Contents 

A Message from the Secretary of the Treasury ............................................................................1 

Executive Summary ........................................................................................................................3 

Management’s Discussion and Analysis........................................................................................7 

Government Accountability Office Comptroller General’s Statement....................................27 

Financial Statements 

 Statements of Net Cost .................................................................................................................31 

 Statements of Operations and Changes in Net Position................................................................31 

 Reconciliations of Net Operating Cost and Unified Budget Deficit.............................................33 

 Statements of Changes in Cash Balance from Unified Budget and Other Activities ...................33 

 Balance Sheets..............................................................................................................................34 

 Statements of Social Insurance.....................................................................................................35 

Notes to the Financial Statements 

 Note 1. Summary of Significant Accounting Policies..................................................................45 

 Note 2. Cash and Other Monetary Assets.....................................................................................50 

 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 .............................................................................55 

 Note 6. Property, Plant, and Equipment, Net ...............................................................................57 

 Note 7. Securities and Investments...............................................................................................58 

 Note 8. Other Assets.....................................................................................................................59 

 Note 9. Accounts Payable.............................................................................................................59 

 Note 10. Federal Debt Securities Held by the Public and Accrued Interest .................................60 

 Note 11. Federal Employee and Veteran Benefits Payable ..........................................................63 

 Note 12. Environmental and Disposal Liabilities.........................................................................69 

 Note 13. Benefits Due and Payable ..............................................................................................71 

 Note 14. Insurance Program Liabilities........................................................................................71 

 Note 15. Other Liabilities.............................................................................................................73 

 Note 16. Collections and Refunds of Federal Revenue ................................................................74 

 Note 17. Prior Period Adjustments -Corrections of Errors...........................................................77 

 Note 18. Contingencies ................................................................................................................77 

 Note 19. Commitments.................................................................................................................81 

 Note 20. Earmarked Funds ...........................................................................................................84 

 Note 21. Dedicated Collections....................................................................................................92 

 Note 22. Indian Trust Funds.........................................................................................................95 

 Note 23. Social Insurance.............................................................................................................97 

 Note 24. Stewardship Land ........................................................................................................105 

 Note 25. Heritage Assets ............................................................................................................105 

 Note 26. Restatements................................................................................................................106 

Supplemental Information (Unaudited) 

 Social Insurance .........................................................................................................................107 

 Social Security and Medicare.....................................................................................................107 

 Railroad Retirement, Black Lung, and Unemployment Insurance .............................................127 

 Deferred Maintenance ................................................................................................................140 

 Unexpended Budget Authority...................................................................................................141 

 Tax Burden.................................................................................................................................141 

 Tax Gap ......................................................................................................................................142 

 Other Claims for Refunds...........................................................................................................143 

 Risk Assumed.............................................................................................................................143 

 Unmatched Transactions and Balances ......................................................................................144 
Stewardship Information (Unaudited) ......................................................................................145 

 Stewardship Investments ............................................................................................................145 

 Non-Federal Physical Property...................................................................................................145 

 Human Capital............................................................................................................................146 

 Research and Development ........................................................................................................146 

Appendix 

 Significant Government Entities Included 

 and Excluded from the Financial Statements...........................................................................147 

Government Accountability Office Auditor’s Report..............................................................149 
List of Social Insurance Charts 

Chart 1 OASDI Beneficiaries per 100 Covered Workers, 1970-2080....................................112 

Chart 2 OASDI Income (Excluding Interest) and Expenditures, 1970-2080 .........................113 

Chart 3 OASDI Income (Excluding Interest) and Expenditures 

 as a Percent of Taxable Payroll, 1970-2080 ............................................................114 

Chart 4 OASDI Income (Excluding Interest) and Expenditures 

 as a Percent of GDP, 1970-2080..............................................................................115 

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

 as a Percent of GDP, 1970-2080..............................................................................118 

Chart 6 Medicare Part A Income (Excluding Interest) and Expenditures, 1970-2080 ...........119 

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

 as a Percent of Taxable Payroll, 1970-2080 ............................................................120 

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

 as a Percent of GDP, 1970-2080..............................................................................121 

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

 1970-2080................................................................................................................122

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

 as a Percent of GDP, 1970-2080..............................................................................123 

Chart 11 Estimated Railroad Retirement Income (Excluding Interest and 

 Financial Interchange Income) and Expenditures, 2006-2080 ................................129 

Chart 12 Estimated Railroad Retirement Income (Excluding Interest and 

 Financial Interchange Income) and Expenditures as a Percent of 

 Tier II Taxable Payroll, 2006-2080 .........................................................................130 

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

 2007-2040................................................................................................................134

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

 Fund Balance, 2007-2040........................................................................................135 

Chart 15 Estimated Unemployment Fund Cashflow Using Expected Economic 

 Conditions, 2007-2016 ............................................................................................137 

Chart 16 Unemployment Trust Fund Solvency as of September 30, 2006...............................139
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A MESSAGE FROM THE 

SECRETARY OF THE TREASURY 

 
This page is intentionally blank. 
EXECUTIVE SUMMARY 3

"We might hope to see the finances of the Union as clear and intelligible 

as a merchant's books, so that every member of Congress and every man 

of any mind in the Union should be able to comprehend them, to 

investigate abuses, and consequently to control them."

President Thomas Jefferson to Treasury Secretary Albert Gallatin, 1802

billions of dollars

Gross Costs 2,732.0 $ 3,174.6 $ 3,127.7 $ 

Less: Earned (Program) Revenue 207.1 $ 224.8 $ 226.4 $ 

Less: Taxes & Other Revenues: 1,912.7 $ 2,185.5 $ 2,440.8 $ 

 Individual Income Tax 1,512.3 $ 1,690.1 $ 1,846.1 $ 

 Corporate Income Tax 183.8 $ 271.8 $ 350.0 $ 

Other 216.6 $ 223.6 $ 244.7 $ 

Net Operating Cost 1 $ (760.2) (615.6) $ (449.5) $ 

Assets 1,397.3 $ 1,447.9 $ 1,496.5 $ 

Less: Liabilities, comprised of: $ 9,914.8 9,107.1 $ 10,412.9 $ 

Debt to the Public 4,329.3 $ 4,624.2 $ 4,867.5 $ 

Federal Employee & Veterans Benefits 4,062.1 $ 4,491.8 $ 4,679.0 $ 

Other Liabilities 715.7 $ 798.8 $ 866.4 $ 

Net Position (Assets Net of Liabilities) $ (8,466.9) (7,709.8) $ (8,916.4) $ 

Social Insurance Responsibilities (off-balance sheet): 2

$ 40,038.0 37,279.0 $ 44,147.0 $ 

$ 35,689.0 33,363.0 $ 38,851.0 $ 

Budget Deficit (net of): (412.3) $ (318.6) $ (247.7) $ 

Receipts $ 2,153.4 1,879.8 $ 2,406.7 $ 

Outlays $ 2,472.1 2,292.1 $ 2,654.4 $ 

1

Total Net Operating Cost includes 'Unmatched Transactions and Balances' not shown in this table.

4

 includes all current and future projected participants (i.e., individuals receiving and/or are eligible to receive benefits ages 15 and over at the start of the 

period, PLUS participants estimated to receive and/or be eligible to receive beneifts over the 75-year horizon).

2

 present value of 75-year actuarial projections of benefit payments under current law for Social Security, Meidcare, and other social insurance programs 

in excess of their scheduled contributions and earmarked taxes. Not considered liabilites on the balance sheet. 

Open Group (current + future participants) 4

Closed Group (current participants) 3

3

 includes current participants (i.e., receiving and/or are eligible to receive benefits) ages 15 and over at the start of the period.

2004

Table 1: Key Financial Indicators: FY 2004 - FY 2006

2005 2006

Budget Results

EXECUTIVE SUMMARY 

Financial Condition of the U.S. Government: An Overview 

The Fiscal Year 2006 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. 

 For the tenth consecutive year, GAO has issued a disclaimer of opinion on the consolidated financial 

statements. A disclaimer of opinion is not an indication of the validity or accuracy of the Government’s financial 

information; it means that sufficient information was not available for the auditors to determine whether the 

information was reliable. Material weaknesses in internal control and other limitations on the scope of its work 

resulted in conditions that prevented GAO from forming and expressing an opinion on the Government’s 

consolidated financial statements for the fiscal years ended September 30, 2006 and 2005. Eighteen of 24 CFO Act 

agencies and 24 of 31 major agencies earned unqualified opinions on their individual audits on their fiscal year 2006 

financial statements. 

Table 1 below provides an overview of several key indicators of the U.S. Government’s financial health. 
4 EXECUTIVE SUMMARY 

billions of 

dollars

Total 

Revenue

Change from 

Prior Year

% 

Increase

Change 

from 2003

% Increase 

from 2003

2003 $ (81.7) 1,796.0 $ -4.4%

2004 $ 116.7 1,912.7 $ 6.5% 116.7 $ 6.5%

2005 $ 272.8 2,185.5 $ 14.3% 389.5 $ 21.7%

2006 $ 255.3 2,440.8 $ 11.7% 644.8 $ 35.9%

Table 2: Revenue Growth: 2003-2006

Two Sets of Books? - - Absolutely Not - - Comparing the 

Financial Report to the Budget Deficit 

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

o the President’s Budget, the Government’s primary financial planning and control tool, reports "actual" budget 

results to inform that public that the government spent taxpayer money in accordance with applicable laws; 

o the Financial Report of the United States Government provides the President, Congress, and the American 

people a broad, comprehensive overview of the cost of the Government’s operations, the sources used to 

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

The following illustrates how the two reports complement each other. 

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

Prepared 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: focus on how resources have 

been used to implement initiatives. 

• Revenue: recognized when earned, but not 

necessarily received.1

• Costs: recognized when owed, but not 

necessarily paid. 

The Financial Report has as its base ALL the transactions that form the budget results. Adjustments to convert 

costs and revenues from the cash basis to the accrual basis are shown in the Statement of Reconciliations of Net 

Operating Cost and Unified Budget Deficit in this report. The amounts itemized on this statement are intended to 

represent the difference between the two bases for reporting. There is no magic, no sleight of hand; just cost accruals 

to adjust for the timing of the cash outlay versus the portion of non cash-based cost attributable to the current period. 

In 2006, for the first time, the Statement of Social Insurance has been reported and audited as a principal 

financial statement. The statement provides a perspective on the Government’s long-term responsibilities and costs. 

It should be noted, however, that even with this addition, the financial statements do not reflect future costs implied 

by current policy, such as national defense, the global war on terrorism, and hurricane cleanup efforts. 

Outstanding Revenue Growth Narrows the Gap between Costs and Revenues 

As shown in Table 2, 2006 marked the third 

consecutive fiscal year of substantial revenue 

growth. A combination of solid economic growth 

and improved corporate tax yields have 

contributed to revenue growth of over 35% since 

2003. In 2006, revenues grew to $2,440.8 billion 

establishing a new record high. Nearly $600 

billion in increased cash was collected over the last three years over the $1.8 trillion base level of 2003 (an average 

of nearly $200 billion per year). This has contributed to a reduction of both the budget deficit and net operating cost. 

Costs Decline Slightly 

Costs decreased to $3,127.7 billion from 2005’s level of $3,174.6 billion. This is mostly made up of two 

contrasting items: (1) an inflationary and programmatic increase in outlays of $182 billion; and (2) a $242.5 billion 

reduction in actuarial costs from last year’s record level of $429.7 billion to $187.2 billion in 2006, offsetting the 

spending increase. This unusual result stems from the methodology used to calculate the liabilities for post-

 

1 Under GAAP, U.S. Government revenues are recognized on a ‘modified cash’ basis, or when they become measurable. Exchange 

revenue is recognized at the time the government provides goods or services to the public or to another Government entity. Nonexchange revenue 

(e.g., taxes, fines, donations) is recognized to the extent that the collection is probable and the amount is measurable. 
EXECUTIVE SUMMARY 5

Chart A 

Annual Change in VA Actuarial Cost (2000-2006)

$164

$70

($52)

($ 136)

$228

($ 167)

$ 18

($300)

($200)

($100)

$0

$100

$200

$300

2000 2001 2002 2003 2004 2005 2006

Dollars in Billions

employment benefit programs such as employee pensions, health, and veteran’s compensation. Actuarial 

calculations of future outlays by year for these programs are made; then all years are discounted back to the present. 

Interest rate levels are among the most significant 

assumptions about the future that can impact these 

estimates. 

Chart A shows the fluctuation in VA’s actuarial 

costs over the past several years. Interest rate changes 

have a significant role in these variations. VA 

reported a substantial decrease in actuarial costs 

(calculated as the annual change in actuarial liabilities) 

of $166.6 billion. This followed both significant 

actuarial cost increases and decreases in 2005 and 

2004, respectively. These fluctuations stem mainly 

from the use of interest rates at year-end to discount 

future benefits and estimate a current liability amount. 

Most federal actuarial liabilities are calculated through 

the use of average future interest rates, not spot rates as 

of September 30th of the current period. Because a small change in interest rate assumptions produces the large 

actuarial cost fluctuations shown in Chart A, reported annual VA actuarial costs are not useful in predicting future 

annual costs. The change in VA’s actuarial costs from year to year accounts for the majority of the change in the 

Government’s net cost in most years (54 percent in 2006). Moreover, in 2006, the change in these and other 

actuarial (e.g., pension) costs accounted for nearly 80 percent of the $310 billion decrease in total net operating cost. 

Finally, total actuarial costs in 2006 of $187.2 billion, as in most recent years, account for most of the annual 

differences (93 percent in 2006) between the Government’s budget deficit and net cost, and ostensibly, between the 

cash and accrual bases of accounting in the Federal Government. 

Assets & Liabilities – What We Own and What We Owe 

The Government’s year-end net position can be derived by netting its assets against its liabilities on the 

Balance Sheet. It is important to note that the balance sheet excludes the financial impact 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. 

Moreover, the Government’s responsibilities are broader than the liabilities presented on the balance sheet, 

including its future social insurance responsibilities (e.g., Social Security and Medicare), as well as other programs 

and contingencies. 

The Government’s largest liability has been the Federal debt held by the public and accrued interest, which 

increased $243.3 billion to $4,867.5 billion in fiscal year 2006 from $4,624.2 billion in 2005. The sharp increase in 

tax revenues enabled the Government to borrow a smaller amount of cash from the public this year as compared to 

the previous year to finance its operations. The Government increased its net borrowings from the public by a 

combined $529.5 billion since fiscal year 2005 to help finance more than 90 percent of budget deficits in both 2005 

and 2006. 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. For example, in fiscal year 2006, new borrowings 

were $4.5 trillion and maturing debts were $4.2 trillion. 

Federal employee and veteran benefits payable, 45% of the Government’s total reported liabilities, have 

increased dramatically in recent years, from $2,600.7 billion at fiscal year-end 1999, to $4,679.0 billion as of 

September 30, 2006. 

Social Insurance and Other Responsibilities 

Information reported on social insurance programs addresses fundamental questions about their current and 

future financial sustainability, i.e., the extent to which the Government could meet future program demands under 

current laws and conditions. For the programs listed as social insurance (e.g., Old Age, Survivors’ and Disability 

Insurance (OASDI) or Social Security, Medicare (Parts A, B, and D)), the Statement of Social Insurance (SOSI) 

shows the estimated future excess of scheduled benefit expenses over contributions, premiums, and tax income 

(excluding interest), based on each program’s actuarial trust fund report (see Table 3). 

In concert with other financial statements and reports, this information gives both a short- and long-term view 

of significant financial issues facing the Government. For financial reporting purposes, the Balance Sheet presents 
6 EXECUTIVE SUMMARY 

billions of dollars 2002 2003 2004 2005 2006

 $ (6,820) $ (7,094) $ (7,710) $ (8,467) $ (8,916)

 $ (24,219) $ (26,858) $ (37,279) $ (40,038) $ (44,147)

Combined Net Liabilities (current) and Social 

Insurance Responsibilities (future) $ (33,952) (31,039) $ (44,989) $ (48,505) $ (53,063) $ 

The balance sheet presents a 'snapshot' of an entity's current financial position (net 

of assets and liabilities as of the end of the current fiscal year. 

Liabilities Net of Assets 

(balance sheet)

The Statement of Social Insurance presents the present value of estimated future 

revenues and expenditures under current law. 

Social Insurance Responsibilities, Net (closed 

group - - off-balance sheet)

Table 4. Comparing Current Net Liabilities to Future Social Insurance Responsibilities

billions of dollars 2002 2003 2004 2005 2006

Social Security (OASDI) (11,216) $ (11,742) $ (12,552) $ (13,583) $ (14,976) $ 

Medicare (12,896) $ (15,007) $ (24,615) $ (26,339) $ (29,040) $ 

Other 2 $ (109) (107) $ (112) $ (116) $ (131) $ 

Total Social Insurance Responsibilities, 

Net, (closed group) $ (26,858) (24,219) $ (37,279) $ (40,038) $ (44,147) $ 

Total Social Insurance, Net 

(open group) 2 $ (20,825) (17,887) $ (33,363) $ (35,689) $ (38,851) $ 

Table 3: Social Insurance Responsibilities 

2

 For the 'closed' group, 'Other Social Insurance Programs' = Railroad Retirement Program. The 'open' group includes both the Railroad Retirement 

and Black Lung Programs. The SOSI presents only 'open group' totals for Black Lung (i.e., does not identify 'closed' group amounts separately). 

Therefore, Black Lung is only reflected in the 'open' group amounts above.

This table shows the present value of 75-year actuarial projections of the benefit payments under current law for Social Security, Meidcare, 

and other social insurance programs in excess of their scheduled contributions and earmarked taxes for current participants ages 15 and 

over at the start of the period.

Social Insurance Responsibilities, Net (closed group) 1

1

 The 'closed group' includes current participants (i.e., receiving and/or are eligible to receive benefits) ages 15 and over at the start of the period. 

The 'open' group' (shown below for comparative purposes), includes all current and future projected participants (i.e., individuals receiving and/or 

are eligible to receive benefits ages 15 and over at the start of the period, PLUS participants estimated to receive and/or be eligible to receive 

beneifts in the future over the 75-year horizon).

a ‘snapshot’ at a point in time of the Government’s current financial condition, emphasizing how current and prior 

actions and events 

have impacted its 

assets and liabilities. 

By contrast, the SOSI

presents an assessment 

of the extent to which 

the programs are 

unfunded under 

current financing 

arrangements relative 

to scheduled benefit 

obligations, based on 

the calculated net 

present value of future 

estimated revenues and 

expenditures over an 

extended period. 

Since these estimates are not liabilities, and therefore do not impact either an entity’s current assets or liabilities, 

they are considered ‘off-balance sheet’ items; according to Federal accounting standards. This distinction 

substantially limits the comparability of the Government’s current net liabilities to future net social insurance 

responsibilities. Their significance can, however, be measured in other contexts. Table 4 shows how the two 

compare. Fiscal year 2006 total assets of $1,496.5 billion and total liabilities of $10,412.9 billion combine to derive 

the Government’s current net liability of $8,916.4 billion. By comparison, SOSI reports net present value 

expenditures of $44,147 billion in net social insurance responsibilities. 2

 The net social insurance responsibilities 

(scheduled benefits in excess of estimated revenues) indicate that those programs are on an unsustainable fiscal path 

and difficult choices will be necessary in order to address their large and growing long-term fiscal imbalance. Delay 

is costly and choices 

will be more difficult 

as the retirement of the 

'baby boom' gets closer 

to becoming a reality 

with the first wave of 

boomers eligible for 

retirement under 

Social Security in 

2008 

Looking Ahead – The President’s Management Agenda 

Fiscal responsibility requires the sound stewardship of taxpayer money. Once the Congress and the President 

decide on overall spending levels, taxpayer dollars should be managed to maximize results. The President’s 

Management Agenda (PMA) is creating a results-oriented Government where agencies and programs are managed 

professionally and efficiently to achieve the results expected by the Congress and the American people. 

The PMA’s broad goal is to make the Government more results-oriented with a focus on achievement, 

efficiency, and accountability. It emphasizes improving Government operations by setting clear goals and action 

plans, and then following through on those plans. Agencies continue to manage to achieve better results. PMA 

standards for success are used to measure agencies’ progress and achievement in meeting overall goals. The chart 

above summarizes Federal agencies’ current status as of September 30, 2006. Agencies are also rated on their 

progress. These ratings and other related information are discussed later in this report and are available at: 

www.whitehouse.gov/results/agenda/standards.pdf

 

2 Tables 3 and 4 both focus on closed-group obligations, equal to the present value of net payments (benefits less taxes) expected during 

the projection period on behalf of program participants over age 15 at the start of the projection period. While a true accrual measure would count 

only benefits already earned (and taxes already paid) by current workers, the closed-group liability includes future benefit accruals and future 

taxes of current workers, making the closed-group numbers more forward-looking than a strict accrual-based calculation.
MANAGEMENT’S DISCUSSION AND ANALYSIS 7

MANAGEMENT’S DISCUSSION AND 

ANALYSIS 

Introduction 

The 2006 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. 

Pursuant to 31 U.S.C. § 331(e)(1), the Department of the Treasury must submit the Financial Report, which is 

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

September 30 fiscal year-end. In order to encourage more timely and relevant reporting, the Office of Management 

and Budget (OMB) accelerated both the individual agency and governmentwide reporting deadlines to 45 days and 

75 days after year-end, respectively, beginning 

with fiscal year 2004 reporting cycle. 

For each of the past ten years, GAO has 

issued a disclaimer of opinion on the 

consolidated financial statements. A 

‘disclaimer’ means that sufficient information 

was not available for the auditors to determine 

whether the information was reliable. Material 

weaknesses in internal control and other scope 

limitations resulted in conditions that prevented 

GAO from forming and expressing an opinion 

on the Government’s consolidated financial 

statements for the fiscal years ended September 

30, 2006 and 2005. However, eighteen of the 

24 most significant Federal agencies earned unqualified opinions on their FY 2006 financial statement audits. Table 

5 summarizes agency audit results. 

The fiscal year 2006 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; 

• Stewardship and Supplemental Information; and 

• GAO’s Audit Report. 

FY 2006 marks the first year that agencies’ Statements of Social Insurance (SOSI) have been audited as a 

separate, principal statement. These statements are based on the Trustee Reports for such programs as Social 

Security and Medicare. All agencies reporting on the SOSI earned unqualified opinions on their FY 2006 audits. 

Mission & Organization 

The Government’s fundamental mission is derived from the original mission in 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 new or changed 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. The following chart provides an abbreviated overview of how the U.S. 

Government is organized. 

Qualified Disclaimer

USDA Treasury SBA Energy 1 Defense

Commerce VA SSA Transportation DHS 2

Education USAID Ex/Im Bank Smithsonian3 State

HHS EPA FCC NASA

HUD GSA PBGC

Interior NSF RRB

Justice NRC SEC

Labor OPM USPS 1 Balance Sheet Audit Only

2 Balance Sheet and Custodial Statement Audit Only

3 GFRS Audit Only

Unqualified

FY 2006 Agency Audit Results

Table 5
8 MANAGEMENT’S DISCUSSION AND ANALYSIS 

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 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 Retirement Thrift 

 Investment Board 

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 *

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 * 

*Indicates a significant entity included in the Financial Report.

Original source: U.S. Government Manual 2005/2006

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 9

81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11

-500

-400

-300

-200

-100

0

100

200

300

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0 Legend

Deficit/Surplus Level (right scale)

Percent of GDP (left scale)

Fiscal Years

FEDERAL BUDGET BALANCE

Projected

FY 2007

 to 2011

% GDP BILLIONS $

Source of Projections: FY 2007 Mid-Session Review

Economy, Federal Budget, & Federal Debt 

Growth in the U.S. economy remained favorable and well balanced through fiscal year 2006. Real GDP and 

real hourly compensation increased, job creation was solid, and the unemployment rate averaged 4.7 percent, down 

from 5.2 percent in the previous year. Productivity growth continued through 2005 to the first half of 2006. The 

deficit outlook through 2012 is for steady deficit declines due to a growing economy, tight controls on discretionary 

spending, and continued strong economic growth. 

The Economy in Fiscal 2006 

After rising at an annual average rate of 3.2 percent over the four quarters of 2005, growth in real GDP 

continued to increase through the first three quarters of 2006 - - rising at annual rates of 5.6 percent in the first 

quarter of the year; 2.6 percent in the second quarter; and 2.2 percent in the third quarter of 2006. Holding growth 

down in the third quarter was a sharp 18.0 percent annual rate decrease in residential fixed investment, extending a 

string of declines to four quarters in this sector as housing demand weakened. The quarterly pattern of GDP growth 

and consumer spending in 2005 and 2006 was also affected by last fall’s hurricanes. Consumer spending growth 

averaged a 3.6 percent annual rate in the first three quarters of 2005 before slowing to 0.8 percent in the fourth 

quarter. Consumer spending rebounded in the first three quarters of 2006, rising 4.8 percent in the first quarter, 2.6 

percent in the second, and accelerating to 2.9 percent in the third for an average rate of 3.4 percent over that period. 

In the third quarter of 2006, consumer spending on durable goods picked up to a 6.0 percent annual rate in the third 

quarter as purchases of motor vehicles moved higher and contributed 0.29 percentage points to real GDP growth. 

Outside of residential building, fixed investment was strong. Real investment in equipment and software 

expanded by an average of 7.0 percent in the four quarters of 2005 followed by a 15.6 percent hike in the first 

quarter of 2006, a 1.4 percent decline in the second quarter, and a 7.2 percent increase in the third -- for an average 

of 7.1 percent over the three quarters of 2006. Investment in nonresidential structures shot up at a 12.0 percent 

annual rate in the final quarter of 2005 and rose at annual rates of 8.7 percent in the first quarter of 2006, 20.3 

percent in the second quarter, and 16.7 percent in the third for an average pace of 15.2 percent over the three 

quarters -- the largest gain for this sector since a 24.7 percent spike in the second quarter of 1994. Labor markets 

continue to be robust. Nonfarm payroll employment expanded at an average rate of 147,000 jobs per month through 

the first ten months of 2006, and since the employment trough of August 2003, the economy has created more than 

6.0 million new jobs. 

An upcoming benchmark revision 

announced by the Bureau of Labor Statistics 

will be incorporated into the jobs totals next 

February, and may imply that the economy has 

actually generated closer to 7 million jobs since 

August 2003 or about 180,000 per month. The 

unemployment rate declined to 4.6 percent in 

September 2006 from 4.7 percent in the 

previous month, and dipped further to 

4.4 percent in October. Core inflation remains 

relatively benign. Inflation rose in the first three 

quarters of the year, but appears contained. The 

overall consumer price index (CPI) fell 0.5 

percent in September and October as energy 

prices turned down. The “core” CPI (excluding 

food and energy) was up 2.7 percent in the year 

ending September 30, 2006. 
10 MANAGEMENT’S DISCUSSION AND ANALYSIS 

Chart B

Federal Debt Held by the Public as a % of Nominal GDP

 (1987-2006*)

0

10

20

30

40

50

60

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006*

Fiscal Year

Percent of Nominal GDP

So urce: Office o f M anagement and B udget . *2006 from OM B M id-Session Review

Budget Results 

The deficit improved in fiscal year 2006. Receipts totaled $2,407 billion, up $253.4 billion from a year earlier. 

Increases in receipts are the main reason the deficit picture has improved, with growth in receipts fueled by 

increased employment and corporate profits, which contributed to growth in both individual income tax revenue and 

in corporate tax revenue Outlays rose to $2,654 billion, $182 billion more than last year. The deficit in 2006 came 

in at $248 billion, $71 billion less than the deficit in 2005. 

Federal Debt 

There are two kinds of Federal debt: debt held by the public and intragovernmental debt (i.e., debt the 

Government owes to itself). At the end of fiscal year 2006, the total of these two kinds of debt was $8,529.6 billion. 

Debt held by (or owed to) the public is included as a liability on the balance sheet and includes all Treasury 

securities (bills, notes, bonds, inflation-protected, and other securities) 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. The laws 

establishing Government trust funds generally require the excess trust fund receipts to be invested in these special 

securities. This debt is not included on the balance sheet because these payments are claims of one part of the 

Government against another and are eliminated for consolidation purposes (see Financial Statement Note # 10). 

Federal debt is subject to a statutory ceiling known as the debt limit. Prior to 1917, the Congress approved each 

issuance of debt. In 1917, to facilitate planning in World War I, the law established a dollar ceiling for Federal 

borrowing, which has been periodically increased over the years. On March 20, 2006, legislation became effective 

raising the current limit from $8,184.0 billion to $8,965.0 billion. Gross debt, excluding some adjustments, is the 

measure subject to the Federal debt limit. At the end of fiscal year 2006, the amount of debt subject to the limit was 

$8,420.3 billion, leaving a margin of $544.7 billion until the debt ceiling is reached. 

How the Federal Budget is related to the Federal Debt 

The budget surplus or deficit is the difference between total Federal spending and receipts in a given year. The 

Government borrows from the public to finance a budget deficit. A budget surplus occurs when the Government 

accumulates excess funds that are used to reduce debt held by the public. In other words, deficits or surpluses are 

related to the annual net change in the amount of debt held by the public, while the debt held by the public generally 

represents the total of all cash-based deficits minus all cash-based surpluses built up over time. 

Federal Debt Held by the Public as a Percentage of GDP 

The Federal debt held by the public as 

a share of GDP reflects how much of the 

Nation’s wealth is absorbed by the Federal 

Government to finance its obligations. 

Chart B shows the Debt/GDP ratio trend 

from 1987 through 2006. Starting in the late 

1970s, increasing budget deficits spurred a 

corresponding increase in debt held by the 

public, which essentially doubled as a share 

of GDP over a 15-year period throughout 

the mid-1990s and reached about 50 percent 

in 1993. The budget controls instituted by 

the Congress and the President, together 

with economic growth, contributed to the budget surpluses at the end of the 1990s. These surpluses led to a decline 

in the debt held by the public, and from fiscal years 1998 through 2001, the debt-to-GDP measure declined from 

about 43 percent to about 33 percent. 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, the 

decline in receipts owing to the recession and lower stock market value, as well as tax cuts, and the expiration of the 

budget controls that once helped instill spending discipline. The ratio has increased each year since 2001, but has 

risen only slightly since 2004 to 37.6 percent in 2006, still far below the roughly 50 percent ratio of the mid-1990s. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 11

Financial Condition 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 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 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. 

• Costs: recognized when owed, but not 

necessarily paid. 

Treasury prepares the financial statements in this Report primarily on an accrual basis of accounting (i.e., 

recognizing revenues when earned, not received; and costs when incurred, not paid) as prescribed by U. S. generally 

accepted accounting principles (GAAP) for Federal entities.1

 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). 

Reporting Entity 

These financial statements cover the three branches of the Government (legislative, executive, 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; fiduciary funds owned by Federal employees; and governmentsponsored 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). While the statements have been 

prepared from the books and records of the entity in accordance with U.S. GAAP for Federal entities and the 

formats prescribed by OMB, the statements are in addition to the financial reports used to monitor and control 

budgetary resources that are prepared from the same books and records. 

 

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

Statement of Changes in Cash

Balance from Unified Budget

and Other Activities 

 4 Budget (Deficit) or Surplus 

 (+/-) Adjustments for noncash budget 

outlays 

 (+/-) Items affecting the cash balance 

not included in the budget 

 (=) Increase (or decrease) in operating 

cash balance 

 (+) Plus Operating Cash (beginning) 

 5 (=) Operating Cash (ending) 

How the Federal Government’s Financial Statements are Related to Each Other 

The Government’s financial statements share relationships that, in combination, provide a comprehensive, 

integrated view of the Nation’s finances. The following graphic illustrates these relationships. 

How the Federal Government’s Financial Statements are Related to Each Other

Notes 

1 The total operating expense, called Net Cost, presented in the Statement of Net Cost is used in the Statement of Operations and 

Changes in Net Position to determine whether the Federal Government’s financial operations (revenue less expenses) resulted in net 

operating cost or net operating revenue for the year. 

2 The operating result from the Statement of Operations and Changes in Net Position explains the change in the Federal Government’s 

net position. It is also the beginning balance in the Reconciliation of Net Operating Revenue (or Cost) and Unified Budget Surplus (or 

Deficit). 

3 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 Federal Government’s reported assets and liabilities. 

4 The unified budget result is used in the Reconciliation of Net Operating Revenue (or Cost) and Unified Budget Surplus (or Deficit) 

and the Statement of Changes in Cash Balance from Unified Budget and Other Activities to show how the Federal Government’s 

financial operations and changes in operating cash are connected to the unified budget results. 

5 The Federal Government’s ending operating cash balance from the Statement of Changes in Cash Balance from Unified Budget and 

Other Activities is the same as the operating cash component of the “Cash and other monetary assets” line on the Balance Sheet. The 

operating cash amount can be found in the Balance Sheet note for Cash and other monetary assets. 

Source: Government Accountability Office.

Statement of 

Net Cost 

Gross Cost 

(-) Earned 

Revenue 

 1 (=) Net Cost 

Statement of Operations

and Changes 

in Net Position 

Revenue 

1 (-) Net Cost of 

Government 

Operations 

 2 (=) Net Operating Cost 

Net Position (beginning)

 (+) Net Operating Cost 

 3 (=) Net Position (end) 

Reconciliation of Net 

Operating Revenue (or Cost) 

and Unified Budget Surplus 

(or Deficit) 

2 Net Operating Revenue 

(or Cost) 

(+/-) Reconciling Transactions 

4 (=) Budget (Deficit) or Surplus 

Balance Sheet 

 Total Assets 

5 Cash 

 (-) Total Liabilities 

 3 (=) Net Position 

Used to 

compute net 

operating 

costs 

Used as opening 

balance to show 

relationship to 

budget (deficit) 

or surplus 

Used as opening 

balance to show 

relationship to 

operating cash 

Agrees to 

operating cash 

balance included 

in the cash 

footnote 

Agrees to net 

position, calculated 

by adding net 

operating costs to 

beginning net 

position 

Social insurance* 

(+) Contributions and earmarked taxes 

(-) Expenditures for Future Scheduled Benefits 

*Note – The Statement of Social Insurance (SOSI) was first audited separately as a 

principal financial statement during the FY 2006 reporting cycle. The SOSI presents 

actuarial estimates of future expenditures, net of contributions over a 75 year period as an 

indicator of the government’s capacity to sustain funding of social insurance programs. 

As they represent sustainability estimates over an extended future period, SOSI amounts 

are not reflected in the balance sheet or other principal financial statements. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 13

Chart C 

Revenues & Costs (2002-2006)

($4.0)

($3.0)

($2.0)

($1.0)

$0.0

$1.0

$2.0

$3.0

02 03 04 05 06 02 03 04 05 06 02 03 04 05 06

Dollars in Trillions

Actuarial

Total 

Net Cost Net 

Operating 

Cost

Fiscal Years

billions of dollars 2004 2005 2006

HHS 583.9 $ 623.4 $ 678.8 $ 

DoD 672.1 $ 703.9 $ 658.0 $ 

SSA 534.9 $ 572.1 $ 593.1 $ 

Interest on Federal Debt 158.3 $ 181.2 $ 221.5 $ 

VA 51.1 $ 276.6 $ 117.3 $ 

Other Federal Agencies 731.7 $ 817.4 $ 859.0 $ 

Total Gross Costs $ 3,174.6 2,732.0 $ 3,127.7 $ 

Less: Earned Revenue (revenue 

generated by programs) (224.8) (207.1) (226.4) 

Net Cost 2,524.9 $ 2,949.8 $ 2,901.3 $ 

Less: Taxes & Other Revenue 1,912.7 2,185.5 2,440.8

Total Net Operating Cost1 $ 760.3 615.6 $ 449.5 $ 1

Total Net Operating Cost includes 'Unmatched Transactions and Balances ' not shown in this table.

Gross Costs:

Table 6: Net Cost of the Federal Government

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’ (i.e., its net revenues and costs). Chart 

C shows that the Government has incurred 

a total net operating cost (i.e., costs have 

exceeded its revenues) over the past several 

years. In 2006, net operating costs 

decreased more than 40 percent from 

$760.2 billion in fiscal year 2005 to $449.5 

billion. 2006 net operating costs accounted 

for the 5.3 decrease in net position from 

$8,466.9 billion to $8,916.4 billion during 

the year. The Government last generated 

net operating revenue (i.e., revenues 

exceeded costs) in fiscal years 1999 and 2000 in the amounts of $101.3 billion and $39.6 billion, respectively, in 

concert with the budget surplus. Since then, the government has incurred average net operating costs of $562.1 

billion per year. 

The Government nets its costs against both earned revenues from Government programs (e.g., Medicare 

premiums, national park entry fees) and taxes and other revenue. Taxes account for the vast majority of total 

revenues. The government’s ‘bottom line’ is its net operating cost, or those costs that cannot be supported by 

earned, program revenue. Table 6 illustrates the derivation of the government’s net cost and net operating cost for 

2004, 2005, and 2006. The Government must finance any costs as they are paid that cannot be covered by revenues 

with federal debt, subject to the 

statutory debt limit. Beginning 

in fiscal year 2006, the 

Statement of Operations and 

Changes in Net Position

identifies resources that have 

been earmarked for specific 

activities or operations. 

Net operating costs are 

comparable, but not identical, to 

the budget deficit. The 

Reconciliation of Net 

Operating Cost and Unified 

Budget Deficit Statement

shows how the government’s 

net operating cost relates to the more widely-known budget deficit. As indicated in Table 7, the main differences 

between the two for fiscal years 2005 and 2006 are: 
14 MANAGEMENT’S DISCUSSION AND ANALYSIS 

Chart D

Individual, Corporate, and Total Revenues 

(2002-2006) 

$-

$400.0

$800.0

$1,200.0

$1,600.0

$2,000.0

$2,400.0

$2,800.0

2002 2003 2004 2005 2006

Dollars in Billions

Total Revenue

Individual income tax & tax withholdings

Corporation income taxes

o changes in actuarial expenses related to employee and veteran benefits are included in net operating cost, 

but not in the budget deficit; 

o purchases of capitalized fixed assets are included in the budget deficit (recorded in the year outlay(s) are 

made), but not in net operating cost, offset by depreciation over the life of the asset. 

As noted earlier, Treasury 

primarily uses the ‘accrual 

method’ of accounting in 

preparing the Government’s 

financial statements, 

recognizing revenues when 

earned, not collected, and costs 

when incurred, not paid. Chart 

C shows that the Government’s 

total net cost includes an 

‘actuarial’ element (e.g., the present value of an employer’s expected long-term cost of paying postemployment 

pension benefits that have been earned by the employee at the time the employee is eligible). Changes in 

assumptions used to project actuarial costs, such as interest rates and VA’s annual estimates of veterans 

compensation and burial benefits can cause those projections, and consequently total costs, to fluctuate year to year. 

Further, these actuarial costs, in recent years, have accounted for the vast majority of the difference between the 

primarily cash-based budget and the primarily accrual-based financial reports. Chart C shows the impact that 

actuarial costs have on total costs. 

Revenue: “What Came In” 

The Statement of Net Costs reports ‘earned’ revenue generated by Federal programs. In fiscal year 2006, the 

Government’s total earned revenues increased $1.6 billion to $226.4 billion. Nearly one-fourth of these revenues 

are 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’). 

Fiscal year 2006 marked the third 

consecutive year of substantial revenue 

growth. A combination of solid 

economic growth and improved corporate 

tax yields have contributed to revenue 

growth of over 35 percent since 2003. 

Personal income and corporate profits 

before tax rose 6.3 percent and 14.1 

percent, respectively in 2006 2

, and have 

increased by an average of 5.0 percent 

and 16.4 percent per year, respectively, 

since fiscal year 2001, including revenue 

decreases in 2001and 2002. These trends, 

in part, contributed to an increase in taxes 

and other revenues for 2006 of $255.3 

billion to $2,440.8 billion, establishing a new record high. Chart D shows that individual and corporate income tax 

revenues, which increased 9.2 percent and 28.8 percent, respectively during 2006, account for the majority (nearly 

90 percent) of total revenues. Similarly, nearly $600 billion in increased cash was collected over the last three years 

over the $1.8 trillion base level of 2003 (an average of nearly $200 billion per year). This recent growth in revenues 

has contributed to a reduction of both the budget deficit and net operating cost. 

Cost: “What Went Out.” 

The Statement of Net Cost 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, and the corresponding earned revenues, as described above. This amount, in turn, is offset 

 

2 Personal income and corporate profit statistics sources: National Income and Products Account Tables, Bureau of 

Economic Analysis, Department of Commerce.

billions of dollars 2004 2005 2006

Total Ne t Ope rating Cost 615.6 $ 760.3 $ 449.5 $ 

Net Change: Federal Employee and 

Military Benefit Liabilities (232.0) (212.1) (156.0) 

Net Change in Veterans Benefits Liabilities 30.0 (197.8) (31.2) 

Net Change - Other Costs (21.2) (11.9) (14.6) 

B udge t De ficit 412.3 $ 317.6 $ 247.7 $ 

Table 7: How Net Operating Cost 

Relates to the Budget Deficit
MANAGEMENT’S DISCUSSION AND ANALYSIS 15

Chart E 

Net Cost By Agency/Entity: 2006

Department of 

Defense

21.8%

All Other 

Entities

24.5%

Department of 

Veterans Affairs

3.9%

Interest on Debt 

Held by the 

Public

7.6%

Social Security 

Administration

20.4%

Department of 

Health and 

Human Services

21.6%

$0

$100

$200

$300

$400

$500

$600

$700

Dollars in Billions

DoD HHS SSA Interest

on Debt

Held By

the Public

VA

Chart F 

Net Cost Comparison: 2002-2006

2002

2003

2004

2005

2006

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 costs. 

In fiscal year 2006, the Government’s 

total gross cost decreased $46.9 billion to 

$3,127.7 billion. Offsetting gross cost against 

the $226.4 billion in earned revenue described 

earlier yields a total net cost of operations of 

$2,901.3 billion. Further reducing this 

amount by the $2,440.8 billion in taxes and 

other revenues results in the Government’s 

‘bottom line’ accrual net operating cost of 

$449.5 billion, a decrease of more than $300 

billion (more than 40 percent) from 2005 net 

operating costs of $760.2 billion. 

Chart E shows that, along with interest 

on debt held by the public, the source of over 

three-quarters of the Government’s fiscal year 

2006 net cost of operations comes from four Federal entities: the Departments of Defense (DoD) and Health and 

Human Services (HHS), the Social Security Administration (SSA), and the Department of Veterans Affairs (VA). 

Chart F shows that DoD has incurred the largest agency share of the Government’s total net cost of operations in 

recent years, mostly attributable to the continued global war on terror and changes in actuarial liabilities related to its 

Military Retirement Fund and Health Benefits. HHS and SSA combine to make up nearly half of the 2006 total net 

cost of operations. The bulk of these 

agencies’ costs are attributable to their 

administration of the Government’s major 

social insurance programs, e.g., Old Age, 

Survivors’, and Disability Income (Social 

Security), and Medicare. The Statement of 

Social Insurance and the supplemental 

information in this report, as well as the social 

insurance discussion in this section discuss 

the current costs and future sustainability of 

these programs in greater detail. 

Among cabinet agencies, the 

Department of Energy (Energy) experienced 

the greatest percentage increase in its net cost 

(+ 52.7 percent), while VA experienced the 

greatest cost decrease (- 58.3 percent). Both changes resulted from each agency’s need to estimate future costs and 

liabilities based on complex assumptions and cost models. As reported in Energy’s 2006 Performance and 

Accountability Report, Energy’s cost increase, in large part, stems from revised estimates of currently unfunded 

environmental clean-up liabilities. By comparison, 

VA considers several variables (e.g., number of 

eligible recipients, discount rates, and life 

expectancy) in estimating its actuarial liability for 

future veterans’ compensation benefits, which 

experienced a slight increase of $31.2 billion (2.8 

percent) from $1,122.6 billion in fiscal year 2005 to 

$1,153.8 billion in 2006. A liability balance 

increase during the year represents the actuarial cost 

amount for that year. Because a small change in 

interest rate assumptions produces the large 

actuarial cost fluctuations shown in Table 8, 

reported annual VA actuarial costs are not useful in 

predicting future annual costs. VA’s 2006 decrease 

of nearly $170 billion followed a more than $200 billion actuarial cost increase in 2005 and a nearly $140 billion 

decrease in 2004. These fluctuations are caused primarily by changes in interest rate assumptions. The change in 

1999 $483 ($95) –

2000 $553 $69 $164 

2001 $692 $139 $70 

2002 $849 $157 $18 

2003 $955 $106 ($52)

2004 $925 ($30) ($136)

2005 $1,123 $198 $228 

2006 $1,154 $31 ($167)

Table 8: Change in VA’s Total Actuarial Cost: 1999 - 2006

Estimated Liability 

(as of Sept. 30)

Liability Change = 

Actuarial Cost

Change in 

Actuarial Cost

billions of 

dollars

Note: Source: Treasury analy sis of VA’s 2000-2006 net cost statements. 

Totals may not add due to rounding.
16 MANAGEMENT’S DISCUSSION AND ANALYSIS 

Hurricane Katrina – One Year Later

September 2006 marked the one year anniversary of Hurricane Katrina’s assault on the Gulf Coast. 

Katrina was the most destructive natural disaster in U.S. history. The Federal Government has responded by 

providing more than $110 billion in resources, plus an additional $8 billion in tax relief – to support the 

region’s reconstruction and renewal. Recovery has proved to truly be a multi-faceted effort, requiring 

contributions from several Federal agencies, including: 

• The Federal Emergency Management Administration has funded more than $5 billion to repair and 

replace damaged public infrastructure, such as roads and bridges, schools, water systems, public 

buildings, and public utilities; 

• The U.S. Department of Housing and Urban Development (HUD), through its Community 

Development Block Grants program, as awarded nearly $17 billion in State grants to help rebuild 

damaged housing and other infrastructure. 

• The Department of Education has released nearly $2 billion to help reopen schools and educate 

students. 

• The U.S. Small Business Administration (SBA) has approved more than $10 billion in disaster 

recovery loans to homeowners, renters, and businesses. More than 22,000 loans totaling more than 

$2 billion have gone to small business owners. 

Source: White House fact sheet, released August 24, 2006. http://www.whitehouse.gov/news/releases/2006/08/print/20060824.html.

VA’s actuarial costs from year to year accounts for the majority of the change in the Government’s net cost in most 

years (54 percent in 2006). Moreover, in 2006, the change in these and other actuarial (e.g., pension) costs 

accounted for $242.5 billion of the $310 billion decrease (nearly 80 percent) in total net operating cost. Finally, 

total actuarial costs in 2006 of $187.2 billion, as in most recent years, account for most of the annual differences (93 

percent in 2006) between the Government’s budget deficit and net cost, and ostensibly, between the cash and accrual 

bases of Government accounting. 

2006 marks the first fiscal year in which the Government’s Statement of Social Insurance (SOSI), which 

provides perspective on the Government’s long term estimated responsibilities and costs, has been prepared and 

audited as a principal financial statement. It should be noted, however, that even with the addition of the SOSI, the 

financial statements do not reflect future costs implied by current policy, such as national defense, the global war on 

terrorism, and hurricane cleanup efforts. 

 

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 impact 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. However, as was the case with the Statement of Operations and Changes in Net 

Position, 2006 marks the first fiscal year in which the balance sheet separately does include a presentation of the 

portion of net position attributable to earmarked fund activities. Moreover, the Government’s responsibilities are 

broader than the liabilities presented on the balance sheet, including such ‘off-balance sheet items as the 

Government’s future social insurance responsibilities (e.g., Social Security and Medicare), as well as other programs 

and contingencies. These responsibilities are discussed in this section’s Social Insurance and Other Responsibilities 

discussion, later in this section, and in the supplemental disclosures of this Report. 

Assets – “What We Own.”

The Government’s total assets increased $48.6 billion from $1,447.9 billion in fiscal year 2005 to $1,496.5 

billion in 2006. During the year, all government asset balances increased except loans receivable and ‘other’ assets, 

which declined slightly. Representing almost 50 percent of total assets this fiscal year, net property, plant, and 

equipment has been the Government’s largest asset over the past seven fiscal years. In fact, the reported value of 

these assets increased substantially in 2003 as a result of a change in Federal accounting standards. This change 

resulted in the recognition of a net book value of $325.1 billion in military equipment being presented on the 

balance sheet for the first time. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 17

FY 1999

FY 2000

FY 2001

FY 2002

FY 2003

FY 2004

FY 2005

FY 2006

-

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

Dollars in Billions

Chart G

Liabilities by Type: 1999-2006

All Other

Environmental &

disposal liabilities

Fed employee &

veteran benefits

payable

Federal debt

securities held

by the public

Liabilities – “What We Owe.” 

Chart G shows the major components of liabilities, or what the Government owes, as of September 30, for 

fiscal years 2002 through 2006. During 2006, total liabilities increased $498.1 billion from $9,914.8 billion in 2005 

to $10,412.9 billion. 

The largest liability in recent years has been Federal debt held by the public and accrued interest, the balance 

of which increased to $4,867.5 billion in 2006. The Government borrowed a smaller amount of cash from the public 

this year primarily because of the sharp increase in tax revenues. 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 operating cash, and explains how a budget 

surplus or deficit normally affects changes in debt balances. 

The Government’s net borrowings from the public increased by $237.2 billion in fiscal year 2006 and by a 

combined $529.5 billion since 2005 to help 

finance more than 90% of the budget deficits 

in those years. 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. For 

example, in 2006, new borrowings were $4.5 

trillion and maturing debts were $4.2 trillion. 

Federal employee and veteran benefits 

payable have been increasing dramatically, 

from $2,600.7 billion as of the end of fiscal 

year 1999, to $4,679.0 billion as of fiscal 

year-end, 2006, making up nearly half of the 

Government’s total reported liabilities in both 

2005 and 2006. 

The Office of Personnel Management (OPM) administers the largest civilian pension plan, covering about 90 

percent of all Federal civilian employees, including 2.6 million current employees and 2.5 million annuitants. By 

comparison, the military pension plan covers 2.9 million current employees and 1.9 million annuitants. At the end 

of fiscal year 2006, civilian Federal employee benefits payable of $1,694.3 billion accounted for 36 percent of total 

Federal employee and veteran benefits payable, and included $1,349.0 billion of pensions, $295.2 billion of health, 

and $50.1 billion of other benefits. 

Environmental and disposal liabilities increased $45.4 billion from $259.8 billion in 2005 to $305.2 billion in 

2006. This increase, mainly due to the increases in environmental management baseline estimates at Energy, 

accounted for 9.1% of the change in total liabilities during 2006. 
18 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. 

Social Insurance and Other 

Responsibilities 

Information reported on social insurance programs addresses fundamental questions about their current and 

future financial condition, including whether scheduled benefits are sustainable with current scheduled income. This 

information is intended to facilitate an assessment of the programs’ long-term sustainability as well as their ability to 

raise resources from future program participants to pay for benefits to present participants. 

For the programs listed as social insurance (e.g., Social Security, Medicare Parts A, B, and D),the Statement of 

Social Insurance (SOSI) presents the actuarial present value for the projection period of: all future contributions and 

tax income (excluding interest) received from or on behalf of current and future participants; the estimated future 

scheduled expenditures paid to or on behalf of current and future participants; and the estimated future excess of 

contributions and tax income (excluding interest) over future scheduled expenditures. Amounts reported in the SOSI 

and in the supplemental information in this report are based on the official actuarial trust fund reports for each 

program. 

Social Insurance Trust Funds 

The social insurance trust funds were created to account for 

all related program income and expenses. Social Security and 

Medicare taxes, premiums, and other income are credited to the 

funds. Benefit payments and program administrative costs are the 

only purposes for which disbursements from the funds can be 

made. Program revenues not needed in the current year to pay 

benefits and administrative costs are invested in special nonmarketable U.S. Government securities on which a market rate of 

interest is credited. The trust funds represent the accumulated 

value, including interest, of all prior program annual surpluses 

and provide automatic funding authority to pay benefits. 

Trustees Short-Range Outlook (2005-2015) 

The adequacy of the OASI, DI, and HI Trust Funds is measured by comparing their assets at the beginning of a 

year to projected costs for that year (the "trust fund ratio"). A ratio of 100 percent or more (i.e., assets at least equal 

to projected benefit payments for a year) is considered a good indicator of a fund's short-term adequacy and means 

that even if expenditures exceed income, the trust fund reserves combined with annual tax revenues would be 

sufficient to pay full benefits for several years, allowing time for legislative action to restore financial adequacy. 

By this measure, the OASI and DI funds are considered financially adequate throughout the short range 

because the assets of each fund are projected to exceed the 100 percent level through the year 2015. The HI fund 

does not meet the short-range test of financial adequacy because its assets fall below the 100 percent level of one 

year's expenditures during 2014. For SMI, a less stringent annual "contingency reserve" asset test applies to both 

Part B and Part D because the financing of each of those accounts is provided by beneficiary premiums and Federal 

general fund revenue payments automatically adjusted each year to meet expected costs. Thus, under current law 

both SMI accounts are fully financed throughout the 75-year projection period no matter what the costs may be. 

Trustees Long-Range Outlook (2005-2080)

Social Security and Medicare costs increase steeply between 2010 and 2030 because the number of people 

receiving benefits will increase rapidly as the large baby-boom generation retires. Thereafter, Social Security costs 

grow slowly primarily due to projected increasing life expectancy. Medicare costs continue to grow rapidly due to 

expected increases in the use and cost of health care. The continued development of new technology is expected to 

cause per capita health care expenditures to continue to grow faster in the long term, than the economy as a whole. 

Comparison of projected Social Security and Medicare costs to gross domestic product (GDP) is a commonlyused metric for fund analysis. Medicare costs are projected to exceed Social Security's in 2024. Social Security 

expenditures amounted to 4.3 percent of GDP in 2006 and is projected to increase to 6.3 percent of GDP in 2080. 

Medicare's cost amounted to 3.2 percent of GDP in 2006 and is projected to grow more than threefold to 11.0 

percent of GDP in 2080. Absent reform, Social Security and Medicare together will more than double as a 

percentage of the U.S. economy, from nearly 6 percent in 2006 to over 17 percent by 2080. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 19

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

Dollars in Billions

2001

2002

2003

2004

20052006

Chart H 

Net Social Insurance Responsibilities 

(open group)

Social Security

Medicare Part A

Medicare Part B

Medicare Part D

billions of dollars (details may not add to totals due 

to rounding). 2002 2003 2004 2005 2006

Social Security (OASDI) $ (11,742) (11,216) $ (12,552) $ (13,583) $ (14,976) $ 

Medicare:

Medicare Part A (6,409) $ (7,287) $ (9,254) $ (9,621) $ (12,153) $ 

Medicare Part B (6,487) $ (7,720) $ (9,055) $ (9,900) $ (10,630) $ 

Medicare Part D - $ - $ (6,306) $ (6,818) $ (6,257) $ 

Subtotal: Medicare (Parts A, B, D) (12,896) $ (15,007) $ (24,615) $ (26,339) $ (29,040) $ 

Other Social Insurance Programs 2 $ (109) (107) $ (112) $ (116) $ (131) $ 

Total Social Insurance Responsibilities, Net 

(closed group) $ (26,858) (24,219) $ (37,279) $ (40,038) $ (44,147) $ 

Total Social Insurance Responsibilities, Net 

(open group) 2 $ (20,825) (17,887) $ (33,363) $ (35,689) $ (38,851) $ 

Table 9: Social Insurance Responsibilities

2 'Other Social Insurance Programs' for the 'closed' group includes the Railroad Retirement Program. The 'open' group includes both the Railroad 

Retirement and Black Lung Programs. The SOSI presents only 'open group' totals for Black Lung (i.e., does not identify 'closed' group amounts 

separately). Therefore, Black Lung is only reflected in the 'open' group amounts above.

1

 The 'closed group' includes current participants (i.e., receiving and/or are eligible to receive benefits) ages 15 and over at the start of the period. 

The 'open' group' (shown below for comparative purposes), includes all current and future projected participants (i.e., individuals receiving and/or 

are eligible to receive benefits ages 15 and over at the start of the period, PLUS participants estimated to receive and/or be eligible to receive 

beneifts in the future over the 75-year horizon).

This table shows the present value of 75-year actuarial projections of the benefit payments under current law for Social Security, Meidcare, 

and other social insurance programs in excess of their scheduled contributions and earmarked taxes for current participants ages 15 and 

over at the start of the period.

Social Insurance Responsibilities, Net (closed group) 1

The Government’s Net Liabilities and its Responsibilities 

Information reported on social insurance 

programs addresses fundamental questions about 

their current and future financial sustainability, i.e., 

the extent to which the Government could meet 

future demands for resources under current laws and 

conditions. For the programs listed as social 

insurance (e.g., Old Age, Survivors’ and Disability 

Insurance (OASDI) or Social Security, Medicare 

(Parts A, B, and D)), the Statement of Social 

Insurance (SOSI) shows the estimated future excess 

of scheduled benefit expenses over contributions and 

tax income (excluding interest), based on each 

program’s actuarial trust fund report. 

The social insurance figures in Tables 9 and 10 

present estimated net social insurance and other responsibilities for the ‘closed-group’ population. which equals the 

present value of net payments (benefits less taxes) expected during the projection period (75 years) on behalf of program 

participants over age 15 at the start of the projection period. While a true accrual measure would count only benefits 

already earned (and taxes already paid) by current workers, the closed-group liability includes future benefit accruals and 

future taxes of current workers. In this sense, the closed-group numbers are more forward-looking than a strict accrualbased calculation. They 

represent an estimate of the 

responsibility, under current 

law, of future taxpayers to 

pay benefits to current 

participants. For 

comparative purposes, Table 

9 also presents actuarial 

social insurance estimates 

for the ‘open group’ 

population, which differs 

from the ‘closed group’ by 

including all future projected 

participants who will make 

contributions to 

postemployment benefit 

plans and/or receive and/or 

be eligible to receive 

benefits over the 75-year 

horizon. Open group trends 

are also shown in Chart H. 

The SOSI details the 

actuarial estimates 

attributable to each group. 

Table 9 summarizes the Government’s significant ‘Other Responsibilities’ for fiscal years 2002-2006. Social 

insurance and other responsibilities include amounts disclosed in the SOSI, as well as amounts disclosed in Notes 19 

(Contingencies) and 20 (Commitments) that are not presented on the balance sheet. 

Viewing this ‘sustainability’ information in concert with other financial statements and information provides 

both a short- and long-term view of significant financial issues facing the Government. It should be noted, however, 

that there are significant differences between liabilities presented on the balance sheet and the responsibilities from 

the SOSI, which limit their comparability. For the purposes of financial reporting, the Balance Sheet presents a 

‘snapshot’ at a point in time of an entity’s current financial condition, with an emphasis on how current and prior 

actions and events have impacted its assets and liabilities. By contrast, the SOSI presents the calculated net present 

value of future estimated revenues and expenditures over an extended period. They represent an assessment of the 

extent to which the social insurance programs are unfunded under current financing arrangements relative to 

scheduled benefit obligations. Since they are not liabilities, and therefore do not impact either an entity’s current 

assets or liabilities, they are considered ‘off-balance sheet’ items; according to Federal accounting standards. While 

comparability of liabilities to ‘other responsibilities’ is limited, their significance can be analyzed in other contexts. 
20 MANAGEMENT’S DISCUSSION AND ANALYSIS 

billions of dollars 2002 2003 2004 2005 2006

Total Assets 997 $ 1,405 $ 1,397 $ 1,448 $ 1,497 $ 

Total Liabilities (7,817) $ (8,500) $ (9,107) $ (9,915) $ (10,413) $ 

Liabilites, net of Assets (balance sheet) (6,820) $ (7,094) $ (7,710) $ (8,467) $ (8,916) $ 

Social Insurance Responsibilities, Net (closed group - -

off-balance sheet) $ (26,858.0) (24,219.0) $ (37,279.0) $ (40,038.0) $ (44,147.0) $ 

Net Liabilities and Net Social Insurance 

Responsibilities - Closed Group (Combined) $ (33,952) (31,039) $ (44,989) $ (48,505) $ (53,062) $ 

Table 10: Comparing Net Liabilities to Social Insurance Responsibilities

Table 10 shows 

how the 

Government’s 

current net liabilities 

compare to its 

estimated future 

social insurance 

responsibilities. 

Fiscal year 2006 

total assets of $1,496.5 billion and total liabilities of $10,412.9 billion combine to derive the Government’s current 

net liability of $8,916.4 billion. By comparison, the net present value of estimated future net social insurance 

responsibilities is $44,147 billion1

. The net social insurance responsibilities (scheduled benefits in excess of 

estimated revenues) indicate that those programs are on an unsustainable fiscal path and difficult choices will be 

necessary in order to address their large and growing long-term fiscal imbalance. Delay is costly and choices will be 

more difficult as the retirement of the 'baby boom' gets closer to becoming a reality with the first wave of boomers 

eligible for retirement under Social Security in 2008. 

The President’s Management Agenda: Managing for 

Results 

Fiscal responsibility requires the sound stewardship of taxpayer dollars. Once the Congress and the President 

decide on overall spending levels, taxpayer dollars should be managed to maximize results. The President’s 

Management Agenda (PMA) is creating a results-oriented Government where each agency and program is managed 

professionally and efficiently and achieves the results expected by the Congress and the American people. 

Launched in August 2001, the PMA articulates the goal of making the Government more results-oriented, 

focusing on achievement, efficiency, and accountability. It emphasizes improving Government operations by 

setting clear goals and implementing action plans, Agencies continue to manage for and achieve better results. 

The PMA Executive Scorecard is used to measure agencies’ progress and overall achievement in meeting the 

overall improvement goals, otherwise known as standards for success. The following pages contain an overview and 

discussion of agency performance on the PMA initiatives: 

o Implementing Strategic Human Capital 

o Gaining Efficiencies Through 

Strategic Sourcing 

o Improving Financial Performance 

o Expanding Electronic Government 

o Eliminating Improper Payments 

o Budget and Performance Integration. 

o Asset Management 

The fourth quarter scorecard on the 

following page and the accompanying 

discussion of agency performance under the PMA initiative presents the agencies’ status and progress ratings as of 

September 30, 2006. These ratings preceded the publication of the fiscal year 2006 audited financial statements. 

The status and progress ratings in the first quarter scorecard, as of December 31, 2006, will reflect auditors’ findings 

from the fiscal year 2006 financial statement audit. For example, several agency audit opinions and internal controls 

declined during 2006. OMB will review these changes and update the status and progress ratings reflecting the 

fiscal year-end 2006 results during the fiscal year 2007 first quarter assessment cycle. Additional information on the 

PMA initiatives may be found at www.whitehouse.gov/results/agenda/standards.pdf. 

 

1 Tables 9 and 10 both focus on closed-group obligations, equal to the present value of net payments (benefits less taxes) expected during 

the projection period on behalf of program participants over age 15 at the start of the projection period. While a true accrual measure would count 

only benefits already earned (and taxes already paid) by current workers, the closed-group liability includes future benefit accruals and future 

taxes of current workers, making the closed-group numbers more forward-looking than a strict accrual-based calculation.

Red

Yellow

Green

Any of a number of serious flaws.

Satisfies intermediate levels of 

performance in all criteria.

Meets all of the standards for success.

Initiative in serious jeopardy. Unlikely to 

realize objectives without significant 

Status Progress

PMA Scores

Implementation proceeding according to 

plans.

Slippage in implementation schedule, 

quality of deliverables, or other issues 

requiring adjustments by agency in order to 

achieve initiative on a timely basis.
MANAGEMENT’S DISCUSSION AND ANALYSIS 21

Executive Branch Management Scorecard 

 Current Status as of 

September 30, 2006. 

Progress in Implementing the President’s 

Management Agenda 

Human 

Capital 

Competitive 

Sourcing 

Financial

Perf. E-Gov 

Budget/

Perf. 

Integration 

Human

Capital 

Competitive 

Sourcing

Financial 

Perf. E-Gov 

Budget/

Perf. 

Integration 

AGRICULTURE ↑ ↓

COMMERCE ↑

DEFENSE ↑

EDUCATION ↑

ENERGY ↑

EPA ↑

HHS ↓

DHS 

HUD 

INTERIOR ↑

JUSTICE ↑

LABOR 

STATE ↑ ↑

DOT ↑↑

TREASURY 

VA 

AID 

CORPS 

GSA ↑

NASA ↓

NSF 

OMB 

OPM 

SBA ↑↑

SMITHSONIAN ↑

SSA ↑ ↓

Legend: = Red = Yellow = Green 

↑↓ Arrows indicate change in status since evaluation on June 30, 2006. 
22 MANAGEMENT’S DISCUSSION AND ANALYSIS 

USDA Transportation

Energy Treasury

HHS VA

Interior Corps of Engineers

Justice NASA

Labor NSF

State OPM

SSA

GREEN STATUS 

as of 9/30/2006

HUMAN CAPITAL

USDA State

Education Transportation

Energy Treasury

EPA GSA

HHS NASA

Interior OPM

Labor SBA

SSA

GREEN STATUS 

as of 9/30/2006

COMPETITIVE SOURCING

Comerce State

Education NSF

EPA Smithsonian

Labor SSA

FINANCIAL PERFORMANCE

GREEN STATUS 

as of 9/30/2006

Strategic Management of Human Capital 

The Strategic Management of Human Capital Initiative recognizes that 

the men and women serving in the Federal Government are its most 

important resource. Through this initiative, the Government seeks to 

maximize the workforce’s ability to accomplish agencies’ missions for the 

American people by supporting agency efforts to institute state-of-the-art 

human capital management systems, including strategic alignment, 

leadership and knowledge management, results-oriented performance 

culture, talent management, and accountability. An ultimate goal of the 

initiative is to "imbed" the strategic management of human capital into an 

agency's daily management operations. To accomplish this, agencies must 

transition to a system of strong self-accountability whereby agency leaders 

will use Human Capital results in strategic decision making. 

Workforce planning must assure alignment of federal human capital resources with agency mission, objectives 

and goals. Agencies must design agile strategic human capital plans to ensure that their workforce has the 

competencies needed to meet new challenges and demands, perform new functions, and accomplish the agency’s 

mission. 

Federal workforce demographics are changing quickly, requiring agencies to identify effective succession 

management, and service and mission continuity strategies and systems. Agencies are working to pinpoint 

competency gaps in mission-critical occupations and develop and implement successful strategies to close them. 

Agencies have made significant progress in establishing and implementing personnel management practices to better 

achieve their missions. They are deploying and improving performance management systems that better link 

individual performance to agency mission and results, thus providing the foundation for establishing new 

compensation systems that reward performance instead of time on the job. Federal executives play a key role. Over 

the past year, agencies have improved their SES performance plans, particularly in the way performance measures 

are established. These programs aim not only to ensure that potential future managers are waiting in the wings, but 

that those individuals have the proper skills to work in today's changing work environment. 

Competitive Sourcing 

Managers of highly commercial activities – including those responsible 

for finance and accounting activities and information technology support – 

are using public-private competition to make common-sense determinations 

about whether our taxpayers are better served through performance by the 

most efficient government organization or, alternatively by the best qualified 

contractor. Competitions are helping agencies find new and better ways of 

delivering service to taxpayers by leveraging technology, lowering contract 

support costs, realigning their workforces, and establishing clearer 

performance standards. Competitions completed between fiscal years 2003-

2005 are expected to generate more than $5 billion over the next 10 years, 

which equates to about $23,000 in annualized net savings for every job 

examined through competition. Savings will continue to grow as more competitions are completed and cost control 

and performance efficiencies are brought to bear on a larger number of daily tasks. Agencies could generate 

taxpayer savings of more than $4 billion annually by competing just half of the commercial FTEs identified as 

suitable for competition in their workforce inventories. 

Improved Financial Performance 

The ultimate goal of the President’s Management Agenda (PMA) 

Improved Financial Performance initiative is for managers to have access to 

reliable financial information for decision-making. Reliable and timely 

financial information is measured in many ways such as the rendering of an 

unqualified opinion from the independent auditor on the agency’s financial 

statements, the absence of material internal control weaknesses, and 

reporting annual financial information by November 15 and meeting other 

relevant reporting deadlines. For fiscal year 2006, the Government strengthened its requirements for reliable and 
MANAGEMENT’S DISCUSSION AND ANALYSIS 23

Education State

EPA Transportation

HUD NSF

Labor SBA

GREEN STATUS 

as of 9/30/2006

E-GOVERNMENT

timely financial information by making agencies subject to updated guidance on management’s responsibility for 

internal control. This guidance (OMB Circular A-123, Management’s Responsibility for Internal Control) requires 

management to undertake a more rigorous assessment process over internal controls over financial reporting, 

including direct testing, and for agency heads to provide a separate management assurance on the internal control 

over financial reporting. 

Federal agencies continue to show their resolve in meeting these requirements as demonstrated by their 

continuing efforts to implement rigorous corrective actions plans to reduce material process, systems, and control 

weaknesses. In conjunction with the implementation of new financial management controls and processes and 

accelerated reporting schedules, these accomplishments lay the foundation for the production and availability of 

more reliable information to support day-to-day management. 

Improved financial business practices, management systems, and reporting tools enable agencies to enhance 

the timeliness, accuracy, and reliability of financial information. These improvements yield better management of 

Federal dollars, and consequently, greater taxpayer confidence that the proper safeguards are in place for effective 

financial stewardship. 

Expanded Electronic Government 

The Expanded Electronic Government initiative focuses on two key 

areas—strengthening agencies’ management of their information 

technology (IT) resources and using the Internet to simplify and enhance 

service delivery to the citizen. The Government must capitalize on its 

approximate $65 billion annual investment in IT. 

Most agencies have improved their IT management since fiscal year 

2003. Also, 88 percent of agency IT systems have been certified and 

accredited, up from 85 percent the previous year. In addition, currently 

about 83 percent of agencies have an effective enterprise architecture, an integral part of ensuring their IT 

investments support overall agency goals and do not duplicate Government-wide IT investments. Such 

improvements are central ingredients in developing a more focused and results-oriented approach to IT investment 

across agencies. 

Specific improvements in service delivery are being achieved through the E-Gov Initiatives. For instance, 

GovBenefits.gov has expanded assistance information available through the site, now including links to some statefunded, state-administered programs. The addition of state links ensures GovBenefits.gov is truly a one-stop 

resource for government benefits. To date, GovBenefits.gov has provided benefits information to more than 22 

million visitors and referred nearly 5 million citizens to benefit programs. Another E-Gov Initiative, Grants.gov, 

hosts information regarding all of the Federal grant programs on its site. In fiscal year 2006, 76 percent of all 

Federal discretionary grant opportunities (2,092 out of 2,757) were available for electronic application via 

Grants.gov and grantees submitted more than 86,000 applications through Grants.gov. This is a 32 percent increase 

over the number of opportunities that were available for electronic application submission in 2005 (44 percent) and 

Grants.gov has received more than 5 times the number of applications submitted in 2005 (16,000). 

Through the E-Payroll initiative, the Federal Government has consolidated many payroll systems, reducing the 

cost of payroll processing. For example, the Department of Health and Human Services (HHS) has reduced its 

annual costs of payroll processing for its more than 65,000 employees by almost $11 million, from $259 to $90 per 

employee. The Environmental Protection Agency (EPA) has also reduced its average cost from $270 to $90 per 

employee; with its staff of 18,000 the agency has realized an annual savings of approximately $3.2 million. 

Grants Management Line of Business (GMLOB) is working to create a common solution for grants 

management that will promote citizen access, customer service, and agency financial and technical stewardship. To 

date, three agencies (ED, HHS-ACF, and NSF) have been designated as Federal consortia leads. These agencies 

offer shared grants management technical solutions and services that will allow partner agencies to process grants in 

a decentralized way using common business processes. Consortium leads will spread operations and maintenance 

(O&M) costs, and development, modernization, and enhancement (DME) costs across agencies, decreasing the 

burden that any one agency must bear. Automated business processes available through consortium lead agencies 

will decrease agency reliance on manual and paper-based processing. 

The Government is investing significant resources in IT to assist it in achieving its mission and better serving 

the American taxpayer. Agencies are making improvements towards ensuring these investments are well managed, 

more secure, and providing services to the American people more efficiently and effectively. 
24 MANAGEMENT’S DISCUSSION AND ANALYSIS 

Commerce Transportation

Education USAID

Energy GSA

Interior NASA

Justice NSF

Labor SBA

State Smithsonian

GREEN STATUS 

as of 9/30/2006

BUDGET & PERFORMANCE 

INTEGRATION

SSA

Budget and Performance Integration 

Executive departments and agencies are using meaningful program 

performance information to inform their budget and management 

decisions. They are asking whether their programs are working and, if not, 

they are taking steps to improve them. Assessments of programs using the 

Program Assessment Rating Tool (PART) have helped focus agency 

efforts to improve program results. OMB and agencies have now assessed 

the performance of more than 800 Federal programs, representing almost 

$1.5 trillion dollars in Federal spending. Summaries of PART findings for 

each program assessed, as well as the detailed PART analyses for those 

programs, can be found at the OMB website. The Administration will also 

launch a new website, ExpectMore.gov, to provide greater public access to 

information about what programs work, which ones don’t, and efforts to improve. 

The Administration is also using the PART to compare the performance and management of similar programs 

across Government so that lessons about how to improve program performance can be shared among those 

programs. These analyses will tell us what steps we need to take to improve program performance for similar 

programs across Government. 

The PART is a vehicle for improving program performance. As more and more program assessments are 

conducted, the Administration will have better program performance information to use when making budget and 

management decision. Agencies will be better able to describe to the taxpayer what they are getting for their 

investment and what improvements in efficiency and results can be documented every year. 

Eliminating Improper Payments 

An improper payment occurs when the funds go to the wrong recipient, the recipient receives the incorrect 

amount of funds, the recipient uses the funds in an improper manner, or when a duplicate payment occurs.2

 In fiscal 

year 2006, the Government continued to make progress toward identifying all Government-wide improper payments 

and is well on its way to establishing a baseline measurement for all programs susceptible to improper payments. 

Currently, 85 percent of all high-risk programs are reporting an improper payment error measurement ($1.3 trillion 

of $1.5 trillion in high-risk programs) and the number of high-risk programs reporting is increasing annually. A key 

achievement in 2006 was establishing error measurement plans for a majority of the remaining high-risk programs. 

OMB anticipates that 57 or more programs will likely report on their program integrity efforts through their 

fiscal year 2006 Performance and Accountability Reports (PAR) under the Improper Payments Information Act 

(IPIA) of 2002 (compared with 30 reporting programs in 2004, the initial year of implementation). Programs 

reporting for the first time in 2006 include the Special Supplemental Nutrition Program for Women, Infants, and 

Children, the Child and Adult Care Food Program, and the Individual and Household (temporary housing due to 

natural disasters) Program. Beginning in 2007, Medicaid, Temporary Assistance to Needy Families, and the State 

Children’s Health Insurance Program will report component error rates. In 2008, OMB projects that these programs 

will be reporting comprehensive national error measurements. At that point, the OMB projects that virtually all of 

high-risk programs will be reporting a national improper payment estimate. 

Much of this success can be attributed to agency commitment to identify and reduce improper payments, the 

Chief Financial Officers (CFO) Council’s Improper Payments Transformation Team, and the PMA initiative. 

Another key success factor has been information sharing. To that end, the CFO Council’s Improper Payments 

Transformation Team will co-sponsor an event in fiscal year 2007 to facilitate State-to-State and program-toprogram best practices discussions on program integrity for means-tested programs. 

OMB continues its commitment to identify all improper payments Government-wide and to help agencies 

establish corrective action plans to address their root causes. In some cases, this might lead to legislative and/or 

regulatory changes. Regardless, taxpayers will be more fully served by the assurance that their tax dollars are being 

used in proper amounts and for their intended purposes. 

Asset Management 

Pursuant to the PMA Real Property Management program initiative, agencies continue to make significant 

progress in implementing the tools necessary to manage the size, condition, and costs of their asset portfolios and 

comply with the requirements of Executive Order 13327, Federal Real Property Asset Management. In fiscal year 

 

2 From OMB website - - http://www.whitehouse.gov/omb/financial/fia_improper.html 
MANAGEMENT’S DISCUSSION AND ANALYSIS 25

2006, Executive agencies reported more than 1.2 million assets, including land, buildings, and structures, to the 

Government-wide real property inventory, which provides, for the first time, a more complete picture of the 

Government’s asset inventory; where the assets are located; and how and whether the assets are being used 

effectively to help serve agency mission and objectives. The Federal Real Property Council has also established a 

Performance Assessment Tool that helps agencies evaluate the performance of their real property portfolio and 

identifies assets for potential improvement or disposition. Having the inventory and performance information means 

that agencies, and the Government as a whole, can make smarter asset management decisions. 

The Administration continues to hold agencies accountable for their asset management goals through the PMA 

process. Since fiscal year 2004, agencies have shown significant improvement in their asset management processes 

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

rightsizing the Government’s real property assets. Executive Agencies have disposed of more than $3.5 billion in 

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

the close of fiscal year 2009. 

Systems, Controls, & Legal Compliance 

Systems 

As Federal agencies have continued to demonstrate success in obtaining and keeping unqualified opinions on 

their audited financial statements, the Federal Government continues to face challenges in implementing financial 

systems that meet Federal requirements. In January 2006, the latest version of the Core Financial Systems 

requirements were released, and most major agencies are in the process of having completed or implementing 

certified commercial-off-the-shelf financial management systems that meet these requirements. However, many 

agencies continue to struggle when implementing these complex systems and agency auditors’ Federal Financial 

Management Improvement Act (FFMIA) reviews have indicated that a majority of CFO Act agencies experience 

challenges with their financial management systems. 

The Financial Management Line of Business (FMLoB) initiative is intended to help agencies implement 

financial systems compliant with Federal requirements. It is intended to improve the cost, quality, and performance 

in the Government’s financial management systems by leveraging shared service solutions and implementing 

Government-wide reforms that improve efficiency of financial operations. OMB expects this initiative to help 

agencies meet Federal standards and achieve efficiencies, while delivering cost savings to the taxpayers. 

Multiple FMLoB initiatives are underway that will collectively make these improved results possible, 

including standardizing financial processes across the Government, creating opportunities for agencies to move 

financial systems to shared-service providers where a single provider supports multiple customers, and increasing 

transparency by establishing performance measures to evaluate the results of these efforts. Through the FMLoB and 

other information-sharing initiatives, the Federal financial community is working to ensure that mistakes of the past 

are not repeated and that agencies initiating complex modernization efforts have a clear understanding of significant 

risks and appropriate mitigation strategies. 

 

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. 

The Federal Managers’ Financial Integrity Act (FMFIA) 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. OMB Circular No. A-123, Management’s Responsibility for Internal 

Control (A-123), provides instruction to agencies in implementing the FMFIA and the OMB Circular No. A-127, 
26 MANAGEMENT’S DISCUSSION AND ANALYSIS 

Financial Management Systems, provides instruction for complying with the federal financial system requirements 

(see the Systems section for more discussion on federal systems). 

Recognizing the importance of effective internal control within Federal agencies, OMB revised A-123 in 

December 2004. The revisions to A-123 primarily focused on providing agencies with a framework for assessing 

and managing financial reporting risks more strategically and effectively. Appendix A of the revised A-123 

required management to undertake a more rigorous assessment process and for agency heads to provide a separate 

management assurance on the internal control over financial reporting. 

 Fiscal year 2006 was the initial year that the 24 CFO Act agencies began to implement the new requirements in 

the Appendix A of the A-123. Some agencies elected to implement the new requirements over multiple years rather 

than in this initial year, which was permitted by OMB. Those agencies specified their multi-year implementation 

strategy in their respective assurance statements. Over this past fiscal year, each agency completed risk assessments, 

identified key processes and controls, and tested these controls to determine their effectiveness, in accordance with 

A-123. These efforts culminated in the agencies’ first management assurance statement specific to the internal 

control over financial reporting as of June 30, 2006. The separate assurance on the internal control over financial 

reporting is included in each agency’s Performance and Accountability Report as a subset of the overall FMFIA 

statement. 

During fiscal year 2007, OMB will continue to work with the Chief Financial Officers’ Council to identify 

potential areas for additional guidance and to share best practices and strategies that agencies found most helpful 

during the initial year of implementation. OMB will also continue to incorporate key milestones from agencies’ 

plans for this year’s assessment into the Improved Financial Performance initiative scorecard under the President’s 

Management Agenda to ensure agencies are accountable for meeting their goals. 

While many agencies are making progress on identifying and resolving deficiencies found in internal 

control, continued diligence and commitment is 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. 

 Additional Information 

The appendices to this Report contain the names and web sites of the significant Government entities included 

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

these entities’ Performance and Accountability Reports. Related Government publications, include, but are not 

limited to: 

• the Budget of the United States Government, 

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

Government, 

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

• the Economic Report of the President, and 

• the Trustees’ Reports for the Social Security and Medicare Programs. 
GOVERNMENT ACCOUNTABILITY OFFICE STATEMENT 27

December 15, 2006 

The President 

The President of the Senate 

The Speaker of the House of Representatives 

Our report on the U.S. government’s consolidated financial statements for fiscal years 

2006 and 2005 is enclosed. In summary, we found the following: 

• Certain material weaknesses in financial reporting1

 and other limitations on the 

scope of our work resulted in conditions that, for the 10th consecutive year, 

prevented us from expressing an opinion on the federal government’s 

consolidated financial statements. About $797 billion, or 53 percent, of the federal 

government’s reported total assets as of September 30, 2006, and approximately 

$790 billion, or 27 percent, of the federal government’s reported net cost for fiscal 

year 2006 relate to 5 of the 24 Chief Financial Officers (CFO) Act agencies’ fiscal 

year 2006 financial statements that were disclaimed on or not audited.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, 2006. 

• Our work to test compliance with selected provisions of significant laws and 

regulations in fiscal year 2006 was limited by the material weaknesses and scope 

limitations discussed in our report. 

While over the past 10 years significant progress has been made in improving federal 

financial management since the U.S. government began preparing consolidated financial 

statements, three major impediments continue to prevent us from rendering an opinion on 

 

1

A material weakness is a condition that precludes the entity’s internal control from providing 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. 

2

The CFO Act agencies that received disclaimers of opinions on all of their fiscal year 2006 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 2006, only the Consolidated 

Balance Sheet and Statement of Custodial Activity were subjected to audit; the auditor was unable to 

express an opinion on these two financial statements. For fiscal year 2006, only the Consolidated Balance 

Sheet of the Department of Energy was subjected to audit, and the auditor qualified its opinion on this 

statement. 

United States Government Accountability Office

Washington, DC 20548 

Comptroller General

of the United States
28 GOVERNMENT ACCOUNTABILITY OFFICE STATEMENT 

the 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. 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. 

Accounting and financial reporting standards have continued to evolve to provide greater 

transparency and accountability over the federal government’s operations and fiscal 

condition. Beginning in fiscal year 2006, the Statement of Social Insurance, which shows 

long-range actuarial projections of scheduled social insurance benefits in excess of 

earmarked revenues, became a principal financial statement.3

 This new statement shows 

projected scheduled benefits exceeding earmarked revenues by approximately $394

trillion in present value terms for the next 75-year period.5

 Considering this long-range 

projected funding gap in social insurance, in addition to reported liabilities (e.g., debt 

held by the public and federal employee and veterans benefits payable) and other implicit 

commitments and contingencies that the federal government has pledged to support, the 

federal government’s fiscal exposures totaled approximately $50 trillion as of September 

30, 2006, an increase of about $4 trillion over September 30, 2005, and up from about 

$20 trillion as of September 30, 2000.6

 This translates into a current burden of about 

$170,000 per American or approximately $440,000 per American household. Also, 

beginning in fiscal year 2006, the consolidated financial statements reported earmarked 

funds activity separately from nonearmarked funds activity.7

 For fiscal year 2006, 

earmarked funds revenue and nonearmarked funds revenue totaled about $1,094 billion 

and $1,532 billion respectively. In addition, for fiscal year 2006, earmarked funds had 

reported net operating revenue of approximately $172 billion and nonearmarked funds 

reported net operating cost of approximately $622 billion.8

 

3

Social insurance programs included in the Statement of Social Insurance are Social Security, Medicare, 

Railroad Retirement, and Black Lung. 

4

On an open group basis (current and future participants). On a closed group basis, which excludes the 

benefit payments and contributions of individuals under the age of 15 (or not yet born), this amount is 

approximately $44 trillion. 

5

Black Lung’s long-range actuarial projections are over a 34-year period. 6

The federal government’s fiscal exposures are derived from information reported throughout the financial 

statements and related footnotes. 

7

Earmarked funds (e.g., Social Security and Medicare trust funds) are financed by specifically identified 

revenues and other financing sources which remain available over time; are required by statute to be used 

for designated activities, benefits, or purposes; and must be accounted for separately from the federal 

government’s general revenues. See the Federal Accounting Standards Advisory Board’s (FASAB) 

Statement of Federal Financial Accounting Standards No. 27, Identifying and Reporting Earmarked Funds 

(Washington, D.C.: Dec. 28, 2004). 

8

The earmarked funds net operating revenue is the excess of revenues and of transfers from nonearmarked 

funds over net costs. The nonearmarked funds net operating cost is the excess of net costs and of transfers 

to earmarked funds over revenues. 
GOVERNMENT ACCOUNTABILITY OFFICE STATEMENT 29

Although improvements have been made, additional financial reporting enhancements are 

needed to effectively convey the long-term financial condition of the U.S. government 

and annual changes therein. Specifically, the federal government’s financial reporting 

should be expanded to disclose the reasons for significant changes during the year in 

scheduled social insurance benefits and funding. It should also include a Statement of 

Fiscal Sustainability—providing a long-term look at the sustainability of social insurance 

in the context of all federal programs.9

 The reporting on fiscal sustainability should 

include additional information that will assist in understanding the sustainability of 

current social insurance and other federal programs, including key measures of fiscal 

sustainability and intergenerational equity,10 projected annual cash flows, and changes in 

fiscal sustainability during the reporting period. Further, earmarked Social Security and 

Medicare taxes that have not yet been used to pay benefits should be recorded as deferred 

earmarked revenue, resulting in an additional liability for such social-insurance-related 

obligations.11 As of September 30, 2006, such “unused” earmarked taxes related to social 

insurance totaled over $2 trillion. 

Finally, to better inform both Congress and American citizens about the federal 

government’s fiscal condition and operations, the federal government should produce an 

easily understandable summary annual report that includes, in a clear, concise, and 

transparent manner, key financial and performance information embodied in the 

Financial Report of the United States Government. This report would include, among 

other things, illustrative graphs and charts depicting such information as (1) the cost of 

the federal government as a whole and for each major component such as defense and 

homeland security, (2) the primary components of federal revenues, and (3) various other 

current financial and future fiscal information. 

 - - - - 

We appreciate the cooperation and assistance of the Department of the Treasury and 

Office of Management and Budget officials, as well as the federal agencies’ CFO’s and 

inspectors general, in carrying out our statutory responsibility to report on the U.S. 

government’s consolidated financial statements. We look forward to continuing to work 

with these officials and the Congress to achieve the goals and objectives of financial 

management reform. 

 

9

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. 

10Intergenerational equity assesses the extent to which different age groups may be required to assume 

financial burdens to sustain federal responsibilities. 

11The FASAB recently issued the preliminary views document, Accounting for Social Insurance, Revised 

(Washington, D.C.: Oct. 23, 2006), which discusses differing views on accounting for social insurance. 
30 GOVERNMENT ACCOUNTABILITY OFFICE STATEMENT 

Our audit report begins on page 149. Our guide12 to the Financial Report of the United 

States Government will help those who seek to obtain a better understanding of the 

Financial Report. In addition, our recently issued guide13 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 and other GAO reports noted above are available on GAO’s Web site at 

www.gao.gov. 

Our report was prepared under the direction of Jeffrey C. Steinhoff, Managing Director, 

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) 512-2600. 

David M. Walker 

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 

(198411) 

 

12GAO, Understanding the Primary Components of the Annual Financial Report of the United States 

Government, GAO-05-958SP (Washington, D.C.: September 2005). 13GAO, Understanding Similarities and Differences between Accrual and Cash Deficits, GAO-07-117SP 

(Washington, D.C.: December 2006). 
FINANCIAL STATEMENTS 31

Financial Statements 

of the United States Government 

for the Years Ended September 30, 2006, 

and September 30, 2005 

Statements of Net Cost 

These statements present the net cost of fiscal years 2006 and 2005 Government operations, which include the 

operations related to earmarked funds, funds financed by specifically identified revenues, often supplemented by 

other financing sources, which remain available over time. For the purposes of this document, “Government” refers 

to the United States Government. It categorizes costs by Chief Financial Officer Act entities and other significant 

entities. 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 Federal Government. 

These statements contain the following three components: 

• Gross cost—This is the full cost of all the departments and entities. These costs are assigned on a cause-andeffect basis, or reasonably allocated to the corresponding departments and entities. 

• Earned revenue—This is revenue the Government earned by providing goods and services to the public at a 

price. 

• Net cost—This 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 and reflected 

in the costs of their user agencies. 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. Health and pension benefits that are not reported in the 

individual agency statements have been allocated out of OPM to the agencies. The interest on securities issued by 

the Department of the Treasury (Treasury) held by the public is part of Treasury’s responsibilities, 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 unearned 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 (earned revenues). They further include any 

adjustments and unreconciled transactions that affect the net position. 
32 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 collected from other agencies. 

These taxes are characterized as “unearned” 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 “unearned” revenue. 

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

associated cost. Therefore, unlike other earned revenues, 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 from specifically identified “earmarked” activities during the year. 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 20—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 included in Note 10, 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, as well as contributions to earmarked funds made by Federal agencies on behalf of 

their employees, beneficiaries, or others. 

Other-Unmatched Transactions and Balances 

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

due to unreconciled 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 17—Prior 

Period Adjustments-Corrections of Errors for detailed information. 
FINANCIAL STATEMENTS 33

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 

The purpose of the reconciliation is to report how the proprietary net operating cost and the unified budget 

deficit relate to each other. The premise of the reconciliation is that the accrual and budgetary accounting bases 

share transaction data. 

These statements report the reconciliation of 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. 

Receipts and outlays in the President’s budget are measured primarily on a cash basis and differ from the basis 

of accounting measures 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 of benefits payable for veterans, 

military and civilian employees, and 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 accounts and 

taxes receivable, and increases in other assets not included in the operating results. These items are typically part of 

the balance sheets only, and are not part of the operating results. All Other Reconciling Items represent the net 

difference that is needed to balance this statement to the unified budget deficit. 

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 operating cash balance 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 operating cash balance. 

These statements reconcile the unified budget deficit to the change in operating cash during the fiscal year and 

explain how the budget deficits (fiscal years 2006 and 2005) were financed. A budget deficit is the result of outlays 

(expenditures) exceeding receipts (revenue) during a particular fiscal year. 
34 FINANCIAL STATEMENTS 

In depicting how the unified budget deficits were financed, these statements show that in fiscal years 2006 and 

2005, the greatest amounts were net new borrowings from the public. Other transactions also required 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, required cash payments and 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 and liabilities. When combined with stewardship 

information, this information presents a more comprehensive understanding of the Government’s financial position. 

All of the line items on the balance sheets are described in the Notes to the Financial Statements. 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; 

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, and set monetary 

policy. 

Liabilities and Net Position 

Liabilities are obligations of the Government resulting from prior actions that will require financial resources. 

The most significant liabilities reported on the balance sheets are Federal debt securities held by the public and 

accrued interest and Federal employee and veteran benefits payable. Liabilities also include environmental and 

disposal liabilities 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. 

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 20—Earmarked Funds and Note 21—Dedicated Collections. 

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 18—Contingencies and Note 19—Commitments. 
FINANCIAL STATEMENTS 35

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 (SSA), the Department of Health and Human Services (HHS), 

the Railroad Retirement Board (RRB), and the Department of Labor (DOL), respectively. The estimates are 

actuarial present values1

 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 Railroad Retirement Board and the 

Department of Labor (Black Lung). 

 

1 Present values recognize 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. To calculate a present value, future amounts are thus reduced using an assumed interest rate, and those reduced 

amounts are summed. 
36 FINANCIAL STATEMENTS 

This page is intentionally blank.
FINANCIAL STATEMENTS 37

United States Government 

Statements of Net Cost 

for the Years Ended September 30, 2006, and September 30, 2005 

 Gross

 Cost 

 Earned 

 Revenue 

Net 

Cost 

Gross 

Cost 

Earned 

Revenue 

Net 

Cost 

(In billions of dollars) 2006 2005 

 

Department of Defense ............................... 658.0 24.1 633.9 703.9 26.9 677.0 

Department of Health & Human Services..... 678.8 51.4 627.4 623.4 39.6 583.8 

Social Security Administration..................... 593.1 0.3 592.8 572.1 (2.0) 574.1 

Interest on Treasury Securities held by 

the public................................................... 221.5 - 221.5 181.2 - 181.2 

Department of Veterans Affairs ................... 117.3 3.5 113.8 276.6 3.4 273.2 

Department of Agriculture............................ 109.0 11.4 97.6 112.6 19.9 92.7 

Department of Education............................. 97.3 4.7 92.6 75.6 4.7 70.9 

Department of the Treasury......................... 85.5 4.1 81.4 82.3 3.1 79.2 

Department of Transportation...................... 66.6 0.6 66.0 62.4 0.6 61.8 

Department of Energy ................................. 70.9 5.1 65.8 46.8 3.7 43.1 

Department of Homeland Security .............. 63.4 6.8 56.6 74.6 6.7 67.9 

Department of Labor.................................... 48.2 - 48.2 50.0 - 50.0 

Department of Housing and Urban 

Development............................................. 43.0 1.0 42.0 43.6 1.3 42.3 

Department of Justice.................................. 28.6 1.0 27.6 27.3 0.8 26.5 

Office of Personnel Management................ 34.8 15.1 19.7 33.1 14.4 18.7 

National Aeronautics and Space 

Administration .............................................. 19.2 - 19.2 16.5 0.1 16.4 

Department of the Interior............................ 20.0 2.9 17.1 19.5 3.2 16.3 

Department of State .................................... 16.0 2.2 13.8 15.6 2.0 13.6 

Agency for International Development ........ 10.5 0.1 10.4 13.0 0.2 12.8 

Environmental Protection Agency ............... 9.9 0.3 9.6 9.3 0.4 8.9 

Department of Commerce ........................... 9.9 1.7 8.2 9.2 1.5 7.7 

Federal Communications Commission........ 7.9 0.3 7.6 7.2 0.6 6.6 

Railroad Retirement Board.......................... 12.1 5.0 7.1 9.5 - 9.5 

National Science Foundation....................... 5.7 - 5.7 5.5 - 5.5 

Federal Deposit Insurance Corporation ...... 1.8 0.1 1.7 1.4 0.2 1.2 

Small Business Administration...................... 1.7 0.3 1.4 1.4 0.4 1.0 

U.S. Nuclear Regulatory Commission......... 1.0 0.6 0.4 0.9 0.5 0.4 

General Services Administration ................. 0.9 0.5 0.4 0.2 0.4 (0.2) 

National Credit Union Administration........... 0.2 0.1 0.1 0.1 0.2 (0.1) 

Tennessee Valley Authority........................... 9.5 10.0 (0.5) 8.6 8.7 (0.1) 

Export-Import Bank of the United States ..... - 1.3 (1.3) (0.2) 2.5 (2.7) 

Pension Benefit Guaranty Corporation ........ (0.5) 3.8 (4.3) 5.1 4.3 0.8 

U.S. Postal Service ........................................ 58.9 71.6 (12.7) 56.0 68.9 (12.9) 

All other entities .............................................. 27.0 (3.5) 30.5 30.3 7.6 22.7 

Total .......................................................... 3,127.7 226.4 2,901.3 3,174.6 224.8 2,949.8 

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

United States Government 

Statements of Operations and Changes in Net Position 

for the Years Ended September 30, 2006, and September 30, 2005 

(In billions of dollars) 

NonEarmarked 

Funds 

Earmarked 

Funds 2006 

Consolidated

2005 

Consolidated

(Restated) 

 

Revenue: 

Individual income tax and tax withholdings ........... 1,045.7 800.4 1,846.1 1,690.1 

Corporation income taxes...................................... 350.0 - 350.0 271.8 

Unemployment taxes ............................................. - 41.4 41.4 40.0 

Excise taxes........................................................... 24.5 49.6 74.1 71.0 

Estate and gift taxes .............................................. 27.4 - 27.4 24.7 

Customs duties ...................................................... 24.7 - 24.7 22.0 

Other taxes and receipts........................................ 42.8 17.2 60.0 46.7 

Miscellaneous earned revenues............................ 17.1 - 17.1 19.2 

Intragovernmental interest..................................... - 185.3 185.3 - 

Total revenue......................................................... 1,532.2 1,093.9 2,626.1 - 

Eliminations............................................................ (185.3) - 

Consolidated revenue............................................ 2,440.8 2,185.5 

 

Net Cost: 

Net cost.................................................................. 1,635.1 1,266.2 2,901.3 2,949.8 

Intragovernmental interest..................................... 185.3 - 185.3 - 

Total net cost ......................................................... 1,820.4 1,266.2 3,086.6 - 

Eliminations............................................................ (185.3) 

Consolidated net cost ............................................ 2,901.3 2,949.8 

 

Intragovernmental transfers ................................. (344.3) 344.3 - - 

 

Other--Unmatched transactions and balances 

(Note 1) ................................................................. 11.0 - 11.0 4.1 

 

Net Operating (Cost)/Revenue .............................. (621.5) 172.0 (449.5) (760.2) 

 

 

Net position, beginning of period......................... (8,714.1) 247.2 (8,466.9) (7,709.8) 

Prior period adjustments-corrections of errors 

(Note 17 and Note 26)......................................... - - - 2.9 

Other prior period adjustments (Note 17).............. - - - 0.2 

Net Operating (Cost)/Revenue .............................. (621.5) 172.0 (449.5) (760.2) 

Net position, end of period.................................... (9,335.6) 419.2 (8,916.4) (8,466.9) 

 

The accompanying notes are an integral part of these financial statements. 
FINANCIAL STATEMENTS 39

United States Government 

Reconciliations of Net Operating Cost and Unified Budget Deficit 

for the Years Ended September 30, 2006, and September 30, 2005 

(In billions of dollars) 2006 

2005 

(Restated) 

 

Net operating cost..................................................................................... (449.5) (760.2) 

Components of Net Operating Cost Not Part of the Budget Deficit:

Increase (decrease) in Liability for Military Employee Benefits (Note 11): 

Increase in military pension liabilities ....................................................... 71.7 57.7 

Increase in military health liabilities .......................................................... 3.3 108.6 

(Decrease) Increase in other military benefits.......................................... (0.3) 3.3 

Increase in liability for military employee benefits .................................... 74.7 169.6 

 

Increase (Decrease) in Liability for Veterans Compensation (Note 11):

Increase in liabilities for veterans ............................................................. 45.4 150.1 

(Decrease) Increase in liabilities for survivors.......................................... (14.3) 47.2 

Increase in liabilities for burial benefits..................................................... 0.1 0.5 

Increase in liability for veteran's compensation........................................ 31.2 197.8 

 

Increase in Liabilities for Civilian Employee Benefits (Note 11): 

Increase in civilian pension liabilities ........................................................ 75.2 43.6 

Increase in civilian health liabilities........................................................... 4.5 24.6 

Increase (Decrease) in other civilian benefits........................................... 1.6 (5.9) 

Increase in liabilities for civilian employee benefits .................................. 81.3 62.3 

 

Increase in Environmental Liabilities (Note 12): 

Increase in Energy's environmental liabilities........................................... 40.5 8.1 

Increase in all others' environmental liabilities ......................................... 4.9 2.5 

Increase in environmental liabilities.......................................................... 45.4 10.6 

 

Depreciation expense.................................................................................. 82.9 79.7 

Property, plant, and equipment disposals and revaluations ...................... 2.4 (43.7) 

Increase in benefits due and payable ......................................................... 12.3 14.1 

(Decrease) Increase in insurance programs............................................... (20.4) 31.0 

Increase in other liabilities........................................................................... 21.1 15.1 

Seigniorage and sale of gold ...................................................................... (0.7) (0.8) 

(Decrease) Increase in accounts payable................................................... (9.5) 7.8 

(Increase) in accounts and taxes receivable............................................... (2.7) (9.7) 

Components of the Budget Deficit Not Part of Net Operating Cost: 

Capitalized Fixed Assets: 

Department of Defense............................................................................. (76.4) (28.3) 

Civilian Agencies ...................................................................................... (27.3) (25.1) 

Total Capitalized Fixed Assets............................................................... (103.7) (53.4) 

 

(Increase) in inventory................................................................................. (9.3) (10.5) 

(Increase) in Securities and Investments.................................................... (6.4) (16.2) 

Decrease (Increase) in other assets ........................................................... 0.5 (5.0) 

Principal repayments of precredit reform loans .......................................... 3.5 (2.2) 

 

All Other Reconciling Items ..................................................................... (0.8) (4.8) 

 

Unified budget deficit................................................................................ (247.7) (318.5) 

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

United States Government 

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

for the Years Ended September 30, 2006, and September 30, 2005 

(In billions of dollars) 2006 2005 

 

Unified budget deficit .................................... (247.7) (318.5)

 

Adjustments for Noncash Outlays Included in the Budget: 

Interest accrued by Treasury on debt held by 

the public............................................................. (177.6) (154.4) 

Subsidy expense (Note 4)............................. 34.3 14.4 

 

Items Affecting the Cash Balance Not Included in the Budget: 

Net Transactions from Financing Activity: 

Repayment of debt held by the public ............ 4,248.5 4,317.4 

Borrowings from the public ......................... (4,485.5) (4,614.1) 

Total ........................................................ (237.0) (296.7) 

 

Net Transactions from Monetary Activity: 

Increase/(decrease) in special drawing 

rights........................................................ 0.4 (4.5) 

Increase in other monetary assets ............. 3.1 0.3 

(Decrease) in loans to the IMF ............................ (6.6) (6.2) 

Total .................................................................... (3.1) (10.4) 

 

Net Transactions from Other Activities: 

Net direct loan activity ................................ (3.7) - 

Interest paid by Treasury on debt held by 

the public ................................................. 171.4 152.2 

Net guaranteed loan activity....................... (46.9) (20.1) 

(Decrease)/Increase in miscellaneous 

assets ...................................................... (0.5) 0.3 

(Increase)/Decrease in allocations of 

special drawing rights .............................. (0.1) 0.1 

Decrease/(Increase) in deposit fund 

balances .................................................. 1.0 (2.0) 

Decrease in miscellaneous liabilities .............. 0.1 - 

Seigniorage and other equity...................... (0.7) (0.9) 

Reclassification of aged unreconciled 

accounts .................................................. - - 

NRRIT non-Federal securities1................... 2.1 2.1 

 Prior period adjustment ............................... (2.7) -

Total ........................................................ 120.0 131.7 

 

Disposition of deficit...................................... (263.4) (315.4)

 

Increase/(Decrease) in operating cash 

balance....................................................... 15.7 (3.1)

 

Operating Cash: (Note 2)

Operating cash balance beginning of period... 27.9 31.0 

Operating cash balance end of period........... 43.6 27.9 

 1 For more information, see Railroad Retirement in the Supplemental Information-Social Insurance section. The amount for the 

change in the NRRIT non-Federal Securities reflected above is based on NRRIT amounts reported as of August 31. This differs 

from the amounts reflected in Note 7, Securities and Investments, for NRRIT which are as of September 30. 

The accompanying notes are an integral part of these financial statements. 
FINANCIAL STATEMENTS 41

United States Government 

Balance Sheets 

as of September 30, 2006, and September 30, 2005 

(In billions of dollars) 2006 

2005 

(Restated) 

Assets: 

Cash and other monetary assets (Note 2) ..................................... 97.9 85.8 

Accounts and taxes receivable, net (Note 3).................................. 68.8 66.1 

Loans receivable, net (Note 4) ....................................................... 220.8 221.8 

Inventories and related property, net (Note 5)................................ 281.3 272.0 

Property, plant, and equipment, net (Note 6 and Note 26) ............ 688.5 670.2 

Securities and investments (Note 7) .............................................. 83.8 75.3 

Other assets (Note 8) ..................................................................... 55.4 56.7 

Total assets.................................................................................. 1,496.5 1,447.9 

Stewardship property, plant, and equipment 

Stewardship Land (Note 24) and Heritage Assets (Note 25) 

Liabilities: 

Accounts payable (Note 9) ............................................................. 58.4 67.9 

Federal debt securities held by the public and accrued interest 

(Note 10)...................................................................................... 4,867.5 4,624.2 

Federal employee and veteran benefits payable (Note 11) ........... 4,679.0 4,491.8 

Environmental and disposal liabilities (Note 12)............................. 305.2 259.8 

Benefits due and payable (Note 13)............................................... 129.3 117.0 

Insurance program liabilities (Note 14)........................................... 72.8 93.2 

Loan guarantee liabilities (Note 4).................................................. 66.4 47.7 

Other liabilities (Note 15)................................................................ 234.3 213.2 

Total liabilities .............................................................................. 10,412.9 9,914.8 

Contingencies (Note 18) and Commitments (Note 19) 

Net position: 

Earmarked funds (Note 20) ............................................................ 419.2 

Non-earmarked funds..................................................................... (9,335.6) 

Total net position....................................................................... (8,916.4) (8,466.9) 

Total liabilities and net position ................................................. 1,496.5 1,447.9 

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

United States Government 

Statements of Social Insurance 

Present Value of Long-Range (75 Years, except Black Lung) Actuarial Projections 

 ************UNAUDITED*********** 

(In billions of dollars) 2006 2005 2004 2003 2002

Federal Old-Age, Survivors and Disability Insurance (Social Security): (Note 23) 

Contributions and Earmarked Taxes from: 

Participants who have attained age 62......................................... 533 464 411 359 348

Participants ages 15-61................................................................ 16,568 15,290 14,388 13,576 13,048

Future participants (under age 15 and births during period).............. 15,006 13,696 12,900 12,213 11,893

All current and future participants.............................................. 32,107 29,450 27,699 26,147 25,289

Expenditures for Scheduled Future Benefits for: 

Participants who have attained age 62......................................... 5,866 5,395 4,933 4,662 4,402

Participants ages 15-61................................................................ 26,211 23,942 22,418 21,015 20,210

Future participants (under age 15 and births during period).............. 6,480 5,816 5,578 5,398 5,240

All current and future participants.............................................. 38,557 35,154 32,928 31,075 29,851

Present value of future expenditures less future revenue ............ 6,4491 5,7042 5,2293 4,9274 4,5625

Federal Hospital Insurance (Medicare Part A): (Note 23) 

Contributions and Earmarked Taxes from: 

Participants who have attained eligibility age 65 .......................... 192 162 148 128 125

Participants who have not attained eligibility age 15-64 ............... 5,685 5,064 4,820 4,510 4,408

Future participants (under age 15 and births during period))............. 4,767 4,209 4,009 3,773 3,753

All current and future participants.............................................. 10,644 9,435 8,976 8,411 8,286

Expenditures for Scheduled Future Benefits for: 

Participants who have attained eligibility age 65 .......................... 2,397 2,179 2,168 1,897 1,747

Participants who have not attained eligibility age 15-64 ............... 15,633 12,668 12,054 10,028 9,195

Future participants (under age 15 and births during period))............. 3,904 3,417 3,246 2,653 2,470

All current and future participants.............................................. 21,934 18,264 17,468 14,577 13,412

Present value of future expenditures less future revenue ............ 11,2901 8,8292 8,4923 6,1664 5,1265

Federal Supplementary Medical Insurance (Medicare Part B): (Note 23) 

Premiums from: 

Participants who have attained eligibility age 65 .......................... 409 363 332 283 252

Participants who have not attained eligibility age 15-64 ............... 3,167 2,900 2,665 2,148 1,856

Future participants (under age 15 and births during period))............. 906 924 891 688 600

All current and future participants.............................................. 4,481 4,187 3,889 3,119 2,708

Expenditures for Scheduled Future Benefits for: 

Participants who have attained eligibility age 65 .......................... 1,773 1,622 1,475 1,306 1,132

Participants who have not attained eligibility age 15-64 ............... 12,433 11,541 10,577 8,845 7,463

Future participants (under age 15 and births during period))............. 3,407 3,408 3,277 2,622 2,238

All current and future participants.............................................. 17,613 16,571 15,329 12,773 10,833

Present value of future expenditures less future revenue6 .............. 13,1311 12,3842 11,4403 9,6534 8,1255

Federal Supplementary Medical Insurance (Medicare Part D): (Note 23) 

Premiums and State Transfers from: 

Participants who have attained eligibility age 65 .......................... 173 185 176 

Participants who have not attained eligibility age 15-64 ............... 1,700 1,790 1,857 

Future participants (under age 15 and births during period))............. 492 572 618 

All current and future participants.............................................. 2,366 2,547 2,651 

Expenditures for Scheduled Future Benefits for: 

Participants who have attained eligibility age 65 .......................... 792 880 773 

Participants who have not attained eligibility age 15-64 ............... 7,338 7,913 7,566 

Future participants (under age 15 and births during period))............. 2,121 2,440 2,431 

All current and future participants.............................................. 10,250 11,233 10,770 

Present value of future expenditures less future revenue6 ...................... 7,8841 8,6862 8,1193
FINANCIAL STATEMENTS 43

United States Government 

Statements of Social Insurance 

Present Value of Long-Range (75 Years, except Black Lung) Actuarial Projections 

 ************UNAUDITED*********** 

(In billions of dollars) 2006 2005 2004 2003 2002

Railroad Retirement: (Note 23) 

Contributions and Earmarked Taxes from: 

Participants who have attained eligibility ...................................... 5 4 4 4 3 

Participants who have not attained eligibility ................................ 40 37 37 40 40 

Future participants........................................................................ 56 41 39 41 41 

All current and future participants.............................................. 100 82 80 85 83 

Expenditures for Scheduled Future Benefits for: 

Participants who have attained eligibility ...................................... 92 84 81 80 74 

Participants who have not attained eligibility ................................ 84 73 72 73 76 

Future participants........................................................................ 25 16 14 14 13 

All current and future participants.............................................. 201 173 167 167 162 

Present value of future expenditures less future revenues 7

.............. 101 1 91 2 87 3 83 4 79 5

 

Black Lung (Part C): (Note 23) 

Present value of future expenditures less future revenues 8

.............. (4) 9 (5) 10 (4) 11 (4) 12 (5) 13

1 The projection period is 1/1/2006 - 12/31/2080 and the valuation date is 1/1/2006. 2 The projection period is 1/1/2005 - 12/31/2079 and the valuation date is 1/1/2005. 3 The projection period is 1/1/2004 - 12/31/2078 and the valuation date is 1/1/2004. 4 The projection period is 1/1/2003 - 12/31/2077 and the valuation date is 1/1/2003. 5 The projection period is 1/1/2002 - 12/31/2076 and the valuation date is 1/1/2002. 6 These amounts represent the present value of the 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’ (CMS) Financial Report but are not income from the Governmentwide perspective of this report. 7 These amounts approximate the present value of the financial interchange and transfers from the General Fund of the Treasury to the 

Social Security Equivalent Benefit (SSEB) 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 9/30/2006 - 9/30/2040 and the valuation date is 9/30/2006. 10 The projection period is 9/30/2005 - 9/30/2040 and the valuation date is 9/30/2005. 11 The projection period is 9/30/2004 - 9/30/2040 and the valuation date is 9/30/2004. 12 The projection period is 9/30/2003 - 9/30/2040 and the valuation date is 9/30/2003. 13 The projection period is 9/30/2002 - 9/30/2040 and the valuation date is 9/30/2002. 

Totals do not necessarily equal the sum of components due to rounding. 

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

This page is intentionally blank.
NOTES TO THE FINANCIAL STATEMENTS 45

United States Government 

Notes to the Financial Statements 

for the Years Ended September 30, 2006, 

and September 30, 2005 

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 the 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 because it is not 

required by law to submit financial statement information to Treasury. The Appendix section of this report contains 

a list of significant Government entities included in the Financial Report, as well as examples of entities excluded. 

The excluded entities are not part of the Financial Report because they are Government sponsored enterprises, such 

as the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation 

(Freddie Mac), etc.; or their activities are not included in the Federal budget's totals, such as the Thrift Savings 

Fund, and the Board of Governors of the Federal Reserve System. 

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 except that the costs of social insurance programs including 

Social Security, Medicare, Railroad Retirement, Black Lung, and Unemployment Insurance are recognized only 

for amounts currently due and payable. 

• Nonexchange (unearned) 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. 

Beginning in fiscal year 2006, the Federal Government has implemented the requirements of new standards 

related to earmarked funds, social insurance, heritage assets and stewardship land, and required Governmentwide 

reporting. 
46 NOTES TO THE FINANCIAL STATEMENTS 

• Earmarked funds: 

As required by SFFAS No. 27,1

 the Federal Government now separately identifies: (1) earmarked fund 

activities in the statement of operations and changes in net position: and (2) the portion of net position attributable to 

earmarked fund activities on the balance sheet. As required by SFFAS No. 27, fiscal year 2005 balances and 

amounts have not been restated to show this separate identification of earmarked fund activities and net position. For 

further information on these funds, see Note 20—Earmarked Funds. 

• Social Insurance: 

As required by SFFAS Nos. 17, 25, 26, and 28,2

 the Statements of Social Insurance and related note on 

significant underlying assumptions were reclassified from required supplemental stewardship information to basic 

information. For further information on social insurance, see Note 23—Social Insurance. 

• Heritage Assets and Stewardship Land: 

As required by SFFAS No. 29,3

 information related to heritage assets and stewardship land was reclassified 

from required supplemental stewardship information to basic information. For further information on stewardship 

land and heritage assets, see Note 24—Stewardship Land, and Note 25—Heritage Assets, respectively. 

• Governmentwide Reporting: 

SFFAS No. 324

 amends standards issued prior to January 2003 to specify disclosure requirements appropriate 

for the Financial Report based on the guidance contained in Statements of Federal Financial Accounting Concepts 

No. 4 (SFFAC 4). Some disclosure requirements contained in previously issued standards were modified to allow 

aggregation and reduce detail for Governmentwide reporting while other disclosure requirements were eliminated 

because of excessive detailed information required that is inappropriate for a Governmentwide report consistent with 

the guidance contained in SFFAC 4. 

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 represents 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. 

 

1 SFFAS No. 27, Identifying and Reporting Earmarked Funds. 2 SFFAS No. 17, Accounting for Social Insurance, No. 25, Reclassification of Stewardship Responsibilities and Eliminating the Current Services 

Assessment; SFFAS No. 26, Presentation of Significant Assumptions for the Statement of Social Insurance: Amending SFFAS 25, and SFFAS 

No. 28, Deferral of the Effective Date of Reclassification of the Statement of Social Insurance: Amending SFFAS 25 and 26. 3

 SFFAS No. 29, Heritage Assets and Stewardship Land. 4 SFFAS No. 32, Consolidated Financial Report of the United States Government Requirements: Implementing SFFAC 4 “Intended Audience 

and Qualitative Characteristics for the Consolidated Financial Report of the United States Government.” 
NOTES TO THE FINANCIAL STATEMENTS 47

The category taxes receivable consists 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. 

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. 

The related property portion of the inventory and related property line 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. 

F. Property, Plant, and Equipment 

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 

comprises approximately 68 percent of the Government’s reported property, plant, and equipment as of September 30, 

2006. During fiscal year 2006, DOD changed its methodology to calculate “a more accurate” value for military 

equipment. DOD replaced the use of data from the Bureau of Economic Analysis (BEA) with an estimation 

methodology for military equipment based on internal DOD records to calculate a value for military equipment. DOD’s 

prior use of the BEA data was determined to be incorrect and the new methodology reflects a correction of previously 

disclosed amounts 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. Automated data processing 

(internal use) software includes purchased commercial off-the-shelf software, contractor-developed software, and software 

that was internally developed by agency employees. 

Please refer to the individual financial statements of DOD, National Aeronautics and Space Administration (NASA), 

the Department of Energy (DOE), the United States Postal Service (USPS), and the Tennessee Valley Authority (TVA) 

for significant detailed information on the useful lives and related capitalization thresholds for property, plant, and 

equipment. These agencies comprise 83 percent of the Government’s total reported net property, plant, and equipment of 

$688.5 billion as of September 30, 2006. 
48 NOTES TO THE FINANCIAL STATEMENTS 

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, post-retirement health benefits, life insurance 

benefits, Federal Employee and Compensation Act benefits and veterans’ compensation and burial 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 veteran’s pension benefits is disclosed but is not included in the 

Federal employee and veteran benefits payable line. However, the estimated present value for veteran health benefits 

is not estimated; 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. 

H. Environmental and Disposal Liabilities 

Environmental and disposal liabilities are recorded at the estimated current cost of removing, containing and/or 

disposing of hazardous waste and environmental contamination, 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 hazardous waste, only the estimable portion of the liability, typically safe containment, is 

recorded. 

I. 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. 

J. Contingent Liabilities 

Liabilities for contingencies are recognized on the balance sheets when both: 

• A past transaction or event has occurred. 

• 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, are disclosed in Note 18—Contingencies. 

K. Commitments 

In the normal course of business, the Government has a number of unfulfilled commitments that may require 

the use of its financial resources. Note 19—Commitments describes the components of the Government’s actual 
NOTES TO THE FINANCIAL STATEMENTS 49

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 

included in the Commitments section. 

L. 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, Note 20—Earmarked Funds, and Note 21—Dedicated Collections. 

M. 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 agent. They process Federal payments and deposits to Treasury’s account and 

service Treasury securities. FRBs owned $764.6 billion and $732.7 billion of Treasury securities held by the public 

as of September 30, 2006, and 2005, respectively. FRB earnings that exceed statutory amounts of surplus 

established for FRBs are paid to the Government and are recognized as nonexchange revenue. Those earnings 

totaled $29.9 billion and $19.3 billion for the years ended September 30, 2006, and 2005, respectively. The primary 

source of these earnings is from interest earned on Treasury securities held by the FRBs. Also, as described in Note 

15—Other Liabilities, the FRB holds certificates and special drawing rights certificates. 

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 does not guarantee payment of the liabilities of Government-sponsored enterprises such as 

the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, which are privately 

owned. These enterprises also are excluded from the reporting entity. 

N. 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, 

• Timing differences and errors in Federal agencies’ reporting. 

Refer to the Supplemental Information—Unmatched Transactions and Balances for detailed information. 
50 NOTES TO THE FINANCIAL STATEMENTS 

Note 2. Cash and Other Monetary Assets 

 

Cash and Other Monetary Assets as of September 30 

 (In billions of dollars) 2006 2005 

 

Operating cash ...................................................................................... 43.6 27.9 

Other cash-not restricted....................................................................... 13.2 10.5 

Other cash-restricted............................................................................. 2.9 4.5 

Total cash ........................................................................................... 59.7 42.9 

International monetary assets ............................................................... 27.2 32.0 

Gold ....................................................................................................... 11.0 10.9 

Total cash and other monetary assets................................................ 97.9 85.8 

 

Cash 

Total cash consists of: 

• Operating Cash of the Federal Government representing balances from tax collections, customs duties, 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). 

Checks outstanding are netted against operating cash until they are cleared by the Federal Reserve System. 

• Other cash not included in the operating cash balance includes balances representing cash equivalents and other 

funds held in agencies’ books, such as demand deposits, amounts held in trust, deposits in transit, imprest funds, 

undeposited collections, and amounts representing the balances of petty cash. Restricted cash represents cash that 

is restricted due to the imposition on cash deposits by law, regulation, or agreement. 

Operating Cash of the Federal Government held by depositary institutions is either insured (for balances up to 

$100,000) by the Federal Deposit Insurance Corporation or collateralized by securities pledged by the depositary 

institution or through securities held under reverse repurchase agreements. 

International Monetary Assets 

International monetary assets include the U.S. reserve position in the International Monetary Fund (IMF), U.S. 

holdings of Special Drawing Rights (SDRs), and official reserves of foreign currency and gold. 

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 payments system to facilitate growth in the world economy. Its primary activities are 

surveillance of member economies, financial assistance as appropriate, and technical assistance. 

Only a portion of the U.S. financial subscriptions to the IMF is made in the form of reserve assets, the 

remainder is provided in the form of a letter of credit from the United States to the IMF. 

The balance available under the letter of credit totaled $48.1 billion and $40.4 billion for the years ended 

September 30, 2006, and 2005, respectively. The U.S. reserve position in the IMF has a U.S. dollar equivalent of 

$6.6 billion and $13.2 billion for the years ended September 30, 2006, and 2005, respectively.

SDRs are 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 $8.7 billion and $8.2 billion equivalent for the years ended September 30, 2006, and 2005, respectively. 
NOTES TO THE FINANCIAL STATEMENTS 51

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 for the years ended September 30, 2006, and 2005 and are included in Note 15—Other Liabilities. 

As of September 30, 2006, and 2005, other liabilities included $7.2 billion and $7.1 billion, respectively, 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 

Gold is valued at the statutory price of $42.2222 per fine troy ounce. The number of fine troy ounces was 

261,498,900 and 258,713,310 as of September 30, 2006, and 2005, respectively. The market value of gold on the 

London Fixing as of the reporting date was $599 and $473 per fine troy ounce for the years ended September 30, 

2006, and 2005, respectively. Gold totaling $11.0 and $10.9 billion for the years ending September 30, 2006, and 

2005, respectively, 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. See Note 15—Other Liabilities. 

Note 3. Accounts and Taxes Receivable, Net 

Accounts receivable includes related interest receivable of $5.4 billion and $4.8 billion for the years ended 

September 30, 2006, and 2005, respectively, and represents claims to cash or other assets from entities outside the 

Government. 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. 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. Accounts receivable are net of an allowance for uncollectible accounts. The allowance 

amounts are $12.5 billion and $13.2 billion for the years ended September 30, 2006 and 2005, respectively. 

Taxes receivable are the gross tax receivables net of allowance for doubtful accounts. Gross taxes receivable 

consists primarily of assessments, penalties, and related interest that were not paid or abated and which the taxpayers 

have agreed the amounts are owed or a court has determined the assessments are owed. The allowance for doubtful 

accounts is based on projections of collectibility from a statistical sample of unpaid tax assessments. 
52 NOTES TO THE FINANCIAL STATEMENTS 

Note 4. Loans Receivable and Loan Guarantee Liabilities, Net 

The Government uses two methods, direct loans and loan guarantee programs, to accomplish the same goals. 

These goals are to promote the Nation’s welfare by making direct Federal loans and guaranteeing non-federal loans 

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 the fiscal yearend. The amount of the longterm 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 the end of this fiscal 

year. 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. 

 

 Accounts and Taxes Receivable as of September 30 

 

(In billions of dollars) 2006 2005 

Department of Agriculture...................................................................... 8.6 9.4 

Department of Defense.......................................................................... 7.9 7.6 

Social Security Administration ............................................................... 7.6 7.0 

Department of Energy............................................................................ 4.0 4.0 

Department of Health and Human Services.......................................... 3.2 2.1 

Department of the Interior...................................................................... 2.5 2.7 

Pension Benefit Guaranty Corporation.................................................. 2.0 1.7 

Tennessee Valley Authority................................................................... 1.4 1.1 

Department of Veterans Affairs ............................................................. 1.2 0.9 

Department of Homeland Security ........................................................ 1.2 0.5 

Department of Labor.............................................................................. 1.1 1.0 

All other departments............................................................................. 5.4 5.7 

Accounts receivable, net........................................................................ 46.1 43.7 

 

Gross taxes receivable .......................................................................... 94.3 90.7 

Allowance for doubtful accounts............................................................ (71.6) (68.3) 

Taxes receivable, net............................................................................. 22.7 22.4 

 

Total accounts and taxes receivable, net............................................ 68.8 66.1 

 
NOTES TO THE FINANCIAL STATEMENTS 53

 

Direct Loans and Loan Guarantees as of September 30 

Face Value 

of Loans 

Outstanding 

Long-term 

Cost of 

Loans and 

Guarantees 

Outstanding

Net Loans 

Receivable 

Amount 

Guaranteed 

by the 

Government 

Subsidy 

Expense for 

the Fiscal 

Year Ended 

September 30

(In billions of dollars) 2006 

 2005 

(Restated) 2006 2005 2006

 

2005 2006 

2005 

(Restated) 2006 2005

Direct Loan Programs: 

Federal Direct Student Loans - 

Education............................................ 101.0 97.7 8.3 2.0 92.7 95.7 6.6 5.2 

Electric Loans - USDA.......................... 34.2 30.2 1.6 2.2 32.6 28.0 (0.3) (0.1)

Rural Housing Services - USDA.......... 26.8 26.8 7.0 6.0 19.8 20.8 1.0 (0.5)

Federal Family Education Loans - 

Education .................................................. 21.2 20.2 7.6 8.5 13.6 11.7 - - 

Water and Environmental Loans - 

USDA...................................................... 8.7 8.3 0.8 0.8 7.9 7.5 - - 

Farm Loans - USDA ............................. 6.7 6.9 0.5 0.6 6.2 6.3 0.1 0.1 

Housing for the Elderly and Disabled 

- HUD.................................................. 5.5 6.5 (0.1) (0.1) 5.6 6.6 - - 

Export-Import Bank Loans..................... 6.0 8.4 1.5 2.9 4.5 5.5 - - 

U.S. Agency for International 

Development ...................................... 7.2 7.7 2.4 2.6 4.8 5.1 - - 

Housing and Urban Development ....... 3.9 4.0 (0.4) (0.1) 4.3 4.1 (0.2) 0.4 

Telecommunications Loans - USDA ... 4.0 4.1 - 0.1 4.0 4.0 - - 

Foreign Military Financing Program..... 3.7 4.2 - - 3.7 4.2 - - 

All Other Direct Loan Programs ............. 32.3 32.8 11.2 10.5 21.1 22.3 1.2 (0.1)

Total..................................................... 261.2 257.8 40.4 36.0 220.8 221.8 8.4 5.0 

 

Guaranteed Loan Programs: 

Federal Housing Administration 

Loans - HUD ............................................ 434.2 454.3 3.5 4.6 395.8 416.4 (1.4) (1.2)

Federal Family Education Loans - 

Education............................................ 324.6 289.2 52.6 30.5 321.0 288.1 28.0 9.8 

Veterans Housing Benefit Programs - 

VA...................................................... 203.2 202.1 3.3 3.5 61.3 62.1 (0.8) (1.5)

Small Business Loans - SBA ................ 67.2 63.3 1.6 2.1 54.6 51.1 - (0.3)

Export-Import Bank Guarantees........... 49.4 50.9 1.3 2.3 49.4 50.9 0.2 0.2 

Rural Housing Services - USDA.......... 15.9 14.8 0.6 0.6 14.3 13.3 0.1 0.1 

Israeli Loan Guarantee Program - AID. 12.9 13.0 1.2 1.1 12.9 13.0 - 0.2 

Overseas Private Investment 

Corporation Credit Program .............. 4.1 3.6 0.6 0.6 4.1 3.6 - - 

Export Credit Guaranteed Programs - 

USDA.................................................. 3.0 4.2 0.2 0.3 2.9 4.1 (0.3) (0.3)

Business and Industry Loans - USDA. 3.9 4.2 0.3 0.4 2.9 3.1 - 0.1 

Federal Ship Financing Fund (Title 

XI) - DOT................................................ 2.9 3.1 0.3 0.4 2.9 3.1 - - 

All Other Guaranteed Loan Programs. 18.2 20.2 0.9 1.3 16.6 18.6 0.1 2.3

Total Guaranteed Loan Programs .... 1,139.5 1,122.9 66.4 47.7 938.7 927.4 25.9 9.4 

 
54 NOTES TO THE FINANCIAL STATEMENTS 

Net loans receivable includes related interest and foreclosed property, and is included in the assets section of 

the balance sheets. Foreclosed property is property that is transferred from borrowers to a Federal credit program, 

through foreclosure or other means, in partial or full settlement of post-1991 direct loans or as a compensation for 

losses that the Government sustained under post-1991 loan guarantees. Please refer to the individual financial 

statements of the Department of Veterans Affairs (VA) and the Department of Housing and Urban Development 

(HUD) for significant detailed information regarding foreclosed property. 

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 major education 

loan 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 major education loan 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 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 unable to obtain private commercial credit and 

through this supervised credit to graduate its borrowers to commercial credit. The CCC offers both guarantee credit 

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 

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. 

• Multifamily 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, Federal Housing Administration (FHA) provides 

mortgage insurance to encourage lenders to make credit available to expand home ownership. FHA predominately 

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. 

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. 

The Export-Import Bank (EXIM) aids in financing and promoting U.S. exports. To accomplish its objectives, 

the bank’s authority and resources are used to: 

• Assume commercial and political risk that exporters or private institutions are unwilling or are unable to 

undertake. 

• Overcome maturity and other limitations in private sector financing. 

• Assist U.S. exports to meet foreign officially sponsored export credit competition. 

• Provide leadership and guidance in export financing to the U.S. exporting and banking communities and to 

foreign borrowers. 

The average repayment terms for these loans are approximately 7 years. 
NOTES TO THE FINANCIAL STATEMENTS 55

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 Small Business Administration general business loan guarantees and disaster 

loans; and the Farm Service Agency’s farm ownership, emergency, and disaster loans. 

Government-sponsored enterprises have the authority to request borrowings totaling $10 billion, subject to the 

approval of the Secretary of the Treasury. The face value and amounts guaranteed by the Federal government of 

guaranteed loans related to Small Business loans—SBA as of September 30, 2005 were restated to reduce both by 

$10 billion. Refer to Note 26—Restatements for further detail. 

Please refer to the individual financial statements of the agencies specified above for significant detailed 

information regarding direct and guaranteed loans. 

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) 2006 2005 

 

Inventory purchased for resale ................. 86.5 0.7 87.2 80.0 0.6 80.6 

Inventory held in reserve for future sale ... - - - - - - 

Inventory and operating material and 

supplies held for repair ........................... 48.1 0.5 48.6 45.3 0.4 45.7 

Inventory—excess, obsolete, and 

unserviceable ......................................... 9.8 0.1 9.9 6.8 - 6.8 

Operating materials and supplies held 

for use..................................................... 130.5 4.6 135.1 126.3 5.2 131.5 

Operating materials and supplies held 

in reserve for future use ......................... - 0.2 0.2 - 0.2 0.2 

Operating materials and supplies— 

excess, obsolete, and unserviceable ..... 2.1 (0.2) 1.9 3.7 (0.3) 3.4 

Stockpile materials.................................... 0.1 42.9 43.0 0.1 42.2 42.3 

Stockpile materials held for sale ............... 1.0 0.3 1.3 1.2 0.3 1.5 

Forfeited Property ..................................... - 0.2 0.2 - 0.1 0.1 

Other related property............................... 0.8 0.8 1.6 0.9 1.1 2.0 

Total allowance for inventories and 

related property ...................................... (47.2) (0.5) (47.7) (41.7) (0.4) (42.1)

Total inventories and related property, net .. 231.7 49.6 281.3 222.6 49.4 272.0 

 

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, which accounts for nearly all of the inventory purchased for resale in the Government, generally uses 

the Latest Acquisition Cost (LAC) method, which is revalued for holding gains and losses. DOD is transitioning 

their inventory to the moving average cost (MAC) method to be compliant with SFFAS No. 3 and approximately 60 

percent of their inventory is now reported using MAC. 

Inventory held in reserve for future sale is inventory not readily available, or inventory that will be needed in 

the future. 

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). 
56 NOTES TO THE FINANCIAL STATEMENTS 

Inventory—excess, obsolete, and unserviceable: 

• Excess inventory is that which 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 that which no longer is 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 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. 

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 that they will eventually be needed. DOD, which accounts for most of the reported operating 

materials and supplies held for use, uses LAC and Standard Price under the purchase and consumption methods of 

accounting and does not adjust for holding gains and losses, which does not approximate historical cost. 

Operating materials and supplies—excess, obsolete, and unserviceable: 

• 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 in all others is stockpile materials held in reserve, with the majority 

of it being reported by DOE. Please refer to their individual financial statements for more information on stockpile 

materials. 

Other related property: 

• 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 of only 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 included as 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. 

• Other property not classified above. 
NOTES TO THE FINANCIAL STATEMENTS 57

Note 6. Property, Plant, and Equipment, Net 

The category of property, plant, and equipment consists of tangible assets including land, buildings, structures, 

automated data processing software, and other assets used to provide goods and services. Depreciation and 

amortization is recognized using the straight-line method over the estimated useful lives of the assets. 

 

Property, Plant, and Equipment as of September 30, 2006 

 Cost 

Accumulated 

Depreciation/ 

Amortization Net 

(In billions of dollars) Defense

 All 

 Others Defense

All 

Others Defense 

All 

Others

Buildings, structures, and 

facilities.................................... 167.9 180.2 98.4 91.9 69.5 88.3 

Furniture, fixtures, and 

equipment................................ 700.4 127.7 338.6 76.6 361.8 51.1 

Construction in progress ............ 20.0 47.2 N/A N/A 20.0 47.2 

Land ........................................... 10.5 11.0 N/A N/A 10.5 11.0 

Automated data processing 

software................................... 8.7 8.9 5.3 3.8 3.4 5.1 

Assets under capital lease......... 0.6 1.6 0.5 0.6 0.1 1.0 

Leasehold improvements........... 0.3 4.4 0.2 2.5 0.1 1.9 

Other property, plant, and 

equipment................................ 0.1 50.8 - 33.4 0.1 17.4 

Subtotal ................................... 908.5 431.8 443.0 208.8 465.5 223.0 

Total property, plant, and 

equipment, net ................... 1,340.3 651.8 688.5 

 

Property, Plant, and Equipment as of September 30, 2005 (Restated) 

 Cost 

Accumulated 

Depreciation/ 

Amortization Net 

(In billions of dollars) Defense

All 

Others Defense

All 

Others Defense 

All 

Others

Buildings, structures, and 

facilities.................................... 163.9 172.7 95.4 87.3 68.5 85.4 

Furniture, fixtures, and 

equipment (restated) ............... 665.5 121.7 316.1 71.1 349.4 50.6 

Construction in progress ............ 20.3 44.0 N/A N/A 20.3 44.0 

Land ........................................... 10.5 10.7 N/A N/A 10.5 10.7 

Automated data processing 

software................................... 7.9 7.4 4.4 2.7 3.5 4.7 

Assets under capital lease......... 0.6 1.6 0.4 0.5 0.2 1.1 

Leasehold improvements........... 0.3 4.0 0.1 2.3 0.2 1.7 

Other property, plant, and 

equipment................................ 0.2 49.3 - 30.1 0.2 19.2 

Subtotal ................................... 869.2 411.4 416.4 194.0 452.8 217.4 

Total property, plant, and 

equipment, net ................... 1,280.6 610.4 670.2 

 
58 NOTES TO THE FINANCIAL STATEMENTS 

For physical quantity information related to the multiuse heritage assets, refer to Note 25—Heritage Assets. 

Due to DOD’s correction of errors, the fiscal year 2005 furniture, fixtures, and equipment acquisition costs, 

accumulated depreciation, and the net balances were restated downward by $600.9 billion, $592.7 billion, and $8.2 

billion, respectively. Refer to Note 26—Restatements for further detail. 

Please refer to the individual financial statements of DOD, NASA, DOE, USPS, and the TVA for significant 

detailed information for property, plant and equipment. These agencies comprise 83 percent of the Government’s 

total reported net property, plant, and equipment of $688.5 billion as of September 30, 2006. 

Note 7. Securities and Investments 

 

Securities and Investments as of September 30 

(In billions of dollars) 2006 2005 

 

Securities and investments: 

 Pension Benefit Guaranty Corporation1 ................................................ 35.5 30.8 

NRRIT.................................................................................................... 28.6 26.1 

Exchange Stabilization Fund................................................................. 9.3 9.4 

 All other ................................................................................................ 10.4 9.0 

Total Securities and Investments........................................................ 83.8 75.3 

 1 For more information, see the Social Insurance, Railroad Retirement, segment in the Supplemental Information section. 

 

These securities and investments do not include nonmarketable Treasury securities, which have been 

eliminated in consolidation. They are presented at cost, net of unamortized premiums and discounts. The Pension 

Benefit Guaranty Corporation (PBGC) invests primarily in fixed maturity and equity securities. As discussed in the 

Railroad Retirement section of Supplemental Information—Social Insurance, the NRRIT 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, a social insurance program. Treasury’s Exchange Stabilization Fund invests primarily 

in foreign currency, bonds, and bills. 
NOTES TO THE FINANCIAL STATEMENTS 59

Note 8. Other Assets 

 

Other Assets as of September 30 

 

(In billions of dollars) 2006 2005 

 

Advances and prepayments .................................................................... 29.9 32.8 

Other ........................................................................................................ 25.5 23.9 

Total other assets.................................................................................. 55.4 56.7 

 

Other assets include advances and prepayments which 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 carriers 

(pending disposition on behalf of OPM), and receivables from bank and thrift resolutions. 

Note 9. Accounts Payable 

 

Accounts Payable as of September 30 

(In billions of dollars) 2006 2005 

 

Department of Defense................................................................................. 27.4 28.6 

Department of Agriculture............................................................................. 4.2 4.3 

Department of Homeland Security................................................................ 2.8 3.3 

Agency for International Development.......................................................... 2.3 3.2 

Department of Justice ................................................................................... 2.3 1.9 

Pension Benefit Guaranty Corporation ......................................................... 2.2 9.3 

U.S. Postal Service ....................................................................................... 2.0 2.3 

General Services Administration................................................................... 2.0 2.1 

National Aeronautics and Space Administration........................................... 1.7 2.1 

Department of Energy................................................................................... 1.3 1.4 

Department of State...................................................................................... 1.3 1.3 

Department of the Interior............................................................................. 1.1 1.0 

Tennessee Valley Authority .......................................................................... 1.1 0.8 

Department of Labor ..................................................................................... 0.9 1.1 

Department of Education .............................................................................. 0.9 0.7 

All other departments.................................................................................... 4.9 4.5 

Total accounts payable............................................................................ 58.4 67.9 

 

The accounts payable table includes accounts payable for goods and property ordered and received, services 

rendered by other than Federal employees, and accounts payable for cancelled appropriations. 
60 NOTES TO THE FINANCIAL STATEMENTS 

Note 10. Federal Debt Securities Held by the Public and 

Accrued Interest 

Definitions of Debt 

Debt Held by the Public⎯Federal debt held outside the Government by individuals, 

corporations, State or local governments, Federal Reserve banks, and foreign governments and 

central banks. 

Intragovernmental Debt Holdings⎯Federal debt held by Government trust funds, revolving 

funds, and special funds.
 NOTES TO THE FINANCIAL STATEMENTS 61

 

Federal Debt Securities Held by the Public and Accrued Interest 

(In billions of dollars) 

 Balance 

September 

30, 2005 

Net 

Change

During 

Fiscal Year

2006 

 Balance 

September 

30, 2006 

Average 

Interest 

Rate 

2006 

Average 

Interest 

Rate 

2005 

 

Treasury Securities (Public): 

Marketable securities: 

Treasury bills ................................ 910.3 (1.8) 908.5 5.0% 3.4% 

Treasury notes.............................. 2,328.2 117.1 2,445.3 4.2% 3.7% 

Treasury bonds............................. 520.5 14.0 534.5 7.6% 7.9% 

Treasury inflation-protected 

securities (TIPS)......................... 307.0 88.5 395.5 2.3% 2.4% 

Total marketable Treasury 

securities ................................. 4,066.0 217.8 4,283.8 

 

Nonmarketable securities ............. 535.2 24.1 559.3 5.0% 4.9% 

Net unamortized premium/ 

(discounts)............................... (35.5) (4.7) (40.2) 

Total Treasury securities, net 

(public) .................................. 4,565.7 237.2 4,802.9 

 

Agency Securities: 

Tennessee Valley Authority.......... 22.9 - 22.9 

All other agencies ......................... 0.3 (0.1) 0.2 

Total agency securities, net of 

unamortized premiums and 

discounts ................................. 23.2 (0.1) 23.1 

Accrued interest payable ............. 35.3 6.2 41.5 

 

Total Federal debt securities 

held by the public and 

accrued interest ....................... 4,624.2 243.3 4,867.5 

 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. 

This table details Government borrowing to finance operations and shows marketable and nonmarketable 

securities at face value less net unamortized discounts including accrued interest. 

Securities that represent Federal debt held by the public are issued primarily by the Treasury and include: 

• Interest-bearing marketable securities (bills, notes, bonds, and inflation-protected). 

• Interest-bearing nonmarketable securities (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 2006 and 2005. 

As of September 30, 2006, and 2005, respectively, $8,420.3 billion and $7,871.0 billion of debt were subject to a 

statutory limit (31 U.S.C. § 3101). That limit was $8,965.0 billion as of September 30, 2006, and $8,184.0 billion as of 
62 NOTES TO THE FINANCIAL STATEMENTS 

September 30, 2005. 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 table 

below). 

Intragovernmental debt holdings represent the portion of the gross Federal debt held as investments by 

Government entities. This includes trust funds that are earmarked funds. For fiscal year 2005, these trust funds were 

reported as dedicated collections. For more information on earmarked funds and dedicated collections, see Note 

20─Earmarked Funds and Note 21─Dedicated Collections. These intragovernmental debt holdings are eliminated in 

the consolidation of these financial statements. 

 

Intragovernmental Debt Holdings: Federal Debt Securities 

Held as Investments by Government Accounts as of September 30 

(In billions of dollars) 

 Balance 

 2005 

Net 

Change 

During 

Fiscal Year 

2006 

Balance 

2006 

 

Social Security Administration, Federal Old-Age and 

Survivors Insurance.................................................... 1,616.1 177.0 1,793.1 

Office of Personnel Management, Civil Service 

Retirement and Disability............................................ 660.8 29.1 689.9 

Department of Health and Human Services, Federal 

Hospital Insurance...................................................... 277.3 24.9 302.2 

Social Security Administration, Federal Disability 

Insurance .................................................................... 193.3 8.9 202.2 

Department of Defense, Military Retirement Fund........ 177.3 4.5 181.8 

Department of Defense, Medicare-Eligible Retiree 

Health Care Fund ....................................................... 52.9 19.8 72.7 

Department of Labor, Unemployment........................... 54.8 11.4 66.2 

Federal Deposit Insurance Corporation Funds ............. 48.2 1.1 49.3 

Pension Benefit Guaranty Corporation Fund ................ 13.0 23.6 36.6 

Department of Energy, Nuclear Waste Disposal........... 33.5 3.0 36.5 

Department of Health and Human Services, Federal 

Supplementary Medical Insurance ............................. 17.2 15.1 32.3 

Office of Personnel Management, Employees' Life 

Insurance....................................................................... 29.5 1.8 31.3 

Housing and Urban Development, Federal Housing .... 22.6 (0.6) 22.0 

Department of Treasury, Exchange Stabilization 

Fund............................................................................ 15.2 0.5 15.7 

Office of Personnel Management, Employees Health 

Benefits....................................................................... 12.5 2.3 14.8 

Department of State, Foreign Services Retirement 

and Disability Fund ..................................................... 13.4 0.5 13.9 

Department of Transportation, Highway Trust Fund..... 8.3 2.7 11.0 

Department of Veterans Affairs, National Service 

Life Insurance Fund...................................................... 10.6 (0.4) 10.2 

Department of Transportation, Airport and Airway 

Trust Fund .................................................................. 10.0 (2.0) 8.0 

All other programs and funds ........................................ 65.0 9.2 74.2 

Subtotal....................................................................... 3,331.5 332.4 3,663.9 

Unamortized net (discounts)/premiums ........................ 14.7 (15.9) (1.2) 

Total intragovernmental debt holdings, net.............. 3,346.2 316.5 3,662.7 
 NOTES TO THE FINANCIAL STATEMENTS 63

Note 11. Federal Employee and Veteran Benefits Payable 

The Government offers its employees life and health insurance, as well as retirement and other benefits. These 

benefits, which include actuarial and amounts due and payable to beneficiaries and health care carriers, apply to 

civilian and military employees. 

The Federal Government administers more than 40 pension plans. OPM administers the largest civilian plan. 

DOD, meanwhile, 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. The changes in the accrued 

post-retirement pension and health benefit liability and components of related expense for the years ended 

September 30, 2006, and 2005, respectively, are presented below. 

 

Federal Employee and Veteran Benefits Payable as of September 30 

 

 Civilian Military Total

(In billions of dollars) 2006 2005 2006 2005 2006 2005 

 

Pension and accrued 

benefits .............................. 1,349.0 1,273.8 967.1 895.4 2,316.1 2,169.2 

Post-retirement health and 

accrued benefits ................ 295.2 290.7 837.2 833.9 1,132.4 1,124.6 

Veterans compensation 

and burial benefits ............. N/A N/A 1,153.8 1,122.6 1,153.8 1,122.6 

Life insurance and accrued 

benefits .............................. 34.2 32.9 - - 34.2 32.9 

FECA benefits ...................... 14.4 14.3 22.2 22.7 36.6 37.0 

Liability for other benefits ..... 1.5 1.3 4.4 4.2 5.9 5.5 

Total Federal employee 

and veteran benefits 

payable............................ 1,694.3 1,613.0 2,984.7 2,878.8 4,679.0 4,491.8 

 

 

Change in Pension and Accrued Benefits 

(In billions of dollars) Civilian Military Total

 

Actuarial accrued pension liability 

as of September 30, 2005 .......................................... 1,273.8 895.4 2,169.2 

 

Pension Expense: 

Normal costs............................................................... 26.8 15.6 42.4 

Plan amendment changes.......................................... - 0.1 0.1 

Assumption changes .................................................. 1.0 35.4 36.4 

Interest on liability....................................................... 78.0 55.0 133.0 

Prior (and past) service cost....................................... - - - 

Actuarial (gains)/losses............................................... 29.7 6.1 35.8 

Total pension expense............................................. 135.5 112.2 247.7 

Less benefits paid....................................................... 60.3 40.5 100.8 

Actuarial accrued pension liability 

as of September 30, 2006 ..................................... 1,349.0 967.1 2,316.1 

 
64 NOTES TO THE FINANCIAL STATEMENTS 

Significant Long-Term Economic Assumptions Used in Determining 

Pension Liability and the Related Expense 

Civilian Military 

(In percentages) 2006 2005 2006 2005 

 

Rate of interest................................................................... 6.25% 6.25% 6.00% 6.25%

Rate of inflation .................................................................. 3.50% 3.25% 3.00% 3.00%

Projected salary increases................................................. 4.25% 4.00% 3.75% 3.75%

 

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, 2005................................ 290.7 833.9 1,124.6 

 

Post-Retirement Health Benefits Expense: 

Normal costs..................................................................... 11.2 21.0 32.2 

Interest on liability............................................................. 17.1 52.9 70.0 

Other actuarial (gains)/losses........................................... (12.5) (53.8) (66.3) 

Total post-retirement health benefits expense .............. 15.8 20.1 35.9 

Less claims paid............................................................... 11.3 16.8 28.1 

Actuarial accrued post-retirement health benefits 

liability, as of September 30, 2006.............................. 295.2 837.2 1,132.4 

 

 

Significant Long-Term Economic Assumptions Used in 

Determining Post-Retirement Health Benefits and the Related 

Expense 

 

 

 Civilian Military 

(In percentages) 2006 2005 2006 2005 

 

Rate of interest................................................ 6.25% 6.25% 6.25% 6.25% 

Rate of health care cost inflation..................... 7.00% 7.00% 6.25% 6.25% 

 

Separate boards of actuaries for OPM and DOD determine the actuarial assumptions used in calculating the 

pension liability and the post-retirement health benefit liability for the civilian and military personnel. Both 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. The board for DOD uses a range of rates for the inflation and the projected salary 

increases, with an ultimate rate for the long term. The board for DOD also uses different health care cost inflation 

rates for inpatient, outpatient, and prescription drugs. The long-term ultimate rate is shown in the tables above. 
 NOTES TO THE FINANCIAL STATEMENTS 65

The long-term ultimate rate for fiscal year 2006 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 2006 is 7.20 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 20—Earmarked Funds. 

The Federal Retirement Thrift Investment Board, an independent Government agency, administers the Thrift 

Savings Plan (TSP) Fund. The TSP Fund includes the C-Fund, S-Fund, F-Fund, I-Fund, and G-Fund, and the newly 

established L-Funds. These financial statements exclude this fund because the CSRS and FERS employees own its 

assets. 

Treasury securities held in the G-Fund are included and classified as Treasury securities held by the public. 

Beginning January 2006, there are no limits on the percentage of contribution to the plan for CSRS and FERS 

employees, as long as they do not exceed the Internal Revenue Service elective deferral limit, which is $15,000 for 

2006. FERS participants received the following: Agency Automatic (1 percent) Contributions; Agency Matching 

Contributions; and vesting is immediate for agency automatic contributions and attributable earnings. Vesting is 

generally 3 years for agency matching contributions and attributable earnings. To receive the maximum agency 

Matching Contribution, FERS employees must contribute at least five percent of the basic pay each pay period 

during the year. (The first five percent of the basic pay each pay period is matched dollar-for-dollar on the first 

percent, and 50 cents on the dollar for the next two percent.) CSRS employees do not receive any agency 

contributions. 

The G-Fund held $72.2 billion and $63.5 billion in nonmarketable Treasury securities as of September 30, 

2006, and 2005, respectively. The Federal Government’s related liability is included in total Federal debt securities 

held by the public and accrued interest in the balance sheets. 

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. 

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 an 

insurance premium 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. 

Other 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 in 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. 
66 NOTES TO THE FINANCIAL STATEMENTS 

Military Employees (Including Veterans) 

Pensions 

The DOD Military Retirement Fund (MRF) finances military retirement and survivor benefit programs. The 

increase in the actual liability for Military Pensions is largely the result of a decrease in the assumed interest rate on 

invested balances, and thus a decrease in the associated assumed earnings of $32.8 billion and an increase in the 

actuarial liability. The majority of the remaining change is due to expected liability increases. 

Projected revenues into the MRF come from three sources: interest earnings on MRF assets, monthly DOD 

contributions, and annual contributions from the Treasury Department. Beginning with 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. 

The military retirement system consists of a funded, noncontributory, defined benefit plan. It applies to the 

Departments of the Army, Navy, Air Force, and Marine Corps. This system includes nondisability retirement pay, 

disability retirement pay, and retirement pay for reserve service and survivor annuity programs. Military personnel 

(Army, Navy, Marine Corps, and Air Force) who remain on active duty for 20 years or longer are eligible for 

retirement. There are three different retirement systems that are currently being used by the military: Final Pay, 

High-3 Year Average, and the Military Retirement Reform Act of 1986 (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. 

Final Pay Retirement System: Final Pay applies to individuals who entered the Service before September 8, 

1980. Each year of service is worth 2.5 percent towards the retirement multiplier. The longer an individual stays on 

active duty, the higher the multiplier and the higher the retirement income, up to the maximum of 75 percent. This 

multiplier is applied against the final basic pay of the individual’s career. A cost of living adjustment (COLA) is 

given annually based on the increase in the CPI. 

High–3 Year Average Retirement System: High–3 Year Average applies to members who first entered the 

Service after September 8, 1980, but before August 1, 1986. It also applies to individuals who entered on or after 

August 1, 1986, who do not elect the REDUX retirement system with the $30,000 career status bonus (CSB) at their 

15th year of service. The High–3 Year Average calculation is similar to the Final Pay except the High-3 Year 

Average uses the multiplier against basic pay for the highest 36 months of the individual’s career. A COLA is given 

annually based on the increase in the CPI. 

CSB/REDUX Retirement System: The REDUX applies to those who entered the Service on or after August 1, 

1986, and who elected to receive the $30,000 CSB at their 15th year of service. Under the CSB/REDUX retirement 

system, each of the first 20 years of service is worth 2 percent towards the retirement multiplier and each year after 

20 years of service is worth 3.5 percent. The retirement multiplier under this retirement system is applied against the 

average basic pay for the highest 36 months of the individual’s basic pay. A COLA is given annually based on the 

increase in the CPI minus 1 percent. Members retiring under CSB/REDUX receive a one-time catchup at age 62 that 

restores the retired pay to what it would have been at that point had the member retired under High-3 Year Average. 

Thereafter, CSB/REDUX members receive reduced (i.e., based on the increase in the CPI minus 1 percent) COLAs 

for life. 

On October 30, 2000, the Floyd D. Spence National Defense Authorization Act for fiscal year 2001 (Public 

Law No. 106-398) was signed into law. This law extended participation in the TSP to members of the uniformed 

services. Members may contribute from their pay, and their contributions and earnings attributable to their TSP 

belongs to them even if they do not serve the 20 or more years ordinarily required to receive retirement pay. 
 NOTES TO THE FINANCIAL STATEMENTS 67

Health Benefits 

Military benefits entitle retirees and their dependents to health care in military medical facilities if a facility can 

provide the needed care. Until they reach age 65, military retirees and their dependents also are entitled to be 

reimbursed for the cost of health care from civilian providers. A premium is charged to enroll in DOD’s civilian care 

program. In addition, there are deductible and copayment requirements for civilian care. Medicare, and since fiscal 

year 2002, Tricare as secondary payer, covers military retirees after they reach 65 years of age. 

Military retiree health care figures include the cost of education and training, staffing, buildings and 

equipment, as well as the operation and maintenance of medical facilities. They also include claims paid to civilian 

providers and the cost of administering the program. 

Chapter 56 of Title 10, U.S.C. created the DOD Medicare-Eligible Retiree Health Care Fund effective October 

1, 2002. The purpose of this fund is to account for the health benefits of Medicare-eligible members and former 

members of the DOD Uniformed Services who are entitled to retirement or retainer pay, and their eligible 

dependents who are Medicare eligible. 

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 2002-2006, the average medical 

cost per year was $25.7 billion. 
68 NOTES TO THE FINANCIAL STATEMENTS 

Veterans Compensation and Burial Benefits

The Government compensates disabled veterans and their survivors. Veterans compensation is payable as a 

disability benefit or a survivor’s benefit. Entitlement to compensation depends on the veteran’s disabilities having 

been incurred in, or aggravated during, active military service; death while on duty; or death resulting from serviceconnected disabilities, if not in 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 veteran’s compensation and burial benefits payable increased by $31.2 billion in fiscal year 

2006 and increased by $197.8 billion in fiscal year 2005. The primary factors contributing to these fluctuations were 

changes in interest rates and other actuarial assumptions; various assumptions in the actuarial model, such as the 

number of veterans and dependents receiving payments; and life expectancy. 

Veterans Compensation and Burial Benefits as of September 30 

(In billions of dollars) 2006 2005 

 

Veterans................................................................................................ 970.8 925.4 

Survivors............................................................................................... 179.1 193.4 

Burial benefits ....................................................................................... 3.9 3.8 

Total compensation and burial benefits payable ............................... 1,153.8 1,122.6 

Significant Economic Assumptions Used in Determining Veterans 

Compensation and Burial Benefits as of September 30 

(In percentages) 2006 2005 

 

Rate of interest ..................................................................................... 4.76% 3.93%

Rate of inflation..................................................................................... 4.10% 3.60%

Other Benefits 

Veterans insurance includes the following programs: 

• United States Government Life Insurance, established in 1919 to handle new issues and the conversion of 

World War I Risk Term Insurance. 

• National Service Life Insurance, established in 1940 to meet the needs of World War II service personnel. 

• Veterans Special Life Insurance, established in 1951 for Korean veterans who did not have service-connected 

disabilities. 

• Service-Disabled Veterans Insurance, established in 1951 for veterans with service-connected disabilities. 

• Veterans Reopened Insurance, which established a 1-year reopening in 1965 of National Service Life Insurance 

for certain disabled World War II and Korean veterans. 

The VA supervises Service members’ Group Life Insurance and Veterans’ Group Life Insurance programs which 

provide life insurance coverage to members of the uniformed armed services, reservist, and post-Vietnam veterans. The 

VA also provides certain veterans and/or their dependents with pension benefits, based on annual eligibility reviews, if the 

veteran died or was disabled for nonservice-related causes. The actuarial present value of the future liability for pension 

benefits is a 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, 2006, and 2005 were $97.0 billion and $96.8 billion, 

respectively. 
 NOTES TO THE FINANCIAL STATEMENTS 69

Note 12. Environmental and Disposal Liabilities 

Environmental and Disposal Liabilities as of September 30 

(In billions of dollars) 2006 2005 

 

Department of Energy: 

Environmental Management Facilities................................................. 159.1 121.4 

Active and Surplus Facilities................................................................ 27.6 26.0 

Legacy Environmental Liabilities ......................................................... 18.2 17.5 

High-level Waste and Spent Nuclear Fuel........................................... 15.5 15.1 

 Surplus Plutonium and HEU Disposition............................................. 9.9 9.8 

Total Department of Energy.............................................................. 230.3 189.8 

Department of Defense: 

Environmental Restoration .................................................................. 33.5 36.0 

Disposal of Weapon Systems Program............................................... 30.2 23.2 

Base Realignment and Closure........................................................... 4.1 4.1 

Active Installations............................................................................... 2.2 1.7 

Total Department of Defense............................................................ 70.0 65.0 

All other agencies ................................................................................ 4.9 5.0 

Total environmental and disposal liabilities....................................... 305.2 259.8 

 

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; and 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 hexaflouride. 

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. 
70 NOTES TO THE FINANCIAL STATEMENTS 

Estimated cleanup costs at sites for which there are no current feasible remediation approach 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). 

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. Recent increases in project cost estimates have created a significant gap between DOE’s preliminary 

budgetary funding levels and the estimated costs of performing the work as recorded in the environmental liability 

estimates. If additional funding is not received, cleanup work scope will need to be extended and delayed resulting 

in higher costs. 

DOE 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 DOE unrecognized portion of the cleanup cost associated with general property, plant, 

and equipment is $505.0 million and $440.0 million for fiscal years 2006 and 2005, 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 to clean up contamination resulting from waste disposal practices, leaks, spills, and other 

activities that have created a public health or environmental risk. 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 required by law to adhere to CERCLA and the Superfund Amendment and Reauthorization Act to 

clean up contamination resulting from past waste disposal practices, leaks, spills, and other activities which have 

created a risk to public health or the environment. The Army is DOD’s executive agent for cleaning up 

contamination at sites formerly used by DOD. CERCLA requires DOD to clean up contamination in coordination 

with regulatory agencies, other responsible parties, and current property owners. 

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). These two methods of valuation are used in 

this note’s table. Additionally, cost estimates are based on the following: (1) historic comparable project, (2) a 

specific bid or independent Government cost estimate for the project, (3) site level data, and (4) annual cost-tocomplete estimate. 

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 $1,527.4 million and $152.1million for fiscal years 2006 and 2005, respectively. The unrecognized 

portion of the cleanup costs is recognized over a predetermined period of time. Please refer to the financial 

statements of the Department of Defense for further detailed information regarding DOD’s environmental and 

disposal liabilities, including cleanup costs. 
 NOTES TO THE FINANCIAL STATEMENTS 71

Note 13. Benefits Due and Payable 

These amounts are the benefits owed to program recipients or medical service providers as of the fiscal 

yearend that have not been paid. For a description of the programs, see the Supplemental Information—Social 

Insurance section. 

Benefits Due and Payable as of September 30 

(In billions of dollars) 2006 2005

 

Federal Old-Age and Survivors Insurance ................................................ 41.6 39.3 

Federal Supplementary Medical Insurance (Medicare Part B) ................. 21.1 16.6 

Federal Disability Insurance ...................................................................... 20.9 19.2 

Federal Hospital Insurance (Medicare Part A) ......................................... 19.8 16.8 

Grants to States for Medicaid .................................................................... 19.2 20.1 

Supplemental Security Income.................................................................. 3.5 2.8 

Unemployment Insurance.......................................................................... 1.1 0.9 

All Other Benefit Programs........................................................................ 2.1 1.3

Total benefits due and payable............................................................... 129.3 117.0

 

Note 14. Insurance Program Liabilities 

Insurance Program Liabilities as of September 30 

(In billions of dollars) 2006 2005 

 

Insurance Program Liabilities: 

Pension Benefit Guaranty Corporation's defined benefit pension 

plans ................................................................................................. 69.1 69.8 

National Flood Insurance Program...................................................... 3.6 23.4 

 All other insurance programs ............................................................ 0.1 - 

Total Insurance Programs ................................................................ 72.8 93.2 

 
72 NOTES TO THE FINANCIAL STATEMENTS 

Insurance programs are Federal programs that provide protection to individuals or entities against specified 

risks except for those Federal employees or veterans discussed in Note 11—Federal Employee and Veteran Benefits 

Payable. These funds are commonly held in revolving funds with the Federal 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. Insurance programs do not include social insurance, loan guarantee 

programs, and programs designed to benefit only current, former, and dependents of Federal employees. 

PBGC insures pension benefits of 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 generally. As of 

September 30, 2006, PBGC had total liabilities of $80.0 billion, and its total liabilities exceeded its total assets by 

$18.9 billion. In addition, as discussed in Note 18—Contingencies, PBGC reported reasonably possible contingent 

losses of about $73.4 billion. 

The Federal Emergency Management Agency of DHS administers the National Flood Insurance Program 

(NFIP). The NFIP is administered through sale or continuation-in-force of insurance 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, including interest 

payments, inherent in the NFIP insurance underwriting operations experience and expectations. 
NOTES TO THE FINANCIAL STATEMENTS 73

Note 15. Other Liabilities 

Other Liabilities as of September 30 

(In billions of dollars) 2006 

 2005

(Restated)

Nuclear Waste Fund .............................................................................. 21.1 19.6 

Other Accrued Liabilities........................................................................ 19.9 23.2 

Contingent liabilities ............................................................................... 17.6 6.6 

Accrued wages and benefits.................................................................. 15.3 16.0 

Accrued annual leave ............................................................................ 14.2 9.5 

Deferred revenue ................................................................................... 13.8 8.5 

Accrued grant liability............................................................................. 12.8 10.4 

Actuarial liabilities................................................................................... 12.0 11.6 

Gold certificates ..................................................................................... 11.0 10.9 

Deposit funds and undeposited collections ........................................... 9.8 11.2 

Exchange Stabilization Fund ................................................................. 9.4 9.3 

Custodial liabilities ................................................................................. 9.2 7.3 

District of Columbia pension liabilities ................................................... 9.1 8.5 

Other debt .............................................................................................. 8.8 8.8 

Energy Employees Occupational Illness Compensation Act................. 6.9 7.4 

Miscellaneous liabilities.......................................................................... 43.4 44.4 

Total Other Liabilities........................................................................... 234.3 213.2 

 

The following are descriptions of some of the other categories (i.e., those over $8 billion) classified as other liabilities: 

• Nuclear Waste Fund (NWF) refers to revenues that are accrued by DOE based on fees assessed against 

owners and generators of high-level radioactive waste and spent nuclear fuel and interest accrued on 

investments in Treasury securities. These revenues are recognized as revenues as costs are incurred for NWF 

activities. 

• Other accrued liabilities include amounts accrued by the USDA for the Tobacco Transition Program, Direct 

and Counter-Cyclical Program, Conservation Reserve Program, and other accrued liabilities. 

• Contingent liabilities include amounts accrued by DOE for Spent Nuclear Fuel Litigation, and amounts 

accrued by DOD for future contract financing payments and other contingent liabilities. 

• Accrued wages and benefits consist of the estimated liability for civilian and military salaries and wages 

earned but unpaid. 

• Accrued annual leave represents the dollar value of annual leave accrued to employees for annual leave hours 

earned but not used, and that is expected to be paid from future years' appropriations. Annual leave is an 

expense which accrues as it is earned by employees. 

• Deferred revenue refers to revenue received but not yet earned, such as payments received in advance from 

outside sources for future delivery of products or services. 

• Accrued grant liability represents the accruals related to grant program funds provided primarily to State and 

local governments, as well as universities and nonprofit organizations. 

• Actuarial liabilities include the estimated liability for the future benefit payments of contracted employees at 

the DOE. These are not for employee related benefit payments and therefore are not reflected in the Federal 

Employee and Veteran Benefits Payable footnote. 

• Gold certificates include monetized portions of gold and certificates deposited in FRBs. 
74 NOTES TO THE FINANCIAL STATEMENTS 

• Deposit funds and undeposited collections are deposits held and maintained by the Government on behalf of a 

third party and include unclassified deposited funds that are amounts offsetting undeposited collections, as well 

as funds deposited in clearing accounts and suspense accounts that await disposition or reclassification. 

• Exchange Stabilization Fund includes SDR certificates issued to the FRBs and allocations from the IMF. 

• Custodial liabilities include funds collected into the Foreign Military Sales Trust Fund in advance of the 

performance of services or sale of articles. 

• District of Columbia (D.C.) pension liability represents the amount payable to the Judicial Retirement Fund and 

the D.C. Federal Pension Fund by Treasury for the annual amortized payments that are required to be made 

from the General Fund of the U.S. Government to fund certain D.C. retirement plans. 

• Other debt includes Government obligations, whether secured or unsecured, not included in public debt. 

• Miscellaneous liabilities include amounts accrued for other liabilities by PBGC, DOD, TVA, DOE, VA, 

Treasury, and the DOI. Refer to the financial statements and footnotes of the respective agencies for additional 

details. 

Note 16. Collections and Refunds of Federal Revenue 

Collections of Federal Revenue for the Year Ended September 30, 2006 

 

Tax Year to Which Collections Relate 

(In billions of dollars) 

Federal 

Revenue 

Collections 2006 2005 2004 

 Prior 

 Years 

Individual income and tax 

withholdings............................. 2,034.2 1,309.4 690.8 17.3 16.7 

Corporation income taxes.......... 380.4 259.1 103.8 1.7 15.8 

Unemployment taxes ................. 41.6 22.8 10.1 8.6 0.1 

Excise taxes............................... 74.8 55.5 19.0 0.1 0.2 

Estate and gift taxes .................. 28.7 0.1 18.8 1.2 8.6 

Railroad retirement taxes........... 4.7 3.6 1.1 - - 

Federal Reserve earnings.......... 29.9 24.1 5.8 - - 

Fines, penalties, interest, and 

other revenue .......................... 2.4 2.0 0.4 - - 

Custom duties ............................ 25.9 25.9 - - - 

Subtotal ................................... 2,622.6 1,702.5 849.8 28.9 41.4 

Less: amounts collected for 

non-federal entities............. (0.4) 

Total ................................... 2,622.2 

 

Treasury is the Government’s principal revenue-collecting agency. Collections of individual income tax and tax 

withholdings consist of FICA/SECA and other taxes including payroll taxes collected from other agencies. 
NOTES TO THE FINANCIAL STATEMENTS 75

Federal Tax Refunds Disbursed for the Year Ended September 30, 2006 

 Tax Year to Which Refunds Relate 

(In billions of dollars) 

Refunds 

Disbursed 2006 2005 2004 

Prior 

Years 

 

Individual income and tax 

withholdings................................ 245.2 0.6 225.5 13.5 5.6 

Corporation income taxes............. 30.5 1.2 8.8 3.9 16.6 

Unemployment taxes .................... 0.1 - 0.1 - - 

Excise taxes.................................. 0.7 - 0.5 - 0.2 

Estate and gift taxes ..................... 1.3 0.5 0.2 0.3 0.3 

Custom duties ............................... 1.1 1.1 - - - 

Total............................................ 278.9 3.4 235.1 17.7 22.7 

 

Reconciliation of Collections to Revenue 

(In billions of dollars) 2006 2005 

 

Total revenue per the Statements of Operations and Changes in Net 

Position................................................................................................ 2,440.8 2,185.5 

Tax refunds ............................................................................................ 278.9 268.3 

Earned Income Tax Credit and Child Tax Credit Imputed Revenue ..... (57.0) (55.3) 

Nontax related fines and penalties reported by agencies...................... (23.4) (19.2) 

Nontax related earned revenue ............................................................. (17.1) (19.2) 

Collections of Federal revenue .............................................................. 2,622.2 2,360.1 

 

Total 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 Earned Income Tax Credit (EITC) payments and other nontax related 

revenue. EITC 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 reported in the table in this Note are reported on a gross cash 

basis. The table above reconciles total revenue to collections. 
76 NOTES TO THE FINANCIAL STATEMENTS 

Collections of Federal Revenue for the Year Ended September 30, 2005 

 

Tax Year to Which Collections Relate 

(In billions of dollars) 

Federal 

Revenue 

Collections 2005 2004 2003 

 Prior 

 Years 

 

Individual income and tax 

withholdings............................. 1,864.7 1,211.9 620.9 13.9 18.0 

Corporation income taxes.......... 306.9 209.4 83.1 1.2 13.2 

Unemployment taxes ................. 40.1 22.2 9.9 7.9 0.1 

Excise taxes............................... 72.4 52.8 18.9 0.1 0.6 

Estate and gift taxes .................. 25.6 0.1 16.6 1.3 7.6 

Railroad retirement taxes........... 4.5 3.4 1.1 - - 

Federal Reserve earnings.......... 19.3 14.2 5.1 - - 

Fines, penalties, interest, and 

other revenue .......................... 4.3 3.9 0.4 - - 

Custom duties ............................ 23.2 23.2 - - - 

Subtotal ................................... 2,361.0 1,541.1 756.0 24.4 39.5 

Less: Amounts collected 

for non-federal entities ....... (0.9) 

Total ................................... 2,360.1 

 

Federal Tax Refunds Disbursed for the Year Ended September 30, 2005 

 Tax Year to Which Refunds Relate 

(In billions of dollars) 

Refunds 

Disbursed 2005 2004 2003 

Prior 

Years 

 

Individual income and tax 

withholdings................................. 230.0 0.6 211.1 12.8 5.5 

Corporation income taxes.............. 35.1 1.0 7.2 5.5 21.5 

Unemployment taxes ..................... 0.1 - 0.1 - - 

Excise taxes................................... 1.0 0.3 0.3 - 0.3 

Estate and gift taxes ...................... 0.9 - 0.3 0.4 0.3 

Custom duties ................................ 1.2 0.7 0.1 - 0.3 

Total............................................. 268.3 2.6 219.1 18.7 27.9 

 
NOTES TO THE FINANCIAL STATEMENTS 77

Note 17. Prior Period Adjustments-Corrections of Errors 

 

Prior Period Adjustments 

to Fiscal Years 2006 and 2005 

 Increases to Net Position 

(In billions of dollars) 2006 2005

 

Prior Period Adjustments-Corrections of Errors: 

Department of Defense..................................................... - 2.9 

Other prior period adjustments ......................................... - 0.2 

Total prior period adjustments........................................ - 3.1 

 

For fiscal year 2005, DOD recorded $10.9 billion (net) for correction of accounting errors. Of these 

corrections, $3.6 billion (net) were due to a change in accounting principle for the historical cost of inventorySFFAS No. 3, Accounting for Inventory and Related Property, which became effective during fiscal year 1994 but 

DOD failed to implement the accounting principle until fiscal year 2005. The $7.3 (net) were due to prior period 

adjustments and were the result of the Air Force completing the conversion of its inventory valuation method from 

Latest Acquisition Cost to Moving Average Cost. This resulted in adjustments to eliminate allowance for gains and 

losses, establish an allowance for repair, and revalue the inventory. Other agencies recorded $0.2 (net) as prior 

period adjustments. 

In fiscal year 2006, DOD recorded a prior period adjustment to property, plant, and equipment, net for ($8.2) 

billion and other adjustments $0.2 billion for correction of accounting errors. This adjustment was due to material 

errors resulting from a change in the methodology for the reporting of military equipment. Refer to Notes 6 and 26 

for additional details. 

Note 18. 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. For an overview of the standards that provide 

criteria for how Federal agencies are to account for loss contingencies, based on the likelihood of the loss and 

measurability,1

 see the following table. 

 

1

 In addition, a third condition must be met to be a loss contingency: a past event or an exchange transaction must occur. 
78 NOTES TO THE FINANCIAL STATEMENTS 

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 & Statements of 

Net Cost. 

Accrue liability of best 

estimate or minimum 

amount in loss range if 

there is no best 

estimate, and disclose 

nature of contingency 

and range of estimated 

liability. 

Disclose nature of 

contingency and include 

a statement that an 

estimate cannot be 

made. 

Reasonably possible. 

Possibility of future 

confirming event(s) 

occurring is more than 

remote and less than 

likely.

Disclose nature of 

contingency and 

estimated 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. 

The Government is subject to loss contingencies which 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 that 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. For example, the 

estimated aggregate unfunded vested benefits exposure to PBGC for private-sector single-employer and 

multiemployer defined pension plans is $ 73.4 billion and $ 108.5 billion for 2006 and 2005, respectively. 

Insurance in Force 

Insurance in Force is the accumulation of policy limits for all policies issued and outstanding at a point in time. 

The Federal Government has Insurance in Force in the amount of $1,048.6 billion for 2006, and $864.3 billion for 

2005. These amounts represent estimated maximum exposure to insurance claims and guarantee programs. The 

major types are identified below: 

• DHS reported $994.1 billion and $811.6 billion for 2006 and 2005, respectively for the National Flood 

Insurance Program (NFIP). 

• EXIM reported $36.4 billion and $35.9 billion for 2006 and 2005, respectively for Export Credit Insurance. 

 

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.
NOTES TO THE FINANCIAL STATEMENTS 79

Deposit Insurance 

Deposit Insurance covers all types of deposits accounts such as checking, NOW and savings accounts, money 

market deposit accounts, and certificates of deposits (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 intuition’s closing. As a result, 

the Federal Government has aggregated insured deposit exposure estimated at approximately $4,627.1 billion for 

2006, and $4,344.4 billion for 2005. However, these amounts represent maximum possible losses assuming all the 

FDIC and NCUA member depository institutions were to fail 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: 

• Federal Deposit Insurance Corporation (FDIC) has estimated insured deposits of $4,094.7 billion for 2006, 

and $3,831.0 billion for 2005, respectively for the Deposit Insurance Fund (DIF).

• National Credit Union Administration (NCUA) has estimated insured deposits of $532.3 billion for 2006, 

and $513.4 billion for 2005, respectively for the National Credit Union Share Insurance Fund (NCUSIC). 

Legal Contingencies 

The Federal 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 Federal Government. 

Management and legal counsel have determined that it is “probable” that some of these actions will result in a 

loss to the Federal Government and the loss amounts are reasonably measurable. The estimated liabilities for these 

cases are $3.7 billion and $5.0 billion for 2006 and 2005, respectively, and are recorded in the balance sheet line 

items “Insurance Liabilities,” or “Other Liabilities.” A few of the major cases are summarized below: 

• HHS has unasserted claims that resulted from processing errors where incorrect Medicare eligibility 

determinations were made. Estimated amounts payable to States to reimburse them for payments they paid on 

behalf of beneficiaries are $1.6 billion for 2005. No states have filed any claims since the HHS’ Centers for 

Medicare and Medicaid Services (CMS) first disclosed this issue; no additional amounts have been recorded for 

2006. 

• DOI has estimated potential liability for a breach of contract case related to undeveloped Federal oil and gas 

leases in the amount of $0.5 billion. 

• VA has recorded liabilities for pending legal claims related to medical malpractice and other tort claim exposure 

in the amounts of $0.6 billion and $0.5 billion for 2006 and 2005, respectively. 

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 possible liability or a range of possible 

liability. The estimated potential losses for such claims and actions range from $7.6 billion to $9.5 billion for 2006, 

and from $1.2 billion to $7.9 billion for 2005. Two of the major cases are summarized below: 

• USDA reported that, as of September 30, 2006, $2.9 billion could be owed to plaintiffs of a pending class action 

discrimination suit. 

• DHS has pending legal claims in the range of $0.1 billion to $2.7 billion for refunds of user fees, harbor 

maintenance tax claims, and tariff claims as of September 30, 2006. 

Numerous litigation cases are pending where the outcome is uncertain or there is at least a reasonable 

possibility 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. 

• Numerous complaints have arisen as a result of Hurricane Katrina. These New Orleans Federal Tort Claims Act 

(FTCA) cases allege personal injury, wrongful death, and property damages as a result of massive flooding 

caused by the hurricane. There are over 25,000 Administrative claims filed in relation to Hurricane Katrina with 

an aggregate claim amount of over $104 billion. In addition to administrative claims, there have been over 50 

Katrina related litigations in Federal district courts with an aggregated claim amount of over $105 billion. 
80 NOTES TO THE FINANCIAL STATEMENTS 

Additional suits are expected. The United States is currently awaiting a ruling on a motion to dismiss that will 

determine if an assertion of immunity would be successful. The range of potential loss is $10 billion to an 

amount perhaps several times larger. In addition to the tort claims, two purported class actions have been filed 

in the Court of Federal Claims alleging that property was taken in violation of the Fifth Amendment of the 

Constitution. The alleged just compensation owed exceeds $150 billion. Motions to dismiss have been filed in 

both actions. 

• The North American Free Trade Agreement (NAFTA) allows Canadian and Mexican investors to bring 

arbitration proceedings against the United States for breaches of certain NAFTA provisions. These cases raise 

allegations of expropriation as well as other claims of treatment inconsistent with international law or specific 

treaty commitments that provide investment protections. The United States has successfully defended itself 

against two claims submitted to arbitration under Chapter 11 of the NAFTA. The United States is currently 

defending itself against eight claims submitted to arbitration and nine claims not yet submitted under Chapter 11 

of NAFTA. These claims total approximately $1.4 billion. 
NOTES TO THE FINANCIAL STATEMENTS 81

Environmental and Disposal Contingencies 

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 and remediation costs. 

Management and legal counsel have determined that it is “probable” that some of these actions will result in a 

loss to the Federal Government and the loss amounts are reasonably measurable. The estimated liabilities for these 

cases are $7.0 billion and $5.2 billion for 2006 and 2005, respectively, and are recorded in the balance sheet line 

item “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. Significant claims for partial breach of contract have 

been filed with estimated liability amounts of $6.8 billion and $5.0 billion for 2006 and 2005, respectively. 

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 possible liability or a range of possible 

liability. The Department of Commerce (DOC) has estimated liabilities for a variety of cleanup costs, many of 

which are associated with the Second World War at various sites within the United States in the amounts of $0.5 

billion and $0.8 billion for 2006 and 2005, respectively. 

Other Contingencies 

DOT has large contingency amounts. The major contingencies are summarized below: 

• DOT’s Federal Highway Administration (FHWA) reported $45 billion and $40 billion respectively, for 

2006 and 2005 for Advance Construction Projects. 

• DOT reported $1.8 billion and $0.2 billion for 2006 and 2005, respectively for Hurricanes Katrina and Rita. 

• DOT’s Federal Transit Administration (FTA) reported $1.4 billion and $2.2 billion for 2006 and 2005, 

respectively for Full Funding Agreements. 

Note 19. Commitments 

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 as shown in the following table. 

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 (MDB), 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. 
82 NOTES TO THE FINANCIAL STATEMENTS 

 

Commitments as of September 30 

Capital 

Leases 

Operating

Leases 

Capital 

Leases 

Operating

Leases 

(In billions of dollars) 2006 2005 

 

General Services Administration....................... 0.3 22.9 0.3 22.9 

U.S. Postal Service ........................................... 0.7 8.4 - 9.6 

Department of Homeland Security .................... 0.1 1.8 0.1 1.4 

Department of Health and Human Services...... - 1.1 - 1.4 

Department of Justice ....................................... 0.1 0.9 0.1 - 

Department of Defense ..................................... 0.2 0.4 0.3 0.8 

Tennessee Valley Authority............................... 0.2 0.1 0.2 0.1 

Other Capital Leases......................................... 0.4 4.2 0.5 3.8 

Total long-term leases 2.0 39.8 1.5 40.0 

 

 Undelivered Orders 

 2006 2005 

 

Department of Defense ..................................... 173.6 174.5 

Department of Housing & Urban 

Development ......................................................... 72.0 68.4 

Department of Transportation ........................... 68.6 68.1 

Department of Health and Human Services...... 67.6 67.9 

Department of the Treasury .............................. 51.1 44.4 

Department of Education................................... 47.6 46.4 

Department of Homeland Security .................... 28.2 23.3 

Department of Agriculture ................................. 16.0 16.0 

Agency for International Development .............. 11.6 13.0 

Department of Energy ....................................... 11.1 10.3 

Environmental Protection Agency ..................... 9.2 9.7 

Department of Justice ....................................... 8.9 9.1 

Department of State .......................................... 8.6 7.3 

National Science Foundation ............................ 7.3 7.1 

Department of the Interior ................................. 6.6 6.4 

Other undeliverable orders................................ 37.2 25.4 

Total undelivered orders................................. 625.2 597.3 

 

 Other Commitments 

 2006 2005 

 

Callable capital subscriptions for multilateral 

development banks ........................................ 62.1 62.0 

Sales of Surplus Power .................................... 23.4 10.9 

Agriculture Direct Loans and Guarantees ........ 22.3 21.0 

Long-term satellite and systems ....................... 6.4 7.5 

Power purchase obligations ............................. 4.3 4.3 

Grant Programs - Airport Improvement 

Program ......................................................... 3.8 3.6 

Fuel purchase obligations ................................ 3.0 2.3 

Conservation Reserve Program ....................... 2.0 2.0 

Other.................................................................. 2.7 2.6 

Total other commitments ................................ 130.0 116.2 

 
NOTES TO THE FINANCIAL STATEMENTS 83

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. 

In addition, the United States 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.
84 NOTES TO THE FINANCIAL STATEMENTS 

Note 20. Earmarked Funds 

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 following tables depict major earmarked funds separately chosen based on their significant financial 

activity and importance to taxpayers. All other Federal Government earmarked funds not separately shown 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 Federal debt 

securities – including unamortized amounts, and other assets which includes 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 Federal 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 exceed 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 10—Federal Debt Securities Held by the Public and Accrued Interest for 

further information related to the investments in Federal debt securities. 
NOTES TO THE FINANCIAL STATEMENTS 85

Earmarked Funds as of September 30, 2006* 

(In millions of dollars) 

Federal OldAge & 

Survivors 

Insurance 

Trust Fund 

Civil Service 

Retirement & 

Disability 

Fund 

Federal 

Hospital 

Insurance 

Trust Fund 

(Medicare 

Part A) 

Federal 

Disability 

Insurance 

Trust 

Fund 

Military 

Retirement 

Fund 

MedicareEligible 

Retiree 

Health Care 

Fund 

(MERHCF) 

 

Assets: 

Cash and other monetary 

assets...................................... - - 13.0 - - - 

Fund balance with 

 Treasury................................. (795.0) 17.0 955.0 (348.0) 30.7 37.9 

Investments in U.S. Treasury 

 securities.................................. 1,793,129.0 689,936.0 302,186.0 202,178.0 208,392.1 85,395.0 

 Other Federal assets........... 23,006.0 9,861.0 24,693.0 2,628.0 - - 

 Non-federal assets.............. 2,112.0 277.0 882.0 2,886.0 23.3 8.8 

 Total assets ...................... 1,817,452.0 700,091.0 328,729.0 207,344.0 208,446.1 85,441.7 

 

Liabilities: 

Liabilities due and payable 

to beneficiaries ................. 41,677.0 4,545.0 19,751.0 23,611.0 - - 

 Other Federal liabilities.......... 3,867.0 3.0 20,531.0 720.0 1.3 49.1 

 Other Non-federal liabilities.... - 1,287,185.0 595.0 6.0 967,106.1 538,860.6 

 Total liabilities................... 45,544.0 1,291,733.0 40,877.0 24,337.0 967,107.4 538,909.7 

 Total net position .............. 1,771,908.0 (591,642.0) 287,852.0 183,007.0 (758,661.3) (453,468.0) 

Total liabilities and net 

position........................ 1,817,452.0 700,091.0 328,729.0 207,344.0 208,446.1 85,441.7 

 

Change in Net Position: 

 Beginning net position......... 1,595,523.0 (549,022.0) 266,754.0 175,137.0 (697,577.3) (477,660.1) 

 Investment revenue............. 89,385.0 36,618.0 15,541.0 10,495.0 12,317.8 4,052.8 

 Revenue from the public .... 530,006.0 - 180,392.2 90,001.0 - - 

Other changes in fund 

balance............................. 9,138.0 46,416.0 10,954.8 (1,498.0) 39,419.9 27,749.9 

 Other expenses................... - - 2,929.0 - - - 

Program expenses.............. 452,144.0 125,654.0 182,861.0 91,128.0 112,821.7 7,610.6 

Ending net position........... 1,771,908.0 (591,642.0) 287,852.0 183,007.0 (758,661.3) (453,468.0) 

* 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.
86 NOTES TO THE FINANCIAL STATEMENTS 

Earmarked Funds as of September 30, 2006 

(In millions of dollars) 

Unemployment Trust 

Fund 

Federal 

Supplementary Medical

Insurance 

Trust Fund 

(Medicare 

Parts B and D)

Railroad 

Retirement

Trust Funds

Land and 

Water 

Conservation 

Fund 

Foreign 

Service 

Retirement

and 

Disability 

Fund 

National 

Service 

Life 

Insurance

Fund 

 

Assets: 

 Cash and other monetary 

assets................................. - 132.0 - - - - 

 Fund balance with 

 Treasury.............................. 60.3 27,771.0 (3.7) 14,836.2 2.1 5.0 

 Investments in U.S. 

Treasury securities............ 66,212.6 33,061.0 1,200.5 - 13,875.7 10,338.0 

 Other Federal assets ...... 1,078.3 22,603.0 3,757.0 - 199.6 474.0 

Non-federal assets.......... 1,435.8 2,459.0 29,399.2 - 1.7 - 

Total assets.................. 68,787.0 86,026.0 34,353.0 14,836.2 14,079.1 10,817.0 

 

Liabilities: 

 Liabilities due and 

payable to 

beneficiaries ................. 1,068.4 21,073.0 812.9 - - 142.0 

 Other Federal liabilities...... 1,309.8 22,983.0 3,506.8 - - 10,397.0 

 Other Non-federal 

liabilities......................... - 311.0 268.4 - 14,272.5 - 

 Total liabilities............... 2,378.2 44,367.0 4,588.1 14,272.5 10,539.0 

Total net position.......... 66,408.8 41,659.0 29,764.9 14,836.2 (193.4) 278.0 

 Total liabilities and 

net position.............. 68,787.0 86,026.0 34,353.0 14,836.2 14,079.1 10,817.0 

 

Change in Net Position: 

 Beginning net position .... 54,496.5 9,266.0 28,067.8 14,303.5 72.5 284.0 

 Investment revenue ........ 2,780.1 1,601.0 1,754.0 - 765.6 990.0 

 Revenue from the 

public ............................ 41,406.6 - 15.0 894.6 - 1.0 

 Other changes in fund 

balance......................... (1,768.7) 181,979.0 9,466.1 (361.9) 430.7 - 

 Other expenses............... - 2,102.0 - - 1,462.2 - 

Program expenses.......... 30,505.7 149,085.0 9,538.0 - - 997.0 

Ending net position....... 66,408.8 41,659.0 29,764.9 14,836.2 (193.4) 278.0 

* 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 87

Earmarked Funds as of September 30, 2006* 

 

(In millions of dollars) 

Airport 

and 

Airway 

Trust 

Fund 

Highway 

Trust 

Fund 

Hazardous 

Substance 

Superfund 

Black 

Lung 

Disability 

Trust 

Fund 

All Other 

Earmarked 

Funds 

Total 

Earmarked 

Funds 

 

Assets: 

 Cash and other monetary 

assets........................................ - - - - 23,581.6 23,726.6 

 Fund balance with 

 Treasury .................................... 645.5 4,431.6 35.1 39.3 39,275.5 86,995.5 

 Investments in U.S. Treasury 

 Securities................................... 7,967.5 10,997.6 2,619.5 - 127,269.4 3,554,757.9 

 Other Federal assets ........... - - 24.2 - 14,425.6 102,749.7 

Non-federal assets............... - 331.0 269.0 8.8 56,388.9 96,482.5 

Total assets ....................... 8,613.0 15,760.2 2,947.8 48.1 260,941.0 3,864,712.2 

 

Liabilities: 

 Liabilities due and payable 

to beneficiaries .................. - - - 21.2 7,500.8 120,202.3 

 Other Federal liabilities........... 2,214.2 - 129.0 9,631.6 20,310.3 95,653.1 

Other Non-federal liabilities..... - 3,888.6 434.7 - 416,687.9 3,229,615.8 

 Total liabilities.................... 2,214.2 3,888.6 563.7 9,652.8 444,499.0 3,445,471.2 

Total net position............... 6,398.8 11,871.6 2,384.1 (9,604.7) (183,558.0) 419,241.0 

 Total liabilities and net 

position......................... 8,613.0 15,760.2 2,947.8 48.1 260,941.0 3,864,712.2 

 

Change in Net Position: 

 Beginning net position.......... 7,317.6 10,231.4 2,200.1 (9,160.0) (183,006.7) 247,227.3 

 Investment revenue ............ 483.4 1.1 108.8 0.3 8,454.2 185,348.1 

 Revenue from the public...... 10,202.1 38,753.4 298.5 607.4 16,030.9 908,608.7 

 Other changes in fund 

balance.............................. - 27.2 1,214.7 (57.6) 21,121.7 344,231.8 

 Other expenses.................... - - - - 26,528.6 33,021.8 

Program expenses............... 11,604.3 37,141.5 1,438.0 994.8 19,629.5 1,233,153.1 

 Ending net position ........... 6,398.8 11,871.6 2,384.1 (9,604.7) (183,558.0) 419,241.0 

* 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. 

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 13—Benefits 

Due and Payable. 
88 NOTES TO THE FINANCIAL STATEMENTS 

Federal Old-Age and Survivors Insurance Trust Fund 

The Federal Old-Age and Survivors Insurance Trust Fund, administered by SSA, provide 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. 

Civil Service Retirement and Disability Fund 

The CSRDF covers two Federal civilian retirement systems: CSRS—for employees hired before 1984, and 

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 earned on investments in Treasury securities. 

Federal Hospital Insurance Trust Fund 

(Medicare Part A) 

The Federal Hospital Insurance Trust Fund 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. HHS administers the program. 

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. 

Federal Disability Insurance Trust Fund 

The Federal Disability Insurance Trust Fund provides assistance and protection against the loss of earnings due 

to a wage earner’s disability in the form of money payments. SSA administers the Federal Disability Insurance 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. 
NOTES TO THE FINANCIAL STATEMENTS 89

Military Retirement Fund 

The Military Retirement Fund 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 earned on 

investments in Federal debt securities. DOD administers the Military Retirement Fund. 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. 

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 fund, payments to the fund authorized by 10 

U.S.C. § 1116, and interest on investments authorized by 10 U.S.C. § 1117. 

Unemployment Trust Fund 

The UTF provides temporary assistance to workers who lose their jobs. The program is administered through a 

unique system of Federal and State partnerships, established in Federal law, but executed through conforming State 

laws by State officials. DOL administers the Federal operations of the program. 

Taxes on employers provide the primary funding source for the UTF. However, interest earned on investments 

in Treasury securities also provides 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 finances the Supplementary Medical Insurance 

Program (Medicare Part B) and the Medicare Prescription Drug Benefit Program (Medicare Part D) that provides 

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. HHS administers the 

programs. 

Medicare Part B financing is not based on payroll taxes; it is based on monthly premiums and income from the 

General Fund of the Treasury. The law establishing the Federal Supplementary Medical Insurance Trust Fund and 

authorizing the depositing of amounts to the credit of the trust fund is set forth in 42 U.S.C. § 1395t. 

Medicare Part D was created by the Medicare Prescription Drug, Improvement, and Modernization Act of 

2003 (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. 

Railroad Retirement Trust Funds 

The Railroad Retirement Trust Fund provides annuities and survivor benefits to eligible railroad employees 

and their survivors. The fund also pays disability annuities based on total or occupational disability. Payroll taxes 

paid by railroad employers and their employees provide the primary source of income for the Railroad Retirement 
90 NOTES TO THE FINANCIAL STATEMENTS 

Survivor Benefit program. The law establishing the Railroad Retirement Trust Fund and authorizing the depositing 

of amounts to the credit of the trust fund is set forth in 45 U.S.C. § 231n and 45 U.S.C. § 231n-1. 

The Railroad Retirement and Survivors’ Improvement Act, enacted on December 21, 2001, created the 

National Railroad Retirement Investment Trust to administer the new fund, which is allowed to invest in Federal 

debt securities as well as other investments outside of the U.S. Government (see Railroad Retirement in the 

Supplemental Information-Social Insurance section). 

Land and Water Conservation Fund 

The Land and Water Conservation Fund (LWCF) is administered by DOI and was enacted in 1964, by Public 

Law 88-578, to create and maintain a nationwide legacy of high quality recreation areas and facilities. The LWCF 

Act established a funding source for both Federal acquisition of authorized national park, conservation, and 

recreation areas as well as grants to State and local governments to help them acquire, develop, and improve outdoor 

recreation areas. Annually, $903 million for the LWCF are transferred from the Minerals Management Service to 

the National Park Service, the majority of which are from royalties from Outer Continental Shelf oil deposits. Each 

year, amounts from the LWCF are warranted to some of the bureaus within the DOI and the rest to USDA’s Forest 

Service. The law establishing the Land and Water Conservation Fund and authorizing the depositing of amounts to 

the credit of the trust fund is set forth in 16 U.S.C. § 4601-11. 

Foreign Service Retirement and Disability Fund 

The Foreign Service Retirement and Disability Fund (FSRD) is administered by the Department of State and 

provides pensions to retired and disabled members of the Foreign Service. The FSRD’s revenues consist of 

contributions from active participants and their U.S. Government agency employers, appropriations, and interest on 

investments in Treasury securities. Monthly annuity payments are made to eligible retired employees or their survivors. 

Separated employees without title to an annuity may take a refund of their contributions. P.L. 96-465 limits the amount 

of administrative expense that can be charged to the fund to $5,000 per year. Cash is invested in U.S. Treasury 

securities until it is needed. The laws establishing the Foreign Service Retirement and Disability Fund and authorizing 

the deposit of amounts to the credit of the trust fund are set forth in 22 U.S.C. § 4042 and 22 U.S.C. § 4045. 

National Service Life Insurance Fund 

The National Service Life Insurance Program (NSLI) covers policyholders who served during World War II. 

The program opened October 8, 1940, when it became clear that large-scale military inductions were imminent. 

Over 22 million policies were issued under the NSLI Program. The majority of policies administered directly by the 

Department of Veteran’s Affairs are NSLI policies. This program remained opened until April 25, 1951, when two 

new programs were established for Korean War service members and veterans. The financing sources for the NSLI 

come from the public and veterans. The law establishing the NSLI Program and authorizing the depositing of 

amounts to the credit of the trust fund is set forth in 38 U.S.C. § 1920. 

Airport and Airway Trust Fund 

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. DOT administers the Airport and Airway Trust Fund. 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. 
NOTES TO THE FINANCIAL STATEMENTS 91

• Interest earned on investments in Treasury securities. 

The above tables 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). 

Highway Trust Fund 

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. DOT administers programs financed by the Highway Trust Fund. 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 taxes on gasoline and other fuels, certain tires, the initial sale of 

heavy trucks, and highway use by commercial motor vehicles. 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. 

Hazardous Substance Superfund 

The Hazardous Substance Superfund was authorized to address public health and environmental threats from 

spills of hazardous materials and from sites contaminated with hazardous substances. The Environmental Protection 

Agency administers the fund. The law establishing the Hazardous Substance Superfund and authorizing the 

depositing of amounts to the credit of the trust fund is set forth in 26 U.S.C. § 9507. Funding sources include: 

• Fines, penalties, and cost recoveries from responsible parties. 

• Appropriations. 

• Interest earned on investments in Treasury securities. 

Black Lung Disability Trust Fund 

The BLDTF provides disability benefits to coal miners who are totally disabled due to pneumoconiosis (black 

lung disease) and death benefits for the eligible survivors of those miners who die from the disease. Excise taxes on 

coal mine operators, based on the sale of coal, partially fund black lung disability payments as well as related 

administrative and interest costs. Intragovernmental advances to the BLDTF, which must be repaid with interest, 

fund the shortfall. DOL administers the BLDTF. The law establishing the BLDTF and authorizing the depositing of 

amounts to the credit of the trust fund is set forth in 26 U.S.C. § 9501. 

All Other Earmarked Funds 

The above sixteen earmarked funds represent the Government’s most significant earmarked activity. All other 

earmarked activity is aggregated as “all other” in accordance with SFFAS No. 27. This “all other” aggregate 

includes 210 earmarked funds that are designated as significant funds by the agencies in their collective financial 

statements. These funds address a variety of issues and are managed by a widespread number of agencies. Some of 

the funds that comprise the “all other” earmarked funds include the following: 

• Department of the Treasury-Exchange Stabilization Fund

• Federal Communications Commission-Universal Service Fund

• United States Department of Agriculture-Federal Crop Insurance Corporation Fund and Funds for 

Strengthening Markets, Income, and Supply 

• Environmental Protection Agency-Leaking Underground Storage Tanks

• Department of Commerce-U.S. Patent and Trademark Office

• Department of Veterans Affairs-Medical Care

• Department of Homeland Security-Customs User Fees, Immigration Examination Fees and the National

 Flood Insurance Program.
92 NOTES TO THE FINANCIAL STATEMENTS 

Note 21. Dedicated Collections 

The implementation of SFFAS No. 27 in fiscal year 2006 supersedes the dedicated collections provisions in 

SFFAS No. 7 for earmarked funds. Earmarked funds were reported as dedicated collections in fiscal year 2005. For 

fiscal year 2006, the dedicated collection amounts related to non-earmarked funds are immaterial. Refer to Note 

20—Earmarked Funds. 

Dedicated Collections as of September 30, 2005*

 

(In millions of dollars) 

Federal OldAge & 

Survivors 

Insurance 

Trust Fund 

Civil Service 

Retirement & 

Disability 

Fund 

Federal 

Hospital 

Insurance 

Trust Fund 

(Medicare 

Part A) 

Federal 

Disability 

Insurance 

Trust 

Fund 

Military 

Retirement 

Fund 

MedicareEligible 

Retiree 

Health Care 

Fund 

(MERHCF) 

Assets: 

 Fund balance ...................... (384.0) 23.0 366.0 (73.0) 22.9 5.0 

 Investments............................... 1,616,159.0 660,750.0 280,996.0 193,263.0 197,807.1 60,691.7 

 Other Federal assets........... 20,936.0 9,684.0 17,978.0 2,539.0 - 32.9 

 Non-federal assets.............. 1,965.0 276.0 3,126.0 2,480.0 26.7 11.3 

 Total assets ...................... 1,638,676.0 670,733.0 302,466.0 198,209.0 197,856.7 60,740.9 

 

Liabilities: 

Liabilities due and payable 

to beneficiaries ................. 39,213.0 4,323.0 16,806.0 22,375.0 - - 

 Other liabilities ...................... 3,940.0 1,215,432.0 18,906.0 697.0 895,434.0 538,401.0 

 Total liabilities................... 43,153.0 1,219,755.0 35,712.0 23,072.0 895,434.0 538,401.0 

 Total net position .............. 1,595,523.0 (549,022.0) 266,754.0 175,137.0 (697,577.3) (477,660.1) 

Total liabilities and net 

position........................ 1,638,676.0 670,733.0 302,466.0 198,209.0 197,856.7 60,740.9 

 

Change in Net Position: 

 Beginning net position......... 1,433,278.0 (537,448.0) 253,259.0 170,598.0 (649,695.1) (466,096.2) 

 Nonexchange revenue........ 585,819.0 - 184,457.0 95,591.0 - - 

 Other financing sources ...... 16.0 25,652.0 9,431.0 47.0 - - 

Other changes in fund 

balance............................. 9,416.0 - - (1,221.0) - - 

 Exchange revenue .............. - 57,864.0 2,314.0 - 48,812.2 28,412.4 

 Program expenses.............. 433,006.0 95,090.0 180,380.0 89,878.0 96,694.4 39,976.3 

Other expenses................... - - 2,327.0 - - - 

Ending net position........... 1,595,523.0 (549,022.0) 266,754.0 175,137.0 (697,577.3) (477,660.1) 

 

* 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

Dedicated Collections as of September 30, 2005*

 

(In millions of dollars) 

Unemployment Trust 

Fund 

Federal 

Supplementary Medical 

Insurance 

Trust Fund 

(Medicare 

Part B) 

Railroad 

Retirement 

Trust Funds

Land and 

Water 

Conservation 

Fund 

Foreign 

Service 

Retirement 

and Disability

Fund 

 

Assets: 

 Fund balance ....................... (273.0) 1,303.0 43.3 - 0.1 

 Investments................................ 54,805.9 17,448.0 2,156.3 14,303.5 13,359.4 

 Other Federal assets............ 979.0 29,345.0 3,644.3 - 196.8 

Non-federal assets............... 1,418.1 3,424.0 26,438.8 - 1.9 

Total assets ....................... 56,930.0 51,520.0 32,282.7 14,303.5 13,558.2 

 

Liabilities: 

 Liabilities due and payable 

to beneficiaries .................. 931.7 16,593.0 787.4 - 45.9 

Other liabilities ....................... 1,501.8 25,661.0 3,784.2 - 13,439.8 

 Total liabilities.................... 2,433.5 42,254.0 4,571.6 - 13,485.7 

Total net position ............... 54,496.5 9,266.0 27,711.1 14,303.5 72.5 

 Total liabilities and net 

position ......................... 56,930.0 51,520.0 32,282.7 14,303.5 13,558.2 

 

Change in Net Position: 

 Beginning net position.......... 45,395.9 10,043.0 25,319.5 13,859.2 (345.8) 

 Nonexchange revenue......... 44,404.4 1,336.0 5,010.7 - - 

 Other financing sources ....... 0.1 115,784.0 3,176.0 444.3 - 

 Other changes in fund 

balance .............................. (3,815.0) (2,577.0) - - - 

 Exchange revenue ............... - 35,945.0 4,868.5 - 1,206.8 

 Program expenses............... 31,488.9 149,463.0 10,664.2 - - 

Other expenses.................... - 1,802.0 (0.6) - 788.5 

Ending net position............ 54,496.5 9,266.0 27,711.1 14,303.5 72.5 

 

* 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 

 

Dedicated Collections as of September 30, 2005*

 

(In millions of dollars) 

National 

Service Life 

Insurance 

Fund 

Airport 

and 

Airway 

Trust 

Fund 

Corpus 

Highway 

Trust 

Fund 

Hazardous 

Substance 

Superfund 

Black 

Lung 

Disability

Trust 

Fund 

Assets: 

 Fund balance........................ 9.0 692.3 2,549.0 7.2 41.9 

 Investments................................. 10,758.0 10,047.4 8,270.6 2,293.0 - 

 Other Federal assets............ 505.0 85.6 - 4.2 - 

Non-federal assets ............... - - - - 9.1 

Total assets........................ 11,272.0 10,825.3 10,819.6 2,304.4 51.0 

 

Liabilities: 

 Liabilities due and payable 

to beneficiaries................... 142.0 - - - 24.4 

Other liabilities........................ 10,846.0 3,507.7 11,708.0 - 9,186.6 

 Total liabilities .................... 10,988.0 3,507.7 11,708.0 - 9,211.0 

Total net position................ 284.0 7,317.6 (888.4) 2,304.4 (9,160.0) 

 Total liabilities and net 

position ......................... 11,272.0 10,825.3 10,819.6 2,304.4 51.0 

 

Change in Net Position: 

 Beginning net position .......... 283.0 6,959.1 5,562.3 2,394.5 (8,711.4) 

 Nonexchange revenue ......... - 10,699.9 37,892.6 69.0 611.1 

 Other financing sources ....... 1.0 - 34.8 1,247.5 - 

 Other changes in fund 

balance .............................. - - - - (56.7) 

 Exchange revenue................ 1,081.0 - 52.5 - 

 Program expenses ............... 1,081.0 10,341.4 44,378.1 1,459.1 1,003.0 

Other expenses .................... - - - - - 

Ending net position ............ 284.0 7,317.6 (888.4) 2,304.4 (9,160.0) 

 

* 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

The tables above depict selected trust funds that have been chosen based on their financial activity. 

Additionally, the Federal Government has many other dedicated collections and trust funds. The tables above 

exclude all trust funds that are identified as earmarked funds as defined by SFFAS No. 27. See Note 20—Earmarked 

Funds for a listing of major earmarked funds. Dedicated collections include the Indian Trust Funds. Refer to Note 

22—Indian Trust Funds for more details. 

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 line item “investments,” listed under assets in the tables above, refers to investments in Federal debt 

securities, net of unamortized discounts and premiums. Total assets represent the unexpended balance from all 

sources of receipts and amounts due the trust 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 balance with Treasury, investments in Federal debt 

securities—including unamortized amounts, and other assets which include the related accrued interest receivable. 

These amounts were eliminated in preparing these financial statements. The non-federal assets represent only the 

activity with individuals and organizations outside the Government. All related Governmental balances are removed 

to present the Government’s position as a whole. 

Most of the trust fund assets are invested in intragovernmental debt holdings. These securities require 

redemption if a fund’s disbursements exceed its receipts. Redeeming these securities to pay benefits as they become 

due and payable will require the Government to finance these benefit payments in the same way that it finances all 

Government spending, which is by using cash on hand or by issuing debt to the public, if there is insufficient cash 

on hand. 

Note 22. Indian Trust Funds 

DOI has responsibility for the assets held in trust on behalf of American Indian tribes and individuals. 

DOI, through the Office of the Special Trustee (OST), holds trust funds in accounts for Indian tribes. It 

maintains approximately 1,450 accounts for Tribal and Other Special Trust Funds (including the Alaska Native 

Escrow Fund) and approximately 300,000 accounts for individuals. 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 Federal Government. 

The balances that have accumulated in the Tribal and Other Special 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 Special 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). 

The tables below depict the U.S. Government as trustee for Indian Trust Funds Held for Indian Tribes and 

Other Special Trust Funds. The Other Special Trust Funds included in the tables below ($284.2 million and $277.3 

million for fiscal years 2006 and 2005, respectively, identified in DOI’s financial statements) and trust funds 

considered Federal funds are included in DOI’s financial statements. 
96 NOTES TO THE FINANCIAL STATEMENTS 

 

U.S. Government as Trustee for Indian Trust Funds Held for Indian Tribes 

and Other Special Trust Funds 

Statement of Assets and Trust Fund Balances as of September 30 

(In millions of dollars) 2006 2005 

Assets 

Current Assets: 

Cash and cash equivalents ...................................................................... 503.4 501.6 

Investments .............................................................................................. 2,417.8 2,380.2 

Total assets............................................................................................ 2,921.2 2,881.8 

Trust fund balances, held for Indian Tribes and by DOI ..................... 2,921.2 2,881.8 

 

 

U.S. Government as Trustee for Indian Trust Funds Held for Indian Tribes 

and Other Special Trust Funds 

Statement of Changes in Trust Fund Balances as of September 30 

(In millions of dollars) 2006 2005 

Receipts ...................................................................................................... 460.50 517.7 

Disbursements ............................................................................................ (421.1) (611.2) 

Increase (decrease) in trust fund balances, net.......................................... 39.4 (93.5) 

Trust fund balances, beginning of year....................................................... 2,881.8 2,975.3 

Trust fund balances, end of year ........................................................... 2,921.2 2,881.8 

 

OST also maintains about 323,000 open Individual Indian Monies (IIM) accounts. The IIM fund is primarily a 

deposit fund 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. 
NOTES TO THE FINANCIAL STATEMENTS 97

 

U.S. Government as Trustee for Indian Trust Funds Held for Individual 

Indian Monies Trust Funds 

Statement of Assets and Trust Fund Balances as of September 30 

(In millions of dollars) 2006 2005 

Assets: 

Cash and cash equivalents......................................................................... 61.9 28.3 

Investments................................................................................................. 353.9 388.6 

Accrued interest receivable......................................................................... 2.5 3.0 

Total assets .............................................................................................. 418.3 419.9 

Trust fund balances, held for individual Indians .................................... 418.3 419.9 

 

 

U.S. Government as Trustee for Indian Trust Funds Held for Individual 

Indian Monies Trust Funds 

Statement of Changes in Trust Fund Balances as of September 30 

(In millions of dollars) 2006 2005 

Receipts ..................................................................................................... 372.9 301.6 

Disbursements ........................................................................................... (374.5) (278.4) 

Increase (decrease) in trust fund balances, net......................................... (1.6) 23.2 

Trust fund balances, beginning of year...................................................... 419.9 396.7 

Trust fund balances, end of year............................................................. 418.3 419.9 

 

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 Special 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 Special 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. 

Note 23. Social Insurance 

The statements of social insurance provide estimates of the status of the Social Security, Medicare, Railroad 

Retirement and Black Lung social insurance programs which are administered by the SSA, HHS, RRB, and DOL, 

respectively. The estimates are actuarial present values of the projections and 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 relevant agency performance and accountability reports for SSA, HHS, RRB and DOL 

(Black Lung). The projections are based on the continuation of program provisions contained in current law. The 

estimates in the consolidated financial statements are for persons who are participants or eventually will participate 

in the programs as contributors (workers) or beneficiaries (retired workers, survivors, and disabled) during a 75-year 
98 NOTES TO THE FINANCIAL STATEMENTS 

time period (Black Lung is projected only through 2040). 

Contributions and earmarked taxes consist of payroll taxes from employers, employees, and self-employed 

persons; revenue from Federal income taxation of OASDI and railroad retirement benefits; excise tax on 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. 

Future participants for Social Security and Medicare include births during the projection period and individuals 

below age 15 as of January 1 of the valuation year. Railroad’s future participants are the projected new entrants as of 

January 1 of the valuation year. 

The present values of future expenditures less future revenues is the current amount of funds needed to cover 

projected shortfalls, excluding the starting trust fund balances, over the projection period. They are calculated by 

subtracting the actuarial present values of future scheduled contributions and dedicated tax income by and on behalf 

of current and future participants from the actuarial present value of the future scheduled benefit payments to them 

or on their behalf. For these calculations, the trust fund balances at the beginning of the valuation period are not 

included. The trust fund balances in billions of dollars, as of the valuation date, for the respective programs, 

including interest earned, are shown in the following table. 

 **********************UNAUDITED*********************

Social Insurance Program 

 2006 2005 2004 2003 2002 

 

Social Security....................... 1,859 1,687 1,531 1,378 1,213 

Medicare 

HI ................................... 285 268 256 235 209 

SMI ................................... 23 19 24 34 41 

Railroad Retirement .............. 30 28 26 22 21 

Black Lung............................. (10) (9) (8) (8) (8) 

The projection period for future participants covers the next 75 years for the Social Security, Medicare, and 

Railroad Retirement programs. The projection period for current participants in the Social Security and Medicare 

programs (i.e., those age 15 and over on January 1 of the valuation year, referred to as the “closed group”) would 

theoretically cover all of their working and retirement years, a period that could be greater than 75 years in a 

relatively small number of instances. 

Social Security – Program Description 

The OASDI program, 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 these two funds are taxes paid by workers, their employers, and individuals with selfemployment 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 fluctuations 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. 
NOTES TO THE FINANCIAL STATEMENTS 99

Medicare – Program Description 

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.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. Similarly 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. 

Social Security and Medicare – Demographic and Economic Assumptions 

The Boards of Trustees2 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 consumer price index (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 and HHS’s performance and accountability 

reports. 

 

1

 Medicare legislation in 2003 created the new Part D account in the SMI Trust Fund to account for the new prescription drug benefit that began 

in 2006. Similar to Medicare Part B, approximately three-quarters of revenues to the Part D account is expected to come from future transfers 

from the General Fund of the Treasury. 

2

 There are six trustees: the Secretaries of 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. 
100 NOTES TO THE FINANCIAL STATEMENTS 

Table 1A 

Social Security – Demographic and Economic Assumptions 

 

Demographic Assumptions 

Period Life 

Expectancy 

at Birth4

Year 

Total 

Fertility 

Rate1

Age-Sex 

Adjusted 

Death Rate2

Net 

Immigration3

(persons) Male Female 

2006 2.03 848.9 1,075,000 75.0 79.7 

2010 2.03 829.2 1,000,000 75.5 79.9 

2020 2.01 767.1 950,000 76.6 80.7 

2030 2.00 707.4 900,000 77.6 81.6 

2040 2.00 654.5 900,000 78.5 82.4 

2050 2.00 608.0 900,000 79.4 83.1 

2060 2.00 566.9 900,000 80.3 83.9 

2070 2.00 530.3 900,000 81.0 84.5 

2080 2.00 497.6 900,000 81.8 85.1 

 

 Economic Assumptions 

Year 

Real 

Wage 

Differential5

(percent) 

Average 

Annual Wage 

in Covered 

Employment6

(percent 

change) 

CPI7

(percent 

change) 

Real 

GDP8

(percent 

change) 

Total 

Employment9

(percent 

change) 

Average 

Annual 

Interest 

Rate10

(percent) 

2006 1.2 4.1 2.9 3.4 1.7 4.9 

2010 1.5 4.3 2.8 2.6 0.7 5.9 

2020 0.9 3.7 2.8 2.1 0.4 5.7 

2030 1.1 3.9 2.8 1.9 0.3 5.7 

2040 1.1 3.9 2.8 2.0 0.3 5.7 

2050 1.1 3.9 2.8 2.0 0.3 5.7 

2060 1.1 3.9 2.8 1.9 0.3 5.7 

2070 1.1 3.9 2.8 2.0 0.3 5.7 

2080 1.1 3.9 2.8 1.9 0.3 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 2030. 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. 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. 

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.

7 The calendar price index (CPI) is the annual average value for the calendar year of the CPI for urban wage earners and clerical

workers. 

8 The real Gross Domestic Product (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. 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. 
NOTES TO THE FINANCIAL STATEMENTS 101

Table 1B 

Medicare – Demographic and Economic Assumptions 

 

Demographic Assumptions 

Year 

Total 

Fertility 

Rate1

Age-Sex 

Adjusted 

Death Rate2

Net 

Immigration3

(persons) 

2006 2.03 848.9 1,075,000 

2010 2.03 829.2 1,000,000 

2020 2.01 767.1 950,000 

2030 2.00 707.4 900,000 

2040 2.00 654.5 900,000 

2050 2.00 608.0 900,000 

2060 2.00 566.9 900,000 

2070 2.00 530.3 900,000 

2080 2.00 497.6 900,000 

 

 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) 

2006 1.2 4.1 2.9 3.4 4.7 8.6 0.0 1.4 

2010 1.5 4.3 2.8 2.6 4.7 4.1 7.9 3.1 

2020 0.9 3.7 2.8 2.1 4.4 4.5 6.6 2.9 

2030 1.1 3.9 2.8 1.9 5.8 5.6 5.3 2.9 

2040 1.1 3.9 2.8 2.0 5.8 5.3 5.2 2.9 

2050 1.1 3.9 2.8 2.0 4.9 4.8 4.9 2.9 

2060 1.1 3.9 2.8 1.9 4.6 4.7 4.6 2.9 

2070 1.1 3.9 2.8 2.0 4.5 4.4 4.4 2.9 

2080 1.1 3.9 2.8 1.9 4.3 4.3 4.3 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 2030. 

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. 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. 

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 calendar price index (CPI) is the annual average value for the calendar year of the CPI for urban wage earners and clerical workers. 6

 The real Gross Domestic Product (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. 
102 NOTES TO THE FINANCIAL STATEMENTS 

Railroad Retirement – Program Description 

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 had 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 transactions are intragovernmental transfers and are 

excluded in the 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 

228,000 in 2006. 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 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 National Railroad Retirement Investment Trust 

(NRRIT) investments. The wage increase reflects the expected increase in railroad employee earnings. 

The demographic assumptions include rates for mortality 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 

2006 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 103

Table 2 

Railroad Retirement Demographic Actuarial Assumptions 

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 which are limited to spouses and disabled 

children. 

3 This rate is 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 – Program Description

The Black Lung Disability Benefit Program provides compensation for medical and survivor benefits for 

eligible coal miners who are disabled due to pneumoconiosis (black lung disease) arising out 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. 

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. 
104 NOTES TO THE FINANCIAL STATEMENTS 

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 4.40 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 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 range from 4.00 

percent to 4.30 percent, and medical cost increases range from 4.00 percent to 4.10 percent. 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 4.5 percent to 13.9 percent and new borrowings ranging from 

4.9 percent to 5.8 percent. 

SMI Part B Physician Update Factor 

The projected Part B expenditure growth reflected in the accompanying SOSI 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 37 percent over 

the next 9 years. Reductions of this magnitude are not feasible and such reductions are very unlikely to occur fully in 

practice. For example, Congress has overridden scheduled negative updates for each of the last 4 years. 3

 However, 

since these reductions are required in the future under the current-law payment system, they are reflected in the 

accompanying SOSI as required under GAAP. Consequently, the projected actuarial present values of Part B 

expenditure shown in the accompanying SOSI 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 $17.6 trillion. 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 

$22.3 trillion. Alternatively, 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 $24.4 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). 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. 

 

3

 Recently, Congress passed legislation to override scheduled reductions for 2007. The Tax Relief and Health Care Act of 2006, H.R. 6111, 109th 

Cong. As of December 11, 2006, the President had not signed the legislation. 
NOTES TO THE FINANCIAL STATEMENTS 105

Note 24. Stewardship Land 

Stewardship land refers to 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 modified its units of measure to more accurately reflect the major categories of uses of stewardship land. 

As of fiscal year 2006 they have 547 national wildlife refuges, 390 national parks, 126 geographic management 

areas, 86 fish hatcheries, and many other categories. At the end of fiscal year 2006 the Department of Agriculture’s 

Forest Services managed an estimated 192.8 million acres of public land, while 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. 

Note 25. Heritage Assets 

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 nonfinancial. The public entrusts the Government with these assets and holds it accountable for their 

preservation. Examples of heritage assets include 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 have been put in place that 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 controls 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 discussion of the Government’s heritage assets is not all-inclusive. Rather, it highlights significant heritage 

assets reported by Federal agencies. 

The Government classifies heritage assets into two broad categories: 

• Collection type 

• Non-collection type 

Collection type heritage assets include objects gathered and maintained for museum and library collections. 

Non-collection type heritage assets include national wilderness areas, wild and scenic rivers, natural landmarks, 

forests, grasslands, historic places and structures, memorials and monuments, buildings, national cemeteries and 

archeological sites. 
106 NOTES TO THE FINANCIAL STATEMENTS 

Please refer to the individual financial statements of the Smithsonian Institution, the Department of the Interior, 

the Department of Agriculture-Forest Service, the National Archives and Records Administration, and the website 

for the Library of Congress at http://www.loc.gov/index.html, for additional information on multi-use heritage 

assets, including agency stewardship policies, physical units by major categories and the condition. 

Note 26. Restatements 

 September 30, 2005 

In billions of dollars) Reported Restated 

Reconciliation of Net Operating Cost and Unified Budget Deficit: 

Net Operating Cost......................................................................................................... 760.0 760.2 

Components of Net Operating Cost not Part of the Budget Deficit: 

Property, plant, and equipment disposals and revaluations ........................................ 47.8 (43.7) 

Components of the Budget Deficit not Part of Net Operating Cost: 

Capitalized Fixed assets: 

Department of Defense............................................................................................. (110.2) (28.3) 

Civilian Agencies ...................................................................................................... (36.4) (25.1) 

Total Capitalized Fixed Assets............................................................................... (146.6) (53.4) 

(Increase) in Securities and Investments..................................................................... (18.2) (16.2) 

Principal repayments of precredit reform loans ........................................................... 9.7 (2.2) 

All other Reconciling Items .......................................................................................... (13.2) (4.8) 

Guaranteed Loan Programs (Note 4): 

Small Business Loans-SBA: 

Face Value of Loans Outstanding............................................................................. 73.3 63.3 

Amount Guaranteed By the Government.................................................................. 61.1 51.1 

Property, Plant, and Equipment, Net (Note 6): 

Defense: Furniture, Fixtures and Equipment: 

Cost................................................................................................................................ 1,266.4 665.5 

Accumulated Depreciation.............................................................................................. 908.8 316.1 

Net Balance.................................................................................................................... 357.6 349.4 

 

The fiscal year 2005 Reconciliation of Net Operating Cost and Unified Budget Deficit has been restated to 

correct for material errors made during the consolidation process. These errors caused an understatement of the 

property, plant, and equipment disposals and revaluations line item and an overstatement of the capitalized fixed 

assets line item by $91.5 billion and by $93.2 billion, respectively. The components of total capitalized fixed assets, 

Department of Defense and Civilian Agencies, were overstated by $81.9 billion and $11.3 billion, respectively. In 

addition, the increase in securities and investments and the principal repayments of precredit reform loans were also 

overstated by $2.0 billion and $11.9 billion, respectively. Lastly, all other reconciling items (formerly called the “net 

amount of all other differences”) was overstated by $8.4 billion. 

The Department of Defense reported a prior period adjustment due to material errors resulting from a change in 

the methodology for the reporting of military equipment. The methodology previously used by DOD was not 

compliant with Statement of Federal Financial Accounting Standards (SFFAS) Number 23, Eliminating the 

Category National Defense Property, Plant, and Equipment. This adjustment decreased the value of furniture, 

fixtures, and equipment (FFE) and associated accumulated depreciation by $600.9 billion and 592.7 billion, 

respectively, resulting in an $8.2 billion downward restatement in net FFE balance. The net effect of this adjustment 

impacted the fiscal year 2005 Balance Sheet and the Statements of Operations and Changes in Net Position. In fiscal 

year 2006, DOD recorded other adjustments of $0.2 billion for correction of accounting errors. 

During fiscal year 2006, the SBA discovered an error in their presentation of Guaranteed Loans Outstanding in 

its fiscal year 2005 financial statements. The amounts disclosed in the fiscal year 2005 consolidated financial 

statements’ Note 4—Loans Receivable and Loan Guarantee Liabilities, Net for Small Business Loans-SBA 

guaranteed loans outstanding as of September 30, 2005, were overstated by $10 billion due to a data error in SBA's 

loan accounting system. The correction of this error by SBA has lowered both the face value and the amount 

guaranteed by the Federal Government of guaranteed loans outstanding as of September 30, 2005, by $10 billion. 

Since these amounts are for informative purposes only and are not contained in any other financial statement line 

items, there is no further impact of this correction in the consolidated financial statements or notes. 
SUPPLEMENTAL INFORMATION (UNAUDITED) 107

United States Government 

Supplemental Information (Unaudited) 

for the Years Ended September 30, 2006, 

and September 30, 2005 

Social Insurance

The social insurance programs 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. At the end of calendar year 2005, OASDI benefits were paid to 

approximately 48 million beneficiaries. Though the events that trigger benefit payments are quite different, both 

trust funds have the same earmarked financing structure: primarily payroll taxes and income taxes on benefits. All 

financial operations of the OASI and DI Programs are handled through these respective funds. The two funds are 

often referred to as simply the combined OASDI Trust Funds. 

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 covered earnings. The self-employed pay 12.4 percent of covered earnings. Payroll taxes 

are computed on wages and net earnings from self-employment up to a specified maximum annual amount ($94,200 

in 2006) 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. 

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 

 

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. 
108 SUPPLEMENTAL INFORMATION (UNAUDITED) 

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. Similarly 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 75 percent of program costs for both Parts B and D. Beneficiaries pay monthly premiums that finance 

approximately 25 percent of costs. 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. 

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 

Federal 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 offbudget status, 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 Federal 

programs. (For ease of understanding, these other Federal programs are referred to here as 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 these 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 receives large 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. While the transfers currently 

support the Part B account, in 2006 additional transfers were made to the Part D account and are expected to finance 

about three-fourths of expenses in that account. The transfers are automatic; their size depends on how much the 

program spends, not on how much revenue comes into the Treasury. If General Fund revenues become insufficient 

 

2

 The Federal unified budget encompasses all Federal 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 Federal Trust and Other 

Earmarked Funds, GAO-01-199SP, January 2001. In the figure and the discussion that follows, we group all other programs, including these 

other earmarked trust fund programs, under “Other Government Accounts” to simplify the description and maintain the focus on Social Security 

and Medicare. 
SUPPLEMENTAL INFORMATION (UNAUDITED) 109

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, or reduce SMI benefits. 

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). But 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. So from the standpoint of the Government as a whole, at least in an 

accounting sense, these interest credits are a wash. 

It is important to understand the additional implications of these loans from the trust funds to the other 

Government accounts. When the trust funds get the receipts that they loan to the General Fund, these receipts 

provide additional authority to spend on benefits and other program expenses. The General Fund, in turn, has taken 

on the obligation of paying interest on these loans every year and repaying the principal when trust fund income 

from other sources falls below expenditures—the loans will be called in and the General Fund will have to reduce 

other spending, raise taxes, or borrow more from the public to finance the benefits paid by the trust funds. 

Figure 1 

Social Security, Medicare, and Governmentwide Finances 

M 

E 

A 

N 

S 

O 

F 

F 

I 

N 

A 

N 

C 

E 

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 

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 
110 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Actual dollar amounts roughly corresponding to the flows presented in Figure 1 are shown in Table 1 for fiscal 

year 2006. The first three columns show revenues and expenditures for HI, SMI, and OASDI, respectively, and the 

fourth column is the sum of these three columns. The fifth column has total revenues and expenditures for all other 

Government programs, which includes the General Fund account, and the last column is the sum of the “combined” 

and “other Government” columns. 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 ($162.8 billion) and interest credits ($114.5 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 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 ($184.9 billion) and revenues ($194.4 billion) was $9.5 billion in 2006, indicating that HI had a 

relatively small positive 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 

2006. The difference, $147.7 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 ($548.5 billion) and revenues from the public ($636.4 

billion) was -$87.9 billion in 2006, 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 revenues exceeded total expenditures by $25.4 billion in 2006, 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 $210.2 billion ($46.1 + $164.1), including $162.6 billion transferred from other Government 

accounts (the General Fund), exceeded total expenditures by $16.4 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 $733.8 billion ($636.4 + $97.4), including interest and a small amount of other Government transfers, 

exceeded total expenditures of $548.5 billion by $185.2 billion. 
SUPPLEMENTAL INFORMATION (UNAUDITED) 111

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 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 

Annual Revenues and Expenditures for Medicare and Social Security 

Trust Funds and the Total Federal Budget, Fiscal Year 2006 

(In billions of dollars) 

 Trust Funds 

Revenue and Expenditure Categories HI SMI 

 

OASDI 

Combined 

Other 

Government Total1 

 

Revenues from the Public: 

Payroll and benefit taxes ........................ 190.7 - 636.4 827.1 - 827.1

Premiums ............................................... 3.7 46.1 - 49.8 - 49.8

Other taxes and fees .............................. - - - - 1,529.8 1,529.8

Total ..................................................... 194.4 46.1 636.4 876.9 1,529.8 2,406.7

 

Total expenditures to the public2............... 184.9 193.8 548.5 927.1 1,727.2 2,654.4

 

Net results for budget perspective3 ...... 9.5 (147.7) 87.9 (50.3) (197.4) (247.7)

 

Revenues from Other Government 

Accounts: 

Transfers ................................................ 0.5 162.6 (0.3) 162.8 (162.8) - 

Interest credits........................................ 15.4 1.5 97.7 114.5 (114.5) - 

Total ..................................................... 15.9 164.1 97.4 277.3 (277.3) - 

 

Net results for trust fund 

perspective 3, 4....................................... 25.4 16.4 185.2 227.0 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 $247.7 was the 

total Federal deficit in fiscal year 2006. 

2

 The OASDI figure includes $3.8 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. 

4

 Details may not add to totals due to rounding. 

Note: “N/A” indicates not applicable. 
112 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 workers for the historical period and 

estimated for the next 75 years. In 2006, there were about 30 beneficiaries for every 100 workers. By 2030, there 

will be about 46 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 2006; by 

2030 there are expected to be about 42 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 due to declining birth rates and increasing 

longevity. 

Chart 1—OASDI Beneficiaries per 100 Covered Workers 

1970-2080 

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/TR06
SUPPLEMENTAL INFORMATION (UNAUDITED) 113

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 1970-2080 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 

1970-2080 

(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/TR06

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. 
114 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 decline slightly until about 2008. It then begins 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 2040, 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 74 percent of scheduled benefits after trust fund exhaustion in 2040 and 

70 percent of scheduled benefits in 2080. 

Chart 3—OASDI Income (Excluding Interest) and Expenditures 

as a Percent of Taxable Payroll 

1970-2080 

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/TR06 Calendar Year

Historical Data

Expenditures

Income

2040: Year Trust Fund Exhausted

2017: First Year Expenditures

Exceed Noninterest Income

Cash Deficit Covered by

Interest and Trust Fund Assets
SUPPLEMENTAL INFORMATION (UNAUDITED) 115

Income and Expenditures as a Percent of GDP. Chart 4 shows estimated annual income (excluding interest) 

and expenditures, expressed as percentages of GDP, the total value of goods and services produced in the United 

States. This alternative perspective shows the size of the OASDI Program in relation to the capacity of the national 

economy to sustain it. The gap between expenditures and income widens continuously 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 2006 to 6.3 percent in 2080. In 2080, expenditures are projected to 

exceed income by 1.8 percent of GDP. 

Chart 4—OASDI Income (Excluding Interest) and Expenditures 

as a Percent of GDP 

1970-2080 

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/TR06 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. 
116 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 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 0.72 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 $6,449 billion to $5,000 billion, a 22 

percent smaller shortfall. The high cost death rate assumption (1.26 percent) results in an increase in the shortfall, 

from $6,449 billion to $8,195 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 results in an 12 

percent smaller shortfall (i.e., expenditures less income), from $6,449 billion to $5,699 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 

$6,449 billion to $5,542 billion, a 14 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 $6,449 billion to $6,876 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 7 percent drop in the shortfall, from $6,449 billion to $5,982 billion, relative to the intermediate case; and 

the high-cost assumption results in a 5 percent higher shortfall. 

Finally, Table 2 shows the sensitivity of the shortfall to variations in the real interest rate or, in present value 

terminology, the sensitivity to alternative discount rates. Assuming a higher discount rate results in a lower present 

value. The shortfall of $4,850 billion is 25 percent lower when the real interest rate is 3.6 percent rather than 2.9 

percent, and 40 percent higher when the real interest rate is 2.1 percent rather than 2.9 percent. 
SUPPLEMENTAL INFORMATION (UNAUDITED) 117

Table 2 

Present Values of Estimated OASDI Expenditures in Excess of Income 

Under Various Assumptions, 2006-2080 

(In billions of dollars) 

Shortfall 

Assumption Low Intermediate High 

 

Average annual reduction in death rates .. 5,000 

(0.30) 

6,449 

(0.72) 

8,195 

(1.26) 

Total fertility rate........................................ 5,699 

(2.3) 

6,449 

(2.0) 

7,189 

(1.7) 

Real wage differential................................ 5,542 

(1.6) 

6,449 

(1.1) 

7,091 

(0.6) 

CPI change................................................ 6,015 

(3.8) 

6,449 

(2.8) 

6,876 

(1.8) 

Net immigration ......................................... 5,982 

(1,300,000) 

6,449 

(900,000) 

6,782 

(672,500) 

Real interest rate....................................... 4,850 

(3.6) 

6,449 

(2.9) 

9,034 

(2.1) Numbers in parentheses are the values of the assumptions used in the respective scenario. 

Source: 2006 OASDI Trustees Report and SSA. 

Medicare Projections 

Recent Medicare Legislation. On December 8, 2003, President Bush signed into law the Medicare Prescription 

Drug, Improvement, and Modernization Act of 2003. The 2003 law will have 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 could be obtained through a private drug-only plan, a 

private preferred-provider organization or health maintenance organization, or through an employer-sponsored 

retiree health plan. The preferred-provider organizations are new to the Medicare Program and will operate on a 

regional basis. The Federal Government will assume 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. 
118 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 11 percent of GDP by 2080. Revenues from taxes and premiums (including State 

transfers under Part D) are expected to increase from 1.8 percent of GDP in 2005 to 3.1 percent of GDP in 2080. 

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 1.0 percent to 5.0 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 65 percent in 

2005 to 40 percent in 2080) while general revenues will rise (from 35 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 2080. 

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

as a Percent of GDP 

1970-2080 

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) 119

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 1970-2080 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 

1970-2080 

(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
120 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 beginning in 2004, and cash deficits continue thereafter. Trust fund 

interest earnings and assets provide enough resources to pay full benefit payments until 2018 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 2018. Present tax rates would be 

sufficient to pay 80 percent of scheduled benefits after trust fund exhaustion in 2018 and 29 percent of scheduled 

benefits in 2080. 

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

as a Percent of Taxable Payroll 

1970-2080 

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

2018: 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) 121

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 1.5 

percent of GDP in 2005, to 2.8 percent in 2030, and to 4.9 percent by 2080. The gap between expenditures and 

income widens continuously with expenditures growing as a share of GDP and income declining slightly relative to 

GDP. By 2080, expenditures are projected to exceed income by 3.5 percent of GDP. 

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

as a Percent of GDP 

1970-2080 

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
122 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 

1970-2080 

(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) 123

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 2005, SMI expenditures were $157 billion, which was 1.26 percent of GDP. After 

2005, this percentage is projected to increase steadily reaching 6.1 percent in 2080. 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 0.3 percent in 2005 to nearly 1.5 percent of GDP in 2080, 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 

1970-2080 

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

 (Part B+Part D)

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 $11,290 billion to $4,459 billion, a 61 percent smaller shortfall. The high cost assumption results in a near 

doubling of the shortfall, from $11,290 billion to $22,387 billion. 
124 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 7 percent greater shortfall while a lower 

growth rate reduces the shortfall by about 9 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 40 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, 2006-2080 

(In billions of dollars) 

 Shortfall 

Assumption1 Low Intermediate High 

Average annual growth in health costs2 ............. 4,459 

(3.1) 

11,290 

(4.1) 

22,387 

(5.1) 

Total fertility rate3 ................................................ 11,078 

(2.3) 

11,290 

(2.0) 

11,510 

(1.7) 

Real wage differential ......................................... 10,521 

(0.6) 

11,290 

(1.1) 

12,286 

(1.6) 

CPI change ......................................................... 11,234 

(1.8) 

11,290 

(2.8) 

11,337 

(2.8) 

Net immigration................................................... 11,157 

(672,500) 

11,290 

(900,000) 

11,498 

(1,300,000) 

Real interest rate................................................. 8,464 

(3.6) 

11,290 

(2.9) 

15,847 

(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. 
SUPPLEMENTAL INFORMATION (UNAUDITED) 125

Table 4 shows the effects of various assumptions about the growth in health care costs on the present value of 

estimated SMI (Medicare Parts B and D) expenditures in excess of income. As with HI, net SMI expenditures are 

very sensitive to changes in the health care cost growth assumption. For the low cost alternative, the slower assumed 

growth in health costs reduces the Governmentwide resources needed for Part B from $13,132 billion to $9,236 

billion and in Part D from $7,884 billion to $5,559 billion, about a 30 percent difference in each case. The high-cost 

assumption increases Governmentwide resources needed to $19,316 billion for Part B and to $11,539 billion for Part 

D, just over a 45 percent increase 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, 2006-2080 

(In billions of dollars) 

 Governmentwide Resources Needed 

Medicare Program1

Low 

(4.1) 

Intermediate 

(5.1) 

High 

(6.1) 

Part B ............................................................. 9,236 13,132 19,316 

Part D............................................................. 5,559 7,884 11,539 

 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 2006 Medicare Trustees Report, the HI Trust Fund is projected to remain solvent until 2018 

and, according to the 2006 Social Security Trustees Report, the OASDI Trust Funds are projected to remain solvent 

until 2040. 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 $11,290 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 $11,005 billion in present value after subtracting the value of the existing trust fund balances (an 

asset to the trust fund account but an intragovernmental transfer to the overall budget). For SMI, revenues from the 

public for Parts B and D combined are estimated to be $21,016 billion less than total expenditures for the two 

accounts, an amount that, from a budget perspective, will be needed to keep the SMI program solvent for the next 75 

years. From the trust fund perspective, however, the present values of total revenues and total expenditures for the 

 

5

 Interest income is not a factor in this table as dollar amounts are in present value terms. 
126 SUPPLEMENTAL INFORMATION (UNAUDITED) 

SMI Program are equal due to the annual adjustment of revenue from other Government accounts to meet program 

costs.6 For OASDI, projected revenues from the public fall short of total expenditures by $6,449 billion in present 

value dollars and, from the trust fund perspective, by $4,591billion. 

From the Governmentwide perspective, the present value of the total resources needed for the Social Security 

and Medicare Programs equals $38,754 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 $15,572 billion in present value 

terms are needed, beyond the $21,015 billion in present value of required general revenue transfers already 

scheduled for the SMI Program and the $2,167 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, 2006) 

 SMI 

 HI Part B Part D OASDI Total 

Revenues from the Public: 

Taxes......................................... 10,644 - - 32,107 42,751

Premiums, State transfers......... - 4,481 2,366 - 6,847

Total........................................ 10,644 4,481 2,366 32,107 49,598

Total costs to the public.......... 21,934 17,613 10,250 38,557 88,354

Net results for Governmentwide (budget) perspective1, 2 .. 11,290 13,131 7,884 6,449 38,754

Revenues from other 

Government accounts ............... - 13,131 7,884 - 21,015

Trust fund in 1/1/2006.................. 285 23 - 1,859 2,167

Net results for trust fund 

perspective1 ............................. 11,005 23 - 4,590 15,572

1

 Net results are computed as costs less revenues. 

2

 Details may not add to totals due to rounding. 

Source: 2006 OASDI and Medicare Trustees’ Reports. 

Infinite Horizon 

The 75-year horizon represented in Table 5 is consistent with the primary focus of the Social Security and 

Medicare Trustees’ Reports. For the OASDI Program, for example, an additional $6.5 trillion in present value will 

be needed above currently scheduled taxes to pay for scheduled benefits ($4.6 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 

 

6

 The SMI Trust Fund also has a very small amount of existing assets. 
SUPPLEMENTAL INFORMATION (UNAUDITED) 127

needed for all the programs sums to almost than $86 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 2006. 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 $28.1 trillion and $13.3 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 ($26.2 trillion + $16.0 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 2080 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, 2006) 

 SMI 

(In trillions of dollars) HI Part B Part D OASDI Total 

Present value of future costs less 

future taxes and premiums and State 

transfers for current participants .......... 12.2 10.6 6.2 15.1 44.1 

Less current trust fund ............................ 0.3 - - 1.9 2.2 

Equals net obligations for past and 

current participants............................... 11.9 10.6 6.2 13.2 41.9 

Plus net obligations for future 

participants ........................................... 16.2 15.6 9.8 0.1 41.7 

Equals net obligations through the 

infinite future for all participants ........... 28.1 26.2 16.0 13.3 83.6 

 

Present value of future costs less the 

present values of future income over 

the infinite horizon ................................ 28.4 26.2 16.0 15.2 85.8 

 

Source: 2006 OASDI and Medicare Trustees’ Reports. 

Railroad Retirement, Black Lung, and Unemployment 

Insurance 

Railroad Retirement 

The RRB was created in the 1930s to establish a retirement benefit program for the nation’s railroad workers. 

As the social security program legislated in 1935 would not give railroad workers credit for service performed prior 

to 1937, legislation was enacted in 1934, 1935, and 1937 (collectively the Railroad Retirement Acts of the 1930s) to 

establish a railroad retirement 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 
128 SUPPLEMENTAL INFORMATION (UNAUDITED) 

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 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 $3.6 billion. During fiscal year 2006, the NRRIT made net transfers of $947 

million to the RRB to pay retirement benefits. Administrative expenses of the trust are paid out of trust assets. The 

balance as of September 30, 2006, and 2005, 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 2006-2080 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) 129

Chart 11—Estimated Railroad Retirement Income 

(Excluding Interest and Financial Interchange Income) and Expenditures 

2006-2080 

(In billions of nominal dollars) 

$0

$10

$20

$30

$40

$50

$60

$70

2006 2010 2014 2018 2022 2026 2030 2034 2038 2042 2046 2050 2054 2058 2062 2066 2070 2074 2078

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, after which their growth slows for the next 45 years (until 2050). 

After 2060, the imbalances widen due in part to reductions in tax rates between 2061 to 2068. 
130 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 2016 but then begin to decrease steadily as 

expenditures fall. Tax rates begin to decline after 2048, stabilizing after 2063. Compared to last year, projected tax 

rates are lower. 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 

2006-2080 

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2010 2014 2018 2022 2026 2030 2034 2038 2042 2046 2050 2054 2058 2062 2066 2070 2074 2078

Calendar Year

Income

Expenditure

Source: Railroad Retirement Board
SUPPLEMENTAL INFORMATION (UNAUDITED) 131

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 4.5 percent smaller shortfall of income to expenditures, and the high-cost scenario has a 

3.8 percent higher shortfall. A higher discount rate reduces future values relative to a lower rate. As seen in the 

table, the shortfall is 29.5 percent lower if the interest rate is 11 percent rather than 7.5 percent and 72 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 

(In millions of dollars) 

 

Assumption Low Middle High 

Employment1 ................ 96,480 

(1.0%) 

101,050 

(2.5%) 

104,876 

(4.0%) 

 

Interest rate................... 71,242 

(11%) 

101,050 

(7.5%) 

173,819 

(4%) 

1

 The low and middle employment scenarios have passenger service employment remaining at 43,000 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 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, 2006. The data are consistent with the statements of social insurance. 

From a Governmentwide perspective, revenues are expected to fall short of expenditures by approximately 

$101.1 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. 
132 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, 2006) 

 

Estimated Future Income (Excluding Interest)3 Received from or on Behalf of: 

Current participants who have attained retirement age............................................. 4.5 

Current participants not yet having attained retirement age...................................... 39.7 

Those expected to become participants.................................................................... 55.5 

All participants............................................................................................................ 99.7 

Estimated Future Expenditures:4

Current participants who have attained retirement age............................................. 91.7 

Current participants not yet having attained retirement age...................................... 84.1 

Those expected to become participants.................................................................... 25.0 

All participants............................................................................................................ 200.8 

Net obligations from budget perspective (expenditures less income).............. 101.1 

Railroad Retirement Program assets (mostly investments stated at market)5 .......... 30.0 

Financial Interchange from Social Security Trust ...................................................... 72.1 

Net Obligations from Trust Fund Perspective......................................................... (1.0)

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 1/1/2005 

whereas present values are as of 1/1/2006. 
SUPPLEMENTAL INFORMATION (UNAUDITED) 133

Black Lung 

The Federal Coal Mine Health and Safety Act of 1969 created the Black Lung Disability Benefit Program to 

provide compensation for medical and survivor benefits for eligible coal miners who are disabled due to 

pneumoconiosis (black lung disease) arising out of their coal mine employment. The 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, 2006, total liabilities of the BLDTF exceed assets by $9.6 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 4.5 

percent to 13.8 percent and new borrowings ranging from 4.9 percent to 5.8 percent. 

From the budget or consolidated financial perspective, Chart 13 shows projected black lung expenditures 

(excluding interest) and excise tax collections for the period 2007-2040. 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 52 percent between the years 2013 to 

2015. After 2015, cash surpluses continue to widen due to a declining beneficiary population and increasing 

revenues. Including projected interest payments that the program must make, however, the picture changes 

dramatically. 
134 SUPPLEMENTAL INFORMATION (UNAUDITED) 

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

2007-2040 

(In millions of nominal dollars) 

$0

$100

$200

$300

$400

$500

$600

$700

$800

2007 2010 2013 2016 2019 2022 2025 2028 2031 2034 2037 2040

Fiscal Years

Cash Income

Cash Outgo

(benefits and administrative

costs)

Source: Department of Labor
SUPPLEMENTAL INFORMATION (UNAUDITED) 135

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 

2007-2040 

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

2007 2010 2013 2016 2019 2022 2025 2028 2031 2034 2037 2040

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 35-year projections of expenditures and revenues for the Black Lung Program 

computed as of September 30, 2006, using a discount rate equivalent to 6.34 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 $3.7 billion (a surplus). From a trust fund perspective, a 

large balance ($9.6 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 $5.9 billion in present value dollars. 
136 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Table 9 

Present Values of 35-Year Projections of Revenues and Expenditures 

for the Black Lung Program (In billions of present value dollars, as of September 30, 2006) 

 

Estimated future tax income............................................................................................ 6.9 

Estimated future expenditures......................................................................................... 3.2 

Net obligations from budget perspective (expenditures less income)............................. (3.7) 

Accumulated balance due General Fund........................................................................ 9.6 

Net obligations from trust fund perspective..................................................................... 5.9 

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 

unemployed workers who lose 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 also are 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) 137

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 positive net cash inflows for the next 4 years. 

There is a crossover back to a net outflow in fiscal year 2012, after which net inflows resume for the remainder of 

the projection period. 

Chart 15—Estimated Unemployment Fund Cashflow 

Using Expected Economic Conditions 

2007-2016 

(In billions of nominal dollars) 

$30

$35

$40

$45

$50

$55

$60

$65

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Fiscal Years 

Cash Inflow

Cash Outflow 

Source: Department of Labor 
138 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 6.04 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 4.8 percent during fiscal year 2007, increasing to 4.9 percent in fiscal year 2009 

and thereafter. Under the mild recessionary scenario, the unemployment rate peaks at 7.43 percent in fiscal year 

2009 and declines gradually until reaching 4.9 percent in 2015. Finally, under the deep recession scenario, the 

unemployment rate is assumed to peak at 10.14 percent in 2010 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 

$16 billion. From the same perspective, under a deep recession scenario, the present value of expenditures exceeds 

the present value of income by $51 billion. From a trust fund perspective, the program has more than $66 billion in 

assets. When combined with the present value of net cash income under expected economic conditions, the program 

has a surplus of $82 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 October 1, 2006) 

 Economic Conditions 

Expected 

Mild 

Recession 

Deep 

Recession 

 

Future cash income................................................... 357.3 415.6 475.1 

Future expenditures................................................... 341.3 420.1 526.3 

Net obligations from budget perspective 

(expenditures less income)..................................... (16.0) 4.5 51.2 

Trust fund assets ....................................................... 66.1 66.1 66.1 

Net obligations from trust fund perspective1.............. (82.1) (61.6) (14.9) 

1

Net obligations from the trust fund perspective=net obligations from the budget perspective-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. The Missouri state account had loans payable 

to FUA at the end of fiscal year 2006. In addition, Texas had outstanding debts to other sources. 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, 2006. As the table illustrates, 27 

State funds were below the minimal solvency ratio on September 30, 2006. 
SUPPLEMENTAL INFORMATION (UNAUDITED) 139

Chart 16—Unemployment Trust Fund Solvency as of September 30, 2006 

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
140 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 on 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) 2006 2005 2006 2005 2006 2005 

 

Asset Category: 

Buildings, structures, and 

facilities ................................... 25.3 23.2 32.1 33.7 11.7 11.4 

Furniture, fixtures, and 

equipment ............................... 0.4 - 0.4 0.1 0.1 0.1 

Other general property, plant, 

and equipment ........................ 1.6 1.1 1.6 1.1 0.1 - 

Heritage assets.......................... 1.7 1.7 2.9 2.9 - 0.1 

Total deferred maintenance.... 29.0 26.0 37.0 37.8 11.9 11.6 

 

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 $688.5 billion as of September 30, 2006. 
SUPPLEMENTAL INFORMATION (UNAUDITED) 141

Unexpended Budget Balances 

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 for fiscal years 2006 and 2005 are $381.1 billion 

(estimated) and $458.0 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 for fiscal years 2006 and 2005 are $1,013.8 billion (estimated) and $911.3 billion, 

respectively. 

The President’s Budget with fiscal year 2006 actuals is expected to be published in February 2007; thus the 

unobligated and obligated amounts reported for fiscal year 2006 are estimates from the President’s Budget issued in 

February 2006. The amounts initially reported as unexpended budget balances at the end of fiscal year 2005 were 

different from the actual balances reflected in the President’s Budget that was issued in February 2006 by 

approximately $83.1 billion (net) and $16.3 billion (net) for unobligated and obligated balances, respectively, due to 

compilation differences. The unobligated balance that was previously reported erroneously included about $56.4 

billion of non-budgetary financing accounts and $27.1 billion of expired accounts and excluded $0.4 billion amounts 

from certain verifying agencies. The obligated balance that was previously reported erroneously included about 

$42.1 billion of non-budgetary financing accounts, and excluded $0.8 billion from certain verifying agencies, and 

$(25) billion in adjustments to agencies’ reported balances. 

Tax Burden 

The Internal Revenue Code provides for progressive tax rates, whereby higher incomes are generally subject to 

higher tax rates. The 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 Returns for Tax Year 2004 

 

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 ................... 37,315 200,248 3,306 5,366 89 1.7% 

$15,000 under $30,000 ...... 29,581 650,044 23,749 21,975 803 3.7% 

$30,000 under $50,000 ...... 24,536 957,783 62,190 39,036 2,535 6.5% 

$50,000 under $100,000 .... 28,196 1,984,569 178,486 70,385 6,330 9.0% 

$100,000 under $200,000 .. 9,750 1,291,062 176,173 132,417 18,069 13.6% 

$200,000 or more............... 3,007 1,681,201 386,515 559,096 128,538 23.0% 

Total ................................ 132,385 6,764,907 830,419 
142 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Corporation Income Tax Returns for Tax Year 2003 

Total Assets 

Income Subject 

to Tax 

Total Income Tax 

after Credits

Percentage of Income 

Tax after Credits to 

Taxable Income 

 (In millions of dollars) (In millions of dollars)

Zero assets .............................. 7,476.0 1,987.0 26.6% 

$1 under $500.......................... 8,159.0 1,435.0 17.6% 

$500 under $1,000................... 3,541.0 785.0 22.2% 

$1,000 under $5,000................ 10,482.0 2,994.0 28.6% 

$5,000 under $10,000.............. 6,240.0 2,045.0 32.8% 

$10,000 under $25,000............ 9,033.0 2,941.0 32.6% 

$25,000 under $50,000............ 8,208.0 2,677.0 32.6% 

$50,000 under $100,000.......... 10,321.0 3,297.0 31.9% 

$100,000 under $250,000........ 20,870.0 6,516.0 31.2% 

$250,000 or more..................... 615,006.0 152,840.0 24.9% 

Total....................................... 699,336.0 177,517.0 25.6% 

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 or not the IRS detects it, and whether or not 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’s balance sheet. The tax gap and the collection gap are related and 

overlapping concepts, but they have significant differences. The collection gap is a cumulative balance sheet concept 

for a particular point in time, while the tax gap is like an income statement item for a single year. Moreover, the tax 

gap estimates include all noncompliance, while the collection gap includes only amounts that have been assessed (a 

small portion of all noncompliance). 
SUPPLEMENTAL INFORMATION (UNAUDITED) 143

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 $14.8 billion and $12.0 billion for fiscal years 2006 and 2005, respectively. 

For those under appeal, the estimated payout is $7.0 billion and $11.1 billion for fiscal years 2006 and 2005, 

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. 

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 14─Insurance Program 

Liabilities, for events that have already occurred, the Federal 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 for the 

following insurance programs. 

Please refer to the individual financial statements of the PBGC and the National Credit Union Administration 

for other significant detailed information. 

Risk Assumed Information as of September 30 

(In billions of dollars) 2006 2005 

 

 Present Value of unpaid expected losses, 

 net of associated premiums:

Pension Benefit Guaranty Corporation..... 73.4 108.5 

All other...................................................... - 0.1 

Total........................................................ 73.4 108.6 

Periodic changes in risk 

 assumed amounts: 

Pension Benefit Guaranty Corporation...... (35.1) 12.7 

All other...................................................... - (0.2) 

Total........................................................ (35.1) 12.5 
144 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Unmatched Transactions and Balances 

 

(In millions of dollars)

Fiscal Year 

2006 

Fiscal Year 

2005 

Change in Intra-Governmental Unmatched Balances 

Debt/Investments..................................................................... 1,231.4 (4,881.5)

Interest Payable/Receivable.................................................... 77.7 81.6 

Loans Payable/Receivable...................................................... (1,178.0) (9,891.3)

Benefit Program Contributions Payable/Receivable ............... (128.8) 5,021.1 

Accounts Payable/Receivable................................................. 10,271.5 (13,096.3)

Advances from/to Others & Deferred Credits/Prepayments ... (855.5) 9,047.6 

Transfers Payable/Receivable................................................. (379.8) 1,627.4 

 9,038.5 (12,091.4)

 

Unmatched Intra-Governmental Transactions 

Federal Securities Interest Revenue/Expense– 

Investment Exchange .......................................................... 2,206.2 1,578.9 

Borrowings Interest Revenue/Expense–Exchange................. 397.0 669.6 

Borrowings Gains/Losses........................................................ (16.5) (10.3)

Transfers - In/Out Without Reimbursement............................. 7,386.3 6,352.4 

Appropriations Transfers–In/Out ............................................. (5,554.0) (5,495.8)

Imputed Financing Source/Cost .............................................. (7.6) 87.2 

Benefit Program Revenue/Cost............................................... (950.3) (1,672.8)

Unexpended Appropriations Transferred In/Out ..................... (601.4) 3,058.3 

 2,859.7 4,567.5 

 

General Fund Transactions and Timing Adjustments.................. (13,579.9) 9,589.6 

Intra-Agency Reporting Errors*.................................................... (5,357.5) 1,019.6 

Top Level Journal Vouchers ........................................................ (3,951.5) (7,198.5) 

Unmatched Transactions and Balances, Net........................... (10,990.7) (4,113.2) 

*Includes reporting errors for DHS (5,371.0) million in fiscal year 2006 and (2.0) million in fiscal year 2005. 

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 reveal 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 than the net amounts shown. In addition, included in the net amount labeled “General Fund 

Transactions and Timing Adjustments” are certain intragovernmental accounts, primarily related to 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 table above reflect improvements or deteriorations in the 

Government’s ability to reconcile intra-governmental transactions. The Federal community considers the identification 

and accurate reporting of intra-governmental activity a priority
STEWARDSHIP INFORMATION (UNAUDITED) 145

United States Government

Stewardship Information (Unaudited)

for the Years Ended September 30, 2006, 

and September 30, 2005

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 2006 for investments in prior years (fiscal years 2005-2002) 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

 2006

 Restated

 Fiscal

 Year

 2005

Restated

Fiscal

Year

2004

Restated

Fiscal

Year

2003 

Restated

Fiscal

Year

2002 

Investments in non-federal physical 

property ................................................................ 52.3 49.7 49.4 48.1 48.2 

Investments in human capital ................................ 107.8 88.0 76.9 71.1 61.5 

Research and development:

Investments in basic research................................ 26.2 25.4 23.9 22.3 20.5 

Investments in applied research................................ 20.7 21.1 20.8 19.2 18.1 

Investments in development ................................ 80.5 66.6 61.1 50.1 45.6 

Total investments ................................

 287.5 250.8 232.1 210.8 193.9 

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. 

DOT, HUD, and the Environmental Protection Agency (EPA) had $43.5 billion (83 percent), $3.6 billion (7

percent), and $3.1 billion (6 percent), respectively, of the total non-federal physical property investments in fiscal 
146 STEWARDSHIP INFORMATION (UNAUDITED)

year 2006 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 $39.7 billion during fiscal year 2006, 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 wastewater and related waterquality programs. 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.

Education, DOL, and VA had $93.1 billion (86 percent), $6.0 billion (6 percent), and $3.6 billion (3 percent), 

respectively, of the total human capital investments in fiscal year 2006 as shown in Table 11. These same agencies 

also had similar investment amounts (and percentage contributions) in each of the preceding 4 years.

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 

47 percent of the annual investments relate 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.

Research and Development

Federal investments in research and development (R&D) comprise those expenses for basic research, applied 

research, and development that are intended to increase or maintain national economic productive capacity or yield 

other future benefits.

• Investments in basic research are for systematic studies to gain knowledge or understanding of the 

fundamental aspects of phenomena and of observable facts without specific applications toward processes 

or products in mind.

• Investments in applied research are for systematic studies to gain knowledge or understanding necessary 

for determining the means by which a recognized and specific need may be met.

• Investments in development are the systematic use of the knowledge and understanding gained from 

research for the production of useful materials, devices, systems, or methods, including the design and 

development of prototypes and processes.

With regard to basic and applied research, HHS had $15.7 billion (60 percent) and $10.9 billion (52 percent), 

of the total basic and applied research investments, respectively, in fiscal year 2006 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 of the department’s basic and applied 

research. NIH conducts many types of basic and applied medical research, including basic and disease-related 

research, observational, population-based, behavioral and clinical research; and health services research.

With regard to development, DOD had $56.7 billion (70 percent) of total development investments in fiscal 

year 2006 as shown in Table 11. DOD development focuses on advanced technology, weapons demonstrations, and 

engineering, manufacturing and operational systems development. This development is aimed to improve all aspects 

of war-fighting, including ground, air and space, tactical, and strategic weaponry.
APPENDIX 147

Appendix: Significant Government Entities Included and 

Excluded from the Financial Statements 

This Financial Report includes the executive branch with their corresponding departments and entities, the 

legislative and judicial branches, and other independent establishments and Government corporations. Excluded are 

privately owned Government-sponsored enterprises such as the Federal Home Loan Banks and the Federal National 

Mortgage Association. The Federal Reserve System is excluded because organizations and functions pertaining to 

monetary policy are traditionally separate from, and independent of, other central Government organizations and 

functions. 

Significant Entities Included in these Statements: 

(in Statement of Net Cost order):

Department of Defense (DOD)

 www.defenselink.mil 

Department of Health and Human Services (HHS)

 www.hhs.gov 

Social Security Administration (SSA)

 www.ssa.gov 

Department of Veterans Affairs (VA)

 www.va.gov 

Department of Agriculture (USDA) 

 www.usda.gov 

Department of Education (ED) 

 www.ed.gov 

Department of the Treasury (Treasury)

 www.ustreas.gov 

Department of Transportation (DOT)

 www.dot.gov 

Department of Energy (DOE) 

 www.energy.gov 

Department of Homeland Security (DHS)

 www.dhs.gov 

Department of Labor (DOL) 

 www.dol.gov 

Department of Housing and Urban Development (HUD)

 www.hud.gov 

Department of Justice (DOJ) 

 www.usdoj.gov 

Office of Personnel Management (OPM)

 www.opm.gov 

National Aeronautics and Space Administration (NASA)

 www.nasa.gov 

Department of the Interior (DOI) 

 www.doi.gov 

Department of State (State) 

 www.state.gov 

U.S. Agency for International Development (USAID)

 www.usaid.gov 

Environmental Protection Agency (EPA)

 www.epa.gov 

Department of Commerce (DOC) 

 www.doc.gov 

Federal Communications Commission (FCC)

 www.fcc.gov 

Railroad Retirement Board (RRB) 

 www.rrb.gov 

National Science Foundation (NSF) 

 www.nsf.gov 

Federal Deposit Insurance Corporation (FDIC)

 www.fdic.gov 

Small Business Administration (SBA)

 www.sba.gov 

Nuclear Regulatory Commission (NRC)

 www.nrc.gov 

General Services Administration (GSA)

 www.gsa.gov 

National Credit Union Administration (NCUA)

 www.ncua.gov 

Tennessee Valley Authority (TVA) 

 www.tva.gov 

Export-Import Bank of the United States (Ex-Im Bank)

 www.exim.gov 

Pension Benefit Guaranty Corporation (PBGC)

 www.pbgc.gov 

U.S. Postal Service (USPS) 

 www.usps.gov 

 Other Significant Entities

Farm Credit System Insurance Corporation (FCSIC)

 www.fcsic.gov 

U.S. Securities and Exchange Commission (SEC)

 www.sec.gov 

Smithsonian Institution 

 www.si.edu 

Executive Office of the President 

Federal Trade Commission (FTC) 

 www.ftc.gov 
148 APPENDIX 

Government Accountability Office (GAO) 

 www.gao.gov 

Government Printing Office (GPO) 

 www.gpo.gov 

Library of Congress (LC) 

 www.loc.gov 

National Archives and Records Administration (NARA)

 www.nara.gov 

National Transportation Safety Board (NTSB)

 www.ntsb.gov 

Significant Entities Excluded from these Statements: 

Army and Air Force Exchange Service 

Board of Governors of the Federal Reserve System 

 (Including the Federal Reserve Banks) 

Federal National Mortgage Association (Fannie Mae) 

Farm Credit System 

Federal Home Loan Banks 

Federal Retirement Thrift Investment Board 

 (Including the Thrift Savings Fund) 

Financing Corporation 

Federal Home Loan Mortgage Corporation 

 (Freddie Mac) 

Marine Corps Exchange 

Navy Exchange Service Command 

Resolution Funding Corporation 

Student Loan Marketing Association (SLMA or Sallie 

Mae)
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 149

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 (OMB), 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 our report on the accompanying U.S. government’s consolidated 

financial statements for the fiscal years ended September 30, 2006 and 2005,2 and our 

associated reports on internal control and compliance with significant laws and 

regulations. 

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 audit the consolidated financial statements for the fiscal years ended September 

30, 2006 and 2005. Appendix I discusses the scope and methodology of our work. 

 

1

The Government Management Reform Act of 1994 has required such reporting, covering the executive 

branch of government, beginning with financial statements prepared for fiscal year 1997. 31 U.S.C. 331(e). 

The federal government has elected to include certain financial information on the legislative and judicial 

branches in the consolidated financial statements as well. 2

The consolidated financial statements for the fiscal years ended September 30, 2006 and 2005 consist of 

the Statements of Net Cost, Statements of Operations and Changes in Net Position, Reconciliations of Net 

Operating Cost and Unified Budget Deficit, Statements of Changes in Cash Balance from Unified Budget 

and Other Activities, Balance Sheets, and as of January 1, 2006, the Statement of Social Insurance, 

including the related notes to these 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). 

United States Government Accountability Office

Washington, DC 20548 

Comptroller General

of the United States
150 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

A significant number of material weaknesses5 related to financial systems, fundamental 

recordkeeping and financial reporting, and incomplete documentation 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 economical, efficient, and effective manner. We found the following: 

• Certain material weaknesses in financial reporting and other limitations on the scope 

of our work resulted in conditions that continued to prevent us from expressing an 

opinion on the accompanying consolidated financial statements for the fiscal years 

ended September 30, 2006 and 2005.6

 

• 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, 2006. 

• Our work to test compliance with selected provisions of significant laws and 

regulations in fiscal year 2006 was limited by the material weaknesses and scope 

limitations discussed in this report. 

DISCLAIMER OF OPINION ON THE CONSOLIDATED FINANCIAL 

STATEMENTS

Because of the federal government’s inability to demonstrate the reliability of significant 

portions of the U.S. government’s accompanying consolidated financial statements for 

fiscal years 2006 and 2005, 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 financial statements. 

As a result of these limitations, readers are cautioned that amounts reported in the 

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 

government day to day and budget information reported by federal agencies—that is 

taken from the same data sources as the consolidated financial statements. 

 

5

A material weakness is a condition that precludes the entity’s internal control from providing 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. 

6

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 2005. 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 151

We have not audited and do not express an opinion on the Management’s Discussion and 

Analysis, Stewardship Information, Supplemental Information, or other information 

included in the accompanying fiscal year 2006 Financial Report of the United States 

Government (Financial Report). 

In fiscal year 2006, the federal government adopted the following new federal accounting 

standards, as discussed in the notes: 

• accounting for and reporting of earmarked funds7 (Notes 1 and 20), 

• reporting heritage assets and stewardship land8

 (Notes 1, 24, and 25), 

• changes in disclosure of certain information in the consolidated financial 

statements9 (Note 1), and 

• presentation of the Statement of Social Insurance (SOSI) as a basic financial 

statement10 (Notes 1 and 23). 

The SOSI presents the actuarial present value of the federal government’s estimated 

future revenue to be received from or on behalf of the participants and estimated future 

expenditures to be paid to or on behalf of participants, using a projection period sufficient 

to illustrate the long-term sustainability of the social insurance programs. In preparing the 

SOSI, 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 SOSI 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 SOSI and the actual results, and those differences may be material. 

In addition to the inherent uncertainty that underlies the expenditure projections prepared 

for all parts of Medicare, the Supplementary Medical Insurance (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 for each 

of the last 4 years and recently passed legislation to override scheduled reductions for 

 

7

Federal Accounting Standards Advisory Board (FASAB) Statement of Federal Financial Accounting 

Standards (SFFAS) 27, Identifying and Reporting Earmarked Funds (Washington, D.C.: Dec. 28, 2004). 8

SFFAS 29, Heritage Assets and Stewardship Land (Washington, D.C.: June 7, 2005). 9

SFFAS 32, Consolidated Financial Report of the United States Government Requirements: Implementing 

Statement of Federal Financial Accounting Concepts 4 “Intended Audience and Qualitative 

Characteristics for the Consolidated Financial Report of the United States Government” (Washington, 

D.C.: Sept. 28, 2006). 

10SFFAS 25, Reclassification of Stewardship Responsibilities and Eliminating the Current Services 

Assessment (July 2003), and SFFAS 26, Presentation of Significant Assumptions for the Statement of Social 

Insurance: Amending SFFAS 25 (Washington, D.C.: Oct. 29, 2004). 
152 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

2007.11 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 more than the amounts presented in the SOSI. 

Significant Matters of Emphasis

Before discussing the material weaknesses that contributed to our disclaimer of opinion 

and the additional limitations on the scope of our work we identified, two significant 

matters require emphasis—the nation’s fiscal imbalance and restatements to the fiscal 

year 2005 consolidated financial statements. 

The Nation’s Fiscal Imbalance

While we are unable to express an opinion on the U.S. government’s consolidated 

financial statements, the following key items deserve emphasis in order to put the 

information contained in the financial statements and the Management’s Discussion and 

Analysis section of the 2006 Financial Report of the United States Government into 

context. Despite improvement in both the fiscal year 2006 reported net operating cost and 

the cash-based budget deficit, the U.S. government’s total reported liabilities, net social 

insurance commitments, and other fiscal exposures continue to grow and now total 

approximately $50 trillion, representing approximately four times the Nation’s total 

output (GDP) in fiscal year 2006, up from about $20 trillion, or two times GDP in fiscal 

year 2000. As this long-term fiscal imbalance continues to grow, the retirement of the 

“baby boom” generation is closer to becoming a reality with the first wave of boomers 

eligible for early retirement under Social Security in 2008. Given these and other factors, 

it seems clear that the nation’s current fiscal path is unsustainable and that tough choices 

by the President and the Congress are necessary in order to address the nation’s large and 

growing long-term fiscal imbalance. 

Restatements to the Consolidated Financial Statements

As discussed in Notes 4, 6, 17, and 26, the federal government restated certain of its 

fiscal year 2005 consolidated financial statements to correct errors. Restatements relating 

to property, plant, and equipment resulted from misstatements by the Department of 

Defense, which had received a disclaimer on its originally issued as well as its restated 

fiscal year 2005 financial statements. Certain other restatements that were made to the 

consolidated financial statements related to errors that occurred during the preparation of 

the fiscal year 2005 Reconciliation of Net Operating Cost and Unified Budget Deficit. 

Because of the material weaknesses over property, plant, and equipment and over the 

preparation of the consolidated financial statements discussed in this report, the restated 

amounts may not be reliable. 

 

11The Tax Relief and Health Care Act of 2006, H.R. 6111, 109th Cong. As of December 12, 2006, the 

President had not signed the legislation. 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 153

Limitations on the Scope of Our Work

For fiscal years 2006 and 2005, there were limitations on the scope of our work in 

addition to the material weaknesses that contributed to our disclaimer of opinion. First, 

Treasury and OMB depend on certain federal agencies’ representations 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 consolidated financial statements primarily because of insufficient 

representations provided to them by two CFO Act agencies. Second, Treasury was unable 

to provide the final consolidated financial statements and supporting documentation in 

time for us to complete all of our planned auditing procedures related to the compilation 

of these financial statements. 

Material Weaknesses Contributing to Our Disclaimer of Opinion

The federal government did not maintain adequate systems or have sufficient, reliable 

evidence to support certain material information reported in the accompanying 

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. Appendix II describes the material weaknesses in more detail and 

highlights the primary effects of these material weaknesses on the accompanying 

consolidated financial statements and on the management of federal government 

operations. The material weaknesses that contributed to our disclaimer of opinion 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 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 consolidated financial statements were 

(1) consistent with the underlying audited agency financial statements, (2) balanced, 

and (3) in conformity with GAAP; and 

• identify and either resolve or explain material differences that exist between certain 

components of the budget deficit reported in Treasury’s records, used to prepare the 

Reconciliation of Net Operating Cost and Unified Budget Deficit and Statement of 
154 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

Changes in Cash Balance from Unified Budget and Other Activities, and 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 consolidated 

financial statements that have not been identified. 

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, 

2006, 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, 

which were discussed above, we found the following four other material weaknesses in 

internal control as of September 30, 2006. These weaknesses are discussed in more detail 

in Appendix III, including the primary effects of the material weaknesses on the 

accompanying consolidated financial statements and on the management of federal 

government operations. These other material weaknesses were the federal government’s 

inability to: 

• implement effective credit reform estimation and related financial reporting 

processes; 

• determine the full extent to which improper payments exist; 

• identify and resolve information security control weaknesses and manage information 

security risks on an ongoing basis; and 

• effectively manage its tax collection activities. 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 155

Individual federal agency financial statement audit reports identify additional reportable 

conditions12 in internal control, some of which were reported by agency auditors as being 

material weaknesses at the individual agency level. These additional reportable 

conditions do not represent material weaknesses at the governmentwide level. Also, due 

to the issues noted throughout this report, additional material weaknesses may exist that 

have not been 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 the agency’s compliance with 

significant laws and regulations. Certain individual agency audit reports contain instances 

of noncompliance. None of these instances were material 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 the CFO Act, FFMIA, 

and the President’s Management Agenda, federal agencies need to modernize their 

financial management systems to generate reliable, useful, and timely financial and 

performance information throughout the year and at year-end. As discussed throughout 

this report, serious financial management weaknesses have contributed significantly to 

our inability to determine the reliability of the consolidated financial statements. In this 

regard, for fiscal year 2006, auditors for the majority of the CFO Act agencies reported 

material weaknesses or other reportable conditions in internal control over financial 

reporting. 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 CFO Act agencies’ financial statement audits, to 

report whether 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 year 2006, auditors for 17 of the 24 CFO Act agencies reported that the 

agencies’ financial management systems did not substantially comply with one or more 

 

12Reportable conditions are matters coming to our attention that, in our judgment, should be communicated 

because they represent significant deficiencies in the design or operation of internal control that could 

adversely affect the federal government’s ability to meet the internal control objectives described in this 

report. 
156 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

of these three FFMIA requirements. As a result, the financial management systems at the 

majority of federal agencies are still unable to routinely produce reliable, useful, and 

timely financial information, and the federal government’s capacity to manage with 

timely and objective data is limited, thereby hampering its ability to effectively 

administer and oversee its major programs. 

OMB CIRCULAR NO. A-123, Management’s Responsibility for Internal Control

OMB revised OMB Circular No. A-123, Management’s Responsibility for Internal 

Control, which GAO has supported.13 In fiscal year 2006, agencies began to implement 

the more rigorous requirements of the revised OMB Circular No. A-123, which include 

management identification, assessment, testing, correction, and documentation of internal 

controls over financial reporting for each account or group of accounts, as well as an 

annual assurance statement from the agency head as to whether internal control over 

financial reporting is effective. 

OMB recognized that due to the complexity of some agencies, implementation of these 

new requirements may span more than 1 year. Accordingly, certain agencies have 

adopted multi-year implementation plans. OMB stated that it will continue to work with 

the Chief Financial Officers Council to identify potential areas for additional guidance 

and share agencies’ best practices. It will be important that OMB monitor and oversee 

federal agencies’ implementation of these new requirements. 

- - - - - 

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. 

David M. Walker 

Comptroller General 

of the United States 

December 1, 2006 

 

13See GAO, Financial Management: Effective Internal Control Is Key to Accountability, GAO-05-321T 

(Washington, D.C.: Feb. 16, 2005). 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 157

APPENDIX I 

Objectives, Scope, and Methodology

The Government Management Reform Act of 1994 expanded the requirements of the 

Chief Financial Officers (CFO) Act by making the inspectors general of 24 major federal 

agencies14 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 200215 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 agencies16 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 focused primarily on determining the current status of the material weaknesses 

that contributed to our disclaimer of opinion and the other material weaknesses affecting 

internal control that we had previously reported in our report on the consolidated 

financial statements for fiscal year 2005.17 Our work included separately auditing the 

following significant federal agency components: 

• We audited and expressed an unqualified opinion on the Internal Revenue Service’s 

(IRS) fiscal years 2006 and 2005 financial statements. In fiscal years 2006 and 2005, 

IRS collected about $2.5 trillion and $2.3 trillion, respectively, in tax payments and 

paid about $277 billion and $267 billion, respectively, in refunds to taxpayers.18 In 

fiscal year 2006, we continued to report material internal control weaknesses, which 

resulted in ineffective internal control. Our tests of 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. 

• 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, 2006 and 2005.19 The schedules reported for these 2 fiscal years 

 

1431 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); see footnote 1. 15Pub. L. No. 107-289, 116 Stat. 2049 (Nov. 7, 2002); see 31 U.S.C. 3515. 

16See Treasury Financial Manual, volume I, part 2, chapter 4700, for a listing of the 35 agencies. 17For our report on the U.S. government’s consolidated financial statements for fiscal year 2005, see U.S. 

Department of the Treasury, 2005 Financial Report of the United States Government (Washington, D.C. 

Dec. 2005), pp. 135-154, which can be found on GAO’s Internet site at www.gao.gov. 18GAO, Financial Audit: IRS’s Fiscal Years 2006 and 2005 Financial Statements, GAO-07-136 

(Washington, D.C.: Nov. 9, 2006). 

19GAO, Financial Audit: Bureau of the Public Debt’s Fiscal Years 2006 and 2005 Schedules of Federal 

Debt, GAO-07-127 (Washington, D.C.: Nov. 7, 2006). 
158 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

(1) approximately $4.8 trillion (2006) and $4.6 trillion (2005) of federal debt held by 

the public;20 (2) about $3.7 trillion (2006) and $3.3 trillion (2005) of 

intragovernmental debt holdings;21 and (3) about $222 billion (2006) and $181 billion 

(2005) of interest on federal debt held by the public. We reported that as of 

September 30, 2006, BPD had effective internal control over financial reporting and 

compliance with significant laws and regulations relevant to the Schedule of Federal 

Debt. Further, we reported that there was no reportable noncompliance in fiscal year 

2006 with selected provisions of significant laws we tested. 

• We audited and expressed unqualified opinions on the December 31, 2005 and 2004, 

financial statements of the funds administered by the Federal Deposit Insurance 

Corporation (FDIC), including the Bank Insurance Fund, the Savings Association 

Insurance Fund, and the FSLIC Resolution Fund.22 We reported that as of December 

31, 2005, FDIC had effective internal control over financial reporting and compliance 

with significant laws and regulations. In addition, we performed certain procedures 

and tests of internal control over certain material balances of the funds administered 

by FDIC as of September 30, 2006. 

• We audited and expressed unqualified opinions on the fiscal years 2006 and 2005 

financial statements of the United States Securities and Exchange Commission 

(SEC).23 In fiscal year 2006, we reported that SEC had effective controls over 

financial reporting and compliance with significant laws and regulations. Further, we 

reported that there was no reportable noncompliance with selected provisions of 

significant laws and regulations we tested. 

We considered the CFO Act agencies’ and certain other federal agencies’ fiscal years 

2006 and 2005 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. We did not audit, and we do not express an opinion on, any of these individual 

federal agency financial statements. 

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 2002.24 In accordance with section 1008 of this act, DOD reported 

that its fiscal year 2006 financial statements were not completely reliable. DOD cited 

deficiencies in several areas affecting its financial statements, including, among others, 

 

20The public holding federal debt is comprised of individuals, corporations, state and local governments, 

the Federal Reserve Banks, and foreign governments and central banks. 

21Intragovernmental debt holdings represent federal debt issued by Treasury and held by certain federal 

government accounts such as the Social Security and Medicare trust funds. 22GAO, Financial Audit: Federal Deposit Insurance Corporation Funds’ 2005 and 2004 Financial 

Statements, GAO-06-146 (Washington, D.C.: March 2, 2006). 23GAO, Financial Audit: Securities and Exchange Commission’s Financial Statements for Fiscal Years 

2006 and 2005, GAO-07-134 (Washington, D.C.: Nov. 15, 2006). 24Pub. L. No. 107-107, §1008, 115 Stat. 1012, 1204 (Dec. 28, 2001). 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 159

(1) property, plant, and equipment; (2) inventory and operating material and supplies; 

(3) environmental liabilities; (4) intragovernmental eliminations; and (5) disbursement 

activity. DOD also acknowledges that it makes material amounts of unsupported 

accounting entries. 

We performed sufficient audit work to provide this report on the consolidated financial 

statements, internal control, and the results of our assessment of compliance with selected 

provisions of significant laws and regulations. We considered the limitations on the scope 

of our work in forming our conclusions. Our work was performed in accordance with 

U.S. generally accepted government auditing standards. 
160 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

APPENDIX II 

Material Weaknesses Contributing to Our Disclaimer of Opinion

The continuing material weaknesses discussed below contributed to our disclaimer of 

opinion on the federal government’s consolidated financial statements. The federal 

government did not maintain adequate systems or have sufficient, reliable evidence to 

support information reported in the accompanying 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 

consolidated financial statements. Most of the PP&E and inventories and related property 

are the responsibility of the Department of Defense (DOD). As in past years, DOD did 

not maintain adequate systems or have sufficient records to provide reliable information 

on these assets. Other agencies, most notably the National Aeronautics and Space 

Administration, reported continued weaknesses in internal control procedures and 

processes related to PP&E. 

Without reliable asset information, the federal government does not fully know the assets 

it owns and their location and condition and cannot effectively (1) safeguard assets from 

physical deterioration, theft, or loss; (2) account for acquisitions and disposals of such 

assets; (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 those related to treaties and other international 

agreements entered into to further the U.S. 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, improperly 

stated environmental and disposal liabilities and weak internal control supporting the 

process for their estimation affect the federal government’s ability to determine priorities 

for cleanup and disposal activities and to appropriately consider future budgetary 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 161

resources needed to carry out these activities. In addition, when 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 weaknesses in reconciling disbursement activity. For fiscal years 2006 and 

2005, there was unreconciled disbursement activity, including unreconciled differences 

between federal agencies’ and the Department of the 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. Improperly recorded disbursements 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 (hereafter referred to as “the 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. The Office of Management and Budget (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 2006 and 2005. For these fiscal years, based on trading 

partner information provided in the Governmentwide Financial Report System (GFRS), 

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. After analysis of the 

“Material Difference Reports” for fiscal year 2006, we noted that a significant 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 2006 and 2005, amounts reported by federal agency trading partners 
162 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

for certain intragovernmental accounts were significantly out of balance. In addition, for 

fiscal year 2006, about 31 percent of the significant agencies identified by Treasury and 

OMB did not perform the required audit procedures on their intragovernmental trading 

partner data included in the footnotes to their closing packages.25 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. 

OMB recently issued Memorandum No. M-07-03, Business Rules for Intragovernmental 

Transactions (November 13, 2006), which has also been incorporated in the Treasury 

Financial Manual.26 The OMB memorandum added criteria for resolving 

intragovernmental disputes and major differences between trading partners for certain 

intragovernmental transactions by creating the Chief Financial Officers Council’s 

Intragovernmental Dispute Resolution Committee.27 Resolving the intragovernmental 

transactions problem remains a difficult challenge and will require a strong commitment 

by federal agencies to fully implement the recently issued business rules and continued 

strong leadership by OMB. 

Preparation of Consolidated Financial Statements

While further progress was demonstrated in fiscal year 2006, 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, balanced, and in conformity with U.S. generally accepted 

accounting principles (GAAP). In addition, as discussed in our scope limitation section of 

this report, Treasury could not provide the final fiscal year 2006 consolidated financial 

statements and supporting documentation in time for us to complete all of our planned 

auditing procedures. During our fiscal year 2006 audit, we found the following:28

• Treasury showed progress by demonstrating 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 consistent 

with federal agencies’ financial statements prior to eliminating intragovernmental 

activity and balances. However, Treasury’s process for compiling the consolidated 

financial statements did not ensure that the information in the remaining three 

 

25GFRS uses a closing package methodology that has been developed to capture each federal agency's 

information and link the agencies' audited financial statements to the governmentwide consolidated 

financial statements. 

26Treasury Financial Manual, Bulletin No. 2007-03, Intragovernmental Business Rules. 27The U.S. Chief Financial Officers Council is an organization of the CFOs and Deputy CFOs of the largest 

federal agencies and senior officials of the Office of Management and Budget and the Department of the 

Treasury who work collaboratively to improve financial management in the U.S. Government. 

28Most of the issues we identified in fiscal year 2006 existed in fiscal year 2005, and many have existed for 

a number of years. In April 2006, we reported in greater detail on the issues we identified in GAO, 

Financial Audit: Significant Internal Control Weaknesses Remain in Preparing the Consolidated Financial 

Statements of the U.S. Government, GAO-06-415 (Washington, D.C.: April 21, 2006). This report includes 

numerous recommendations to Treasury and OMB. 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 163

principal financial statements and notes were fully consistent with the underlying 

information in federal agencies’ audited financial statements and other financial data. 

• To make the fiscal years 2006 and 2005 consolidated financial statements balance, 

Treasury recorded net decreases of $11 billion and $4.1 billion, respectively, to net 

operating cost on the Statement of Operations and Changes in Net Position, which it 

labeled “Other - Unmatched transactions and balances.”29 An additional net $10.4 

billion and $3.2 billion of unmatched transactions were recorded in the Statement of 

Net Cost for fiscal years 2006 and 2005, respectively. Treasury is unable to fully 

identify and quantify all components of these unreconciled activities. 

• The federal government did not have an adequate process to fully identify and report 

items needed to reconcile the operating results, which for fiscal year 2006 showed a 

net operating cost of $449.5 billion, to the budget results, which for the same period 

showed a unified budget deficit of $247.7 billion. 

• Treasury’s elimination of certain intragovernmental activity and balances continues to 

be impaired by the federal agencies’ problems in handling their intragovernmental 

transactions. As previously discussed, amounts reported for federal agency trading 

partners for certain intragovernmental accounts were significantly out of balance. 

This resulted in the need for unsupported intragovernmental elimination entries by 

Treasury in order to force the Statements of Operations and Changes in Net Position 

into balance. In addition, differences in other intragovernmental accounts, primarily 

related to transactions with the General Fund, have not been reconciled, still remain 

unresolved, and total hundreds of billions of dollars. Therefore, the federal 

government continues to be unable to determine the impact of unreconciled 

intragovernmental activity and balances on the consolidated financial statements. 

• We have consistently reported that certain financial information required by GAAP 

was not disclosed in the consolidated financial statements. In 2006, the Federal 

Accounting Standards Advisory Board issued a new standard that eliminated or 

lessened the disclosure requirements for the consolidated financial statements related 

to certain information that Treasury had not been reporting.30 There continued, 

though, to be other disclosures required by GAAP that are not disclosed in the 

consolidated financial statements. Treasury has plans to address certain of the omitted 

disclosures in future years’ consolidated financial statements. Because of certain of 

the material weaknesses noted in this report, we were unable to determine if the 

omitted information was material to the consolidated financial statements. 

 

29Although Treasury was unable to determine how much of the unmatched transactions and balances, if 

any, relate to operations, it reported this amount as a component of net operating cost in the accompanying 

consolidated financial statements. 

30SFFAS No. 32, Consolidated Financial Report of the United States Government Requirements: 

Implementing Statement of Federal Financial Accounting Concepts 4 “Intended Audience and Qualitative 

Characteristics for the Consolidated Financial Report of the United States Government” (Washington, 

D.C.: Sept. 28, 2006). 
164 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

• Treasury continued to make progress in addressing certain other internal control 

weaknesses in Treasury’s process for preparing the consolidated financial statements. 

However, internal control weaknesses continued to exist involving a lack of 

(1) appropriate documentation of certain policies and procedures for preparing the 

consolidated financial statements, (2) adequate supporting documentation for certain 

adjustments made to the consolidated financial statements, and (3) effective 

management reviews. 

• 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 

or disclose in the consolidated financial statements that the excluded financial 

information was immaterial. 

• As in previous years, Treasury did not have adequate systems and personnel to 

address the magnitude of the fiscal year 2006 financial reporting challenges it faced, 

such as (1) GFRS undergoing further development31 and not yet being fully 

operational, and (2) weaknesses in Treasury’s 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, 

there were not enough personnel with specialized financial reporting experience to 

help ensure reliable financial reporting by the reporting date. 

• During fiscal year 2006, Treasury, in coordination with OMB, developed and began 

implementing corrective action plans and milestones for short-term and long range 

solutions for certain internal control weaknesses we have previously reported 

regarding the process for preparing the consolidated financial statements. Resolving 

some of these internal control weaknesses will be a difficult challenge and will 

require a strong commitment from Treasury and OMB as they execute and implement 

their corrective action plans.

Outlays and Receipts—Components of the Budget Deficit

Both the Reconciliation of Net Operating Cost and Unified Budget Deficit and Statement 

of Changes in Cash Balance from Unified Budget and Other Activities report the budget 

deficit for fiscal years 2006 and 2005 of $247.7 billion and $318.6 billion, respectively.32

 

31See GAO, Financial Management Systems: Lack of Disciplined Processes Puts Effective Implementation 

of Treasury's Governmentwide Financial Report System at Risk, GAO-06-413 (Washington, D.C.: April 

21, 2006). 

32The budget deficit, receipts, and outlays amounts are reported in Treasury's Monthly Treasury Statement 

and the President's Budget. 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 165

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 deficit33

reported in the consolidated financial statements. OMB and Treasury have been working 

with federal agencies to reduce these material unreconciled differences. Such efforts have 

resulted in significantly reducing the net outlay differences in fiscal year 2006. 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 U.S. 

government’s consolidated financial statements will be unknown. 

In fiscal year 2006, we again noted that several agencies’ auditors reported internal 

control weaknesses (1) affecting the agencies’ SBRs, and (2) relating to monitoring, 

accounting, and reporting of budgetary transactions. These weaknesses could affect the 

reporting and calculation of the net outlay amounts in the agencies’ SBRs. In addition, 

such weaknesses also affect the agencies’ ability to report reliable budgetary information 

to Treasury and OMB and may affect the unified budget outlays reported by Treasury in 

its Combined Statement of Receipts, Outlays, and Balances,

34 and certain amounts 

reported in the President’s Budget. 

 

33See GAO's audit report on its audit of the federal government's fiscal year 2005 financial statements that 

was incorporated in the 2005 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). 34Treasury’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. 
166 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

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, 2006. In addition to the material weaknesses discussed in 

Appendix II that contributed to our disclaimer of opinion, we found the following four 

other material weaknesses in internal control. 

Loans Receivable and Loan Guarantee Liabilities

Federal agencies accounting for the majority of the reported balances for direct loans and 

loan guarantee liabilities continue to have internal control weaknesses related to their 

credit reform estimation and related financial reporting processes. While progress in 

addressing these long-standing weaknesses was reported by federal credit agencies, these 

issues and the complexities associated with estimating the costs of lending activities 

significantly increase the risk that material misstatements in agency and governmentwide 

financial statements could occur and go undetected. Further, these weaknesses continue 

to 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. 

Improper Payments

Under the leadership of OMB, agencies have continued to make progress in addressing 

improper payments. Improvements, though, are still needed to fully address the 

requirements of the Improper Payments Information Act of 2002 (IPIA).35 Major 

challenges remain in meeting the goals of the act and ultimately better ensuring the 

integrity of payments.36 The IPIA requires federal agencies to review all programs and 

activities, identify those that may be susceptible to significant improper payments, 37

estimate and report the annual amount of improper payments for those programs, and 

implement actions to cost-effectively reduce improper payments. In addition, OMB has 

established a program-specific initiative under the President’s Management Agenda for 

15 federal agencies to hold federal agency managers accountable for meeting the goals of 

IPIA and to ensure that the necessary attention and resources are dedicated to meeting the 

IPIA requirements. 

 

35Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002). 

36See GAO, Improper Payments: Incomplete Reporting under the Improper Payments Information Act 

Masks the Extent of the Problem, GAO-07-254T (Washington, D.C.: Dec. 5, 2006). 37IPIA defines improper payments as any payment that should not have been made or that was made in an 

incorrect amount (including overpayments and underpayments) under statutory, contractual, administrative, 

or other legally applicable requirements. It includes any payment to an ineligible recipient, any payment for 

an ineligible service, any duplicate payment, payments for services not received, and any payment that does 

not account for credit for applicable discounts. OMB’s guidance defines significant improper payments as 

those in any particular program that exceed both 2.5 percent of program payments and $10 million 

annually. 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 167

For fiscal year 2006, federal agencies’ estimates of improper payments, based on 

available information, totaled about $42 billion, a net increase of about $4 billion, or an 

11 percent increase from the prior year improper payment estimate of $38 billion.38 This 

increase was primarily attributable to 10 newly reported programs with improper 

payment estimates totaling about $2.3 billion and certain federal agencies reporting an 

increase in estimates for programs that had previously reported. 

We found that some agencies have not annually reviewed all programs and activities, 

have not estimated improper payments for all risk-susceptible programs, or have not 

estimated improper payments for all components of risk-susceptible programs. For 

example, we noted that in fiscal year 2006, improper payment estimates were not made 

for 9 risk-susceptible federal programs, including Medicaid with total program outlays of 

about $183 billion for fiscal year 2006. Further, we noted some agencies reported 

noncompliance issues and major management challenges related to IPIA implementation, 

including the methodologies used to estimate improper payments, adequacy of agency 

documentation, management oversight, and contract management. 

Information Security

Although progress has been made, serious and widespread information security control 

weaknesses 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. Such information security control weaknesses could result in 

compromising the reliability and availability of data that are recorded in or transmitted by 

federal financial management systems. A primary reason for these weaknesses is that 

federal agencies have not yet fully institutionalized comprehensive security management 

programs, which are critical to identifying information security control weaknesses, 

resolving information security problems, and managing information security risks on an 

ongoing basis. The Congress has shown continuing interest in addressing these risks, as 

evidenced by hearings on the implementation of the Federal Information Security 

Management Act of 200239 and information security. In addition, the administration has 

taken important actions to improve information security, such as requiring agencies in 

OMB Memorandum M-06-1640 to perform specific actions to protect certain personally 

identifiable information and issuing extensive guidance on information security. 

 

38In their fiscal year 2006 Performance and Accountability Reports (PARs), selected federal agencies 

updated their fiscal year 2005 improper payment estimates to reflect changes since issuance of their fiscal 

year 2005 PARs. These updates increased the governmentwide improper payment estimate for fiscal year 

2005 from $38 billion to $39 billion. 

39Title III of the E-Government Act of 2002, Pub. L. No. 107-347, 116 Stat. 2899, 2946 (Dec. 17, 2002). 40OMB Memorandum No. M-06-16, Protection of Sensitive Agency Information (June 23, 2006). 
168 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

Tax Collection Activities

Material internal control weaknesses and systems deficiencies continue to affect the 

federal government’s ability to effectively manage its tax collection activities,41 an issue 

that has been reported in our financial statement audit reports for the past 9 years. 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. In addition, the federal government did not always 

follow up on potential unreported or underreported taxes and did not always pursue 

collection efforts against taxpayers owing taxes to the federal government. 

Weaknesses in controls over tax collection activities continue to affect the federal 

government’s ability to efficiently and effectively account for and collect revenue. 

Additionally, weaknesses in financial reporting of revenues affect the federal 

government’s ability to make informed decisions about collection efforts. 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. 

(198411) 

 

41GAO, Financial Audit: IRS’s Fiscal Years 2006 and 2005 Financial Statements, GAO-07-136 

(Washington, D.C.: Nov. 9, 2006).