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

Financial Statements 

Introduction ..................................................................................................................................29 

 Statements of Net Cost .................................................................................................................35 

 Statements of Operations and Changes in Net Position................................................................36 

 Reconciliations of Net Operating Cost and Unified Budget Deficit.............................................37 

 Statements of Changes in Cash Balance from Unified Budget and Other Activities ...................38 

 Balance Sheets..............................................................................................................................39 

 Statements of Social Insurance.....................................................................................................40 

Notes to the Financial Statements 

 Note 1. Summary of Significant Accounting Policies..................................................................43 

 Note 2. Cash and Other Monetary Assets.....................................................................................49 

 Note 3. Accounts and Taxes Receivable, Net...............................................................................51 

 Note 4. Loans Receivable and Loan Guarantee Liabilities, Net...................................................52 

 Note 5. Inventories and Related Property, Net .............................................................................56 

 Note 6. Property, Plant, and Equipment, Net ...............................................................................58 

 Note 7. Securities and Investments...............................................................................................59 

 Note 8. Financial and Housing Market Stabilization....................................................................61 

 Note 9. Other Assets.....................................................................................................................64 

 Note 10. Accounts Payable...........................................................................................................65 

 Note 11. Federal Debt Securities Held by the Public and Accrued Interest .................................66 

 Note 12. Federal Employee and Veteran Benefits Payable ..........................................................69 

 Note 13. Environmental and Disposal Liabilities.........................................................................75 

 Note 14. Benefits Due and Payable ..............................................................................................77 

 Note 15. Insurance Program Liabilities........................................................................................78 

 Note 16. Other Liabilities.............................................................................................................79 

 Note 17. Collections and Refunds of Federal Revenue ................................................................81 

 Note 18. Prior Period Adjustments...............................................................................................84 

 Note 19. Contingencies ................................................................................................................85 

 Note 20. Commitments.................................................................................................................89 

 Note 21. Earmarked Funds ...........................................................................................................92 

 Note 22. Indian Trust Funds.......................................................................................................102 

 Note 23. Social Insurance...........................................................................................................104 

 Note 24. Stewardship Land and Heritage Assets........................................................................113 

 Note 25. Subsequent Events .......................................................................................................114 
Supplemental Information (Unaudited) 

 Social Insurance .........................................................................................................................117 

 Social Security and Medicare.....................................................................................................117 

 Railroad Retirement, Black Lung, and Unemployment Insurance .............................................138 

 Deferred Maintenance ................................................................................................................150 

 Unexpended Budget Balances....................................................................................................151 

 Tax Burden.................................................................................................................................151 

 Tax Gap ......................................................................................................................................152 

 Other Claims for Refunds...........................................................................................................153 

 Tax Assessments ........................................................................................................................153 

 Risk Assumed.............................................................................................................................153 

 Unmatched Transactions and Balances ......................................................................................155 

Stewardship Information (Unaudited)

 Stewardship Investments ............................................................................................................157 

 Non-Federal Physical Property...................................................................................................158 

 Human Capital............................................................................................................................158 

 Research and Development ........................................................................................................159 

Appendix 

 Significant Government Entities ................................................................................................161 

Government Accountability Office Auditor’s Report..............................................................165 
List of Social Insurance Charts 

Chart 1 OASDI Beneficiaries per 100 Covered Workers, 1970-2082....................................122 

Chart 2 OASDI Income (Excluding Interest) and Expenditures, 1970-2082 .........................123 

Chart 3 OASDI Income (Excluding Interest) and Expenditures 

 as a Percent of Taxable Payroll, 1970-2082 ............................................................124 

Chart 4 OASDI Income (Excluding Interest) and Expenditures 

 as a Percent of GDP, 1970-2082..............................................................................125 

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

 as a Percent of GDP, 1970-2082..............................................................................128 

Chart 6 Medicare Part A Income (Excluding Interest) and Expenditures, 1970-2082 ...........129 

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

 as a Percent of Taxable Payroll, 1970-2082 ............................................................130 

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

 as a Percent of GDP, 1970-2082..............................................................................131 

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

 1970-2082................................................................................................................132

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

 as a Percent of GDP, 1970-2082..............................................................................133 

Chart 11 Estimated Railroad Retirement Income (Excluding Interest and 

 Financial Interchange Income) and Expenditures, 2008-2082 ................................139 

Chart 12 Estimated Railroad Retirement Income (Excluding Interest and 

 Financial Interchange Income) and Expenditures as a Percent of 

 Tier II Taxable Payroll, 2008-2082 .........................................................................140 

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

 2009-2040................................................................................................................144

Chart 14 Estimated Black Lung Trust Fund Net Outflow and End of Year 

 Fund Balance, 2009-2040........................................................................................145 

Chart 15 Estimated Unemployment Fund Cashflow Using Expected Economic 

 Conditions, 2009-2018 ............................................................................................147 

Chart 16 Unemployment Trust Fund Solvency as of September 30, 2008...............................149 
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A Citizen’s Guide to the 2008 Financial Report of the U.S. Government

A citizens guide to the report of the united states government 

The federal government’s financial health 
A Citizen’s Guide to the 2008 Financial Report of the U.S. Government 

OVERVIEW

Fiscal Year (FY) 2008 was a year of unprecedented change in the financial position and condition of the U.S. 

Government, with potentially more changes in the near future. The Government’s net operating cost and budget 

deficit both more than doubled during FY 2008. Chart 1 shows that the net operating cost increased from 

$276 billion in FY 2007 to just over $1 trillion in FY 2008, and the budget deficit jumped to $455 billion, 

compared with a deficit of $163 billion in FY 2007. These increases were due in part to the developing weakness 

in the economy throughout 2008 and to the Administration’s response to that weakness. Due to the weakening 

economy, corporate tax revenues declined by $68 billion. Net operating cost increased, mainly due to large 

increases in revaluations of long-term employee and veteran benefits payable. See ‘Where We Are Now’, p.3.

 

The unprecedented volatility in the Nation’s mortgage and credit markets in 2008 has led to extraordinary actions 

by the Government intended to limit the extent of this turmoil. Congress passed and the President signed the 

Housing and Economic Recovery Act (HERA) and the Emergency Economic Stabilization Act of 2008 (EESA) in 

an effort to stabilize the financial sector and protect the economy. Other actions with large financial consequences 

have been taken by the Federal Reserve, the central bank of the United States. So far, the largest financial effects 

of these actions have not yet appeared in the financial statements or the budget, but they will show up in FY 2009, 

and they will likely result in continued historically high budget deficit and net operating cost levels. See 

‘The Government Acts to Address the Financial Crisis’, p. 5.

Chart 1

U.S. Budget Deficit & Net Operating Cost

2004-2008

$760.3

$275.5

$1,009.1

$449.5

$615.6

$454.8

$162.8

$247.7

$318.6

$412.3

$100.0

$ 00.0

$200.0

$300.0

$400.0

$500.0

$600.0

$700.0

$800.0

$900.0

$1,000.0

$1,100.0

2004 2005 2006 2007 2008

D

ollars in

Billions

Net Operating Cost

Budget Deficit

1
A Citizen’s Guide to the 2008 Financial Report of the U.S. Government

The Government’s immediate challenge is to deal with the current financial crisis and the resulting economic 

recession. Net operating costs and budget deficits are likely to remain elevated for some time as the Government 

works to restore market stability. If the Government is to retain the ability to manage a financial crisis such as the 

one today, it must eventually address the long-term fiscal imbalance resulting from Social Security, Medicare, and 

Medicaid. The Government’s fiscal policies for these programs as currently structured are not sustainable. Without 

changes, spending for Social Security, Medicare, and Medicaid would permanently and dramatically increase the 

Government’s budget deficit and debt, leading eventually to renewed financial and economic instability. See ‘Where 

We Are Headed’ p. 7.

This Citizen’s Guide (Guide) highlights important information contained in the 2008 Financial Report of the 

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

(OMB), and Acting Comptroller General of the United States believe that the information discussed in this Guide 

is important to all Americans. 

Chart 2

Debt held by the Public

(as a percent of GDP)

0

100

200

300

400

500

600

700

1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

Percent of GDP

World War II 

 109% of GDP

2
A Citizen’s Guide to the 2008 Financial Report of the U.S. Government 

WHERE WE ARE NOW 

The Economy and the Deficit 

The economy fell into recession in FY 2008. The ongoing slump in the residential homebuilding sector and the 

effects of record high energy prices and turmoil in financial markets dampened both consumer spending and private 

business investment. Employment declined steadily beginning in January 2008 with a loss of about 1 million jobs 

through the final quarter of FY 2008. Overall inflation accelerated through much of the year because of significant 

increases in energy and food prices, but the core inflation rate (which excludes food and energy) was more stable. 

Partly as a result of higher inflation, real wages fell through FY 2008. Corporate profits, outside the energy sector, 

weakened or declined. Federal tax receipts remained relatively constant, and spending growth accelerated. As a 

result, the 2008 budget deficit increased to $455 billion – more than double the 2007 deficit of $163 billion.

What Came In and What Went Out 

What came in? In FY 2008, Government revenue totaled $2.7 trillion. Chart 3 shows that total Government 

revenue remained relatively constant, compared to FY 2007, increasing slightly by $34 billion or just over 1 

percent. Individual income tax revenue increased by $79 billion or almost 4 percent, but corporate income tax 

revenue substantially decreased by $68 billion or 18.4 percent in FY 2008. The corporate revenue decrease is 

attributable largely to changing economic conditions as the economy entered a recession in December 2007. Social 

Security tax revenue of $671 billion and Medicare tax revenue of $197 billion accounted for approximately onethird of total revenues in FY 2008.

Chart 3

Revenues of the U.S. Government 

FY 2004-2008

0.5

1.0

1.5

2.0

2.5

3.0

2004 2005 2006 2007 2008

Dollars in Trillions

Total Revenue

Other Individual tax

revenue

Social Security and Medicare 

Tax Revenue

Corporate income tax revenue 

0.0

3
A Citizen’s Guide to the 2008 Financial Report of the U.S. Government

What went out? The Government’s net cost totaled $3.6 trillion, an increase of $731 billion or more than 25 

percent over FY 2007. The Government’s “bottom line” net operating cost—the difference between revenue and 

net cost—exceeded $1 trillion for the first time—more than triple the FY 2007 net operating cost of $276 billion. 

Chart 4 shows that the largest contributors to the Government’s net cost include the Departments of Health and 

Human Services (HHS) and Defense (DoD), the Social Security Administration, and the interest paid on debt held 

by the public. In FY 2008, the Department of Veterans Affairs’ (VA) contribution to net cost increased from just 

over 2 percent or $59.4 billion in 2007 to nearly 12 percent or $430.4 billion, as shown in Chart 4 in FY 2008. 

This $371 billion increase (in net cost) stems almost entirely from a $339 billion increase in VA’s estimated actuarial 

liabilities for veterans’ benefits. This net cost increase was the largest by far at VA in recent years and accounted 

for more than half of the increase in total net cost across the Government. The substantial reestimation of VA’s 

actuarial liabilities was driven largely by changes in the discount rates used and in revised estimates of the number 

of veterans that became eligible for and applied to receive benefits. The Financial Report contains additional 

information about these and other changes. 

Cost vs. Deficit: What’s the Difference? 

In FY 2008, the Government’s budget deficit 

of $454.8 billion (budget basis reporting) was 

$554.3 billion less than its net operating cost 

(from the Financial Report) of just over $1 

trillion. Table 1 shows that almost the entire 

difference between the Government’s budget 

deficit and net operating costs in FY 2008 can 

be attributed to a $550 billion increase in net 

accrued but unpaid Federal employee and veteran 

benefits. This amount is not included in the 

Budget, but is recognized as a cost and liability in 

the financial statements, because it is cost that has 

not yet been paid.

Chart 4

Net Cost of the U.S. Government: 2008

Department 

of Defense

20.3% All Other

23.5%

Interest on 

Debt Held by

the Public

6.6%

Department 

of Veterans 

Affairs

11.8%

Social 

Security

Admin

18.2%

Department 

of Health and 

Human 

Services

19.6%

Table 1: Budget Deficit vs. Net Operating Cost

Dollars in billions 2008 2007

Budget Deficit $454.8 $162.8

 Change in:

 Federal Employee and Veteran

 Benefits Payable $549.8 $90.1

 Environmental & Disposal Liabilities $0.8 $36.8

 Capitalized Fixed Assets, Net ($46.6) ($2.6)

 Other $50.3 ($11.6)

Net Operating Cost $1,009.1 $275.5

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A Citizen’s Guide to the 2008 Financial Report of the U.S. Government 

The President’s Budget (Budget) is the Government’s primary financial planning and control tool. It describes how 

the Government spent and plans to spend its money, comparing receipts, or cash paid to the Government, to primarily 

cash-based outlays, or payments to individuals, businesses or other parties. The Financial Report of the United States 

Government (Report) reports on the accrual-based cost of operations, the sources used to finance the Government’s 

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, to its costs

to derive net operating cost. Together, the Budget and the Report present a complementary perspective on the Nation’s 

financial health and provide a valuable management tool for the country’s leaders.

The Debt

Historically, the Government has incurred debt: (1) when it borrows from the public to fund budget deficits, and (2) 

when Government funds invest excess receipts in government securities. However, in FY 2008, this relationship has 

changed, with Treasury borrowing $300 billion to increase cash balances at the Federal Reserve (Fed) to support the 

Fed’s market stabilization efforts (discussed later in this Guide). The implementations of both HERA and EESA have 

the potential to increase future borrowings by more than $1 trillion. Substantial borrowings in FY 2009 and beyond are 

expected to fund equity and other asset purchases in financial institutions and from the markets.

Of the Government’s total debt of about $10 trillion at the end of FY 2008, approximately $5.8 trillion was debt held 

by the public in the form of Treasury securities, such as bills, notes, and bonds. The ‘public’ consists of individuals, 

corporations, state and local governments, Federal Reserve Banks, and foreign governments. The balance—more than 

$4.2 trillion—was intragovernmental debt, which arises when one part of the Government borrows from another. It 

represents debt held by Government funds, including the Social Security ($2.4 trillion) and Medicare ($378 billion) trust 

funds. These Government funds are typically required to invest any excess annual receipts in Federal securities. When the 

Government borrows these excess receipts, it still has an obligation to repay them to the Government funds with interest. 

Gross Federal debt (with some adjustments) is subject to a statutory ceiling (i.e., the debt limit), which has been 

recently raised to $11.3 trillion. 

If budget deficits continue, the Government will have to borrow more from the public in order to make benefit 

payments and to pay for other programs. This Guide examines these and other indicators of the challenges the 

Government will face in maintaining long-term fiscal sustainability.

The Government Acts to Address the Financial Crisis 

Falling asset values in the mortgage and credit markets sparked extraordinary events and actions involving many 

financial institutions in the United States in 2008. Much of the recent market instability can be attributed to the 

decline in the housing market aggravated by the recession that began in December 2007. Declines in the value of 

mortgage-backed securities (MBS) and sub-prime credit market debt precipitated significant portfolio losses across 

many financial and credit institutions that had invested heavily in these instruments in recent years. These losses led to 

financial market instability, forced mergers, and bankruptcies. A sharp reduction in credit availability resulted as banks 

and financial institutions struggled to maintain solvency in the face of these widespread losses. The large Government 

Sponsored Enterprises (GSEs)1

 Fannie Mae and Freddie Mac, which create and guarantee MBS, were placed into 

conservatorship. Other financial institutions required large infusions of Federal funds to remain in business. 

Exhibit 1 on the following page summarizes significant actions taken by the Federal Government to respond to 

these events. Further information is reported in the 2008 Financial Report.

1. GSEs are chartered by the Federal Government and pursue a Federally-mandated mission (e.g., Fannie Mae and Freddie 

Mac were created to provide stability and liquidity in the secondary mortgage market). However, Fannie Mae and Freddie 

Mac were both distinctly established as corporate entities – owned by shareholders of stock traded on the New York Stock 

Exchange. Their debt is not guaranteed by the Federal Government.

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A Citizen’s Guide to the 2008 Financial Report of the U.S. Government

Exhibit 1 - The Fiscal Crisis at a Glance

The Federal Government is taking unprecedented actions, some of which are summarized below, to stabilize the 

economy. The impact of these actions will largely be reflected in the FY 2009 financial statements and beyond. 

Housing and Economic Recovery Act (HERA) (July 2008) – HERA established a new regulatory agency, the 

Federal Housing Finance Agency (FHFA), with enhanced regulatory authority over the housing GSEs. HERA 

also authorized the Treasury Department to provide financial support for the housing GSEs. Treasury, in 

conjunction with the FHFA’s decision to place Fannie Mae and Freddie Mac into conservatorship, has agreed 

to: (1) provide capital of up to $200 billion to Fannie Mae and Freddie Mac should it be needed; and 

(2) purchase GSE-guaranteed MBS. As of September 30, 2008, the Federal Government’s financial statements 

recognized a liability for $13.8 billion of capital to be paid to Freddie Mac, investments of $3.3 billion for 

purchased MBS, and $7 billion for preferred stock and stock warrants received from the GSEs. Additionally, 

Treasury established a facility to lend money to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, 

if requested. Also, the HOPE for Homeowners Program was established under HERA to help borrowers faced 

with foreclosure refinance through the Federal Housing Administration (FHA).

Emergency Economic Stabilization Act (EESA) (October 2008)– Under EESA, Treasury established the 

Troubled Asset Relief Program (TARP), which was authorized by the Act to purchase or insure up to $700 billion 

of “troubled assets” to stabilize financial markets and support financial institutions. As of December 9, 2008, 

Treasury has used over $200 billion in FY 2009 to purchase financial assets of qualifying entities. As FY 2009 

unfolds, the disposition of the balance will be determined. Amounts expended have been and are expected to 

continue to be treated as either investments or loans. The Government expects a recovery of at least some of these 

funds and possibly even to earn a positive return on amounts spent as economic conditions improve. In the short 

term, Treasury will need to increase borrowings. As these borrowings take place, Treasury’s ability to borrow for 

other purposes may become more challenging. In addition, the Federal Deposit Insurance Corporation (FDIC) 

deposit insurance was temporarily increased from $100,000 to $250,000 per depositor.

Also, the FDIC implemented a temporary liquidity guarantee program for participating institutions to 

guarantee newly issued senior unsecured debt and to provide full coverage of non-interest bearing deposit 

transaction accounts, regardless of dollar amount. Further, through the Supplementary Financing Program, 

Treasury increased its deposit balances with the Federal Reserve (Fed) to support the Fed’s market stabilization 

actions, which resulted in an increase in cash and debt held by the public. As of September 30, 2008, the 

deposit balance was $300 billion.

In addition to these actions, the Fed has been directly involved in addressing this financial crisis. They (1) 

have taken actions to support several prominent financial institutions, including Bear Stearns, American 

International Group (AIG), and Citigroup; (2) have developed a program to support the commercial paper 

market; and (3) are formulating plans to lend support for new car, student, and small-business loans. The vast 

majority of Fed actions and transactions will not directly impact the Government’s financial statements since 

the Fed is an independent organization and not considered a part of the Federal reporting entity. As such, their 

financial results are not consolidated into the Government’s financial statements. However, there is a potential 

that reduced Fed earnings will be available in the future for transfer to the Government.

Exhibit 1 - The Fiscal Crisis at a Glance

Information on these and the Government’s other market stabilization efforts under EESA

may be found at http://www.treas.gov/initiatives/eesa/

6
A Citizen’s Guide to the 2008 Financial Report of the U.S. Government 

Where We Are Headed

As the first quarter of FY 2009 draws to a close, the Government is exploring a number of recovery strategies. Actions 

under HERA, EESA, and other initiatives are expected to restore confidence to lenders and consumers, and provide 

stability to the nation’s economy. Regardless, the dramatic measures that the Government has already taken and may 

take in the future could in the long term significantly impact fiscal sustainability. Despite the urgency with which the 

Government must act in the short term to restore market stability and emerge from the current recession, it must not lose 

sight of other key issues such as the entitlement programs that continue to pose a challenge to future fiscal sustainability. 

An Unsustainable Fiscal Path 

The projected growth in entitlement spending under current law – chiefly for Social Security, Medicare, and 

Medicaid – will ultimately affect every citizen in the nation. Continued growth in health care costs is expected 

to cause government spending for its major health programs to grow faster than both the economy and Federal 

revenues over the next 75 years2

 . Similarly, population aging is expected to cause the Government’s Social Security 

and health program costs and expenditures to increase as a share of GDP over that period. Consequently, total 

Government expenditures are projected to exceed total assumed revenue throughout the projection period, with the 

fiscal imbalance – between spending and revenue – growing larger each year into the future.

Chart 5 shows Government revenue and spending, expressed as a percentage of GDP, from 1970 through 20803

. 

For most of the past several decades, revenue as a share of GDP has averaged around 18 percent, with little 

variation4

. For this reason, revenue is assumed to be about 18 percent of GDP throughout the projection period. 

Chart 5 also shows that by 2080, costs related to the currently scheduled benefits for the three major entitlement 

programs are projected to be about equal to total Government revenue. By 2060, total Government expenditures 

are projected to be 45 percent of GDP – levels unseen since World War II, when Government expenditures reached 

44 percent of GDP. By 2080, expenditures could exceed 60 percent of GDP, more than three times the assumed 

Chart 5

Current Trends Are Not Sustainable

10.0

0.0

20.0

30.0

40.0

50.0

60.0

70.0

1970

1980

1990

2000

2010

2020

2030

2040

2050

2060

2070

2080

Net Interest

Other

Government

Medicaid

Medicare

Social Security

Total Revenues

Percent of GDP

2. The FY 2008 Statement of Social Insurance may be found in the 2008 Financial Report. 

3. Projected spending is based on scheduled Social Security and Medicare benefits and current spending trends.

4. GDP is one way of measuring the size of a nation’s economy and is defined as the total market value of all final goods and 

services that the nation produces in a given period. The projection that the government’s revenue as a percentage of GDP 

will remain relatively constant is based on historical data and trends that are not expected to change.

7
A Citizen’s Guide to the 2008 Financial Report of the U.S. Government

revenues. These large and growing deficits could increase Government debt levels as a percentage of GDP to 

unprecedented and unsustainable heights – from 170 percent by 2040 to over 600 percent by 2080 – far exceeding 

the historical high of 109 percent that occurred immediately following WWII and far exceeding the Government’s 

ability to fund program expenditures. It is important to note that precise expenditure projections change with 

different forecasting assumptions (e.g., life expectancy increases and health care cost growth), but even under a 

wide range of reasonable assumptions, budget deficits and debt are projected to increase dramatically5

. Should such 

dramatic increases occur, interest costs would increase, making the Federal Government’s fiscal path even more 

unsustainable, and the Government’s ability to borrow from the public could be affected. 

Preparing for the Future

With respect to entitlement spending, the nation must change course before the deficit and debt reach 

unprecedented heights. The Government must act to bring social insurance expenses and resources in balance. 

Delays will increase the magnitude of the reforms needed and will place more of the burden on future generations. 

There is no simple fix to the projected imbalance between social insurance expenditures and revenues. The precise 

amount of the Government’s future financial responsibilities is far from certain, as they are based on many complex 

calculations and assumptions. Nevertheless, the magnitude of these responsibilities and the pressing need to control 

their continued growth are evident.

The Government has made and is expected to continue to make a vast commitment of financial resources to 

establish and maintain stability in the credit markets. The Government expects that at least some of the financial 

assets acquired by the Government in its market stabilization efforts may eventually return full value to the taxpayer 

and possibly even earn a positive return on amounts spent as economic conditions improve. The Government 

has been able to take these stabilization actions because of the deep, liquid market for Treasury securities. The 

unsustainable growth in Social Security, Medicare, and Medicaid remains a long-term fiscal challenge to be 

addressed once the current credit crisis has passed and overall economic conditions have improved.

5. Chart 5 includes projections of scheduled benefits for Medicare and Social Security. The Medicare Trustees’ Report shows 

that, under current law, the Hospital Insurance Trust Fund will not have sufficient funds to pay scheduled benefits beginning 

in 2019. At that point, trust fund income would cover only 78 percent of scheduled benefits, falling to about 30 percent 

in 2082. The Social Security Trust Fund could encounter a similar problem. Under current law, trust fund income would 

cover only 78 percent of scheduled benefits in 2041 and only 75 percent by 2082.

KEY SUSTAINABILITY DATES

2008 Medicare Hospital Insurance benefits begin to

exceed program tax revenues.

2017 Social Security benefits begin to exceed program

tax revenues.

2040 Federal Debt held by the Public surpasses historic

high of 109% of GDP.

2080 Total Government cost is more than

3 times revenue.*

* Revenue is assumed to be the historical average of about 18 percent of GDP.

8
A Citizen’s Guide to the 2008 Financial Report of the U.S. Government

Looking Ahead

The 2008 Financial Report of the United States Government, issued by the U.S. Department of the Treasury, is a 

comprehensive financial report that provides a backdrop for both the Government’s current financial position and 

prospects for moving forward. It discusses the steps the Federal Government has taken to restore stability in the 

U.S. financial system. The issues discussed in the Citizen’s Guide and the Financial Report affect, and should be 

of interest to, every citizen. The Financial Report’s comprehensive reporting is intended to inform and support the 

decision-making needs of lawmakers and the public and to help keep the United States on solid financial ground. 

Find Out More

You will find more detail on these matters in the Financial Report. You are encouraged to explore the information 

it contains and to ask questions about how the Government manages taxpayers’ money. The 2008 Financial Report 

of the United States Government and other information about the nation’s finances are available at:

• U.S. Department of the Treasury’s Financial Management Service, 

http://www.fms.treas.gov/fr/index.html;

• OMB’s Office of Federal Financial Management, 

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

• GAO, 

http://www.gao.gov/financial/fy2008financialreport.html.

This Citizens’ Guide highlights information in the 2008 Financial Report. The Government Accountability 

Office’s (GAO) complete audit report on the U.S. Government’s consolidated financial statements can be 

found beginning on page 165 of the Financial Report. For FY 2008 and FY 2007, GAO issued an unqualified 

or ‘clean’ opinion on the 2008 and 2007 Statements of Social Insurance. However, certain material financial 

reporting control weaknesses and other limitations on the scope of its work prevented GAO from expressing an

opinion on the remaining financial statements.

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A Citizen’s Guide to the 2008 Financial Report of the U.S. Government

The 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 health, which are 

discussed in greater detail in the Report.

billions of dollars 2008 2007 2006

Gross Costs $ (3,891.6) $ (3,157.3) $ (3,127.7)

Earned Revenues $ 250.9 $ 247.8 $ 226.4

Net Cost $ (3,640.7) $ (2,909.5) $ (2,901.3)

Total Taxes and Other Revenues $ 2,661.4 $ 2,627.3 $ 2,440.8

Other $ (29.8) $ 6.7 $ 11.0

Net Operating Cost $ (1,009.1) $ (275.5) $ (449.5)

Assets $ 1,974.7 $ 1,581.1 $ 1,496.5

Less: Liabilities, comprised of:

Debt Held By the Public $ (5,836.2) $ (5,077.7) $ (4,867.5)

Federal Employee & Veteran Benefits $ (5,318.9) $ (4,769.1) $ (4,679.0)

Other Liabilities $ (1,023.1) $ (940.1) $ (866.4)

Total Liabilities $ (12,178.2) $ (10,786.9) $ (10,412.9)

Net Position (Assets Minus Liabilities) $ (10,203.5) $ (9,205.8) $ (8,916.4)

Statement of Social Insurance:

1

Closed Group (current participants) 2 $ (49,135) $ (45,062) $ (44,145)

Open Group (current + future participants)

3 $ (42,970) $ (40,948) $ (38,851)

Unified Budget Deficit $ (454.8) $ (162.8) $ (247.7)

A Snapshot of 

The Government's Financial Position & Condition

1 Present value of projected revenues and expenditures for scheduled benefits over the next 75 years of certain benefit programs that are referred to as

Social Insurance (e.g., Social Security, Medicare). Not considered liabilites on the balance sheet.

2 Includes current participants (i.e., receiving and/or are eligible to receive benefits) for the Social Security and Medicare programs ages 15 and over at

the start of the 75-year projection period, except for the 2007 Medicare programs for which current participants are assumed to be at least 18 years of

age at the start of the 75-year projection period.

3 Includes all current and future projected participants over the 75-year projection period.

Budget Results

Sustainability Measures: 

The Statement of Social Insurance provides certain fiscal sustainability information concerning Social

Security, Medicare, and other social insurance programs.

10
A Citizen’s Guide to the 2008 Financial Report of the U.S. Government
MANAGEMENT’S DISCUSSION AND ANALYSIS 1

Disclaimer

USDA HUD DoT NSF

Commerce Interior VA NRC Defense

Education Justice USAID OPM DHS 1

Energy Labor EPA SBA State

HHS Treasury GSA SSA NASA 1 Balance Sheet and Custodial Statement Audit Only

Unqualified

FY 2008 Agency Audit Results

MANAGEMENT’S DISCUSSION AND 

ANALYSIS 

Introduction 

The fiscal year (FY) 2008 Financial Report of the United States Government (Report) provides the President, 

Congress, and the American people 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 gives particular emphasis to two key issues: The Government's response in recent months to the 

financial market crisis, and the Government's capacity to sustain the funding and pay the benefits of key social 

insurance programs, such as Social Security and Medicare. 

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 agency and governmentwide reporting deadlines to 45 days and 75 days after yearend, respectively. 

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). For FY 2008, GAO has issued a 

‘disclaimer’ of opinion on the accrual-based 

consolidated financial statements, as it has for the past 

eleven years, for the fiscal years (FY) ended September 

30, 2008 and 2007. This means that sufficient information was not available for the auditors to determine whether 

the financial results were reliable. In FY 2008, 20 of 24 of the most significant agencies earned unqualified opinions 

on the financial statement audits. In addition, the Government earned an unqualified audit opinion on a Report 

component - the Statement of Social Insurance (SOSI) - for the second year in a row, indicating the auditor’s 

opinion that the SOSI fairly presents the financial condition of the programs covered in that statement. 

The FY 2008 Financial 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; 

• The principal financial statements and the related footnotes to the financial statements; 

• Supplemental and Stewardship Information; and 

• GAO’s Audit Report. 

 In addition, for the second consecutive year, the Government has produced a Citizens' 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 health. 

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 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. 

Exhibit 1 on the following page provides an overview of how the U.S. Government is organized. 
2 MANAGEMENT’S DISCUSSION AND ANALYSIS 

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 

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 

United States Court of Appeals for the 

 Armed Forces 

United States Tax Court 

United States Court of Appeals 

for Veterans Claims 

Administrative Office of the United States Courts

Federal Judicial Center 

United States Sentencing Commission 

INDEPENDENT ESTABLISHMENTS AND GOVERNMENT CORPORATIONS 

African Development Foundation 

Broadcasting Board of Governors 

Central Intelligence Agency 

Commodity Futures Trading 

 Commission 

Consumer Product Safety Commission 

Corporation for National and 

 Community Service 

Defense Nuclear Facilities Safety 

 Board 

Environmental Protection Agency * 

Equal Employment Opportunity 

 Commission 

Export-Import Bank of the U.S. * 

Farm Credit Administration 

Farm Credit System Insurance Corporation * 

Federal Communications 

 Commission * 

Federal Deposit Insurance 

 Corporation * 

Federal Election Commission 

Federal Housing Finance Board 

Federal Labor Relations Authority 

Federal Maritime Commission 

Federal Mediation and 

 Conciliation Service 

Federal Mine Safety and 

 Health Review Commission 

Federal Reserve System 

Federal Trade Commission 

General Services Administration *

Inter-American Foundation 

Merit Systems Protection Board 

National Aeronautics and 

 Space Administration * 

National Archives and Records 

 Administration 

National Capital Planning 

 Commission 

National Credit Union 

 Administration * 

National Foundation on the Arts 

 and the Humanities 

National Labor Relations Board 

National Mediation Board 

National Railroad Passenger 

 Corporation (Amtrak) 

National Science Foundation * 

National Transportation Safety 

 Board 

Nuclear Regulatory Commission * 

Occupational Safety and Health 

 Review Commission 

Office of the Director of National 

 Intelligence 

Office of Government Ethics 

Office of Personnel Management * 

Office of Special Counsel 

Overseas Private Investment 

 Corporation 

Peace Corps 

Pension Benefit Guaranty 

 Corporation * 

Postal Rate Commission 

Railroad Retirement Board * 

Securities and Exchange 

 Commission * 

Selective Service System 

Small Business Administration *

Smithsonian* 

Social Security Administration *

Tennessee Valley Authority * 

Trade and Development Agency

U.S. Agency for International 

 Development * 

U.S. Commission on Civil 

Rights 

U.S. International Trade 

 Commission 

U.S. Postal Service * 

*Significant entities included in the FY 2008 Financial Report of the U.S. Government

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 * 
MANAGEMENT’S DISCUSSION AND ANALYSIS 3

What Does This Mean to Me?

2008 marked a departure from 

the recent pattern of declining 

deficits. Market stabilization 

efforts are expected to contribute 

to potentially substantial deficit 

increases in the coming year.

The Government’s Financial 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. As discussed later in this Report, the Government’s financial statements show its financial position at 

the end of the fiscal year, explain how and why the financial position changed during the year, and provide insight 

into how the Government’s financial condition may change in the future. In particular, the Statement of Social 

Insurance (SOSI) compares the actuarial present value of the Government’s anticipated expenditures for future 

scheduled benefits to its expected collections (e.g., taxes and premiums) for 

Social Security, Medicare, and other social insurance programs over a 75-

year period. Expected expenditures for other major programs, including 

defense, Medicaid and education, and future tax revenues, while not 

presented in the SOSI, will also affect the Government’s future fiscal 

condition, as will the Government's recent efforts to stabilize the economy. 

 The natural starting point for assessing the Government’s long-term 

financial condition is its current financial position, both in absolute 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. It serves as a useful indicator of the economy’s 

capacity to sustain the Government’s many programs. For example, in FY 2008: 

• Government cash-based outlays of $3.0 trillion, net of receipts of $2.5 trillion (approximately 21 percent 

and 18 percent of GDP, respectively) yielded a record unified budget deficit for FY 2008 of $454.8 billion. 

Similarly, the Government’s net operating cost more than tripled – from $275.5 billion in FY 2007 to just 

over $1 trillion in FY 2008. 

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

(commonly referred to as the unified 'budget deficit'). The value, including interest, of publicly held debt 

was 40.8 percent of GDP at the end of FY 2008. 

• The social insurance programs and Medicaid have become a large share of Government cash-based 

expenditures. Forty years ago, Medicare, Medicaid, and Social Security accounted for 16 percent of total 

Government expenditures. Today, they comprise 40 percent of all expenditures. 

The following pages contain a more detailed discussion of the budget, the economy, and the debt, as well as a 

long-term view of the Government’s ability to meet its obligations for social insurance and market stabilization. 

Budget Deficit vs. Net Cost 

 Each year, the Administration issues two 

reports which detail the financial results for the 

Government. The President’s Budget 

(Budget), the Government’s primary financial 

planning and control tool, describes how the 

Government spent and plans to spend the 

money it collects. By comparison, the accrualbased Financial Report of the United States 

Government (Report) includes the cost of 

operations, the sources used to finance those 

costs, how much the Government owns and 

owes, and the outlook for its social insurance 

programs. 

In FY 2008, the Government incurred a record high unified budget deficit of $454.8 billion, more than 

doubling the FY 2007 deficit of $162.8 billion. This historic increase was due in great part to the combined effect of 

the developing weakness in the economy and the Government's response to that weakness. Because of the 

weakening economy, corporate tax revenues declined by $68 billion. These factors also contributed to the increase 

2008 2007

$454.8 $162.8

$0.8 $36.8

($46.6) ($2.6)

$50.3 ($11.6)

$1,009.1 $275.5

Table 1: Budget Deficit vs. Net Operating Cost

Capitalized Fixed Assets, Net 

$90.1 

Other

Net Operating Cost

Environmental & Disposal Liabilities

Federal Employee and Veteran Benefits 

Payable

Change in: 

$549.8 

Dollars in billions

Budget Deficit
4 MANAGEMENT’S DISCUSSION AND ANALYSIS 

 National Economic Indicators FY 2008 FY 2007

Real GDP growth 0.7% 2.8%

Residential construction growth -20.9% -17.0%

Average monthly payroll job increase (thousands) -43 109

Unemployment rate ( percent, end of period) 6.1% 4.7%

Consumer price index (CPI) 5.3% 2.4%

CPI, excluding food and energy 2.5% 2.1%

Treasury constant-maturity 10-year rate, (end of period) 3.9% 4.6%

Moody's Baa bond rate (end of period) 7.8% 6.6%

Table 2: Economic Indicators

in the Government's net operating cost, which jumped to just over $1 trillion – more than three times the 2007 net 

operating cost of $275.5 billion. Net operating cost also increased due to agencies' substantial reestimates of 

liabilities for postemployment benefits. The Departments of Defense, Health and Human Services, and Veterans’ 

Affairs, and the Social Security Administration, as well as interest on the Federal debt accounted for the majority of 

the Government’s net costs. Table 1 shows that $549.8 billion changes in estimates of the Government's net 

postemployment liabilities to its military and civil service employees accounts for most of the difference between 

the Government's unified budget deficit and net operating cost. This issue is discussed further in the 'Where We 

Are' section of this document. 

The Economy in Fiscal Year 2008 

A review of the Nation's key 

economic indicators can add context 

to a discussion of the Government's 

financial results. As summarized in 

Table 2, the U.S. economy slowed 

noticeably in FY 2008, and it fell 

into recession in December 2007, 

three months into the fiscal year. 

Growth was significantly restrained 

for the third straight year by the 

ongoing slump in the residential 

homebuilding sector. In addition, 

consumer spending grew modestly 

during the first three quarters of the 

fiscal year, and then showed its sharpest one-quarter decline since 1980 in the final quarter. Record high energy 

prices through most of the year and elevated food prices dampened consumer confidence. Mounting financial 

market losses also weighed on confidence. The turmoil in the financial sector limited credit availability, further 

contributing to sagging consumption. 

Employment fell beginning in January 2008, and the unemployment rate rose. Inflation was dominated by 

significant increases in energy and food prices, but underlying inflation remained relatively stable. Partly as a result 

of higher overall inflation, real wages fell throughout FY 2008 on a year over year basis. Corporate profits, outside 

the energy sector, weakened or declined. Federal tax receipts remained relatively constant and spending growth 

accelerated in FY 2008. As a result, the Federal unified budget deficit rose to $454.8 billion, or about 3.2 percent of 

GDP (compared to 1.2 percent in FY 2007). 

After rising at an annual average rate of 2.8 percent during FY 2007, real GDP growth slowed to 0.7 percent 

over the four quarters of FY 2008. Quarterly performance was quite volatile. Growth was noticeably stronger in the 

third quarter of the fiscal year (2.8 percent), boosted in large part by a narrowing trade deficit and the spring 

stimulus payments, but real GDP declined 0.5 percent in the final quarter of the fiscal year. Residential fixed 

investment declined at double-digit rates in each of the fiscal year’s four quarters, reflecting another year of sharply 

weaker housing demand. Nonresidential fixed investment growth slowed markedly during the fiscal year. 

The following key points summarize economic performance in FY 2008. 

• After increasing by 2.7 percent in FY 2007, consumer spending was slightly negative over the four quarters 

of FY 2008, with a notable slowing in the final quarter. 

• Exports have been a key driver of the economy, maintaining a steady pace of growth in FY 2008 and 

accelerating markedly during the latter half of the fiscal year, but the outlook for exports is uncertain in 

view of the spreading world-wide recession. 

• Labor market conditions deteriorated during FY 2008. Nonfarm payroll employment declined at an 

average rate of 68,000 jobs per month in FY 2008, compared with the 109,000 average increase in jobs per 

month in FY 2007. From the employment trough of August 2003 through December 2007, the economy 

created 8.3 million new jobs, but between December and the end of FY 2008, employment fell by about 

1 million. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 5

Exhibit 2: Mortgage Securitization Process

$

INVESTORS

(e.g., pension funds,

mutual funds, domestic 

and foreign banks)

$

Mortgages

Lender

(e.g., bank) 

lends $ to 

consumer 

via mortgage

Consumer

Mortgage MBS $

Mortgage Securitizers

Fannie Mae & 

Freddie Mac 

provide 

guarantees on 

MBS 

Private Label 

(e.g., investment 

banks)

MBS $

Exhibit 2: Mortgage Securitization Process

$

INVESTORS

(e.g., pension funds,

mutual funds, domestic 

and foreign banks)

$

Mortgages

Lender

(e.g., bank) 

lends $ to 

consumer 

via mortgage

Consumer

Mortgage MBS $

Mortgage Securitizers

Fannie Mae & 

Freddie Mac 

provide 

guarantees on 

MBS 

Private Label 

(e.g., investment 

banks)

Mortgage Securitizers

Fannie Mae & 

Freddie Mac 

provide 

guarantees on 

MBS 

Private Label 

(e.g., investment 

banks)

MBS $

• The unemployment rate trended steadily higher throughout FY 2008, reaching 6.1 percent at the very end 

of the fiscal year, compared to 4.7 percent at the end of FY 2007. 

• Overall inflation, as measured by the consumer price index (CPI), advanced to 5.3 percent in FY 2008, up 

significantly from the 2.4 percent pace of FY 2007. Core inflation (which excludes food and energy) 

remained relatively contained, however, rising to 2.5 percent in FY 2008 versus 2.1 percent in FY 2007. 

• Financial market turbulence intensified during the last few months of FY 2008, as uncertainties about the 

value of mortgage-market-related assets led investors to reappraise asset values in a variety of markets. 

This turbulence reduced credit availability. For example: 

o Corporate debt yields reached about 450 basis points above Treasury securities in late September 2008, 

compared with about 175 basis points in August 2007; 

o The difference between the 3-month London Interbank Offered Rate (LIBOR)1

 and the risk-free 3-

month Treasury rate shot up to nearly 550 basis points in late September 2008 (after averaging less 

than 50 basis points in 2006 and much of 2007). 

Market Stabilization Efforts 

 Volatility in the mortgage and credit markets during the last half of FY 2008 sparked unprecedented economic 

events. Efforts to restore financial stability began in earnest in March with the Federal Reserve’s2 support of JP 

Morgan Chase & Co. in its acquisition of The Bear Stearns Companies, Inc. (Bear Stearns). Bear Stearns had been 

considered one of the leading U.S. investment firms, with much of its investment portfolio tied to sub-prime 

mortgage-backed securities (MBS). Declines in the sub-prime credit market precipitated significant portfolio losses 

and a substantial cash shortfall not only at Bear Stearns, but eventually across many other major financial and credit 

institutions who had invested heavily in 

MBS in recent years. The MBS market 

played a key role in the deterioration of 

credit market conditions in FY 2008. 

Exhibit 2 provides an illustration of 

how individual mortgage loans are 

transformed into MBS. 

 MBS performance was directly 

dependent on the performance of the 

underlying mortgages and loans that 

comprised the security. A developing 

recession, housing market declines, 

including falling property values and 

demand, a decline in the value of the 

U.S. dollar, significantly increased 

availability and use of sub-prime loans 

(with limited homeowner equity), and 

increased mortgage defaults and foreclosures placed tremendous pressure on the MBS market, particularly the subprime portion of the market. Mounting losses compelled MBS investors, in particular bank investors, to retain 

whatever funds they could and minimize their exposure by being reluctant and, in some cases, refusing to make 

loans. This would ultimately lead to a ‘frozen’ credit market. Due to the inherent relationship between the MBS 

and the underlying loans, this freeze impacted a wide array of investors – from the prospective homebuyer seeking a 

mortgage on a first home, to the multimillion dollar corporation seeking short-term financing so that it could meet 

payroll. In addition, failing mortgage loans precipitated a surge in foreclosures. 

 

1 LIBOR is the interest rate at which banks can borrow funds from other banks in the London interbank market. Set daily by the British 

Bankers’ Association, it is the most widely used benchmark for short term interest rates. 2 The Federal Reserve is the central banking system of the United States. It is a quasi-public (government entity with private components) 

banking system composed of (1) the presidentially appointed Board of Governors of the Federal Reserve System in Washington, D.C.; (2) the 

Federal Open Market Committee; (3) twelve regional Federal Reserve Banks located in major cities throughout the nation acting as fiscal agents 

for the U.S. Treasury; (4) numerous private U.S. member banks; and (5) various advisory councils. Since February 1, 2006, Ben Bernanke has 

served as the Chairman of the Board of Governors of the Federal Reserve System. 
6 MANAGEMENT’S DISCUSSION AND ANALYSIS 

 This precarious environment eventually led to the demise of such long-established firms as Lehman Brothers, 

and to transformations within or acquisitions of other major institutions, such as Wachovia Bank, Washington 

Mutual Bank, and American International Group (AIG). It also placed the financial future of both the Federal 

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

Mac or Freddie) in jeopardy. Something had to be done to restore investor and lender confidence and to get the 

credit pipeline flowing again. In response, the Treasury Department championed two legislative efforts in attempts 

to restore consumer confidence and market stability. 

The Path to Recovery, Part I – HERA 

 In July 2008, Congress passed the Housing and Economic Recovery Act (HERA) of 2008, based on concern 

that continued losses at Fannie and Freddie and throughout the U.S. housing/credit market could lead to significantly 

larger and broader problems for both the U.S. and foreign economies. HERA established a new regulatory agency: 

the Federal Housing Finance Agency (FHFA) with enhanced regulatory authority over the housing Government 

Sponsored Enterprises (GSEs)3

, including the capital requirements and business activities of Fannie Mae and 

Freddie Mac. HERA also provided the Treasury Secretary with temporary authority to purchase any obligations and 

other securities issued by the housing GSEs. 

 Due to deteriorating conditions in the housing mortgage markets and the resulting negative financial impact 

on Fannie Mae and Freddie Mac, FHFA placed them under conservatorship on September 7, 2008. This action was 

taken to preserve GSE assets, ensure a sound and solvent financial condition, and mitigate systemic risks that 

contributed to current market instability. Placing Fannie Mae and Freddie Mac under protection of a 

conservatorship enabled the Government to avert the initial threat of failure and focus on the larger, systemic 

challenges, with the ultimate intention of restoring financial stability. Under the conservatorship, the conservator 

(FHFA) replaced the organization’s senior management and oversaw the continued operation of the GSEs. Pursuant 

to the authorities provided to the Secretary of the Treasury under the HERA, the Treasury Department, on 

September 7, 2008, took three additional steps to help ensure the solvency and liquidity of the GSE while they are 

working to resolve their financial difficulties: 

o entering into senior preferred stock purchase arrangements with Fannie Mae and Freddie Mac; 

o establishing a GSE credit facility; and 

o establishing a GSE MBS purchase program. 

HERA established the HOPE for Homeowners Program4

, which provides another stop-gap measure by helping 

borrowers faced with foreclosure refinance through the Federal Housing Administration. Despite these actions, 

there was still a pressing need to address the more systemic challenges posed by the credit crisis. 

The Path to Recovery, Part II – EESA and TARP 

In October 2008, Congress passed and the President signed the Emergency Economic Stabilization Act (EESA), 

which authorized Treasury to establish and manage the Troubled Asset Relief Program (TARP). In general, TARP 

authorizes the Government to provide additional protection and stability to financial markets through a wide array of 

mechanisms: 

• EESA authorizes the Government to purchase or insure up to $700 billion in troubled assets, such as securities 

and other financial instruments. 

• The Treasury Secretary had immediate access to the first $250 billion. Following that, an additional $100 billion 

was authorized by the President. The last $350 billion is subject to Presidential approval and Congressional 

review. In its first use of the TARP, Treasury created the Capital Purchase Program (CPP) to purchase up to 

$250 billion in senior preferred shares in a wide variety of banks and other financial institutions. These will be 

largely non-voting shares, may be sold to a third party, and will pay a 5 percent dividend in the first 5 years, and 

9 percent thereafter. 

 

3 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 of stock traded on the New York Stock Exchange. The operations of the housing GSEs are not guaranteed by the Federal 

Government. 4 HOPE for Homeowners is a voluntary program for the refinancing of distressed loans by providing Federal Housing Administration 

(FHA) insurance for refinanced loans that meet certain eligibility requirements. Both borrower and lender must agree to participate in the 

program.
MANAGEMENT’S DISCUSSION AND ANALYSIS 7

• Any firm participating in the CPP will provide the Treasury Secretary with a warrant guaranteeing the right to 

purchase additional common shares worth up to 15 percent of the value of the preferred stock purchased. The 

purchase price will be the average stock selling price over the 20-day period before the preferred stock 

purchase. If the company is unable to issue a warrant, it may issue senior debt instead. 

• EESA provides for: (1) oversight by the Government Accountability Office (GAO) and a Special Inspector 

General; and (2) transparency by requiring Treasury to make available an electronic description of assets 

acquired under the program. 

Recovery Efforts and Actions 

 The following summarizes some of the recovery efforts to date and their impact on and implications for the 

Government’s consolidated financial statements. It should be noted that, although HERA and EESA authorize the 

Government to spend hundreds of billions of dollars in the recovery effort, the majority of those funds have yet to 

actually be spent, and as a result, are not and would not be reported on the Government’s consolidated financial 

statements. Generally, the Government has recorded the funds that have already been spent at cost. The 

Government expects to recover, if not earn a return on these funds. 

Actions by Congress:

• Passes HERA, which enhanced the regulatory framework and provided temporary authority for the Treasury Secretary to 

provide financial support to Government Sponsored Enterprises (GSEs). 

• Passes EESA, establishing the Troubled Asset Relief Program (TARP), authorizing the Treasury Department to use up to 

$700 billion in support of market stabilization efforts. The $700 billion limit shall be reduced by the difference between 

outstanding and guaranteed obligations under the EESA-authorized insurance program, if any, and the balance in the 

Troubled Assets Insurance Financing Fund (TAIFF), established by EESA to guarantee timely payments on mortgagerelated assets.

• Legislation only authorizes the Government to engage in specified market relief efforts. Authorizations by themselves do 

not impact either the Government’s financial statements or the deficit - the exercise of those authorities do. 

Actions by the Federal Reserve System (Fed)

• Lends approximately $30 billion in support of JP Morgan Chase to facilitate its acquisition of Bear Stearns; 

• Agrees to lend up to $85 billion to American International Group (AIG). Subsequent to FY-end 2008, the credit facility was 

modified and Treasury agreed to purchase $40 billion in Senior AIG preferred stock and will receive common stock 

warrants for 2 percent of the outstanding AIG common stock; 

• Announces Money Market Investor Funding Facility through which the Fed is authorized to buy $600 billion in CDs and 

commercial paper to bolster money market mutual funds, and sets up separate facilities to purchase certain AIG assets; 

• Agrees to guarantee $306 billion of Citigroup troubled assets. Pursuant to the agreement, Citigroup would cover the first 

$37 billion in losses, Treasury would cover the next $5 billion, and FDIC would cover up to $10 billion of additional losses. 

Treasury and FDIC receive Citigroup preferred stock as part of the arrangement; 

• Announces program to purchase up to $500 billion of mortgage-backed securities and up to $100 billion of Fannie and 

Freddie debt, and to lend up to $200 billion against new car, student, and small-business loans. Treasury has pledged $20 

billion from TARP for this program as well; 

• Under the Supplementary Financing Program, Treasury borrowed $300 billion to increase cash balances at the Fed to 

support the Fed’s market stabilization efforts. 

 The vast majority of Fed actions and transactions will not directly impact the Government’s financial statements 

since the Fed is an independent entity and, while part of the Government, is not considered part of the Federal 

Government reporting entity. To date, the Government’s exposure is largely limited to any impact that losses from 

these programs may have on excess profits that the Fed is required to pass on to the Treasury’s General fund. 

Actions by Treasury:

• Under HERA authority, received preferred stock and warrants, valued at $7 billion as consideration for entering into 

assistance agreements - recorded as an investment. Commits to provide up to $200 billion under a preferred stock purchase 

agreement to ensure that GSEs’ assets and liabilities remain in balance – records $13.8 billion as a liability in FY 2008, 

based upon the Federal Housing Finance Agency’s notification to the Treasury Department that a payment is due to Freddie 
8 MANAGEMENT’S DISCUSSION AND ANALYSIS 

Chart A

Debt Held by the Public as a % of Nominal GDP

0

10

20

30

40

50

60

70

80

90

Fiscal Year

Percent of Nominal GDP

Source: Office of Management and Budget. 2008 preliminary from OMB Mid-Session Review

1990-2008

by year 1950-1990

by decade

Mac, based on Freddie Mac’s September 30, 2008 net worth status. Fannie Mae did not require a payment in FY 2008. 

Purchased $3.3 billion in MBS and recorded that amount as a loan receivable in FY 2008. 

• Under EESA, used over $200 billion to purchase assets of qualifying financial institutions since fiscal year-end as of 

December 9, 2008. None of these purchases occurred during FY 2008. 

Amounts expended under HERA and EESA have been and are expected to be treated as either investments or 

loans, as the Government may recover and possibly even earn a positive return on amounts invested as economic 

conditions improve. 

 As the first quarter of FY 2009 draws to a close, the Government is exploring a number of other recovery 

strategies. Actions under HERA, EESA, and other initiatives are intended to restore confidence to lenders and 

consumers, and provide stability to the nation’s economy. 

Federal Debt 

As noted earlier, 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 (receipts exceed spending), the Government typically uses those excess 

funds to reduce the debt borrowed from the public. Historically, the Government has incurred debt when: (1) it 

borrows from the public to fund budget deficits, and (2) government funds invest excess receipts in government 

securities. However, in FY 2008, this relationship changed, with Treasury borrowing over $300 billion to increase 

cash balances at the Fed so that the Fed can assist with market stabilization efforts. The implementation of both 

HERA and EESA including the Troubled Asset Relief Program (TARP) have the potential to increase future 

borrowings by more than $1 trillion. Substantial borrowings in FY 2009 and beyond are expected to fund stock and 

asset purchases at financial institutions across the country. 

At the end of FY 2008, the Government had incurred $10 trillion in debt, comprised of: debt held by (or owed 

to) the public (i.e., publicly held debt) and intragovernmental debt (i.e., debt the Government owes to itself). 

Publicly held debt (a balance sheet liability) includes all Treasury securities (e.g., bills, notes, and bonds) held by 

individuals, corporations, Federal Reserve banks, foreign governments, and other entities outside the Government. 

Intra-governmental debt is primarily held in the form of special nonmarketable securities by various parts of the 

Government. Laws establishing Government trust funds generally require excess trust fund receipts to be invested in 

these special securities. Intra-governmental debt is not shown on the balance sheet because claims of one part of the 

Government against another are eliminated 

for consolidation purposes (see Financial 

Statement Note 11). 

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, which has been 

periodically increased over the years (most 

recently from $9.8 trillion to $10.6 trillion 

in 2008). At the end of FY 2008, the 

amount of debt subject to the limit was 

$9.96 trillion, $655.2 billion under the limit. 

In October 2008, in connection with the 

passage of EESA, the limit was raised again 

to $11.3 trillion. 

Publicly Held Debt as a Percentage of GDP 

The Federal debt held by the public as a share of GDP (Chart A – on the previous page) compares a country’s 

debt level to the size of its economy over time. In the late 1970s, increasing budget deficits spurred an increase in 

publicly held debt, which essentially doubled as a share of GDP over a 15-year period, reaching about 50 percent in 
MANAGEMENT’S DISCUSSION AND ANALYSIS 9

Chart B 

Current Trends Are Not Sustainable

(as a percent of GDP)

---

10.0

20.0

30.0

40.0

50.0

60.0

70.0

1970

1980

1990

2000

2010

2020

2030

2040

2050

2060

2070

2080

Percent of GDP

Net Interest

Other

Government

Medicaid

Medicare

Social Security

Total Revenues

1993. The budget controls instituted by the Congress and the President, together with economic growth, contributed 

to declining deficits and emerging surpluses at the end of the 1990s. This improved fiscal performance led to a 

decline in publicly held debt, (from 43 percent of GDP to about 33 percent from 1998 through 2001). In fiscal years 

2002 through 2004, the debt-to-GDP ratio started to rise slightly, due to many factors, including increased spending 

for homeland security and defense commitments, a decline in receipts owing to the recession and lower stock market 

value, tax cuts, and the expiration of the budget controls from the late 1990s. The publicly held debt-to-GDP ratio 

has ranged from 35 to 37 percent for most of this decade. The 2008 ratio of 40.8 percent is the highest since 1999, 

but is still far below the nearly 50 percent ratio of the mid-1990s. 

The Long-Term Fiscal Outlook 

While the Government’s immediate priority is market stabilization and addressing the recession, it cannot lose 

sight of the longer term challenges. The Government’s long-term financial condition will also depend on a number 

of factors, including: the market stabilization effort, the aging of the population and the growth rate of future health 

care costs. Consider the following: 

• The 78 million baby boomers (those born between 1946 and 1964) comprise one quarter of the Nation’s 

population. Beginning in 2008, the first of the ‘boomers’ became eligible for early retirement benefits under 

Social Security, and in 2011, they will start to become eligible for Medicare. 

• Over the next 25 years, the share of the population aged 65 and older is forecast to increase from 12 percent to 

20 percent (effectively increasing anticipated expenditures), while the share of the Nation’s population that is 

working and paying taxes (anticipated revenue) will decrease from 60 percent to approximately 55 percent. 

• Medicare spending has grown at 

more than 11⁄2 times the overall rate 

of economic growth over the last 

four decades, and the Medicare 

Trustees assume that Medicare 

expenditures will continue to 

outpace overall economic growth in 

the future. 

• Social Security, Medicare, and 

Medicaid expenditures are projected 

to grow from 44 percent of 

Government non-interest 

expenditures to 65 percent by 2030. 

• Under current law, 30 years from 

now, Government revenues will be 

sufficient to cover approximately 

half of all anticipated expenditures. 

• Chart B shows, as a percent of GDP, the Government’s: (1) historical and assumed revenues (at 18 percent); (2) 

historical and projected long-term expenditures for Social Security, Medicare, Medicaid, interest on the debt 

held by the public, and other purposes, and (3) the difference between the two.5

 The assumed constant revenue-to-GDP ratio of about 18 percent is based on an average historical ratio of 18 

percent over the past several decades. Chart B also shows that, by 2080, expenditures on just three programs (Social 

Security, Medicare, and Medicaid) could absorb all Government revenue. 

Without a change in law, by 2060, total Government expenditures are projected to be 45 percent of GDP– 

levels unseen since World War II, when Government expenditures reached a record high of 44 percent of GDP. 

 

5

 In this chart, expenditures for Social Security and Medicare are consistent with the SOSI, expenditures for Medicaid reflect Medicare 

cost growth rates and Social Security demographic projections, and expenditures for all other programs and tax revenue are assumed to grow at 

the same rate of growth as GDP. Supplemental appropriations are assumed to be phased out over the next ten years. 
10 MANAGEMENT’S DISCUSSION AND ANALYSIS 

Social Insurance Trust Funds

 Social Security:

• Old-Age and Survivors Insurance (OASI) pays 

retirement and survivors benefits, 

• Disability Insurance (DI) pays disability benefits. 

 Medicare: 

• Part A: Hospital Insurance (HI), which pays for 

inpatient hospital and related care. 

• Part B: Supplementary Medical Insurance (SMI), 

which pays for physician and outpatient services 

• Part D, SMI prescription drug benefit program. 

Chart C

Total Government Noninterest Revenue and Social Security and Medicare O utlays

(percent of GDP)

0

5

10

15

20

25

1970

1976

1982

1988

1994

2000

2006

2012

2018

2024

2030

2036

2042

2048

2054

2060

2066

2072

2078

Year

Percent of GDP

Average Historical Revenues

Social Security+Medicare O utlays

Actual Historical Projections

Historical data are from 2008 Analytical Perspectives based on fiscal year data. 

Social Security and Medicare projections from the 2008 Trustees Reports based on calendar year data.

Total Non-interest 

Government Revenue

$ %

Social Security 17,188 $ 16,265 $ 923 $ 5.7%

Medicare: - $ 

Part A 13,590 $ 12,044 $ 1,546 $ 12.8%

Part B 12,615 $ 10,347 $ 2,268 $ 21.9%

Part D 5,605 $ 6,273 $ (668) $ -10.6%

Subtotal - Medicare 31,810 $ 28,664 $ 3,146 $ 11.0%

Other 137 $ 133 $ 4 $ 2.7%

4.9%

Closed Group (Net):

Total Net Social Insurance 

Expenditures, Net (Open Group) $ 40,948 42,970 $ 2,023 $ 

4.9%

Table 3: Social Insurance Future Expenditures 

in Excess of Future Revenues

2008 2007 Increase (Decrease)

Total Social Insurance 

Expenditures, Net (Closed Group) $ 45,062 49,135 $ 4,073 $ 

And by 2080, expenditures could exceed 60 percent of GDP. Such a dramatic increase in spending and, as 

explained below, necessary Government borrowing is not sustainable. 

Much uncertainty surrounds the future of Government programs and their impact on Government finances. 

Despite this uncertainty, projections such as these are critical to 

assessing whether future Government revenue will be sufficient 

to meet future expenses. 

Social Insurance 

For the ‘social insurance’ programs -- Social Security, 

Medicare, Railroad Retirement, and the Black Lung Program - 

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 

information in this report are based on 

each program’s official actuarial 

calculations. 

The SOSI provides additional 

perspective on the Government’s long 

term estimated exposures and costs. 

However, it should be noted that the 

Government’s financial statements do 

not reflect future costs implied by any 

current policy, such as national defense, 

the global war on terrorism, and disaster relief 

and recovery. Table 3 shows the 

Government's estimated present value of 

future social insurance expenditures, net of 

dedicated future revenues for the programs 

reported in the Statement of Social Insurance 

(SOSI), projected to be $43 trillion as of 

January 1, 2008 for the ‘Open Group’6

. 

While these expenditures are currently not 

considered Government liabilities, they do 

have the potential to become 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. 

Social Security and Medicare 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 (surpluses) 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. 

 

6 '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 

'Closed' Group. See ‘Social Insurance’ in the Supplemental Information section in this report for more information. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 11

As shown in Chart C, over the next two decades, Medicare and Social Security expenditures are projected to 

increase from their current 8 percent of GDP to about 11 percent. By 2080, they are projected to be approaching the 

18 percent of GDP assumed for all revenues7

. Simply said, holding total revenues constant, current spending for 

Social Security and Medicare alone will put unsustainable pressure on limited Government resources. 

Unsustainable Debt 

 As noted earlier, the Government must borrow from the public to finance any gaps between expenditures and 

revenues. Increased borrowing leads to higher levels of debt and debt service (net interest) which in turn can make 

it more difficult to balance expenditures and revenues in the future. Chart D shows that by 2017, publicly held debt 

is projected to rise to 50 percent of GDP, surpassing the non-wartime peak of 49 percent in 1993. Without changes 

to the major three entitlement programs, publicly held debt may be more than 110 percent of GDP by 2032, 

surpassing the World War II peak of 109 percent, and by 2080, publicly held debt may exceed 600 percent of GDP. 

Chart D

Debt Held by the Public

(as a percent of GDP)

0

100

200

300

400

500

600

700

1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

Percent of GDP

WWII 

109% of GDP

Such rapid growth in the Government’s deficit and resulting debt would create financial sector instability, 

increasing risk and uncertainty across many sectors of the U.S. economy. Avoiding the economic consequences of 

this fiscal path will require action to bring program expenditures and Government resources in balance. Delays in 

addressing this critical issue could increase the magnitude of the changes needed and place a greater burden on 

future generations. 

The Government has made and is expected to continue to make a vast commitment of financial resources to 

establish and maintain stability in the credit markets, although many of the financial assets acquired by the 

Government in its market stabilization efforts may eventually be sold and return value to the taxpayer. The 

Government has been able to take these stabilization actions because investors believe the United States' credit is 

unimpeachable, prompting investors to willingly purchase Treasury securities in preference to other securities. The 

unsustainable growth in Social Security, Medicare, and Medicaid remains a long-term fiscal challenge to be 

addressed once the current credit crisis has passed and overall economic conditions have improved. 

 

7 The Medicare Trustees' Report shows that, under current law, the Hospital Insurance Trust Fund will not have sufficient funds to pay 

scheduled benefits beginning in 2019. At that point, trust fund income would cover only 78 percent of scheduled benefits, falling to about 30 

percent in 2082. The Social Security Trust Fund could encounter a similar problem. Under current law, trust fund income would cover only 78 

percent of scheduled benefits in 2041 and only 75 percent in 2082.
12 MANAGEMENT’S DISCUSSION AND ANALYSIS 

Financial Position and Results of Operations 

This Report provides the results of the Government’s financial operations, including its financial condition, 

revenues and costs, assets and liabilities, and other obligations and commitments. This information, when combined 

with the President’s Budget, collectively provides a valuable tool for managing current operations and planning 

future initiatives. 

Accrual-Based Results and Basis of Accounting 

Each year, the Administration issues two reports that detail financial results for the Federal Government: the 

President’s Budget, whose main purpose is to provide a prospective discussion of future initiatives and the resources 

needed to support them; and this Financial Report, which provides the President, Congress, and the American 

people a broad, comprehensive overview of the cost on an accrual basis of the Government’s operations, the sources 

used to finance them, its balance sheet, and the outlook for its social insurance programs. 

President’s Budget Financial Report of the U.S. Government 

Prepared primarily on a ‘cash basis’

• Initiative-based: focus on current and future 

initiatives planned and how resources will 

be used to fund them. 

• Receipts (‘cash in’), e.g. federal income tax 

received, National Park fees collected. 

• Outlays (‘cash out’), e.g., defense spending, 

benefit checks sent. 

Prepared on an ‘accrual basis’

• Retrospective – prior and present resources 

used to implement initiatives. 

• Revenue: recognized when earned, but not 

necessarily received (with the exception of 

tax revenues - see footnote). 

• Costs: recognized when owed, but not 

necessarily paid. 

Treasury prepares the financial statements in this Report on an ‘accrual basis’ of accounting as prescribed by 

U.S. generally accepted accounting principles (GAAP) for Federal entities.8

 

These standards are tailored to the Government’s unique characteristics and circumstances. For example, 

agencies prepare a uniquely structured ‘Statement of Net Cost,’ which is intended to present net Government 

resources used in its operations, instead of an ‘Income Statement,’ which private sector companies typically use to 

focus on profits earned. Also unique to Government is the preparation of separate statements, to reconcile 

differences and articulate the relationship between budget and accrual accounting results (e.g., Statement of 

Reconciliation of Net Operating Revenue (or Cost) and Unified Budget Deficit and the Statement of Changes in 

Cash Balance from Unified Budget Deficit and Other Activities). 

Reporting Entity 

These financial statements conceptually cover the three branches of the Government (legislative, executive, 

and judicial). Legislative and judicial branch reporting focuses primarily on budgetary activity. Only executive 

branch entities are required, by law, to prepare audited financial statements. Some legislative branch entities do, 

however, voluntarily submit financial reports. 

A number of Government entities and organizations are excluded due to the nature of their operations, 

including the Federal Reserve System (an independent entity that serves both public and private purposes); the 

Federal Retirement Thrift Investment Board; all fiduciary funds, and government-sponsored but privately-owned 

enterprises, including the Federal Home Loan Banks, the Federal National Mortgage Association, and the Federal 

Home Loan Mortgage Corporation. A list of the significant agencies and entities contributing to this report is 

included in the Appendices. 

Limitations of the Financial Statements 

The principal financial statements have been prepared to report the financial position and results of operations 

of the Federal Government, pursuant to the requirements of 31 U.S.C. § 331(e)(1). These statements are in addition 

to the financial reports used to monitor and control budgetary resources that are prepared from the same books and 

records. 

Exhibit 3, on the following page is a blueprint to the Government’s financial statements, demonstrating how 

they connect with one other. 

 

8 Under GAAP, most U.S. Government revenues are recognized on a ‘modified cash’ basis, or when they become measurable.
 MANAGEMENT’S DISCUSSION AND ANALYSIS 13

2008 2007 (in billions) 2008 2007

Gross Cost (3,891.6) $ (3,157.3) $ Net Postion (beginning) (8,916.4) (9,205.8) 

(-) Earned Revenue 250.9 247.8 (+) Revenue 2,661.4 2,627.3 

(=) Net Cost 1 $ (2,909.5) (3,640.7) $ (-) Net Cost (2,909.5) (3,640.7) 

Net Operating Cost (1,009.1) (275.5) 

(=) Net Position (end)* $ (9,205.8) (10,203.5) $ 

*Includes the effect of prior period adjustments. 

2008 2007

 (162.8) (454.8) 

Cash and Other Monetary Assets:

Beginning Balance 128.0 97.9 2008 2007

Net Operating Cost 2 (275.5) (1,009.1) 

Increase (Decrease) in : 

 $ 424.5 $ 128.0 Postemployment Liabilities 549.8 90.1

Environmental Liabilities, 0.8 36.8 

Other, Net 3.7 (14.1)

2008 2007

Assets:

Cash 5 $ 128.0 424.5 $ 

Property, Plant & Equipment 737.7 691.1

Inventories & Related Property 289.6 277.1

Loans Receivable 263.4 231.9 

Other 259.5 253.0 

Total Assets 1974.7 1581.1 2008 2007

Liabilities: Social Security (6,555) $ (6,763) $ 

Debt held by the Public 5,077.7 5,836.2 Medicare (36,312) $ (34,085) $ 

Environmental Liabilities 342.0 342.8 

Other 598.1 680.3 

(-) Total Liabilities $ (12,178.2) $ (10,786.9)

Net Position 3 $ (9,205.8) (10,203.5) $ 

How does Net 

Operating Cost 

differ from the 

Budget Deficit?

(in billions)

$ (454.8)

What does the 

Govt own?

3. The 'Reconciliation Statement' shows the primary differences between the Government's accrual-based Net Operating Cost and cash-based unified budget deficit. 

$ (162.8)

What about Social Security and Medicare?

Unified Budget 

Surplus (Deficit) 4

2 The Net Position from the Statement of Operations and Changes in Net Position agrees to the Net Position on the Balance Sheet, which is based on the difference between the 

Government’s reported assets and liabilities.

*Note - The SOSI presents the projected actuarial estimates of future 

expenditures, net of contributions over a 75-year period. SOSI 

amounts illustrate the long-term financial sustainability of the social 

insurance programs, and are therefore NOT reflected in the balance 

sheet or other financial statements. Amounts reflect 'open group' 

totals.

 4,769.1 5,318.9 Federal Employee and 

Veteran Benefits

Net Position also 

shown in II

Statement of Social Insurance (SOSI)*

VI

Present Value of Future Expenditures 

in Excess of Future Revenues

Changes in Net Position

(in billions)

(=) Ending Balance

IV

How does Net Cost 

affect Net 

Position?

III

Reconciliation of Net Operating Revenue (or Cost) & 

Unified Budget Surplus (Deficit)

How did the 

Government's cash 

change?

*Net Operating Cost includes adjustment for Unmatched Transactions and 

Balances.

Statements of Changes in Cash Balance from 

Unified Budget Deficit and Other Activities5

(in billions)

Budget Surplus (Deficit) 4

Balance Sheet

(in billions)

4 The Reconciliation of Net Operating Revenue (or Cost) and Unified Budget Surplus (or Deficit) shows the differences between the Government’s spending deficit and its Net Operating Cost.

1. The Statements of Net Cost presents the Government's net operating expense, which, when combined with tax and other revenue in the Statement of Operations and Changes in Net Position, 

yields the Government's Net Operating Cost and shows how the Government's Net Position changed during the year.

5 The Statement of Changes in Cash Balance from Unified Budget and Other Activities explains why the unified budget deficit normally would not result in an equivalent change in teh 

Government's Cash and Monetary Assets. The ending balance of Cash and Other Monetary Assets on this statement is the same as it is on the Balance Sheet. 

What does the 

Govt owe?

Exhibit 3

V

Navigating the Government's Financial Statements

I II

Statements of Net Cost Statements of Operations and 

(+) Increase (Decrease) in cash and 

other monetary assets 30.1 296.5 
14 MANAGEMENT’S DISCUSSION AND ANALYSIS 

Chart E 

Revenues & Costs

($5.0)

($4.0)

($3.0)

($2.0)

($1.0)

$0.0

$1.0

$2.0

$3.0

$4.0

04 05 06 07 08 04 05 06 07 08 04 05 06 07 08

Dollars in Trillions

Actuarial

Revenue

Net Cost Net 

Operating 

Cost

Fiscal Years

Chart F 

Government Revenue: 2004-2008

$-

$400.0

$800.0

$1,200.0

$1,600.0

$2,000.0

$2,400.0

$2,800.0

2004 2005 2006 2007 2008

Dollars in Billions

Total Revenue

Individual Tax Revenue

Corproate Tax Revenue

Determining the Government’s Net Position: 

“Where We Are” 

The Government’s financial position and condition have traditionally been expressed through the Budget, 

focusing on the impact of surpluses and deficits. 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 net position is driven 

simultaneously by the Government’s revenues and expenses, as well as the changes in its assets and liabilities. 

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

The Government’s Statement of 

Operations and Changes in Net 

Position, much like a corporation’s 

income statement, shows the 

Government’s ‘bottom line’. Chart E 

shows that the Government has 

incurred a total net operating cost (i.e., 

costs have exceeded its revenues) over 

the past several years. Notably, in FY 

2008, net operating costs exceeded $1 

trillion for the first time (Chart E). The 

Government’s revenues last exceeded 

its costs in FYs 1999 and 2000 in 

concert with the budget surplus. 

The Government nets its costs 

against both earned revenues from 

Government programs (e.g., national 

park entry fees) and taxes, which 

account for the vast majority of total revenues. In addition, the Government distinguishes revenues that are 

earmarked for specific purposes (e.g., Medicare premiums) from those for general purpose spending. The 

Government’s ‘bottom line’ is its net operating cost, or total costs in excess of revenues. The Government must 

issue debt to finance any costs as they are paid that cannot be covered by revenues, subject to the statutory debt 

limit. 

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 widelyknown cash-based budget deficit. Most 

of this difference is attributable to 

accruals of actuarial costs associated with 

the estimated present value of the Federal 

Government's net postemployment 

liabilities. Chart E shows the effect of 

this ‘actuarial’ element on the 

Government’s total net cost. These 

actuarial costs, in recent years, have also 

accounted for majority of the change in 

the annual change in the Government’s 

total net cots. The Department of Veterans Affairs (VA) and other agencies use a number of assumptions, such as 

interest rates and life expectancy, to make annual actuarial projections of their long-term benefits liabilities and the 

related costs. As further discussed later, changes in these assumptions can cause those projections, and consequently 

total costs, to fluctuate, sometimes significantly, year to year. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 15

Chart G 

Annual Change in VA Actuarial Cost

$ (135.6)

$227.8

$365.1

$ (166.6) $(57.3)

$(400.0)

$(300.0)

$(200.0)

$(100.0)

$-

$100.0

$200.0

$300.0

$400.0

2004 2005 2006 2007 2008

Dollars in Billions

$ %

Gross Cost

DoD (767.6) $ (689.6) $ (78.0) $ 11.3%

HHS (769.1) $ (718.6) $ (50.5) $ 7.0%

SSA (663.9) $ (626.4) $ (37.5) $ 6.0%

VA (434.6) $ (63.1) $ (371.5) $ 588.7%

Interest on Federal Debt (241.6) $ (238.9) $ (2.7) $ 1.1%

Other Federal Agencies (1,014.8) $ (820.7) $ (194.1) $ 23.6%

($3,891.6) ($3,157.3) (734.3) $ 18.9%

Less: Earned Revenue $250.9 $247.8 3.1 $ 1.2%

Net Cost ($3,640.7) ($2,909.5) (731.2) $ 25.1%

Less: Taxes & Other Revenue 2,661.4 $ 2,627.3 $ 34.1 $ 1.3%

($1,009.1) ($275.5) (733.6) $ 266.3%

1

 Net Operating Cost includes adjustment for Unmatched Transactions and Balances

Table 4: Gross Cost. Revenues, and Net Cost 

Dollars in Billions 2008 2007 Increase

Total Gross Cost

Net Operating Cost 1 

Revenue: “What Came In” 

The Statement of Net 

Costs reports ‘earned’ revenue 

generated by Federal programs. 

In FY 2008, more than 25 

percent of these revenues were 

attributable to Medicare 

premiums paid by program 

participants. The Statement of 

Operations and Changes in 

Net Position shows the 

Government’s taxes and other 

revenues (i.e., revenues other 

than ‘earned’). Government 

revenue totaled $2.7 trillion, 

remaining relatively constant 

and increasing slightly by $34 

billion or just over 1 percent, 

compared to FY 2007. 

Individual income tax revenue increased by $79 billion or almost 4 percent. However, the developing recession 

precipitated a significant decline in corporate tax revenues ($67.5 billion or more than 18 percent). Individual and 

corporate tax revenue account for the majority (nearly 90 percent) of total revenues (see Chart F). 

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 of operations or 

the difference between costs of goods 

produced and services rendered by the 

Government during the fiscal year. 

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. 

In FY 2008, the Government’s 

‘bottom line’ net operating cost totaled $1,009.1 

billion or just over $1 trillion, a substantial increase 

over FY 2007’s net operating cost of $275.5 billion 

(see Table 4). As noted earlier, changes in the 

actuarial calculations of VA’s veterans benefit 

liability were the primary reason behind a nearly 

seven-fold increase in VA’s actuarial and gross 

costs during FY 2008, compared with a relatively 

meager decrease in FY 2007 (see Chart G). Table 5 

shows the major components of this significant 

liability change, which include changes in discount rates, pay adjustments, and estimates of veteran eligibility. The 

liability increase of $339 billion in FY 2008, when compared to a $26 billion decrease in FY 2007, combine to cause 

a $365 billion increase in actuarial cost for FY 2008. This was the largest increase by far at VA in recent years and 

accounted for: (1) approximately 98 percent of the increase in VA total net costs, and (2) about half of the increase 

in total net cost across the Government. DoD also experienced a significant increase ($110 billion) due to 

reestimation of its net postemployment benefit liabilities. 

Dollars in billions $ %

Changes in discount rates 128 38%

106 31%

60 18%

45 13%

Total Change 339 100%

Other sources

Components of VA Federal Employee & Veteran 

Benefit Liability Change - FY 2008

Table 5

Changes in original awards

Change in report date
16 MANAGEMENT’S DISCUSSION AND ANALYSIS 

$0

$100

$200

$300

$400

$500

$600

$700

$800

Dollars in Billions

Dept of

Defense

Dep of Health

& Human

Svcs

Soc Security

Admin

Interest of

Federal Debt

Dept of Vet

Affairs

Chart H

Net Cost Comparison 

2004

2005

2006

2007

2008

Chart H shows that DoD, HHS, 

and SSA have consistently incurred 

the largest agency shares of the 

Government’s total net cost of 

operations in recent years. HHS and 

SSA combine to make up about 40 

percent of the 2008 total net cost of 

operations, the bulk of which are 

attributable to these agencies’ 

administration of the Government’s 

major social insurance programs, 

e.g., Social Security and Medicare. 

The Statement of Social Insurance

(SOSI) and the related information in 

this report discuss the current costs 

and future sustainability of these 

programs in greater detail. Of note, 

the substantial cost increase from 

VA's revaluation of net 

postemployment liabilities increased the Department's proportional share of total net costs from 2 percent in FY 

2007 to 12 percent in FY 2008. Among cabinet agencies, the Energy Department experienced the greatest cost 

decrease (50 percent). Energy also attributes the majority of this decrease to revaluations of unfunded liability 

estimates, caused primarily by a 1.25 percentage point increase in the discount rate and smaller than expected 

pension plan values. 

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

 Net Position at the end of the year can also be derived by netting the Government’s assets against its 

liabilities, as presented in the Balance Sheet. 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. As noted earlier, the Government distinguishes between resources and spending that are 

earmarked for specific purposes versus those intended for general purposes. In FY 2008, earmarked funds 

accounted for less than 6 percent of the Government’s total Net Position. In addition, as was the case with the 

Statement of Operations and Changes in Net Position, the Balance Sheet does include a separate presentation of 

the portion of net position earmarked for specific funds and programs (e.g., Social Security, Medicare, 

unemployment, and military and civilian retirement). Moreover, the Government’s exposures are broader than the 

liabilities presented on the balance sheet, including such items as the Government’s future social insurance 

exposures (e.g., Social Security and Medicare), as well as other commitments and contingencies. These exposures 

are discussed in this section as well as in the supplemental disclosures of this Report. 

$ %

$ 1,581.1 1,974.7 $ $ 24.9% 393.6

Less: Liabilities, comprised of:

Debt Held by the Public 5,836.2 $ 5,077.7 $ 758.5 $ 14.9%

Other Liabilities 1,023.1 $ 940.1 $ 83.0 $ 8.8%

Total Liabilities $ 10,786.9 12,178.2 $ $ 12.9% 1,391.3

$ 4,769.1

$ (9,205.8)

$ 11.5% 549.8

Net Position 

(Assets Minus Liabilities) $ (997.7) (10,203.5) $ -10.8%

Federal Employee & 

Veterans Benefits $ 5,318.9

Net Position 

Dollars in Billions 

2008

Assets

Table 6: Assets and Liabilities

2007 Increase (Decrease)
MANAGEMENT’S DISCUSSION AND ANALYSIS 17

2004

2005

2006

2007

2008

$-

$1,000.0

$2,000.0

$3,000.0

$4,000.0

$5,000.0

$6,000.0

Dollars in Billions

Chart I

Liabilities by Type

Other Liabilities

Environmental &

disposal

liabilities

Fed employee &

veteran benefits

payable

Federal debt

securities held

by the public

Assets – “What We Own”

During FY 2008, nearly all Government asset balances increased. Net property, plant, and equipment 

($737.7 billion in FY 2008) has been the Government’s largest asset over the past several fiscal years, accounting 

for approximately 40% percent of $1,974.7 billion in total assets in FY 2008 (see Table 6). As part of the market 

stabilization effort, the Government implemented the Supplementary Financing Program (SFP) - a temporary 

program that deposits cash in Treasury bank accounts with the Fed -- causing the Government’s cash balance to rise 

by $300 billion as of September 30, 2008. This program also accounted for a corresponding $300 billion increase in 

publicly held debt. In addition to assets recorded on the balance sheet, the Government owns certain other 

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” 

Chart I shows the major 

components of liabilities, or 

what the Government owes, as 

of September 30, for fiscal years 

2004 through 2008. As 

indicated in Table 6, the largest 

liability in recent years has been 

Federal debt held by the public 

and accrued interest, the balance 

of which increased to $5,836.2 

billion in FY 2008. The 

increase in expenditures resulted 

in the Government having to 

borrow additional cash from the 

public this year. In addition, as 

noted above, implementation of 

the temporary SFP resulted in 

the issuance of hundreds of 

billions of dollars in new debt. 

Over the past seven fiscal years, 

Federal debt securities held by the public and accrued interest have moved in tandem with the budget results. 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, and explains how a budget surplus or deficit normally affects changes in debt balances. 

The Government’s net borrowings from the public, including accrued interest, increased by $758.5 billion in 

FY 2008. Typically, budget surpluses have resulted in borrowing reductions, and budget deficits have yielded 

borrowing increases. However, the Government’s debt operations are much more complex than this would imply. 

Each year, trillions of dollars of debt matures and new debt takes its place. In FY 2008, new borrowings were $5.6 

trillion and maturing debts repaid were $4.9 trillion. As noted earlier, market stabilization efforts could further 

impact net borrowings as the Government will likely need to issue debt to continue to fund financial asset purchases 

and support the capital needs of the banking industry. 

Federal employee postemployment and veteran benefits payable have increased dramatically in recent years, to 

$5,318.9 billion as of fiscal year-end 2008 (representing nearly half of the Government’s total liabilities), with 

civilian benefits payable accounting for more than a third of total employee and veteran benefits. The Office of 

Personnel Management (OPM) administers the largest civilian pension plan, covering nearly 2 million current 

employees and 2.4 million annuitants9

. The military pension plan covers nearly 3 million current employees 

(including active service, reserve, and national guard) and approximately 2.2 million annuitants10. 

Environmental and disposal liabilities stayed relatively constant at approximately $343 billion as of September 30, 

2008. The majority of these types of liabilities are attributable to the Departments of Defense and Energy for the 

clean-up of radioactive waste and other nuclear material stored at former testing and storage sites. 

 

9 OPM FY 2008 Performance and Accountability Report, p. 1. 10 DoD FY 2008 Military Retirement Fund (MRF) financial statements, p 6. 
18 MANAGEMENT’S DISCUSSION AND ANALYSIS

How We Define and Measure Financial Management 

Success 

The Office of Management and Budget (OMB) provides Federal agencies with a concise set of clear and 

measurable financial management performance goals that allow Federal managers, Congress, and the public to 

gauge whether taxpayer funds are being properly accounted for and wisely spent. These performance measures 

include, among others, the achievement of clean audit opinions, the elimination of material weaknesses in internal 

control, timely financial reporting, the disposal of excess real property, the elimination of improper payments, and 

the reduction in government costs through the strategic use of financial data. What follows is an overview of FY 

2008 results for OMB’s Government-wide initiatives: 1) Improving Financial Performance, 2) Eliminating Improper 

Payments, and 3) Real Property Asset Management.11

These initiatives are managed by OMB’s Office of Federal Financial Management (OFFM). OFFM has also 

developed a “Framework for Improving Financial Performance” to provide direction and clarity on how these 

financial management improvement goals will be met. The Framework (as depicted in the below diagram) is 

intended to provide stakeholders with a simple tool for identifying the: 1) priority objectives of the Government’s 

financial management improvement efforts, which historically have included improving financial statement audit 

results and other financial health metrics, such as reducing improper payments; 2) ongoing Government-wide 

financial management reform activities; and 3) day-to-day financial management activities or “core” activities that 

help ensure a strong foundation is in place for achieving financial management success. 

The Framework is also described in OFFM’s 2008 Federal Financial Management Report that was submitted 

to the Congress on January 31, 2008. The most recent reports are available at 

http://www.whitehouse.gov/omb/financial/reports. Also visit http://www.Results.gov and 

http://www.ExpectMore.gov for additional information on OMB’s initiatives, including individual agencies’ 

performance under these initiatives, and agencies’ performance under their individual programs.12

 

11 The other four initiatives are: 1) Implementing Strategic Human Capital, 2) Gaining Efficiencies through Strategic Sourcing, 3) Expanding Electronic Government, and 

4) Performance Improvement.

12 Since programs are not administered at the Government-wide level, the FASAB requirement to report performance goals and measures for the Federal Government as a 

whole does not apply and, therefore, is not reported upon here. Program administration and the subsequent reporting of the outcomes and results of those programs are handled at 

the agency level. 
 MANAGEMENT’S DISCUSSION AND ANALYSIS

 

19

Fiscal Year 2008 Results 

Improving Financial Performance 

For the fourth year in a row, all major Federal agencies successfully met the 45-day financial audit deadline as 

required by the rigorous reporting guidelines set by OMB. Since 2004, agencies are required to complete the 

financial report 45-days after the end of the fiscal year, compared to the previous five month (150 days) window for 

completion. The accelerated deadline results in more immediate availability of financial information to agency 

decision-makers and requires agencies to employ rigorous disciplines throughout the year to ensure readiness for 

year-end reporting. 

In addition to timely reporting, the results from FY 2008 show that the Federal Government is improving the 

validity of its financial information. Of the 24 major Federal agencies, 20 received clean opinions, one more than 

the 19 clean opinions reported last year and the highest total in the past 6 years. Table 7 below includes the audit 

results for FY 2008. 

Table 7: Summary of FY 2008 Financial Statement Results by Agencies 

CFO Act Agencies: FY 2008 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) Unqualified 

Department of Homeland Security (DHS)13 Disclaimer 

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) Disclaimer 

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) Disclaimer 

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 

This year’s Government-wide results are complemented by notable milestones for these individual agencies: 

 

13 Balance Sheet and Custodial Statement Audit Only 
20 MANAGEMENT’S DISCUSSION AND ANALYSIS

Chart J

Error Rate Reduction for Programs Reported Between FY 

2004 and FY 2007

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

2004 2005 2006 2007 2008

Fiscal Year 

Percentage

FY 2004 Cohort FY 2005 Cohort FY 2006 Cohort

FY 2007 Cohort Total Rate

`

• The U.S. Army Corps of Engineers (USACE). USACE achieved its first ever clean audit opinion. The 

Army Corps is the largest organization within the Department of Defense (DoD) to achieve this milestone. 

This accomplishment is a critical building block for DoD’s overarching effort to achieve a clean opinion. 

• The Department of the Treasury (Treasury). As the Federal government took action to stabilize the 

economy, the Treasury faced the challenge of accounting for an unprecedented and complex array of 

financial activities that took place within a few days of the end of the fiscal year. The Treasury 

Department’s achievement of a clean audit opinion this year demonstrates that it was equal to the financial 

reporting challenge posed by the new programs undertaken to address the economic crisis. 

• The Department of Transportation (DOT). DOT, for the first time in its history, achieved a clean 

opinion with no material weaknesses. DOT joins the ranks of the Departments of Justice and Housing and 

Urban Development as one of the Government’s larger and more complex Federal agencies to achieve the 

important milestone of a clean opinion with no material weaknesses. 

In addition to these results, the total number of material weaknesses Government-wide declined from 39 to 32 (or 18 

percent), primarily from a reduction in Financial Systems and Security material weaknesses. The remaining 32 

material weaknesses are primarily comprised of weaknesses related to Financial Management and Reporting, 

Financial Systems and Security, Property, Plant & Equipment (PP&E), and Budgetary Reporting. Examples of 

these weaknesses entail improvements needed in controls over: the financial statement preparation process, 

Information Technology security, the receipt and tracking of PP&E, and funds control. This is the fifth year in a 

row that material weaknesses have declined, with almost a 50 percent decrease in weaknesses since 2001. 

Eliminating Improper Payments 

Fiscal Year 2008 was also an important year for identifying, measuring, and eliminating improper 

payments (e.g., the right amount, to the right recipient). Full transparency of annual improper payment totals allows 

the public to understand the extent of payment errors and assess the Government’s efforts to eliminate them. With 

this year’s financial reports, Federal agencies are now reporting improper payment measurements for nearly 95 

percent of all high-risk programs (up from 85 percent in FY 2007), with error rates reported on 12 new programs, 

including Medicaid and parts of the Medicare program. 

The results from the past five years of reporting on improper payments demonstrate that once an agency 

has measured and reported program errors, it is able to implement corrective actions to reduce those errors in 

subsequent years. As illustrated in 

Chart J,14 Error Rate Reduction for 

Programs Reported Between FY 

2004 and FY 2007, the error rate for 

the first programs measured, in FY 

2004, was 4.4 percent (or $45.1 

billion in improper payments). For 

these programs, the error rate has 

declined to 3.0 percent (or a $7.1 

billion reduction in improper 

payments). Similar to the progress 

achieved in programs that first 

reported in FY 2004, programs that 

first reported in FYs 2005, 2006, and 

2007 have reduced improper 

payments, representing an $800 

million reduction.15

With 12 additional programs reporting in FY 2008, the preliminary Government-wide error rate is 3.9 percent 

or $71.7 billion, an increase of $16.7 billion from FY 2007. The increase is driven primarily by the newly measured 

programs, which include parts of Medicare and Medicaid. A significant cause of improper payments is insufficient 

 

14 The table does not include programs reporting for the first time in FY 2008. 

15 In FY 2007, Medicaid measured one of its components and reported an 18.4 percent error rate. In FY 2008, Medicaid measured all program components and reported a 

10.5 percent error rate. For IPIA reporting, Medicaid will be reported in the FY 2008 cohort. 
 MANAGEMENT’S DISCUSSION AND ANALYSIS

 

21

documentation, meaning that all of the supporting documentation necessary to verify the accuracy of the claim was 

not provided. If all the supporting documentation had been received, the agencies could have better determined 

whether the payment was appropriate or made in error. As documentation of payments improves, it is anticipated 

that the amount of payment errors reported will decline significantly. 

Asset Management 

Under the OMB’s Real Property Asset Management initiative, agencies continue to make significant progress 

implementing the necessary tools to manage the size, condition, and costs of their asset portfolios and comply with 

Executive Order 13327, Federal Real Property Asset Management. In FY 2008, Executive agencies reported more 

than 1.1 million assets, including land, buildings, and structures, to the Government-wide real property inventory. 

This resource provides a more complete picture of the Government’s asset inventory; where the assets are located; 

and how and whether the assets are used effectively to serve agencies’ missions and objectives, than was previously 

possible. A more complete inventory picture and performance information ensures that agencies, and the 

Government as a whole, can make smarter asset management decisions. Agencies are also using this information to 

move forward with efforts to improve asset condition, increase asset utilization, and dispose of unneeded assets. 

OMB continues holding agencies accountable for their asset management goals through the Real Property 

Asset Management process. Since FY 2004, agencies have significantly improved their asset management 

processes and their ability to gather and use inventory and performance data to drive the decision-making process 

toward rightsizing the Government’s real property assets. To this end, Executive agencies have disposed of more 

than $8 billion in real property assets and are well on the way to meeting OMB’s goal of disposing $9 billion in 

assets by the close of FY 2009. 

Systems, Controls, & Legal Compliance 

Systems 

As Federal agencies demonstrate success in obtaining and keeping an unqualified opinion on their audited 

financial statements, the Federal Government continues to face challenges in implementing financial systems that 

meet Federal requirements. Although the number of agencies in compliance with the Federal Financial 

Management Improvement Act (FFMIA) continued to increase in fiscal year 2008 from 14 to 15, the number of 

auditors reporting compliance with FFMIA decreased from 11 to 10. The annual changes in compliances reported 

each year underscores the importance of current initiatives to standardize the financial management practices across 

the Federal Government. 

In addition, OMB has continued to standardize common business processes across the Government, create 

opportunities for agencies to move financial systems to shared service providers, and increase transparency by 

establishing performance measures to evaluate the results. These efforts will help agencies implement financial 

systems that are compliant with Federal requirements and improve the cost, quality, and performance in the 

Government’s financial management systems. 

This year, OMB will be updating Circular No. A-127, Financial Management Systems. The revised Circular 

will clarify the definition of FFMIA substantial compliance so that auditors and agency heads interpret the guidance 

more consistently. This effort will further improve management of financial systems. 

Controls 

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

Effective internal control helps 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. 
22 MANAGEMENT’S DISCUSSION AND ANALYSIS

Federal Financial Management 

Improvement Act of 1996

provides instruction to agencies for implementing the FMFIA 

provides instruction for complying with the federal financial 

system requirements.

requries that Federal financial management systems provide 

accurate, reliable, and timely financial management information 

to the Government’s managers.

OMB Circular A-123

OMB Circular A-127

Law & Policy

Federal Managers' Finanical 

Integrity Act of 1982

requires the head of each executive agency to annually prepare a 

statement reporting the effectiveness of the agency’s internal 

control and whether its systems comply with the federal 

financial system requirements. 

What it Does

The OMB Circular No. A-123 is the policy document that implements the requirements of the Federal 

Managers’ Financial Integrity Act (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 

the internal control over financial reporting. Appendix B requires agencies to maintain internal control that reduces 

the risk of fraud, waste, and error in government charge card programs. Appendix C implements the requirements 

of the Improper Payment Information Act, which includes the measurement and remediation of improper payments. 

In FY 2008, agencies continued to implement the requirements of FMFIA and Circular No. A-123 and have 

made much progress. The 24 major CFO Act agencies completed the third year of the more rigorous assessment of 

the internal control over financial reporting as required by the A-123 Appendix A. This year, 22 of the 24 major 

CFO Act agencies completed a full scope Appendix A assessment of the internal control over financial reporting 

(testing all key processes) as compared to 17 agencies last year. During FY 2009, OMB will continue working with 

the remaining two agencies that have not yet completed the full scope assessment. During FY 2008, OMB 

facilitated a forum on the better integration and leverage of internal control reviews being performed throughout 

departments and agencies through the exploration of alternate frameworks and implementation strategies. The 

forum included representatives from the financial, audit, acquisition, program, and information technology 

communities. Due to the myriad of legislative and regulatory requirements, internal control reviews, to satisfy those 

legislative and regulatory requirements, have been layered upon each other rather than being integrated. This forum 

included a robust discussion of alternatives and current practices that will inform potential next steps in future 

guidance. 

This year, OMB will be updating Circular No. A-123, Appendix B. The revised appendix will expand the scope 

to include convenience checks, introduce a disciplinary framework for charge card abuse, and discuss the accounting 

for property purchased with charge cards. 

Pursuant to Circular No. A-123, Appendix C, Federal agencies are now reporting improper payment 

measurements for nearly 95 percent of all high-risk outlays and reported error rates for 12 new programs (see 

Eliminating Improper Payments section for more details). 

While many agencies are making progress identifying and resolving deficiencies found in internal control, 

continued diligence and commitment are needed. However, effective internal control is not only a challenge at the 

agency level, but it is also a challenge at the Government-wide level. Consequently, GAO has issued an adverse 

opinion on the effectiveness of the internal control for the Government as a whole, in its report. 

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. 
 MANAGEMENT’S DISCUSSION AND ANALYSIS

 

23

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, are 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 

www.gao.gov, 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. 
24 MANAGEMENT’S DISCUSSION AND ANALYSIS

This page is intentionally blank. 
STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 25

United States Government Accountability Office

Washington, DC 20548 

Comptroller General

of the United States

December 15, 2008 

The President 

The President of the Senate 

The Speaker of the House of Representatives 

The need for reliable, high-quality financial information has never been greater. 

However, our report illustrates that much work remains to be done on improving the state 

of federal financial management. Continued improvement needs to be a top priority of the 

new administration and Congress to help provide the financial accountability the public 

deserves and the information decision makers need to help evaluate government 

programs and manage the government in a cost-effective manner. 

Our report on the U.S. government’s consolidated financial statements for fiscal years 

2008 and 2007 is enclosed. In summary we found the following: 

• Certain material weaknesses in financial reporting and other limitations on the scope 

of our work resulted in conditions that prevented us from expressing an opinion on 

the financial statements other than the 2008 and 2007 Statements of Social Insurance. 

About $847 billion, or 43 percent, of the federal government’s reported total assets as 

of September 30, 2008, and approximately $833 billion, or 23 percent, of the federal 

government’s reported net cost for fiscal year 2008 relate to four of the Chief 

Financial Officers (CFO) Act agencies’ fiscal year 2008 financial statements that, as 

of the date of our report, received disclaimers of opinion or were not audited.1 

• The 2008 and 2007 Statements of Social Insurance are presented fairly, in all material 

respects, in conformity with U.S. generally accepted accounting principles; we 

disclaim an opinion on the 2006 Statement of Social Insurance.2

 

• The federal government did not maintain effective internal control over financial 

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

regulations as of September 30, 2008. 

 

1

Of the 24 CFO Act agencies, the agencies that, as of the date of our report, received disclaimers of 

opinions on all of their fiscal year 2008 financial statements were the Department of Defense, Department 

of State, and the National Aeronautics and Space Administration. For the Department of Homeland 

Security for fiscal year 2008, only the Consolidated Balance Sheet and the Statement of Custodial Activity 

were subjected to audit; the auditor was unable to express an opinion on these two financial statements. 2

Beginning in fiscal year 2006, the Statement of Social Insurance became a principal financial statement 

and was audited as part of the applicable federal agencies’ financial statements. We disclaimed an opinion 

on the fiscal year 2006 consolidated financial statements, including the Statement of Social Insurance. 
26 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 

• Our work to test compliance with selected provisions of significant laws and 

regulations in fiscal year 2008 was limited by the material weaknesses and scope 

limitations discussed in our report. 

While significant progress has been made in improving financial management since the 

federal government began preparing consolidated financial statements 12 years ago, three 

major impediments have continued to prevent us from rendering an opinion on the 

accrual basis consolidated financial statements over this period of time:3 (1) serious 

financial management problems at the Department of Defense, (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. In addition to the material 

weaknesses underlying these major impediments, we noted three material weaknesses 

involving 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 costeffectively 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. Until the problems outlined in our audit 

report are adequately addressed, they will continue to have adverse implications for the 

federal government and American taxpayers. 

The material weaknesses discussed in our report 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. 

The federal government is taking unprecedented actions to restore stability to financial 

markets, including specific actions in fiscal year 2008 to address capital and liquidity 

problems at the Federal National Mortgage Association (Fannie Mae) and the Federal 

Home Loan Mortgage Corporation (Freddie Mac), which together held or guaranteed 

approximately $5 trillion of mortgages and mortgage-backed securities as of September 

30, 2008. In addition, legislation enacted early in fiscal year 2009 authorized the creation 

of the Troubled Asset Relief Program (TARP) that enables the federal government to 

purchase or insure certain troubled assets that it deems necessary to promote financial 

 

3

The accrual basis consolidated financial statements for the fiscal years ended September 30, 2008 and 

2007 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 2008 and 2007 

Statements of Social Insurance, including the related notes, are also included in the consolidated financial 

statements. The Statements of Social Insurance do not interrelate to the accrual basis consolidated financial 

statements. 
STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 27

market stability.4 Under TARP, the federal government has injected billions of dollars 

into certain financial institutions. These and other actions the federal government has 

taken to stabilize financial markets and restore the availability of credit for Americans are 

discussed in this 2008 Financial Report of the United States Government. These actions 

will likely have a significant effect on the federal government’s financial condition, at 

least in the short-term, through increased borrowing. In addition, the current recession 

could significantly affect the federal government’s future tax revenues and the value of 

certain of its assets and liabilities. 

Currently, policymakers are understandably focused on dealing with stabilizing financial 

markets and stimulating the economy. However, once these issues are addressed, the 

nation’s new and returning leaders will need to turn their attention to the long-term 

challenges of addressing the federal government’s large and growing structural deficits 

that are driven primarily by rising health care costs and known demographic trends. As 

discussed in this 2008 Financial Report of the United States Government, the federal 

government is on an unsustainable long-term fiscal path. The Statement of Social 

Insurance, for example, shows that projected scheduled benefits exceed earmarked 

revenues for social insurance programs (e.g., Social Security and Medicare) by 

approximately $43 trillion5

 in present value terms over the 75-year projection period. 

GAO also prepares long-term fiscal simulations that are based on the Social Security and 

Medicare Trustees’ projections, but provide a more comprehensive analysis of fiscal 

sustainability because they include revenue and expenditure projections for all other 

government programs. Our most recent long-term fiscal simulation was issued in 

September 2008.6

Accounting and financial reporting standards have continued to evolve to provide greater 

transparency and accountability over the federal government’s operations, financial 

condition, and fiscal outlook. However, further enhancements to accounting and financial 

reporting standards are needed to more effectively convey the long-term financial 

condition of the federal government and annual changes therein. For example, it should 

include a Statement of Fiscal Sustainability7

—providing information on the long-term 

sustainability of social insurance programs in the context of all federal programs—and 

other sustainability information, including intergenerational equity and an analysis of 

changes in sustainability during the year.8, 9 In addition, there is a need for a combined 

report on the performance and financial accountability of the federal government as a 

 

4

The TARP was established by the Department of the Treasury under authority provided in the Emergency 

Economic Stabilization Act of 2008 (Pub. L. No. 110-343). 

5

On an open group basis (current and future participants). 

6

GAO, The Nation’s Long-Term Fiscal Outlook: September 2008 Update, GAO-09-94R (Washington, 

D.C.: September 2008). 

7

The Statement of Fiscal Sustainability would show the relationship between the present value of projected 

revenues and outlays for social insurance and for all other federal programs. 

8

Intergenerational equity assesses the extent to which different age groups may be required to assume 

financial burdens to sustain federal responsibilities. 

9

On September 2, 2008, the Federal Accounting Standards Advisory Board (FASAB) issued an exposure 

draft concerning long-term fiscal sustainability, Reporting Comprehensive Long-Term Fiscal Projections 

for the U.S. Government; and on November 17, 2008, an exposure draft was issued concerning accounting 

for social insurance, Accounting for Social Insurance, Revised.
28 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 

whole. This report would include, among other things, key outcome-based national 

indicators (e.g., economic, security, social, and environmental), which could be used to 

help assess the nation’s and other governmental jurisdictions’ position and progress. 

- - - - 

This report 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 agencies. We also appreciate the 

cooperation and assistance of the Department of the Treasury and Office of Management 

and Budget officials, as well as the federal agencies’ CFOs. We look forward to 

continuing to work with these individuals, the new administration, and the Congress to 

achieve the goals and objectives of financial management reform. 

Our audit report begins on page 165. Our guide10 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. In addition, our guide11

 on Understanding Similarities and 

Differences between Accrual and Cash Deficits 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. These guides are 

available on GAO’s Web site at www.gao.gov. 

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 

Acting 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 

(198521)

 

10GAO, Understanding the Primary Components of the Annual Financial Report of the United States 

Government, GAO-05-958SP (Washington, D.C.: September 2005). 11GAO, Understanding Similarities and Differences between Accrual and Cash Deficits, GAO-07-117SP 

(Washington, D.C.: December 2006). In January 2007 and 2008, we issued updates to this guide for fiscal 

years 2006 and 2007, GAO-07-341SP (Washington, D.C.: January 2007) and GAO-08-410SP 

(Washington, D.C.: January 2008). 
FINANCIAL STATEMENTS 29

Financial Statements 

of the United States Government 

for the Years Ended September 30, 2008, 

and September 30, 2007 

Statements of Net Cost 

These statements present the net cost of fiscal years 2008 and 2007 Government1 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 are categorized on the Statement of Net Cost by significant entity. Costs and earned 

revenues are generally presented by department on an accrual basis, while the budget presents costs and revenues by 

obligations and outlays, generally on a cash basis. In the Statements of Net Cost, the costs and earned revenues are 

divided between the corresponding departments and entities mentioned above, providing greater accountability by 

showing the relationship of the agencies’ net cost to the Governmentwide net cost. 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 control of the Government. 

These statements contain the following three components: 

• Gross cost—is the full cost of all the departments and entities. 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. 

• Net cost—is computed by subtracting earned revenue from gross cost. 

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 the costs of 

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. 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, 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 earmarked fund 

operations. 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 cover 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 United States Government. 
30 FINANCIAL STATEMENTS 

Revenue 

Individual income tax and tax withholdings include Federal Insurance Contributions Act (FICA)/SelfEmployment Contributions Act (SECA) taxes and other taxes including payroll 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. 

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

associated cost. Therefore, unlike other earned revenues on the Statement of Net Cost, miscellaneous earned 

revenues are not subtracted from gross cost to derive net cost. It also includes 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. Refer to Note 21—

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 11, 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 (which is gross cost 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 of which 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 sufficient 

funding from the General Fund to equal the annual costs incurred by these Medicare programs). Additionally, this 

line item includes contributions to earmarked funds made by Federal agencies on behalf of their employees, 

beneficiaries, or others. 

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, and timing differences in the 

consolidated financial statements. Refer to Note 1—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. Refer to Note 1B—Basis of Accounting and Revenue Recognition, and Note 18—Prior 

Period Adjustments for detailed information. 
FINANCIAL STATEMENTS 31

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 shown separately. 

Reconciliations of Net Operating Cost and Unified Budget 

Deficit 

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

Changes in Net Position to the unified budget deficit in the President’s budget. The premise of the reconciliation is 

that the accrual and budgetary accounting bases share transaction data. 

Receipts and outlays in the President’s budget are measured primarily on a cash basis and differ from the 

accrual basis of accounting used in the Financial Report. 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 differed. 

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, changes in net inventory, 

and increases in other assets not included in the operating results. These items impact the balance sheet only and are 

not part of the operating results. 
32 FINANCIAL STATEMENTS 

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 2008 and 2007) were financed. A budget deficit is 

the result of outlays (expenditures) exceeding receipts (revenue) during a particular fiscal year. 

The budget deficit is typically financed through borrowings from the public. Other transactions also require 

cash disbursements and are not part of the repayments of the debt. These other transactions, such as the payment of 

interest on debt held by the public, contributed to the use of cash. These statements show the differences between 

accrual and cash budgetary basis, mainly because of timing differences in the financial statements.

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; cash 

and other monetary assets; inventories; and loans receivable. 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 and social insurance 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 and are disclosed in the Supplemental Information—Social Insurance 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 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. Note 23—

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. 
FINANCIAL STATEMENTS 33

Each of the social insurance programs has an associated trust fund to account for its activity. The collection of 

earmarked taxes and other earmarked revenue is credited to the corresponding trust 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 the 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 21—Earmarked Funds. That note also contains information 

about trust fund receipts, disbursements, and assets. 

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 19—Contingencies and Note 20—Commitments. 

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. 

Statements of Social Insurance 

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, HHS, the Railroad Retirement Board (RRB), and the 

Department of Labor, respectively. The estimates are actuarial present values2

 of the projections and are based on 

the economic and demographic assumptions representing the trustees’ best estimates as set forth in the relevant 

Social Security and Medicare trustees’ reports and in the relevant agency performance and accountability reports for 

the RRB and the Department of Labor (Black Lung).

 

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. 
34 FINANCIAL STATEMENTS 

This page is intentionally blank.
FINANCIAL STATEMENTS 35

United States Government 

Statements of Net Cost 

for the Years Ended September 30, 2008, and September 30, 2007 

Gross 

Cost 

Earned 

Revenue 

Net 

Cost 

Gross 

Cost 

Earned 

Revenue 

Net 

Cost 

(In billions of dollars) 2008 2007 

 

Department of Defense ............................... 767.6 26.8 740.8 689.6 25.1 664.5 

Department of Health and Human 

Services............................................................ 769.1 56.4 712.7 718.6 51.8 666.8 

Social Security Administration..................... 663.9 0.3 663.6 626.4 0.3 626.1 

Department of Veterans Affairs ................... 434.6 4.2 430.4 63.1 3.7 59.4 

Interest on Treasury Securities held by 

the public................................................... 241.6 - 241.6 238.9 - 238.9 

Department of the Treasury......................... 197.0 12.4 184.6 86.9 6.3 80.6 

Department of Agriculture............................ 109.3 9.8 99.5 98.6 12.1 86.5 

Department of Transportation...................... 71.5 0.8 70.7 66.2 0.5 65.7 

Department of Education............................. 66.9 5.0 61.9 66.3 4.5 61.8 

Department of Labor.................................... 60.6 - 60.6 50.1 - 50.1 

Department of Housing and Urban 

Development............................................. 60.6 0.8 59.8 54.0 0.9 53.1 

Department of Homeland Security .............. 60.0 7.9 52.1 51.1 7.1 44.0 

Department of Energy ................................. 35.8 4.2 31.6 67.5 4.3 63.2 

Department of Justice.................................. 31.7 1.1 30.6 28.8 1.0 27.8 

Office of Personnel Management................ 39.5 16.0 23.5 36.2 15.5 20.7 

Federal Deposit Insurance Corporation ....... 24.3 1.7 22.6 1.7 0.9 0.8 

Department of the Interior............................ 23.4 2.1 21.3 18.6 2.0 16.6 

National Aeronautics and Space 

Administration ........................................... 20.4 0.2 20.2 16.3 0.1 16.2 

Department of State .................................... 22.1 2.6 19.5 18.4 3.4 15.0 

Railroad Retirement Board.......................... 20.7 4.2 16.5 15.7 10.3 5.4 

Department of Commerce ........................... 11.9 2.0 9.9 9.6 1.9 7.7 

Environmental Protection Agency ............... 10.1 0.5 9.6 10.0 0.4 9.6 

Agency for International Development ........ 9.1 (0.1) 9.2 9.7 0.3 9.4 

Federal Communications Commission........ 8.5 0.4 8.1 7.9 0.4 7.5 

National Science Foundation....................... 6.0 - 6.0 5.7 - 5.7 

Small Business Administration...................... 1.9 0.4 1.5 1.3 0.4 0.9 

Smithsonian Institution ................................ 0.9 - 0.9 0.7 - 0.7 

General Services Administration ................. 1.0 0.5 0.5 0.6 0.5 0.1 

U.S. Nuclear Regulatory Commission......... 1.2 0.8 0.4 1.0 0.6 0.4 

National Credit Union Administration........... 0.5 0.1 0.4 0.3 0.1 0.2 

Securities and Exchange Commission ........ 1.1 1.0 0.1 1.0 1.5 (0.5) 

Tennessee Valley Authority......................... 10.2 10.1 0.1 10.9 10.4 0.5 

Farm Credit System Insurance 

Corporation ............................................... - 0.2 (0.2) - 0.1 (0.1) 

Export-Import Bank of the United States..... 0.4 0.7 (0.3) 0.5 0.9 (0.4) 

Pension Benefit Guaranty Corporation........ 2.3 3.5 (1.2) 1.5 6.1 (4.6) 

U.S. Postal Service...................................... 60.0 73.7 (13.7) 60.1 73.7 (13.6) 

All other entities .............................................. 45.9 0.6 45.3 23.5 0.7 22.8 

Total .......................................................... 3,891.6 250.9 3,640.7 3,157.3 247.8 2,909.5 

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

United States Government 

Statements of Operations and Changes in Net Position 

for the Years Ended September 30, 2008, and September 30, 2007 

(Restated-See Note 21) 

 

NonEarmarked

Funds 

Earmarked

Funds Consolidated 

NonEarmarked 

Funds 

Earmarked

Funds Consolidated

(In billions of dollars) 2008 2007 (Restated) 

 

Revenue: 

Individual income tax and tax withholdings ... 1,210.0 868.4 2,078.4 1,164.4 835.4 1,999.8 

Corporation income taxes ............................. 299.7 299.7 367.2 367.2 

Unemployment taxes .................................... 39.4 39.4 39.3 39.3 

Excise taxes.................................................. 15.3 51.8 67.1 13.9 53.6 67.5 

Estate and gift taxes ..................................... 28.8 28.8 26.0 26.0 

Customs duties ............................................. 27.3 27.3 18.2 18.2 

Other taxes and receipts............................... 50.7 34.3 85.0 44.4 35.2 79.6 

Miscellaneous earned revenues ................... 29.9 5.8 35.7 25.3 4.4 29.7 

Intragovernmental interest ............................ 201.0 201.0 192.7 192.7 

Total revenue ................................................ 1,661.7 1,200.7 2,862.4 1,659.4 1,160.6 2,820.0 

Eliminations................................................... (201.0) (192.7) 

Consolidated revenue ................................... 2,661.4 2,627.3 

 

Net Cost: 

Net cost......................................................... 2,186.4 1,454.3 3,640.7 1,653.1 1,256.4 2,909.5 

Intragovernmental interest ............................ 201.0 201.0 192.7 192.7 

Total net cost ................................................ 2,387.4 1,454.3 3,841.7 1,845.8 1,256.4 3,102.2 

Eliminations................................................... (201.0) (192.7) 

Consolidated net cost.................................... 3,640.7 2,909.5 

 

Intragovernmental transfers ......................... (338.0) 338.0 (290.6) 290.6 

 

Unmatched transactions and balances 

(Note 1) ........................................................ (29.8) (29.8) 6.7 6.7 

 

Net operating (cost)/revenue ........................ (1,093.5) 84.4 (1,009.1) (470.3) 194.8 (275.5) 

 

Net position, beginning of period................. (9,826.0) 620.2 (9,205.8) (9,340.7) 424.3 (8,916.4) 

Prior period adjustments – changes in 

accounting principles (Note 18).................. 11.4 - 11.4 (15.0) 1.1 (13.9) 

Net operating (cost)/revenue......................... (1,093.5) 84.4 (1,009.1) (470.3) 194.8 (275.5) 

Net position, end of period ........................... (10,908.1) 704.6 (10,203.5) (9,826.0) 620.2 (9,205.8) 

 

The accompanying notes are an integral part of these financial statements. 
FINANCIAL STATEMENTS 37

United States Government 

Reconciliations of Net Operating Cost and Unified Budget Deficit 

for the Years Ended September 30, 2008, and September 30, 2007 

(In billions of dollars) 2008 2007 

Net Operating Cost .............................................................................................. (1,009.1) (275.5) 

Components of Net Operating Cost Not Part of the Budget Deficit: 

Increase in Liability for Military Employee Benefits (Note 12): 

Increase in military pension liabilities .................................................................. 125.3 61.7 

(Decrease) in military health liabilities ................................................................. (15.3) (1.3) 

(Decrease) in other military benefits.................................................................... (0.1) (0.1) 

Increase in liability for military employee benefits................................................ 109.9 60.3 

Increase (Decrease) in liability for veteran's compensation (Note 12): 

Increase (Decrease) in liabilities for veterans...................................................... 287.9 (26.8) 

Increase in liabilities for survivors........................................................................ 50.2 0.8 

Increase (Decrease) in liabilities for burial benefits ............................................. 0.9 (0.1) 

Increase (Decrease) in liability for veteran's compensation................................. 339.0 (26.1) 

Increase in liabilities for civilian employee benefits (Note 12): 

Increase in civilian pension liabilities................................................................... 68.5 37.3 

Increase in civilian health liabilities...................................................................... 30.2 16.4 

Increase in other civilian benefits ........................................................................ 2.2 2.2 

Increase in liabilities for civilian employee benefits ............................................. 100.9 55.9 

Increase in environmental and disposal liabilities (Note 13): 

Increase in Energy's environmental and disposal liabilities................................. 2.4 33.3 

(Decrease) Increase in all others' environmental and disposal liabilities.............. (1.6) 3.5 

Increase in environmental and disposal liabilities................................................ 0.8 36.8 

Depreciation expense ............................................................................................ 54.8 45.3 

Property, plant, and equipment disposals and revaluations .................................. 5.0 10.9 

Increase in benefits due and payable..................................................................... 10.7 4.4 

Increase (Decrease) in insurance program liabilities.............................................. 5.1 (0.1) 

Increase in other liabilities...................................................................................... 41.6 21.8 

Seigniorage and sale of gold ................................................................................. (0.7) (0.8) 

Increase in accounts payable................................................................................. 7.1 7.8 

(Increase) in net accounts and taxes receivable .................................................... (5.2) (19.0) 

(Increase) in Investments in Government Sponsored Enterprises ......................... (7.0) - 

Increase in Keepwell Payable ................................................................................ 13.8 - 

Components of the budget deficit that are not part of net operating cost: 

Capitalized Fixed Assets 

Department of Defense ....................................................................................... (71.6) (29.1) 

All Other Agencies............................................................................................... (34.8) (29.7) 

Total Capitalized Fixed Assets ......................................................................... (106.4) (58.8) 

(Increase) Decrease in net inventory ..................................................................... (12.5) 4.2 

Decrease (Increase) in Securities and Investments ............................................... 18.2 (12.9) 

(Increase) in other assets....................................................................................... (14.5) (10.0) 

Principal repayments of precredit reform loans ..................................................... 5.1 8.5 

All Other Reconciling items .................................................................................... (11.4) (15.5) 

Unified budget deficit.............................................................................................. (454.8) (162.8) 

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

United States Government 

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

for the Years Ended September 30, 2008, and September 30, 2007 

(In billions of dollars) 2008 2007 

 

Unified budget deficit ......................................... (454.8) (162.8) 

 

Adjustments for noncash outlays included 

 in the budget: 

Interest accrued by Treasury on debt 

held by the public...................................... 209.0 

 

 189.4 

Subsidy expense (Note 4) ........................... (3.0) (9.3) 

Subtotal..................................................... 206.0 180.1 

 

Items affecting the cash balance not included

 in the Budget: 

Net Transactions from financing activity: 

Borrowings from the public.......................... 5,615.8 4,547.3 

Repayment of debt held by the public......... (4,853.1) (4,340.4) 

Agency securities ........................................ - (0.4) 

Subtotal..................................................... 762.7 206.5 

 

 

Net transactions from monetary and other 

 activity: 

Interest paid by Treasury on debt held by 

the public................................................... (213.3)

 (186.1)

Other............................................................ (4.1) (7.6) 

Subtotal..................................................... (217.4) (193.7) 

 

Cash and other monetary assets: (Note 2): 

Increase in cash and other monetary 

assets ..................................................... 296.5 

 

 30.1 

Balance beginning of period ..................... 128.0 97.9 

Balance end of period............................... 424.5 128.0 

The accompanying notes are an integral part of these financial statements. 
FINANCIAL STATEMENTS 39

United States Government 

Balance Sheets 

as of September 30, 2008, and September 30, 2007 

(Restated-See Note 21) 

(In billions of dollars) 2008 

2007 

(Restated) 

Assets: 

Cash and other monetary assets (Note 2) ..................................... 424.5 128.0 

Accounts and taxes receivable, net (Note 3).................................. 93.0 87.8 

Loans receivable, net (Note 4) ....................................................... 263.4 231.9 

Inventories and related property, net (Note 5)................................ 289.6 277.1 

Property, plant, and equipment, net (Note 6) ................................. 737.7 691.1 

Securities and investments (Note 7) .............................................. 79.6 99.8 

Investments in Government sponsored enterprises (Note 8)......... 7.0 - 

Other assets (Note 9) ..................................................................... 79.9 65.4 

Total assets.................................................................................. 1,974.7 1,581.1 

Stewardship Land and Heritage Assets (Note 24) 

Liabilities: 

Accounts payable (Note 10) ........................................................... 73.3 66.2 

Federal debt securities held by the public and accrued interest 

(Note 11) ...................................................................................... 5,836.2 5,077.7 

Federal employee and veteran benefits payable (Note 12) ........... 5,318.9 4,769.1 

Environmental and disposal liabilities (Note 13)............................. 342.8 342.0 

Benefits due and payable (Note 14)............................................... 144.4 133.7 

Insurance program liabilities (Note 15)........................................... 77.8 72.7 

Loan guarantee liabilities (Note 4).................................................. 72.9 69.1 

Keepwell payable (Note 8) ............................................................. 13.8 - 

Other liabilities (Note 16)................................................................ 298.1 256.4 

Total liabilities .............................................................................. 12,178.2 10,786.9 

Contingencies (Note 19) and Commitments (Note 20) 

Net position: 

Earmarked funds (Note 21) (Restated) .......................................... 704.6 620.2 

Non-earmarked funds (Restated)................................................... (10,908.1) (9,826.0) 

Total net position....................................................................... (10,203.5) (9,205.8) 

Total liabilities and net position ................................................. 1,974.7 1,581.1 

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

United States Government 

Statements of Social Insurance (Note 23) 

Present Value of Long-Range (75 Years, except Black Lung) Actuarial Projections 

 ***UNAUDITED*** 

(In billions of dollars) 2008 2007 2006 2005 2004

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) ..... 542 477 533 464 411

Participants who have not attained eligibility age ................ 18,249 17,515 16,568 15,290 14,388

Future participants ..................................................................... 17,566 16,121 15,006 13,696 12,900

All current and future participants..................................... 36,357 34,113 32,107 29,450 27,699

Expenditures for Scheduled Future Benefits for: 

Participants who have attained eligibility age (62 and over) ..... (6,958) (6,329) (5,866) (5,395) (4,933)

Participants who have not attained eligibility age ................ (29,021) (27,928) (26,211) (23,942) (22,418)

Future participants ..................................................................... (6,933) (6,619) (6,480) (5,816) (5,578)

All current and future participants..................................... (42,911) (40,876) (38,557) (35,154) (32,928)

Present value of future expenditures in excess of future 

revenue ............................................................................ (6,555) 1 (6,763) 2 (6,449) 3 (5,704) 4 (5,229) 5

Federal Hospital Insurance (Medicare Part A): 14

Revenue (Contributions and Earmarked Taxes) from: 

Participants who have attained eligibility age (65 and over) ..... 202 178 192 162 148

Participants who have not attained eligibility age ................ 6,320 5,975 5,685 5,064 4,820

Future participants ..................................................................... 5,361 4,870 4,767 4,209 4,009

All current and future participants..................................... 11,883 11,023 10,644 9,435 8,976

Expenditures for Scheduled Future Benefits for: 

Participants who have attained eligibility age (65 and over) ..... (2,747) (2,558) (2,397) (2,179) (2,168)

Participants who have not attained eligibility age ................ (17,365) (15,639) (15,633) (12,668) (12,054)

Future participants ..................................................................... (4,506) (5,118) (3,904) (3,417) (3,246)

All current and future participants..................................... (24,619) (23,315) (21,934) (18,264) (17,468)

Present value of future expenditures in excess of future 

revenue ............................................................................ (12,736) 1 (12,292) 2 (11,290) 3 (8,829) 4 (8,492) 5

Federal Supplementary Medical Insurance (Medicare Part B): 14 

Revenue (Premiums) from: 

Participants who have attained eligibility age (65 and over) ..... 461 433 409 363 332

Participants who have not attained eligibility age ................ 3,859 3,184 3,167 2,900 2,665

Future participants ..................................................................... 1,158 1,172 906 924 891

All current and future participants..................................... 5,478 4,789 4,481 4,187 3,889

Expenditures for Scheduled Future Benefits for: 

Participants who have attained eligibility age (65 and over) ..... (1,986) (1,834) (1,773) (1,622) (1,475)

Participants who have not attained eligibility age ................ (14,949) (12,130) (12,433) (11,541) (10,577)

Future participants ..................................................................... (4,262) (4,257) (3,407) (3,408) (3,277)

All current and future participants..................................... (21,197) (18,221) (17,613) (16,571) (15,329)

Present value of future expenditures in excess of future 

 revenue 6

.............................................................................. (15,719) 1 (13,432) 2 (13,131) 3 (12,384) 4 (11,440) 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 41

United States Government 

Statements of Social Insurance (Note 23), continued 

Present Value of Long-Range (75 Years, except Black Lung) Actuarial Projections 

 ***UNAUDITED*** 

(In billions of dollars) 2008 2007 2006 2005 2004

Federal Supplementary Medical Insurance (Medicare Part D): 14

Revenue (Premiums and State Transfers) from: 

Participants who have attained eligibility age (65 and over) ..... 123 167 173 185 176

Participants who have not attained eligibility age ................ 1,380 1,627 1,700 1,790 1,857

Future participants ..................................................................... 604 611 492 572 618

All current and future participants..................................... 2,107 2,405 2,366 2,547 2,651

Expenditures for Scheduled Future Benefits for: 

Participants who have attained eligibility age (65 and over) ..... (581) (794) (792) (880) (773)

Participants who have not attained eligibility age ................ (6,527) (7,273) (7,338) (7,913) (7,566)

Future participants ..................................................................... (2,856) (2,699) (2,121) (2,440) (2,431)

All current and future participants..................................... (9,964) (10,766) (10,250) (11,233) (10,770)

Present value of future expenditures in excess of future 

 revenue 6

.............................................................................. (7,857) 1 (8,361) 2 (7,884) 3 (8,686) 4 (8,119) 5

Railroad Retirement: 

Revenue (Contributions and Earmarked Taxes) from: 

Participants who have attained eligibility ........................... 5 5 5 4 4

Participants who have not attained eligibility ..................... 43 41 40 37 37

Future participants............................................................. 54 54 56 41 39

All current and future participants................................... 102 100 100 82 80

Expenditures for Scheduled Future Benefits for: 

Participants who have attained eligibility ........................... (97) (93) (92) (84) (81)

Participants who have not attained eligibility ..................... (88) (86) (84) (73) (72)

Future participants............................................................. (26) (26) (25) (16) (14)

All current and future participants................................... (212) (205) (201) (173) (167)

Present value of future expenditures in excess of 

 future revenue 7

................................................................... (109) 1 (105) 2 (101) 3 (91) 4 (87) 5

Black Lung (Part C): 

Present value of future revenue in excess of future 

expenditures 8 ...................................................................... 5 9 5 10 4 11 5 12 4 13

 

Total present value of future expenditures in excess 

of future revenue................................................................ (42,970) (40,948) (38,851) (35,689) (33,363)

Totals may not equal the sum of components due to rounding. 

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

United States Government 

Statements of Social Insurance (Note 23), continued

Present Value of Long-Range (75 Years, except Black Lung) Actuarial Projections 

 ***UNAUDITED*** 

(In billions of dollars) 2008 2007 2006 2005 2004

Social Insurance Summary: 14

Participants who have attained eligibility age: 

Revenue (e.g., Contributions and earmarked taxes) ......... 1,333 1,260 1,312 1,178 1,071

Expenditures for scheduled future benefits ....................... (12,369) (11,608) (10,920) (10,160) (9,430)

Present value of future expenditures in excess of 

future revenue ............................................................. (11,036) (10,348) (9,608) (8,982) (8,359)

Participants who have not attained eligibility age: 

Revenue (e.g., Contributions and earmarked taxes) ......... 29,851 28,342 27,160 25,081 23,767

Expenditures for scheduled future benefits ....................... (67,950) (63,056) (61,696) (56,138) (52,686)

Present value of future expenditures in excess of 

future revenue ............................................................. (38,099) (34,714) (34,536) (31,057) (28,919)

Closed group – Total present value of future 

expenditures in excess of future revenue........................ (49,135) (45,062) (44,145) (40,039) (37,278)

Future participants: 

Revenue (e.g., Contributions and earmarked taxes) ......... 24,743 22,828 21,227 19,442 18,457

Expenditures for scheduled future benefits ....................... (18,578) (18,714) (15,933) (15,092) (14,542)

Present value of future revenue in excess of future 

expenditures ................................................................ 6,165 4,114 5,294 4,350 3,915 

 

Open group – Total present value of future 

expenditures in excess of future revenue........................ (42,970) (40,948) (38,851) (35,689) (33,363) 

 

1 The projection period is 1/1/2008 - 12/31/2082 and the valuation date is 1/1/2008. 2 The projection period is 1/1/2007 - 12/31/2081 and the valuation date is 1/1/2007. 3 The projection period is 1/1/2006 - 12/31/2080 and the valuation date is 1/1/2006. 4 The projection period is 1/1/2005 - 12/31/2079 and the valuation date is 1/1/2005. 5 The projection period is 1/1/2004 - 12/31/2078 and the valuation date is 1/1/2004. 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 required 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 9/30/2008 - 9/30/2040 and the valuation date is 9/30/2008. 10 The projection period is 9/30/2007 - 9/30/2040 and the valuation date is 9/30/2007. 11 The projection period is 9/30/2006 - 9/30/2040 and the valuation date is 9/30/2006. 12 The projection period is 9/30/2005 - 9/30/2040 and the valuation date is 9/30/2005. 13 The projection period is 9/30/2004 - 9/30/2040 and the valuation date is 9/30/2004. 14 Participants for the Social Security and Medicare programs are assumed to be the “closed group” of individuals who are at least age 15 

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. 
NOTES TO THE FINANCIAL STATEMENTS 43

United States Government 

Notes to the Financial Statements 

for the Years Ended September 30, 2008, 

and September 30, 2007 

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 primarily related to budget 

activity because it is not required by law to submit financial statement information to the Department of the 

Treasury (Treasury). The Appendix section 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. 

In September 2008, the Government began a number of emergency economic measures relating to the 

economy which involved various financing programs. Key initiatives effective for fiscal year 2008 involved 

programs concerning two GSEs, provision of a credit facility for GSE and Federal Home Loan Banks, purchase of 

Mortgage Backed Securities (MBS), and setup of a Money Market Insurance Program (see Notes 8 and 25). 

Material intragovernmental transactions are eliminated in consolidation, except as described below in this note 

and in the Supplemental Information—Unmatched Transactions and Balances. The financial reporting period ends 

September 30 and is the same as used for the annual budget.

B. Basis of Accounting and Revenue Recognition 

These financial statements were prepared using U.S. Generally Accepted Accounting Principles (GAAP), 

primarily based on Statements of Federal Financial Accounting Standards (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.
44 NOTES TO THE FINANCIAL STATEMENTS 

C. Direct Loans and Loan Guarantees 

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 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 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. 

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 for estimated losses 

due to uncollectible amounts 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 collectibility from a 

statistical sample of unpaid tax assessments. 

E. Inventories and Related Property 

Inventories within the Government are valued using historical cost, net realizable value, and latest acquisition 

cost (see Note 5—Inventories and Related Property, Net). Historical cost methods include first-in-first-out, weighted 

average, and moving average. 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 operating materials and supplies, stockpile materials, commodities, seized and 

monetary instruments, and forfeited property. 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. 
NOTES TO THE FINANCIAL STATEMENTS 45

F. Property, Plant, and Equipment 

Property, plant, and equipment consists of tangible assets including equipment, buildings, construction in 

progress, internal use software, 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 Department of Defense (DOD) military equipment (e.g., ships, aircraft, combat vehicles, and weapons). DOD uses 

an estimation methodology for military equipment based on internal DOD records to calculate a value for military 

equipment. 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. 

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. 

G. 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 Employee and 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. 
46 NOTES TO THE FINANCIAL STATEMENTS 

H. 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. 

I. Insurance Program Liabilities 

Insurance programs provide protection to individuals or entities against specified risks except for those 

specifically covered by Federal employee and veteran benefits. Insurance 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 program liabilities are particularly sensitive to changes in underlying estimates and assumptions, which 

are subject to change. 

J. 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 Supplemental Information 

section of this report. 

K. 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. 

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, is disclosed in Note 19—Contingencies. 
NOTES TO THE FINANCIAL STATEMENTS 47

L. 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 20—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. 

Discussion of treaties and other international agreements entered into by the United States Government are also 

included in the Commitments section. 

M. 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 Supplemental Information—

Social Insurance section, and Note 23—Social Insurance. 

N. 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 Treasury’s account and 

service Treasury securities. As of September 30, 2008, FRBs owned $221.3 billion, net of $255.3 billion in 

securities lent to dealers, for total holdings of $476.6 billion. As of September 30, 2007, the FRBs owned $774.5 

billion, net of $5.1 billion in securities lent to dealers, for total holdings of $779.6 billion. 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 on deposit $300 billion with the Federal 

Reserve as of September 30, 2008, to support Federal Reserve initiatives (see Note 2). 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 $33.6 billion and $32.0 billion for the years ended September 30, 2008, and 2007, 

respectively. The primary source of these earnings is from interest earned on Treasury securities held by the FRBs. 

Also, as described in Note 16—Other Liabilities, the FRBs hold certificates and special drawing rights certificates. 

The FRBs also was a key player in actions taken in fiscal year 2008 to stabilize the housing and financial markets 

(see Note 8). 

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. 

The Government generally does not guarantee payment of the liabilities of Government-sponsored enterprises 

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, and the Government now guarantees, 

up to $200 billion, to provide additional capital to the extent that liabilities exceeds assets (see Note 8). These 

enterprises also are excluded from the reporting entity.
48 NOTES TO THE FINANCIAL STATEMENTS 

O. 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 Supplemental Information—Unmatched Transactions and Balances for detailed information. 

P. Reclassifications and Restatements 

Certain fiscal year 2007 amounts have been reclassified to conform to the fiscal year 2008 presentation. See 

Note 21 for Restatements. 

 Q. 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 that are used to prepare these financial statements. 

Actual results could differ from these estimates. Major items subject to estimates include loan receivables (including 

MBS); investments in non-Federal securities (including Freddie Mac and Fannie Mae); taxes receivables; 

depreciation; money market insurance liability; liability for liquidity commitment (Freddie Mac and Fannie Mae); 

imputed costs; actuarial liabilities; cost and earned revenue allocations; contingent legal liabilities; and credit reform 

subsidy costs. 

The Government recognizes the sensitivity of credit reform modeling to slight changes in some model 

assumptions and uses continual review of model factors, statistical modeling, and annual re-estimates to reflect the 

most accurate cost of the credit programs to the U.S. Government. 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 facility, both operate under the provisions of credit reform and the use of estimates as dictated by the Federal 

Credit Reform Act. Further, the assumptions underlying the estimated future liquidity payments to the GSE are 

subject to a high level of market volatility, so that actual future payments may differ significantly from current 

estimates due to changing circumstances. The Troubled Asset Relief Program described further in Note 25 will also 

require the use of sophisticated estimates. 

The Government used the following methodologies for valuation of the investment in GSE: 

• Common Stock Warrants: The Black-Scholes Option Model (1973) was used to affirm that the value of 

the warrants is insensitive to the usual option input variables, including time to expiration and stock 

volatility, and the value per warrant share is nominally less than the trading price at September 30, 2008. 

• Senior Preferred Stock: These shares were valued based on an interpolation of market prices during the 

five trading days prior to the announcement of the senior preferred stock purchase agreement for (i) Fannie 

Mae and Freddie Mac subordinated debt, as adjusted for the tax advantage of stock dividends compared 

with taxable interest, and (ii) Fannie Mae and Freddie Mac preferred stock. 
NOTES TO THE FINANCIAL STATEMENTS 49

Note 2. Cash and Other Monetary Assets 

 

Cash and Other Monetary Assets as of September 30 

 (In billions of dollars) 2008 2007 

 

Unrestricted cash: 

Cash held by Treasury for Governmentwide Operations ................... 64.3 69.7 

Other ................................................................................................... 6.5 6.4 

Restricted cash: 

Cash held by Treasury for Governmentwide Operations ................... 300.0 - 

Other ................................................................................................... 14.0 13.5 

Total cash......................................................................................... 384.8 89.6 

 

International monetary assets ............................................................... 14.3 13.9 

Gold ....................................................................................................... 11.0 11.0 

Foreign currency.................................................................................... 14.4 13.5 

Total cash and other monetary assets................................................ 424.5 128.0 

 

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 includes the 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, 2008, there was a total of eight cash management bills outstanding related to SFP that 

totaled $300 billion. The issuing of these cash management bills leads to the large amount in the restricted cash 

balance as of September 30, 2008. The Foreign Military Sales program included $13.3 billion and $12.4 billion as of 

September 30, 2008, and 2007, respectively. This year, $12.4 billion was reclassified from unrestricted to restricted 

cash for this program. All cash held by depositary institutions is either insured (for balances up to $100,000 and 

temporarily increased to $250,000 per Note 25) by the Federal Deposit Insurance Corporation (FDIC) or 

collateralized by securities pledged by the depositary institution or through securities held under reverse repurchase 

agreements. See Note 25—Subsequent Events for a discussion on the change in insured limits. 

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 reflects the reserve asset portion of the financial subscription that the 

United States has paid in as part of its participation in 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. 
50 NOTES TO THE FINANCIAL STATEMENTS 

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 $53.0 billion and $53.2 billion as of September 30, 2008, and 2007, respectively. The U.S. 

reserve position in the IMF has a U.S. dollar equivalent of $4.8 billion and $4.5 billion as of September 30, 2008, 

and 2007, respectively. 

SDRs are in international monetary reserves issued by the IMF. These interest-bearing assets can be obtained 

by IMF allocations, transactions with IMF member countries, interest earnings on SDR holdings, or U.S. reserve 

position in the IMF. SDR holdings are an asset of Treasury’s Exchange Stabilization Fund (ESF), which held SDRs 

totaling $9.5 billion and $9.4 billion equivalent as of September 30, 2008, and 2007, respectively. 

The IMF allocates SDRs to its members in proportion to each member’s quota in the IMF. The SDR Act of 

1968 authorized the Secretary of the Treasury to issue SDR Certificates (SDRCs) to the Federal Reserve in 

exchange for dollars. The amount of SDRCs outstanding cannot exceed the dollar value of SDR holdings. The 

Secretary of the Treasury determines when Treasury will issue or redeem SDRCs. SDRCs outstanding totaled $2.2 

billion as of September 30, 2008, and 2007, and are included in Note 16—Other Liabilities. 

As of September 30, 2008, and 2007, other liabilities included $7.6 billion of interest-bearing liability to the 

IMF for SDR allocations. The SDR allocation item represents the cumulative total of SDRs distributed by the IMF 

to the United States in allocations that occurred in 1970, 1971, 1972, 1979, 1980, and 1981. 

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, 2008, and 2007. The market value of gold on the London Fixing was $885 and 

$743 per fine troy ounce as of September 30, 2008, and 2007, respectively. Gold totaling $11.0 billion as of 

September 30, 2008, and 2007, was pledged as collateral for gold certificates issued and authorized to the FRBs by 

the Secretary of the Treasury. Treasury may redeem the gold certificates at any time. The liabilities for the gold 

certificates issued are included in Note 16—Other Liabilities. 

Foreign currency is translated into U.S. dollars at the exchange rate at fiscal yearend. The foreign currency is 

maintained by various U.S. Federal agencies and foreign banks. 
NOTES TO THE FINANCIAL STATEMENTS 51

Note 3. Accounts and Taxes Receivable, Net 

Accounts receivable includes related interest receivable of $6.4 billion and $6.3 billion as of September 30, 

2008, and 2007, respectively. Accounts receivable are net of an allowance for uncollectible accounts. The allowance 

amounts are $15.2 billion and $14.3 billion as of September 30, 2008, and 2007, respectively. 

Accounts receivable for Health and Human Services (HHS) decreased by $5.6 billion primarily due to the 

Medicare Prescription Drug Program for the year ending September 30, 2008.

 

 Accounts and Taxes Receivable as of September 30 

 

(In billions of dollars) 2008 2007 

Accounts Receivable: 

Department of Agriculture...................................................................... 10.1 8.9 

Social Security Administration ............................................................... 8.9 8.0 

Pension Benefit Guaranty Corporation.................................................. 8.4 5.8 

Department of Defense.......................................................................... 7.8 7.5 

Department of Health and Human Services.......................................... 7.4 13.0 

Department of Energy............................................................................ 4.0 3.9 

Tennessee Valley Authority................................................................... 3.0 1.7 

Department of the Treasury................................................................... 1.9 1.7 

Department of Veterans Affairs ............................................................. 1.8 1.3 

Department of the Interior...................................................................... 1.6 1.9 

Office of Personnel Management.......................................................... 1.2 1.0 

All other departments............................................................................. 5.8 5.2 

Accounts receivable, net........................................................................ 61.9 59.9 

 

Taxes Receivable: 

Gross taxes receivable .......................................................................... 115.5 101.5 

Allowance for doubtful accounts............................................................ (84.4) (73.6) 

Taxes receivable, net............................................................................. 31.1 27.9 

 

Total accounts and taxes receivable, net............................................ 93.0 87.8 

 
52 NOTES TO THE FINANCIAL STATEMENTS 

Note 4. Loans Receivable and Loan Guarantee Liabilities, 

Net 

Direct Loan and Defaulted Guaranteed Loan Programs as of September 30 

Face Value 

of Loans 

Outstanding 

Long-term Cost of 

Direct Loans and 

Defaulted 

Guaranteed Loans 

Outstanding 

Loans 

Receivable, 

Net 

Subsidy Expense

 for the Fiscal 

Year 

(In billions of dollars) 2008 2007 2008 2007 2008 2007 2008 2007 

 

Federal Direct Student Loans - 

Education.................................................. 124.4 108.0 14.2 8.7 110.2 99.3 5.2 (0.5) 

Electric Loans - USDA............................... 37.5 36.0 2.0 1.2 35.5 34.8 0.5 - 

Federal Family Education Loans - 

Education.................................................. 32.7 23.7 8.2 7.2 24.5 16.5 (0.2) - 

Rural Housing Services - USDA............... 27.6 27.1 7.0 6.9 20.6 20.2 0.3 0.1 

Water and Environmental Loans - 

USDA............................................................ 9.9 9.3 0.9 0.7 9.0 8.6 0.2 - 

Disaster Loan Programs - SBA ................ 8.6 9.0 1.5 1.5 7.1 7.5 - - 

Farm Loans - USDA................................... 6.7 6.6 (0.4) 0.3 7.1 6.3 (0.4) - 

Housing and Urban Development 

Loans ............................................................ 4.9 3.9 (0.8) (0.9) 5.7 4.8 1.1 (0.2) 

Telecommunications Loans - USDA........ 4.0 4.0 (0.1) (0.3) 4.1 4.3 0.2 (0.1) 

U.S. Agency for International 

Development Loans ................................ 6.3 6.7 2.3 2.3 4.0 4.4 - 5.9 

Food Aid - USDA........................................ 6.7 7.6 2.8 3.5 3.9 4.1 (0.3) - 

Housing for the Elderly and Disabled - 

HUD........................................................... 3.9 4.6 - - 3.9 4.6 - - 

Export-Import Bank Loans ........................ 6.4 7.3 2.6 2.9 3.8 4.4 - - 

GSE Mortgage Backed Securities 

Purchase Program - Treasury ............... 3.3 - (0.1) - 3.4 - (0.1) - 

All Other Programs..................................... 25.1 16.0 4.5 3.9 20.6 12.1 0.4 0.4 

Total Direct Loans and Defaulted 

Guaranteed Loans................................ 308.0 269.8 44.6 37.9 263.4 231.9 6.9 5.6 

 
NOTES TO THE FINANCIAL STATEMENTS 53

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. For those unable to afford 

credit at the market rate, Federal credit programs provide subsidies in the form of direct loans offered at an interest 

rate lower than the market rate. For those to whom non-Federal financial institutions are reluctant to grant credit 

because of the high risk involved, Federal credit programs guarantee the payment of these non-Federal loans and 

absorb the cost of defaults. 

The amount of the long-term cost of post-1991 direct loans and loan guarantees outstanding equals the subsidy 

cost allowance for direct loans and the liability for loan guarantees as of September 30. The amount of the long-term 

cost of 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. 

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 the Department of Housing and Urban Development 

(HUD) for significant detailed information regarding foreclosed property. 

Loan Guarantees as of September 30 

Principal Amount

of Loans under 

Guarantee 

Principal Amount

Guaranteed by the 

United States 

Loan Guarantee 

Liabilities 

Subsidy Expense

for the Fiscal 

Year 

(In billions of dollars) 2008 2007 2008 2007 2008 2007 2008 2007 

 

Federal Housing Administration Loans - 

HUD................................................................ 576.4 438.8 534.9 400.0 19.6 7.4 (1.0) (1.0)

Federal Family Education Loans - 

Education...................................................... 414.6 363.3 405.2 359.2 43.2 50.8 (2.7) 4.9 

Small Business Loans - SBA.................... 75.1 71.5 61.7 58.4 1.8 1.7 0.4 -

Export-Import Bank Guarantees................ 51.8 50.2 51.8 50.2 1.4 1.3 - 0.1 

Veterans Housing Benefit Programs - 

VA................................................................... 220.8 207.6 36.1 24.9 3.5 3.8 (0.6) 0.1 

Rural Housing Services - USDA .............. 22.5 17.9 20.3 16.1 0.8 0.7 0.1 -

Israeli Loan Guarantee Program - AID ... 12.5 12.7 12.5 12.7 1.2 1.4 - -

Overseas Private Investment 

Corporation Credit Program................... 4.7 4.1 4.7 4.1 0.1 0.5 - -

Export Credit Guaranteed Programs - 

USDA............................................................. 3.9 2.4 3.8 2.3 0.2 0.2 - (0.3)

Business and Industry Loans - USDA ..... 3.8 3.7 2.8 2.7 0.3 0.3 - 0.1 

Federal Ship Financing Fund (Title XI) - 

DOT................................................................ 2.4 2.7 2.4 2.9 0.3 0.3 (0.1) -

All Other Guaranteed Loan Programs..... 14.2 18.5 13.0 16.6 0.5 0.7 - (0.1) 

Total Loan Guarantees........................... 1,402.7 1,193.4 1,149.2 950.1 72.9 69.1 (3.9) 3.8 

 
54 NOTES TO THE FINANCIAL STATEMENTS 

The total subsidy expense is the cost of direct loans and loan guarantees recognized during the fiscal year. It 

consists of the subsidy expense 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 reestimates as of the end of 

the fiscal year of the cost of loans and guarantees outstanding. This expense is included in the Statements of Net 

Cost. 

Major Loan Programs 

The Department of Education (Education) has two major education loan programs. The first program, the 

Federal Direct Student Loan Program, established in fiscal year 1994, offers four types of education loans: Stafford, 

Unsubsidized Stafford, PLUS for parents, 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 Program, established in fiscal year 1965, is a guaranteed loan 

program. Like the Federal Direct Student Loan Program, it offers four types of loans: Stafford, Unsubsidized 

Stafford, PLUS for parents, and consolidation loans. 

The 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 Mission Area (RD). 

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 and through this supervised credit, 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. These programs include: 

• Very low- and low-to-moderate-income home ownership loans and guarantees. 

• Very low-income housing repair loans. 

• Multi-family housing loans and guarantees. 

• Domestic farm labor housing loans. 

• Housing site loans. 

• Credit sales of acquired property. 

The Rural Utilities Program administers a variety of loan programs for electric energy, telecommunications, 

and water and environmental projects in rural America. 

The Department of Housing and Urban Development’s, Federal Housing Administration (FHA) provides 

mortgage insurance to encourage lenders to make credit available to expand home ownership. FHA predominantly 

serves borrowers that the conventional market does not serve adequately. This includes first-time homebuyers, 

minorities, low-income families, and residents of under-served areas. 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. FHA continues to be a financially conservative and stabilizing presence 

for credit markets in times of economic disruption. 

The Small Business Administration’s (SBA’s) Disaster Assistance Loan Program makes direct loans to disaster 

victims for the following: 

• Loans for homes and personal property. 

• Physical disaster loans to business of any size. 

• Economic injury loans to small businesses without credit available elsewhere. 

• Economic injury loans to eligible businesses affected by essential employees called up to active duty 

in the military reserves. 

The maximum interest rate is 4 percent for applicants without credit available elsewhere and 8 percent for 

applicants with credit available elsewhere. 

 The VA’s Veterans Housing Benefit Program provides partial guarantee of residential mortgage loans issued 

to eligible veterans, reservists, and service members by private lenders. This guarantee allows veterans, reservists, 

and service members to purchase a home without a substantial down payment. 
NOTES TO THE FINANCIAL STATEMENTS 55

The Export-Import Bank aids in financing and promoting U.S. exports. The average repayment term for these 

loans is approximately 7 years. 

The U.S. Agency for International Development (USAID) provides economic assistance to selected countries 

in support of U.S. efforts to promote stability and security interests in strategic regions of the world. 

Other loan programs include the SBA’s general business loan guarantees, the FSA’s farm ownership, 

emergency and disaster loans, and loans and guarantees made by the DOD under its Military Housing Privatization 

and Armament Retooling and Manufacturing Support Initiative. 

Please refer to the individual financial statements of the agencies specified above for significant detailed 

information regarding their direct and guaranteed loan programs. 

MBS Purchase Program 

Congress granted Treasury authority to purchase MBS issued by GSE in the Housing and Economic Recovery 

Act of 2008. The authority expires on December 31, 2009. To promote stability in the mortgage market, Treasury 

makes MBS purchases in the open market. GSE MBS are credit-guaranteed by the GSE and Treasury plans to hold 

its portfolio of MBS to maturity unless, based on mortgage market conditions, sales are necessary. This program 

was implemented to help improve the availability of mortgage credit to American homebuyers and mitigate 

pressures on mortgage rates. By purchasing these securities, Treasury seeks to broaden access to mortgage funding 

for current and prospective homeowners, as well as to promote market stability. The scale of the program will be 

based on developments in the capital markets and housing markets. 

The MBS program is accounted for under the provisions of the Federal Credit Reform Act, section 13201 of 

the Omnibus Budget Reconciliation Act of 1990, P.L. No. 101-508, dated November 5, 1990. Treasury develops 

subsidy estimates, re-estimates, and rates based on anticipated cashflows from the purchases of MBS. Factors that 

impact these cashflows and the subsidy rate include the interest coupons on the securities, the discount or premium 

paid at the time of purchase, the speed of mortgage prepayments, and the probability of GSE failure. A positive 

subsidy reflects the cost to the Government of the program and a negative subsidy reflects earnings on the program. 

The fiscal year 2008 GSE MBS subsidy rate was negative, indicating Treasury expects to earn a return on its 

investments in these securities. As of September 30, 2008, the Treasury agent responsible for MBS purchases was in 

receipt of $1.7 billion that was recorded as an advance. This amount was to purchase MBS but had not been 

purchased at yearend and was not made until after September 30, 2008. 

GSE Credit Facility Program 

Congress granted Treasury authority to make credit available to GSE in the Housing and Economic Recovery 

Act of 2008. The GSE credit facility program (GSECF) will offer liquidity if needed until December 31, 2009. This 

will ensure credit availability to GSE and provide secured funding on an as needed basis under terms and conditions 

established by the Secretary of Treasury to protect taxpayers. Fannie Mae, Freddie Mac, and the Federal Home Loan 

Banks are eligible to borrow under this program if needed. Funding will be provided directly by Treasury in 

exchange for eligible collateral from the GSE which will be limited to guaranteed MBS issued by Freddie Mac and 

Fannie Mae, as well as advances made by the Federal Home Loan Banks. All such assets pledged against loans will 

be accepted with appropriate collateral margins as determined by Treasury. Loan requests will require approval from 

Treasury and verification that adequate collateral has been pledged. 

The GSECF program is accounted for under the provisions of the Federal Credit Reform Act, section 13201 of 

the Omnibus Budget Reconciliation Act of 1990, P.L. No. 101-508, dated November 5, 1990. Treasury develops 

subsidy estimates, re-estimates, and rates based on anticipated cashflows from the credit facility. Factors that impact 

these cashflows and the subsidy rate include the interest rate on loans and the probability of GSE failure. A positive 

subsidy reflects the cost to the Government of the program and a negative subsidy reflects earnings on the program. 

The GSECF was not utilized in fiscal year 2008 and no loans were made. 
56 NOTES TO THE FINANCIAL STATEMENTS 

Note 5. Inventories and Related Property, Net 

 

Inventories and Related Property as of September 30 

Defense

All 

Others Total Defense 

All 

Others Total 

(In billions of dollars) 2008 2007 

 

Inventory purchased for resale ................. 101.1 0.8 101.9 86.5 0.7 87.2 

Inventory and operating material and 

supplies held for repair ........................... 44.1 0.6 44.7 48.5 0.6 49.1 

Inventory—excess, obsolete, and 

unserviceable ......................................... 7.8 - 7.8 7.3 - 7.3 

Operating materials and supplies held 

for use..................................................... 131.7 4.9 136.6 124.0 5.8 129.8 

Operating materials and supplies held 

in reserve for future use ......................... - 0.2 0.2 - 0.2 0.2 

Operating materials and supplies— 

excess, obsolete, and unserviceable ..... 3.6 0.2 3.8 2.4 0.2 2.6 

Stockpile materials.................................... - 46.1 46.1 - 43.9 43.9 

Stockpile materials held for sale ............... 0.7 0.2 0.9 0.9 0.3 1.2 

Other related property............................... 0.7 1.0 1.7 0.6 1.0 1.6 

Allowance for loss ..................................... (53.7) (0.4) (54.1) (45.3) (0.5) (45.8)

Total inventories and related property, net .. 236.0 53.6 289.6 224.9 52.2 277.1 

 

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. 

Inventory purchased for resale is the cost or value of tangible personal property purchased by an agency for 

resale. DOD values approximately 65 percent of its resale inventory using the moving average cost (MAC) method. 

An additional 15 percent (fuel inventory) is reported using the first-in-first-out method. DOD reports the remaining 

20 percent of resale inventories at an approximation of historical cost using latest acquisition cost (LAC) adjusted 

for holding gains and losses. 

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 economic to repair than to dispose of (operating materials and 

supplies). 

Inventory—excess, obsolete, and unserviceable consists of: 

• Excess inventory is 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 is inventory that is no longer needed due to changes in technology, laws, customs, or 

operations. 

• Unserviceable inventory is inventory damaged beyond economic repair. 

Excess, obsolete, and unserviceable inventory is reported at net realizable value. 

Please refer to the individual financial statements of DOD and the General Services Administration (GSA) for 

significant detailed information regarding inventory held for future sale. 

Operating materials and supplies held for use are tangible personal property to be consumed in normal 

operations.
NOTES TO THE FINANCIAL STATEMENTS 57

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 under the purchase and consumption 

methods of accounting and does not adjust for holding gains and losses. The DOD valuation methods do not 

approximate historical cost. 

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 and NASA 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 the 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: 

• 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 

(Justice), 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 Justice, 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. 

• Other property not classified above.
58 NOTES TO THE FINANCIAL STATEMENTS 

Note 6. Property, Plant, and Equipment, Net 

 

Property, Plant, and Equipment as of September 30, 2008 

Cost

Accumulated 

Depreciation/ 

Amortization Net

(In billions of dollars) Defense

All 

Others Defense

All 

Others Defense 

All 

Others

Buildings, structures, and 

facilities.................................... 180.2 193.3 105.3 99.6 74.9 93.7 

Furniture, fixtures, and 

equipment................................ 789.5 156.5 386.7 91.5 402.8 65.0 

Construction in progress ............ 22.5 39.0 N/A N/A 22.5 39.0 

Land ........................................... 10.5 11.7 N/A N/A 10.5 11.7 

Internal use software.................. 8.9 12.8 5.5 5.9 3.4 6.9 

Assets under capital lease......... 1.0 2.0 0.5 0.8 0.5 1.2 

Leasehold improvements........... 0.6 4.9 0.4 2.6 0.2 2.3 

Other property, plant, and 

equipment................................ 0.1 8.6 - 5.6 0.1 3.0 

Subtotal ................................... 1,013.3 428.8 498.4 206.0 514.9 222.8 

Total property, plant, and 

equipment, net ................... 1,442.1 704.4 737.7 

 

Property, Plant, and Equipment as of September 30, 2007 

Cost

Accumulated 

Depreciation/ 

Amortization Net

(In billions of dollars) Defense

All 

Others Defense

All 

Others Defense 

All 

Others 

Buildings, structures, and 

facilities.................................... 173.3 189.3 101.5 96.9 71.8 92.4 

Furniture, fixtures, and 

equipment................................ 728.1 151.0 359.7 84.5 368.4 66.5 

Construction in progress ............ 19.5 34.5 N/A N/A 19.5 34.5 

Land ........................................... 10.5 11.3 N/A N/A 10.5 11.3 

Internal use software.................. 9.3 10.6 5.8 4.9 3.5 5.7 

Assets under capital lease......... 1.0 1.7 0.5 0.7 0.5 1.0 

Leasehold improvements........... 0.6 4.4 0.3 2.4 0.3 2.0 

Other property, plant, and 

equipment................................ 0.1 8.6 - 5.5 0.1 3.1 

Subtotal ................................... 942.4 411.4 467.8 194.9 474.6 216.5 

Total property, plant, and 

equipment, net ................... 1,353.8 662.7 691.1 

 
NOTES TO THE FINANCIAL STATEMENTS 59

For physical quantity information related to multi-use heritage assets, refer to Note 24—Stewardship Land and 

Heritage Assets. 

DOD comprises approximately 70 percent of the Government’s reported property, plant, and equipment as of 

September 30, 2008. Refer to the individual financial statements of DOD, DOE, the Tennessee Valley Authority 

(TVA), the United States Postal Service (USPS), NASA, and GSA for significant detailed information on the useful 

lives and related capitalization thresholds for property, plant, and equipment. These agencies comprise 86 percent of 

the Government’s total reported net property, plant, and equipment of $737.7 billion as of September 30, 2008. 

Note 7. Securities and Investments 

Securities and Investments as of September 30, 2008 

By Category 

Held-To-Maturity Trading Securities 

(In billions of dollars) 

Cost 

Basis 

Unamortized

Premium/

Discount 

Net 

Investment 

Cost

Basis

Unrealized 

Gain/Loss 

Net 

Investment Total 

 

Fixed/debt securities: 

 Non-U.S. Government .............. 10.8 - 10.8 2.9 (0.3) 2.6 13.4 

 Commercial............................... - - - (0.2) - (0.2) (0.2)

 Mortgage/asset backed............. 0.2 - 0.2 3.8 (0.4) 3.4 3.6 

 Corporate and other bonds....... - - - 13.4 (2.3) 11.1 11.1 

 All other fixed debt securities.... - - - 0.2 (0.1) 0.1 0.1 

 

Equity securities: 

 Common stocks ........................ - - - 3.6 (0.7) 2.9 2.9 

 Unit trust.................................... - - - 6.2 3.4 9.6 9.6 

 All other equity securities .......... - - - 1.1 (0.1) 1.0 1.0 

Other ......................................... 2.1 - 2.1 36.0 - 36.0 38.1 

 Total Securities and 

Investments.......................... 13.1 - 13.1 67.0 (0.5) 66.5 79.6 

 
60 NOTES TO THE FINANCIAL STATEMENTS 

Securities and Investments as of September 30, 2007 

By Category

Held-To-Maturity Trading Securities 

(In billions of dollars) 

Cost 

Basis 

Unamortized

Premium/

Discount 

Net 

Investment 

Cost 

Basis

Unrealized 

Gain/Loss 

Net 

Investment Total 

 

Fixed/debt securities: 

 Non-U.S. Government .............. 10.2 0.1 10.3 2.2 - 2.2 12.5

 Commercial............................... - - - 1.2 - 1.2 1.2

 Mortgage/asset backed............. 0.2 - 0.2 4.6 - 4.6 4.8

 Corporate and other bonds....... - - - 11.4 (0.2) 11.2 11.2

 All other fixed debt securities.... - - - 4.4 0.2 4.6 4.6

 

Equity securities: 

 Common stocks ........................ - - - 3.8 0.6 4.4 4.4

 Unit trust.................................... - - - 6.3 6.2 12.5 12.5

 All other equity securities .......... - - - 1.2 - 1.2 1.2

Other ......................................... 1.7 - 1.7 45.7 - 45.7 47.4 

 Total Securities and 

Investments.......................... 12.1 0.1 12.2 80.8 6.8 87.6 99.8

 

Securities and Investments as of September 30 

By Agency 

(In billions of dollars) 2008 2007 

 

Securities and Investments: 

Pension Benefit Guaranty Corporation ......................................... 33.6 45.9 

Railroad Retirement Board ........................................................... 24.9 32.0 

Exchange Stabilization Fund ........................................................ 10.6 10.0 

Tennessee Valley Authority .......................................................... 7.9 9.6 

All other......................................................................................... 2.6 2.3 

Total Securities and Investments ............................................... 79.6 99.8 

 
NOTES TO THE FINANCIAL STATEMENTS 61

These securities and investments do not include nonmarketable Treasury securities, which have been 

eliminated in consolidation. Held-to-maturity securities and investments are presented at cost, net of unamortized 

premiums and discounts. Trading securities and investments are presented at fair market value. The Pension Benefit 

Guaranty Corporation (PBGC) and the Tennessee Valley Authority invest primarily in fixed maturity and equity 

securities, all classified as trading. The National Railroad Retirement Investment Trust (NRRIT), on behalf of the 

Railroad Retirement Board, 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. The NRRIT’s investments are all 

classified as other trading equity securities. Treasury’s Exchange Stabilization Fund invests primarily in foreign 

currency, bonds, and bills and are all classified as held-to-maturity. The TVA balance includes $6.9 billion and $8.4 

billion as of September 30, 2008, and 2007, respectively, for the Tennessee Valley Authority Retirement System 

(TVARS). Please refer to the individual financial statements of PBGC, the NRRIT, the Department of the TreasuryExchange Stabilization Fund, the Tennessee Valley Authority and the TVARS for more detailed information related 

to securities and investments. These agencies comprise 96.0 percent of the total reported securities and investments 

of $79.6 billion as of September 30, 2008. 

Note 8. Financial and Housing Market Stabilization 

Steps Taken to Ensure Financial Stability of GSE 

Fannie Mae and Freddie Mac are stockholder-owned GSE. Congress established the GSE to increase stability 

and housing in the secondary mortgage market. A key Fannie Mae and Freddie Mac business function is to 

guarantee mortgage-backed securities. These securities are subsequently sold to investors. Proceeds from these sales 

are used to buy additional mortgages and keep money flowing through the mortgage markets. Fannie Mae and 

Freddie Mac debt and guaranteed MBS outstanding totaled approximately $5 trillion at September 30, 2008. 

Increasingly difficult conditions in the housing market challenged the soundness and profitability of Fannie 

Mae and Freddie Mac, thereby undermining the entire housing market. This led Congress to pass the Housing and 

Economic Recovery Act of 2008 in July 2008 (HERA). This Act created the new Federal Housing Finance Agency 

(FHFA), with enhanced regulatory authority over the GSE, and provided the Secretary of the Treasury with certain 

authorities intended to ensure the financial stability of the GSE, if necessary. 

Due to deteriorating conditions in the housing mortgage markets and the resulting negative financial impact on 

the GSE, FHFA placed them under conservatorship on September 7, 2008. This action was taken to preserve GSE 

assets, ensure a sound and solvent financial condition, and mitigate systemic risks that contributed to current market 

instability. 

Pursuant to the authorities provided to the Secretary of the Treasury under the HERA, the Treasury 

Department, also on September 7, 2008, took three additional steps discussed below to help ensure the solvency and 

liquidity of the GSE while they are working to resolve their financial difficulties. 

Senior Preferred Stock Purchase Agreements 

The first step was entering into senior preferred stock purchase agreements with each GSE. In exchange for 

entering into these agreements, Treasury initially received from each GSE: (1) 1,000,000 shares of non-voting 

variable liquidation preference senior preferred stock with a liquidation preference value of $1,000 per share and (2) 

a non-transferrable 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 GSE preferred stock and warrants for common stock were 

valued as of the initial date at about $7 billion and also valued at September 30, 2008, at about $12 billion. Treasury 

recorded the investment using the appraisal value ($7 billion) at the date of purchase, September 8, 2008, and then 

subsequently used the valuation ($12 billion) at the reporting date to determine that no permanent impairment had 

occurred; therefore, the recorded amount remained at the historical appraised value. Other revenue of about $7 

billion was recognized from the acquisition of preferred stock and warrants. As of September 30, 2008, GSE 

investments consisted of the following items: 
62 NOTES TO THE FINANCIAL STATEMENTS 

 

GSE Investment 

(In billions of dollars) 

Appraisal 

Value At 

Purchase 

Date 

Unamortized 

(Premium) 

Discount 

Net 

Investment

Interest 

Receivable

9/30/08 

Investment 

Balance 

Appraisal 

Value At 

Reporting 

Date 

 

Fannie Mae Senior 

Preferred Stock................ .8 - .8 - .8 .7 

Freddie Mac Senior 

Preferred Stock................ .8 - .8 - .8 .7 

Fannie Mae Warrants 

Common Stock ................ 3.1 - 3.1 - 3.1 6.5 

Freddie Mac Warrants 

Common Stock ................ 2.3 - 2.3 - 2.3 4.4 

Total GSE Investment ....... 7.0 - 7.0 - 7.0 12.3 

 

The senior preferred stock accrues dividends at 10 percent per year, payable quarterly. This rate shall increase 

to 12 percent if, in any quarter, the dividends are not paid in cash, until all accrued dividends have been paid. In 

addition, beginning on March 31, 2010, the GSE will pay the Treasury Department a periodic commitment fee on a 

quarterly basis. This commitment fee will compensate the Treasury Department for the explicit support provided by 

the preferred stock agreements. This fee will be initially set by December 31, 2009, based on mutual agreement 

between the Treasury Department and each GSE (in practice, the FHFA while the GSE are in conservatorship), in 

consultation with the Chairman of the Federal Reserve Board. The fee shall be established for 5-year periods, and 

may be waived by Treasury for one year at a time if warranted by adverse mortgage market conditions. It may be 

paid in cash or may be added to the liquidation preference. 

These agreements, which have no expiration date, provide that Treasury will increase its investment in the 

senior preferred stock 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 is $100 billion. Treasury determined that 

the net present value of this potential liability cannot be measured with sufficient reliability for fiscal year 2008. 

Accordingly, the estimated future liability, which would take into account increases in preferred stock liquidation 

preference, associated dividends, and future commitment fees, is not recorded in the financial statements. Treasury 

will attempt to make this determination on at least an annual basis going forward. 

The actual recorded liability arising from the reported excess of Freddie Mac liabilities over assets (there was 

no payment anticipated or accrued for Fannie Mae) as of September 30, 2008, is $13.8 billion. This amount is also 

recorded as an expense for fiscal year 2008. The payment of this liability in fiscal year 2009 will result in an 

increase to the investment in GSE preferred stock. The carrying value of the investment will be evaluated on at least 

an annual basis. 

GSE Credit Facility (GSECF) 

The second step was the establishment of the GSECF to ensure credit availability to Fannie Mae, Freddie Mac, 

and the Federal Home Loan Banks. This lending facility will provide secured funding on an as needed basis under 

terms and conditions established by the Secretary of the Treasury to protect taxpayers. The GSECF provides 

liquidity, if needed, until December 31, 2009. 

Funding will be provided directly by Treasury from its account held at the Federal Reserve Bank of New York 

(FRBNY) in exchange for eligible collateral, which will be limited to guaranteed mortgage backed securities issued 

by the GSE as well as advances made by the Federal Home Loan Banks. Loan requests will require approval from 

Treasury and verification by the FRBNY that adequate collateral has been pledged. Loans will be for short-term 

durations and are in general expected to be for less than one month but no shorter than one week. Loans will not be 

made with a maturity date beyond December 31, 2009. The rate on a loan request ordinarily will be based on the 

daily London Interbank Borrowing Rate for a similar term loan plus 50 basis points. The rate is set at the discretion 

of the Treasury Secretary with the objective of protecting the taxpayer, and is subject to change. 
NOTES TO THE FINANCIAL STATEMENTS 63

There is no stated limitation on loans provided through the GSECF. However, loans are limited to the amounts 

of available collateral. 

There were no loans made through the GSECF in fiscal year 2008 (see Note 4). 

GSE Mortgage-Backed Securities Purchase Program 

The third step was the initiation of a temporary program to further support the availability of mortgage 

financing for millions of Americans and to mitigate pressures on mortgage rates. Under this program, Treasury 

purchases GSE MBS in the open market. By purchasing these credit-guaranteed securities, Treasury seeks to 

broaden access to mortgage funding for current and prospective homeowners and to promote stability in the 

mortgage market. 

The size and timing of the MBS purchases is subject to the discretion of the Secretary of the Treasury. The 

scale of the program will be based on developments in the capital and housing markets. Initial purchases of $3.3 

billion were made during September 2008. Purchases continued into fiscal year 2009, and additional purchases will 

be made as deemed appropriate through the expiration of this authority on December 31, 2009. 

As these securities are backed by individual mortgages, they are accounted for under the Credit Reform Act of 

1990 and are included in Note 4. 

Temporary Guarantee Program for Money Market 

Funds 

Treasury has established a Temporary Guarantee Program (Program) for Money Market Funds. Under this 

Program the Treasury Department will guarantee to investors that they will receive the stable share price (SSP) for 

shares held in participating money market funds as of the close of business on September 19, 2008. President 

George W. Bush approved the use of existing authorities by Secretary Henry M. Paulson, Jr. to make available, as 

necessary, the assets of the ESF to support the Program. If a participating fund’s market-based net asset value 

(NAV) falls below 99.5 percent of the SSP and is not cured, a Guarantee Event will be deemed to occur. If outlays 

become necessary, they would be paid out initially from the ESF, and then under the provisions of Section 131 of 

the Emergency Economic Stabilization Act of 2008, such outlays would be reimbursed from funds available under 

the Troubled Asset Relief Program (Note 25). 

Eligible funds must be regulated under Rule 2a-7 of the Investment Company Act of 1940, must maintain a 

SSP, must have had a market-based NAV of at least 99.5 percent of the SSP as of September 19, 2008, and must be 

publicly offered and registered with the Securities and Exchange Commission. The program was to be in effect until 

December 18, 2008, but was subsequently extended to April 30, 2009, with an option to extend until September 18, 

2009, at the discretion of the Secretary of the Treasury. 

To participate in the Program, eligible money market funds must submit an application and pay a premium of 1 

basis point if the fund’s NAV is greater than or equal to 99.75 percent of the SSP, or 1.5 basis points of the SSP if 

the fund’s NAV is less than 99.75 percent of the SSP but greater than or equal to 99.50 percent of the SSP. With the 

extension of the program beyond December 18, 2008, new premium charges apply and funds have the option to 

renew their coverage. 

As of September 30, 2008, Treasury collected $39.7 million in program participation premiums. As of October 

10, 2008, Treasury collected an additional $298.1 million in premiums. These premiums represent the payments for 

the first three months of coverage which began September 19, 2008. All premium payments were invested into U.S. 

Government securities. The program currently covers over $3 trillion of assets. Program participation payments 

from funds that are not accepted into the Program will be returned. Of the total $337.8 million collected, $45.0 

million was recognized as earned revenue, while $292.8 million remained as unearned revenue at September 30, 

2008. 

The Government’s exposure under the Program, when a guarantee event occurs, is the difference between the 

SSP and the NAV at liquidation of the money market fund. The Government believes the risk of loss under the 

Program is negligible, and no future liability is recorded at September 30, 2008.
64 NOTES TO THE FINANCIAL STATEMENTS 

Note 9. Other Assets 

 

Other Assets as of September 30 

 

(In billions of dollars) 2008 2007 

 

Advances and prepayments .................................................................... 43.9 30.5 

Other ........................................................................................................ 36.0 34.9 

Total other assets.................................................................................. 79.9 65.4 

 

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. 

Other items included in other assets are regulatory assets, purchased power generating capacity, deferred 

nuclear generating units, nonmarketable equity investments in international financial institutions, the balance of 

assets held by the experience-rated carriers participating in the Health Benefits and Life Insurance Program (pending 

disposition on behalf of Office of Personnel Management (OPM)), and receivables from bank and thrift resolutions. 

With regard to regulatory assets, the Department of Energy’s Power Marketing Authorities (PMAs) and the 

Tennessee Valley Authority (TVA) record certain amounts as assets in accordance with SFAS No. 71, Accounting 

for the Effects of Certain Types of Regulation. The provisions of SFAS No. 71 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 SFAS No. 71, 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, SFAS No. 71 would no longer be applicable, and all of the 

deferred costs under that standard would be expensed. As of September 30, 2008, and 2007, DOE and TVA total 

regulatory assets are $12.0 billion and $10.7 billion, respectively.
NOTES TO THE FINANCIAL STATEMENTS 65

Note 10. Accounts Payable 

 

Accounts Payable as of September 30 

(In billions of dollars) 2008 2007 

 

Department of Defense................................................................................. 32.1 29.7 

Department of Veterans Affairs..................................................................... 6.2 3.9 

Department of the Treasury.......................................................................... 3.8 2.5 

Tennessee Valley Authority .......................................................................... 3.2 2.7 

Department of Homeland Security................................................................ 2.9 3.0 

Department of State...................................................................................... 2.8 2.0 

Federal Deposit Insurance Corporation........................................................ 2.6 - 

Department of Justice ................................................................................... 2.1 2.8 

General Services Administration................................................................... 2.1 1.8 

Agency for International Development.......................................................... 1.9 2.4 

U.S. Postal Service ....................................................................................... 1.7 2.0 

Department of Energy................................................................................... 1.6 1.4 

National Aeronautics and Space Administration........................................... 1.4 1.0 

Department of Education .............................................................................. 1.3 0.9 

Department of the Interior............................................................................. 1.0 1.1 

All other......................................................................................................... 6.6 9.0 

Total accounts payable .............................................................................. 73.3 66.2 

 

Accounts payable includes amounts due for goods and property ordered and received, services rendered by 

other than Federal employees, and accounts payable for cancelled appropriations. 
66 NOTES TO THE FINANCIAL STATEMENTS 

Note 11. Federal Debt Securities Held by the Public and 

Accrued Interest 

 

Federal Debt Securities Held by the Public and Accrued Interest 

Average Interest 

Rate 

(In billions of dollars) 

Balance 

September 30,

2007 

Net 

Change

During

Fiscal 

Year 

2008 

Balance 

September 30,

2008 2008 2007 

 

Treasury securities (public): 

Marketable securities:

Treasury bills.............................. 954.6 529.7 1,484.3 1.6% 4.6% 

Treasury notes ........................... 2,456.1 167.3 2,623.4 4.1% 4.4% 

Treasury bonds .......................... 560.9 17.6 578.5 7.1% 7.4% 

Treasury inflation-protected 

securities (TIPS)...................... 456.8 67.2 524.0 2.0% 2.3% 

Total marketable Treasury 

securities.................................... 4,428.4 781.8 5,210.2 

 

Nonmarketable securities ............. 620.9 (22.4) 598.5 4.1% 4.9% 

Net unamortized premium/ 

(discounts)............................... (39.4) 3.3 (36.1) 

Total Treasury securities, net 

(public) .......................................... 5,009.9 762.7 5,772.6 

 

Agency securities: 

Tennessee Valley Authority.......... 22.6 - 22.6 

All other agencies ......................... 0.4 - 0.4 

Total agency securities, net of 

unamortized premiums and 

discounts ................................. 23.0 - 23.0 

 

Accrued interest payable ............. 44.8 (4.2) 40.6 

 

Total Federal debt securities 

held by the public and 

accrued interest ....................... 5,077.7 758.5 5,836.2 

 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. 

Federal debt securities held by the public outside the Government are held by individuals, corporations, State 

or local governments, Federal Reserve banks, 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. 
 NOTES TO THE FINANCIAL STATEMENTS 67

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 (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 2008 and 2007. 

Over the course of fiscal year 2008, changes in economic conditions, financial markets, and fiscal policy as 

well as a reduction in nonmarketable debt issuance have caused an increase in the Government’s marketable 

borrowing needs. Financial market strains have impacted the real economy, and the nation has experienced lower 

economic growth, lower receipts, and increased outlays. The Government has responded to the increase in 

marketable borrowing requirements by increasing issuance sizes of regular bills, the frequency, terms, and issuance 

sizes of cash management bills, and the issuance sizes of nominal coupon security offerings. 

As of September 30, 2008, and 2007, respectively, $9,959.9 billion and $8,921.3 billion of debt were subject to a 

statutory limit (31 U.S.C. § 3101). That limit was $10,615.0 billion as of September 30, 2008, and $9,815.0 billion as of 

September 30, 2007. 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). 
68 NOTES TO THE FINANCIAL STATEMENTS 

 

Intragovernmental Debt Holdings: Federal Debt Securities 

Held as Investments by Government Accounts as of September 30 

(In billions of dollars) 

Balance 

2007 

Net 

Change 

During 

Fiscal Year 

2008 

Balance 

2008 

 

Social Security Administration, Federal Old-Age and 

Survivors Insurance.................................................... 1,968.3 182.4 2,150.7 

Office of Personnel Management, Civil Service 

Retirement and Disability............................................ 701.7 27.1 728.8 

Department of Health and Human Services, Federal 

Hospital Insurance...................................................... 319.4 (0.7) 318.7 

Social Security Administration, Federal Disability 

Insurance .................................................................... 213.8 2.7 216.5 

Department of Defense, Military Retirement Fund........ 190.2 25.7 215.9 

Department of Defense, Medicare-Eligible Retiree 

Health Care Fund ......................................................... 92.2 20.5 112.7 

Department of Labor, Unemployment Trust Fund ........ 74.9 (2.5) 72.4 

Department of Health and Human Services, Federal 

Supplementary Medical Insurance Trust Fund........... 39.2 19.9 59.1 

Department of Energy, Nuclear Waste Disposal 

Fund............................................................................ 39.4 3.2 42.6 

Office of Personnel Management, Employees' Life 

Insurance .................................................................... 33.0 1.4 34.4 

Federal Deposit Insurance Corporation Funds ............. 50.7 (17.4) 33.3 

Office of Personnel Management, Postal Service 

Retiree Health Benefits Fund ..................................... 25.5 6.8 32.3 

Pension Benefit Guaranty Corporation Fund ................ 35.8 (13.4) 22.4 

Housing and Urban Development, Federal Housing 

Administration (FHA) - Liquidating Account................ 22.4 (3.3) 19.1 

Department of the Treasury, Exchange Stabilization 

Fund................................................................................. 16.4 0.4 16.8 

Office of Personnel Management, Employees' 

Health Benefits ........................................................... 15.9 (0.3) 15.6 

Department of State, Foreign Service Retirement 

and Disability Fund ..................................................... 14.4 0.5 14.9 

Department of Transportation, Highway Trust Fund..... 12.2 0.6 12.8 

 

All other programs and funds ........................................ 93.0 4.0 97.0 

Subtotal ......................................................................... 3,958.4 257.6 4,216.0 

Unamortized net (discounts)/premiums ........................ 3.7 28.9 32.6 

Total intragovernmental debt holdings, net.............. 3,962.1 286.5 4,248.6 

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 21─Earmarked Funds. These 

intragovernmental debt holdings are eliminated in the consolidation of these financial statements.
 NOTES TO THE FINANCIAL STATEMENTS 69

Note 12. Federal Employee and Veteran Benefits Payable 

 

Federal Employee and Veteran Benefits Payable as of September 30 

 

Civilian Military Total

(In billions of dollars) 2008 2007 2008 2007 2008 2007 

 

Pension and accrued 

benefits .............................. 1,454.8 1,386.3 1,154.1 1,028.8 2,608.9 2,415.1 

Post-retirement health and 

accrued benefits ................ 341.8 311.6 820.6 835.9 1,162.4 1,147.5 

Veterans compensation 

and burial benefits ............. N/A N/A 1,466.7 1,127.7 1,466.7 1,127.7 

Life insurance and accrued 

benefits .............................. 37.5 35.9 12.6 13.1 50.1 49.0 

FECA benefits ...................... 16.6 15.9 8.8 8.7 25.4 24.6 

Liability for other benefits ..... 0.4 0.5 5.0 4.7 5.4 5.2 

Total Federal employee 

and veteran benefits 

payable............................ 1,851.1 1,750.2 3,467.8 3,018.9 5,318.9 4,769.1 

 

 

Change in Pension and Accrued Benefits 

(In billions of dollars) Civilian Military Total

 

Actuarial accrued pension liability as of September 30, 2007 ........ 1,386.3 1,028.8 2,415.1 

 

Pension Expense: 

Prior (and past) service costs from plan amendments.................... - 8.1 8.1 

Assumption changes....................................................................... 0.2 60.1 60.3 

Normal costs ................................................................................... 28.0 18.7 46.7 

Interest on pension liability during the period.................................. 84.8 60.8 145.6 

Actuarial (gains)/losses ................................................................... 21.6 23.3 44.9 

Total pension expense.................................................................. 134.6 171.0 305.6 

 

Less benefits paid......................................................................... 66.1 45.7 111.8 

 

Actuarial accrued pension liability as of September 30, 2008 ..... 1,454.8 1,154.1 2,608.9 

 
70 NOTES TO THE FINANCIAL STATEMENTS 

Change in Post-Retirement Health and Accrued Benefits 

 

(In billions of dollars) Civilian Military Total 

 

Actuarial accrued post-retirement health benefits 

liability, as of September 30, 2007................................ 311.6 833.8 1,145.4 

Reclassification from liability for other benefits................... - 2.1 2.1 

Corrected beginning post-retirement health benefits 

liability............................................................................... 311.6 835.9 1,147.5 

 

Post-Retirement Health Benefits Expense: 

Normal costs..................................................................... 12.4 20.8 33.2 

Interest on liability............................................................. 19.9 50.8 70.7 

Change in medical inflation rate assumption 

(gains)/losses................................................................. - (58.1) (58.1) 

Other actuarial (gains)/losses........................................... 10.6 (10.0) 0.6 

Total post-retirement health benefits expense .............. 42.9 3.5 46.4 

Less claims paid............................................................... 12.7 18.8 31.5 

Actuarial accrued post-retirement health benefits 

liability, as of September 30, 2008.............................. 341.8 820.6 1,162.4 

 

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, 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 and the Foreign 

Service. 

Significant Long-Term Economic Assumptions Used in Determining 

Pension Liability and the Related Expense 

Civilian Military 

2008 2007 2008 2007 

 

Rate of interest................................................ 6.25% 6.25% 5.75% 6.00% 

Rate of inflation ............................................... 3.50% 3.50% 3.00% 3.00% 

Projected salary increases.............................. 4.25% 4.25% 3.75% 3.75% 

 

Significant Long-Term Economic Assumptions Used in Determining 

Post-Retirement Health Benefits and the Related Expense 

 

 

Civilian Military 

2008 2007 2008 2007 

 

Rate of interest................................................ 6.25% 6.25% 5.75% 6.00% 

Rate of health care cost increases.................. 7.00% 7.00% 6.25% 6.25% 

 
 NOTES TO THE FINANCIAL STATEMENTS 71

Separate boards of actuaries for OPM and DOD approve the actuarial assumptions used in calculating the 

pension liability and the post-retirement health benefit liability for the civilian and military personnel. The boards 

use generally accepted actuarial methodologies. The board for OPM uses a fixed rate of inflation and projected 

salary increases over all years for both the pension and post-retirement health benefit liabilities. These rates are 

shown in the tables above. OPM approves the long term assumptions for interest, inflation, and across-the-board 

salary increases shown in the table above. The DOD Board approves the assumptions used for the Medicare-eligible 

portion of the military post-retirement health benefit liabilities. DOD uses a range of rates for the health care cost 

inflation increases, varying by year and type of service, with an ultimate rate for the long-term as shown in the table 

above. 

The long-term ultimate rate for fiscal year 2008 of 6.25 percent is shown in the tables above. For disclosure 

and comparison purposes, DOD’s estimate of a single equivalent fixed rate of health care cost inflation for fiscal 

year 2008 is 6.5 percent, which is an approximation of the single equivalent rate that would produce that same 

actuarial liability as the actual rates used. 

Civilian Employees 

Pensions 

OPM administers the largest civilian pension plan, which covers approximately 90 percent of all Federal 

civilian 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 21—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 2040, L 2030, L 2020, L 2010, and L Income). The L-Funds, established August 

1, 2005, diversifies participant accounts among the G, F, C, S, and I Funds, using professionally determined 

investment mixes (allocations) that are tailored to different time horizons. These financial statements exclude the 

TSP because the CSRS and FERS employees own its assets. 

Treasury securities held in the G-Fund are included in total Federal debt securities held by the public and 

accrued interest in the balance sheets. The G-Fund held $101.5 billion and $81.4 billion in nonmarketable Treasury 

securities as of September 30, 2008, and 2007, respectively (Note 11). 

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, these premiums cover only a portion of 

the costs. The OPM actuary applies economic assumptions to historical cost information to estimate the liability, 

which is then reduced by certain operating costs and premiums received during the year. 

Life Insurance Benefits 

One of the largest other employee benefits is the Federal Employee Group Life Insurance 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 Life Insurance Program 

participants. The OPM actuary uses interest rate, inflation, and salary increase assumptions that are consistent with 

the pension liability. 
72 NOTES TO THE FINANCIAL STATEMENTS 

Workers’ Compensation Benefits 

The Department of Labor (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 a specific incurred period to predict the final payment related to the period. These estimated 

payments have been discounted to present value using the Office of Management and Budget’s economic 

assumptions for 10-year U.S. Treasury notes and bonds. For 2008, a 4.37 percent interest rate was assumed and 4.77 

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 

2009 3.87% 4.01% 

2010 2.73% 3.86% 

2011 2.20% 3.87% 

2012 2.23% 3.93% 

2013+ 2.30% 3.93% 

Military Employees (Including Veterans) 

Pensions 

The DOD Military Retirement Fund (MRF) finances military retirement and survivor benefit programs. The 

increase in Military Retirement Pension is due to interest on the pension liability, assumption and benefit changes, 

and experience. The increase due to interest is proportionate to the size of the liability. Liabilities in the future will 

depend on future benefit changes, assumption changes, and actuarial experience. 

Projected revenues into the MRF come from three sources: interest earnings on MRF assets, monthly DOD 

contributions, and annual contributions from Treasury. In fiscal year 2005, the contributions made by Treasury were 

increased by an amount equal to the annual expense for the new concurrent receipt provision of the fiscal year 2004 

National Defense Authorization Act. 

 Pension and accrued benefits increased in fiscal year 2008 primarily due to changes in assumptions, benefits 

and actuarial experience. The key assumption changes were a 0.25 percent interest rate reduction that increased the 

liability $41.7 billion and changes in retiree and mortality rates which led to an $18.4 billion increase. Actuarial 

experience, including military pay and cost of living adjustments, led to a $23.3 billion increase, and benefit 

improvements, primarily an allowance for certain reservists to retire early, led to a $8.1 billion increase. The 

remaining increase results primarily from an expected increase in the actuarial liability of $34.0 billion (growth due 

to normal cost, interest cost, and liability released through benefit payments). 

The military retirement system consists of a funded, noncontributory, defined benefit plan. It applies to 

military personnel (Departments of the Army, Navy, Air Force, and 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/REDUX. The date each 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/army2/bonuses/redux.html, and http://www.defenselink.mil/militarypay/ 

retirement/index.html). 
 NOTES TO THE FINANCIAL STATEMENTS 73

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 fund was created in 2000). The purpose of this fund is to account for the health 

benefits of Medicare-eligible members and former retirees of the Uniformed Services and their eligible dependents 

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 

premium costs for HMO 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. VA recognizes the medical care 

expenses in the period the medical care services are provided. For the time period 2004 through 2008, the average 

medical cost per year was $30.0 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 $339.0 billion in fiscal year 

2008 and decreased by $26.1 billion in fiscal year 2007. Actuarial assumption changes were the primary reason 

behind a more than six-fold increase in VA’s costs during fiscal year 2008, compared with a relatively meager 

decrease in fiscal year 2007. The fiscal year 2008 actuarial cost increase was the largest by far at VA in recent years 

and accounted for approximately 50 percent of the change in total cost across the Government. The major 

components of this significant change include changes in discount rates, pay adjustments, and estimates of veteran 

eligibility. 
74 NOTES TO THE FINANCIAL STATEMENTS 

Veterans Compensation and Burial Benefits Payable as of September 30 

(In billions of dollars) 2008 2007 

 

Veterans................................................................................................ 1,231.9 944.0 

Survivors............................................................................................... 230.1 179.9 

Burial benefits ....................................................................................... 4.7 3.8 

Total veterans compensation and burial benefits payable................. 1,466.7 1,127.7 

Significant Economic Assumptions Used in Determining Veterans 

Compensation and Burial Benefits as of September 30 

2008 2007 

 

Rate of interest ..................................................................................... 3.97% 4.67% 

Rate of inflation..................................................................................... 2.45% 2.31% 

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. 

The components of veteran life insurance liability for future policy benefits are presented below. 

Veteran Life Insurance Liability as of September 30 

 

(In billions of dollars) 2008 2007 

 

Insurance death benefits: 

NSLI........................................................................................... 7.8 8.2 

VSLI ........................................................................................... 1.6 1.6 

VRI............................................................................................. 0.3 0.3 

Other.......................................................................................... 0.4 0.5 

Total death benefits................................................................. 10.1 10.6 

 

Death benefit annuities................................................................. 0.1 0.1 

Disability income and waiver........................................................ 0.5 0.5 

Insurance dividends payable........................................................ 1.9 1.9 

Total veterans life insurance liability.......................................... 12.6 13.1 

 

Insurance dividends payable consists of dividends left on deposit with VA, related interest payable, and 

dividends payable to policyholders. 

The VA supervises service members’ 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 
 NOTES TO THE FINANCIAL STATEMENTS 75

present value of the future liability for pension benefits is a nonexchange transaction and is not required to be 

recorded on the balance sheet. The projected amounts of future payments for pension benefits as of September 30, 

2008, and 2007, were $97.3 billion and $81.4 billion, respectively. 

Note 13. Environmental and Disposal Liabilities 

Environmental and Disposal Liabilities as of September 30 

(In billions of dollars) 2008 2007 

 

Department of Energy: 

Environmental management program.................................................. 185.4 188.6 

Legacy environmental liabilities - other................................................ 51.2 45.8 

Active and Surplus Facilities ................................................................ 29.4 29.2 

Total Department of Energy............................................................... 266.0 263.6 

Department of Defense: 

Environmental restoration .................................................................... 32.0 33.1 

Disposal of weapon systems program ................................................. 28.8 31.4 

Base realignment and closure.............................................................. 5.2 5.1 

Environmental corrective other............................................................. 4.5 2.9 

Total Department of Defense............................................................. 70.5 72.5 

All other agencies ................................................................................. 6.3 5.9 

Total environmental and disposal liabilities ....................................... 342.8 342.0 

 

During World War II and the Cold War, DOE (or predecessor agencies) developed a massive industrial 

complex to research, produce, and test nuclear weapons. The nuclear weapons complex included nuclear reactors, 

chemical-processing buildings, metal machining plants, laboratories, and maintenance facilities. 

At all the 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 areas and buildings, and large volumes of waste and 

special nuclear materials requiring treatment, stabilization, and disposal. 

Of those environmental liabilities, this report presents only cleanup costs from Federal operations known to 

result in hazardous and radioactive waste that the Government is required to clean up by Federal, State, or local 

statutes and/or regulations. Some of these statutes are: the Comprehensive Environmental Response, Compensation, 

and Liability Act (CERCLA); the Resource Conservation and Recovery Act; the Nuclear Waste Policy Act of 1982, 

which provides for permanent disposal of the Nation’s high-level radioactive waste and spent nuclear fuel; and 

Public Law No. 105-204, which requires a plan for the conversion of depleted uranium hexafluoride. 

DOE is responsible for managing the legacy of contamination from the nuclear weapons complex. The 

environmental management baseline estimate includes projections of the technical scope, schedule, and costs for 

environmental restoration; managing nuclear materials waste treatment, storage and disposal activities; and postcleanup monitoring and stewardship at each installation. The baseline estimate includes costs for related activities 

such as landlord responsibilities, program management, and legally prescribed grants and cooperative agreements 

for participation and oversight by Native American tribes, regulatory agencies, and other stakeholders. Active and 

surplus facilities represent anticipated remediation costs for those facilities that are conducting ongoing operations 

but ultimately will require stabilization, deactivation, and decommissioning. 

Estimated cleanup costs at sites for which there are no current feasible remediation approaches are excluded from 

the baseline estimates, although applicable stewardship and monitoring costs for these sites are included. Significant 

projects not included are the nuclear explosion test areas (e.g., Nevada test site). 
76 NOTES TO THE FINANCIAL STATEMENTS 

Estimating DOE’s environmental cleanup liability requires making assumptions about future activities and is 

inherently uncertain. The future course of DOE’s environmental management program will depend on a number of 

fundamental technical and policy choices to be made in the future. The sites and facilities could be restored to a 

pristine condition suitable for any desirable use, or could be restored to a point where they pose no near-term health 

risks. Achieving pristine conditions would have a higher cost but may or may not, warrant the costs and potential 

ecosystem disruption, or be legally required. The environmental 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 the estimates. 

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. The DOE unrecognized portion of the cleanup cost associated with active and surplus facilities is $698.0 

million and $760.0 million for fiscal years 2008 and 2007, respectively. The unrecognized portion of the cleanup 

cost is recognized over a predetermined period of time. 

Please refer to the financial statements of the Department of Energy for significant detailed information 

regarding DOE’s environmental and disposal liabilities, including cleanup costs. 

DOD is required by law to adhere to CERCLA and the Superfund Amendment and Reauthorization Act to 

clean up contamination resulting from waste disposal practices, leaks, spills, and other activities that have created a 

public health or environmental risk. CERCLA requires DOD to clean up contamination in coordination with 

regulatory agencies, other responsible parties, and current property owners. 

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 nonrange unexploded ordnance cleanup. 

DOD is currently using two independently validated estimating models, in addition to engineering estimates, to 

report its environmental liabilities. The models are the Remedial Action Cost Engineering Requirements (RACER) 

and the Department of Navy Normalization of Data System (NORM). DOD uses the models to estimate cost during 

the preliminary assessment and initial site investigation phases of restoration projects. Engineering estimates are 

generally used to estimate cost from the remedial investigation/feasibility phase of the project forward. DOD is also 

required to recognize closure and post-closure costs for its general property, plant, and equipment and environmental 

corrective action costs for current operations. The cleanup cost associated with general property, plant, and 

equipment that is allocated to operating periods beyond the balance sheet date is identified as the unrecognized 

portion. The DOD unrecognized portion of the cleanup cost associated with general property, plant, and equipment 

is $1,953.9 million and $1,589.1 million for fiscal years 2008 and 2007, respectively. The unrecognized portion of 

the cleanup costs is recognized over a predetermined period of time. 

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 77

Note 14. Benefits Due and Payable 

Benefits Due and Payable as of September 30 

(In billions of dollars) 2008 2007 

 

Federal old-age and survivors insurance .................................................. 46.4 44.1 

Federal supplementary medical insurance (Medicare Parts B and D)...... 24.0 22.2 

Federal disability insurance ....................................................................... 22.2 21.7 

Federal hospital insurance (Medicare Part A) .......................................... 21.0 19.4 

Grants to states for Medicaid..................................................................... 20.4 19.4 

Supplemental security income................................................................... 4.5 4.2 

Unemployment insurance.......................................................................... 1.6 1.3 

All other benefit programs.......................................................................... 4.3 1.4 

Total benefits due and payable............................................................... 144.4 133.7 

 

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 Supplemental Information—Social 

Insurance section. 
78 NOTES TO THE FINANCIAL STATEMENTS 

Note 15. Insurance Program Liabilities 

Insurance Program Liabilities as of September 30 

(In billions of dollars) 2008 2007 

 

Insurance program liabilities: 

Pension Benefit Guaranty Corporation - Benefit Pension Plans......... 60.0 69.2 

Federal Deposit Insurance Corporation .............................................. 12.1 1.8 

Department of Homeland Security - National Flood Insurance 

Program ............................................................................................ 5.5 1.5 

All other insurance programs .............................................................. 0.2 0.2 

Total insurance program liabilities .................................................... 77.8 72.7 

 

Pension Benefit Guaranty Corporation (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, 2008, PBGC had total liabilities of $74.1 billion, and its total 

liabilities exceeded its total assets by $11.2 billion. In addition, as discussed in Note 19—Contingencies, PBGC 

reported reasonably possible contingent losses of about $46.8 billion. 

Of the total FDIC amount, $11.7 billion represents the recorded contingent liability and loss provision for 

Depositor Insured Fund institutions that are likely to fail within one year. The remaining amounts represent pending 

depositor claims and contingent liabilities for litigation. 

The Federal Emergency Management Agency (FEMA) of DHS administers the National Flood Insurance 

Program (NFIP) in communities that enact and enforce appropriate flood plain management measures. This liability 

represents an estimate of NFIP losses that are unpaid at the balance sheet date and is based on the loss and loss 

adjustment expense factors inherent in the NFIP insurance underwriting operations experience and expectations. 

In addition, see Note 8 for information regarding Treasury’s Temporary Guarantee Program for Money Market 

Funds. The Government believes the risk of loss under the program is negligible, and no liability is recorded as of 

September 30, 2008. 
NOTES TO THE FINANCIAL STATEMENTS 79

Note 16. Other Liabilities 

Other Liabilities as of September 30 

(In billions of dollars) 2008 2007 

 

Unearned revenue and assets held for others: 

DOE's unearned fees for nuclear waste disposal and other unearned 

revenue.................................................................................................. 53.3 33.6 

Assets held on behalf of others................................................................ 46.2 38.7 

Subtotal.................................................................................................. 99.5 72.3 

 

Employee-related liabilities: 

Accrued Federal employees wages and benefits .................................... 35.1 31.2 

Selected DOE contractors' and D.C. employees’ pension benefits ......... 29.2 28.8 

Subtotal.................................................................................................. 64.3 60.0 

 

Subsidies and grants: 

Farm and other subsidies......................................................................... 21.4 17.9 

Grant payments due to State and local governments and others............ 14.6 13.1 

Subtotal.................................................................................................. 36.0 31.0 

 

International monetary liabilities and gold certificates (Note 2).......... 18.7 20.8 

 

Miscellaneous liabilities: 

Legal and other contingencies ................................................................. 26.6 24.7 

Bonneville Power Administration non-Federal power projects and 

capital lease liabilities, and disposal liabilities ....................................... 10.2 12.5 

Other miscellaneous ................................................................................ 42.8 35.1 

Subtotal.................................................................................................. 79.6 72.3 

Total other liabilities ............................................................................ 298.1 256.4 

 

Other liabilities represent liabilities that are not separately identified on the balance sheet and are presented on 

a comparative basis by major category. 
80 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 $25.5 billion and $24.8 

billion as of September 30, 2008, and 2007, respectively. The Federal Communications Commission includes 

deferred revenue of $17.1 billion as of September 30, 2008, for proceeds received from its competitive bidding 

system for the recovered analog spectrum relating to licenses that have not been granted. Other unearned revenue 

includes U.S. Postal Service income for such things as prepaid postage, outstanding money orders, and prepaid P.O. 

Box rentals. Assets held on behalf of others include funds collected in advance and undelivered defense articles. The 

Foreign Military Sales program holds $36.0 billion and $29.0 billion as of September 30, 2008, and 2007, 

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 12 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 $12.3 

billion as of September 30, 2008, and 2007. Also, the Government owed about $8.8 billion and $9.0 billion as of 

September 30, 2008, and 2007, respectively, for estimated future pension benefits of the District of Columbia’s 

judges, police, firefighters, and teachers. 

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. Department of Agriculture 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 $12.2 billion, and $11.5 billion as of September 30, 2008, and 

2007, 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, 2008, and 2007, the Department of Transportation (DOT), Department of Education (Education), and 

HHS collectively owed their grantees about $11.9 billion and $11.6 billion, respectively. Refer to the financial 

statements and footnotes of the respective agencies for additional information. 

Miscellaneous Liabilities 

Some of the more significant liabilities included in this category are for (1) legal and other contingencies (see 

Note 19—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 described.
NOTES TO THE FINANCIAL STATEMENTS 81

Note 17. Collections and Refunds of Federal Revenue 

Collections of Federal Revenue for the Year Ended September 30, 2008 

 

Tax Year to Which Collections Relate 

(In billions of dollars) 

Federal 

Revenue 

Collections 2008 2007 2006 

Prior 

Years 

Individual income and tax 

 withholdings ............................ 2,294.3 1,455.0 799.2 23.5 16.6 

Corporation income taxes.......... 354.0 222.0 114.0 2.0 16.0 

Unemployment taxes ................. 39.5 21.9 10.1 7.4 0.1 

Excise taxes............................... 68.4 50.2 17.9 0.1 0.2 

Estate and gift taxes .................. 29.8 - 19.2 1.3 9.3 

Railroad retirement taxes........... 4.9 3.7 1.2 - - 

Federal Reserve earnings.......... 33.6 25.9 7.7 - - 

Fines, penalties, interest, and 

 other revenue.......................... 6.6 6.1 0.4 0.1 - 

Customs duties .......................... 28.6 28.6 - - - 

Subtotal ................................... 2,859.7 1,813.4 969.7 34.4 42.2 

Less: amounts collected for 

non-Federal entities ........... (0.9) 

Total ................................... 2,858.8 

 

Treasury is the Government’s principal revenue-collecting agency. Collections of individual income tax and tax 

withholdings consist of Federal Insurance Contributions Act (FICA)/Self-Employment Contributions Act (SECA) 

and other taxes. 
82 NOTES TO THE FINANCIAL STATEMENTS 

Federal Tax Refunds Disbursed for the Year Ended September 30, 2008 

 Tax Year to Which Refunds Relate 

(In billions of dollars) 

Refunds 

Disbursed 2008 2007 2006 

Prior 

Years 

 

Individual income and tax 

 withholdings ............................... 369.3 0.9 342.1 19.2 7.1 

Corporation income taxes............. 54.3 2.2 19.6 10.4 22.1 

Unemployment taxes .................... 0.1 - 0.1 - - 

Excise taxes.................................. 1.3 0.5 0.5 0.1 0.2 

Estate and gift taxes ..................... 1.0 - 0.3 0.4 0.3 

Customs duties ............................. 1.3 0.7 0.2 0.1 0.3 

Total............................................ 427.3 4.3 362.8 30.2 30.0 

 

Reconciliation of Revenue to Collections for the Year Ended 

September 30 

(In billions of dollars) 2008 2007 

 

Consolidated revenue per the Statements of Operations and 

 Changes in Net Position ..................................................................... 2,661.4 2,627.3 

Tax refunds ............................................................................................ 427.3 299.7 

Stimulus Act Recovery Rebate Payments ............................................. (94.3) - 

Earned income tax credit and child tax credit imputed revenue............ (59.2) (58.4) 

Nontax-related fines and penalties reported by agencies ..................... (40.7) (33.8) 

Nontax-related earned revenue ............................................................. (35.7) (29.7) 

Collections of Federal revenue .............................................................. 2,858.8 2,805.1 

 

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. Stimulus Act Recovery Rebate 

payments, Earned Income Tax Credit, and Child Tax Credit amounts (unaudited) are included in gross cost in the 

Statements of Net Cost as a component of Treasury. 

On the other hand, collections of Federal revenue are reported on a gross cash basis. The table above reconciles 

total revenue to collections. 
NOTES TO THE FINANCIAL STATEMENTS 83

Collections of Federal Revenue for the Year Ended September 30, 2007 

 

Tax Year to Which Collections Relate 

(In billions of dollars) 

Federal 

Revenue 

Collections 2007 2006 2005 

Prior 

Years 

 

Individual income and tax 

 withholdings ............................ 2,201.5 1,408.6 750.6 23.9 18.4 

Corporation income taxes.......... 395.3 253.4 116.3 2.9 22.7 

Unemployment taxes ................. 39.4 21.9 9.8 7.6 0.1 

Excise taxes............................... 69.9 51.8 17.8 0.1 0.2 

Estate and gift taxes .................. 27.0 - 16.2 1.6 9.2 

Railroad retirement taxes........... 4.7 3.6 1.1 - - 

Federal Reserve earnings.......... 32.0 26.2 5.8 - - 

Fines, penalties, interest, and 

 other revenue.......................... 9.5 9.1 0.4 - - 

Customs duties .......................... 26.3 26.3 - - - 

Subtotal ................................... 2,805.6 1,800.9 918.0 36.1 50.6 

Less: amounts collected for 

non-Federal entities .............. (0.5) 

Total ................................... 2,805.1 

 

Federal Tax Refunds Disbursed for the Year Ended September 30, 2007 

 Tax Year to Which Refunds Relate 

(In billions of dollars) 

Refunds

Disbursed 2007 2006 2005 

Prior 

Years 

 

Individual income and tax 

 withholdings ................................ 261.1 1.8 235.2 17.8 6.3 

Corporation income taxes.............. 28.2 1.2 8.2 4.3 14.5 

Unemployment taxes ..................... 0.1 - 0.1 - - 

Excise taxes................................... 2.4 0.4 0.6 0.3 1.1 

Estate and gift taxes ...................... 1.0 - 0.3 0.5 0.2 

Customs duties .............................. 6.9 5.6 0.2 0.3 0.8 

Total............................................. 299.7 9.0 244.6 23.2 22.9 

 
84 NOTES TO THE FINANCIAL STATEMENTS 

Note 18. Prior Period Adjustments 

 

Prior Period Adjustments for the Year Ended September 30 

 Changes to Net Position 

(In billions of dollars) 2008 2007

 

Prior Period Adjustments 

Department of Agriculture................................................. 11.5 - 

National Aeronautics and Space Administration............... - (12.7) 

Other prior period adjustments ......................................... (0.1) (1.2) 

Total prior period adjustments........................................ 11.4 (13.9) 

 

DHS deposits 30 percent of customs duties collected into an unavailable receipt account. USDA receives an 

amount annually from this account in accordance with 7 USC 612c to encourage exportation and domestic 

consumption of agricultural products. Treasury and OMB decided that Agriculture should be assigned responsibility 

for the unavailable receipt account to improve Governmentwide reporting. Consequently, the cumulative effect of 

this change on prior periods increased the beginning balance of Net Position by $13.6 billion. Additionally, USDA 

implemented a reclassification of its road prism assets from general plant, property, and equipment to Stewardship 

plant, property, and equipment. This change removes a net book value of $2.1 billion from the beginning balance of 

Net Position. The net value of these two numbers increased USDA’s beginning balance of Net Position by $11.5 

billion. 

In fiscal year 2007, NASA recorded prior period adjustments for $12.7 billion (net decrease), primarily to 

reflect a change in accounting principle for property, plant, and equipment to reclassify costs previously categorized 

as general property, plant, and equipment to R&D expenses. After a detailed review of all items previously 

categorized as property, plant, and equipment, NASA concluded certain projects are more properly classified as 

R&D, and should not be classified, in their entirety, as capital assets under the classification of property, plant, and 

equipment. Accordingly, NASA applied the provisions of SFAS No. 2, Accounting for R&D Costs, to account for 

its R&D projects. NASA believes the recognition and measurement requirements of SFAS No. 2 result in reporting 

financial information that is more relevant and accurate. 
NOTES TO THE FINANCIAL STATEMENTS 85

Note 19. 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. 

Reported on Balance 

Sheet and Statement 

of Net Cost. 

Accrue liability using 

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.
86 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 $64.0 billion as of September 30, 2008, and 

$67.8 billion as of September 30, 2007. The major programs are identified below: 

• PBGC reported $46.8 billion and $65.7 billion as of September 30, 2008 and 2007, respectively, for the 

estimated aggregate unfunded vested benefits exposure to the PBGC for private-sector single-employer and 

multiemployer defined pension plans that is classified as a reasonably possible exposure to loss. 

• FDIC reported $17.2 billion and $0.9 billion as of September 30, 2008 and 2007, respectively, 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 $1,660.1 billion as of September 30, 2008, and $1,157.3 

billion as of September 30, 2007. These amounts represent estimated maximum exposure to insurance claims and 

guarantee programs. The major programs are identified below: 

• The Department of Homeland Security reported $1,600.0 billion and $1,100.0 billion as of September 30, 

2008, and 2007, respectively, for the National Flood Insurance Program. 

• The Export-Import Bank of the United States reported $39.9 billion and $39.1 billion as of September 30, 

2008, and 2007, respectively, for Export Credit Insurance. 

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, 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 an aggregated insured deposit exposure estimated at approximately $5,063.7 billion as of 

September 30, 2008, and $4,800.2 billion as of September 30, 2007, which represent the total face amount of 

insurance in force. However, these amounts represent maximum possible losses assuming all the FDIC and NCUA 

member depository institutions were to fail (i.e., the likelihood of this occurring is remote) and the acquired assets 

provided no recovery of funds. Actual losses have generally been a very small fraction of the aggregate estimated 

insured deposits. The breakdown by agency is identified below: 

• FDIC has estimated insured deposits of $4,462.0 billion as of September 30, 2008, and $4,239.0 billion as 

of September 30, 2007, for the Deposit Insurance Fund.

• NCUA has estimated insured deposits of $601.6 billion as of September 30, 2008, and $561.2 billion as of 

September 30, 2007, for the National Credit Union Share Insurance Fund.
NOTES TO THE FINANCIAL STATEMENTS 87

Legal and Other Contingencies 

Legal and other contingencies as of September 30, 2008, and 2007, are summarized in the table below: 

 2008 2007

 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 and other 

contingencies 

 

Probable............ 6.6 5.8 7.8 6.4 6.4 8.0 

Reasonably 

possible .......... 8.0 21.4 3.6 6.6 

 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 

$6.6 billion and $6.4 billion as of September 30, 2008, and 2007, respectively, and are reflected in the balance sheet 

as “Insurance Liabilities” or “Other Liabilities.” A few of the major cases are summarized below: 

• HHS has accrued $3.8 billion for contingent liabilities related to administrative proceedings, legal actions, and 

tort claims as of September 30, 2008. HHS Centers for Medicare and Medicaid Services has accrued $3.5 

billion for Medicaid, which consists of Medicaid and audit and program disallowances of $0.7 billion and $2.8 

billion for reimbursements of State Plan amendments. Contingent liabilities have been established as a result of 

Medicaid audit and program disallowances that are currently being appealed by the States. HHS will be required 

to pay these amounts if the appeals are decided in favor of the States. 

• DOI has accrued $1.2 billion for contingent liabilities, consisting of numerous claims and lawsuits that are 

awaiting adjudication. These actions typically relate to administrative and judicial claims, contract related 

actions, tribal and Indian trust-related matters, personnel and employment related matters, and various land and 

resource related claims and adjudications. 

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 $8.0 billion to $21.4 billion as of 

September 30, 2008, and from $3.6 billion to $6.6 billion as of September 30, 2007. Two of the major cases are 

summarized below: 

• DHS has received and has pending administrative claims and 30 Class Action lawsuits. The claims and lawsuits 

are related to claims against FEMA for personal injuries allegedly resulting from exposure to formaldehyde in 

temporary housing units; i.e., travel trailers, and mobile homes, issued by FEMA in response to Hurricanes 

Katrina and Rita. 

• USDA has pending class action discrimination suits. 
88 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: 

• Native Americans allege that DOI and Treasury have breached trust obligations with respect to the management 

of the plaintiffs’ individual Indian monies. The plaintiffs have not made claims for specific dollar amounts in 

the Federal district court proceedings, but in public statements have asserted that the class is owed tens of 

billions of dollars. 

• DOI is involved in two related cases in connection with Indian mineral lease amendments containing increased 

royalty rates negotiated by the Navajo Nation and the Hopi Tribe. The tribes assert that the United States 

breached fiduciary duties to the tribes when the Secretary approved the tribally-negotiated amendments. 

• Threatened or pending DOD litigation cases include claims asserted under the Federal Tort Claims Act 

(FTCA), patent infringement and damage claims, and contract litigation involving cost accounting standards. 

• Numerous complaints have arisen as a result of Hurricane Katrina. These New Orleans FTCA cases allege 

personal injury, wrongful death, and property damages as a result of massive flooding caused by the hurricane. 

There are over 507,000 administrative claims filed in relation to Hurricane Katrina and 1,000 related suits in 

Federal district courts. Additional suits are expected. 

Environmental and Disposal Contingencies 

Environmental and disposal contingencies as of September 30, 2008, and 2007, are summarized in the table 

below: 

 2008 2007

 

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 ....................... 12.7 12.7 13.0 11.2 11.2 11.3 

Reasonably possible .... 0.4 0.4 0.3 0.8 

 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 

$12.7 billion and $11.2 billion as of September 30, 2008, and 2007, respectively, and are reflected on the balance 

sheet as “Other Liabilities.” 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 $12.4 billion and $11.1 billion as of 

September 30, 2008, and 2007, respectively. 
NOTES TO THE FINANCIAL STATEMENTS 89

Other Contingencies 

DOT 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 $46.2 billion to the states to establish 

budgets for its construction projects for fiscal years ending September 30, 2008, and 2007. Congress has 

not provided appropriations for these projects and no liability is accrued in the consolidated financial 

statements. 

• The Federal Transit Administration (FTA) provides grants to state and local transit authorities and 

agencies. FTA executes Full Funding Grant Agreements authorizing transit authorities to establish project 

budgets and incur costs with their own funds in advance of annual appropriations by Congress. Under these 

agreements, FTA has committed approximately $1.7 billion and $3.9 billion for fiscal years ending 

September 30, 2008, and 2007. Congress has not provided appropriations for these commitments and no 

liability is reflected in the consolidated financial statements. 

Note 20. Commitments 

 

Long-Term Operating Leases as of September 30 

(In billions of dollars) 2008 2007

 

General Services Administration.................... 23.9 23.1 

U.S. Postal Service ........................................ 8.3 8.4 

Department of Justice.................................... 4.3 3.1 

Department of Homeland Security................. 2.3 0.9 

Department of Health and Human Services .. 1.5 1.6 

Department of State....................................... 1.0 1.8 

Department of Agriculture.............................. 0.8 0.8 

Other operating leases................................... 4.6 4.8 

Total long-term operating leases................. 46.7 44.5 

 

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 contractual commitments that may require future use of financial resources. For 

example, the Government has callable subscriptions in the Multilateral Development Banks (MDBs), which are 

autonomous international financial entities that finance economic and social development projects in developing 

countries. Callable capital resembles promissory notes to honor MDB debts if the MDB cannot otherwise meet its 

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. Treasury officials do not anticipate any calls 

on MDB subscriptions. To date, there has never been a call on this capital for any of the major MDBs.
90 NOTES TO THE FINANCIAL STATEMENTS 

Undelivered Orders and Other Commitments 

as of September 30 

(In billions of dollars) 2008 2007 

 

Undelivered Orders: 

 Department of Defense ......................................... 316.1 246.0 

 EOP Foreign Military Sales Program .................... 77.6 63.8 

 Department of Transportation ................................... 71.7 72.2 

 Department of Health and Human Services ......... 69.3 72.1 

 Department of the Treasury ................................... 57.1 55.8 

 Department of Housing and Urban Development .. 56.8 65.2 

 Department of Education ...................................... 47.2 48.2 

 Department of Agriculture ..................................... 37.8 34.9 

 Department of Homeland Security......................... 33.6 29.9 

 Department of Energy ........................................... 13.6 12.2 

 Department of State .............................................. 13.6 11.3 

 Agency for International Development .................. 11.6 12.0 

 Department of Justice ........................................... 8.9 9.0 

 National Science Foundation ................................ 8.0 7.7 

 Environmental Protection Agency ......................... 7.8 8.0 

 Department of Veterans Affairs ............................. 7.4 4.6 

 All other agencies .................................................. 32.0 32.2 

Total undelivered orders....................................... 870.1 785.1 

 

Other Commitments: 

Senior GSE Preferred Stock Purchase 

Agreement ......................................................... 186.2 - 

Callable capital subscriptions for multilateral 

development banks............................................ 62.3 62.2 

Sales of surplus power ......................................... 32.8 21.2 

Power purchase obligations ................................. 7.2 4.8 

Long-term satellite and systems............................ 4.8 7.7 

Fuel purchase obligations .................................... 4.2 3.1 

Agriculture direct loans and guarantees............... 3.8 2.7 

Contract Options and Negotiations ...................... 3.7 - 

All other commitments.......................................... 4.7 8.1 

Total other commitments ................................... 309.7 109.8 
NOTES TO THE FINANCIAL STATEMENTS 91

Other Commitments and Risks 

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. 

On September 7, 2008, the Secretary of the Treasury announced a program designed to protect the U.S. 

markets and the taxpayers from the systemic risk posed by the financial condition of the GSE. Treasury entered into 

a senior preferred stock purchase contract with Freddie Mac and Fannie Mae. They are indefinite in duration and 

have a capacity of $100 billion each, an amount chosen to demonstrate a strong commitment to the GSE creditors 

and mortgage-backed security holders. Treasury also established a new secured lending credit facility which will be 

available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Funding will be provided directly by 

Treasury from its general fund held at the FRBNY in exchange for eligible collateral from the GSE which will be 

limited to guaranteed mortgage-backed securities issued by the GSE. See Note 8 for further information. 

In addition, the U. S. Government has entered into other agreements that could potentially require claims on 

Government resources in the future. Examples include war risk and terrorism risk insurance. 
92 NOTES TO THE FINANCIAL STATEMENTS 

Note 21. Earmarked Funds 

Earmarked Funds as of September 30, 2008 1

 

(In billions of dollars) 

Federal OldAge 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.... (0.3) - - - 0.2 0.9 

Investments in U.S. Treasury 

securities .............................. 2,150.7 250.3 728.9 132.8 318.7 47.8 

Other Federal assets............... 26.4 2.7 10.1 1.5 26.8 1.1 

Non-Federal assets................. 2.5 - 0.3 - 1.1 0.9 

Total assets.......................... 2,179.3 253.0 739.3 134.3 346.8 50.7 

 

Liabilities: 

Liabilities due and payable to 

beneficiaries ......................... 46.4 3.4 5.0 0.6 21.0 4.1 

Other Federal liabilities............ 4.2 - 0.1 0.1 22.5 0.3 

Other non-Federal liabilities .... - 1,150.7 1,387.8 500.3 0.4 331.8 

Total liabilities....................... 50.6 1,154.1 1,392.9 501.0 43.9 336.2 

Total net position.................. 2,128.7 (901.1) (653.6) (366.7) 302.9 (285.5) 

Total liabilities and net 

position ........................... 2,179.3 253.0 739.3 134.3 346.8 50.7 

 

Change in net position: 

Beginning net position............. 1,946.7 (810.6) (613.6) (407.9) 295.0 (262.8) 

Prior period adjustment ........... - - - - - - 

Beginning net position, 

adjusted................................ 1,946.7 (810.6) (613.6) (407.9) 295.0 (262.8) 

Investment revenue................. 104.1 15.5 37.3 8.2 16.6 1.9 

Individual income taxes........... 573.8 - - - 197.2 - 

Unemployment and excise 

taxes ........................................ - - - - - - 

Other taxes and receipts ......... - - - - 0.6 - 

Miscellaneous earned 

revenues .............................. - - - - - - 

Other changes in fund 

balance (e.g., 

appropriations, transfers) ..... 10.0 65.1 30.9 24.4 11.2 8.7 

Non-program expenses........... - - - - - - 

Program net cost..................... 505.9 171.1 108.2 (8.6) 217.7 33.3 

Ending net position............... 2,128.7 (901.1) (653.6) (366.7) 302.9 (285.5) 

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 93

Earmarked Funds as of September 30, 2008 1

(In billions of dollars) 

Federal 

Disability 

Insurance 

Trust Fund 

Unemployment 

Trust Fund 

Federal 

Supplementary 

Medical 

Insurance Trust 

Fund (Medicare 

Parts B and D) 

All Other 

Earmarked 

Funds 

IntraEarmarked 

Fund 

Eliminations 

Total 

Earmarked 

Funds 

 

Assets: 

Cash and other monetary 

assets ............................... - - 0.3 22.3 - 22.6 

Fund balance with Treasury .. (0.4) (0.1) 12.3 77.5 - 90.1 

Investments in U.S. 

Treasury securities ........... 216.5 72.4 59.1 177.6 - 4,154.8 

Other Federal assets........... 2.7 1.2 26.5 18.3 (53.5) 63.8 

Non-Federal assets ............. 3.0 1.5 5.0 116.2 - 130.5 

Total assets ...................... 221.8 75.0 103.2 411.9 (53.5) 4,461.8 

 

Liabilities: 

Liabilities due and payable 

to beneficiaries ................. 24.1 1.6 24.0 2.0 - 132.2 

Other Federal liabilities........ 1.0 1.3 26.9 61.9 (53.5) 64.8 

Other non-Federal liabilities... - - 0.3 188.9 - 3,560.2 

Total liabilities ................... 25.1 2.9 51.2 252.8 (53.5) 3,757.2 

Total net position .............. 196.7 72.1 52.0 159.1 - 704.6 

Total liabilities and net 

position ....................... 221.8 75.0 103.2 411.9 (53.5) 4,461.8 

 

Change in net position: 

Beginning net position ......... 193.9 75.0 43.9 160.6 - 620.2 

Prior period adjustment ....... - - - - - - 

Beginning net position, 

adjusted............................ 193.9 75.0 43.9 160.6 - 620.2 

Investment revenue............. 11.0 3.6 2.5 0.3 - 201.0 

Individual income taxes ....... 97.4 - - - - 868.4 

Unemployment and excise 

taxes................................. - 39.4 - 51.8 - 91.2 

Other taxes and receipts ..... 0.1 - 3.3 30.7 (0.4) 34.3 

Miscellaneous earned 

revenues........................... - - - 5.8 - 5.8 

Other changes in fund 

balance (e.g., 

appropriations, transfers).. (1.5) (3.7) 179.6 13.3 - 338.0 

Non-program expenses....... - - - 1.9 - 1.9 

Program net cost ................ 104.2 42.2 177.3 101.5 (0.4) 1,452.4 

Ending net position ........... 196.7 72.1 52.0 159.1 - 704.6 

1 By law, certain expenses (costs), revenues, and other financing sources related to the administration of the above funds are not charged to the funds 

and are therefore financed and/or credited to other sources. 
94 NOTES TO THE FINANCIAL STATEMENTS 

Earmarked Funds as of September 30, 20071 (Restated) 

(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................. (0.9) - - - - 0.9 

Investments in U.S. Treasury 

Securities .......................................... 1,968.3 215.4 701.7 108.4 319.4 41.3 

Other Federal assets............................ 25.0 2.8 9.8 1.1 25.4 0.9 

Non-Federal assets.............................. 2.3 - 0.3 - 1.0 0.7 

Total assets....................................... 1,994.7 218.2 711.8 109.5 345.8 43.8 

 

Liabilities and net position: 

Liabilities due and payable to 

beneficiaries ...................................... 44.1 3.5 4.8 0.6 19.4 3.8 

Other Federal liabilities......................... 3.9 - 0.1 0.1 29.5 0.3 

Other non-Federal liabilities ................. - 1,025.3 1,320.5 516.7 1.9 302.5 

Total liabilities.................................... 48.0 1,028.8 1,325.4 517.4 50.8 306.6 

Total net position............................... 1,946.7 (810.6) (613.6) (407.9) 295.0 (262.8) 

Total liabilities and net position....... 1,994.7 218.2 711.8 109.5 345.8 43.8 

 

Change in net position: 

Beginning net position.......................... 1,771.9 (758.7) (591.6) (453.5) 287.9 (273.5) 

Prior period adjustment ........................ (5.0) - - - - - 

Beginning net position, adjusted .......... 1,766.9 (758.7) (591.6) (453.5) 287.9 (273.5) 

Investment revenue.............................. 97.4 10.3 37.2 4.4 16.3 1.0 

Individual income taxes........................ 553.4 - - - 188.0 - 

Unemployment and excise taxes ......... - - - - - - 

Other taxes and receipts ...................... - - - - - - 

Miscellaneous earned revenue ............ - - - - - - 

Other changes in fund balance (e.g., 

appropriations, transfers) .................. 10.6 43.1 13.8 27.3 11.4 25.6 

Non-program expenses........................ - - - - - - 

Program net cost.................................. 481.6 105.3 73.0 (13.9) 208.6 15.9 

Ending net position............................ 1,946.7 (810.6) (613.6) (407.9) 295.0 (262.8) 

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.
NOTES TO THE FINANCIAL STATEMENTS 95

Earmarked Funds as of September 30, 20071 (Restated) 

(In billions of dollars) 

Federal 

Disability 

Insurance 

Trust Fund 

Unemployment 

Trust Fund 

Federal 

Supplementary 

Medical 

Insurance Trust 

Fund (Medicare 

Parts B and D) 

All Other 

Earmarked 

Funds 

IntraEarmarked 

Fund 

Eliminations 

Total 

Earmarked 

Funds 

 

Assets: 

Cash and other monetary 

assets ............................... - - 0.1 21.8 - 21.9 

Fund balance with 

Treasury ............................. (0.4) 0.1 8.8 70.7 - 79.2 

Investments in U.S. 

Treasury Securities........... 213.8 74.9 39.2 169.4 - 3,851.8 

Other Federal assets........... 2.7 1.2 32.9 17.4 (58.3) 60.9 

Non-Federal assets ............. 2.8 1.5 10.8 93.5 - 112.9 

Total assets ...................... 218.9 77.7 91.8 372.8 (58.3) 4,126.7 

 

Liabilities and net position: 

Liabilities due and payable 

to beneficiaries ................. 21.7 1.3 22.2 2.0 - 123.4 

Other Federal liabilities........ 1.0 1.4 24.8 62.0 (58.3) 64.8 

Other non-Federal liabilities... 2.3 - 0.9 148.2 - 3,318.3 

Total liabilities ................... 25.0 2.7 47.9 212.2 (58.3) 3,506.5 

Total net position .............. 193.9 75.0 43.9 160.6 - 620.2 

Total liabilities and net 

position ....................... 218.9 77.7 91.8 372.8 (58.3) 4,126.7 

 

Change in net position: 

Beginning net position ......... 183.0 66.4 41.6 150.8 - 424.3 

Prior period adjustment ....... 5.0 - 0.1 1.0 - 1.1 

Beginning net position, 

adjusted............................ 188.0 66.4 41.7 151.8 - 425.4 

Investment revenue............. 11.0 3.3 2.1 9.7 - 192.7 

 

Individual income taxes ....... 94.0 - - - - 835.4 

Unemployment and excise 

taxes................................. - 39.3 - 53.6 - 92.9 

Other taxes and receipts ..... 0.1 1.6 - 34.0 (0.5) 35.2 

Miscellaneous earned 

revenue............................. - - - 4.4 - 4.4 

Other changes in fund 

balance (e.g., 

appropriations, transfers).. (1.6) (3.5) 159.0 4.9 - 290.6 

Non-program expenses....... - - - 3.0 - 3.0 

Program net cost ................. 97.6 32.1 158.9 94.8 (0.5) 1,253.4 

Ending net position ........... 193.9 75.0 43.9 160.6 - 620.2 

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. 
96 NOTES TO THE FINANCIAL STATEMENTS 

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 11—Federal Debt Securities Held by the Public and Accrued Interest for 

further information related to the investments in Federal debt securities. 

Depicted below is a description of the major 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 14—

Benefits Due and Payable. 

Federal Old-Age and Survivors Insurance Trust Fund 

The Federal Old-Age and Survivors Insurance Trust Fund, administered by the Social Security Administration 

(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. 
NOTES TO THE FINANCIAL STATEMENTS 97

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 Civil Service Retirement and Disability Fund (CSRDF) covers two Federal civilian retirement systems: 

the Civil Service Retirement System (CSRS)—for employees hired before 1984, and the Federal Employees’ 

Retirement System (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. § 8334-8348. 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 Medicare-Eligible Retiree Health Care Fund, administered by DOD and established by 10 U.S.C. § 1111, 

finances and pays the liabilities under the DOD retiree health care programs for Medicare-eligible beneficiaries. 

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 Health Maintenance Organization plans. Retired employees can choose to continue coverage upon 

separation from the Government. OPM administers the HBP. 
98 NOTES TO THE FINANCIAL STATEMENTS 

The law establishing the first HBP trust fund, the Federal Employees Health Benefits (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 Act of 2006 (Postal Act of 2006) (P.L. 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. The Postal Act of 2006 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. 

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. 

Unemployment Trust Fund 

The Unemployment Trust Fund (UTF) provides temporary assistance to workers who lose their jobs. The 

program is administered through a unique system of Federal and State partnerships, established in Federal law, but 

executed through conforming State laws by State officials. DOL administers the Federal operations of the program. 

Employer taxes provide the primary funding source for the UTF and constitute all the earmarked 

unemployment tax revenues as shown on the consolidated Statement of Operations and Changes in Net Position. For 

the years ending September 30, 2008, and 2007, UTF unemployment tax revenues were $39.4 billion and $39.3 

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. 

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. 
NOTES TO THE FINANCIAL STATEMENTS 99

Medicare Part D was created by the Medicare Prescription Drug, Improvement, and Modernization Act of 

2003 (P.L. No. 108-173). Medicare Part D financing is similar to Part B; it is based on monthly premiums and 

income from the General Fund of the Treasury, not on payroll taxes. 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. 

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 table above 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, 2008 and 2007, there were approximately 537 and 521 

earmarked funds, respectively. The earmarked funds within the “all other” aggregate, along with the agencies that 

administer them, include the following: 

• Exchange Stabilization Fund—administered by Treasury.

• Railroad Retirement Trust Fund—administered by RRB.

• Universal Service Fund—administered by FCC.

• Federal Crop Insurance Corporation Fund and Funds for Strengthening Markets, Income, and Supply—

administered by USDA. 

• Superfund (Hazardous Substance) and Leaking Underground Storage Tanks—administered by EPA. 

• U.S. Patent and Trademark Office—administered by DOC. 

• Land and Water Conservation Fund, Historical Preservation Fund and Reclamation Fund—administered 

by DOI. 

• Medical Care—administered by VA. 

• Customs User Fees, Immigration Examination Fees and the National Flood Insurance Program—

administered by DHS. 

• Government National Mortgage Association (Ginnie Mae)—administered by HUD. 

Excise Taxes 

In addition, there are 10 other earmarked funds within the “all other” aggregate that contribute to all of the 

earmarked excise tax revenue shown on the consolidated Statement of Operations and Changes in Net Position. Two 

of these earmarked funds, the Highway Trust Fund and the Airport and Airway Trust Fund, provide 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, 2008, and 2007, Highway Trust Fund excise tax revenues were $36.4 

billion and $39.2 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 entity, 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. 
100 NOTES TO THE FINANCIAL STATEMENTS 

For the years ending September 30, 2008, and 2007, Airport and Airway Trust Fund excise tax revenues were 

$11.8 billion and $12.4 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 (SAFETEA-LU). 

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 intra-earmarked 

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 Railroad Retirement Board 

(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 23—Social Insurance. 

Restatements 

The Balance Sheet and Statement of Operations and Changes in Net Position as of September 30, 2007, were 

restated for the changes discussed below. 

Due to a correction during the current year in the computation of the fiscal year 2007 asset and liability 

elimination amount, the previously reported asset and liability elimination amount was increased by $4.4 billion, 

thereby decreasing the previously reported amounts for total assets, total liabilities, and total liabilities and net position 

by $4.4 billion. In addition, as of September 30, 2007, there was one Federal Agency that, in fiscal year 2008, restated 

some of its fiscal year 2007 balances and transactions from non-earmarked funds to earmarked funds. This resulted in 

an increase in beginning and ending net position attributable to earmarked funds of $5.1 billion and $6.1 billion, 

respectively. This Federal Agency also had $1.0 billion of exchange revenues in excess of gross cost, resulting in a $1 

billion decrease in total program net cost attributable to earmarked funds. As a result of this restatement, the previously 

reported amounts for total assets and for total liabilities and net position increased by $6.1 billion. 

As of September 30, 2007, $4.4 billion of Other Taxes and Receipts for All Other Earmarked Funds were restated 

to Miscellaneous Earned Revenues to correct their presentation. These amounts relate to royalties retained by various 

earmarked funds within DOI. 

In addition, various other restatements were made to certain line items to correct their presentation. As of 

September 30, 2007, the following restatements were made: 

• Individual income and payroll taxes and net intragovernmental transfers were decreased and increased, 

respectively, by $11.8 billion to correct the amount of FICA/SECA taxes collected in fiscal year 2007 by HHS' 

Hospital Insurance Trust Fund. 

• Excise taxes increased by $1.4 billion to correct their being included erroneously in other taxes and receipts.

• Other taxes and receipts increased by a net $13.5 billion. The increase was primarily due to $7.4 billion, $5.4 

billion and $5.2 billion that had been erroneously included in program net cost, net intragovernmental transfers, 

and non-program expenses, respectively. 

• Intragovernmental transfers decreased by a net $37.0 billion, primarily due to $42.1 billion of exchange revenue 

that should have been included in program net cost. 

 
NOTES TO THE FINANCIAL STATEMENTS 101

September 30, 2007 Restatements 

(In billions of dollars) 

Note Line Item 

As 

Published 

Agency 

Restatement 

Change in 

Eliminations 

All Other 

Changes Total 

 

Assets and Liabilities: 

Fund Balance with 

Treasury ............................ 73.3 5.9 - - 79.2 

Other Federal Assets ........... 65.3 - (4.4) - 60.9 

Other Non-Federal Assets.... 112.7 0.2 - - 112.9 

Total Assets ......................... 4,125.0 6.1 (4.4) - 4,126.7 

Other Federal Liabilities ....... 69.2 - (4.4) - 64.8 

Total Liabilities ..................... 3,510.9 - (4.4) - 3,506.5 

Net Position.......................... 614.1 6.1 - - 620.2 

Total Liabilities and Net 

Position.............................. 4,125.0 6.1 (4.4) - 4,126.7 

 

Changes in Net Position: 

Beginning Net Position......... 419.2 5.1 - - 424.3 

Beginning Net Position, 

Adjusted ............................ 420.3 5.1 - - 425.4 

Individual Income Taxes* ..... 847.2 - - (11.8) 835.4 

Unemployment and Excise 

Taxes* ............................... 91.5 - - 1.4 92.9 

Other Taxes and Receipts* .. 21.7 - - 13.5 35.2 

Miscellaneous Earned 

Revenue............................ - - - 4.4 4.4 

Other Changes in Fund 

Balance ............................. 327.6 - - (37.0) 290.6 

Non-Program Expenses....... (2.2) - - 5.2 3.0 

Program Net Cost................. 1,289.1 (1.0) - (34.7) 1,253.4 

Ending Net Position.............. 614.1 6.1 - - 620.2 

* These line items were collectively labeled “Revenue from the public” in the published fiscal year 2007 earmarked funds note 

disclosure. However, these line items were individually published, as shown, in the fiscal year 2007 Statement of Operations and 

Changes in Net Position. 

The restatements related to Changes in Net Position also affected the same line items in the Statement of 

Operations and Changes in Net Position by the same amounts. In addition, on the Balance Sheet, the previously 

reported amounts for net position – non-earmarked funds and for net position – earmarked funds decreased and 

increased, respectively, by $6.1 billion. 

These restatements, including the restatements related to the above Federal Agency restatement and to 

miscellaneous earned revenues, did not affect total Governmentwide consolidated revenues and expenses or 

consolidated ending net position for the year ended September 30, 2007. 
102 NOTES TO THE FINANCIAL STATEMENTS 

Note 22. Indian Trust Funds 

U.S. Government as Trustee for Indian Trust Funds Held for Indian Tribes 

and Other Special Trust Funds – Cash Basis 

Statement of Assets and Trust Fund Balances as of September 30 

(In millions of dollars) 2008 2007 

Assets: 

 Cash and cash equivalents ..................................................................... 519.4 602.5 

 Investments ............................................................................................. 2,483.8 2,278.2 

 Total Assets .......................................................................................... 3,003.2 2,880.7 

Trust fund balances, held for Indian Tribes and by DOI ..................... 3,003.2 2,880.7 

 

 

Tribal and Other Trust Funds 

Statement of Changes in Trust Fund Balances – Cash Basis 

for the Fiscal Years Ended September 30 

(In millions of dollars) 2008 2007 

Receipts ...................................................................................................... 371.2 339.2 

Interest received.......................................................................................... 133.1 139.3 

Gain (loss) on disposition of investments, net ............................................ 1.6 0.6 

Disbursements ............................................................................................ (383.3) (519.6) 

Increase (decrease) in trust fund balances, net.......................................... 122.6 (40.5) 

Trust fund balances, beginning of year....................................................... 2,880.6 2,921.2 

Trust fund balances, end of year.............................................................. 3,003.2 2,880.7 

 

DOI has responsibility for the assets held in trust on behalf of American Indian tribes and individual Indian 

monies. DOI, through the Office of the Special Trustee (OST), holds trust funds in accounts for Indian tribes. It 

maintains over 2,700 accounts for Tribal and Other Trust Funds (including the Alaska Native Escrow Fund). The 

OST was established by the American Indian Trust Fund Management Reform Act of 1994 (Public Law 103-412) 

and was created to improve the accountability and management of Indian funds held in trust by the Government. 

The balances that have accumulated in the Tribal and Other Trust Funds have resulted from judgment awards, 

settlements of claims, land use agreements, royalties on natural resource depletion, and other proceeds derived 

directly from trust resources and investment income. 

The trust fund balances included in the Trust Funds Held for Indian Tribes and Other Trust Funds contain two 

categories: trust funds held for Indian tribes (considered non-Federal funds) and trust funds held by DOI for future 

transfer to a tribe upon satisfaction of certain conditions or where the Corpus of the fund is non-expendable 

(considered Federal funds). 
NOTES TO THE FINANCIAL STATEMENTS 103

The tables above depict the U.S. Government as trustee for Indian Trust Funds Held for Indian Tribes and 

Other Trust Funds. The Other Trust Funds included in the tables ($299.9 million and $289.9 million as of September 

30, 2008, and 2007, respectively, identified in DOI’s financial statements) and trust funds considered Federal funds 

are included in DOI’s financial statements, and other DOI special reports. 

OST also maintains about 378,000 open Individual Indian Monies (IIM) accounts. The IIM fund is primarily 

funds on deposit for individuals who have a beneficial interest in the trust funds. The IIM account-holders realize 

receipts primarily from royalties on natural resource depletion, land use agreements, and enterprises that have a 

direct relationship to trust fund resources and investment income. Funds related to the IIM Trust Fund are included 

in the following tables. 

 

U.S. Government as Trustee for Indian Trust Funds Held for Individual 

Indian Monies Trust Funds – Modified Cash Basis 

Statement of Assets and Trust Fund Balances as of September 30 

(In millions of dollars) 2008 2007 

Assets: 

 Cash and Cash Equivalents ................................................................... 49.3 48.3 

 Investments ............................................................................................ 391.8 372.6 

 Accrued interest receivable .................................................................... 3.1 2.8 

 Total Assets ......................................................................................... 444.2 423.7 

Trust fund balances, held for individual Indians.................................. 444.2 423.7 

 

 

Individual Indian Monies Trust Funds 

Statement of Changes in Trust Fund Balances – Modified Cash Basis 

for the Fiscal Years Ended September 30 

(In millions of dollars) 2008 2007 

Receipts ..................................................................................................... 437.9 303.7 

Interest received......................................................................................... 21.6 20.8 

Gain (loss) on disposition of investments, net ........................................... 0.3 0.4 

Disbursements ........................................................................................... (439.3) (319.5) 

Increase (decrease) in trust fund balances, net......................................... 20.5 5.4 

Trust fund balances, beginning of year...................................................... 423.7 418.3 

Trust fund balances, end of year............................................................. 444.2 423.7 

 

The amounts presented in the four tables of this note were prepared using a cash basis of accounting, which is a 

comprehensive basis of accounting other than GAAP. Receivables and payables are not recorded, and investment 

premiums and discounts are not amortized in the Trust Funds Held for Indian Tribes and Other Trust Funds. 

Receipts are recorded when received and disbursements when paid and investments are stated at historical cost. The 

only basis of accounting difference between the Trust Funds Held for Indian Tribes and Other Trust Funds and the 

IIM Trust Fund is that the latter records the receivables and payables related to accrued interest and dividends when 

earned, including amortization of investment discounts and premiums, and investments are stated at amortized cost. 
104 NOTES TO THE FINANCIAL STATEMENTS 

Note 23. Social Insurance 

Social Insurance Programs Trust Fund Balances ******UNAUDITED*******

(In billions of dollars) 2008 2007 2006 2005 2004 

 

Social Security........................ 2,238 2,048 1,859 1,687 1,531 

Medicare: 

HI ......................................... 312 300 285 268 256 

SMI Part B ........................... 53 38 23 19 24 

SMI Part D ........................... 3 1 - - - 

Railroad Retirement ............... 33 32 30 28 26 

Black Lung.............................. (10) (10) (10) (9) (8) 

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, RRB, and DOL (Black Lung). The projections are based on the 

continuation of program provisions contained in current law. The estimates in the consolidated Statements of Social 

Insurance 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, when the program will terminate). 

Contributions and earmarked taxes consist of payroll taxes from employers, employees, and self-employed 

persons; revenue from Federal income taxation of Old-Age and Survivors 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 does not provide for full benefit 

payments after the trust funds are exhausted. 

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 age 15 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. 
NOTES TO THE FINANCIAL STATEMENTS 105

The present values of future expenditures in excess of future revenue are the current amounts 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. 

The trust fund balances as of the valuation date for the respective programs, including interest earned, are in 

the table shown above. 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 guaranteed for principal and interest by the full faith and credit of the U.S. Government. 

Social Security 

The OASDI program, created in 1935, collectively referred to as “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 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 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 excluded 

in the consolidation at the Governmentwide level. 

For SMI, transfers from the General Fund of the Treasury represent the largest source of income for both Parts 

B and D. Beneficiaries finance the remainder of Parts B and D costs via monthly premiums to these programs. With 

Part D drug coverage, Medicaid will no longer be the primary payer 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 and these Treasury securities and related interest are eliminated in 

consolidation at the Governmentwide level. Refer to the Social Insurance segment in the Supplemental Information 

section for additional information on Medicare program financing. 

The Medicare 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. 
106 NOTES TO THE FINANCIAL STATEMENTS 

SMI Part B Physician Update Factor 

The projected Part B expenditure growth reflected in the accompanying 2008 Statement of Social Insurance is 

significantly reduced as a result of the structure of physician payment updates under current law. In the absence of 

legislation, this structure would result in multiple years of significant reductions in physician payments, totaling an 

estimated 41 percent over the next 9 years. Reductions of this magnitude are not feasible and are very unlikely to 

occur fully in practice. For example, Congress has overridden scheduled negative updates for each of the last 6 years 

in practice. However, since these reductions are required in the future under the current-law payment system, they 

are reflected in the accompanying 2008 Statement of Social Insurance as required under GAAP. Consequently, the 

projected actuarial present values of Part B expenditure shown in the accompanying 2008 Statement of Social 

Insurance, is likely understated. 

The potential magnitude of the understatement of Part B expenditures due to the physician payment 

mechanism can be illustrated using two hypothetical examples of changes to current law. 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 on physician payments under Medicare 

and of the broad range of uncertainty associated with such impacts. Under current law, the projected 75-year present 

value of future Part B expenditures is $21.2 trillion. An alternative scenario indicated that if Congress were to set 

future physician payment updates at zero percent per year, then absent other provisions to offset these costs, the 

projected present value would increase to $23.4 trillion. Similarly, if Congress were to set future physician payment 

updates equal to the Medicare Economic Index (projected to be 2 to 2.5 percent per year), the present value would 

be $25.4 trillion. 

The extent to which actual future Part B costs could exceed the projected current-law amounts due to physician 

payments depends on both the level of physician payment updates that might be legislated and on whether Congress 

would pass further provisions to help offset such costs (as it did, for example, in the Deficit Reduction Act in 2005 

and the Medicare Improvements for Patients and Providers Act of 2008). As noted, these examples only reflect 

hypothetical changes to physician payments. It is likely that in the coming years, Congress will consider and pass 

numerous other legislative proposals affecting Medicare. Many of these would 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. 

Medicare Improvements for Patients and Providers Act of 2008 

On July 15, 2008, the Medicare Improvements for Patients and Providers Act (MIPPA) of 2008 was enacted. 

There were many provisions in MIPPA that affected the Medicare program. These include beneficiary 

improvements, such as expanded access to care, enrollment assistance and increased coverage. There were also 

provisions affecting payments to providers, such as physicians and managed care plans. The net overall impact of all 

MIPPA provisions over the 10-year period from fiscal years 2009-2018 is roughly $25 billion (unaudited) in 

increased Medicare spending. This represents less than 0.5 percent of total Medicare spending during the same time 

period. 

The long-range financial projections underlying the Medicare projections in the 2008 Statement of Social 

Insurance are drawn from the Annual Report of the Medicare Board of Trustees to Congress, which was issued on 

March 25, 2008. These projections are based on an assumption that the Medicare laws, regulations, and policies in 

effect on that date will continue indefinitely without modification. In practice, the subsequent enactment of MIPPA 

will have an effect on Medicare expenditures and revenues. Due to the timing, complexity, and scope of the 

legislation, it is not possible to incorporate the impact of MIPPA into the long-range SOSI projections. The shortrange estimates of the Medicare costs and savings under MIPPA, summarized above, provided an indication of the 

relative financial effect of the legislation. As stated above, the impact these provisions would have on the projections 

presented in the SOSI are relatively minor. 
NOTES TO THE FINANCIAL STATEMENTS 107

Social Security and Medicare – Demographic and Economic Assumptions 

The Boards of Trustees1 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 gross domestic product (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’ best estimate 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.

 

1

 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. 
108 NOTES TO THE FINANCIAL STATEMENTS 

 

Table 1A 

Social Security – Demographic and Economic Assumptions 

Demographic Assumptions 

Period Life 

Expectancy 

at Birth 4

Year 

Total 

Fertility 

Rate 1

Age-Sex 

Adjusted 

Death Rate 2 

(per 100,000) 

Net 

Immigration 3

(persons) Male Female 

2008 2.06 822.2 1,250,000.0 75.4 79.9 

2010 2.06 812.2 1,195,000.0 75.7 80.0 

2020 2.03 750.5 1,130,000.0 76.9 80.9 

2030 2.01 689.8 1,085,000.0 78.0 81.8 

2040 2.00 635.9 1,050,000.0 79.0 82.6 

2050 2.00 588.6 1,035,000.0 80.0 83.4 

2060 2.00 546.8 1,030,000.0 80.8 84.2 

2070 2.00 509.8 1,025,000.0 81.7 84.9 

2080 2.00 476.8 1,025,000.0 82.4 85.6 

 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) 

2008 1.3 4.1 2.8 2.3 0.4 4.4 

2010 1.3 4.0 2.8 2.7 0.9 5.6 

2020 1.1 3.9 2.8 2.2 0.5 5.7 

2030 1.1 3.9 2.8 2.1 0.4 5.7 

2040 1.1 3.9 2.8 2.2 0.5 5.7 

2050 1.1 3.9 2.8 2.1 0.4 5.7 

2060 1.1 3.9 2.8 2.1 0.4 5.7 

2070 1.1 3.9 2.8 2.1 0.4 5.7 

2080 1.1 3.9 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 2032. 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 a given 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 observed in, or 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, expressed in 2000 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 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 special-issue 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 109

Table 1B 

Medicare – Demographic and Economic Assumptions 

 

Demographic Assumptions 

Year 

Total 

Fertility 

Rate1

Age-Sex 

Adjusted 

Death Rate2 

(per 100,000) 

Net 

Immigration3

(persons) 

2008 2.06 822.2 1,250,000 

2010 2.06 812.2 1,195,000 

2020 2.03 750.5 1,130,000 

2030 2.01 689.8 1,085,000 

2040 2.00 635.9 1,050,000 

2050 2.00 588.6 1,035,000 

2060 2.00 546.8 1,030,000 

2070 2.00 509.8 1,025,000 

2080 2.00 476.8 1,025,000 

 

 Economic Assumptions 

Per Beneficiary Cost 

(percent change)7

SMI 

Year 

Real 

Wage 

Differential4

(percent) 

Average 

Annual Wage 

in Covered 

Employment 

(percent 

change) 

CPI5

(percent 

change) 

Real 

GDP6

(percent) HI Part B Part D 

Real 

Interest 

Rate8 

(percent) 

2008 1.3 4.1 2.8 2.3 7.1 1.4 2.9 1.9

2010 1.3 4.0 2.8 2.7 4.3 3.8 6.4 2.3

2020 1.1 3.9 2.8 2.2 4.3 6.1 7.8 2.9

2030 1.1 3.9 2.8 2.1 5.6 5.8 5.7 2.9

2040 1.1 3.9 2.8 2.2 5.9 5.5 5.3 2.9

2050 1.1 3.9 2.8 2.1 4.9 4.9 5.0 2.9

2060 1.1 3.9 2.8 2.1 4.8 4.8 4.7 2.9

2070 1.1 3.9 2.8 2.1 4.7 4.6 4.5 2.9

2080 1.1 3.9 2.8 2.1 4.4 4.3 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 of 2.0 is assumed to be reached in 2032. 

2 The age-sex-adjusted death rate is a weighted average of age-sex-specific death rates (deaths per 100,000) in a year where the weights are 

the number of people in the corresponding age-sex group as of April 1, 2000. 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. It is a summary measure and not a basic assumption; 

it summarizes 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, expressed in 2000 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. 
110 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 interchanges and transactions 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 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. From a Governmentwide perspective, these future financial interchanges and transactions are intragovernmental 

transfers and are excluded 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’ best 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 

231,000 in 2008. 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 43,000 and (2) the employment 

base, excluding passenger service employment, will decline at a constant 2.5 percent annual rate for 25 years, at a 

falling rate over the next 25 years, and remain level thereafter. All the projections are based on an open group (i.e., 

future entrants) population. 

The moderate (middle) economic assumptions include a long-term cost of living increase of 3.0 percent, an 

interest rate of 7.5 percent, and a wage increase of 4 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 Railroad Retirement System Annual Report, June 

2008 and the 23rd Actuarial Valuation of the Assets and Liabilities under the Railroad Retirement Acts (Valuation 

Report) as of December 31, 2004, with Technical Supplement. 
NOTES TO THE FINANCIAL STATEMENTS 111

Table 2 

Railroad Retirement Demographic Actuarial Assumptions (Sources) 

Mortality after age 

retirement 2004 RRB Annuitants Mortality Table 

2004 RRB Disabled Mortality Table for 

Mortality after disability Annuitants with Disability Freeze 

retirement 2004 RRB Disabled Mortality Table for 

Annuitants without Disability Freeze 

Mortality during active 

service 1994 RRB Active Service Mortality Table 

Mortality Rates1 

Mortality of widow 

annuitants 1995 RRB Mortality Table for Widows 

Termination for spouses 2004 RRB Spouse Total Termination Table Total Termination 

Rates2 Termination for disabled 

children 

2004 RRB Total Termination Table for 

Disabled Children 

Widow Remarriage 

Rate3 1997 RRB Remarriage Table 

Age retirement See the Valuation Report Retirement Rates4

Disability retirement See the Valuation Report 

Withdrawal Rates5 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. 

Black Lung Disability Benefit Program

The Black Lung Disability Benefit Program provides medical and survivor benefits for eligible coal miners 

who are disabled due to pneumoconiosis (black lung disease) as a result of their coal mine employment. The DOL 

operates the Black Lung Disability Benefit Program. The Black Lung Disability Trust Fund (BLDTF) provides 

benefit payments to eligible coal miners disabled by pneumoconiosis when no responsible mine operator can be 

assigned the liability. 

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. Though excise tax revenues currently exceed costs (and are 

expected to in the future), that was not always the case. The Black Lung Benefits Revenue Act provides for 

repayable advances to the BLDTF from the General Fund of the Treasury, in the event that BLDTF resources are 

not adequate to meet program obligations. During earlier years of the program, general revenues were needed to pay 

for cash shortfalls in the program. 
112 NOTES TO THE FINANCIAL STATEMENTS 

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. Life tables are used to project the life expectancies of the beneficiary population. 

The economic assumptions used for the most recent set of projections are coal excise tax revenue estimates, the 

tax rate structure, Federal civilian pay raises, medical cost inflation, and the interest rate on new repayable advances 

from the Treasury. 

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, through December 

31, 2013. Starting in 2014, 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 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 consumer price index-medical, which are used to 

calculate future benefit costs. During the current projection period, future benefit rate increases 2.4 percent in each 

year, and medical cost increases 3.9 percent each year. Estimates for administrative costs for the first 11 years of the 

projection are supplied by DOL’s Budget Office, while later years are based on the number of projected 

beneficiaries. Estimates for future interest on advances are based on the interest rates on outstanding advances 

ranging from 4.3 percent to 13.9 percent and new borrowings ranging from 4.9 percent to 5.6 percent. 
NOTES TO THE FINANCIAL STATEMENTS 113

Note 24. 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, number of National Parks and square miles of 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. 

Most stewardship land managed by the Government was once part of the 1.8 billion acres of public domain 

land acquired between 1781 and 1867. Stewardship land accounts for 28 percent of the current U.S. landmass. 

DOI uses units as a measure to more accurately reflect the major categories of uses of stewardship land. As of 

September 30, 2008, they have 548 national wildlife refuges, 378 park units, 134 geographic management areas, 67 

fish hatcheries, and many other categories. At the end of fiscal year 2008, the Department of Agriculture’s Forest 

Service managed an estimated 193 million acres of public land, while the Department of Commerce (DOC) had 13 

National Marine Sanctuaries, which included near–shore coral reefs and open ocean, covering a total of 19 thousand 

square miles. 

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 can be obtained in 

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 property, plant, and equipment 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 DOI, the USDA, the 

National Archives and Records Administration, and the websites for the Library of Congress 

(http://www.loc.gov/index.html) and 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. 
114 NOTES TO THE FINANCIAL STATEMENTS 

Note 25. Subsequent Events 

A. Emergency Economic Stabilization Act of 2008 

The Emergency Economic Stabilization Act of 2008 (EESA) was signed into law on October 3, 2008. This law 

authorizes a Troubled Asset Relief Program (TARP) to be administered by the Department of the Treasury. The 

TARP is intended to promote market stability and protect the U.S. economy by authorizing Treasury to purchase and 

guarantee troubled mortgage-related assets and other financial assets. EESA also provides for the purchase of any 

other financial instruments that the Secretary of the Treasury determines, after consultation with the Federal Reserve 

Board Chairman, is necessary to purchase in order to promote financial market stability. 

The Secretary of the Treasury’s authority to purchase troubled assets was limited initially to $250 billion in 

outstanding assets, and increased to $350 billion upon certification by the President to the Congress on October 14, 

2008. The authority can be increased to the maximum of $700 billion upon submission of a written report from the 

President to the Congress detailing the Secretary of the Treasury’s plan to exercise additional authority, providing 

Congress does not enact a joint resolution disapproving the plan of the Secretary. 

Upon establishment of the insurance program required under EESA the $700 billion limit shall be reduced by 

the difference between outstanding guaranteed obligations under the insurance program authorized by EESA, if any, 

and the balance in the Troubled Assets Insurance Financing Fund (TAIFF) established by EESA to guarantee timely 

payments on mortgage-related assets. The Treasury Secretary can guarantee timely payment of up to 100 percent of 

the principal and interest on these insured assets. Institutions seeking this guarantee will be required to pay riskbased premiums into the fund. The premiums will be in amounts determined by the Treasury Secretary, as 

necessary, to meet anticipated claims and eliminate any budgetary cost. 

Significant EESA authorities terminate on December 31, 2009. However, the Treasury Secretary can extend 

this authority to October 3, 2010, upon submission of a written certification to Congress. EESA increases the 

statutory public debt limit by $700 billion, from $10.615 trillion to $11.315 trillion. 

Upon passage of EESA, Treasury established the Office of Financial Stability to administer the TARP. No 

EESA transactions occurred during fiscal year 2008. As of December 9, 2008, over $200 billion in troubled assets 

were purchased or committed through TARP. 

The EESA also provides for a temporary increase in the Federal Deposit Insurance Corporation (FDIC) deposit 

coverage from $100,000 per depositor to $250,000 per depositor from the date of the enactment of the legislation 

through December 31, 2009. This will significantly increase future contingent liabilities for anticipated failure of 

insured institutions. See FDIC’s Annual Report, released on a calendar year basis, for more information. 

EESA contains numerous tax provisions that could result in additional burdens to future deficits. EESA also 

amended the HOPE for Homeowners Program, established by HERA, which the Federal Housing Administration 

may guarantee up to $300 billion in mortgages. 

The Federal Reserve announced a program to purchase up to $500 billion of mortgage-backed securities and 

up to $100 billion of Fannie and Freddie debt, and to lend up to $200 billion against new car, student, and smallbusiness loans. Treasury has pledged $20 billion from TARP to cover partial loss. 

The Reserve Fund’s U.S. Government Money Market Fund (the “Fund”), which Treasury accepted into its 

temporary guarantee program for money market funds (see Note 8), has not made a claim to Treasury under the 

program. In a separate agreement with the Fund, the Treasury Exchange Stabilization Fund (ESF) has agreed to 

serve as a buyer of last resort for the Fund’s portfolio, which consists of short-term U.S. Government and GSE 

securities. EESA contains a provision for reimbursement of the ESF for its funds used under the Temporary 

Guarantee Program for Money Market Funds, which would cover any losses, however unlikely, arising from the 

separate agreement with the Fund. 

Under EESA, in November 2008, Treasury has committed to providing Citigroup another $20 billion from 

TARP. In addition, Treasury and FDIC agreed to share losses with Citigroup on a $306 billion asset pool for any 

losses in excess of $37 billion. Treasury and FDIC's combined maximum exposure is $15 billion, which may be 

offset by any value of the $7 billion of preferred stock issued to them by Citigroup. FRB will backstop residual risk 

in the asset pool through a nonrecourse loan. 

Treasury’s actions to stabilize the financial system and the economy continue as of the date of this Report. 

Treasury’s strategy for continued implementation of the financial rescue package can be found at: 

http://www.treas.gov/initiatives/eesa/. 
NOTES TO THE FINANCIAL STATEMENTS 115

B. American International Group (AIG) 

To help AIG work out its financial difficulties, the Federal Reserve agreed to lend up to $85 billion to AIG 

pursuant to the authority in Section 13(3) of the Federal Reserve Act. The Government is not a party to the AIG 

credit facility with the Federal Reserve, and has no liabilities, commitments, or guarantees pursuant to the Fed’s 

arrangements with AIG or any other financial relationship with AIG. 

Under the terms of the agreement with AIG and the Federal Reserve, an approximately 79.9 percent equity 

interest in AIG (in the form of Convertible Participating Serial Preferred Stock convertible into approximately 79.9 

percent of the issued and outstanding shares of common stock) was to be issued to a trust to be established by the 

Federal Reserve. As of the date of this report, it is anticipated that the Treasury will be named as the beneficiary of 

that trust, so that when the stock is ultimately liquidated the proceeds will be deposited into the General Fund of the 

Government. Treasury would also be the recipient of any dividends and any proceeds from the liquidation of the 

stock on behalf of the General Fund. The accounting and reporting for any activities related to the government’s 

interest in the stock held by the trust will be done by Treasury. 

Subsequent to September 30, 2008, the credit facility to assist AIG was restructured significantly. Treasury 

agreed in November 2008 to directly purchase $40 billion in senior AIG preferred stock through the TARP, with the 

proceeds being used to pay down the Federal Reserve’s $85 billion credit facility. Treasury will also receive 

common stock warrants for 2 percent of the outstanding AIG common stock, with the above-described convertible 

preferred stock interest to be owned by the trust reduced to 77.9 percent. 

C. Energy Improvement and Extension Act of 2008 

The Energy Improvement and Extension Act of 2008, enacted on October 3, 2008, allowed for a temporary 

increase in coal excise tax rates to continue an additional 5 years beyond the current statutory limit collected for the 

Black Lung Disability Trust Fund. The excise rates were set to decrease from $1.10 per ton for coal from 

underground mines and $0.55 per ton for coal from surface mines (not to exceed 4.4 percent of sales) to $0.50 per 

ton for coal from underground mines and $0.25 per ton for coal from surface mines (not to exceed 2 percent of 

sales) on January 1, 2014. The Act extended the temporary increase to December 31, 2018. The higher excise tax 

rates will continue until the earlier of December 31, 2018, or the first December 31 after 2007 in which there exist 

no (1) balances of repayable advances described in section 9501 of the Internal Revenue Code and (2) unpaid 

interest on the advances. 

Section 113 of the Energy Improvement and Extension Act of 2008 also allowed a restructuring of the debt of the 

Black Lung Disability Trust Fund that resulted in an actuarial present value of future excise tax income during the 

projection period of $9,293 billion as of October 7, 2008, and an actuarial present value of the par value of the zero 

coupon bonds coming due during the projection period of $6,326 billion as of October 7, 2008. This, with an actuarial 

present value of $2,967 billion for expenses, results in a fund balance of zero at the end of the projection period. 

D. Temporary Liquidity Guarantee Program 

On October 14, 2008 the FDIC established the Temporary Liquidity Guarantee Program as part of a larger 

government effort to strengthen confidence and encourage liquidity in the banking system. The new program will (1) 

guarantee newly issued senior unsecured debt of eligible FDIC-insured depository institutions and certain holding 

companies between October 14, 2008 and June 30, 2009 with guarantees expiring no later than June 30, 2012, and (2) 

provide full deposit insurance coverage for non-interest bearing deposit transaction accounts in FDIC-insured 

institutions until December 31, 2009. The FDIC will charge a fee, based on a sliding scale from 50 to 100 basis points, 

depending on length of maturity, to guarantee newly-issued senior unsecured debt and a 10-basis point surcharge will 

be collected through the normal assessment cycle to cover the non-interest bearing transaction accounts. 

E. Other 

The ability of issuers of the debt securities held by the Government to meet their obligations may be affected 

by economic developments in a specific industry or region. The values of the securities can be significantly affected 

by changes in interest rates or in the financial condition of the issuer or market conditions generally. The 

Government invests a portion of its assets in mortgage-backed securities and debentures. The value and related 

income of these securities is sensitive to change in economic conditions, including delinquencies and/or defaults. 

Recent instability in the markets for fixed-income securities, particularly mortgage-backed securities, has resulted in 

increased volatility of market prices and periods of illiquidity have adversely impacted the valuation of certain 

securities held by the Government. The values of such investments are reported at their fair value based upon the 

market conditions as of September 30, 2008. Due to continued market instability since yearend, the fair values of 

such investments have decreased from the amounts reported. 
116 NOTES TO THE FINANCIAL STATEMENTS 

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 SUPPLEMENTAL INFORMATION (UNAUDITED) 117

United States Government 

Supplemental Information (Unaudited) 

for the Years Ended September 30, 2008, 

and September 30, 2007 

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 they are sustainable under current law, as well as what their 

effect will be 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 Federal Old-Age and Survivors Insurance (OASI) Trust Fund was established on January 1, 1940, as a 

separate account in the Treasury. The Federal Disability Insurance (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 due to medical conditions. 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 Old-Age and Survivors Disability Insurance (OASDI) Trust Funds. At the 

end of calendar year 2007, OASDI benefits were paid to approximately 49 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 ($102,000 in 2008), that increases each year with economy-wide wages. 

Since 1984, up to one-half of OASDI benefits have been subject to Federal income taxation. Effective for 

taxable years beginning after 1993, the maximum percentage of benefits subject to taxation was increased from 50 

percent to 85 percent. The revenue from income taxes on up to 50 percent of benefits is allocated to the OASDI 

Trust Funds and the rest is allocated to the Hospital Insurance (HI) Trust Fund. 
118 SUPPLEMENTAL INFORMATION (UNAUDITED) 

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. Employers and employees each pay 1.45 percent of earnings, while self-employed workers 

pay 2.9 percent of their net earnings. Other income to the HI 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. These Treasury securities 

and related interest are excluded upon consolidation at the Governmentwide level. 

For SMI, transfers from the General Fund of the Treasury represent the largest source of income covering 

about 74 percent and 79 percent of program costs for Parts B and D, respectively. Beneficiaries pay monthly 

premiums that finance approximately 26 percent and 21 percent of costs for Parts B and D, respectively. With Part D 

drug coverage, Medicaid will no longer be the primary payer 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 are excluded upon 

consolidation at the Governmentwide level. Refer to Note 23—Social Insurance, for additional information on 

Medicare program financing. 

Figure 1 

Social Security, Medicare, and 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. 

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) 119

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.

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 is 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 

between the SMI Trust Fund and 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 the only one of the four 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 will receive 

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 are increasing––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. 

 

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. 
120 SUPPLEMENTAL INFORMATION (UNAUDITED) 

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 reduce 

other spending, raise taxes, or borrow more from the public to finance the benefits paid by the trust funds. 

Actual dollar amounts roughly corresponding to the flows presented in Figure 1 are shown in Table 1 for fiscal 

year 2008. 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 ($181.1 billion) and interest credits ($132.8 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. 

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 ($230.2 billion) and revenues ($213.2 billion) was ($17.1 billion) in 2008, 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 

2008. The difference ($163.6 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 ($617.0 billion) and revenues from the public ($689.0 

billion) was $71.9 billion in 2008, indicating that OASDI had a positive 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 $0.5 billion in 2008, as shown at the bottom of the first column. This 

surplus would be added to the beginning trust fund (not shown) that leads to budget obligations in future years. For 

SMI, total revenues of $244.5 billion ($60.9 + $183.6), including $180.4 billion transferred from other Government 

accounts (the General Fund), exceeded total expenditures by $20 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 $802.7 billion ($689.0 + $113.7), including interest and a small amount of other Government transfers, 

exceeded total expenditures of $617.0 billion by $185.7 billion. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 121

Cashflow Projections 

Background 

Economic and Demographic Assumptions. The Boards of Trustees4 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 23—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, 2008 

 Trust Funds 

(In billions of dollars) HI SMI 

 

OASDI Total All Other Total 1 

 

Revenues from the public: 

Payroll and benefit taxes ........................ 208.9 - 689.0 897.9 - 897.9 

Premiums ............................................... 4.2 53.8 - 58.0 - 58.0 

Other taxes and fees .............................. - 7.0 - 7.0 1,561.0 1,568.0 

Total ..................................................... 213.2 60.9 689.0 962.9 1,561.0 2,523.9 

 

Total expenditures to the public 2.............. 230.2 224.5 617.0 1,071.7 1,907.0 2,978.7 

 

Net results for budget perspective 3 ..... (17.1) (163.6) 71.9 (108.8) (346.0) (454.8) 

 

Revenues from other Government 

accounts: 

Transfers ................................................ 0.7 180.4 - 181.1 (181.1) - 

Interest credits........................................ 15.9 3.2 113.7 132.8 (132.8) - 

Total ..................................................... 16.6 183.6 113.7 313.9 (313.9) - 

 

Net results for trust fund 

perspective 3 ......................................... (0.5) 20.0 185.7 205.2 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 $454.8 billion 

was the total Federal deficit in fiscal year 2008. 

2

 The OASDI figure includes $4.0 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. 
122 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 2007, there were about 30 beneficiaries for every 100 workers. By 2030, 

there will be about 45 beneficiaries for every 100 workers. A similar demographic pattern confronts the Medicare 

Program. For example, for the HI Program, there were about 26 beneficiaries for every 100 workers in 2008; by 

2030, there are expected to be about 41 beneficiaries for every 100 workers. This ratio for both programs will 

continue to increase to about 50 beneficiaries for every 100 workers by the end of the projection period, after the 

baby-boom generation has moved through the Social Security system as well as declining birth rates and increasing 

longevity. 

Chart 1—OASDI Beneficiaries per 100 Covered Workers 

1970-2082 

10

15

20

25

30

35

40

45

50

55

1970 1976 1982 1988 1994 2000 2006 2012 2018 2024 2030 2036 2042 2048 2054 2060 2066 2072 2078

Calendar Year

Historical Data

Source: www.ssa.gov/OACT/TR/TR08
 SUPPLEMENTAL INFORMATION (UNAUDITED) 123

Social Security Projections 

Nominal Income and Expenditures. Chart 2 shows historical values and actuarial estimates of combined 

OASDI annual income (excluding interest) and expenditures for 1970-2082 in nominal dollars. 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 

1970-2082 

(In billions of nominal dollars) 

$0

$5,000

$10,000

$15,000

$20,000

$25,000

1970 1976 1982 1988 1994 2000 2006 2012 2018 2024 2030 2036 2042 2048 2054 2060 2066 2072 2078

Calendar Year

Historical Data

2017: Crossover Year

Expenditures

Income

Source: www.ssa.gov/OACT/TR/TR08

Currently, Social Security tax revenues exceed benefit payments and will continue to do so until 2017, when 

revenues are projected to fall below benefit payments, after which the gap between expenditures and revenues 

continues to widen. 
124 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 2017, producing 

cashflow deficits thereafter. As described above, surpluses that occur prior to 2017 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 2017, 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 2041, 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 78 

percent of scheduled benefits after trust fund exhaustion in 2041 and 75 percent of scheduled benefits in 2082. 

Chart 3—OASDI Income (Excluding Interest) and Expenditures 

as a Percent of Taxable Payroll 

1970-2082 

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1970 1976 1982 1988 1994 2000 2006 2012 2018 2024 2030 2036 2042 2048 2054 2060 2066 2072 2078

Source: www.ssa.gov/OACT/TR/TR08 Calendar Year

Historical Data

Expenditures

Income

2041: Year Trust Fund Exhausted

2017: First Year Expenditures

Exceed Noninterest Income

Cash Deficit Covered by

Interest and Trust Fund Assets
 SUPPLEMENTAL INFORMATION (UNAUDITED) 125

Income and Expenditures as a Percent of Gross Domestic Product (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 4.3 percent of GDP in 2008 to 5.8 percent in 2082. In 2082, 

expenditures are projected to exceed income by 1.4 percent of GDP. 

Chart 4—OASDI Income (Excluding Interest) and Expenditures 

as a Percent of GDP 

1970-2082 

2%

3%

4%

5%

6%

7%

8%

1970 1976 1982 1988 1994 2000 2006 2012 2018 2024 2030 2036 2042 2048 2054 2060 2066 2072 2078

Source: www.ssa.gov/OACT/TR/TR08 Calendar Year

Historical Data

Expenditures

Income

2017: First Year Expenditures

Exceed Noninterest Income

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. 
126 SUPPLEMENTAL INFORMATION (UNAUDITED) 

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 consumer price index (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 0.75 percent. For the low cost alternative, a slower reduction rate (0.30 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 $6,555 billion to $4,885 billion, a 25 

percent smaller shortfall. The high cost death rate assumption (1.26 percent) results in an increase in the shortfall, 

from $6,555 billion to $8,301 billion, a 27 percent increase in the shortfall. Clearly, alternative death rate 

assumptions have a substantial impact on estimated future cashflows in the OASDI Program. 

A higher fertility rate means more workers relative to beneficiaries over the projection period, thereby 

lowering the shortfall relative to the intermediate assumption. An increase in the rate from 2.0 to 2.3 percent results 

in a 13 percent smaller shortfall (i.e., expenditures less income), from $6,555 billion to $5,702 billion. 

Higher real wage growth results in faster income growth relative to expenditure growth. Table 2 shows that a 

real wage differential that is 0.5 greater than the intermediate assumption of 1.1 results in a drop in the shortfall from 

$6,555 billion to $5,324 billion, a 19 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 

1.8 percent rather than 2.8 percent, the shortfall rises about 7 percent, from $6,555 billion to $7,034 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 6 percent drop in the shortfall, from $6,555 billion to $6,141 billion, relative to the intermediate case; and 

the high-cost assumption results in a 6 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 $5,050 billion is 23 percent lower when the real interest rate is 3.6 percent rather than 2.9 

percent, and 37 percent higher when the real interest rate is 2.1 percent rather than 2.9 percent. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 127

Table 2 

Present Values of Estimated OASDI Expenditures in Excess of Income 

under Various Assumptions, 2008-2082 

(Dollar values in billions; values of assumptions shown in parentheses) 

Shortfall 

Assumption Low Intermediate High 

 

Average annual reduction in death rates .. 4,885 

(0.30) 

6,555 

(0.75) 

8,301 

(1.26) 

Total fertility rate........................................ 5,702 

(2.3) 

6,555 

(2.0) 

7,423 

(1.7) 

Real wage differential................................ 5,324 

(1.6) 

6,555 

(1.1) 

7,452 

(0.6) 

CPI change................................................ 6,068 

(3.8) 

6,555 

(2.8) 

7,034 

(1.8) 

Net immigration ......................................... 6,141 

(1,375,000) 1 6,555 

(1,070,000) 1 6,950 (790,000) 1

 

Real interest rate....................................... 5,050 

(3.6) 

6,555 

(2.9) 

8,969 

(2.1) 1

 Amounts represent the average annual net immigration over the 75-year projection period. 

Source: 2008 OASDI Trustees Report and SSA. 

Medicare Projections 

Medicare Legislation. On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, 

Improvement, and Modernization Act of 2003. The 2003 law has a major impact on the operations and finances of 

Medicare. The law added a prescription drug benefit to Medicare beginning in 2006 and a new prescription drug 

account in the SMI Trust Fund. The benefit can be obtained through a private drug-only plan, a private preferredprovider organization or health maintenance organization, or through an employer-sponsored retiree health plan. The 

preferred-provider organizations are new to the Medicare Program and operate on a regional basis. The Government 

assumes some of the costs of providing prescription drug coverage to people eligible for both Medicare and 

Medicaid. 

The legislation also includes provisions not related to the prescription drug benefit. It includes increases in 

Medicare provider reimbursements, higher Medicare Part B premiums for people at higher income levels, and an 

expansion of tax-deductible health savings accounts. The 2003 legislation is expected to have a significant effect on 

future Medicare finances as seen below and earlier in the Statement of Social Insurance. 

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. Continuing 

development and use of new technology is expected to cause health care expenditures to grow faster than GDP in 

the long run. For the intermediate assumption, health care expenditures per beneficiary are assumed to grow, on 

average, about one percentage point faster than per capita GDP over the long range. 
128 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Total Medicare. It is important to recognize the rapidly increasing long-range cost of Medicare and the large 

role of general revenues and beneficiary premiums in financing the SMI Program. 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 10.8 percent of GDP by 2082. Revenues from taxes and premiums (including 

State transfers under Part D) are expected to increase from 2.0 percent of GDP in 2008 to 3.0 percent of GDP in 

2082. Payroll tax income declines gradually as a percent of GDP as growth in the number of workers paying such 

taxes slows and wages as a portion of compensation declines, offset by higher premiums combined for Parts B and 

D of SMI 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 1.3 percent to 4.5 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 61 

percent in 2008 to 40 percent in 2082) while general revenues will rise (from 39 percent to 60 percent). The gap 

between total noninterest Medicare income (including general revenue contributions) and expenditures begins 

around 2010 and then steadily continues to widen, reaching 3.3 percent of GDP by 2082. 

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

as a Percent of GDP 

1970-2082 

0%

2%

4%

6%

8%

10%

12%

1970 1976 1982 1988 1994 2000 2006 2012 2018 2024 2030 2036 2042 2048 2054 2060 2066 2072 2078

Calendar Year

Source: www.ssa.gov/OACT/TRSUM/trsummary.html

Historical Data

General Revenue

Transfers to SMI

(Part B+Part D)

HI Deficit

 Premiums

and state transfers

Payroll Taxes Tax on Benefits

Total Noninterest Income

Total Medicare Expenditures
 SUPPLEMENTAL INFORMATION (UNAUDITED) 129

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 1970-2082 in nominal dollars. The 

estimates are for the open-group population. The figure reveals a widening gap between projected income and 

expenditures. 

Chart 6—Medicare Part A Income (Excluding Interest) and Expenditures 

1970-2082 

(In billions of nominal dollars) 

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

1970 1976 1982 1988 1994 2000 2006 2012 2018 2024 2030 2036 2042 2048 2054 2060 2066 2072 2078

Calendar Year

Historical Data

Expenditures

Income

Shortfall

Source: www.ssa.gov/OACT/TRSUM/images/LD_ChartC.html and CMS
130 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Medicare, Part A Income and Expenditures as a Percent of Taxable Payroll. Chart 7 illustrates income 

(excluding interest) and expenditures as a percentage of taxable payroll over the next 75 years. The chart shows that 

the expenditure rate exceeds the income rate in 2007, and cash deficits continue thereafter. Trust fund interest 

earnings and assets provide enough resources to pay full benefit payments until 2019 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 2019. Present tax rates would be sufficient to 

pay 78 percent of scheduled benefits after trust fund exhaustion in 2019 and 30 percent of scheduled benefits in 

2082. 

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

as a Percent of Taxable Payroll 

1970-2082 

0%

2%

4%

6%

8%

10%

12%

14%

1970 1976 1982 1988 1994 2000 2006 2012 2018 2024 2030 2036 2042 2048 2054 2060 2066 2072 2078

Calendar Year

Historical Data

Expenditures

Income

2019: Trust Fund Exhausted

Deficit Covered by Trust

Fund Interest and Assets

Source:www.ssa.gov/OACT/TRSUM/images/LD_ChartC.html and CMS
 SUPPLEMENTAL INFORMATION (UNAUDITED) 131

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, 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 1.6 

percent of GDP in 2008, to 2.7 percent in 2030, and to 4.8 percent by 2082. The gap between expenditures and 

income widens continuously with expenditures growing as a share of GDP and income declining slightly relative to 

GDP. By 2082, expenditures are projected to exceed income by 3.4 percent of GDP. 

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

as a Percent of GDP 

1970-2082 

0%

1%

2%

3%

4%

5%

6%

1970 1976 1982 1988 1994 2000 2006 2012 2018 2024 2030 2036 2042 2048 2054 2060 2066 2072 2078

Source:www.ssa.gov/OACT/TRSUM/images/LD_ChartC.html and CMS Calendar Year

Expenditures

Income

Historical Data
132 SUPPLEMENTAL INFORMATION (UNAUDITED) 

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 

1970-2082 

(In billions of nominal dollars) 

$0

$5,000

$10,000

$15,000

$20,000

$25,000

1970 1976 1982 1988 1994 2000 2006 2012 2018 2024 2030 2036 2042 2048 2054 2060 2066 2072 2078

Source: Centers for Medicare & Medicaid Services Calendar Year

Historical Data

 Expenditures

Part B + Part D

Premium Income

+ State Transfers

 General Fund

Transfers Needed
 SUPPLEMENTAL INFORMATION (UNAUDITED) 133

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. In 2008, SMI expenditures are expected to be $242 billion or 1.7 percent of GDP. 

After 2008, this percentage is projected to increase steadily reaching 6.0 percent in 2082. This reflects growth in the 

volume and intensity of Medicare services provided per beneficiary throughout the projection period, including the 

prescription drug benefits, together with the effects of the baby boom retirement. Premium and State transfer income 

grows from about 0.4 percent in 2008 to 1.3 percent of GDP in 2082, so the portion financed by General Fund 

transfers to SMI is projected to be about 75 percent throughout the projection period. 

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

as a Percent of GDP 

1970-2082 

0%

1%

2%

3%

4%

5%

6%

7%

1970 1976 1982 1988 1994 2000 2006 2012 2018 2024 2030 2036 2042 2048 2054 2060 2066 2072 2078

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 $12,736 billion to $5,083 billion, a 60 percent smaller shortfall. The high cost assumption results in a near 

doubling of the shortfall, from $12,736 billion to $25,196 billion. 
134 SUPPLEMENTAL INFORMATION (UNAUDITED) 

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 a less than 2 percent change in the shortfall relative to the 

intermediate case. The higher real wage growth rate results in about a 6 percent greater shortfall while a lower 

growth rate reduces the shortfall by about 8 percent. 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). As a result, an assumed higher real wage differential has a larger impact on HI 

expenditures than HI income, thereby increasing the shortfall of income relative to expenditures. CPI and net 

immigration changes have very little effect on net HI expenditures. Higher immigration increases the net shortfall 

modestly as higher payroll tax revenue is more than offset by higher medical care expenditures. 

Table 3 also shows that the present value of net HI expenditures is 25 percent lower if the real interest rate is 

3.6 percent rather than 2.9 percent and 41 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, 2008-2082 

(Dollar values in billions; values of assumptions shown in parentheses) 

Shortfall 

Assumption1 Low Intermediate High 

Average annual growth in health costs2 ............. 5,083 

(3.1) 

12,736 

(4.1) 

25,196 

(5.1) 

Total fertility rate3 ................................................ 12,499 

(2.3) 

12,736 

(2.0) 

12,980 

(1.7) 

Real wage differential ......................................... 11,918 

(1.6) 

12,736 

(1.1) 

13,742 

(0.6) 

CPI change ......................................................... 12,669 

(1.8) 

12,736 

(2.8) 

12,744 

(3.8) 

Net immigration................................................... 12,658 

(1,375,000) 4

12,736 

(1,070,000)4

13,062 

(790,000) 4

 

Real interest rate................................................. 9,599 

(3.6) 

12,736 

(2.9) 

17,936 

(2.1) 1

 The sensitivity of the projected HI net cashflow to variations in future mortality rates is also 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. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 135

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 $15,719 billion to $10,984 

billion and in Part D from $7,857 billion to $5,468 billion, about a 30 percent difference in each case. The high-cost 

assumption increases Governmentwide resources needed to $23,260 billion for Part B and to $11,650 billion for Part 

D, about a 48 percent difference in each case. 

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, 2008-2082 

(In billions of dollars) 

 Governmentwide Resources Needed 

Medicare Program1

Low 

(4.1) 

Intermediate 

(5.1) 

High 

(6.1) 

Part B ............................................................. 10,984 15,719 23,260 

Part D............................................................. 5,468 7,857 11,650 

 1

 Annual growth rate is the aggregate cost of providing covered health care services to beneficiaries. The low and high 

scenarios assume that costs increase one percent slower or faster, respectively, than the intermediate assumption. 

Source: Centers for Medicare & Medicaid Services. 

Sustainability of Social Security and Medicare 

75-Year Horizon 

According to the 2008 Medicare Trustees Report, the HI Trust Fund is projected to remain solvent until 2019 

and, according to the 2008 Social Security Trustees Report, the OASDI Trust Funds are projected to remain solvent 

until 2041. 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 (see footnote 1). 

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 $12,736 billion in present value terms which is the additional 

amount needed in order to pay scheduled benefits over the next 75 years. 5 From the trust fund perspective, the 

amount needed is $12,424 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 

 

5

 Interest income is not a factor in this table as dollar amounts are in present value terms. 
136 SUPPLEMENTAL INFORMATION (UNAUDITED) 

public for Parts B and D combined are estimated to be $23,576 billion6 less than total expenditures for the two 

accounts, an amount that, from a budget perspective, will be needed to keep the SMI program solvent for the next 75 

years. From the trust fund perspective, however, the present values of total revenues and total expenditures for the 

SMI Program are roughly equal due to the annual adjustment of revenue from other Government accounts to meet 

program costs.7

 For OASDI, projected revenues from the public fall short of total expenditures by $6,555 billion8 in 

present value dollars and, from the trust fund perspective, by $4,317 billion. 

From the Governmentwide perspective, the present value of the total resources needed for the Social Security and 

Medicare Programs equals $42,867 billion, in addition to payroll taxes, benefit taxes, and premium payments from the 

public. From the trust fund perspective, which counts the trust funds and the general revenue transfers to the SMI 

Program as dedicated funding sources additional resources in the amount of $16,685 billion in present value terms are 

needed, beyond the $23,576 billion in present value of required general revenue transfers already scheduled for the 

SMI Program and the $2,606 billion to honor the trust fund investments in Treasury securities. 

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, 2008) 

 SMI 

 HI Part B Part D OASDI Total 

Revenues from the public: 

Taxes......................................... 11,883 - - 36,357 48,240 

Premiums, State transfers......... - 5,478 2,107 - 7,585 

Total........................................ 11,883 5,478 2,107 36,357 55,825 

 

Total costs to the public.......... 24,619 21,197 9,964 42,911 98,691 

 

Net results for Governmentwide (budget) perspective*

..... 12,736 15,719 7,857 6,555 42,867 

 

Revenues from other 

Government accounts ............... - 15,719 7,857 - 23,576 

Trust fund as of 1/1/2008............. 312 53 3 2,238 2,606 

 

Net results for trust fund 

perspective*

.............................. 12,424 (53) (3) 4,317 16,685 

*Net results are computed as costs less revenues. 

Note: Details may not add to totals due to rounding. 

Source: 2008 OASDI and Medicare Trustees’ Reports. 

 

6

 For 2008, the present value of estimated future expenditures in excess of estimated future revenue for the Part B program increased $2,287 

billion as compared to that reported for 2007. This growth is primarily attributable to (1) the significant increase in the residual growth rate (the 

per capita growth in medical costs over the growth in gross domestic product) for the intermediate years of the projection period (i.e., for 2018 

through 2031), and (2) the normal annual level of increase including interest in moving the 75-year projection period year forward from the prior 

year’s valuation date (i.e., where much larger amounts of estimated future expenditures in excess of future revenues associated with the last year 

of the current year’s projection period replaced smaller amounts of estimated future expenditures in excess of future revenue associated with the 

first year of the prior year’s projection period). For 2008, the present value of estimated future expenditures in excess of estimated future revenue 

for the Part D program decreased $504 billion as compared to that reported for 2007. This reduction is primarily attributable to actual experience 

in 2006 where actual drug costs were much lower than expected, while manufacturer rebates were greater than anticipated. In addition, the 

projected trend for the next few years, which is based on the projected growth in prescription drug spending nationally, is lower than in the prior 

year’s projections.

7

 The SMI Trust Fund also has a very small amount of existing assets. 

8

 For 2007, the present value of future expenditures exceeded future revenue by $6,763 billion. The improvement in the long-range acturial status 

of the OASDI program indicated in this report is principally the result of changes in immigration methods and assumptions. These changes 

resulted in substantial reductions in the projected cost of the program as a percentage of taxable payroll, particularly in the latter half of the longrange projection period. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 137

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 $6.6 trillion in present value will 

be needed above currently scheduled taxes to pay for scheduled benefits ($4.3 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 

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 more than $101 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 2008. 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 $34.4 trillion and $13.7 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. The substantial gap that exists between premiums and State transfer revenue and program expenditures in 

the SMI Program ($33.9 trillion + $17.2 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 2082, 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, 2008) 

 SMI 

HI Part B Part D OASDI Total 

Present value of future costs less 

future taxes and premiums and State 

transfers for current participants .......... 13.6 12.6 5.6 17.4 49.2 

Less current trust fund ............................ 0.3 0.1 - 2.2 2.6 

Equals net obligations for past and 

current participants............................... 13.3 12.5 5.6 15.2 46.6 

Plus net obligations for future 

participants ........................................... 21.1 21.4 11.6 (1.5) 52.6 

Equals net obligations through the 

infinite future for all participants ........... 34.4 33.9 17.2 13.7 99.2 

 

Present value of future costs less the 

present values of future income over 

the infinite horizon ................................ 34.7 34.0 17.2 15.9 101.8 

 Details may not add to totals due to rounding. 

Source: 2008 OASDI and Medicare Trustees’ Reports. 
138 SUPPLEMENTAL INFORMATION (UNAUDITED) 

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). Refer to Note 23—Social Insurance, for additional 

information on railroad retirement program financing. 

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. Per 

the RRSIA, amounts in the Railroad Retirement Account and the Social Security Equivalent Benefit (SSEB) 

Account that are not needed to pay current benefits and administrative expenses are transferred to the National 

Railroad Retirement Investment Trust (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 $6.3 billion. During fiscal year 2008, the NRRIT made net transfers of $1.3 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, 2008, and 2007, of non-Federal securities and investments of the NRRIT are disclosed in Note 

7—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 23—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 2008-2082 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. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 139

Chart 11—Estimated Railroad Retirement Income 

(Excluding Interest and Financial Interchange Income) and Expenditures 

2008-2082 

(In billions of nominal dollars) 

$0

$10

$20

$30

$40

$50

$60

$70

2008 2012 2016 2020 2024 2028 2032 2036 2040 2044 2048 2052 2056 2060 2064 2068 2072 2076 2080

Calendar Year

Income (excluding interest and financial interchange)

Expenditures

Source: Railroad Retirement Board

As Chart 11 shows, expenditures are expected to exceed tax income for the entire projection period. The 

imbalances continue to widen until about 2020, hold steady for the next 15 years, and begin to grow steadily after 

2035. 
140 SUPPLEMENTAL INFORMATION (UNAUDITED) 

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 2017 but then begin to decrease steadily as 

expenditures fall. Tax rates begin to decline after 2032, stabilizing after 2064. Compared to last year, projected tax 

rates are slightly 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 

2008-2082 

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2012 2016 2020 2024 2028 2032 2036 2040 2044 2048 2052 2056 2060 2064 2068 2072 2076 2080

Calendar Year

Income

Expenditures

Source: Railroad Retirement Board
 SUPPLEMENTAL INFORMATION (UNAUDITED) 141

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 4.3 percent smaller shortfall of income to expenditures, and the high-cost scenario has a 

3.5 percent higher shortfall. A higher discount rate reduces future values relative to a lower rate. As seen in the 

table, the shortfall is 30.1 percent lower if the interest rate is 11 percent rather than 7.5 percent and 72.8 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 

(Dollar values in billions; values of assumptions shown in parentheses) 

 

Assumption Low Middle High 

Employment1 ................ 104.6 

(1.0%) 

109.3 

(2.5%) 

113.1 

(4.0%) 

 

Interest rate................... 76.4 

(11%) 

109.3 

(7.5%) 

188.9 

(4%) 

1

 The low and middle employment scenarios have passenger service employment remaining at 43,000 workers per year 

and the remaining employment base declining at 1.0 percent and 2.5 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 4.0 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, 2008. The data are consistent with the Statements of social Insurance. 

From a Governmentwide perspective, revenues are expected to fall short of expenditures by approximately 

$109.3 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. 
142 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Table 8 

Present Values of 75-Year Projections of Revenues and Expenditures for the 

Railroad Retirement Program1, 2

(In billions of present-value dollars as of January 1, 2008) 

Estimated future income (excluding interest)3 received from or on behalf of: 

Current participants who have attained retirement age............................................. 4.9 

Current participants not yet having attained retirement age...................................... 42.8 

Those expected to become participants.................................................................... 54.4 

All participants............................................................................................................ 102.1 

Estimated future expenditures:4

Current participants who have attained retirement age............................................. 97.0 

Current participants not yet having attained retirement age...................................... 88.4 

Those expected to become participants.................................................................... 26.0 

All participants............................................................................................................ 211.4 

Net obligations from budget perspective (expenditures less income)................. 109.3 

Railroad retirement program assets (mostly investments stated at market)5............ 33.2 

Financial interchange from Social Security Trust ...................................................... 77.0 

Net obligations from trust fund perspective............................................................ (0.9) 

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 1/1/2007 

whereas present values are as of 1/1/2008. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 143

Black Lung 

The Federal Coal Mine Health and Safety Act of 1969 created the Black Lung Disability Benefit Program to 

provide compensation and medical benefits for eligible coal miners who are disabled due to pneumoconiosis (black 

lung disease) arising out of their coal mine employment. The Department of Labor (DOL) operates the Black Lung 

Disability Benefit Program. The 1977 Black Lung Amendments established a Black Lung Disability Trust Fund 

(BLDTF) to provide benefit payments to eligible coal miners disabled by pneumoconiosis when no responsible mine 

operator can be assigned the liability. The beneficiary population has been declining as the incidence of black lung 

disease has fallen, and the group of miners affected by the disease (and their widows) has been dying at a more rapid 

rate than new awards have been made. 

Excise taxes on coal mine operators, based on the sale of coal, is the primary source of financing black lung 

disability payments and related administrative costs. The Black Lung Benefits Revenue Act provides for repayable 

advances to the BLDTF from the General Fund of the Treasury in the event that BLDTF resources are not adequate 

to meet program obligations. On September 30, 2008, total liabilities of the BLDTF exceed assets by $10.4 billion. 

This deficit fund balance represents the accumulated shortfall of excise taxes necessary to meet benefit payment and 

interest expenses. This shortfall was funded by repayable advances to the BLDTF which are repayable with interest. 

Estimates for future interest on advances are based on the interest rates on outstanding advances ranging from 4.3 

percent to 13.9 percent and new borrowings ranging from 4.9 percent to 5.6 percent. 

From the budget or consolidated financial perspective, Chart 13 shows projected black lung expenditures 

(excluding interest) and excise tax collections for the period 2009-2040. The significant assumptions used in the 

most recent set of projections are shown in the “Black Lung” section of Note 23—Social Insurance. Analysts project 

that a scheduled reduction in taxes on coal sales will decrease cash inflows by 51 percent between the years 2013 to 

2015. After 2015, cash surpluses widen due to a declining beneficiary population and increasing revenues. However, 

the picture dramatically changes when including projected interest payments that the program must make. Please see 

Note 25─Subsequent Events for more information. 
144 SUPPLEMENTAL INFORMATION (UNAUDITED) 

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

2009-2040 

(In millions of nominal dollars) 

$0

$100

$200

$300

$400

$500

$600

$700

$800

2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039

Fiscal Years

Cash Income

Cash Outflow

(benefits and administrative

costs)

Source: Department of Labor
 SUPPLEMENTAL INFORMATION (UNAUDITED) 145

Chart 14 shows the projected financial status of the program from a trust fund perspective that includes interest 

outflows from the program to the General Fund. Trust fund net outflows (benefits plus interest payments less cash 

income from excise taxes) grow without bound, as a result of projected interest payments on the large accumulated 

liability to the General Fund. This deficit fund balance represents the accumulated shortfall between excise taxes and 

benefit payment plus interest expenses. 

Chart 14—Estimated Black Lung Trust Fund 

Net Outflow and End of Year Fund Balance 

2009-2040 

(In millions of nominal dollars) 

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039

Fiscal Year

-$60,000

-$50,000

-$40,000

-$30,000

-$20,000

-$10,000

$0

Trust Fund Net Outflow (Benefit and Admin 

Expenditures plus Interest less Cash Inflow) (left 

scale)

Source: Department of Labor

End-of-Year Fund Balance (right scale)

Table 9 shows present values of 32-year projections of expenditures and revenues for the Black Lung Program 

computed as of September 30, 2008, using a discount rate equivalent to 6.18 percent. (The discount rate is higher 

than the current Government borrowing rate because the program borrowed from the General Fund during periods 

of relatively high interest rates). From a Governmentwide (budget) perspective, the present value of expenditures is 

expected to be less than the present value of income by $4.0 billion (a surplus). From a trust fund perspective, a 

large balance ($10.4 billion) is owed to the General Fund. From that perspective, when that accumulated balance is 

combined with the cashflow surplus, the program shows a negative balance of $6.4 billion in present value dollars. 

As a consequence of the Energy Improvement and Extension Act of 2008 that permitted restructuring of the 

debt of the Black Lung Disability Trust Fund (as well as an extension of higher excise taxes) the financial status of 

the fund is expected to be much improved (see Note 25—Subsequent Events). This will be reflected in future 

Financial Reports, beginning with the 2009 report.
146 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Table 9 

Present Values of 32-Year Projections of Revenues and Expenditures 

for the Black Lung Program 

(In billions of present value dollars, as of September 30, 2008) 

 

Estimated future tax income............................................................................................ 6.5 

Estimated future expenditures......................................................................................... 2.5 

Net obligations from budget perspective (expenditures less income)............................. (4.0) 

Accumulated balance due general fund.......................................................................... 10.4 

Net obligations from trust fund perspective..................................................................... 6.4 

Note: Detail may not add to totals due to rounding. 

Source: Department of Labor projections and Treasury Department calculations. 

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. 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 Unemployment Trust Fund (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 are also used to maintain a loan account within the UTF, from which insolvent State accounts may borrow 

funds to pay unemployment insurance benefits. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 147

Chart 15 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 cash flow in 2009 followed by 

positive net cash flow for the remainder of the projection period. 

Chart 15—Estimated Unemployment Fund Cashflow 

Using Expected Economic Conditions 

2009-2018 

(In billions of nominal dollars) 

$30

$35

$40

$45

$50

$55

$60

$65

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Fiscal Years 

Source: Department of Labor

Cash Inflow

Cash Outflow
148 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Table 10 shows present values of 10-year projections of revenues and expenditures for the Unemployment 

Insurance Program using a discount rate of 4.86 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 5.58 percent during fiscal year 2009, decreasing to 4.80 percent in fiscal year 

2013 and thereafter. Under the mild recession scenario, the unemployment rate peaks at 7.43 percent in fiscal year 

2011 and declines gradually until reaching 4.80 percent in 2017. Finally, under the deep recession scenario, the 

unemployment rate is assumed to peak at 10.14 percent in 2012 and gradually fall to 5.25 percent by the end of the 

projection period. 

Each scenario uses an open group that includes current and future participants of the Unemployment Insurance 

Program. Table 10 shows that, as economic conditions worsen, while tax income is projected to increase as higher 

layoffs result in higher employer taxes, benefit outlays increase much faster. From the Governmentwide (budget) 

perspective, under expected conditions, the present value of income exceeds the present value of expenditures by 

$13.7 billion. From the same perspective, under a deep recession scenario, the present value of expenditures exceeds 

the present value of income by $69.2 billion. From a trust fund perspective, the program has $72 billion in assets. 

When combined with the present value of net cash income under expected economic conditions, the program has a 

surplus of $85.8 billion. 

Table 10 

Present Values of 10-Year Projections of Revenues and Expenditures for 

Unemployment Insurance Under Three Alternative Scenarios 

for Economic Conditions 

(In billions of present value dollars, as of September 30, 2008) 

 Economic Conditions 

 Expected 

Mild 

Recession 

Deep 

Recession 

 

Future cash income................................................... 410.0 461.3 524.9 

Future expenditures................................................... 396.3 467.9 594.1 

Net obligations from budget perspective 

(expenditures less income)..................................... (13.7) 6.6 69.2 

Trust fund assets ....................................................... 72.1 72.1 72.1 

Net obligations from trust fund perspective1.............. (85.8) (65.5) (2.9) 

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. 

Source: Data for the present value calculations are from the 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 1 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 prior to a recession indicates a State is minimally solvent. States below this level are 

vulnerable to exhausting their funds in a recession. States exhausting their reserve balance must borrow funds from 

the Federal Unemployment Account (FUA) to make benefit payments. During periods of high-sustained 

unemployment, balances in the FUA may be depleted. In these circumstances, FUA is authorized to borrow from the 

Treasury General Fund. 

Chart 16 presents the State by State results of this analysis as of September 30, 2008. As the chart illustrates, 

29 State funds were below the minimal solvency ratio on September 30, 2008. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 149

Chart 16—Unemployment Trust Fund Solvency as of September 30, 2008 

01234

Alabama

Alaska

Arizona

Arkansas

California

Colorado

Connecticut

Delaware

District of Columbia

Florida

Georgia

Hawaii

Idaho

Illinois

Indiana

Iowa

Kansas

Kentucky

Louisiana

Maine

Maryland

Massachusetts

Michigan

Minnesota

Mississippi

Missouri

Montana

Nebraska

Nevada

New Hampshire

New Jersey

New Mexico

New York

North Carolina

North Dakota

Ohio

Oklahoma

Oregon

Pennsylvania

Puerto Rico

Rhode Island

South Carolina

South Dakota

Tennessee

Texas

Utah

Vermont

Virgin Islands

Virginia

Washington

West Virginia

Wisconsin

Wyoming

Years of benefit payments held in reserve
150 SUPPLEMENTAL INFORMATION (UNAUDITED) 

 Deferred Maintenance 

Deferred maintenance is the estimated cost to bring Government-owned property 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 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. 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 

Deferred Maintenance 

Cost Range 

Low 

Estimate 

High 

Estimate 

Critical 

Maintenance 

(In billions of dollars) 2008 2007 2008 2007 2008 2007 

 

Asset category: 

Buildings, structures and 

facilities ................................... 88.6 89.9 94.1 97.2 5.0 12.5 

Furniture, fixtures and 

equipment ............................... 0.3 0.2 0.3 0.3 0.1 0.2 

Other general property, plant, 

and equipment ........................ 11.9 6.4 12.0 6.4 0.2 0.2 

Heritage assets.......................... 7.0 3.9 7.0 5.3 - 0.2 

Stewardship land....................... 2.2 - 3.2 - - - 

Total deferred maintenance.... 110.0 100.4 116.6 109.2 5.3 13.1 

 

Please refer to the individual financial statements of DOD, USDA, DOE, VA, DOI, and NASA for detailed 

significant information on deferred maintenance, including the standards used for acceptable operating condition and 

changes in asset condition. These agencies comprise 81 percent of the Government’s total reported net property, plant, and 

equipment of $737.7 billion as of September 30, 2008.
SUPPLEMENTAL INFORMATION (UNAUDITED) 151

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 until the purposes for which it was provided have 

been accomplished. The total unobligated budget balances as of September 30, 2007, and 2006 are $471.1 billion 

and $463.3 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, 2007 and 2006 are $1,078.3 billion and $977.6 billion, respectively. 

The President’s Budget with fiscal year 2008 actuals is expected to be published in February 2009. 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 2009 Budget (issued on February 4, 2008), 

includes the estimates of the unobligated and obligated amounts for fiscal year 2008. However, these estimated amounts 

are expected to differ from the actual amount and are therefore not reported. 

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. 

Individual Income Tax Liability for Tax Year 2006 

 

Adjusted Gross Income 

(AGI) 

Number of 

Taxable 

Returns AGI

Total 

Income 

Tax 

Average 

AGI per Return 

Average 

Income 

Tax per Return

Income Tax as

a Percentage

 of AGI 

(In thousands) 

(In millions 

of dollars) 

(In millions 

of dollars) 

(In whole 

dollars) 

(In whole 

dollars) 

Under $15,000...................... 37,614 188,624 3,141 5,015 84 1.7% 

$15,000 under $30,000 ........ 29,649 655,386 22,562 22,105 761 3.4% 

$30,000 under $50,000 ........ 24,907 973,569 59,846 39,088 2,403 6.1% 

$50,000 under $100,000 ...... 30,053 2,123,894 185,019 70,672 6,156 8.7% 

$100,000 under $200,000 .... 12,110 1,610,028 210,538 132,956 17,386 13.1% 

$200,000 or more ................. 4,088 2,431,160 545,226 594,740 133,380 22.4% 

Total ................................... 138,421 7,982,661 1,026,332 
152 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Corporation Income Tax Liability for Tax Year 2005 

 

Total Assets 

Income Subject 

to Tax 

Total Income Tax 

after Credits

Percentage of Income

Tax after Credits to

Taxable Income 

(In thousands of dollars) (In millions of dollars) (In millions of dollars)

Zero assets .............................. 19,086 5,094 26.7% 

$1 under $500.......................... 9,223 1,698 18.4% 

$500 under $1,000................... 4,473 1,043 23.3% 

$1,000 under $5,000................ 14,935 4,372 29.3% 

$5,000 under $10,000.............. 9,367 3,060 32.7% 

$10,000 under $25,000............ 13,506 4,456 33.0% 

$25,000 under $50,000............ 13,459 4,366 32.4% 

$50,000 under $100,000.......... 14,239 4,624 32.5% 

$100,000 under $250,000........ 31,250 9,935 31.8% 

$250,000 or more..................... 1,071,781 273,431 25.5% 

Total....................................... 1,201,319 312,079 

Tax Gap 

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 Internal Revenue Service (IRS) currently 

projects that the annual Federal gross tax gap is estimated at $345.0 billion. This estimate is based on the results of 

the National Research Program (NRP). The NRP was a study conducted to measure the compliance rate of the 

individual filers based on examination of a statistical sample of their filed returns for tax year 2001. The tax gap 

arises from three types of noncompliance: not filing timely tax returns (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 the IRS detects it, and whether the taxpayer is even aware of the noncompliance. 

The tax gap does not include underpayments by corporate taxpayers or include taxes that should have been paid on 

income from the illegal sector of the economy. 

Underreporting of income tax, employment taxes, and other taxes represents 83 percent of the tax gap. The 

single largest subcomponent of underreporting involves individuals understating their income, taking improper 

deductions, overstating business expenses, and erroneously claiming credits. Individual underreporting represents 

about half of the total tax gap. Individual income tax also accounts for about half of all tax liabilities. 

The collection gap is the cumulative amount of assessed tax, penalties, and interest that 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).
SUPPLEMENTAL INFORMATION (UNAUDITED) 153

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 $5.0 billion and $8.8 billion for fiscal years 2008 and 2007, respectively. For those under 

appeal, the estimated payout is $17.0 billion and $5.9 billion for fiscal years 2008 and 2007, 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 which 

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. 

Management’s best estimate of additional revenues that may potentially be collected by agencies from 

compliance assessments and pre-assessment work in process are $69.1 billion and $67.7 billion for fiscal years 2008 

and 2007, respectively. The amount of assessments that agencies have statutory authority to collect at the end of the 

period, but have been written off and excluded from accounts receivable are $99.3 billion and $100.2 billion for fiscal 

years 2008 and 2007, respectively. 

Risk Assumed 

Risk assumed information is important for all Federal insurance and guarantee programs, except those relating 

to 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 15─Insurance Program 

Liabilities, for events that have already occurred, the Government is also 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 

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 Pension Benefit Guaranty Corporation, the Department 

of Agriculture, and the Department of Veterans Affairs for other significant detailed information. 
154 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Risk Assumed Information as of September 30 

(In billions of dollars) 2008 2007 

 

 Present Value of unpaid expected losses, 

 net of associated premiums:

Pension Benefit Guaranty Corporation.......... 46.8 65.7 

Department of Agriculture................................ 9.9 6.6 

Department of Veterans Affairs ...................... 0.8 - 

All other......................................................... 0.6 0.7 

Total ................................................................ 58.1 73.0 

Periodic changes in risk assumed amounts: 

Pension Benefit Guaranty Corporation.......... (19.0) (7.6) 

Department of Agriculture............................. 3.3 2.1 

Total ................................................................ (15.7) (5.5)

Treasury did not record a contingent liability for any risk assumed related to the temporary guarantee program for 

money market funds because Treasury’s exposure under the program is the difference between a stable share price and 

the net asset value at liquidation of the money market fund. For all of the reasons outlined in Note 8 and based on 

current information and the Federal programs in place, and as this is a temporary program dealing with issues of first 

impression, the risk of loss to the Government is believed to be negligible. 

The liquidity commitment to the GSE described in the senior preferred stock purchase agreements section of 

Note 8 is essentially an insurance program in that the Treasury received a commitment fee in return for a guarantee 

of GSE liquidity should their liabilities exceed their assets at the end of any future quarter. The total program 

liability as of September 30, 2008, should include the amount of quarterly liquidity draws requested but not yet paid, 

accruals for amounts of liquidity draws not known until after the end of the quarter, and an estimated contingent 

liability for the discounted present value of future liquidity draws up to the $200 billion combined liability limit. The 

discounted present value would take into account estimated offsetting increases in the liquidity preference of the 

preferred stock, increases in dividends on the increased liquidity preference, and annual commitment fees. However, 

due to the current uncertainties and turbulence in the financial markets, for fiscal year 2008 the estimated contingent 

liability amount does not have “sufficient reliability” to be recorded as a liability. The only liability that is recorded 

for this activity for fiscal year 2008 is the $13.8 billion draw request received from the Federal Housing Financing 

Agency on behalf of Freddie Mac in November 2008 for the quarter ended September 30, 2008. As noted above, the 

total gross risk under this commitment was $200 billion; after the November draw request, the remaining 

commitment is $186.2 billion. 
SUPPLEMENTAL INFORMATION (UNAUDITED) 155

Unmatched Transactions and Balances 

 

(In millions of dollars) 

Fiscal Year 

2008 

Fiscal Year 

2007 

Change in intra-Governmental unmatched balances: 

Debt/investment........................................................................... 343.0 2,137.0 

Interest payable/receivable.......................................................... (35.1) (73.6) 

Loans payable/receivable ............................................................ 1,843.1 5,602.4 

Benefit program contributions payable/receivable....................... (514.9) 53.3 

Accounts payable/receivable....................................................... 2,502.1 (2,093.7) 

Advances from/to others and deferred credits/prepayments ...... 3,877.2 (209.1) 

Transfers payable/receivable....................................................... 9.0 (523.3) 

 8,024.4 4,893.0 

 

Unmatched intra-Governmental transactions: 

Federal securities interest revenue/expense - investment 

 exchange ................................................................................... 570.2 (830.0) 

Borrowings interest revenue/expense - exchange ...................... 1,532.4 (1,058.1) 

Borrowings gains/losses .............................................................. (54.7) (6.8) 

Nonexpenditure transfers-in/out .................................................. 1,352.2 6,600.1 

Expenditure transfers-in/out......................................................... 5,279.5 (855.8) 

Transfers-in/out without reimbursement ...................................... (2,974.0) 5,508.6 

Imputed financing source/cost..................................................... (13.1) (8.9) 

Benefit program revenue/cost...................................................... 1,551.8 1,961.7 

 7,244.3 11,310.8 

 

General fund transactions: 

Fund balance with Treasury ........................................................ (38,370.7) (18,149.1) 

Appropriations of unavailable special or trust fund receipts - 

 transfers out............................................................................... 1,032.1 2,781.4 

Appropriations of unavailable special or trust fund receipts - 

 transfers in ................................................................................. 744.0 (1,585.4) 

Appropriations received/warrants ................................................ (31,000.7) (133,251.2) 

Other general fund transactions .................................................. 82,826.6 120,149.7 

 15,231.3 (30,054.6) 

 

Net intra-agency reporting errors................................................... (751.9) 7,171.3 

 

Unmatched transactions and balances, net .................................. 29,748.1 (6,679.5) 

( ) Parentheses indicate a decrease to Net Position. 
156 SUPPLEMENTAL INFORMATION (UNAUDITED) 

The Statement of Operations and Changes in Net Position includes an amount for unmatched transactions and 

balances that result from the consolidation of Federal reporting entities. Transactions between Federal entities must be 

eliminated in consolidation to calculate the financial position of the 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.
STEWARDSHIP INFORMATION (UNAUDITED) 157

United States Government 

Stewardship Information (Unaudited) 

for the Years Ended September 30, 2008, 

and September 30, 2007 

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. The amounts reported in 

fiscal year 2008 for investments in prior years (fiscal years 2007-2004) are restated due to agencies continuously 

reviewing, correcting, and updating this data. 

 Table 11 

Stewardship Investments 

for the Years Ended September 30 

 

 

(In billions of dollars) 

Fiscal 

Year 

2008 

Restated

Fiscal 

Year 

2007 

Restated

Fiscal 

Year 

2006 

Restated 

Fiscal 

Year 

2005 

Restated

Fiscal 

Year 

2004 

 

Investments in non-Federal physical 

property ............................................. 57.8 56.2 54.4 51.9 54.8 

Investments in human capital .............. 77.2 76.1 107.4 88.2 76.6 

Research and development: 

Investments in basic research........... 27.6 26.5 25.2 25.1 23.4 

Investments in applied research........ 21.4 22.2 21.7 21.2 20.0 

Investments in development.............. 79.2 66.3 52.1 42.1 37.9 

Total investments............................ 263.2 247.3 260.8 228.5 212.7 
158 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. Cost 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. 

The DOT, the HUD, and the Environmental Protection Agency (EPA) had $48.9 billion (85 percent), $3.7 

billion (6 percent), and $2.7 billion (5 percent), respectively, of the total non-Federal physical property investments 

in fiscal year 2008 as shown in Table 11. These same agencies also had similar investment amounts (and percentage 

contributions) in each of the preceding 4 years. 

Within DOT, the Federal Highway Administration invested $35.3 billion during fiscal year 2008, primarily via 

reimbursement from the Highway Trust Fund, of States’ construction costs related to interstate and national 

highways. The States’ contribution is 10 percent for the Interstate System and 20 percent for most other programs. 

These highway programs have not typically resulted in significant transfers of property to State or local 

governments. 

The significant programs administered by HUD relate to grants for property renovation and public housing 

programs. The significant programs administered by the EPA relate to grants for the nation’s drinking water and 

clean water infrastructure. Neither of these programs typically transfers property to State or local governments. 

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. 

The Department of Education (Education), the Department of Labor (DOL), and the Department of Veterans 

Affairs (VA) had $62.8 billion (81 percent), $5.8 billion (8 percent), and $3.6 billion (5 percent), respectively, of the 

total human capital investments in fiscal year 2008 as shown in Table 11. These same agencies also had similar 

investment amounts (and percentage contributions) in each of the preceding 4 years, with the exception of Education 

in fiscal year 2007, where there was a decrease in Federal Family Education Loan and Direct Loan subsidy reestimates and subsidy transfers due to decreased loan consolidation activity during the current and prior year. 

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. Within Education, approximately 

32 percent of the annual investment in fiscal year 2008 relates to Federal student aid, either in the form of direct or 

guaranteed loans or grants to eligible undergraduate and graduate students. The remaining investments primarily 

relate to grants for Elementary, Secondary, and Special Education programs as well as for various departmental 

initiatives (e.g., charter schools, foreign language assistance, etc.). 

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. 
STEWARDSHIP INFORMATION (UNAUDITED) 159

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, the Department of Health and Human Services (HHS) had $16.6 

billion (60 percent) and $11.4 billion (53 percent), of the total basic and applied research investments, respectively, 

in fiscal year 2008 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 (97 percent) of the department’s basic 

and applied research. The NIH Research Program includes all aspects of the medical research continuum, including 

basic and disease-oriented research, observational and population-based research, behavioral research, and clinical 

research, including research to understand both health and disease states, to move laboratory findings into medical 

applications, to assess new treatments or compare different treatment approaches; and health services research. 

The NIH regards the expeditious transfer of the results of its medical research for further development and 

commercialization of products of immediate benefit to improved health as an important mandate. 

With regard to development, the DOD and the NASA had $65.2 billion (82 percent) and $11.4 billion (14 

percent), respectively, of total development investments in fiscal year 2008, as shown in Table 11. DOD changed its 

methodology for reporting yearly investments in research and development during fiscal year 2008 which affected 

the current and prior 4 years. Their data is based on research and development outlays (expenditures). As a result, 

the total amounts of investments in development (Table 11) have been restated. 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 outcomes of DOD 

development are: 

• Hardware and software components, or complete weapon systems, ready for operational and developmental 

testing and field use, and 

• Weapon systems finalized for complete operational and developmental testing. 

NASA development programs include activities to extend our knowledge of Earth, its space environment, and 

the universe, and to invest in new aeronautics and advanced space transportation technologies that support the 

development and application of technologies critical to the economic, scientific, and technical competiveness of the 

United States. Some outcomes and future outcomes of this development are: 

• The Constellation Systems program to develop, demonstrate, and deploy the capabilities to transport crew and 

cargo for missions to the lunar surface and safely return the crew to Earth. 

• Robotic spacecraft that use electrical power for propulsion, data acquisition, and communication to accurately 

place themselves in orbit around the surfaces of bodies about which we may know relatively little. 

• The Fundamental Aeronautics Program conducts research to enable the design of vehicles that fly through any 

atmosphere at any speed. A key focus will be the development of physics-based, multidisciplinary design, 

analysis, and optimization tools to address the multiple design challenges in future aircraft. 

• The James Webb Space Telescope is a large, deployable infrared astronomical space-based observatory. The 

mission is a logical successor to the Hubble Space Telescope, extending beyond Hubble’s discoveries into the 

infrared, where the highly red shifted early universe must be observed, where cool objects like protostars and 

protoplanetary disks emit strongly, and where dust obscures shorter wavelengths. 

• The study of the dynamic Earth system to trace effect to cause, connect variability and forcing with response, and 

vastly improve national capabilities to predict climate, weather, natural hazards, and conditions in the space 

environment. 
160 STEWARDSHIP INFORMATION (UNAUDITED) 

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APPENDIX 161

Appendix: Significant Government Entities 

This appendix list the organizations and agencies encompassed in the reporting entity for this publication. 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 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 147 organizations and agencies included in the Financial Report of the United States 

Government. The lists below describe three groups of entity types that comprise the reporting entity for the 

Financial Report. 

Twenty-Four Chief Financial Officer Act Agencies

Department of Agriculture 

 www.usda.gov 

Department of Commerce 

 www.doc.gov 

Department of Defense 

 www.defenselink.mil 

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.ustreas.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 
162 APPENDIX 

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 Twelve Additional Entities

Abraham Lincoln Bicentennial Commission 

Advisory Council on Historic Preservation 

African Development Fund 

American Battle Monuments Commission 

America’s Education Goals Panel 

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 

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 Affordable Housing and Health 

 Facility Needs for Seniors in the 21st Century 

Commission on Civil Rights 

Commission on International Religious Freedom 

Commission on Ocean Policy 

Commission on Online Child Protection 

Commission on Review of Overseas Military Facility 

 Structure United States 

Commission on Security and Cooperation–Europe 

Commission on Weapons of Mass Destruction 

Committee for Purchase from People who are Blind 

 or Severely Disabled 

Commodity Futures Trading Commission 

Community Management Staff 

Congressional Budget Office 

Congressional-Executive Commission on the People’s 

 Republic of China 

Consumer Product Safety Commission 

Corporation for National and Community Service 

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 Housing Finance Board 

Federal Labor Relations Authority 

Federal Maritime Commission 

Federal Mediation and Conciliation Service 

Federal Mine Safety and Health Review Commission 

Federal Trade Commission 

Government Accountability Office 

Government Printing Office 

Harry S. Truman Scholarship Trust Fund 

Institute of Museum 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 163

Library of Congress 

Marine Mammal Commission 

Medicare Payment Advisory Commission 

Merit Systems Protection Board 

Military Sales Program 

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 Commission on Terrorist Attacks upon 

 the United States 

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 Veterans Business Development Corporation 

Neighborhood Reinvestment Corporation 

Nuclear Waste Technical Review Board 

Occupational Safety and Health Review Commission 

Office of Compliance 

Office of Government Ethics 

Office of Navajo and Hopi Indian Relocation 

Office of Special Counsel 

Office of the Federal Coordination for Alaska Natural 

 Gas Transportation Projects 

Open World Leadership Center Funds 

Overseas Private Investment Corporation 

Panama Canal Commission 

Peace Corps 

Presidio Trust 

Public Defender Service 

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 branch to prepare 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. 

Board of Governors of the Federal Reserve System 

 (Including the Federal Reserve Banks) 

Federal Home Loan Banks 

Federal Home Loan Mortgage Corporation 

 (Freddie Mac) 

Federal National Mortgage Association (Fannie Mae) 

Federal Retirement Thrift Investment Board 

 (Including the Thrift Savings Fund) 

Financing Corporation 

Resolution Funding Corporation 

Student Loan Marketing Association (SLMA or Sallie 

 Mae) 
164 APPENDIX 

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GOVERNMENT ACCOUNTABILITY OFFICE REPORT 165

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 annually to 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 basis 

consolidated financial statements for the fiscal years ended September 30, 2008 and 

2007, and the 2008, 2007, and 2006 Statements of Social Insurance, and (2) our 

associated reports on internal control and compliance with significant laws and 

regulations. As used in this report, accrual basis financial statements refer to all of the 

consolidated financial statements and notes, except for those related to the Statement of 

Social Insurance.2

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 assessing 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 significant 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 Federal Financial 

Management Improvement Act of 1996 (FFMIA)4

 requirements. Our objective was to 

 

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 basis consolidated financial statements for the fiscal years ended September 30, 2008 and 

2007 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 2008, 2007, and 2006 

Statements of Social Insurance, including the related notes, are also included in the consolidated financial 

statements. The Statements of Social Insurance do not interrelate to the accrual basis 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). 
166 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

audit the consolidated financial statements for the fiscal years ended September 30, 2008 

and 2007. Appendix I discusses the scope and methodology of our work. 

Material weaknesses5

 discussed later in our report 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. We found the following: 

• Certain material weaknesses in 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 basis consolidated financial statements for the 

fiscal years ended September 30, 2008 and 2007.7

• The Statements of Social Insurance for 2008 and 20078 are presented fairly, in all 

material respects, in conformity with GAAP; we disclaim an opinion on the 2006 

Statement of Social Insurance.9

• The federal government did not maintain effective internal control over financial 

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

regulations as of September 30, 2008. 

 

5

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in 

more than a remote likelihood that a material misstatement of the financial statements will not be prevented 

or detected. A significant deficiency is a control deficiency, or combination of control deficiencies, that 

adversely affects the entity’s ability to initiate, authorize, record, process, or report financial data reliably in 

accordance with generally accepted accounting principles such that there is more than a remote likelihood 

that a misstatement of the entity’s financial statements that is more than inconsequential will not be 

prevented or detected. A control deficiency 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 misstatements on a timely basis. 

6

Three major impediments continue to prevent us from rendering an opinion on the accrual basis 

consolidated financial statements: (1) serious financial management problems at the Department of 

Defense, (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. 

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 basis consolidated financial statements of the U.S. government for fiscal year 2007. 8

The valuation date is January 1 for all social insurance programs except the Black Lung program, which 

valuation date is September 30. 

9

We disclaimed an opinion on the fiscal year 2006 consolidated financial statements, including the 

Statement of Social Insurance. 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 167

• Our work to test compliance with selected provisions of significant laws and 

regulations in fiscal year 2008 was limited by the material weaknesses and scope 

limitations discussed in this report. 

Significant Matters of Emphasis—The Federal Government’s Response to Stabilize 

Financial Markets and Its Long-Term Fiscal Challenges

Before discussing our disclaimer of opinion on the accrual basis consolidated financial 

statements for fiscal years 2008 and 2007 and on the 2006 Statement of Social Insurance, 

and our unqualified opinions on the 2008 and 2007 Statements of Social Insurance, 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 2008 

Financial Report of the United States Government (2008 Financial Report) into context. 

The unprecedented actions that the federal government is taking to restore stability to the 

financial markets will likely have a significant effect on the federal government’s 

financial condition, at least in the short-term, through increased borrowing. In addition, 

the current recession could significantly affect the federal government’s future tax 

revenues and the value of certain of its assets and liabilities, such as loans and loan 

guarantees. The ultimate effect of these actions and the recession on the federal 

government’s financial condition are not yet known and will not be fully reflected in the 

consolidated financial statements and The Budget of the United States Government until 

fiscal year 2009 and beyond. For example, the federal government placed the Federal 

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

Corporation (Freddie Mac) into conservatorship and committed to (1) provide capital of 

up to $200 billion ($13.8 billion of which was recorded as a liability at September 30, 

2008), (2) make short-term loans to the entities, and (3) buy mortgage-backed securities 

issued by the entities.10 Also, under the Troubled Asset Relief Program (TARP)11

established in fiscal year 2009, the federal government may purchase, up to $700 

billion,12 or insure “troubled assets”. Substantial purchases have been made thus far under 

TARP. Further, the federal government borrowed money to increase its cash deposits at 

the Federal Reserve to support the Federal Reserve’s market stabilization actions (as of 

September 30, 2008, the deposit balance was $300 billion). These and other actions that 

the federal government has taken to stabilize financial markets and restore the availability 

of credit for Americans are discussed in the Management Discussion and Analysis 

section of the 2008 Financial Report and Notes 2, 4, 8, 20, and 25 of the consolidated 

financial statements. 

 

10The Housing and Economic Recovery Act of 2008 (Pub. L. No. 110-289) authorizes the Department of 

the Treasury to purchase, for a limited amount of time, any amount of Fannie Mae or Freddie Mac 

securities, whether debt or equity. 

11The TARP was established by the Department of the 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 report every 60 days on a variety of areas associated with oversight of TARP. For the initial 60-day 

report see GAO, Troubled Asset Relief Program, GAO-09-161 (Washington, D.C.: December 3, 2008). 12The $700 billion purchase limit is reduced by an amount equal to the difference between the total of the 

outstanding insured obligations and the balance in the Troubled Assets Insurance Financing Fund. 
168 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

Currently, policymakers are understandably focused on dealing with stabilizing financial 

markets and stimulating the economy. However, once these issues are addressed, the 

nation’s new and returning leaders will need to turn their attention to the serious longterm challenges of addressing the federal government’s large and growing structural 

deficits that are driven primarily by rising health care costs and known demographic 

trends. As discussed in this 2008 Financial Report, the federal government is on an 

unsustainable long-term fiscal path. The federal government faces increasing pressures 

yet a shrinking window of opportunity for phasing in adjustments. 

DISCLAIMER OF OPINION ON THE ACCRUAL BASIS 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 basis consolidated financial 

statements for fiscal years 2008 and 2007, principally resulting from certain material 

weaknesses, and other limitations on the scope of our work, described in this report, we 

are unable to, and we do not, express an opinion on such accrual basis consolidated 

financial statements. 

As a result of these limitations, readers are cautioned that amounts reported in the accrual 

basis consolidated financial statements and related notes may not be reliable. These 

material weaknesses and other scope limitations also affect the reliability of certain 

information contained in the accompanying Management’s Discussion and Analysis and 

other financial management information—including information used to manage the 

federal government day to day and budget information reported by federal agencies—that 

is taken from the same data sources as the accrual basis consolidated financial statements. 

We have not audited and do not express an opinion on the Management’s Discussion and 

Analysis, or on Stewardship Information, Supplemental Information, or other information 

that is not part of the consolidated financial statements and related notes included in the 

2008 Financial Report. 

As discussed in Note 21 to the consolidated financial statements, the fiscal year 2007 

Balance Sheet and Statement of Operations and Changes in Net Position were both 

restated to correct certain earmarked activity and balances. Last year, we disclaimed an 

opinion on the fiscal year 2007 accrual basis consolidated financial statements due to 

certain material weaknesses and limitations on the scope of our work, including the 

material weakness related to the preparation of the consolidated financial statements. 

Given the material weaknesses and scope limitations discussed below, additional 

restatements may occur in the future. 

Limitations on the Scope of Our Work

For fiscal years 2008 and 2007, 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 basis consolidated financial statements. First, the Department of the Treasury 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 169

(Treasury) and the Office of Management and Budget (OMB) depend on representations 

from certain federal agencies to provide their representations to us regarding the U.S. 

government’s consolidated financial statements. Treasury and OMB were unable to 

provide us with adequate representations regarding the U.S. government’s accrual basis 

consolidated financial statements primarily because of insufficient representations 

provided to them by the Department of Defense (DOD) for fiscal years 2008 and 2007. 

Second, the final 2008 Financial Report and 2007 Financial Report were not provided in 

time for us to complete all of our planned audit procedures related to the compilation of 

these reports.

Material Weaknesses Contributing to Our Disclaimer of Opinion on the Accrual Basis 

Consolidated Financial Statements

The federal government did not maintain adequate systems or have sufficient, reliable 

evidence to support certain material information reported in the accompanying accrual 

basis consolidated financial statements, as briefly described below. The underlying 

material weaknesses in internal control, which generally have existed for years, 

contributed to our disclaimer of opinion on the accrual basis consolidated financial 

statements. Appendix II describes the material weaknesses in more detail and highlights 

the primary effects of these material weaknesses on the accompanying accrual basis 

consolidated financial statements and on the management of federal government 

operations. The material weaknesses that contributed to our disclaimer of opinion on the 

accrual basis 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 basis 

consolidated financial statements; 

• reasonably estimate or adequately support amounts reported for certain liabilities, 

such as environmental and disposal liabilities, or determine whether commitments 

and contingencies were complete and properly reported; 

• support significant portions of the total net cost of operations, most notably related to 

DOD, and adequately reconcile disbursement activity at certain agencies; 

• adequately account for and reconcile intragovernmental activity and balances 

between federal agencies; 

• ensure that the federal government’s accrual basis consolidated financial statements 

were (1) consistent with the underlying audited agency financial statements, (2) 

properly balanced, and (3) in conformity with GAAP; and 

• identify and either resolve or explain material differences between certain 

components of the budget deficit reported in Treasury’s records, which are used to 

prepare the Reconciliation of Net Operating Cost and Unified Budget Deficit and 

Statement of Changes in Cash Balance from Unified Budget and Other Activities, and 
170 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

related amounts reported in federal agencies’ financial statements and underlying 

financial information and records. 

Due to the material weaknesses and the additional limitations on the scope of our work 

discussed above, there may also be additional issues that could affect the accrual basis 

consolidated financial statements that were not identified. 

UNQUALIFIED OPINIONS ON THE STATEMENTS OF SOCIAL INSURANCE FOR 

2008 AND 2007

In our opinion, the Statements of Social Insurance for 2008 and 2007 present fairly, in all 

material respects, the financial condition of the federal government’s social insurance 

programs, in conformity with GAAP. We disclaim an opinion on the 2006 Statement of 

Social Insurance13 and have not audited and do not express an opinion on the Statements 

of Social Insurance for 2005 and 2004, and on other information related to such 

statements that is included in the accompanying 2008 Financial Report. 

As discussed in Note 23 to the consolidated financial statements, the Statement of Social 

Insurance presents the actuarial present value of the federal government’s estimated 

future revenue to be received from or on behalf of participants and estimated future 

expenditures to be paid to or on behalf of participants, based on benefit formulas in 

current law and using a projection period sufficient to illustrate the long-term 

sustainability of the social insurance programs.14 In preparing the Statement 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, significant uncertainties, and contingencies), 

there will be differences between the estimates in the Statement of Social Insurance and 

the actual results, and those differences may be material. The Supplemental Information 

section of the 2008 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. 

 

13Beginning in fiscal year 2006, the Statement of Social Insurance became a principal financial statement 

and was audited as part of the applicable federal agencies’ financial statements. We disclaimed an opinion 

on the fiscal year 2006 consolidated financial statements, including the Statement of Social Insurance. For 

fiscal years 2008 and 2007, we designed our audit to provide an opinion on the 2008 and 2007 consolidated 

Statements of Social Insurance, respectively. 

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 2040, when the program is 

scheduled to terminate. 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 171

In addition to the inherent uncertainty that underlies the expenditure projections prepared 

for all parts of Medicare, the Supplementary Medical Insurance (SMI) Part D projections 

have an added uncertainty in that they were prepared using very little program experience 

upon which to base the estimates, and the SMI Part B projections assume significant 

reductions in physician payments, as required under current law, which may or may not 

occur. The Congress has overridden scheduled reductions in physician payments 

calculated for each of the last 6 years, including for 2008, and also for 2009.15 On 

December 29, 2007, legislation was enacted to override scheduled reductions in 

payments for the first half of 2008. On July 15, 2008, the Medicare Improvements for 

Patients and Providers Act (MIPPA) of 2008 was enacted. Many provisions in the 

MIPPA affected the Medicare program including payments to providers such as 

physicians and managed care plans, and beneficiary improvements, such as expanded 

access to care, enrollment assistance, and increased coverage. It is not possible to 

anticipate what other actions the Congress might take, either in the near or long-term, to 

alter the scheduled reductions in physician payments. If scheduled reductions continue to 

be overridden in the future, actual SMI Part B expenditures could be materially greater 

than the amounts presented in the 2008 Statement of Social Insurance. 

The scheduled future benefits reported 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 

2008 Financial Report, the Social Security and Medicare Part A trust funds are projected 

to be exhausted in 2041 and 2019, respectively, at which time they will be unable to pay 

the full amount of scheduled future benefits. For Social Security, projected future 

revenues would be sufficient to pay 78 percent of scheduled benefits in 2041, the year of 

trust fund exhaustion, and decreasing to 75 percent of scheduled benefits in 2082. 

Similarly, for Medicare Part A, projected future revenues would be sufficient to pay 78 

percent of scheduled benefits in 2019, the year of trust fund exhaustion, and decreasing to 

30 percent of scheduled benefits in 2082. 

Management’s Discussion and Analysis, Supplemental Information, and other 

information included in the accompanying 2008 Financial Report contain information 

directly related to the Statements of Social Insurance. We did not audit and do not 

express an opinion on this information. However, we compared the information that 

directly related to the Statements of Social Insurance for consistency with the Statements 

of Social Insurance and discussed the methods of measurement and presentation of such 

 

15The Medicare, Medicaid, and SCHIP Extension Act of 2007, Pub. L. No. 110-173, § 101(a)(1)(B), 

overrode the scheduled reductions for the first six months of calendar year 2008 and the Medicare 

Improvement for Patients and Providers Act of 2008, Pub. L. No. 110-275, § 131 (a)(1), overrode the 

scheduled reductions for the last six months of calendar year 2008 and all of 2009. 
172 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

information with Treasury officials. Based on this limited work, we found no material 

inconsistencies with the Statements of Social Insurance or GAAP. 

ADVERSE OPINION ON INTERNAL CONTROL

Because of the effects of the material weaknesses discussed in this report, in our opinion, 

the federal government did not maintain effective internal control as of September 30, 

2008, to meet the following objectives: (1) transactions are properly recorded, processed, 

and summarized to permit the preparation of the financial statements and stewardship 

information 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 significant 

laws and regulations that could have a direct and material effect on the financial 

statements and stewardship information. Consequently, the federal government’s internal 

control did not provide reasonable assurance that misstatements, losses, or 

noncompliance material in relation to the financial statements or to stewardship 

information would be prevented or detected on a timely basis. Our adverse opinion on 

internal control over financial reporting and compliance is based upon the criteria 

established under FMFIA. 

In addition to the material weaknesses that contributed to our disclaimer of opinion on the 

accrual basis consolidated financial statements, which were discussed above, we found 

the following three other material weaknesses in internal control as of September 30, 

2008. These material weaknesses are discussed in more detail in appendix III, including 

the primary effects of the material weaknesses on the accompanying accrual basis 

consolidated financial statements and on the management of federal government 

operations. 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 cost-effectively 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. 

Further, we found the following significant deficiencies in internal control as of 

September 30, 2008, which are discussed in more detail in appendix IV. These significant 

deficiencies involve the following areas: 

• implementing effective credit reform estimation and related financial reporting 

processes for loans receivable and loan guarantee liabilities at certain federal credit 

agencies, and 

• preparing the Statement of Social Insurance for certain programs. 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 173

Due to improvements during fiscal year 2008, (1) control deficiencies related to loans 

receivable and loan guarantee liabilities, which were reported as a material weakness in 

fiscal year 2007, are reported as a significant deficiency in fiscal year 2008, and (2) the 

significant deficiency regarding monitoring and oversight of federal grants and the 

Medicare Advantage Organizations that was reported in fiscal year 2007 is no longer 

reported as a significant deficiency. 

Individual federal agency financial statement audit reports identify additional control 

deficiencies, which were reported by agency auditors as either material weaknesses or 

significant deficiencies at the individual agency level. We do not consider these 

additional deficiencies to represent material weaknesses or significant deficiencies at the 

governmentwide level. Also, due to the issues noted throughout this report, additional 

material weaknesses and significant deficiencies may exist that were not identified and 

reported. 

COMPLIANCE WITH SIGNIFICANT LAWS AND REGULATIONS

Our work to test compliance with selected provisions of significant laws and regulations 

related to financial reporting was limited by the material weaknesses and scope 

limitations discussed in this report. U.S. generally accepted government auditing 

standards and OMB guidance require auditors to report on agencies’ compliance with 

significant laws and regulations. Certain individual agency audit reports contain instances 

of noncompliance. None of these instances were deemed to be reportable noncompliances 

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 significant 

laws and regulations. 

AGENCY FINANCIAL MANAGEMENT SYSTEMS

To achieve the financial management improvements envisioned by Congress when 

enacting the CFO Act and FFMIA, federal agencies need to modernize their financial 

management systems to generate reliable, useful, and timely financial and performance 

information throughout the year as well as at year-end. The size and complexity of the 

federal government and the long-standing nature of its financial management systems 

weaknesses continue to present a formidable management challenge in providing 

accountability to the nation’s taxpayers. 

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 at the 

transaction level. For fiscal years 2008 and 2007, auditors for 14 and 13 of the 24 CFO 

Act agencies, respectively, reported that the agencies’ financial management systems did 
174 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

not substantially comply with one or more of these three FFMIA requirements. Agency 

heads for the 24 CFO Act agencies also annually report on FFMIA compliance. A fewer 

number of agency heads (9 in 2008 and 10 in 2007) reported that their agencies’ systems 

were not in substantial compliance with one or more of the three FFMIA requirements. In 

our report on fiscal year 2000 FFMIA results,16 we first recommended additional OMB 

guidance be provided to clarify the meaning of substantial compliance to address these 

inconsistencies, and have reiterated this recommendation thereafter. We noted that OMB 

started taking action in our most recent FFMIA report on fiscal year 2007 results,17 and 

we will continue to work with OMB on this issue. According to many of the agency 

auditors’ reports, serious financial management systems problems remain. As a result, 

federal agencies’ financial management systems are unable to routinely produce reliable, 

useful, and timely financial information, which hampers the federal government’s ability 

to effectively administer and oversee its major programs. 

_ _ _ _ _ 

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 9, 2008 

 

16GAO, Financial Management: FFMIA Implementation Critical for Federal Accountability, GAO-02-29 

(Washington, D.C.: Oct. 1, 2001). 

17GAO, Financial Management: Persistent Financial Management System Issues Remain for Many CFO 

Act Agencies, GAO-08-1018 (Washington, D.C.: Sept. 30, 2008). 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 175

APPENDIX I 

Objectives, Scope, and Methodology

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 agencies18 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 

200219 requires most other executive branch agencies 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 agencies20 that are significant to the U.S. 

government’s consolidated financial statements. Our work was performed in coordination 

and cooperation with the inspectors general and independent public accountants for these 

35 agencies to achieve our joint audit objectives. Our audit approach regarding the 

accrual basis consolidated financial statements focused primarily on determining the 

current status of the material weaknesses that contributed to our disclaimer of opinion on 

the accrual basis consolidated financial statements and the other material weaknesses 

affecting internal control that we had previously reported in our report on the 

consolidated financial statements for fiscal year 2007.21 Our work included separately 

auditing the financial statements of the following significant federal agencies and federal 

agency components: 

• We audited and expressed an unqualified opinion on the Internal Revenue Service’s 

(IRS) fiscal years 2008 and 2007 financial statements.22 In fiscal years 2008 and 

2007, IRS collected about $2.7 trillion in tax payments each year and paid about $426 

billion and $292 billion, respectively, in refunds and economic stimulus rebates to 

taxpayers.23 For fiscal year 2008, we continued to report material weaknesses that 

resulted in ineffective internal control. We also reported a significant deficiency. Our 

tests of IRS’s compliance with selected provisions of significant 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 the Federal Financial 

Management Improvement Act of 1996. 

 

1831 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. 31 U.S.C. 3515(c). 

19Pub. L. No. 107-289, 116 Stat. 2049 (Nov. 7, 2002); see 31 U.S.C. 3515. 

20See Treasury Financial Manual, volume I, part 2, chapter 4700, for a listing of the 35 agencies. 21For our report on the U.S. government’s consolidated financial statements for fiscal year 2007, see U.S. 

Department of the Treasury, Fiscal Year 2007 Financial Report of the United States Government

(Washington, D.C.: Dec. 2007), pp. 159-182, which can be found on GAO’s Internet site at www.gao.gov. 22GAO, Financial Audit: IRS’s Fiscal Years 2008 and 2007 Financial Statements, GAO-09-119 

(Washington, D.C.: Nov. 10, 2008). 

23The Economic Stimulus Act of 2008, Pub. L. No. 110-185, §101, 122 Stat. 613, 613-17 (Feb.13, 2008) 

(codified at 26 U.S.C. § 6428), included provisions to help stimulate the economy, such as the 2008 

disbursement to eligible taxpayers of recovery rebates (i.e. tax refunds) of up to $600 for individuals and 

$1,200 for couples, with an additional $300 for each child. Pursuant to the act, IRS disbursed refunds 

totaling about $94 billion, or about 22 percent of all refunds disbursed by IRS during fiscal year 2008. 
176 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

• 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, 2008 and 2007.24 For these 2 fiscal years, the schedules reported (1) 

approximately $5.8 trillion (2008) and $5.0 trillion (2007) of federal debt held by the 

public;25 (2) about $4.2 trillion (2008) and $3.9 trillion (2007) of intragovernmental 

debt holdings;26 and (3) about $242 billion (2008) and $239 billion (2007) of interest 

on federal debt held by the public. We reported that as of September 30, 2008, BPD 

had effective internal control over financial reporting and compliance with laws and 

regulations relevant to the Schedule of Federal Debt. Further, we reported that there 

was no reportable BPD noncompliance in fiscal year 2008 with a selected provision 

of law we tested. 

• We audited and expressed unqualified opinions on the fiscal years 2008 and 2007 

financial statements of the United States Securities and Exchange Commission 

(SEC).27 For fiscal year 2008, we reported that although certain internal controls 

could be improved, SEC had effective internal control over financial reporting, 

including safeguarding of assets, and compliance with laws and regulations. We also 

reported three significant deficiencies in internal control. Further, we reported that 

there was no reportable noncompliance with selected provisions of laws and 

regulations we tested. 

• We audited and expressed unqualified opinions on the December 31, 2007 and 2006, 

financial statements of the funds administered by the Federal Deposit Insurance 

Corporation (FDIC), including the Deposit Insurance Fund (DIF) and the FSLIC 

Resolution Fund.28 We reported that as of December 31, 2007, FDIC had effective 

internal control over financial reporting and compliance with significant laws and 

regulations. 

In addition, we considered the CFO Act agencies’ and certain other federal agencies’ 

fiscal years 2008 and 2007 financial statements and the related auditors’ reports prepared 

by the inspectors general or contracted independent public accountants. Financial 

statements and audit reports for these agencies provide information about the operations 

of each of these entities. The agency 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 agency financial statements. 

 

24GAO, Financial Audit: Bureau of the Public Debt’s Fiscal Years 2008 and 2007 Schedules of Federal 

Debt, GAO-09-44 (Washington, D.C.: Nov. 7, 2008). 25The public holding federal debt is comprised of individuals, corporations, state and local governments, 

the Federal Reserve Banks, and foreign governments and central banks. 

26Intragovernmental debt holdings represent federal debt issued by Treasury and held by certain federal 

government accounts such as the Social Security and Medicare trust funds. 27GAO, Financial Audit: Securities and Exchange Commission’s Financial Statements for Fiscal Years 

2008 and 2007, GAO-09-173 (Washington, D.C.: Nov. 14, 2008). 28GAO, Financial Audit: Federal Deposit Insurance Corporation Funds’ 2007 and 2006 Financial 

Statements, GAO-08-416 (Washington, D.C.: Feb. 11, 2008). 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 177

We considered the Department of Defense’s (DOD) assertion that DOD management 

prepared and submitted pursuant to the provisions of the National Defense Authorization 

Act for Fiscal Year 2002.29 In accordance with section 1008 of this act, DOD reported 

that certain major deficiencies related to noncompliant systems and noncompliant 

processes continued to impact the department’s ability to prepare reliable financial 

statements. In addition, DOD refers to its ongoing efforts to address related material 

weaknesses reported by the DOD Inspector General. In the DOD Inspector General’s 

fiscal year 2008 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 included in the Statement of Social Insurance 

related to the Social Security Administration (SSA) and the Department of Health and 

Human Services (HHS), our audit approach regarding the Statement of Social Insurance 

focused primarily on these two agencies. For each federal agency preparing a Statement 

of Social Insurance,30 we considered the agencies’ fiscal years 2008 and 2007 financial 

statements and the related auditors’ reports prepared by the inspectors general or 

contracted independent public accountants. We performed sufficient audit work, 

including internal control and substantive audit procedures, reperformance procedures, 

and review of the other auditors’ Statement of Social Insurance-related audit work, to 

support our opinions on the 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 significant laws 

and regulations. We considered the limitations on the scope of our work regarding the 

accrual basis consolidated financial statements in forming our conclusions. Our work was 

performed in accordance with U.S. generally accepted government auditing standards. 

 

29Pub. L. No. 107-107, §1008, 115 Stat. 1012, 1204 (Dec. 28, 2001). 

30These agencies include SSA, HHS, the Railroad Retirement Board, and the Department of Labor. 
178 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

APPENDIX II 

Material Weaknesses Contributing to Our Disclaimer of Opinion on the Accrual Basis 

Consolidated Financial Statements

The continuing material weaknesses discussed below contributed to our disclaimer of 

opinion on the federal government’s accrual basis consolidated financial statements. The 

federal government did not maintain adequate systems or have sufficient, reliable 

evidence to support information reported in the accompanying accrual basis 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 basis consolidated financial statements. Most of the PP&E and inventories and 

related property are the responsibility of DOD. As in past years, DOD did not maintain 

adequate systems or have sufficient records to provide reliable information on these 

assets. Other agencies, most notably the National Aeronautics and Space Administration, 

reported continued deficiencies in internal control procedures and processes related to 

PP&E. 

Deficiencies in internal control over assets could affect the federal government’s ability 

to fully know the assets it owns, including their location and condition, and its ability to 

effectively (1) safeguard assets from physical deterioration, theft, or loss; (2) account for 

acquisitions and disposals of such assets and reliably report asset balances; (3) ensure that 

the assets are available for use when needed; (4) prevent unnecessary storage and 

maintenance costs or purchase of assets already on hand; and (5) determine the full costs 

of programs that use these assets. 

Liabilities and Commitments and Contingencies

The federal government could not reasonably estimate or adequately support amounts 

reported for certain liabilities. For example, DOD was not able to estimate with assurance 

key components of its environmental and disposal liabilities. In addition, DOD could not 

support a significant amount of its estimated military postretirement health benefits 

liabilities included in federal employee and veteran benefits payable. These unsupported 

amounts related to the cost of direct health care provided by DOD-managed military 

treatment facilities. Further, the federal government could not determine whether 

commitments and contingencies, including any related to treaties and other international 

agreements entered into to further the federal government’s interests, were complete and 

properly reported. 

Problems in accounting for liabilities affect the determination of the full cost of the 

federal government’s current operations and the extent of its liabilities. Also, deficiencies 

in internal control supporting the process for estimating environmental and disposal 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 179

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, if disclosures of commitments and contingencies are incomplete or 

incorrect, reliable information is not available about the extent of the federal 

government’s obligations. 

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 agencies affect reported net 

costs. As a result, the federal government was unable to support significant portions of 

the total net cost of operations, most notably related to DOD. 

With respect to disbursements, DOD and certain other federal agencies reported 

continued control deficiencies in reconciling disbursement activity. For fiscal years 2008 

and 2007, there was unreconciled disbursement activity, including unreconciled 

differences between federal agencies’ and Treasury’s records of disbursements and 

unsupported federal agency 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. If disbursements are improperly recorded, this could result in misstatements in 

the financial statements and in certain data provided by federal agencies 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

Federal agencies are unable to adequately account for and reconcile intragovernmental 

activity and balances. OMB and Treasury require the chief financial officers (CFO) of 35 

executive departments and agencies to reconcile, on a quarterly basis, selected 

intragovernmental activity and balances with their trading partners. In addition, these 

agencies are required to report to Treasury, the agency’s inspector general, and GAO on 

the extent and results of intragovernmental activity and balances reconciliation efforts as 

of the end of the fiscal year. 

A substantial number of the agencies did not adequately perform the required 

reconciliations for fiscal years 2008 and 2007. For these fiscal years, based on trading 

partner information provided to Treasury through agencies’ closing packages, Treasury 

produced a “Material Difference Report” for each agency showing amounts for certain 

intragovernmental activity and balances that significantly differed from those of its 

corresponding trading partners as of the end of the fiscal year. Based on our analysis of 

the “Material Difference Reports” for fiscal year 2008, we noted that a significant 
180 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

number of CFOs were unable to adequately explain the differences with their trading 

partners or did not provide adequate documentation to support responses on the CFO 

Representations. For both fiscal years 2008 and 2007, amounts reported by federal 

agency trading partners for certain intragovernmental accounts were not in agreement by 

significant amounts. In addition, a significant number of CFOs cited differing accounting 

methodologies, accounting errors, and timing differences for their material differences 

with their trading partners. Some CFOs simply indicated that they were unable to explain 

the differences with their trading partners with no indication when the differences will be 

resolved. As a result of the above, the federal government’s ability to determine the 

impact of these differences on the amounts reported in the consolidated financial 

statements is significantly impaired. 

In 2006, OMB issued Memorandum No. M-07-03, Business Rules for Intragovernmental 

Transactions (Nov. 13, 2006), and Treasury issued the Treasury Financial Manual 

Bulletin No. 2007-03, Intragovernmental Business Rules (Nov. 15, 2006). This guidance 

added criteria for resolving intragovernmental disputes and major differences between 

trading partners for certain intragovernmental transactions and called for the 

establishment of an Intragovernmental Dispute Resolution Committee. OMB is currently 

working with the Chief Financial Officers Council to create the Intragovernmental 

Dispute Resolution Committee.31 OMB is also using a “Watch List” that lists federal 

agencies with large intragovernmental imbalances. The Watch List was developed to 

facilitate reductions in some of the largest intragovernmental imbalances, bring federal 

agency reporting into alignment with the Intragovernmental Business Rules, bring the 

appropriate representatives together from the respective agencies, and document the 

issues and resolutions. 

Treasury is also taking steps to help resolve material differences in intragovernmental 

activity and balances. For example, Treasury is requiring federal agencies to provide 

documentation on how and when agencies are resolving certain of their unresolved 

material differences. Resolving the intragovernmental transactions problem remains a 

difficult challenge and will require a strong commitment by federal agency leadership to 

fully implement the required business rules and continued strong leadership by OMB and 

Treasury. 

Preparation of Consolidated Financial Statements

While further progress was demonstrated in fiscal year 2008, the federal government 

continued to have inadequate systems, controls, and procedures to ensure that the 

consolidated financial statements are consistent with the underlying audited agency 

financial statements, properly balanced, and in conformity with U.S. generally accepted 

accounting principles (GAAP). In addition, as discussed in our scope limitation section of 

this report, the final 2008 Financial Report was not provided in time for us to complete 

 

31The U.S. Chief Financial Officers Council is an organization of the CFOs and Deputy CFOs of the largest 

federal agencies and senior officials of OMB and Treasury who work collaboratively to improve financial 

management in the U.S. Government. 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 181

all of our planned audit procedures related to its compilation. During our fiscal year 2008 

audit, we found the following:32

• Treasury’s process for compiling the consolidated financial statements demonstrated 

that amounts in the Statement of Social Insurance were consistent with the underlying 

federal agencies’ audited financial statements and that the Balance Sheet and the 

Statement of Net Cost were also consistent with federal agencies’ 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 were fully consistent with the underlying information in federal agencies’ 

audited financial statements and other financial data. 

• At the federal agency level, for fiscal year 2008, auditors for many of the CFO Act 

agencies reported significant deficiencies regarding agencies’ financial reporting 

processes which, in turn, could affect the preparation of the consolidated financial 

statements. For example, auditors for several agencies reported that a significant 

number of adjustments were required to prepare the agencies’ financial statements. 

These and other auditors are also required to separately audit financial information 

sent by the federal agencies to Treasury through a closing package. In connection 

with preparing the consolidated financial statements, several auditors reported 

significant deficiencies regarding the preparation of the closing package and Treasury 

had to record material adjustments to correct errors found in agencies’ audited closing 

package information. 

• To make the fiscal years 2008 and 2007 consolidated financial statements balance, 

Treasury recorded a net increase of $29.8 billion and a net decrease of $6.7 billion, 

respectively, to net operating cost on the Statement of Operations and Changes in Net 

Position, which it labeled “Unmatched transactions and balances.”33 An additional net 

$11 billion and $2.5 billion of unmatched transactions were recorded in the Statement 

of Net Cost for fiscal years 2008 and 2007, respectively. Treasury is unable to fully 

identify and quantify all components of these unreconciled activities. 

• The federal government could not demonstrate that it had fully identified and reported 

all items needed to reconcile the operating results, which for fiscal year 2008 showed 

a net operating cost of $1,009.1 billion, to the budget results, which for the same 

period showed a unified budget deficit of $454.8 billion. 

 

32Most of the issues we identified in fiscal year 2008 existed in fiscal year 2007, and many have existed for 

a number of years. In June 2008, we reported the issues we identified to Treasury and OMB and provided 

recommendations for corrective action in GAO, Financial Audit: Material Weaknesses in Internal Control 

over the Processes Used to Prepare the Consolidated Financial Statements of the U.S. Government, GAO08-748 (Washington, D.C.: June 17, 2008). 

33Although 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. 
182 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

• The federal government continues to be unable to determine the impact of 

unreconciled intragovernmental activity and balances on the accrual basis 

consolidated financial statements. Treasury’s elimination of certain intragovernmental 

activity and balances continues to be impaired by the federal agencies’ problems in 

handling their intragovernmental transactions. As a result, Treasury recorded the net 

differences in intragovernmental elimination entries as “Unmatched transactions and 

balances,” in order to force the Statements of Operations and Changes in Net Position 

into balance. As previously discussed, amounts reported for federal agency trading 

partners for certain intragovernmental accounts were not in agreement by significant 

amounts. In addition, there are hundreds of billions of dollars of unreconciled 

differences between the General Fund and federal agencies related to appropriation 

and other intragovernmental transactions. The ability to reconcile such transactions is 

hampered because only some of the General Fund is reported in the Department of 

the Treasury’s financial statements. 

• Over the past several years, significant actions have been taken to assist in ensuring 

that financial information required by GAAP is disclosed in the consolidated financial 

statements. However, Treasury’s reporting of certain financial information required 

by GAAP continues to be impaired. Due to certain material weaknesses 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 if the omitted information is material. Further, Treasury's 

ability to report information in accordance with GAAP will also remain impaired 

until federal agencies, 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 agencies 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 Treasury’s process for preparing the 

consolidated financial statements, involving inadequate or ineffective (1) policies and 

procedures, (2) reviews of the financial statements and supporting documentation 

provided to GAO, and (3) processes for monitoring the preparation of the 

consolidated financial statements. 

• As in previous years, Treasury did not have adequate systems and personnel to 

address the magnitude of the fiscal year 2008 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 amount 

of effort and dedication to compile the consolidated financial statements; however, 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 183

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. 

During fiscal year 2008, Treasury, in coordination with OMB, continued implementing 

corrective action plans and made progress in addressing certain internal control 

deficiencies we have previously reported. Until the 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 agency financial 

statements, properly balanced, and in conformity with GAAP will be impaired. Resolving 

some of these internal control deficiencies will be a difficult challenge and will require a 

strong commitment from Treasury and OMB as they continue to 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 2008 and 2007 of $454.8 billion and $162.8 billion, 

respectively.34 The budget deficit is calculated by subtracting actual budget outlays 

(outlays) from actual budget receipts (receipts). 

For several years, we have been reporting material unreconciled differences between the 

total net outlays reported in selected federal agencies’ Statement of Budgetary Resources 

(SBR) and Treasury’s central accounting records used to compute the budget deficit35

reported in the consolidated financial statements. OMB and Treasury have continued to 

work with federal agencies to reduce these material unreconciled differences. Such 

efforts have resulted in significantly reducing the net outlay differences in fiscal year 

2008. However, billions of dollars of differences still exist in this and other components 

of the deficit because the federal government does not have effective processes and 

procedures for identifying, resolving, and explaining material differences in the 

components of the deficit between Treasury’s central accounting records and information 

reported in agency financial statements and underlying agency financial information and 

records. Until these differences are timely reconciled by the federal government, their 

effect on the accrual basis consolidated financial statements will be unknown. 

 

34The budget deficit, receipts, and outlays amounts are reported in Treasury's Monthly Treasury Statement

and the President's Budget. 

35See GAO's audit report on its audit of the federal government's fiscal year 2007 financial statements that 

was incorporated in the 2007 Financial Report of the U.S. Government published by Treasury. Also, see 

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). 
184 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

In fiscal year 2008, we again noted that several agencies’ auditors reported internal 

control deficiencies (1) affecting the agencies’ SBRs, and (2) relating to monitoring, 

accounting, and reporting of budgetary transactions. These control deficiencies could 

affect the reporting and calculation of the net outlay amounts in the agencies’ SBRs. In 

addition, such deficiencies may also affect the agencies’ ability to report reliable 

budgetary information to Treasury and OMB and may affect the unified budget deficit 

reported in the accrual basis consolidated financial statements. The unified budget deficit 

is also reported in Treasury’s Combined Statement of Receipts, Outlays, and Balances,

36

and in other federal government publications. 

 

36Treasury’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 

agency reporting. 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 185

APPENDIX III 

Other Material Weaknesses

The federal government did not maintain effective internal control over financial 

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

regulations as of September 30, 2008. In addition to the material weaknesses discussed in 

appendix II that contributed to our disclaimer of opinion on the accrual basis consolidated 

financial statements, we found the following three other material weaknesses in internal 

control. 

Improper Payments

While the federal government, under OMB’s leadership, has made significant progress in 

increasing the number of programs that reported estimates of improper payments, the 

federal government did not have effective internal controls to determine the full extent to 

which improper payments occur and to reasonably assure that appropriate actions are 

taken to cost-effectively reduce improper payments as intended by the Improper 

Payments Information Act of 2002 (IPIA).37 Reported federal agencies’ estimates of 

improper payments, based on available information, totaled about $72 billion for fiscal 

year 2008, which represented about 4 percent of $1.8 trillion of reported outlays for the 

related programs. The increase from the prior year estimate of $49 billion38 was primarily 

attributable to (1) a $5.7 billion increase in the Medicaid program’s estimate which now 

encompasses each of its three components—fee-for-service, managed care, and 

eligibility; and (2) ten newly reported programs with improper payment estimates totaling 

about $10 billion. We view these efforts as a positive step to improve transparency over 

the full magnitude of improper payments. 

However, we noted continuing weaknesses related to the federal government’s ability to 

determine the full extent of improper payments, including 2 agencies that had not 

reported improper payment estimates for 6 risk-susceptible federal programs with total 

program outlays of about $50 billion (primarily Medicare Part D) for fiscal year 2008 and 

programs for which risk assessments (to identify the potential risk of improper payments) 

 

37Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002). The IPIA requires federal executive branch 

agencies to review all programs and activities, identify those that may be susceptible to significant 

improper payments, estimate and report the annual amount of improper payments for those programs, and 

implement actions to cost-effectively reduce improper payments. 38In their fiscal year 2008 Performance and Accountability Reports (PAR), selected federal agencies 

updated their fiscal year 2007 improper payment estimates to reflect changes since issuance of their fiscal 

year 2007 PARs. These updates decreased the governmentwide improper payment estimate for fiscal year 

2007 from $55 billion to $49 billion, primarily because the Department of Health and Human Services 

(HHS) updated Medicaid’s improper payment estimate for fiscal 2007 from $12.9 billion (or 18.45 percent 

error rate) to about $6.6 billion (or 4.7 percent error rate), a $6.3 billion decrease (or 13.75 percent error 

rate decrease). HHS reported in its fiscal year 2008 PAR that the $12.9 billion estimate for fiscal year 2007 

was preliminary based on two quarters (or six months) of fiscal year 2006 claim payments. In fiscal year 

2008, HHS completed its review of fiscal year 2006 claim payments and derived a significantly lower error 

rate of 4.7 percent or $6.6 billion for fiscal year 2007. 
186 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

have either not yet been performed or have not been recently updated. In addition, agency 

auditors reported internal control and systems deficiencies related to (1) testing of 

payment transactions for improper payments, (2) development of corrective action plans 

to reduce improper payments, and (3) recovery of improper payments. Also, agency 

auditors reported a number of control deficiencies that could allow improper payments to 

occur. For example, in the Department of Transportation’s fiscal year 2008 Performance 

and Accountability Report, the Office of Inspector General reported that its audits and 

investigations continue to find oversight and control deficiencies, fraud and abuse, and 

other ethics issues involving agency officials and contractors, including schemes related 

to bribery and kickbacks, bid rigging, and over-billing of labor and materials. Also, at the 

Department of Health and Human Services, the auditor reported control deficiencies 

related to preventing and detecting errors in Medicare payments. Further, as reported 

improper payment estimates are not required to be audited, such estimates may not be 

reliable. Until the federal government has implemented effective controls to determine 

the full extent to which improper payments occur and to reasonably assure that 

appropriate actions are taken to cost-effectively reduce improper payments, including 

making any necessary policy changes, 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 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. GAO has reported information security as a high-risk area across government 

since February 1997. During fiscal year 2008, federal agencies did not consistently 

implement effective controls to prevent, limit, or detect unauthorized access to computing 

resources. Specifically, agencies did not always (1) protect information system 

boundaries; (2) utilize identification and authentication mechanisms; (3) protect sensitive 

system resources; (4) use audit and monitoring capability, including incident handling; 

and (5) restrict physical access to information assets. In addition, agencies did not 

consistently configure network devices and services to prevent unauthorized access and 

ensure system integrity, such as patching key servers and workstations, in a timely 

manner; assign incompatible duties to different individuals or groups so that one 

individual does not control all aspects of a process or transaction; and maintain or test 

continuity of operations plans for key information systems. 

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 control 

deficiencies is that federal agencies 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 administration has taken important actions to 

improve information security, such as issuing extensive guidance on information security 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 187

and requiring agencies to perform specific actions to protect certain personally 

identifiable information. However, until agencies effectively and fully implement 

agencywide information security programs, federal data and systems, including financial 

information, will remain at risk. 

Tax Collection Activities

During fiscal year 2008, material weaknesses and systems 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, payments, and other 

activities, taxpayers were not always credited for payments made on their taxes owed, 

which could result in undue taxpayer burden by causing frustration to taxpayers who 

either have already paid taxes owed or who owe significantly lower amounts. In addition, 

deficiencies in control over tax revenue and refunds continue to hamper the federal 

government’s ability to optimize the use of its limited resources to collect unpaid taxes 

and minimize payment of improper refunds. These control deficiencies are due to the 

federal government’s (1) lack of cost benefit information, and (2) not having fully 

established and implemented a systematic process for ensuring it is using its resources to 

maximize its ability to collect what is owed and minimize the disbursements of improper 

tax refunds. These deficiencies can significantly affect the level of enforcement tax 

revenue collected and improper refunds disbursed. As a result, the federal government is 

vulnerable to loss of tax revenue and exposed to potentially billions of dollars in losses 

due to inappropriate refund disbursements. 
188 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

APPENDIX IV 

Significant Deficiencies

In addition to the material weaknesses discussed in appendices II and III, we found two 

significant deficiencies in internal control described below. In fiscal year 2007, we 

reported a significant deficiency in monitoring and oversight of federal grants and the 

Medicare Advantage Organizations. In fiscal year 2008, sufficient improvements were 

made. Consequently, we no longer consider this area a significant deficiency. 

Loans Receivable and Loan Guarantee Liabilities

Federal agencies accounting for the majority of the reported balances for direct loans and 

loan guarantee liabilities continued to have internal control deficiencies related to their 

credit reform estimation and related financial reporting processes. However, due to 

improvements during fiscal year 2008 at the Department of Agriculture and certain of the 

federal credit agencies, we removed this area from the list of material weaknesses 

contributing to our disclaimer of opinion 0and consider the remaining control 

deficiencies to be a significant deficiency. Nevertheless, these issues and the complexities 

associated with estimating the costs of lending activities significantly increase the risk 

that misstatements in agency 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. 

Preparation of the Statement of Social Insurance

Deficiencies were identified in certain controls over spreadsheets used by the Department 

of Health and Human Services (HHS) to prepare its Statement of Social Insurance, 

including the lack of robust automated controls over spreadsheet changes that may result 

in output that varies from management’s intentions. HHS contributes the majority of the 

amounts reported on the consolidated Statement of Social Insurance. Such control 

deficiencies could result in misstatements to the consolidated Statement of Social 

Insurance. 

(198521)