP than any level seen in the last 50 years. At the same 

time, revenues are projected to rise in the near term as the economy continues to recover. 

Debt held by the public as a share of GDP, however, remains well above historical averages. At 

the end of fiscal year 2014, debt held by the public reached 74 percent of GDP—the highest it 

has been as a share of GDP since 1950. 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 natural disaster. Further, our past work has also 

identified a variety of fiscal exposures—responsibilities, programs, and activities that explicitly or 

 

18GAO, Fiscal Outlook: Federal Fiscal Outlook (Spring 2014) (Washington, D.C.: 2014), accessed on February 19, 

2015, http://www.gao.gov/fiscal_outlook/federal_fiscal_outlook/overview. 19GAO’s Spring 2014 Alternative simulation, the most recent one available as of the date of our audit report, 

incorporates the CMS Office of the Actuary’s 2013 alternative projections for health care cost growth, which assume 

physician payments are not reduced as specified under current law and certain cost controls are not maintained over 

the long term. Also, in this simulation, expiring tax provisions, such as the research and experimentation tax credit, 

are extended to 2024. In the Alternative simulation, discretionary spending follows the original discretionary spending 

caps set by the Budget Control Act of 2011, but not the lower caps triggered by the automatic enforcement 

procedures. Over the long term, discretionary spending and revenue are held at their historical average share of 

GDP.

20The BCA, Pub. L. No. 112-25, 125 Stat. 240 (Aug. 2, 2011), which enacted changes to the Balanced Budget and 

Emergency Deficit Control Act, as amended (BBEDCA), imposed discretionary spending limits for fiscal years 2012 

through 2021 to reduce projected spending by about $1 trillion. The BCA also established the Joint Select Committee 

on Deficit Reduction, which was tasked with proposing legislation to reduce the deficit by an additional $1.2 trillion 

through fiscal year 2021. The Joint Committee did not report a proposal, and Congress and the President did not 

enact legislation. This triggered the sequestration process in section 251A of BBEDCA. Section 251A also provides 

for an annual reduction of the discretionary spending limits and a sequestration of direct spending from fiscal years 

2014 through 2021. The Bipartisan Budget Act of 2013 (budget agreement), which enacted further changes to 

BBEDCA, as amended, established new (higher) limits on defense and nondefense discretionary appropriations for 

fiscal years 2014 and 2015, extended sequestration for direct spending programs by 2 years through fiscal year 

2023, and made other changes to direct spending and revenue. Pub. L. No. 113-67, div. A, tit. I, § 101,127 Stat. 

1165, 1166-69 (Dec. 26, 2013). In all, BBEDCA, as amended through December 2013, reduced deficits over the next 

10 years in our Spring 2014 Baseline Extended simulation without significantly changing the long-term federal budget 

outlook. In 2014, sequestration for direct spending programs was extended by 1 year to fiscal year 2024. Pub. L. No. 

113-82, § 1, 128 Stat. 1009 (Feb. 15, 2014). The Consolidated and Further Continuing Appropriations Act, 2015, Pub. 

L. No. 113-235, 128 Stat. 2130 (Dec. 16, 2014), enacted discretionary appropriations for fiscal year 2015 consistent 

with BBEDCA. Our updated simulations for 2015 will incorporate the effects of more recently enacted amendments to 

BBEDCA. 
234 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

implicitly expose the federal government to future spending.21 Fiscal exposures vary widely as 

to source, extent of the government’s legal commitment, and magnitude. Over the past decade, 

some fiscal exposures have grown due to events and trends and the government’s response to 

them. Increased attention to these fiscal exposures will be important for understanding risks to 

the federal fiscal outlook and enhancing 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 RSI and RSSI be presented in the 2014 Financial Report

to supplement the financial statements. Although 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. 

Other Information 

Other information included in the 2014 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 2014 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 accrualbased consolidated financial statements; the 2014, 2013, 2012, 2011, and 2010 Statements of 

Social Insurance; and the 2014 and 2013 Statements of Changes in Social Insurance Amounts. 

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.22 The Federal Financial Management Improvement Act of 1996 

(FFMIA) was designed to lead to system improvements that would result in CFO Act agency 

 

21GAO, Fiscal Outlook: Federal Fiscal Outlook (Washington, D.C.: 2015), accessed on February 19, 2015, 

http://www.gao.gov/fiscal_outlook/federal_fiscal_outlook/overview#t=3, and Fiscal Exposures: Improving Cost 

Recognition in the Federal Budget, GAO-14-28 (Washington, D.C.: Oct. 29, 2013). 22The 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 235 

managers routinely having access to reliable, useful, and timely financial-related 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 the requirements of FFMIA. 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 both fiscal years 2014 and 2013, auditors for 11 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 years 2014 and 2013, agency management at 10 and 9 

of the CFO Act agencies, respectively, reported that their agencies’ financial management 

systems were not in substantial compliance with one or more of the three FFMIA requirements. 

Based on agency financial reports, the differences in the assessments of substantial compliance 

between the auditors and agency management reflected differences in management’s and 

auditors’ views of the impact reported deficiencies had on agencies’ financial management 

systems. 

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 to the nation’s taxpayers 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).23

 

 

2331 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. 
236 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

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 2014 that come to our attention as a result of our 

audit. 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.24 Therefore, additional material weaknesses or 

significant deficiencies may exist that were not identified. Our work was performed 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 laws governing the 

use of budget authority and with other applicable laws, regulations, contracts, and grant 

agreements that could have a direct and material effect on the financial statements. 

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 disclaimer of opinion on the 

accrual-based consolidated financial statements, which were discussed previously, we found 

 

24A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a 

material weakness, yet important enough to merit attention by those charged with governance. 
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 237 

the following three other material weaknesses in internal control. These other material 

weaknesses were the federal government’s inability to 

x determine the full extent to which improper payments occur and reasonably assure that 

appropriate actions are taken to reduce them, 

x identify and resolve information security control deficiencies and manage information 

security risks on an ongoing basis, and 

x effectively manage its tax collection activities. 

These material weaknesses are discussed in more detail in appendix III, including the primary 

effects of the material weaknesses on the accompanying accrual-based consolidated financial 

statements and on the management of federal government operations. 

We also found a significant deficiency in the federal government’s internal control related to 

implementing effective internal controls over management of federal grants at certain federal 

entities. This significant deficiency is discussed in more detail in appendix IV. 

Further, individual federal entity financial statement audit reports identified additional control 

deficiencies that were reported by the entities’ auditors 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 in 

considering internal control. Accordingly, this report on internal control over financial reporting is 

not suitable for any other purpose. 

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 consolidated 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. Due to the 

limitations discussed below and the scope of our procedures, noncompliance may occur and not 

be detected by these tests. 
238 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

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. 

Our work was performed in accordance with U.S. generally accepted government auditing 

standards. 

Results of Our 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. 

Agency Comments

We provided a draft of this audit report to Treasury and OMB officials, who provided technical 

comments, which have been incorporated as appropriate. Treasury and OMB officials 

expressed their continuing commitment to address the problems this report outlines. 

Robert F. Dacey 

Chief Accountant 

U.S. Government Accountability Office 

February 19, 2015 
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 239 

Appendix I 

Objectives, Scope, and Methodology

Our objectives were to audit the consolidated financial statements consisting of the (1) accrualbased consolidated financial statements as of and for the fiscal years ended September 30, 

2014, and 2013; (2) 2014, 2013, 2012, 2011, and 2010 Statements of Social Insurance; and 

(3) 2014 and 2013 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.25 GMRA requires GAO to be responsible for the audit of the U.S. government’s 

consolidated financial statements,26 and the Accountability of Tax Dollars Act of 2002 (ATDA) 

requires most other executive branch entities to prepare and have audited annual financial 

statements.27 The Office of Management and Budget (OMB) and the Department of the 

Treasury (Treasury) have identified 37 federal entities that are significant to the U.S. 

government’s consolidated financial statements, consisting of the 24 CFO Act agencies, several 

other federal executive branch agencies, and some government corporations.28 We consider 

these 37 entities to be significant component entities for purposes of our audit of the 

consolidated financial statements. Our work was performed in coordination and cooperation with 

the inspectors general and independent public accountants for these 37 significant component 

entities to achieve our respective audit objectives. Our audit approach regarding the accrualbased 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 had reported in our report on the consolidated financial statements for fiscal year 

2013.29 We also separately audited the financial statements of certain component entities, and 

parts of a significant component entity, including the following. 

x 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, 2014, and 2013.30 In 

fiscal years 2014 and 2013, IRS collected about $3.1 trillion and $2.9 trillion, respectively, in 

tax payments and paid about $374 billion and $364 billion, respectively, in refunds to 

taxpayers. For fiscal year 2014, we continued to report a material weakness in internal 

control over unpaid tax assessments that resulted in ineffective internal control over financial 

reporting. 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 

 

2531 U.S.C. § 3521(e). GMRA authorized the Office of Management and Budget to designate agency components 

that also would receive financial statement audits. See 31 U.S.C. § 3515(c). 

26GMRA, Pub. L. No. 103-356, § 405(c), 108 Stat. 3410, 3416-17 (Oct. 13, 1994), codified at 31 U.S.C. § 331(e)(2). 27ATDA, Pub. L. No. 107-289, 116 Stat. 2049 (Nov. 7, 2002), codified at 31 U.S.C. § 3515. 28In addition to the 35 entities identified as significant to the consolidated financial statements for fiscal year 2013, for 

fiscal year 2014, OMB and Treasury identified two additional entities as significant to the consolidated financial 

statements—the Millennium Challenge Corporation and the Overseas Private Investment Corporation. See Treasury 

Financial Manual, vol. I, part 2, ch. 4700, for a listing of the 37 entities. 29GAO, Financial Audit: U.S. Government’s Fiscal Years 2013 and 2012 Consolidated Financial Statements, GAO14-319R (Washington, D.C.: Feb. 27, 2014). 

30GAO, Financial Audit: IRS’s Fiscal Years 2014 and 2013 Financial Statements, GAO-15-173 (Washington, D.C.: 

Nov. 12, 2014). 
240 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

noncompliance for fiscal year 2014 with provisions of applicable laws, regulations, contracts, 

and grant agreements we tested. 

x 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, 2014, and 2013.31 For these 2 fiscal years, the schedules reported 

(1) approximately $12.8 trillion (2014) and $12.0 trillion (2013) of federal debt held by the 

public;32 (2) about $5.0 trillion (2014) and $4.8 trillion (2013) of intragovernmental debt 

holdings;33 and (3) about $260 billion (2014) and $247 billion (2013) of interest on federal 

debt held by the public. We also reported that Fiscal Service maintained, in all material 

respects, effective internal control over financial reporting relevant to the Schedule of 

Federal Debt as of September 30, 2014. In addition, we reported that we found no 

reportable noncompliance for fiscal year 2014 with provisions of applicable laws, 

regulations, contracts, and grant agreements we tested related to the Schedule of Federal 

Debt. 

x 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, 2014, and 2013.34 We also reported that although 

internal controls could be improved, SEC maintained, in all material respects, effective 

internal control over financial reporting for both the entity as a whole and the IPF as of 

September 30, 2014. In addition, we reported that we found no reportable noncompliance 

for either SEC or IPF for fiscal year 2014 with provisions of applicable laws, regulations, 

contracts, and grant agreements we tested. 

x 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, 2014, and 

2013.35 We also reported that FHFA maintained, in all material respects, effective internal 

control over financial reporting as of September 30, 2014. In addition, we reported that we 

found no reportable noncompliance for fiscal year 2014 with provisions of applicable laws, 

regulations, contracts, and grant agreements we tested. 

x 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, 2014, and 2013.36 We also reported that OFS maintained, in all 

material respects, effective internal control over financial reporting as of September 30, 

2014. In addition, we reported that we found no reportable noncompliance for fiscal year 

2014 with provisions of applicable laws, regulations, contracts, and grant agreements we 

tested. 

 

31GAO, Financial Audit: Bureau of the Fiscal Service’s Fiscal Years 2014 and 2013 Schedules of Federal Debt, GAO15-157 (Washington, D.C.: Nov. 10, 2014). 

32Debt held by the public on the Schedules of Federal Debt represents federal debt issued by Treasury and held by 

investors outside of the federal government, including individuals, corporations, state or local governments, the 

Federal Reserve, and foreign governments. 

33Intragovernmental debt holdings represent federal debt owed by Treasury to federal government accounts, primarily 

federal trust funds such as Social Security and Medicare. 

34GAO, Financial Audit: Securities and Exchange Commission’s Fiscal Years 2014 and 2013 Financial Statements, 

GAO-15-166R (Washington, D.C.: Nov. 17, 2014). 

35GAO, Financial Audit: Federal Housing Finance Agency’s Fiscal Years 2014 and 2013 Financial Statements, GAO15-147R (Washington, D.C.: Nov. 17, 2014). 

36GAO, Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Years 2014 and 2013 

Financial Statements, GAO-15-132R (Washington, D.C.: Nov. 7, 2014). 
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 241 

x We audited and expressed an unmodified opinion on the Bureau of Consumer Financial 

Protection’s (CFPB) financial statements as of and for the fiscal years ended September 30, 

2014, and 2013.37 We also reported that CFPB’s internal control over financial reporting was 

not effective as of September 30, 2014, because of a material weakness in internal control 

over the reporting of accounts payable. In addition, we continued to report a significant 

deficiency in CFPB’s internal control over accounting for property and equipment. Further, 

we reported that we found no reportable noncompliance for fiscal year 2014 with provisions 

of applicable laws, regulations, contracts, and grant agreements we tested. 

In addition, we considered the CFO Act agencies’ and certain other federal entities’ fiscal years 

2014 and 2013 financial statements and the related auditors’ reports prepared by the inspectors 

general or contracted independent public accountants. Financial statements and audit reports 

for these entities provide information about the entities’ operations. Each entity audit report also 

contains details regarding 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. 

We considered the Department of Defense’s (DOD) assertion in the DOD Agency Financial 

Report for Fiscal Year 2014 regarding its noncompliant financial management systems and lack 

of reasonable assurance that internal controls over financial reporting were effective. In addition, 

in the DOD Inspector General’s fiscal year 2014 report on internal control over financial 

reporting, the Inspector General cited material weaknesses in several areas, including 

(1) property, plant, and equipment; (2) inventory and operating material and supplies; 

(3) environmental liabilities; (4) intragovernmental eliminations; and (5) material amounts of 

unsupported accounting entries needed to prepare DOD’s annual consolidated financial 

statements. 

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 2014, 2013, 2012, 2011, and 2010 Statements of Social 

Insurance and the 2014 and 2013 Statements of Changes in Social Insurance Amounts, as well 

as the related auditor’s reports prepared by the inspectors general or contracted independent 

public accountants. 

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; the 2014, 2013, 2012, 2011, and 2010 Statements of Social Insurance; and the 

2014 and 2013 Statements of Changes in Social Insurance Amounts in forming our conclusions.

Our work was performed in accordance with U.S. generally accepted government auditing 

standards. 

 

37GAO, Financial Audit: Bureau of Consumer Financial Protection’s Fiscal Years 2014 and 2013 Financial 

Statements, GAO-15-146R (Washington, D.C.: Nov. 17, 2014). 38These entities are SSA, HHS, the Railroad Retirement Board, and the Department of Labor. 
242 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

Appendix II 

Material Weaknesses Contributing to Our Disclaimer of Opinion on the Accrual-Based 

Consolidated Financial Statements 

The continuing material weaknesses discussed below contributed to our disclaimer of opinion 

on the federal government’s accrual-based consolidated financial statements. The federal 

government did not maintain adequate systems or have sufficient appropriate evidence to 

support information reported in the accompanying accrual-based consolidated financial 

statements, as described below. 

Property, Plant, and Equipment and Inventories and Related Property 

The federal government could not satisfactorily determine that property, plant, and equipment 

(PP&E) and inventories and related property 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 also reported continued deficiencies in internal control 

procedures and processes related to PP&E. 

Deficiencies in internal control over such assets could affect the federal government’s ability to 

fully know the assets it owns, including their location and condition, and its 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. 

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 related to the cost 

of direct health care provided by DOD-managed military treatment facilities. 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 as well as 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. 
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 243 

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 reconciliations of disbursement activity 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 2014 and 

2013, 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 provided by federal entities for inclusion in The Budget 

of the United States Government (President’s Budget) concerning obligations and outlays. 

Accounting for and Reconciliation of Intragovernmental Activity and Balances 

Significant progress has been made over the past few years; however, the federal government 

continues to be unable to adequately account for and reconcile 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, resulting in errors in the 

consolidated financial statements. The Office of Management and Budget (OMB) and Treasury 

require the chief financial officers (CFO) of the 37 significant component entities to reconcile, on 

a quarterly basis, selected intragovernmental activity and balances with their trading partners. In 

addition, these entities are required 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. 

In fiscal year 2014, Treasury continued to actively work with significant federal entities to resolve 

differences in intragovernmental activity and balances between federal entities through its 

quarterly scorecard process.39 This process highlights differences requiring the entities’ 

attention, identifies differences that need to be resolved through a formal dispute resolution 

process,40 and reinforces the entities’ responsibilities to resolve intragovernmental differences. 

 

39For each quarter, Treasury produces a scorecard for each significant entity 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. Entities are expected to resolve, with their respective trading partners, the differences identified 

in their scorecards. 

40When an entity and respective trading partner cannot resolve an intragovernmental difference, the entity must 

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

difference, which the entity must follow. 
244 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

Treasury also implemented the Governmentwide Treasury Account Symbol Adjusted Trial 

Balance System, which among other things, provided more complete financial data from entities 

that are intended to improve the analysis of intragovernmental differences. As a result of these 

and other actions, a significant number of intragovernmental differences were identified and 

resolved. While such 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 cited by several CFOs included differing accounting methodologies, 

accounting errors, and timing differences. In addition, the auditor for DOD reported that DOD, 

which contributes significantly to the unreconciled amounts, could not accurately identify most of 

its intragovernmental transactions by customer and was unable to reconcile most 

intragovernmental transactions with trading partners, which resulted in adjustments that cannot 

be fully supported. 

Further, there are unreconciled transactions between the General Fund of the U.S. Government 

(General Fund)41 and federal entity trading partners related to appropriations and other 

intragovernmental transactions, which amount to hundreds of billions of dollars on an absolute 

value basis. In fiscal year 2014, Treasury made significant improvements to the processes used 

to identify and reconcile General Fund differences. For example, Treasury established more 

specific guidance regarding General Fund-related activity and balances and issued this 

guidance for federal entities to follow in reporting their financial data. The General Fund also 

began reporting monthly intragovernmental information for the majority of the activity and 

balances related to budget authority, such as the liability for federal entities’ Fund Balance with 

Treasury. In addition, Treasury included the General Fund in its quarterly scorecard process—

issuing the General Fund its own scorecard and incorporating General Fund reconciliation 

metrics in federal entities’ scorecards. However, the ability to effectively reconcile General Fund 

transactions is hampered because a significant amount of the General Fund is not 

independently accounted for and reported. 

As a result of the above-noted circumstances, the federal government’s ability to determine the 

impact of these differences on the amounts reported in the accrual-based consolidated financial 

statements is significantly impaired. Resolving the intragovernmental transactions problem 

remains a difficult challenge and will require a strong and sustained commitment by federal 

entities to timely resolve differences with their trading partners, as well as continued strong 

leadership by Treasury and OMB. 

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 implementing new systems to collect certain additional data from entities and to 

compile the consolidated financial statements, and new procedures to address certain internal 

 

41The General Fund is a central reporting entity that tracks activities fundamental to funding the federal government 

(e.g., issued budget authority, operating cash, and debt financing activities). 
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 245 

control deficiencies detailed in our previously issued report.42 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 2014 audit, we found the following. 

x For fiscal year 2014, auditors reported internal control deficiencies at several entities 

regarding entities’ financial reporting processes that could affect information in those 

entities’ closing packages.43 Further, Treasury had to record significant adjustments to 

correct errors found in federal entities’ audited closing package information. These errors 

primarily related to intragovernmental activity and balances and totaled tens of billions of 

dollars. To reasonably assure consistency of underlying entity information and financial data 

with the U.S. government’s consolidated financial statements, entity auditors are required to 

separately audit and report on the financial information that the 37 significant component 

entities send to Treasury through closing packages. 

x Treasury is unable to properly balance the accrual-based consolidated financial statements. 

To make the fiscal years 2014 and 2013 consolidated financial statements balance, 

Treasury recorded a net increase of $20.4 billion and a net decrease of $9.0 billion, 

respectively, to net operating cost on the Statements of Operations and Changes in Net 

Position, which were identified as “Unmatched transactions and balances.”44 Treasury 

recorded an additional net $1.7 billion and $5.9 billion of unmatched transactions in the 

Statement of Net Cost for fiscal years 2014 and 2013, respectively. The material weakness 

in the federal government’s ability to account for and reconcile intragovernmental activity 

and balances, discussed above, significantly contributes to the unmatched transactions and 

balances and consequently impairs Treasury’s ability to fully eliminate such 

intragovernmental activity and balances. 

x Over the past several years, Treasury has taken significant actions to assist in reasonably 

assuring 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 GAAP compliance operating procedures and checklists. However, Treasury’s 

reporting of certain financial information required by U.S. GAAP continues to be impaired. 

Due to 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 additional disclosure is required by U.S. GAAP 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 federal entities, such as DOD, can provide 

Treasury with complete and reliable information required to be reported in the consolidated 

financial statements. 

 

42Most of the issues we identified in fiscal year 2014 existed in fiscal year 2013, and many have existed for a number 

of years. Most recently, in June 2014, we reported the issues we identified to Treasury and OMB and provided 

recommendations for corrective action. See GAO, Management Report: Improvements Needed in Controls over the 

Processes Used to Prepare the U.S. Consolidated Financial Statements, GAO-14-543 (Washington, D.C.: June 19, 

2014). 

43The closing package methodology links federal entities’ audited consolidated department-level financial statements 

to certain of the U.S. government’s consolidated financial statements. 

44Although Treasury was unable to determine how much of the unmatched transactions and balances, if any, relates 

to net operating cost, it reported this amount as a component of net operating cost in the accompanying consolidated 

financial statements. 
246 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

x The consolidated financial statements include financial information for the executive, 

legislative, and judicial branches, to the extent that federal entities within those branches 

have provided Treasury such information. However, while progress was made over the past 

few years, undetermined amounts of assets, liabilities, costs, and revenues are not included, 

and the federal government did not provide evidence that the excluded financial information 

was immaterial. 

x In fiscal year 2014, Treasury implemented corrective actions to resolve several internal 

control deficiencies in the processes used to prepare the consolidated financial statements. 

For example, Treasury resolved deficiencies related to the identification of federal entities 

significant to the consolidated financial statements, disclosure of the reporting entity, and 

analysis of federal entity-provided data. However, other internal control deficiencies existed 

in the processes used to prepare the consolidated financial statements, involving 

(1) inadequate design and ineffective implementation of policies and procedures related to 

certain areas, and (2) inadequate processes for monitoring and assessing internal controls 

over the preparation of the consolidated financial statements. As a result, we identified 

errors, such as incomplete disclosures and disclosures that were inconsistent with the 

underlying audited entity financial statements, in draft consolidated financial statements that 

were subsequently corrected. 

x In fiscal year 2014, Treasury and OMB made progress with respect to their corrective action 

plans, for example, by supplementing certain information in the plans. However, Treasury’s 

and OMB’s corrective action plans are not adequate to reasonably assure that internal 

control deficiencies involving the processes used to prepare the consolidated financial 

statements are efficiently and effectively addressed. The plans continued to lack certain key 

elements as recommended by the CFO Council’s Implementation Guide for OMB Circular A123, Management’s Responsibilities for Internal Control—Appendix A, Internal Control over 

Financial Reporting. For example, these plans did not contain sufficiently detailed and 

comprehensive actions that must be performed to resolve each of the deficiencies, interim 

milestones so that interim actions and progress can be monitored and progress assessed, 

and outcome measures to assist in assessing the effectiveness of the corrective actions. 

Also, the corrective actions do not fully consider the interrelationships between deficiencies. 

 

x In fiscal year 2014, Treasury continued to improve its systems and build its staff capacity. 

For example, Treasury (1) obtained and used interim financial information from federal 

entities in preparing initial financial statement drafts, (2) enhanced the automated tool used 

in the compilation process, (3) significantly increased staff to permanently work in the 

division responsible for preparing the consolidated financial statements, and (4) created lead 

accountant positions to assist in supervising the compilation process. However, challenges 

remain related to systems and processes, such as accounting for all transactions that affect 

the General Fund, including cash activity. It is important that Treasury (1) continues to 

improve its systems and ensure that it has a sufficient number of personnel with appropriate 

skills to implement the corrective action plans and (2) remains committed to maintaining the 

progress that has been made in this area and to building upon that progress to make 

needed improvements to fully address the magnitude of the financial reporting challenges it 

faces. 

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 entities’ financial statements, properly balanced, and in accordance 
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 247 

with U.S. GAAP will be impaired. Resolving these internal control deficiencies remains a difficult 

challenge and will require a strong and sustained commitment from Treasury and OMB as they 

continue to execute and implement corrective actions.

Reconciliations of Budget Deficit to Net Operating Cost and Changes in Cash Balance 

For fiscal year 2014, Treasury improved its process for preparing the Reconciliation of Net 

Operating Cost and Unified Budget Deficit and the Statement of Changes in Cash Balance from 

Unified Budget and Other Activities (Reconciliation Statements), for example, by identifying and 

reporting amounts related to certain entities’ credit reform subsidy re-estimates. However, the 

federal government has not established and implemented effective processes and procedures 

for (1) identifying and reporting all items needed to prepare the Reconciliation Statements and 

(2) reasonably assuring the information in these statements was fully consistent with the 

underlying information in the 37 significant component entities’ audited financial statements and 

other financial data, including Treasury’s records of General Fund cash transactions. Until 

Treasury develops and fully implements an effective process for reasonably assuring 

completeness and consistency of the information in the statements and is able to fully reconcile 

this information, the effect on the U.S. government’s consolidated financial statements will 

continue to be unknown. 

The Reconciliation Statements report a unified budget deficit for fiscal years 2014 and 2013 of 

about $483 billion and $680 billion, respectively.45 The budget deficit is calculated by subtracting 

actual budget outlays (outlays) from actual budget receipts (receipts). Also, the Fiscal 

Projections for the U.S. Government included in the unaudited Required Supplementary 

Information section of the Fiscal Year 2014 Financial Report of the United States Government

use such outlays and receipts. With respect to the reported budget deficit, Treasury and OMB 

continue to lack an effective process for reasonably assuring the consistency of (1) information 

used by Treasury to compute the budget deficit reported in the consolidated financial 

statements, (2) Treasury’s records of General Fund cash transactions, and (3) information 

reported in federal entity financial statements and underlying entity financial information and 

records. In fiscal year 2014, Treasury continued to make progress through the further 

development and implementation of procedures to reconcile certain outlays and receipts 

between Treasury’s records used to compute the budget deficit reported in the consolidated 

financial statements and underlying federal entity financial information and records. For 

example, Treasury obtained from significant federal entities explanations of and support for 

certain differences. 

In fiscal year 2014, 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 

unified budget deficit reported in the accrual-based consolidated financial statements. The 

unified budget deficit is also reported by Treasury in its Combined Statement of Receipts, 

Outlays, and Balances,

46 and in other federal government publications. 

 

45The budget deficit, receipts, and outlays amounts are reported in Treasury's Monthly Treasury Statement and the 

President’s Budget. 

46Treasury’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 official 

publication of receipts and outlays of the federal government based on entity reporting. 
248 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

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 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.47 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),48 requires federal executive branch entities to (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, (4) implement actions to 

reduce improper payments and set reduction targets, and (5) report on the results of addressing 

the foregoing requirements. 

The Office of Management and Budget (OMB) reported that the government-wide improper 

payment error rate increased to 4.0 percent of program outlays in fiscal year 2014 from 3.5 

percent in fiscal year 2013 when including the Department of Defense’s (DOD) Defense 

Finance and Accounting Service (DFAS) Commercial Pay program.49 When excluding the 

DFAS Commercial Pay program, the reported government-wide error rate was 4.5 percent of 

program outlays in fiscal year 2014 compared to 4.0 percent in fiscal year 2013. In May 2013, 

we reported on major deficiencies in DOD’s process for estimating fiscal year 2012 improper 

payments in the DFAS Commercial Pay program, including deficiencies in identifying a 

complete and accurate population of payments and developing a statistically valid sampling 

methodology.50 While DOD reported in its fiscal year 2014 agency financial report (AFR) that it 

revised its sampling methodology, the foundation of reliable statistical sampling estimates is a 

complete, accurate, and valid population from which to sample. Because of long-standing 

financial management weaknesses, DOD also reported in its fiscal year 2014 AFR that it cannot 

demonstrate that all payments subject to improper payment estimation requirements were 

included in the population of payments for review. Therefore, the fiscal year 2014 improper 

payment estimate for the DFAS Commercial Pay program may not be reliable. 

 

47Under 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. 

48IPIA, 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. 

49Reported error rates reflect the estimated improper payments as a percentage of total program outlays. 50GAO, DOD Financial Management: Significant Improvements Needed in Efforts to Address Improper Payment 

Requirements, GAO-13-227 (Washington, D.C.: May 13, 2013). 
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 249 

Without the DFAS Commercial Pay program, federal entity improper payment estimates totaled 

$124.7 billion in fiscal year 2014, a significant increase from the prior year estimate of 

$105.8 billion. Increases in reported estimates of improper payments were mostly attributable to 

increased error rates in three major programs: the Department of Health and Human Services’ 

(HHS) Medicare Fee-for-Service, HHS’s Medicaid, and the Department of the Treasury’s 

Earned Income Tax Credit programs. It is important to note that pursuant to OMB implementing 

guidance, reported improper payment estimates include overpayments, underpayments, and 

payments for which adequate documentation was not found, and may also include amounts of 

payments for years prior to the current fiscal year. 

During fiscal year 2014, the federal government continued to make progress in identifying and 

reporting on improper payments. While the specific programs included in the government-wide 

improper payment estimate may change from year to year, a net of 40 additional programs were 

included when compared to fiscal year 2013, most of which pertain to funds received under the 

Disaster Relief Appropriations Act, 2013.51 Nevertheless, two federal entities did not report fiscal 

year 2014 estimated improper payment amounts for four risk-susceptible programs, including 

HHS’s Temporary Assistance for Needy Families.52 Further, various inspectors general reported 

deficiencies related to compliance with the criteria listed in IPERA for fiscal year 2013 at their 

respective federal entities,53 including risk-susceptible programs 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 fiscal year 2014, federal entities reported improper payment error rates for 10 risksusceptible programs, accounting for more than 50 percent of the government-wide improper 

payment estimate, that exceeded 10 percent.54 Under IPERA, an entity that is determined by its 

inspector general to not be 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, must 

 

51Pub. L. No. 113-2, div. A, 127 Stat. 4 (Jan. 29, 2013). The Disaster Relief Appropriations Act, 2013, states that all 

funds received under the act are deemed “susceptible to significant improper payments” for purposes of IPIA, as 

amended, which requires entities to estimate improper payments for these funds. 

52The three other programs are at the Department of Homeland Security, which plans to report improper payment 

estimates for such programs in fiscal year 2015. 

53IPERA established a requirement for entity inspectors general to report annually on entities’ compliance with criteria 

listed in IPERA. The six criteria are that the entity has (1) published an annual financial statement and accompanying 

materials in the form and content required by OMB for the most recent fiscal year and posted that report on the entity 

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 entity’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 inspectors general reports on compliance with the criteria listed in 

IPERA were issued in 2014 for fiscal year 2013. Pursuant to the OMB implementing guidance in M-15-02, Appendix 

C to Circular No. A-123, Requirements for Effective Estimation and Remediation of Improper Payments (Oct. 20, 

2014), inspectors general reports are due within 180 days of publication of the performance and accountability report 

or AFR. Therefore, inspectors general reports on fiscal year 2014 compliance with the criteria listed in IPERA are 

generally expected to be issued by May 2015. 

54The 10 programs that reported improper payment estimates that exceeded 10 percent in fiscal year 2014 were 

(1) the Department of the Treasury’s Earned Income Tax Credit program, (2) the Department of Agriculture’s (USDA) 

School Breakfast program, (3) USDA’s Farm Security and Rural Investment program, (4) USDA’s Loan Deficiency 

Payments program, (5) USDA’s National School Lunch program, (6) HHS’s Disaster Relief – Administration for 

Children and Families Social Services Block Grant program, (7) HHS’s Medicare Fee-for-Service program, (8) HHS’s 

Disaster Relief - Substance Abuse and Mental Health Services Administration program, (9) the Small Business 

Administration’s Disaster Assistance Loans program, and (10) the Department of Labor’s Unemployment Insurance 

program. 
250 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

submit a plan to Congress describing the actions that the entity will take to come into 

compliance. 

Further, entity auditors continued to report internal control deficiencies over financial reporting in 

their fiscal year 2014 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. 

Finally, IPERIA was enacted in January 2013 to intensify efforts to identify, prevent, and recover 

payment error, waste, fraud, and abuse within federal spending. Among other things, IPERIA 

enacted into law elements of the President’s “Do Not Pay List” initiative by requiring entities 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 entity responsible for administering one of 

these high-priority programs to annually submit a program report to its inspector general and 

make a report copy available to the public. 

Until the federal government has implemented effective processes to determine the full extent to 

which improper payments occur and has taken appropriate actions across entities and 

programs 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 government-wide high-risk area since February 

1997. During our fiscal year 2014 audit, we found that serious and widespread information 

security control deficiencies continue 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 inappropriate disclosure, and critical operations at risk of disruption. 

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. 

Although significant challenges remain, the federal government has taken actions toward 

improving information security. For example, the Federal Information Security Modernization Act 

of 2014 was enacted, which is intended to strengthen information security across the federal 

government.55 In addition, for fiscal year 2015, the administration plans to continue to monitor 

and track entities’ performance in implementing goals for the areas of continuous monitoring 

 

55The Federal Information Security Management Act of 2002 was enacted as Title III of the E-Government Act of 

2002, Pub. L. No. 107-347, 116 Stat. 2899, 2946 (Dec. 17, 2002). The Federal Information Security Modernization 

Act of 2014, which largely superseded the 2002 act, was enacted as Pub. L. No. 113-283, 128 Stat. 3073 (Dec. 18, 

2014), and amended chapter 35 of Title 44, U.S. Code. 
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 251 

and strong authentication, and has added anti-phishing56 and malware defense as a priority 

area.57 However, until entities identify and resolve information security control deficiencies and 

manage information security risks on an ongoing basis, federal data and systems, including 

financial information, will remain at risk. 

Tax Collection Activities 

During fiscal year 2014, a material weakness continued to affect the federal government's ability 

to effectively manage its tax collection activities. Due to financial system limitations, as well as 

errors in taxpayers’ accounts, the federal government’s records did not always reflect the 

correct amount of taxes owed by the public to the federal government. Such errors may cause 

undue burden and frustration to taxpayers who either have already paid taxes owed or who owe 

significantly lower amounts. 

Collectively, these deficiencies indicate that internal controls were not effective in (1) ensuring 

that reported amounts of taxes receivable and other tax 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, and required supplementary information and other 

information without extensive supplemental procedures and adjustments.

 

56Phishing is a digital form of social engineering that uses authentic-looking, but fake, e-mails to request information 

from users or direct them to a fake website that requests information. 

57The administration describes anti-phishing and malware defense as implementing technologies, processes, and 

training that reduce the risk of malware introduced through e-mail and malicious or compromised websites. 
252 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

Appendix IV 

Significant Deficiency 

In addition to the material weaknesses discussed in appendixes II and III, we found a significant 

deficiency in the federal government’s internal control related to implementing effective internal 

controls over management of federal grants at certain federal entities, as described below. In 

fiscal year 2013, we reported a significant deficiency related to loans receivable and loan 

guarantee liabilities. During fiscal year 2014, certain corrective actions were implemented, 

primarily by the Department of Education (Education), such that we no longer consider this area 

to be a significant deficiency as of September 30, 2014. Education accounted for the largest 

reported balance of loans receivable. 

Federal Grants Management 

In fiscal year 2014, several federal entities’ auditors continued to identify internal control 

deficiencies related to grants management.58 Reported deficiencies primarily related to grant 

accrual estimation methodologies and monitoring of grant activities. 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. 

 

58The Department of Housing and Urban Development, one of the largest grant-making entities and whose auditor 

has reported grants-related issues for numerous years, had not issued its audited financial statements for fiscal year 

2014 as of the date of our audit report.