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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 ...................................................... 29 

Financial Statements 

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

 Statements of Net Cost ................................................................................................................. 40 

 Statements of Operations and Changes in Net Position................................................................ 42 

 Reconciliations of Net Operating Cost and Unified Budget Deficit ............................................. 43 

 Statements of Changes in Cash Balance from Unified Budget and Other Activities ................... 44 

 Balance Sheets .............................................................................................................................. 45 

 Statements of Social ..................................................................................................................... 46 

 Changes in Social Insurance Amounts ......................................................................................... 49 

Notes to the Financial Statements 

 Note 1. Summary of Significant Accounting Policies .................................................................. 51 

 Note 2. Cash and Other Monetary Assets ..................................................................................... 63 

 Note 3. Accounts and Taxes Receivable, Net ............................................................................... 65 

 Note 4. Loans Receivable, Mortgage-Backed Securities, and Loan Guarantee Liabilities, Net ... 66 

 Note 5. TARP Direct Loans and Equity Investments, Net ........................................................... 70 

 Note 6. Non-TARP Investments in American International 

 Group, Inc. ....................................................................................................................... 76 

 Note 7. Inventories and Related Property, Net ............................................................................. 77

 Note 8. Property, Plant, and Equipment, Net ............................................................................... 79

 Note 9. Debt and Equity Securities .............................................................................................. 81 

 Note 10. Derivatives ..................................................................................................................... 84 

 Note 11. Investments in and Liabilities to Government-Sponsored Enterprises .......................... 85 

 Note 12. Other Assets ................................................................................................................... 88 

 Note 13. Accounts Payable ........................................................................................................... 89 

 Note 14. Federal Debt Securities Held by the Public and Accrued Interest ................................. 90 

 Note 15. Federal Employee and Veteran Benefits Payable .......................................................... 93 

 Note 16. Environmental and Disposal Liabilities ....................................................................... 101 

 Note 17. Benefits Due and Payable ............................................................................................ 103 

 Note 18. Insurance and Guarantee Program Liabilities .............................................................. 104 

 Note 19. Other Liabilities ........................................................................................................... 105 

 Note 20. Collections and Refunds of Federal Revenue .............................................................. 107 

 Note 21. Prior Period Adjustments ............................................................................................. 110 

 Note 22. Contingencies .............................................................................................................. 111 

 Note 23. Commitments ............................................................................................................... 116 

 Note 24. Earmarked Funds ......................................................................................................... 119 

 Note 25. Fiduciary Activities...................................................................................................... 128 

 Note 26. Social Insurance ........................................................................................................... 130 

 Note 27. Stewardship Land and Heritage Assets ........................................................................ 146 

 
Supplemental Information (Unaudited) 

 Fiscal Projections for the U.S. Government – Fiscal Year 2011 ................................................ 147 

 Statement of Long Term Fiscal Projections............................................................................. 147 

 The Sustainability of Fiscal Policy .......................................................................................... 151 

 Alternative Scenarios ............................................................................................................... 155 

 Fiscal Projections in Context ................................................................................................... 157 

 Conclusion ............................................................................................................................... 158 

 Social Insurance ....................................................................................................................... 159 

 Social Security and Medicare .................................................................................................. 159 

 Railroad Retirement, Black Lung, and Unemployment Insurance .......................................... 181 

 Deferred Maintenance ................................................................................................................ 191 

 Unexpended Budget Balances .................................................................................................... 192 

 Tax Burden ................................................................................................................................. 192 

 Tax Gap ...................................................................................................................................... 193 

 Other Claims for Refunds ........................................................................................................... 194 

 Tax Assessments ........................................................................................................................ 194 

 Risk Assumed ............................................................................................................................. 195 

 Unmatched Transactions and Balances ...................................................................................... 196

Stewardship Information (Unaudited)

 Stewardship Investments ............................................................................................................ 199 

 Non-Federal Physical Property ................................................................................................... 200 

 Human Capital ............................................................................................................................ 200 

 Research and Development ........................................................................................................ 200 

Appendices 

 A. Significant Government Entities ............................................................................................ 203 

 B. Acronyms ............................................................................................................................... 207 

U.S. Government Accountability Office Auditor’s Report ...................................................... 211 
List of Social Insurance Charts 

Chart 1 OASDI Beneficiaries per 100 Covered Workers, 1970-2085 ................................... 164 

Chart 2 OASDI Income (Excluding Interest) and Expenditures, 1970-2085 ......................... 165 

Chart 3 OASDI Income (Excluding Interest) and Expenditures 

 as a Percent of Taxable Payroll, 1970-2085 ............................................................ 166 

Chart 4 OASDI Income (Excluding Interest) and Expenditures 

 as a Percent of GDP, 1970-2085 ............................................................................. 167 

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

 as a Percent of GDP, 1970-2085 ............................................................................. 171 

Chart 6 Medicare Part A Income (Excluding Interest) and Expenditures, 1970-2085 .......... 172 

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

 as a Percent of Taxable Payroll, 1970-2085 ............................................................ 173 

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

 as a Percent of GDP, 1970-2085 ............................................................................. 174 

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

 1970-2085 ............................................................................................................... 175 

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

 as a Percent of GDP, 1970-2085 ............................................................................. 176 

Chart 11 Estimated Railroad Retirement Income (Excluding Interest and 

 Financial Interchange Income) and Expenditures, 2011-2085 ................................ 182 

Chart 12 Estimated Railroad Retirement Income (Excluding Interest and 

 Financial Interchange Income) and Expenditures as a Percent of 

 Tier II Taxable Payroll, 2011-2085 ......................................................................... 183 

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

 2012-2040 ............................................................................................................... 186 

Chart 14 Estimated Unemployment Trust Fund Cashflow Using Expected 

 Economic Conditions, 2012-2021 ............................................................................. 188 

Chart 15 Unemployment Trust Fund Solvency as of September 30, 2011 .............................. 190 
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A Citizen's Guide to the 2011 Financial Report of the U.S. Government 

i 

CITIZEN’S GUIDE TO THE 

2011 FINANCIAL REPORT OF THE UNITED STATES 

GOVERNMENT
A Citizen's Guide to the 2011 Financial Report of the U.S. Government 

ii

A Citizen’s Guide to the Fiscal Year 2011 

Financial Report of the United States Government 

OVERVIEW 

The Citizen’s Guide to the Fiscal Year (FY) 2011 Financial Report of the U.S. Government 

presents the Nation’s financial position and condition of the U.S. Government and discusses key 

financial topics, including continuing economic recovery efforts and fiscal sustainability. This 

Guide and the full Report are produced by the U.S. Department of the Treasury in cooperation 

with the Office of Management and Budget (OMB). 

 During FY 2011, nearly equivalent increases in Federal tax receipts and outlays resulted in 

a cash-based U.S. budget deficit that remained essentially flat at $1.3 trillion. The Government’s 

net cost decreased from $4.3 trillion to $3.7 trillion due in large part to decreased estimated costs 

for federal employee and veteran benefits as well as a decline in projected costs for the 

Government’s economic recovery programs and a slight revenue increase from $2.2 trillion to 

$2.4 trillion. The net cost of $3.7 trillion and revenue of $2.4 trillion yield a “bottom line” net 

operating cost figure for the Federal Government of $1.3 trillion, a $768 billion or 37 percent 

decrease from $2.1 trillion in FY 2010 (see Chart 1). See ‘Where We Are Now’, p. iv.

Some Government programs act as “automatic stabilizers,” helping to support the economy 

during a downturn by increasing spending and reducing tax collections. This support is 

“automatic” because increased spending on programs like unemployment benefits, Social 

Security, and Medicaid and a reduction in tax receipts happen even without any legislative 

changes in policies. These automatic stabilizers had caused deficits and net operating costs to 

increase in recent years, but should decline as the economy recovers. 
A Citizen's Guide to the 2011 Financial Report of the U.S. Government 

iii 

During FY 2011, the economy continued to grow, albeit at a slower pace than in the 

previous year, residential homebuilding increased for the first time since FY 2005, and the 

economy added about 1.9 million non-farm payroll jobs. Policies enacted to foster economic 

recovery, including the Housing and Economic Recovery Act of 2008 (HERA), the Emergency 

Economic Stabilization Act of 2008 (EESA), and the American Recovery and Reinvestment Act 

of 2009 (Recovery Act or ARRA), represented unprecedented efforts to stabilize the financial 

markets, jump-start the Nation's economy, and create or save millions of jobs. The Government 

and the taxpayer continue to see returns on many of these investments as evidenced by 

repayments made under the Troubled Assets Relief Program (TARP) and the selling of many 

Government investments during FY 2011. See ‘Review of the Government’s Stabilization 

Efforts’, p. viii. 

While the Government’s immediate priority is to continue to promote policies that foster 

economic recovery, there are longer term fiscal challenges that must ultimately be addressed. 

The aging of the population due to the retirement of the “baby boom” generation, increasing 

longevity, and persistent growth of health care costs will make it increasingly difficult to fund 

critical social programs, including notably Medicare, Medicaid, and Social Security. Chart 2 

shows this growing gap between receipts and total spending, indicating that, as currently 

structured, the Government's fiscal path cannot be sustained indefinitely. Legislative initiatives, 

such as the Affordable Care Act (ACA) of 2010 and the Budget Control Act (BCA) of 2011 are 

expected to help bring the Government’s expenditures more in line with its receipts. See 

‘Where We Are Headed’ p. x. 

This Guide highlights important information contained in the 2011 Financial Report of the 

United States Government. The Secretary of the Treasury, Director of the Office of Management 

and Budget (OMB), and Comptroller General of the United States believe that the information 

discussed in this Guide is important to all Americans. 
A Citizen's Guide to the 2011 Financial Report of the U.S. Government 

iv

Where We Are Now 

The Economy 

The economy continued to grow during FY 2011. Consumer spending rose at a moderate 

pace. Residential investment grew on a fiscal year basis for the first time since FY 2005, and 

nonresidential investment strengthened slightly. Job creation accelerated in FY 2011, with the 

economy adding about 1.9 million private nonfarm payroll jobs (after creating nearly 350,000 

private nonfarm payroll jobs during the previous fiscal year). Overall inflation increased during 

the course of the year, reflecting higher energy and food prices. The core inflation rate (which 

excludes food and energy) also increased from the previous fiscal year’s very low level, but 

remained low by historical standards. Real wages fell due to a combination of slower nominal 

wage growth and rising consumer prices. The level of corporate profits increased in FY 2011, 

but at a slower pace than in the previous fiscal year. Federal spending grew and tax receipts 

increased in FY 2011, which resulted in the Federal unified budget deficit remaining essentially 

flat at $1.3 trillion. However, the deficit narrowed as a share of GDP to 8.7 percent from 9.0 

percent in FY 2010. The economy continued to receive significant support during the fiscal year 

by a wide variety of measures implemented under the American Recovery and Reinvestment Act 

of 2009 (Recovery Act or ARRA). It was also supported by additional measures, including a 

new Small Business Jobs and Wages Tax Credit, supplemental support for State and local 

Governments to support jobs and medical services, a 2 percent payroll tax cut, extensions of 

unemployment benefits, and refundable tax credits, and a two-year extension of the 2001 tax 

cuts. 

What Came In and What Went Out 

What came in? 

Total Government 

revenues (calculated 

using a modified cash 

basis of accounting) 

increased slightly from 

$2.2 trillion to $2.4 

trillion in FY 2011. 

Chart 3 shows that a 

$133 billion or 7.7 

percent increase in 

personal income and 

payroll tax revenues 

during FY 2011 was 

partially offset by a $5 

billion or 2.5 percent 

decrease in corporate 

tax revenues. 

Together, personal and 

corporate taxes accounted for about 86 percent of total revenues. The other 14 percent is 

attributed to other revenues, including excise taxes, unemployment taxes, and customs duties. 
A Citizen's Guide to the 2011 Financial Report of the U.S. Government 

v 

What went out? To derive its net cost ($3.7 trillion in FY 2011), the Government subtracts 

revenues earned from Government programs (e.g., Medicare premiums, National Park entry fees, 

and postal service fees) from its gross costs and adjusts the net amount for gains or losses from 

changes in actuarial assumptions used to estimate federal employee pensions, other retirement 

benefits, and other postemployment benefits. For FY 2011, total net costs declined by $635 

billion (about 15 percent). This decline is mostly due to significant decreases in estimates of 

certain non-cash costs from FY 2010 to FY 2011 relating to federal employee and veterans 

benefits and federal government economic recovery efforts. The amounts associated with these 

declines are reflected in the ‘Change’ column of Table 1 and discussed further below. 

Chart 4 shows that the largest contributors to the Government’s net cost in FY 2011, as is 

the case in most years, include the Departments of Health and Human Services (HHS) and 

Defense (DoD) and the Social Security Administration (SSA). The bulk of HHS and SSA costs 

are attributable to major social insurance and postemployment benefits programs administered 

by those agencies. Similarly, much of DoD’s costs are also associated with its Military 

Retirement Fund and other benefits programs, as well as its current operations. In fact, across 

the Government, just the change in current costs of and actuarial and other estimated costs 

associated with the change in Federal Employee and Veterans Benefits Payable for the 

Government’s three largest postemployment benefits programs ($431.2 billion decrease as 

shown in Table 1 on the following page) accounted for more than two-thirds of the total $635.2 

billion decrease in the Government’s net cost and more than half of the $767.7 billion decrease 

in the bottom line net operating cost, as described below, for FY 2011. Further, the long-term 

nature of these costs and their sensitivity to a wide range of complex assumptions can, in some 

cases, cause significant fluctuation in agency and government-wide costs from year to year. 

To arrive at the Government's “bottom line” net operating cost, the Government subtracts 

taxes and other revenues (Chart 3) from its net cost. The 15 percent decrease in net cost 

combined with a 6.6 percent increase in taxes and other revenues, translated into a $768 billion 

(37 percent) decrease in the Government’s “bottom line” net operating cost from $2.1 trillion in 

FY 2010 to $1.3 trillion in FY 2011.
A Citizen's Guide to the 2011 Financial Report of the U.S. Government 

vi

Dollars in Billions 2011 2010 Increase / 

(Decrease)

Net Operating Cost $ (1,312.6) $ (2,080.3) $ (767.7)

Change in: 

Federal Employee and Veterans Benefits Payable $ 71.9 $ 503.1 $ (431.2)

Liabilities for Government Sponsored Enterprises $ (43.7) $ 268.0 $ (311.7)

Other, Net $ (14.2) $ 15.1 $ (29.3)

Subtotal - Net Difference: $ 14.0 $ 786.2 $ (772.2)

Budget Deficit $ (1,298.6) $ (1,294.1) $ 4.5 

Table 1: Budget Deficit vs. Net Operating Cost

 Cost vs. Deficit: What’s the Difference?

The Budget of the United States Government (President’s Budget) is the Government’s 

primary financial planning and control tool. It describes how the Government spent and plans to 

spend the public's money, comparing receipts, or cash received by the Government, with outlays, 

or payments made by the Government to the public to derive a budget surplus (excess of 

receipts over outlays) or deficit (excess of outlays over receipts). Outlays are measured 

primarily on a cash basis and receipts are measured on a purely cash basis – or essentially they 

are measured when the Government receives or dispenses cash. 

The Financial Report of the United States Government (Report) reports on the 

Government’s accrual-based costs, the sources used to finance those costs, how much the 

Government owns and owes, and the outlook for fiscal sustainability. It compares the 

Government’s revenues, or amounts that the Government has collected and expects to collect, 

but has not necessarily received, with its costs (recognized when owed, but not necessarily paid) 

to derive net operating cost. Together, the President’s Budget and the Financial Report present 

complementary perspectives on the Nation’s financial health and provide a valuable decisionmaking and management tool for the Nation’s leaders. 

 Table 1 shows that, the difference between the budget deficit and net operating cost were 

comparatively minimal for FY 2011 ($14 billion in FY 2011compared to $786.2 billion in FY 

2010). However, in both cases, the significant non-cash costs (i.e. changes in estimated 

liabilities) relating to Federal employee and veteran benefits, as well as future spending on 

investments in Government Sponsored Enterprises (GSEs), specifically Fannie Mae and Freddie 

Mac, account for most of the change difference between budget deficit and net operating cost. 

Further, the changes in these amounts (see ‘Change’ column in Table 1) account for most of the 

change in the Government’s net cost between FY 2010 and FY 2011. See the Financial Report 

of the U.S. Government for a more detailed analysis of these issues. 
A Citizen's Guide to the 2011 Financial Report of the U.S. Government 

vii 

What We Own and What We Owe 

Chart 5 is a summary of what the Government owns in assets and what it owes in liabilities. 

As of September 30, 2011, the Government held about $2.7 trillion in assets, comprised mostly 

of net property, plant, and equipment ($852.8 billion) and a combined total of $985.2 billion in 

net loans receivable, mortgage-backed securities, and investments. During FY 2011, the 

Government’s total assets decreased by $176.5 billion, due mostly to elimination of the cash 

deposits with the Federal Reserve under the Supplementary Financing Program (SFP). Under 

the SFP, the Treasury issued special bills, which provided cash that the Federal Reserve used to 

manage its authorized lending and liquidity initiatives. 

As indicated in Chart 5, the Government’s largest liabilities are: (1) Federal debt held by the 

public and accrued interest, 1 the balance of which increased from $9.1 trillion to $10.2 trillion 

during FY 2011, and (2) Federal employee postemployment and veteran benefits payable, which 

increased slightly during FY 2011, from $5.7 trillion to $5.8 trillion. 

In addition to debt held by the public, the Government reports about $4.7 trillion of 

intragovernmental debt outstanding, which arises when one part of the Government borrows 

from another. It represents debt held by Government funds, including the Social Security and 

Medicare trust funds, which are typically required to invest any excess annual receipts in Federal 

debt securities. Because these amounts are both liabilities of the Treasury and assets of the 

Government trust funds, they are eliminated in the consolidation process for the Government-

 

1

 Debt held by the public, as reported on the Government’s balance sheet, consists of Treasury securities, net of 

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

and local governments, Federal Reserve Banks, foreign governments, and other entities outside the Federal 

Government. 
A Citizen's Guide to the 2011 Financial Report of the U.S. Government 

viii

wide financial statements. 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). During FY 2011, the debt limit was raised twice, by $400 billion in August 2011 to 

$14.694 trillion and by $500 billion in September 2011 to $15.194 trillion, pursuant to the 

Budget Control Act (BCA) of 2011. The BCA also provides for an additional debt limit increase 

once certain conditions are met. 

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

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

extended periods can pose additional challenges. 

Review of the Government’s Stabilization Efforts 

Since the 

financial crisis in 

2008, the Treasury 

Department, the 

Federal Reserve, the 

Federal Deposit 

Insurance Corporation 

(FDIC), and other 

U.S. Government 

bodies have taken 

actions to help 

stabilize financial 

markets and pave the 

way for sustained 

economic recovery. 

Among these actions 

were financial support 

to provide liquidity to 

the housing market 

and the financial system and the American Recovery and Reinvestment Act (Recovery Act or 

ARRA), which provided much-needed support for American families and spurred investment, 

thereby providing a critical boost to the economy. Chart 6 summarizes the outstanding balances 

of investments and direct loans related to key economic recovery programs described below. 

The Housing and Economic Recovery Act of 2008 (HERA) established the Federal Housing 

Finance Agency (FHFA), to regulate the housing GSEs, including Fannie Mae and Freddie Mac. 

HERA also authorized the Treasury Department to provide financial support for the housing 

GSEs through such programs as the Senior Preferred Stock Purchase Agreements (SPSPA) 

program, which provides that the Government will make funding advances to Fannie Mae and 

Freddie Mac as needed to ensure that the GSEs have sufficient assets to support their liabilities; 

and the GSE-guaranteed mortgage-backed securities (MBS) purchase program (which was 

terminated as of December 31, 2009). These efforts helped bring down mortgage rates to 

historically low levels and helped provide liquidity to housing markets. 

As of September 30, 2011, Treasury’s payments under the SPSPA program to Fannie Mae 

and Freddie Mac totaled a cumulative combined $169.0 billion, reflected on the Government’s 

balance sheet at fair value at $133.0 billion and a combined $316.2 billion has been accrued as a 
A Citizen's Guide to the 2011 Financial Report of the U.S. Government 

ix 

contingent liability under this program. Between October 2008 and December 31 2009, 

Treasury purchased $225 billion in agency-guaranteed MBS. In March 2011, Treasury began 

selling off its MBS purchases, reducing the outstanding portfolio by more than half from $172.2 

billion as of the end of FY 2010 to $72.4 billion as of September 30, 2011 and by more than twothirds when compared to Treasury’s initial purchases (see Chart 6). 

The Emergency Economic Stabilization Act of 2008 (EESA) created the Troubled Asset 

Relief Program (TARP), which gave the Secretary of the Treasury authorities and facilities 

necessary to help restore liquidity and stability to the U.S. financial system and help ensure that 

such authorities are used in a manner that protects home values, college funds, retirement 

accounts, and life savings; preserves homeownership; promotes jobs and economic growth; 

maximizes overall returns to taxpayers; and provides public accountability. EESA provided 

authority for TARP to purchase or guarantee up to $700 billion in troubled assets. The DoddFrank Wall Street Reform and Consumer Protection Act reduced cumulative authority to $475 

billion, in line with expected investment amounts. 

TARP’s bank programs are now producing a profit for taxpayers. The Treasury Department 

reduced its stake in General Motors Company by 50 percent and fully exited its investment in 

Chrysler Group, as Chrysler Group repaid its loans six years earlier than the loans’ maturity 

dates. In addition, Treasury, working with other Federal entities, closed on a major restructuring 

plan for American International Group (AIG), putting the Government in a better position to 

recover its investment. Chart 6 shows how TARP’s net investments have changed since FY 

2009. Since TARP’s inception through September 30, 2011, Treasury has disbursed $413.4 

billion in direct loans and investments, and for the Housing programs under TARP, collected 

$276.9 billion from repayments and sales, and reported nearly $40 billion from cash received 

through interest and dividends, as well as from proceeds from the sale and repurchase of assets in 

excess of cost. As of September 30, 2011, TARP had $122.4 billion in gross outstanding direct 

loans and equity investments, valued at $80.1 billion (see Chart 6). 

The ultimate cost of TARP investments is subject to uncertainty, and will depend on, among 

other things, how the economy, financial markets, and particular companies perform. Additional 

information concerning the TARP program and other related initiatives can be found at 

www.financialstability.gov. 

The economic recovery initiatives and efforts undertaken since the spring of 2009 reflect a 

broad and aggressive policy response that included the HERA and TARP initiatives and 

programs, other financial stability policies implemented by the FDIC and the Board of 

Governors of the Federal Reserve, accommodative monetary policy, and the Recovery Act. The 

purpose of the original $787 billion ARRA package was to jump-start the economy and to create 

and save jobs, with one-third of ARRA dedicated to tax provisions to help businesses and 

working families, another third for emergency relief for those who have borne the brunt of the 

recession, and the final third devoted to investments to create jobs, spur economic activity, and 

lay the foundation for future sustained growth. Cumulative ARRA amounts paid out by Federal 

agencies as of September 30, 2011 totaled $421.4 billion, as compared to $307.9 billion as of 

September 30, 2010.2

 Readers may find the most up-to-date information on where and how 

Recovery Act funds are being used at www.recovery.gov.

 

2

 Agency Financial & Activity Reports as of September 30, 2011 and 2010. For more information, see the 

Recovery Act website at www.Recovery.gov. 
A Citizen's Guide to the 2011 Financial Report of the U.S. Government 

x

Where We Are Headed 

An important purpose 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 it sustainable. A sustainable policy is one where the ratio of debt held 

by the public to GDP (the debt-to-GDP ratio) is stable in the long run. Sustainability concerns 

only whether long-run revenues and expenditures are in balance; it does not concern fairness or 

efficiency implications of the reforms necessary to achieve sustainability. 

To determine if current fiscal policies are sustainable, the projections in this report assume 

current policies will be sustained indefinitely and draw out the implications for the growth of 

public debt as a share of GDP.3 The projections are therefore neither forecasts nor predictions. 

If policy changes are enacted, then actual financial outcomes will of course be different than 

those projected.4 

The Primary Deficit, Interest, and the Debt 

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

determinant of the ratio of debt held by the public to GDP that the Government controls directly. 

(The other determinants are interest rates and growth in GDP). Chart 7 shows receipts, noninterest spending, and the difference – the primary deficit – expressed as a share of GDP. The 

primary deficit-to-GDP ratio grew rapidly in 2009 and stayed large in 2010 and 2011due to the 

financial crisis 

and the 

recession, and 

the policies 

pursued to 

combat both. 

The primary 

deficit-to-GDP 

ratio is 

projected to fall 

rapidly between 

2012 and 2019 

(turning to 

surplus in 

2015) as 

spending 

reductions 

called for in the 

Budget Control 

Act (BCA) of 

2011 take 

 

3

 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 extension of relief from the 

Alternative Minimum Tax (AMT). 4

 Further information about the projections summarized in this section and the underlying assumptions can be 

found in the Supplemental Information section of the Financial Report. 
A Citizen's Guide to the 2011 Financial Report of the U.S. Government 

xi 

effect and the economy recovers. Between 2019 and 2035, increased spending for Social 

Security and health programs due to continued aging of the population is expected to cause the 

primary balance to steadily deteriorate. A primary deficit is expected to reappear in 2025 that 

reaches 1.3 percent of GDP in 2035. After 2035, the projected primary deficit-to-GDP ratio 

slowly declines as the impact of the baby boom generation retiring dissipates. Between 2035 and 

2086, the projected primary deficit averages 0.9 percent of GDP. 

 The revenue share of GDP fell substantially in 2009 and 2010 and increased only modestly in 

2011 because of the recession and tax reductions enacted as part of ARRA and the Tax Relief, 

Unemployment Insurance Reauthorization, and Job Creation Act of 2010, and is projected to 

return to near its long-run average as the economy recovers and these temporary tax cuts expire. 

After the economy is fully recovered, 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 

higher individual income tax brackets. These projections assume that Congress and the President 

will continue to enact legislation to prevent the share of income subject to the Alternative 

Minimum Tax from rising. 

 The non-interest spending share of GDP is projected to fall from its current level of 22.6 

percent to about 20 percent in 2013, to stay at or below that level until 2026, and then to rise 

gradually and plateau at about 22 percent beginning in about 2040. The reduction in the noninterest spending share of GDP over the next two years is mostly due to caps on discretionary 

spending and further automatic spending cuts enacted in the BCA, and the subsequent increase is 

principally due to growth in Medicare, Medicaid, and Social Security spending.5

 The retirement 

of the baby boom generations over the next 25 years is projected to increase the Social Security, 

Medicare, and Medicaid spending shares of GDP by about 1.4 percentage points, 1.3 percentage 

points, and 1.0 percentage points, respectively. After 2035, the Social Security spending share of 

GDP is relatively steady, 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) significantly reduces projected Medicare and Medicaid cost growth from the 

levels projected in the 2009 Financial Report. However, 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. 

 

5

 The 2011 Medicare Trustees Report projects that, assuming full implementation of ACA provisions, the 

Hospital Insurance (HI) Trust Fund will remain solvent until 2024 under current law – five years earlier than was 

projected in the 2010 Trustees Report. The projected share of scheduled benefits that can be paid from trust fund 

income is 90 percent in 2024, declines to about 76 percent in 2050, and then increases to 88 percent by 2085. As for 

Social Security, under current law, the Old-Age, Survivors, and Disability Insurance (OASDI) Trust Funds are 

projected to be exhausted in 2036, at which time the projected share of scheduled benefits payable from trust fund 

income is 77 percent, declining to 74 percent in 2085. More information is available at 

http://www.ssa.gov/oact/trsum/index.html . 
A Citizen's Guide to the 2011 Financial Report of the U.S. Government 

xii

 The primary deficit projections in Chart 7, along with those for interest rates and GDP, 

determine the projections for the ratio of debt held by the public to GDP that are shown in Chart 

8. That ratio was 68 percent at the end of fiscal year 2011, and under current policy is projected 

to exceed 76 percent in 2022, 125 percent in 2042, and 287 percent in 2086. The continuous rise 

of the debt-to-GDP ratio illustrates that current policy is unsustainable. 

This year’s projections are somewhat more favorable than were the projections in the 2010 

Financial Report. Last year’s report projected the debt-to-GDP ratio to reach 352 percent in 

2085, which compares with 283 percent projected in this year’s report. The more favorable 

outlook is mainly due to spending reductions called for in the Budget Control Act of 2011 that 

are partly offset by somewhat less favorable economic and technical assumptions. 

The Fiscal Gap and the Cost of Delaying Policy Reform 

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

would require running primary surpluses over the period that average 1.1 percent of GDP. This 

compares with an average primary deficit of 0.7 percent of GDP under current policy. The 

difference, the “75-year fiscal gap,” is 1.8 percent of GDP, which is about 9 percent of the 75-

year present value of projected receipts and of non-interest spending. 

Closing the 75-year fiscal gap requires some combination of expenditure reductions and 

revenue increases that amount to 1.8 percent of GDP on average over the next 75 years. The 

timing of such changes has important implications for the well-being of future generations. For 

example, it is estimated that the magnitude of reforms necessary to close the 75-year fiscal gap is 

60 percent larger if reforms are concentrated into the last 55 years of the 75-year period than if 

they are spread over the entire 75 years. 
A Citizen's Guide to the 2011 Financial Report of the U.S. Government 

xiii 

Conclusion 

The United States took potentially significant steps towards fiscal sustainability by enacting 

the ACA in 2010 and the BCA in 2011. The ACA holds the prospect of lowering the long-term 

growth trend for Medicare and Medicaid spending, and the BCA significantly curtails 

discretionary spending. Together, these two laws substantially reduce the estimated long-term 

fiscal gap. But even with the new law, the debt-to-GDP ratio is projected to increase over the 

next 75 years and beyond if current policies are kept in place, which means current policies are 

not sustainable. Subject to the important caveat that policy changes not be 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 necessary to return the Nation to a 

sustainable fiscal path. 

While this Report’s projections of expenditures and receipts under current policies are 

highly uncertain, there is little question that current policies cannot be sustained indefinitely. 

Looking Ahead 

The Nation continues to face extraordinary financial and fiscal challenges. Signs of 

progress are already evident as Treasury and the Government as a whole continue to develop and 

implement an array of efforts to foster continued economic recovery. Realizing the true return 

on those efforts requires perseverance and patience. However, even as the Government 

continues its current efforts to foster economic growth, it should not lose sight of the long-term 

fiscal challenges associated with its social insurance programs compared to expected future 

levels of revenue. The Nation must bring social insurance expenses and resources into balance 

before the deficit and debt reach unprecedented heights. Delays will only increase the magnitude 

of the reforms needed and will place more of the burden on future generations. While there is 

still more work to be done and both near- and long-term challenges remain, the Federal 

Government has already accomplished a great deal during this fiscal year and anticipates 

continued progress in the years to come. 

 
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A Citizen's Guide to the 2011 Financial Report of the U.S. Government 

xv 

billions of dollars 2011 2010

Gross Costs (3,998.3) $ (4,472.3) $ 

Less: Earned Revenues 365.6 $ 309.2 $ 

 Gain / (Loss) from Changes in Assumptions (28.1) $ (132.9) $ 

Net Cost (3,660.8) $ (4,296.0) $ 

Less: Total Taxes and Other Revenues 2,363.8 $ 2,216.5 $ 

 Unmatched Transactions and Balances (15.6) $ (0.8) $ 

Net Operating Cost (1,312.6) $ (2,080.3) $ 

Assets: 2,707.3 $ 2,883.8 $ 

Less: Liabilities, comprised of:

Debt Held By the Public & Accrued Interest (10,174.1) $ (9,060.0) $ 

Federal Employee & Veteran Benefits (5,792.2) $ (5,720.3) $ 

Other (1,526.4) $ (1,576.3) $ 

Total Liabilities (17,492.7) $ (16,356.6) $ 

Net Position (Assets Minus Liabilities) (14,785.4) $ (13,472.8) $ 

Social Insurance Net Expenditures1 $ (30,857) (33,830) $ 

Total Non-Interest Net Expenditures2 $ (16,300) (6,400) $ 

Sustainability Measures as Percent of Gross Domestic Product (GDP)3:

Social Insurance Net Expenditures -3.8% -3.7%

Total Federal Government Non-Interest Net Expenditures -0.7% -1.9%

Unified Budget Deficit (1,298.6) $ (1,294.1) $ 

2 Repres ents the 75-year pro jectio n o f the Federal Go vernment's receipts les s no n-interes t s pending as repo rted in the 

'Statement o f Lo ng Term Fis cal P ro jectio ns ' in the Supplemental Info rmatio n s ectio n o f the Financal Repo rt o f the U.S. 

Go vernment.

3 GDP values repres ent the average o f 75-year pres ent value o f no minal GDP values fro m 2011 and 2010 fo r So cial Security and 

Medicare fro m the So cial Security and Medicare Trus tees Repo rts .

NATION BY THE NUMBERS

A Snapshot of 

The Government's Financial Position & Condition

Sustainability Measures: 

Budget Results

1 So urce: Statement o f So cial Ins urance. Amo unts equal pres ent value o f pro jected revenues and expenditures fo r s cheduled 

benefits o ver the next 75 years o f certain benefit pro grams that are referred to as So cial Ins urance (e.g., So cial Security, 

Medicare). Amo unts repres ent 'o pen gro up' po pulatio n (all current and future beneficiaries ). No t co ns idered liabilites o n the

balance s heet. 

Government’s Financial Position and Condition 

The Financial Report of the U.S. Government (Report) provides the President, Congress, and 

the American people a comprehensive view of how the Federal 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 following table presents several key indicators of the Government’s financial position 

and condition, which are discussed in greater detail in the Report. 

 

 
A Citizen's Guide to the 2011 Financial Report of the U.S. Government 

xvi

This page is intentionally blank. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 1

MANAGEMENT’S DISCUSSION AND 

ANALYSIS 

Introduction 

The fiscal year (FY) 2011 Financial Report of the United States Government (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 Report also discusses important financial issues and significant conditions that may affect future 

operations. This year's Report emphasizes two key issues: the Government’s ongoing efforts to strengthen the 

economy and create jobs and 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 must submit the Report, which is subject to 

audit by the Government Accountability Office (GAO), to the President and Congress no later than six months after 

the September 30 fiscal year end. To encourage timely and relevant reporting, the Office of Management and 

Budget (OMB) accelerated both individual agency and government-wide reporting deadlines. 

The 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). GAO issued, as it has for the past fourteen years, a “disclaimer” of opinion on the accrual-based consolidated 

financial statements for the fiscal years ended September 30, 2011 and 2010. Additionally, GAO issued disclaimers 

of opinion on the 2011 and 2010 Statements of Social Insurance (SOSI), following unqualified opinions on the 

2007, 2008, and 2009 SOSI, and a disclaimer of opinion on the 2011 Statement 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 FY 2011, 321

 of the 35 most 

significant agencies earned unqualified opinions on their financial statement audits.2

 

The FY 2011 Report consists of: 

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

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

• Principal financial statements and the related footnotes to the financial statements, including a new 

Statement of Changes in Social Insurance Amounts; 

• Supplemental and Stewardship Information; and 

• GAO’s Audit Report. 

 In addition, the Government has produced a Citizen’s Guide to provide the American taxpayer with a quick 

reference to the key issues in the 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 

productivity, providing veteran 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. 

 

1 The Department of Health and Human Services received a disclaimer of opinion on its 2011 SOSI and SCSIA. 2 The Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Farm Credit System 

Insurance Corporation (FCSIC) are among the 35 significant entities. However, because these entities operate on a calendar year basis 

(December 31 year-end), their 2011 audits are not yet complete. Statistic reflects 2010 audit results for these organizations.
2 MANAGEMENT’S DISCUSSION AND ANALYSIS 

Exhibit 1 provides an overview of how the U.S. 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 

NATIONAL CREDIT UNION ADMINISTRATION 

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 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 (3,998.3) $ (4,472.3) $ $ (10.6% ) (474.0)

Less: Earned Revenue 365.6 $ 309.2 $ 56.4 $ 18.2%

 Gain/(Loss) from Changes in Assumptions (28.1) $ (132.9) $ (104.8) $ (78.9%)

Net Cost1 $ (4,296.0) (3,660.8) $ (635.2) $ (14.8% )

Less: Taxes and Other Revenue: 2,363.8 $ 2,216.5 $ 147.3 $ 6.6%

 Unmatched Transactions & Balances (15.6) $ (0.8) $ 14.8 $ 1850.0%

Net Operating Cost2 $ (2,080.3) (1,312.6) $ (767.7) $ (36.9% )

Assets3

:

Cash & Other Monetary Assets 177.0 $ 428.6 $ (251.6) $ (58.7%)

Loans Receivable and Investments, Net4 $ 942.5 985.2 $ 42.7 $ 4.5%

Property, Plant & Equipment, Net 852.8 $ 828.9 $ 23.9 $ 2.9%

Other 692.3 $ 683.8 $ 8.5 $ 1.2%

Total Assets 2,707.3 $ 2,883.8 $ (176.5) $ (6.1% )

Liabilities3

 :

Federal Debt Held by the Public & Accrued Interest (10,174.1) $ (9,060.0) $ 1,114.1 $ 12.3%

Federal Employee & Veterans Benefits (5,792.2) $ (5,720.3) $ 71.9 $ 1.3%

Other (1,526.4) $ (1,576.3) $ (49.9) $ (3.2%)

Total Liabilities (17,492.7) $ (16,356.6) $ 1,136.1 $ 6.9%

Net Position (Assets minus Liabilities) (14,785.4) $ (13,472.8) $ (1,312.6) $ (9.7% )

Social Insurance Net Expenditures5

:

Social Security (OASDI) (9,157) $ (7,947) $ 1,210 $ 15.2%

Medicare (Parts A, B, & D) (24,572) $ (22,813) $ 1,759 $ 7.7%

Other (101) $ (97) $ 4 $ 4.1%

Total Social Insurance Net Expenditures (33,830) $ (30,857) $ 2,974 $ 9.6%

Total Federal Government Noninterest Net Expenditures6 $ (16,300) (6,400) $ (9,900) $ (60.7% )

Unified Budget Deficit7 $ (1,294.1) (1,298.6) $ 4.5 $ 0.3%

Table 1

The Federal Government's Financial Position and Condition

Dollars in Billions 2011 2010 Increase / (Decrease)

7 Source: Final Monthly Treasury Statement (as of 9/30/2011 and 9/30/2010).

FINANCIAL MEASURES

SUSTAINABILITY MEASURES

1 Source: Statement of Net Cost.

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

3 Source: Balance Sheet.

4 Includes Loans Receivable and Mortgage-Backed Securities, Troubled Asset Relief Program (TARP) Investments, and Investments in 

Government-Sponsored Enterprises (GSEs). 

6 Represents the 75-year projection of the Federal Government's receipts less non-interest spending as reported in the Statement of LongTerm Fiscal Projections in the Supplemental Information section of the Financial Report.

5 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.

BUDGET DEFICIT

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 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: 

• The Government’s gross costs decreased nearly 11 percent to $4.0 trillion. Deducting $365.6 billion in 

revenues earned for services provided (e.g., national park fees) and adding $28.1 billion in losses from 

changes in assumptions yields a net cost of $3.7 trillion. 

• Taxes and other revenues increased $147 billion to $2.4 trillion, which, when offset against the 

Government’s net cost, results in a “bottom line” net operating cost of $1.3 trillion. 

• Comparing total 2011 Government assets of $2.7 trillion to total liabilities of $17.5 trillion yields a 

negative net position of $14.8 trillion. Government liabilities are comprised mostly of $10.2 trillion in 

Federal debt held by the public and accrued interest payable3

 and $5.8 trillion of Federal employee and 

veterans benefits payable. 

• As of September 30, 2011, the Government’s total debt subject to the debt limit was $14.747 trillion. 

Pursuant to the Budget Control Act of 2011 (BCA), the debt limit was increased by a combined $900 

billion to $15.194 trillion during FY 2011. 

This 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 Supplemental Information section of the 

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

on the sustainability of the Government’s fiscal path: 

• The SOSI compares the actuarial present value 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 years4

to a subset of the revenues5 supporting these programs. In the 2011 SOSI, projected social insurance 

expenditures exceeded projected revenues by $34 trillion, a $3 trillion increase over 2010 projections. 

• From a government-wide perspective, projected expenditures for other major programs (including defense, 

Medicaid, and education) and future tax revenues will also affect the Government’s future fiscal condition. 

Over the next 75 years, under current policy, the Government’s total projected, non-interest expenditures 

(including its social insurance programs) are projected to exceed total projected receipts by $6.4 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: 

• Outlays of $3.6 trillion net of receipts of $2.3 trillion yielded a FY 2011 unified budget deficit that 

remained essentially flat compared to FY 2010 at $1.3 trillion (8.7 percent of GDP).6

• The Government borrows from the public to finance the gap between cash-based outlays and receipts and 

to finance certain cash transactions that are not reflected in the deficit. For FY 2011, debt held by the 

public, excluding interest payable, of $10.1 trillion, equates to 67.7 percent of GDP. 

• The projected $34 trillion excess of expenditures over receipts over 75 years for the programs reported in 

the 2011 SOSI represents about 3.8 percent of the present value of GDP over 75 years. The excess of total 

projected non-interest spending over receipts of $6.4 trillion discussed in the ‘Statement of Long Term 

Fiscal Projections’ in the Supplemental Information section of the Report represents 0.7 percent of GDP. 

As discussed in this report, these projections can, in turn, have a significant impact on projected debt as a 

percent of GDP. 

 

3 On the Government’s balance sheet, debt held by the public and accrued interest payable consists of Treasury securities, net of

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

governments, Federal Reserve Banks, foreign governments, and other entities outside the Federal Government. 4 The Black Lung Program is projected through September 30, 2040. 

5 Social Security and Medicare Part A are funded by the payroll taxes and revenue from taxation of benefits and premiums that support 

those programs. Medicare Parts B and D are primarily financed by general revenues. By accounting convention, general revenues are eliminated 

in consolidation at the government-wide level and, as such, are not included in SOSI projections. 6 Final Monthly Treasury Statement (as of September 30, 2011 and 2010).
MANAGEMENT’S DISCUSSION AND ANALYSIS 5

Chief Financial Officers (CFO) Act Agency Audit Opinion

Department of Agriculture (USDA) Unqualified

Department of Commerce (DOC) Unqualified

Department of Defense (DOD) Disclaimer

Department of Education (Education) Unqualified

Department of Energy (DOE) Unqualified

Department of Health and Human Services (HHS)1 Unqualified

Department of Homeland Security (DHS)2 Qualified

Department of Housing and Urban Development (HUD) Unqualified

Department of the Interior (DOI) Unqualified

Department of Labor (DOL) Unqualified

Department of Justice (DOJ) Unqualified

Department of State (State)3 Qualified

Department of Transportation (DOT) Unqualified

Department of the Treasury (Treasury) Unqualified

Department of Veterans Affairs (VA) Unqualified

Agency for International Development (USAID) Unqualified

Environmental Protection Agency (EPA) Unqualified

General Services Administration (GSA) Unqualified

National Aeronautics and Space Administration (NASA) Unqualified

National Science Foundation (NSF) Unqualified

Nuclear Regulatory Commission (NRC) Unqualified

Office of Personnel Management (OPM) Unqualified

Small Business Administration (SBA) Unqualified

Social Security Administration (SSA) Unqualified

Other Significant Reporting Entities Audit Opinion

Export-Import Bank of the United States Unqualified

Farm Credit System Insurance Corportation (FCSIC)4 Unqualified

Federal Communications Commission (FCC) Unqualified

Federal Deposit Insurance Corporation (FDIC)4 Unqualified

National Credit Union Administration (NCUA)4 Unqualified

Pension Benefit Guaranty Corporation (PBGC) Unqualified

Railroad Retirement Board (RRB) Unqualified

Securities and Exchange Commission (SEC) Unqualified

Smithsonian Institution5 Unqualified

Tennessee Valley Authority (TVA) Unqualified

U.S. Postal Service (USPS) Unqualified

2 Balance Sheet and Custodial Statement Audit Only.

4 Entities operate under calendar year (CY)-end. Opinions reflect CY 2010 audit results.

5 Opinion on the most recent annual report, covering FY 2010.

3 Received unqualified opinion on Statement of Budgetary Resources and Consolidated 

Statement of Net Cost, and a qualfied opinion on the Consolidated Balance Sheet and 

Statement of Changes in Net Position.

Table 2: FY 2011 Financial Statement Audit Results by Agency

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

in Social Insurance Amounts.

Fiscal Year 2011 Financial 

Statement Audit Results 

For FY 2011, the Government 

Accountability Office (GAO) issued a fifteenth 

consecutive disclaimer of audit opinion on the 

accrual-based government-wide financial 

statements. In addition, GAO issued disclaimers 

of opinion on the 2011 and 2010 audits of the 

Statements of Social Insurance (SOSI), 

following unqualified SOSI opinions on the 

2009, 2008, and 2007 SOSI, and a disclaimer of 

opinion on the 2011 Statement of Changes in 

Social Insurance Amounts (SCSIA). The 2011 

and 2010 SOSI and 2011 SCSIA disclaimers 

stem from significant uncertainties (discussed in 

note 26), primarily related to the achievement of 

projected reductions in Medicare cost growth 

reflected in the 2011 and 2010 SOSI. 

Twenty-one of the 24 agencies required to 

issue audited financial statements under the 

Chief Financial Officers (CFO) Act received 

unqualified audit opinions, as did 11 of 11 

additional significant reporting agencies, (see 

Table 2 and Appendix A for a list of these 

agencies)7

. 

The Government-wide 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. 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, 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 

guarantee assets from a wide range of financial institutions. Following U.S. Generally Accepted Accounting 

Principles (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. Even though some of the equity investments are 

 

7 The Department of Health and Human Services received a disclaimer of opinions on its 2011 SOSI and SCSIA. 
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MANAGEMENT’S DISCUSSION AND ANALYSIS 7

Dollars in Billions 2011 2010 Increase / 

(Decrease)

Net Operating Cost $ (1,312.6) $ (2,080.3) $ (767.7)

Change in: 

Federal Employee and Veterans Benefits Payable $ 71.9 $ 503.1 $ (431.2)

Liabilities for Government Sponsored Enterprises $ (43.7) $ 268.0 $ (311.7)

Other, Net $ (14.2) $ 15.1 $ (29.3)

Subtotal - Net Difference: $ 14.0 $ 786.2 $ (772.2)

Budget Deficit $ (1,298.6) $ (1,294.1) $ 4.5 

Table 3: Budget Deficit vs. Net Operating Cost

Budget Deficit vs. Net Operating Cost 

As the economy continues along a path of gradual recovery, the Government’s primarily cash-based10 budget 

deficit remained relatively flat at about $1.3 trillion, compared to FY 2010, following significant increases during 

FY 2008 and especially FY 2009 due to the impacts of the financial crisis, the recession, and the policy actions 

responding to both. These increases were attributable in part to Government programs that act as “automatic 

stabilizers,” which help to support the economy during a downturn by increasing spending and reducing tax 

collections. This support is “automatic” because increased spending on programs like unemployment benefits, 

Social Security, and Medicaid, and a reduction in tax receipts happen even without any legislative changes in 

policies. These “automatic stabilizers,” in addition to recent economic recovery efforts, caused the deficit to 

increase in recent years. However, the deficit decreased during FY 2010 and remained largely unchanged in 2011. 

The Government’s largely accrual-based net operating cost (which decreased from a record high of nearly $2.1 

trillion in FY 2010 to $1.3 trillion in FY 2011) typically exceeds the deficit due largely to the inclusion of cost 

accruals or changes in future estimated liabilities for the Government’s postemployment benefit programs for its 

military and civilian employees, as well as its veterans. The longer-term actuarial 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. Agencies and their actuaries estimate the liability for these 

benefits over the long-term, but funds have yet to actually be spent. Similarly, changes in estimated long-term 

liabilities associated with economic recovery programs supporting Fannie Mae and Freddie Mac also result in costs 

that are reflected in the Government’s financial statements, but not in the Budget. 

Table 3 shows that, for FY 2011, the $14 billion net difference between the Government’s budget deficit and 

net operating cost is minimal, especially when compared to FY 2010 net difference of $786.2 billion. As indicated 

in Table 3, this is largely due to agencies recording large increases in liabilities for employee and veterans benefits, 

and support for Government-Sponsored Enterprises (GSEs) – Fannie Mae and Freddie Mac in FY 2010 ($503.1 

billion and $268 billion, respectively) and significantly smaller changes for these same amounts in FY 2011 ($71.9 

billion increase and $43.7 billion decrease, respectively). As discussed in greater detail later, the smaller estimates 

of the increase in future employee and veterans benefits relative to FY 2010 stems from changes in experience and 

economic and demographic assumptions, as well as the implementation of a new Federal accounting standard during 

FY 2010 that provided for greater consistency in these estimates. GSE estimated liabilities decreased due to 

payments to the GSEs and lower loss projections. As discussed later and as indicated in the “change” column of 

Table 3, the difference in the changes of these estimates resulted in significant actuarial and total cost reductions for 

the Federal Government during FY 2011. 

 

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

made. For Federal credit programs, outlays are recorded when loans are disbursed, in an amount representing the present value cost to the 

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

nonbudgetary financing accounts.
8 MANAGEMENT’S DISCUSSION AND ANALYSIS 

$ %

Gross Cost (3,998.3) $ (4,472.3) $ (474.0) $ (10.6% )

Less: Earned Revenue 365.6 $ 309.2 $ 56.4 $ 18.2%

Subtotal (3,632.7) $ (4,163.1) $ (530.4) $ (12.7% )

Gain/(Loss) from Changes in Assumptions (28.1) $ (132.9) $ (104.8) $ 78.9%

Net Cost (3,660.8) $ (4,296.0) $ (635.2) $ (14.8% )

Less: Taxes and Other Revenue 2,363.8 $ 2,216.5 $ 147.3 $ 6.6%

Unmatched Transactions and Balances (15.6) $ (0.8) $ 14.8 $ 1850.0%

Net Operating Cost (1,312.6) $ (2,080.3) $ (767.7) $ (36.9% )

Increase / (Decrease)

Table 4: Gross Cost, Revenues, and Net Cost 

Dollars in Billions 2011 2010

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. 

Revenues and Costs: "What Came In & What Went Out" 

The Government’s Statement 

of Operations and Change 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). The Government 

nets its costs against both: (1) earned 

revenues from Government 

programs (e.g., Medicare premiums, 

National Park entry fees, and postal 

service fees) to derive net cost; and 

(2) taxes and other revenue to arrive 

at the Government’s “bottom line” 

net operating cost. 

Chart A and Table 4 show that 

the Government has incurred a total 

net operating cost (i.e., costs have 

exceeded its revenues) over the past 

several years, causing net position to decline. In summary, Table 4 shows that during FY 2011, the Government’s 

“bottom line” net operating cost of $1,312.6 billion decreased by 37 percent or $768 billion, compared to 2010’s net 

operating cost of $2,080.3 billion. As summarized in Table 4 and as will be discussed below, the net decrease in net 

operating cost in FY 2011 was caused by both a slight revenue increase and a significant net cost decrease. 

The Reconciliation of Net Operating Cost and Unified Budget Deficit Statement 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. As summarized in Table 3 on the previous page, most of this difference is 

attributable to cost related to changes in the estimated present value of the Federal Government's net liabilities for 

Federal Employee and Veterans’ Benefits. The impact of these accrual costs on the Government’s total net costs is 

shown in Chart E. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 9

Revenue: “What Came In” 

The Statement of Net Cost

reports “earned” revenue generated 

by Federal programs, including 

Medicare premiums paid by program 

participants and postal service fees. 

The Statement of Operations and 

Changes in Net Position shows the 

Government’s taxes and other 

revenues (i.e., revenues other than 

“earned”). As shown in Chart B, a 

slight increase in personal income tax 

and other revenues, partially offset by 

a slight decrease in corporate tax 

revenues combined to increase total 

Government revenues by $147 billion 

(6.6 percent) to about $2.4 trillion for 

FY 2011. Together, personal and 

corporate income taxes accounted for 

86 percent of total revenues in FY 2011. The remaining 14 percent consists of various other taxes and receipts, 

including excise taxes, unemployment taxes, and customs duties. 

Cost: “What Went Out” 

The Statement of Net Cost also 

shows how much it costs to operate 

the Federal Government, recognizing 

expenses when they happen, 

regardless of when payment is made 

(accrual basis). It shows the 

derivation of the Government’s net 

cost or the net of: (1) 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 assumptions impacting 

longer-term estimated costs. This 

amount, in turn, is offset against the 

Government’s taxes and other 

revenue in the Statement of 

Operations and Changes in Net Position to calculate the “bottom line” or net operating cost. Chart C shows the 

composition of the Government’s net cost (gross cost less earned revenue and gain/loss from changes in 

assumptions) of $3,660.8 billion in FY 2011, which decreased about 15 percent or $635.2 billion compared to FY 

2010. In FY 2011, about two-thirds of total net cost came from the Department of Defense (DOD), the Social 

Security Administration (SSA), and the Department of Health and Human Services (HHS), which have consistently 

incurred the largest agency shares of the Government’s total net cost in recent years, as shown in Charts C and D. 

The bulk of HHS and SSA costs (which totaled $877.1 billion and $782.5 billion in FY 2011, respectively) are 

attributable to major social insurance programs administered by these agencies, e.g., Medicare and Social Security. 

The Statement of Social Insurance (SOSI) and the related information in this 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 net costs of $718.7 billion relate primarily to operational 

activities and the longer-term costs of military retirement and health benefits. Charts C and D show that the 

Department of Veterans Affairs (VA) as well as interest on debt held by the public were also significant contributors 

to the Government’s net cost during FY 2011. The combined other agencies included in the Government’s 

Statement of Net Cost accounted for 23 percent of the Government’s total net cost. 
10 MANAGEMENT’S DISCUSSION AND ANALYSIS 

In recent years, the changes in the 

Government’s net cost have been significantly 

impacted by changes in the current costs of and 

especially the actuarial and other estimated 

costs associated with the Government’s 

postemployment benefits programs for its 

military and civilian employees reported 

primarily by the Office of Personnel 

Management (OPM), DOD, and VA:

• OPM recorded a total agency cost decrease 

of $126 billion due primarily to actual cost 

of living adjustment (COLA) and salary 

increases being lower than expected and 

actuarial estimate changes. 11

• DOD cost decreased $131 billion due to 

changes in the discount rate and 

demographic assumptions used to calculate 

military retiree health benefits.12

• VA recorded a cost decrease of $152.7 

billion in FY 2011, compared to a 

significant increase in FY 2010 due to the 

recognition of the initial cost for three new 

presumptive disability benefits in FY 2010 

(subsequent adjustments each year are 

comparatively smaller) and the 

implementation of revised projection and 

calculation methods under a new Federal 

accounting standard.13 

In the aggregate, the combined decrease of 

$431.2 billion from Table 3 in actuarial and other 

estimated costs associated with the change in 

estimated liabilities for the Government’s three 

largest postemployment benefits programs, including veterans’ benefits, accounted for more than two-thirds of the 

$635.2 billion total net decrease in the Government’s total net cost for FY 2011 (see Chart E). 

 By comparison and to illustrate the volatility of the changes in these costs, during FY 2010, increases in 

actuarial costs of more than $538 billion accounted for 65 percent of the total $826.6 billion increase in the 

Government’s 2010 net cost. 

These agencies employ a complex series of assumptions, including but not limited to interest rates, beneficiary 

eligibility, life expectancy, medical cost levels, compensation levels, and cost of living to make annual actuarial 

projections of their long-term benefits liabilities and the related costs. Annual changes in these assumptions can 

cause those projections, and consequently total costs, to fluctuate, sometimes significantly, from year to year. Table 

4 shows that the losses associated with these changes in assumptions totaled only $28.1 billion in FY 2011, but 

reflected a decrease of $105 billion compared to losses incurred in FY 2010. DOD, VA, and OPM each attributed 

significant decreases in their respective agency total net costs largely to changes in these assumptions. 

In addition, a decline in net costs at the Department of the Treasury of $288 billion (77 percent) during FY 

2011 was another significant contributor to the decline in the Government’s total net costs. Last year, Treasury 

recorded a $268 billion increase in net cost related to the expense associated with recording a contingent liability for 

 

11 OPM FY 2011 Agency Financial Report (AFR), p. 16. Cost reduction reflects amounts reported in OPM’s annual AFR. Agency costs 

reported in their AFRs are adjusted at the government-wide level in this Report for consolidation and allocation of inter-agency costs. 12 DOD FY 2011 AFR, p. 29. Cost reduction reflects amounts reported in DOD’s annual AFR. Agency costs reported in their AFRs are 

adjusted at the government-wide level in this Report for consolidation and allocation of inter-agency costs. 13 VA FY 2011 Performance and Accountability Report (PAR) p. I-95. Cost reduction reflects amounts reported in VA’s PAR. Agency 

costs reported in their PARs are adjusted at the government-wide level for consolidation and allocation of inter-agency costs.
MANAGEMENT’S DISCUSSION AND ANALYSIS 11

$ %

Assets

$ 428.6 177.0 $ (251.6) $ (58.7%)

$ 286.2 296.1 $ 9.9 $ 3.5%

Property, Plant & Equipment, Net 852.8 $ $ 828.9 $ 2.9% 23.9

Other 396.2 $ 397.6 $ (1.4) $ (0.4%)

Total Assets 2,707.3 $ 2,883.8 $ (176.5) $ (6.1% )

Less: Liabilities, comprised of:

$ (9,060.0) (10,174.1) $ 1,114.1 $ 12.3%

Other (1,526.4) $ (1,576.3) $ (49.9) $ (3.2%)

Total Liabilities (17,492.7) $ (16,356.6) $ 1,136.1 $ 6.9%

$ 942.5

1.3%

*Includes Net Loans Receivable and Mortgage-Backed Securities, Troubled Asset Relief Program 

(TARP) Investments, and Investments in Government-Sponsored Enterprises (GSEs). 

$ (5,792.2)

Net Position 

(Assets Minus Liabilities) $ (14,785.4)

$ 71.9

$ 42.7

$ (9.7% ) (1,312.6)

Table 5: Assets and Liabilities

2011

$ (13,472.8)

Loans Receivable and 

Investments, Net*

Cash & Other Monetary Assets

$ 985.2

Net Position Increase (Decrease)

Dollars in Billions 

Inventories

Federal Employee & Veterans 

Benefits

4.5%

2010

$ (5,720.3)

Federal Debt Held by the Public 

& Accrued Interest

projected total costs payable to the Government Sponsored Enterprises (GSEs) under the Senior Preferred Stock 

Purchase Agreement (SPSPA) program. Payments to and revised loss projections for the GSEs resulted in a $43.7 

billion reduction of the estimated liability for FY 2011, which, when compared to the $268 billion liability increase 

(cost) in 2010, yields a combined decrease of $311.7 billion (see Table 3). 

As noted earlier, taxes and other revenues of $2,363.8 billion are deducted from the Government’s total net 

cost of $3,660.8 billion (including actuarial costs) to derive a “bottom line” net operating cost14. As previously 

shown in Table 4, a slight increase in taxes and other revenues, combined with the nearly 15 percent decrease in net 

costs, resulted in a “bottom line” net operating cost of about $1.3 trillion ($1,312.6 billion) for FY 2011, a decrease 

of 37 percent or $767.7 billion, compared to the FY 2010 net operating cost of about $2.1 trillion ($2,080.3 billion). 

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

The Federal 

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 earmarked for 

specific funds and programs. 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 

supplemental disclosures of this Report. 

Assets – “What We Own”

As of September 30, 2011, the Government held about $2.7 trillion in assets, comprised mostly of net property, 

plant, and equipment ($852.8 billion in FY 2011) and a combined total of $985.2 billion in net loans receivable and 

mortgage-backed securities, and investments, including amounts associated with the Troubled Asset Relief Program 

(TARP) and the GSEs as discussed later. During FY 2011, the Government’s total assets decreased by $176.5 

billion, due in large part to the elimination of cash deposits with the Federal Reserve held under the Supplementary 

Financing Program (SFP). Under the SFP, the Treasury issued special bills, which provided cash that the Federal 

Reserve used to manage its authorized lending and liquidity initiatives. As of September 30, 2011, there were no 

outstanding cash management bills earmarked for SFP as compared to $200 billion as of September 30, 2010. In 

addition to assets recorded on the balance sheet, the Government discloses that it also owns certain other 

 

14 As shown in Table 4, net operating cost includes a slight adjustment for unmatched transactions and balances. These amounts are 

described in greater detail in the Required Supplementary Information section of this Report. 
12 MANAGEMENT’S DISCUSSION AND ANALYSIS 

stewardship assets such as land (e.g., national parks and forests) and heritage assets (e.g., national memorials and 

historic structures). 

Liabilities – “What We Owe” 

As indicated in Table 5 and Chart F, the Government’s largest liability is Federal debt held by the public and 

accrued interest, the balance of which increased to $10.2 trillion as of September 30, 2011. 

The other major component of the 

Government’s liabilities is Federal 

employee postemployment and veterans 

benefits payable (i.e., the Government’s 

pension and other benefit plans for its 

military and civilian employees), which 

increased only $71.9 billion or just over 1 

percent during FY 2011, from $5,720.3 

billion to $5,792.2 billion. OPM 

administers the largest civilian pension 

plan, covering nearly 2.8 million current 

employees15 and 2.5 million annuitants.16 

The military pension plan covers more 

than three million current military 

personnel (including active service, 

reserve, and National Guard) and 

approximately 2.2 million retirees and 

annuitants.17 

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 Statements 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 debt held by the public, and accrued interest, as reported on the 

Government’s balance sheet, 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. 

Debt held by the public and accrued interest is a balance sheet liability and totaled approximately $10.2 trillion at 

the end of FY 2011 – an increase of about $1.1 trillion. 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 matures and new debt is issued to take its place. In FY 2011, new borrowings were $8.0 trillion and 

repayments of maturing debt held by the public were $6.9 trillion. Both represented slight decreases over new 

borrowings and debt repayments as compared to FY 2010. 

In addition to debt held by the public, the Government has about $4.7 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 ($2.7 trillion) and Medicare ($316.3 

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) 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 government-wide financial statements (see Note 14 of the Report). When 

 

15 As of 9/30/2010 OPM Office of Actuaries

16 OPM FY 2011 Annual Financial Report, p. 12. 17 DOD FY 2011 Agency Financial Report, p.12; DOD Military Retirement Fund (MRF) financial statements, p. 14.
MANAGEMENT’S DISCUSSION AND ANALYSIS 13

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 2011, debt subject to the statutory limit was $14.747 trillion, nearly $450 billion under the current limit of 

$15.194 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. Since 1960, Congress has passed 79 separate acts to 

raise the debt limit, extend the duration of a temporary increase, or revise the definition. The debt limit has been 

raised multiple times in recent years – most recently by $400 billion in August 2011 to $14.694 trillion and by $500 

billion in September 2011 to $15.194 trillion, pursuant to the Budget Control Act (BCA) of 2011. The BCA 

provides for one additional increase to the debt limit, which will occur fifteen days after the President certifies that 

the outstanding debt subject to limit is within $100 billion of the debt limit, unless Congress enacts a joint resolution 

of disapproval. The amount of the next increase will be $1.2 trillion, unless a balanced budget amendment to the 

Constitution has been submitted to the states for ratification, in which case the amount of the increase will be $1.5 

trillion. 

The Federal debt 

held by the public 

measured as a percent 

of GDP compares the 

country’s debt to the 

size of its economy, 

making this measure 

sensitive to changes in 

both. Over time, the 

ratio of Federal debtto-GDP 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 G, 

wartime spending and borrowing had pushed the debt to GDP ratio to an all-time high of 109 percent in 1946, but it 

decreased rapidly in the post-war years, falling to 80 percent by 1950, 46 percent in 1960, and the postwar low point 

of 24 percent in 1974. Since then, the ratio has increased, growing rapidly from the mid-1970s 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 49 percent in 1993-1994, to 33 percent in 2001. 

During the last decade, much of this progress was undone as PAYGO rules were allowed to lapse, significant tax 

cuts were implemented, entitlements were expanded, and spending related to defense and homeland security 

increased. By September 2008, the debt-to-GDP ratio was 40 percent of GDP. The extraordinary demands of the 

recent economic and fiscal crisis and the consequent actions taken by the Federal Government, combined with 

slower economic growth in the wake of the crisis, have pushed the debt/GDP ratio up to almost 68 percent in 2011. 

The preceding section has focused on the Federal Government’s financial results for FY 2011. The following 

sections discuss the Government’s economic recovery efforts and provide a perspective on the issue of fiscal 

sustainability. 
14 MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2011 FY 2010

Real GDP Growth 1.5% 3.5%

Residential Investment Growth 1.4% -7.8%

Average monthly payroll job change (thousands) 158 29

Unemployment rate (percent, end of period) 9.1% 9.6%

Consumer Price Index (CPI) 3.9% 1.1%

CPI, excluding food and energy 2.0% 0.8%

Treasury constant maturity 10-year rate (end of period) 1.9% 2.5%

Moody's Baa bond rate (end of period) 5.2% 5.6%

Table 6: National Economic Indicators*

* Some FY2010 data may differ from the FY2010 Report due to update and revision.

Economic Recovery Efforts 

This section provides an overview of the economy at the end of FY 2011 and discusses the many important 

recovery efforts that have been initiated by the Department of the Treasury and across the Government. 

The Economy in Fiscal Year 2011 

 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 

grow, albeit at a slower rate during 

FY 2011. Job growth accelerated, 

with private non-farm payrolls 

rising by almost 1.9 million after a 

gain of nearly 350,000 the previous 

fiscal year. The unemployment rate 

declined during FY 2011 but 

remained relatively high. 

After rising by 3.5 percent during FY 2010, real GDP grew at an annual average rate of 1.5 percent over the 

four quarters of FY 2011. Quarterly performance was mixed, with real GDP rising 2.3 percent during the first 

quarter of FY 2011, 0.8 percent on average in the second and third quarters, and 2.0 percent in the fourth quarter of 

the fiscal year. The economy added 1.6 million total nonfarm payroll jobs during FY 2011, a substantial 

improvement on the 118,000 nonfarm payroll jobs added during FY 2010. In the private sector, nonfarm payrolls 

rose by about 1.9 million, after increasing by nearly 350,000 during the previous fiscal year. Nonetheless, the 

unemployment rate remained elevated in the aftermath of the financial crisis during FY 2011, declining from 9.6 

percent in September 2010 to 9.1 percent in September 2011. Inflation increased for the second straight year, 

mainly reflecting increases in energy and food prices, but still remained contained. Underlying inflation (the core 

rate, excluding food and energy) also increased but was still low by historical standards. Real wages declined, 

reflecting the combination of slower nominal wage growth and rising consumer prices. The level of corporate profits 

increased in FY 2011, but at a slower pace than in the previous fiscal year. Growth of Federal spending and receipts 

accelerated in FY 2011. As a result, the Federal unified budget deficit was little-changed at $1.3 trillion but 

narrowed as a share of GDP to 8.7 percent of GDP from 9.0 percent in FY 2010. 

The following key points summarize economic performance in FY 2011: 

• Consumer spending rose 2.2 percent for a second straight fiscal year during FY 2011. Nonetheless, 

quarterly performance ranged from a solid 3.6 percent annualized increase in the first quarter of FY 2011 to 

a more tepid 0.7 percent annualized increase in the third quarter. 

• Residential fixed investment started to recover in the latest fiscal year, growing by 1.4 percent over the four 

quarters of FY 2011, with growth recorded in all but one quarter. Nonresidential fixed investment grew 8.9 

percent, after rising by 7.7 percent during the previous fiscal year. 

• Labor market conditions improved noticeably during FY 2011, despite a moderation in the pace of job 

growth towards the end of the fiscal year. Over the entire fiscal year, private nonfarm payroll employment 

advanced at an average rate of 158,000 jobs per month, compared with an average monthly increase of 

29,000 in FY 2010. During FY 2011, the number of unemployed persons fell from 14.7 million to 14.0 

million. The unemployment rate stood at 9.1 percent in September 2011, down from 9.6 percent at the end 

of FY 2010, or 0.5 percentage point lower. At the end of FY 2011, the unemployment rate was a full 

percentage point lower than the recent peak of 10.1 percent, reached in October 2009. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 15

• The overall price level, as measured by the consumer price index (CPI), rose 3.9 percent during FY 2011, 

boosted by rising energy and food prices. In FY 2010, the CPI had increased by 1.1 percent. Core inflation 

(which excludes food and energy) was 2.0 percent in FY 2011, compared with 0.8 percent the previous 

fiscal year. 

• Financial markets conditions and measures of financial risk generally remained stable in FY 2011: 

o Corporate debt yields on bonds of moderate risk stood at about 305 basis points above the rate on 

10-year Treasury securities at the end of FY 2010. After narrowing through much of the 

following fiscal year, the spread widened somewhat during the final quarter of FY 2011 and ended 

the fiscal year at 330 basis points. 

o The difference between the 3-month London Interbank Offered Rate (LIBOR) and the 3-month 

Treasury rate stood at 13 basis points at the end of FY 2010. This spread widened over the course 

of the latest fiscal year, ending FY 2011at 43 basis points. 

Review of the Government’s Stabilization Efforts 

 Three years ago, the U.S. 

financial system was on the 

verge of collapse and many 

major financial institutions were 

at risk of failure. Markets had 

ceased to function. Without 

immediate and forceful 

government action, our country 

faced the possibility of a second 

Great Depression. The 

Department of the Treasury, the 

Federal Reserve, the Federal 

Deposit Insurance Corporation 

(FDIC), and other U.S. 

Government bodies undertook 

an array of unprecedented steps 

at that time to avert a potential 

collapse and continue to 

administer a number of programs 

to help pave the way for 

sustained economic recovery. 

Three years later, substantial 

progress continues to be made in stabilizing the financial system as the Government continues to wind down the 

extraordinary assistance that was provided during the crisis. Chart H summarizes the outstanding balances of 

investments and direct loans related to key economic recovery programs.

HERA

 The Housing and Economic Recovery Act of 2008 (HERA) established a new regulatory agency, the Federal 

Housing Finance Agency (FHFA), to regulate the housing Government-Sponsored Enterprises (GSEs),18 Fannie 

Mae, Freddie Mac, and the Federal Home Loan Banks. FHFA placed Fannie Mae and Freddie Mac under 

conservatorship in September 2008 in order to preserve GSE assets and restore those GSEs to a sound and solvent 

financial condition. Pursuant to HERA, the Treasury Department undertook certain efforts to help ensure the 

solvency and liquidity of the GSEs, including: 

• entering into senior preferred stock purchase arrangements (SPSPAs) with Fannie Mae and Freddie Mac; 

• establishing a GSE mortgage-backed securities (MBS) purchase program (expired on December 31, 2009). 

 

18 The housing GSEs (Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System) are chartered by the Federal Government and 

pursue a federally mandated mission to support housing finance. Some GSEs are distinctly established as corporate entities - owned by 

shareholders. The obligations of the housing GSEs are not guaranteed by the Federal Government, however, Treasury's actions under HERA 

provided significant financial support to Fannie Mae and Freddie Mac.
16 MANAGEMENT’S DISCUSSION AND ANALYSIS 

The SPSPAs are intended to maintain the solvency of the GSEs so they can continue to fulfill their vital roles in the 

mortgage market while the Administration and Congress determine what structural changes should be made. These 

agreements provide that the Government will make funding advances to the GSEs if, at the end of any quarter, the 

FHFA, acting as the conservator, determines that the liabilities of either GSE exceeds its respective assets. GSE 

funding is subject to a formulaic cap that adjusts upwards quarterly by the cumulative amount of any losses realized 

by either GSE and downward by the cumulative amount of any gains, but not below $200 billion per GSE, and will 

become fixed on December 31, 2012. At that time, the remaining commitment will then be fixed and available to be 

drawn per the terms of the agreements. As of September 30, 2011, Treasury had made total actual cumulative 

combined payments to Fannie Mae and Freddie Mac of $169.0 billion, reflected on the Government’s balance sheet 

at fair value of $133.0 billion (see Chart H). In addition, a combined $316.2 billion has been accrued as a contingent 

liability for future SPSPA investments in the GSEs, a $44 billion decrease from FY 2010, following a $268 billion 

increase between 2009 and 2010. The significant increase in this liability in FY 2010 was due primarily to the 

increased availability of GSE projection data, coupled with the effect of the 2009 amendment to the liquidity cap for 

each GSE. The decrease in FY 2011 was attributable to payments to the GSEs and updated projections reflecting 

lower expected future losses at the GSEs. 

The GSE Mortgage-Backed Securities (MBS) Purchase Program was created to broaden access to mortgage 

funding for current and prospective homeowners and to promote stability in the mortgage market. Between October 

2008 and December 31, 2009, Treasury purchased $225 billion in agency MBS. In March 2011, Treasury 

announced its plans to sell up to $10 billion of its MBS portfolio per month, subject to market conditions. As a 

result of these sales and prepayments, the outstanding MBS portfolio decreased by more than half from $172.2 

billion at the end of FY 2010 to $72.4 billion at the end of FY 2011 (see Chart H) and by more than two-thirds when 

compared to Treasury’s initial purchases. Treasury’s efforts combined with purchases by the Federal Reserve, has 

helped bring down mortgage rates to historically low levels and provide liquidity and stability to housing markets. 

EESA, TARP, and the Office of Financial Stability 

The Emergency Economic Stabilization Act of 2008 (EESA) provided authority and facilities that the 

Secretary of the Treasury could use to restore liquidity and stability to the financial system of the United States and 

ensured that such authority and facilities have been used in a manner that protected home values, college funds, 

retirement accounts, and life savings; preserved home ownership; promoted jobs and economic growth; maximized 

overall returns to the taxpayers of the United States; and provided public accountability for the exercise of such 

authority. The EESA authorized the establishment of the Office of Financial Stability (OFS) within the Treasury 

Department to implement the Troubled Asset Relief Program (TARP). TARP, in conjunction with other Federal 

Government actions, helped to prevent a collapse of the financial system and unfreeze capital and credit markets, 

bringing down the cost of borrowing for businesses, individuals, and state and local governments, restoring 

confidence in the financial system, and restarting economic growth. TARP did so faster and at a much lower cost 

than many anticipated. 

The EESA originally provided authority for the TARP to purchase or guarantee up to $700 billion in troubled 

assets. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 reduced the cumulative TARP 

authority to $475 billion. On October 3, 2010, OFS’ authority to make new commitments under TARP expired. 

During FY 2011, OFS focused principally on exiting remaining investments in a timely and orderly manner, 

maximizing return for taxpayers, and continuing to help homeowners avoid preventable foreclosures: 

• The TARP programs launched to help stabilize the nation’s banking institutions are now producing a profit 

to taxpayers. A total of $245 billion was invested in banking institutions pursuant to several TARP 

initiatives, compared to approximately $258 billion that OFS has recovered through repayments, dividends, 

interest, and other income since TARP’s inception through September 30, 2011. 

• OFS reduced its stake in General Motors Company by 50 percent through General Motors’ highly 

successful Initial Public Offering and fully exited its investment in Chrysler Group, as Chrysler Group 

repaid its loans six years earlier than the loans’ maturity dates. 

• OFS, working with other Federal Government entities, closed a major restructuring plan for American 

International Group (AIG), marking a major milestone in the company’s turnaround and putting OFS in a 

better position to recover their investment in AIG. In May 2011, Treasury completed the sale of 132 

million shares of AIG common stock held by OFS and 68 million shares held by the General Fund. As of 

September 30, 2011, OFS held 960 million shares and the General Fund held an additional 495 million 
MANAGEMENT’S DISCUSSION AND ANALYSIS 17

shares of AIG common stock, resulting in a combined percentage ownership of AIG’s outstanding shares 

of approximately 77 percent. 

As a result of improved financial conditions of TARP participants, earlier than expected asset repurchases, 

lower utilization of the program, and careful stewardship, the estimated cost of TARP over its lifetime continues to 

decline on a budget basis, from $341 billion in August 2009 (assuming the full $700 billion of TARP authority was 

utilized), to $117 billion in February 2010 (assuming $546 billion of the $700 billion TARP authority was utilized). 

The most recent estimates as of September 30, 2011, reflect a lifetime cost of $70.2 billion on $470 billion of TARP 

authority that was obligated. These budget-basis estimates, which assume that all planned expenditures are made, 

differ from the cost reported in the financial statements, which are based on transactions through September 30, 

2011, and thus, do not include committed but undisbursed funds for housing programs as well as other programs all 

of which are included in the expected lifetime cost for budget purposes. TARP’s costs from inception (October 3, 

2008), through September 30, 2011, as reported in the OFS financial statements, were $28.0 billion. 

Since its inception through September 30, 2011, OFS has disbursed $413.4 billion in direct loans and 

investments and for the Treasury Housing programs under TARP, collected $276.9 billion from repayments and 

sales, and reported nearly $40 billion from cash received through interest and dividends, as well as from proceeds 

from the sale and repurchase of assets in excess of cost. As of September 30, 2011, TARP had $122.4 billion in 

gross outstanding direct loans and equity investments, valued at $80.1 billion (see Chart H). 

It should be noted that TARP cost estimates are based on current market prices, where available. The ultimate 

cost of the outstanding TARP investments is, therefore, subject to significant uncertainty and will depend on, among 

other things, how the economy, financial markets, and particular companies perform. Additional information 

concerning the TARP program and other related initiatives can be found at www.financialstability.gov. 

The Recovery Act 

Improvement in the economic and financial outlook since the spring of 2009 reflects a broad and aggressive 

policy response that has included the initiatives and programs under HERA and TARP as discussed above, other 

financial stability policies implemented by the FDIC and the Board of Governors of the Federal Reserve, 

accommodative monetary policy, and the American Recovery and Reinvestment Act of 2009 (ARRA or the 

Recovery Act). The purpose of the original $787 billion ARRA package was to jump-start the economy and to 

create and save jobs, with one-third of ARRA dedicated to tax provisions to help businesses and working families, 

another third for emergency relief for those who have borne the brunt of the recession, and the final third devoted to 

investments to create jobs, spur economic activity, and lay the foundation for future sustained growth. Cumulative 

ARRA amounts paid out by Federal agencies as of September 30, 2011 totaled $421.4 billion, as compared to 

$307.9 billion as of September 30, 2010.19 It is important to note that amounts spent by the Federal, State, and 

Local government agencies, as well as by the private sector are constantly changing. Readers may find the most upto-date information on where and how these funds are being used at www.recovery.gov. 

 

 

19 Agency Financial & Activity Reports as of September 30, 2011 and 2010. For more information, see the Recovery Act website at 

www.Recovery.gov.
18 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” generation and increasing longevity 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 and policymakers assess whether current fiscal 

policy is sustainable and, if it is not, to highlight the urgency and magnitude of policy reforms necessary to make it 

sustainable. A sustainable policy is one where the ratio of debt held by the public (publicly-held debt) to Gross 

Domestic Product (the debt–to-GDP ratio) is stable in the long run. Sustainability concerns only whether long-run 

revenues and expenditures are in balance; it does not concern fairness or efficiency implications of the reforms 

necessary to achieve sustainability. 

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

will be sustained indefinitely and draw out the implications for the growth of debt held by the public as a share of 

GDP.20 The projections are therefore neither forecasts nor predictions. If policy changes are enacted, then actual 

financial outcomes will of course be different than those projected. 

The projections in this Report indicate that the trajectory of current policy is not sustainable. The debt-to-GDP 

ratio is projected to reach 287 percent in 2086 and to rise continuously thereafter. Closing the gap between spending 

and receipts over the next 75 years (the “75-year fiscal gap”) is estimated to require some combination of spending 

reductions and revenue increases that amount to 1.8 percent of GDP over the period. While the precise size of the 

fiscal gap is highly uncertain, there is little question that current fiscal policies cannot be sustained indefinitely. 

It is important to address the Nation’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 60 percent larger if reforms are 

concentrated into the last 55 years of the 75-year period than if they are spread over the entire 75 years. 

The estimates of the cost of policy delay in this Report assume policy does not affect GDP (or interest rates). 

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

ratio of publicly-held debt to GDP that the Government controls directly. (The other determinants are interest rates 

and growth in GDP). Chart I shows receipts, non-interest spending, and the difference – the primary deficit – 

expressed as a share of GDP. The primary deficit-to-GDP ratio grew rapidly in 2009 and stayed large in 2010 and 

2011 due to the financial crisis and the recession and the policies pursued to combat both. The primary deficit-toGDP ratio is projected to fall rapidly between 2012 and 2019 (turning to surplus in 2015) as spending reductions 

called for in the Budget Control Act (BCA) of 2011 take effect and the economy recovers. Between 2019 and 2035, 

however, increased spending for Social Security and health programs due to continued aging of the population is 

expected to cause the primary balance to steadily deteriorate. A primary deficit is expected to reappear in 2025 that 

reaches 1.3 percent of GDP in 2035. After 2035, the projected primary deficit-to-GDP ratio slowly declines as the 

impact of the baby boom generation retiring dissipates. Between 2035 and 2086, the projected primary deficit 

averages 0.9 percent of GDP. 

 

20 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 extension of relief from the Alternative Minimum Tax (AMT). 
MANAGEMENT’S DISCUSSION AND ANALYSIS 19

The revenue share of GDP fell substantially in 2009 and 2010 and increased only modestly in 2011 because of 

the recession and tax reductions enacted as part of the ARRA and the Tax Relief, Unemployment Insurance 

Reauthorization, and Job Creation 

Act of 2010, and is projected to 

return to near its long-run average 

as the economy recovers and these 

temporary tax cuts expire. After 

the economy is fully recovered, 

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. 

These projections assume that 

Congress and the President will 

continue to enact legislation to 

prevent the share of income 

subject to the Alternative 

Minimum Tax from rising. 

Non-interest spending share of 

GDP is projected to fall from its 

current level of 22.6 percent to 

about 20 percent in 2013, to stay at or below that level until 2026, and then to rise gradually and plateau at about 22 

percent beginning in about 2040. The reduction in the non-interest spending share of GDP over the next two years 

is mostly due to caps on discretionary spending and further automatic spending reductions enacted in the BCA, and 

the subsequent increase is principally due to growth in Medicare, Medicaid, and Social Security spending. (See 

Chart J.) The retirement 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 1.4 percentage points, 1.3 percentage points, 

and 1.0 percentage points, 

respectively. After 2035, the 

Social Security spending share of 

GDP is relatively steady, 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)21 significantly reduces 

projected Medicare and Medicaid 

cost growth from the levels 

projected in the 2009 Financial 

Report. However, 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. 

 

21 P.L. 111-148 as amended by P.L. 111-152. 
20 MANAGEMENT’S DISCUSSION AND ANALYSIS 

Period of Delay

No Delay: Reform in 2012 1.8 percent of GDP between 2012 and 2086

Ten Years: Reform in 2022 2.2 percent of GDP between 2022 and 2086

Thirty Years: Reform in 2032 2.8 percent of GDP between 2032 and 2086

Table 7: Costs of Delaying Fiscal Consolidation

Note: Reforms taking place in 2011, 2021, and 2031 from the 2010 Report were 2.4, 2.9, and 3.7 

percent of GDP.

Change in Average Primary Surplus

The primary deficit projections in Chart I, along with those for interest rates and GDP, determine the 

projections for the ratio of publicly-held debt to GDP that are shown in Chart K. That ratio was 68 percent at the 

end of fiscal year 2011 and under 

current policy is projected to exceed 

76 percent in 2022, 125 percent in 

2042, and 287 percent in 2086. This 

continuous rise of the debt-to-GDP 

ratio illustrates that current policy is 

unsustainable. 

The change in debt held by the 

public from one year to the next is 

essentially equal to the unified 

budget deficit, the difference 

between total spending (which 

consists of non-interest spending 

plus interest spending) and total 

receipts. Chart L shows that the 

rapid rise in total spending and the 

unified deficit is almost entirely due 

to projected interest payments on the 

debt. Interest spending was 1.5 

percent of GDP in 2011 and under 

current policies is projected to reach 

5 percent in 2031 and nearly 16 

percent in 2086. 

This year’s projections are 

somewhat more favorable than were 

the projections in the 2010 Financial 

Report. Last year’s report projected 

a debt-to-GDP ratio to reach 352 

percent in 2085, which compares 

with 283 percent projected in this 

year’s report. The more favorable 

outlook is mainly due to spending 

reductions called for in the BCA that 

are partly offset by somewhat less 

favorable economic and technical 

assumptions. 

 

The Fiscal Gap and the 

Cost of Delaying Policy 

Reform 

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

primary surpluses over the period that average 1.1 percent of GDP. This compares with an average primary deficit 

of 0.7 percent of GDP under current policy. The difference, the “75-year fiscal gap,” is 1.8 percent of GDP, which 

is about 9 percent of the 75-year 

present value of projected receipts 

and non-interest spending. 

Table 7 illustrates the cost of 

delaying policy to close the fiscal 

gap by comparing three policies 

closing the fiscal gap that begin on 

different dates. The first policy 

begins immediately; it increases the primary surplus by 1.8 percent of GDP in every year between 2012 and 2086. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 21

$ %

Open Group (Net):

 Social Security (OASDI) (9,157) $ (7,947) $ 1,210 $ 15%

Medicare (Parts A, B, & D) (24,572) $ (22,813) $ 1,759 $ 8%

Other (101) $ (97) $ 4 $ 4%

Total Social Insurance Expenditures, Net 

(Closed Group) $ (43,057) (46,273) $ $ 7% 3,217

Open Group 2011 2010

 Social Security (OASDI) -1.0% -0.9%

Medicare (Parts A, B, & D) -2.8% -2.7%

Other 0.0% 0.0%

Total (Open Group) -3.8% -3.7%

Total (Closed Group) -5.3% -5.1%

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

$ (33,830) $ 2,974

Increase / (Decrease)

* GDP values from the 2011 & 2010 Social Security and Medicare Trustees Reports represent the present value of 

GDP over the 75 years. 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.

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 curent and projected program participants during the 75-year projection 

period. 'Closed Group' totals reflect only current participants.

10%

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

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

$ (30,857)

Dollars in Billions

Total Social Insurance Expenditures, Net 

(Open Group)

2011 2010

This is accomplished by invoking some combination of spending reductions and revenue increases that amounts to 

an average of 1.8 percent of GDP in every year. The second policy shown in Table 7 begins in 2022. Because debt 

grows unabated between 2011 and 2021 and the same fiscal consolidation must be compressed into 10 fewer years, 

the primary surplus must increase by 2.2 percent of GDP in every year between 2022 and 2086 in order to close the 

75-year fiscal gap. Similarly, beginning the policy change in 2032 requires that the primary surplus increase by 2.8 

percent of GDP in every year between 2032 and 2086 in order to close the 75-year fiscal gap. The difference 

between the primary surplus boost starting in 2022 and 2032 (2.2 and 2.8 percent of GDP, respectively) and the 

primary surplus boost starting in 2012 (1.8 percent of GDP) is a measure of the additional burden policy delay 

would impose on future generations. Future generations are harmed by policy delay because the higher the primary 

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

spending they benefit from. 

Conclusion 

The United States took potentially significant steps towards fiscal sustainability by enacting the ACA in 2010 

and the BCA in 2011. The ACA holds the prospect of lowering the long-term growth trend for Medicare and 

Medicaid spending, and the BCA significantly curtails discretionary spending. Together, these two laws 

substantially reduce the estimated long-term fiscal gap. But even with the new law, the debt-to-GDP ratio is 

projected to increase continually over the next 75 years and beyond if current policies are kept in place, which 

means current policies are not sustainable. Subject to the important caveat that policy changes are not so abrupt that 

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

revenue increases and/or spending decreases necessary to return the Nation to a sustainable fiscal path. 

While this Report’s projections of expenditures and receipts under current policies are highly uncertain, there 

is little question that current policies cannot be sustained indefinitely. These and other issues concerning fiscal 

sustainability are discussed in further detail in the Supplemental Information section of this Report. 

Statement of Social Insurance – Challenges Continue 

The preceding 

analysis of the 

Government’s longterm fiscal projections 

considered 

Government receipts 

and spending as a 

whole. A more 

focused perspective 

can be achieved 

through analysis of the 

Government’s “social 

insurance” programs: 

Social Security, 

Medicare, Railroad 

Retirement, and Black 

Lung. For these 

programs, the 

Statement of Social 

Insurance (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 supplemental 
22 MANAGEMENT’S DISCUSSION AND ANALYSIS 

Net Present Value (NPV) - Open Group (FY 2010) (30,857)

Change In:

Valuation Period (1,518) $ 

Demographic data and assumptions (859) $ 

Economic data and assumptions (145) $ 

Law or policy (14) $ 

Methodology and programmatic data 56 $ 

Economic and other healthcare assumptions (463) $ 

Change in projection base (31) $ 

Net Change in Open Group measure (2,974) $ 

NPV - Open Group (FY 2011) (33,830)

Dollars in Billions

Table 9: Changes in Social Insurance Projections

information in this 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 financial statements 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. 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 Supplemental Section of this 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 

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, which summarizes amounts reported in the SOSI, shows that net social insurance 

expenditures are projected to be approximately $34 trillion as of January 1, 2011 for the “Open Group,” an increase 

of approximately $3 trillion over net expenditures of $31 trillion projected in the 2010 Report.22 Table 9 

summarizes the principal reasons for the changes in projected social insurance amounts during FY 2011. Most of 

the change from the past year is attributable to the change in valuation period. For a 75-year projection period, the 

change in valuation period measures the effect of replacing the first projection year from the prior year with a new 

75th year in the current reporting year. Another significant variable was changes in demographic (e.g., birth, 

mortality, and immigration) and economic (e.g., taxable earnings, unemployment, and interest rates) assumptions. 

For the Old-Age, Survivors, and Disability Insurance (OASDI) programs administered by the Social Security 

Administration, the largest component for change was the change in demographic assumptions. For the Medicare 

programs (Parts A, B, and D) the most significant components of change were the changes in valuation period and in 

economic assumptions. 

As was reported in the FY 2010 Financial 

Report of the U.S. Government, projected 

Medicare costs declined significantly reflecting 

provisions of the ACA. As reported last year 

and again this year in Note 26, there continues 

to be uncertainty about whether the projected 

reductions in health care cost growth will be 

fully achieved. Note 26 includes an alternative 

projection to illustrate the uncertainty of 

projected Medicare costs. As indicated 

earlier, GAO disclaimed opinions on the 2011 

and 2010 SOSI, because of these significant 

uncertainties. 

The retirement of the “baby boom 

generation” and increases in health care costs are still anticipated to have a prolonged impact on the long-run 

financial condition of Medicare and Social Security, which is analyzed annually in the Medicare and Social Security 

Trustees’ Reports. According to the Medicare Trustees’ Report, under current law, including the assumption of the 

full implementation of ACA program changes, spending on Medicare is projected to rise from 3.7 percent of GDP in 

2011 to 5.6 percent in 2035 and 6.2 percent in 2085. The Hospital Insurance (HI) Trust Fund is now expected to 

remain solvent until 2024, five years earlier than estimated in last year’s report, after which point tax income is 

estimated to be sufficient to pay 90 percent of benefits, declining to 76 percent in 2050 and then increasing to 88 

percent by 2085. 

As for Social Security (the Old-Age, Survivors, and Disability Insurance Trust Funds or OASDI), combined 

spending is projected to increase gradually from its current level of 4.8 percent of GDP to 6.2 percent in 2035, 

declining to about 6.0 percent by 2050 and remaining at about that level through 2085. The Social Security 

 

22 '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 Supplemental Information section in this report for more information. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 23

Trustees’ Report indicates that annual OASDI income, including interest on trust fund assets, will exceed annual 

cost and trust fund assets will increase every year until 2023, at which time it will be necessary to begin drawing 

down on trust fund assets to cover part of expenditures until assets are exhausted in 2036, one year earlier than 

estimated in the prior year’s Trustees’ Report. After trust fund exhaustion, continuing tax income would be 

sufficient to pay 77 percent of scheduled benefits in 2036 and 74 percent in 2085.23 

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 Supplemental Information section of this 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, 

but progress has been made. The number of agencies reporting compliance with the Federal Financial Management 

Improvement Act (FFMIA) in FY 2011 remains at 17, and the number of auditors reporting compliance with 

FFMIA reduced to 13, compared to 14 in FY 2010. The annual compliances reported each year underscores 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 control. 

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. 

The 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 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 of the Improper Payments 

Information Act, as amended by the Improper Payments Elimination and Recovery Act, which includes the 

measurement, reporting, recovery, and remediation of improper payments. 

In addition to the FY 2011 agency financial statement audit results, the total number of material weaknesses for 

Chief Financial Officers (CFO) Act agencies remained steady at 31. Effective internal controls are a challenge not 

only at the agency level, but also at the government-wide level. GAO reported that at the government-wide 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. 

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 government-wide 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. 

 

23 A Summary of the 2011 Annual Social Security and Medicare Trust Fund Reports, p. 10.
24 MANAGEMENT’S DISCUSSION AND ANALYSIS 

Financial Management Progress and Priorities 

The Office of Federal Financial Management (OFFM) within the Office of Management and Budget (OMB) is 

responsible for the Federal Government’s financial management policy and manages government-wide financial 

management priorities. This section summarizes recent progress and outlines several key initiatives intended to 

achieve improved results moving forward. 

Progress To Date 

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, for the first time since the passage of the 

CFO Act over 20 years ago, 23 of the 24 CFO Act agencies obtained an opinion from the independent auditors on 

their financial statements.24 Over the past 20 years, 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. Out of the 24 major “CFO Act” agencies, there were 

21 clean opinions, 2 qualified opinions, and only one remaining disclaimer in FY 2011. In addition, the number of 

auditor-identified material weaknesses stands at 31, an approximate 50 percent decline from the 61 material 

weaknesses that were identified at the start of this past decade. 

The foundations for the accomplishments achieved over the past 20 years are numerous. In particular, and as 

envisioned by OMB Circular No. A-123, Management’s Responsibility for Internal Control, the Federal financial 

management community approached these reporting challenges holistically, integrating both programmatic and 

financial management disciplines in building successful financial reporting programs. Given the size and 

complexity of the programs and transactions involved, these results would not have been possible without the 

advances in Federal financial management. 

Ongoing Challenges 

Despite the progress identified above, critical gaps in financial management performance remain. Weaknesses 

in basic financial management practices and other limitations continue to prevent one major agency, and the 

Government as a whole, from achieving an audit opinion. The cost of maintaining effective financial operations is 

increasing, driven largely by the growing and high costs agencies are incurring to modernize agency financial 

systems. While Federal agencies have mobilized resources to meet the new and growing demand for real-time 

transparency into where Federal dollars are going, more work is necessary to sustain these solutions in a costeffective manner over the long term. Federal agencies reported approximately $115 billion in improper payments in 

FY 2011 and continue to maintain thousands of unneeded real property assets on their books. These instances of 

Government waste compromise the integrity of Federal programs, lead to damaging inefficiencies, and erode 

citizens’ trust in Government. However, initiatives as outlined below are resulting in progress with these issues and 

are putting the Government in a better position. 

Improvement Initiatives 

It has never been more vital that the Government’s financial managers are performing at high levels to meet 

these challenges and are maximizing the return on every dollar invested in financial management activities. To do 

so, three areas emerge as the optimal priority areas for the Federal financial management community: 

• Eliminating Waste – The President launched the Campaign to Cut Waste last summer to reduce costs, identify 

and implement efficiencies, and root out wasteful expenditures across government. Building on this effort, the 

 

24 The Department of Homeland Security had the Balance Sheet and the Statement of Custodial Activity audited and received a qualified 

opinion on these statements. The Department of State received a clean opinion on the Statements of Net Costs and the Statement of Budgetary 

Resources, and a qualified opinion on the Balance Sheet and Statement of Changes in Net Position. HHS 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 Department of Defense received a disclaimed opinion on all statements subject to audit.
MANAGEMENT’S DISCUSSION AND ANALYSIS 25

Federal Government will continue to focus on removing unneeded real property from the Government’s books 

and eliminating improper payments. 

• Closing the Efficiency and Technology Gap in Financial Operations – The Federal Government are working 

to simplify the governance structure in an effort to unify the grants community and strengthen the audit 

framework for Federally-funded State and local activities. In February, the President issued a memorandum 

directing OMB to work with stakeholders to improve Federal grants management. In addition, expensive and 

long-term investments in technology solutions to support financial reporting and accounting must be 

reconsidered in favor of shorter-term, lower cost, and easier to manage solutions that meet critical business 

needs, drive operational efficiency, and leverage shared service solutions where cost-effective. 

• Promoting Accountability and Innovation through Open Government – Efforts should be directed towards 

improving the content and quality of currently reported information to provide better value to taxpayers and 

Government decision-makers. Further, solutions must be developed and deployed in partnerships that extend 

beyond the borders of the Federal financial management community, to involve Federal and State stakeholders, 

and most critically, members of the public. 

Eliminating Waste 

• Campaign to Cut Waste. In an effort to reduce costs, identify and implement efficiencies, eliminate practices 

that are antiquated and unnecessary, and root out waste across government, the President launched the 

Campaign to Cut Waste in June of 2011. Executive Order 13576 “Delivering an Efficient, Effective, and 

Accountable Government,” which established the Campaign to Cut Waste, called upon all agencies to reinforce 

the performance and management reform gains already achieved; systematically identify additional reforms 

necessary to eliminate wasteful, duplicative or otherwise inefficient programs; and publicize these reforms so 

that they may serve as a model across the Federal Government. Building on this effort, the President issued an 

Executive Order on “Promoting Efficient Spending” that requires agencies to cut certain administrative costs in 

FY 2013 by not less than 20 percent below FY 2010 levels. The Chief Financial Officers at each of the 

agencies are largely responsible for achieving these savings. The CFO Council is responsible for reporting the 

result of these efforts to the President’s Management Council. These efforts under the Campaign to Cut Waste 

are expected to result in billions of dollars in savings by FY 2013.

• Accelerating Efforts to Better Manage Federal Real Property. The Administration is focused on improving the 

management of real property assets. The Federal Government is the largest property owner in the country, but 

it is not using some of those assets productively. The Administration supports efforts to remove unneeded real 

property from the Government’s books and reduce operating costs related to real property., On June 10, 2010, 

the President signed a memorandum on Disposing of Unneeded Federal Real Estate—Increasing Sales 

Proceeds, Cutting Operating Costs, and Improving Energy Efficiency, which directed Federal agencies to 

accelerate efforts to remove excess and surplus property and to realize $3 billion in savings from the 

Government’s properties by September 30, 2012. To date, Federal agencies have identified $1.5 billion of the 

President’s $3 billion goal through actions including reducing annual operating costs, reducing square footage 

through consolidating space within owned and leased buildings, increasing the impact of telework, selling 

owned properties, and improving energy efficiencies. To build on this effort and work in achieving more longterm savings, the President introduced the Civilian Property Realignment Act in the FY 2012 budget. The 

proposal would create an independent Board to reduce and realign the Federal civilian property inventory. The 

Board would cut bureaucratic red tape, resolve longstanding competing stakeholder interests, and help address 

the financial challenges that hinder efforts to dispose and consolidate Federal real property. Expanding on the 

work toward the passage of the President’s proposal, the Administration has continued to make progress on 

achieving savings in real property by working with the Federal Real Property Council and the Real Property 

Advisory Committee to encourage greater collaboration across agencies. 

• Addressing Improper Payments. The Improper Payments Information Act of 2002 (IPIA) as amended by the 

Improper Payments Elimination and Recovery Act of 2010 (IPERA), created a framework for assessing every 

Federal program and dollar for risk of improper payments, annually measuring the accuracy of payments, and 

initiating improvements to ensure that errors are reduced and eliminated and overpayment recoveries are 

pursued. Addressing improper payments is a central component of Administration efforts to eliminate waste. 

Over the past two years, the President has issued Executive Order 13520 on Reducing Improper Payments, a 

Presidential memorandum on intensifying and expanding agency efforts to recapture improper payments, and a 

Presidential memorandum directing that a Do Not Pay List be established to help prevent improper payments 

from being made to ineligible recipients. In addition, the President also signed into law the Improper Payments 

Elimination and Recovery Act of 2010 (IPERA), which amends IPIA. While agencies are continuing to 
26 MANAGEMENT’S DISCUSSION AND ANALYSIS 

implement these initiatives, we are already seeing real results. Based on information submitted by agencies in 

FY 2011, the reported government-wide error rate is 4.69 percent, a decrease from the FY 2010 rate of 5.29 

percent. The estimated improper payments reported for FY 2011 are $18 billion lower than if the error rate had 

remained at the higher rate of 5.42 percent reported for FY 2009, the first year of improper payment reporting 

under the Administration. In addition, agencies reported recapturing more than $1.2 billion in improper 

payments to contractors and vendors in FY 2011, almost twice as much as was recaptured in FY 2010. More 

information on agency improper payments and the Administration’s improper payment initiatives can be found 

at PaymentAccuracy.gov. 

Closing the Efficiency and Technology Gap in Financial Operations 

• Improving Grants Management. Each year, the Federal Government provides over $500 billion in grants to 

State, local and tribal governments, colleges and universities, and other non-profit organizations –roughly onesixth of the Federal budget. OFFM is committed to working with the grants community to make the grant 

process efficient and citizen-friendly through streamlining grant applications and reports and modernizing the 

grants system, Grants.gov. On February 28, 2011, the President issued a Memorandum instructing OMB to 

work with Federal and non-Federal stakeholders to review OMB Circulars and look for ways to reduce 

administrative burden for recipients while improving program outcomes for Federal grants. OFFM convened 

two working groups, one focusing on Cost Principles and Audit Requirements for States, Localities, and Tribes, 

and another to look at the same policies for universities. The recommendations of these two groups were 

submitted to OMB at the end of August. On October 27, 2011, OMB issued M-12-01, creating the Council on 

Financial Assistance Reform (COFAR) to provide policy level leadership for the grants community to 

implement much needed reforms to improve effectiveness and efficiency in Federal grants. The COFAR is 

working to develop these reforms based on the recommendations received from the grants community. 

• Decreasing the Cost of Financial System Modernizations. Complexity and inefficiency in the Federal 

Government’s financial management operations has led to an increasingly expensive environment for 

modernizing financial systems. Also, once deployed, the Federal Government’s modern systems do not 

consistently meet our business needs or produce the right information to support decision-making. In June 

2010, OMB froze activity on CFO Act agency financial system plans pending their immediate review and 

approval. To date, a total of 21 agencies have been reviewed and, where appropriate, the agencies have 

realigned their financial system plans through splitting projects into smaller, simpler segments with clear 

deliverables; focusing on the most critical business needs first; and ensuring ongoing, transparent project 

oversight. These realignments have resulted in cost reductions for some of the projects reviewed. Review of 

the agency financial system projects continues according to the risk associated with the projects. In addition, 

Customer Control Boards were established to organize agencies that are leveraging similar solutions. This will 

allow the agencies to pool resources, share strategies, and organize solutions across the Government in an effort 

to support the combined interests of agencies to modernize at a pace and scope that fits their individual business 

needs. 

Promoting Accountability and Innovation through Open Government 

• Improving Data Quality for Federal Spending Information. Ensuring the quality of Federal spending 

information has been central to OMB’s efforts in implementing the Federal Funding Accountability and 

Transparency Act. Under the Administration’s Campaign to Cut Waste, the President’s June 13, 2011 

Executive Order (EO), “Delivering an Efficient, Effective, and Accountable Government” established the 

Government Accountability and Transparency Board (GATB). Under the EO, the Board is charged with 

providing recommendations to the President on enhancing the transparency of Federal spending and advance 

fraud detection efforts, data quality and fraud detection. These recommendations will leverage the experience 

and lessons learned from the implementation of the Recovery Act and the Recovery Accountability and 

Transparency Board (RATB). In December 2009, the Administration established the Open Government 

Directive (M-10-06), which required each agency take specific steps to ensure that data is reported quickly, 

efficiently, and accurately. The Open Government Directive was quickly followed by the Data Quality 

Framework in February, which provides specific guidance on data quality plans as they relate to Federal 

spending data. Pursuant to this guidance, Federal agencies developed these specific data quality plans that 

outline a governance structure, risk assessment process, governing principles and controls, communications, and 

monitoring of Federal spending information. In April and August 2010, OMB issued guidance to Federal 

agencies on improving information quality and required the reporting of grants and contracts sub-award 

information. Access to both prime and now sub-award data offers the public unprecedented amounts of 

information on Federal spending. This increased transparency will ensure that the Federal Government is held 
MANAGEMENT’S DISCUSSION AND ANALYSIS 27

fully accountable for the administration of Federal programs. Notwithstanding these accomplishments, efforts 

must continue to address existing and burgeoning data quality concerns. Informed by stakeholder input and 

recommendations, OMB and Federal agencies will work to ensure that high quality Federal spending 

information is available to promote accountability and ultimately be used to improve the performance of our 

Federal programs. 

• Strengthening the Reporting Model. The Federal Government’s “reporting model” defines the information that 

is included in federal entity financial statements and other required supplemental information (e.g., 

Management’s Discussion and Analysis) and the scope of internal controls related to financial reporting. 

Inclusion in the financial statements or required supplemental information also affects the nature and extent of 

the auditor’s responsibilities. The overall goal of this initiative is to maintain public faith and confidence in 

Federal financial management by proposing improvements to the usefulness of financial reports to decision 

makers and the public and strengthening audit requirements in areas where financial risks are the most 

significant. Particular emphasis is being placed on obtaining improved information on the cost of Government 

activities and the results achieved. OMB, working with the CFO Council, developed a new statement of 

spending that focused on how and where Federal money was spent. This new statement is currently being 

piloted and will establish reliable reporting of how taxpayer dollars are being spent. 

• Partnering For Solutions. The Partnership Fund for Program Integrity Innovation (Partnership Fund) was 

established by the Consolidated Appropriations Act of 2010 (P.L. 111-117) to fund pilot projects to improve 

delivery of Federal assistance programs administered through state and local governments or where Federalstate cooperation could be beneficial. Funding supports pilots and evaluations of promising innovations that 

confront these challenges in Federal, state and/or local administration. Partnership Fund pilots advance four 

goals: (1) improve payment accuracy; (2) improve administrative efficiency; (3) improve service delivery; and 

(4) reduce access barriers for eligible beneficiaries. OMB is actively working with a Collaborative Forum of 

Federal agencies, state and local administrators, industry and other stakeholders to identify pilot opportunities 

that could inform the expansion of innovations to other state or local agencies as well as further potential 

administrative or legislative action to facilitate these goals. In aggregate, pilots must save at least as much as 

they cost. So far, six pilots have been funded and are being implemented by lead Federal agencies in 

cooperation with state partners. These pilots address multiple programs, including the Supplemental Nutrition 

Assistance Program (SNAP), Unemployment Insurance, Medicaid, the Earned Income Tax Credit (EITC), and 

the Treasury Offset Program. 

The sweeping challenges we face 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 Financial 

Management Community has made critical progress – decreasing the reported government-wide improper payment 

rate, from 5.29 percent in FY 2010 to 4.69 percent in FY 2011 and increasing the amount of recaptured improper 

payments by approximately 80 percent. In addition, the agencies are on target to exceed the goal of $3 billion in 

savings from real property by September 30, 2012. 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 we enter 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 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 Annual 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.fms.treas.gov/fr/index.html; 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: 

• Budget of the United States Government, 

• Treasury Bulletin, 

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

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

• Economic Report of the President, and 

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

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STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 29

United States Government Accountability Office

Washington, DC 20548 

Comptroller General

of the United States

December 23, 2011 

The President 

The President of the Senate 

The Speaker of the House of Representatives 

During fiscal year 2011, the federal government continued to face economic and fiscal challenges 

in a slow growth economy with high unemployment. Dealing with the government’s longer-term 

fiscal challenge will, as discussed below, require sustained attention and difficult decisions to 

address serious deficit and debt issues. These fiscal issues further highlight the need for the 

federal government to operate as effectively and efficiently as possible. Therefore, the Congress, 

the administration, and federal managers must have ready access to reliable and complete 

financial and performance information for individual federal entities and the federal government 

as a whole. Even though significant progress has been made in federal financial management 

since the enactment of key reforms in the 1990s, our report on the U.S. government’s 

consolidated financial statements illustrates that much work remains to improve federal financial 

management. 

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

we found the following: 

• Certain material weaknesses 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 fiscal years 2011 and 2010 accrual-based consolidated financial statements.1

 About 35 

percent of the federal government’s reported total assets as of September 30, 2011, and 

approximately 21 percent of the federal government’s reported net cost for fiscal year 2011 

relate to the Department of Defense (DOD), which received a disclaimer on its consolidated 

financial statements, and the Department of Homeland Security (DHS), which received a 

qualified opinion on its Balance Sheet and Statement of Custodial Activity for fiscal year 

2011 with the remainder of its financial statements being unaudited. 

 

1

The accrual-based consolidated financial statements for the fiscal years ended September 30, 2011, and 2010, 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. Two additional statements that do not interrelate with the accrual-based consolidated 

financial statements are also included: the Statements of Social Insurance, and the Statement of Changes in Social 

Insurance Amounts, and related notes. 
30 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 

• Because of significant uncertainties, primarily related to the achievement of projected 

reductions in Medicare cost growth reflected in the 2011 and 2010 Statements of Social 

Insurance, we are unable to, and we do not, express an opinion on the 2011 and 2010 

Statements of Social Insurance, as well as on the 2011 Statement of Changes in Social 

Insurance Amounts. About $24.6 trillion, or 72.6 percent, of the federal government’s 

reported total present value of future expenditures in excess of future revenue for 2011 relate 

to the Department of Health and Human Service’s 2011 Statement of Social Insurance, which 

received a disclaimer of opinion.2

 

• Material weaknesses resulted in ineffective internal control over financial reporting. 

• Our work to test compliance with selected provisions of laws and regulations in fiscal year 

2011 was limited by the material weaknesses and other scope limitations discussed in our 

report. 

While significant progress has been made in improving federal financial management since the 

federal government began preparing consolidated financial statements 15 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 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 agencies, and (3) the federal 

government’s ineffective process for preparing the consolidated financial statements. 

It is important to emphasize that while the vast majority of the 24 CFO Act agencies received 

unqualified opinions, DOD and DHS have consistently been unable to receive such audit 

opinions. Efforts are underway at both agencies to address this situation. At DOD, following 

years of unsuccessful financial improvement efforts, the Comptroller established the Financial 

Improvement and Audit Readiness (FIAR) Directorate to develop, manage, and implement a 

strategic approach for addressing weaknesses and for achieving auditability, and to integrate 

those efforts with other improvement activities, such as the department’s business system 

modernization efforts. DOD’s current FIAR strategy and methodology is to focus on two 

priorities—budgetary information and asset accountability—with an overall goal of preparing 

auditable financial statements by September 30, 2017.3

 Because budgetary information is widely 

and regularly used for management, the Comptroller designated as one of DOD’s highest interim 

priorities the improvement of its budgetary information and processes underlying its Statement of 

Budgetary Resources (SBR). On October 13, 2011, the Secretary of Defense directed the 

department to accelerate its audit readiness timelines to achieve audit readiness on DOD 

components’ SBR by fiscal year 2014, and planning for this accelerated goal is underway. 

 

2

We issued an unqualified opinion on the Statements of Social Insurance for 2009, 2008, and 2007. 3

Section 1003 of the National Defense Authorization Act for Fiscal Year 2010 (Pub. L. No. 111-84) made the 

development and maintenance of the FIAR Plan into a statutory requirement. Under the act, the FIAR Plan must ensure 

that DOD’s financial statements are validated as ready for audit by September 30, 2017. 
STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 31

DHS was able to attain a qualified audit opinion on its fiscal year 2011 Balance Sheet and 

Statement of Custodial Activity. This is a significant achievement for DHS. However, the 

remaining statements are unaudited. The auditor was unable to form an opinion on DHS’s 

internal control over financial reporting due to pervasive material internal control weaknesses 

over key financial reporting processes. It is important that DHS continue to remediate its internal 

control deficiencies and build upon the progress it has accomplished as it moves forward to 

expand the audit to all the financial statements and achieve its ultimate goal of obtaining a clean 

audit opinion on the full set of financial statements and on internal control over financial 

reporting. 

In addition to the material weaknesses underlying the three aforementioned major impediments, 

we identified three other material weaknesses. These entail the federal government’s inability to 

(1) determine the full extent to which improper payments occur and reasonably assure that 

appropriate actions are taken to reduce improper payments, (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 report. Until the problems 

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

for the federal government and American taxpayers. 

The last economic recession and the federal government’s actions to stabilize financial markets 

and promote economic recovery, among other factors, continued to significantly affect the federal 

government’s financial condition. The federal government reported a net operating cost of about 

$1.3 trillion and a unified budget deficit of approximately $1.3 trillion for fiscal year 2011, and as 

of September 30, 2011, debt held by the public increased to 68 percent of gross domestic product 

(GDP). As of September 30, 2011, the federal government’s actions to stabilize the financial 

markets and to promote economic recovery also resulted in reported federal government assets of 

over $295 billion, which is net of about $95 billion in valuation losses. In addition, the federal 

government reported incurring significant liabilities resulting from these actions. Because the 

valuation of these assets and liabilities is based on assumptions and estimates that are inherently 

subject to substantial uncertainty arising from the uniqueness of certain transactions and the 

likelihood of future changes in general economic, regulatory, and market conditions, actual 

results may be materially different from the reported amounts. For example, assets and liabilities 

reported by the federal government that are subject to substantial uncertainty include the 

following: 

• The federal government’s consolidated financial statements for fiscal year 2011 include 

approximately $133 billion of investments in Federal National Mortgage Association (Fannie 

Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) (net of about $43 billion 

in valuation losses), and approximately $316 billion of liabilities for future payments to these 

entities. The notes to these financial statements also discuss an estimated additional $60 

billion of future payments that could be incurred under an “extreme case” scenario, based on 

the estimates as of September 30, 2011. Challenges in the housing market have continued and 

the future structures of these government-sponsored enterprises and the roles they will serve 

in the mortgage markets must still be determined. 
32 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 

• The federal government reported Troubled Asset Relief Program direct loans and equity 

investments of approximately $80 billion as of September 30, 2011 (net of about $42 billion 

in valuation losses, including about $21 billion related to the American International Group, 

Inc. Investment Program, and approximately $19 billion related to loans to and equity 

investments in certain entities in the automotive industry, including General Motors 

Company). 

• The federal government reported Federal Deposit Insurance Corporation liabilities of 

approximately $47 billion as of September 30, 2011, related to estimated failures of insured 

financial institutions, guarantees, and bank resolutions. Additional losses could occur 

if economic and market conditions deteriorate in the future. 

• Further deterioration in the residential real-estate market could result in additional losses for 

the Federal Housing Administration beyond the reported loan guarantee liability of 

approximately $36 billion as of September 30, 2011. 

• The federal government reported that the Pension Benefit Guaranty Corporation’s (PBGC) 

liabilities exceeded its assets by about $26 billion as of September 30, 2011. PBGC is subject 

to further losses if plan terminations that are reasonably possible occur. 

The ultimate cost of the federal government’s actions to stabilize the financial markets and 

promote economic recovery will not be known for some time as these uncertainties are resolved 

and further federal government actions are taken in fiscal year 2012 and later. Looking ahead, the 

federal government will face the challenge of determining the most expeditious manner in which 

to bring closure to its financial stabilization initiatives while optimizing its investment returns. 

The comprehensive long-term fiscal projections presented in this 2011 Financial Report of the 

United States Government (2011 Financial Report) show that—absent policy changes—the 

federal government continues to face an unsustainable fiscal path. Largely as a result of the 

provisions in the Budget Control Act of 2011,4

 the fiscal outlook has improved. However, rising 

health care costs and the aging of the U.S. population continue to create budgetary pressure. The 

oldest members of the baby boom generation are now eligible for early Social Security retirement 

benefits and for Medicare benefits. In addition, debt held by the public continues to grow as a 

share of the economy; this means the current structure of the federal budget is unsustainable over 

the longer term. 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 in law designed to slow the growth of Medicare costs are sustained 

and remain effective throughout the projection period. GAO also prepares long-term fiscal 

simulations for the U.S. government.5

 Under GAO’s Alternative simulation, which modifies the 

revenue assumptions used in the above noted projections and uses the Centers for Medicare and 

Medicaid Services (CMS) actuary’s alternative health care cost projections, projected 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 2011 Financial Report. For example, under GAO’s 

Alternative simulation, debt held by the public as a share of GDP would exceed the historical 

 

4

Pub. L. No. 112-25, 125 Stat. 240 (Aug. 2, 2011). 

5

GAO, The Federal Government’s Long-Term Fiscal Outlook: Fall 2011 Update, GAO-12-28SP (Washington, D.C.: 

Oct. 24, 2011). 
STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 33

high reached in the aftermath of World War II by 2027,6 10 years earlier than the projections in 

the 2011 Financial Report. 

_________________________ 

Our 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 Department of the Treasury 

and Office of Management and Budget officials as well as the federal entities’ chief financial 

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

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

Our report begins on page 211. Our guide7

 to the Financial Report of the United States

Government is intended to help those who seek to obtain a better understanding of the Financial 

Report and is available on GAO’s website at www.gao.gov. In addition, the website includes a 

guide8 to understanding the differences between accrual and cash measures of the deficit and 

provides a useful perspective on the different purposes cash and accrual measures serve in 

providing a comprehensive picture of the federal government’s fiscal condition today and over 

time. 

 

6

GAO’s Alternative simulation incorporates the CMS Office of the Actuary’s 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 other than the Social Security 

payroll tax reductions are extended to 2021 and the alternative minimum tax exemption amount is indexed to inflation 

through 2021; revenues are then brought back to the 40-year historical average as a share of GDP. Discretionary 

spending follows the Congressional Budget Office’s baseline for the first 10 years, which reflect the discretionary 

spending caps in the Budget Control Act of 2011, and thereafter gradually increases to the historical average share of 

GDP. Automatic procedures in the Budget Control Act of 2011 that reduce spending by $1.2 trillion are applied to total 

annual deficits evenly from 2013 to 2021 and remain a constant share of GDP thereafter. 7

GAO, Understanding the Primary Components of the Annual Financial Report of the United States Government, 

GAO-09-946SP (Washington, D.C.: September 2009). 8

See http://www.gao.gov/special.pubs/longterm/deficit/, which is based on information in GAO, Understanding 

Similarities and Differences between Accrual and Cash Deficits, and 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). 
34 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 

Our 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 

 The Minority Leader of the House 

(198663) 
FINANCIAL STATEMENTS 35

Financial Statements 

of the United States Government 

for the Years Ended September 30, 2011, 

and 2010 

Statements of Net Cost 

These statements present the net cost of fiscal years 2011 and 2010 Government 1 operations, including the 

operations related to earmarked funds (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 report by department 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: 

• 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. 

• Earned revenue—is exchange revenue resulting from the Government providing goods and services to the 

public at a price. 

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

to measure the liabilities reported for Federal civilian and military employee pensions, other postemployment benefits and other retirement benefits, including veterans’ compensation. 

• Net cost—is computed by subtracting earned revenue from gross cost, plus/minus the (gain)/loss from 

changes in assumptions. 

Net cost for Governmentwide reporting purposes includes the General Services Administration (GSA) and the 

Office of Personnel Management (OPM) agency allocations, and is net of intragovernmental eliminations. For this 

reason, individual agency net cost amounts will not agree with the agency’s financial statements. Because of their 

specific functions, most of the costs originally associated with GSA and OPM have been allocated to their user 

agencies for Governmentwide reporting purposes. The remaining costs for GSA and OPM on the Statements of Net 

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

amendments, and the actuarial gains and losses for these agencies, if applicable. 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. 

Statements of Operations and Changes in Net Position 

These statements report the results of Government operations, which include the results of operations for 

earmarked funds. They include non-exchange revenues that are generated principally by the Government’s 

sovereign power to tax, levy duties, and assess fines and penalties. These statements also present the cost of 

Government operations, net of revenue earned from the sale of goods and services to the public (exchange revenue). 

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

 

1

 For purposes of this document, “Government” refers to the U.S. Government. 
36 FINANCIAL STATEMENTS 

Revenue 

Individual income tax and tax withholdings include Federal Insurance Contributions Act (FICA)/SelfEmployment Contributions Act (SECA) taxes and other taxes. These taxes are characterized as non-exchange 

revenue. 

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

spirits and imported liquor, tobacco, firearms, and others. These also are characterized as non-exchange revenue. 

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. 

Earmarked revenues are required by statute to be used for designated activities, benefits or purposes and must 

be accounted for separately from the rest of the Government’s non-earmarked revenues. See Note 24—Earmarked 

Funds for detailed information. 

Intragovernmental interest represents interest earned from the investment of surplus earmarked revenues, 

which finance the deficit spending of non-earmarked operations. These investments are recorded as 

intragovernmental debt holdings and are included in Note 14—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 payments 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 earmarked activities is 

separately reported. 

Intragovernmental Transfers 

Intragovernmental transfers reflect amounts required by statute to be transferred from the General Fund of the 

Treasury to earmarked funds (an example is the annual transfer to the Department of Health and Human Services’ 

(HHS) Supplementary Medical Insurance Trust Fund (Medicare Parts B and D) which receives approximately 76 

percent and 80 percent, respectively, of its funding from the General Fund. 

Unmatched Transactions and Balances 

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

due to unreconciled intragovernmental differences, agency reporting errors, timing differences, and General Fund 

transactions in the consolidated financial statements. See Note 1.T—Summary of Significant Accounting Policies 

and the Supplemental Information—Unmatched Transactions and Balances for detailed information. 

Net Position, Beginning of Period 

The net position, beginning of period, reflects the net position reported on the prior year’s balance sheet as of 

the end of that fiscal year. The net position for earmarked funds is shown separately. 

Prior-period adjustments are revisions to adjust the beginning net position and balances presented on the prior 

year financial statements due to corrections of errors or changes in accounting principles. See Note 1.B—Basis of 

Accounting and Revenue Recognition and Note 21—Prior Period Adjustments for detailed information. 
FINANCIAL STATEMENTS 37

Net Position, End of Period 

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

position for earmarked funds is separately shown. 

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), where operating revenues are 

reported on a modified cash basis of accounting and the net cost of Government operations on an accrual basis of 

accounting and reports 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, the environmental liabilities, and depreciation expense not included in the 

budget results. 

Components of the Budget Deficit Not Part of 

Net Operating Cost 

This information includes the budget components, such as capitalized fixed assets which 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 and 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 and explain how the budget deficits (fiscal years 2011 and 2010) were financed. A budget deficit is 

the result of outlays (expenditures) exceeding receipts (revenue) during a particular fiscal year. 

The budget deficit is financed through borrowings from the public. Other transactions also require cash 

disbursements and are not part of the deficit. These other transactions, such as the payment of interest on debt 

held by the public, contributed to the use of cash. The budget deficit also includes certain amounts that are 

recognized in the budget and 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 and subsidy 
38 FINANCIAL STATEMENTS 

expense related to direct and guaranteed loans as well as equity investment activity and did not contribute to the 

change in the cash balance. 

These statements show the adjustments for noncash 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 earmarked funds 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 property, plant, and equipment (PP&E), 

net; inventories and related property, net; cash and other monetary assets; loans receivable and mortgage-backed 

securities, net; and Troubled Asset Relief Program (TARP) direct loans and equity investments, net. There are, 

however, other significant resources available to the Government that extend beyond the assets presented in these 

financial statements. Those resources include stewardship assets, including natural resources, and the Government’s 

sovereign powers to tax, regulate commerce, set monetary policy, and the power to print additional currency. 

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, liabilities to Government-Sponsored Enterprises, and benefits due and payable as of the reporting 

date. 

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 in the Statements of 

Social Insurance disclosed in the Supplemental Information—Social Insurance section, the fiscal long-term 

projections of non-interest spending disclosed in the Supplemental Information—Statement of Fiscal Projections for 

the U.S. 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, as well as 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 22—Contingencies and Note 23—Commitments. 

The collection of earmarked taxes and other earmarked revenue is credited to the corresponding Earmarked 

Fund 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 “loaned” to 

Treasury’s General Fund; therefore, the trust fund balances do not represent cash. An explanation of the trust funds 

for social insurance and many of the other large trust funds is included in Note 24—Earmarked Funds. That note 

also contains information about trust fund receipts, disbursements, and assets. 

Because of 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. 
FINANCIAL STATEMENTS 39

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 social insurance programs, which are 

administered by the Social Security Administration (SSA), HHS, the Railroad Retirement Board (RRB), and the 

Department of Labor (DOL), respectively. The estimates are actuarial present values 2

 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 and in the agency financial report of HHS and DOL 

(Black Lung) and in the relevant agency performance and accountability reports for the SSA and RRB. The 

projections are based on the continuation of program provisions contained in current law. 

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 statement. However, because of the large number of 

factors that affect the Statements 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 Statements of Social Insurance and the actual results, and those 

differences may be material. Note 26—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. Using this information, readers can apply their own judgment as to the condition and 

sustainability of the individual programs. The Statement of Changes in Social Insurance Amount reconciles the 

change between the current valuation period and the prior valuation period. 

 

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 

United States Government 

Statement of Net Cost 

for the Year Ended September 30, 2011 

(In billions of dollars)

Gross 

Cost 

Earned 

Revenue Subtotal 

(Gain)/Loss 

from 

Changes in 

Assumptions 

Net 

Cost 

Department of Health and Human 

Services ............................................................ 943.4 66.4 877.0 0.1 877.1 

Social Security Administration ..................... 782.9 0.4 782.5 - 782.5 

Department of Defense ............................... 828.7 78.0 750.7 (32.0) 718.7 

Interest on Treasury Securities Held by 

the Public .................................................. 250.9 - 250.9 - 250.9 

Department of Veterans Affairs ................... 124.3 4.7 119.6 58.9 178.5 

Department of Agriculture ............................ 154.2 9.4 144.8 - 144.8 

Department of Labor .................................... 132.8 - 132.8 - 132.8 

Department of the Treasury......................... 115.2 30.6 84.6 - 84.6 

Department of Transportation ...................... 77.9 0.7 77.2 - 77.2 

Department of Housing and Urban 

Development ............................................. 60.8 1.2 59.6 - 59.6 

Department of Education ............................. 69.7 15.0 54.7 - 54.7 

Department of Homeland Security .............. 58.9 9.4 49.5 0.4 49.9 

Department of Energy ................................. 52.5 7.9 44.6 - 44.6 

Department of Justice .................................. 31.3 1.3 30.0 - 30.0 

Office of Personnel Management ................. 43.7 19.1 24.6 0.3 24.9 

Department of State .................................... 27.0 3.4 23.6 0.4 24.0 

Department of the Interior ............................ 23.8 2.7 21.1 - 21.1 

National Aeronautics and Space 

Administration ........................................... 18.8 0.1 18.7 - 18.7 

Agency for International Development ........ 12.1 0.7 11.4 - 11.4 

Railroad Retirement Board .......................... 17.0 5.9 11.1 - 11.1 

Environmental Protection Agency ............... 11.3 0.5 10.8 - 10.8 

Federal Communications Commission........ 9.3 0.4 8.9 - 8.9 

Department of Commerce ........................... 11.3 2.5 8.8 - 8.8 

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

Pension Benefit Guaranty Corporation........ 12.8 7.4 5.4 - 5.4 

Small Business Administration .................... 3.6 0.4 3.2 - 3.2 

Smithsonian Institution ................................ 0.7 - 0.7 - 0.7 

U.S. Nuclear Regulatory Commission......... 1.0 0.8 0.2 - 0.2 

Farm Credit System Insurance 

Corporation ............................................... - 0.1 (0.1) - (0.1)

Export-Import Bank of the United States..... 0.6 0.7 (0.1) - (0.1)

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

Tennessee Valley Authority ......................... 11.5 11.8 (0.3) - (0.3)

Securities and Exchange Commission........ 1.1 1.6 (0.5) - (0.5)

National Credit Union Administration ........... 0.2 3.1 (2.9) - (2.9)

U.S. Postal Service ...................................... 56.2 64.6 (8.4) - (8.4)

Federal Deposit Insurance Corporation ...... (2.1) 13.7 (15.8) - (15.8)

All other entities .............................................. 47.4 0.5 46.9 - 46.9 

Total .......................................................... 3,998.3 365.6 3,632.7 28.1 3,660.8 

The accompanying notes are an integral part of these financial statements. 
FINANCIAL STATEMENTS 41

United States Government 

Statement of Net Cost 

for the Year Ended September 30, 2010 

(In billions of dollars)

Gross 

Cost 

Earned 

Revenue Subtotal 

(Gain)/Loss 

from 

Changes in 

Assumptions

Net 

Cost 

Department of Health and Human 

Services ............................................................ 920.4 62.7 857.7 (0.1) 857.6 

Social Security Administration ..................... 754.2 0.3 753.9 - 753.9 

Department of Defense ............................... 929.0 39.8 889.2 (58.8) 830.4 

Interest on Treasury Securities Held by 

the Public .................................................. 214.8 - 214.8 - 214.8 

Department of Veterans Affairs ................... 240.2 4.7 235.5 101.4 336.9 

Department of Agriculture ............................ 136.6 6.0 130.6 - 130.6 

Department of Labor .................................... 179.0 - 179.0 - 179.0 

Department of the Treasury......................... 402.3 29.4 372.9 - 372.9 

Department of Transportation ...................... 80.4 0.6 79.8 - 79.8 

Department of Housing and Urban 

Development ............................................. 56.7 1.3 55.4 - 55.4 

Department of Education ............................. 100.8 11.3 89.5 - 89.5 

Department of Homeland Security .............. 58.9 8.9 50.0 5.7 55.7 

Department of Energy ................................. 28.9 3.8 25.1 - 25.1 

Department of Justice .................................. 32.7 1.2 31.5 - 31.5 

Office of Personnel Management ................. 43.5 18.0 25.5 84.1 109.6 

Department of State .................................... 24.5 2.8 21.7 0.6 22.3 

Department of the Interior ............................ 20.7 2.4 18.3 - 18.3 

National Aeronautics and Space 

Administration ........................................... 22.1 0.1 22.0 - 22.0 

Agency for International Development ........ 10.7 0.2 10.5 - 10.5 

Railroad Retirement Board .......................... 14.6 5.8 8.8 - 8.8 

Environmental Protection Agency ............... 12.7 0.5 12.2 - 12.2 

Federal Communications Commission........ 9.5 0.5 9.0 - 9.0 

Department of Commerce ........................... 16.5 2.3 14.2 - 14.2 

National Science Foundation ....................... 6.9 - 6.9 - 6.9 

Pension Benefit Guaranty Corporation........ 11.9 8.1 3.8 - 3.8 

Small Business Administration .................... 5.4 0.4 5.0 - 5.0 

Smithsonian Institution ................................ 0.8 - 0.8 - 0.8 

U.S. Nuclear Regulatory Commission......... 1.2 0.9 0.3 - 0.3 

Farm Credit System Insurance 

Corporation ............................................... - 0.1 (0.1) - (0.1)

Export-Import Bank of the United States..... 0.4 0.7 (0.3) - (0.3)

General Services Administration ................. 0.6 0.6 - - -

Tennessee Valley Authority ......................... 9.7 10.8 (1.1) - (1.1)

Securities and Exchange Commission........ 1.1 1.4 (0.3) - (0.3)

National Credit Union Administration ........... 3.2 1.1 2.1 - 2.1 

U.S. Postal Service ...................................... 57.3 65.7 (8.4) - (8.4)

Federal Deposit Insurance Corporation ...... 16.8 16.1 0.7 - 0.7 

All other entities .............................................. 47.3 0.7 46.6 - 46.6 

Total .......................................................... 4,472.3 309.2 4,163.1 132.9 4,296.0 

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

United States Government 

Statements of Operations and Changes in Net Position 

for the Years Ended September 30, 2011, and 2010 

 

NonEarmarked

Funds 

Earmarked

Funds Consolidated 

NonEarmarked 

Funds 

Earmarked

Funds Consolidated

(In billions of dollars) 2011 2010 

 

Revenue: 

Individual income tax and tax withholdings ...... 1,092.9 772.9 1,865.8 902.6 830.3 1,732.9 

Corporation income taxes ............................. 175.1 175.1 179.6 179.6 

Unemployment taxes .................................... 56.1 56.1 45.2 45.2 

Excise taxes .................................................. 21.3 52.2 73.5 22.6 49.0 71.6 

Estate and gift taxes ..................................... 7.3 7.3 18.8 18.8 

Customs duties ............................................. 28.5 28.5 25.1 25.1 

Other taxes and receipts ............................... 120.4 20.9 141.3 96.9 30.6 127.5 

Miscellaneous earned revenues ................... 11.3 4.9 16.2 11.3 4.5 15.8 

Intragovernmental interest ............................ 202.0 202.0 195.0 195.0 

Total revenue ................................................ 1,456.8 1,109.0 2,565.8 1,256.9 1,154.6 2,411.5 

Eliminations ................................................... (202.0) (195.0)

Consolidated revenue ................................... 2,363.8 2,216.5 

 

Net Cost of Government Operations: 

Net cost ......................................................... 2,110.6 1,550.2 3,660.8 2,553.5 1,742.5 4,296.0 

Intragovernmental interest ............................ 202.0 202.0 195.0 195.0 

Total net cost ................................................ 2,312.6 1,550.2 3,862.8 2,748.5 1,742.5 4,491.0 

Eliminations ................................................... (202.0) (195.0)

Consolidated net cost.................................... 3,660.8 4,296.0 

 

Intragovernmental transfers ......................... (540.5) 540.5 (482.1) 482.1

 

Unmatched transactions and balances 

(Note 1.T) ..................................................... (15.6) (15.6) (0.8) (0.8)

 

Net operating (cost)/revenue ........................ (1,411.9) 99.3 (1,312.6) (1,974.5) (105.8) (2,080.3)

 

Net position, beginning of period ................. (14,119.7) 646.9 (13,472.8) (12,208.6) 752.7 (11,455.9)

Prior period adjustments–changes in 

accounting principles (Note 21) .................. (2.0) 2.0 - 63.4 - 63.4 

Net operating (cost)/revenue ......................... (1,411.9) 99.3 (1,312.6) (1,974.5) (105.8) (2,080.3)

Net position, end of period ........................... (15,533.6) 748.2 (14,785.4) (14,119.7) 646.9 (13,472.8)

 

The accompanying notes are an integral part of these financial statements. 
FINANCIAL STATEMENTS 43

United States Government 

Reconciliations of Net Operating Cost and Unified Budget Deficit 

for the Years Ended September 30, 2011, and 2010 

(In billions of dollars) 2011 2010 

Net operating cost ................................................................................................ (1,312.6) (2,080.3)

Components of net operating cost not part of the budget deficit:

Increase in liability for military employee benefits (Note 15):

Increase in military pension liabilities............................................................ 98.6 85.6 

(Decrease)/increase in military health liabilities........................................... (62.4) 78.9 

(Decrease) in other military benefits.............................................................. (1.2) (0.3)

Increase in liability for military employee benefits ....................................... 35.0 164.2 

Increase in liability for veteran's compensation (Note 15) 58.9 223.8 

(Decrease)/increase in liabilities for civilian employee benefits (Note 15):

(Decrease)/increase in civilian pension liabilities ........................................ (13.2) 103.5 

(Decrease)/increase in civilian health liabilities ........................................... (13.0) 3.3 

Increase in other civilian benefits................................................................... 4.2 8.3 

(Decrease)/increase in liabilities for civilian employee benefits ................ (22.0) 115.1 

Increase/(decrease) in environmental and disposal liabilities (Note 16):

Increase/(decrease) in Energy's environmental and disposal

liabilities .......................................................................................................... 0.4 (17.5)

Increase/(decrease) in all others' environmental and disposal

liabilities .................................................................................................................. 2.4 (3.0)

Increase/(decrease) in environmental and disposal liabilities ................... 2.8 (20.5)

 

Depreciation expense......................................................................................... 68.4 57.5 

Property, plant, and equipment disposals and revaluations ........................ (4.6) (9.8)

Increase in benefits due and payable .............................................................. 6.7 3.5 

(Decrease)/increase in insurance and guarantee program liabilities .......... (13.9) 9.4 

Increase in other liabilities ................................................................................. 10.5 62.4 

Seigniorage and sale of gold ............................................................................ - (0.4)

(Decrease) in accounts payable ....................................................................... (9.5) (0.3)

(Increase) in net accounts and taxes receivable............................................ (11.7) (7.1)

TARP yearend upward/(downward) re-estimate ............................................ 23.3 (23.6)

Decrease in Non-TARP Investments in American International Group,

Inc. due to valuation losses ............................................................................ 9.9 2.7 

(Decrease)/increase in liabilities to Government-sponsored enterprises ... (43.7) 268.0 

(Decrease)/increase in valuation loss on investments in Governmentsponsored enterprises ..................................................................................... (3.0) 8.1 

Components of the budget deficit that are not part of net operating cost:

Capitalized fixed assets: 

Department of Defense ................................................................................... (51.3) (59.4)

All other agencies............................................................................................. (36.4) (33.1)

Total capitalized fixed assets....................................................................... (87.7) (92.5)

 

Effect of prior year TARP downward re-estimate........................................... 23.6 110.0 

(Increase) in inventory (9.9) (1.6)

(Increase) in investments in Government-sponsored enterprises............... (20.8) (52.6)

(Increase) in debt and equity securities........................................................... (0.8) (5.8)

Decrease/(increase) in other assets ................................................................ 4.0 (24.7)

Credit reform and other loan activities ....................................................... (10.5) 8.0 

All other reconciling items .................................................................................. 9.0 (7.6) 

Unified budget deficit .................................................................................. (1,298.6) (1,294.1)

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

United States Government 

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

for the Years Ended September 30, 2011, and 2010 

(In billions of dollars) 2011 2010 

 

Unified budget deficit ......................................... (1,298.6) (1,294.1) 

 

Adjustments for noncash outlays included

 in the budget: 

Interest accrued by Treasury on debt 

held by the public ...................................... 244.2 206.8 

TARP yearend re-estimates ........................ (46.9) (86.4) 

TARP Subsidy expense/(income) (Note 5) ..... 7.2 (24.2) 

Other Federal entity subsidy 

expense/(income) (Note 4) ........................... (43.9) (9.4) 

Subtotal ..................................................... 160.6 86.8 

Items affecting the cash balance not 

 included in the Budget: 

Net Transactions from financing activity: 

Borrowings from the public .......................... 7,962.8 8,525.5 

Repayment of debt held by the public ......... (6,854.2) (7,054.5) 

Agency securities ........................................ 1.0 0.7 

Subtotal ..................................................... 1,109.6 1,471.7 

Transactions from monetary and other 

activity: 

Interest paid by Treasury on debt held by 

the public ................................................... (239.7) (201.2)

Net TARP direct loans and equity 

investments activity ................................... 59.0 111.8 

Net GSE—mortgage-backed securities 

activity ....................................................... 93.7 9.1 

Net loan receivable activity .......................... (157.6) (160.3)

Allocations of special drawing rights ........... 0.2 (1.0)

Other ............................................................ 21.2 12.6 

Subtotal ..................................................... (223.2) (229.0) 

 

Cash and other monetary assets (Note 2): 

(Decrease)/increase in cash and other 

monetary assets ..................................... (251.6) 35.4 

Balance, beginning of period .................... 428.6 393.2 

Balance, end of period .............................. 177.0 428.6 

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

For budgetary purposes, the effect of the yearend downward re-estimates (reduction of net outlays) and upward re-estimates 

(increase of net outlays) is not recognized until the subsequent fiscal year. As such, for fiscal year 2011, the budget deficit

reflected a reduction of noncash outlays for $23.6 billion relating to the fiscal year 2010 yearend downward re-estimates. Also, for 

fiscal year 2011, TARP subsidy expense includes $23.3 billion in yearend upward re-estimates, which will be reflected in the fiscal 

year 2012 budget. For fiscal year 2010, the budget deficit reflected a reduction of noncash outlays for $110 billion relating to the 

fiscal year 2009 yearend downward re-estimates. Also, for fiscal year 2010, TARP subsidy income includes $23.6 billion in 

yearend downward re-estimates, which was reflected in the fiscal year 2011 budget. 
FINANCIAL STATEMENTS 45

United States Government 

Balance Sheets 

as of September 30 

(In billions of dollars) 2011 2010

Assets: 

Cash and other monetary assets (Note 2) ..................................... 177.0 428.6 

Accounts and taxes receivable, net (Note 3) .................................. 106.3 94.6 

Loans receivable and mortgage-backed securities, net (Note 4) ... 772.1 688.6 

TARP direct loans and equity investments, net (Note 5) ............... 80.1 144.7 

Non-TARP Investments in American International Group, Inc. 

(Note 6) ........................................................................................ 10.9 20.8 

Inventories and related property, net (Note 7) ................................ 296.1 286.2 

Property, plant, and equipment, net (Note 8) ................................. 852.8 828.9 

Debt and equity securities (Note 9) ................................................ 99.7 98.9 

Investments in Government-Sponsored Enterprises (Note 11) ..... 133.0 109.2 

Other assets (Notes 10 and 12) ..................................................... 179.3 183.3 

Total assets .................................................................................. 2,707.3 2,883.8 

Stewardship land and heritage assets (Note 27) 

Liabilities: 

Accounts payable (Note 13) ........................................................... 63.4 72.9 

Federal debt securities held by the public and accrued interest 

(Note 14) ...................................................................................... 10,174.1 9,060.0 

Federal employee and veteran benefits payable (Note 15) ........... 5,792.2 5,720.3 

Environmental and disposal liabilities (Note 16)............................. 324.1 321.3 

Benefits due and payable (Note 17) ............................................... 171.0 164.3 

Insurance and guarantee program liabilities (Note 18) .................. 161.7 175.6 

Loan guarantee liabilities (Note 4) .................................................. 63.0 65.8 

Liabilities to Government-Sponsored Enterprises (Note 11) .......... 316.2 359.9 

Other liabilities (Notes 10 and 19) .................................................. 427.0 416.5 

Total liabilities .............................................................................. 17,492.7 16,356.6 

Contingencies (Note 22) and Commitments (Note 23) 

Net position: 

Earmarked funds (Note 24) ............................................................ 748.2 646.9 

Non-earmarked funds ..................................................................... (15,533.6) (14,119.7) 

Total net position ....................................................................... (14,785.4) (13,472.8) 

Total liabilities and net position ................................................. 2,707.3 2,883.8 

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

United States Government 

Statements of Social Insurance (Note 26) 

Present Value of Long-Range (75 Years, except Black Lung) Actuarial Projections 

(In billions of dollars) 2011 2010 2009 2008 2007 

Federal Old-Age, Survivors and Disability Insurance (Social Security): 14

Revenue (Contributions and Earmarked Taxes) from: 

Participants who have attained eligibility age (62 and over) ..... 726 672 575 542 477

Participants who have not attained eligibility age ................ 20,734 19,914 18,559 18,249 17,515

Future participants ..................................................................... 20,144 19,532 18,082 17,566 16,121

All current and future participants ..................................... 41,603 40,118 37,217 36,357 34,113

Expenditures for Scheduled Future Benefits for: 

Participants who have attained eligibility age (62 and over) ..... (8,618) (8,096) (7,465) (6,958) (6,329)

Participants who have not attained eligibility age ................ (34,042) (32,225) (30,207) (29,021) (27,928)

Future participants ..................................................................... (8,100) (7,744) (7,223) (6,933) (6,619)

All current and future participants ..................................... (50,760) (48,065) (44,894) (42,911) (40,876)

Present value of future expenditures in excess of future 

revenue ............................................................................ (9,157) 1 (7,947) 2 (7,677) 3 (6,555) 4 (6,763) 5

Federal Hospital Insurance (Medicare Part A): 14

Revenue (Contributions and Earmarked Taxes) from: 

Participants who have attained eligibility age (65 and over) ..... 262 248 209 202 178

Participants who have not attained eligibility age ................ 7,581 7,216 6,348 6,320 5,975

Future participants ..................................................................... 7,260 6,944 5,451 5,361 4,870

All current and future participants ..................................... 15,104 14,408 12,008 11,883 11,023

Expenditures for Scheduled Future Benefits for: 

Participants who have attained eligibility age (65 and over) ..... (2,923) (2,648) (2,958) (2,747) (2,558)

Participants who have not attained eligibility age ................ (12,887) (12,032) (18,147) (17,365) (15,639)

Future participants ..................................................................... (2,546) (2,411) (4,673) (4,506) (5,118)

All current and future participants ..................................... (18,356) (17,091) (25,778) (24,619) (23,315)

Present value of future expenditures in excess of future 

revenue ............................................................................ (3,252) 1 (2,683) 2 (13,770) 3 (12,736) 4 (12,292) 5

Federal Supplementary Medical Insurance (Medicare Part B): 14 

Revenue (Premiums) from: 

Participants who have attained eligibility age (65 and over) ..... 570 538 498 461 433

Participants who have not attained eligibility age ................ 3,651 3,460 4,224 3,859 3,184

Future participants ..................................................................... 865 839 1,270 1,158 1,172

All current and future participants ..................................... 5,086 4,836 5,992 5,478 4,789

Expenditures for Scheduled Future Benefits for: 

Participants who have attained eligibility age (65 and over) ..... (2,343) (2,166) (2,142) (1,986) (1,834)

Participants who have not attained eligibility age ................ (13,489) (12,587) (16,342) (14,949) (12,130)

Future participants ..................................................................... (3,108) (2,984) (4,672) (4,262) (4,257)

All current and future participants ..................................... (18,940) (17,737) (23,156) (21,197) (18,221)

Present value of future expenditures in excess of future 

 revenue 6

 .............................................................................. (13,854) 1 (12,901) 2 (17,165) 3 (15,719) 4 (13,432) 5

 

Totals may not equal the sum of components due to rounding. 

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

 
FINANCIAL STATEMENTS 47

United States Government 

Statements of Social Insurance (Note 26), continued 

Present Value of Long-Range (75 Years, except Black Lung) Actuarial Projections 

(In billions of dollars) 2011 2010 2009 2008 2007 

Federal Supplementary Medical Insurance (Medicare Part D): 14

Revenue (Premiums and State Transfers) from: 

Participants who have attained eligibility age (65 and over) ..... 173 165 140 123 167

Participants who have not attained eligibility age ................ 1,608 1,626 1,442 1,380 1,627

Future participants ..................................................................... 703 694 618 604 611

All current and future participants ..................................... 2,484 2,486 2,199 2,107 2,405

Expenditures for Scheduled Future Benefits for: 

Participants who have attained eligibility age (65 and over) ..... (695) (646) (595) (581) (794)

Participants who have not attained eligibility age ................ (6,438) (6,355) (6,144) (6,527) (7,273)

Future participants ..................................................................... (2,817) (2,714) (2,632) (2,856) (2,699)

All current and future participants ..................................... (9,950) (9,715) (9,371) (9,964) (10,766)

Present value of future expenditures in excess of future 

 revenue 6

 .............................................................................. (7,466) 1 (7,229) 2 (7,172) 3 (7,857) 4 (8,361) 5

Railroad Retirement: 

Revenue (Contributions and Earmarked Taxes) from: 

Participants who have attained eligibility ........................... 6 5 5 5 5

Participants who have not attained eligibility ..................... 46 47 48 43 41

Future participants ............................................................. 65 66 70 54 54

All current and future participants ................................... 117 118 123 102 100

Expenditures for Scheduled Future Benefits for: 

Participants who have attained eligibility ........................... (109) (105) (102) (97) (93)

Participants who have not attained eligibility ..................... (86) (88) (91) (88) (86)

Future participants ............................................................. (28) (27) (30) (26) (26)

All current and future participants ................................... (223) (220) (223) (212) (205)

Present value of future expenditures in excess of 

 future revenue 7

 ................................................................... (106) 1 (103) 2 (100) 3 (109) 4 (105) 5

Black Lung (Part C): 

Present value of future revenue in excess of future 

expenditures 8

 ...................................................................... 5 9 6 10 6 11 5 12 5 13

 

Total present value of future expenditures in excess

of future revenue ................................................................ (33,830) (30,857) (45,878) (42,970) (40,948)

Totals may not equal the sum of components due to rounding. 

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

United States Government 

Statements of Social Insurance (Note 26), continued

Present Value of Long-Range (75 Years, except Black Lung) Actuarial Projections 

(In billions of dollars) 2011 2010 2009 2008 2007 

Social Insurance Summary: 14

Participants who have attained eligibility age: 

Revenue (e.g., Contributions and earmarked taxes) ......... 1,737 1,628 1,427 1,333 1,260

Expenditures for scheduled future benefits ....................... (14,688) (13,661) (13,262) (12,369) (11,608)

Present value of future expenditures in excess of 

future revenue ............................................................. (12,951) (12,033) (11,835) (11,036) (10,348)

Participants who have not attained eligibility age: 

Revenue (e.g., Contributions and earmarked taxes) ......... 33,620 32,263 30,621 29,851 28,342

Expenditures for scheduled future benefits ....................... (66,942) (63,287) (70,931) (67,950) (63,056)

Present value of future expenditures in excess of 

future revenue ............................................................. (33,322) (31,024) (40,310) (38,099) (34,714)

Closed-group – Total present value of future 

expenditures in excess of future revenue ........................ (46,272) (43,057) (52,145) (49,135) (45,062)

Future participants: 

Revenue (e.g., Contributions and earmarked taxes) ......... 29,037 28,075 25,491 24,743 22,828

Expenditures for scheduled future benefits ....................... (16,594) (15,875) (19,224) (18,578) (18,714)

Present value of future revenue in excess of future 

expenditures ................................................................ 12,443 12,200 6,267 6,165 4,114

 

Open-group – Total present value of future

expenditures in excess of future revenue........................ (33,830) (30,857) (45,878) (42,970) (40,948)

1 The projection period is 1/1/2011 -12/31/2085 and the valuation date is 1/1/2011. 2 The projection period is 1/1/2010 -12/31/2084 and the valuation date is 1/1/2010. 3 The projection period is 1/1/2009 -12/31/2083 and the valuation date is 1/1/2009. 4 The projection period is 1/1/2008 -12/31/2082 and the valuation date is 1/1/2008. 5 The projection period is 1/1/2007 -12/31/2081 and the valuation date is 1/1/2007. 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 transfers from the General Fund of the 

Treasury to the Social Security Equivalent Benefit Account (see discussion of Railroad Retirement Program in the unaudited supplemental 

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 9/30/2011 -9/30/2040 and the valuation date is 9/30/2011. 10 The projection period is 9/30/2010 -9/30/2040 and the valuation date is 9/30/2010. 11 The projection period is 9/30/2009 -9/30/2040 and the valuation date is 9/30/2009. 12 The projection period is 9/30/2008 -9/30/2040 and the valuation date is 9/30/2008. 13 The projection period is 9/30/2007 -9/30/2040 and the valuation date is 9/30/2007. 14 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, except for the 2007 

Medicare programs for which current participants are assumed to be at least 18 instead of 15 years of age. 

Totals may not equal the sum of components due to rounding. 

The accompanying notes are an integral part of these financial statements. 
FINANCIAL STATEMENTS 49

United States Government 

Statement of Changes in Social Insurance Amounts 

for the Year Ended September 30, 2011 (Note 26) 

(In billions of dollars)

Social 

Security 

Medicare

HI 

Medicare 

SMI 

Other (e.g. 

Railroad 

Retirement) 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 ..................................... (7,947) (2,683) (20,130) (97) (30,857) 

Reasons for changes in the NPV during 

the year: 

Changes in valuation period ..................... (436) (112) (968) (2) (1,518) 

Changes in demographic data and 

assumptions ........................................... (688) (112) (59) (0) (859) 

Changes in economic data and 

assumptions ........................................... (143) 0 - (2) (145) 

Changes in law or policy ........................... - - (14) - (14) 

Changes in methodology and 

programmatic data ................................. 56 - - - 56 

Changes in economic and other 

healthcare assumptions ......................... - 185 (648) - (463) 

Change in projection base ........................ - (531) 500 - (31) 

Net change in open group measure ............ (1,211) (570) (1,189) (4) (2,974) 

Open group measure, end of year............... (9,157) (3,252) (21,320) (101) (33,830) 

 

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 

This page is intentionally blank. 
NOTES TO THE FINANCIAL STATEMENTS 51

United States Government 

Notes to the Financial Statements 

for the Years Ended September 30, 2011, 

and 2010 

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 report on a cash basis), and the judicial branch (which also 

reports on a cash basis) of the Government. The judicial branch reports on a limited basis and is not required by law 

to submit financial statement information to Treasury. Appendix A of this report contains a list of significant 

Government entities included and excluded in the Financial Report. Certain entities are excluded from the Financial 

Report because they are Government-Sponsored Enterprises (GSE), such as the Federal National Mortgage 

Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), or their activities are 

not included in the Federal budget, such as the Thrift Savings Fund and the Board of Governors of the Federal 

Reserve System. 

During fiscal year 2008, the Government began a number of additional emergency economic measures relating 

to the economy that involved various financing programs. Key initiatives effective for fiscal year 2008 involved 

programs concerning Fannie Mae and Freddie Mac (GSEs), provision of a credit facility for GSEs and Federal 

Home Loan Banks, purchase of Mortgage-Backed Securities (MBS), and setup of a Money Market Guarantee 

Program (see Note 1.J—Investments in and Liabilities to Government Sponsored Enterprises and Note 11—

Investments in and Liabilities to Government-Sponsored Enterprises). The Emergency Economic Stabilization Act 

of 2008 (EESA) gave the Secretary of the Treasury temporary authority to purchase and guarantee assets in a wide 

range of financial institutions and markets (see Note 5—TARP Direct Loans and Equity Investments, Net). 

Following U.S. Generally Accepted Accounting Principles for Federal entities (U.S. GAAP), 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 below in this note 

and in the Supplemental Information—Unmatched Transactions and Balances (see Note 1.T). The financial 

reporting period ends September 30 and is the same as used for the annual budget. 
52 NOTES TO THE FINANCIAL STATEMENTS 

B. Basis of Accounting and Revenue Recognition 

These financial statements were prepared using U.S. GAAP, primarily based on SFFAS. Under these 

principles: 

• Expenses are generally recognized when incurred. 

• Nonexchange revenues, including taxes, duties, fines, and penalties, are recognized when collected and adjusted 

to the change in net measurable and legally collectable amounts receivable. Related refunds and other offsets, 

including those that are measurable and legally payable, are netted against nonexchange revenue. 

• Exchange (earned) revenues are recognized when the Government provides goods and services to the public for 

a price. Exchange revenues 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 

new Statement of Changes in Social Insurance Amounts (SCSIA) are covered in Note 26—Social Insurance. 

Beginning in fiscal year 2011, the Government has implemented the requirements of SFFAS No. 37. 1

As required by SFFAS No 37, the Government is now required to present a new SCSIA that: (1) reconciles 

beginning and ending open group measures and presents the components of the changes in the open group measures 

from the end of the previous reporting period; and (2) presents significant components of the change, e.g., the 

difference due to the change in valuation period; the changes in demographic, economic, and health care 

assumptions; and the changes in law and policy. 

Beginning in fiscal year 2010, the Government implemented the requirements of new standards related to: 

pensions, other retirement benefits, and other postemployment benefits; long-term fiscal projections; and subsequent 

events. 

• Pensions, other retirement benefits (ORB), and other postemployment benefits (OPEB): 

As required by SFFAS, No. 33, 2

 the Government statement of net cost is now required to present the 

amounts reported under the gain/loss from changes in assumptions on pension, other retirement benefits, or 

other postemployment benefits as a separate component that will provide more transparent information 

regarding the underlying costs associated with these liabilities. 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. For further information on these new requirements, see Note 1.L—

Federal Employee and Veteran Benefits Payable. 

• Long-term fiscal projections: 

As required by SFFAS No. 36, 3 the Government is now required to include a statement presenting for all 

its activities (a) the present value of projected receipts and non-interest spending under current policy 

without change, (b) the relationship of these amounts to projected Gross Domestic Product (GDP) and (c) 

changes in the present value of projected receipts and non-interest spending from the prior year (not 

effective for fiscal year 2010). The Government is also required to provide supplementary information that 

explains and illustrates projected trends in the relationship between receipts and spending, deficits (or 

surpluses), debt held by the public as a share of GDP, possible results using alternative scenarios, and the 

likely impact of delaying corrective action when a fiscal gap exists. Finally, the Government is also 

required to disclose the assumptions underlying the projections, the factors influencing trends, and 

significant changes in the projections from period to period. Refer to the Fiscal Projections for the U.S. 

Government–Fiscal Year 2011 segment in the Supplementary Information for these required disclosures. 

 

1 SFFAS No. 37, Social Insurance: Additional Requirements for Management’s Discussion and Analysis and Basic Financial Statements. 2 SFFAS No. 33, Pensions, Other Retirement Benefits, and Other Postemployment Benefits: Reporting the Gains and Losses from Changes in 

Assumptions and Selecting Discount Rates and Valuation Dates. 

3 SFFAS No. 36, Reporting Comprehensive Long-Term Fiscal Projections for the U.S. Government. 
NOTES TO THE FINANCIAL STATEMENTS 53

• Subsequent events: 

The objective of SSFAS No. 39, 4

 is to incorporate the accounting and financial reporting guidance 

regarding subsequent events that have been included in the Statements of Auditing Standards of the 

American Institute of Certified Public Accountants (AICPA) into SFFAS. Accordingly, SFFAS No. 39 

does not establish new accounting guidance with regard to subsequent events. 

C. Loans Receivable, Mortgage-Backed Securities, 

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 cash outflows of the loan guarantees is recognized as a liability for loan 

guarantees. 

The subsidy expense for direct or guaranteed loans disbursed during a fiscal year is the present value of 

estimated net cash outflows for those loans or guarantees. A subsidy expense also is recognized for modifications 

made during the year to loans and guarantees outstanding and for reestimates 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 

allowance-for-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. 

The MBS are similarly treated to direct loans, and the value of the Government’s position and the associated 

credit subsidy requirements are determined based on the net present value of the securities’ forecasted future 

cashflows. For more details on MBS, see Note 4—Loans Receivable, Mortgage-Backed Securities, and Loan 

Guarantee Liabilities, Net. 

D. 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 the amounts are owed or a court has determined the assessments are owed. The Balance Sheets do not 

include unpaid assessments when neither taxpayers nor a court have 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 (writeoffs). 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. 

 

4

 SFFAS No. 39, Subsequent Events: Codification of Accounting and Financial Reporting Standards Contained in the AICPA Statements on 

Auditing Standards.
54 NOTES TO THE FINANCIAL STATEMENTS 

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. 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. 

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, and is reported as an adjustment to the face value of the direct loan or equity investment. 

The recorded subsidy allowance for a direct loan, equity investment or asset guarantee is based on a set of 

estimated future cashflows. 

The Government used the following methodologies for valuation of the TARP direct loans and equity 

investments: 

• 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 and 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. 

• 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, as well as market prices of comparable securities trading in the market. 

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. Non-TARP Investments in American International 

Group, Inc. 

The Non-TARP investments in American International Group (AIG), Inc. are recorded at fair value and 

represent the Government's non-TARP holdings of AIG common stock. On September 30, 2010, the Government, 

the Federal Reserve Bank of New York (FRBNY) and AIG entered into an AIG Recapitalization Agreement for the 

purpose of restructuring the Government's holdings in AIG. The value of the non-TARP investments in AIG is 

based on the market value of the Government’s holdings of AIG common stock as of the reporting date. (See Note 

6—Non-TARP Investments in American International Group, Inc., for further details.) 
NOTES TO THE FINANCIAL STATEMENTS 55

G. 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 

moving average cost methods for valuing most of its inventory. To a lesser degree, DOD also uses LAC methods 

adjusted for holding gains and losses to approximate the historical cost of resale inventory items remaining in its 

legacy system. DOD is continuing to transition inventories from these legacy systems to new inventory systems, 

using moving average cost methods, however, most of DOD’s inventory value for its activities remain noncompliant with SFFAS No. 3. 

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 latest acquisition 

cost 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 and monetary instruments, forfeited and foreclosed property, 

raw materials and work in process. Operating materials and supplies are valued at historical cost, latest acquisition 

cost, 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. 

H. Property, Plant, and Equipment 

Property, plant, and equipment consists of tangible assets including equipment, buildings, construction in 

progress, internal use software, assets acquired through capital leases, including leasehold improvements, and other 

assets used to provide goods and services. 

Property, plant, and equipment used in Government operations are carried at acquisition cost, with the exception 

of DOD military equipment (e.g., ships, aircraft, combat vehicles, and weapons) and some National Aeronautics and 

Space Administration (NASA) equipment. DOD military equipment is valued at estimated historical costs, which are 

calculated using internal DOD records. DOD identified the universe of military equipment by accumulating 

information relating to program funding and associated military equipment, equipment useful life, and program 

acquisitions and disposals to create a baseline. The equipment baseline is updated using expenditure information and 

information related to acquisition and logistics to identify acquisitions and disposals. NASA also uses estimates of 

historical cost to value some of its equipment for which historical cost information is not readily available, such as 

components of the International Space Station. 

All property, plant, and equipment 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 property, plant, and equipment 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 property, plant, and equipment are assigned useful lives depending on their 

category and vary considerably between the Federal entities. The cost of acquisition, betterment, or reconstruction of all 

multi-use heritage assets is capitalized as general property, plant, and equipment 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 off-the-shelf software, contractor-developed software, and software internally 

developed. 
56 NOTES TO THE FINANCIAL STATEMENTS 

I. 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-forsale debt and equity securities are reported at fair value. Trading debt and equity securities are reported at fair value. 

J. Investments in and Liabilities to GovernmentSponsored Enterprises 

The senior preferred stock liquidity preference (preferred stock) and associated common stock warrant 

(warrant(s)) in GSEs are presented at their fair value as permitted by Office of Management and Budget (OMB) 

Circular No. A-136. This Circular includes language that generally requires agencies to value non-Federal 

investments at acquisition cost, and also permits the use of other measurement basis, such as fair value, in certain 

situations. Treasury performs annual valuations, as of September 30th, to provide a “sufficiently reliable” 

estimate of the outstanding commitments in order for Treasury to record the remaining liability in accordance 

with SFFAS No. 5, Accounting for Liabilities of the Federal Government. The valuations incorporated various 

forecasts, projections, and cashflow analyses to develop an estimate of the potential liability. Annual valuations 

are performed, as of September 30, of the 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 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 preferred stock and warrants are exchange 

transactions, any change in valuation is also recorded as an exchange transaction. 

The GSE Senior Preferred Stock Purchase Agreements (SPSPAs) provide that Treasury will increase its 

investment in the GSEs’ senior preferred stock if at the end of any quarter the Federal Housing Finance Agency 

(FHFA), acting as the conservator, determines the liabilities of either GSE, individually, exceed its respective assets. 

Based on U.S. GAAP, these contingent liquidity commitments, predicated on the future occurrence of any 

shareholders’ deficits of the GSEs at the end of any reporting quarter, are potential liabilities of Treasury. The 

potential liabilities to the GSEs are assessed annually and recorded at the gross amount, without considering the 

increase in preferred stock liquidity preference, future divided payments, or future commitment fees, due to the 

uncertainties involved. The Government currently accounts for the GSE MBS purchase program and the two 

programs of the state and local Housing Finance Agency (HFA) Initiative (the New Issue Bond Program (NIBP) and 

Temporary Credit and Liquidity Program (TCLP)) under the provisions of credit reform and the use of estimates is 

dictated by the SFFAS No. 2. See Note 11—Investments in and Liabilities to Government-Sponsored Enterprises for 

further details. 

K. 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 (CPI) for all Urban 

Consumers. 
NOTES TO THE FINANCIAL STATEMENTS 57

L. 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, postretirement 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. 

The estimated present value for veterans’ pension benefits is disclosed but is not included in the Federal employee 

and veteran benefits payable line. These benefits are expensed when services are provided. 

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 (and prior service cost, if any) are 

recognized immediately in the year they occur, without amortization. 

Gains and losses from changes in long-term assumptions used to estimate Federal employee pensions, ORB, 

and 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 15—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. 

M. 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, and other 

environmental contaminations, 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 and 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. 

N. Insurance and Guarantee Program Liabilities 

Insurance and guarantee programs 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. 

O. Deferred Maintenance 

Deferred maintenance is maintenance that was not performed when it should have been or scheduled 

maintenance that was 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 services and achieve their expected life. Maintenance excludes activities aimed at 

expanding the capacity of assets or otherwise upgrading them to serve needs different from those originally 

intended. Deferred maintenance expenses are not accrued in the Statements of Net Cost or recognized as liabilities 

on the Balance Sheets. However, deferred maintenance information is disclosed in the Unaudited Supplemental 

Information section of this report. 
58 NOTES TO THE FINANCIAL STATEMENTS 

P. Contingent Liabilities 

Liabilities for contingencies are recognized on the Balance Sheets when both: 

• A past transaction or event has occurred, and 

• A future outflow or other sacrifice of resources is probable and measurable. 

The estimated contingent liability may be a specific amount or a range of amounts. If some amount within the 

range is a better estimate than any other amount within the range, then that amount is recognized. If no amount 

within the range is a better estimate than any other amount, then the minimum amount in the range is recognized and 

the range 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 have been incurred, are disclosed in Note 22—Contingencies. 

Q. 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 23—Commitments describes the components of the Government’s actual 

commitments that need to be disclosed because of their nature and/or their amount. They include long-term leases, 

undelivered orders, and other commitments. 

R. 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 Supplemental 

Information—Social Insurance section, and Note 26—Social Insurance. 

S. Related Party Transactions 

Federal Reserve banks (FRBs) and private banks, which are not part of the reporting entity, serve as the 

Government’s depositary and fiscal agents. They process Federal payments and deposits to the Treasury General 

Account (which functions as the Government’s checking account for deposits and disbursements) and service 

Treasury securities. The FRBs had total holdings of $1,665.4 billion and $813.6 billion, including a net of $0.8 

billion and $1.9 billion in Treasury securities held by the FRB as collateral for securities lending activities, as of 

September 30, 2011 and 2010, respectively. These securities are held in the FRBs’ System Open Market Account 

(SOMA) for the purpose of conducting monetary policy. Additionally, under the Supplementary Financing Program 

(SFP), the Government had no deposit with the Federal Reserve as of September 30, 2011, as compared to $200 

billion as of September 30, 2010, to support Federal Reserve initiatives (see Note 2—Cash and Other Monetary 

Assets). FRBs earnings that exceed statutory amounts of surplus established for FRBs are paid to the Government 

and are recognized as nonexchange revenue. Those earnings totaled $82.5 billion and $75.8 billion for the years 

ended September 30, 2011, and 2010, respectively and reflect the increase in securities held by the FRB. Also, the 

FRBs hold Special Drawing Rights Certificates (SDRCs) (see Note 19—Other Liabilities, international monetary 

liabilities and gold certificates). For further details on the coordinated activities of the U.S. Government—primarily 

Treasury and the Federal Deposit Insurance Corporation—and the Board of Governors of the Federal Reserve 

System and the FRBs to help stabilize the financial system and the housing market, see Note 5—TARP Direct Loans 

and Equity Investments, Net, Note 6—Non-TARP Investments in American International Group, Inc., and Note 

11—Investments in and Liabilities to Government-Sponsored Enterprises. 

FRBs issue Federal Reserve notes, the circulating currency of the United States. Specific assets owned by 

FRBs, typically Treasury securities, collateralize these notes. Federal Reserve notes are backed by the full faith and 

credit of the Government. 
NOTES TO THE FINANCIAL STATEMENTS 59

The Government generally does not guarantee payment of the liabilities of GSEs such as Fannie Mae, Freddie 

Mac, or the Federal Home Loan Banks, which are privately owned. Fannie Mae and Freddie Mac have been placed 

under conservatorship as of September 7, 2008. On December 24, 2009, Treasury amended the SPSPAs to replace 

the existing fixed $200 billion cap per the GSEs on Treasury advances, with a formulaic cap for the next 3 years that 

will adjust upwards quarterly by the cumulative amount of any losses realized by either Fannie Mae or Freddie Mac 

and downwards by the cumulative amount of any gains, but not below $200 billion per GSE. At the conclusion of 

the 3-year period, the remaining commitment will then be fixed and available to be drawn per the terms of the 

agreements (referred to as the “Adjusted Cap”). These entities also are excluded from the reporting entity. 

The Department of Transportation (DOT) 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. DOT does not record the notes in its financial 

statements because the present value of the notes was immaterial at September 30, 2011. These notes were discounted 

according to rates published in OMB M-10-07, Appendix C, and the maturity dates of 2975 and 2082. 

In addition, DOT has possession of all the preferred stock shares (109.4 million) of Amtrak. Congress through the 

DOT continues to fund Amtrak since 1981; originally through the purchase of preferred stock, notes receivable and 

then through grants after 1997. The Amtrak Reform and Accountability Act of 1997 changed the structure of the 

preferred stock by rescinding the voting rights and eliminating the preferred stock’s liquidation preference over the 

common stock. This Act also eliminated further issuance of preferred stock to the DOT. DOT does not record the 

Amtrak stock in its financial statements because it is not publicly traded and no fair market value can be placed on it. 

Amtrak is not a department, agency or instrumentality of the Government or the 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 Rail 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 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 exporters’ council. 

The contractual agreements provide that Ex-Im Bank will (1) guarantee the due and punctual payment of 

principal and 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, Mortgage Backed Securities, and Loan Guarantee Liabilities, Net, these 

guarantees to PEFCO, aggregating $5.3 billion and $5.1 billion at September 30, 2011 and 2010, 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 totaling $0.03 billion in both fiscal years 

2011 and 2010 for the agreements, which are included as earned revenue on the Statements of Net Costs. 
60 NOTES TO THE FINANCIAL STATEMENTS 

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 excess of revenues over net cost, plus or minus prior-period adjustments. 

The unmatched transactions and balances are needed to bring the change in net position into balance. The 

primary factors affecting this out of balance situation are: 

• Unmatched intragovernmental transactions and balances between Federal agencies, 

• General fund transactions, and 

• Timing differences and errors in Federal agencies’ reporting. 

Refer to the Unaudited Supplemental Information—Unmatched Transactions and Balances for detailed 

information. 

U. Derivatives 

A derivative is a financial instrument or other contract with all three of the following characteristics: 

• It has (1) one or more underlyings and (2) one or more notional amounts or payment provisions or both. Those 

terms determine the amount of the settlement or settlements, and, in some cases, whether a settlement is required. 

• It requires no initial net investment or an initial net investment that is smaller than would be required for other 

types of contracts that would be expected to have a similar response to changes in market factors. 

• Its terms require or permit net settlement, it can readily be settled net by a means outside the contract, or it 

provides for delivery of an asset that puts the recipient in a position not substantially different from net 

settlement. 

An underlying is a specified interest rate, security price, commodity price, foreign exchange rate, index of 

prices or rates, or other variable. An underlying may be a price or rate of an asset or liability but is not the asset or 

liability itself. A notional (or face) amount is a number of currency units, shares, bushels, pounds, or other units 

specified in the contract. The settlement of a derivative instrument with a notional amount is determined by 

interaction of that notional amount with the underlying. The interaction may be simple multiplication, or it may 

involve a formula with leverage factors or other constants. A payment provision specifies a fixed or determinable 

settlement to be made if the underlying behaves in a specified manner. 

The accounting for derivative instruments are governed by FASB Accounting Standards Codification (ASC) 

Topic 815, Derivatives and Hedging, which aims to highlight to financial statement users additional disclosures on 

an entity’s objectives in its use of derivatives and the method of accounting for such financial instruments. This 

standard requires that entities with derivatives disclose the following: 

• How and why an entity uses derivatives, 

• How derivatives and related hedged items are accounted for under this accounting standard, and 

• How derivatives and related hedged items affect an entity’s financial statements. 

For further information, see Note 10—Derivatives. 

V. Reclassifications 

One fund previously reported as an earmarked fund was reclassified to non-earmarked funds and recorded as a 

prior period adjustment. See Note 21—Prior Period Adjustments. 
NOTES TO THE FINANCIAL STATEMENTS 61

W. 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 fiduciary assets are not assets of the 

Government and are not recognized on the Balance Sheet. See Note 25—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 receivable and mortgage-backed securities, net; 

TARP direct loans and equity investments; investments in other non-Federal securities (including GSEs and foreign 

and domestic public entities) and related impairment, if any; tax receivables; loan guarantees; depreciation; liability 

for liquidity commitment (GSEs); actuarial liabilities; contingent legal liabilities; environmental liabilities; credit 

reform subsidy costs; and insurance and guarantee program liabilities. 

The Government recognizes the sensitivity of credit reform modeling to slight changes in some model 

assumptions and uses regular review of model factors, statistical modeling, and annual reestimates to reflect the most 

accurate cost of the credit programs to the U.S. Government. Two of the emergency economic programs that the 

Government implemented in the latter part of September 2008, the purchase program for MBS and the GSE credit line 

facility, are accounted for pursuant to the provisions of credit reform and the use of estimates as dictated by the Federal 

Credit Reform Act of 1990 (FCRA). FCRA loan receivables and loan guarantees are disclosed in Note 4—Loans 

Receivable, Mortgage Backed Securities, and Loan Guarantee Liabilities, Net. Additionally, all TARP credit activity, 

including investments in common and preferred stock and 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, 2011, and 2010, 

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, 2011, and 2010, is reflective of relative illiquid, troubled 

assets whose values are particularly sensitive to future economic conditions and other assumptions. 

The GSE senior preferred stock purchase agreements provide that the Government will make funding advances 

to the GSEs, if at the end of any quarter, FHFA, acting as the conservator, determines that the liabilities of either 

GSE, individually, exceed its respective assets. These contingent liquidity commitments predicated on the future 

occurrence of any shareholders’ deficits of the GSEs at the end of any reporting quarter, are potential liabilities of 

the Government. Valuation analyses were performed to attempt to provide a “sufficiently reliable” estimate of the 

outstanding commitment which is recorded as a liability in accordance with SFFAS No. 5. The valuation 

incorporated various forecasts, projections and cashflow analysis to develop an estimate of potential liability. Note 

1.J—Investments in and Liabilities to Government-Sponsored Enterprises and Note 11—Investments in and 

Liabilities to Government-Sponsored Enterprises discusses the results of the valuation and the contingent liability 

recorded as of September 30, 2011, and 2010. 
62 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, liquidity 

commitment to GSEs, the MBS portfolio, 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 63

Note 2. Cash and Other Monetary Assets 

 

Cash and Other Monetary Assets as of September 30, 2011, and 2010 

 (In billions of dollars) 2011 2010

 

Unrestricted cash: 

Cash held by Treasury for Governmentwide operations .................... 49.8 103.6 

Other ................................................................................................... 8.3 9.0 

Restricted cash: 

Cash held by Treasury for Governmentwide operations .................... - 200.0 

Other ................................................................................................... 18.8 19.4 

Total cash ......................................................................................... 76.9 332.0 

 

International monetary assets ............................................................... 76.6 70.4 

Gold ....................................................................................................... 11.1 11.1 

Foreign currency .................................................................................... 12.4 15.1 

Total cash and other monetary assets ................................................ 177.0 428.6 

 

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. Operating Cash includes balances invested with commercial depositaries in Treasury Tax and Loan 

Accounts (including funds invested through the Term Investment Option program and the Repo Pilot program). 

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, imprest funds, and amounts representing the balances of petty cash. 

Restricted cash is restricted due to the imposition on cash deposits by law, regulation, or agreement. Restricted 

cash is primarily composed of the Supplementary Financing Program (SFP) and cash held by the Foreign Military 

Sales programs. On September 18, 2008, Treasury began issuing specific cash management bills to fund the SFP. 

The SFP is a temporary program that deposits cash with the Federal Reserve to support Federal Reserve initiatives 

aimed at addressing the ongoing crisis in financial markets. As of September 30, 2011, there were no outstanding 

cash management bills earmarked for SFP, as compared to eight outstanding cash management bills totaling $200.0 

billion as of September 30, 2010. The Foreign Military Sales program included $18.2 billion and $18.6 billion as of 

September 30, 2011, and 2010, 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 payment system to 

facilitate growth in the world economy. Its primary activities are surveillance of member economies, financial 

assistance as appropriate and technical assistance. 

Only a portion of the U.S. financial subscriptions 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 $43.0 billion and $45.2 billion as of September 30, 2011, and 2010, respectively. The U.S. 

reserve position in the IMF has a U.S. dollar equivalent of $22.7 billion and $12.9 billion as of September 30, 2011, 

and 2010, respectively. 
64 NOTES TO THE FINANCIAL STATEMENTS 

The SDR is an international reserves 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 position 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 $55.9 billion and $57.4 billion as of September 30, 2011, and 2010, 

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 Special Drawing Right Certificates (SDRCs) to 

the Federal Reserve in exchange for dollars. The amount of SDRCs outstanding cannot exceed the dollar value of 

SDR holdings. The Secretary of the Treasury determines when Treasury will issue or redeem SDRCs. SDRCs 

outstanding totaled $5.2 billion as of September 30, 2011, and 2010 respectively, and are included in Note 19—

Other Liabilities. 

As of September 30, 2011, and 2010, other liabilities included $55.1 billion and $55.0 billion of interestbearing liability to the IMF for SDR allocations. The SDR allocation item represents the cumulative total of SDRs 

distributed by the IMF to the United States in allocations that occurred in 1970, 1971, 1972, 1979, 1980, 1981, and 

2009. 

Gold is valued at the statutory price of $42.2222 per fine troy ounce. The number of fine troy ounces was 

261,498,900 as of September 30, 2011, and 2010. The market value of gold on the London Fixing was $1,620 and 

$1,307 per fine troy ounce as of September 30, 2011, and 2010, respectively. Gold totaling $11.1 billion as of 

September 30, 2011, and 2010, 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, 2011, and 2010, 

which are included in Note 19—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 yearend. The foreign currency is maintained by 

the ESF and various U.S. Federal agencies and foreign banks. 
NOTES TO THE FINANCIAL STATEMENTS 65

Note 3. Accounts and Taxes Receivable, Net 

Accounts and Taxes Receivable as of September 30, 2011, and 2010 

(In billions of dollars) 2011 2010 

Accounts receivable: 

Gross accounts receivable ................................................................... 89.2 75.1 

Allowance for uncollectible accounts .................................................... (20.7) (18.0) 

Accounts receivable, net ...................................................................... 68.5 57.1 

Taxes receivable: 

Gross taxes receivable ......................................................................... 151.5 141.9 

Allowance for doubtful accounts ........................................................... (113.7) (104.4) 

Taxes receivable, net ........................................................................... 37.8 37.5 

Total accounts and taxes receivable, net .......................................... 106.3 94.6 

Accounts receivable includes related interest receivable of $6.6 billion and $6.7 billion as of September 30, 

2011, and 2010, respectively.
66 NOTES TO THE FINANCIAL STATEMENTS 

Note 4. Loans Receivable, Mortgage-Backed Securities, 

and Loan Guarantee Liabilities, Net 

Direct Loan, Mortgage-Backed Securities, and Defaulted Guaranteed Loan Programs 

as of September 30, 2011, and 2010 

Face Value 

of Loans Outstanding

Long-term Cost

of/(Income From) 

Direct Loans and 

Defaulted 

Guaranteed Loans 

Outstanding 

Loans 

Receivable and 

Mortgage-Backed 

Securities, 

Net 

Subsidy Expense/

(Income) for the 

Fiscal Year 

(In billions of dollars) 2011 2010 2011 2010 2011 2010 2011 2010 

 

Federal Direct Student Loans - 

Education .............................................. 356.1 231.3 (25.3) 2.4 381.5 228.9 (28.6) (1.6) 

Federal Family Education Loans - 

Education .............................................. 147.3 138.9 (0.8) - 148.0 138.9 (4.9) (1.1) 

GSE Mortgage Backed Securities 

Purchase Program - Treasury ........... 70.6 164.3 (1.8) (7.9) 72.4 172.2 1.8 (0.6) 

Electric Loans - USDA .............................. 42.2 40.7 2.1 2.2 40.2 38.5 (0.2) - 

Rural Housing Services - USDA .......... 30.7 29.8 7.1 7.0 23.6 22.8 0.5 0.5 

State and Local Housing Finance 

Agency Initiative - Treasury................ 15.1 15.3 0.8 1.2 14.3 14.1 - 1.7 

Housing and Urban Development 

Loans................................................. 13.9 11.3 1.3 (0.2) 12.6 11.5 0.2 1.3 

Water and Environmental Loans - 

USDA ......................................................... 11.9 11.0 0.7 0.8 11.1 10.3 - 0.1 

Farm Loans - USDA ............................... 8.6 8.2 0.4 0.3 8.3 7.9 0.2 (0.1) 

Export-Import Bank Loans .................... 9.9 8.9 2.8 3.6 7.0 5.3 (0.4) (0.2) 

Disaster Loan Programs - SBA ............ 7.5 7.9 1.5 1.5 6.0 6.5 0.2 0.2 

Telecommunications Loans - USDA .... 4.5 4.3 - - 4.5 4.3 - - 

U. S. Agency for International 

Development Loans .......................... 4.7 5.3 1.3 1.9 3.4 3.4 - - 

Housing for the Elderly and Disabled 

- HUD ................................................ 2.8 3.2 - - 2.8 3.2 - - 

Food Aid - USDA ................................. 5.2 5.6 2.5 2.0 2.7 3.7 - - 

All Other Programs .............................. 45.5 26.6 11.8 9.2 33.7 17.1 2.2 0.6 

Total Direct Loans and Defaulted 

Guaranteed Loans .......................... 776.5 712.6 4.4 24.0 772.1 688.6 (29.0) 0.8 

 
NOTES TO THE FINANCIAL STATEMENTS 67

The Government has two different types of loans and loan guarantees. One major type of loan is direct loans 

such as the Department of Education’s (Education) Federal Direct Student Loans. Direct Loans includes purchases 

of asset-backed securities (ABS), such as the Treasury’s GSE MBS Purchase Program. 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 nonFederal 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 pre-1992 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, reestimates, amortizations, and writeoffs. 

Loan Guarantees as of September 30, 2011, and 2010 

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) 2011 2010 2011 2010 2011 2010 2011 2010 

 

Federal Housing Administration Loans - 

HUD ................................................................ 1,167.1 1,025.1 1,096.8 968.0 36.1 35.0 (7.2) (3.0) 

Federal Family Education Loans - 

Education ...................................................... 327.6 390.5 320.7 382.0 10.0 14.5 (11.2) (13.3) 

Export-Import Bank Guarantees .............. 70.7 61.7 70.7 61.7 1.2 1.4 (0.2) (0.2) 

Small Business Loans - SBA...................... 82.2 76.2 70.0 64.4 4.7 4.5 2.4 4.2 

Veterans Housing Benefit Programs - 

VA ................................................................. 247.7 214.7 66.2 58.1 5.1 4.9 0.6 1.3 

Rural Housing Services - USDA .............. 63.3 51.0 56.9 45.8 2.5 1.8 0.3 0.5 

Israeli Loan Guarantee Program - AID ... 11.6 11.9 11.6 11.9 1.3 1.9 - - 

Export Credit Guaranteed Programs - 

USDA ........................................................ 6.1 6.6 6.0 6.5 0.1 0.2 0.1 - 

Business and Industry Loans - USDA ..... 7.0 5.9 5.3 4.4 0.8 0.6 0.4 0.3 

Overseas Private Investment 

Corporation Credit Program .................... 4.9 5.0 4.9 5.0 0.2 0.1 - - 

Federal Ship Financing Fund (Title XI) - 

DOT ................................................................ 1.8 2.0 1.8 2.0 0.2 0.2 - - 

All Other Guaranteed Loan Programs..... 22.6 19.8 20.8 18.4 0.8 0.7 (0.1) - 

Total Loan Guarantees ........................... 2,012.6 1,870.4 1,731.7 1,628.2 63.0 65.8 (14.9) (10.2) 

 
68 NOTES TO THE FINANCIAL STATEMENTS 

Net loans receivable includes related interest and foreclosed property, and is included in the assets section of 

the Balance Sheets. 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 individual financial 

statements of the Department of Veterans Affairs (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 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. 

Major Loan Programs 

Education has two major education loan programs, authorized by Title IV of the Higher Education Act of 1965 

(HEA). The first program, the William D. Ford Federal Direct Student Loan Program, established in fiscal year 

1994, offers four types of education loans: Stafford, Unsubsidized Stafford, PLUS for parents and graduate or 

professional students, and consolidation loans. Evidence of financial need is required for a student to receive a 

subsidized Stafford loan. The other three types of loans are available to borrowers at all income levels. These loans 

usually mature 9 to 13 years after the student is no longer enrolled. They are unsecured. The second program, the 

Federal Family Education Loan (FFEL) Program, established in fiscal year 1965, is a guaranteed loan program. Like 

the William D. Ford Federal Direct Student Loan Program, it offered four types of loans: Stafford, Unsubsidized 

Stafford, PLUS for parents and graduate or professional students, and consolidation loans. Student Aid and Fiscal 

Responsibility Act (SAFRA), 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 July 1, 2010. During fiscal year 2010, FFEL 

loans receivable continued to increase significantly, principally due to amendments made to the HEA by the 

Ensuring Continued Access to Student Loans Act of 2008 (ECASLA). These amendments gave Education 

temporary authority to purchase FFEL loans and interests in those loans. This authority was to expire on July 1, 

2009; however, Public Law 110-350 extended the authority through July 1, 2010. 

The Housing and Economic Recovery Act of 2008 (HERA), Public Law 110-289, authorized the Treasury to 

enter into the GSE MBS Purchase Program. Under this program, the Treasury, using private sector asset managers, 

purchased on the open market as a portfolio of mortgage-backed securities issued by the GSEs. By purchasing these 

credit-guaranteed securities, the Treasury sought to broaden access to mortgage funding for current and prospective 

homeowners and to promote stability in the mortgage market. The asset managers were also authorized to enter into 

other trade/sell transactions such as pair offs, turns, assignments, and dollar rolls to further support the market under 

the HERA provision/mandate. The authority granted by Congress to purchase MBS expired on December 31, 2009, 

at which point the purchase of new securities ended, though the Treasury still retains its portfolio of previously 

purchased securities. 

The Treasury’s GSE MBS Purchase Program portfolio consists of mortgage pass-through securities issued by 

Freddie Mac and Fannie Mae. 

Under HERA, Treasury together with the FHFA, Fannie Mae, Freddie Mac, and HUD announced in October 

2009 an initiative to provide support to state and local HFAs. HFAs have historically played a central role in 

providing a safe, sustainable path to homeownership for working families in all 50 states and many localities across 

the country. This initiative is designed to support low mortgage rates and expand resources for low and middle 

income borrowers to purchase or rent homes, making them more affordable over the long term. In December 2009, 

several transactions closed as part of the HFA Initiative’s two separate programs: (1) TCLP and (2) the NIBP. As 

part of the TCLP, the Treasury has entered into participation agreements with Fannie Mae and Freddie Mac, 

supporting credit and liquidity facilities that the GSEs are providing to 11 states as part of the program. 

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 and 

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. HUD decided to raise the annual 
NOTES TO THE FINANCIAL STATEMENTS 69

premium and lower the upfront premium to aid in returning the Mutual Mortgage Insurance Fund to congressionally 

mandated levels of capital reserves without disruption to the marketplace.

The United States Department of Agriculture (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 Small Business Administration’s (SBA’s) Disaster Assistance Loan Program makes direct loans to disaster 

victims primarily for homes and personal property. 

The Export-Import Bank aids in financing and promoting U.S. exports. The average repayment term for these 

loans is approximately 7 years. 

Please refer to the individual financial statements of the agencies listed in the tables for significant detailed 

information regarding their direct and guaranteed loan programs. 
70 NOTES TO THE FINANCIAL STATEMENTS 

Note 5. 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 to help stabilize the financial system, restore the flow of credit to 

consumers and businesses, and tackle the foreclosure crisis. Under the TARP programs, Treasury made direct loans 

and equity investments as well as entered into the asset guarantees program. This authority to make new 

commitments to purchase or guarantee troubled assets expired on October 3, 2010. 

The following table lists the TARP programs and types: 

 

Program Program Type 

Capital Purchase Program Equity Investment/Subordinated Debentures 

American International Group, Inc. Investment 

Program * Equity Investment 

Targeted Investment Program Equity Investment 

Automotive Industry Financing Program Equity Investment and Direct Loan 

Consumer and Business Lending Initiative Direct Loan, Subordinated Debentures and 

Equity Investments 

Public-Private Investment Program Equity Investment and Direct Loan 

Asset Guarantee Program Asset Guarantee 

Housing Programs Under TARP ** Expenditure and Loss Sharing 

 

* Formerly known as the Systemically Significant Failing Institutions Program. 

** 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, equity investments, or asset guarantees. 

TARP Direct Loans and Equity Investments, Net and Asset Guarantee Program balances as of September 30, 

2011, and 2010 are as follows: 

Troubled Asset Relief Program as of September 30, 2011, and 2010 

(In billions of dollars) 2011 2010

 

Direct Loans and Equity Investments, Net..................................................... 80.1 142.5 

Asset Guarantee Program ............................................................................. - 2.2 

Total ............................................................................................................ 80.1 144.7 
NOTES TO THE FINANCIAL STATEMENTS 71

The Direct Loans and Equity Investments, Net represents the estimated net outstanding amount of direct loans and 

equity investments.

The table below is a summary of TARP loans and equity investments. 

Troubled Asset Relief Program Direct Loans and Equity Investments 

as of September 30, 2011, and 2010 

(In billions of dollars) 

Direct Loans 

and Equity 

Investments 

Subsidy 

Cost 

Allowance 

Net Direct 

Loans and 

Equity 

Investments 

Subsidy 

Expense 

(Income) 

for the 

Fiscal Year 

 2011 2010 2011 2010 2011 2010 2011 2010 

American International Group, Inc. 

Investment Program .................................. 51.1 47.5 (20.7) (21.4) 30.4 26.1 1.6 (7.7) 

Public-Private Investment Program ............. 15.9 13.7 2.4 0.7 18.3 14.4 (1.9) (0.7) 

Automotive Industry Financing Program 37.3 67.3 (19.4) (14.6) 17.9 52.7 9.7 (16.6)

Capital Purchase Program ........................... 17.3 49.8 (4.9) (1.5) 12.4 48.3 (1.8) 3.9 

Consumer and Business Lending 

Initiative ..................................................... 0.8 0.9 0.3 0.1 1.1 1.0 (0.2) 0.3 

Targeted Investment Program ..................... - - - - - - (0.2) (1.9) 

Total ........................................................... 122.4 179.2 (42.3) (36.7) 80.1 142.5 7.2 (22.7) 

 

American International Group, Inc. Investment Program (AIG) 

Treasury provided assistance to AIG in order to prevent its disorderly failure as well as to prevent broader 

disruption to the financial markets. In November 2008, Treasury invested $40.0 billion in AIG’s cumulative Series 

D perpetual cumulative preferred stock with a dividend rate of 10.0 percent compounded quarterly. On April 17, 

2009, AIG and Treasury restructured their November 2008 agreement. Under the restructuring, Treasury exchanged 

$40.0 billion of cumulative Series D preferred stock for $41.6 billion of non-cumulative 10.0 percent Series E 

preferred stock. In addition to the exchange, Treasury agreed to make available an additional $29.8 billion capital 

facility to allow AIG to draw additional funds if necessary to assist in AIG’s restructuring. As of January 14, 2011, 

AIG had drawn an aggregate of $27.8 billion from the capital facility. On September 30, 2010, Treasury, FRBNY, 

and AIG announced plans for a restructuring of the U.S. Government’s investments in AIG. The restructuring, 

which occurred on January 14, 2011, converted Treasury’s $27.8 billion investment in Series F preferred stock into 

$20.3 billion of interest in AIG Special Purpose Vehicles (SPVs), and 168 million shares of AIG common stock. As 

a result of the restructuring, Treasury under TARP also converted its AIG Series E preferred stock into 925 million 

shares of AIG common stock. 

At the completion of the January 14, 2011, restructuring, Treasury held 1,093 million shares of AIG common 

stock under TARP and the General Fund held an additional 563 million shares (see Note 6— Non-TARP 

Investments in American International Group, Inc.) resulting in a combined total of about 1.7 billion shares (or 92.1 

percent ownership) of AIG common stock. In fiscal year 2011, Treasury sold 200 million shares of AIG common 

stock (68 million General Funds shares and 132 million Treasury under TARP shares) for $5.8 billion, of which the 

General Fund and Treasury under TARP received $2.0 billion and $3.8 billion, respectively. Treasury also received 

$11.5 billion in distributions from the AIG SPVs in fiscal year 2011. Treasury received no payments from AIG in 

fiscal year 2010. At September 30, 2011, Treasury held 960 million shares of AIG common stock under TARP, and 

the General Fund held an additional 495 million shares, resulting in a combined total of about 1.5 billion shares of 

AIG common stock with a market value totaling approximately $31.9 billion, or 76.9 percent of AIG’s outstanding 

common stock on a fully diluted basis, of which TARP owned 50.8 percent. As of September 30, 2011, Treasury 

also owned preferred units in an AIG SPV with an outstanding balance of $9.3 billion. 
72 NOTES TO THE FINANCIAL STATEMENTS 

According to the terms of the preferred stock, if AIG misses four dividend payments, Treasury may appoint to 

the AIG Board of Directors, the greater of two members or 20.0 percent of the total number of directors of the 

Company. On April 1, 2010, Treasury appointed two directors to the Company’s Board as a result of non-payments 

of dividends. The additional two directors increased the total number of AIG directors to 12. The two additional 

Treasury-appointed directors remained on the Board as of September 30, 2011. 

Public Private Investment Program (PPIP) 

The PPIP is part of Treasury’s efforts to help restart the markets and provide liquidity for legacy assets. Under 

this program, Treasury makes equity and debt investments in investment vehicles (referred to as Public Private 

Investment Funds or “PPIFs”) established by private investment managers. The equity investment is used to match 

private capital and will equal not more than 50 percent of the total equity invested. Treasury’s debt commitment, at 

the option of the investment manager, equals to 50 percent or 100 percent of the total equity (including private 

equity). The PPIFs invest primarily in commercial mortgage-backed securities and non-agency residential MBS. At 

least 90 percent of the assets underlying any eligible asset must be situated in the United States. During fiscal year 

2010, Treasury disbursed $4.9 billion as equity investment and $9.2 billion as loans to these eight PPIFs. During 

fiscal year 2011, Treasury disbursed $1.1 billion as equity investment and $2.3 billion as loans to these PPIFs. At 

September 30, 2010, Treasury had equity investment in PPIFs outstanding of $4.8 billion and loans outstanding of 

$8.9 billion for a total of $13.7 billion. At September 30, 2011, Treasury had equity investment in PPIFs outstanding 

of $5.5 billion and loans outstanding of $10.4 billion for a total of $15.9 billion. In addition, as of September 30, 

2011, Treasury had legal commitments to disburse up to $4.3 billion for additional investments and loans in PPIFs. 

Automotive Industry Financing Program (AIFP) 

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 $49.5 billion to Old GM through various loan 

agreements including the initial loan for general and working capital purposes and the final loan for debtor in 

possession (DIP) financing while Old GM was in bankruptcy. Treasury assigned its rights in these loans (with the 

exception of $1.0 billion which remained in Old GM for wind down purposes and $7.1 billion that would be 

assumed) and previously received common stock warrants to a newly created entity New GM. New GM used the 

assigned loans and warrants to credit bid for substantially all of the assets of GM in a sale pursuant to Section 363 of 

the Bankruptcy Code (see 11 U.S.C. 363). Upon closing of the Section 363 sale, the credit bid loans and warrants 

were extinguished and Treasury received $2.1 billion in 9.0 percent cumulative perpetual preferred stock and 60.8 

percent of the common equity interest in New GM. In addition, New GM assumed $7.1 billion of the DIP loan, 

simultaneously paying $0.4 billion (return of warranty program funds), resulting in a balance of $6.7 billion. The 

assets received by Treasury as a result of the assignment and Section 363 sale are considered recoveries of the 

original loans for subsidy cost estimation purposes. During fiscal year 2010, Treasury received the remaining $6.7 

billion as full repayment of the DIP loan assumed. During fiscal year 2011, pursuant to a letter agreement between 

Treasury and New GM, New GM repurchased its preferred stock for 102.0 percent of its liquidation amount, or $2.1 

billion. As a result of the New GM initial public offering (IPO), in fiscal year 2011, Treasury sold approximately 

412 million shares of its GM common stock. Treasury received approximately $13.5 billion in net proceeds, and its 

equity stake in General Motors Company decreased from 60.8 percent to 33.3 percent. Market value of the 500 

million shares of New GM common stock held (representing 32 percent equity stake in New GM) as of September 

30, 2011, was $10.1 billion. On March 31, 2011, the Plan of Liquidation for Old GM became effective and 

Treasury’s $1.0 billion loan was converted to an administrative claim. Treasury retains the right to recover 

additional proceeds but recoveries are dependent on actual liquidation proceeds and pending litigation. Treasury 

recovered $0.1 billion in fiscal year 2011 on the administrative claim. Treasury does not expect to recover any 

significant additional proceeds from this claim. 
NOTES TO THE FINANCIAL STATEMENTS 73

GMAC LLC Rights Offering—In December 2008, Treasury agreed, in principal, to lend up to $1.0 billion to Old 

GM for participation in a rights offering by GMAC (now known as Ally Financial, Inc.) in support of GMAC’s 

reorganization as a bank holding company. The loan was secured by the GMAC common interest acquired in the 

rights offering. The loan was funded for $0.9 billion. In May 2009, Treasury exercised its exchange option under the 

loan and received 190,921 membership interests, representing approximately 35.36 percent of the voting interest at 

the time, in GMAC in full satisfaction of the loan. 

Ally Financial Inc. (formerly known as GMAC Inc.)—In December 2008, Treasury purchased preferred 

membership interests for $5.0 billion with an 8 percent annual distribution right (dividends) from GMAC. In May 

2009, Treasury had invested $7.5 billion in 9 percent Mandatory Convertible Preferred Stock in GMAC to support 

its ability to originate new loans to Chrysler dealers and consumers, and help address GMAC’s capital needs. As of 

September 30, 2009, Treasury owned $13.1 billion in preferred shares in GMAC, through purchases and the 

exercise of warrants, in addition to 35.36 percent of the common equity in GMAC, as described previously under 

GMAC LLC Rights Offering. 

In December 2009, Treasury invested $2.5 billion in 8 percent Trust Preferred Securities and $1.25 billion in 

GMAC’s Series F-2 shares which have a $50 per share liquidation preference and are convertible into GMAC 

common stock at the option of GMAC or Treasury. Absent an optional conversion, the Series F-2 shares 

automatically convert to common stock after 7 years from the issuance date. In addition, as part of the December 

2009 transactions, Treasury exchanged its preferred membership interests and its 9 percent Mandatory Convertible 

Preferred Stock for a combination of additional Series F-2 convertible shares and GMAC’s common shares. The 

additional shares in GMAC common stock increased Treasury’s ownership in GMAC from 35.36 percent to 56.3 

percent. 

In May 2010, GMAC changed its corporate name to Ally Financial, Inc. (Ally). As of September 30, 2010, 

Treasury owned $2.7 billion of Trust Preferred Securities and $11.4 billion of Series F-2 Convertible Securities in 

Ally, through purchases, exchanges, and the exercise of warrants, in addition to 56.3 percent of common equity in 

Ally. In December 2010, Treasury converted 110 million shares of the Series F-2 preferred stock into 531,850 

shares of Ally’s common stock. 

In March 2011, Treasury sold its Trust Preferred Securities for $2.7 billion. On March 31, 2011, Treasury 

announced that it had agreed to be named as a selling shareholder of common stock in Ally’s registration statement 

filed with the Securities and Exchange Commission (SEC) for a proposed initial public offering. Since March 31, 

2011, Ally has filed four amendments in response to SEC comments and the public offering has not been made. 

At September 30, 2011, Treasury held 981,971 shares of common stock (73.84 percent of Ally’s outstanding 

common stock) and 119 million shares of the Series F-2 preferred securities. 

Chrysler Holding LLC (Chrysler)

In January 2009, Treasury provided a $4.0 billion General Purpose Loan to a parent company of Chrysler 

(Chrysler Holdings). On April 30, 2009, Chrysler filed for Chapter 11 bankruptcy. In May 2009, Treasury provided 

an additional $1.9 billion to Chrysler under the terms of a DIP credit agreement. On June 10, 2009, substantially all 

of the assets of Chrysler were sold to a newly-created entity (New Chrysler). Recovery of the DIP loan is subject to 

the bankruptcy process associated with the Chrysler assets remaining after the sale to New Chrysler. 

In June 2009, Treasury entered into a credit agreement to lend an additional $6.6 billion. Also, New Chrysler 

assumed $0.5 billion of the General Purpose Loan, and the balance of $3.5 billion remained outstanding from the 

Chrysler Holdings. As of September 30, 2009, Treasury had funded approximately $4.6 billion of the $6.6 billion in 

new commitments to New Chrysler. Treasury also obtained other consideration relating to these new commitments, 

including a 9.85 percent equity interest in New Chrysler and additional notes with principal balances of 

approximately $0.3 billion and $0.1 billion. 

In fiscal year 2010, pursuant to the terms of a settlement agreement, Treasury received approximately $1.9 

billion and subsequently wrote-off the remaining $1.6 billion of the General Purpose Loan. As of September 30, 

2010, Treasury had loans outstanding from New Chrysler of $5.1 billion and owned a 9.85 percent equity interest in 

New Chrysler and additional notes with principal balances of approximately $0.4 billion. Additionally, as of 

September 30, 2010, Treasury had an interest in an old Chrysler entity as a result of the $1.9 billion DIP Loan, 

recovery of which is subject to the bankruptcy process associated with the Chrysler assets remaining after the sale to 

New Chrysler. In May 2011, New Chrysler repaid $5.1 billion, the additional notes totaling $0.4 billion and all 

associated interests. New Chrysler’s ability to draw the remaining $2.1 billion loan commitment was terminated. In 

July 2011, Fiat SpA paid Treasury $0.6 billion for all of its remaining equity interest and rights relating to New 

Chrysler. As a result of the fiscal year 2011 transactions, Treasury has no remaining interest in New Chrysler as of 
74 NOTES TO THE FINANCIAL STATEMENTS 

September 30, 2011. Treasury continues to hold a right to receive proceeds from a bankruptcy liquidation trust but 

no significant cash flows are expected. 

Capital Purchase Program 

In October 2008, Treasury began implementation of the TARP with 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 and support 

the economy. Under this program, Treasury purchased senior perpetual preferred stock from qualifying federally- or 

state-regulated banks, savings associations, and certain bank and savings and loan holding companies (Qualified 

Financial Institution (QFI)). In addition to the senior preferred stock, Treasury received warrants from public QFIs 

to purchase shares of common stock. The senior preferred stock has a stated dividend rate of 5.0 percent through 

year five, increasing to 9.0 percent in subsequent years thereafter. The dividends are cumulative for bank holding 

companies and subsidiaries of bank holding companies and non-cumulative for others and payable when and if 

declared by the institution’s board of directors. QFIs that are Sub-chapter S corporations issued subordinated 

debentures in order to maintain compliance with the Internal Revenue Code. The maturity of the subordinated 

debentures is 30 years and interest rates are 7.7 percent for the first 5 years and 13.8 percent for the remaining years 

thereafter. For fiscal years 2011 and 2010, repayments totaled $30.2 billion and $81.4 billion, respectively. 

The Consumer and Business Lending Initiative (CBLI) 

The Consumer and Business Lending Initiative is intended to help unlock the flow of credit to consumers and 

small businesses. The following three programs were established to help accomplish this: Term Asset-Backed 

Securities Loan Facility (TALF), Small Business Administration (SBA) 7(a) Securities Purchase Program, and the 

Community Development Capital Initiative (CDCI). 

TALF, which was created to help jump start the market for securitized consumer and small business loans, was 

created by the Board of Governors of the Federal Reserve System and Treasury to provide low-cost funding to 

investors in certain classes of ABS. Treasury participates in the program as part of Treasury’s Consumer and 

Business Lending Initiative by providing liquidity and credit protection to the FRBNY. As part of the program, the 

FRBNY has entered into a put agreement with the TALF, LLC, a special purpose vehicle created by the FRBNY. In 

the event of a TALF borrower default, the FRBNY will seize the collateral and sell it to the TALF, LLC under this 

agreement. Under the TALF, the FRBNY, as implementer of the TALF program, originates loans on a non-recourse 

basis to holders of certain AAA rated ABS. The TALF, LLC receives a monthly fee equal to the differences between 

the TALF loan rate and the FRBNY’s fee (spread) as compensation for entering into the put agreement. The 

accumulation of this fee will be used to fund purchases. In the event there are insufficient funds to purchase the 

collateral, Treasury committed to invest up to $20.0 billion in non-recourse subordinate notes issued by the TALF, 

LLC. On July 19, 2010, the Treasury commitment was reduced to $4.3 billion. Treasury disbursed $0.1 billion upon 

creation of the TALF, LLC and the remainder can be drawn to purchase collateral in the event the accumulated fees 

are not sufficient to cover purchases. As of September 30, 2011 and 2010, approximately $11.3 billion and $29.7 

billion of loans due to FRBNY remained outstanding, respectively. 

The SBA 7(a) Securities Purchase Program was created to provide additional liquidity to the SBA 7(a) market 

so that banks are able to make more small business loans. Under this program, Treasury purchases 7(a) Securities 

collateralized with 7(a) loans (these loans are guaranteed by the full faith and credit of the United States 

Government) packaged on or after July 1, 2008. As of September 30, 2010, Treasury has entered into trades to 

purchase about $0.4 billion, of which about $0.2 billion had settled. The remaining trades settled by December 30, 

2010. In May 2011, Treasury began selling its securities to bond market investors. As of September 30, 2011, 

Treasury held $0.1 billion of SBA 7(a) securities. 

The CDCI Initiative was created to provide additional low-cost capital to small banks to encourage more 

lending to small businesses. Under the terms of the initiatives, Treasury purchases senior preferred stock (or 

subordinated debt) from eligible CDFI financial institutions. The senior preferred stock has an initial dividend rate 

of 2 percent. CDFIs may apply to receive capital up to 5 percent of risk-weighted assets. To encourage repayment 

while recognizing the unique circumstances facing CDFIs, the dividend rate will increase to 9 percent after 8 years. 

CDFIs participating in the CPP, subject to certain criteria, were eligible to exchange, through September 30, 2010, 

their current CPP preferred shares (subordinated debt) for CDCI preferred shares (subordinated debt). As of 

September 30, 2010, and 2011, Treasury had $0.6 billion invested under the CDCI Initiative. 
NOTES TO THE FINANCIAL STATEMENTS 75

Targeted Investment Program (TIP) 

The TIP was designed to prevent a loss of confidence in financial institutions that could result in significant 

market disruptions, threatening the financial strength of similarly situated financial institutions, impairing broader 

financial markets, and undermining the overall economy. 

In fiscal year 2009, Treasury invested $20.0 billion in each of Bank of America and Citigroup under TIP. In 

December 2009, both institutions repaid the invested amounts along with dividends through the date of repayment. 

In fiscal year 2010, Treasury received a total of $1.1 billion in dividends on the Bank of America and Citigroup 

investments and proceeds of $1.2 billion from the sale of Bank of America warrants. In fiscal year 2011, Treasury 

sold its warrants from Citigroup under TIP for $0.2 billion, and closed the program.

Asset Guarantee Program (AGP) 

The AGP provided guarantees for assets held by systemically significant financial institutions that faced a risk 

of losing market confidence due in large part to a portfolio of distressed or illiquid assets. The AGP was applied 

with extreme discretion in order to improve market confidence in the systemically significant institution and in 

financial markets broadly. 

In January 2009, Treasury finalized the terms of a guarantee agreement with Citigroup. Under the agreement, 

Treasury, FDIC, and the FRBNY provided protection against the possibility of large losses on an asset pool of 

approximately $301.0 billion of loans and securities which remained on Citigroup’s balance sheet. Treasury’s 

guarantee was limited to $5.0 billion. As a premium for the guarantee, Citigroup issued approximately $7.0 billion of 

cumulative preferred stock (subsequently converted to trust preferred securities with similar terms) with an 8.0 percent 

stated dividend rate and a warrant for the purchase of common stock; approximately $4.0 billion and the warrant was 

issued to Treasury and approximately $3.0 billion was issued to the FDIC. For fiscal year 2010, the AGP’s subsidy 

income was $1.5 billion. 

On December 23, 2009, the Treasury, Federal Reserve, Federal Deposit Insurance Corporation, and Citigroup 

terminated this program. The Government parties did not pay any losses under the program and kept $5.2 billion of 

$7 billion in trust preferred securities as well as warrants for common shares that were issued by Citigroup as 

consideration for such guarantee. On September 29, 2010, Treasury exchanged its remaining trust preferred 

securities for other Citigroup trust preferred securities containing market terms to facilitate a sale. On September 30, 

2010, Treasury agreed to sell its trust preferred securities held for $2.2 billion. The sale was settled on October 5, 

2010, and additional warrants were sold in January 2011 for $0.07 billion. 

Housing Programs under TARP 

The following housing programs under TARP provide stability for both housing market and homeowners. 

These programs assist homeowners who are experiencing financial hardships to remain in their homes while they 

get back on their feet or relocate to a more sustainable living situation. These programs fall into three initiatives: 

• Making Home Affordable Program; 

• Housing Finance Agency Hardest-Hit Fund, and 

• Federal Housing Administration Refinance Program. 

As of September 30, 2011, and 2010, Treasury has committed up to $45.6 billion for these programs. Payments 

made under the housing program under TARP from inception through September 30, 2011, and 2010, amounted to 

$2.4 billion and 0.5 billion, respectively. 

For more details on the TARP, please see the Treasury’s Annual Financial Report. 
76 NOTES TO THE FINANCIAL STATEMENTS 

Note 6. Non-TARP Investments in American International 

Group, Inc. 

Under the initial terms of a capital facility agreement between the FRBNY and AIG, a 77.9 percent equity 

interest in AIG (in the form of Series C Convertible Participating Serial Preferred Stock convertible into 

approximately 77.9 percent of the issued and outstanding shares of AIG common stock) was issued to a trust (Trust) 

established by the FRBNY. Subsequent to the initial agreement, a reverse stock split of AIG’s common stock 

increased this equity interest to 79.8 percent. The General Fund of the U.S. Government was the sole beneficiary of 

the Trust. In connection with the establishment of the Trust, Treasury, as custodian of the General Fund, recorded a 

non-entity asset of $23.5 billion as of September 30, 2009, along with a corresponding entry to custodial revenue for 

the same amount, to reflect the value of the General Fund’s beneficiary interest holding in the Trust. As of 

September 30, 2010, the value of the Trust had declined by $2.7 billion, reducing the carrying value of this nonentity asset to $20.8 billion. 

On September 30, 2010, an AIG Recapitalization Agreement was established for the purpose of restructuring 

the holdings in AIG. This restructuring was executed on January 14, 2011, converting the Trust’s AIG preferred 

stock into 562.9 million shares of AIG common stock, and the Trust was dissolved (see Note 5 for a discussion of 

the TARP-related transactions that occurred in connection with the January 14, 2011, restructuring). 

On May 27, 2011, 200 million shares of AIG common shares held by the General Fund and Treasury under 

TARP (68 million and 132 million shares, respectively) was sold in the open market. The sale of the AIG common 

stock resulted in total gross cash proceeds of $5.8 billion, of which the General Fund and Treasury under TARP 

received $2.0 billion and $3.8 billion, respectively, for the fiscal year ended September 30, 2011. 

After taking into consideration the May 2011 sale of AIG common stock, the carrying value of the non-TARP 

investment in AIG was $10.9 billion as of September 30, 2011, which represented the fair value as of that date of the 

remaining AIG common stock held by the General Fund. As of September 30, 2010, the carrying value of the nonTARP investment in AIG was $20.8 billion, which represented the fair value, as of that date, of the General Fund’s 

sole beneficiary interest in the Trust. The fair value of the non-TARP AIG investments recorded as of September 30, 

2011, and 2010 were based on the market value of AIG’s common stock which is actively traded on the New York 

Stock Exchange. This basis of valuation was used for the Trust since the underlying AIG common stock, to which 

the preferred shares were converted, represented the best independent valuation available for the General Fund’s 

beneficial interest. During fiscal years 2011 and 2010, AIG investments held on behalf of the General Fund 

experienced a net fair value decline of $9.9 billion and $2.7 billion, respectively. Accordingly, the carrying value of 

the AIG common stock investment was decreased by this amount. 
NOTES TO THE FINANCIAL STATEMENTS 77

Note 7. Inventories and Related Property, Net 

 

Inventories and Related Property as of September 30, 2011, and 2010 

Defense

All 

Others Total Defense 

All 

Others Total

(In billions of dollars) 2011 2010 

 

Inventory purchased for resale ................. 65.1 0.6 65.7 81.2 0.7 81.9 

Inventory and operating material and 

supplies held for repair ........................... 48.3 0.6 48.9 46.5 0.6 47.1 

Inventory—excess, obsolete, and 

unserviceable ......................................... 7.8 - 7.8 8.4 0.1 8.5 

Operating materials and supplies held 

for use ..................................................... 131.4 2.7 134.1 131.6 2.3 133.9 

Operating materials and supplies held 

in reserve for future use ......................... - 0.2 0.2 - 0.4 0.4 

Operating materials and supplies— 

excess, obsolete, and unserviceable ..... 2.2 0.1 2.3 2.6 0.1 2.7 

Stockpile materials .................................... - 48.6 48.6 - 49.0 49.0 

Stockpile materials held for sale ............... 0.5 0.2 0.7 0.6 0.2 0.8 

Other related property ............................... 1.7 0.9 2.6 1.0 0.9 1.9 

Allowance for loss ..................................... (14.5) (0.3) (14.8) (39.7) (0.3) (40.0)

Total inventories and related property, 

net ........................................................ 242.5 53.6 296.1 232.2 54.0 286.2 

 

Inventory purchased for resale is the cost or value of tangible personal property purchased by an agency for 

resale. As of September 30, 2011, DOD values approximately 87 percent of its resale inventory using the moving 

average cost (MAC) method. An additional 9 percent (fuel inventory) is reported using the first-in-first-out method. 

DOD reports the remaining 4 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. 

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). 

Inventory—excess, obsolete, and unserviceable consists of: 

• 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. 

• Obsolete inventory that is no longer needed due to changes in technology, laws, customs, or operations. 

• Unserviceable inventory that is damaged beyond economic repair. 

Excess, obsolete, and unserviceable inventory is reported at net realizable value. 

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 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. 
78 NOTES TO THE FINANCIAL STATEMENTS 

Operating materials and supplies—excess, obsolete, and unserviceable consists of: 

• 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. 

• Obsolete operating materials and supplies are materials no longer needed due to changes in technology, laws, 

customs, or operations. 

• 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, and 

stockpile materials that are authorized to be sold. The majority of the amount reported by DOD is stockpile materials 

held for sale, and 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 individual financial statements for more 

information on stockpile materials. 

Other related property consists of the following: 

• 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. 

• 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 individual financial statements of the Department of Justice 

(DOJ), Treasury, and the Department of Homeland Security (DHS) for significant detailed information 

regarding seized property. 

• 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 unclaimed and abandoned merchandise. Please refer to the individual financial 

statements of DOJ, Treasury, and DHS for significant detailed information regarding forfeited property. 

• 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 individual financial statements of USDA and HUD for significant detailed information 

regarding foreclosed property. 
NOTES TO THE FINANCIAL STATEMENTS 79

Note 8. Property, Plant, and Equipment, Net 

 

Property, Plant, and Equipment as of September 30, 2011 

Cost 

Accumulated 

Depreciation/ 

Amortization Net 

(In billions of dollars) Defense

All 

Others Defense

All 

Others Defense 

All 

Others

Buildings, structures, and 

facilities .................................... 230.2 220.6 118.6 115.5 111.6 105.1 

Furniture, fixtures, and 

equipment ................................ 945.1 161.6 511.1 98.3 434.0 63.3 

Construction in progress ............ 46.5 47.5 N/A N/A 46.5 47.5 

Land ........................................... 10.6 11.9 N/A N/A 10.6 11.9 

Internal use software .................. 10.0 19.9 6.9 10.7 3.1 9.2 

Assets under capital lease ......... 1.2 2.9 0.7 1.5 0.5 1.4 

Leasehold improvements ........... 1.0 6.9 0.5 3.6 0.5 3.3 

Other property, plant, and 

equipment ................................ 1.2 6.2 - 3.1 1.2 3.1 

Subtotal ................................... 1,245.8 477.5 637.8 232.7 608.0 244.8 

Total property, plant, and 

equipment, net ................... 1,723.3 870.5 852.8 

 

Property, Plant, and Equipment as of September 30, 2010

Cost 

Accumulated

Depreciation/ 

Amortization Net 

(In billions of dollars) Defense

All

Others Defense

All 

Others Defense 

All

Others

Buildings, structures, and 

facilities .................................... 207.4 211.6 112.0 110.8 95.4 100.8 

Furniture, fixtures, and 

equipment ................................ 912.6 159.5 466.9 96.7 445.7 62.8 

Construction in progress ............ 38.6 41.3 N/A N/A 38.6 41.3 

Land ........................................... 10.5 11.7 N/A N/A 10.5 11.7 

Internal use software .................. 9.4 17.6 6.1 9.3 3.3 8.3 

Assets under capital lease ......... 1.0 3.2 0.6 1.4 0.4 1.8 

Leasehold improvements ........... 1.0 6.1 0.4 3.2 0.6 2.9 

Other property, plant, and 

equipment ................................ 1.2 7.8 - 4.2 1.2 3.6 

Subtotal ................................... 1,181.7 458.8 586.0 225.6 595.7 233.2 

Total property, plant, and 

equipment, net ................... 1,640.5 811.6 828.9 
80 NOTES TO THE FINANCIAL STATEMENTS 

For further information related to multi-use heritage assets, see Note 27—Stewardship Land and Heritage 

Assets. 

DOD comprises approximately 71.7 percent of the Government’s reported property, plant, and equipment net 

as of September 30, 2011. Refer to the individual financial statements of DOD, DOE, the United States Postal 

Service (USPS), the Tennessee Valley Authority (TVA), GSA, DHS, and the Department of Interior (DOI), 

Department of State, VA, and DOT for significant detailed information on the useful lives and related capitalization 

thresholds for property, plant, and equipment. These agencies comprise 94.5 percent of the Government’s total cost 

of property, plant, and equipment net of $852.8 billion as of September 30, 2011. 
NOTES TO THE FINANCIAL STATEMENTS 81

Note 9. Debt and Equity Securities 

Debt and Equity Securities as of September 30, 2011 

 By Category

Held-to-Maturity Available-for-Sale Trading 

(In billions of dollars) 

Cost 

Basis 

Unamortized 

Premium/

Discount

Net 

Investment Cost

Basis

Unrealized 

Gain 

Fair 

Value 

Cost 

Basis 

Unrealized 

Gain 

Fair

Value Total 

 

Debt securities: 

Non-U.S. Government ......... 0.2 - 0.2 15.5 0.3 15.8 5.1 0.1 5.2 21.2 

Commercial .......................... - - - - - - - - - - 

Mortgage/asset backed ....... - - - - - - 5.2 0.1 5.3 5.3 

Corporate and other bonds .. - - - - - - 11.2 0.8 12.0 12.0 

All other debt securities ....... - - - - - - 0.5 - 0.5 0.5 

 

Equity securities: 

Common stocks ................... - - - - - - 1.7 - 1.7 1.7 

Unit trust .............................. - - - - - - 12.3 3.6 15.9 15.9 

All other equity securities ..... 2.9 - 2.9 - - - 2.6 (0.1) 2.5 5.4 

Other .................................... 3.3 - 3.3 - - - 12.8 0.1 12.9 16.2 

Total debt and equity 

securities categorized 

as held-to-maturity, 

available-for-sale or 

trading ............................. 6.4 - 6.4 15.5 0.3 15.8 51.4 4.6 56.0 78.2 

Total RRB debt and 

equity securities .............. 21.5 

Total debt and equity 

securities ........................ 99.7 
82 NOTES TO THE FINANCIAL STATEMENTS 

Debt and Equity Securities as of September 30, 2010 

 By Category

Held-to-Maturity Available-for-Sale Trading 

(In billions of dollars) 

Cost 

Basis 

Unamortized 

Premium/

Discount

Net 

Investment Cost

Basis

Unrealized 

Gain 

Fair 

Value 

Cost 

Basis 

Unrealized 

Gain 

Fair

Value Total 

 

Debt securities: 

Non-U.S. Government ......... 0.2 - 0.2 12.3 0.3 12.6 4.5 0.5 5.0 17.8 

Commercial .......................... - - - - - - 0.2 - 0.2 0.2 

Mortgage/asset backed ....... - - - - - - 2.8 0.1 2.9 2.9 

Corporate and other bonds .. - - - - - - 9.5 0.9 10.4 10.4 

All other debt securities ....... - - - - - - 0.7 - 0.7 0.7 

Equity securities: 

Common stocks ................... - - - - - - 2.0 0.1 2.1 2.1 

Unit trust............................... 0.2 - 0.2 - - - 13.1 6.4 19.5 19.7 

All other equity securities ..... - - - 2.8 - 2.8 3.3 - 3.3 6.1 

Other .................................... 2.6 - 2.6 0.1 - 0.1 13.6 - 13.6 16.3 

Total debt and equity 

securities categorized 

as held-to-maturity, 

available-for-sale or 

trading ............................ 3.0 - 3.0 15.2 0.3 15.5 

 

 49.7 8.0 57.7 76.2 

Total RRB debt and 

equity securities .............. 22.7 

Total debt and equity 

securities ........................ 98.9 
NOTES TO THE FINANCIAL STATEMENTS 83

Debt and Equity Securities as of September 30, 2011, and 2010 

By Agency 

(In billions of dollars) 2011 2010 

 

Debt and Equity Securities: 

Pension Benefit Guaranty Corporation ......................................... 47.4 49.5 

Railroad Retirement Board ........................................................... 21.5 22.7 

Exchange Stabilization Fund ........................................................ 15.8 12.6 

Tennessee Valley Authority .......................................................... 8.6 8.2 

All other ......................................................................................... 6.4 5.9 

Total Debt and Equity Securities ................................................ 99.7 98.9 

 

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. TVA also has a small investment in availablefor-sale securities. 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 information. The TVA balance includes $7.0 billion as of September 30, 2011, 

and 2010, respectively, for the Tennessee Valley Authority Retirement System (TVARS). Please refer to the 

individual financial statements of PBGC, NRRIT, Treasury, TVA and TVARS for more detailed information related 

to debt and equity securities. These agencies comprise 93.6 percent of the total reported debt and equity securities of 

$99.7 billion as of September 30, 2011. 
84 NOTES TO THE FINANCIAL STATEMENTS 

Note 10. Derivatives 

Derivatives are financial instruments that entities use to hedge their particular exposure to some sort of 

financial risk. These financial risks include interest rate risk, market price risk, credit risk, foreign exchange risk, 

and commodity risk. As FASAB (which determines GAAP for Federal entities) is silent on this issue, the accounting 

for derivative instruments are governed by FASB ASC Topic 815, Derivatives and Hedging, which aims to 

highlight to financial statement users additional disclosures on an entity’s objectives in its use of derivatives and the 

method of accounting for such financial instruments. Derivatives are accounted for at market value in accordance 

with this standard. Derivatives are marked to market with changes in value reported within financial income. The 

hedge strategy (i.e., fair value, cashflow, or foreign currency) employed determines the financial statement impact 

on their statement of operations and net position. Per ASC Topic 815, the fair value of derivative instruments shall 

be presented on a gross basis when they are subject to master netting agreements. 

PBGC uses derivatives to mitigate investment risks, enhance investment returns (derivatives are not used to 

leverage investment portfolios) and as a liquid and cost efficient substitute for positions in physical securities. PBGC 

utilizes a no hedging designation which results in the gain or loss on a derivative instrument being recognized 

currently in earnings. PBGC elects to net its derivative receivables and derivative payables and the related cash 

collateral received for its non-exchange derivative contracts subject to International Swaps and Derivatives 

Association, Inc. master agreements. As of September 30, 2011, PBGC had $0.1 billion of derivatives in an asset 

position (recorded in other assets). PBGC had $(0.02) billion of derivatives in an asset position (recorded in other 

assets) as of September 30, 2010, and $(0.01) billion of derivatives in a liability position (recorded in other 

liabilities) as of September 30, 2011, and 2010. 

Other than certain derivative instruments in investment funds, TVA uses derivatives purely for hedging 

purposes and not for speculative purposes. The accounting for changes in fair value of these instruments depends on 

whether TVA uses regulatory accounting to defer the derivative gains and losses, and whether the derivative 

instrument qualifies for hedge accounting treatment. As of September 30, 2011, and 2010, respectively, TVA had 

$0.4 billion and $0.2 billion worth of derivatives in an asset position (recorded in other assets), and $2.1 billion and 

$1.6 billion worth of derivatives in a liability position (recorded in other liabilities). 

The gain/(loss) on derivatives was $0.1 billion and $0.2 billion for PBGC and $(0.1) billion and $(0.1) billion 

for TVA for fiscal years 2011 and 2010, respectively. 

Please refer to the individual financial statements of PBGC and TVA for more detailed information related to 

derivatives. 
NOTES TO THE FINANCIAL STATEMENTS 85

Note 11. Investments in and Liabilities to GovernmentSponsored Enterprises 

Fannie Mae and Freddie Mac are stockholder-owned GSEs. Congress established the GSEs to support the 

supply of mortgage loans. A key function is to package purchased mortgages into securities, which are subsequently 

sold to investors. 

In the lead 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. 

On September 7, 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 current market instability. 

The actions taken by Treasury thus far are temporary, as defined by section 1117 of HERA, 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. The FHFA director may terminate the conservatorship if safe and solvent 

conditions can be established. Draws under the SPSPAs are designed to ensure the GSEs maintain positive net worth 

as a result of any net losses from operations, and also meet taxpayer dividend requirements under the SPSPAs. 

While this arrangement is somewhat circular in the event dividends exceed net income and draws are made to fund 

dividends, the SPSPAs were structured to ensure any draws result in an increased nominal investment as further 

discussed below. Per SFFAC No. 2, Entity and Display, these entities meet the criteria of “bailed out” entities. 

Accordingly, the Federal 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 (SPSPAs) 

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 nontransferable 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. 

The senior preferred stock accrues dividends at 10.0 percent per year, payable quarterly. This rate will increase 

to 12 percent if, in any quarter, the dividends are not paid in cash, until all accrued dividends have been paid. 

Dividends of $15.6 billion and $12.1 billion were received during fiscal years ended September 30, 2011, and 

September 30, 2010, respectively. In addition, beginning on March 31, 2011, the GSEs were scheduled to begin 

paying Treasury a Periodic Commitment Fee (PCF) on a quarterly basis, payable in cash or via an increase to the 

liquidation preference. The PCF was to initially be established by Treasury on December 31, 2010, based on mutual 

agreement between Treasury and each GSE in consultation with the Chairman of the Federal Reserve Board, and 

then subsequently re-established every 5 years thereafter. This fee may be waived by Treasury for up to 1 year at a 

time, if warranted by adverse mortgage market conditions. Treasury waived the PCF for the calendar year 2011 

given that the imposition of the PCF at that time would not fulfill its intended purpose of generating increased 

compensation to the American taxpayer. 

These initial 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 originally $100 billion and, in May 2009, the maximum 

was raised to $200 billion. In December 2009, Treasury amended the SPSPAs to replace the $200 billion per GSE 

funding commitment cap with a formulaic cap that will allow continued draws for 3 years at amounts that will 

automatically adjust upwards quarterly by the cumulative amount of any losses realized by either GSE and 

downward by the cumulative amount of any gains, but not below $200 billion, and will become fixed at the end of 

the 3 years. At the conclusion of the 3 year period ending December 2012, the remaining commitment will then be 

fully available to be drawn per the terms of the agreements (referred to hereafter as the “Adjusted Caps”). 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. 
86 NOTES TO THE FINANCIAL STATEMENTS 

Actual payments to the GSEs for fiscal years ended September 30, 2011, and 2010, were $20.8 billion and 

$52.6 billion, respectively. Additionally, $316.2 billion and $359.9 billion were accrued as a contingent liability as 

of September 30, 2011, and 2010, respectively. This accrued contingent liability is based on the projected draws 

under the SPSPAs. It is undiscounted and does not take into account any of the offsetting dividends which may be 

received as a result of those draws. 

The $316.2 billion contingent liability as of September 30, 2011, represents the total estimated future payments 

for the life of the agreement under the Adjusted Caps and is the most likely liability estimate. Under this scenario, 

the estimated ultimate payments made to the GSEs under the SPSPAs total $485.2 billion. This amount consists of 

the $169.0 billion of payments made through September 30, 2011, and the $316.2 billion liability as of that date. 

Under an “extreme case” scenario, the estimated ultimate payments made to the GSEs under the SPSPAs total 

$545.1 billion. 

OMB issued guidance to Treasury on October 7, 2009, allowing the use of fair value accounting for nonFederal securities beginning with reporting for fiscal year 2009. As a result, the GSE investments are reported at fair 

value as of September 30, 2011, and 2010. Annual valuations are performed as of September 30 for the preferred 

stock and warrants. In accordance with SFFAS No. 7, the annual valuation is classified as usual and recurring and 

thus recorded as an expense or revenue to the financial statements. 

Changing Regulatory Environment 

On June 20, 2011, FHFA published, in the Federal Register, a final rule to clarify certain terms of 

conservatorship and receivership operations for the GSEs. This rule was effective July 20, 2011. The key issues 

addressed in the final rule are the status and priority of claims and the relationships among various classes of 

creditors and equity-holders under conservatorships or receiverships. 

On July 21, 2010, the President signed the Wall Street Reform and Consumer Protection Act (Dodd-Frank 

Act), into law, which significantly changed the regulation of the financial services industry, including the creation of 

new standards related to regulatory oversight of financial institutions deemed systemically important; an orderly 

liquidation mechanism for these institutions; and oversight of derivatives, capital requirements, asset-backed 

securitization, mortgage underwriting, and consumer financial protection. The Dodd-Frank Act may result in the 

GSEs being subjected to new and additional regulatory oversight and standards, which would lead to increased 

restrictions on their day-to-day business and operations. Also, it contains a provision requiring the Secretary of the 

Treasury to conduct a study and develop recommendations regarding the options for ending the conservatorship. On 

February 11, 2011, the President delivered to Congress a report from the Secretary 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 what will be done with the GSEs. 
NOTES TO THE FINANCIAL STATEMENTS 87

As of September 30, 2011, and 2010, GSE investments consisted of the following: 

Investments in GSE as of September 30, 2011 

(In billions of dollars) 

Gross 

Investments 

as of 9/30/11 

Cumulative 

Valuation 

(Loss) 

9/30/11 

Fair 

Value 

Fannie Mae Senior Preferred Stock ............. 104.5 (26.7) 77.8 

Freddie Mac Senior Preferred Stock ............ 66.0 (12.4) 53.6 

Fannie Mae Warrants Common Stock ......... 3.1 (2.1) 1.0 

Freddie Mac Warrants Common Stock ........ 2.3 (1.7) 0.6 

Total GSE Investment ................................ 175.9 (42.9) 133.0 

Investments in GSE as of September 30, 2010 

(In billions of dollars) 

Gross 

Investments 

as of 9/30/10 

Cumulative 

Valuation (Loss) 

9/30/10 

Fair 

Value 

Fannie Mae Senior Preferred Stock ............. 85.9 (29.4) 56.5 

Freddie Mac Senior Preferred Stock ............ 63.9 (12.7) 51.2 

Fannie Mae Warrants Common Stock ......... 3.1 (2.1) 1.0 

Freddie Mac Warrants Common Stock ........ 2.3 (1.8) 0.5 

Total GSE Investment ................................ 155.2 (46.0) 109.2 
88 NOTES TO THE FINANCIAL STATEMENTS 

Note 12. Other Assets 

 

Other Assets as of September 30, 2011, and 2010 

 

(In billions of dollars) 2011 2010

 

Advances and prepayments ....................................................... 112.9 90.8 

FDIC Receivable from Resolution Activity .................................. 29.3 49.7 

NCUA Loans ............................................................................... - 10.1 

Regulatory assets ....................................................................... 19.7 15.2 

Other ........................................................................................... 17.4 17.5 

Total other assets ..................................................................... 179.3 183.3 

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 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 bid 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. 

The National Credit Union Administration (NCUA) provides a variety of loans as a liquidity lender to credit 

unions experiencing unusual or unexpected liquidity shortfalls. These loans can be either short or long term. NCUA 

also provides loans to stimulate economic development in low-income communities. 

With regard to regulatory assets, the DOE’s Power Marketing Authorities (PMAs) and the TVA record certain 

amounts as assets in accordance with FASB 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, 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). 
NOTES TO THE FINANCIAL STATEMENTS 89

Note 13. Accounts Payable 

 

Accounts Payable as of September 30, 2011, and 2010 

(In billions of dollars) 2011 2010 

 

Department of Defense ................................................................................. 26.1 31.1 

Department of the Treasury .......................................................................... 4.8 5.4 

Department of Education .............................................................................. 4.2 4.8 

Department of Homeland Security ................................................................ 2.9 2.6 

General Services Administration ................................................................... 2.7 2.4 

Department of Justice ................................................................................... 2.5 2.5 

Tennessee Valley Authority .......................................................................... 2.4 2.4 

Department of State ...................................................................................... 1.9 1.8 

Department of Energy ................................................................................... 1.8 2.0 

Agency for International Development .......................................................... 1.7 2.1 

U.S. Postal Service ....................................................................................... 1.7 1.9 

National Aeronautics and Space Administration ........................................... 1.4 1.3 

Department of Housing and Urban Development ......................................... 1.4 1.0 

Department of Transportation ....................................................................... 1.2 0.7 

Department of Veterans Affairs ..................................................................... 1.1 5.0 

All other ......................................................................................................... 5.6 5.9 

 Total accounts payable .............................................................................. 63.4 72.9 

 

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. 
90 NOTES TO THE FINANCIAL STATEMENTS 

Note 14. Federal Debt Securities Held by the Public and 

Accrued Interest 

 

Federal Debt Securities Held by the Public and Accrued Interest 

(In billions of dollars) 

Balance 

September 30,

2010 

Net 

Change

During

Fiscal 

Year 

2011 

Balance 

September 30,

2011 

Average Interest 

Rate 

2011 2010 

 

Treasury securities (public): 

Marketable securities: 

Treasury bills .............................. 1,783.7 (308.1) 1,475.6 0.1% 0.2% 

Treasury notes ........................... 5,252.6 1,154.4 6,407.0 2.3% 2.6% 

Treasury bonds .......................... 846.0 170.4 1,016.4 5.8% 6.1% 

Treasury inflation-protected 

securities (TIPS) ...................... 593.6 111.7 705.3 1.9% 2.2% 

Total marketable Treasury 

securities .................................... 8,475.9 1,128.4 9,604.3 

 

Nonmarketable securities ............. 546.9 (24.2) 522.7 2.8% 2.8% 

Net unamortized premiums/ 

(discounts) ............................... (33.9) 4.4 (29.5) 

Total Treasury securities, net 

(public) .......................................... 8,988.9 1,108.6 10,097.5 

 

Agency securities: 

Tennessee Valley Authority .......... 23.4 1.0 24.4 

All other agencies ......................... 0.3 - 0.3 

Total agency securities, net of 

unamortized premiums and 

discounts ....................................... 23.7 1.0 24.7 

 

Accrued interest payable ............. 47.4 4.5 51.9 

 

Total Federal debt securities 

held by the public and 

accrued interest ....................... 9,060.0 1,114.1 10,174.1 

 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 at least 1 year, but not more than 10 years. 

Bonds–Long-term obligations of more than 10 years. 

TIPS–Term of more than 5 years. 
 NOTES TO THE FINANCIAL STATEMENTS 91

Federal debt securities held by the public outside the Government are held by individuals, corporations, State 

or local governments, FRBs, foreign governments, and central banks. The above table details Government 

borrowing primarily to finance operations and shows marketable and nonmarketable securities at face value less net 

unamortized discounts including accrued interest. 

Securities that represent Federal debt held by the public are issued primarily by the Treasury and include: 

• Interest-bearing marketable securities (bills, notes, bonds, and inflation-protected). 

• 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). 

• 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 2011 and 2010. 

Gross Federal debt (with some adjustments) is subject to a statutory ceiling (i.e., the debt limit). 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. On December 28, 2009, Public Law 111-123 was enacted, which increased the 

statutory debt limit to $12,394.0 billion. On February 12, 2010, Public Law 111-139 was enacted, which increased 

the statutory debt limit to $14,294.0 billion. On August 2, 2011, Public Law 112-25 was enacted, which increased 

the statutory debt limit to $14,694.0 billion on August 2, 2011, and to $15,194.0 billion on September 22, 2011. 

Public Law 112-25 also established procedures to further increase the statutory debt limit. Prior to the enactment of 

Public Law 112-25, Treasury faced a period that required it to depart from its normal debt management procedures 

and to invoke legal authorities to avoid exceeding the statutory debt limit. As of September 30, 2011, and 2010, debt 

subject to the statutory debt limit was $14,746.6 billion and $13,510.8 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). 
92 NOTES TO THE FINANCIAL STATEMENTS 

 

Intragovernmental Debt Holdings: Federal Debt Securities 

Held as Investments by Government Accounts as of September 30, 2011, 

and 2010 

(In billions of dollars) 

Balance 

2010 

Net 

Change 

During 

Fiscal Year 

2011 

Balance 

2011 

Social Security Administration, Federal Old-Age and 

Survivors Insurance Trust Fund ................................. 2,399.1 93.4 2,492.5 

Office of Personnel Management, Civil Service 

Retirement and Disability Fund .................................. 780.4 23.4 803.8 

Department of Defense, Military Retirement Fund........ 282.0 44.0 326.0 

Department of Health and Human Services, Federal 

Hospital Insurance Trust Fund ................................... 279.5 (33.6) 245.9 

Social Security Administration, Federal Disability 

Insurance Trust Fund .................................................. 187.2 (25.2) 162.0 

Department of Defense, Medicare-Eligible Retiree 

Health Care Fund ......................................................... 142.3 19.4 161.7 

Department of Health and Human Services, Federal 

Supplementary Medical Insurance Trust Fund........... 71.0 (0.6) 70.4 

Department of Energy, Nuclear Waste Disposal .......... 47.6 1.0 48.6 

Federal Deposit Insurance Corporation Funds ............. 47.0 (1.4) 45.6 

Office of Personnel Management, Postal Service 

Retiree Health Benefits Fund ..................................... 42.1 1.6 43.7 

Office of Personnel Management, Employees Life 

Insurance .................................................................... 37.6 2.1 39.7 

Department of the Treasury, Exchange Stabilization 

Fund ............................................................................ 20.4 2.3 22.7 

Pension Benefit Guaranty Corporation Fund ................ 19.9 1.1 21.0 

Office of Personnel Management, Employees Health 

Benefits Fund .............................................................. 16.2 3.0 19.2 

Department of State, Foreign Service Retirement 

and Disability Fund ........................................................ 15.9 0.5 16.4 

Department of Transportation, Highway Trust Fund..... 24.5 (8.2) 16.3 

Department of Labor, Unemployment Trust Fund ........ 18.7 (2.7) 16.0 

National Credit Union Share Insurance Fund ............... 9.3 1.4 10.7 

All other programs and funds ........................................ 97.6 3.5 101.1 

Subtotal ....................................................................... 4,538.3 125.0 4,663.3 

Unamortized net (discounts)/premiums ................... 38.4 9.2 47.6 

Total intragovernmental debt holdings, net ........... 4,576.7 134.2 4,710.9 

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. This includes trust funds that are 

earmarked funds. For more information on earmarked funds, see Note 24─Earmarked Funds. These 

intragovernmental debt holdings are eliminated in the consolidation of these financial statements.
 NOTES TO THE FINANCIAL STATEMENTS 93

Note 15. Federal Employee and Veteran Benefits Payable 

 

Federal Employee and Veteran Benefits Payable as of September 30, 2011, 

and 2010 

 

Civilian Military Total

(In billions of dollars) 2011 2010 2011 2010 2011 2010 

 

Pension and accrued 

benefits .............................. 1,619.7 1,632.9 1,361.3 1,262.7 2,981.0 2,895.6 

Post-retirement health and 

accrued benefits ................ 342.5 355.5 842.3 904.7 1,184.8 1,260.2 

Veterans compensation 

and burial benefits ............. N/A N/A 1,533.7 1,474.8 1,533.7 1,474.8 

Life insurance and accrued 

benefits .............................. 44.6 44.0 11.1 11.7 55.7 55.7 

FECA benefits ...................... 24.2 21.8 8.3 8.3 32.5 30.1 

Liability for other benefits ..... 1.6 0.4 2.9 3.5 4.5 3.9 

Total Federal employee 

and veteran benefits 

payable ............................ 2,032.6 2,054.6 3,759.6 3,665.7 5,792.2 5,720.3 

 

Change in Pension and Accrued Benefits 

Civilian Military Total

(In billions of dollars) 2011 2010 2011 2010 2011 2010 

Actuarial accrued pension 

liability, beginning of 

fiscal year .............................. 1,632.9 1,529.4 1,262.7 1,177.1 2,895.6 2,706.5 

 

Pension Expense: 

Expected normal costs ............ 36.8 31.8 24.9 24.0 61.7 55.8 

Interest on pension liability 

during the period ................... 78.3 93.4 62.6 67.0 140.9 160.4 

Prior (or past) service cost 

from the initiation of a new 

plan ....................................... - 0.1 - - - 0.1 

Actuarial (gains)/losses (from 

experience) ........................... (70.6) (39.8) 0.1 (21.6) (70.5) (61.4) 

Actuarial (gains)/losses (from 

assumption changes) ............ 15.9 90.5 62.0 66.6 77.9 157.1 

Total pension expense .......... 60.4 176.0 149.6 136.0 210.0 312.0 

Less benefits paid ................. 73.6 72.5 51.0 50.4 124.6 122.9 

 

Actuarial accrued 

pension liability, end of 

fiscal year .............................. 1,619.7 1,632.9 1,361.3 1,262.7 2,981.0 2,895.6 

 
94 NOTES TO THE FINANCIAL STATEMENTS 

Change in Post-Retirement Health and Accrued Benefits 

 

(In billions of dollars) Civilian Military Total 

2011 2010 2011 2010 2011 2010 

Actuarial accrued postretirement health benefits 

liability, beginning of fiscal 

year ........................................... 355.5 352.2 904.7 825.8 1,260.2 1,178.0 

 

Post-Retirement Health 

Benefits Expense: 

Prior (and past) service costs 

from plan amendments ........... - (0.1) (15.9) - (15.9) (0.1) 

Normal costs .............................. 14.5 13.4 24.0 21.4 38.5 34.8 

Interest on liability ...................... 17.8 21.7 45.8 48.0 63.6 69.7 

Actuarial (gains)/losses (from 

experience) ............................. (17.9) (18.2) (1.1) 154.7 (19.0) 136.5 

Actuarial (gains)/losses (from 

assumption changes) .............. (13.8) (0.1) (94.0) (125.4) (107.8) (125.5) 

Total post-retirement health 

benefits expense .................. 0.6 16.7 (41.2) 98.7 (40.6) 115.4 

Less claims paid ........................ 13.6 13.4 21.2 19.8 34.8 33.2 

Actuarial accrued postretirement health 

benefits liability, end of 

fiscal year ............................ 342.5 355.5 842.3 904.7 1,184.8 1,260.2 

 

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 civilian and military employees. 

OPM administers the largest civilian plan. DOD administers the largest military plan. Other significant pension 

plans with more than $10 billion in accrued benefits payable include those of the Coast Guard (DHS) and Foreign 

Service (Department of State). 

Change in Civilian Life Insurance and Accrued Benefits 

(In billions of dollars) 2011 2010 

Actuarial accrued life insurance benefits liability, 

beginning of fiscal year ......................................................... 44.0 39.7 

Life Insurance Benefits Expense: 

New entrant expense ............................................................... 0.4 0.3 

Interest on liability ..................................................................... 2.1 2.4 

Actuarial (gains)/losses (from experience) ............................... (0.5) (0.4) 

Actuarial (gains)/losses (from assumption changes) ............... (0.9) 2.5 

Total life insurance benefits expense .................................... 1.1 4.8 

Less costs paid ......................................................................... 0.5 0.5 

Actuarial accrued life insurance benefits liability, end 

of fiscal year ...................................................................... 44.6 44.0 

 
 NOTES TO THE FINANCIAL STATEMENTS 95

Significant Long-Term Economic Assumptions Used in Determining 

Pension Liability and the Related Expense 

Civilian Military 

2011 2010 2011 2010

FERS CSRS FERS CSRS 

Rate of interest ..................................... 4.90% 4.60% 5.10% 4.80% 4.80% 5.00% 

Rate of inflation .................................... 2.40% 2.40% 2.50% 2.50% 2.50% 2.40% 

Projected salary increases ................... 3.10% 3.10% 3.50% 3.50% 3.30% 3.60% 

 

Significant Long-Term Economic Assumptions Used in Determining 

Post-Retirement Health Benefits and the Related Expense 

 

 

Civilian Military 

2011 2010 2011 2010 

 

Rate of interest ................................................ 4.90% 5.10% 4.90% 5.00% 

Single equivalent medical trend rate - - 5.20% 5.80% 

Ultimate medical trend rate ............................. 4.35% 4.40% 5.25% 5.65% 

 

Significant Long-Term Economic Assumptions Used in Determining Life 

Insurance Benefits and the Related Expense 

Civilian 

2011 2010 

Rate of interest ................................................ 4.80% 4.90% 

Rate of increase in salary ................................ 3.10% 3.50% 

 

In fiscal year 2010, agencies implemented 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. The standard requires the separate presentation of 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. 

DOD’s long-term ultimate medical trend rate for post-retirement health benefits liability is 5.25 percent for 

fiscal year 2011 and 5.65 percent for fiscal year 2010. For disclosure and comparison purposes, DOD’s estimate of a 

single equivalent medical trend rate for fiscal year 2011 is 5.2 percent and for fiscal year 2010 is 5.8 percent, which 

is an approximation of the single equivalent rate that would produce that same actuarial liability as the actual rates 

used. Please refer to the individual financial statements of DOD for further details regarding Military Retirement 

Health Benefits-Medical Trend. 
96 NOTES TO THE FINANCIAL STATEMENTS 

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. These are 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). 

CSRDF monies are generated primarily from employees’ contributions, agency contributions, payments from 

the General Fund, and interest on investments in Treasury securities. See Note 24—Earmarked Funds. 

The Federal Retirement Thrift Investment Board administers the Thrift Savings Plan (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 in the Balance Sheets. The G Fund held $139.3 billion and $123.6 billion in nonmarketable Treasury securities as of September 30, 2011, and 2010, respectively. 

Post-Retirement Health Benefits 

The post-retirement civilian health benefit liability is an estimate of the Government’s future cost of providing 

post-retirement 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. 

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. The OPM actuary uses interest rate, inflation, and salary increase assumptions that are consistent with 

the pension liability. 

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 ultimate payments. These estimated payments have been discounted to present value using 

OMB’s interest rate assumptions for 10-year U.S. Treasury notes. For 2011, a 3.54 percent interest rate was assumed 

in year one and 4.03 percent was assumed for year two and thereafter. 

The DOL calculates the FECA liability using wage inflation factors cost of living adjustments or (COLA) and 

medical inflation factors (Consumer Price Index–Medical or (CPIM)). The table below reflects the compensation 

COLAs and CPIMs used in the estimations for various charge-back years. 

Fiscal Year COLA CPIM 

2012 2.10% 3.07% 

2013 2.53% 3.62% 

2014 1.83% 3.66% 

2015 1.93% 3.73% 

2016+ 2.00% 3.73% 
 NOTES TO THE FINANCIAL STATEMENTS 97

Military Employees (Including Veterans) 

Pensions 

The DOD Military Retirement Fund (MRF) finances 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, assumption and benefit changes, and actuarial experience. 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 to pay for the 

current years’ service cost; annual payments from 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 

nondisability retirement pay, disability retirement pay, and survivor annuity programs. Military personnel who 

remain on active duty for 20 years or longer are eligible for retirement. There are three different retirement benefit 

formulas that are currently being used by the military: Final Pay, High-3 Year Average, and Career Status 

Bonus/Military Retirement Reform Act of 1986 (REDUX). The date an individual enters the military determines 

which retirement system they would fall under and if they have the option to pick their retirement system. For more 

information on these benefits, see DOD’s Websites 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 their dependents also are entitled 

to participate in TRICARE, 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 

(PPO), and health maintenance organization (HMO) designs. 

Since fiscal year 2002, TRICARE, as second payer to Medicare, covers military retirees and their dependents 

after they become Medicare eligible. This TRICARE coverage for Medicare eligible beneficiaries requires that the 

beneficiary enroll in Medicare Part B 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 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. 

Chapter 56 of Title 10, U.S.C. 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. 

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. Accordingly, VA recognizes the 

medical care expenses in the period the medical care services are provided. For the fiscal years 2009 through 2011, 

the average medical care cost per year was $37.0 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 serviceconnected disabilities, if not on active duty. 

Burial benefits include a burial and plot or interment allowance payable for a veteran who, at the time of death, 

is qualified to receive compensation or a pension, or whose death occurred in a VA facility. 

The liability for veterans’ compensation and burial benefits payable increased by $58.9 billion in fiscal year 

2011, and increased by $157.3 billion in fiscal year 2010. 
98 NOTES TO THE FINANCIAL STATEMENTS 

The net cost of Veterans Compensation and Burial benefits is $58.9 billion and $223.8 billion for fiscal years 

2011 and 2010, respectively. The fiscal year 2010 net cost of $223.8 billion does not include the $(66.5) billion 

cumulative effect of changes in accounting principle from adopting SFFAS No. 33 in fiscal year 2010. 

Several significant actuarial assumptions were used in the valuation of compensation, pension, 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 and pension programs; and (3) a 

proportional share of those in active military service as of the valuation date who will become veterans in the Future. 

The Veterans Compensation and Burial benefits liability is a valuation of a long period of estimated cashflows. 

As a result, changes in economic assumptions can have a dramatic effect on the liability. If those changes to 

economic assumptions are in different directions from one period to the next, the changes to net cost from period to 

period are more pronounced as demonstrated over the past several years. 
 NOTES TO THE FINANCIAL STATEMENTS 99

Change in Veterans Compensation and Burial Benefits 

Compensation Burial Total 

(In billions of dollars) 2011 2010 2011 2010 2011 2010 

 

Actuarial accrued liability 

beginning of fiscal year .................. 1,470.5 1,313.9 4.3 3.6 1,474.8 1,317.5 

Prior period adjustments (not 

restated) - (66.4) - (0.1) - (66.5) 

Actuarial accrued liability, 

beginning of fiscal year, as 

adjusted 1,470.5 1,247.5 4.3 3.5 1,474.8 1,251.0 

 

Current Year Expense: 

Actuarial (gain)/losses (from 

experience) - 122.4 - - - 122.4 

Actuarial (gain)/losses 

(from assumption changes) ......... 58.7 100.6 0.2 0.8 58.9 101.4 

Total current year expense 58.7 223.0 0.2 0.8 58.9 223.8 

 

Actuarial accrued liability end of 

fiscal year ....................................... 1,529.2 1,470.5 4.5 1,533.7 1,533.7 1,474.8 

 

 

Significant Economic Assumptions Used in Determining Veterans 

Compensation and Burial Benefits as of September 30, 2011, and 2010 

2011 2010 

 

Rate of interest .................................................................. 4.53% 4.73% 

Rate of inflation .................................................................. 2.78% 2.86% 

 

Life Insurance Benefits 

The largest veterans’ life insurance programs consist of the following: 

• National Service Life Insurance (NSLI) covers policyholders who served during World War II. 

• Veterans’ Special Life Insurance (VSLI) was established in 1951 to meet the insurance needs of veterans 

who served during the Korean Conflict and through the period ending January 1, 1957. 

• Veterans’ Reopened Insurance (VRI), which provided a 1-year reopening for insurance coverage in 1965 

for those eligible to have obtained NSLI or VSLI and were disabled. 
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, 2011, and 2010 

(In billions of dollars) 2011 2010 

 

Insurance death benefits: 

NSLI ........................................................................................... 6.2 6.8 

VSLI ........................................................................................... 1.5 1.6 

VRI ............................................................................................. 0.2 0.3 

Other .......................................................................................... 0.6 0.5 

Total death benefits ................................................................. 8.5 9.2 

 

Death benefit annuities ................................................................. 0.1 0.1 

Disability income and waiver ........................................................ 0.7 0.6 

Insurance dividends payable ........................................................ 1.7 1.7 

Unearned premiums ..................................................................... 0.1 0.1 

Total veterans life insurance liability .......................................... 11.1 11.7 

 

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 and veterans who served during the 

Vietnam era or thereafter. 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. The actuarial 

present value of the future liability for pension benefits is a non-exchange transaction and 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, 2011, and 2010, were $89.2 billion and $80.8 billion, respectively. 
 NOTES TO THE FINANCIAL STATEMENTS 101

Note 16. Environmental and Disposal Liabilities 

Environmental and Disposal Liabilities as of September 30, 2011, and 2010 

(In billions of dollars) 2011 2010 

 

Department of Energy: 

Environmental and Disposal Liabilities ................................................. 250.6 250.2 

Department of Defense: 

Environmental Restoration ................................................................... 29.4 27.9 

Disposal of Weapon Systems Program ............................................... 24.9 24.3 

Environmental Corrective Other ........................................................... 5.7 5.4 

Base Realignment and Closure ............................................................ 4.8 5.3 

 Total Department of Defense ......................................................... 64.8 62.9 

All other agencies ................................................................................. 8.7 8.2 

 Total environmental and disposal liabilities ................................... 324.1 321.3 

 

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 one thousand 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. The cost estimate would be higher if some remediation were assumed for these areas; however, because DOE 

has not identified effective remedial technologies for these sites, no basis for estimating costs is available. 

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 liability estimates include contingency estimates intended to account for the 

uncertainties associated with the technical cleanup scope of the program. 

DOE’s environmental liability 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 is also required to recognize closure and post-closure costs for its active and surplus facilities and 

environmental corrective action costs for current operations. The cleanup cost associated with active and surplus 

facilities that is allocated to operating periods beyond the balance sheet date is identified as the unrecognized portion. 

For facilities newly contaminated since fiscal year 1997, cleanup costs allocated to future periods and not included in 

the liability amounted to $920.0 million and $608.0 million for fiscal years 2011 and 2010, respectively. The 

unrecognized portion of the cleanup cost is recognized over a predetermined period of time. 
102 NOTES TO THE FINANCIAL STATEMENTS 

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 is responsible, as well, for training range and other non-range unexploded ordinance cleanup. 

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. 

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 $2.9 billion and $2.9 billion for 

fiscal years 2011 and 2010, 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. 
 NOTES TO THE FINANCIAL STATEMENTS 103

Note 17. Benefits Due and Payable 

Benefits Due and Payable as of September 30, 2011, and 2010 

(In billions of dollars) 2011 2010 

 

Federal Old-Age and Survivors Insurance ................................................ 53.1 51.7 

Federal Hospital Insurance (Medicare Part A) .......................................... 28.6 21.8 

Grants to States for Medicaid ................................................................... 26.1 27.2 

Federal Supplementary Medical Insurance (Medicare Parts B and D) ....... 25.7 23.3 

Federal Disability Insurance ...................................................................... 23.9 23.7 

Supplemental Security Income .................................................................. 5.2 5.4 

Unemployment Insurance .......................................................................... 3.2 6.3 

All other Benefits Programs ....................................................................... 5.2 4.9 

Total Benefits Due and Payable ............................................................. 171.0 164.3

Benefits due and payable are amounts owed to program recipients or medical service providers as of 

September 30 that have not been paid. For a description of the programs, see the Unaudited Supplemental 

Information—Social Insurance section and Note 26—Social Insurance. 
104 NOTES TO THE FINANCIAL STATEMENTS 

Note 18. Insurance and Guarantee Program Liabilities 

Insurance and Guarantee Program Liabilities as of September 30, 2011, 

and 2010 

(In billions of dollars) 2011 2010

 

Insurance and Guarantee Program Liabilities: 

Pension Benefit Guaranty Corporation—Benefit Pension Plans ........ 93.0 90.0 

Federal Deposit Insurance Corporation Funds ................................... 47.4 72.6 

All other insurance and guarantee programs ...................................... 21.3 13.0 

Total insurance and guarantee program liabilities ............................ 161.7 175.6 

 

PBGC insures pension benefits for participants in covered defined benefit pension plans. As a wholly-owned 

corporation of the U.S. Government, PBGC’s financial activity and balances are included in the consolidated 

financial statements of the U.S. 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, 2011, and 2010, PBGC had total liabilities of $106.7 billion and $102.5 billion, and its total liabilities 

exceeded its total assets by $26.0 billion and $23.0 billion, respectively. In addition, as discussed in Note 22—

Contingencies, PBGC reported reasonably possible contingent losses of about $250.2 billion and $190.0 billion as of 

September 30, 2011, and 2010, respectively. 

Of the total FDIC amount as of September 30, 2011, and 2010, $7.2 billion and $21.3 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, $31.5 billion and $42.8 billion pertain to liabilities due to resolutions of failed or 

failing institutions and to pending depositor claims as of September 30, 2011, and 2010 respectively. Another $8.2 

billion and $7.9 billion as of September 30, 2011, and 2010 respectively, pertains to the Temporary Liquidity 

Guarantee Program, which guarantees certain newly issued debt and certain noninterest-bearing transaction accounts 

in an effort to counter the system-wide crisis in the nation’s financial sector. The remaining amounts represent 

contingent liabilities for litigation. As of September 30, 2011, and 2010, the Deposit Insurance Fund had total 

liabilities of $69.2 billion and $107.4 billion, respectively. As of September 30, 2011, total assets exceeded its total 

liabilities by $7.8 billion due to the overall improvement in the financial condition of the bank and thrift agency. 

Of the $21.3 billion and $13.0 billion under all other insurance and guarantee programs as of September 30, 

2011, and 2010, respectively, $10.3 billion and $4.6 billion, respectively, pertain to the USDA’s Federal Crop 

Insurance Program. The increase in the loss ratio is due to the extreme drought in the Southwest and significant 

flooding along the Missouri and Mississippi rivers. 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. Also, $7.4 billion and 6.4 billion relates to 

the National Credit Union Administration’s Temporary Corporate Credit Union Stabilization Fund as of September 

30, 2011, and 2010, respectively. This Program guarantees the timely payment of principal and interest on certain 

unsecured debt of participating credit unions. 
NOTES TO THE FINANCIAL STATEMENTS 105

Note 19. Other Liabilities 

Other Liabilities as of September 30, 2011, and 2010 

(In billions of dollars) 2011 2010 

 

Unearned revenue and assets held for others: 

Unearned fees for nuclear waste disposal (DOE) and other unearned 

revenue .................................................................................................. 64.4 74.2 

Assets held on behalf of others ................................................................ 69.8 64.9

Subtotal .................................................................................................. 134.2 139.1

 

Employee-related liabilities: 

Accrued Federal employees wages and benefits .................................... 35.2 42.7 

Selected DOE contractors' and D.C. employees’ pension benefits ......... 55.0 50.2 

Subtotal .................................................................................................. 90.2 92.9

 

International monetary liabilities and gold certificates: 

Exchange Stabilization Fund .................................................................... 60.3 60.1 

Gold Certificates (Note 2) ......................................................................... 11.0 11.0 

Subtotal .................................................................................................. 71.3 71.1

 

Subsidies and grants: 

Farm and other subsidies ......................................................................... 12.5 13.2 

Grant payments due to State and local governments and others ............ 18.1 18.1

Subtotal .................................................................................................. 30.6 31.3

 

Miscellaneous liabilities: 

Legal and other contingencies ................................................................. 38.0 31.4 

Bonneville Power Administration non-Federal power projects and 

capital lease liabilities, and disposal liabilities ....................................... 13.5 9.4 

Other miscellaneous ................................................................................. 49.2 41.3 

Subtotal .................................................................................................. 100.7 82.1

Total other liabilities ............................................................................ 427.0 416.5 

 

Other liabilities represent liabilities that are not separately identified on the Balance Sheets 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 $30.0 billion and $28.0 

billion as of September 30, 2011, and 2010, 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’s (DIF) liquidity needs of $20.4 

billion and $33.4 billion in fiscal years 2011 and 2010, respectively. Assets held on behalf of others include funds 

collected in advance and undelivered defense articles. The Foreign Military Sales program holds $58.6 billion and 

$53.9 billion as of September 30, 2011, and 2010, respectively for articles and services for future delivery to foreign 

governments. 

Employee-Related Liabilities 

This category includes amounts owed to employees at yearend and actuarial liabilities for certain non-Federal 

employees. Actuarial liabilities for Federal employees and veteran benefits are included in Note 15 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 postretirement benefits, which is about $30.2 

billion and $28.3 billion as of September 30, 2011, and 2010, respectively. Also, the Government owed about $9.7 

billion and $9.7 billion as of September 30, 2011, and 2010, respectively, for estimated future pension benefits of 

the District of Columbia’s judges, police, firefighters, and teachers. 

International Monetary Liabilities and Gold Certificates 

Consistent with U.S. obligations in the IMF on orderly exchange arrangements and a stable system of 

exchange rates, the Secretary of the Treasury, with the approval of the President, may use the 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 Federal Reserve banks, 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 Federal Reserve 

banks. 

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 the 

Conservation Reserve, Tobacco Transition Payment, and Direct and Counter-Cyclical Payment programs account 

for the majority of the subsidies due, about $8.9 billion, and $9.9 billion as of September 30, 2011, and 2010, 

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, 2011, and 2010, DOT, Education, and HHS collectively owed their grantees about $15.0 billion and 

$14.9 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 22—Contingencies), (2) Bonneville Power Administration liability to pay annual budgets of several power 

projects for its electrical generating capacity, and (3) payables due to derivative contracts and the purchases of 

securities. In addition, many Federal agencies reported relatively small amounts of miscellaneous liabilities that are 

not otherwise classified. 

Note 20. Collections and Refunds of Federal Revenue 

Collections of Federal Tax Revenue for the Year Ended September 30, 2011 

 

Federal 

Tax 

Revenue 

Collections

Tax Year to Which Collections Relate 

(In billions of dollars) 2011 2010 2009 

Prior 

Years 

Individual income and tax 

 withholdings ............................ 2,102.0 1,357.0 703.9 19.0 22.1 

Corporation income taxes .......... 242.8 165.7 62.6 1.9 12.6 

Unemployment taxes ................. 56.2 30.4 14.3 11.4 0.1 

Excise taxes ............................... 75.7 56.3 19.0 0.1 0.3 

Estate and gift taxes .................. 9.1 - 6.4 0.7 2.0 

Railroad retirement taxes ........... 4.7 3.5 1.2 - -

Fines, penalties, interest, and 

 other revenue .......................... 5.4 5.2 0.1 0.1 - 

Customs duties .......................... 29.9 29.9 - - -

Subtotal ................................... 2,525.8 1,648.0 807.5 33.2 37.1 

Less: amounts collected for 

non-Federal entities ........... (0.9) 

Total ................................... 2,524.9 

 

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

spirits and imported liquor, tobacco, firearms, and others. These are also characterized as non-exchange revenue. 
108 NOTES TO THE FINANCIAL STATEMENTS 

Federal Tax Refunds Disbursed for the Year Ended September 30, 2011 

 Tax Year to Which Refunds Relate 

(In billions of dollars) 

Refunds 

Disbursed 2011 2010 2009 

Prior 

Years 

 

Individual income and tax 

 withholdings ............................... 344.4 1.1 302.8 26.5 14.0 

Corporation income taxes ............. 67.8 6.3 16.6 6.5 38.4 

Unemployment taxes .................... 0.1 - 0.1 - -

Excise taxes .................................. 2.2 0.8 1.0 0.2 0.2 

Estate and gift taxes ..................... 1.8 - - 0.4 1.4 

Customs duties ............................. 1.3 0.6 0.3 0.1 0.3 

Total ............................................ 417.6 8.8 320.8 33.7 54.3 

 

Reconciliation of Revenue to Tax Collections for the Year 

Ended September 30, 2011, and 2010 

(In billions of dollars) 2011 2010

Consolidated revenue per the Statements of Operations and 

 Changes in Net Position ..................................................................... 2,363.8 2,216.5 

Tax refunds ............................................................................................ 417.6 468.9 

First-time Homebuyers Tax Credit ......................................................... (2.2) (8.7)

Making work pay credit .......................................................................... (13.9) (13.7)

Earned income tax credit and child tax credit imputed revenue ............ (78.3) (77.4)

Other tax credits ..................................................................................... (13.9) (10.5)

Federal Reserve earnings ...................................................................... (82.5) (75.8)

Nontax-related fines and penalties reported by agencies ..................... (49.5) (44.0)

Nontax-related earned revenue ............................................................. (16.2) (15.9)

Collections of Federal tax revenue ........................................................ 2,524.9 2,439.5 

Consolidated revenue in the Statements of Operations and Changes in Net Position is presented on a modified 

cash basis, is net of tax refunds, and includes other nontax related revenue. First-time Homebuyer Credit, Earned 

Income Tax Credit and Child Tax Credit, Making work pay credit, and Other tax credits amounts (unaudited) are 

included in gross cost in the Statements of Net Cost as a component of Treasury. Collections of Federal tax revenue 

are reported on a gross cash basis. The table above reconciles total revenue to Federal tax collections. 
NOTES TO THE FINANCIAL STATEMENTS 109

Collections of Federal Tax Revenue for the Year Ended September 30, 2010 

 

Federal 

Tax 

 Revenue 

Collections

Tax Year to Which Collections Relate 

(In billions of dollars) 2010 2009 2008 

Prior 

Years 

 

Individual income and tax 

 withholdings ............................ 1,988.8 1,315.9 635.9 20.2 16.8 

Corporation income taxes .......... 277.9 188.5 75.5 1.6 12.3 

Unemployment taxes ................. 45.3 24.9 11.4 8.9 0.1 

Excise taxes ............................... 73.8 54.9 18.6 0.1 0.2 

Estate and gift taxes .................. 19.8 - 7.9 0.9 11.0 

Railroad retirement taxes ........... 4.6 3.5 1.1 - -

Fines, penalties, interest, and 

 other revenue .......................... 3.8 3.6 0.1 0.1 - 

Customs duties .......................... 26.4 26.4 - - -

Subtotal ................................... 2,440.4 1,617.7 750.5 31.8 40.4 

Less: amounts collected for 

non-Federal entities .............. (0.9) 

Total ................................... 2,439.5 

 

Federal Tax Refunds Disbursed for the Year Ended September 30, 2010 

 Tax Year to Which Refunds Relate 

(In billions of dollars) 

Refunds

Disbursed 2010 2009 2008 

Prior 

Years 

Individual income and tax 

 withholdings ................................ 366.1 1.3 312.2 35.6 17.0 

Corporation income taxes .............. 98.3 2.7 16.2 16.8 62.6 

Unemployment taxes ..................... 0.1 - 0.1 - -

Excise taxes ................................... 2.2 0.6 0.9 0.3 0.4 

Estate and gift taxes ...................... 0.9 - 0.2 0.4 0.3 

Customs duties .............................. 1.3 0.7 0.2 0.1 0.3 

Total ............................................. 468.9 5.3 329.8 53.2 80.6 

 
110 NOTES TO THE FINANCIAL STATEMENTS 

Note 21. Prior-Period Adjustments 

 

Prior-Period Adjustments for the Year Ended September 30, 2011, 

and 2010 

 Changes to Net Position 

(In billions of dollars) 2011 2010

Prior-Period Adjustments 

Department of Veterans Affairs ......................................... - 66.5 

National Aeronautics and Space Administration .............. - (3.0) 

Other prior-period adjustments ......................................... - (0.1) 

Total Prior-Period Adjustments ...................................... - 63.4 

 

For fiscal year 2011, as discussed in Note 1.V—Reclassifications, one fund previously reported as an 

earmarked fund was reclassified to non-earmarked funds and was recorded as a prior period adjustment. As shown 

in the Statement of Changes in Net Position, this reclassification had no effect on the total net position. 

During fiscal year 2010, VA adopted SFFAS 33, Pensions, Other Retirement Benefits, and Other 

Postemployment Benefits: Reporting Gains and Losses from Changes in Assumptions, and Selecting Discount Rates 

and Valuation Dates. This resulted in a $66.5 billion reduction in the Veterans Compensation and Burial Actuarial 

Liabilities and an increase to VA’s net position by $66.5 billion. Additionally, NASA reviewed the consumption 

method in relation to its business processes and operations and determined that it did not reflect NASA’s business 

processes and operations and that the purchase method explained in SFFAS No. 3, Accounting for Inventory and 

Related Property, is the preferred method. Accordingly, NASA reduced its assets and net position by $3.0 billion. 
NOTES TO THE FINANCIAL STATEMENTS 111

Note 22. 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.1

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. 2

Accrue the liability. 

Report on Balance 

Sheet and Statement 

of Net Cost. 

Accrue liability of the 

best estimate or 

minimum amount in loss 

range if there is no best 

estimate, and disclose 

nature of contingency 

and range of estimated 

liability. 

Disclose nature of 

contingency and include 

a statement that an 

estimate cannot be 

made. 

Reasonably possible 

Possibility of future 

confirming event(s) 

occurring is more than 

remote and less than 

likely.

Disclose nature of 

contingency and 

estimated 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 

 

1

 In addition, a third condition must be met to be a loss contingency: a past event or an exchange transaction must occur. 2

 For loss contingencies related to litigation, probable is defined as the future confirming event or events 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.
112 NOTES TO THE FINANCIAL STATEMENTS 

The Government is subject to loss contingencies that include insurance and litigation cases. These loss 

contingencies arise in the normal course of operations and their ultimate disposition is unknown. Based on 

information currently available, however, it is management’s opinion that the expected outcome of these matters, 

individually or in the aggregate, will not have a material adverse effect on the financial statements, except for the 

insurance and litigation described in the following sections: 

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 $267.0 billion as of September 30, 2011, and 

$224.2 billion as of September 30, 2010. The major programs are identified below: 

• PBGC reported $250.2 billion and $190.0 billion as of September 30, 2011, and 2010, respectively, for the 

estimated aggregate unfunded vested benefits exposure to the PBGC for private-sector single-employer 

and multiemployer defined pension plans that are classified as a reasonably possible exposure to loss. 

• Of the remaining $16.8 billion for 2011, FDIC reported $16.5 billion as of September 30, 2011, and $34.2 

billion as of September 30, 2010, for identified additional risk in the financial services industry that could 

result in additional loss to the Deposit Insurance Fund should potentially vulnerable insured institutions 

ultimately fail. Actual losses, if any, will largely depend on future economic and market conditions. 

Insurance in Force 

Insurance in Force is the accumulation of policy limits for all policies issued and outstanding at a point in time. 

The Government has Insurance in Force in the amount of $1,408.6 billion as of September 30, 2011, and $1,394.8 

billion as of September 30, 2010. These amounts represent estimated maximum exposure to insurance claims and 

guarantee programs. The major programs are identified below: 

• The DHS reported $1,247.2 billion and $1,230.0 billion as of September 30, 2011, and 2010, respectively, 

for the National Flood Insurance Program (NFIP). 

• The DOT reported $90.8 billion and $98.3 billion as of September 30, 2011, and 2010, respectively for the 

Federal Aviation Administration (FAA) Aviation Insurance Program. 

Deposit Insurance 

Deposit insurance covers all types of deposit accounts such as checking, NOW and savings accounts, money 

market deposit accounts, and certificates of deposit (CDs) 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: 

• FDIC has estimated insured deposits of $6,777.0 billion as of September 30, 2011, and $5,423.0 billion as 

of September 30, 2010, for the Deposit Insurance Fund.

• NCUA has estimated insured shares of $782.4 billion as of September 30, 2011, and $750.9 billion as of 

September 30, 2010, for the National Credit Union Share Insurance Fund. 
NOTES TO THE FINANCIAL STATEMENTS 113

Legal Contingencies 

Legal contingencies as of September 30, 2011, and 2010, are summarized in the table below: 

2011 2010

 Estimated Range of Loss

for Certain Cases 2

Estimated Range of Loss

for Certain Cases 2

(In billions of dollars) 

Accrued 

Liabilities 1 Lower End Upper End

Accrued 

Liabilities 1 Lower End Upper End

 

Legal contingencies 

Probable .............. 9.2 9.0 9.7 4.3 4.3 5.2 

Reasonably 

possible ............ 12.4 14.6 118.4 122.6 

 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 

$9.2 billion and $4.3 billion as of September 30, 2011, and 2010, respectively, and are included in “Other 

Liabilities” on the Balance Sheet. For example, DOI 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 $4.7 billion and 0.3 billion has been accrued in the financial statements as of September 30, 

2011 and 2010, respectively. The Cobell vs. Salazar lawsuit brought against the Interior Department and Treasury 

Department on behalf of 490,000 individual Indian trust beneficiaries for an historical accounting of their trust 

accounts and reform of trust management systems. On December 7, 2009, the parties announced that a $3.4 billion 

settlement had been reached. On December 8, 2010, the President signed into law H.R. 4783, the Claims Resolution 

Act of 2010, which authorized and funded the settlement. DOI has accrued the $3.4 billion in their financial 

statements. The settlement agreement provides for the distribution of $1.5 billion directly to individual Indians, the 

creation of a $1.9 billion fund to purchase highly fractioned interests in trust lands that stymie and slow the 

Government’s management, and sets aside up to $60 million for educational scholarships for Indian children. 

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 $12.4 billion to $14.6 billion as of 

September 30, 2011, and from $118.4 billion to $122.6 billion as of September 30, 2010. 
114 NOTES TO THE FINANCIAL STATEMENTS 

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 claimed amounts 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: 

• Tribal Trust Fund Cases - Numerous cases have been filed in U.S. District Court in which Native American 

Tribes seek a declaration that the United States has not provided the tribes with a full and complete accounting 

of their trust funds, and seek an order requiring the Government to provide such an accounting. It is not possible 

at this time to determine the likelihood of an unfavorable outcome or an estimate of the amount or range of any 

potential loss. 

• Various parties filed administrative claims and lawsuits against the U.S. Army Corps of Engineers 

(USACE) as a result of Hurricane Katrina in 2005. Most of the Hurricane Katrina tort actions that have 

been filed are consolidated before a single judge sitting in the Eastern District of Louisiana. The court has 

classified the individual cases that have been consolidated into seven categories: Levee, MRGO, 

Insurance, Responder, Dredging Limitations, St. Rita Nursing Home, and Barge. Approximately 490,000 

administrative claims related to the allegations in this consolidated action have been filed. 

Environmental and Disposal Contingencies 

Environmental and disposal contingencies as of September 30, 2011, and 2010, are summarized in the table 

below: 

 2011 2010

 

Estimated Range of Loss

for Certain Cases 2

Estimated Range of Loss

for Certain Cases 2

(In billions of dollars) 

Accrued 

Liabilities 1 Lower End Upper End

Accrued 

Liabilities 1 Lower End Upper End

 

 Environmental and 

 disposal contingencies

 

Probable ......................... 20.0 20.0 20.2 15.8 15.8 16.0 

Reasonably possible ...... 0.2 0.2 0.2 0.3 

 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 and 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 

$20.0 billion and $15.8 billion as of September 30, 2011, and 2010, 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 exposures 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 $19.1 billion and $15.5 

billion as of September 30, 2011, and 2010, respectively. However, DOE reported that several developments have 

made it difficult to predict the amount of the Government’s likely liability, which at this time is undetermined. 
NOTES TO THE FINANCIAL STATEMENTS 115

Other Contingencies 

DOT and HHS reported the following other contingencies: 

• The Federal Highway Administration (FHWA) reimburses states for construction costs on projects related 

to the Federal Highway System of roads. FHWA has pre-authorized $41.4 billion and $40.2 billion to the 

states to establish budgets for its construction projects for fiscal years ending September 30, 2011, and 

2010, respectively. Congress has not provided appropriations for these projects and no liability is accrued 

in the consolidated financial statements. 

• Contingent liabilities have been accrued as a result of Medicaid audit and program disallowances that are 

currently being appealed by the States. The Medicaid amounts are $3.0 billion and $5.4 billion for fiscal 

years ending September 30, 2011, and 2010, respectively. 

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. 
116 NOTES TO THE FINANCIAL STATEMENTS 

Note 23. Commitments 

 

Long-Term Operating Leases as of September 30, 2011, and 2010 

(In billions of dollars) 2011 2010 

 

General Services Administration .................... 26.7 26.1 

U.S. Postal Service ........................................ 7.3 7.8 

Department of Health and Human Services .. 1.5 1.7 

Department of State ....................................... 1.4 1.3 

Department of Defense .................................. 1.2 0.7 

Securities and Exchange Commission .......... 0.8 1.1 

Department of Agriculture .............................. 0.8 1.0 

Other Operating Leases ................................. 4.2 3.9 

Total long-term operating leases ................. 43.9 43.6 

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 called, 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 is 

anticipated. 
NOTES TO THE FINANCIAL STATEMENTS 117

Undelivered Orders and Other Commitments as of September 30, 2011, 

and 2010 

(In billions of dollars) 2011 2010 

Undelivered Orders: 

Department of Defense ............................................. 315.9 348.6 

Department of Education ........................................... 229.2 237.5 

Department of the Treasury ...................................... 207.1 144.8 

EOP Foreign Military Sales Program ........................ 121.4 112.4 

Department of Transportation ................................... 104.7 102.1 

Department of Health and Human Services.............. 90.3 92.9 

Department of Housing and Urban Development ..... 56.9 64.8 

Department of Agriculture ......................................... 51.7 54.8 

Department of Energy ............................................... 45.7 49.2 

Department of Homeland Security ............................ 36.3 37.7 

Department of State .................................................. 20.9 19.2 

Agency for International Development ...................... 15.6 15.7 

National Science Foundation .................................... 11.6 11.8 

Environmental Protection Agency ............................. 10.8 11.4 

Department of Justice ............................................... 10.0 11.5 

Export-Import Bank of the United States................... 9.7 5.6 

All other agencies ...................................................... 62.1 63.8 

Total undelivered orders ......................................... 1,399.9 1,383.8 

 

Other Commitments: 

Callable capital subscriptions for multilateral 

development banks ................................................. 72.0 63.9 

Fuel Purchase Obligations ........................................ 8.5 7.9 

Agriculture Direct Loans and Guarantees ................. 5.9 4.8 

Power Purchase Obligations ..................................... 5.1 5.5 

Long-term Satellite and Systems ................................ 3.2 3.9 

Conservation Reserve Program ................................ 1.8 1.8 

Contract Options and Negotiations ........................... 0.0 10.2 

All other commitments ............................................... 6.8 6.0 

Total other commitments ........................................ 103.3 104.0 
118 NOTES TO THE FINANCIAL STATEMENTS 

Other Commitments and Risks 

The U. S. Government has entered into agreements that could potentially require claims on Government 

resources in the future. For example, The Terrorism Risk Insurance Act of 2002 (TRIA or the Act) was signed into 

law on November 26, 2002. This law was enacted to address market disruptions resulting from terrorist attacks on 

September 11, 2001. On December 26, 2007, the Terrorism Risk Insurance Program Reauthorization Act of 2007 

(Reauthorization Act) was enacted extending the Program through December 31, 2014. The Act helps to ensure 

available and affordable commercial property and casualty insurance for terrorism risk, and simultaneously allows 

private markets to stabilize. The Terrorism Risk Insurance Program is activated upon the certification of an “act of 

terrorism” by the Secretary of the Treasury in concurrence with the Secretary of State and the Attorney General. If a 

certified act of terrorism occurs, insurers may be eligible to receive reimbursement from the Government for insured 

losses above a designated deductible amount. Insured losses above this amount will be shared between insurance 

companies and the Government. 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 a certified act of terrorism. There were no claims under TRIA as of September 

30, 2011, or September 30, 2010. 
NOTES TO THE FINANCIAL STATEMENTS 119

Note 24. Earmarked Funds 

Earmarked Funds as of September 30, 2011 1

(In billions of dollars) 

Federal Old-Age 

and Survivors 

Insurance Trust 

Fund 

Military 

Retirement 

Fund 

Civil Service 

Retirement 

and Disability 

Fund 

MedicareEligible 

Retiree Health 

Care Fund 

(MERHCF) 

Federal

Hospital 

Insurance 

Trust Fund 

(Medicare 

Part A) 

Civil Service 

Health 

Benefits 

Program Trust 

Funds 

Assets: 

Cash and other monetary 

assets ....................................... - - - - - -

Fund balance with Treasury ........ (0.6) 0.4 - 0.2 0.4 1.3 

Investments in U.S. Treasury 

securities, net of unamortized 

premiums/discounts ................. 2,492.5 368.2 803.8 185.9 245.9 62.9 

Other Federal assets ................... 26.2 3.6 10.7 1.9 37.0 1.1 

Non-Federal assets ..................... 1.9 - 0.3 0.5 6.3 1.0

Total assets .............................. 2,520.0 372.2 814.8 188.5 289.6 66.3 

Liabilities: 

Liabilities due and payable to 

beneficiaries ............................. 53.2 0.3 5.5 0.7 28.6 4.3 

Other Federal liabilities................ 4.7 - 0.1 0.1 33.9 0.3 

Other non-Federal liabilities ........ - 1,361.0 1,533.4 534.0 0.3 329.5 

Total liabilities ........................... 57.9 1,361.3 1,539.0 534.8 62.8 334.1 

Total net position ...................... 2,462.1 (989.1) (724.2) (346.3) 226.8 (267.8)

Total liabilities and net 

position ............................... 2,520.0 372.2 814.8 188.5 289.6 66.3 

Change in net position: 

Beginning net position ................. 2,370.7 (941.0) (765.6) (406.9) 261.8 (284.3)

Prior-period adjustment ............... - - - - - -

Beginning net position, adjusted .... 2,370.7 (941.0) (765.6) (406.9) 261.8 (284.3)

Investment revenue ..................... 106.9 18.0 35.4 9.2 12.4 1.9 

Individual income taxes ............... 496.5 - - - 192.1 -

Unemployment and excise taxes ... - - - - - -

Other taxes and receipts ............. - - - - 0.6 -

Miscellaneous earned revenues .... - - - - - -

Other changes in fund 

balance (e.g., appropriations, 

transfers) .................................. 81.7 87.3 31.3 21.1 16.2 10.3 

Non-program expenses ............... - - - - - -

Program net cost ......................... 593.7 153.4 25.3 (30.3) 256.3 (4.3)

Ending net position ................... 2,462.1 (989.1) (724.2) (346.3) 226.8 (267.8)

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.
120 NOTES TO THE FINANCIAL STATEMENTS 

Earmarked Funds as of September 30, 2011 1

(In billions of dollars) 

Federal 

Disability 

Insurance 

Trust Fund 

Federal 

Supplementary 

Medical 

Insurance Trust 

Fund (Medicare 

Parts B and D) 

 Exchange 

Stabilization 

Fund 

All Other 

Earmarked 

Funds 

IntraEarmarked 

Fund 

Eliminations 

Total 

Earmarked 

Funds 

Assets: 

Cash and other monetary 

assets ............................... - - 66.7 0.4 - 67.1 

Fund balance with Treasury .. (0.4) 5.7 - 103.6 - 110.6 

Investments in U.S. 

Treasury securities, net 

of unamortized 

premiums/discounts .......... 162.0 70.4 22.7 193.4 - 4,607.7 

Other Federal assets ........... 1.8 29.3 0.1 23.0 (67.9) 66.8 

Non-Federal assets ............. 3.8 17.5 15.7 88.2 - 135.2 

Total assets ...................... 167.2 122.9 105.2 408.6 (67.9) 4,987.4 

Liabilities: 

Liabilities due and payable 

to beneficiaries ................. 24.2 25.7 - 5.2 - 147.7 

Other Federal liabilities ........ 1.1 30.4 - 96.7 (67.9) 99.4 

Other non-Federal liabilities ... - 0.4 60.4 173.1 - 3,992.1 

Total liabilities ................... 25.3 56.5 60.4 275.0 (67.9) 4,239.2 

Total net position .............. 141.9 66.4 44.8 133.6 - 748.2 

Total liabilities and net 

position ....................... 167.2 122.9 105.2 408.6 (67.9) 4,987.4 

Change in net position: 

Beginning net position ......... 166.7 53.5 43.8 148.2 - 646.9 

Prior-period adjustment ....... - - - 2.0 - 2.0 

Beginning net position, 

adjustment ........................

 166.7 

 53.5 43.8 150.2 - 648.9 

Investment revenue ............. 8.2 3.2 - 6.8 - 202.0 

Individual income taxes ....... 84.3 - - 0.0 - 772.9 

Unemployment and excise 

taxes ................................. - - - 108.3 - 108.3 

Other taxes and receipts ..... - 1.9 - 19.1 (0.7) 20.9 

Miscellaneous earned 

revenues ........................... - - - 4.9 - 4.9 

Other changes in fund 

balance (e.g., 

appropriations, transfers) .. 10.3 225.6 - 56.7 - 540.5 

Non-program expenses ....... - - - 4.8 - 4.8 

Program net cost ................ 127.6 217.8 (1.0) 207.6 (0.7) 1,545.4 

Ending net position ........... 141.9 66.4 44.8 133.6 - 748.2 

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

Earmarked Funds as of September 30, 2010 1

(In billions of dollars) 

Federal 

Old-Age and 

Survivors 

Insurance

 Trust Fund 

Military 

Retirement 

Fund 

Civil Service 

Retirement

and 

 Disability 

Fund 

MedicareEligible 

 Retiree 

Health 

Care Fund 

 (MERHCF) 

Federal

Hospital 

Insurance

Trust Fund 

(Medicare

Part A) 

Civil Service 

Health 

 Benefits 

Program 

 Trust Funds

Assets:

Cash and other monetary assets ......... - - - - -. - 

Fund balance with Treasury ................. (0.4) - - 0.2 -. 1.1 

Investments in U.S. Treasury 

Securities, net of unamortized 

premiums/discounts .......................... 2,399.1 318.6 780.4 164.4 279.5 58.4 

Other Federal assets ............................ 26.7 3.1 10.1 1.8 28.5 1.3 

Non-Federal assets .............................. 1.9 - 0.4 0.6 1.0 1.0 

Total assets ............................................. 2,427.3 321.7 790.9 167.0 309.0 61.8 

Liabilities and net position: 

Liabilities due and payable to 

beneficiaries ...................................... 51.7 4.2 5.5 0.7 21.8 4.0 

Other Federal liabilities......................... 4.9 0.1 0.1 0.1 25.2 0.4 

Other non-Federal liabilities ................. - 1,258.4 1,550.9 573.1 0.2 341.7 

Total liabilities .................................... 56.6 1,262.7 1,556.5 573.9 47.2 346.1 

Total net position ............................... 2,370.7 (941.0) (765.6) (406.9) 261.8 (284.3) 

Total liabilities and net position ............... 2,427.3 321.7 790.9 167.0 309.0 61.8 

Change in net position: 

Beginning net position .......................... 2,270.2 (898.8) (696.0) (361.4) 292.4 (290.8) 

Prior-period adjustment ........................ - - - - - - 

Beginning net position, adjusted ............. 2,270.2 (898.8) (696.0) (361.4) 292.4 (290.8) 

Investment revenue .............................. 108.4 10.4 36.4 5.3 14.2 1.8 

Individual income taxes ........................ 552.8 - - - 183.6 - 

Unemployment and excise taxes ......... - - - - - - 

Other taxes and receipts ...................... - - - - 0.6 - 

Miscellaneous earned revenue ............ - - - - - - 

Other changes in fund balance (e.g., 

appropriations, transfers) .................. 14.2 83.5 33.2 21.1 14.8 9.6 

Non-program expenses ........................ - - - - - - 

Program net cost .................................. 574.9 136.1 139.2 71.9 243.8 4.9 

Ending net position ............................ 2,370.7 (941.0) (765.6) (406.9) 261.8 (284.3) 

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.
122 NOTES TO THE FINANCIAL STATEMENTS 

Earmarked Funds as of September 30, 2010 1

(In billions of dollars) 

Federal 

Disability 

Insurance 

Trust Fund 

 Federal 

Supplementary 

Medical 

Insurance Trust 

Fund (Medicare 

Parts B and D) 

Exchange 

Stabilization 

Fund 

All Other 

Earmarked 

Funds 

IntraEarmarked 

Fund 

Eliminations 

Total 

Earmarked 

Funds 

Assets: 

Cash and other monetary 

assets ............................... - - 70.9 0.2 - 71.1 

Fund balance with 

Treasury ............................. (0.4) 2.0 - 104.2 - 106.7 

Investments in U.S. 

Treasury Securities, net 

of unamortized 

premiums/discounts .......... 187.2 71.0 20.4 198.5 - 4,477.5 

Other Federal assets ........... 2.2 25.6 0.1 23.7 (54.9) 68.2 

Non-Federal assets ............. 3.4 4.9 12.5 82.7 - 108.4 

Total assets ...................... 192.4 103.5 103.9 409.3 (54.9) 4,831.9 

Liabilities and net position: 

Liabilities due and payable 

to beneficiaries ................. 24.3 23.3 - 7.9 - 143.4 

Other Federal liabilities ........ 1.4 26.4 - 86.6 (54.9) 90.3 

Other non-Federal liabilities ... - 0.3 60.1 166.6 - 3,951.3 

Total liabilities ................... 25.7 50.0 60.1 261.1 (54.9) 4,185.0 

Total net position .............. 166.7 53.5 43.8 148.2 - 646.9 

Total liabilities and net 

position ....................... 192.4 103.5 103.9 409.3 (54.9) 4,831.9 

Change in net position: 

Beginning net position ......... 186.6 44.0 43.8 162.7 - 752.7 

Beginning net position, 

adjusted ............................. - - - - - - 

Beginning net position ......... 186.6 44.0 43.8 162.7 - 752.7 

Investment revenue ............. 9.6 3.1 - 5.8 - 195.0 

Individual income taxes ....... 93.9 - - - - 830.3 

Unemployment and excise 

taxes ................................. - - - 94.2 - 94.2 

Other taxes and receipts ..... - - - 30.5 (0.5) 30.6 

Miscellaneous earned 

revenue ............................. - - - 4.5 - 4.5 

Other changes in fund 

balance (e.g., 

appropriations, transfers) .. (1.6) 209.7 0.1 97.5 - 482.1 

Non-program expenses ....... - - - 1.5 - 1.5 

Program net cost ................. 121.8 203.3 0.1 245.5 (0.5) 1,741.0 

Ending net position ........... 166.7 53.5 43.8 148.2 - 646.9 

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 123

Earmarked funds are financed by specifically identified revenues, 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 revenues. Earmarked funds generally include trust funds, public enterprise revolving 

funds (not including credit reform financing funds), and special funds. 

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 earmarked funds 

differs from fiduciary activities primarily in that earmarked fund assets are Government-owned. 

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 earmarked to finance a continuing cycle of businesstype operations. Some of the financing for these funds may be from appropriations. 

Special funds are Federal funds earmarked 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 earmarked funds chosen based on their significant financial activity and 

importance to taxpayers. All other Government earmarked funds not shown separately are aggregated as “all other.” 

Total assets represent the unexpended balance from all sources of receipts and amounts due to the earmarked 

funds, regardless of source, including related Governmental transactions. These are transactions between two 

different entities within the Government (for example, monies received by one entity of the Government from 

another entity of the Government). 

The intragovernmental assets are comprised of fund balances with Treasury, investments in Treasury 

securities—including unamortized amounts, and other assets that include the related accrued interest receivable on 

Federal investments. These amounts were eliminated in preparing the principal financial statements. 

The non-Federal assets represent only the activity with individuals and organizations outside of the 

Government. 

Most of the earmarked fund assets are invested in intragovernmental debt holdings. The Government does not 

set aside assets to pay future benefits or other expenditures associated with earmarked funds. The cash receipts 

collected from the public for an earmarked fund 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 of the U.S. Government. 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 14—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 earmarked funds shown in the above tables, which also 

includes the names of the Government agencies that administer each particular fund. For detailed information 

regarding these earmarked funds, please refer to the financial statements of the corresponding administering 

agencies. For information on the benefits due and payable liability associated with certain earmarked funds, see 

Note 17—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 a basic annuity 

to workers to protect them from loss of income at retirement and provide a guaranteed income to survivors in the 

event of the death of a family’s primary wage earner. 

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 trust fund is set forth in 42 U.S.C. § 401. 
124 NOTES TO THE FINANCIAL STATEMENTS 

Military Retirement Fund 

The Military Retirement Fund, administered by DOD, provides retirement benefits for Army, Navy, Marine 

Corps, and Air Force personnel and their survivors. The fund is financed by DOD contributions, appropriations, and 

interest earnings on Treasury securities. The laws establishing the Military Retirement Fund and authorizing the 

depositing of amounts to the credit of the trust fund are set forth in 10 U.S.C. § 1461-1467. 

Civil Service Retirement and Disability Fund 

The CSRDF covers two Federal civilian retirement systems: the CSRS—for employees hired before 1984, and 

the FERS—for employees hired after 1983. OPM administers the CSRS and the FERS systems. The laws 

establishing the CSRDF and authorizing the depositing of amounts to the credit of the trust fund are set forth in 5 

U.S.C. §§ 8331-8348. Funding sources include: 

• Federal civilian employees’ contributions. 

• Agencies’ contributions on behalf of employees. 

• Appropriations. 

• Interest earnings on Treasury securities. 

Medicare-Eligible Retiree Health Care Fund 

The Department of Defense Medicare-Eligible Retiree Health Care Fund, administered by the Secretary of the 

Treasury and established by 10 U.S.C. § 1111, finances and pays the liabilities under the DOD retiree health care 

programs for military retirees, their dependents and survivors who are Medicare-Eligible. Such beneficiaries include 

qualifying members, former members, and dependents of the Uniformed Services. The assets of the fund are 

comprised of any amounts appropriated to the trust fund, payments to the fund authorized by 10 U.S.C. § 1116, and 

interest earned on investments authorized by 10 U.S.C. § 1117. 

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. The law establishing the Federal Hospital Insurance Trust Fund and 

authorizing the depositing of amounts to the credit of the trust fund is set forth in 42 U.S.C. § 1395i. 

Civil Service Health Benefits Program Trust Funds 

The Civil Service Health Benefits Program (HBP) provides health benefits to Federal employees and 

dependents as well as to Federal retirees, including USPS retirees, and survivor annuitants. The program is operated 

through two revolving trust funds. The HBP administers a wide variety of health and wellness plans including FeeFor-Service and HMO plans. Retired employees can choose to continue coverage upon separation from the 

Government. OPM administers the HBP.
NOTES TO THE FINANCIAL STATEMENTS 125

The law establishing the first HBP trust fund, the FEHB Fund, and authorizing the depositing of amounts to the 

credit of the trust fund is set forth in 5 U.S.C. § 8909. The FEHB fund is funded on a “pay-as-you-go” basis and 

funding sources include: 

• Federal civilian employees’ contributions. 

• Agencies’ contributions on behalf of employees. 

• Appropriations (for “employer” share related to retirement program annuitants). 

• Interest earnings on Treasury securities. 

The Postal Accountability and Enhancement (Postal Act of 2006) (Public Law No 109-435, Title VIII), made 

significant changes in the funding of retiree health benefits for employees of the USPS, including the requirement 

for the USPS to make scheduled payments to the second HBP trust fund, the newly-created Postal Service Retiree 

Health Benefits (PSRHB) Fund. 

The laws establishing the PSRHB Fund and authorizing the depositing of amounts to the credit of the trust 

fund are set forth in 5 U.S.C. § 8909a. Public Law 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. Thereafter, the USPS will make annual payments in the amount of the normal cost payment. The 

PSRHB Fund is also funded by interest earnings on Treasury securities. However, Public Law 111-68 changed 

the USPS contribution for fiscal year 2009 to $1.4 billion rather than $5.4 billion. For fiscal years 2011 and 2010, 

the USPS contributions were $0.0 billion and $5.5 billion, respectively. Per Public Law 109-435 for fiscal years 

2011 and 2010, the required USPS contributions were $5.5 billion. However, Congress extended the $5.5 billion 

payment due September 30, 2011, to November 18, 2011, and has subsequently extended the due date to 

December 16, 2011, per Public Law 112-55. 

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 trust 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 trust 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 based on monthly premiums, income from 

the General Fund of the Treasury, and interest earnings on Treasury securities. The law establishing the Federal 

Supplementary Medical Insurance Trust Fund and authorizing the depositing of amounts to the credit of the trust 

fund is set forth in 42 U.S.C. § 1395t. 

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. It 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 trust fund is set forth in 42 

U.S.C. § 1395w-116. 
126 NOTES TO THE FINANCIAL STATEMENTS 

Exchange Stabilization Fund (ESF) 

The Exchange Stabilization Fund may be used by the Secretary of Treasury to purchase or sell currencies, to hold 

U.S. foreign exchange and SDR assets, and to provide financing to foreign governments. Appropriations, U.S. SDR 

assets in the International Monetary Fund, investments in Treasury securities, and investments in Foreign Currency 

Denominated assets are the sources of revenues or financing sources to the ESF. The law establishing the ESF account 

and authorizing the use of its funds is section 10 of the Gold Reserve Act of 1934, as amended (31 U.S.C. § 5302). 

All Other Earmarked Funds 

The Government is responsible for the management of numerous earmarked funds that serve a wide variety of 

purposes. The earmarked funds presented on an individual basis in the preceding `table represent the majority of the 

Government’s net position attributable to earmarked funds. All other earmarked activity is aggregated in accordance 

with SFFAS No. 27. For the years ending September 30, 2011, and 2010, there were approximately 630 and 621 

earmarked funds, respectively. The earmarked funds within the “all other” aggregate, along with the agencies that 

administer them, include the following: 

• Railroad Retirement Trust Fund—administered by RRB. 

• National Flood Insurance Program—administered by DHS. 

• Land and Water Conservation Fund, Reclamation Fund, Water and Related Resources Fund, Lower Colorado 

River Basin Fund, and Historic Preservation Fund—administered by DOI. 

• Government National Mortgage Association (Ginnie Mae) and Recovery Act Funds—administered by HUD. 

• National Telecommunications and Information Administration (NTIA) Digital Television Transition and 

Public Safety Fund and Broadband Technology Opportunities Program-Recovery Act Fund—administered by 

the Department of Commerce (DOC). 

• Decommissioning and Decontamination Fund—administered by DOE. 

• Black Lung Disability Trust Fund (BLDTF)—administered by DOL. 

• Investor Protection Fund—administered by the Securities and Exchange Commission (SEC). 

• Universal Service Fund—administered by the Federal Communication Commission (FCC). 

• Crime Victims Fund—administered by DOJ. 

• District of Columbia Pensions—administered by Treasury. 

• Federal Employees’ Life Insurance Fund—administered by OPM. 

• Superfund (Hazardous Substance) and Leaking Underground Storage Tanks—administered by Environmental 

Protection Agency (EPA). 

Unemployment Trust Fund (UTF) and Excise Taxes 

In addition to the previous listed earmarked funds within the “all other” aggregate, there are 11 other 

earmarked funds, also within the “all other” aggregate that represent all the earmarked unemployment and excise tax 

revenues shown on the consolidated Statement of Operations and Changes in Net Position. The Unemployment Trust 

Fund represents all the earmarked unemployment tax revenues and the remaining 10 other earmarked funds represent 

all the earmarked excise tax revenues. 

The Unemployment Trust Fund 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 earmarked unemployment 

tax revenues as shown on the consolidated Statement of Operations and Changes in Net Position. For the years ending 

September 30, 2011, and 2010, UTF unemployment tax revenues were $56.1 billion and $45.2 billion, respectively. 

However, interest earnings on Treasury securities also provide income to the fund. Appropriations have supplemented 

the fund’s income during periods of high and extended unemployment. The law establishing the UTF and authorizing 

the depositing of amounts to the credit of the trust fund is set forth in 42 U.S.C. § 1104. 

In addition, there are 10 other earmarked funds within the “all other” aggregate that represent all of the 

earmarked excise tax revenue shown on the consolidated Statement of Operations and Changes in Net Position. Two 
NOTES TO THE FINANCIAL STATEMENTS 127

of these earmarked funds, the Highway Trust Fund and the Airport and Airway Trust Fund, represent more than 90 

percent of the total earmarked excise tax revenues. Both of these earmarked funds are administered by the DOT and, 

for more detailed information regarding them, 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 law establishing the Highway Trust Fund and authorizing the depositing of amounts to 

the credit of the trust fund is set forth in 26 U.S.C. § 9503. Funding sources include earmarked 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, 2011, and 2010, Highway Trust Fund excise tax revenues were $36.9 

billion and $35.0 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 law establishing the Airport and Airway Trust Fund and authorizing the depositing of amounts to the 

credit of the trust fund is set forth in 26 U.S.C. § 9502. Funding sources include: 

• Taxes received from transportation of persons and property in the air and fuel used in commercial and 

general aviation. 

• International departure taxes. 

• Interest earnings on Treasury securities. 

For the years ending September 30, 2011, and 2010, Airport and Airway Trust Fund excise tax revenues were 

$11.5 billion and $10.6 billion, respectively. These revenue amounts do not reflect any transfers from the Highway 

Trust Fund to the Airport and Airway Trust Fund for fuel which was used in aviation, but which was taxed at 

highway rates under P.L. 109-59 Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for 

Users (SAFETEA-LU). 

Miscellaneous Earned Revenues 

Miscellaneous earned revenues due to earmarked funds activity primarily relate to royalties retained by various 

earmarked funds within DOI. 

Intra-Earmarked Fund Eliminations 

The intra-earmarked fund eliminations represent the activity between earmarked funds that are administered 

by different Federal agencies and which are eliminated to produce consolidated earmarked revenues and net costs 

as shown on the Statement of Operations and Changes in Net Position. Significant examples of such intraearmarked fund activity include the financial interchanges and transactions between the Railroad Retirement Trust 

Fund, the Social Security Trust Funds, and the Medicare Trust Funds, which are administered by the RRB, SSA and 

HHS, respectively. The financial interchanges and transactions between RRB’s Railroad Retirement Trust Fund, 

SSA’s Federal Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund, and HHS’ 

Federal Hospital Insurance Trust Fund are 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. For further information, see the 

Railroad Retirement program description within Note 26—Social Insurance. 
128 NOTES TO THE FINANCIAL STATEMENTS 

Note 25. 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 Governmentwide Balance Sheet. Examples of 

the Government’s fiduciary activities include the Thrift Savings 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, 2011, 

and 2010 

(In billions of dollars) 2011 2010 

FRTIB-Thrift Savings Plan .............................................. 281.6 264.0 

Department of the Interior ............................................... 3.8 3.7 

All other ........................................................................... 5.8 4.9 

Total fiduciary net assets .............................................. 291.2 272.6 

 

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 Governmentwide Balance Sheet as debt held by the public and as liability for fiduciary fund balance with 

Treasury, respectively. Refer to Note 14—Federal Debt Securities Held by the Public and Accrued Interest for more 

information on Treasury securities. 

As of September 30, 2011, total fiduciary investments in Treasury securities and in non-Treasury securities are 

$143.9 billion and $145.1 billion, respectively. As of September 30, 2010, total fiduciary investments in Treasury 

securities and in non-Treasury securities are $127.5 billion and $143.4 billion, respectively. As of September 30, 

2011, and 2010, the total fiduciary fund balance with Treasury is $1.2 billion and $0.8 billion, respectively. A 

liability for this fiduciary fund balance with Treasury is reflected as other miscellaneous liabilities in Note 19—

Other Liabilities. 

As of September 30, 2011, and 2010, collectively, the fiduciary investments in Treasury securities and 

fiduciary fund balance with Treasury held by all Government entities represent $4.0 billion and $2.9 billion, 

respectively, of unrestricted cash included within cash held by Treasury for Governmentwide Operations shown in 

Note 2—Cash and Other Monetary Assets. 

FRTIB-Thrift Savings Plan 

The TSP is administered by an independent Government agency, the Federal Retirement Thrift Investment 

Board (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 Plan). 

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 

(FERSA). 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 the FERS. 
NOTES TO THE FINANCIAL STATEMENTS 129

As of September 30, 2011, and 2010, the TSP held $281.6 billion and $264.0 billion, respectively, in net 

assets, which included $139.3 billion and $123.6 billion, respectively, of U.S. Government Securities (amounts are 

unaudited). The most recent audited financial statements for the TSP are as of December 31, 2010, and 2009. As of 

December 31, 2010, and 2009, the TSP held $281.0 billion and $244.4 billion, respectively, in net assets, which 

included $124.7 billion and $114.9 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, 2011, and 2010. 

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, 2010, and 2009, there were approximately 4.4 million and 4.3 

million participants in the TSP, respectively, with approximately 2.9 million and 2.8 million, respectively, 

contributing their own money. For further information about FRTIB and the TSP, please refer to the FRTIB website 

at http://www.frtib.gov.

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 nonFederal entities. The component agencies 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, 2011, and 2010, including FRTIB and DOI, 

there are a total of 15 and 15 Federal entities, respectively, with fiduciary activities with a grand total of 58 and 58 

fiduciary funds, respectively. For further information relating to the fiduciary activities of the remaining component 

entities within the “all other” aggregate, please refer to the financial statements for: 

• Small Business Administration 

• Library of Congress 

• Department of the Treasury 

• Department of State 

• Department of Defense 

• Department of Transportation 

• Department of Labor 

• Department of Agriculture 

• Smithsonian Institution 

• Department of Commerce 

• National Labor Relations Board 

• National Endowment for the Arts (2011 only) 

• Government Accountability Office, and 

• Peace Corps (2010 only). 
130 NOTES TO THE FINANCIAL STATEMENTS 

Note 26. 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 and demographic assumptions presented later in this note as set forth in the relevant 

Social Security and Medicare trustees’ reports and in the agency financial report of HHS and in the relevant agency 

performance and accountability reports for SSA and RRB and the annual financial report for DOL. The projections 

are based on the continuation of program provisions contained in current law. The estimates in the consolidated 

Statements of Social Insurance (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 

projection period will terminate on September 30, 2040). 

Contributions and earmarked 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); and premiums from, and State transfers on behalf of, 

participants in Medicare. 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. However, current Social Security and Medicare law provides for full benefit payments 

only to the extent that there are sufficient balances in the trust funds. 

Actuarial present values of estimated future revenue (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 attained eligibility age, (2) current participants who have 

not attained eligibility age, and (3) future participants who are new entrants expected to become participants in the 

future. Current participants in the Social Security and Medicare programs form the “closed group” of taxpayers 

and/or beneficiaries who are at least 15 years of age at the start of the projection period. For the 2007 Medicare 

projections, current participants are at least 18 years of age at the beginning 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 (below age 18 for the Medicare 

programs for 2007) 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 the current amount of funds needed to 

cover projected shortfalls, excluding the starting trust fund balances, over the projection period. They are calculated 

by subtracting the actuarial present values of future scheduled contributions and 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. 
NOTES TO THE FINANCIAL STATEMENTS 131

The trust fund balances as of the valuation date for the respective programs, including interest earned, are in 

the table shown below. Substantially all of the Social Security (OASDI) and Medicare Hospital Insurance (HI), and 

Supplementary Medical Insurance (SMI) trust fund balances consist of investments in special non-marketable 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) 2011 2010 2009 2008 2007 

 

Social Security ........................ 2,609 2,540 2,419 2,238 2,048 

Medicare: 

HI ......................................... 272 304 321 312 300 

SMI Part B ........................... 71 76 59 53 38 

SMI Part D ........................... 1 1 1 3 1 

Railroad Retirement ............... 26 25 22 33 32 

Black Lung .............................. (6) (6) (6) (10) (10) 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 self-employment income, based on work covered by the OASDI Program. Refer to the Social Insurance

segment in the Unaudited Supplemental Information 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 interest-bearing 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 Hospital Insurance (HI, Medicare 

Part A) and Supplementary Medical Insurance (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 earmarked 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. 
132 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 and related interest are 

eliminated in consolidation at the Governmentwide level. Refer to the Social Insurance segment in the Unaudited 

Supplemental Information 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 Affordable Care Act improves the financial outlook for Medicare substantially; however, the effects of 

some of the new law’s provisions on Medicare are not known at this time, with the result that the projections are 

very uncertain, especially in the longer-range future. For example, the ACA initiative for aggressive research and 

development has the potential to reduce Medicare costs in the future; however, as specific reforms have not yet been 

designed, tested, or evaluated, their ability to reduce costs cannot be estimated at this time, and thus no specific 

savings have been reflected in the projections for the initiative. 

Another important example involves lower payment rate updates to most categories of Medicare providers in 

2011 and later. These updates will be adjusted downward by the increase in productivity experienced in the 

economy overall. Since the provision of health services tends to be labor-intensive and is often customized to match 

an individuals’ specific needs, most categories of health providers have not been able to improve their productivity 

to the same extent as the economy at large. Over time, the productivity adjustments mean that the prices paid for 

health services by Medicare will grow about 1.1 percent per year more slowly than the increase in prices that 

providers must pay to purchase the goods and services they use to provide health care services. Unless providers 

could reduce their cost per service correspondingly, through productivity improvements, or other steps, they could 

eventually become unwilling or unable to treat Medicare beneficiaries. 

It is possible that providers can improve their productivity, reduce wasteful expenditures, and take other steps 

to keep their cost growth within the bounds imposed by the Medicare price limitations. Similarly, the 

implementation of payment and delivery system reforms, facilitated by the ACA research and development 

program, could help constrain cost growth to a level consistent with the lower Medicare payments. These outcomes 

are far from certain, however. The feasibility of such sustained improvements is debatable. Without fundamental 

changes in current health care delivery systems and payment mechanisms the Medicare price constraints would 

probably become unworkable in which case Congress would likely override them, much as they have done to 

prevent the reductions in physician payment rates otherwise required by the sustainable growth rate formula in 

current law. 

The reductions in provider payments reflected in these updates, if implemented for all future years as required 

under current law, could have secondary impacts, for beneficiary access to care; utilization, intensity and quality of 

services; and other factors. These possible impacts are speculative, and at present there is not 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. 

Because knowledge of the potential long-range effects of the productivity adjustments, delivery and payment 

innovations, and certain aspects of the Affordable Care Act is so limited, in August 2010, the HHS Secretary 

working on behalf of the Medicare Board of Trustees, established an independent panel of technical of expert 

actuaries and economists to review the assumptions and methods used by the Medicare Trustees to make projections 

of the financial status of the trust funds. The members of the Panel were selected in October 2010 and began their 

deliberations in November 2010. They were asked to focus their immediate attention on the long-range Medicare 

expenditure growth rate assumption. In its interim report, the Panel found that the long-range Medicare growth rate 

assumptions used in the 2010 Medicare Trustees Report and in the 2010 Statement of Social Insurance for the 

current-law projections were not unreasonable in light of the provisions of the Affordable Care Act. The Panel 

recommended the continued use of a supplemental analysis, similar to the illustrative projection in the 2010 
NOTES TO THE FINANCIAL STATEMENTS 133

Medicare Trustees Report, for the purpose of illustrating the higher Medicare costs that would result if the reduction 

in physician payment rates and the productivity adjustments to most other provider payment updates are not fully 

implemented as required under current law. 1

The Panel members noted the extreme difficulty involved in developing long-range Medicare cost growth 

assumptions, due to the many uncertainties that surround not only the long-term evolution of the U.S. health care 

system but also the system’s interaction with the provisions of the Affordable Care Act. The Medicare Trustees will 

continue their efforts, with the assistance of the panel, to develop possible improvements to the cost growth 

assumptions underlying the 2010 Medicare Trustee Report. 

The SOSI projections are based on current law. Therefore, the productivity adjustments are assumed to occur 

in all future years, as required by the Affordable Care Act. In addition, an almost 30 percent reduction in Medicare 

payment rates for physician services in January 2012 is assumed to be implemented as required under current law, 

despite the virtual certainty that Congress will continue to override this reduction. Therefore, it is important to note 

that the actual future costs for Medicare are likely to exceed those shown by these current-law projections. 

The extent to which actual future Part A and Part B costs exceed the projected current-law amounts due to 

changes to the productivity adjustments and physician payments depends on both the specific changes that might be 

legislated and on whether Congress would pass further provisions to help offset such costs. As noted, these 

examples only reflect hypothetical changes to provider payment rates. 

It is likely that in the coming years Congress will consider, and pass, numerous other legislative proposals 

affecting Medicare. Many of these will likely be designed to reduce costs in an effort to make the program more 

affordable. In practice, it is not possible to anticipate what actions Congress might take, either in the near term or 

over longer periods.

The Medicare Board of Trustees, in their annual report to Congress, references an alternative scenario to 

illustrate the potential understatement of costs under current law. This alternative scenario assumes that the 

productivity adjustments are gradually phased out over the 16 years starting in 2020 and that the physician fee 

reductions are overridden. These examples were developed by management for illustrative purposes only; the 

calculations have not been audited; and the examples do not attempt to portray likely or recommended future 

outcomes. Thus, the illustrations are useful only as general indicators of the substantial impacts that could result 

from future legislation affecting the productivity adjustments and physician payments 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 income and expenditures under current law with those under the alternative scenario 

illustration. 

 

1

 The Interim Report of the Technical Panel of the Medicare Trustees Report is available at 

http://aspe.hhs.gov/health/medpanel/2010/interim1103.shtml 
134 NOTES TO THE FINANCIAL STATEMENTS 

Medicare Present Values (in billions) (Unaudited) 

 

2011 Consolidated 

SOSI 

Illustrative Alternative 

Scenario 1, 2

 

Income 

Part A .................................................... $15,104 $15,104 

Part B 3 ................................................. 5,086 7,740 

Part D 4 ................................................. 2,484 2,484 

Total Income ...................................... $22,674 $25,328 

 

Expenditures 

Part A .................................................... $18,356 $23,640 

Part B .................................................... 18,940 28,744 

Part D .................................................... 9,950 9,950 

Total Expenditures ............................. $47,246 $62,334 

 

Part A ...................................................... $3,252 $8,536 

Part B ...................................................... 13,854 21,004 

Part D ...................................................... 7,466 7,466 

Excess of Expenditures over Income.... $24,572 $37,006 

 

1

 These amounts are not presented in the 2011 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 $13,854 billion and $21,004 of General Revenue Contributions from the 2011 Consolidated SOSI projection 

and the Illustrative Alternative Scenario’s projection, respectively; i.e., to reflect Part B income on a consolidated 

Governmentwide basis. 

4

 Excludes $7,466 billion of General Revenue Contributions from both the 2011 Consolidated SOSI projection and the 

Illustrative Alternative Scenario’s projection, respectively; i.e., to reflect Part D income on a consolidated 

Governmentwide basis.

 

As expected, the differences between the current-law projections and the illustrative alternative are substantial 

for Part A and Part B. All Part A fee-for-service providers are affected by the productivity adjustments, so the 

current law projections reflect an estimated 1.1 percent reduction in annual Part A cost growth each year. If the 

productivity adjustments were gradually phased out, as illustrated under the alternative scenario, the present value of 

Part A expenditures is estimated to be roughly 29 percent higher than the current-law projection. As indicated above, 

the present value of Part A income is unchanged under the alternative scenario. 

The Part B expenditure projections are significantly higher under the alternative scenario than under current 

law, both because of the assumed gradual phase-out of the productivity adjustments and the assumption that the 

scheduled physician fee reductions would be overridden and based on annual increases in the Medicare Economic 

Index. The productivity adjustments are assumed to affect more than half of Part B expenditures at the time their 

phase-out is assumed to begin. Similarly, physician fee schedule services are assumed to be roughly 30 percent 

higher under the alternative scenario than under current law at that time. The combined effect of these two factors 

results in a present value of Part B expenditures under the alternative scenario that is approximately 52 percent 

higher than the current-law projection. 

The Part D projections are unaffected under the alternative projection because the services are not impacted by 

the productivity adjustments or the physician fee schedule reductions. 
NOTES TO THE FINANCIAL STATEMENTS 135

Social Security and Medicare–Demographic and Economic Assumptions 

The Boards of Trustees 2 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. Assumptions are made about many economic and demographic factors, 

including GDP, earnings, the CPI, the unemployment rate, the fertility rate, immigration, mortality, disability incidence 

and terminations and, for the Medicare projections, health care cost growth. The assumptions used for the most recent 

set of projections shown in Tables 1A (Social Security) and Table 1B (Medicare) are generally referred to as the 

“intermediate assumptions,” and reflect the trustees’ reasonable estimate 3

 of expected future experience. For further 

information on Social Security and Medicare demographic and economic assumptions, refer to SSA’s Performance and 

Accountability Report and HHS’ Agency Financial Report. 

 

2

 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. 3

 Statement of Federal Financial Accounting Standard (SFFAS) No. 33: Pensions, Other Retirement Benefits, and Other Postemployment 

Benefits: Reporting the Gains and Losses From Changes in Assumptions and Selecting Discount Rates and Valuation Dates, effective for fiscal 

years beginning after September 30, 2009, revised SFFAS No. 17: Accounting for Social Insurance, paragraphs 25, 27 (2), and 27 (4), by 

replacing the term “best estimate” with “reasonable estimate.” 
136 NOTES TO THE FINANCIAL STATEMENTS 

 

Table 1A 

Social Security – Demographic and Economic Assumptions 

Demographic Assumptions

Year 

Total 

Fertility 

Rate 1

Age-Sex 

Adjusted 

Death Rate 2 

(per 100,000) 

Net 

Immigration 3

(persons) 

Period Life 

Expectancy 

at Birth 4

Male Female 

2011 2.07 766.5 895,000 75.9 80.6 

2020 2.05 707.8 1,195,000 77.1 81.4 

2030 2.02 648.7 1,115,000 78.2 82.4 

2040 2.00 596.6 1,070,000 79.3 83.3 

2050 2.00 550.8 1,050,000 80.3 84.1 

2060 2.00 510.5 1,040,000 81.3 84.9 

2070 2.00 474.9 1,030,000 82.1 85.7 

2080 2.00 443.2 1,030,000 82.9 86.4 

 

 Economic Assumptions 

Year 

Real 

Wage 

Differential 5

(percent) 

Average 

Annual Wage 

in Covered 

Employment 6

(percent 

change) 

CPI 7

(percent 

change) 

Real 

GDP 8

(percent 

change) 

Total 

Employment 9

(percent 

change) 

Average 

Annual 

Interest 

Rate 10

(percent) 

2011 2.9 4.1 1.2 2.7 0.7 3.1 

2020 1.1 3.9 2.8 2.1 0.5 5.7 

2030 1.2 4.0 2.8 2.2 0.5 5.7 

2040 1.2 4.0 2.8 2.2 0.5 5.7 

2050 1.2 4.0 2.8 2.2 0.5 5.7 

2060 1.1 3.9 2.8 2.1 0.5 5.7 

2070 1.1 3.9 2.8 2.1 0.4 5.7 

2080 1.2 4.0 2.8 2.1 0.4 5.7 

 

1 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. The ultimate 

total fertility rate of 2.0 is assumed to be reached in 2035. 

2 The age-sex-adjusted death rate is the crude rate that would occur in the enumerated total population as of April 1, 2000, if that population 

were to experience the death rates by age and sex assumed for the selected year. The death rate is a summary measure and not a basic 

assumption; it summarizes the effects of the basic assumptions from which it is derived. 3 Net immigration is the number of persons who enter during the year (both legally and otherwise) minus the number of persons who leave 

during the year. It is a summary measure and not a basic assumption; it summarizes the basic assumptions from which it is derived. 4 The period life expectancy for a group of persons born in the selected year is the average that would be attained by such persons if the group 

were to experience in succeeding years the death rates by age assumed for the given year. 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 difference between the percentage increases, before rounding, in the average annual wage in covered 

employment, and the average annual CPI. 

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 annual average value for the calendar year of the CPI for urban wage earners and clerical workers. 

8 The real GDP is the value of total output of goods and services produced in the U.S., expressed in 2005 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 represents the total of civilian and military employment in the U.S. economy. 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, in practice, are compounded semiannually for specialissue Treasury obligations sold only to the trust funds in each of the 12 months of the year. It is a summary measure and not a basic 

assumption; it summarizes the basic assumptions from which it is derived. 
NOTES TO THE FINANCIAL STATEMENTS 137

Table 1B 

Medicare – Demographic and Economic Assumptions 

 

Demographic Assumptions 

Year 

Total 

Fertility 

Rate1

Age-Sex 

Adjusted 

Death Rate2 

(per 100,000) 

Net 

Immigration3

(persons) 

2011 2.07 766.5 895,000 

2020 2.05 707.8 1,195,000 

2030 2.02 648.7 1,115,000 

2040 2.00 596.6 1,070,000 

2050 2.00 550.8 1,050,000 

2060 2.00 510.5 1,040,000 

2070 2.00 474.9 1,030,000 

2080 2.00 443.2 1,030,000 

 

 Economic Assumptions 

Year 

Real 

Wage 

Differential4

(percent) 

Average 

Annual Wage 

in Covered 

Employment 

(percent 

change) 

CPI5

(percent 

change) 

Real 

GDP6

(percent

change) 

Per Beneficiary Cost 

(percent change)7

Real 

Interest 

Rate8

 

HI (percent) 

SMI 

Part B Part D 

2011 2.9 4.1 1.2 2.7 2.3 3.7 3.1 1.5 

2020 1.1 3.9 2.8 2.1 3.3 5.5 6.5 2.9 

2030 1.2 4.0 2.8 2.2 4.6 4.9 5.7 2.9 

2040 1.2 4.0 2.8 2.2 4.9 4.5 5.4 2.9 

2050 1.2 4.0 2.8 2.2 3.9 4.1 5.1 2.9 

2060 1.1 3.9 2.8 2.1 3.7 4.1 4.8 2.9 

2070 1.1 3.9 2.8 2.1 3.6 3.9 4.6 2.9 

2080 1.2 4.0 2.8 2.1 3.3 3.7 4.4 2.9 

 

1 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. The ultimate 

total fertility rate is assumed to be reached in 2035. 

2 The age-sex-adjusted death rate is the crude rate that would occur in the enumerated total population as of April 1, 2000, if that population 

were to experience the death rates by age and sex assumed for the selected year. The death rate is a summary measure and not a basic 

assumption; it summarizes the effects of the basic assumptions from which it is derived. 3 Net immigration is the number of persons who enter during the year (both legally and otherwise) minus the number of persons who leave 

during the year. It is a summary measure and not a basic assumption; it summarizes the basic assumptions from which it is derived. 4 The real-wage differential is the difference between the percentage increases, before rounding, in the average annual wage in covered 

employment, and the average annual CPI. 

5 The CPI is the annual average value for the calendar year of the CPI for urban wage earners and clerical workers. 

6

 The real GDP is the value of total output of goods and services produced in the U.S., expressed in 2005 dollars. It is a summary measure and 

not a basic assumption; it summarizes the effects of the basic assumptions from which it is derived. 7 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. 8 The average annual interest rate earned on new trust fund securities, above and beyond the rate of inflation. 
138 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, 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. 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, 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 5 years (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. Tier II taxes 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 

and reflect 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 and freight employment. The average railroad employment is assumed to be 

218,000 in 2011 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 44,000 and (2) the employment base, excluding passenger service employment, will decline at a constant 

2.0 percent annual rate for 23 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 3.0 percent, an 

interest rate of 7.5 percent, and a wage increase of 4.0 percent. The cost of living assumption reflects the expected 

level of price inflation. The interest rate assumption reflects the expected 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 widows, 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 U.S. Railroad Retirement Board Annual Report, and 

the 24th Actuarial Valuation of the Assets and Liabilities under the Railroad Retirement Acts (Valuation Report) as 

of December 31, 2007, with Technical Supplement. 
NOTES TO THE FINANCIAL STATEMENTS 139

Table 2 

Railroad Retirement Demographic Actuarial Assumptions (Sources) 

Mortality Rates 1 

Mortality after age 

retirement 2007 RRB Annuitants Mortality Table 

Mortality after disability 

retirement 

2007 RRB Disabled Mortality Table for 

Annuitants with Disability Freeze 

2007 RRB Disabled Mortality Table for 

Annuitants without Disability Freeze 

Mortality during active 

service 2003 RRB Active Service Mortality Table 

Mortality of widow 

annuitants 1995 RRB Mortality Table for Widows 

Total Termination 

Rates 2

Termination for spouses 2007 RRB Spouse Total Termination Table 

Termination for disabled 

children 

2004 RRB Total Termination Table for 

Disabled Children 

Widow Remarriage 

Rate 3 1997 RRB Remarriage Table 

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. 
140 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) as a result of 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. BLDTF provides benefit 

payments to eligible coal miners totally disabled by pneumoconiosis and to eligible survivors when no responsible 

mine operator can be assigned the liability. 

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. Prior to October 3, 2008, the Black Lung Benefits Revenue Act provided for 

repayable advances to the BLDTF from the general fund of Treasury, in the event that BLDTF resources were not 

adequate to meet program obligations. 

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, 

Federal civilian pay raises, medical cost inflation, and the interest rate on new debt issued by the BLDTF. 

Projections are sensitive to changes in the tax rate and changes in interest rates on debt issued by the BLDTF. 

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 11 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 undergroundmined coal and $0.55 per ton of surface-mined coal sold, with a cap of 4.4 percent of sales price. Based on 

Treasury’s interpretation of the Act, the higher excise tax rates will continue until the earlier of December 31, 2018, 

or the first December 31 after 2008, 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. Starting in 2019, 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, future benefit rate increases 0.0 percent in 2012 and medical cost 

increases 3.2 percent in 2012, and ranges from 3.6 percent to 3.8 percent thereafter. Estimates for administrative 

costs for the first 11 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. 

Public Law 110-343, Division B—Energy Improvement and Extension Act of 2008, enacted on October 3, 

2008, in section 113, (1) allowed for the temporary increase in coal excise tax rates to continue an additional 5 years 

beyond the current statutory limit, and (2) restructured the BLDTF debt by refinancing the outstanding repayable 

advances (which had higher interest rates) with the proceeds from issuing discounted debt instruments similar in 

form to zero-coupon bonds (which had lower interest rates), plus a one-time appropriation. Public Law 110-343 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 Public Debt. 

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, because the projection period will terminate on 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 
NOTES TO THE FINANCIAL STATEMENTS 141

components of the changes in the open group measure during the reporting period from the end of the previous 

reporting period for the Federal Government’s social insurance programs. 

Social Security 

All estimates relating to the Social Security program in the Statement of Changes in Social Insurance Amounts 

are presented as incremental to the prior change. As an example, the present values shown for economic data and 

assumptions, represent the additional effect that these new data and assumptions have, once the effects from the 

demography and the change in the valuation period have been considered. 

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 and demographic assumptions used for the intermediate assumptions 

in the Social Security Trustees Reports for those years. Table 1A summarizes these assumptions for the current year. 

Present values as of January 1, 2010, are calculated using interest rates from the intermediate assumptions of 

the 2010 Social Security Trustees Report. All other present values in the Statement of Changes in Social Insurance 

Amounts are calculated as a present value as of January 1, 2011. Estimates of the present value of changes in social 

insurance amounts due to changing the valuation period and changing demographic data and assumptions are 

presented using the interest rates under the intermediate assumptions of the 2010 Social Security Trustees Report. 

Since interest rates are an economic estimate and all estimates in the Statement of Changes in Social Insurance 

Amounts are incremental to the prior change, all other present values in the Statement of Changes in Social 

Insurance Amounts are calculated using the interest rates under the intermediate assumptions of the 2011 Social 

Security Trustees Report. 

Changes in Valuation Period 

The effect on the 75-year present values of changing the valuation period from the prior valuation period 

(2010-84) to the current valuation period (2011-85) is measured by using the assumptions for the prior period and 

applying them, in absence of any changes, to the current valuation period. Changing the valuation period removes a 

small negative net cashflow for 2010 and replaces it with a much larger negative net cashflow for 2085. The present 

value of future net cashflows (including or excluding the combined OASI and DI Trust Fund assets at the start of the 

period) was therefore decreased (made more negative) when the 75-year valuation period changed from 2010-84 to 

2011-85. 

Changes in Demographic Data and Assumptions 

The ultimate demographic assumptions for the current valuation period are the same as those for the prior 

valuation period. However, the starting demographic values were changed. The economic recovery has been slower 

than was assumed for the prior valuation period. 

• The inclusion of final mortality data for 2007 results in lower starting death rates and faster near-term declines 

in death rates at older ages for the current valuation period. 

• Revised historical estimates of net other immigration and final data on legal immigration for 2009 are also used 

in the current valuation. Based on estimates from the Department of Homeland Security for 2007 and 2008 and 

due to the weak U.S. economy since 2008, net other immigration levels for 2007-10 are assumed negative for 

the current valuation period. These levels are significantly lower than the positive estimates used in the prior 

valuation period. 

• Birth rates projected through 2026 are slightly lower in the current valuation; preliminary birth data for 2008 

and 2009 was lower than was expected for the prior valuation. 

• Updated starting values of population levels were incorporated in the current valuation. 

Except for updating starting values of population levels, inclusion of each of these demographic data sets 

decreases the present value of future net cashflows. 
142 NOTES TO THE FINANCIAL STATEMENTS 

The following demographic methods were changed in the current valuation. 

• The method for determining the initial projected rates of mortality decline was changed to place greater 

emphasis on recent experience. These initial rates of decline are now determined using the most recent 10 years 

of historical data, rather than the most recent 20 years. This change increased the rate of decline in death rates at 

older ages for years following the year of final data (2007) up to the year the ultimate rates of decline are fully 

in effect (2035). 

• The historical estimates of the other immigrant population by age and sex were improved, resulting in greater 

consistency between the other immigrant population and the total population. 

Both of these changes to demographic methods decrease the present value of future net cashflows. 

Changes in Economic Data and Assumptions 

The ultimate economic assumptions for the current valuation period are the same as those for the prior 

valuation period. However, the starting economic values and near-term economic growth rate assumptions were 

changed. The economic recovery has been slower than was assumed for the prior valuation period. 

• For the current valuation period, OASDI taxable earnings are considerably lower for the starting year, 2010, 

than were projected for the prior valuation period. Even though earnings grow faster after 2010 through 2019, 

the projected level of earnings is lower through 2018 for the current valuation period. 

• Unemployment rates are slightly higher over first few years of the projection for the current valuation period. 

• The real interest rate is lower over first few years of the projection for the current valuation period. 

Inclusion of each of these economic revisions decreases the present value of future net cashflows. 

A change to the methodology for projecting labor force participation was implemented in the current valuation 

period. The assumed effect of gains in life expectancy on labor force participation for persons over 40 was doubled, 

significantly increasing projected participation rates at higher ages. Disability prevalence was added as an input 

variable to the labor force model for persons over normal retirement age, partially offsetting increases in the labor 

force due to changes in life expectancy. Inclusion of these changes to labor force participation projections increase 

the present value of future net cashflows. 

Changes in Methodology and Programmatic Data 

Several methodological improvements and updates of program-specific data are included in the current 

valuation and the most significant are identified below. 

• Disabled worker mortality and termination rates were updated to reflect a more recent historical period. 

Inclusion of these updates decrease the present value of future net cashflows. 

• The historical sample of new beneficiaries, which serves as the basis of average benefit levels, was updated 

from a 2006 sample to a 2007 sample. Inclusion of this update increases the present value of future net 

cashflows. 

Changes in Law or Policy 

There were no legislative changes, included in the current valuation and not in the prior valuation, that are 

projected to have a significant effect on the present value of the 75-year net cashflows. 

Medicare 

All estimates relating to the Medicare program in the Statement of Changes in Social Insurance Amounts are 

presented as 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 those years. Table 1.B summarizes these assumptions for the current year. 

Present values as of January 1, 2010, are calculated using interest rates from the intermediate assumptions of 

the 2010 Medicare Trustees Report. All other present values in the Statement of Changes in Social Insurance 

Amounts are calculated as a present value as of January 1, 2011. Estimates of the present value of changes in social 
NOTES TO THE FINANCIAL STATEMENTS 143

insurance amounts due to changing the valuation period, projection base, and demographic assumptions are 

determined using the interest rates under the intermediate assumptions of the 2010 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 2011 Medicare Trustees Report. 

Changes in Valuation Period 

The effect on the 75-year present values of changing the valuation period from the prior valuation period 

(2010-84) to the current valuation period (2011-85) 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 2010 and replaces it with a much larger negative net 

cashflow for 2085. The present value of future net cashflow was therefore decreased (made more negative) when the 

75-year valuation period changed from 2010-84 to 2011-85.

Change in Projection Base 

Actual revenue and expenditures in 2010 were different than what was anticipated when the 2010 Medicare 

Trustees Report projections were prepared. Part A revenue was lower than estimated and Part A expenditures were 

higher than anticipated, due to the impacts of the economic recession. Part B total revenue and expenditures were 

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 a slight decrease in the 

future net cashflow. 

Changes in Demographic Data and Assumptions 

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 Social 

Security Administration (SSA). 

The ultimate demographic assumptions for the current valuation period are the same as those for the prior 

valuation period. However, the starting demographic values were changed. 

• The inclusion of final mortality data for 2007 results in lower starting death rates and faster near-term declines 

in death rates at older ages for the current valuation period. 

• Revised historical estimates of net other immigration and final data on legal immigration for 2009 also are used 

in the current valuation. Based on estimates from the Department of Homeland Security for 2007 and 2008, and 

due to the weak U.S. economy since 2008, net other immigration levels for 2007 – 2010 are assumed negative 

for the current valuation period. These levels are significantly lower than the positive estimates used in the prior 

valuation period. 

• Birth rates projected through 2026 are slightly lower in the current valuation; preliminary birth data 2008 and 

2009 was lower than expected for the prior valuation. 

These changes have little impact on the present values of future expenditures and revenue. 

Changes in Economic and Other Health Care Assumptions

The economic 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 Social 

Security Administration (SSA). 

The ultimate economic assumptions for the current valuation period are the same as those for the prior 

valuation period. However, the starting economic values and near-term economic growth rate assumptions were 

changed. The economic recovery has been slower than was assumed for the prior valuation period. 

• For the current valuation period, HI taxable earnings are considerably lower for the starting year, 2010, than 

were projected for the prior valuation period. The projected level of taxable earnings grows more slowly 

through 2017 for the current valuation period. 

• Unemployment rates are slightly higher over the first few years of the projection for the current valuation 

period. 

The interest rates assumed in the short-range period are lower for the current valuation period.

Inclusion of each of these economic revisions decrease the present value of future net cashflow. 
144 NOTES TO THE FINANCIAL STATEMENTS 

The health care assumptions are specific to the Medicare projections. The following health care assumptions 

were changed in the current valuation: 

• Utilization rates for certain hospitals were lowered,

• Components of price updates for home health agency services were lowered.

• Slightly lower residual assumptions were used for certain Part B services in the short-range period.

• Slight refinement in the Part B application of the Affordable Care Act multifactor productivity adjustments were 

used in the long-range period, which lowers expenditures. 

• The utilization assumed for beneficiaries assumed to switch from Medicare Advantage to fee-for-service was 

lowered.

• The utilization assumed for beneficiaries assumed to switch from fee-for-service to Medicare Advantage was 

increased.

• Assumed utilization of skilled nursing facility and home health agency services was increased.

• The projected growth in prescription drug spending in the United States was reduced.

These changes had a net negative impact on the future net cashflow for total Medicare. For Part A, these 

changes resulted in a net increase to the present value of both revenue and expenditures, with an overall increase on 

the future net cashflow. For Part B, these changes resulted in a net increase to the present value of both revenue and 

expenditures with an overall decrease on the future net cashflow. 

Changes in Law or Policy 

Although Medicare legislation was enacted since the prior valuation date, most of the provisions have a 

negligible impact on the present value of the 75-year revenue, expenditures, and net cashflow. However, the enacted 

changes to the physician payment update very slightly increased the present value of expenditures, and decreased the 

75-year present value of future net cashflow. 

Railroad Retirement 

The largest change in the open group measure of the Railroad Retirement social insurance program is due to 

changes in economic data and assumptions. Although ultimate economic assumptions remained the same, select 

economic assumptions were updated in 2011 along with the following other components of changes in the open 

group measure. 

Changes in Valuation Period 

The change in the valuation period (from 2010-2084 to 2011-2085) had a minimal effect on the social 

insurance open group measure. 

Changes in Demographic Data and Assumptions 

Demographic assumptions were not changed between 2010 and 2011. Changes in demographic data had a 

minimal effect on the open group measure. 

Changes in Economic Data and Assumptions 

Ultimate economic assumptions were not changed from last year’s report, but the select economic assumptions 

were. The actual COLA of 0.0 percent was used for 2011 in place of the 0.5 percent COLA assumed for 2011 in last 

year’s Statement of Social Insurance. A wage increase rate of 2.4 percent was used for 2010 rather than the assumed 

4 percent wage increase rate used for 2010 in last year’s Statement of Social Insurance. Also, the actual 2010 

investment return of 14.4 percent was higher than the assumed 7.5 percent investment rate used for 2010 in last 

year’s Statement of Social Insurance. Economic data and assumptions for Cost of Living Adjustments, wage 

increase rate, and investment return were updated in 2011 and had the greatest effect on the open group measure. 

Changes in Methodology and Programmatic Data 

There were no changes in methodology and programmatic data. 

Changes in Law or Policy 

There were no changes in law or policy. 
NOTES TO THE FINANCIAL STATEMENTS 145

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. From fiscal year 2010 to fiscal year 

2011, the decrease in the assumptions about coal excise tax revenues represents the largest decrease in the open 

group measure. From fiscal year 2010 to fiscal year 2011, the coal excise tax revenue projections were revised 

downward to reflect current year experience and a decrease in future collections. From fiscal year 2010 to fiscal year 

2011, the increase in the assumptions about beneficiaries, including costs (not associated with medical inflation or 

Federal civilian pay raises), number, type, age, and life expectancy represents the largest increase in the open group 

measure. From fiscal year 2010 to fiscal year 2011, the assumptions about the beneficiaries were revised downward 

to reflect current year experience and a decrease in future expenditures. From fiscal year 2010 to fiscal year 2011, 

the increases and decreases with respect to changes in assumptions for Federal civilian pay raises for income 

benefits, medical cost inflation for medical benefits, and administrative costs were based on revisions to reflect 

current year experience and future costs. From fiscal year 2010 and fiscal year 2011, the change in economic 

assumption about the interest rate represents the change in the discount rate from 3.75 percent to 3.375 percent. 

There were no changes in law or policy from fiscal year 2010 to fiscal year 2011. 
146 NOTES TO THE FINANCIAL STATEMENTS 

Note 27. 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 accounts for 28 percent of the 

current U.S. landmass. 

Stewardship lands are used and managed in accordance with the statutes authorizing their acquisition or 

directing their 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, DOC, DOD, and USDA. 

Heritage assets are Government-owned assets that have one or more of the following characteristics: 

• Historical or natural significance. 

• Cultural, educational, or artistic importance. 

• 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 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. Noncollection 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. 

The discussion of the Government’s heritage assets is not all-inclusive. Rather, it highlights significant heritage 

assets reported by Federal agencies. Please refer to the individual financial statements of the DOC, VA, State, DOD, 

National Archives and Records Administration, and Web sites for the Library of Congress 

(http://www.loc.gov/index.html) and the Smithsonian Institution (http://www.si.edu), for additional information on 

multi-use heritage assets, agency stewardship policies, and physical units by major categories and conditions. 
SUPPLEMENTAL INFORMATION (UNAUDITED) 147

United States Government

Supplemental Information (Unaudited)

For the Years Ended September 30, 2011 and 2010

Fiscal Projections for the U.S. 

Government – FY 2011 

This section is prepared pursuant to Statement of Federal Financial Accounting Standard (SFFAS) 36, Reporting 

Comprehensive Long-Term Fiscal Projections for the U.S. Government. It is intended to help readers of the 

Financial Report of the U.S. Government (FR) assess whether future budgetary resources will be sufficient to 

sustain public services and to meet future obligations as they come due, assuming that the Federal Government’s 

current policies for spending and taxation are continued. Such an assessment requires prospective information about 

receipts and spending, the resulting debt, and how these amounts relate to the economy. The assessment is also 

referred to as reporting on “fiscal sustainability.” 

The information in this section is important not only for its financial, but also its social and political, implications. 

Financial reports should provide information that can help readers assess the likelihood that the Government will be 

able to continue providing the equivalent level of public services and to assess whether financial burdens without 

related benefits will be shifted to future taxpayers. Fiscal sustainability reporting should assist the reader in 

understanding these financial, social, and political implications. 

The projections and analysis presented here are mathematical extensions and extrapolations based on an array of 

assumptions as described below, including the assumption that current Federal policy does not change. These 

projections cannot be interpreted as forecasts or predictions of the future, in part because they encompass 

hypothetical future trends or events that are improbable. This is the second year in which this information is 

included with the other Supplemental Information, and the methods and assumptions used in producing this section 

are still under development.

Statement of Long Term Fiscal Projections

Table 1, on the following page, presents projections of the Federal Government’s receipts and non-interest 

spending.1

 Receipt categories include individual income taxes, Social Security and Medicare payroll taxes, and all 

other receipts. On the spending side, the projections include both discretionary programs, such as defense spending, 

which are funded through annual appropriations, and mandatory (entitlement) programs, such as Social Security and 

Medicare, which generally provide benefits under permanent or multi-year appropriations. The Federal budget 

provides the framework used for the projections in Table 1, which differs in some respects from the presentation of 

the projections in the trustees’ reports for Social Security and Medicare (as explained below). The key assumptions 

used in the long-term fiscal projections are summarized in the next section. This year’s projections for Social 

Security and Medicare are based on the same economic and demographic assumptions as are used for the 2011 

trustees’ reports and the Statement of Social Insurance, while comparative information presented from last year’s 

report is based on the 2010 trustees’ reports. Projections for the other categories are consistent with the assumptions 

used for the trustees’ reports. In order to produce a more realistic projection of the fiscal outlook under current 

policy, the projections assume several likely departures from current law, noted below. 

                                                            

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 spend an amount – or to outlays, which reflect actual payments made. 
148 SUPPLEMENTAL INFORMATION (UNAUDITED)   

The projections in Table 1 

are expressed in present 

value dollars as of October 

1, 2011, and as a percentage 

of the present value of 

Gross Domestic Product 

(GDP).2

 The present value 

of a future amount, for 

example, $1 billion in 

March 2021, is the amount 

of money that if invested on 

October 1, 2011 in an 

account earning the 

government borrowing rate 

would have a value of $1 

billion in March 2021.3

 The 

present value of a receipt or 

expenditure category over 

75 years is the sum of the 

annual present value 

amounts. GDP measures 

the total value of all final 

goods and services 

produced in the U.S. in a 

year and is a standard 

measure of the overall size of the economy. 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 

Government programs. The interest rates used to compute present values are the rates that underlie the projections in 

the 2011 Social Security and Medicare trustees’ reports, with comparative present values presented from last year’s 

report consistent with the 2010 trustees’ report. The use of discount factors consistent with the Social Security 

actuaries 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. 

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. As discussed later, one notable difference between the analysis in 

the Long-Term Fiscal Projections and the trustees’ reports is that these projections are based on fiscal years starting 

on October 1, 2011, whereas the trustees’ reports feature projections made on a calendar-year basis. This difference 

allows the projections to start from the actual results from fiscal year 2011. This Report also considers the period of 

time beyond the 75-year window, noting most importantly that the assumptions become more uncertain the further 

in time the projections are extended. This report compares projections of fiscal sustainability between 2011 and 

2010, with significant changes between the two years evident in Table 1 and characterized and explained in Table 2 

in the “Current Policy Projections for Primary Deficits” section. 

Just as the financial statements give information about the financial position of the Federal government, but not 

State or local governments, the analysis and discussion of long-term fiscal projections for the U.S. Government does 

not address the fiscal sustainability of State and local governments. 

                                                            

2

 GDP is 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.

Receipts: 2011 2010 Change 2011 2010 Change

    Social Security Payroll Taxes 39.1 37.8 1.3 4.4 4.4 0.0

    Medicare Payroll Taxes 13.0 12.4 0.6 1.5 1.4 0.0

    Individual Income Taxes 93.5 90.6 2.9 10.5 10.5 0.0

    Other Receipts 34.7 34.4 0.3 3.9 4.0 ‐0.1

Total Receipts 180.2 175.2 5.0 20.3 20.2 0.0

Non‐interest Spending:

    Defense Discretionary 28.7 31.0 ‐2.3 3.2 3.6 ‐0.4

    Nondefense Discretionary 15.4 30.7 ‐15.4 1.7 3.6 ‐1.8

    Social Security 51.8 49.1 2.6 5.8 5.7 0.1

    Medicare Part A3 17.6 17.3 0.4 2.0 2.0 0.0

    Medicare Parts B&D4 21.1 20.4 0.7 2.4 2.4 0.0

    Medicaid 24.0 24.2 ‐0.3 2.7 2.8 ‐0.1

    Other Mandatory 28.1 18.8 9.3 3.2 2.2 1.0

Total Non‐interest Spending 186.7 191.6 ‐4.9 21.0 22.1 ‐1.2

Non‐interest Spending less Receipts 6.4 16.3 ‐9.9 0.7 1.9 ‐1.2

3/ Represents porti ons of Medi ca re s upported by payroll ta xes.

4/ Represents porti ons of Medi ca re s upported by general revenues. Consi s tent wi th the Presi dent's Budge t, Pa rts B & D a re

presented net of premi ums.

Table 1:  Long‐Term Fiscal Projections of Federal Receipts and Spending

Dollars in Trillions % GDP2

75‐Year Present Values1

1/ 75‐yea r present val ue projections for 2011 a re a s of 9/30/2011 for the period FY 2012‐2086; projections for 2010 a re a s of

9/30/2010 for the pe ri od FY 2011‐2085.

2/ The 75‐yea r present value of nominal GDP, which drives the calcula tions a bove i s $889.8 trilli on s ta rting in FY 2012, and was

$865.6 trillion s ta rti ng i n FY 2011.
SUPPLEMENTAL INFORMATION (UNAUDITED) 149

Assumptions Used and Relationship to Other Financial Statements

A fundamental assumption underlying the projections in Table 1 is that current Federal policy – as 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. 

This is because the long-range projections are inherently uncertain and because simplifying assumptions are made. 

One key simplifying assumption, for example, is that interest rates paid on public debt remain unchanged, regardless 

of the amount of debt outstanding. It is likely that if the debt rises as shown in these projections, future interest rates 

will increase. To help illustrate this uncertainty, present value calculations under higher and lower interest rate 

scenarios are presented in the “Alternative Scenarios” section. 

The projections in Table 1 focus on future cash flows, and do not reflect either the accrual basis or the modified-cash 

basis of accounting. These cash-based projections reflect receipts or spending at the time cash is received or when a 

payment is made by the Government. In contrast, accrual-based projections would reflect amounts in the time 

period in which income is earned or when an expense or obligation is incurred. The cash basis is consistent with 

methods used to prepare the Statement of Social Insurance (SOSI) and the generally cash-based Federal budget. 

The following summarizes the assumptions used for the key categories of receipts and spending presented in Table 1 

and in the related analysis: 

• Social Security: Social Security (OASDI) spending in the fiscal projections is based on the projected 

expenditures in the Social Security trustees’ report for benefits,4

 plus the Railroad Retirement interchange, 

but excluding administrative expenses. The projections of Social Security payroll taxes and future Social 

Security spending begin with actual budget data for FY 2011. The projected growth rates for future 

spending and payroll taxes are derived from the spending and tax growth rate projections underlying the 

latest trustees’ report. 

• Medicare: Current law Medicare spending is based on incurred expenditures from the 2011 Medicare 

trustees’ report, which reflects the changes in Medicare that are projected to result from passage of the - 

Affordable Care Act (ACA) in 2010. However, some adjustments are required to convert these amounts to 

Medicare spending as measured in these projections and in the budget. Medicare Part B and D premiums,5

as well as State contributions to Part D, are subtracted from gross spending in measuring Part B and Part D 

outlays in the projections and the budget just as they are subtracted from gross cost to yield net cost in the 

financial statements.5

 The budget treats the premiums as “negative spending” rather than receipts, since 

they represent payment for a service. This is similar to the financial statement treatment of premiums as 

“earned” revenue as distinct from all other sources of revenue, which are unearned. In the budget, 

Government receipts are defined as payments obtained through the Government’s sovereign power to tax, 

similar to (unearned) revenue in the financial statements. With these adjustments, Medicare spending net of 

administrative costs corresponds to Medicare spending in the budget. The 2011 long-term fiscal projection 

uses historical budget data from FY 2011 for Medicare spending and Part A payroll tax revenues, with both 

growing at growth rates presented in the trustees’ report. Also, as discussed in Note 26, there is uncertainty 

about whether the projected reductions in health care cost growth will be fully achieved. Note 26 includes 

an alternative projection to illustrate the uncertainty of projected Medicare costs. 

• Medicaid: The model for the Medicaid program starts with the projections from the 2010 Actuarial Report 

on the Financial Outlook for Medicaid prepared by the Office of the Actuary, Centers for Medicare and 

Medicaid Services (CMS).6

 As projections in that report only extend until 2019, the model assumes that 

Medicaid benefits in 2020 and later years grow at the same rate per beneficiary as Medicare benefits grow. 

                                                            

4 As indicated in the more detailed discussion of Social Insurance in Note 26 to the financial statements.

5

 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 $8.1 trillion, or 0.9 percent of GDP. 6 Christopher J. Truffer, John D. Klemm, Christian J. Wolfe, and Kathryn E. Rennie 2010 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. 
150 SUPPLEMENTAL INFORMATION (UNAUDITED)   

Supporting this assumption is a historical trend where the average annual growth in Medicaid outlays per 

beneficiary from 1987 to 2011 has been within 0.2 percent growth per year of the average annual growth in 

Medicare outlays per beneficiary over the same period. The model accounts for the effects of the ACA to 

reflect higher future enrollment, as calculated by CMS, and reflects other adjustments to align the base 

projections with the latest budget data. The Medicaid projections reflect the temporary increase in 

Medicaid spending due to the American Recovery and Reinvestment Act of 2009 (ARRA) and the phaseout of that spending. 

• Other Mandatory Spending: Other mandatory spending components are assumed to increase by the rate 

of growth in nominal GDP, implying that such spending will remain constant as a percentage of GDP in the 

long run. Adjustments are made for temporary spending that is not expected to persist in the long run: the 

mandatory spending authorized by ARRA and other stabilization measures including temporary expansions 

in unemployment insurance benefits, the implementation of the Troubled Asset Relief Program (TARP), 

the purchase of government sponsored enterprise (GSE) preferred stock, and higher net spending for the 

Federal Deposit Insurance Corporation (FDIC). The 75-year present value of these temporary measures 

totals $0.1 trillion. 

• Discretionary Spending: In these projections, aside from the expected reductions in Overseas 

Contingency Operations (OCO) spending, discretionary spending is capped at the levels enacted in the 

Budget Control Act of 2011 (BCA) through FY 2021, after which it resumes growth at the same rate as 

nominal GDP, and thus plateaus at a long-term level of 3.1 percent of GDP by 2023 once the OCO 

adjustment has been fully phased out. Adjustments are made for the discretionary components of 

temporary spending authorized by ARRA. The 75-year present value of OCO and the discretionary 

measures in ARRA total $0.6 trillion, or 0.1 percent of present value GDP. 

• Receipts (Other than Social Security and Medicare): Instead of attempting a projection of the entire 

income distribution, the fiscal projections link individual income taxes to wages and salaries, and all other 

receipts to GDP. Individual income taxes are projected to return to their historical ratio to wages and 

salaries of about 17 percent over the next several years, and from that point on to increase gradually to 

almost 28% in 2086 to reflect the progressive nature of the Federal income tax, which implies that as real 

wages rise over time, the average taxpayer will move into higher tax brackets. The levels of individual 

income taxes are also adjusted over the next several years for the phase-out of the temporary tax cuts 

enacted by ARRA. Computing individual income taxes as a ratio of wages and salaries allows the 

projections to reflect changes in the ratio of taxable income to total GDP. All other receipts also rise over 

the next several years back to their historical ratio to GDP of around 4 percent from 1979 through 2010. 

• Further Budget Control Act (BCA) Deficit Reduction: The BCA created the Joint Select Committee on 

Deficit Reduction with a goal to reduce the deficit by at least $1.5 trillion. Because the Joint Committee 

failed to reach agreement on a deficit reduction proposal, under current law automatic procedures specified 

in the BCA will result in $1.2 trillion in reductions in discretionary and mandatory spending through 2021. 

The projections assume that such automatic reductions occur or that the reductions are replaced with an 

equivalent set of cuts, with the effects estimated through 2021 using the procedures set forth in the BCA 

and the resulting lower levels of spending grown with nominal GDP thereafter. 

• 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 convert those in the 2011 Social Security 

Trustees Report7

 to a fiscal year basis. The average interest rate over the projection period is 5.6 percent. 

These rates are then used to convert future cash flows to present values as of the start of fiscal year 2012. 

                                                            

7 As indicated in the more detailed discussion of Social Insurance in Note 26 to the financial statements.
SUPPLEMENTAL INFORMATION (UNAUDITED) 151

Departures from Current Law and Policy

As noted earlier, the long-term fiscal projections are made on the basis of current Federal policy, even where current 

Federal policy would not be continued under provisions of current law. For example, the projections presented in 

Table 1 and throughout this analysis are made without regard to the statutory limit on outstanding Federal debt. The 

projection also assumes several other departures from current law: continued discretionary appropriations 

throughout the projection period, the continued payment of Social Security and Medicare benefits beyond the 

projected point of trust fund exhaustion, extension of some of the 2001/2003 tax cuts, indexing of the alternative 

minimum tax (AMT), and the reauthorization of many mandatory programs with expiration dates prior to the end of 

the 75-year projection period. The projections assume reductions in Medicare physician fees will occur as 

scheduled under current law, just as they are reflected in the Medicare trustees’ report and in the Statement of Social 

Insurance.8

The Sustainability of Fiscal Policy

An important purpose 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 it sustainable. 

A sustainable policy is one where the ratio of debt held by the public to GDP (debt to GDP) is stable over time. The 

discussion below focuses on 

balancing revenues and 

expenditures over time, and does 

not consider fairness or 

efficiency implications of the 

reforms necessary to achieve 

sustainability. 

It is shown below that, under 

current policy, the ratio of debt 

to GDP is projected to rise only 

1.2 percent from 2013 to 2022, 

before resuming faster growth 

over the remainder of the 75-

year window, eventually 

exceeding 280 percent by 2086. 

The continuing rise in this ratio 

by the end of the 75-year horizon 

means that current policy is 

unsustainable. If these 

projections were extended beyond 2086, deficits excluding interest would persist as the population continues to age 

and if the other assumptions made for the 75-year horizon continue to hold. Persistence of the primary deficit 

beyond the 75-year horizon implies that the ratio of debt to GDP would continue to grow beyond the 75-year 

horizon. 

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-toGDP ratio is the primary deficit expressed as a percent of GDP. As shown in Chart 1, the primary deficit-to-GDP 

                                                            

8 Congress has acted repeatedly to prevent the reductions in Medicare physician fees from taking place, but recent actions have also included 

spending reductions to offset the cost of physician fee relief. The assumption here that future reductions will occur as scheduled under current 

law is comparable to an assumption that the reductions will be overridden but the resulting costs will be paid for with reductions in other areas.
152 SUPPLEMENTAL INFORMATION (UNAUDITED)   

ratio grew rapidly in 2009 and stayed large in 2010 and 2011 due to the financial crisis and the recession and the 

policies pursued to combat both. The primary deficit ratio is projected to fall rapidly between 2012 and 2019 

(turning to surplus in 2015) as spending reductions called for in the BCA take effect and the economy recovers. 

Between 2019 and 2035, however, increased spending for Social Security and health programs due to continued 

aging of the population is expected to cause the primary balance to steadily deteriorate. A primary deficit is 

expected to reappear in 2025 that reaches 1.3 percent of GDP in 2035. After 2035, the projected primary deficit-toGDP ratio slowly declines as the impact of the baby boom generation retiring dissipates. Between 2035 and 2086, 

the projected primary deficit averages 0.9 percent of GDP. 

The revenue share of GDP fell substantially in 2009 and 2010 and increased only modestly in 2011 because of the 

recession and tax reductions enacted as part of the 2009 ARRA and the Tax Relief, Unemployment Insurance 

Reauthorization, and Job Creation Act of 2010. The share is projected to return to near its long-run average as the 

economy recovers and the temporary tax cuts expire. After the economy is fully recovered, 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.9

 This projection assumes that Congress and the President will 

continue to enact legislation that prevents the share of income subject to the Alternative Minimum Tax from rising. 

On the spending side, the non-interest spending share of GDP is projected to fall from its current level of 22.6 

percent to about 20 percent in 2013, and stay at or below that level until 2026, and to then rise gradually and plateau 

at about 22 percent beginning in about 2040. The reduction in the non-interest spending share of GDP over the next 

two years is mostly due to the caps on discretionary spending and the automatic spending cuts mandated by the 

BCA, and the subsequent increase is 

principally due to growth in 

Medicare, Medicaid, and Social 

Security spending (see Chart 2). The 

retirement 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 1.4 

percentage points, 1.3 percentage 

points, and 1.0 percentage points, 

respectively. After 2035, the Social 

Security spending share of GDP is 

relatively steady, 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. 

Both Medicare and Medicaid 

projections continue to be 

significantly affected by the enactment of the ACA in 2010. The reform expands health insurance coverage, but the 

long-term budgetary effect will depend on the effectiveness of provisions designed to reduce health care cost 

growth. The 2011 Medicare trustees’ report reflects the ACA and thus projects reductions in future Medicare cost 

growth as called for by the new law. If the trustees’ report projections hold true, there will be a substantial 

slowdown in future Medicare spending and following the projections methodology outlined above there will also be 

a slowdown in future Medicaid spending growth. However, even with this reduced growth in Medicare and 

Medicaid spending, there is still a persistent gap between projected receipts and projected total Federal non-interest 

spending. 

                                                            

9

Projected revenues also account for increases (as a share of GDP) in employer-sponsored health insurance costs, which are tax exempt. 
SUPPLEMENTAL INFORMATION (UNAUDITED) 153

The overall 75-year present value net excess of non-interest spending over receipts expressed in Table 1 of $6.4 

trillion (0.7 percent of the 75-year present value of GDP) for the 2011 projections can be expressed in terms of 

funding sources. In these projections there is an excess of receipts over spending of $6.0 trillion or 0.7 percent of 

GDP among programs funded by the government’s general revenues but an imbalance of $12.4 trillion or 1.4 

percent of GDP among Social Security (OASDI) and 

Medicare Part A, which are funded by payroll taxes and 

which are not funded in any material respects by the 

government’s general revenues. By comparison, the 2010 

projections showed that programs funded by the 

government’s general revenues had an imbalance of $5.3 

trillion or 0.6 percent of GDP while the payroll tax funded 

programs had an imbalance of $11.0 trillion or 1.3 percent of 

GDP.10 While the imbalance for payroll tax funded programs 

has actually risen modestly since 2010, programs funded by general revenues are no longer in imbalance in 2011 

and show a large present value surplus more than offsetting the increase in the dedicated imbalance. This speaks 

further to the gains brought about through the BCA in 2011. 

As shown in Table 1 and discussed 

above, the 2011 projection of the 

75-year present value imbalance of 

spending over receipts of $6.4 

trillion is a sizable drop from the 

2010 projection, which measured 

the 75-year imbalance as $16.3 

trillion. Table 2 breaks down the 

sources of the change in this key 

projection from 2010 to 2011 and 

clearly illustrates the projected 

effects of newly enacted legislation 

as the main driver of the change 

since last year. The changes due to 

enacted legislation shown on Table 

2 reflect the effect on the long-term 

fiscal imbalance of the 

incorporation of the passage of key 

pieces of legislation since 2010 

including the 2011 full year 

continuing resolution, as well as the BCA. The enactment of discretionary caps in the BCA improved the long run 

fiscal imbalance in the 2011 projections by $7.0 trillion and the additional deficit reduction from the automatic 

spending reductions improved the fiscal imbalance by $4.1 trillion. Technical adjustments and changes to modeling 

assumptions improved the fiscal picture by $2.3 trillion since 2010. The main source of these changes are actual 

budget numbers being lower than projected in 2010, as well as refinements to the fiscal projections model. Also 

reflected are revised economic assumptions, as well as the effect of changing the projection period from 2011-2085 

to 2012-2086, which collectively somewhat reduce the overall decreases brought about since 2010 from legislation. 

                                                            

10 If payroll and self-employment taxes and related assets in the OASDI Trust Funds or Medicare Part A become insufficient to cover related 

benefits, as indicated by projections, additional funding for each of these two programs would be necessary or scheduled benefits would need to 

be reduced. If the government’s general revenues are insufficient to cover both mandated transfers to Medicare Parts B and D and spending for 

other general government programs funded by the government’s general revenues, either Medicare Parts B and D revenues (premiums and state 

transfers), or the government’s general revenues would need to be increased, spending for Medicare Parts B and D and/or other general 

government spending would need to be reduced, and/or additional amounts would need to be borrowed from the public.

Non‐Interest Spending Less Receipts: FY 2010 16.3

Components of Change:

Change due to Enacted Legislation..................... ‐11.0

Change in Economic Assumptions....................... 2.4

Change in Reporting Period................................ 1.0

Change in Technical Assumptions....................... ‐2.3

Total ‐9.9

Non‐Interest Spending Less Receipts: FY 2011 6.4

Table 2:  Components of Change (PV Dollars in Trillions)
154 SUPPLEMENTAL INFORMATION (UNAUDITED)   

Another way of viewing the improvement in the financial outlook in this year's Report relative to last year's Report 

is in terms of the projected level of publicly-held debt in 2085. The ratio of publicly-held debt to GDP in 2085 is 

projected to reach 283 percent in this year's Report, which compares with 352 percent projected in last year's Report. 

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 ratio of debt held by the public to GDP that are shown in Chart 3. That ratio was 68 percent at 

the end of fiscal year 2011, and under current policy, it is projected to exceed 76 percent in 2022, 125 percent in 

2042, and 287 percent in 2086. The continuous rise of the debt-to-GDP ratio illustrates 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.11 Total spending consists of non-interest spending plus 

interest spending. Chart 4 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 1.5 percent in 2011, and under 

current policies it is projected to reach 5 percent by 2031 and nearly 16 percent by 2086. 

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 2012 to 2086, and the target 

debt-to-GDP ratio is equal to the 

ratio at beginning of the projection 

period, in this case the end of fiscal 

year 2011 debt-to-GDP ratio of 68 

percent of GDP. 

The 75-year fiscal gap under 

current policy is estimated at 1.8 

percent of GDP, as reflected in 

Table 3, which represents about 

9% of the 75-year present value of 

projected receipts and of noninterest spending. As noted in Table 1, the difference between projected programmatic (non-interest) spending and 

receipts is 0.7 percent of GDP (reflecting the deficit condition of excess spending over receipts). However, 

eliminating this primary deficit of 0.7 percent of GDP is not sufficient to stabilize the debt-to-GDP ratio. Because 

interest rates are assumed to exceed the growth rate of GDP, reaching primary balance will still leave debt rising 

relative to GDP. The average primary surplus needed to return the debt-to-GDP ratio of 68 percent to its initial level 

and fully close the fiscal gap is 1.1 percent of GDP per year. 

                                                            

11 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 0.6 percent 

of present value GDP.
SUPPLEMENTAL INFORMATION (UNAUDITED) 155

The Cost of Closing the 75‐Year Fiscal Gap

The longer policy action to close the fiscal gap is delayed, the larger the post-reform primary surplus must be to 

stabilize the debt-to-GDP ratio by the end of the 75 year period. Varying the years in which reforms are introduced 

while holding constant the ultimate target ratio of debt to GDP helps to illustrate the cost of delaying policy changes 

that close the fiscal gap. The reforms considered here increase the primary surplus relative to current policy by a 

fixed percent of GDP starting in the reform year. Three such policies are considered, each beginning in a different 

year. The analysis shows that the longer policy action is delayed, the larger the post-reform primary surplus must be 

to stabilize the debt-to-GDP ratio in 2086. Future generations are harmed by policy delay because higher primary 

surpluses imply lower spending and/or higher taxes than would be needed with earlier deficit reduction. 

As previously shown in Chart 1, under current policy, primary deficits occur in virtually every year of the projection 

period. Table 3 shows primary surplus changes necessary to make the debt-to-GDP ratio in 2086 equal to its level in 

2011 under each of the three policies. If reform begins in 2012, then it is sufficient to raise the primary surplus 

share of GDP by 1.8 percentage points in every year between 2012 and 2086 in order to have a debt-to-GDP ratio in 

2086 equal to the level in 2011. This raises the 

average 2011-2086 primary surplus-to-GDP ratio 

from -0.7 percent to 1.1 percent. 

In contrast to a reform that begins immediately, if 

reform is begun in 2022 or 2032, the primary surplus 

must be raised by 2.2 percent and 2.8 percent of 

GDP, respectively, in order to reach a debt-to-GDP 

ratio in 2086 equal to the level in 2011. The difference between the primary surplus increasing in 2022 and 2032 

(2.2 and 2.8 percent of GDP, respectively) rather than in 2012 (1.8 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 debt-to-GDP ratio rising 

during the interim period, which increases the future amount of interest that must be covered with the primary 

surplus. Delaying reform increases the cost of reaching the target debt-to-GDP ratio even if the target year is 

extended beyond 2086, since the starting debt-to-GDP ratio will be higher. 

These estimates likely understate the cost of delay because they do not assume interest rates will rise as the debt-toGDP ratio grows. If a higher debt-to-GDP ratio increases the interest rate, making it more costly for the government 

to service its debt and simultaneously slowing private investment, the primary surplus required to return the debt-toGDP ratio to its 2011 level will also increase. This dynamic may accelerate with higher ratios of debt to GDP, 

potentially leading to the point where there may be no feasible level of taxes and spending that would reduce the 

debt-to-GDP ratio to its 2011 level. The potential impact of changes in interest rates is among the variables 

explored in the following section. 

Alternative Scenarios  

The long-run outlook for the budget is extremely uncertain and therefore it makes sense to consider possible 

alternative projections to indicate the range of uncertainty. There are many dimensions to the projections for which 

reasonable variations could be considered. Some of the key issues concern long-run economic and demographic 

assumptions. The long-run fiscal gap is partly the result of demographic patterns that have emerged over the last 50 

years with lower birth rates and reduced mortality. 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 expected fertility, mortality, or immigration rates could have important long-run effects on the 

projections. Increases in immigration or fertility rates, or reduction in the mortality rate would improve the longterm fiscal projections. Conversely, decreases in immigration or fertility rates, or improvements in the mortality rate 

would result in deterioration in the long-term fiscal projections. The remainder of this section will focus on two 

important variables that can also impact fiscal projections: the growth rate of heath care costs and interest rates.

Period of Delay Change in Average Primary Surplus

No Delay: Reform in 2012 1.8 percent of GDP between 2012 and 2086

Ten Years: Reform in 2022 2.2 percent of GDP between 2022 and 2086

Thirty Years: Reform in 2032 2.8 percent of GDP between 2032 and 2086

Table 3

Costs of Delaying Fiscal Consolidation

Note: Re forms taking pla ce in 2011, 2021, and 2031 from the 2010 Report we re 2.4, 2.9, and

3.7 pe rcent of GDP.
156 SUPPLEMENTAL INFORMATION (UNAUDITED)   

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 growth rates, Chart 5 and 

Table 4 show the effect on 

future primary deficits as well 

as the present value imbalance 

of growth rates that are one 

percent higher or two percent 

higher than the growth rates in the base 

projection. Relative to the base assumption 

of 0 percent average excess health cost 

growth, the one percent higher health care 

cost growth scenario raises the 75-year 

present value of non-interest spending less 

receipts to 4.8 percent of GDP, compared 

to 0.7 percent of GDP assumed in the base projection. The two percent higher health cost growth scenario raises the 

75-year present value of non-interest spending less receipts even further, to 7.5 percent of GDP. The dramatic 

deterioration on 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 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. If a constant ratio of debtto-GDP is not achieved and the ratio 

continues to rise continuously, longterm interest rates would be 

expected to rise further, worsening 

the debt ratio in the process. Chart 6 

and Table 5 display several 

alternative scenarios where differing 

interest rate assumptions are used 

from the base case found in the 

Social Security trustees’ report. In 

the scenario where the interest rate rises a constant one-half percentage point above the base projection starting in 

2012, the debt-to-GDP ratio in 2086 rises from 287 percent to 378 percent. As shown in Table 5, the present value 

imbalance falls from $6.4 trillion to $5.5 trillion. Adding a full percentage point to the base projection starting in 

2012 raises the 2086 debt-to-GDP ratio to 502 percent, but drops the 75-year fiscal imbalance to $4.7 trillion. To 

show the effects of achieving balance and lowering long-term debt-to-GDP and interest rates, lowering interest rates 

Scenario Dollars in Trillions % GDP

Base Case: 0% Average Excess Health Cost Growth 6.4 0.7

1% Average Excess Health Cost Growth 42.7 4.8

2% Average Excess Health Cost Growth 66.5 7.5

Table 4

Impact of Alternative Health Cost Scenarios on 75‐year PV imbalance

75‐Year Present Value Fiscal Imbalance:
SUPPLEMENTAL INFORMATION (UNAUDITED) 157

by one-half percentage point from the 

base projection starting in 2012 in turn 

lowers the 2086 debt ratio to 220 

percent; however lowering the interest 

rate raises the 75-year present value 

imbalance to $7.6 trillion. It is clear that 

there is risk to continuing down a path 

of rising debt-to-GDP ratios, with a 

compounding impact that could lead to even worse consequences if no policy actions are taken. 

Other key economic assumptions in this report include the future growth rate of real GDP, which itself depends on 

assumptions such as future growth in the labor force and labor productivity. Historically, U.S. labor productivity 

has increased at a rate of about 2 percent or more per year, but there have been periods when productivity grew less 

rapidly and other periods in which it grew faster. Productivity growth has averaged 2.5 percent per year over the 

last 15 years, which is above its long-run trend. In these projections, the rate of productivity growth is assumed to 

be somewhat below its long-run trend, which is a conservative assumption. It is unlikely that higher productivity 

growth will be sufficient to resolve the long-run budget problem. Faster growth will lead to higher wages, which 

will lead to more tax revenue in the near term, but these gains will be partly offset by higher payments for Social 

Security and other benefit programs in the long term, because benefits are tied to wages. Inflation is not a major 

factor in these calculations. Changes in the trend rate of inflation have offsetting effects on future revenues and 

future spending, so the budget effect is more nearly neutral in the long run.

Fiscal Projections in Context

All of the major countries of the world have outstanding government debt. The United States Government’s debt as 

a percentage of GDP is relatively large compared with 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, the 31 OECD countries ranged in debt ratios in 2009 from 6 percent of GDP to 126 percent of GDP, 

with the United States in the higher echelon.12 However, each country is different in how it finances its sovereign 

debt, how robustly its economies grow, and how fair and stable taxation and benefits are across generations and 

income levels, so the comparison of current debt levels across nations and what they mean for fiscal projections 

across nations is not well defined. Past accrual of debt is certainly important, but future action encompassed in fiscal 

projections is a more prudent gauge for comparison. 

Several countries have begun to produce long-range fiscal projections in the last two decades. However, 

comparisons are difficult because the coverage of the reports and the time horizon projected vary across countries. 

The horizon for most of these reports is less than 75 years, and the projections are not always updated annually. 

Some of the countries that have produced long-range projections have shown sustainable policies in the long run, 

although the recent financial crisis will have worsened the near-term budget outlook in almost every country. Early 

developers of such fiscal projections include Australia, New Zealand, Canada, the United Kingdom, Denmark, 

Sweden, Norway, and the Netherlands.13

                                                            

12 Central Government Debt, OECD National Accounts Statistics (database) available at http://www.oecd-ilibrary.org/finance-andinvestment/total-central-government-debt-2010_20758294-2010-table1 13 The Organization for Economic Cooperation and Development (OECD) released a policy brief in October 2009 (available at 

http://www.oecd.org/dataoecd/40/26/43836144.pdf) describing the efforts of different member countries to produce long-term fiscal projections.

Scenario Dollarsin Trillions % GDP

Base Case: Average of 5.6 percent over 75 years 6.4 0.7

0.5 percent higher interest rate in each year 5.5 0.7

1.0 percent higher interest rate in each year 4.7 0.7

0.5 percent lower interest rate in each year 7.6 0.7

Table 5

Impact of Alternative Interest Rate Scenarios on 75‐year PV imbalance

75‐Year Present Value Fiscal Imbalance:

==
158 SUPPLEMENTAL INFORMATION (UNAUDITED)   

Conclusion

The United States took a potentially significant step towards fiscal sustainability in 2010 by reforming its system of 

health insurance. The legislated changes for Medicare, Medicaid, and other health coverage hold the prospect of 

lowering the long-term growth trend for future health care costs and significantly reducing the long-term fiscal gap. 

Furthermore, enactment of the Budget Control Act in August 2011 placed limits on future discretionary spending 

and established a process to assure further deficit reduction of $1.2 trillion over 10 years. But even with the new 

laws, the projections in this Report indicate that if policy remains unchanged then the debt-to-GDP ratio will 

continually increase over the next 75 years and beyond, which means 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 revenue increases and/or 

spending decreases necessary to reach a target debt-to-GDP ratio in 2086 and return the Nation to a sustainable 

fiscal path. 

The projections presented in this Report assume current policies remain unchanged 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 it 

sustainable. The projections are therefore neither forecasts nor predictions. If policy changes are enacted, perhaps in 

response to projections like those presented here, then actual financial outcomes will of course be different than 

those projected. While this these projections of expenditures and receipts under current policies are highly 

uncertain, there is little question that current policies cannot be sustained indefinitely. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 159

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 law provisions of the programs can be sustained, 

and more generally what effect they will likely have on the Government’s financial condition. The resources needed 

to run these programs are raised through taxes and fees. Eligibility for benefits rests 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 entitling 

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 earmarked 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 simply the combined OASDI Trust Funds. At the end of calendar year 2010, OASDI benefits were 

paid to approximately 54 million beneficiaries. 

The primary financing of 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, employers and employees have 

each paid 6.2 percent of taxable earnings. The self-employed pay 12.4 percent of taxable earnings. Payroll taxes are 

computed on wages and net earnings from self-employment up to a specified maximum annual amount, referred to 

as maximum taxable earnings ($106,800 in 2011), that increases each year with economy-wide average wages. 

Legislation passed in 1984 subjected up to half of OASDI benefits to tax and allocated the revenue to the 

OASDI Trust Funds, and in 1993 legislation upped the potentially taxed portion of benefits to 85 percent and 

allocated the additional revenue to the Hospital Insurance Trust Fund. 

Medicare 

The Medicare Program, created in 1965, also has two separate trust funds: the Hospital Insurance (HI, 

Medicare Part A) and Supplementary Medical Insurance (SMI, Medicare Parts B and D) Trust Funds.1

 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 earmarked financing structures. Similar to OASDI, HI is financed primarily 

by payroll contributions. Currently, employers and employees each pay 1.45 percent of earnings, while selfemployed workers pay 2.9 percent of their net earnings. Beginning in 2013, employees and self-employed 

individuals with earnings above certain thresholds will 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. 

 

1

 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 the SMI Trust Fund and the Federal budget 

described below is largely unaffected by the presence of the Part D account though the magnitude will be greater. 
160 SUPPLEMENTAL INFORMATION (UNAUDITED) 

For SMI, transfers from the General Fund of the Treasury represent the largest source of income covering 

about 76 percent and 80 percent of program costs for Parts B and D, respectively. In 2011, beneficiary premiums 

and, for Part D, State transfers financed approximately 24 percent and 20 percent of costs for Parts B and D, 

respectively. 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 

26—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 Social Security and Medicare Trust Funds is the focus of 

the 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. 

Surplus 

Borrowed 

Interest 

Credited 

Benefit 

Taxes 

Interest 

Credited 

Surplus 

Borrowed 

General 

Government 

Expenditures, 

Net Interest 

SMI Trust 

Fund 

Account 

Other 

Government

Accounts 

HI, OASDI 

Trust Fund 

Accounts 

Supplementary 

Medical Insurance 

Premiums and 

State Transfers 

Income Taxes 

Benefit Taxes 

Other Revenues 

Borrowing from 

the Public 

Payroll Taxes 

Hospital Insurance 

Premiums 

HI, OASDI, SMI 

Benefits 

Other 

Government 

Transfers 

E 

X 

P 

E 

N 

D 

I 

T 

U 

R 

E 

S 

M 

E 

A 

N 

S 

O 

F 

F 

I 

N 

A 

N 

C 

I 

N 

G 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 161

Figure 1 is a simplified graphical depiction of the interaction of the Social Security and Medicare Trust Funds 

with the rest of the Federal budget.2 The boxes on the left show sources of funding, those in the middle represent the 

trust funds and other Government accounts (of which the General Fund is a part) 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. 

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 are earmarked specifically for the 

respective trust fund, and cannot be used for other purposes. In contrast, personal and corporate income taxes and 

other revenue go into the General Fund of the Treasury and are drawn down for any Government program for which 

Congress has approved spending.3

 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. SMI is currently 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 Part D account also receives transfers from the 

States). The transfers finance roughly three-fourths of SMI Program expenses. The transfers are automatic; their size 

depends on how much the program requires, not on how much revenue comes into the Treasury. If General Fund 

revenues become insufficient to cover both the mandated transfer to SMI and expenditures on other general 

Government programs, Treasury would have 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 standpoint of the Government as a whole, at least in an 

accounting sense, these interest credits are a wash. 

It is important to understand the additional implications of these loans from the trust funds to the other 

Government accounts. 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—the loans will be called in and the General Fund will have to finance 

the benefits paid by the trust fund through general revenues or borrowing, just as for any Governmental program. 

Actual dollar amounts roughly corresponding to the flows presented in Figure 1 are shown in Table 1 for fiscal 

year 2011. 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 ($306.3 billion) and interest credits ($132.1 billion) received by the trust funds appear as negative entries 

under “Other Government” 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. 

 

2

 The Federal unified budget encompasses all Government financing and is synonymous with a Governmentwide perspective. 3

 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 

earmarked 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 earmarked trust fund programs, are grouped under “Other Government Accounts” to 

simplify the description and maintain the focus on Social Security and Medicare. 
162 SUPPLEMENTAL 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 ($259.6 billion) and revenues ($213.1 billion) was ($46.5 billion) in 2011, 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 a quarter of total expenditures made to the public in 

2011. The difference ($227.5 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 ($730.7 billion) and revenues from the public ($602.1 

billion) was ($128.6) billion in 2011, indicating that OASDI had a negative effect on the overall budget outcome in 

that year. 

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 $33.1 billion in 2011, 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 of $301.3 billion ($72.9 + $228.4), including $225.2 billion transferred from other 

Government accounts (the General Fund), exceeded total expenditures by $0.9 billion. Transfers to the SMI 

Program from other Government accounts (the General Fund), amounting to about 75 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 $798.7 billion ($602.1 + $196.6), including interest and other Government transfers, 

exceeded total expenditures of $730.7 billion by $68.0 billion. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 163

Cashflow Projections 

Background 

Economic and Demographic Assumptions. The Boards of Trustees 4 of the OASDI and Medicare Trust Funds 

provide in their annual reports to Congress short-range (10-year) and long-range (75-year) actuarial estimates of 

each trust fund. Because of the inherent uncertainty in estimates for 75 years into the future, the Boards use three 

alternative sets of economic and demographic assumptions to show a range of possibilities. The economic and 

demographic assumptions used for the most recent set of intermediate projections for Social Security and Medicare 

are shown in the “Social Security” and “Medicare” sections of Note 26—Social Insurance. 

 

4 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 are members of two different political parties. 

Table 1 

Revenues and Expenditures for Medicare and Social Security 

Trust Funds and the Total Federal Budget 

for the Fiscal Year ended September 30, 2011 

 Trust Funds 

(In billions of dollars) HI SMI 

 

OASDI Total All Other Total 1 

 

Revenues from the public and States: 

Payroll and benefit taxes, State grants... 207.2 602.1 809.3 809.3 

Premiums ............................................... 5.9 64.5 70.4 70.4 

Other taxes and fees .............................. 8.4 8.4 1,414.4 1,422.8 

Total ........................................................ 213.1 72.9 602.1 888.1 1,414.4 2,302.5 

 

Total expenditures to the public 2 .............. 259.6 300.4 730.7 1,290.7 2,310.4 3,601.1 

 

Net results—budget perspective 3......... (46.5) (227.5) (128.6) (402.6) (896.0) (1,298.6)

 

Revenues from other Government 

accounts: 

Transfers ................................................ 0.5 225.2 80.6 306.3 (306.3) 

Interest credits ........................................ 12.9 3.2 115.9 132.1 (132.1) 

Total ........................................................ 13.4 228.4 196.6 438.4 (438.4) 

 

Net results—trust fund perspective

(change in trust fund balance) 3

 .......... (33.1) 0.9 68.0 35.8 N/A N/A 

 

1 This column is the sum of the preceding two columns and shows data for the total Federal budget. The figure $1,298.6 billion 

was the total Federal deficit in fiscal year 2011. 

2

 The OASDI figure includes $4.6 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. 
164 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Beneficiary-to-Worker Ratio. Underlying the pattern of expenditure projections for both the OASDI and 

Medicare Programs is the impending demographic change that will occur as the large baby-boom generation, born in 

the years 1946 to 1964, retires or reaches eligibility age. The consequence is that the number of beneficiaries will 

increase much faster than the number of workers who pay taxes that are used to pay benefits. The pattern is 

illustrated in Chart 1 which shows the ratio of OASDI beneficiaries to 100 covered workers for the historical period 

and estimated for the next 75 years. In 2011, there were about 35 beneficiaries for every 100 workers. By 2030, 

there will be about 47 beneficiaries for every 100 workers. A similar demographic pattern confronts the Medicare 

Program. For example, for the HI Program, there were about 30 beneficiaries for every 100 workers in 2011; by 

2030, there are expected to be about 43 beneficiaries for every 100 workers. This ratio for both programs will 

continue to increase to about 49 beneficiaries for Medicare and 52 beneficiaries for OASDI for every 100 workers 

by the end of the projection period, after the baby-boom generation has moved through the Social Security system 

and as birth rates decline and longevity increase. 

Chart 1—OASDI Beneficiaries per 100 Covered Workers 

1970-2085 

10

15

20

25

30

35

40

45

50

55

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080 2085

Calendar Year

Historical Data

Source: http://www.ssa.gov/OACT/TR/2011/lrIndex.html 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 165

Social Security Projections 

Income and Expenditures. Chart 2 shows historical values and actuarial estimates of combined OASDI annual 

income (excluding interest) and expenditures for 1970-2085. The estimates are for the open-group population. That 

is, the estimates include taxes paid from, and on behalf of, workers who will enter covered employment during the 

period, as well as those already in covered employment at the beginning of that period. These estimates also include 

scheduled benefit payments made to, and on behalf of, such workers during that period. Note that expenditure 

projections in Chart 2 and subsequent charts are based on current-law benefit formulas, regardless of whether the 

income and assets are available to finance them. 

Chart 2—OASDI Income (Excluding Interest) and Expenditures 

1970-2085 

(In billions of dollars) 

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080

Calendar Year

Historical Data

2011: Crossover Year

Expenditures

Income

Source: http://www.ssa.gov/OACT/TR/2011/lr6f9.html

Currently, Social Security tax revenues exceed benefit payments and is expected to continue to do so until 

2011, when revenues are projected to fall below benefit payments, after which the gap between expenditures and 

revenues continues to widen.
166 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Income and Expenditures as a Percent of Taxable Payroll. Chart 3 shows annual income (excluding interest 

but including both payroll and benefit taxes) and expenditures expressed as percentages of taxable payroll, 

commonly referred to as the income rate and cost rate, respectively. 

The OASDI cost rate is projected to increase rapidly and first exceeds the income rate in 2011, producing 

cashflow deficits thereafter. As described above, surpluses that occur prior to 2016 are “loaned” to the General Fund 

and accumulate, with interest, reserve spending authority for the trust fund. The reserve spending authority 

represents an obligation for the General Fund. Beginning in 2011, Social Security will start using interest credits to 

meet full benefit obligations. The Government will need to raise taxes, reduce benefits, increase borrowing from the 

public, and/or cut spending for other programs to meet its obligations to the trust fund. By 2036, the trust fund 

reserves (and thus reserve spending authority) are projected to be exhausted. Even if a trust fund's assets are 

exhausted, however, tax income will continue to flow into the fund. Present tax rates would be sufficient to pay 77 

percent of scheduled benefits after trust fund exhaustion in 2036 and 74 percent of scheduled benefits in 2085. 

Chart 3—OASDI Income (Excluding Interest) and Expenditures 

as a Percent of Taxable Payroll 

1970-2085 

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080

Source: http://www.ssa.gov/OACT/TR/2010/lr4b1.html Calendar Year

Historical Data

Expenditures

Income

2036: Year Trust Fund Exhausted

2011: Begin using interest credits

to meet full benefit obligations

Cash Deficit Covered by

Interest and Trust Fund Assets
 SUPPLEMENTAL INFORMATION (UNAUDITED) 167

Income and Expenditures as a Percent of GDP. Chart 4 shows estimated annual income (excluding interest) 

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 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 4.85 percent of GDP in 2011 to 6.01 percent in 2085. In 2085, expenditures are projected to 

exceed income by 1.46 percent of GDP. 

Chart 4—OASDI Income (Excluding Interest) and Expenditures 

as a Percent of GDP 

1970-2085 

2%

3%

4%

5%

6%

7%

8%

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080 2085

Calendar Year Source: http://www.ssa.gov/OACT/TR/2011/lr6f4.html

Historical Data

Expenditures

Income

2011: First Year Expenditures

Exceed Noninterest Income
168 SUPPLEMENTAL 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 and 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 generally 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 generally worsen the financial outlook. One 

exception occurs with the CPI assumption (see below). 

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 0.78 percent. For the low-cost alternative, a slower reduction rate (0.32 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 $9,157 billion to $7,017 billion, a 23 

percent smaller shortfall. The high-cost death rate assumption (1.31 percent) results in an increase in the shortfall, 

from $9,157 billion to $11,244 billion, a 23 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 an 11 percent smaller shortfall (i.e., expenditures less income), from $9,157 billion to $8,179 billion. 

Higher real wage growth results in faster income growth relative to expenditure growth. Table 2 shows that a 

real wage differential that is 0.6 greater than the intermediate assumption of 1.2 results in a drop in the shortfall from 

$9,157 billion to $7,099 billion, a 22 percent decline. 

The CPI change assumption operates in a somewhat counterintuitive manner, as seen in Table 2. A lower rate 

of change results in a higher 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 

2.8 percent rather than 3.8 percent, the shortfall decreases about 6 percent, from $9,157 billion to $8,634 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 5 percent drop in the shortfall, from $9,157 billion to $8,659 billion, relative to the intermediate case; and 

the high-cost assumption results in a 5 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 of $7,313 billion is 20 percent lower when the real interest rate is 3.6 percent rather than 2.9 

percent, and is 32 percent higher when the real interest rate is 2.1 percent rather than 2.9 percent. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 169

Table 2 

Present Values of Estimated OASDI Expenditures in Excess of Income 

under Various Assumptions, 2011-2085 

(Dollar values in billions; values of assumptions shown in parentheses) 

Financing Shortfall Range 

Assumption Low Intermediate High 

Average annual reduction in death rates ..... 7,017

(0.32)

9,157

(0.78)

11,244

(1.31)

Total fertility rate .......................................... 8,179

(2.3)

9,157

(2.0)

10,130

(1.7)

Real wage differential .................................. 7,099

(1.8) 

9,157

(1.2) 

10,554

(0.6) 

CPI change .................................................. 8,634

(3.8)

9,157

(2.8)

9,696

(1.8)

Net immigration ............................................ 8,659

(1,385,000) 1 9,157

(1,075,000) 1 9,645

(785,000) 1

Real interest rate .......................................... 7,313

(3.6) 

9,157

(2.9) 

12,103

(2.1) 1

 Amounts represent the average annual net immigration over the 75-year projection period. 

Source: 2011 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 rates for parts A and B services other than for 

physicians’ services. Relative to payment rates made under prior law that were based on the rate at which prices for 

inputs used to provide Medicare services increase, the ACA reduces those payment rates by the rate at which 

productive efficiency in the overall economy increases, which is projected to average 1.1 percent per year. The ACA 

also achieves substantial cost savings by reducing 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 highcost 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 2011 Medicare Trustees’ Report warns that the “actual future costs for Medicare are likely to exceed those 

shown by the current-law projections that underlie both the Trustees’ Report and this Financial Report. This 

warning is primarily due to the fact that productivity growth in the provisions of Medicare services have in the past 

been much smaller than productivity growth in the overall economy, which suggests that the new productivity-based 

downward adjustments to Medicare payment rates may not be sustainable. This concern is reinforced by the fact that 

similar adjustments to payment rates for Medicare physicians’ services mandated by a 1996 Medicare reform have 

been consistently overridden by new law. 
170 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Health Care Cost Growth. In addition to the growth in the number of beneficiaries per worker, the Medicare 

Program has the added pressure of expected growth in the use and cost of health care per person that is driven in 

large part by new technology. Growth in Medicare cost per beneficiary in excess in growth in per capita GDP is 

referred to as “excess cost growth.” In last year’s Financial Report, excess cost growth was assumed to be about 1 

percentage point—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. An assumption for excess cost growth was smaller 

than in recent history; excess cost growth averaged 1-1/2 percentage points between 1990 and 2007. 5

 The 

combination of more beneficiaries per worker and 1 percent excess cost growth caused projected Medicare 

expenditures to grow substantially more rapidly than GDP in the 2010 Financial Report. In this year’s Financial 

Report, however, long-term excess cost growth is essentially zero because of the productivity adjustments to 

payment rates called for by the ACA. As a result, the long term projected Medicare spending share of GDP in this 

Report is driven primarily by the same demographic trends that drive the OASDI spending share of GDP. 

 

5 Congressional Budget Office, the Long-Term Budget Outlook, June 2011. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 171

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 6.24 percent of GDP by 

2085. Revenues from taxes and premiums (including State transfers under Part D) are expected to increase from 

1.88 percent of GDP in 2011 to 2.99 percent of GDP in 2085. 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 1.48 percent to 3.06 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 56 percent in 2011 to 49 percent in 2085) while general revenues will rise (from 44 percent 

to 51 percent). The gap between total noninterest Medicare income (including general revenue contributions) and 

expenditures begins around 2011 and then steadily continues to widen, reaching 0.2 percent of GDP by 2085. 

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

as a Percent of GDP 

1970-2085 
172 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Medicare, Part A (Hospital Insurance)─Nominal Income and Expenditures. Chart 6 shows historical and 

actuarial estimates of HI annual income (excluding interest) and expenditures for 1970-2085 in nominal dollars. The 

estimates are for the open-group population. 

Chart 6—Medicare Part A Income (Excluding Interest) and Expenditures 

1970-2085 

(In billions of dollars) 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 173

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 

the expenditure rate exceeds the income rate in 2008, and cash deficits continue thereafter. Trust fund interest 

earnings and assets provide enough resources to pay full benefit payments until 2024 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 2024. Present tax rates would be sufficient to 

pay 90 percent of scheduled benefits after trust fund exhaustion in 2024 and 88 percent of scheduled benefits in 

2085. 

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

as a Percent of Taxable Payroll 

1970-2085

0%

1%

2%

3%

4%

5%

6%

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080

Calendar Year

Historical Data

Expenditures

Income

2024: Trust Fund Exhausted Deficit Covered by Trust

Fund Interest and Assets

Source:http://www.ssa.gov/OACT/TRSUM//images/LD_ChartC.html
174 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Medicare, Part A Income and Expenditures as a Percent of GDP. Chart 8 shows estimated annual income 

(excluding interest) and expenditures, expressed as percentages of GDP, and 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 1.71 

percent of GDP in 2011, to 2.03 percent in 2030, and to 2.11 percent by 2085. The gap between expenditure and 

income shares of GDP widens and peaks at 0.57 percent in 2046 and then commences a steady decline, reaching 

0.25 percent of GDP in 2085. 

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

as a Percent of GDP 

1970-2085 

0%

1%

2%

3%

4%

5%

6%

1970 1977 1984 1991 1998 2005 2012 2019 2026 2033 2040 2047 2054 2061 2068 2075 2082

Source:http://www.ssa.gov/OACT/TRSUM//images/LD_ChartC.html Calendar Year

Expenditures

Income

Historical Data
 SUPPLEMENTAL INFORMATION (UNAUDITED) 175

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) and expenditures for each of the next 75 years, 

in nominal dollars. The gap between premiums and State transfer revenues and 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 

1970-2085 

(In billions of dollars) 

$0

$5,000

$10,000

$15,000

$20,000

$25,000

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080

Source: Centers for Medicare & Medicaid Services Calendar Year

Historical Data

 Expenditures

Part B + Part D

Premium Income

+ State Transfers

 General Fund

Transfers Needed
176 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Medicare Part B and Part D Premium and 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 2011 to 3.37 percent in 2035, and then grow more slowly reaching 4.13 in 2085. This growth pattern reflects 

growth in Medicare spending per beneficiary that is positive for the first half of the projection period before turning 

negative as a result of provisions in the ACA and to population ageing that is rapid through 2035 as the baby boom 

generation move into their advanced years and then slows to a modest pace consistent with increasing longevity. 

Premium and State transfer income grows from about 0.49 in 2011 to 1.08 percent in GDP in 2085, so the portion 

financed by General Fund transfers to SMI is projected to be about 75 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 

1970-2085 

0%

1%

2%

3%

4%

5%

6%

7%

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080

Source: Centers for Medicare & Medicaid Services Calendar Year

Historical Data

Total SMI 

Expenditures

Premium Income

 Part B+Part D

+ State Transfers

 General Fund

 Transfers Needed

to Part B and Part D

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 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 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 $3,252 billion to a surplus of $1,917 billion, a 159 percent change. The high-cost assumption results in a near 

quadrupling of the shortfall, from $3,252 billion to $11,445 billion. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 177

Variations in the next four assumptions in Table 3 result in relatively minor changes in net HI expenditures. 

The higher or lower fertility assumptions cause an approximate 12 and 11 percent, respectively, change in the 

shortfall relative to the intermediate case. The higher or lower real wage growth rate results in about a 34 and 17 

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. HI expenditures exceed HI income 

by a wide and increasing margin in the future (Charts 6 to 8). CPI and net immigration changes have very little 

effect on net HI expenditures. Higher immigration decreases the net shortfall modestly as higher payroll tax revenue 

offsets higher medical care expenditures. 

Table 3 also shows that the present value of net HI expenditures is 20 percent lower if the real interest rate is 

3.6 percent rather than 2.9 percent and 32 percent higher if the real interest rate is 2.1 percent rather than 2.9 percent. 

Table 3 

Present Values of Estimated Medicare Part A Expenditures in Excess of 

Income Under Various Assumptions, 2011-2085 

(Dollar values in billions; values of assumptions shown in parentheses) 

 Financing Shortfall Range 

Assumption1 Low Intermediate High 

Average annual growth in health costs 2 ............ (1,917)

(2.0)

3,252

(3.0) 

11,445

(4.0)

Total fertility rate 3 ............................................... 2,874

(2.3) 

3,252

(2.0) 

3,623

(1.7) 

Real wage differential ......................................... 2,156

(1.8)

3,252

(1.2)

3,819

(0.6)

CPI change ......................................................... 3,006

(3.8)

3,252

(2.8)

3,478

(1.8)

Net immigration ................................................... 3,169

(1,385,000) 4

3,252

(1,075,000) 4

3,327

(785,000) 4

Real interest rate ................................................. 2,589

(3.6)

3,252

(2.9)

4,293

(2.1) 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. 
178 SUPPLEMENTAL 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 $13,854 billion to $9,985 

billion and in Part D from $7,466 billion to $5,228 billion, about a 28 percent and 30 percent difference for Part B 

and Part D, respectively. The high-cost assumption increases Governmentwide resources needed to $19,890 billion 

for Part B and to $11,022 billion for Part D, about a 44 percent and a 48 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, 2011-2085 

(In billions of dollars) 

 Governmentwide Resources Needed 

Medicare Program1

Low 

(2) 

Intermediate 

(3) 

High 

(4) 

Part B ............................................................. 9,985 13,854 19,890 

Part D ............................................................. 5,228 7,466 11,022 

 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 and Medicaid Services. 

Sustainability of Social Security and Medicare 

75-Year Horizon 

According to the 2011 Medicare Trustees Report, the HI Trust Fund is projected to remain solvent until 2024 

and, according to the 2011 Social Security Trustees Report, the OASDI Trust Funds are projected to remain solvent 

until 2036. In each case, some general revenues must be used to satisfy the authorization of full benefit payments 

until the year of exhaustion. This occurs when the trust fund 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 $3,252 billion in present value terms which is the additional 

amount needed in order to pay scheduled benefits over the next 75 years. 6 From the trust fund perspective, the 

amount needed is $2,980 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 Parts B and D combined are estimated to be $21,320 billion less than total expenditures for the two 

 

6

 Interest income is not a factor in this table as dollar amounts are in present value terms. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 179

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. 7

 For OASDI, projected revenues from the public fall short of total expenditures by $9,157 billion in 

present value dollars, and, from the trust fund perspective, by $6,548 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 $33,729 billion. From the trust fund perspective, which counts the trust funds ($2,953 

billion in present value) and the general revenue transfers to the SMI Program ($21,320 billion in present value) as 

dedicated funding sources, additional resources needed to fund the programs are $9,456 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, 2011) 

 SMI 

 HI Part B Part D OASDI Total 

Revenues from the public: 

Taxes ......................................... 15,104 - - 41,603 56,707

Premiums, State transfers ......... - 5,086 2,484 - 7,570

Total ........................................ 15,104 5,086 2,484 41,603 64,277

Total costs to the public............ 18,356 18,940 9,950 50,760 98,006 

Net results — budget 

perspective*

.............................. 3,252 13,854 7,466 9,157 33,729

Revenues from other 

Government accounts ............... - 13,854 7,466 - 21,320

Trust fund balance as of 

1/1/2010 .................................... 272 71 1 2,609 2,953 

Net results — trust fund 

perspective*

.............................. 2,980 (71) (1) 6,548 9,456 

*Net results are computed as costs less revenues. 

Note: Details may not add to totals due to rounding. 

Source: 2011 OASDI and Medicare Trustees’ Reports. 

Infinite Horizon 

The 75-year horizon represented in Table 5 is consistent with the primary focus of the Social Security and 

Medicare Trustees’ Reports. For the OASDI Program, for example, an additional $9.2 trillion in present value will 

be needed above currently scheduled taxes to pay for scheduled benefits ($6.5 trillion from the trust fund 

perspective). Yet, a 75-year projection is not a complete representation of all future financial flows through the 

infinite horizon. 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 

 

7 The SMI Trust Fund has $72 billion of existing assets. 
180 SUPPLEMENTAL INFORMATION (UNAUDITED) 

expected future program tax and premium revenues. Such a measure is provided in Table 6 for the three trust funds 

represented in Table 5. 

From the budget or Governmentwide perspective, the values in line 1 plus the values in line 4 of Table 6 

represent the value of resources needed to finance each of the programs into the infinite future. The sums are shown 

in the last line of the table (also equivalent to adding the values in the second and fifth lines). The total resources 

needed for all the programs sums to $51.2 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 2011. 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 $0.1 trillion and $9.8 trillion, respectively, are needed to sustain the 

programs into the infinite future. 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 and State transfer revenue 

and program expenditures in the SMI Program ($22.3 trillion and $16.2 trillion) represents future general revenue 

obligations of the Federal budget. 

In comparison to the analogous 75-year number in Table 5, extending the calculations beyond 2085, captures 

the full lifetime benefits, and taxes and premiums of all current and future participants. The shorter horizon 

understates 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, 2011) 

 SMI 

HI Part B Part D OASDI Total 

Present value of future costs less 

future taxes, premiums, and State 

transfers for current participants .......... 8.0 11.5 5.4 21.4 46.3 

Less current trust fund balance .............. 0.3 0.1 - 2.6 3.0 

Equals net obligations for past and 

current participants ............................... 7.7 11.4 5.4 18.8 43.3 

Plus net obligations for future 

participants ........................................... (7.8) 10.9 10.8 (9.0) 4.9 

Equals net obligations through the 

infinite future for all participants ........... (0.1) 22.3 16.2 9.8 48.2 

 

Present values of future costs less the 

present values of future income over 

the infinite horizon ................................ 0.2 22.4 16.2 12.4 51.2 

 Details may not add to totals due to rounding. 

Source: 2011 OASDI and Medicare Trustees’ Reports. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 181

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: 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 26—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 are transferred to the NRRIT 

whose 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 $11.6 billion. During fiscal year 2011, the NRRIT made net transfers of $1.7 

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, 2011, and 2010, of non-Federal securities and investments of the NRRIT are 

disclosed in Note 9—Securities and Investments. 

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 26—Social Insurance.

Nominal Income and Expenditures. Chart 11 shows, in nominal dollars, estimated railroad retirement income 

(excluding interest and financial interchange income) and expenditures for the period 2011-2085 based on the 

intermediate set of assumptions used in the RRB’s actuarial evaluation 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. 
182 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Chart 11—Estimated Railroad Retirement Income 

(Excluding Interest and Financial Interchange Income) and Expenditures 

2011-2085 

(In billions of dollars) 

As Chart 11 shows, expenditures are expected to exceed tax income for the entire projection period. The 

imbalances continue to widen until about 2022, decrease slightly for next 15 years, and then begin to grow steadily 

after 2038. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 183

Income and Expenditures as a Percent of Taxable Payroll. Chart 12 shows estimated expenditures and income 

as a percent of tier II taxable payroll. The imbalances grow until 2021 but then begin to decrease somewhat steadily 

as expenditures fall. Tax rates begin to decline after 2037, stabilizing in 2073 and after. Compared to last year, 

projected tax rates are lower, on average. The tier II tax rate is determined from a tax rate table based on the average 

account benefit ratio. 

Chart 12—Estimated Railroad Retirement Income 

(Excluding Interest and Financial Interchange Income) and Expenditures 

as a Percent of Tier II Taxable Payroll 

2011-2085 
184 SUPPLEMENTAL 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. 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 4.9 percent smaller shortfall of income to expenditures, and the high-cost scenario has a 

4.9 percent higher shortfall. A higher discount rate reduces future values relative to a lower rate. As seen in the 

table, the shortfall is 29 percent lower if the interest rate is 11 percent rather than 7.5 percent and 76.9 percent higher 

when the interest rate is 4 percent rather than 7.5 percent. 

Table 7 

Present Values of Railroad Retirement Expenditures in Excess of Income 

under Various Employment and Interest Rate Assumptions, 2011-2085 

(Dollar values in billions; values of assumptions shown in parentheses) 

 

Assumption Low Middle High 

Employment 1 ............... 100.8 

(-0.5%) 

106.0 

(-2.0%) 

111.2 

(-3.5%) 

 

Interest rate ................... 75.3 

(11%) 

106.0 

(7.5%) 

187.5 

(4.0%) 

1

 The low and middle employment scenarios have passenger service employment remaining at 44,000 workers per year 

and the remaining employment base declining at 0.5 percent and 2.0 percent, respectively, for the next 25 years. The 

high-cost scenario has passenger service employment declining by 500 per 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, 2011. The data are consistent with the Statements of Social Insurance. 

From a Governmentwide perspective, revenues are expected to fall short of expenditures by approximately 

$106.0 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. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 185

Table 8 

Present Values of 75-Year Projections of Revenues and Expenditures for the 

Railroad Retirement Program 1, 2

(In billions of present-value dollars as of January 1, 2011) 

Estimated future income (excluding interest) 3 received from or on behalf of: 

Current participants who have attained retirement age ............................................. 5.8 

Current participants not yet having attained retirement age ...................................... 46.3 

Those expected to become participants .................................................................... 65.1 

All participants ............................................................................................................ 117.2 

Estimated future expenditures: 4

Current participants who have attained retirement age ............................................. 109.3 

Current participants not yet having attained retirement age ...................................... 86.2 

Those expected to become participants .................................................................... 27.6 

All participants ............................................................................................................ 223.1 

Net obligations from budget perspective (expenditures less income)................. 106.0 

Railroad Retirement Program assets (mostly investments stated at market) 5 ......... 26.3 

Financial interchange from Social Security Trust ...................................................... 80.8 

Net obligations from trust fund perspective............................................................ (1.1) 

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 7.5 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 1/1/2010, 

whereas present values are as of 1/1/2011. 

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. The survivor benefits are available 

only for eligible survivors of coal miners who died due to pneumoconiosis. DOL operates the Black Lung Disability 

Benefit Program. The BLDTF provides benefit payments to eligible coal miners totally disabled by pneumoconiosis 

and to eligible survivors when no responsible mine operator can be assigned the liability. 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 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. 
186 SUPPLEMENTAL 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: 

• Continuation of a previously-enacted increase in coal excise tax rates for an additional 5 years, through 

December 2018; 

• 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 

• 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 Public Debt. 

On September 30, 2011, total liabilities of the BLDTF exceeded assets by $6.1 billion. Prior to the enactment 

of Public Law 110-343, this shortfall was funded by repayable advances to the BLDTF, which are repayable with 

interest. Pursuant to Public Law 110-343, any shortfall will be financed with debt instruments similar in form to 

zero-coupon bonds. 

From the budget or consolidated financial perspective, Chart 13 shows projected black lung expenditures 

(excluding interest) and excise tax collections for the period 2012-2040. The significant assumptions used in the 

most recent set of projections are shown in the “Black Lung” section of Note 26—Social Insurance. 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 38.9 percent decrease in the amount of excise taxes 

collected between the years 2018 and 2019. 

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

2012-2040 

(In millions of dollars) 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 187

Table 9 

Present Values of 29-Year Projections of Expenditures and Revenues 

for the Black Lung Disability Benefit Program 

(In billions of present value dollars, as of September 30, 2011) 

 

Projected future expenditures.......................................................................................... 2.6 

Projected future tax income ............................................................................................. 6.8 

Net obligations from budget perspective (expenditures less income) ............................. (4.2) 

Accumulated balance due General Fund ........................................................................ 6.1 

Net obligations from trust fund perspective .................................................................. 1.9 

Note: Detail may not add to totals due to rounding. 

Source: Department of Labor projections and Treasury Department calculations 

Table 9 shows present values of 29-year projections of expenditures and revenues for the Black Lung 

Disability Benefit Program computed as of September 30, 2011. Cashflows were discounted using the rates on the 

debt in the BLDTF. From a Governmentwide (budget) perspective, the present value of expenditures is expected to 

be less than the present value of income by $4.2 billion (a surplus). From a trust fund perspective, a large balance 

($6.1 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 $1.9 billion in present value dollars. This compares to a shortfall 

of $1.0 billion reported in last year’s Financial Report. 

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 U.S. 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. 
188 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Chart 14 shows the projected cash contributions and expenditures over the next 10 years under expected 

economic conditions (described below). 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, and interest rates on UTF 

investments. These projections, excluding interest earnings, indicate a negative net cashflow until 2012 followed by 

positive net cashflow for the remainder of the projection period. 

The Worker, Homeownership, and Business Assistance Act of 2009, was enacted on November 6, 2009. This 

Act extended unemployment benefits to eligible recipients up to 14 additional weeks in all States. It also extended a 

total of up to 20 additional weeks in States with unemployment of 8.5 percent or greater. It also amended section 

3301 of the Internal Revenue Code of 1986 to extend the 0.2 percent Federal Unemployment Tax Act (FUTA) 

surtax on covered employers through June 30, 2011. No benefits are payable for weeks of unemployment 

commencing before the date of enactment of the Act. 

Public Law 111-205 Unemployment Compensation Extension Act of 2010, enacted on July 22, 2010, amends 

the Supplemental Appropriation Act, 2008 with respect to the state-established individual emergency unemployment 

compensation account (EUCA) and to apply to claims for Emergency Unemployment Compensation (EUC) 

payments the terms and conditions of state unemployment compensation law relating to availability of work, active 

search for work, and refusal to accept work. The Act extends the final dates for entering a federal-state agreement 

under the EUC program through November 30, 2010. The Act also postpones the termination of the program until 

April 30, 2011, and amends the Assistance for Unemployed Workers and Struggling Families Act to extend until 

December 1, 2010, and requires Federal payments to states cover 100 percent of EUC. 

Chart 14—Estimated Unemployment Trust Fund Cashflow 

Using Expected Economic Conditions 

2012-2021 

(In billions of dollars) 

Table 10 shows present values of 10-year projections of revenues and expenditures for the Unemployment 

Insurance Program using a discount rate of 3.76 percent, the average of the interest rates underlying the 10-year 

projections. 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 9.27 percent during fiscal year 2011, decreasing to below 6 percent in fiscal year 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 189

2015 and thereafter. Under Recovery Scenario One (lower than expected unemployment rates), the unemployment 

rate decreases from 7.8 percent in fiscal year 2012 to 6.0 percent after fiscal year 2016. Under Recovery Scenario 

Two (higher than expected unemployment), the unemployment rate is assumed to reach 10.11 percent in fiscal year 

2012 decreasing to below 6 percent in fiscal year 2019 and thereafter. 

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 Recovery 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, the present value of income exceeds the present value of expenditures by $42.9 billion. From the same 

perspective, under Recovery Scenario Two, the present value of expenditures exceeds the present value of income 

by $7.6 billion. From a trust fund perspective, the program has a ($27.0) billion balance. When combined with the 

present value of net cash income under expected economic conditions, the program has a surplus of $15.9 billion. 

Table 10 

Present Values of 10-Year Projections of Expenditures and Revenues for 

Unemployment Insurance Under Three Alternative Scenarios 

for Economic Conditions 

(In billions of present value dollars, as of September 30, 2011) 

 Economic Conditions 

 Expected 

Recovery 

Scenario 

One 

Recovery 

Scenario 

Two 

 

Projected future expenditures.................................... 431.2 422.5 508.3 

Projected future cash income .................................... 474.1 468.0 515.9 

Net obligations from budget perspective 

(expenditures less income) ..................................... (42.9) (45.5) (7.6) 

Trust fund assets ....................................................... (27.0) (27.0) (27.0) 

Net obligations from trust fund perspective 1 ............. (15.9) (18.5) 19.4 

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: Detail 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 (FUA) to make benefit payments. During fiscal year 2011, the balances in the FUA were 

depleted and the FUA borrowed from the Treasury General Fund. 

Chart 15 presents the State by State results of this analysis as of September 30, 2011. As the chart illustrates, 

46 state funds were below the minimal solvency ratio of 1.0 at September 30, 2011. 
190 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Chart 15—Unemployment Trust Fund Solvency as of September 30, 2011 
SUPPLEMENTAL INFORMATION (UNAUDITED) 191 

Deferred Maintenance 

Deferred maintenance is the estimated cost to bring Government-owned property, plant, and equipment to an 

acceptable condition, resulting from not performing maintenance on a timely basis. Deferred maintenance excludes 

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 could include increased safety hazards, poor 

service to the public, higher costs in the future, and inefficient operations. Estimated deferred maintenance 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 are allowed to be measured using one of the following three 

methods: 

• Condition assessment surveys are periodic inspections of the Government-owned property to determine the 

current condition and estimated cost to bring the property to an acceptable condition. 

• Life-cycle cost forecast is an acquisition or procurement technique that considers operation, maintenance, and 

other costs in addition to the acquisition cost of assets. 

• Management analysis method 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 and the changes in these standards and changes in asset 

condition vary widely between the Federal entities. 

Some deferred maintenance has 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 the 

materiality of the estimated cost of returning the asset to the acceptable condition versus the total value of the 

corresponding asset. 

 

 Deferred Maintenance as of September 30, 2011, and 2010 

Deferred Maintenance 

Cost Range 

Low 

Estimate 

High 

Estimate 

Critical 

Maintenance 

(In billions of dollars) 2011 2010 2011 2010 2011 2010 

 

Asset category: 

Buildings, structures and 

facilities ................................... 31.3 129.7 36.4 134.8 97.6 95.0 

Furniture, fixtures and 

equipment ............................... 0.1 4.7 0.1 4.7 2.5 4.5 

Other general property, plant, 

and equipment ........................ 5.1 5.3 5.1 5.3 0.8 4.9 

Heritage assets .......................... 0.9 1.9 0.9 1.9 1.2 1.6 

Stewardship land ....................... 3.6 3.5 5.2 5.2 - - 

Total deferred maintenance .... 41.0 145.1 47.7 151.9 102.1 106.0 

 

The low and high estimate amounts for 2011 are significantly lower than 2010 due to agencies’ incorrect 

reporting in 2010 that was not adjusted. 
192 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Please refer to the individual financial statements of DOI, DOD, USDA, and DOE for detailed significant 

information on deferred maintenance, including the standards used for acceptable operating condition and changes 

in asset condition. 

Unexpended Budget Balances 

The Federal budget and budget process largely use obligational accounting–a distinct administrative control 

through which Federal agencies control, monitor, and report on the status of funds at their disposal. Unexpended 

budget balances consist of the unobligated and obligated, but unliquidated, budget balances. 

Unobligated budget balances, including amounts for trust funds, are the cumulative amount of budget balances 

that are not obligated and that remain available for obligation. In 1-year accounts, the unobligated balance is not 

available for new obligations after the end of the fiscal year. In multiyear accounts, the unobligated balance may be 

carried forward and remains available for obligation for the period specified. 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 2 consecutive years. The total unobligated budget balances as of September 30, 2010, and 2009, 

are $885.1 billion and $1,012.7 billion, respectively. 

Obligated budget balances are the cumulative budget balances that have been obligated but not liquidated. The 

obligated balance can be carried forward for a maximum of 5 years after the appropriation has expired. The total 

obligated budget balances as of September 30, 2010, and 2009, are $1,503.9 billion and $1,418.1 billion, 

respectively. 

The President’s Budget is located at www.whitehouse.gov/omb; unexpended budget balances are shown in the 

supporting documentation section under “Balances of Budget Authority.” The President’s Fiscal Year 2012 Budget 

(issued on February 14, 2011) includes the actual unobligated and obligated amounts for fiscal year 2010. The 

President’s Budget with fiscal year 2011 actual amounts is expected to be published in February 2012. 

Tax Burden 

The Internal Revenue Code provides for progressive tax rates, whereby higher incomes are 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. 
SUPPLEMENTAL INFORMATION (UNAUDITED) 193 

Individual Income Tax Liability for Tax Year 2009 

 

Adjusted Gross Income 

(AGI) 

Number of 

Taxable 

Returns 

(In thousands)

AGI

(In millions 

of dollars)

Total

Income 

Tax 

(In millions 

of dollars)

Average 

AGI per Return 

(In whole 

dollars)

Average 

Income 

Tax per Return

(In whole 

dollars)

Income Tax as

a Percentage

 of AGI 

Under $15,000 ...................... 37,624 76,133 1,354 2,024 36 1.8% 

$15,000 under $30,000 ........ 30,097 662,180 14,013 22,002 466 2.1% 

$30,000 under $50,000 ........ 25,168 982,969 45,556 39,056 1,810 4.6% 

$50,000 under $100,000 ...... 30,159 2,139,407 158,455 70,938 5,254 7.4% 

$100,000 under $200,000 .... 13,522 1,801,447 212,291 133,223 15,700 11.8% 

$200,000 under $500,000 .... 3,195 905,347 176,322 283,364 55,187 19.5% 

$500,000 or more ................. 729 1,058,948 257,958 1,452,604 353,852 24.4% 

Total ................................... 140,494 7,626,431 865,949 

Corporation Income Tax Liability for Tax Year 2008 

 

Total Assets 

(In thousands of dollars)

Income Subject 

to Tax 

(In millions of dollars)

Total Income Tax 

after Credits

(In millions of dollars)

Percentage of Income

Tax after Credits to 

Taxable Income 

Zero assets .............................. 13,373 3,870 28.9% 

$1 under $500 .......................... 7,414 1,406 19.0% 

$500 under $1,000 ................... 3,778 889 23.5% 

$1,000 under $5,000 ................ 12,785 3,783 29.6% 

$5,000 under $10,000 .............. 7,846 2,569 32.7% 

$10,000 under $25,000 ............ 11,898 3,893 32.7% 

$25,000 under $50,000 ............ 10,343 3,366 32.5% 

$50,000 under $100,000 .......... 12,766 4,100 32.1% 

$100,000 under $250,000 ........ 23,043 7,445 32.3% 

$250,000 under $500,000 ........ 30,685 9,180 29.9% 

$500,000 under $2,500,000 ..... 107,715 31,935 29.6% 

$2,500,000 or more .................. 736,507 156,087 21.2% 

Total....................................... 978,153 228,523 23.4% 

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 $345.3 billion based on updated fiscal year 2001 estimates, represents the amount of noncompliance with the 

tax laws. Underreporting of income tax, employment taxes, and other taxes represents 82 percent of the 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. 
194 SUPPLEMENTAL INFORMATION (UNAUDITED) 

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). 

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 $8.1 billion and $8.8 billion for fiscal years 2011 and 2010, respectively. For those under 

appeal, the estimated payout is $7.5 billion and $8.0 billion for fiscal years 2011 and 2010, 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 supplemental 

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. 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 $105.0 billion and $95.4 billion for fiscal 

years 2011 and 2010, 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 agencies have statutory authority to collect at the 

end of the period but that have been written off and excluded from accounts receivable are $106.6 billion and $99.0 

billion for fiscal years 2011 and 2010, respectively. 
SUPPLEMENTAL INFORMATION (UNAUDITED) 195 

Risk Assumed 

Risk assumed information is important for all Federal insurance and guarantee programs, except social 

insurance, life insurance, and loan guarantee programs. Risk assumed is generally measured by the present value of 

unpaid expected 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 18─Insurance 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 expected based on the risk assumed are based on 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. 

Please refer to the individual financial statements of the PBGC, USDA, 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. 

Risk Assumed Information as of September 30, 2011, and 2010 

(In billions of dollars) 2011 2010 

 

 Present value of unpaid expected losses, 

 net of associated premiums:

Pension Benefit Guaranty Corporation .......... 250.2 190.0 

Department of Agriculture ................................ 8.8 7.5 

National Credit Union Administration ............. 7.4 7.5 

All other ......................................................... 0.9 2.0 

Total ................................................................ 267.3 207.0 

Periodic changes in risk assumed amounts: 

Pension Benefit Guaranty Corporation .......... 60.2 21.8 

Department of Agriculture ............................. 1.3 (1.4) 

National Credit Union Administration ............ (0.1) 1.6 

All other ......................................................... (1.1) 0.4 

Total ................................................................ 60.3 22.4 
196 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Unmatched Transactions and Balances 

(In millions of dollars) 

Fiscal Year 

2011 

Fiscal Year 

2010 

Change in intragovernmental unmatched balances: 

Debt/investment ........................................................................... (6.5) 1,369.9 

Interest payable/receivable .......................................................... (1.5) 3.6 

Loans payable/receivable ............................................................ (27.9) 6,399.2 

Benefit program contributions payable/receivable ....................... (44.6) 110.2 

Accounts payable/receivable ....................................................... 5,863.4 (4,111.7) 

Advances from/to others and deferred credits/prepayments ...... 416.7 (953.8) 

Transfers payable/receivable ....................................................... 14.2 80.6 

 6,213.8 2,898.0 

 

Unmatched intragovernmental transactions: 

Federal securities interest revenue/expense─investment 

 exchange ................................................................................... 1.0 1.3 

Borrowings interest revenue/expense─exchange ....................... 1.4 (26.3) 

Borrowings gains/losses .............................................................. 0.4 (1.7) 

Nonexpenditure transfers-in/out .................................................. (671.0) 1,683.5 

Expenditure transfers-in/out ......................................................... (26.0) 649.9 

Transfers-in/out without reimbursement ...................................... 328.5 (752.8) 

Imputed financing source/cost ..................................................... 5.3 (15.4) 

Benefit program revenue/cost ...................................................... (775.6) (1,448.3) 

 (1,136.0) 90.2 

 

General fund transactions: 

Fund balance with Treasury ........................................................ 13,671.8 (4,697.6) 

Appropriations of unavailable special or trust fund receipts─

transfers-out/in .......................................................................... 146.1 (976.7) 

Appropriations received/warrants ................................................ (7,486.2) 22,060.4 

Other taxes and receipts/trust fund warrants ............................... 1,862.7 2,235.1 

Custodial and non-entity collections transferred out/in ................ 45,405.0 (713,283.8) 

Other General Fund transactions ................................................ (45,775.6) 693,163.0 

 7,823.8 (1,499.6) 

 

Net intra-agency reporting errors and restatements ...................... 2,685.1 (719.2) 

 

Unmatched transactions and balances, net .................................. 15,586.7 769.4 

( ) Parentheses indicate a decrease to Net Position. 
SUPPLEMENTAL INFORMATION (UNAUDITED) 197 

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 U.S. 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, totaling hundreds of billions of dollars. 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. 
198 SUPPLEMENTAL INFORMATION (UNAUDITED) 

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STEWARDSHIP INFORMATION (UNAUDITED) 199

United States Government 

Stewardship Information (Unaudited) 

for the Years Ended September 30, 2011, 

and 2010 

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 4 years are shown below in Table 11. 

 Table 11 

Stewardship Investments for the Years Ended 

September 30, 2007, through 2011 

 

(In billions of dollars) 

Fiscal 

Year 

2011 

Fiscal 

Year 

2010 

Fiscal 

Year 

2009 

Fiscal 

Year 

2008 

Fiscal 

Year 

2007 

 

Investments in non-Federal physical 

property ............................................. 69.9 66.7 65.1 57.8 56.2 

Investments in human capital .............. 91.9 122.3 60.3 77.2 76.1 

Research and development: 

Investments in basic research ........... 35.7 31.5 27.4 27.6 26.5 

Investments in applied research ........ 28.8 26.2 19.1 21.4 22.2 

Investments in development .............. 71.7 77.3 101.0 79.2 66.3 

Total investments ............................ 298.0 324.0 272.9 263.2 247.3 
200 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 $55.7 billion (80 

percent), $5.6 billion (8 percent), and $4.6 billion (7 percent), respectively, of the total non-Federal physical 

property investments in fiscal year 2011 as shown in Table 11. Within DOT, the Federal Highway Administration 

invested $42.9 billion during fiscal year 2011, primarily via reimbursement from the Highway Trust Fund, for 

States’ construction costs of interstate and national highways. 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, DOL, and VA had $66.8 billion (73 percent), $7.7 billion (8 percent), and $11.8 billion (13 

percent), respectively, of the total human capital investments in fiscal year 2011 as shown in Table 11. In 

comparison over the past 5 years, Education had an increase in human capital investments in fiscal years 2008 and 

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 

2009, 2010, and 2011 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 workstudy 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 also relate to grants for job training and 

rehabilitation programs for veterans. 

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. 

• Investments in basic research are for systematic studies to gain knowledge or understanding of the 

fundamental aspects of phenomena and of observable facts without specific applications toward processes 

or products in mind. 

• Investments in applied research are for systematic studies to gain knowledge or understanding necessary 

for determining the means by which a recognized and specific need may be met. 

• Investments in development are the systematic use of the knowledge and understanding gained from 

research for the production of useful materials, devices, systems, or methods, including the design and 

development of prototypes and processes. 

With regard to basic and applied research, HHS had $20.1 billion (56 percent) and $13.6 billion (47 percent), 

of the total basic and applied research investments, respectively, in fiscal year 2011 as shown in Table 11. HHS also 

had similar R&D investment amounts (and percentage contributions) in each of the preceding 4 years. 

Within HHS, the National Institutes of Health (NIH) conducts almost all (98 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 
STEWARDSHIP INFORMATION (UNAUDITED) 201

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 $63.4 billion (88 percent) and $4.8 billion (7 percent), 

respectively, of total development investments in fiscal year 2011, as shown in Table 11. Development is comprised 

of five stages: advanced technology development, advanced component development and prototypes, system 

development and demonstration, management support, and operational systems development. Major outputs of 

DOD development are: 

• Hardware and software components, and complete weapon systems ready for operational and 

developmental testing and field use, and 

• Weapon systems finalized for complete operational and developmental testing. 

NASA development includes the systematic application of knowledge or understanding directed toward the 

production of useful materials, devices, and systems or methods, including design, development, and improvement 

of prototypes and new processes to meet specific requirements. NASA’s development activities include those related 

to space launch systems, earth and planetary sciences, and advanced technologies. 
202 STEWARDSHIP INFORMATION (UNAUDITED) 

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APPENDIX A 203

Appendix A: Significant Government Entities 

This appendix lists the organizations and agencies encompassed in the reporting entity for this publication as 

well as some organizations excluded from the reporting entity. The reporting entity is a specifically defined group of 

agencies, principally Cabinet departments and other agencies of the executive branch, as stated in the law and 

accounting guidance. 

The determination as to which organizations and agencies will be included in the reporting entity is governed 

by Federal laws and is also based on guidance issued by the Federal Accounting Standards Advisory Board (the 

Board) in their Statement of Federal Financial Accounting Concept No. 2, Entity and Display, which provides 

criteria for determining what should be included in the reporting entity for a consolidated Governmentwide report. 

The Board is now considering more specific guidance on the reporting entity for this report. 

There are a total of 150 organizations and agencies included in the Financial Report of the United States 

Government. The lists below describe three groups of entity/fund 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 Commerce 

 www.doc.gov 

Department of Defense 

 www.defense.gov 

Department of Education 

www.ed.gov 

Department of Energy 

 www.doe.gov 

Department of Health and Human Services 

 www.hhs.gov 

Department of Homeland Security 

 www.dhs.gov 

Department of Housing and Urban Development 

 www.hud.gov 

Department of the Interior 

 www.doi.gov 

Department of Justice 

 www.usdoj.gov 

Department of Labor 

 www.dol.gov 

Department of State 

 www.state.gov 

Department of Transportation 

 www.dot.gov 

Department of the Treasury 

 www.treasury.gov 

Department of Veterans Affairs 

www.va.gov 

Environmental Protection Agency 

www.epa.gov 

General Services Administration 

www.gsa.gov 

National Aeronautics and Space Administration 

www.nasa.gov 

National Science Foundation 

www.nsf.gov 

Office of Personnel Management 

www.opm.gov 

Small Business Administration 

www.sba.gov 

Social Security Administration 

www.ssa.gov 

U.S. Agency for International Development 

www.usaid.gov 

U.S. Nuclear Regulatory Commission 

www.nrc.gov 
204 APPENDIX A 

Eleven 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 

National Credit Union Administration 

www.ncua.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 Fifteen Additional Entities/Funds

Abraham Lincoln Bicentennial Commission 

Administrative Conference of the United States 

Advisory Council on Historic Preservation 

African Development Foundation 

American Battle Monuments Commission 

Antitrust Modernization Commission 

Appalachian Regional Commission 

Appalachian Regional Development Fund 

Architect of the Capitol 

Architectural and Transportation Barriers Compliance 

 Board 

Armed Forces Retirement Home 

Barry Goldwater Scholarship and Excellence in 

 Education Foundation 

Broadcasting Board of Governors 

Bureau of Consumer Financial Protection 

Central Intelligence Agency 

Chemical Safety Hazard Investigation Board 

Christopher Columbus Fellowship Foundation 

Commission for the Preservation of America’s 

 Heritage Abroad 

Commission of Fine Arts 

Commission on Civil Rights 

Commission on International Religious Freedom 

Commission on Security and Cooperation in Europe 

Commission on Weapons of Mass Destruction 

Committee for Purchase from People Who Are Blind 

 or Severely Disabled 

Commodity Futures Trading Commission 

Congressional Budget Office 

Congressional-Executive Commission on the People’s 

 Republic of China 

Consumer Product Safety Commission 

Corporation for National and Community Service 

Council of the Inspectors General on Integrity and 

 Efficiency 

Court of Appeals for Veterans Claims 

Court Services and Offender Supervision Agency 

 for DC 

DC Courts 

DC Courts–Defender Services 

Defense Nuclear Facilities Safety Board 

Delta Regional Authority 

Denali Commission 

Dwight D. Eisenhower Memorial Commission 

Eisenhower Exchange Fellowship Program 

Election Assistance Commission 

Environmental Dispute Resolution Fund 

Equal Employment Opportunity Commission 

Executive Office of the President 

Farm Credit Administration 

Federal Election Commission 

Federal Financial Institutions Examination Council 

 Appraisal Subcommittee 

Federal Housing Finance Agency 

Federal Labor Relations Authority 

Federal Maritime Commission 

Federal Mediation and Conciliation Service 

Federal Mine Safety and Health Review Commission 

Federal Trade Commission 

Financial Crisis Inquiry Commission 

Foreign Military Sales Program 

Government Accountability Office 

Government Printing Office 

Harry S. Truman Scholarship Trust Fund 

Indian Law and Order Commission 

Institute of Museum and Library Services 

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 
APPENDIX A 205

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 

Millennium Challenge Corporation 

Morris K. Udall Scholarship Foundation 

National Archives and Records Administration 

National Capital Planning Commission 

National Commission on Libraries and Information 

 Science 

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 Retirement Investment Trust 

National Transportation Safety Board 

National Veterans Business Development Corporation 

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 Director of National Intelligence 

Office of the Federal Coordination for Alaska Natural 

 Gas Transportation Projects 

Open World Leadership Center 

Overseas Private Investment Corporation 

Patient Centered Outcomes Research Trust Fund 

Peace Corps 

Presidio Trust 

Public Defender Service 

Ronald Reagan Centennial Commission 

Recovery Act Accountability and Transparency Board 

Selective Service System 

Senate Preservation Fund 

St. Lawrence Seaway Development Corporation 

State Justice Institute 

U.S. Capital 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 

White House Commission on the National Moment of 

 Remembrance 

Woodrow Wilson International Center for Scholars 

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. Therefore, these consolidated statements do not include accrual-based accounting data for such entities 

as the U.S. Courts or the Congress. Some legislative branch entities voluntarily prepare and submit such information 

(e.g., Government Accountability Office, Government Printing Office, and Library of Congress). The President’s 

Budget includes cash-based outlay data for the legislative and judicial branches and, to a limited extent, this outlay 

data is also a part of the information contained in this report. 

 

Entities Excluded from These Statements 

The following entities are not part of the Governmentwide reporting entity based on an assessment of these 

entities in accordance with the indicative criteria stated in SFFAC No. 2, Entity and Display. However, this list is 

not all inclusive of all entities excluded from these statements. 

American International Group (AIG) 

Board of Governors of the Federal Reserve System 

 (Including the Federal Reserve Banks) 

Citigroup 

Federal Home Loan Banks 

Federal Home Loan Mortgage Corporation 

 (Freddie Mac) 

Federal National Mortgage Association (Fannie Mae) 

Thrift Savings Fund 

The Financing Corporation 

GMAC Financial (Ally Financial) 

National Railroad Passenger Corporation 

 (does business as Amtrak) 

Public-Private Investment Funds (PPIF) 

Resolution Funding Corporation 

Student Loan Marketing Association (SLMA or Sallie 

 Mae) 
206 APPENDIX A 

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APPENDIX B 207

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 

AICPA American Institute of Certified Accountants 

AIFP Automotive Industry Financing Program 

AIG American International Group, Inc. 

AGP Asset Guarantee Program 

AMT Alternative Minimum Tax 

ARRA American Recovery and Reinvestment Act of 2009 

ASC Accounting Standards Codification 

BLDTF Black Lung Disability Trust Fund 

CBLI Consumer and Business Lending Initiative 

CCC Commodity Credit Corporation 

CDs Certificates of Deposits 

CDCI Community Development Capital Initiative 

CERCLA Comprehensive Environmental Response, Compensation, and Liability Act 

CMS Centers for Medicare and Medicaid 

COLA Cost of Living Adjustments 

CPI Consumer Price Index 

CPIM Consumer Price Index–Medical 

CPP Capital Purchase Program 

CSRDF Civil Service Retirement and Disability Fund 

CSRS Civil Service Retirement System 

DHS Department of Homeland Security 

DI Disability Insurance 

DIF Deposit Insurance Fund 

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 

ECASLA Ensuring Continued Access to Student Loans Act of 2008 

Education Department of Education 

EESA Emergency Economic Stabilization Act of 2008 

EPA Environmental Protection Agency 

ESF Exchange Stabilization Fund 

EUC Unemployment Account 

EUCA Unemployment Compensation Account 

Ex-Im Bank Export-Import Bank 

FAA Federal Aviation Administration 

Fannie Mae Federal National Mortgage Association 

FASAB Federal Accounting Standards Advisory Board 

FCC Federal Communications Commission 

FCRA Federal Credit Reform Act of 1991 

FDIC Federal Deposit Insurance Corporation 

FECA Federal Employees’ Compensation Act 

FEGLI Federal Employees’ Group Life Insurance 

FEHB Federal Employees Health Benefits Program 

 
208 APPENDIX B 

 

FEMA Federal Emergency Management Agency 

FERS Federal Employees’ Retirement System 

FERSA Federal Employees’ Retirement System Act of 1986 

FFAS Farm and Foreign Agricultural Services 

FFEL Federal Family Education Loan 

FHA Federal Housing Administration 

FHFA Federal Housing Financing Agency 

FHWA Federal Highway Administration 

FICA Federal Insurance Contribution Act 

FR Financial Report of the United States Government 

FRBNY Federal Reserve Bank of New York 

FRBs Federal Reserve banks 

Freddie Mac Federal Home Loan Mortgage Corporation 

FRTIB Federal Retirement Thrift Investment Board 

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 

Ginnie Mae Government National Mortgage Association 

GM General Motors 

GSA General Services Administration 

GSE Government-Sponsored Enterprises 

HBP Health Benefits Program 

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 

IMF International Monetary Fund 

IPO Initial Public Offering 

IRS Internal Revenue Service 

LAC Latest Acquisition Cost 

LSAPs Large-Scale Asset Purchase Programs 

MAC Moving Average Cost 

MBS Mortgage-Backed Securities 

MDBs Multilateral Development Banks 

MERHCF Medicare Eligible Retiree Health Care Fund 

MMA Medicare Prescription Drug, Improvement, and Modernization Act 

MRF Military Retirement Fund 

NASA National Aeronautics and Space Administration 

NAV Net Asset Value 

NCUA National Credit Union Administration 

NFIP National Flood Insurance Program 

NIBP New Issue Bond Program 

NIH National Institutes of Health 

NPV Net Present Value 

NRRIT National Railroad Retirement Investment Trust 

NSLI National Service Life Insurance 

NTIA National Telecommunications and Information Administration 

OASDI Old-Age, Survivors, and Disability Insurance 

OASI Old-Age and Survivors Insurance 

OCO Overseas Contingency Operations 

OMB Office of Management and Budget 

OPEB Other Postemployment Benefits 

 
APPENDIX B 209

 

OPM Office of Personnel Management 

ORB Other Retirement Benefits 

PBGC Pension Benefit Guaranty Corporation 

PCF Periodic Commitment Fee 

PEFCO Private Export Funding Corporation 

PMAs Power Marketing Authorities 

PP&E Property, Plant, and Equipment 

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 

SAFETEA-LU Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users 

SAFRA Student Aid and Fiscal Responsibility Act 

Sallie Mae Student Loan Marketing Association 

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 

SLMA Student Loan Marketing Association 

SMI Supplementary Medical Insurance 

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 

SSP Stable Share Price 

TALF Term Asset-Backed Loan Facility 

TARP Troubled Asset Relief Program 

TCLP Temporary Credit Liquidity Program 

TFL TRICARE for Life 

TIP Targeted Investment Program 

TIPS Treasury Inflation-Protected Securities 

Treasury Department of the Treasury 

TRIA Terrorism Risk Insurance Act 

TSP Thrift Savings Plan 

TVA Tennessee Valley Authority 

TVARS Tennessee Valley Authority Retirement System 

USACE U.S. Army Corps of Engineers 

U.S.C. United States Code 

USDA United States Department of Agriculture 

USPS United States Postal Service 

UTF Unemployment Trust Fund 

VA Department of Veterans Affairs 

VRI Veterans Reopened Insurance 

VSLI Veterans Special Life Insurance 

 
210 APPENDIX B 

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U.S. GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT 211

United States Government Accountability Office

Washington, DC 20548 

The President 

The President of the Senate 

The Speaker of the House of Representatives 

The Secretary of the Treasury, in coordination with the Director of the Office of Management and 

Budget, is required to annually submit financial statements for the U.S. government to the President and 

the Congress. GAO is required to audit these statements.1

 This is (1) our report on the accompanying U.S. 

government’s accrual-based consolidated financial statements for the fiscal years ended September 30, 

2011 and 2010; the 2011, 2010, 2009, 2008, and 2007 Statements of Social Insurance; and the 2011 

Statement of Changes in Social Insurance Amounts; and (2) our associated reports on internal control 

over financial reporting and on compliance with selected provisions of laws and regulations. As used in 

this report, accrual-based financial statements refer to all of the consolidated financial statements and 

notes, except for those related to the Statements of Social Insurance and the Statement of Changes in 

Social Insurance Amounts.2

Management of the federal government is responsible for (1) preparing annual consolidated financial 

statements in conformity with U.S. generally accepted accounting principles (GAAP); (2) establishing, 

maintaining, and evaluating internal control to provide reasonable assurance that the control objectives of 

the Federal Managers’ Financial Integrity Act (FMFIA)3

 are met; and (3) complying with laws and 

regulations. Also, the 24 Chief Financial Officers (CFO) Act agencies are responsible for implementing 

and maintaining financial management systems that substantially comply with the requirements of the 

Federal Financial Management Improvement Act of 1996 (FFMIA).4

 Appendix I discusses the objective, 

scope, and methodology of our work. 

 

1

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). The federal government has elected to 

include certain financial information on the legislative and judicial branches in the consolidated financial statements as well. 2

The accrual-based consolidated financial statements for the fiscal years ended September 30, 2011 and 2010 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 2011, 

2010, 2009, 2008, and 2007 Statements of Social Insurance, including the related notes, are also included in the consolidated 

financial statements. In addition, in fiscal year 2011, the federal government adopted Statement of Federal Financial Accounting 

Standards No. 37, “Social Insurance: Additional Requirements for Management’s Discussion and Analysis and Basic Financial 

Statements,” which calls for a new basic financial statement, the Statement of Changes in Social Insurance Amounts, that is 

included, along with the related notes, in the consolidated financial statements. The Statement of Changes in Social Insurance 

Amounts presents the components of the changes of the open group measure (total present value of future expenditures in excess 

of future revenue), presented in the 2011 and 2010 Statements of Social Insurance. Both the Statements of Social Insurance and 

the Statement of Changes in Social Insurance Amounts do not interrelate with the accrual-based consolidated financial 

statements.

3

31 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 the Congress on the adequacy of their internal control and accounting systems and on actions to 

correct significant problems. 

4

31 U.S.C. 3512 note (Federal Financial Management Improvement Act). 
212 U.S. GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT 

In summary, we found the following: 

• Certain material weaknesses5

 in internal control over financial reporting and other limitations on the 

scope of our work6

 resulted in conditions that continued to prevent us from expressing an opinion on 

the accompanying accrual-based consolidated financial statements for the fiscal years ended 

September 30, 2011 and 2010.7

 

• Significant uncertainties (discussed in Note 26 to the consolidated financial statements), primarily 

related to the achievement of projected reductions in Medicare cost growth reflected in the 2011 and 

2010 Statements of Social Insurance, prevented us from expressing an opinion on those statements as 

well as on the 2011 Statement of Changes in Social Insurance Amounts. The Statements of Social 

Insurance for 2009, 2008, and 20078

 are presented fairly, in all material respects, in conformity with 

GAAP. 

• Material weaknesses resulted in ineffective internal control over financial reporting (including 

safeguarding of assets). 

• Our work to test compliance with selected provisions of laws and regulations in fiscal year 2011 was 

limited by the material weaknesses and other scope limitations discussed in this report. 

Significant Matters of Emphasis 

Before discussing our conclusions on the consolidated financial statements, the following key items 

deserve emphasis in order to put the information contained in the financial statements and the 

Management’s Discussion and Analysis section of the 2011 Financial Report of the United States 

Government (2011 Financial Report) into context. 

 

5

A material weakness is a deficiency, or combination of deficiencies, in internal control 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. 6

Three major impediments continued to prevent us from rendering an opinion on the accrual-based consolidated financial 

statements: (1) serious financial management problems at the Department of Defense (DOD) that have prevented DOD’s 

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. In addition, the Department of Homeland Security (DHS) received a qualified 

opinion on its Balance Sheet and Statement of Custodial Activity for fiscal year 2011; also, the remainder of its financial 

statements for fiscal year 2011 (consisting of the Statements of Net Cost, Changes in Net Position, and Budgetary Resources) and 

all of DHS’s financial statements for fiscal year 2010 were not auditable or not subjected to audit by agency auditors. Further, the 

financial statements of the National Aeronautics and Space Administration for fiscal year 2010 and the Department of State for 

fiscal years 2011 and 2010 were not fully auditable. Also, in our audit report on the U.S. government’s consolidated financial 

statements for fiscal year 2010, we reported that the financial statements of the Department of Labor (Labor) for fiscal year 2010 

were not auditable or not subjected to audit by agency auditors. However, subsequent to our report, the agency’s auditors issued 

an unqualified opinion in a revised audit report on Labor’s reissued financial statements for fiscal year 2010. According to the 

May 2011 auditor’s report, Labor’s implementation of a new accounting and reporting system hindered its ability to assure the 

accuracy and completeness of the consolidated financial statement balances that received a disclaimer of opinion in November 

2010. Further, the audit report states that Labor was subsequently able to prepare consolidated financial statements and provide 

sufficient support so that it received an unqualified opinion on its financial statements for fiscal year 2010. 7

We previously reported that certain material weaknesses prevented us from expressing an opinion on the consolidated financial 

statements of the U.S. government for fiscal years 1997 through 2006 and on the accrual-based consolidated financial statements

of the U.S. government for fiscal years 2007 through 2010. 

8

The valuation date is January 1 for all social insurance programs except the Black Lung program, which has a valuation date of 

September 30.
U.S. GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT 213

The Federal Government’s Actions to Stabilize Financial Markets and to Promote Economic 

Recovery 

The accrual-based consolidated financial statements for fiscal year 2011 include, as they did for fiscal 

year 2010, substantial assets and liabilities resulting from the federal government’s actions to stabilize 

financial markets and to promote economic recovery. Key actions that the federal government has taken 

to stabilize financial markets and to promote economic recovery are discussed in the Management’s 

Discussion and Analysis section of the 2011 Financial Report and related Notes to the consolidated 

financial statements. 

The ultimate cost of all of the federal government’s market stabilization and economic recovery actions 

and the effect of such actions on its financial condition will not be known for some time. As of September 

30, 2011, the federal government’s actions to stabilize the financial markets and to promote economic 

recovery resulted in reported federal government assets of over $295 billion (e.g., the Troubled Asset 

Relief Program (TARP) equity investments,9

 investments in the Federal National Mortgage Association 

(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), and mortgage-backed 

securities guaranteed by them),10 which is net of about $95 billion in valuation losses. In addition, the 

federal government reported incurring significant liabilities as of September 30, 2011 (e.g., about $316 

billion related to estimated future payments to Fannie Mae and Freddie Mac) resulting from these actions. 

In valuing these assets and liabilities, 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 certain 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, 2011, and the actual results, and such differences may be material. 

These differences will also affect the ultimate cost of the federal government’s actions. 

Long-Term Fiscal Challenges 

Although the economy is still fragile, there is wide agreement on the need to take steps to address the 

federal government’s long-term fiscal challenges. The comprehensive long-term fiscal projections 

presented in this 2011 Financial Report show that—absent policy changes—the federal government 

continues to face an unsustainable fiscal path. Largely as a result of the provisions in the Budget Control 

Act of 2011,11 the fiscal outlook has improved. However, rising health care costs and the aging of the U.S. 

population continue to create budgetary pressure. The oldest members of the baby boom generation are 

now eligible for early Social Security retirement benefits and for Medicare benefits. In addition, debt held 

by the public continues to grow as a share of the economy; this means the current structure of the federal 

budget is unsustainable over the longer term. 

These comprehensive 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 in law designed to slow the growth of Medicare costs are sustained and remain effective 

 

9

TARP was established by the Department of the Treasury (Treasury) under authority provided in the Emergency Economic 

Stabilization Act of 2008 (Pub. L. No. 110-343). The act requires the U.S. Comptroller General to audit TARP’s financial 

statements as well as report every 60 days on a variety of areas associated with oversight of TARP. For the TARP financial 

statement audits and the 60-day reports, see GAO’s website at www.gao.gov. 10The Housing and Economic Recovery Act of 2008 (Pub. L. No. 110-289) authorized Treasury to purchase, until December 31, 

2009, any amount of Fannie Mae or Freddie Mac securities, whether debt or equity. 11Pub. L. No. 112-25, 125 Stat. 240 (Aug. 2, 2011).
214 U.S. GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT 

throughout the projection period. GAO also prepares long-term fiscal simulations for the U.S. 

government.12 Under GAO’s Alternative simulation, which modifies the revenue assumptions used in the 

above noted projections and uses the Centers for Medicare and Medicaid Services (CMS) actuary’s 

alternative health care cost projections, projected spending in excess of receipts would be greater and debt 

held by the public as a share of gross domestic product (GDP) would grow more quickly than the 

projections in the 2011 Financial Report. For example, under GAO’s Alternative simulation, debt held by 

the public as a share of GDP would exceed the historical high reached in the aftermath of World War II 

by 2027,13 10 years earlier than the projections in the 2011 Financial Report. The federal government 

faces increasing pressures, yet a shrinking window of opportunity, for making policy changes regarding 

these challenges. 

Equity Interests in Certain Financial Organizations and Commercial Entities 

As discussed in Note 1 to the consolidated financial statements, such financial statements do not include 

the assets, liabilities, or results of operations of any financial organizations or commercial entities in 

which Treasury holds either a direct, indirect, or beneficial equity interest. Treasury and the Office of 

Management and Budget (OMB) have determined that none of these organizations or entities meet the 

criteria for a federal entity. The federal government’s investments in and any liabilities to such 

organizations and entities, however, are valued and reported on the Balance Sheet. 

Disclaimers of Opinion on the Accrual-Based Consolidated Financial Statements 

Because of the federal government’s inability to demonstrate the reliability of significant portions of the 

U.S. government’s accompanying accrual-based consolidated financial statements for fiscal years 2011 

and 2010, principally resulting from limitations related to certain material weaknesses in internal control 

over financial reporting and other limitations on the scope of our work, we are unable to, and we do not, 

express an opinion on such accrual-based consolidated financial statements. 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, reliable evidence to support 

certain material information reported in the accompanying accrual-based consolidated financial 

statements. The underlying material weaknesses in internal control, which generally have existed for 

years, contributed to our disclaimer of opinion on the accrual-based consolidated financial statements. 

The material weaknesses that contributed to our disclaimer of opinion on the accrual-based consolidated 

financial statements were the federal government’s inability to 

• satisfactorily determine that property, plant, and equipment and inventories and related property, 

primarily held by DOD, were properly reported in the accrual-based consolidated financial 

statements; 

 

12GAO, The Federal Government’s Long-Term Fiscal Outlook: Fall 2011 Update, GAO-12-28SP (Washington, D.C.: Oct. 24, 

2011). 

13GAO’s Alternative simulation incorporates the CMS Office of the Actuary’s 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 other than the Social Security payroll tax reductions are 

extended to 2021 and the alternative minimum tax exemption amount is indexed to inflation through 2021; revenues are then 

brought back to the 40-year historical average as a share of GDP. Discretionary spending follows the Congressional Budget 

Office’s baseline for the first 10 years, which reflect the discretionary spending caps in the Budget Control Act of 2011, and 

thereafter gradually increases to the historical average share of GDP. Automatic procedures in the Budget Control Act of 2011 

that reduce spending by $1.2 trillion are applied to total annual deficits evenly from 2013 to 2021 and remain a constant share of 

GDP thereafter.
U.S. GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT 215

• reasonably estimate or adequately support amounts reported for certain liabilities, such as 

environmental and disposal liabilities, or determine whether commitments and contingencies were 

complete and properly reported; 

• support significant portions of the reported total net cost of operations, most notably related to DOD, 

and adequately reconcile disbursement activity at certain federal entities; 

• adequately account for and reconcile intragovernmental activity and balances between federal 

entities; 

• ensure that the federal government’s accrual-based consolidated financial statements were (1) 

consistent with the underlying audited entities’ financial statements, (2) properly balanced, and (3) in 

conformity with GAAP; and 

• identify and either resolve or explain material differences between (1) certain components of the 

budget deficit reported in Treasury’s records that are used to prepare the Reconciliation of Net 

Operating Cost and the Unified Budget Deficit, the Statement of Changes in Cash Balance from 

Unified Budget and Other Activities, and the Fiscal Projections for the U.S. Government (included in 

Supplemental Information) and (2) related amounts reported in federal entities’ financial statements 

and underlying financial information and records. 

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 the material weaknesses and other limitations on the scope of our work discussed above, there may 

also be additional issues that could affect the accrual-based 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. 

Disclaimers of Opinion on the Statements of Social Insurance for 2011 and 2010 and 

Unqualified Opinions for 2009, 2008, and 2007, and Disclaimer of Opinion on the 

Statement of Changes in Social Insurance Amounts for 2011 

Because of significant uncertainties (discussed in Note 26 to the consolidated financial statements), 

primarily related to the achievement of projected reductions in Medicare cost growth reflected in the 2011 

and 2010 Statements of Social Insurance, we were unable to obtain sufficient evidence to support the 

amounts presented in the 2011 and 2010 Statements of Social Insurance and the 2011 Statement of 

Changes in Social Insurance Amounts. Consequently, we are unable to, and we do not, express opinions 

on the 2011 and 2010 Statements of Social Insurance as well as on the 2011 Statement of Changes in 

Social Insurance Amounts. 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 
216 U.S. GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT 

current law and using a projection period sufficient to illustrate the long-term sustainability of the social 

insurance programs.14

The significant uncertainties, discussed in further detail in Note 26 to the consolidated financial 

statements, include: 

• Medicare projections in the 2011 and 2010 Statements of Social Insurance were based on full 

implementation of the provisions of the Patient Protection and Affordable Care Act, as amended 

(PPACA),15 including a significant decrease in projected Medicare costs from the 2009 Statement of 

Social Insurance, related to (1) reductions in physician payment rates (totaling almost 30 percent in 

January 2012) and (2) productivity improvements for most other categories of Medicare providers. 

However, there are significant uncertainties concerning the achievement of these projected decreases 

in Medicare costs. 

• Management has noted that actual future costs for Medicare are likely to exceed those shown by the 

current-law projections presented in the 2011 and 2010 Statements of Social Insurance due to the 

likelihood of modifications to the scheduled reductions.16 The extent to which actual future costs 

exceed the projected current-law amounts due to changes to the physician payments and productivity 

adjustments depends on both the specific changes that might be legislated and on whether legislation 

would include other provisions to help offset such costs. 

• 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 $24.6 trillion estimate in the 2011 Statement of Social Insurance by $12.4 

trillion. 

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. For example, behavioral responses of health care providers 

could affect Medicare beneficiaries’ access to care. Such secondary impacts are not reflected in the 

Statement of Social Insurance projections but could be expected to influence the excess cost growth rate17

used in the projections. 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 change such as the PPACA. The work of the 2010 

Technical Review Panel on the Medicare Trustees Report18 could provide additional guidance to 

management concerning ways to incorporate secondary impacts into future Statement of Social Insurance 

projections and related disclosures. 

 

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. 15Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat. 119 (Mar. 23, 2010), as amended by Health Care 

and Education Reconciliation Act of 2010, Pub. L. No. 111-152, 124 Stat. 1029 (Mar. 30, 2010). 16The Medicare and Medicaid Extenders Act of 2010, Pub. L. No. 111-309, § 101, overrode the scheduled reductions in 

physician payments through December 2011 and reduced non-Medicare outlays by limiting a health insurance tax credit. 17The excess cost growth rate is the increase in health care spending per person relative to the growth of GDP per person after 

removing the effects of demographic changes on health care spending. 18In August 2010, the Secretary of the Department of Health and Human Services, working on behalf of the Board of Trustees, 

established an independent panel of expert actuaries and economists to review the assumptions and methods used by the Trustees 

to make projections of the financial status of the trust funds. 
U.S. GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT 217

As a result of the uncertainties discussed previously, readers are cautioned that amounts reported in the 

2011 and 2010 Statements of Social Insurance and related Notes to such financial statements may not 

fairly present, in all material respects, the financial condition of the federal government’s social insurance 

programs, in conformity with GAAP. The uncertainties related to the 2011 and 2010 Statements of Social 

Insurance also affect the projected Medicare and Medicaid costs reported in the Fiscal Projections for the 

U.S. government, which is presented in Supplemental Information and is summarized in Management’s 

Discussion and Analysis and other accompanying information. 

In addition, the Supplemental Information section of the 2011 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. 

In our opinion, the Statements of Social Insurance for 2009, 2008, and 2007 present fairly, in all material 

respects, the financial condition of the federal government’s social insurance programs, in conformity 

with GAAP. 

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 changes in general 

economic, regulatory, and market conditions, as well as other more specific future events, such as 

legislative changes (e.g., changes in benefits or provider payments), other 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. In addition to the inherent uncertainty that 

underlies the expenditure projections prepared for all parts of Medicare, the Supplementary Medical 

Insurance Part D projections have an added uncertainty in that they were prepared using very little 

program experience upon which to base the estimates. 

The scheduled future benefits presented in the Statement of Social Insurance are based on benefit 

formulas in current law. However, consistent with the respective annual Trustees Reports, the Social 

Security and Medicare programs are not sustainable under current financing arrangements. Also, the law 

concerning these programs can be changed at any time by the Congress. In fact, payment of Social 

Security and Medicare Hospital Insurance (Part A) benefits are 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 Supplemental Information section of the 2011 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 2036 and 2024, respectively, at which time 

the full amount of scheduled future benefits will be unable to be paid. For Social Security, projected 

future revenues as of January 1, 2011 would be sufficient to pay 77 percent of scheduled benefits in 2036, 

the year of trust fund exhaustion, and decreasing to 74 percent of scheduled benefits in 2085. Similarly, 

for Medicare Hospital Insurance (Part A), projected future revenues as of January 1, 2011 would be 

sufficient to pay 90 percent of scheduled benefits in 2024, the year of trust fund exhaustion, declining to 

76 percent in 2050 and then increasing to 88 percent of scheduled benefits in 2085. 

Other Limitations on the Scope of Our Work 

For fiscal years 2011 and 2010, there were limitations on the scope of our work in addition to the material 

weaknesses that contributed to our disclaimer of opinion on the accrual-based consolidated financial 

statements. Treasury and OMB depend on representations from certain federal entities to provide their 
218 U.S. GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT 

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 2011 and 2010 primarily because of insufficient 

representations provided to them by certain federal entities. 

Material Weaknesses Resulted in Ineffective Internal Control over Financial Reporting 

The material weaknesses discussed in this report resulted in ineffective internal control over financial 

reporting. Consequently, the federal government’s internal control did not provide reasonable assurance 

that misstatements, losses, or noncompliance material in relation to the consolidated financial statements 

would be prevented or detected and corrected on a timely basis. The federal government is responsible for 

establishing and maintaining effective internal control over financial reporting and evaluating its 

effectiveness. 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 the financial statements in conformity with GAAP, 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 laws and regulations that could have a direct 

and material effect on the financial statements. 

In planning and performing our audit, we considered 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 statistical reports and ensuring efficient operations. We do not 

express an opinion on the effectiveness of internal control over financial reporting because the purpose of 

our work was to determine our procedures for auditing the financial statements, not to express an opinion 

on internal control. Based on the scope of our work and the effects of the other limitations on the scope of 

our audit noted throughout this report, our internal control work would not necessarily identify all 

deficiencies in internal control, including those that might be material weaknesses or significant 

deficiencies.19

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 the following three other 

material weaknesses in internal control. These other material weaknesses were the federal government’s 

inability to 

• determine the full extent to which improper payments occur and reasonably assure that appropriate 

actions are taken to reduce improper payments, 

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

on an ongoing basis, and 

• 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. 

 

19A 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 AUDITOR’S REPORT 219

We also found two significant deficiencies in the federal government’s internal control related to 

implementing effective internal controls at certain federal entities for the following areas: 

• loans receivable and loan guarantee liabilities, which for the most part, involve credit subsidy 

estimation and related financial reporting processes; and 

• federal grants management. 

These significant deficiencies are discussed in more detail in appendix IV. 

Further, individual federal entity financial statement audit reports identified additional control 

deficiencies that were reported by the entity’s 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 consolidated financial statements. 

Compliance with Laws and Regulations 

Our work to test compliance with selected provisions of laws and regulations that have a direct and 

material effect on the consolidated financial statements was limited by the material weaknesses and other 

scope limitations discussed in this report. U.S. generally accepted government auditing standards and 

OMB guidance require auditors to report on entities’ compliance with selected provisions of laws and 

regulations. Certain individual entity audit reports contain instances of noncompliance. None of these 

instances were deemed to be reportable noncompliance with regard to the accompanying consolidated 

financial statements. 

We caution that other noncompliance may have occurred and not been detected. Further, the results of our 

limited procedures may not be sufficient for other purposes. Our objective was not to, and we do not, 

express an opinion on compliance with laws and regulations. 

Other Information Included in the Financial Report 

Management’s Discussion and Analysis, Stewardship Information, Supplemental Information, and other 

accompanying information, including the Citizen’s Guide, included in the 2011 Financial Report contain 

a wide range of information, some of which is not directly related to the consolidated financial statements. 

We did not audit and we do not express an opinion on this information. 

Readers are cautioned that the material weaknesses and scope limitations discussed in this audit report, 

including those related to our disclaimers of opinion on the 2011 and 2010 Statements of Social Insurance 

and the 2011 Statement of Changes in Social Insurance Amounts, affect the reliability of certain 

information contained in the Management’s Discussion and Analysis, Stewardship Information, 

Supplemental Information, and other accompanying information that is taken from the same data sources 

as the accrual-based consolidated financial statements, the 2011 and 2010 Statements of Social Insurance, 

and the 2011 Statement of Changes in Social Insurance Amounts. 
220 U.S. GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT 

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 systems20 to produce 

complete, reliable, timely, and consistent financial information for use by executive branch agencies and 

the Congress. FFMIA was designed to lead to system improvements that would result in CFO Act agency 

managers routinely having access to reliable, useful, and timely financial-related information to measure 

performance and increase accountability throughout the year. 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 Standard General Ledger (SGL) at the 

transaction level. For fiscal years 2011 and 2010, auditors for 11 and 10 of the 24 CFO Act agencies, 

respectively, 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 both fiscal years 2011 and 2010, agency management at 7 of 

the CFO Act agencies reported that their agencies’ financial management systems were not in substantial 

compliance with one or more of the three FFMIA requirements. The differences in the assessments of 

substantial compliance between the auditors and agency management reflected differences in views 

between management and the auditors on 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 the material weaknesses and other limitations that have resulted in our disclaimers of 

opinion on the accrual-based consolidated financial statements. 

 _ _ _ _ _ 

We provided a draft of this 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 

December 12, 2011 

 

20The term financial management systems includes 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 AUDITOR’S REPORT 221

APPENDIX I 

Objective, Scope, and Methodology

Our objective was to audit the consolidated financial statements for the fiscal years ended September 30, 

2011 and 2010, including the new Statement of Changes in Social Insurance Amounts for 2011, and the 

2009, 2008, and 2007 Statements of Social Insurance, along with reporting on internal control over 

financial reporting and on compliance with selected provisions of laws and regulations. 

The Government Management Reform Act of 1994 expanded the requirements of the Chief Financial 

Officers (CFO) Act of 1990 by making the inspectors general of 24 major federal agencies21 responsible 

for annual audits of agencywide financial statements prepared by these agencies and GAO responsible for 

the audit of the U.S. government’s consolidated financial statements. The Accountability of Tax Dollars 

(ATD) Act of 200222 requires most other executive branch entities to prepare and have audited annual 

financial statements. The Office of Management and Budget (OMB) and the Department of the Treasury 

(Treasury) have identified 35 federal entities23 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 (35 significant entities). Our work was performed in 

coordination and cooperation with the inspectors general and independent public accountants for these 35 

significant entities to achieve our respective audit objectives. Our audit approach regarding the accrualbased consolidated financial statements 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 2010.24 We also separately audited the financial 

statements of certain federal entities and federal agency components including the following: 

• We audited and expressed an unqualified opinion on the Internal Revenue Service’s (IRS) fiscal years 

2011 and 2010 financial statements.25 In fiscal years 2011 and 2010, IRS collected about $2.4 trillion 

and $2.3 trillion, respectively, in tax payments and paid about $416 billion and $467 billion, 

respectively, in refunds to taxpayers. For fiscal year 2011, we continued to report material 

weaknesses that resulted in ineffective internal control over financial reporting. In addition, we 

continued to find a significant deficiency in IRS’s internal control over tax refund disbursements, 

which resulted in the payment of erroneous tax refunds to taxpayers. Our tests of IRS’s compliance in 

fiscal year 2011 with selected provisions of laws and regulations disclosed one area of 

noncompliance. We also found that IRS’s financial management systems did not substantially comply 

with the requirements of FFMIA. 

• We audited and expressed an unqualified opinion on the Schedules of Federal Debt managed by 

Treasury’s Bureau of the Public Debt (BPD) for the fiscal years ended September 30, 2011 and 

2010.26 For these 2 fiscal years, the Schedules reported (1) approximately $10.1 trillion (2011) and 

 

2131 U.S.C. 901(b), 3521(e). The 1994 act authorized the Office of Management and Budget to designate agency components that 

also would receive a financial statement audit. See 31 U.S.C. 3515(c). 22Pub. L. No. 107-289, 116 Stat. 2049 (Nov. 7, 2002); see 31 U.S.C. 3515. 23See Treasury Financial Manual, volume I, part 2, chapter 4700, for a listing of the 35 entities. 24For our report on the U.S. government’s consolidated financial statements for fiscal year 2010, see U.S. Department of the 

Treasury, 2010 Financial Report of the United States Government (Washington, D.C.: December 2010), pp. 221-249, which can 

be found on GAO’s website at www.gao.gov/financial.html. 25GAO, Financial Audit: IRS’s Fiscal Years 2011 and 2010 Financial Statements, GAO-12-165 (Washington, D.C.: Nov. 10, 

2011). 26GAO, Financial Audit: Bureau of the Public Debt’s Fiscal Years 2011 and 2010 Schedules of Federal Debt, GAO-12-164 

(Washington, D.C.: Nov. 8, 2011). 
222 U.S. GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT 

$9.0 trillion (2010) of federal debt held by the public;27 (2) about $4.7 trillion (2011) and $4.5 trillion 

(2010) of intragovernmental debt holdings;28 and (3) about $251 billion (2011) and $215 billion 

(2010) of interest on federal debt held by the public. We reported that as of September 30, 2011, BPD 

had effective internal control over financial reporting relevant to the Schedule of Federal Debt. 

Further, we reported that we found no reportable noncompliance in fiscal year 2011 with selected 

provisions of laws related to the Schedules of Federal Debt we tested. 

• We audited and expressed unqualified opinions on the fiscal years 2011 and 2010 financial statements 

of the United States Securities and Exchange Commission (SEC) and its Investor Protection Fund 

(IPF).29 We also reported that as of September 30, 2011, although internal controls could be 

improved, SEC had effective internal control over financial reporting for both the entity as a whole 

and the IPF. In addition, we reported that we found no reportable noncompliance for either SEC or 

IPF in fiscal year 2011 with the selected provisions of laws and regulations we tested. 

• We audited and expressed an unqualified opinion on the fiscal years 2011 and 2010 financial 

statements of the Federal Housing Finance Agency (FHFA).30 We reported that FHFA had effective 

internal control over financial reporting as of September 30, 2011, and we found no reportable 

noncompliance in fiscal year 2011 with the selected provisions of laws and regulations we tested. 

• We audited and expressed an unqualified opinion on the Office of Financial Stability’s (OFS) fiscal 

years 2011 and 2010 financial statements for the Troubled Asset Relief Program (TARP).31 We 

reported that although certain internal controls could be improved, OFS had effective internal control 

over financial reporting as of September 30, 2011. We also reported that we found no reportable 

noncompliance for fiscal year 2011, with the selected provisions of laws and regulations we tested. 

• We audited and expressed an unqualified opinion on the fiscal year 2011 financial statements of the 

Bureau of Consumer Financial Protection (CFPB).32 We reported that CFPB had effective internal 

control over financial reporting as of September 30, 2011, and we found no reportable noncompliance 

for fiscal year 2011 with the selected provisions of laws and regulations we tested.

• We audited and expressed unqualified opinions on the December 31, 2010 and 2009, financial 

statements of two funds administered by the Federal Deposit Insurance Corporation (FDIC), 

including the Deposit Insurance Fund (DIF) and the Federal Savings and Loan Insurance Corporation 

 

27The public holding federal debt is comprised of individuals, corporations, state and local governments, the Federal Reserve 

Banks, foreign governments, and central banks. 

28Intragovernmental debt holdings represent federal debt issued by Treasury and held by certain federal government accounts 

such as the Social Security and Medicare trust funds. 29GAO, Financial Audit: Securities and Exchange Commission’s Financial Statements for Fiscal Years 2011 and 2010, GAO12-219 (Washington, D.C.: Nov. 15, 2011). 

30GAO, Financial Audit: Federal Housing Finance Agency’s Fiscal Years 2011 and 2010 Financial Statements, GAO-12-161 

(Washington, D.C.: Nov. 15, 2011). 31GAO, Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Years 2011 and 2010 Financial 

Statements, GAO-12-169 (Washington, D.C.: Nov. 10, 2011). 32GAO, Financial Audit: Bureau of Consumer Financial Protection’s Fiscal Year 2011 Financial Statements, GAO-12-186 

(Washington, D.C.: Nov. 15, 2011). CFPB was established in Title X of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act of 2010, Pub. L. No. 111-203, Title X, 124 Stat. 1376, 1955 (July 21, 2010), as the federal entity charged with the 

responsibility of regulating the offering and provision of consumer financial products or services under the federal consumer 

financial laws. While CFPB began operations in 2010, fiscal year 2011 was its first full year of operations and the first year for 

which it prepared financial statements. Consequently, CFPB’s fiscal year 2011 financial statements do not present comparative 

information for the prior year. 
U.S. GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT 223

(FSLIC) Resolution Fund.33 We reported that as of December 31, 2010, FDIC had effective internal 

control over financial reporting, and we found no reportable noncompliance for calendar year 2010 

with the selected provisions of laws and regulations we tested. 

In addition, we considered the CFO Act agencies’ and certain other federal entities’ fiscal years 2011 and 

2010 financial statements and the related auditors’ reports prepared by the inspectors general or 

contracted independent public accountants. Financial statements and audit reports for these significant 

entities provide information about the operations of each of these entities. The entity audit reports also 

contain details regarding any audit findings 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 2011 regarding its noncompliant financial systems and lack of reasonable assurance that 

internal controls over financial reporting were effective. In addition, in the DOD Inspector General’s 

fiscal year 2011 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 Statement of Social Insurance and Statement 

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,34 we considered the entity’s 2011, 2010, 2009, 2008, 

and 2007 Statements of Social Insurance and the 2011 Statement 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 believe our audit, including internal control and substantive audit 

procedures, reperformance procedures, and review of the other auditors’ Statement of Social Insurancerelated audit work, provides a reasonable basis for our opinions on the 2009, 2008, and 2007 Statements 

of Social Insurance. 

We performed sufficient audit work to provide this report on the consolidated financial statements, 

internal control, and compliance with selected provisions of laws and regulations. We considered the 

limitations on the scope of our work regarding the accrual-based consolidated financial statements, the 

2011 and 2010 Statements of Social Insurance, and the 2011 Statement of Changes in Social Insurance 

Amounts in forming our conclusions. Our work was performed in accordance with U.S. generally 

accepted government auditing standards. 

 

33GAO, Financial Audit: Federal Deposit Insurance Corporation Funds’ 2010 and 2009 Financial Statements, GAO-11-412 

(Washington, D.C.: Mar. 18, 2011). 

34These entities consist of SSA, HHS, the Railroad Retirement Board, and the Department of Labor.
224 U.S. GOVERNMENT ACCOUNTABILITY OFFICE 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, reliable 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 entities 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 DODmanaged 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 AUDITOR’S REPORT 225

Cost of Government Operations and Disbursement Activity 

The previously discussed material weaknesses in reporting assets and liabilities; material weaknesses in 

financial statement preparation, as discussed below; and the lack of adequate disbursement reconciliations 

at certain federal entities affected reported net costs. 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, DOD and certain other federal entities reported continued material 

weaknesses and significant deficiencies in reconciling disbursement activity. For fiscal years 2011 and 

2010, there was unreconciled disbursement activity, including unreconciled differences between federal 

entities’ and the Department of the Treasury’s (Treasury) records of disbursements and unsupported 

federal entity adjustments, totaling billions of dollars, 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 

Although progress has been made, federal entities continue to be unable to adequately account for and 

reconcile intragovernmental activity and balances. The Office of Management and Budget (OMB) and 

Treasury require the chief financial officers (CFO) of 35 significant 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, the entity’s inspector general, and GAO on the extent and 

results of intragovernmental activity and balance-reconciliation efforts as of the end of the fiscal year. 

A substantial number of the entities did not adequately perform the required year-end reconciliations for 

fiscal years 2011 and 2010. For these fiscal years, based on trading partner information provided to 

Treasury in the 35 significant entities’ closing packages, Treasury provided a Material Differences Report

to each entity showing amounts for certain intragovernmental activity and balances that significantly 

differed from those of the entity’s corresponding trading partners as of the end of the fiscal year. Entities 

are required to complete their Material Differences Reports, which includes providing explanations of the 

reasons for certain differences. Based on our review of completed Material Differences Reports for fiscal 

year 2011, we continue to note that amounts reported by federal entity trading partners for certain 

intragovernmental accounts were not in agreement by significant amounts. We noted that a significant 

number of CFOs continue to cite differing accounting methodologies, accounting errors, and timing 

differences for material differences with their trading partners. Some CFOs indicated that they did not 

know the reason for the differences. In addition, some CFOs confirmed the balance or activity, however, 

differences continued to exist. Further, there continue to be hundreds of billions of dollars of unreconciled 

differences between the General Fund of the U.S. Government and federal entity trading partners related 

to appropriation and other intragovernmental transactions. The ability to reconcile such transactions is 

hampered because only some of the General Fund of the U.S. Government is reported in the Department 

of the Treasury’s financial statements. As a result of these 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. 
226 U.S. GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT 

During fiscal year 2011, Treasury furthered its commitment to resolve differences in intragovernmental 

activity and balances, which included several short- and long-term initiatives. For example, Treasury 

expanded focus groups’ monitoring and outreach efforts that included quarterly analysis and ongoing 

collaboration with entities to resolve intragovernmental differences.35 Such focus groups made significant 

progress in understanding reasons for material differences and determining corrective actions to be taken, 

which resulted in adjustments to eliminate certain differences. Also, Treasury identified deficiencies in 

the intragovernmental process and is planning to develop government-wide systems to improve 

intragovernmental transactions data. Further, Treasury is currently working to develop a complete set of 

financial statements for the General Fund, including intragovernmental transactions. Resolving the 

intragovernmental transactions problem remains a difficult challenge and will require a strong and 

sustained commitment by federal entities, as well as continued strong leadership by OMB and Treasury. 

Preparation of Consolidated Financial Statements 

While Treasury, in coordination with OMB, implemented corrective actions during fiscal year 2011 to 

address certain internal control deficiencies detailed in our previously issued report, the federal 

government continued to have inadequate systems, controls, and procedures to ensure that the 

consolidated financial statements are consistent with the underlying audited entity financial statements, 

properly balanced, and in conformity with U.S. generally accepted accounting principles (GAAP). During 

our fiscal year 2011 audit, we found the following:36

• Treasury’s process for compiling the consolidated financial statements generally demonstrated that 

amounts in the Statement of Social Insurance and the Statement of Changes in Social Insurance 

Amounts were consistent with the underlying federal entities’ financial statements and that the 

Balance Sheet and the Statement of Net Cost were also consistent with the 35 significant federal 

entities’ financial statements prior to eliminating intragovernmental activity and balances. However, 

Treasury’s process did not ensure that the information in the remaining three principal financial 

statements was fully consistent with the underlying information in the 35 significant federal entities’ 

audited financial statements and other financial data. 

• For fiscal year 2011, auditors reported significant internal control deficiencies at several entities that 

impacted the preparation of the respective entities’ closing packages. Further, Treasury had to record 

significant adjustments to correct errors found in federal entities’ audited closing package 

information. To ensure 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 sent by the 35 significant federal entities to Treasury through 

closing packages. 

• Treasury is unable to fully identify and quantify all components of unreconciled activities. To make 

the fiscal years 2011 and 2010 consolidated financial statements balance, Treasury recorded net 

increases of $15.6 billion and $0.8 billion, respectively, to net operating cost on the Statements of 

Operations and Changes in Net Position, which were identified as “Unmatched transactions and 

 

35Beginning in 2008, Treasury established three focus groups to work with federal entity personnel to identify and resolve 

reported differences related to benefits, transfers, and buy/sell transactions. 36Most of the issues we identified in fiscal year 2011 existed in fiscal year 2010, and many have existed for a number of years. 

Most recently, in May 2011, we reported the issues we identified to Treasury and OMB and provided recommendations for 

corrective action in GAO, Management Report: Improvements Needed in Controls over the Preparation of the U.S. Consolidated 

Financial Statements, GAO-11-525 (Washington, D.C.: May 26, 2011). 
U.S. GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT 227

balances.”37 Treasury recorded an additional net $6.0 billion and $3.8 billion of unmatched 

transactions in the Statement of Net Cost for fiscal years 2011 and 2010, respectively. 

• The federal government continues to be unable to determine the impact of unreconciled 

intragovernmental activity and balances on the accrual-based consolidated financial statements. 

Treasury’s elimination of certain intragovernmental activity and balances continues to be impaired by 

the federal entities’ problems in handling their intragovernmental transactions. As a result, Treasury 

recorded the net differences in intragovernmental elimination entries as part of the “Unmatched 

transactions and balances” discussed above. 

• The federal government could not demonstrate that it had fully identified and reported all items 

needed to reconcile the operating results to the budget results. Typical reconciling items would 

include both accrual-based costs that are not yet recognized in the unified budget deficit and budget 

costs that are not yet recognized in the net operating cost. 

• The federal government has not established and implemented effective processes and procedures for 

identifying and reporting all items needed to prepare the Statement of Changes in Cash Balance from 

Unified Budget and Other Activities. 

• Over the past several years, significant actions have been taken to assist in ensuring that financial 

information is reported or disclosed in the consolidated financial statements in conformity with 

GAAP. However, Treasury’s reporting of certain financial information required by GAAP continues 

to be impaired. Due to certain control deficiencies noted in this report—for example, commitments 

and contingencies related to treaties and other international agreements—Treasury is precluded from 

determining if additional disclosure is required by 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 conformity with 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. 

• 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, as we have reported in past years, there continue to be undetermined 

amounts of assets, liabilities, costs, and revenues that are not included, and the federal government 

did not provide evidence that the excluded financial information was immaterial. 

• Other internal control deficiencies existed in the process for preparing 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 

numerous errors in draft consolidated financial statements that were subsequently corrected. 

• As in previous years, Treasury did not have adequate systems and personnel to address the magnitude 

of the fiscal year 2011 financial reporting challenges it faced, such as control deficiencies in its 

process for preparing the consolidated financial statements noted above. We found that personnel at 

Treasury’s Financial Management Service had excessive workloads that required an extraordinary 

 

37Although Treasury was unable to determine how much of the unmatched transactions and balances, if any, relate to net 

operating cost, it reported this amount as a component of net operating cost in the accompanying consolidated financial 

statements. 
228 U.S. GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT 

amount of effort and dedication to compile the consolidated financial statements. Further, there were 

not enough personnel with specialized financial reporting experience to help ensure reliable financial 

reporting by the reporting date. In addition, the federal government does not perform interim 

compilations at the governmentwide level, which leads to almost all of the compilation effort being 

performed during a condensed time period at the end of the year. 

Until these internal control deficiencies have been fully addressed, the federal government’s ability to 

ensure that the consolidated financial statements are consistent with the underlying audited federal 

entities’ financial statements, properly balanced, and in conformity with U.S. GAAP will be impaired. 

Resolving some of these internal control deficiencies will be a difficult challenge and will require a strong 

and sustained commitment from Treasury and OMB as they continue to execute and implement their 

corrective action plans.

Components of the Budget Deficit 

Both the Reconciliation of Net Operating Cost and Unified Budget Deficit and the Statement of Changes 

in Cash Balance from Unified Budget and Other Activities report a unified budget deficit for fiscal years 

2011 and 2010 of about $1.3 trillion and $1.3 trillion, respectively.38 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 Supplemental Information use such outlays and receipts. 

For several years, we have been reporting significant unreconciled differences between the total net 

outlays reported in selected federal entities’ Statements of Budgetary Resources (SBR) and Treasury’s 

central accounting records used to compute the budget deficit39 reported in the consolidated financial 

statements. Unreconciled net outlays of about $31 billion and $40 billion existed for fiscal years 2011 and 

2010, respectively. OMB and Treasury have recognized that it will take a coordinated effort to establish 

effective processes and procedures for identifying, resolving, and explaining material differences in this 

and other components of the deficit between Treasury’s central accounting records and information 

reported in entity financial statements and underlying entity financial information and records. Until these 

types of differences are timely reconciled by the federal government, their effect on the U.S. 

government’s consolidated financial statements will continue to be unknown. 

In fiscal year 2011, we again noted that several entities’ auditors reported internal control deficiencies (1) 

affecting the entities’ SBRs and (2) 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’ SBRs. 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,

40 and in other federal government 

publications. 

 

38The budget deficit, receipts, and outlays amounts are reported in Treasury's Monthly Treasury Statement and the President’s 

Budget. 

39See GAO, Financial Audit: Process for Preparing the Consolidated Financial Statements of the U.S. Government Needs 

Improvement, GAO-04-45 (Washington, D.C.: Oct. 30, 2003). 40Treasury’s Combined Statement of Receipts, Outlays, and Balances presents budget results and cash-related assets and 

liabilities of the federal government with supporting details. Treasury represents this report as the recognized official publication 

of receipts and outlays of the federal government based on entity reporting. 
U.S. GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT 229

APPENDIX III 

Other Material Weaknesses 

Material weaknesses in internal control discussed in this 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 

During fiscal year 2011, the federal government continued to make progress in reporting on improper 

payments. Entities reported on 12 additional programs’ improper payments estimated amounts in fiscal 

year 2011 when compared to fiscal year 2010.41 Most notably, the Department of Health and Human 

Services (HHS) reported an estimated improper payment amount for Medicare Part D of $1.7 billion. 

Nevertheless, the federal government continues to face challenges in determining the full extent of 

improper payments. For example, 3 federal entities did not report fiscal year 2011 estimated improper 

payment amounts for 4 risk-susceptible programs, including HHS’s Children’s Health Insurance Program 

and Temporary Assistance for Needy Families. The Improper Payments Information Act of 2002 

(IPIA),42 as amended by the Improper Payments Elimination and Recovery Act of 2010 (IPERA),43

requires federal executive branch entities to (1) review all programs and activities, (2) identify those that 

may be susceptible to significant improper payments,44 (3) estimate and report the annual amount of 

improper payments for those programs, and (4) implement actions to reduce improper payments. IPERA 

also established additional requirements related to recovery auditing. OMB issued implementing guidance 

in fiscal year 2011. 

Federal entities reported estimates of improper payment amounts that totaled $115.3 billion in fiscal year 

2011, a decrease from the prior year revised estimate of $120.6 billion.45 These estimates represented 

about 4.7 percent and 5.3 percent of reported outlays for the associated programs in fiscal years 2011 and 

2010, respectively. Decreases in reported estimates of improper payments were mostly attributable to 

three major programs: (1) Department of Labor’s Unemployment Insurance program, (2) Department of 

the Treasury’s Earned Income Tax Credit Program, and (3) HHS’ Medicare Advantage program. The 

decreases in the estimates for these programs primarily related to a decrease in reported outlays for the 

Unemployment Insurance program and decreases in reported error rates46 for the Earned Income Tax 

Credit and Medicare Advantage programs. It is important to note that 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. 

 

41Of the 12 programs, 3 programs have been excluded from the governmentwide totals to avoid distortion of the governmentwide 

error rate because those programs were refining their estimating methodologies. 42Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002). 

43Pub. L. No. 111-204, 124 Stat. 2224 (July 22, 2010). 

44Improper payments are 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 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. 45In their fiscal year 2011 Performance and Accountability Reports (PAR) and Annual Financial Reports (AFR), 4 federal entities 

updated their fiscal year 2010 improper payment estimates to reflect changes since issuance of their fiscal year 2010 PARs and 

AFRs. These updates decreased the governmentwide improper payment estimate for fiscal year 2010 from $125.4 billion to 

$120.6 billion. 46Reported error rates reflect the estimated improper payments as a percentage of total program outlays. 
230 U.S. GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT 

Entity auditors reported some internal control deficiencies over financial reporting, such as financial 

system limitations and information system control weaknesses, that significantly increase the risk that 

improper payments may occur and not be detected promptly. Until the federal government has 

implemented effective processes to determine the full extent to which improper payments occur and 

reasonably assure that appropriate actions are taken across entities and programs to effectively reduce 

improper payments, the federal government will not have reasonable assurance that the use of taxpayer 

funds is adequately safeguarded. 

Information Security 

Although progress has been made, serious and widespread information security control deficiencies 

reported during fiscal year 2011 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 information system resources; (4) segregation of incompatible 

duties; and (5) contingency planning. We have reported information security as a high-risk area across 

government since February 1997. 

Such information security control deficiencies unnecessarily increase the risk that the reliability and 

availability of data that are recorded in or transmitted by federal financial management systems could be 

compromised. 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. The federal government has taken important actions to 

improve information security, such as deploying continuous monitoring capabilities, and enhancing 

performance measures and reporting processes. 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 2011, material weaknesses and systemic deficiencies continued to affect the federal 

government's ability to effectively manage its tax collection activities. Due to errors and delays in 

recording taxpayer information, assessments, payments, and other activities, the federal government’s 

records did not always reflect the correct amount that taxpayers owed and this contributed to the federal 

government’s inability to timely release federal tax liens against taxpayers who fully satisfied or were 

otherwise relieved of their tax liability. Such errors and delays may cause undue burden and frustration to 

taxpayers who either have already paid taxes owed or who owe significantly lower amounts. In addition, 

deficiencies in internal control over tax refunds increased the risk of the federal government issuing 

duplicate or otherwise erroneous tax refunds to which individuals or businesses are not entitled. 

Collectively, these deficiencies indicate that internal controls over the financial reporting process were not 

effective in (1) ensuring that reported amounts of taxes receivable and 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; (2) supporting timely and reliable financial statements, accompanying 

notes, and required supplemental and other accompanying information without extensive supplemental 

procedures and adjustments; and (3) safeguarding the federal government’s resources. 
U.S. GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT 231

APPENDIX IV 

Significant Deficiencies 

In addition to the material weaknesses discussed in appendices II and III, we found two significant 

deficiencies in the federal government’s internal control related to implementing effective internal 

controls at certain federal entities, as described below. Also, the significant deficiency in fiscal year 2010 

relating to deficiencies in certain controls over spreadsheets used by the Department of Health and 

Human Services (HHS) to prepare its Statement of Social Insurance is no longer considered to be a 

significant deficiency as of September 30, 2011. HHS, which administers the Medicare programs, 

contributes the majority of the amounts reported on the consolidated Statement of Social Insurance. 

Loans Receivable and Loan Guarantee Liabilities 

Internal control deficiencies were identified at certain federal entities accounting for the majority of the 

reported balances for loans receivable and a significant amount of the reported balances for loan 

guarantee liabilities. The deficiencies, for the most part, involved credit subsidy estimation and related 

financial reporting processes. The issues and the complexities associated with estimating the costs of 

lending and other loan-related financing activities significantly increase the risk that misstatements in 

entity and governmentwide financial statements could occur and go undetected. Further, these control 

deficiencies can adversely affect the federal government’s ability to support annual budget requests for 

these programs, make future budgetary decisions, manage program costs, and measure the performance of 

lending activities. 

Federal Grants Management 

The federal government reported grant outlays to states and local governments of over $600 billion in 

fiscal year 2010—almost one-fifth of the fiscal year 2010 federal budget. In fiscal year 2011, federal 

grants management internal control deficiencies, primarily regarding inadequate monitoring and oversight 

of grant programs, were identified at several federal entities. For example, the auditor for one federal 

entity that awards and manages significant amounts of grants reported issues regarding action and followup with noncompliant grantees, as well as inadequate procedures to identify noncompliant grantees. 

These internal control deficiencies could adversely affect the federal government’s ability to ensure that 

grant funds are being spent in accordance with applicable program laws and regulations. 

(198663) 
232 U.S. GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT 

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