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Contents 

A Message from the Secretary of the Treasury

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

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

Statement of the Comptroller General of the United States ...................................................... 27 

Financial Statements 

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

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

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

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

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

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

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

 Statements of Changes in Social Insurance Amounts .................................................................. 49 

Notes to the Financial Statements 

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

 Note 2. Cash and Other Monetary Assets ..................................................................................... 64 

 Note 3. Accounts and Taxes Receivable, Net ............................................................................... 66 

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

 Liabilities, Net ................................................................................................................. 67 

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

 and Equity Investments, Net ............................................................................................ 71 

 Note 6. Non-TARP Investments in American International Group, Inc. ..................................... 76 

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

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

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

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

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

 Note 12. Other Assets ................................................................................................................... 89 

 Note 13. Accounts Payable ........................................................................................................... 90 

 Note 14. Federal Debt Securities Held by the Public and Accrued Interest ................................. 91 

 Note 15. Federal Employee and Veteran Benefits Payable .......................................................... 94 

 Note 16. Environmental and Disposal Liabilities ....................................................................... 102 

 Note 17. Benefits Due and Payable ............................................................................................ 104 

 Note 18. Insurance and Guarantee Program Liabilities .............................................................. 105 

 Note 19. Other Liabilities ........................................................................................................... 106 

 Note 20. Collections and Refunds of Federal Revenue .............................................................. 108 

 Note 21. Prior-Period Adjustments ............................................................................................ 111 

 Note 22. Contingencies .............................................................................................................. 112 

 Note 23. Commitments ............................................................................................................... 117 

 Note 24. Earmarked Funds ......................................................................................................... 120 

 Note 25. Fiduciary Activities...................................................................................................... 129 

 Note 26. Social Insurance ........................................................................................................... 131 

 Note 27. Stewardship Land and Heritage Assets ........................................................................ 151 

 Note 28. Subsequent Events ....................................................................................................... 152 
Required Supplementary Information (Unaudited) 

 Fiscal Projections for the U.S. Government – Fiscal Year 2012 ................................................ 155 

 Statement of Long Term Fiscal Projections............................................................................. 155 

 The Sustainability of Fiscal Policy .......................................................................................... 158 

 Alternative Scenarios ............................................................................................................... 164 

 Fiscal Projections in Context ................................................................................................... 166 

 Conclusion ............................................................................................................................... 167 

 Social Insurance ......................................................................................................................... 168 

 Social Security and Medicare .................................................................................................. 168 

 Railroad Retirement, Black Lung, and Unemployment Insurance .......................................... 190 

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

 Other Claims for Refunds ........................................................................................................... 202 

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

 Risk Assumed ............................................................................................................................. 203 

Other Accompanying Information (Unaudited) 

 Unexpended Budget Balances .................................................................................................... 205 

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

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

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

Required Supplementary Stewardship Information (Unaudited)

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

 Non-Federal Physical Property ................................................................................................ 212 

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

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

Appendices 

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

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

U.S. Government Accountability Office Independent Auditor’s Report ............................... 223 
List of Social Insurance Charts 

Chart 1 OASDI Beneficiaries per 100 Covered Workers, 1970-2086 ................................... 173 

Chart 2 OASDI Income (Excluding Interest) and Expenditures, 1970-2086 ......................... 174 

Chart 3 OASDI Income (Excluding Interest) and Expenditures 

 as a Percent of Taxable Payroll, 1970-2086 ............................................................ 175 

Chart 4 OASDI Income (Excluding Interest) and Expenditures 

 as a Percent of GDP, 1970-2086 ............................................................................. 176 

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

 as a Percent of GDP, 1970-2086 ............................................................................. 180 

Chart 6 Medicare Part A Income (Excluding Interest) and Expenditures, 1970-2086 .......... 181 

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

 as a Percent of Taxable Payroll, 1970-2086 ............................................................ 182 

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

 as a Percent of GDP, 1970-2086 ............................................................................. 183 

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

 1970-2086 ............................................................................................................... 184 

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

 as a Percent of GDP, 1970-2086 ............................................................................. 185 

Chart 11 Estimated Railroad Retirement Income (Excluding Interest and 

 Financial Interchange Income) and Expenditures, 2012-2086 ................................ 191 

Chart 12 Estimated Railroad Retirement Income (Excluding Interest and 

 Financial Interchange Income) and Expenditures as a Percent of 

 Tier II Taxable Payroll, 2012-2086 ......................................................................... 192 

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

 2013-2040 ............................................................................................................... 196 

Chart 14 Estimated Unemployment Trust Fund Cashflow Using Expected 

 Economic Conditions, 2013-2022 ............................................................................. 198 

Chart 15 Unemployment Trust Fund Solvency as of September 30, 2012 .............................. 200 
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A Citizen's Guide to the 2012 Financial Report of the U.S. Government 

i 

CITIZEN’S GUIDE TO THE 

2012 FINANCIAL REPORT OF THE UNITED STATES 

GOVERNMENT
A Citizen's Guide to the 2012 Financial Report of the U.S. Government 

ii

A Citizen’s Guide to the Fiscal Year 2012 

Financial Report of the United States Government 

The Citizen’s Guide (Guide) to the Fiscal Year (FY) 2012 Financial Report of the U.S. 

Government summarizes the current financial position and condition of the U.S. Government 

(See “Where We Are Now”, p. ii) and discusses key financial topics, including fiscal 

sustainability (See “Where We Are Headed”, p. v). This Guide and the Financial Report of the 

U.S. Government are produced by the U.S. Department of the Treasury in cooperation with the 

Office of Management and Budget (OMB). The Secretary of the Treasury, Deputy Director for 

Management of OMB, and Comptroller General of the United States at the Government 

Accountability Office (GAO) believe that the information discussed in this Guide is important to 

all Americans. 

Where We Are Now 

Comparing the Budget and the Financial Report 

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

financial planning and control tool. It accounts for past Government receipts and spending, and 

presents the President’s proposed receipt and spending plan. The Budget compares receipts, or 

cash received by the Government, with 

outlays, or payments made by the 

Government to the public, to derive a 

budget surplus (excess of receipts over 

outlays) or deficit (excess of outlays 

over receipts). Receipts and outlays 

are measured generally based on when 

the Government receives or dispenses 

cash. 

The Financial Report of the 

United States Government (Report) 

focuses on the Government’s revenues 

and costs (what came in and what went 

out), assets and liabilities (what it owns and owes), and other important financial information. It 

compares revenues (what the Government has collected and expects to collect, but has not 

necessarily received), with its costs (what the Government has incurred, but has not necessarily 

paid) to derive net operating cost. 

Chart 1 compares the Government’s budget deficit and net operating cost for FY 2008-2012. 

The difference between the $1.1 trillion budget deficit and $1.3 trillion net operating cost in FY 

2012 is predominantly due to: (1) non-cash costs associated with an increase in estimated 

liabilities related to Federal employee and veteran benefits, and (2) a partially offsetting decrease 

in costs associated with lower projected liabilities to the Government-Sponsored Enterprises 

(GSEs), specifically Fannie Mae and Freddie Mac. Together, the Budget and the Report present 

complementary perspectives on the Government’s financial position and condition, and provide a 

valuable decision-making and management tool for the Nation’s leaders. 
A Citizen's Guide to the 2012 Financial Report of the U.S. Government 

iii 

What Came In and What Went Out 

What came in? Chart 2 shows 

that increases in each of the three 

revenue categories (individual 

income tax and withholdings, 

corporate income taxes, and other 

revenue) combined to increase 

total Government revenues by 

$154.4 billion (6.5 percent) to just 

over $2.5 trillion for FY 2012. 

Together, individual and corporate 

taxes accounted for about 86 

percent of total revenues. Other 

revenues include excise and 

unemployment taxes, and customs 

duties. 

 What went out? The Government derives its net cost ($3.8 trillion in FY 2012) by 

subtracting revenues earned from Government programs (e.g., Medicare premiums, National 

park entry fees, and postal fees) from its gross costs and adjusts the amount for gains or losses 

from changes in actuarial assumptions used to estimate future liabilities for Federal employee 

and veteran benefits. The Government deducts taxes and other revenues shown in Chart 2, as 

well as adjustments for unmatched transactions and balances, from its net cost to arrive at its 

“bottom line” net operating cost, which increased by $3.7 billion (less than one-half of one 

percent), to remain essentially unchanged at $1.3 trillion in FY 2012. However, this minimal 

change includes significant 

offsetting changes, primarily: (1) a 

$292.1 billion increase in certain 

cost estimates for federal 

employee and veteran benefits; 

and (2) a $288.7 billion cost 

decrease1 associated with changes 

in Government liabilities to the 

GSEs. 

Chart 3 shows that the largest 

contributors to the Government’s 

net cost in FY 2012, as is the case 

in most years, include the 

Departments of Health and 

Human Services (HHS) and 

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

come from major social insurance and postemployment benefits programs administered by those 

agencies (e.g., Medicare for HHS, and Social Security for SSA). While much of DoD’s total 

costs relate to military operations and personnel, most of the increase in DoD’s cost during FY 

2012 was attributed to its Military Retirement Fund and other benefits programs. 

 

1 Department of the Treasury’s FY 2012 Annual Financial Report, p. 101. 
A Citizen's Guide to the 2012 Financial Report of the U.S. Government 

iv

What We Own and What We Owe 

Chart 4 is a summary of 

what the Government owns in 

assets and what it owes in 

liabilities. As of September 30, 

2012, the Government held 

about $2.7 trillion in assets, 

comprised mostly of net 

property, plant, and equipment 

($855.0 billion) and a combined 

total of $1,009.1 billion in net 

loans receivable (e.g., student 

loans) and direct loans and 

investments associated with the 

Troubled Asset Relief Program 

(TARP) and the GSEs (which 

relate to the Government’s 

economic recovery efforts). In recent years, with the ongoing wind-down of these programs, the 

balances of many of these investments have declined primarily through repayments and sales. 

Beyond these assets, other significant resources are available to the Government, including 

stewardship assets, such as natural resources, and the Government’s power to tax and set 

monetary policy.

The $18.8 trillion in total liabilities is comprised mostly of: (1) $11.3 trillion in Federal debt 

securities held by the public and accrued interest2 and (2) $6.3 trillion in Federal employee and 

veteran benefits payable. The Government also reports about $4.9 trillion of intragovernmental 

debt outstanding, which arises when one part of the Government borrows from another. For 

example, Government funds (e.g., Social Security and Medicare trust funds) are typically 

required to invest excess annual receipts in Federal debt securities issued by the Treasury 

Department, thus creating liabilities of the Treasury and assets of the trust funds. These 

respective amounts are included in individual Treasury Department and investing agency 

financial statements, but offset each other when the Governmentwide consolidated financial 

statements are prepared. 

The sum of debt held by the public and intragovernmental debt equals gross Federal debt, 

which, with some adjustments, is subject to a statutory ceiling (i.e., the debt limit), which was 

most recently raised by $1.2 trillion to $16.394 trillion in January 2012 pursuant to the Budget 

Control Act (BCA) of 2011. As of September 30, 2012, the Government’s total debt outstanding 

subject to the debt limit was $16.027 trillion, $367 billion below the current limit. As budget 

deficits continue to occur, the Government will have to borrow more from the public. Instances 

where the debt held by the public increases faster than the economy3

 for extended periods can 

pose additional challenges.

 

2

 Debt held by the public and accrued interest, as reported on the Government’s balance sheet, primarily consists of 

Treasury securities, net of unamortized discounts and premiums, and accrued interest. The “public” consists of individuals, 

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

Government. 3 Considering key macroeconomic indicators can help place the discussion of the Government’s financial results in a 

broader context. During FY 2012, the economy continued to grow, and at a faster rate than the previous year, job creation 

accelerated, and the unemployment rate declined. These and other economic and financial developments are discussed in greater 

detail in the Report.
A Citizen's Guide to the 2012 Financial Report of the U.S. Government 

v 

Where We Are Headed 

An important purpose of this Guide and the Report is to help citizens understand current 

fiscal policy, and the importance and magnitude of policy reforms necessary to make it 

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

Domestic Product (GDP) (the debt-to-GDP ratio) is ultimately stable or declining. To determine 

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

policy will be sustained indefinitely and draw out the implications for the growth of the debt-toGDP ratio.4

 The projections are therefore neither forecasts nor predictions. As policy changes 

are enacted, then actual financial outcomes will, of course, be different than those projected. 

The projections presented in this Report were finalized prior to the enactment of the 

American Taxpayer Relief Act (ATRA) in January 2013. 5 

 Receipts, Spending, and the Debt 

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

major category, and total spending expressed as a percent of GDP. The difference between the 

receipts and noninterest spending 

shares of GDP - 

the primary 

deficit-to-GDP 

ratio, grew 

rapidly in 2009 

due to the 

financial crisis 

and the recession, 

and the Federal 

Government’s 

response. The 

ratio stayed large 

from 2010 to 

2012 despite 

shrinking in each 

successive year, 

but is projected to 

fall rapidly 

between 2013 and 2018 as the economy recovers and spending reductions called for in the BCA 

take effect, reaching primary balance in 2018, and remaining relatively flat and near zero until 

2021. Between 2022 and 2039, however, increased spending for Social Security and health 

 

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

current law but are routinely extended or otherwise expected to continue, such as extension of relief from the Alternative 

Minimum Tax (AMT). In addition, for this year’s Report, the projections include the extension of all 2001/2003 tax cuts 

indefinitely, whereas in the FY 2011 Report, it was assumed that the high income tax cuts were allowed to expire. 5 ATRA did not extend the 2001/2003 tax cuts for high income individuals and families that were assumed to occur in the 

projections. Updating the projections in this Report to account for ATRA would therefore modestly reduce projected long term 

fiscal imbalances.
A Citizen's Guide to the 2012 Financial Report of the U.S. Government 

vi

programs6 due to continued aging of the population and anticipated rising health costs is 

expected to cause the primary deficit-to-GDP ratio to steadily deteriorate, reaching 2.3 percent of 

GDP in 2039. After 2039, the ratio is projected to slowly decline to 1.7 percent of GDP in 2087 

as the impact of the baby boom generation retiring dissipates. In these projections, the 

Affordable Care Act (ACA) 7 provision of health insurance subsidies and expanded Medicaid 

coverage boost federal spending, and other provisions significantly reduce per-beneficiary 

Medicare and Medicaid cost growth. Overall, the ACA is projected to substantially reduce 

federal expenditures over the next 75 years. However, as noted in the Report, there is 

uncertainty about the effectiveness of the ACA’s provisions designed to reduce health care cost 

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

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

The primary deficit projections in Chart 5, along with those for interest rates and GDP, 

determine the debt-toGDP ratio projections 

shown in Chart 6. 

That ratio was 73 

percent at the end of 

FY 2012 and under 

current policy is 

projected to grow to 

78 percent in 2022, 

145 percent in 2042, 

and 395 percent in 

2087. While these 

projections are subject 

to considerable 

uncertainty, the debtto-GDP ratio would 

continue to rise 

unsustainably under 

current policy. 

The Fiscal Gap and the Cost of Delaying Policy Reform 

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

would require some combination of expenditure reductions and revenue increases that amount, 

on average, to 2.7 percent of GDP over each of the next 75 years. The timing of changes to noninterest spending and receipts that close this “75-year fiscal gap” has important implications for 

the well-being of future generations. For example, relative to a policy that begins immediately, it 

 

6 The 2012 Medicare Trustees Report projects that, assuming full implementation of the Affordable Care Act (ACA) 

provisions, the Hospital Insurance (HI) Trust Fund will remain solvent under current law until 2024, at which point the share of 

estimated HI costs that could be paid from trust fund income is 87 percent, declining to 69 percent by 2086. As for Social 

Security, under current law, the Old-Age, Survivors, and Disability Insurance (OASDI) Trust Funds are projected to be exhausted

in 2033, at which time the projected share of scheduled benefits payable from trust fund income is 75 percent, declining to 73 

percent in 2086. The projections assume full Social Security and Medicare benefits are paid after the corresponding trust funds 

are exhausted. See http://www.ssa.gov/oact/trsum/index.html. 7

 The ACA refers to P.L. 111-148, as amended by P.L. 111-152. The ACA expands health insurance coverage, provides 

health insurance subsidies for low-income individuals and families, includes many measures designed to reduce health care cost 

growth, and significantly reduces Medicare payment rates. 
A Citizen's Guide to the 2012 Financial Report of the U.S. Government 

vii 

is estimated that the magnitude of reforms necessary to close the 75-year fiscal gap increases by 

nearly 20 percent if action is delayed by 10-years and for more than 50 percent if action is 

delayed 20 years. 

Conclusion 

The Government took potentially significant steps towards fiscal sustainability by enacting: 

(1) the ACA in 2010 and (2) the BCA in 2011. The ACA holds the prospect of lowering the 

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

significantly curtails discretionary spending. Together, these two laws substantially reduce the 

estimated long-term fiscal gap. But even with these new laws, the Government’s debt-to-GDP 

ratio is projected to increase continuously over the next 75 years and beyond if current policy is 

kept in place, which implies that current policy is not sustainable. Subject to the important 

caveat that changes in policy not be so abrupt that they slow the economy’s recovery, the sooner 

policies are put in place to avert these trends, the smaller the revenue increases and/or spending 

decreases will need to be to return the Government to a sustainable fiscal path.8

The Nation By The Numbers 

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

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

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

responsibilities and commitments, as well as important financial issues that affect the Nation and 

its citizens both now and in the future. The table on the following page presents several key 

indicators of the Government’s financial position and condition, which are summarized in this 

Guide and discussed in greater detail in the Report. 

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

Government’s consolidated financial statements can be found beginning on page 223 of the 

full Report. GAO disclaimed an opinion on the 2012, 2011, and 2010 Statements of Social 

Insurance (SOSI) and the 2012 and 2011 Statements of Changes in Social Insurance 

Amounts because of significant uncertainties (discussed in Note 26 in the Report) primarily 

related to the achievement of projected reductions in Medicare cost growth reflected in the 

2012, 2011, and 2010 SOSI. However, GAO issued an unqualified or “clean” opinion on 

the 2009 and 2008 SOSI. 9 In addition, certain material financial reporting control 

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

an opinion on the remaining FY 2012 and 2011 financial statements in the Report. 

 

8

 Further information about these fiscal projections and the underlying assumptions can be found in the Required 

Supplementary Information section of the Financial Report at www.fms.treas.gov/fr. 9

 In conformity with Federal accounting standards, Statements of Social Insurance are presented for the current year and 

each of the four preceding years. 
A Citizen's Guide to the 2012 Financial Report of the U.S. Government 

viii

billions of dollars 2012 2011

Gross Costs (3,844.9) $ (3,998.3) $ 

Less: Earned Revenues 350.8 $ 365.6 $ 

 Gain/(Loss) from Changes in Assumptions (320.2) $ (28.1) $ 

Net Cost (3,814.3) $ (3,660.8) $ 

Less: Total Taxes and Other Revenues 2,518.2 $ 2,363.8 $ 

 Unmatched Transactions and Balances (20.2) $ (15.6) $ 

Net Operating Cost (1,316.3) $ (1,312.6) $ 

Assets: 2,748.3 $ 2,707.3 $ 

Less: Liabilities, comprised of:

Debt Held By the Public & Accrued Interest (11,332.3) $ (10,174.1) $ 

Federal Employee & Veteran Benefits (6,274.0) $ (5,792.2) $ 

Other (1,243.0) $ (1,526.4) $ 

Total Liabilities (18,849.3) $ (17,492.7) $ 

Net Position (Assets Minus Liabilities) (16,101.0) $ (14,785.4) $ 

Social Insurance Net Expenditures1 $ (33,830) (38,554) $ 

Total Non-Interest Net Expenditures2 $ (6,400) (16,500) $ 

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

Social Insurance Net Expenditures3 -4.2% -3.8%

Total Federal Government Non-Interest Net Expenditures -1.7% -0.7%

Unified Budget Deficit (1,089.4) $ (1,298.6) $ 

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

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

Financial Report of the U.S. Government.

3 GDP values used represent the average of 75-year present value of nominal GDP for 2012 and 2011 from the 

Social Security and Medicare Trustees Reports.

NATION BY THE NUMBERS

A Snapshot of 

The Government's Financial Position & Condition

Sustainability Measures: 

Budget Results

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

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

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

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

Find Out More 

The 2012 Financial Report of the United States Government and other information about the 

Nation’s finances are available at: 

 U.S. Department of the Treasury, http://www.fms.treas.gov/fr.html; 

 OMB’s Office of Federal Financial Management, 

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

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

MANAGEMENT’S DISCUSSION AND 

ANALYSIS 

Introduction 

The fiscal year (FY) 2012 Financial Report of the United States Government (Report) provides the President, 

Congress, and the American people with a comprehensive view of the Federal Government’s finances, i.e., its 

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

commitments. The Report also discusses important financial issues and significant conditions that may affect future 

operations, including the need to achieve fiscal sustainability over the medium and long term. 

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

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

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

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

The Report is prepared from the audited financial statements of specifically designated Federal agencies, 

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

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

financial statements for the fiscal years ended September 30, 2012 and 2011. GAO also issued disclaimers of 

opinion on the 2012, 2011, and 2010 Statements of Social Insurance (SOSI), following unqualified opinions on the 

2008 and 2009 SOSI, and a disclaimer of opinion on the 2012 and 2011 Statement of Changes in Social Insurance 

Amounts (SCSIA). A disclaimer of opinion indicates that sufficient information was not available for the auditors 

to determine whether the reported financial statements were fairly presented in accordance with Generally Accepted 

Accounting Principles (GAAP). In FY 2012, 311

 of the 35 most significant agencies earned unqualified opinions on 

their financial statement audits.2

 

The FY 2012 Report consists of: 

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

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

 Principal financial statements and the related footnotes to the financial statements; 

 Required Supplementary Information, Required Supplementary Stewardship Information, and Other 

Accompanying Information; and 

 GAO’s audit report. 

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

reference to the key issues in the Report and an overview of the Government's financial position and condition. 

Mission & Organization 

The Government’s fundamental mission is derived from the Constitution: “...to form a more perfect union, 

establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare and 

secure the blessings of liberty to ourselves and our posterity.” The Congress authorizes and agencies implement 

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

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

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

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

States provide education. 

 

1 The 31 agencies include the Department of Health and Human Services, which received a disclaimer of opinion on its 2012, 2011, and 

2010 SOSI and on its 2012 and 2011 SCSIA. 2 The Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Farm Credit System 

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

(December 31 year-end), their 2012 audits are not yet complete. Statistic reflects 2011 audit results for these organizations.
2 MANAGEMENT’S DISCUSSION AND ANALYSIS 

Exhibit 1 provides an overview of how the U.S. Government is organized. 

Exhibit 1 

THE CONSTITUTION

EXECUTIVE BRANCH 

THE PRESIDENT 

THE VICE PRESIDENT 

EXECUTIVE OFFICE OF THE PRESIDENT 

White House Office 

Office of the Vice President 

Council of Economic Advisers 

Council on Environmental Quality 

National Security Council 

Office of Administration 

Office of Management and Budget 

Office of National Drug Control Policy 

Office of Policy Development 

Office of Science and Technology Policy 

Office of the U.S. Trade Representative 

LEGISLATIVE BRANCH 

THE CONGRESS 

SENATE HOUSE

Architect of the Capitol 

United States Botanic Garden 

Government Accountability Office 

Government Printing Office 

Library of Congress 

Congressional Budget Office 

U.S. Capitol Police 

THE UNITED STATES GOVERNMENT

JUDICIAL BRANCH 

THE SUPREME COURT OF THE 

UNITED STATES 

United States Courts of Appeals 

United States District Courts 

Territorial Courts 

United States Court of International Trade 

United States Court of Federal Claims 

Administrative Office of the United States 

Courts 

Federal Judicial Center 

United States Sentencing Commission 

OTHER SIGNIFICANT REPORTING ENTITIES 

ENVIRONMENTAL PROTECTION AGENCY 

GENERAL SERVICES ADMINISTRATION 

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION 

NATIONAL SCIENCE FOUNDATION 

OFFICE OF PERSONNEL MANAGEMENT 

SMALL BUSINESS ADMINISTRATION 

SOCIAL SECURITY ADMINISTRATION 

U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT 

U.S. NUCLEAR REGULATORY COMMISSION 

EXPORT-IMPORT BANK OF THE UNITED STATES 

FARM CREDIT SYSTEM INSURANCE CORPORATION 

FEDERAL COMMUNICATIONS COMMISSION 

FEDERAL DEPOSIT INSURANCE CORPORATION 

NATIONAL CREDIT UNION ADMINISTRATION 

PENSION BENEFIT GUARANTY CORPORATION 

RAILROAD RETIREMENT BOARD 

SECURITIES AND EXCHANGE COMMISSION 

SMITHSONIAN INSTITUTION 

TENNESSEE VALLEY AUTHORITY 

U.S. POSTAL SERVICE 

OTHER ENTITIES ARE LISTED IN APPENDIX A OF THIS REPORT

 

DEPARTMENT 

OF 

VETERANS 

AFFAIRS 

DEPARTMENT 

OF THE 

TREASURY 

DEPARTMENT 

OF 

TRANSPORTATION 

DEPARTMENT 

OF 

STATE 

DEPARTMENT 

OF 

LABOR 

DEPARTMENT 

OF HOUSING 

AND URBAN 

DEVELOPMENT 

DEPARTMENT 

OF THE 

INTERIOR 

DEPARTMENT 

OF 

JUSTICE 

DEPARTMENT 

OF HOMELAND 

SECURITY 

DEPARTMENT 

OF HEALTH 

AND HUMAN 

SERVICES 

DEPARTMENT 

OF 

DEFENSE 

DEPARTMENT 

OF 

EDUCATION 

DEPARTMENT 

OF 

ENERGY 

DEPARTMENT 

OF 

COMMERCE 

DEPARTMENT 

OF 

AGRICULTURE 

SIGNIFICANT REPORTING ENTITIES 
MANAGEMENT’S DISCUSSION AND ANALYSIS 3

$ %

Gross Cost (3,844.9) $ (3,998.3) $ $ (3.8% ) (153.4)

Less: Earned Revenue 350.8 $ 365.6 $ (14.8) $ (4.0%)

 Gain/(Loss) from Changes in Assumptions (320.2) $ (28.1) $ 292.1 $ 1039.5%

Net Cost1 $ (3,660.8) (3,814.3) $ 153.5 $ 4.2%

Less: Taxes and Other Revenue: 2,518.2 $ 2,363.8 $ 154.4 $ 6.5%

 Unmatched Transactions & Balances (20.2) $ (15.6) $ 4.6 $ 29.5%

Net Operating Cost2 $ (1,312.6) (1,316.3) $ 3.7 $ 0.3%

Assets3

:

Cash & Other Monetary Assets 206.2 $ 177.0 $ 29.2 $ 16.5%

Loans Receivable and Investments, Net4 $ 985.2 1,009.1 $ 23.9 $ 2.4%

Property, Plant & Equipment, Net 855.0 $ 852.8 $ 2.2 $ 0.3%

Other 678.0 $ 692.3 $ (14.3) $ (2.1%)

Total Assets 2,748.3 $ 2,707.3 $ 41.0 $ 1.5%

Liabilities3

 :

Federal Debt Held by the Public & Accrued Interest (11,332.3) $ (10,174.1) $ 1,158.2 $ 11.4%

Federal Employee & Veterans Benefits (6,274.0) $ (5,792.2) $ 481.8 $ 8.3%

Other (1,243.0) $ (1,526.4) $ (283.4) $ (18.6%)

Total Liabilities (18,849.3) $ (17,492.7) $ 1,356.6 $ 7.8%

Net Position (Assets minus Liabilities) (16,101.0) $ (14,785.4) $ (1,315.6) $ (8.9% )

Social Insurance Net Expenditures5

:

Social Security (OASDI) (11,278) $ (9,157) $ 2,121 $ 23%

Medicare (Parts A, B, & D) (27,174) $ (24,572) $ 2,602 $ 11%

Other (102) $ (101) $ 1 $ 1%

Total Social Insurance Net Expenditures (38,554) $ (33,830) $ 4,724 $ 14.0%

Total Federal Government Noninterest Net Expenditures6 $ (6,400) (16,500) $ 10,100 $ 157.8%

Unified Budget Deficit7 $ (1,298.6) (1,089.4) $ (209.2) $ (16.1% )

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

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

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

program participants during the 75-year projection period). 

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

BUDGET DEFICIT

7 Source: Final Monthly Treasury Statement (as of 9/30/2012 and 9/30/2011).

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

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

FINANCIAL MEASURES

SUSTAINABILITY MEASURES

1 Source: Statement of Net Cost.

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

3 Source: Balance Sheet.

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

Investments in Government-Sponsored Enterprises (GSEs). 

Table 1

The Federal Government's Financial Position and Condition

Dollars in Billions 2012 2011 Increase / (Decrease)

The Government’s Financial Position and Condition 

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

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

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

and why the financial position changed during the year, and provides insight into how the Government’s financial 

condition may change in the future. 

 
4 MANAGEMENT’S DISCUSSION AND ANALYSIS 

Table 1 on the previous page and the following summarize the Federal Government’s financial position: 

 The Government’s gross costs decreased by about 4 percent to $3.8 trillion. Deducting $350.8 billion in 

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

fees) and adding $320.2 billion in losses from changes in assumptions yields a net cost of $3.8 trillion. 

 Taxes and other revenues increased $154.4 billion to $2.5 trillion, which, when offset against the 

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

 Comparing total 2012 Government assets of $2.7 trillion to total liabilities of $18.8 trillion yields a 

negative net position of $16.1 trillion. Government liabilities are comprised mostly of $11.3 trillion in 

Federal debt held by the public and accrued interest payable3

 and $6.3 trillion of Federal employee and 

veteran benefits payable. 

 As of September 30, 2012, the Government’s total debt subject to the debt limit was $16.027 trillion. 

Pursuant to the Budget Control Act of 2011 (BCA), the debt limit was increased by $1.2 trillion to $16.394 

trillion in January 2012. 

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

Under Federal accounting rules, social insurance expenditures, as reported in the Statement of Social Insurance 

(SOSI) and the Statement of Long-Term Fiscal Projections (included in the Required Supplementary Information 

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

valuable perspective on the sustainability of the Government’s fiscal path: 

 The SOSI compares the actuarial present value of the Government’s projected expenditures for scheduled 

benefits for Social Security, Medicare Parts A, B and D, and other social insurance programs over 75 years4

to a subset of the revenues5 supporting these programs. In the 2012 SOSI, projected social insurance 

expenditures exceeded projected revenues by about $38.6 trillion, a nearly $4.8 trillion increase over 2011 

projections. 

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

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

Over the next 75 years, under current policy, the present value of the Government’s total projected, noninterest expenditures (including its social insurance programs) are projected to exceed total projected 

receipts by $16.5 trillion. 

The Government’s current financial position and long-term financial condition can be evaluated both in dollar 

terms and in relation to the economy as a whole. Gross Domestic Product (GDP) measures the size of the Nation’s 

economy in terms of the total value of all final goods and services that are produced in a year. Considering financial 

results relative to GDP is a useful indicator of the economy’s capacity to sustain the Government’s many programs. 

For example: 

 Outlays of $3.5 trillion net of receipts of $2.4 trillion yielded a unified budget deficit that decreased from 

$1.3 trillion (8.7 percent of GDP) in FY 2011 to $1.1 trillion (7.0 percent of GDP) in FY 2012.6

 The Government borrows from the public to finance the gap between its primarily cash-based outlays and 

receipts and to finance certain cash transactions that are not reflected in the deficit. For FY 2012, debt held 

by the public, excluding interest payable, of $11.3 trillion, equates to 73 percent of GDP. 

 The projected $38.6 trillion net present value excess of expenditures over receipts over 75 years for the 

programs reported in the 2012 SOSI represents about 4.4 percent of the present value of GDP over 75 

years. The excess of total projected non-interest spending over receipts of $16.5 trillion discussed in the 

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

Report represents 1.7 percent of GDP. As discussed in this report, these projections can, in turn, have a 

significant impact on projected debt as a percent of GDP. 

 

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

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

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

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

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

transferred to Medicare Parts B and D are eliminated in consolidation at the government-wide level and, as such, are not included in SOSI 

projections. 6 Final Monthly Treasury Statement (as of September 30, 2012 and 2011), 10/12/12 press release.
MANAGEMENT’S DISCUSSION AND ANALYSIS 5

Chief Financial Officers (CFO) Act Agency Audit Opinion

Department of Agriculture (USDA) Unqualified

Department of Commerce (DOC) Unqualified

Department of Defense (DOD) Disclaimer

Department of Education (Education) Unqualified

Department of Energy (DOE) Unqualified

Department of Health and Human Services (HHS)1 Unqualified

Department of Homeland Security (DHS) Qualified

Department of Housing and Urban Development (HUD) Unqualified

Department of the Interior (DOI) Unqualified

Department of Labor (DOL) Unqualified

Department of Justice (DOJ) Unqualified

Department of State (State) Unqualified

Department of Transportation (DOT) Unqualified

Department of the Treasury (Treasury) Unqualified

Department of Veterans Affairs (VA) Unqualified

Agency for International Development (USAID) Qualified

Environmental Protection Agency (EPA) Unqualified

General Services Administration (GSA) Unqualified

National Aeronautics and Space Administration (NASA) Unqualified

National Science Foundation (NSF) Unqualified

Nuclear Regulatory Commission (NRC) Unqualified

Office of Personnel Management (OPM) Unqualified

Small Business Administration (SBA) Unqualified

Social Security Administration (SSA) Unqualified

Other Significant Reporting Entities Audit Opinion

Export-Import Bank of the United States Unqualified

Farm Credit System Insurance Corportation (FCSIC)2 Unqualified

Federal Communications Commission (FCC) Unqualified

Federal Deposit Insurance Corporation (FDIC)2 Unqualified

National Credit Union Administration (NCUA)2 Unqualified

Pension Benefit Guaranty Corporation (PBGC) Unqualified

Railroad Retirement Board (RRB) Disclaimer

Securities and Exchange Commission (SEC) Unqualified

Smithsonian Institution3 Unqualified

Tennessee Valley Authority (TVA) Unqualified

U.S. Postal Service (USPS) Unqualified

2 Entities operate under calendar year (CY)-end. Opinions reflect CY 2011 audit results.

3 Opinion on the most recent annual report, covering FY 2011.

Table 2: FY 2012 Financial Statement Audit Results by Agency

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

in Social Insurance Amounts.

Fiscal Year 2012 Financial 

Statement Audit Results 

For FY 2012, the Government 

Accountability Office (GAO) issued a 

sixteenth consecutive disclaimer of audit 

opinion on the accrual-based, governmentwide financial statements. In addition, GAO 

issued disclaimers of opinion on the 2012, 

2011, and 2010 Statements of Social 

Insurance (SOSI), following unqualified 

opinions on the 2009 and 2008 SOSI, and 

disclaimers of opinion on the 2012 and 2011 

Statement of Changes in Social Insurance 

Amounts (SCSIA). The SOSI and SCSIA 

disclaimers stem from significant 

uncertainties (discussed in note 26), 

primarily related to the achievement of 

projected reductions in Medicare cost growth 

reflected in the 2010-2012 SOSI. 

Twenty-one of the 24 agencies required 

to issue audited financial statements under 

the Chief Financial Officers (CFO) Act 

received unqualified audit opinions, as did 

10 of 11 additional significant reporting 

agencies, (see Table 2 and Appendix A for a 

list of these agencies)7

. 

The Government-wide 

Reporting Entity 

These financial statements cover the 

three branches of the Government 

(legislative, executive, and judicial). 

Legislative and judicial branch reporting 

focuses primarily on budgetary activity. 

Executive branch entities, as well as certain 

legislative branch agencies are required, by 

law, to prepare audited financial statements. 

Some other legislative branch entities 

voluntarily produce audited financial reports. 

A number of entities and organizations 

are excluded due to the nature of their 

operations, including the Federal Reserve 

System (considered to be an independent 

central bank under the general oversight of Congress), all fiduciary funds, and Government-Sponsored Enterprises, 

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

Home Loan Mortgage Corporation (Freddie Mac). The Emergency Economic Stabilization Act (EESA) of 2008 

gave the Secretary of the Treasury temporary authority to purchase and guarantee assets from a wide range of 

financial institutions through the Troubled Asset Relief Program (TARP). Following U.S. GAAP for Federal 

entities, the Government has not consolidated into its financial statements the assets, liabilities, or results of 

operations of any financial organization or commercial entity in which Treasury holds either a direct, indirect, or 

 

7 The Department of Health and Human Services received a disclaimer of opinions on its 2012, 2011, and 2010 SOSI and its 2012 and

2011 SCSIA. 
6 MANAGEMENT’S DISCUSSION AND ANALYSIS 

Limitations of the Financial Statements 

The principal financial statements have been prepared to 

report the financial position and results of operations of the 

Federal Government, and the financial condition and changes 

in financial condition of its social insurance programs, 

pursuant to the requirements of 31 U.S.C. § 331(e)(1). These 

statements are in addition to the financial reports used to 

monitor and control budgetary resources that are prepared 

from the same books and records. 

beneficial majority equity investment. Even though some of the equity investments are significant, the entities in 

which the Federal Government holds equity investments meet the criteria under paragraph 50 of the Statement of 

Federal Financial Accounting Concepts (SFFAC) No. 2, which directs that the financial results of such entities 

should not be consolidated into the financial 

reports of the Federal Government, either in 

part or as a whole. However, the investments 

in these entities and any related liabilities are 

recorded in the financial statements. Appendix 

A includes a list of the agencies and entities 

contributing to this report.8

The following pages contain a more 

detailed discussion of the Government’s 

financial results for FY 2012, the budget, the 

economy, the debt, and a long-term perspective 

about fiscal sustainability, including the Government’s ability to meet its social insurance benefits obligations. The 

information in this Report, when combined with the President’s Budget, collectively provides a valuable tool to the 

Nation’s leaders for managing current operations and planning future initiatives. 

The President’s Budget and The Financial Report 

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

President’s Budget, which provides a plan for future initiatives and the resources needed to support them, as well as 

prior year fiscal and performance results; and this Report, which provides the President, Congress, and the American 

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

used to finance them, its balance sheet, and the overall financial outlook. 

Treasury generally prepares the financial statements in this Report on an “accrual basis” of accounting as 

prescribed by U.S. GAAP for Federal entities.9

 These principles are tailored to the Government’s unique 

characteristics and circumstances. For example, agencies prepare a uniquely structured “Statement of Net Cost,” 

which is intended to present net Government resources used in its operations. Also, unique to Government is the 

preparation of separate statements to reconcile differences and articulate the relationship between the budget and 

financial accounting results. 

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

Prepared primarily on a “cash basis” 

 Initiative-based and prospective: focus on 

current and future initiatives planned and 

how resources will be used to fund them. 

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

collections recorded when received. 

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

payment is made. 

Prepared on an “accrual and modified cash basis” 

 Agency-based and retrospective – prior and 

present resources used to implement 

initiatives. 

 Revenue: Tax revenue (more than 90 percent 

of total revenue) recognized on modified 

cash basis (see Financial Statement Note 

1.B). Remainder recognized when earned, 

but not necessarily received. 

 Costs: recognized when owed, but not 

necessarily paid. 

*See Statements of Changes in Cash Balance from Unified Budget and Other Activities and Reconciliations of Net Operating Cost and 

Unified Budget Deficits.

 

8 Since programs are not administered at the government-wide level, performance goals and measures for the Federal Government, as a 

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

agency’s financial report. 9 Under U.S. GAAP, most U.S. Government revenues are recognized on a ‘modified cash’ basis, or when they become measurable. The 

Statement of Social Insurance presents the present value of the estimated future revenues and expenditures for scheduled benefits over the next 75 

years for the Social Security, Medicare, Railroad Retirement programs; and through September 30, 2040 for the Black Lung program.
MANAGEMENT’S DISCUSSION AND ANALYSIS 7

Dollars in Billions 2012 2011 Increase / 

(Decrease)

Net Operating Cost $ (1,316.3) $ (1,312.6) $ 3.7 

Change in: 

Federal Employee and Veteran Benefits Payable $ 481.8 $ 71.9 $ 409.9 

Liabilities to Government-Sponsored Enterprises (307.2) $ (43.7) $ $ (263.5)

Other, Net 52.3 $ (14.2) $ $ 66.5 

Subtotal - Net Difference: $ 226.9 $ 14.0 $ 212.9 

Budget Deficit $ (1,089.4) $ (1,298.6) $ (209.2)

Table 3: Budget Deficit vs. Net Operating Cost

Budget Deficit vs. Net Operating Cost 

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

deficit decreased from approximately $1.3 trillion in FY 2011 to about $1.1 trillion in FY 2012. The Government’s 

largely accrual-based net operating cost (which remained essentially unchanged at $1.3 trillion in FY 2012) typically 

exceeds the deficit due largely to the inclusion of cost accruals associated with changes in future estimated liabilities 

for the Government’s postemployment benefit programs for its military and civilian employees, as well as its 

veterans. The longer-term estimated actuarial costs of these programs are included in the Government’s net 

operating cost, calculated on an accrual basis as described above, but are not included in the largely cash-based 

budget deficit. Other programs that are subject to significant estimated liabilities and changes in those amounts can 

also impact net cost, but not the deficit. 

Table 3 shows that, for FY 2012, the $226.9 billion net difference between the Government’s budget deficit of 

$1.1 trillion and net operating cost of $1.3 trillion is predominantly due to large, yet offsetting changes in: (1) 

liabilities for Federal employee and veteran benefits payable ($481.8 billion increase), and (2) liabilities to 

Government-Sponsored Enterprises (GSEs) – Fannie Mae and Freddie Mac ($307.2 billion decrease) in FY 2012, 

compared to smaller changes for these same amounts in FY 2011 ($71.9 billion increase and $43.7 billion decrease, 

respectively). As discussed later, changes in future estimated employee and veteran benefits liabilities stem from 

several factors, including experience losses or gains and changes in economic and demographic assumptions. The 

GSE estimated liabilities decreased significantly due primarily to an amended dividend provision of the Senior 

Preferred Stock Purchase Agreements (SPSPAs) with the GSEs that is expected to drive downward the amount of 

future draws needed by the GSEs. 

The Reconciliation of Net Operating Cost and Unified Budget Deficit Statement, as summarized in Table 3,

shows how the Government’s net operating cost from the primarily accrual-based financial statements relates to the 

more widely-known and primarily cash-based budget deficit. 

 

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

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

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

nonbudgetary financing accounts.
8 MANAGEMENT’S DISCUSSION AND ANALYSIS 

$ %

Gross Cost (3,844.9) $ (3,998.3) $ (153.4) $ (3.8% )

Less: Earned Revenue1 $ 365.6 350.8 $ (14.8) $ (4.0%)

Subtotal (3,494.1) $ (3,632.7) $ (138.6) $ (3.8% )

Gain/(Loss) from Changes in Assumptions2 $ (28.1) (320.2) $ 292.1 $ 1039.5%

Net Cost (3,814.3) $ (3,660.8) $ 153.5 $ 4.2%

Less: Taxes and Other Revenue 2,518.2 $ 2,363.8 $ 154.4 $ 6.5%

Unmatched Transactions and Balances3 $ (15.6) (20.2) $ 4.6 $ 29.5%

Net Operating Cost (1,316.3) $ (1,312.6) $ 3.7 $ 0.3%

1 Revenues earned for goods and services provided (e.g., Medicare premiums, national park entry fees, and postal fees)

3: Represents unreconciled differences in intragovernmental activity and balances between Federal agencies.

2: Changes in assumptions used to estimate liabilities for federal employee pensions and other retirement and 

postemployment benefits.

Dollars in Billions 2012 2011 Increase / (Decrease)

Table 4: Gross Cost, Revenues, and Net Cost 

The Government’s Net Position: “Where We Are” 

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

focusing on surpluses, deficits, and debt. However, this primarily cash-based discussion of the Government’s net 

outlays (deficit) or net receipts (surplus) tells only part of the story. The Government’s accrual-based net position, 

(the difference between its assets and liabilities), and its “bottom line” net operating cost (the difference between its 

revenues and costs) are also key financial indicators. 

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

The Government’s Statement of Operations and Change in Net Position, much like a corporation’s income 

statement, shows the Government’s “bottom line” and its impact on net position (i.e., assets net of liabilities). The 

Government nets its costs against both: (1) earned revenues from Government programs (e.g., Medicare premiums, 

National Park entry fees, and postal service fees) to derive net cost; and (2) taxes and other revenue to arrive at the 

Government’s “bottom line” net operating cost. 

Table 4 shows that the Government’s “bottom line” net operating cost remained essentially unchanged, 

increasing less than one-half of 1 percent from $1,312.6 billion in FY 2011 to $1,316.3 billion in FY 2012. As 

discussed below, this slight change includes significant, yet offsetting changes in accrued or estimated future costs 

associated with Federal employee and veteran benefits programs and the GSEs. 

Revenue: “What Came In” 

The Statement of Net Cost reports 

“earned” revenue generated by Federal 

programs, including Medicare premiums 

paid by program participants and postal 

service fees. The Statement of Operations 

and Changes in Net Position shows the 

Government’s taxes and other revenues 

(i.e., revenues other than “earned”). Chart 

A shows that increases in each of the three 

revenue categories shown - individual 

income tax and withholdings, corporate 

income taxes, and other revenues - 

combined to increase total Government 

revenues by $154.4 billion (6.5 percent) to 

just over $2.5 trillion for FY 2012. 

Together, personal and corporate income 

taxes accounted for about 86 percent of total revenues in FY 2012. The remaining 14 percent consists of various 

other taxes and receipts, including excise taxes, unemployment taxes, and customs duties. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 9

Cost: “What Went Out” 

The Statement of Net Cost also shows how much it costs to operate the Federal Government, recognizing 

expenses when they happen, regardless of when payment is made (accrual basis). It shows the derivation of the 

Government’s net cost or the net of: (1) the costs of goods produced and services rendered by the Government, (2) 

the earned revenues generated by those goods and services during the fiscal year, and (3) gains or losses from 

changes in assumptions impacting longer-term estimated costs. This amount, in turn, is offset against the 

Government’s taxes and other revenue in the Statement of Operations and Changes in Net Position to calculate the 

“bottom line” or net operating cost. 

 Chart B shows the composition of the Government’s net cost (gross cost less earned revenue and gain/loss 

from changes in assumptions) of $3,814.3 billion in FY 2012, a $153.5 billion (4.2 percent) increase compared to 

FY 2011. In FY 2012, about two-thirds of total net cost came from the Department of Defense (DOD), the Social 

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

incurred the largest agency shares of 

the Government’s total net cost in 

recent years, as shown in Charts B and 

C. The bulk of HHS and SSA net 

costs (which totaled $856.5 billion and 

$825.1 billion in FY 2012, 

respectively) are attributable to major 

social insurance programs 

administered by these agencies, e.g., 

Medicare by HHS and Social Security 

by SSA. The Statement of Social 

Insurance (SOSI) and the related 

information in this report, including 

the broader discussion of the 

Government’s long-term fiscal 

projections, discuss the projected 

future revenues, expenditures, and 

sustainability of these programs in 

greater detail. DOD net costs of 

$799.1 billion relate primarily to 

military operations and personnel, but 

as noted above, the longer-term costs 

of military retirement and health 

benefits accounted for most of DoD’s 

cost increase in FY 2012. Charts B 

and C show that the Department of 

Veterans Affairs (VA) as well as 

interest on debt held by the public 

were also significant contributors to 

the Government’s net cost for FY 

2012. The combined other agencies 

included in the Government’s 

Statement of Net Cost accounted for 

19 percent of the Government’s total 

net cost. 

As indicated earlier, the change 

in the Government’s net cost ($153.5 

billion or 4.2 percent) and minimal 

change in net operating cost ($3.7 billion or 0.3 percent) both include the individual, offsetting effects of changes in 

the current costs of and especially the changes in actuarial and other estimated costs associated with: (1) the 

Government’s postemployment benefits programs for its military and civilian employees and veterans, and (2) 

liabilities to the GSEs, specifically Fannie Mae and Freddie Mac, which relates to the Government’s economic 

recovery efforts. 
10 MANAGEMENT’S DISCUSSION AND ANALYSIS 

$ %

Assets

Cash & Other Monetary Assets 206.2 $ 177.0 $ 29.2 $ 16.5%

Loans Receivable and Investments, Net* 1,009.1 $ 985.2 $ 23.9 $ 2.4%

Inventories 299.0 $ 296.1 $ 2.9 $ 1.0%

Property, Plant & Equipment, Net 855.0 $ 852.8 $ 2.2 $ 0.3%

Other 379.0 $ 396.2 $ (17.2) $ (4.3%)

Total Assets 2,748.3 $ 2,707.3 $ 41.0 $ 1.5%

Less: Liabilities, comprised of:

Federal Debt Held by the Public & 

Accrued Interest $ (10,174.1) (11,332.3) $ 1,158.2 $ 11.4%

Federal Employee & Veteran Benefits (6,274.0) $ (5,792.2) $ 481.8 $ 8.3%

Other (1,243.0) $ (1,526.4) $ (283.4) $ (18.6%)

Total Liabilities (18,849.3) $ (17,492.7) $ 1,356.6 $ 7.8%

Net Position (Assets Minus Liabilities) (16,101.0) $ (14,785.4) $ (1,315.6) $ (8.9% )

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

Direct Loans and Equity Investments, and Investments in Government-Sponsored Enterprises (GSEs). 

Table 5: Assets and Liabilities

Net Position 

Dollars in Billions 

2012 2011 Increase (Decrease)

DOD, VA, and OPM each attributed significant increases in their respective agency total net costs largely to 

changes in assumptions related to the Government’s postemployment benefits programs. Table 4 on page 8 shows 

that the losses associated with changes in these assumptions totaled $320.2 billion in FY 2012, compared to $28.1 

billion in FY 2011 – an increase of $292.1 billion. These agencies, including but not limited to DOD, VA, and 

OPM, employ a complex series of assumptions, including but not limited to interest rates, beneficiary eligibility, life 

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

actuarial projections of their long-term benefits liabilities and their related costs. 

In addition, the Statement of Net Cost in this Report shows net revenues for the Department of the Treasury of 

$177.5 billion for FY 2012, compared to a net cost amount of $84.2 billion in FY 2011, a combined decrease of 

$261.7 billion. Contributing to this substantial decrease was a $288.7 billion reduction in expense associated with 

Senior Preferred Stock Purchase Agreements (SPSPAs).11 The SPSPAs are intended to maintain the solvency of 

GSEs, specifically Fannie Mae and Freddie Mac. During FY 2012, Treasury introduced a revised SPSPA dividend 

provision, which commences with the quarter ending March 31, 2013. This revision is forecasted to lower the 

amounts drawn from Treasury under the SPSPAs because the GSEs would no longer need to make draws to fund 

dividend payments to Treasury. With the revision, dividend payments would be limited to the amount of the 

positive net worth in excess of a capital reserve amount. Prior to the revision, dividends were forecasted to be paid 

on an amount that was projected to increase as draws continued to be made to fund the dividends. The expected 

dividend payments after the revision are lower than previously forecasted. The forecasted effect of the revision is a 

reduction in the contingent liability, and the net costs associated with the program. 

As noted earlier, taxes and other revenues of $2,518.2 billion are deducted from the total net cost of $3,814.3 

billion (including actuarial costs) to derive the Government’s “bottom line” net operating cost.12 As previously 

shown in Table 4, the increase in taxes and other revenues, combined with the increase in net costs, including the 

effects of the offsetting changes in actuarial and estimated costs described above, result in a “bottom line” net 

operating cost that remained essentially unchanged at about $1.3 trillion ($1,316.3 billion) for FY 2012, an increase 

of only $3.7 billion or less than one-half of one percent compared to the FY 2011 net operating cost of $1,312.6 

billion. 

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

 The Government’s net position at the end of the year is derived by netting the Government’s assets against its 

liabilities, as presented in the Balance Sheet (summarized in Table 5). It is important to note that the balance sheet 

does not include the 

financial value of the 

Government’s sovereign 

powers to tax, regulate 

commerce, and set 

monetary policy. It also 

excludes its control over 

nonoperational 

resources, including 

national and natural 

resources, for which the 

Government is a 

steward. In addition, as 

is the case with the 

Statement of Operations 

and Changes in Net 

Position, the Balance 

Sheet includes a 

separate presentation of 

the portion of net 

 

11 Department of the Treasury FY 2012 Agency Financial Report, p. 101. See also Note 11 – Investments in and Liabilities to GSEs – of 

this Report. 12 As shown in Table 4, net operating cost includes a slight adjustment for unmatched transactions and balances. These amounts are 

described in greater detail in the Other Accompanying Information section of this Report. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 11

position earmarked for specific funds and programs. Moreover, the Government’s exposures are broader than the 

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

(namely, Medicare and Social Security), as well as other fiscal projections, commitments and contingencies, are 

taken into account. These exposures are discussed later in this Management Discussion and Analysis (MD&A) 

section as well as in the required supplementary disclosures of this Report. 

Assets – “What We Own”

As of September 30, 2012, the Government held about $2.7 trillion in assets, an increase of $41.0 billion (1.5 

percent). The Government’s assets are comprised mostly of net property, plant, and equipment ($855.0 billion in 

FY 2012) and a combined total of $1,009.1 billion in net loans receivable ($859.6 billion), and direct loans and 

investments ($149.5 billion) associated with TARP and the GSEs, specifically Fannie Mae and Freddie Mac. 

The Department of Education’s (Education’s) direct loan programs accounted for $673.2 billion (78.3 percent) 

of total net loans receivable. Education’s receivables balances increased by 44 percent ($161.7 billion) during FY 

2011 and 27 percent ($143.7 billion) during FY 2012 primarily due to legislation requiring a transition for new loans 

from guaranteed student loans to full direct lending by Education.13 

Following the financial crisis in 2008, the Government’s assets grew with the implementation of these market 

stabilization and economic recovery initiatives. However, in recent years, with the ongoing wind-down of these 

recovery programs, the balances of many of these investments have declined principally through repayments and 

sales.14 For example: 

 Through the TARP programs, the Treasury made direct loans and equity investments, and entered into 

other credit programs. As of September 30, 2012, the estimated fair value of the outstanding portfolio of 

TARP net direct loans and equity investments was $40.2 billion, compared to $80.1 billion at the end of FY 

2011. The cumulative net cost of TARP from inception through September 30, 2012 amounts to $20.3 

billion. As of September 30, 2012, via sales, collections, and other income, Treasury has collected 88.5 

percent of the $417.6 billion in program funds disbursed under TARP. In FY 2012, Treasury collected 

about $53.3 billion from TARP participants. TARP’s authority to make new commitments to purchase or 

guarantee troubled assets expired on October 3, 2010. Today, Treasury is focused on winding down TARP 

by exiting the remaining TARP investments in a manner that balances the need to exit these investments as 

quickly as practicable with maximizing returns.15 

 Working with the Federal Reserve Bank of New York (FRBNY), Treasury made substantial progress in 

winding down the investments in American International Group (AIG). During the financial crisis, the 

peak amount of assistance offered to AIG by the FRBNY and Treasury was $182.3 billion, of which AIG 

drew a total of $160.2 billion in Federal assistance. AIG has fully repaid the FRBNY with proceeds in 

excess of cost of $17.7 billion. Treasury has sold a total of 1.4 billion AIG shares, including 0.9 billion 

TARP shares, and held 15.9 percent of AIG’s outstanding common stock as of September 30, 2012.16

 The GSE Mortgage-Backed Securities (MBS) Purchase Program under the Housing and Economic 

Recovery Act (HERA) authorized Treasury to purchase GSE MBS consisting of mortgage pass-through 

securities issued by Fannie Mae and Freddie Mac. Between October 2008 and December 31, 2009, 

Treasury purchased $225 billion in agency-guaranteed MBS. During FY 2012, Treasury completed the 

orderly sale of this portfolio,17 and reported that overall, cash returns of $250 billion were received from the 

MBS portfolio through sales, principal, and interest.18

 Amounts invested in the GSEs through Senior Preferred Stock Purchase Agreements (SPSPAs) are 

intended to help maintain the solvency of Fannie Mae and Freddie Mac. As of September 30, 2012, the fair 

value of Treasury’s portfolio of SPSPA investments totaled $109.3 billion compared to $133.0 billion as of 

September 30, 2011. This decrease was attributable in part to an expected decrease in future dividend 

 

13 U.S. Department of Education’s FY 2012 Agency Financial Report, p. 58. 14 As of September 30, 2012, TARP Direct Loans and Equity Investments and Investments in Government-Sponsored Enterprises (GSEs) 

represented 1.5 percent and 4.0 percent of total assets, respectively. 15 Department of the Treasury FY 2012 Agency Financial Report, pp. 11, 87. See also Note 5 – TARP Direct Loans and Equity 

Investments and Note 28 – Subsequent Events – of this Report. Additional information concerning the TARP programs and other related 

initiatives can be found at www.financialstability.gov. 16 Department of the Treasury FY 2012 Agency Financial Report, pp.11, 89. See also Note 5 – TARP Direct Loans and Equity 

Investments and Note 28 – Subsequent Events – of this Report. 17 Department of the Treasury FY 2012 Agency Financial Report, pp. 11, 104. 18 Department of the Treasury FY 2012 Agency Financial Report, p. 159. 
12 MANAGEMENT’S DISCUSSION AND ANALYSIS 

payments due to a change made during FY 2012 to the SPSPA dividend calculation. This change, which 

commences with the quarter ending March 31, 2013, will lower the amount of funds drawn from Treasury 

under the SPSPAs, because the GSEs would no longer need to make draws to fund dividend payments to 

Treasury. Furthermore, with this dividend change, all GSE earnings above a threshold are paid as 

dividends to the Government for its investment in the GSEs. Under the amended SPSPAs, the quarterly 

dividend payment will change from a 10.0 percent per annum fixed rate to an amount equivalent to each 

GSE’s positive net worth above a capital reserve amount. This change had a significant impact on the 

related SPSPA contingent liability representing the total estimated future payments to (draws by) GSEs for 

the remaining life of the agreements. Due in large part to the dividend change, which significantly 

decreased the need for draws due to dividends, the SPSPA contingent liability decreased from $316.2 

billion in FY 2011 to $9.0 billion as of September 30, 2012.19 

Beyond these assets, other significant resources are available to the Government, including stewardship assets, 

such as natural resources, and the Government’s power to tax and set monetary policy. 

Liabilities – “What We Owe” 

As indicated in Table 5 and 

Chart D, of the Government’s 

$18.8 trillion in total liabilities, 

the largest liability is Federal debt 

held by the public and accrued 

interest, the balance of which 

increased $1.2 trillion (11.4 

percent) to $11.3 trillion as of 

September 30, 2012. 

The other major component 

of the Government’s liabilities is 

Federal employee 

postemployment and veteran 

benefits payable (i.e., the 

Government’s pension and other 

benefit plans for its military and 

civilian employees), which 

increased $481.8 billion (8.3 

percent) during FY 2012, from 

$5,792.2 billion to $6,274.0 

billion. OPM administers the largest civilian pension plan, covering nearly 2.8 million current employees20 and 2.5 

million annuitants.21 The military pension plan covers more than three million current military personnel (including 

active service, reserve, and National Guard) and approximately 2.2 million retirees and annuitants.22 

Federal Debt 

The unified budget surplus or deficit is the difference between total Federal spending and receipts (e.g., taxes) 

in a given year. The Government borrows from the public (increases Federal debt levels) to finance deficits. During 

a budget surplus (i.e., when receipts exceed spending), the Government typically uses those excess funds to reduce 

the debt held by the public. The Statements of Changes in Cash Balance from Unified Budget and Other 

Activities reports how the annual unified budget surplus or deficit relates to the Federal Government’s borrowing 

and changes in cash and other monetary assets. It also explains how a budget surplus or deficit normally affects 

changes in debt balances. 

The Government’s publicly-held debt, or Federal debt held by the public, and accrued interest, which is 

reported on the Government’s balance sheet as a liability, is comprised of Treasury securities, such as bills, notes, 

and bonds, net of unamortized discounts and premiums; and accrued interest payable. The “public” consists of 

 

19 Department of the Treasury FY 2012 Agency Financial Report, pp. 11, 98-100. See also Note 11 – Investments in and Liabilities to 

GSEs – of this Report. 20 As of 9/30/2012 OPM Office of Actuaries.

21 OPM FY 2012 Agency Financial Report, p. 9. 22 DOD FY 2012 Agency Financial Report, p.12; DOD Military Retirement Fund (MRF) financial statements, p. 14.
MANAGEMENT’S DISCUSSION AND ANALYSIS 13

individuals, corporations, state and local governments, Federal Reserve Banks, foreign governments, and other 

entities outside the Federal Government. Federal debt held by the public and accrued interest totaled $11.3 trillion 

as of September 30, 2012. As indicated above, budget surpluses have typically resulted in borrowing reductions, 

and budget deficits have conversely yielded borrowing increases. However, the Government’s debt operations are 

generally much more complex than this would imply. Each year, trillions of dollars of debt matures and new debt is 

issued to take its place. In FY 2012, new borrowings were $7.8 trillion and repayments of maturing debt held by the 

public were $6.6 trillion. Both represented slight decreases over new borrowings and debt repayments as compared 

to FY 2011. 

In addition to debt held by the public, the Government has about $4.9 trillion in intragovernmental debt 

outstanding, which arises when one part of the Government borrows from another. It represents debt issued by the 

Treasury and held by Government accounts, including the Social Security ($2.7 trillion) and Medicare ($297.6 

billion) trust funds. Intragovernmental debt is primarily held in Government trust funds in the form of special 

nonmarketable securities by various parts of the Government. Laws establishing Government trust funds generally 

require excess trust fund receipts (including interest earnings) over disbursements to be invested in these special 

securities. Because these amounts are both liabilities of the Treasury and assets of the Government trust funds, they 

are eliminated as part of the consolidation process for the government-wide financial statements (see Note 14). 

When those securities are redeemed, e.g., to pay future Social Security benefits, the Government will need to obtain 

the resources necessary to reimburse the trust funds. The sum of debt held by the public and intragovernmental debt 

equals gross Federal debt, which (with some adjustments) is subject to a statutory ceiling (i.e., the debt limit). At the 

end of FY 2012, debt subject to the statutory limit was $16.027 trillion, $367 billion under the current limit of 

$16.394 trillion. 

Prior to 1917, the Congress approved each debt issuance. In 1917, to facilitate planning in World War I, 

Congress established a dollar ceiling for Federal borrowing. With the Public Debt Act of 1941 (Public Law 77-7), 

Congress and the President set an overall limit of $65 billion on Treasury debt obligations that could be outstanding 

at any one time. Since then, Congress and the President have enacted a number of debt limit increases. Most 

recently, pursuant to the Budget Control Act (BCA) of 2011, the debt limit was raised by $400 billion in August 

2011 to $14.694 trillion, by $500 billion in September 2011 to $15.194 trillion, and by $1.2 trillion to $16.394 

trillion in January 2012.23 

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

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

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

 

23 See also Note 28 - Subsequent Events – of this Report. 
14 MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2012 FY 2011

Real GDP Growth 2.5% 1.6%

Residential Investment Growth 13.7% 1.4%

Average monthly payroll job change (thousands) 156 151

Unemployment rate (percent, end of period) 7.8% 9.1%

Consumer Price Index (CPI) inflation 2.0% 3.9%

Core CPI (excluding food and energy) inflation 2.0% 2.0%

Treasury constant maturity 10-year rate (end of period) 1.65% 1.9%

Moody's Baa bond rate (end of period) 4.7% 5.2%

Table 6: National Economic Indicators*

* Some FY2011 data may differ from the FY2011 Report due to updates and revisions.

shown in Chart E, wartime spending and borrowing had pushed the debt-to-GDP ratio to an all-time high of 109 

percent in 1946, but it decreased rapidly in the post-war years, falling to 80 percent by 1950, 46 percent in 1960, and 

the postwar low point of 24 percent in 1974. Since then, the ratio has increased, growing rapidly from the mid1970s until the early 1990s. In the 1990s, strong economic growth and fundamental fiscal decisions, including 

measures to reduce the Federal deficit and implementation of binding "Pay As You Go" (“PAYGO”) rules, 

generated a significant decline in the debt-to-GDP ratio over the course of the 1990s, from a peak of 49 percent in 

1993-1994, to 33 percent in 2001. During the last decade, much of this progress was undone as PAYGO rules were 

allowed to lapse, significant tax cuts were implemented, entitlements were expanded, and spending related to 

defense and homeland security increased. By September 2008, the debt-to-GDP ratio was 40 percent of GDP. The 

extraordinary demands of the recent economic and fiscal crisis and the consequent actions taken by the Federal 

Government, combined with slower economic growth in the wake of the crisis, have pushed the debt-to-GDP ratio 

up to about 73 percent as of September 30, 2012. 

The Economy in Fiscal Year 2012 

A review of the Nation’s key macroeconomic indicators can help place the discussion of the Government’s 

financial results in a broader context. As summarized in Table 6, the economy continued to grow, and at a faster 

rate, during FY 2012. Job growth accelerated, with private nonfarm payrolls rising by 1.9 million after a gain of 1.8 

million the previous fiscal year. The unemployment rate declined during FY 2012 but remained elevated. 

After rising by 1.6 percent during FY 2011, real GDP growth accelerated to an annual average rate of 2.5 

percent over the four quarters of FY 2012. The economy added 1.9 million total nonfarm payroll jobs during FY 

2012, more than the 1.8 million nonfarm payroll jobs added during FY 2011. The unemployment rate declined from 

9.1 percent in September 2011 to 7.8 percent in September 2012. After accelerating in the two previous fiscal years, 

inflation slowed, mainly reflecting lower energy and food price inflation. Underlying inflation (the core rate, 

excluding food and energy) stabilized at the previous fiscal year’s level and remained low by historical standards. 

Real wages for private production nonsupervisory workers declined, reflecting slower nominal wage growth relative 

to the rise in consumer prices. The level of corporate profits increased in FY 2012, and at a much faster pace than in 

the previous fiscal year. Federal spending declined, and federal tax receipts grew in FY 2012. As a result, the 

Federal unified budget deficit fell to $1.1 trillion in FY 2012, and also narrowed as a share of the economy to 7.0 

percent of GDP from 8.7 percent in FY 2011. 

The following key points summarize economic performance in FY 2012: 

 Consumer spending rose 1.8 percent during FY 2012, slowing from 2.5 percent during FY 2011. 

 Residential fixed investment strengthened notably during FY 2012, jumping by 13.7 percent over the four 

quarters of FY 2012, compared with 1.4 percent during FY 2011. Nonresidential fixed investment grew 

4.5 percent, however, slowing from a 10.1 percent increase during the previous fiscal year. 

 Labor market conditions improved further during FY 2012, despite a moderation in the pace of job growth 

in the middle of the fiscal year. Over the entire fiscal year, total nonfarm payroll employment advanced at 

an average rate of 156,000 jobs per month, slightly faster than the average monthly increase of 151,000 in 
MANAGEMENT’S DISCUSSION AND ANALYSIS 15

FY 2011. The number of unemployed persons fell to 12.1 million in FY 2012 from 13.9 million in FY 

2011. The unemployment rate stood at 7.8 percent in September 2012, down from 9.1 percent at the end of 

FY 2011, or 1.3 percentage points lower. At the end of FY 2012, the unemployment rate was 2.2 

percentage points lower than the recent peak of 10.0 percent, reached in October 2009. 

 The overall price level, as measured by the consumer price index (CPI), rose 2.0 percent during FY 2012, 

restrained by slower energy and food prices. During FY 2011, the CPI increased by 3.9 percent. Core 

inflation (which excludes food and energy) was also 2.0 percent during FY 2012, unchanged from the 

previous fiscal year. 

 Financial markets conditions and measures of financial risk generally remained stable in FY 2012: 

o Corporate debt yields on bonds of moderate risk stood at about 330 basis points above the rate on 

10-year Treasury securities at the end of FY 2011. After fluctuating above and below that level 

through much of the following fiscal year, the spread narrowed during the final quarter of FY 

2012 and ended the fiscal year at 307 basis points. 

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

Treasury rate stood at 43 basis points at the end of FY 2011. This spread generally narrowed over 

the course of the latest fiscal year, ending FY 2012 at 30 basis points. 

o The S&P 500 index rose 27.3 percent during the fiscal year just ended, after declining 0.9 percent 

during FY 2011. 

 The Recovery Act 

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

policy response that has included the initiatives and programs under HERA and TARP, other financial stability 

policies implemented by the FDIC and the Board of Governors of the Federal Reserve, accommodative monetary 

policy, and the American Recovery and Reinvestment Act of 2009 (ARRA or the Recovery Act). The purpose of 

the original $787 billion ARRA package was to jump-start the economy and to create and save jobs, with one-third 

of ARRA dedicated to tax provisions to help businesses and working families, another third for emergency relief for 

those who have borne the brunt of the recession, and the final third devoted to investments to create jobs, spur 

economic activity, and lay the foundation for future sustained growth. Cumulative ARRA amounts paid out by 

Federal agencies as of September 30, 2012 totaled $477.4 billion, as compared to $421.4 billion as of September 30, 

2011.24 It is important to note that amounts spent by the Federal, State, and Local government agencies, as well as 

by the private sector are constantly changing. Readers may find the most up-to-date information on where and how 

these funds are being used at www.recovery.gov. 

The preceding section has focused on the Federal Government’s financial results for FY 2012. The following 

sections discuss the issue of fiscal sustainability. 

 

 

24 Agency Financial & Activity Reports as of September 30, 2012 and 2011. For more information, see the Recovery Act website at 

www.recovery.gov.
16 MANAGEMENT’S DISCUSSION AND ANALYSIS 

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

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

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

population due to the retirement of the “baby boom” generation and increasing longevity will make it increasingly 

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

Fiscal Sustainability 

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

magnitude of policy reforms necessary to make it sustainable. A sustainable policy is one where the debt–to-GDP 

ratio is ultimately stable or declining. 

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

be sustained indefinitely and draw out the implications for the growth of debt held by the public as a share of GDP.25 

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

outcomes will of course be different than those projected. 

The projections presented in this Report were finalized prior to the enactment of the American Taxpayer Relief 

Act (ATRA) in January 2013.26

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

projected to reach 395 percent in 2087 and to rise continuously thereafter. Preventing the debt-to-GDP ratio from 

rising over the next 75 years is estimated to require some combination of spending reductions and revenue increases 

that amount to 2.7 percent of GDP over the period. While this estimate of the “75-year fiscal gap” is highly 

uncertain, current fiscal policies cannot be sustained indefinitely. 

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

of spending reductions and/or revenue increases necessary to stabilize the debt-to-GDP ratio. Relative to a reform 

that begins immediately, for example, it is estimated that the magnitude of reforms necessary to close the 75-year 

fiscal gap is nearly 20 percent larger if reforms are delayed by just ten years, and more than 50 percent larger if 

reform is delayed 20 years. 

The estimates of the cost of policy 

delay in this Report assume policy does 

not affect GDP (or interest rates). 

Reducing deficits too abruptly would be 

counterproductive if it slows the 

economy’s recovery. In the near term, it is 

crucial to strike the proper balance 

between deficit reduction and economic 

growth. 

The Primary Deficit, Interest, 

and Debt 

The primary deficit - the difference 

between non-interest spending and receipts 

– is the only determinant of the debt-toGDP ratio that the Government controls 

 

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

routinely extended or otherwise expected to continue, such as extension of relief from the Alternative Minimum Tax (AMT). In addition, the 

projections in this year’s Report assume that all of the 2001/2003 tax cuts will be extended indefinitely, whereas the projections in the FY 2011 

Report assumed that the tax cuts for high-income taxpayers would be allowed to expire. 26 ATRA did not extend the 2001/2003 tax cuts for high income individuals and families that were assumed to occur in the 

projections. Updating the projections in this Report to account for ATRA would therefore modestly reduce projected long term fiscal imbalances.
MANAGEMENT’S DISCUSSION AND ANALYSIS 17

directly. (The other determinants are interest rates and growth in GDP). Chart F shows receipts, non-interest 

spending, and the difference – the primary deficit – expressed as a share of GDP (primary deficit-to-GDP ratio). 

The primary deficit-to-GDP ratio grew rapidly in 2009 due to the financial crisis and the recession and the Federal 

Government’s response. The ratio stayed large from 2010 to 2012 despite shrinking in each successive year, but is 

projected to fall rapidly between 2013 and 2018 as the economy recovers and spending reductions called for in the 

Budget Control Act of 2011 (BCA) take effect, reaching primary balance in 2018 and remaining relatively flat and 

near zero through 2021. Between 2022 and 2039, however, increased spending for Social Security and health 

programs due to continued aging of the population and anticipated rising health costs is expected to cause the 

primary balance to steadily deteriorate and reach 2.3 percent of GDP in 2039. After 2039, the primary deficit-toGDP ratio slowly declines to 1.7 percent as the impact of the baby boom generation retiring dissipates. 

The revenue share of GDP fell substantially in 2009 and 2010 and remained low in 2011 and 2012 because of 

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

Reauthorization, and Job Creation Act of 2010. This ratio is projected to return to near its long-run average as the 

economy recovers by about 2019, after which receipts are projected to grow slightly more rapidly than GDP as 

increases in real incomes cause more taxpayers and a larger share of income to fall into the higher individual income 

tax brackets. This projection assumes that Congress and the President will continue to enact legislation that prevents 

the share of income subject to the Alternative Minimum Tax from rising. 

The non-interest spending share of GDP is projected to fall from its current level of 21.3 percent to about 20 

percent in 2013, stay at or below that level until 2026, and to then rise gradually to 22 percent of GDP in 2039 and 

22.6 percent of GDP in 2087. The reductions in the non-interest spending share of GDP over the next two years are 

mostly due to the expected reductions in spending for overseas contingency operations, caps on discretionary 

spending, and the automatic spending cuts mandated by the BCA, and the subsequent increase is principally due to 

growth in Medicare, Medicaid, and Social Security spending (see Chart F on page 16). The retirement of the baby 

boom generation over the next 25 years is projected to increase the Social Security, Medicare, and Medicaid 

spending shares of GDP by about 1.4 percentage points, 1.8 percentage points, and 1.1 percentage points, 

respectively. After 2035, the Social Security spending share of GDP is essentially unchanging, while the Medicare 

and Medicaid spending share of GDP continues to increase, albeit at a slower rate, due to projected increases in 

health care costs. The Affordable Care Act (ACA)27 provision of health insurance subsidies and expanded 

Medicaid coverage boost federal spending, and other provisions significantly reduce per-beneficiary Medicare and 

Medicaid cost growth. On net, the ACA is projected to substantially reduce federal expenditures over the next 75 

years. However, there is uncertainty 

about whether the projected cost 

savings, productivity improvements, 

and reductions in physician payment 

rates will be sustained in a manner 

consistent with the projected cost 

growth over time. 

The primary deficit-to-GDP 

projections in Chart F on page 16, 

along with those for interest rates 

(see Chart H) and GDP, determine 

the debt-to-GDP ratio projections 

shown in Chart G . That ratio was 73 

percent at the end of fiscal year 2012 

and under current policy is projected 

to be 78 percent in 2022, 145 percent 

in 2042, and 395 percent in 2087. 

While these projections are subject to 

considerable uncertainty, the debt-toGDP ratio would continue to rise 

unsustainably under current policy. 

 

27 P.L. 111-148, as amended by P.L. 111-152. The ACA expands health insurance coverage, provides health insurance subsidies for lowincome individuals and families, includes many measures designed to reduce health care cost growth, and reduces the annual increases in 

Medicare payment rates. 
18 MANAGEMENT’S DISCUSSION AND ANALYSIS 

Period of Delay

No Delay: Reform in 2013......... 2.7 percent of GDP between 2013 and 2087

Ten Years: Reform in 2023........ 3.2 percent of GDP between 2023 and 2087

Twenty Years: Reform in 2033.. 4.1 percent of GDP between 2033 and 2087

Note: Reforms taking place in 2012, 2022, and 2032 from the 2011 Report were 1.8, 2.2, and 2.8 

percent of GDP.

Table 7

Costs of Delaying Fiscal Reform

Change in Average Primary Surplus

The debt projections in Chart G on page 17 are substantially larger than those projected in last year’s Report. 

In 2086, the projected debt-to-GDP ratio is 101 percentage points higher than was projected last year (388 percent 

versus 287 percent). The difference is primarily due to the changes in the model’s technical assumptions, such as: 

(i) the inclusion of costs for health 

insurance exchange subsidies; (ii) the 

assumption in this year’s Report that all 

of the 2001/2003 tax cuts will be 

extended indefinitely, rather than being 

allowed to expire for high-income 

taxpayers; and (iii) an improved 

methodology for projecting Medicare 

costs. 

The Fiscal Gap and the Cost 

of Delaying Policy Reform 

The 75-year fiscal gap is one 

measure of the degree to which current 

fiscal policy is unsustainable. It is the 

amount by which primary surpluses 

over the next 75 years must rise above 

current-policy levels in order to prevent 

the debt-to-GDP ratio from rising. It is 

estimated that running primary surpluses that average 1.0 percent of GDP over the next 75 years would result in the 

2087 debt-to-GDP ratio equaling its level in fiscal year 2012, which compares with primary deficits that average 1.7 

percent of GDP under current policies. The 75-year fiscal gap is therefore 2.7 percent of GDP, which is 13.5 

percent of the 75-year present value of projected receipts and 12.4 percent of the 75-year present value of noninterest spending. 

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

surpluses be substantially positive on average. This is true because projected GDP growth is on average smaller 

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

than GDP if primary surpluses were zero on 

average. For example, if the primary 

surplus was precisely zero in every year, 

then debt would grow at the rate of interest 

in every year, which would be faster than 

GDP growth. 

Table 7 illustrates the cost of delaying 

policy to close the fiscal gap by comparing 

three policies that begin on different dates. 

The first policy begins immediately and calls for increasing primary surpluses by 2.7 percent of GDP in every year 

between 2013 and 2087. This is accomplished by invoking some combination of spending reductions and revenue 

increases that amount to 2.7 percent of GDP in every year over the 75-year projection period. The second policy in 

Table 7 begins 2023. Because debt grows unabated between 2013 and 2023 and the same fiscal consolidation must 

be compressed into ten fewer years, this policy change is more abrupt, calling for primary surplus increases 

amounting to 3.2 percent of GDP in every year between 2023 and 2087. Similarly, if debt is allowed to accumulate 

unabated for 20 years, then closing the 75-year fiscal gap would require even more abrupt primary surplus increases 

amounting to 4.1 percent of GDP in every year between 2033 and 2087. The differences between the primary 

surplus boost starting in 2023 and 2033 (3.2 and 4.1 percent of GDP, respectively) and the primary surplus boost 

starting in 2012 (2.7 percent of GDP) is a measure of the additional burden policy delay would impose on future 

generations. Future generations are harmed by a policy delay of this sort, because the higher the primary surplus is 

during their lifetimes the greater the difference is between the taxes they pay and the programmatic spending from 

which they benefit. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 19

$ %

Open Group (Net):

 Social Security (OASDI) (11,278) $ (9,157) $ 2,121 $ 23%

Medicare (Parts A, B, & D) (27,174) $ (24,572) $ 2,602 $ 11%

Other (102) $ (101) $ 1 $ 1%

Total Social Insurance Expenditures, Net 

(Open Group) $ (33,830) (38,554) $ $ 14% 4,724

Total Social Insurance Expenditures, Net 

(Closed Group) $ (46,272) (51,604) $ $ 12% 5,332

Open Group

 Social Security (OASDI) -1.2% -1.0%

Medicare (Parts A, B, & D) -3.0% -2.8%

Other 0.0% 0.0%

Total (Open Group) -4.2% -3.8%

Total (Closed Group) -5.6% -5.3%

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

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

Dollars in Billions 2012 2011 Increase / (Decrease)

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

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

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

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

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

* GDP values used are from the 2012 & 2011 Social Security and Medicare Trustees Reports and represent 

the present value of GDP over the 75 years. As the GDP used for Social Security and Medicare differ slightly 

in the Trust Fund Reports, the two values are averaged to estimate the 'Other' and Total Net Social Insurance 

Expenditures as % of GDP.

Conclusion 

The Government took potentially significant steps towards a sustainable fiscal policy by enacting the ACA in 

2010 and the BCA in 2011. The ACA holds the prospect of lowering long-term per-beneficiary spending growth for 

Medicare and Medicaid, and the BCA significantly curtails discretionary spending. Together, these two laws 

substantially reduce the estimated long-term fiscal gap. But even with the new laws, the debt-to-GDP ratio is 

projected to increase continuously over the next 75 years and beyond if current policies are kept in place, which 

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

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

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

path. 

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

policy cannot be sustained indefinitely. 

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

Supplementary Information section of this Report. 

Statement of Social Insurance – Challenges Continue 

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

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

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

these programs, the SOSI reports: (1) the actuarial present value of all future program revenue (mainly taxes and 

premiums) - excluding interest - to be received from or on behalf of current and future participants; (2) the estimated 

future scheduled expenditures to be paid to or on behalf of current and future participants; and (3) the difference 

between (1) and (2). Amounts reported in the SOSI and in the Required Supplementary Information section in this 

Report are based on each program’s official actuarial calculations. By accounting convention, the transfers of 

general revenues are 

eliminated in the 

consolidation of the 

financial statements at the 

government-wide level and 

as such, the general 

revenues that are used to 

finance Medicare Parts B 

and D are not included in 

these calculations even 

though the expenditures on 

these programs are 

included. SOSI programs 

and amounts are included 

in the broader fiscal 

sustainability analysis in 

the previous section, 

although on a slightly 

different basis (as 

described in the Required 

Supplementary Information 

section of this Report). 

The SOSI provides 

perspective on the 

Government’s long-term 

estimated exposures and 

costs for social insurance 

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

expenses and liabilities in the future, based on the continuation of the social insurance programs' provisions 
20 MANAGEMENT’S DISCUSSION AND ANALYSIS 

Dollars in Billions 2012 2011

Net Present Value (NPV) - Open Group 

(Beginning of the Year) (33,830) $ (30,857) 

Change In:

Valuation Period (1,613) $ (1,518) $ 

Demographic data and assumptions 518 $ (859) $ 

Economic data and assumptions (1,039) $ (145) $ 

Law or policy 193 $ (14) $ 

Methodology and programmatic data (471) $ 56 $ 

Economic and other healthcare assumptions1 $ (463) (2,601) $ 

Change in projection base 289 $ (31) $ 

Net Change in Open Group measure (4,724) $ (2,974) $ 

NPV - Open Group (End of the Year) (38,554) $ (33,830) $ 

1 Reported by HHS.

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

Table 9: Changes in Social Insurance Projections

contained in current law. The social insurance trust funds account for all related program income and expenses. 

Medicare and Social Security taxes, premiums, and other income are credited to the funds; fund disbursements may 

only be made for benefit payments and program administrative costs. Any excess revenues are invested in special 

non-marketable U.S. Government securities at a market rate of interest. The trust funds represent the accumulated 

value, including interest, of all prior program surpluses, and provide automatic funding authority to pay for future 

benefits. 28

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

expenditures are projected to be $38.6 trillion as of January 1, 2012 for the “Open Group,” an increase of $4.8 

trillion over net expenditures of $33.8 trillion projected in the 2011 Report.29 Table 9 summarizes the principal 

reasons for the changes in projected social insurance amounts during 2012 and 2011. Most of the change from the 

past year is attributable to the change in the valuation period, and economic data and assumptions (e.g., health care 

costs, taxable earnings, price inflation, and 

real interest rates). For both the Old-Age, 

Survivors, and Disability Insurance (OASDI 

or Social Security) programs administered 

by the Social Security Administration 

(SSA), and the Medicare Part A (Hospital 

Insurance) program, administered by the 

Department of Health and Human Services 

(HHS) , as of the current valuation period 

(January 1, 2011 – January 1, 2012): (1) 

taxable earnings are lower for the starting 

year than projected for the prior valuation 

period; (2) price inflation was higher than 

expected, with the cost of living adjustment 

in December 2011 being higher than 

assumed in the prior valuation, and (3) the 

real interest rate is projected to be lower 

over the first ten years. These changes 

decrease the present value of future cashflows.30 The effects of these changes on HHS are reported separately in 

Table 9 as HHS also includes the effect of specific healthcare assumptions in this category, including but not limited 

to anticipated effects of the ACA, and growth assumptions for inpatient hospitals and hospice services. 

As was reported in the FY 2011and 2010 Reports, projected Medicare costs declined significantly reflecting 

provisions of the ACA. As reported in Note 26, there continues to be uncertainty about whether the projected cost 

savings, productivity improvements, and reductions in physician payment rates will be sustained in a manner 

consistent with the projected cost growth over time. Note 26 includes an alternative projection to illustrate the 

uncertainty of projected Medicare costs. As indicated earlier, GAO disclaimed opinions on the 2012, 2011 and 

2010 SOSI because of these significant uncertainties. 

Costs as a percent of GDP of both Medicare and Social Security, which are analyzed annually in the Medicare 

and Social Security Trustees’ Reports, are projected to increase substantially through 2035, because: (1) the number 

of beneficiaries rises rapidly as the “baby-boom” generation retires; and (2) the lower birth rates that have persisted 

since the baby boom cause slower growth in the labor force and GDP.31 According to the Medicare Trustees’ 

Report, under current law, including the assumption of the full implementation of ACA program changes, spending 

on Medicare is projected to rise from 3.7 percent of GDP in 2011 to 6.7 percent in 2086 (based on the Trustees 

intermediate set of assumptions). The Hospital Insurance (HI) Trust Fund is now expected to remain solvent until 

2024, (no change from last year’s report), at which point tax income is estimated to be sufficient to pay 87 percent of 

estimated HI costs, declining to 69 percent by 2086. 

As for Social Security, combined spending is projected to increase gradually from its current level of 5.0 

percent of GDP to about 6.4 percent in 2035, declining to about 6.1 percent by 2055 and remains at about that level 

 

28 See also Note 28 – Subsequent Events – of this Report. 29 'Closed' Group and 'Open' Group differ by the population included in each calculation. From the SOSI, the 'Closed' Group includes: (1) 

participants who have attained eligibility and (2) participants who have not attained eligibility. The 'Open' Group adds future participants to the 

'Closed' Group. See ‘Social Insurance’ in the Required Supplementary Information section in this Report for more information. 30 FY 2012 HHS Agency Financial Report p. 119, FY 2012 SSA Performance and Accountability Report, p. 142. 31 2012 Annual Trustees Reports on Social Security and Medicare (Summary), p. 2. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 21

through 2086. The Social Security Trustees’ Report indicates that annual OASDI income, including interest on trust 

fund assets, will exceed annual cost and trust fund assets will increase every year until 2021, at which time it will be 

necessary to begin drawing down on trust fund assets to cover part of expenditures until assets are exhausted in 

2033, three years earlier than estimated in the prior year’s Trustees’ Report, at which point continuing tax income 

would be sufficient to pay 75 percent of scheduled benefits in 2033 and 73 percent in 2086.32 

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

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

the Required Supplementary Information section of this Report. 

Systems, Controls, and Legal Compliance 

Systems 

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

Government continues to face challenges in implementing financial systems that meet Federal requirements. The 

number of CFO Act agencies reporting non-compliance with one or more of the Federal Financial Management 

Improvement Act (FFMIA) requirements in FY 2012 was 9, compared to 7 in FY 2011, and the number of auditors 

reporting non-compliance with one or more of the FFMIA requirements was 11 in both FY 2012 and FY 2011. The 

annual compliances reported each year underscores the importance of current initiatives to standardize the financial 

management practices across the Federal Government. 

Controls 

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

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

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

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

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

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

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

assessing and managing risks more strategically and effectively. The Circular contains multiple appendices that 

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

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

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

in Government charge card programs. Appendix C implements the requirements of the Improper Payments 

Information Act, as amended by the Improper Payments Elimination and Recovery Act, which includes the 

measurement, reporting, recovery, and remediation of improper payments. 

The total number of material weaknesses for Chief Financial Officers (CFO) Act agencies increased to 32, 

compared to 31 in FY 2011. Effective internal controls are a challenge not only at the agency level, but also at the 

government-wide level. GAO reported that at the government-wide level, material weaknesses resulted in 

ineffective internal control over financial reporting. While progress is being made at many agencies and across the 

Government in identifying and resolving internal control deficiencies, continued diligence and commitment are 

needed. 

Legal Compliance 

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

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

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

selected laws and regulations related to financial reporting. Certain individual agency audit reports contain 

instances of noncompliance. None of these instances were material to the government-wide financial statements. 

However, GAO reported that its work on compliance with laws and regulations was limited by the material 

weaknesses and scope limitations discussed in its report. 

 

32 2012 Annual Trustees Reports on Social Security and Medicare (Summary), pp. 2,9-10.
22 MANAGEMENT’S DISCUSSION AND ANALYSIS 

Financial Management Progress and Priorities 

The Office of Federal Financial Management (OFFM) within the Office of Management and Budget (OMB) is 

responsible for the Federal Government’s financial management policy and manages government-wide financial 

management priorities. This section summarizes recent progress and outlines several key initiatives intended to 

achieve improved results moving forward. 

Progress To Date 

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

instilling strong accounting and financial reporting practices. This year, 23 of the 24 CFO Act agencies obtained an 

opinion from the independent auditors on their financial statements.33 Out of the 24 major “CFO Act” agencies, 

there were 21 clean opinions, 2 qualified opinions, and only one remaining disclaimer in FY 2012. In addition, 32 

auditor-identified material weaknesses were reported in FY 2012, an approximate 50 percent decline from the 61 

material weaknesses that were identified at the start of this past decade. Over the past 20 years, an increasing 

number of Federal agencies have initiated and sustained disciplined and consistent financial reporting operations, 

implemented effective internal controls around financial reporting, and have successfully integrated transaction 

processing and accounting records. These efforts have resulted in improved results on financial statement audits. 

However, weaknesses in basic financial management practices and other limitations continue to prevent one major 

agency, and the Government as a whole, from achieving an audit opinion. 

The foundations for the accomplishments achieved over the past 20 years are numerous. In particular, and as 

envisioned by OMB Circular No. A-123, Management’s Responsibility for Internal Control, the Federal financial 

management community approached these reporting challenges holistically, integrating both programmatic and 

financial management disciplines in building successful financial reporting programs. Given the size and 

complexity of the programs and transactions involved, these results would not have been possible without the 

advances in Federal financial management. 

Ongoing Challenges 

Despite our progress, critical gaps in financial management performance remain. For example, Federal 

agencies continue to maintain thousands of unneeded real property assets on their books, reported approximately 

$108 billion in estimated improper payments in FY 2012, and continue to incur increased costs to modernize agency 

financial systems. Additionally, while Federal agencies have mobilized resources to meet the new and growing 

demand for real-time transparency into where Federal dollars are going, more work is necessary to sustain these 

solutions in a cost-effective manner over the long term. These instances of Government waste compromise the 

integrity of Federal programs, lead to damaging inefficiencies, and erode citizens’ trust in Government. However, 

initiatives as outlined below are resulting in progress with these issues and are putting the Government in a better 

position. 

Improvement Initiatives 

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

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

funds. It means ensuring that we are not only responsible stewards of taxpayer dollars, but frugal stewards as well, 

looking for every opportunity to save money and create greater efficiencies. 

 

33 HHS received a clean opinion on all statements except the Statement of Social Insurance and the Statement of Changes in Social 

Insurance, both of which received a disclaimer of opinion. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 23

Administrative Savings 

In an effort to reduce costs, identify and implement efficiencies, eliminate practices that are antiquated and 

unnecessary, and root out waste across government, the President launched the Campaign to Cut Waste in June of 

2011. Executive Order (EO) 13576 “Delivering an Efficient, Effective, and Accountable Government,” which 

established the Campaign to Cut Waste, called upon all agencies to reinforce the performance and management 

reform gains already achieved; systematically identify additional reforms necessary to eliminate wasteful, 

duplicative or otherwise inefficient programs; and publicize these reforms so that they may serve as a model across 

the Federal Government. Building on this effort, the President issued an EO on “Promoting Efficient Spending” that 

requires agencies to cut certain administrative costs in FY 2013 by not less than 20 percent below FY 2010 

levels. In addition, a key focus of the Campaign has been reducing government travel and conference spending as 

highlighted through OMB Memorandum 12-12 “Promoting Efficient Spending to Support Agency Operations.” 

Underlying the Administration’s dedication to ensure taxpayer money is spent prudently and effectively, many of 

the innovate management practices highlighted through the Campaign to Cut Waste were included in the President’s 

FY 2013 budget sent to Congress. These efforts under the Campaign to Cut Waste are expected to result in billions 

of dollars in savings by FY 2013. 

Accelerating Efforts to Better Manage Federal Real Property 

The Administration is focused on improving the management of real property assets. The Federal Government 

is the largest property owner in the country, but it is not using some of those assets productively. In June 2010, the 

President signed a memorandum on “Disposing of Unneeded Federal Real Estate—Increasing Sales Proceeds, 

Cutting Operating Costs, and Improving Energy Efficiency” which directed Federal agencies to accelerate efforts to 

remove excess and surplus property and to realize $3 billion in savings from the Government’s properties by 

September 30, 2012. As of the first quarter of 2012, Federal agencies have identified $2.4 billion of the President’s 

$3 billion goal through actions including reducing annual operating costs, reducing square footage through 

consolidating space within owned and leased buildings, increasing the impact of telework, selling owned properties, 

and improving energy efficiencies. In addition, in an effort to spur innovation and further improve the management 

of Federal real property, OMB issued Memorandum 12-12 “Promoting Efficient Spending to Support Agency 

Operations”. This Memorandum prohibits the increase of agency civilian real property inventory, unless certain 

exclusions apply. This policy will enable the Federal Government to continue making progress on real property 

management by encouraging smarter use of building space and requiring an agency-wide assessment of newlyacquired space. 

To further build on this effort and work in achieving more long-term savings, the President introduced the 

Civilian Property Realignment Act in the FY 2013 budget. The proposal would create an independent Board to 

reduce and realign the Federal civilian property inventory. The Board would cut bureaucratic red tape, resolve 

longstanding competing stakeholder interests, and help address the financial challenges that hinder efforts to dispose 

and consolidate Federal real property. Expanding on the work toward the passage of the President’s proposal, the 

Administration has continued to make progress on achieving savings in real property by working with the Federal 

Real Property Council and the Real Property Advisory Committee to encourage greater collaboration across 

agencies. 

Addressing Improper Payments 

The Improper Payments Information Act of 2002 (IPIA), as amended by the Improper Payments Elimination 

and Recovery Act of 2010 (IPERA), created a framework for assessing every Federal program and dollar for risk of 

improper payments, annually measuring the accuracy of payments, and initiating improvements to ensure that errors 

are reduced and eliminated and overpayment recoveries are pursued. Addressing improper payments is a central 

component of Administration efforts to eliminate waste. Over the past three years, the President has issued 

Executive Order 13520 on Reducing Improper Payments, a Presidential memorandum on intensifying and 

expanding agency efforts to recapture improper payments, and a Presidential memorandum directing that a Do Not 

Pay List be established to help prevent improper payments from being made to ineligible recipients. The Do Not 

Pay program opened for business last spring. The Do Not Pay is run by the Department of the Treasury and allows 

agencies to perform data matching by reviewing multiple databases to determine a recipient’s award or payment 

eligibility. A Data Analytics Service has been developed, in addition to the data-matching service, to provide 

customized matching and analysis of an agency’s payment file to identify irregularities and fraud. The Treasury 

Department is also developing new data analytic approaches to assess the relative risk level of those who are 
24 MANAGEMENT’S DISCUSSION AND ANALYSIS 

identified as suspect through the Do Not Pay tool and working to standardize disbursement data, making it easier to 

perform computer matching and trend analysis. 

While agencies are continuing to implement these initiatives, we are already seeing real results. Based on 

information submitted by agencies in FY 2012, the reported government-wide error rate is 4.35 percent, a decrease 

from the FY 2011 rate of 4.69 percent, and we have successfully reduced error rates in major programs, such as 

Medicare Fee-for-Service; Medicaid; Unemployment Insurance (UI); the Earned Income Tax Credit; Supplemental 

Nutrition Assistance Program (SNAP—Food Stamps); Pell Grants; the School Lunch program; and Old Age, 

Survivors, and Disability Insurance. If the FY 2009 rate of 5.4 percent had been in effect in FY 2010, 2011, and 

2012, the Government would have reported in total $47 billion more in estimated improper payments during the 

three-year period. This figure can be compared with the President's ambitious goal of reducing improper payments 

during the same period by $50 billion. In addition, agencies reported recapturing more than $2.4 billion in improper 

payments to contractors and vendors in FY 2012, almost twice as much as was recaptured in FY 2011. 

Partnering for Solutions 

The Partnership Fund for Program Integrity Innovation (Partnership Fund) was established by the 

Consolidated Appropriations Act of 2010 (P.L. 111-117) to fund pilot projects to improve delivery of Federal 

assistance programs administered through state and local governments or where Federal-state cooperation could be 

beneficial. Funding supports pilots and evaluations of promising innovations that confront these challenges in 

Federal, state and/or local administration. Partnership Fund pilots advance four goals: (1) improve payment 

accuracy; (2) improve administrative efficiency; (3) improve service delivery; and (4) reduce access barriers for 

eligible beneficiaries. OMB is actively working with a Collaborative Forum of Federal agencies, state and local 

administrators, industry and other stakeholders to identify pilot opportunities that could inform the expansion of 

innovations to other state or local agencies as well as further potential administrative or legislative action to facilitate 

these goals. In aggregate, pilots must save at least as much as they cost. So far, nine pilots have been funded and are 

being implemented by lead Federal agencies in cooperation with state partners. These pilots address multiple 

programs, including the SNAP, Unemployment Insurance, Medicaid, the Earned Income Tax Credit (EITC), and the 

Treasury Offset Program, as well as other human services and juvenile justice programs. Early pilot results are 

expected in FY 2013. 

Decreasing the Cost of Financial System Modernizations

Complexity and inefficiency in the Federal Government’s financial management operations has led to an 

increasingly expensive environment for modernizing financial systems. Also, once deployed, the Federal 

Government’s modern systems do not consistently meet our business needs or produce the right information to 

support decision-making. In June 2010, OMB froze activity on CFO Act agency financial system plans pending 

their immediate review and approval. As a result, agencies have realigned their financial system plans through 

splitting projects into smaller, simpler segments with clear deliverables; focusing on the most critical business needs 

first; and ensuring ongoing, transparent project oversight. OMB is committed to reshaping its approach to 

modernizing financial systems and will continue to work with the agencies to find smarter practices in 

modernization. During FY 2012, OMB and Treasury partnered to develop a performance-based approach to 

assessing compliance with the Federal Financial Management Improvement Act and revise financial management 

system requirements to emphasize the Federal government’s financial management business needs. OMB plans to 

implement an outcome-based approach and revised system requirements in FY 2013. Moving forward in FY 2013, 

to meet agencies’ long-term financial management needs, OMB and Treasury will work with external service 

providers to enhance service offerings, expand technology and transaction processing capabilities, and build a strong 

governance structure to achieve cost savings and reduce risks in financial system modernization efforts. 

Improving Data Quality for Federal Spending Information 

Ensuring the quality of Federal spending information has been central to OMB’s efforts in implementing the 

Federal Funding Accountability and Transparency Act. As part of the Administration’s Campaign to Cut Waste, 

the President issued Executive Order (EO) 13576, “Delivering an Efficient, Effective, and Accountable 

Government,” establishing the Government Accountability and Transparency Board (GATB) in June 2011. Under 

the EO, the Board is charged with providing recommendations to the President on enhancing the transparency of 

Federal spending and advance fraud detection efforts, data quality and fraud detection, leveraging the experience 

and lessons learned from the implementation of the Recovery Act and the Recovery Accountability and 

Transparency Board (RATB). 
MANAGEMENT’S DISCUSSION AND ANALYSIS 25

The Administration issued Memorandum 10-26 “Open Government Directive,” which required each agency 

take specific steps to ensure that data is reported quickly, efficiently, and accurately. The Open Government 

Directive was quickly followed by the Data Quality Framework, which provides specific guidance on data quality 

plans as they relate to Federal spending data. Pursuant to this guidance, Federal agencies developed these specific 

data quality plans that outline a governance structure, risk assessment process, governing principles and controls, 

communications, and monitoring of Federal spending information. Notwithstanding these accomplishments, efforts 

must continue to address existing and burgeoning data quality concerns. Informed by stakeholder input and 

recommendations, OMB and Federal agencies will work to improve reliability of existing data. Approaches that 

may be explored include, but are not limited to the use of control totals, such as through validation against award 

documents and/or using data from financial systems. Efforts such as these could improve the quality of Federal 

spending information to promote accountability and ultimately to improve the performance of Federal programs. 

Improving Grants Management 

Each year, the Federal Government provides over $500 billion in grants to State, local and tribal governments, 

colleges and universities, and other non-profit organizations – roughly one-sixth of the Federal budget. OFFM is 

committed to working with the grants community to make the grant process efficient and citizen-friendly. In 

February 2012, OMB published an Advance Notice of Proposed Guidance discussing possible policy changes to 

meet the President’s February 2011 directive that OMB will work with Federal and non-Federal stakeholders to 

review OMB Circulars and look for ways to better target risk and reduce administrative burden for recipients while 

improving program outcomes for Federal grants. In November 2012, the Council on Financial Assistance Reform 

(COFAR) approved a set of five priority goals for fiscal years 2012-2015. These include implementing revised 

guidance to target risk and reduce administrative burden per the directive above, standardizing business processes to 

streamline data collections, providing the public with validated financial data that aligns spending information with 

core financial accounting data in coordination with the work of the GATB, ensuring that grants professionals are 

highly qualified, and providing strong program oversight that increases the number of clean, single-audit opinions 

for grant recipients. The COFAR was created in October 2011, when OMB issued Memorandum12-01, “Creation 

of the Council on Financial Assistance Reform ” to provide policy-level leadership for the grants community to 

implement much needed reforms to improve effectiveness and efficiency in Federal grants. 

Conclusion 

The sweeping challenges we face in the Government today require our financial managers to move beyond the 

status quo and to generate a higher return on investment for our financial management activities. The Financial 

Management Community has made critical progress – decreasing the reported government-wide improper payment 

rate, from 4.69 percent in FY 2011 to 4.35 percent in FY 2012, and nearly doubling the amount of recaptured 

overpayments to contractors and vendors. The steps outlined above leverage the tools and capacities in place today, 

and refocus energies on critical and emerging priorities – cutting wasteful spending, improving the efficiency of our 

operations and information technology, and laying a foundation for data quality and collaboration as we enter a new 

era of transparency and open Government. 

Additional Information 

This Report’s Appendix contains the names and websites of the significant Government entities included in the 

Report’s financial statements. Details about the information in this Report can be found in these entities’ financial 

statements included in their Performance and Accountability and Annual Financial Reports. This Report, as well as 

those from previous years, is also available at the Treasury, OMB, and GAO websites at: 

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

http://www.gao.gov/financial.html, respectively. Other related Government publications include, but are not limited 

to the: 

 Budget of the United States Government, 

 Treasury Bulletin, 

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

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

 Economic Report of the President, and 

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

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STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 27

United States Government Accountability Office

Washington, DC 20548 

Comptroller General

of the United States

January 17, 2013 

The President 

The President of the Senate 

The Speaker of the House of Representatives 

During fiscal year 2012, the federal government continued to face economic and fiscal 

challenges in a slow-growth economy with high unemployment. To operate as effectively 

and efficiently as possible and to make difficult decisions to address the federal 

government’s fiscal challenges, Congress, the administration, and federal managers 

must have ready access to reliable and complete financial and performance 

information—both for individual federal entities and for the federal government as a 

whole. Even though significant progress has been made since the enactment of key 

federal financial management reforms in the 1990s, our report on the U.S. government’s 

consolidated financial statements illustrates that much work remains to improve federal 

financial management. Further improvements are urgently needed. 

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

summary, we found the following: 

 Certain material weaknesses1

 in internal control over financial reporting and other 

limitations on the scope of our work resulted in conditions that prevented us from 

expressing an opinion on the fiscal years 2012 and 2011 accrual-based consolidated 

financial statements.2

 About 34 percent of the federal government’s reported total 

assets as of September 30, 2012, and approximately 21 percent of the federal 

government’s reported net cost for fiscal year 2012 relate to the Department of 

Defense (DOD), which received a disclaimer of opinion on its consolidated financial 

statements. 

 

1

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

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

or detected and corrected on a timely basis. A deficiency in internal control exists when the design or 

operation of a control does not allow management or employees, in the normal course of performing their 

assigned functions, to prevent, or detect and correct misstatements on a timely basis. 

2

The accrual-based consolidated financial statements for the fiscal years ended September 30, 2012 and 

2011 consist of the (1) Statements of Net Cost, (2) Statements of Operations and Changes in Net Position, 

(3) Reconciliations of Net Operating Cost and Unified Budget Deficit, (4) Statements of Changes in Cash 

Balance from Unified Budget and Other Activities, and (5) Balance Sheets, including the related notes to 

these financial statements. Most revenues are recorded on a modified cash basis. Two additional 

statements that do not interrelate with the accrual-based consolidated financial statements are also 

included: the 2012, 2011, 2010, 2009, and 2008 Statements of Social Insurance and the 2012 and 2011 

Statements of Changes in Social Insurance Amounts, and related notes.
28 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 

 Because of significant uncertainties, primarily related to the achievement of projected 

reductions in Medicare cost growth reflected in the 2012, 2011, and 2010 Statements 

of Social Insurance, we are unable to, and we do not, express opinions on the 2012, 

2011, and 2010 Statements of Social Insurance, as well as on the 2012 and 2011 

Statements of Changes in Social Insurance Amounts. About $27.2 trillion, or 70.5 

percent, of the reported total present value of future expenditures in excess of future 

revenue presented in the 2012 Statement of Social Insurance relates to Medicare 

programs reported in the Department of Health and Human Services’ 2012 

Statement of Social Insurance, which received a disclaimer of opinion.3

 

 Material weaknesses resulted in ineffective internal control over financial reporting 

for fiscal year 2012. 

 Our tests of compliance with selected provisions of laws and regulations for fiscal 

year 2012 were limited by the material weaknesses and other scope limitations 

discussed in our report. 

While significant progress has been made in improving federal financial management 

since the federal government began preparing consolidated financial statements 16 

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

on the federal government’s accrual-based consolidated financial statements over this 

period: (1) serious financial management problems at DOD that have prevented its 

financial statements from being auditable, (2) the federal government’s inability to 

adequately account for and reconcile intragovernmental activity and balances between 

federal agencies, and (3) the federal government’s ineffective process for preparing the 

consolidated financial statements. 

It is important to emphasize that the vast majority of the 24 Chief Financial Officers Act 

agencies received unqualified opinions on their respective entities’ financial statements. 

However, DOD and the Department of Homeland Security (DHS) have consistently been 

unable to receive such audit opinions. Efforts are under way at both entities to address 

this situation. At DOD, following years of unsuccessful financial improvement efforts, the 

DOD Comptroller established the Financial Improvement and Audit Readiness (FIAR) 

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

internal control weaknesses and for achieving auditability, and to integrate those efforts 

with other improvement activities, such as the department’s business systems 

modernization efforts. DOD’s current FIAR strategy and methodology focus on two 

priorities—budgetary information and asset accountability—with an overall goal of 

preparing auditable departmentwide financial statements by September 30, 2017.4

Because budgetary information is widely and regularly used for management, one of 

DOD’s highest interim priorities is the improvement of its budgetary information and 

processes underlying its Statement of Budgetary Resources (SBR). In October 2011, the 

Secretary of Defense called for a revised plan that would put DOD component 

 

3

We issued an unqualified opinion on the Statements of Social Insurance for 2009 and 2008. 4

Section 1003 of the National Defense Authorization Act for Fiscal Year 2010, Pub. L. No. 111-84, 123 Stat. 

2190, 2439-41 (Oct. 28, 2009), made the development and maintenance of the FIAR Plan a statutory 

requirement. Under the act, the FIAR Plan must ensure that DOD’s financial statements are validated as 

ready for audit by September 30, 2017. More recently, section 1005 of the National Defense Authorization 

Act for Fiscal Year 2013, Pub. L. No. 112-239, 126 Stat. 1632 (Jan. 2, 2013), added a new requirement for 

DOD’s FIAR Plan to ensure that one of DOD’s financial statements, the Statement of Budgetary Resources, 

is validated as ready for audit by September 30, 2014. 
STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 29

organizations on a pace to achieve SBR audit readiness by the end of fiscal year 2014, 

an acceleration of the timeline for most components. In response to the revised plan for 

the SBR, DOD revised its timelines and actions are under way as reported in FIAR Plan 

Status Reports. However, according to the November 2012 FIAR Plan Status Report, 

components are still in the early phases of their actions. Moreover, the results of recent 

work by us and the DOD Office of Inspector General have raised concerns about the 

ability of DOD components to implement the FIAR Plan effectively.5

 

With respect to DHS, for the first time, it was able to attain a qualified audit opinion on its 

departmentwide financial statements. The auditor qualified the audit opinion on DHS’s 

fiscal year 2012 financial statements because of DHS’s inability to provide sufficient 

evidence to support certain components of property, plant, and equipment and heritage 

and stewardship assets presented in the financial statements. In addition, such limitation 

in the scope of the audit contributed to the auditor’s inability to form an opinion on DHS’s 

internal control over financial reporting. It is important that DHS continue to remediate its 

internal control deficiencies and build on the progress it has made as it moves forward to 

achieve its ultimate goal of obtaining clean audit opinions on its fiscal year 2013 financial 

statements and on its internal control over financial reporting.6

Various efforts are also under way to address the other two major impediments. During 

fiscal year 2012, the Department of the Treasury (Treasury) expanded its ongoing 

efforts, working with federal entities, to help resolve and eliminate material differences in 

intragovernmental activity and balances. These efforts included developing and 

implementing a formalized resolution plan and related corrective actions. In addition, 

Treasury implemented corrective actions to address certain deficiencies regarding the 

preparation of the consolidated financial statements, including obtaining and utilizing 

certain interim financial information from federal entities in preparing initial financial 

statement drafts. Treasury also began to develop a methodology to reconcile the budget 

deficit to the consolidated financial statements. Fully addressing the numerous issues in 

these areas will require a strong and sustained commitment by federal entities and 

leadership by Treasury and the Office of Management and Budget. 

The material weaknesses underlying these three major impediments continued to 

(1) hamper the federal government’s ability to reliably report a significant portion of its 

assets, liabilities, costs, and other related information; (2) affect the federal government’s 

ability to reliably measure the full cost as well as the financial and nonfinancial 

performance of certain programs and activities; (3) impair the federal government’s 

ability to adequately safeguard significant assets and properly record various 

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

information to operate in an efficient and effective manner. 

 

5

GAO, DOD Financial Management: Marine Corps Statement of Budgetary Resources Audit Results and 

Lessons Learned, GAO-11-830 (Washington, D.C.: Sept. 15, 2011, reissued Oct. 17, 2011), and DOD 

Financial Management: Improvement Needed in DOD Components’ Implementation of Audit Readiness 

Effort, GAO-11-851 (Washington, D.C.: Sept. 13, 2011). 6

Section 2(b) of the DHS Audit Requirement Target Act of 2012, Pub. L. No. 112-217, 126 Stat. 1591 (Dec. 

20, 2012) (DART Act) made obtaining an unqualified audit opinion on DHS’s financial statements for fiscal 

year 2013, and each subsequent fiscal year, a statutory requirement. Under the DART Act, DHS must 

ensure that its consolidated financial statements for fiscal year 2013, and for each subsequent year, are 

ready in a timely manner and in preparation for an audit in order to obtain an unqualified opinion on the full 

set of financial statements.
30 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 

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

material weaknesses. These are the federal government’s inability to (1) determine the 

full extent to which improper payments occur and reasonably assure that appropriate 

actions are taken to reduce improper payments, (2) identify and resolve information 

security control deficiencies and manage information security risks on an ongoing basis, 

(3) effectively manage its tax collection activities, and (4) effectively monitor and report 

loans receivable and loan guarantee liabilities. Additional details concerning these 

material weaknesses and their effect on the accrual-based consolidated financial 

statements and on the management of federal government operations are presented in 

our report. Until the problems outlined in our report are adequately addressed, they will 

continue to have adverse implications for the federal government and American 

taxpayers. 

The last economic recession and the federal government’s actions to stabilize financial 

markets and promote economic recovery, among other factors, continued to significantly 

affect the federal government’s financial condition. The federal government reported a 

net operating cost of about $1.3 trillion and a unified budget deficit of approximately 

$1.1 trillion for fiscal year 2012, and as of September 30, 2012, debt held by the public 

had increased to 73 percent of gross domestic product (GDP). As of September 30, 

2012, the federal government’s actions to stabilize the financial markets and to promote 

economic recovery resulted in reported federal government assets of over $152 billion 

(reported net of about $109 billion in valuation losses), and certain reported liabilities. 

The ultimate cost of the federal government’s actions to stabilize the financial markets 

and promote economic recovery will not be known for some time as uncertainties related 

to the valuation of these assets and liabilities are resolved and further federal 

government actions are taken in fiscal year 2013 and later. While the federal 

government has significantly reduced assets and liabilities related to its actions to 

stabilize the financial markets and promote economic recovery, it faces the challenge of 

determining the most expeditious manner in which to bring closure to its remaining 

initiatives in these areas while optimizing its investment returns. 

Because the valuation of these and certain other assets and liabilities is based on 

assumptions and estimates that are inherently subject to substantial uncertainty arising 

from the uniqueness of certain transactions and the likelihood of future changes in 

general economic, regulatory, and market conditions, actual results may be materially 

different from the reported amounts. Examples of assets and liabilities reported by the 

federal government that are subject to substantial uncertainty include the following: 

 The federal government’s consolidated financial statements as of September 30, 

2012, include approximately $109 billion of investments in two governmentsponsored enterprises—the Federal National Mortgage Association (Fannie Mae) 

and Federal Home Loan Mortgage Corporation (Freddie Mac) (reported net of about 

$85 billion in valuation losses). In addition, as of September 30, 2012, the financial 

statements include about $9 billion of liabilities for future payments to Fannie Mae 

and Freddie Mac and disclose a projected maximum remaining potential commitment 

to these entities of about $282 billion under agreements between Treasury and the 

entities. The future structures of these two government-sponsored enterprises and 

the roles they will serve in the mortgage market must still be determined. 
STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 31

 The federal government reported Troubled Asset Relief Program (TARP) direct loans 

and equity investments of approximately $40 billion as of September 30, 2012 

(reported net of about $23 billion in valuation losses), of which approximately $20 billion 

related to loans to and equity investments in certain entities in the automotive 

industry. 

 The federal government reported that the Pension Benefit Guaranty Corporation’s 

(PBGC) liabilities exceeded its assets by about $34 billion as of September 30, 2012. 

PBGC is subject to further losses if plan terminations that are reasonably possible 

occur. 

There are risks that other factors could affect the federal government’s financial 

condition in the future, including the following: 

 The U.S. Postal Service (USPS) is facing a deteriorating financial situation as it 

reached its borrowing limit of $15 billion in fiscal year 2012 and finished the year with 

a reported net loss of almost $16 billion. 

 The Federal Housing Administration (FHA) reported that its liabilities exceeded its 

assets by about $15 billion as of September 30, 2012, and that the capital ratio for its 

Mutual Mortgage Insurance Fund fell below zero during the fiscal year. In addition, 

the ultimate roles of Fannie Mae and Freddie Mac in the mortgage market may 

further affect FHA’s financial condition. 

 Several initiatives undertaken during the last 4 years by the Board of Governors of 

the Federal Reserve System to stabilize the financial markets have led to a 

significant change in the composition and size of reported securities on the Federal 

Reserve’s balance sheet. The value of these securities, which include mortgagebacked securities guaranteed by Fannie Mae, Freddie Mac, and the Government 

National Mortgage Association, is subject to interest rate risk and may decline or 

increase depending on interest rate changes. Therefore, if the Federal Reserve sells 

these securities at a loss, future payments of Federal Reserve earnings to the 

federal government may be reduced.7

GAO’s High-Risk list includes some of the issues discussed above such as information 

security, USPS and DOD financial management, and the PBGC insurance program.8

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

highlights federal entities and program areas that are high risk due to their vulnerabilities 

to fraud, waste, abuse, and mismanagement or are most in need of broad reform. We 

plan to update our High-Risk series in early 2013. 

Increased attention to risks that could affect the federal government’s financial condition 

is made more important because of the nation’s longer-term fiscal challenges. The 

comprehensive long-term fiscal projections presented in the unaudited Required 

Supplementary Information section of the 2012 Financial Report of the United States 

 

7

Under Federal Reserve System policy, excess Federal Reserve Bank earnings are paid to the federal 

government. The federal government reported such net earnings of about $82 billion for fiscal year 2012, 

still well above its historical levels. 

8

GAO, High-Risk Series: An Update, GAO-11-278 (Washington, D.C.: February 2011).
32 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 

Government (2012 Financial Report) show that—absent policy changes—the federal 

government continues to face an unsustainable fiscal path. The oldest members of the 

baby-boom generation are already eligible for Social Security retirement benefits and for 

Medicare benefits. Under these projections, spending for the major health and retirement 

programs will increase in coming decades as more members of the baby-boom 

generation become eligible for benefits and the health care cost for each enrollee 

increases. Over the long term, the structural imbalance between spending and revenue 

will lead to continued growth of debt held by the public as a share of GDP; this means 

the current structure of the federal budget is unsustainable. 

These projections, with regard to Social Security and Medicare, are based on the same 

assumptions underlying the information presented in the Statement of Social Insurance 

and assume that the provisions in law designed to slow the growth of Medicare costs are 

sustained and remain effective throughout the projection period. If, however, the cost 

containment measures are not sustained over the long term—a concern expressed by 

the Trustees of the Medicare trust funds, the Centers for Medicare & Medicaid Services’ 

(CMS) Chief Actuary, the Congressional Budget Office, and others—spending on federal 

health care programs will grow much more rapidly. GAO also prepares long-term federal 

fiscal simulations, which continue to show debt rising as a share of GDP.9

 Under GAO’s 

Alternative simulation,10 which uses the CMS Office of the Actuary’s alternative health 

care cost projections, future spending in excess of receipts would be greater and debt 

held by the public as a share of GDP would grow more quickly than the projections in the 

2012 Financial Report. 

In January 2013, the American Taxpayer Relief Act of 201211 was enacted, which 

affected taxes and made some changes to the Budget Control Act of 2011.12 Congress 

will be considering further legislative changes to address the fiscal challenges. 

Reliable financial and performance information is even more critical as (1) federal 

managers likely face increasingly tight budget constraints and need to operate their 

respective entities as efficiently and effectively as possible and (2) decision makers carry 

out the important task of deciding how to use multiple tools (tax provisions, discretionary 

spending, mandatory spending, and credit programs) to address the federal 

government’s fiscal challenges. 

 

9

GAO, The Federal Government’s Long-Term Fiscal Outlook: Fall 2012 Update, GAO-13-148SP 

(Washington, D.C.: Dec. 3, 2012). 

10GAO’s Fall 2012 Alternative simulation incorporates the CMS Office of the Actuary’s alternative projections 

for health care cost growth, which assume physician payments are not reduced as specified under current 

law and certain cost controls are not maintained over the long term. Also in this simulation, expiring tax 

provisions other than the Social Security payroll tax reductions are extended to 2022 and the alternative 

minimum tax exemption amount is indexed to inflation through 2022. In the Alternative simulation, 

discretionary spending follows the original discretionary spending caps set by the Budget Control Act of 

2011 but not the lower caps triggered by the automatic enforcement procedures. Over the long term, 

discretionary spending and revenue are held at their historical average share of GDP. 11The American Taxpayer Relief Act of 2012, Pub. L. No. 112-240, 126 Stat. 2313 (Jan. 2, 2013). 12The Budget Control Act of 2011, Pub. L. No. 112-25, § 302, 125 Stat. 240, 256-59 (Aug. 2, 2011).
STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 33

On December 26, 2012, the Secretary of the Treasury notified Congress that, on 

December 31, 2012, the federal government would reach its debt limit.13 On December 

31, 2012, Treasury began deviating from its normal debt management operations and 

taking a number of actions, referred to by Treasury as extraordinary actions, to avoid 

exceeding the debt limit. As of the date of our audit report, the debt limit has not been 

increased. As we have previously reported, the debt limit does not restrict Congress’s 

ability to enact spending and revenue legislation that affects the level of debt or 

otherwise constrains fiscal policy; it restricts Treasury’s authority to borrow to finance the 

decisions already enacted by Congress and the President.14 The United States benefits 

from the confidence investors have that debt backed by the full faith and credit of the 

United States will be honored. As we have also previously reported, delays in raising the 

debt limit can create uncertainty in the Treasury market and lead to higher Treasury 

borrowing costs. We estimated, as reported in July 2012, that delays in raising the debt 

limit in 2011 led to an increase in Treasury’s borrowing costs of about $1.3 billion in 

fiscal year 2011. However, this does not account for the multiyear effects on increased 

costs for Treasury securities that will remain outstanding after fiscal year 2011. In both 

our February 2011 and July 2012 reports, we noted that Congress should consider ways 

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

avoid potential disruptions to the Treasury market and to help inform the fiscal policy 

debate in a timely way. 

_________________________ 

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

possible without the commitment and professionalism of inspectors general throughout 

the federal government who are responsible for annually auditing the financial 

statements of individual federal entities. We also appreciate the cooperation and 

assistance of Department of the Treasury and Office of Management and Budget 

officials as well as the federal entities’ chief financial officers. We look forward to 

continuing to work with these individuals, the administration, and Congress to achieve 

the goals and objectives of federal financial management reform. 

Our report begins on page 223. Our guide15 to the Financial Report of the United States 

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

Financial Report and is available on GAO’s website at www.gao.gov. In addition, the 

website includes a guide16 to understanding the differences between accrual and cash 

 

13Congress and the President have enacted laws to establish a limit on the amount of federal debt that can 

be outstanding at one time, referred to as the debt limit. The debt limit is codified at 31 U.S.C. §§ 3101 and 

3101A. 

14GAO, Debt Limit: Analysis of 2011-2012 Actions Taken and Effect of Delayed Increase on Borrowing 

Costs, GAO-12-701 (Washington, D.C.: July 23, 2012), and Debt Limit: Delays Create Debt Management 

Challenges and Increase Uncertainty in the Treasury Market, GAO-11-203 (Washington, D.C.: Feb. 22, 

2011). 

15GAO, Understanding the Primary Components of the Annual Financial Report of the United States 

Government, GAO-09-946SP (Washington, D.C.: September 2009). 16See http://www.gao.gov/special.pubs/longterm/deficit/, which is based on information in GAO, 

Understanding Similarities and Differences between Accrual and Cash Deficits, GAO-07-117SP 

(Washington, D.C.: December 2006). In January 2007 and 2008, we issued updates to this guide for fiscal 

years 2006 and 2007; see GAO-07-341SP (Washington, D.C.: January 2007) and GAO-08-410SP 

(Washington, D.C.: January 2008). 
34 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 

measures of the deficit and provides a useful perspective on the different purposes cash 

and accrual measures serve in providing a comprehensive picture of the federal 

government’s fiscal condition today and over time. 

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

Gary T. Engel, Director, Financial Management and Assurance. If you have any 

questions, please contact me on (202) 512-5500 or them on (202) 512-3406. 

Gene L. Dodaro 

Comptroller General 

of the United States 

cc: The Majority Leader of the Senate 

 The Minority Leader of the Senate 

 The Majority Leader of the House of Representatives 

 The Minority Leader of the House of Representatives 

(198709) 
FINANCIAL STATEMENTS 35

Financial Statements 

of the United States Government 

for the Years Ended September 30, 2012, 

and 2011 

Statements of Net Cost 

These statements present the net cost of fiscal years 2012 and 2011 United States Government (Government) 1

operations, including the operations related to earmarked funds (funds financed by specifically identified revenues, 

often supplemented by other financing sources, which remain available over time). The Government’s fiscal year 

begins October 1 and ends September 30. Costs and earned revenues are categorized on the Statement of Net Cost 

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

Governmentwide net cost. Costs and earned revenues are presented in this report by department on an accrual basis, 

while the budget presents costs and revenues by obligations and receipts, generally on a cash basis. The focus of the 

budget of the United States is by agency. Budgets are prepared, defended, and monitored by agency. In reporting by 

agency, we are assisting the external users in assessing the budget integrity, operating performance, stewardship, and 

systems and controls of the Government. 

These statements contain the following four components: 

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

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

corresponding departments and entities. 

 Earned revenue—is exchange revenue resulting from the Government providing goods and services to the 

public at a price. 

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

to measure the liabilities reported for Federal civilian and military employee pensions, other postemployment benefits, and other retirement benefits, including veterans’ compensation. 

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

changes in assumptions. 

Individual agency net cost amounts will differ with the agency’s financial statements because of allocations of 

certain Office of Personnel Management (OPM) costs and intragovernmental eliminations. Because of their specific 

function, most of the costs originally associated with OPM have been allocated to their user agencies for 

Governmentwide reporting purposes. The remaining costs for OPM on the Statements of Net Cost are the 

administrative operating costs, the expenses from prior and past costs from health and pension plan amendments, 

and the actuarial gains and losses, if applicable. The interest on securities issued by the Department of the Treasury 

(Treasury) and held by the public is reported on Treasury’s financial statements, but, because of its importance and 

the dollar amounts involved, it is reported separately in these statements. 

 

1

 For purposes of this document, “Government” refers to the U.S. Government. 
36 FINANCIAL STATEMENTS 

Statements of Operations and Changes in Net Position 

These statements report the results of Government operations, which include the results of operations for 

earmarked funds. They include non-exchange revenues that are generated principally by the Government’s 

sovereign power to tax, levy duties, and assess fines and penalties. These statements also present the cost of 

Government operations, net of revenue earned from the sale of goods and services to the public (exchange revenue). 

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

Revenue 

Individual income tax and tax withholdings include Federal Insurance Contributions Act (FICA)/SelfEmployment Contributions Act (SECA) taxes and other taxes. These taxes are characterized as non-exchange 

revenue. 

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

spirits and imported liquor, tobacco, firearms, and others. These also are characterized as non-exchange revenue. 

Other taxes and receipts include Federal Reserve banks (FRBs) earnings, tax related fines, penalties and 

interest, and railroad retirement taxes. 

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

associated cost. These revenues include rents and royalties on the Outer Continental Shelf Lands resulting from the 

leasing and development of mineral resources on public lands. 

Earmarked revenues are required by statute to be used for designated activities, benefits or purposes and must 

be accounted for separately from the rest of the Government’s non-earmarked revenues. See Note 24—Earmarked 

Funds for detailed information. 

Intragovernmental interest represents interest earned from the investment of surplus earmarked revenues, 

which finance the deficit spending of non-earmarked operations. These investments are recorded as 

intragovernmental debt holdings and are included in Note 14—Federal Debt Securities Held by the Public and 

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

by Government Accounts. These interest payments and the associated investments are eliminated in the 

consolidation process. 

Net Cost of Government Operations 

The net cost of Government operations (gross cost [including (gains)/losses from changes in assumptions] less 

earned revenue) flows through from the Statements of Net Cost. The net cost associated with earmarked activities is 

separately reported. 

Intragovernmental Transfers 

Intragovernmental transfers reflect amounts required by statute to be transferred from the General Fund of the 

Treasury to earmarked funds. An example is the annual transfer to the Department of Health and Human Services’ 

(HHS) Supplementary Medical Insurance Trust Fund (Medicare Parts B and D) which receives approximately 75 

percent and 74 percent, respectively, of its funding from the General Fund. 
FINANCIAL STATEMENTS 37

Unmatched Transactions and Balances 

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

due to unreconciled intragovernmental differences, agency reporting errors, timing differences, and General Fund 

transactions in the consolidated financial statements. See Note 1.T—Unmatched Transactions and Balances for 

detailed information. 

Net Position, Beginning of Period 

The net position, beginning of period, reflects the net position reported on the prior year’s balance sheet as of 

the end of that fiscal year. The net position for earmarked funds is shown separately. 

Prior-period adjustments are revisions to adjust the beginning net position and balances presented on the prior 

year financial statements due to corrections of errors or changes in accounting principles. See Note 21—Prior Period 

Adjustments for detailed information. 

Net Position, End of Period 

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

position for earmarked funds is separately shown. 

Reconciliations of Net Operating Cost and Unified Budget 

Deficit 

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

Changes in Net Position to the unified budget deficit. The premise of the reconciliation is that the accrual and 

budgetary accounting bases share transaction data. 

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

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

details. These statements begin with the net results of operations (net operating cost), where operating revenues are 

reported on a modified cash basis of accounting and the net cost of Government operations on an accrual basis of 

accounting and reports activities where the bases of accounting for the components of net operating cost and the 

unified budget deficit differ. 

Components of Net Operating Cost Not Part of the 

Budget Deficit 

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

military and civilian employees, the environmental liabilities, and depreciation expense, not included in the 

budget results. 
38 FINANCIAL STATEMENTS 

Components of the Budget Deficit Not Part of 

Net Operating Cost 

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

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

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

Statements of Changes in Cash Balance from Unified 

Budget and Other Activities 

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

in the Government’s cash and other monetary assets and debt held by the public. It explains why the unified budget 

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

These statements reconcile the unified budget deficit to the change in cash and other monetary assets during 

the fiscal year and explain how the budget deficits were financed. A budget deficit is the result of outlays 

(expenditures) exceeding receipts (revenue) during a particular fiscal year. 

The budget deficit is financed through borrowings from the public. Other transactions such as the payment 

of interest on debt held by the public also require cash disbursements and are not part of the deficit. The budget 

deficit also includes certain amounts that are recognized in the budget and will be disbursed in a future period or 

are adjustments that did not affect the cash balance. These amounts include interest accrued on debt issued by 

Treasury and held by the public and subsidy expense related to direct and guaranteed loans as well as equity 

investment activity and did not contribute to the change in the cash balance. 

These statements show the adjustments for noncash outlays included in the budget and items affecting the cash 

balance not included in the budget to explain the change in cash and other monetary assets.

Balance Sheets 

The balance sheets show the Government’s assets, liabilities, and net position. When combined with 

stewardship information, this information presents a more comprehensive understanding of the Government’s 

financial position. The net position for earmarked funds is shown separately. 

Assets 

Assets included on the balance sheets are resources of the Government that remain available to meet future 

needs. The most significant assets that are reported on the balance sheets are loans receivable and mortgage-backed 

securities, net; property, plant, and equipment (PP&E), net; inventories and related property, net; and cash and other 

monetary assets. There are, however, other significant resources available to the Government that extend beyond the 

assets presented in these balance sheets. Those resources include the Government’s sovereign powers to tax, and set 

monetary policy. 

Liabilities and Net Position 

Liabilities are obligations of the Government resulting from prior actions that will require financial resources. 

The most significant liabilities reported on the balance sheets are Federal debt securities held by the public and 

accrued interest and Federal employee and veteran benefits payable. Liabilities also include environmental and 

disposal liabilities, liabilities to Government-Sponsored Enterprises (GSEs), benefits due and payable, and insurance 

and guarantee program liabilities. 
FINANCIAL STATEMENTS 39

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

broader than these reported balance sheet liabilities. They include the social insurance programs reported in the 

Statements of Social Insurance and disclosed in the Required Supplementary Information—Social Insurance section, 

the fiscal long-term projections of non-interest spending disclosed in the Required Supplementary Information—

Statement of Fiscal Projections for the United States Government (U.S. Government) section, and a wide range of 

other programs under which the Government provides benefits and services to the people of this Nation, as well as 

certain future loss contingencies. 

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

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

losses. Commitments, as well as contingencies that do not meet the criteria for recognition as liabilities on the 

balance sheets, but for which there is at least a reasonable possibility that losses have been incurred, are disclosed in 

Note 22—Contingencies and Note 23—Commitments. 

The collection of earmarked taxes and other earmarked revenue is credited to the corresponding Earmarked 

Fund that will use these funds to meet a particular Government purpose. If the collections from taxes and other 

sources exceed the payments to the beneficiaries, the excess revenue is invested in Treasury securities or “loaned” to 

Treasury’s General Fund; therefore, the trust fund balances do not represent cash. An explanation of the trust funds 

for social insurance and many of the other large trust funds is included in Note 24—Earmarked Funds. That note 

also contains information about trust fund receipts, disbursements, and assets. 

Because of its sovereign power to tax and borrow, and the country’s wide economic base, the Government has 

unique access to financial resources through generating tax revenues and issuing Federal debt securities. This 

provides the Government with the ability to meet present obligations and those that are anticipated from future 

operations and are not reflected in net position. 

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

operations since inception. For detailed components that comprise the net position, refer to the section “Statement of 

Operations and Changes in Net Position.” 

Statements of Social Insurance and Changes in Social 

Insurance Amounts 

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

programs: Social Security, Medicare, Railroad Retirement, and Black Lung social insurance programs. They are 

administered by the Social Security Administration (SSA), HHS, the Railroad Retirement Board (RRB), and the 

Department of Labor (DOL), respectively. The estimates are actuarial present values 2

 of the projections and are 

based on the economic and demographic assumptions representing the trustees’ reasonable estimates as set forth in 

the relevant Social Security and Medicare trustees’ reports and in the agency financial report of HHS and DOL 

(Black Lung) and in the relevant agency performance and accountability reports for the SSA and RRB. The 

projections are based on the continuation of program provisions contained in current law. 

The magnitude and complexity of social insurance programs, coupled with the extreme sensitivity of 

projections relating to the many assumptions of the programs, produce a wide range of possible results. In preparing 

the Statements of Social Insurance, Government management considers and selects assumptions and data that it 

believes provide a reasonable basis for the assertions in the statements. However, because of the large number of 

factors that affect the Statements of Social Insurance and the fact that such assumptions are inherently subject to 

substantial uncertainty (arising from the likelihood of future events, significant uncertainties, and contingencies), 

there will be differences between the estimates in the Statements of Social Insurance and the actual results, and those 

differences may be material. Note 26—Social Insurance describes the social insurance programs, reports long-range 

estimates that can be used to assess the financial condition of the programs, and explains some of the factors that 

impact the various programs. The Statements of Changes in Social Insurance Amounts reconcile the change between 

the current valuation period and the prior valuation period. 

 

2

 Present values recognize that a dollar paid or collected in the future is worth less than a dollar today, because a dollar today could be invested 

and earn interest. To calculate a present value, future amounts are thus reduced using an assumed interest rate, and those reduced amounts are 

summed. 
40 FINANCIAL STATEMENTS 

United States Government 

Statement of Net Cost 

for the Year Ended September 30, 2012 

(In billions of dollars)

Gross 

Cost 

Earned 

Revenue Subtotal 

(Gain)/Loss 

from 

Changes in 

Assumptions 

Net 

Cost 

Department of Health and Human 

Services ............................................................ 924.0 67.8 856.2 0.3 856.5 

Social Security Administration ..................... 825.4 0.3 825.1 - 825.1 

Department of Defense ............................... 784.7 56.0 728.7 70.4 799.1 

Department of Veterans Affairs ................... 213.6 4.1 209.5 149.3 358.8 

Interest on Treasury Securities Held by 

the Public .................................................. 245.4 - 245.4 - 245.4

Department of Agriculture ............................ 161.0 12.0 149.0 - 149.0 

Office of Personnel Management ................ 48.2 19.1 29.1 98.9 128.0 

Department of Labor .................................... 107.3 - 107.3 - 107.3 

Department of Transportation ...................... 79.0 0.8 78.2 - 78.2 

Department of Housing and Urban 

Development ............................................. 74.5 1.5 73.0 - 73.0 

Department of Energy ................................. 60.8 4.3 56.5 - 56.5 

Department of Homeland Security .............. 58.2 9.9 48.3 0.4 48.7 

Department of Education ............................. 62.7 20.0 42.7 - 42.7 

Department of Justice .................................. 38.9 1.3 37.6 - 37.6 

Department of State ....................................... 29.8 3.5 26.3 0.8 27.1 

Department of the Interior ............................ 23.3 2.7 20.6 - 20.6 

National Aeronautics and Space 

Administration ........................................... 19.0 0.2 18.8 - 18.8 

Agency for International Development ........ 11.4 0.2 11.2 - 11.2 

Environmental Protection Agency ............... 11.4 0.3 11.1 - 11.1 

Railroad Retirement Board .......................... 15.3 5.1 10.2 - 10.2 

Department of Commerce ........................... 12.8 2.6 10.2 - 10.2 

Pension Benefit Guaranty Corporation........ 20.2 10.4 9.8 - 9.8 

Federal Communications Commission........ 10.1 0.4 9.7 - 9.7 

U.S. Postal Service ...................................... 72.8 64.2 8.6 - 8.6 

National Science Foundation ....................... 7.4 - 7.4 - 7.4 

Small Business Administration .................... 1.6 0.4 1.2 - 1.2 

Smithsonian Institution ................................ 0.8 - 0.8 - 0.8 

Export-Import Bank of the United States..... 1.2 0.8 0.4 - 0.4 

U.S. Nuclear Regulatory Commission......... 1.1 0.8 0.3 - 0.3 

National Credit Union Administration........... 1.3 1.0 0.3 - 0.3 

General Services Administration ................. 0.5 0.5 - - -

Farm Credit System Insurance 

Corporation ............................................... - 0.1 (0.1) - (0.1)

Tennessee Valley Authority ......................... 11.0 11.3 (0.3) 0.1 (0.2)

Securities and Exchange Commission ........ 1.2 1.6 (0.4) - (0.4)

Federal Deposit Insurance Corporation ...... 2.6 19.3 (16.7) - (16.7)

Department of the Treasury......................... (150.0) 27.5 (177.5) - (177.5)

All other entities .............................................. 56.4 0.8 55.6 - 55.6 

 Total ................................................... 3,844.9 350.8 3,494.1 320.2 3,814.3 

The accompanying notes are an integral part of these financial statements. 
FINANCIAL STATEMENTS 41

United States Government 

Statement of Net Cost 

for the Year Ended September 30, 2011 

(In billions of dollars)

Gross 

Cost 

Earned 

Revenue Subtotal 

(Gain)/Loss 

from 

Changes in 

Assumptions

Net 

Cost 

Department of Health and Human 

Services ............................................................ 943.3 66.4 876.9 0.1 877.0 

Social Security Administration ..................... 782.9 0.4 782.5 - 782.5 

Department of Defense ............................... 827.0 78.0 749.0 (32.0) 717.0 

Department of Veterans Affairs ................... 123.7 4.7 119.0 58.9 177.9 

Interest on Treasury Securities Held by 

the Public .................................................. 250.9 - 250.9 - 250.9 

Department of Agriculture ............................ 153.8 9.4 144.4 - 144.4 

Office of Personnel Management ................ 43.6 19.1 24.5 0.3 24.8 

Department of Labor .................................... 132.7 - 132.7 - 132.7 

Department of Transportation ...................... 77.7 0.7 77.0 - 77.0 

Department of Housing and Urban 

Development ............................................. 60.7 1.2 59.5 - 59.5 

Department of Energy ................................. 52.5 7.9 44.6 - 44.6 

Department of Homeland Security .............. 58.6 9.4 49.2 0.4 49.6 

Department of Education ............................. 69.7 15.0 54.7 - 54.7 

Department of Justice .................................. 31.1 1.3 29.8 - 29.8 

Department of State ....................................... 26.9 3.4 23.5 0.4 23.9 

Department of the Interior ............................ 23.6 2.7 20.9 - 20.9 

National Aeronautics and Space 

Administration ........................................... 18.7 0.1 18.6 - 18.6 

Agency for International Development ........ 12.1 0.7 11.4 - 11.4 

Environmental Protection Agency ............... 11.2 0.5 10.7 - 10.7 

Railroad Retirement Board .......................... 16.9 5.9 11.0 - 11.0 

Department of Commerce ........................... 11.2 2.5 8.7 - 8.7 

Pension Benefit Guaranty Corporation........ 12.8 7.4 5.4 - 5.4 

Federal Communications Commission........ 9.3 0.4 8.9 - 8.9 

U.S. Postal Service ...................................... 61.7 64.6 (2.9) - (2.9)

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

Small Business Administration .................... 3.6 0.4 3.2 - 3.2 

Smithsonian Institution ................................ 0.7 - 0.7 - 0.7 

Export-Import Bank of the United States..... 0.6 0.7 (0.1) - (0.1)

U.S. Nuclear Regulatory Commission......... 1.0 0.8 0.2 - 0.2 

National Credit Union Administration........... 0.2 3.1 (2.9) - (2.9)

General Services Administration ................. 0.3 0.6 (0.3) - (0.3)

Farm Credit System Insurance 

Corporation ............................................... - 0.1 (0.1) - (0.1)

Tennessee Valley Authority ......................... 11.5 11.8 (0.3) - (0.3)

Securities and Exchange Commission ........ 1.0 1.6 (0.6) - (0.6)

Federal Deposit Insurance Corporation ...... (2.2) 13.7 (15.9) - (15.9)

Department of the Treasury......................... 114.8 30.6 84.2 - 84.2 

All other entities .............................................. 47.1 0.5 46.6 - 46.6 

 Total ................................................... 3,998.3 365.6 3,632.7 28.1 3,660.8 

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

United States Government 

Statements of Operations and Changes in Net Position 

for the Years Ended September 30, 2012, and 2011 

 

NonEarmarked

Funds 

Earmarked

Funds Consolidated 

NonEarmarked 

Funds 

Earmarked

Funds Consolidated

(In billions of dollars) 2012 2011 

 

Revenue: 

Individual income tax and tax withholdings ... 1,135.2 789.9 1,925.1 1,092.9 772.9 1,865.8 

Corporation income taxes ............................. 237.5 237.5 175.1 175.1 

Unemployment taxes .................................... 66.5 66.5 56.1 56.1 

Excise taxes .................................................. 24.6 56.5 81.1 21.3 52.2 73.5 

Estate and gift taxes ..................................... 13.9 13.9 7.3 7.3 

Customs duties ............................................. 28.6 28.6 28.5 28.5 

Other taxes and receipts ............................... 114.9 30.9 145.8 120.4 20.9 141.3 

Miscellaneous earned revenues ................... 13.5 6.2 19.7 11.3 4.9 16.2 

Intragovernmental interest ............................ 185.3 185.3 202.0 202.0 

Total revenue ................................................ 1,568.2 1,135.3 2,703.5 1,456.8 1,109.0 2,565.8 

Eliminations ................................................... (185.3) (202.0)

Consolidated revenue ................................... 2,518.2 2,363.8 

 

Net Cost of Government Operations: 

Net cost ......................................................... 2,020.2 1,794.1 3,814.3 2,110.6 1,550.2 3,660.8 

Intragovernmental interest ............................ 185.3 185.3 202.0 202.0 

Total net cost ................................................ 2,205.5 1,794.1 3,999.6 2,312.6 1,550.2 3,862.8 

Eliminations ................................................... (185.3) (202.0)

Consolidated net cost.................................... 3,814.3 3,660.8 

 

Intragovernmental transfers ......................... (576.5) 576.5 (540.5) 540.5

 

Unmatched transactions and balances 

(Note 1.T) ..................................................... (20.2) (20.2) (15.6) (15.6)

 

Net operating (cost)/revenue ........................ (1,234.0) (82.3) (1,316.3) (1,411.9) 99.3 (1,312.6)

 

Net position, beginning of period ................. (15,533.6) 748.2 (14,785.4) (14,119.7) 646.9 (13,472.8)

Prior period adjustments–changes in 

accounting principles (Note 21) .................. 1.3 (0.6) 0.7 (2.0) 2.0 - 

Net operating (cost)/revenue ......................... (1,234.0) (82.3) (1,316.3) (1,411.9) 99.3 (1,312.6)

Net position, end of period ........................... (16,766.3) 665.3 (16,101.0) (15,533.6) 748.2 (14,785.4)

 

The accompanying notes are an integral part of these financial statements. 
FINANCIAL STATEMENTS 43

United States Government 

Reconciliations of Net Operating Cost and Unified Budget Deficit 

for the Years Ended September 30, 2012, and 2011 

(In billions of dollars) 2012 2011 

Net operating cost ........................................................................................... (1,316.3) (1,312.6)

Components of net operating cost not part of the budget deficit:

Increase in liability for military employee benefits (Note 15):

 Increase in military pension liabilities........................................................ 120.7 98.6 (Decrease) in military health liabilities ...................................................... (9.0) (62.4)

 (Decrease) in other military benefits ......................................................... (0.6) (1.2)

 Increase in liability for military employee benefits ................................... 111.1 35.0 

Increase in liability for veteran's compensation (Note 15) 227.9 58.9 

Increase/(Decrease) in liabilities for civilian employee benefits 

(Note 15):

 Increase/(decrease) in civilian pension liabilities .................................... 152.6 (13.2) (Decrease) in civilian health liabilities....................................................... (14.4) (13.0)

 Increase in other civilian benefits .............................................................. 4.6 4.2 

 Increase/(decrease) in liabilities for civilian employee benefits ............ 142.8 (22.0)

Increase in environmental and disposal liabilities (Note 16):

 Increase in Energy's environmental and disposal liabilities.................... 17.8 0.4 

 (Decrease)/increase in all others' environmental and disposal

 liabilities............................................................................................................. (2.9) 2.4 

 Increase in environmental and disposal liabilities ................................... 14.9 2.8 

 

Depreciation expense........................................................................................ 59.1 68.4 

Property, plant, and equipment disposals and revaluations ....................... 9.4 (4.6)

(Decrease)/increase in benefits due and payable......................................... (4.8) 6.7 

(Decrease) in insurance and guarantee program liabilities ......................... (5.3) (13.9)

Increase in other liabilities ................................................................................ 5.6 10.5 

Increase/(decrease) in accounts payable....................................................... 1.8 (9.5)

(Increase) in net accounts and taxes receivable........................................... (4.9) (11.7)

TARP yearend (downward)/upward re-estimate ........................................... (9.0) 23.3 

(Decrease) in liabilities to Government-sponsored enterprises .................. (307.2) (43.7)

Increase/(decrease) in valuation loss on investments in Governmentsponsored enterprises .................................................................................... 42.3 (3.0)

Components of the budget surplus (or deficit) that are not part of 

net operating revenue/(or cost): 

Capitalized fixed assets: 

Department of Defense .................................................................................. (33.6) (51.3)

All other agencies............................................................................................ (37.1) (36.4)

Total capitalized fixed assets...................................................................... (70.7) (87.7)

 

Effect of prior year TARP (upward)/downward re-estimate......................... (23.3) 23.6 

(Increase) in inventory ................................................................................ (2.9) (9.9)

(Increase) in investments in Government-sponsored enterprises.............. (18.6) (20.8)

Decrease in debt and equity securities........................................................... 0.4 9.1 

Decrease in other assets .................................................................................. 21.7 4.0 

Credit reform and other loan activities ....................................................... 38.6 (4.3)

All other reconciling items ................................................................................. (2.0) 2.8 

Unified budget deficit ............................................................................... (1,089.4) (1,298.6)

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

United States Government 

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

for the Years Ended September 30, 2012, and 2011 

(In billions of dollars) 2012 2011 

 

Unified budget deficit ......................................... (1,089.4) (1,298.6)

 

Adjustments for noncash outlays included

 in the budget: 

Interest accrued by Treasury on debt 

held by the public ...................................... 240.1 244.2 

TARP yearend re-estimates ........................ 32.3 (46.9) 

TARP Subsidy (income)/expense (Note 5) ..... (10.8) 7.2 

Other Federal entity subsidy (income) 

(Note 4) .......................................................... (29.4) (43.9) 

Subtotal ..................................................... 232.2 160.6 

Items affecting the cash balance not 

 included in the budget: 

Net Transactions from financing activity: 

Borrowings from the public .......................... 7,766.9 7,962.8 

Repayment of debt held by the public ......... (6,614.0) (6,854.2) 

Agency securities ........................................ (0.4) 1.0 

Subtotal ..................................................... 1,152.5 1,109.6 

Transactions from monetary and other 

activity: 

Interest paid by Treasury on debt held by 

the public ................................................... (234.3) (239.7)

Net TARP direct loans and equity 

investments activity ................................... 52.3 59.0 

Net Government-sponsored enterprises 

—mortgage-backed securities activity ...... 70.6 93.7 

Net loan receivable activity .......................... (153.7) (157.6)

Allocations of special drawing rights ........... (0.7) 0.2 

Other ............................................................ (0.3) 21.2 

Subtotal ..................................................... (266.1) (223.2) 

 

Cash and other monetary assets (Note 2): 

Increase/(decrease) in cash and other 

monetary assets ..................................... 29.2 (251.6) 

Balance, beginning of period .................... 177.0 428.6 

Balance, end of period .............................. 206.2 177.0 

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

For budgetary purposes, the effect of the yearend downward re-estimates (reduction of net outlays) and upward re-estimates 

(increase of net outlays) is not recognized until the subsequent fiscal year.
FINANCIAL STATEMENTS 45

United States Government 

Balance Sheets 

as of September 30 

(In billions of dollars) 2012 2011

Assets: 

Cash and other monetary assets (Note 2) ..................................... 206.2 177.0 

Accounts and taxes receivable, net (Note 3) .................................. 111.2 106.3 

Loans receivable and mortgage-backed securities, net (Note 4) ... 859.6 772.1 

TARP direct loans and equity investments, net (Note 5) ............... 40.2 80.1 

Inventories and related property, net (Note 7) ................................ 299.0 296.1 

Property, plant, and equipment, net (Note 8) ................................. 855.0 852.8 

Debt and equity securities (Notes 6 and 9) .................................... 110.2 110.6 

Investments in Government-sponsored enterprises (Note 11) ...... 109.3 133.0 

Other assets (Notes 10 and 12) ..................................................... 157.6 179.3 

Total assets .................................................................................. 2,748.3 2,707.3 

Stewardship land and heritage assets (Note 27) 

Liabilities: 

Accounts payable (Note 13) ........................................................... 65.2 63.4 

Federal debt securities held by the public and accrued interest 

(Note 14) ...................................................................................... 11,332.3 10,174.1 

Federal employee and veteran benefits payable (Note 15) ........... 6,274.0 5,792.2 

Environmental and disposal liabilities (Note 16)............................. 339.0 324.1 

Benefits due and payable (Note 17) ............................................... 166.2 171.0 

Insurance and guarantee program liabilities (Note 18) .................. 156.4 161.7 

Loan guarantee liabilities (Note 4) .................................................. 74.6 63.0 

Liabilities to Government-sponsored enterprises (Note 11) ........... 9.0 316.2 

Other liabilities (Notes 10 and 19) .................................................. 432.6 427.0 

Total liabilities .............................................................................. 18,849.3 17,492.7 

Contingencies (Note 22) and Commitments (Note 23) 

Net position: 

Earmarked funds (Note 24) ............................................................ 665.3 748.2 

Non-earmarked funds ..................................................................... (16,766.3) (15,533.6) 

Total net position ....................................................................... (16,101.0) (14,785.4) 

Total liabilities and net position ................................................. 2,748.3 2,707.3 

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

United States Government 

Statements of Social Insurance (Note 26) 

Present Value of Long-Range (75 Years, except Black Lung) Actuarial Projections 

(In billions of dollars) 2012 2011 2010 2009 2008 

Federal Old-Age, Survivors and Disability Insurance (Social Security): 14

Revenue (Contributions and Earmarked Taxes) from: 

Participants who have attained eligibility age (62 and over) ..... 847 726 672 575 542

Participants who have not attained eligibility age ................ 22,703 20,734 19,914 18,559 18,249

Future participants ..................................................................... 21,649 20,144 19,532 18,082 17,566

All current and future participants ..................................... 45,198 41,603 40,118 37,217 36,357

Expenditures for Scheduled Future Benefits for: 

Participants who have attained eligibility age (62 and over) ..... (9,834) (8,618) (8,096) (7,465) (6,958)

Participants who have not attained eligibility age ................ (37,753) (34,042) (32,225) (30,207) (29,021)

Future participants ..................................................................... (8,890) (8,100) (7,744) (7,223) (6,933)

All current and future participants ..................................... (56,477) (50,760) (48,065) (44,894) (42,911)

Present value of future expenditures in excess of future 

revenue ............................................................................ (11,278)1 (9,157)2 (7,947)3 (7,677)4 (6,555)5

Federal Hospital Insurance (Medicare Part A): 14

Revenue (Contributions and Earmarked Taxes) from: 

Participants who have attained eligibility age (65 and over) ..... 302 262 248 209 202

Participants who have not attained eligibility age ................ 7,929 7,581 7,216 6,348 6,320

Future participants ..................................................................... 7,367 7,260 6,944 5,451 5,361

All current and future participants ..................................... 15,598 15,104 14,408 12,008 11,883

Expenditures for Scheduled Future Benefits for: 

Participants who have attained eligibility age (65 and over) ..... (3,369) (2,923) (2,648) (2,958) (2,747)

Participants who have not attained eligibility age ................ (14,919) (12,887) (12,032) (18,147) (17,365)

Future participants ..................................................................... (2,891) (2,546) (2,411) (4,673) (4,506)

All current and future participants ..................................... (21,179) (18,356) (17,091) (25,778) (24,619)

Present value of future expenditures in excess of future 

revenue ............................................................................ (5,581)1 (3,252)2 (2,683)3 (13,770)4 (12,736)5

Federal Supplementary Medical Insurance (Medicare Part B): 14 

Revenue (Premiums) from: 

Participants who have attained eligibility age (65 and over) ..... 635 570 538 498 461

Participants who have not attained eligibility age ................ 3,826 3,651 3,460 4,224 3,859

Future participants ..................................................................... 884 865 839 1,270 1,158

All current and future participants ..................................... 5,344 5,086 4,836 5,992 5,478

Expenditures for Scheduled Future Benefits for: 

Participants who have attained eligibility age (65 and over) ..... (2,646) (2,343) (2,166) (2,142) (1,986)

Participants who have not attained eligibility age ................ (14,303) (13,489) (12,587) (16,342) (14,949)

Future participants ..................................................................... (3,211) (3,108) (2,984) (4,672) (4,262)

All current and future participants ..................................... (20,159) (18,940) (17,737) (23,156) (21,197)

Present value of future expenditures in excess of future 

 revenue 6

 .............................................................................. (14,815)1 (13,854)2 (12,901)3 (17,165)4 (15,719)5

 

Totals may not equal the sum of components due to rounding. 

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

 
FINANCIAL STATEMENTS 47

United States Government 

Statements of Social Insurance (Note 26), continued 

Present Value of Long-Range (75 Years, except Black Lung) Actuarial Projections 

(In billions of dollars) 2012 2011 2010 2009 2008 

Federal Supplementary Medical Insurance (Medicare Part D): 14

Revenue (Premiums and State Transfers) from: 

Participants who have attained eligibility age (65 and over) ..... 179 173 165 140 123

Participants who have not attained eligibility age ................ 1,510 1,608 1,626 1,442 1,380

Future participants ..................................................................... 661 703 694 618 604

All current and future participants ..................................... 2,349 2,484 2,486 2,199 2,107

Expenditures for Scheduled Future Benefits for: 

Participants who have attained eligibility age (65 and over) ..... (694) (695) (646) (595) (581)

Participants who have not attained eligibility age ................ (5,866) (6,438) (6,355) (6,144) (6,527)

Future participants ..................................................................... (2,568) (2,817) (2,714) (2,632) (2,856)

All current and future participants ..................................... (9,128) (9,950) (9,715) (9,371) (9,964)

Present value of future expenditures in excess of future 

 revenue 6

 .............................................................................. (6,778)1 (7,466)2 (7,229)3 (7,172)4 (7,857)5

Railroad Retirement: 

Revenue (Contributions and Earmarked Taxes) from: 

Participants who have attained eligibility ........................... 7 6 5 5 5

Participants who have not attained eligibility ..................... 56 46 47 48 43

Future participants ............................................................. 78 65 66 70 54

All current and future participants ................................... 141 117 118 123 102

Expenditures for Scheduled Future Benefits for: 

Participants who have attained eligibility ........................... (119) (109) (105) (102) (97)

Participants who have not attained eligibility ..................... (95) (86) (88) (91) (88)

Future participants ............................................................. (34) (28) (27) (30) (26)

All current and future participants ................................... (248) (223) (220) (223) (212)

Present value of future expenditures in excess of 

 future revenue 7

 ................................................................. (107)1 (106)2 (103)3 (100)4 (109)5

Black Lung (Part C): 

Present value of future revenue in excess of future 

 expenditures 8

 ................................................................... 5 9 5 10 6 11 6 12 5 13

 

Total present value of future expenditures in excess

of future revenue ................................................................ (38,554) (33,830) (30,857) (45,878) (42,970)

Totals may not equal the sum of components due to rounding. 

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

United States Government 

Statements of Social Insurance (Note 26), continued

Present Value of Long-Range (75 Years, except Black Lung) Actuarial Projections 

(In billions of dollars) 2012 2011 2010 2009 2008 

Social Insurance Summary: 14

Participants who have attained eligibility age: 

Revenue (e.g., Contributions and earmarked taxes) ......... 1,970 1,737 1,628 1,427 1,333

Expenditures for scheduled future benefits ....................... (16,662) (14,688) (13,661) (13,262) (12,369)

Present value of future expenditures in excess of 

future revenue ............................................................. (14,692) (12,951) (12,033) (11,835) (11,036)

Participants who have not attained eligibility age: 

Revenue (e.g., Contributions and earmarked taxes) ......... 36,024 33,620 32,263 30,621 29,851

Expenditures for scheduled future benefits ....................... (72,936) (66,942) (63,287) (70,931) (67,950)

Present value of future expenditures in excess of 

future revenue ............................................................. (36,912) (33,322) (31,024) (40,310) (38,099)

Closed-group – Total present value of future 

expenditures in excess of future revenue ........................ (51,604) (46,272) (43,057) (52,145) (49,135)

Future participants: 

Revenue (e.g., Contributions and earmarked taxes) ......... 30,639 29,037 28,075 25,491 24,743

Expenditures for scheduled future benefits ....................... (17,589) (16,594) (15,875) (19,224) (18,578)

Present value of future revenue in excess of future 

expenditures ................................................................ 13,050 12,443 12,200 6,267 6,165

 

Open-group – Total present value of future

expenditures in excess of future revenue........................ (38,554) (33,830) (30,857) (45,878) (42,970)

1 The projection period is 1/1/2012-12/31/2086 and the valuation date is 1/1/2012. 2 The projection period is 1/1/2011-12/31/2085 and the valuation date is 1/1/2011. 3 The projection period is 1/1/2010-12/31/2084 and the valuation date is 1/1/2010. 4 The projection period is 1/1/2009-12/31/2083 and the valuation date is 1/1/2009. 5 The projection period is 1/1/2008-12/31/2082 and the valuation date is 1/1/2008. 6 These amounts represent the present value of the future transfers from the General Fund of the Treasury to the Supplementary Medical 

Insurance Trust Fund. These future intragovernmental transfers are included as income in both HHS’ and the Centers for Medicare & 

Medicaid Services’ Financial Reports but are not income from the Governmentwide perspective of this report. 7 These amounts approximate the present value of the future financial interchange and the future advances from the General Fund of the 

Treasury to the Social Security Equivalent Benefit Account and future repayments from the Social Security Equivalent Benefit Account to 

the General Fund (see discussion of Railroad Retirement Program in the unaudited required supplementary information section of this 

report). They are included as income in the Railroad Retirement Financial Report but are not income from the Governmentwide 

perspective of this report. 

8 Does not include interest expense accruing on the outstanding debt.

9 The projection period is 9/30/2012-9/30/2040 and the valuation date is 9/30/2012. 10 The projection period is 9/30/2011-9/30/2040 and the valuation date is 9/30/2011. 11 The projection period is 9/30/2010-9/30/2040 and the valuation date is 9/30/2010. 12 The projection period is 9/30/2009-9/30/2040 and the valuation date is 9/30/2009. 13 The projection period is 9/30/2008-9/30/2040 and the valuation date is 9/30/2008. 14 Participants for the Social Security and Medicare programs are assumed to be the “closed-group” of individuals who are at least 15 

years of age at the start of the projection period, and are participating as either taxpayers, beneficiaries, or both. 

Totals may not equal the sum of components due to rounding. 

The accompanying notes are an integral part of these financial statements. 
FINANCIAL STATEMENTS 49

United States Government 

Statement of Changes in Social Insurance Amounts 

for the Year Ended September 30, 2012 (Note 26) 

(In billions of dollars)

Social 

Security 

Medicare

HI 

Medicare 

SMI 

Other (e.g.

Railroad

Retirement) Total 

Net present value (NPV) of future 

revenue less future expenditures for 

current and future participants (the 

“open group”) over the next 75 years, 

beginning of the year ..................................... (9,157) (3,252) (21,320) (101) (33,830) 

Reasons for changes in the NPV during 

the year: 

Changes in valuation period ..................... (473) (125) (1,013) (2) (1,613) 

Changes in demographic data and 

assumptions ........................................... (140) (97) 752 3 518 

Changes in economic data and 

assumptions ........................................... (1,037) - - (2) (1,039) 

Changes in law or policy ........................... - 153 40 - 193 

Changes in methodology and 

programmatic data ................................. (471) - - - (471) 

Changes in economic and other health 

care assumptions ................................... - (2,546) (55) - (2,601) 

Change in projection base ........................ - 286 3 - 289 

Net change in open group measure ............ (2,121) (2,329) (273) (1) (4,724) 

Open group measure, end of year............... (11,278) (5,581) (21,593) (102) (38,554) 

 

Totals may not equal the sum of components due to rounding. 

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

 
50 FINANCIAL STATEMENTS 

United States Government 

Statement of Changes in Social Insurance Amounts 

for the Year Ended September 30, 2011 (Note 26) 

(In billions of dollars)

Social 

Security 

Medicare

HI 

Medicare 

SMI 

Other (e.g.

Railroad

Retirement) Total 

Net present value (NPV) of future 

revenue less future expenditures for 

current and future participants (the 

“open group”) over the next 75 years, 

beginning of the year ..................................... (7,947) (2,683) (20,130) (97) (30,857) 

Reasons for changes in the NPV during 

the year: 

Changes in valuation period ..................... (436) (112) (968) (2) (1,518) 

Changes in demographic data and 

assumptions ........................................... (688) (112) (59) - (859) 

Changes in economic data and 

assumptions ........................................... (143) - - (2) (145) 

Changes in law or policy ........................... - - (14) - (14) 

Changes in methodology and 

programmatic data ................................. 56 - - - 56 

Changes in economic and other health 

care assumptions ................................... - 185 (648) - (463) 

Change in projection base ........................ - (531) 500 - (31) 

Net change in open group measure ............ (1,211) (570) (1,189) (4) (2,974) 

Open group measure, end of year............... (9,157) (3,252) (21,320) (101) (33,830) 

 

Totals may not equal the sum of components due to rounding. 

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

 
NOTES TO THE FINANCIAL STATEMENTS 51

United States Government 

Notes to the Financial Statements 

for the Years Ended September 30, 2012, 

and 2011 

Note 1. Summary of Significant Accounting Policies 

A. Reporting Entity 

This Financial Report includes the financial status and activities of the executive branch, the legislative branch 

(the U.S. Senate and the U.S. House of Representatives report on a cash basis), and the judicial branch (which also 

reports on a cash basis) of the Government. The legislative and judicial branches report on a limited basis and are 

not required by law to submit financial statement information to Treasury. Appendix A of this report contains a list 

of organizations and agencies encompassed in the reporting entity for the Financial Report, as well as some 

organizations excluded from the reporting entity. Certain entities are excluded from the Financial Report because 

they are Government-Sponsored Enterprises (GSEs), such as the Federal National Mortgage Association (Fannie 

Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Other entities are excluded from the 

Financial Report because their activities are not included in the Federal budget, such as the Thrift Savings Fund and 

the Board of Governors of the Federal Reserve System. 

During fiscal year 2008, the Government began a number of additional emergency economic measures relating 

to the economy that involved various financing programs. Key initiatives effective beginning in fiscal year 2008 

involved programs concerning Fannie Mae and Freddie Mac (GSEs), provision of a credit facility for GSEs and 

Federal Home Loan Banks, purchase of Mortgage-Backed Securities (MBS), and setup of a Money Market 

Guarantee Program (see Note 1.J—Investments in and Liabilities to Government-Sponsored Enterprises and Note 

11—Investments in and Liabilities to Government-Sponsored Enterprises). The Emergency Economic Stabilization 

Act of 2008 (EESA) gave the Secretary of the Treasury temporary authority to purchase and guarantee assets from a 

wide range of financial institutions through the Troubled Asset Relief Program (TARP) (see Note 5—TARP Direct 

Loans and Equity Investments, Net). 

Following U.S. Generally Accepted Accounting Principles for Federal entities (U.S. Generally-Accepted 

Accounting Principles (U.S. GAAP)), the Government has not consolidated into its financial statements the assets, 

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

a direct, indirect, or beneficial equity investment. Even though some of the equity investments are significant, under 

Statement of Federal Financial Accounting Concepts (SFFAC) No. 2, these entities meet the criteria of paragraph 50 

and do not appear in the Federal budget section “Federal Programs by Agency and Account.” As such, these entities 

are not consolidated into the financial reports of the Government. However, the values of the investment in such 

entities are presented on the balance sheet. 

Material intragovernmental transactions are eliminated in consolidation, except as described in the Other 

Accompanying Information—Unmatched Transactions and Balances (see Note 1.T). The financial reporting period 

ends September 30 and is the same as used for the annual budget. 
52 NOTES TO THE FINANCIAL STATEMENTS 

B. Basis of Accounting and Revenue Recognition 

These financial statements were prepared using U.S. GAAP, primarily based on Statement of Federal Financial 

Accounting Standards (SFFAS). Under these principles: 

 Expenses are generally recognized when incurred. 

 Nonexchange revenues, including taxes, duties, fines, and penalties, are recognized when collected and 

adjusted for the change in net measurable and legally collectable amounts receivable. Related refunds and 

other offsets, including those that are measurable and legally payable, are netted against nonexchange 

revenue. 

 Exchange (earned) revenues are recognized when the Government provides goods and services to the 

public for a price. Exchange revenues include user charges such as admission to Federal parks and 

premiums for certain Federal insurance. 

The basis of accounting used for budgetary purposes, which is primarily on a cash and obligation basis and 

follows budgetary concepts and policies, differs from the basis of accounting used for the financial statements which 

follow U.S. GAAP. See the Reconciliations of Net Operating Cost and Unified Budget Deficit in the Financial 

Statements section. 

The basis of accounting used and the detail of the basis for the Statement of Social Insurance (SOSI) and the 

Statement of Changes in Social Insurance Amounts are covered in Note 26—Social Insurance. 

New Standards Issued and Not Yet Implemented 

The Federal Accounting Standards Advisory Board (FASAB) issued the following new standards that are 

applicable to the Financial Report of the United States Government (FR), but are not yet implemented at the 

Governmentwide level for fiscal year 2012: 

 In July 2011, FASAB issued SFFAS No. 41, Deferral of the Effective Date of SFFAS 38, Accounting for 

Federal Oil and Gas Resources. SFFAS No. 38 requires the value of the federal government’s estimated 

petroleum royalties from the production of federal oil and gas proved reserves to be reported in a schedule 

of estimated federal oil and gas petroleum royalties. In addition, this standard requires the value of 

estimated petroleum royalty revenue designated for others to be reported in a schedule of estimated federal 

oil and gas petroleum royalties to be distributed to others. These schedules are to be presented in required 

supplementary information (RSI) as part of a discussion of all significant federal oil and gas resources 

under management by the entity. SFFAS No. 41 amends the effective date of SFFAS No. 38 to fiscal year 

2013. The specific impact of implementing the new standard has not yet been determined. 

 In April 2012, FASAB issued SFFAS No. 42, Deferred Maintenance and Repairs, Amending SFFAS No. 

6,14, 29, and 32. SFFAS No. 42 replaces the definition, measurement and reporting requirements for 

deferred maintenance and repairs established in SFFAS No 6. SFFAS No. 42 paragraph 19 rescinds the 

current Governmentwide disclosures required for deferred maintenance established in SFFAS 32 paragraph 

24. SFFAS 42 paragraph 16 requires the Governmentwide financial statements to disclose as RSI a 

description of what constitutes deferred maintenance and repairs (DM&R) and how it was measured; 

amounts of DM&R for each major category of property, plant and equipment; and a general reference to 

specific component entity reports for additional information. SFFAS No. 42 becomes effective in fiscal 

year 2015. The specific impact of implementing the new standard has not yet been determined. 

 In June 2012, FASAB issued SFFAS No. 43, Funds from Dedicated Collections: Amending Statement of 

Federal Financial Accounting Standards 27, Identifying and Reporting Earmarked Funds. SFFAS No. 43 

changes the term “earmarked funds” to “funds from dedicated collections”; clarifies that at least one source 

of funds external to the federal government must exist for a fund to qualify as a fund from dedicated 

collections; and adds an explicit exclusion for any fund established to account for pensions, other 

retirement benefits, other postemployment or other benefits provided for federal employees (civilian and 

military). In addition, the disclosure may present combined or consolidated amounts and the presentation 

must be labeled accordingly. SFFAS No. 43 becomes effective in fiscal year 2013, with early adoption not 

permitted. Further, when implemented in fiscal year 2013, SFFAS No. 43 requires that prior period (i.e., 

fiscal year 2012) amounts displayed on the face of the financial statements and disclosed in notes be 

restated. When implemented, SFFAS No. 43 is expected to have a material impact on the U.S. 

government’s consolidated financial statements primarily due to the exclusion of certain funds currently 

reported as “earmarked funds”, although the specific impact has not yet been determined. 
NOTES TO THE FINANCIAL STATEMENTS 53

C. Loans Receivable, Mortgage-Backed Securities, and 

Loan Guarantee Liabilities, Net 

Direct loans obligated and loan guarantees committed after fiscal year 1991 are reported based on the present 

value of the net cash flows estimated over the life of the loan or guarantee. The difference between the outstanding 

principal of the direct loans and the present value of their net cash inflows is recognized as a subsidy cost allowance. 

The present value of estimated net cashflows of the loan guarantees is recognized as a liability for loan guarantees. 

The subsidy expense for direct or guaranteed loans disbursed during a fiscal year is the present value of 

estimated net cashflows for those loans or guarantees. A subsidy expense also is recognized for modifications made 

during the year to loans and guarantees outstanding and for reestimates made as of the end of the fiscal year to the 

subsidy allowances or loan guarantee liability for loans and guarantees outstanding. 

Direct loans obligated and loan guarantees committed before fiscal year 1992 are valued under two different 

methodologies within the Government: the allowance-for-loss method and the present-value method. Under the 

allowance-for-loss method, the outstanding principal of direct loans is reduced by an allowance for uncollectible 

amounts; the liability for loan guarantees is the amount the agency estimates would more likely than not require 

future cash outflow to pay default claims. Under the present-value method, the outstanding principal of direct loans 

is reduced by an allowance equal to the difference between the outstanding principal and the present value of the 

expected net cashflows. The liability for loan guarantees is the present value of expected net cash outflows due to 

the loan guarantees. 

The MBS are treated similarly to direct loans made after fiscal year 1991, and the value of the Government’s 

position and the associated credit subsidy requirements are determined based on the net present value of the 

securities’ forecasted future cashflows. For more details on MBS, see Note 4—Loans Receivable, Mortgage-Backed 

Securities and Loan Guarantee Liabilities, Net. 

D. Accounts and Taxes Receivable 

Accounts receivable represent claims to cash or other assets from entities outside the Government that arise 

from the sale of goods or services, duties, fines, certain license fees, recoveries, or other provisions of the law. 

Accounts receivable are reported net of an allowance for uncollectible accounts. An allowance is established when it 

is more likely than not the receivables will not be totally collected. The allowance method varies among the agencies 

in the Government and is usually based on past collection experience and is re-estimated periodically as needed. 

Methods include statistical sampling of receivables, specific identification and intensive analysis of each case, aging 

methodologies, and percentage of total receivables based on historical collection. 

Taxes receivable consist primarily of uncollected tax assessments, penalties, and interest when taxpayers have 

agreed the amounts are owed or a court has determined the assessments are owed. The Balance Sheets do not 

include unpaid assessments when neither taxpayers nor a court have agreed that the amounts are owed (compliance 

assessments) or the Government does not expect further collections due to factors such as the taxpayer’s death, 

bankruptcy, or insolvency (writeoffs). Taxes receivable are reported net of an allowance for the estimated portion 

deemed to be uncollectible. The allowance for doubtful accounts is based on projections of collectibles from a 

statistical sample of unpaid tax assessments. 

E. TARP Direct Loans and Equity Investments, Net 

Troubled Asset Relief Program (TARP) equity investments are accounted for at fair value, which is defined as 

the estimated amount of proceeds that would be received if the equity investments were sold to a market participant 

in an orderly transaction. Consistent with the present value accounting concepts embedded in SFFAS No. 2, 

Accounting for Direct Loans and Loan Guarantees, TARP direct loans and equity investments, net, disbursed and 

outstanding are recognized as assets at the net present value of their estimated future cashflows and outstanding 

asset guarantees are recognized as liabilities or assets at the net present value of their estimated future cashflows. 

Market risk is considered in the calculation and determination of the estimated net present values. 
54 NOTES TO THE FINANCIAL STATEMENTS 

The subsidy allowance for TARP’s direct loans and equity investments represents the difference between the 

face value of the outstanding direct loan and equity investment balance and the net present value of the expected 

future cashflows and is reported as an adjustment to the face value of the direct loan or equity investment. 

The recorded subsidy allowance for a direct loan or equity investment is based on a set of estimated future 

cashflows. 

The Government used the following methodologies for valuation of the TARP direct loans and equity 

investments: 

 The estimated future cashflows for TARP direct loans were derived using analytical models that estimate the 

cashflows to and from the Government over the life of the loan. These cashflows include the scheduled principal, 

interest, and other payments to the Government, including estimated proceeds from equity interest obtained or 

additional notes. These models also include estimates of default and recoveries, incorporating the value of any 

collateral provided by the contract. The probability and timing of default and losses relating to a default are 

estimated by using applicable historical data when available, or publicly available proxy data, including credit 

rating agency historical performance data. The models include an adjustment for market risk which is intended to 

capture the risk of unexpected losses, but are not intended to represent fair value, i.e., the proceeds that would be 

expected to be received if the loans were sold to a market participant. 

 TARP preferred stock cashflows are projected using an analytical model developed to incorporate the risk of 

losses associated with adverse events, such as failure of the institution or increases in market interest rates. The 

model estimates how cashflows vary depending on: (1) current interest rates, which may affect the decision 

whether to repay the preferred stock; and (2) the strength of a financial institution’s assets. Inputs to the model 

include institution specific accounting data obtained from regulatory filings, an institution’s stock price volatility, 

and historical bank failure information, as well as market prices of comparable securities trading in the market. 

The Government estimates the values and projects the cashflows of warrants using an option-pricing approach 

based on the current stock price and its volatility. Investments in common stock which are exchange traded are 

valued at the market price. The result of using market prices, either quoted prices for the identical asset or quoted 

prices for comparable assets, is that the equity investments are recorded at estimated fair value. 

For more details on TARP, see Note 5—TARP Direct Loans and Equity Investments, Net. 

F. Non-TARP Investments in American International 

Group, Inc. 

The Non-TARP investments in American International Group (AIG), Inc. are recorded at fair value and 

represent the Government's non-TARP holdings of AIG common stock. The value of the non-TARP investments in 

AIG is based on the market value of the Government’s holdings of AIG common stock as of the reporting date. 

(See Note 6—Non-TARP Investments in American International Group, Inc., Note 1.I—Debt and Equity Securities, 

and Note 9—Debt and Equity Securities for further details.) 

G. Inventories and Related Property

Inventory is tangible personal property that is (1) held for sale, principally to Federal agencies, (2) in the 

process of production for sale, or (3) to be consumed in the production of goods for sale or in the provision of 

services for a fee. SFFAS No. 3, Accounting for Inventory and Related Property, requires inventories held for sale 

and held in reserve for future sale within the Government to be valued using either historical cost or latest 

acquisition cost (LAC). Historical cost methods include first-in-first-out, weighted average, and moving average. 

When LAC methods are used, the inventory is revalued periodically and an allowance account should be established 

for unrealized holding gains and losses. 

The Department of Defense (DOD) holds the majority of the inventories within the Government and uses 

standard price and moving average cost methods for valuing most of its inventory. To a lesser degree, DOD also 

uses LAC methods adjusted for holding gains and losses to approximate the historical cost of resale inventory items 

remaining in its legacy system. DOD is continuing to transition inventories currently accounted for under the LAC 
NOTES TO THE FINANCIAL STATEMENTS 55

methods, to be accounted for under the moving average cost methods, however, DOD still has supportability of 

inventory valuation issues. 

When using historical cost valuation, estimated repair costs reduce the value of inventory held for repair. 

Excess, obsolete, and unserviceable inventories are valued at estimated net realizable value. When latest acquisition 

cost is used to value inventory held for sale, it is adjusted for holding gains and losses in order to approximate 

historical cost. 

Related property includes commodities, seized monetary instruments, forfeited and foreclosed property, raw 

materials and work in process. Operating materials and supplies are valued at historical cost, latest acquisition cost, 

and standard price using the purchase and consumption method of accounting. Operating materials and supplies that 

are valued at latest acquisition cost and standard pricing are not adjusted for holding gains and losses. 

H. Property, Plant, and Equipment 

PP&E consists of tangible assets including buildings, equipment, construction in progress, and internal use 

software, assets acquired through capital leases, including leasehold improvements, and other assets used to provide 

goods and services. 

PP&E used in Government operations are carried at acquisition cost, with the exception of DOD military 

equipment (e.g., ships, aircraft, combat vehicles, and weapons) and some National Aeronautics and Space 

Administration (NASA) equipment. DOD military equipment is valued at estimated historical costs, which are 

calculated using internal DOD records. DOD identified the universe of military equipment by accumulating 

information relating to program funding and associated military equipment, equipment useful life, and program 

acquisitions and disposals to create a baseline. The equipment baseline is updated using expenditure information and 

information related to acquisition and logistics to identify acquisitions and disposals. NASA also uses estimates of 

historical cost to value some of its equipment for which historical cost information is not readily available, such as 

components of the International Space Station. 

All PP&E is capitalized if the acquisition costs (or estimated acquisition cost for DOD) are in excess of 

capitalization thresholds that vary considerably between the Federal entities. Depreciation and amortization expense 

applies to PP&E reported on the balance sheets except for land, unlimited duration land rights and construction in 

progress. Depreciation and amortization are recognized using the straight-line method over the estimated useful lives 

of the assets. All 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 PP&E and is depreciated. Construction in progress is used for the 

accumulation of the cost of construction or major renovation of fixed assets during the construction period. The 

assets are transferred out of construction in progress when the project is substantially completed. Internal use 

software includes purchased commercial off-the-shelf software, contractor-developed software, and software internally 

developed. 

For financial reporting purposes, other than multi-use heritage assets, stewardship assets are not recorded as part of 

PP&E. Stewardship Assets consist of public domain land (Stewardship Land) and Heritage Assets. Examples of 

stewardship land include national parks, wildlife refuges, national forests, and other lands of national and historical 

significance. Heritage assets include national monuments, and historical sites that among other characteristics are of 

historical, natural, cultural, educational or artistic significance. Stewardship land and most heritage assets are considered 

priceless and irreplaceable, and as such they are measured in physical units with no financial value assigned to them. Some 

heritage assets have been designated as multi-use heritage assets, for example the White House, the predominant use of 

which is in government operations. For more details on stewardship assets, see Note 27—Stewardship Land and Heritage 

Assets. 

I. Debt and Equity Securities

Debt and equity securities are classified as held-to-maturity, available-for-sale, and trading. Held-to-maturity 

debt and equity securities are reported at amortized cost, net of unamortized premiums and discounts. Available-forsale debt and equity securities are reported at fair value. Trading debt and equity securities are reported at fair value. 
56 NOTES TO THE FINANCIAL STATEMENTS 

J. Investments in and Liabilities to GovernmentSponsored Enterprises 

The senior preferred stock liquidity preference (preferred stock) and associated common stock warrant 

(warrant(s)) in GSEs are presented at their fair value as permitted by Office of Management and Budget (OMB) 

Circular No. A-136. This Circular includes language that generally requires agencies to value non-Federal 

investments at acquisition cost, and also permits the use of other measurement basis, such as fair value, in certain 

situations. Treasury performs annual valuations, as of September 30th, to provide a “sufficiently reliable” 

estimate of the outstanding commitments in order for Treasury to record the remaining liability in accordance 

with SFFAS No. 5, Accounting for Liabilities of the Federal Government. The valuations incorporated various 

forecasts, projections, and cashflow analyses to develop an estimate of the potential liability. Annual valuations 

are performed, as of September 30, of the preferred stock and warrants and any changes in valuation, including 

impairment, are recorded and disclosed in accordance with SFFAS No. 7, Accounting for Revenue and Other 

Financing Sources. Since the valuation is an annual process, the changes in valuation of the preferred stock and 

warrants are deemed usual and recurring. Accordingly, changes in valuation are recorded as an exchange 

transaction which is either an expense or revenue. Since the costs of preferred stock and warrants are exchange 

transactions, any change in valuation is also recorded as an exchange transaction. 

The Federal Housing Finance Regulatory Reform Act of 2008 established the Federal Housing Finance 

Agency (FHFA), which was created to enhance authority over the GSEs and provide the Secretary of the Treasury 

with certain authorities intended to ensure the financial stability of the GSEs. Treasury entered into a Senior 

Preferred Stock Purchase Agreement (SPSPA) with each GSE. Based on U.S. GAAP, these contingent liquidity 

commitments, predicated on the future occurrence of any shareholders’ deficits of the GSEs, at the end of any 

reporting quarter are potential liabilities of Treasury. The potential liabilities to the GSEs are assessed annually and 

recorded at the gross amount, without the consideration of the increase in preferred stock liquidity preference, future 

dividend payments, or future commitment fees due to the uncertainties involved. For more detailed information on 

investments and liabilities of GSEs, refer to Note 11—Investments in and Liabilities to Government-Sponsored 

Enterprises. 

K. Federal Debt 

Accrued interest on Treasury securities held by the public is recorded as an expense when incurred, instead of 

when paid. Certain Treasury securities are issued at a discount or premium. These discounts and premiums are 

amortized over the term of the security using an interest method for all long-term securities and the straight line 

method for short-term securities. Treasury also issues Treasury Inflation-Protected Securities (TIPS). The principal 

for TIPS is adjusted daily over the life of the security based on the Consumer Price Index (CPI) for all Urban 

Consumers. 

L. Federal Employee and Veteran Benefits Payable 

Generally, Federal employee and veteran benefits payable are recorded during the time employee services are 

rendered. The related liabilities for defined benefit pension plans, veterans’ compensation and burial benefits, postretirement health benefits, life insurance benefits, and Federal Employees’ Compensation Act benefits are recorded 

at estimated present value of future benefits, less any estimated present value of future normal cost contributions. 

The estimated present value for veterans’ pension benefits is disclosed but is not included in the Federal employee 

and veteran benefits payable line. These benefits are expensed when services are provided. 

Normal cost is the portion of the actuarial present value of projected benefits allocated as an expense for 

employee services rendered in the current year. Actuarial gains and losses (and prior service cost, if any) are 

recognized immediately in the year they occur, without amortization. 

Gains and losses from changes in long-term assumptions used to estimate Federal employee pensions, Other 

Retirement Benefits (ORB), and Other Postemployment Benefits (OPEB) liabilities are reflected separately on the 

Statement of Net Cost and the components of the expense related to Federal employee pension, ORB, and OPEB 
NOTES TO THE FINANCIAL STATEMENTS 57

liabilities are disclosed in Note 15—Federal Employee and Veteran Benefits Payable as prescribed by SFFAS No. 

33. In addition, SFFAS No. 33 also provides a standard for selecting the discount rate assumption for present value 

estimates of Federal employee pension, ORB, and OPEB liabilities. 

M. Environmental and Disposal Liabilities 

Environmental and disposal liabilities are recorded at the estimated current cost of removing, containing, 

treating, and/or disposing of radioactive waste, hazardous waste, chemical and nuclear weapons, and other 

environmental contaminations, assuming the use of current technology. Hazardous waste is a solid, liquid, or 

gaseous waste that, because of its quantity or concentration, presents a potential hazard to human health or the 

environment. Remediation consists of removal, decontamination, decommissioning, site restoration, site monitoring, 

closure and post-closure cost, treatment, and/or safe containment. Where technology does not exist to clean up 

radioactive or hazardous waste, only the estimable portion of the liability, typically monitoring and safe containment 

is recorded. 

N. Insurance and Guarantee Program Liabilities 

Insurance and guarantee programs provide protection to individuals or entities against specified risks except for 

those specifically covered by Federal employee and veteran benefits, social insurance, and loan guarantee programs. 

Insurance and guarantee program funds are commonly held in revolving funds in the Government and losses 

sustained by participants are paid from these funds. Many of these programs receive appropriations to pay excess 

claims and/or have authority to borrow from the Treasury. The values of insurance and guarantee program liabilities 

are particularly sensitive to changes in underlying estimates and assumptions. Insurance and guarantee programs 

with recognized liabilities in future periods (i.e., liabilities that extend beyond one year) are reported at their 

actuarial present value. 

O. Deferred Maintenance and Repairs 

Deferred maintenance and repairs is maintenance and repairs that were not performed when they should have 

been or scheduled maintenance and repairs that were delayed or postponed. Maintenance is the act of keeping fixed 

assets in acceptable condition, including preventative maintenance, normal repairs, and other activities needed to 

preserve the assets, so they continue to provide acceptable service and achieve their expected life. Maintenance and 

repairs exclude activities aimed at expanding the capacity of assets or otherwise upgrading them to serve needs 

different from those originally intended. Deferred maintenance and repairs expenses are not accrued in the 

Statements of Net Cost or recognized as liabilities on the Balance Sheets. However, deferred maintenance and 

repairs information is disclosed in the Unaudited Required Supplementary Information section of this report. 

P. Contingent Liabilities 

Liabilities for contingencies are recognized on the Balance Sheets when both: 

 A past transaction or event has occurred, and 

 A future outflow or other sacrifice of resources is probable and measurable. 

The estimated contingent liability may be a specific amount or a range of amounts. If some amount within the 

range is a better estimate than any other amount within the range, then that amount is recognized. If no amount 

within the range is a better estimate than any other amount, then the minimum amount in the range is recognized and 

the range is disclosed. 

Contingent liabilities that do not meet the above criteria for recognition, but for which there is at least a 

reasonable possibility that a loss may have been incurred, are disclosed in Note 22—Contingencies. 
58 NOTES TO THE FINANCIAL STATEMENTS 

Q. Commitments 

In the normal course of business, the Government has a number of unfulfilled commitments that may require 

the use of its financial resources. Note 23—Commitments describes the components of the Government’s actual 

commitments that need to be disclosed because of their nature and/or their amount. They include long-term leases, 

undelivered orders, and other commitments. 

R. Social Insurance 

A liability for social insurance programs (Social Security, Medicare, Railroad Retirement, Black Lung, and 

Unemployment) is recognized for any unpaid amounts currently due as of the reporting date. No liability is 

recognized for future benefit payments not yet due. For further information, see the Unaudited Required 

Supplementary Information—Social Insurance section, and Note 26—Social Insurance. 

S. Related Party Transactions 

Federal Reserve System 

The Federal Reserve System (FR System) was created by Congress under the Federal Reserve Act of 1913. 

The FR System consists of the Federal Reserve Board of Governors (Board), the Federal Open Market Committee 

(FOMC), and the FRBs. Collectively, the FR System serves as the nation’s central bank and is responsible for 

formulating and conducting monetary policy, issuing and distributing currency (Federal Reserve Notes), supervising 

and regulating financial institutions, providing nationwide payments systems (including large-dollar transfers of 

funds, automated clearinghouse ACH operations, and check collection), providing certain financial services to 

federal agencies and fiscal principals, and serving as the Government’s bank. Monetary policy includes actions 

undertaken by the FR System that influence the availability and cost of money and credit as a means of helping to 

promote national economic goals. The FR System also conducts operations in foreign markets in order to counter 

disorderly conditions in exchange markets or to meet other needs specified by the FOMC to carry out its central 

bank responsibilities. The FR System is not included in the federal budget. It is considered an independent central 

bank, and its decisions are not ratified by the executive branch of the Federal Government. 

The Government interacts with the FRBs in a variety of ways, including the following: 

 The FRBs serve as the Government’s fiscal agent and depositary, executing banking and other financial 

transactions on the Government’s behalf. The Government reimburses the FRBs for these services, the 

cost of which is included on the Statements of Net Cost 

 The FRBs hold Treasury and other federal securities in the FRBs’ System Open Market Account (SOMA) 

for the purpose of conducting monetary policy (Note 14—Federal Debt Securities Held by the Public and 

Accrued Interest) 

 The FRBs hold gold certificates issued by the Government in which the certificates are collateralized by 

gold (Note 2—Cash and Other Monetary Assets) 

 The FRBs hold Special Drawing Rights (SDR) certificates issued by the Government which are 

collateralized by SDRs (see Note 2—Cash and Other Monetary Assets) 

 The FRBs are required by Board policy to transfer their excess earnings to the Government 

The Government also consults with the FR System on matters affecting the economy and certain financial 

stability activities (Note 4—Loans Receivable, Mortgage-Backed Securities, and Loan Guarantee Liabilities, Net, 

Note 5—Troubled Asset Relief Program (TARP)—Direct Loans and Equity Investments, and Note 6—Non-TARP 

Investments in American International Group, Inc.). The above financial activities involving the Government are 

accounted for and disclosed in the Government consolidated financial statements. In accordance with SFFAC No. 2, 

Entity and Display, the FR System’s assets, liabilities, and operations are not consolidated into the Government’s 

financial statements, and are, therefore, not a part of the reporting entity. 
NOTES TO THE FINANCIAL STATEMENTS 59

Federal Reserve System Structure 

The Board is an independent organization governed by seven members who are appointed by the President and 

confirmed by the Senate. The full term of a Board member is 14 years, and the appointments are staggered so that 

one term expires on January 31 of each even-numbered year. The Board has a number of supervisory and regulatory 

responsibilities for institutions including, among others, state-chartered banks that are members of the FR System, 

bank holding companies, and savings and loan holding companies. In addition, the Board has general supervisory 

responsibilities for the 12 FRBs, and issues currency (Federal Reserve Notes) to the FRBs for distribution. The 

FOMC is comprised of the seven Board members and five of the 12 FRB presidents, and is charged with 

formulating and conducting monetary policy primarily through open market operations (the purchase and sale of 

certain securities in the open market), the principal tool of national monetary policy. These operations affect the 

amount of reserve balances available to depository institutions, thereby influencing overall monetary and credit 

conditions. The 12 FRBs are chartered under the Federal Reserve Act, which requires each member bank to own the 

capital stock of its FRB. Supervision and control of each FRB is exercised by a board of directors, of which three 

are appointed by the Board of Governors of the FR System, and six are elected by their member banks. 

The FRBs participate in formulating and conducting monetary policy, distribute currency and coin, and serve 

as fiscal agents for the Government, other federal agencies and fiscal principals. Additionally, the FRBs provide 

short-term loans to depository institutions and loans to participants in programs or facilities with broad-based 

eligibility in unusual and crucial circumstances when approved by the Board. 

Federal Reserve System Assets and Liabilities 

The FRBs hold Treasury and other securities in the SOMA for the purpose of conducting monetary policy. 

Treasury securities held by the FRBs totaled $1,646.8 billion and $1,665.4 billion at September 30, 2012, and 2011, 

respectively (Note 14—Federal Debt Securities Held by the Public and Accrued Interest). These assets are generally 

subject to the same market (principally interest-rate) and credit risks as other financial instruments. In the open 

market, the FR System purchases and sells Treasury securities as a mechanism for controlling the money supply. 

The FRBs have deposit liabilities with Treasury and depository institutions. The FRBs issue Federal Reserve 

Notes, the circulating currency of the United States, which are collateralized by the Treasury securities and other 

assets held by the FRBs. Financial and other information concerning the FR System, including financial statements 

for the Board and the FRBs, may be obtained at http://www.federalreserve.gov. 

FRB Residual Earnings Transferred to the Government 

FRBs generate income from interest earned on securities, reimbursable services provided to federal agencies, 

and the provision of priced services to depository institutions, as specified by the Monetary Control Act of 1980. 

Although the FRBs generate earnings from carrying out open market operations (via the earnings on securities held 

in the SOMA account), their execution of these operations is for the purpose of accomplishing monetary policy 

rather than generating earnings. Each FRB is required by Board policy to transfer to the Government its residual (or 

excess) earnings, after providing for the cost of operations, payment of dividends, and reservation of an amount 

necessary to equate surplus with paid-in capital. These residual earnings may vary due to, among other things, 

changes in the SOMA balance levels that may occur in conducting monetary policy. The FRB residual earnings of 

$82.0 billion and $82.5 billion for fiscal years ended September 30, 2012, and 2011, respectively, are reported as 

other taxes and receipts on the Statements of Operations and Changes in Net Position. Accounts and taxes 

receivables, net, includes a receivable for FRB’s residual earnings which represents the earnings due to the Treasury 

General Fund as of September 30, but not collected by the Treasury General Fund until after the end of the month. 

As of September 30, 2012, and 2011, interest receivable on FRB’s residual earnings are $2.3 billion and $1.6 billion, 

respectively (Note 3—Accounts and Taxes Receivables, Net). 

Other Related Parties 

The Government generally does not guarantee payment of the liabilities of GSEs such as Fannie Mae, Freddie 

Mac, or the Federal Home Loan Banks, which are privately owned. For further details regarding investments in or 

liabilities to Fannie Mae and Freddie Mac, see Note 11—Investments in and Liabilities to Government-Sponsored 

Enterprises. 

The Secretary of Transportation has possession of two long term notes with the National Railroad Passenger 

Service Corporation (more commonly referred to as Amtrak). The first note is for $4 billion and matures in 2975 and 

the second note is for $1.1 billion and matures in 2082 with renewable 99 year terms. Interest is not accruing on these 

notes as long as the current financial structure of Amtrak remains unchanged. If the financial structure of Amtrak 

changes, both principal and accrued interest are due and payable. The Department of Transportation (DOT) does not 
60 NOTES TO THE FINANCIAL STATEMENTS 

record the notes in its financial statements because the present value of the notes was immaterial at September 30, 

2012. These notes were discounted according to rates published in OMB M-11-12, Appendix C, Discount Rates for 

Cost Effectiveness Lease Purchase and Related Analyses with maturity dates of 2975 and 2082. 

In addition, DOT has possession of all the preferred stock shares (109.4 million) of Amtrak. Congress, through 

DOT, has continued to fund Amtrak since approximately 1972; originally through grants, then, beginning in 1981, 

through the purchase of preferred stock, and then through grants again after 1997. The Amtrak Reform and 

Accountability Act of 1997 changed the structure of the preferred stock by rescinding the voting rights with respect 

to the election of the Board of Directors and by eliminating the preferred stock’s liquidation preference over the 

common stock. The Act also eliminated further issuance of preferred stock to DOT. DOT does not record the 

Amtrak preferred stock in its financial statements because, under the Corporation's current financial structure, the 

preferred shares do not have a liquidation preference over the common shares, the preferred shares do not have any 

voting rights, and dividends are neither declared nor in arrears. 

Amtrak is not a department, agency or instrumentality of the Government or DOT. The nine members of 

Amtrak’s Board of Directors are appointed by the President of the United States and are subject to confirmation by 

the U.S. Senate. Once appointed, Board members, as a whole, act independently without the consent of the 

Government or any of its officers to set Amtrak policy, determine its budget and decide operational issues. The 

Secretary of Transportation is statutorily appointed to the nine-member Board. Traditionally, the Secretary of 

Transportation has designated the Administrator of the Federal Railroad Administration to represent the Secretary at 

Board meetings. 

The Export-Import Bank of the United States (Ex-Im Bank) has contractual agreements with the Private Export 

Funding Corporation (PEFCO). PEFCO, which is owned by a consortium of private-sector banks, industrial 

companies and financial services institutions, makes medium-term and long-term fixed-rate and variable-rate loans 

to foreign borrowers to purchase U.S.-made equipment when such loans are not available from traditional private 

sector lenders on competitive terms. Ex-Im Bank’s credit and guarantee agreement with PEFCO extends through 

December 31, 2020. Through its contractual agreements with PEFCO, Ex-Im Bank exercises a broad measure of 

supervision over PEFCO’s major financial management decisions, including approval of both the terms of 

individual loan commitments and the terms of PEFCO’s long-term debt issues, and is entitled to representation at all 

meetings of PEFCO’s board of directors, advisory board and its exporters’ council. 

The contractual agreements provide that Ex-Im Bank will (1) guarantee the due and punctual payment of 

principal and interest on export loans made by PEFCO and (2) guarantee the due and punctual payment of interest 

on PEFCO’s long-term secured debt obligations when requested by PEFCO. Related to the amounts for Ex-Im Bank 

as shown in Note 4—Loans Receivable, Mortgage-Backed Securities, and Loan Guarantee Liabilities, Net, these 

guarantees to PEFCO, aggregating $6.1 billion and $5.3 billion at September 30, 2012 and 2011, respectively, are 

included within the principal amounts guaranteed by the United States. The allowance related to these transactions is 

included within the guaranteed loan liability. Ex-Im Bank received fees totaling $0.03 billion in both fiscal years 

2012 and 2011 for the agreements, which are included as earned revenue on the Statements of Net Cost. 

T. Unmatched Transactions and Balances 

The reconciliation of the change in net position requires that the difference between ending and beginning net 

position equals the excess of revenues over net cost, plus or minus prior-period adjustments. 

The unmatched transactions and balances are needed to bring the change in net position into balance. The 

primary factors affecting this out of balance situation are: 

 Unmatched intragovernmental transactions and balances between Federal agencies, 

 General Fund transactions, and 

 Timing differences and errors in Federal agencies’ reporting. 

Refer to the Other Accompanying Information—Unmatched Transactions and Balances for detailed 

information. 
NOTES TO THE FINANCIAL STATEMENTS 61

U. Derivatives 

A derivative is a financial instrument or other contract with all three of the following characteristics: 

 It has (1) one or more underlyings and (2) one or more notional amounts or payment provisions or both. 

Those terms determine the amount of the settlement or settlements, and, in some cases, whether a 

settlement is required. 

 It requires no initial net investment or an initial net investment that is smaller than would be required for 

other types of contracts that would be expected to have a similar response to changes in market factors. 

 Its terms require or permit net settlement, it can readily be settled net by a means outside the contract, or it 

provides for delivery of an asset that puts the recipient in a position not substantially different from net 

settlement. 

An underlying is a specified interest rate, security price, commodity price, foreign exchange rate, index of 

prices or rates, or other variable. An underlying may be a price or rate of an asset or liability but is not the asset or 

liability itself. A notional (or face) amount is a number of currency units, shares, bushels, pounds, or other units 

specified in the contract. The settlement of a derivative instrument with a notional amount is determined by 

interaction of that notional amount with the underlying. The interaction may be simple multiplication, or it may 

involve a formula with leverage factors or other constants. A payment provision specifies a fixed or determinable 

settlement to be made if the underlying behaves in a specified manner. 

The accounting for derivative instruments are governed by FASB Accounting Standards Codification (ASC) 

Topic 815, Derivatives and Hedging, which aims to highlight to financial statement users additional disclosures on 

an entity’s objectives in its use of derivatives and the method of accounting for such financial instruments. This 

standard requires that entities with derivatives disclose the following: 

 How and why an entity uses derivatives, 

 How derivatives and related hedged items are accounted for under this accounting standard, and 

 How derivatives and related hedged items affect an entity’s financial statements. 

For further information, see Note 10—Derivatives. 

V. Reclassifications 

Certain amounts were reclassified in the fiscal year 2011 consolidated statement of net cost. The fiscal year 

2011 allocation of federal employee benefit expenses from the OPM to all other agencies did not include an 

allocation for the benefit expense to the U.S. Postal Service (USPS). The fiscal year 2011 allocation of federal 

benefit expenses now includes an allocation of these expenses to USPS and resulted in an increase of USPS gross 

and net cost of $5.5 billion, as there was no change to the fiscal year 2011 USPS earned revenue amount. This $5.5 

billion gross cost was reclassified from all the remaining agencies’ gross costs to reflect the benefit expense 

allocation to USPS. 

Certain amounts were reclassified in the fiscal year 2011 reconciliation from net operating cost to the unified 

budget deficit. As a result of additional information obtained in fiscal year 2012 for credit reform and other loan 

activities, $6.2 billion included in the "all other" aggregate reconciling line item was reclassified to the credit reform 

and other loan activities reconciling line item. 

Non-TARP Investment in American International Group, Inc. amounts were reclassified to debt and equity 

securities. See Note 9—Debt and Equity Securities. 

The calculation and presentation of the components of the reconciliation of veterans' compensation and burial 

benefits liabilities shown in Note 15—Federal Employee and Veteran Benefits Payable were modified for fiscal 

year 2012 to better align the presentation of these veterans benefits liabilities with those of other agencies for 

improved consistency in government-wide OPEB reporting. As a result, the fiscal year 2011 presentation was also 

modified to conform to the fiscal year 2012 presentation. Neither the fiscal year 2011 ending liability or the related 

benefits expense changed as a result of this presentation change. 

For fiscal years 2012 and 2011, one fund in each year that was previously reported as an earmarked fund was 

reclassified to nonearmarked funds and recorded as a prior period adjustment. See Note 21—Prior Period 

Adjustments, for a prior period adjustment in fiscal year 2012 resulting from a change in accounting principle.
62 NOTES TO THE FINANCIAL STATEMENTS 

W. Fiduciary Activities 

Fiduciary activities are the collection or receipt, and the management, protection, accounting, investment and 

disposition by the Government of cash or other assets in which non-Federal individuals or entities have an 

ownership interest that the Government must uphold. Fiduciary cash and other fiduciary assets are not assets of the 

Government and are not recognized on the Balance Sheet. See Note 25—Fiduciary Activities, for further 

information. 

X. Use of Estimates 

The Government has made certain estimates and assumptions relating to the reporting of assets, liabilities, 

revenues, expenses, and the disclosure of contingent liabilities to prepare these financial statements. There are a 

large number of factors that affect these assumptions and estimates, which are inherently subject to substantial 

uncertainty arising from the likelihood of future changes in general economic, regulatory and market conditions. As 

such, actual results will differ from these estimates and such differences may be material. 

Significant transactions subject to estimates include loans receivable and MBS, TARP direct loans and equity 

investments; investments in other non-Federal securities (including GSEs and foreign and domestic public entities) 

and related impairment, if any; tax receivables; loan guarantees; depreciation; liability for liquidity commitment 

(GSEs); actuarial liabilities; contingent legal liabilities; environmental liabilities; credit reform subsidy costs; and 

insurance and guarantee program liabilities. 

The Government recognizes the sensitivity of credit reform modeling to slight changes in some model 

assumptions and uses regular review of model factors, statistical modeling, and annual reestimates to reflect the 

most accurate cost of the credit programs to the U.S. Government. Two of the emergency economic programs that 

the Government implemented in the latter part of September 2008, the purchase program for MBS and the GSE 

credit line facility, are accounted for pursuant to the provisions of credit reform and the use of estimates as dictated 

by the Federal Credit Reform Act of 1990 (FCRA). FCRA loan receivables and loan guarantees are disclosed in 

Note 4—Loans Receivable, Mortgage-Backed Securities, and Loan Guarantee Liabilities, Net. Additionally, all 

TARP credit activity, including investments in common and preferred stock and loans and asset guarantees, are also 

subject to credit reform accounting (see Note 5—TARP Direct Loans and Equity Investments, Net). 

The forecasted future cashflows used to determine credit reform amounts as of September 30, 2012, and 2011, 

are sensitive to slight changes in model assumptions, such as general economic conditions, specific stock price 

volatility of the entities in which the Government has an equity interest, estimates of expected default, and 

prepayment rates. Forecasts of future financial results have inherent uncertainty and the TARP Direct Loans and 

Equity Investments, Net line item as of September 30, 2012, and 2011, is reflective of relatively illiquid, troubled 

assets whose values are particularly sensitive to future economic conditions and other assumptions. 

The GSE senior preferred stock purchase agreements (SPSPAs) provide that the Government will make 

funding advances to the GSEs, if needed at the end of any quarter. The FHFA, acting as the conservator, determines 

that the liabilities of either GSE, individually, exceed its respective assets. Valuation analyses are performed to 

attempt to provide a “sufficiently reliable” estimate of the outstanding commitment which is recorded as a liability 

in accordance with SFFAS No. 5. As part of the valuation exercise, Treasury prepared a series of long-range 

forecasts through 2025 to determine the implied amount of total liability. In fiscal year 2012, the SPSPAs were 

amended. For more detailed information on investments and liabilities of GSEs and the amended SPSPAs, see Note 

11—Investments in and Liabilities to Government-Sponsored Enterprises. 
NOTES TO THE FINANCIAL STATEMENTS 63

Y. Credit Risk 

Credit risk is the potential, no matter how remote, for financial loss from a failure of a borrower or a 

counterparty to perform in accordance with underlying contractual obligations. The Government takes on credit risk 

when it makes direct loans or credits to foreign entities or becomes exposed to institutions which engage in financial 

transactions with foreign countries. 

The Government also takes on credit risk related to committed but undisbursed direct loans, liquidity 

commitment to GSEs, the MBS portfolio, investments, loans, and asset guarantees of the TARP, guarantee of money 

market funds, and the Terrorism Risk Insurance Program. Except for the Terrorism Risk Insurance Program, these 

activities focus on the underlying problems in the credit markets, and the ongoing instability in those markets 

exposes the Government to potential unknown costs and losses. The extent of the risk assumed is described in more 

detail in the notes to the financial statements, and where applicable, is factored into credit reform models and 

reflected in fair value measurements. 
64 NOTES TO THE FINANCIAL STATEMENTS 

Note 2. Cash and Other Monetary Assets 

 

Cash and Other Monetary Assets as of September 30, 2012, and 2011 

 (In billions of dollars) 2012 2011

 

Unrestricted cash: 

Cash held by Treasury for Governmentwide operations .................... 79.2 49.8 

Other ................................................................................................... 5.9 8.3 

Restricted cash - Other ....................................................................... 20.9 18.8 

Total cash ......................................................................................... 106.0 76.9 

 

International monetary assets ............................................................... 76.8 76.6 

Gold and silver ....................................................................................... 11.1 11.1 

Foreign currency .................................................................................... 12.3 12.4 

Total cash and other monetary assets ................................................ 206.2 177.0 

 

Unrestricted cash includes cash held by Treasury for Governmentwide operations (Operating Cash) and all 

other unrestricted cash held by the Federal agencies. Operating Cash represents balances from tax collections, other 

revenue, Federal debt receipts, and other various receipts net of cash outflows for budget outlays and other 

payments. Operating Cash includes balances invested with commercial depositaries in Treasury Tax and Loan 

Accounts (including funds invested through the Term Investment Option program and the Repo Pilot program). 

Treasury checks outstanding are netted against Operating Cash until they are cleared by the Federal Reserve System. 

Other unrestricted cash not included in Treasury’s Operating Cash balance includes balances representing cash, cash 

equivalents, and other funds held by agencies, such as undeposited collections, deposits in transit, demand deposits, 

amounts held in trust, imprest funds, and amounts representing the balances of petty cash. Operating Cash held by 

the Treasury increased by $29.4 billion (an increase of approximately 60 percent) in fiscal year 2012 due to 

Treasury’s investment and borrowing decisions to manage the balance and timing of the Government’s cash 

position. 

Restricted cash is restricted due to the imposition on cash deposits by law, regulation, or agreement. Restricted 

cash is primarily composed of cash held by the Executive Office of the President (EOP) Foreign Military Sales 

programs. The Foreign Military Sales program included $20.1 billion and $18.2 billion as of September 30, 2012, 

and 2011, respectively. 

International monetary assets include the U.S. reserve position in the International Monetary Fund (IMF) and 

U.S. holdings of Special Drawing Rights (SDRs). The U.S. reserve position in the IMF is an interest-bearing claim 

on the IMF that includes the reserve asset portion of the financial subscription that the United States has paid in as 

part of its participation in the IMF as well as any amounts drawn by the IMF from a letter of credit made available 

by the United States as part of its financial subscription to the IMF. The IMF promotes international monetary 

cooperation and a stable payment system to facilitate growth in the world economy. Its primary activities are 

surveillance of member economies, financial assistance as appropriate and technical assistance. 

Only a portion of the U.S. financial subscriptions to the IMF is made in the form of reserve assets; the 

remainder is provided in the form of a letter of credit from the United States to the IMF. The balance available under 

the letter of credit totaled $41.3 billion and $43.0 billion as of September 30, 2012, and 2011, respectively. The U.S. 

reserve position in the IMF has a U.S. dollar equivalent of $23.5 billion and $22.7 billion as of September 30, 2012, 

and 2011, respectively. 
NOTES TO THE FINANCIAL STATEMENTS 65

The SDR is an international reserves asset created by the IMF to supplement the existing reserve assets of its 

members. These interest-bearing assets can be obtained by IMF allocations, transactions with IMF member 

countries, or in the form of interest earnings on SDR holdings and reserve position in the IMF. U.S. SDR holdings 

are an interest-bearing asset of Treasury’s Exchange Stabilization Fund (ESF). The total amount of SDR holdings of 

the United States was the equivalent of $55.2 billion and $55.9 billion as of September 30, 2012, and 2011, 

respectively. 

The IMF allocates SDRs to its members in proportion to each member’s quota in the IMF. The SDR Act, 

enacted in 1968, authorized the Secretary of the Treasury to issue SDR Certificates (SDRCs) to the Federal Reserve 

in exchange for dollars. The amount of SDRCs outstanding cannot exceed the dollar value of SDR holdings. The 

Secretary of the Treasury determines when Treasury will issue or redeem SDRCs. SDRCs outstanding totaled $5.2 

billion as of September 30, 2012, and 2011, and are included in Note 19—Other Liabilities. 

As of September 30, 2012, and 2011, other liabilities included $54.5 billion and $55.1 billion of interestbearing liability to the IMF for SDR allocations. The SDR allocation item represents the cumulative total of SDRs 

distributed by the IMF to the United States in allocations that occurred in 1970, 1971, 1972, 1979, 1980, 1981, and 

2009. The United States has received no SDR allocations since 2009. 

Gold is valued at the statutory price of $42.2222 per fine troy ounce. The number of fine troy ounces of gold 

was 261,498,927 and 261,498,900 as of September 30, 2012, and 2011, respectively. The market value of gold on 

the London Fixing was $1,776 and $1,620 per fine troy ounce as of September 30, 2012, and 2011, respectively. In 

addition, silver is valued at the statutory price of $1.2929 per fine troy ounce. The number of fine troy ounces of 

silver was 16,000,000 as of September 30, 2012, and 2011. The market value of silver on the London Fixing was 

$34.65 and $30.45 per fine troy ounce as of September 30, 2012, and 2011, respectively. Gold totaling $11.0 billion 

as of September 30, 2012, and 2011, was pledged as collateral for gold certificates issued and authorized to the 

FRBs by the Secretary of the Treasury. Gold certificates were valued at $11.0 billion as of September 30, 2012, and 

2011, which are included in Note 19—Other Liabilities. Treasury may redeem the gold certificates at any time. 

Foreign currency is translated into U.S. dollars at the exchange rate at fiscal yearend. The foreign currency is 

maintained by the ESF and various U.S. Federal agencies and foreign banks. 
66 NOTES TO THE FINANCIAL STATEMENTS 

Note 3. Accounts and Taxes Receivable, Net 

Accounts and Taxes Receivable as of September 30, 2012, and 2011 

(In billions of dollars) 2012 2011 

Accounts receivable: 

Gross accounts receivable ................................................................... 92.6 89.2 

Allowance for uncollectible accounts .................................................... (23.1) (20.7) 

Accounts receivable, net ...................................................................... 69.5 68.5 

Taxes receivable: 

Gross taxes receivable ......................................................................... 156.8 151.5 

Allowance for doubtful accounts ........................................................... (115.1) (113.7) 

Taxes receivable, net ........................................................................... 41.7 37.8 

Total accounts and taxes receivable, net .......................................... 111.2 106.3 

Accounts receivable includes related interest receivable of $7.5 billion and $6.6 billion as of September 30, 

2012, and 2011, respectively. 

Treasury comprises approximately 37.3 percent of the Government’s reported accounts and taxes receivable, 

net, as of September 30, 2012. Refer to the individual financial statements of Treasury, the Social Security 

Administration, the Department of Defense, the Department of Health and Human Services, the Department of 

Agriculture, the Department of Energy, the Department of Homeland Security, the Department of the Interior, the 

Pension Benefit Guaranty Corporation, and the Department of Labor for significant detailed information on gross 

accounts and taxes receivable and the related allowance for doubtful accounts. These agencies comprise 89.7 percent 

of the Government’s accounts and taxes receivable, net, of $111.2 billion as of September 30, 2012. 
NOTES TO THE FINANCIAL STATEMENTS 67

Note 4. Loans Receivable, Mortgage-Backed Securities 

and Loan Guarantee Liabilities, Net 

Direct Loan, Mortgage-Backed Securities and Defaulted Guaranteed Loan Programs 

as of September 30, 2012, and 2011 

Face Value 

of Loans Outstanding

Long-term Cost

of (Income from) 

Direct Loans and 

Defaulted 

Guaranteed Loans 

Outstanding 

Loans 

Receivable, 

Mortgage-Backed 

Securities, Net 

Subsidy Expense 

(Income) for the 

Fiscal Year 

(In billions of dollars) 2012 2011 2012 2011 2012 2011 2012 2011 

 

Federal Direct Student Loans - 

Education .............................................. 495.5 356.1 (31.6) (25.3) 527.1 381.5 (10.7) (28.6) 

Federal Family Education Loans - 

Education .............................................. 147.0 147.3 0.9 (0.8) 146.1 148.0 (2.8) (4.9) 

Electric Loans - USDA ........................... 43.3 42.2 1.4 2.1 41.9 40.2 - (0.2) 

Rural Housing Services - USDA ............ 31.5 30.7 6.8 7.1 24.7 23.6 0.3 0.5 

Housing and Urban Development 

Loans................................................. 15.5 13.9 1.9 1.3 13.6 12.6 (0.9) 0.2 

International Monetary Fund 

Program - Treasury ............................. 13.9 8.2 0.3 0.1 13.6 8.1 - 0.1 

State and Local Housing Finance 

Agency Initiative - Treasury .............. 13.7 15.1 1.1 0.8 12.6 14.3 0.5 - 

Water and Environmental Loans - 

USDA ......................................................... 12.1 11.9 0.5 0.7 11.6 11.1 (0.1) - 

Export-Import Bank Loans .................... 13.9 9.9 2.8 2.8 11.1 7.0 (0.6) (0.4) 

Farm Loans - USDA ............................... 8.8 8.6 0.4 0.4 8.4 8.3 - 0.2 

Disaster Loan Programs - SBA ............ 7.2 7.5 1.4 1.5 5.8 6.0 - 0.2 

Telecommunications Loans - USDA .... 4.6 4.5 (0.1) - 4.7 4.5 - - 

U. S. Agency for International 

Development Loans .......................... 4.1 4.7 1.3 1.3 2.8 3.4 - - 

Food Aid - USDA ................................. 4.5 5.2 2.0 2.5 2.5 2.7 - - 

GSE Mortgage-Backed Securities 

Purchase Program - Treasury ........... - 70.6 - (1.8) - 72.4 (0.7) 1.8 

All other programs .................................. 44.0 40.1 10.9 11.7 33.1 28.4 1.3 2.1 

Total direct loans, MortgageBacked Securities and defaulted 

guaranteed loans ............................ 859.6 776.5 - 4.4 859.6 772.1 (13.7) (29.0) 

 
68 NOTES TO THE FINANCIAL STATEMENTS 

The Government has two different types of loans and loan guarantees. One major type of loan is direct loans 

such as the Department of Education’s (Education) Federal Direct Student Loans. The second type is loan guarantee 

programs, such as the Department of Housing and Urban Development’s (HUD’s) Federal Housing Administration 

Loans program. 

Direct loans and loan guarantee programs are used to promote the Nation’s welfare by making financing 

available to segments of the population not served adequately by non-Federal institutions, or otherwise providing for 

certain activities or investments. For those unable to afford credit at the market rate, Federal credit programs provide 

subsidies in the form of direct loans offered at an interest rate lower than the market rate. For those to whom nonFederal financial institutions are reluctant to grant credit because of the high risk involved, Federal credit programs 

guarantee the payment of these non-Federal loans and absorb the cost of defaults. 

The amount of the long-term cost of post-1991 direct loans and loan guarantees outstanding equals the subsidy 

cost allowance for direct loans and the liability for loan guarantees as of September 30. The amount of the long-term 

cost of pre-1992 direct loans and loan guarantees equals the allowance for uncollectible amounts (or present value 

allowance) for direct loans and the liability for loan guarantees. The long-term cost is based on all direct loans and 

guaranteed loans disbursed in this fiscal year and previous years that are outstanding as of September 30. It includes 

the subsidy cost of these loans and guarantees estimated as of the time of loan disbursement and subsequent 

adjustments such as modifications, reestimates, amortizations, and writeoffs. 

Loan Guarantees as of September 30, 2012, and 2011 

Principal Amount

of Loans under 

Guarantee 

Principal Amount

Guaranteed by the 

United States 

Loan Guarantee 

Liabilities 

Subsidy Expense

(Income) for the 

Fiscal Year 

(In billions of dollars) 2012 2011 2012 2011 2012 2011 2012 2011 

 

Federal Housing Administration Loans - 

HUD ................................................................ 1,253.4 

 

1,167.1 1,170.2 

 

1,096.8 55.0 36.1 (6.0) (7.2) 

Federal Family Education Loans - 

Education ...................................................... 290.7 327.6 284.6 320.7 1.0 10.0 (11.6) (11.2) 

Export-Import Bank Guarantees .............. 76.4 70.7 76.4 70.7 1.8 1.2 (0.4) (0.2) 

Veterans Housing Benefit Programs - 

VA ................................................................... 286.6 247.7 76.1 66.2 5.6 5.1 0.6 0.6 

Small Business Loans - SBA .................... 87.4 82.2 74.4 70.0 3.7 4.7 0.3 2.4 

Rural Housing Services - USDA .............. 77.0 63.3 69.3 56.9 3.2 2.5 0.7 0.3 

Israeli Loan Guarantee Program - AID ... 11.3 11.6 11.3 11.6 1.3 1.3 (0.1) - 

Export Credit Guaranteed Programs - 

USDA ........................................................ 6.2 6.1 6.1 6.0 0.2 0.1 - 0.1 

Overseas Private Investment 

Corporation Credit Program .................... 5.4 4.9 5.4 4.9 0.2 0.2 - - 

Business and Industry Loans - USDA ..... 7.1 7.0 5.3 5.3 0.9 0.8 0.2 0.4 

Federal Ship Financing Fund (Title XI) - 

DOT ................................................................ 2.0 1.8 2.0 1.8 0.2 0.2 - - 

All Other Guaranteed Loan Programs..... 26.3 22.6 23.7 20.8 1.5 0.8 0.6 (0.1) 

Total loan guarantees ............................. 2,129.8 2,012.6 1,804.8 1,731.7 74.6 63.0 (15.7) (14.9) 

 
NOTES TO THE FINANCIAL STATEMENTS 69

Net loans receivable includes related interest and foreclosed property. Foreclosed property is property that is 

transferred from borrowers to a Federal credit program, through foreclosure or other means, in partial or full 

settlement of post-1991 direct loans or as a compensation for losses that the Government sustained under post-1991 

loan guarantees. Please refer to the individual financial statements of the Department of Veterans Affairs (VA) and 

HUD for significant detailed information regarding foreclosed property. 

The total subsidy expense/(income) is the cost of direct loans and loan guarantees recognized during the fiscal 

year. It consists of the subsidy expense/(income) incurred for direct and guaranteed loans disbursed during the fiscal 

year, for modifications made during the fiscal year of loans and guarantees outstanding, and for upward or 

downward re-estimates as of the end of the fiscal year of the cost of loans and guarantees outstanding. This 

expense/(income) is included in the Statements of Net Cost. 

Loan Programs 

The majority of the loan programs are provided by Education, HUD, United States Department of Agriculture 

(USDA), Treasury, Small Business Administration (SBA), VA, and Export-Import Bank. For significant detailed 

information regarding the direct and guaranteed loan programs listed in the tables above, please refer to the 

individual financial statements of the agencies. 

Education has two major loan programs, authorized by Title IV of the Higher Education Act of 1965 (HEA). 

The first program, is the William D. Ford Federal Direct Student Loan Program, (referred to as the Direct Loan 

Program) that was established in fiscal year 1994. The Direct Loan Program offers four types of educational loans: 

Stafford, Unsubsidized Stafford, PLUS for parents and graduate or professional students, and consolidation loans. 

With this program, the Government makes loans directly to students and parents through participating institutions of 

higher education. Direct loans are originated and serviced through contracts with private vendors. Education 

disbursed approximately $142.0 billion in Direct Loans to eligible borrowers in fiscal year 2012 and approximately 

$133.0 billion in fiscal year 2011.The second program is the Federal Family Education Loan (FFEL) Program. This 

program was established in fiscal year 1965, and is a guaranteed loan program. Like the William D. Ford Federal 

Direct Student Loan Program, it offers four types of loans: Stafford, Unsubsidized Stafford, PLUS for parents and 

graduate or professional students, and consolidation loans. The Student Aid and Fiscal Responsibility Act (SAFRA), 

which was enacted as part of the Health Care Education and Reconciliation Act of 2010 (Public Law 111-152), 

eliminated the authority to guarantee new FFEL after June 30, 2010. 

The Housing and Economic Recovery Act of 2008 (HERA) authorized Treasury to purchase GSE MBS 

consisting of mortgage pass-through securities issued by Fannie Mae and Freddie Mac. Treasury, using private 

sector asset managers, purchased such securities on the open market. By purchasing these credit-guaranteed 

securities, Treasury sought to broaden access to mortgage funding for current and prospective homeowners and to 

promote stability in the mortgage market. The authority granted by Congress to purchase MBS expired on December 

31, 2009, at which point the purchase of new securities ended. 

Treasury originally planned to hold the MBS securities to maturity. However, in fiscal year 2011, Treasury 

decided its goals had been achieved and began an orderly sale of its MBS portfolio. Sales were completed during 

fiscal year 2012. 

As of September 30, 2011, the $72.4 billion MBS net credit program receivable included a negative subsidy 

allowance of $1.8 billion. The subsidy allowance was negative in that the Treasury expected to generate earnings in 

excess of costs on its portfolio. Since Treasury originally planned to hold all MBS securities to maturity, the sale of 

the GSE MBS portfolio was not considered in the formulation estimate for the GSE MBS program. Accordingly, 

Treasury recorded a modification in fiscal year 2011, resulting in an upward reestimate or increase in the cost of the 

program by $9.7 billion. Subsequently, at September 30, 2011, Treasury performed a financial statement reestimate 

of the program’s cost that resulted in a downward reestimate, or a decrease in the cost of the program by $7.9 

billion. The decrease in program costs was the result of higher than projected sales proceeds when compared to 

projected sales proceeds in the modification. The effects of the modification and financial statement reestimate, 

when combined with other reconciling items, resulted in the $1.8 billion negative subsidy allowance at September 

30, 2011. As of September 30, 2012, Treasury performed a financial statement reestimate of the program’s cost that 

identified excess sales proceeds of $705.0 million for fiscal year 2012. A closing reestimate will be performed in 

early fiscal year 2013. 

In 2009, Congress passed the Supplemental Appropriations Act of 2009 which authorized an increase in the 

U.S. quota in the IMF, as well as an increase in U.S. participation in the New Arrangements to Borrow, one of the 

IMF’s supplemental borrowing arrangements. For the first time, Congress subjected both program increases to 

FCRA. Under FCRA, both program increases are treated as direct loans to the IMF. 
70 NOTES TO THE FINANCIAL STATEMENTS 

HUD’s Federal Housing Administration (FHA) provides mortgage insurance to encourage lenders to make 

credit available to expand home ownership. FHA serves many borrowers that the conventional market does not 

serve adequately. This includes first-time homebuyers, minorities, low-income, and other underserved households to 

realize the benefit of home ownership. Borrowers obtain an FHA insured mortgage and pay an upfront premium and 

an annual premium to FHA. The proceeds from those premiums are used to fund FHA program costs, including 

claims on defaulted mortgages and holding costs, property management fees, property sales, and other associated 

costs. The possibility of a sizable volume of delinquencies remains a significant risk for the housing market and for 

FHA in the near term. The number of FHA mortgages has risen dramatically. HUD decided to raise the annual 

premium and lower the upfront premium to aid in returning the Mutual Mortgage Insurance Fund to congressionally 

mandated levels of capital reserves without disruption to the marketplace.

USDA offers direct and guaranteed loans through credit programs in the Farm and Foreign Agricultural 

Services (FFAS) mission area through the Farm Service Agency (FSA), and the Commodity Credit Corporation 

(CCC), and in the Rural Development (RD) mission area. 

The FFAS delivers commodity, credit, conservation, disaster and emergency assistance programs that help 

strengthen and stabilize the agricultural economy. The FSA offers direct and guaranteed loans to farmers who are 

temporarily unable to obtain private, commercial credit. Through this supervised credit offered by FSA, the goal 

is to graduate its borrowers to commercial credit. The CCC offers both credit guarantee and direct credit 

programs for buyers of U.S. exports, suppliers, and sovereign countries in need of food assistance. The RD 

provides affordable housing and essential community facilities to rural communities through its rural housing 

loan and grant programs. The Rural Utilities Program helps to improve the quality of life in rural America through a 

variety of loan programs for electric energy, telecommunications, and water and environmental projects. 

The Export-Import Bank aids in financing and promoting U.S. exports. The average repayment term for these 

loans is approximately 7 years. 

The Small Business Administration’s (SBA’s) Disaster Assistance Loan Program makes direct loans to disaster 

victims primarily for homes and personal property. 
NOTES TO THE FINANCIAL STATEMENTS 71

Note 5. Troubled Asset Relief Program (TARP) — Direct 

Loans and Equity Investments, Net 

The TARP was authorized by the EESA. This Act gave the Secretary of the Treasury broad flexible authority 

to establish the TARP to purchase and guarantee mortgages, mortgage related securities, and other troubled assets 

from financial institutions. This permitted the Secretary of the Treasury to inject capital into, and receive equity 

interests in, banks and other financial institutions. Treasury established several programs under the TARP designed 

to help stabilize the financial system, restore the flow of credit to consumers and businesses, and help prevent 

avoidable foreclosures. Under the TARP programs, Treasury made direct loans, equity investments, and entered into 

other credit programs. This authority to make new commitments to purchase or guarantee troubled assets expired on 

October 3, 2010. 

The following table lists the TARP programs and types: 

Program Program Type 

American International Group, Inc. Investment 

 Program Equity Investment 

Public-Private Investment Program Equity Investment and Direct Loan 

Automotive Industry Financing Program Equity Investment and Direct Loan 

Capital Purchase Program Equity Investments/Subordinated Debentures 

Other Programs Direct Loan, Subordinated Debentures and Equity 

Investments 

Housing Programs under TARP* Expenditure and Loss Sharing 

*Housing Programs under TARP are not designed to recoup money spent on loan modifications or payments on the loss sharing 

agreement. As such, these programs do not include direct loans, equity investments, or asset guarantees. 
72 NOTES TO THE FINANCIAL STATEMENTS 

The table below is a summary of TARP—Direct Loans and Equity Investments, Net. 

Troubled Asset Relief Program Direct Loans and Equity Investments 

as of September 30, 2012, and 2011 

(In billions of dollars) 

Direct Loans 

and Equity 

Investments 

Subsidy 

Cost 

Allowance 

Net Direct 

Loans and 

Equity 

Investments 

Subsidy 

Expense 

(Income) 

for the 

Fiscal Year 

 2012 2011 2012 2011 2012 2011 2012 2011 

 Automotive Industry Financing Program .... 37.2 37.3 (19.7) (19.4) 17.5 17.9 0.2 9.7 

 Public-Private Investment Program ........... 9.8 15.9 1.0 2.4 10.8 18.3 0.2 (1.9) 

 Capital Purchase Program .......................... 8.7 17.3 (2.9) (4.9) 5.8 12.4 (1.9) (1.8) 

 American International Group, Inc. 

Investment Program ................................. 6.7 51.1 (1.7) (20.7) 5.0 30.4 (9.2) 1.6 

 All other ...................................................... 0.7 0.8 0.4 0.3 1.1 1.1 (0.1) (0.4) 

Total Troubled Asset Relief Program ........ 63.1 122.4 (22.9) (42.3) 40.2 80.1 (10.8) 7.2 

 

Automotive Industry Financing Program (AIFP) 

The Automotive Industry Financing Program was designed to help prevent a significant disruption of the 

American automotive industry, which could have had a negative effect on the economy of the United States. The 

various activities undertaken by Treasury in the automotive industry include: 

General Motors (GM)—In fiscal year 2009, Treasury provided $49.5 billion to Old GM through various loan 

agreements including the initial loan for general and working capital purposes and the final loan for debtor in 

possession (DIP) financing while Old GM was in bankruptcy. Treasury assigned its rights in these loans, with the 

exception of $1.0 billion which remained in Old GM, to a newly created entity New GM, which New GM used to 

credit bid for substantially all of the assets in Old GM. New GM and Treasury extinguished substantially all but $7.1 

billion of these initial financing arrangements, and Treasury received $2.1 billion in 9.0 percent cumulative 

perpetual preferred stock and 60.8 percent of the common equity interest in New GM in fiscal year 2009. New GM 

also assumed $7.1 billion of the original DIP loan, which it fully repaid to Treasury in fiscal year 2010. During fiscal 

year 2011, pursuant to a letter agreement between Treasury and New GM, New GM repurchased its preferred stock 

for 102.0 percent of its liquidation amount, or $2.1 billion. Also in fiscal year 2011, as a result of the New GM 

initial public offering, Treasury sold approximately 412 million shares of its GM common stock for approximately 

$13.5 billion. As of September 30, 2012, and 2011, Treasury held 500 million shares of the common stock of New 

GM’s common stock shares outstanding (or approximately 32.0 percent). The fair values of Treasury’s holdings of 

New GM common stock as of September 30, 2012, and 2011, totaled approximately $11.4 billion and 10.1 billion, 

respectively. Treasury retains the right to recover additional proceeds relating to the liquidation of Old GM. 

However, Treasury does not expect these recoveries to be significant. Please see Note 28—Subsequent Events for 

additional information. 

Ally Financial Inc. (formerly known as GMAC Inc.)—Between December 2008 and 2009, Treasury invested a 

total of $16.3 billion in GMAC Inc. to help support its ability to originate new loans to GM and Chrysler dealers and 

consumers, and to help address GMAC’s capital needs. GMAC changed its corporate name to Ally Financial, Inc. 

(Ally) in May 2010. Treasury held 981,971 shares of Ally’s outstanding common stock (or 73.8 percent) as of 

September 30, 2012 and 2011. As of September 30, 2012, and 2011, Treasury also held 119 million shares of Ally 

Series F-2 Mandatorily Convertible Preferred Securities, with a $50 per share liquidation preference, with a stated 

dividend rate of 9.0 percent, and convertible into at least 513,000 shares of Ally common stock at Ally’s option, 
NOTES TO THE FINANCIAL STATEMENTS 73

which is subject to an approval of the FRB and consent by Treasury or pursuant to an order by the FRB compelling 

such conversion. The Series F-2 security is also convertible at the option of Treasury upon certain specified 

corporate events. Absent any optional conversion, any F-2 remaining preferred shares will automatically convert to 

Ally common stock after 7 years from the issuance date. Treasury would own 81.0 percent ownership of Ally 

common stock when combined with the Ally common stock currently owned and conversion of the Series F-2 

preferred stock into common stock. 

Treasury held 2.7 million shares of 8.0 percent cumulative Trust Preferred Securities (TRuPS) with a $1,000 

per share liquidation preference prior to fiscal year 2011. In March 2011, Treasury sold its TRuPs for $2.7 billion. 

Chrysler Holding LLC (Chrysler)—In fiscal year 2009, Treasury provided $5.9 billion in loans to Chrysler 

Holding LLC (Old Chrysler). In April 2009, Old Chrysler filed for Chapter 11 bankruptcy, and in June 2009, 

substantially all of the Old Chrysler assets were sold to a newly-created entity (New Chrysler). In June 2009, New 

Chrysler assumed $0.5 billion of the loans to Old Chrysler, and Treasury committed to lend New Chrysler $6.6 

billion (of which only $4.6 billion was funded), and received other consideration including 9.85 percent equity in 

New Chrysler and $0.4 billion in additional notes. In May 2011, New Chrysler repaid the $5.1 billion in loans 

outstanding, the $0.4 billion additional notes, and the associated interest. In July 2011, Fiat SpA paid Treasury $0.6 

billion for all of its remaining equity interest and rights relating to New Chrysler. As of September 2012 and 2011, 

Treasury had no remaining interest in New Chrysler. As of these dates, Treasury continued to hold a right to receive 

proceeds from a bankruptcy liquidation trust, but no significant cashflows are expected. 

Public Private Investment Program (PPIP) 

The PPIP is part of Treasury’s efforts to help restart the markets and provide liquidity for legacy assets. Under 

this program, Treasury made equity investments and loans to nine investment vehicles (referred to as Public Private 

Investment Funds or “PPIFs”) established by private investment managers. The PPIFs may invest in commercial 

mortgage-backed securities and non-agency residential MBS as well as in temporary securities, including bank 

deposits, U.S. Treasury securities and certain money market mutual funds. During fiscal year 2012, Treasury 

disbursed $0.2 billion as equity investment and $0.8 billion as loans to these PPIFs as compared to $1.1 billion as 

equity investment and $2.3 billion as loans in fiscal year 2011. On September 30, 2012, and 2011, Treasury had 

equity investments in PPIFs outstanding of $4.1 billion and $5.5 billion, and loans outstanding of $5.7 billion and 

$10.4 billion, for a total of $9.8 billion and $15.9 billion, respectively. In addition, as of September 2012, and 2011, 

Treasury had legal commitments to disburse up to $3.1 billion and $4.3 billion, respectively, for additional 

investments and loans in PPIFs. 

Capital Purchase Program 

In October 2008, Treasury began implementation of the Capital Purchase Program (CPP), designed to help 

stabilize the financial system by assisting in building the capital base of certain viable U.S. financial institutions to 

increase the capacity of those institutions to lend to businesses and consumers and support the economy. Under this 

program, Treasury purchased senior perpetual preferred stock with a stated dividend rate of 5.0 percent through year 

five, increasing to 9.0 percent in subsequent years, from qualifying U.S. controlled banks, savings associations, and 

certain bank and savings and loan holding companies (Qualified Financial Institution). The dividends are cumulative 

for bank holding companies and subsidiaries of bank holding companies and non-cumulative for others and payable 

when and if declared by the institution’s board of directors. In addition to the senior preferred stock, Treasury 

received warrants from public QFIs to purchase shares of common stock. QFIs that are Sub-chapter S corporations 

issued subordinated debentures; these subordinated debentures have a maturity of 30 years and interest rates of 7.7 

percent for the first 5 years and 13.8 percent for the remaining years, and may repay Treasury subject to regulatory 

approval at any time. For fiscal years 2012 and 2011, repayments and sales totaled $8.2 billion and $30.2 billion, 

respectively. 
74 NOTES TO THE FINANCIAL STATEMENTS 

American International Group, Inc. Investment Program (AIG) 

Treasury provided assistance to help AIG in order to prevent its disorderly failure as well as to prevent broader 

disruption to the financial markets. In fiscal year 2009, Treasury made an investment in AIG (which, after being 

restructured in the same fiscal year) consisted of $41.6 billion of AIG’s non-cumulative 10.0 percent Series E 

preferred stock. Additionally, Treasury made available to AIG a $29.8 billion capital facility (non-cumulative 10.0 

percent Series F preferred stock) under which AIG drew $27.8 billion to assist in its operational restructuring. In 

January 2011, AIG, Treasury, and Federal Reserve Bank of New York (FRBNY) restructured the U.S. 

Government’s investments in AIG. The restructuring converted the $41.6 billion Series E preferred stock and $27.8 

billion investment in Series F equity capital facility into $20.3 billion of interest in AIG Special Purpose Vehicles

(SPVs), and 1.1 billion shares of AIG common stock. The remaining $2.0 billion of undrawn Series F capital facility 

was converted to a new AIG equity capital facility, which subsequently reduced to zero later in fiscal year 2011. As 

described in Note 6—Non-TARP Investments in American International Group, Inc., as part of the restructuring, 

Treasury also received, on behalf of the General Fund, 563 million shares of AIG’s common stock in exchange for 

its beneficial interest in a Trust established by the FRBNY. Additionally, the credit facility between FRBNY and 

AIG was terminated. Upon completion of the restructuring, Treasury under TARP and the General Fund received a 

combined total of 1.7 billion shares (or 92.1 percent ownership) of AIG common stock. 

Since the January 2011 restructuring, shares of AIG common stock have been sold. In fiscal years 2012 and 

2011, Treasury sold 806 million and 132 million shares of AIG’s common stock under TARP for $25.2 billion and 

$3.8 billion, respectively. As of September 30, 2012, Treasury held 154 million shares of AIG’s common stock 

under TARP, with a fair value of approximately $5.1 billion, representing 10.5 percent of the AIG shares 

outstanding. As of September 30, 2011, Treasury held 960 million shares of AIG’s common stock under TARP, 

with a fair value of approximately $21.1 billion representing 50.8 percent of AIG shares outstanding. Refer to Note 

6—Non-TARP Investments in American International Group, Inc., for the detail discussions on Non-TARP 

investments in AIG. 

As of September 30, 2011, Treasury also owned preferred interests in an AIG SPV with an outstanding balance 

of $9.3 billion. In fiscal year 2012, the preferred interests in the AIG SPV were fully repaid. Please see Note 28—

Subsequent Events for additional information. 

Other Programs 

Treasury implemented other programs under TARP to help unlock the flow of credit to consumers and small 

businesses. The following four programs were established to help accomplish this: Term Asset-Backed Securities 

Loan Facility (TALF), SBA 7(a) Securities Purchase Program, Community Development Capital Initiative (CDCI), 

and the Targeted Investment Program (TIP). 

TALF, was created by the Federal Reserve FRBNY to provide low cost funding to investors in certain classes 

of Asset-Backed Securities (ABS). Treasury participated in the program by providing liquidity and credit protection 

to the FRBNY. Under the TALF, the FRBNY originated loans on a non-recourse basis to holders of certain AAA 

rated ABS. Interest rates charged on the TALF loans depend on the weighted-average maturity of the pledged 

collateral, the collateral type and whether the collateral pays fixed or variable interest. As part of the program, the 

FRBNY created the TALF, LLC, an SPV that agreed to purchase from the FRBNY any collateral it has seized 

because of borrower default. In the event there are insufficient funds to purchase the collateral, Treasury committed 

to invest up to $20.0 billion in non-recourse subordinate notes issued by the TALF, LLC. In fiscal year 2010, the 

Treasury commitment was reduced to $4.3 billion and further reduced in fiscal year 2012 to $1.4 billion. As of 

September 30, 2012 and 2011, approximately $1.5 billion and $11.3 billion of loans due to FRBNY remained 

outstanding, respectively. 

The SBA 7(a) Securities Purchase Program was created to provide additional liquidity to the SBA 7(a) market 

so that banks are able to make more small business loans. Under this program, Treasury purchased 7(a) Securities 

collateralized with 7(a) loans that were guaranteed by the full faith and credit of the U.S. Government. In May 2011, 

Treasury began selling its securities to bond market investors; sales were completed and the programs closed in 

January 2012. As of September 30, 2012, Treasury held no investment in SBA 7(a) securities. 

The CDCI Initiative was created to provide additional low-cost capital to small banks to encourage more 

lending to small businesses. Under the terms of the initiatives, Treasury purchased senior preferred stock (or 

subordinated debt) from eligible CDFI financial institutions with an initial dividend rate of 2.0 percent, increasing 

up to a maximum to 9.0 percent after 8 years. CDFIs participating in the CPP, subject to certain criteria, were 

eligible to exchange, through September 30, 2010, their current CPP preferred shares (subordinated debt) for CDCI 

preferred shares (subordinated debt). 
NOTES TO THE FINANCIAL STATEMENTS 75

TIP was designed to prevent a loss of confidence in financial institutions that could result in significant market 

disruptions, threatening the financial strength of similarly situated financial institutions, impairing broader financial 

markets, and undermining the overall economy. In fiscal year 2009, Treasury invested $20.0 billion in each of Bank 

of America and Citigroup under TIP. In December 2009, both institutions repaid the invested amounts along with 

dividends through the date of repayment. In fiscal year 2010, Treasury received a total of $1.1 billion in dividends 

on the Bank of America and Citigroup investments and proceeds of $1.2 billion from the sale of Bank of America 

warrants. In fiscal year 2011, Treasury sold its warrants from Citigroup under TIP for $0.2 billion, and closed the 

program. 

Housing Programs under TARP 

Housing Programs under TARP are not designed to recoup money spent on loan modifications or payments on 

the loss sharing agreement. As such, these programs do not include direct loans, equity investments, or asset 

guarantees. 

The following housing programs under TARP are designed to help prevent avoidable foreclosures. These 

programs provide incentives for mortgage modifications and other types of assistance in order to enable 

homeowners who are experiencing hardships to remain in their homes or relocate to more sustainable living 

situations. These programs fall into three initiatives: 

 Making Home Affordable Program; 

 Housing Finance Agency Hardest-Hit Fund, and 

 Federal Housing Administration Refinance Program. 

As of September 30, 2012, and 2011, Treasury has committed up to $45.6 billion for these programs. Payments 

made under the housing programs under TARP for fiscal years 2012 and 2011, amounted to $3.1 billion and $1.9 

billion, respectively. As of September 30, 2012, Treasury had $40.1 billion in total commitments outstanding for 

future payments under the housing programs. 

For more details on the TARP, please see the Treasury’s Annual Financial Report. 
76 NOTES TO THE FINANCIAL STATEMENTS 

Note 6. Non-TARP Investments in American International 

Group, Inc. 

Under the initial terms of a capital facility agreement between the FRBNY and AIG, a 77.9 percent equity 

interest in AIG (in the form of Series C Convertible Participating Serial Preferred Stock convertible into 

approximately 77.9 percent of the issued and outstanding shares of AIG common stock) was issued to a trust (Trust) 

established by the FRBNY. Subsequent to the initial agreement, a reverse stock split of AIG’s common stock 

increased this equity interest to 79.8 percent. The General Fund of the U.S. Government was the sole beneficiary of 

the Trust. In connection with the establishment of the Trust, Treasury, as custodian of the General Fund, recorded a 

non-entity asset of $23.5 billion as of September 30, 2009, along with a corresponding entry to custodial revenue for 

the same amount, to reflect the value of the General Fund’s beneficiary interest holding in the Trust. As of 

September 30, 2010, the value of the Trust had declined by $2.7 billion, reducing the carrying value of this nonentity asset to $20.8 billion. 

On September 30, 2010, an AIG Recapitalization Agreement was established for the purpose of restructuring 

the holdings in AIG. This restructuring was executed on January 14, 2011, converting the Trust’s AIG preferred 

stock into 563 million shares of AIG common stock, and the Trust was dissolved (see Note 5—Troubled Asset 

Relief Program (TARP)—Direct Loans and Equity Investments, Net for a discussion of the TARP-related 

transactions that occurred in connection with the January 14, 2011, restructuring). 

During fiscal year 2011, 68 million shares of AIG common stock held by the General Fund were sold in the 

open market. The sale of the AIG common stock resulted in total gross cash proceeds of $2.0 billion to the General 

Fund for the fiscal year ended September 30, 2011. 

During fiscal year 2012, Treasury sold 415 million shares of AIG common stock held by the General Fund. 

The sale of the AIG common stock resulted in total gross proceeds of $13.0 billion to the General Fund for the fiscal 

year ended September 30, 2012. 

After taking into consideration the sale of AIG common stock, the General Fund owned 80 million and 495 

million shares of AIG outstanding common stock as of September 30, 2012, and 2011, respectively. The carrying 

value of the non-TARP investment in AIG was $2.6 billion and $10.9 billion as of September 30, 2012, and 2011, 

respectively, which represented the fair value as of that date of the remaining AIG common stock held by the 

General Fund. The fair value of the non-entity assets recorded as of September 30, 2012, and 2011, was based on 

the market value of AIG’s common stock which is actively traded on the New York Stock Exchange. The 

September 30, 2012, carrying value of AIG investments held on behalf of the General Fund declined by $8.3 billion 

from the end of fiscal year 2011 due to sales of $13.0 billion, partially offset by a fair value gain of $4.7 billion 

during fiscal year 2012. The September 30, 2011, carrying value declined by $9.9 billion from the end of fiscal year 

2010, due to sales of $2.0 billion and a fair value loss of $7.9 billion during fiscal year 2011. 

The fair market value of the Non-TARP Investments in AIG as of September 30, 2012 and September 30, 

2011, are included in the equity securities common stock line item in the available-for-sale category of Note 9—

Debt and Equity Securities. Please see Note 28—Subsequent Events for additional information. 
NOTES TO THE FINANCIAL STATEMENTS 77

Note 7. Inventories and Related Property, Net 

 

Inventories and Related Property as of September 30, 2012, and 2011 

Defense

All 

Others Total Defense 

All 

Others Total 

(In billions of dollars) 2012 2011 

 

Inventory purchased for resale ................. 61.6 0.6 62.2 65.1 0.6 65.7 

Inventory and operating material and 

supplies held for repair ........................... 52.8 1.4 54.2 48.3 0.6 48.9 

Inventory—excess, obsolete, and 

unserviceable ......................................... 6.8 0.1 6.9 7.8 - 7.8 

Operating materials and supplies held 

for use ..................................................... 134.6 3.2 137.8 131.4 2.7 134.1 

Operating materials and supplies held 

in reserve for future use ......................... - 0.1 0.1 - 0.2 0.2 

Operating materials and supplies— 

excess, obsolete, and unserviceable ..... 1.9 0.1 2.0 2.2 0.1 2.3 

Stockpile materials .................................... - 49.9 49.9 - 48.6 48.6 

Stockpile materials held for sale ............... 0.5 0.1 0.6 0.5 0.2 0.7 

Other related property ............................... 1.4 0.8 2.2 1.7 0.9 2.6 

Allowance for loss ..................................... (16.3) (0.6) (16.9) (14.5) (0.3) (14.8)

Total inventories and related property, 

net ........................................................ 243.3 55.7 299.0 242.5 53.6 296.1 

 

Inventory purchased for resale is the cost or value of tangible personal property purchased by an agency for 

resale. As of September 30, 2012, DOD values approximately 84 percent of its resale inventory using the moving 

average cost (MAC) method. An additional 12 percent (fuel inventory) is reported using the first-in-first-out method. 

DOD reports the remaining 4 percent of resale inventories at an approximation of historical cost using LAC adjusted 

for holding gains and losses. The LAC method is used because DOD’s legacy inventory systems do not maintain 

historical cost data. 

Please refer to the individual financial statements of DOD for significant detailed information regarding its 

inventories. 

Inventory and operating materials and supplies held for repair are damaged inventory that require repair to 

make them suitable for sale (inventory) or is more economical to repair than to dispose of (operating materials and 

supplies). 

Inventory—excess, obsolete, and unserviceable consists of: 

 Excess inventory that exceeds the demand expected in the normal course of operations and which does not meet 

management’s criteria to be held in reserve for future sale. 

 Obsolete inventory that is no longer needed due to changes in technology, laws, customs, or operations. 

 Unserviceable inventory that is damaged beyond economic repair. 

Excess, obsolete, and unserviceable inventory is reported at net realizable value. 

Operating materials and supplies held for use are tangible personal property to be consumed in normal 

operations. 

Operating materials and supplies held in reserve for future use are materials retained because they are not 

readily available in the market or because they will not be used in the normal course of operations, but there is more 

than a remote chance they will eventually be needed. DOD, which accounts for most of the reported operating 

materials and supplies held for use, uses LAC, MAC, and Standard Price and expenses a significant amount when 

purchased instead of when consumed. 
78 NOTES TO THE FINANCIAL STATEMENTS 

Operating materials and supplies—excess, obsolete, and unserviceable consists of: 

 Excess operating materials and supplies are materials that exceed the demand expected in the normal course of 

operations, and do not meet management’s criteria to be held in reserve for future use. 

 Obsolete operating materials and supplies are materials no longer needed due to changes in technology, laws, 

customs, or operations. 

 Unserviceable operating materials and supplies are materials damaged beyond economic repair. 

DOD, which accounts for most of the reported excess, obsolete, and unserviceable operating materials and 

supplies, revalues it to a net realizable value of zero through the allowance account. 

Please refer to the individual financial statements of DOD for significant detailed information regarding 

operating materials and supplies. 

Stockpile materials include strategic and critical materials held in reserve for use in national defense, 

conservation, or national emergencies due to statutory requirements; for example, nuclear materials and oil, and 

stockpile materials that are authorized to be sold. The majority of the amount reported by DOD is stockpile materials 

held for sale, and the amount reported by others is stockpile materials held in reserve, with the majority of it being 

reported by the Department of Energy (DOE). Please refer to their individual financial statements for more 

information on stockpile materials. 

Other related property consists of the following: 

 Commodities include items of commerce or trade that have an exchange value used to stabilize or support 

market prices. Please refer to the financial statements of the USDA for detailed information regarding 

commodities. 

 Seized monetary instruments are comprised only of monetary instruments that are awaiting judgment to 

determine ownership. The related liability is included in other liabilities. Other property seized by the 

Government, such as real property and tangible personal property, is not considered a Government asset. It 

is accounted for in agency property-management records until the property is forfeited, returned, or 

otherwise liquidated. Please refer to the individual financial statements of the Department of Justice 

(DOJ), Treasury, and the Department of Homeland Security (DHS) for significant detailed information 

regarding seized property. 

 Forfeited property is comprised of monetary instruments, intangible property, real property, and tangible 

personal property acquired through forfeiture proceedings; property acquired by the Government to satisfy 

a tax liability; and unclaimed and abandoned merchandise. Please refer to the individual financial 

statements of DOJ, Treasury, and DHS for significant detailed information regarding forfeited property. 

 Foreclosed property is comprised of assets received in satisfaction of a loan receivable or as a result of 

payment of a claim under a guaranteed or insured loan (excluding commodities acquired under price 

support programs). All properties included in foreclosed property are assumed to be held for sale. Please 

refer to the individual financial statements of USDA and HUD for significant detailed information 

regarding foreclosed property. 
NOTES TO THE FINANCIAL STATEMENTS 79

Note 8. Property, Plant, and Equipment, Net 

 

Property, Plant, and Equipment as of September 30, 2012 

Cost 

Accumulated 

Depreciation/ 

Amortization Net 

(In billions of dollars) Defense

All 

Others Defense

All 

Others Defense 

All 

Others

Buildings, structures, and 

facilities .................................... 248.9 234.0 120.9 123.4 128.0 110.6 

Furniture, fixtures, and 

equipment ................................ 984.4 160.8 570.4 99.1 414.0 61.7 

Construction in progress ............ 42.8 50.8 N/A N/A 42.8 50.8 

Land ........................................... 10.7 12.2 N/A N/A 10.7 12.2 

Internal use software .................. 11.3 22.1 7.6 12.3 3.7 9.8 

Assets under capital lease ......... 0.9 3.1 0.5 1.5 0.4 1.6 

Leasehold improvements ........... 0.9 7.6 0.3 4.0 0.6 3.6 

Other property, plant, and 

equipment ................................ 1.2 6.7 - 3.4 1.2 3.3 

Subtotal ................................... 1,301.1 497.3 699.7 243.7 601.4 253.6 

Total property, plant, and 

equipment, net ................... 1,798.4 943.4 855.0 

 

Property, Plant, and Equipment as of September 30, 2011

Cost 

Accumulated

Depreciation/ 

Amortization Net 

(In billions of dollars) Defense

All

Others Defense

All 

Others Defense 

All

Others

Buildings, structures, and 

facilities .................................... 230.2 220.6 118.6 115.5 111.6 105.1 

Furniture, fixtures, and 

equipment ................................ 945.1 161.6 511.1 98.3 434.0 63.3 

Construction in progress ............ 46.5 47.5 N/A N/A 46.5 47.5 

Land ........................................... 10.6 11.9 N/A N/A 10.6 11.9 

Internal use software .................. 10.0 19.9 6.9 10.7 3.1 9.2 

Assets under capital lease ......... 1.2 2.9 0.7 1.5 0.5 1.4 

Leasehold improvements ........... 1.0 6.9 0.5 3.6 0.5 3.3 

Other property, plant, and 

equipment ................................ 1.2 6.2 - 3.1 1.2 3.1 

Subtotal ................................... 1,245.8 477.5 637.8 232.7 608.0 244.8 

Total property, plant, and 

equipment, net ................... 1,723.3 870.5 852.8 
80 NOTES TO THE FINANCIAL STATEMENTS 

For further information related to multi-use heritage assets, see Note 27—Stewardship Land and Heritage 

Assets. 

DOD comprises approximately 70.4 percent of the Government’s reported property, plant, and equipment, net, 

as of September 30, 2012. Refer to the individual financial statements of DOD, DOE, the Tennessee Valley 

Authority (TVA), GSA, the Department of Interior (DOI), VA, DHS, USPS, Department of State, and DOT for 

significant detailed information on the useful lives and related capitalization thresholds for property, plant, and 

equipment. These agencies comprise 93.9 percent of the Government’s total cost of property, plant, and equipment 

net of $855.0 billion as of September 30, 2012. 
NOTES TO THE FINANCIAL STATEMENTS 81

Note 9. Debt and Equity Securities 

Debt and Equity Securities as of September 30, 2012 

 By Category

Held-to-Maturity Available-for-Sale Trading 

(In billions of dollars) 

Cost 

Basis 

Unamortized 

Premium/

Discount

Net 

Investment Cost

Basis

Unrealized 

Gain

(Loss) 

Fair 

Value 

Cost 

Basis 

Unrealized 

Gain 

(Loss) 

Fair

Value Total 

 

Debt securities: 

Non-U.S. Government ......... 0.2 - 0.2 15.1 0.3 15.4 8.5 0.7 9.2 24.8 

Commercial .......................... - - - - - - 0.4 - 0.4 0.4 

Mortgage/asset backed ....... - - - - - - 3.5 0.2 3.7 3.7 

Corporate and other bonds .. - - - - - - 9.8 1.3 11.1 11.1 

All other debt securities ....... - - - - - - 0.6 - 0.6 0.6 

 

Equity securities: 

Common stocks ................... - - - 3.6 (1.0) 2.6 2.1 0.4 2.5 5.1 

Unit trust .............................. - - - - - - 14.6 5.7 20.3 20.3 

All other equity securities ..... 3.1 - 3.1 - - - 2.2 - 2.2 5.3 

Other .................................... 10.7 - 10.7 - - - 5.2 0.1 5.3 16.0 

Total debt and equity 

securities categorized 

as held-to-maturity, 

available-for-sale or 

trading ............................. 14.0 - 14.0 18.7 (0.7) 18.0 46.9 8.4 55.3 87.3 

Total RRB debt and 

equity securities .............. 22.9 

Total debt and equity 

securities ........................ 110.2 
82 NOTES TO THE FINANCIAL STATEMENTS 

Debt and Equity Securities as of September 30, 2011 

 By Category

Held-to-Maturity Available-for-Sale Trading 

(In billions of dollars) 

Cost 

Basis 

Unamortized 

Premium/

Discount

Net 

Investment Cost

Basis

Unrealized 

Gain

(Loss) 

Fair 

Value 

Cost 

Basis 

Unrealized 

Gain 

(Loss) 

Fair

Value Total 

 

Debt securities: 

Non-U.S. Government ......... 0.2 - 0.2 15.5 0.3 15.8 5.1 0.1 5.2 21.2 

Commercial .......................... - - - - - - - - - - 

Mortgage/asset backed ....... - - - - - - 5.2 0.1 5.3 5.3 

Corporate and other bonds .. - - - - - - 11.2 0.8 12.0 12.0 

All other debt securities ....... - - - - - - 0.5 - 0.5 0.5 

Equity securities: 

Common stocks ................... - - - 22.4 (11.5) 10.9 1.7 - 1.7 12.6 

Unit trust............................... - - - - - - 12.3 3.6 15.9 15.9 

All other equity securities ..... 2.9 - 2.9 - - - 2.6 (0.1) 2.5 5.4 

Other .................................... 3.3 - 3.3 - - - 12.8 0.1 12.9 16.2 

Total debt and equity 

securities categorized 

as held-to-maturity, 

available-for-sale or 

trading ............................ 6.4 - 6.4 37.9 (11.2) 26.7 51.4 4.6 56.0 89.1 

Total RRB debt and 

equity securities .............. 21.5 

Total debt and equity 

securities ........................ 110.6 
NOTES TO THE FINANCIAL STATEMENTS 83

Debt and Equity Securities as of September 30, 2012, and 2011 

By Agency 

(In billions of dollars) 2012 2011 

 

Debt and Equity Securities: 

Pension Benefit Guaranty Corporation ......................................... 52.8 47.4 

Railroad Retirement Board ........................................................... 22.9 21.5 

Department of the Treasury .......................................................... 18.0 26.7 

Tennessee Valley Authority .......................................................... 9.5 8.6 

 All Other ...................................................................................... 7.0 6.4 

 Total Securities and Investments ........................................... 110.2 110.6 

 

These debt and equity securities do not include nonmarketable Treasury securities, which have been eliminated 

in consolidation. Held-to-maturity debt and equity securities are reported at amortized cost, net of unamortized 

discounts and premiums. Available-for-sale debt and equity securities are reported at fair value. Trading debt and 

equity securities are reported at fair value. The Pension Benefit Guaranty Corporation (PBGC) and the TVA invest 

primarily in fixed maturity and equity securities, classified as trading. Treasury invests primarily in fixed maturity 

and equity securities, classified as available-for-sale securities. Treasury’s Exchange Stabilization Fund invests 

primarily in foreign fixed maturity debt, with a fair value of $15.4 billion and $15.8 billion as of September 30, 

2012, and 2011, respectively. The General Fund also owns shares of AIG common stock. This non-TARP 

investment has a fair value of $2.6 billion and $10.9 billion as of September 30, 2012, and 2011, respectively. For 

more information on this non-TARP investment in AIG, refer to Note 6—Non-TARP Investments in American 

International Group, Inc. The National Railroad Retirement Investment Trust (NRRIT), on behalf of the RRB, 

manages and invests railroad retirement assets that are to be used to pay retirement benefits to the Nation’s railroad 

workers under the Railroad Retirement Program. As an investment company, NRRIT is subject to different 

accounting standards that do not require the classifications presented above. NRRIT’s total debt and equity 

securities are presented as a separate line item. Please refer to NRRIT’s financial statements for more detailed 

information concerning this specific investment information. The TVA balance includes $7.2 billion and $7.0 billion 

as of September 30, 2012, and 2011, respectively, for the Tennessee Valley Authority Retirement System. Please 

refer to the individual financial statements of PBGC, NRRIT, Treasury, and TVA for more detailed information 

related to debt and equity securities. These agencies comprise 93.7 percent of the total reported debt and equity 

securities of $110.2 billion as of September 30, 2012. 
84 NOTES TO THE FINANCIAL STATEMENTS 

Note 10. Derivatives 

Derivatives are financial instruments that entities use to hedge their particular exposure to some sort of 

financial risk. These financial risks include interest rate risk, market price risk, credit risk, foreign exchange risk, 

and commodity risk. As FASAB (which determines GAAP for Federal entities) is silent on this issue, the accounting 

for derivative instruments is governed by FASB ASC Topic 815, Derivatives and Hedging, which aims to highlight 

to financial statement users additional disclosures on an entity’s objectives in its use of derivatives and the method 

of accounting for such financial instruments. Derivatives are accounted for at market value in accordance with this 

standard. Derivatives are marked to market with changes in value reported within financial income. The hedge 

strategy (i.e., fair value, cashflow, or foreign currency) employed determines the financial statement impact on their 

statement of operations and net position. Per ASC Topic 815, the fair value of derivative instruments shall be 

presented on a gross basis when they are subject to master netting agreements. 

PBGC uses derivatives to mitigate investment risks, enhance investment returns (derivatives are not used to 

leverage investment portfolios) and as a liquid and cost efficient substitute for positions in physical securities. PBGC 

utilizes a no hedging designation which results in the gain or loss on a derivative instrument being recognized 

currently in earnings. PBGC elects to net its derivative receivables and derivative payables and the related cash 

collateral received for its non-exchange derivative contracts subject to International Swaps and Derivatives 

Association, Inc. master agreements. As of September 30, 2012, PBGC had $0.0 billion of derivatives in an asset 

position (recorded in other assets). PBGC had $0.1 billion of derivatives in an asset position (recorded in other 

assets) as of September 30, 2011, and $(0.01) billion of derivatives in a liability position (recorded in other 

liabilities) as of September 30, 2012, and 2011. 

Other than certain derivative instruments in investment funds, TVA uses derivatives purely for hedging 

purposes and not for speculative purposes. The accounting for changes in fair value of these instruments depends on 

whether TVA uses regulatory accounting to defer the derivative gains and losses, and whether the derivative 

instrument qualifies for hedge accounting treatment. As of September 30, 2012, and 2011, respectively, TVA had 

$0.2 billion and $0.4 billion worth of derivatives in an asset position (recorded in other assets), and $2.4 billion and 

$2.1 billion worth of derivatives in a liability position (recorded in other liabilities). 

The gain/(loss) on derivatives was $0.1 billion and $0.1billion for PBGC and $(0.4) billion and $(0.1) billion 

for TVA for fiscal years 2012 and 2011, respectively. 

Please refer to the individual financial statements of PBGC and TVA for more detailed information related to 

derivatives. 
NOTES TO THE FINANCIAL STATEMENTS 85

Note 11. Investments in and Liabilities to GovernmentSponsored Enterprises 

Congress established Fannie Mae and Freddie Mac as GSEs to support the supply of mortgage loans. A key 

function of the GSEs is to package purchased mortgages into securities, which are subsequently sold to investors. 

Leading up to the financial crisis, increasingly difficult conditions in the housing market challenged the soundness 

and profitability of the GSEs, thereby undermining the entire housing market. This led Congress to pass the HERA. 

This Act created the FHFA, with enhanced regulatory authority over the GSEs, and provided the Secretary of the 

Treasury with certain authorities intended to ensure the financial stability of the GSEs, if necessary. In September 

2008, FHFA placed the GSEs under conservatorship and Treasury entered into a SPSPA with each GSE. These 

actions were taken to preserve the GSEs’ assets, ensure a sound and solvent financial condition, and mitigate 

systemic risks that contributed to current market instability. The SPSPAs were amended in August 2012 (the 

amended SPSPAs) and changed, among other things, the basis by which quarterly dividends are paid by the GSEs to 

the U.S. Government. The dividend change in the amended SPSPAs is effective commencing with the quarter 

ending March 31, 2013. 

The actions taken by Treasury thus far are temporary, as defined by section 1117 of HERA, and are intended to 

provide financial stability. The purpose of Treasury’s actions is to maintain the solvency of the GSEs so they can 

continue to fulfill their vital roles in the home mortgage market while the Administration and Congress determine 

what structural changes should be made. The FHFA director may terminate the conservatorship if safe and solvent 

conditions can be established. Draws under the SPSPAs are designed to ensure the GSEs maintain positive net worth 

as a result of any net losses from operations, and also meet taxpayer dividend requirements under the SPSPAs. The 

SPSPAs were structured to ensure any draws result in an increased nominal investment as further discussed below. 

Per SFFAC No. 2, Entity and Display, these entities meet the criteria of “bailed out” entities. Accordingly, the 

Government has not consolidated them into the financial statements, but included disclosure of the relationship(s) 

with the bailed out entities and any actual or potential material costs or liabilities in the consolidated financial 

statements. 

Senior Preferred Stock Purchase Agreements (SPSPAs) 

Under the SPSPAs, Treasury initially received from each GSE: (1) 1,000,000 shares of non-voting variable 

liquidation preference senior preferred stock with a liquidation preference value of $1,000 per share and (2) a nontransferable warrant for the purchase, at a nominal cost, of 79.9 percent of common stock on a fully-diluted basis. 

The warrants expire on September 7, 2028. Through December 31, 2012, the senior preferred stock accrues 

dividends at 10.0 percent per year, payable quarterly. Under the amended SPSPAs, the quarterly dividend payment 

will change from a 10.0 percent per annum fixed rate dividend to an amount equivalent to the GSE’s positive net 

worth above a capital reserve amount. The capital reserve amount is initially set at $3.0 billion for calendar year 

2013, and declines by $600 million at the beginning of each calendar year thereafter until it reaches zero by calendar 

year 2018. The GSEs will not pay a quarterly dividend if their positive net worth is not above the required capital 

reserve threshold; in such cases, the Treasury may be required to provide funding pursuant to the amended SPSPAs. 

Cash dividends of $18.4 billion and $15.6 billion were received during fiscal years ended September 30, 2012, 

and 2011, respectively. In addition, beginning in fiscal year 2011, the GSEs were scheduled to begin paying 

Treasury a Periodic Commitment Fee (PCF) on a quarterly basis, payable in cash or via an increase to the 

liquidation preference. This fee may be waived by Treasury for up to 1 year at a time, if warranted by adverse 

mortgage market conditions. Treasury waived the PCF payments for the calendar years 2012 and 2011 given that the 

imposition of the PCF at that time would not fulfill its intended purpose of generating increased compensation to the 

Government. Commencing January 1, 2013, the PCF will no longer be required pursuant to the amended SPSPAs. 

The SPSPAs, which have no expiration date, provide that Treasury will disburse funds to the GSEs if at the 

end of any quarter, the FHFA determines that the liabilities of either GSE exceed its assets. The maximum amount 

available to each GSE under this agreement was originally $100 billion in fiscal year 2008, was raised to $200 

billion in fiscal year 2009, and was replaced in fiscal year 2010 with a formulaic cap. This formulaic cap allows 

continued draws for a 3-year period ending December 31, 2012, at amounts that will automatically adjust upwards 

quarterly by the cumulative amount of any net deficits realized by either GSE and downward by the GSE's positive 

net worth, if any, as of December 31, 2012, but not below $200 billion, and will become fixed at the end of the 3-

year period. At the conclusion of the 3-year period, the remaining commitment will then be fully available to be 
86 NOTES TO THE FINANCIAL STATEMENTS 

drawn per the terms of the agreements (referred to hereafter as the “Adjusted Caps”). Draws against the funding 

commitment of the SPSPAs do not result in the issuance of additional shares of senior preferred stock; instead the 

liquidation preference of the initial 1,000,000 shares is increased by the amount of the draw. 

Actual payments to the GSEs for fiscal years ended September 30, 2012, and 2011, were $18.5 billion and 

$20.8 billion, respectively. Additionally, $9.0 billion and $316.2 billion were accrued as a contingent liability as of 

September 30, 2012, and 2011, respectively. This accrued contingent liability is based on the projected draws under 

the SPSPAs. It is undiscounted and does not take into account any of the offsetting dividends which may be received 

as a result of those draws. 

OMB issued guidance to Treasury on October 7, 2009, allowing the use of fair value accounting for nonFederal securities beginning with reporting for fiscal year 2009. As a result, the GSE investments are reported at fair 

value as of September 30, 2012, and 2011. In accordance with SFFAS No. 7, the annual valuation is classified as 

usual and recurring and thus a change in value is recorded as an expense or revenue to the financial statements. 

Annual valuations are performed as of September 30 for the preferred stock and warrants. 

Contingent Liabilities to GSEs 

As part of the fair valuation exercise, Treasury prepared a series of long-range forecasts through 2025 to 

determine what the implied amount of the total contingent liability to the GSEs under the SPSPAs would be as of 

September 30. Since future payments under the SPSPAs are deemed to be probable, Treasury estimated a contingent 

liability of $9.0 billion as of September 30, 2012. This estimate reflects the projected equity deficits of the GSEs 

stemming from credit losses and contractual dividend requirements until December 31, 2012. The estimated 

contingent liability as of September 30, 2012, included several case scenarios which resulted in total SPSPA 

estimates ranging from $3.5 billion (based on an “optimistic” case scenario) to $22.4 billion (based on an “extreme” 

case scenario). 

The $9.0 billion contingent liability reported as of September 30, 2012, reflects Treasury’s best estimate. This 

compares to the $316.2 billion contingent liability reported as of September 30, 2011, which was based on a range 

of $309.6 billion to $376.1 billion. At September 30, 2012, the maximum remaining potential commitment to the 

GSEs for the remaining life of the SPSPAs under the Adjusted Caps was estimated at $282.3 billion, which was 

based upon case scenario estimates ranging from $274.0 billion to $291.5 billion. The recorded contingent liability 

of $316.2 billion at September 30, 2011, constituted the maximum commitment payable under the Adjusted Caps, 

minus actual payments made through the end of that fiscal year. Such accruals are adjusted as new information 

develops or circumstances change. Based on the annual valuation of Treasury’s estimated future contingent liability, 

Treasury reduced its estimated liability by $288.7 billion and $22.9 billion at the end of fiscal years 2012 and 2011, 

respectively, via a reduction in expense. The significant reduction in this estimated liability at September 30, 2012, 

compared to 2011 is primarily due to a forecasted reduction in the amount of future draws needed by the GSEs as a 

result of the amended provisions of the SPSPAs. With the revision, dividend payments would be limited to the 

amount of the positive net worth in excess of a capital reserve amount. Prior to the revision, dividends were 

forecasted to be paid on an amount that was projected to increase as draws continued to be made to fund the 

dividends. The anticipated dividend payments after the revision are lower than previously forecasted. 

Senior Preferred Stock and Warrants for Common Stock 

In determining the fair value of the senior preferred stock and warrants for common stock, Treasury relied on 

the GSEs’ public filings and press releases concerning its financial statements, projection forecasts, monthly 

summaries, quarterly credit supplements, independent research regarding high-yield bond and preferred stock 

trading, independent research regarding the GSEs’ common stock trading, discussions with the GSE’s management, 

and other information pertinent to the fair valuations. Because of the nature of the instruments, which are not 

publicly traded and for which there is no comparable trading information available, the fair valuations rely on 

significant unobservable inputs that reflect assumptions about the expectations that market participants would use in 

pricing. 

The fair value of the senior preferred stock considers the amount of forecasted dividend payments. The fair 

valuations assume that a hypothetical buyer would acquire the discounted dividend stream as of the transaction date. 

The significant decline in the fair value of the senior preferred stock at September 30, 2012, compared to 2011 is 

primarily due to a decrease in expected dividend payments and an increase in the discount rate used in the current 

year’s valuation to reflect more of the variable nature of the future cash flows anticipated as a result of the amended 

SPSPAs compared to the prior fiscal year. 
NOTES TO THE FINANCIAL STATEMENTS 87

The fair value of the warrants are impacted by the nominal exercise price and the large number of potential 

exercise shares, the market trading of the common stock that underlies the warrants as of September 30, the 

principal market, and the market participants. Other discounting factors are the holding period risk related directly to 

the amount of time that it will take to sell the exercised shares without depressing the market and the other activity 

under the SPSPA. 

Regulatory Environment 

Pursuant to a provision within the Dodd Frank Act, the Secretary of the Treasury conducted a study and 

developed recommendations regarding the options for ending the conservatorship. In February 2011, the President 

delivered to Congress a report from the Secretary of the Treasury that provided recommendations regarding the 

options for ending the conservatorship and plans to wind down the GSEs. To date, Congress has not approved a plan 

to address the future of the GSEs, and thus the GSEs continue to operate under the direction of their conservator, the 

FHFA, whose stated planned objectives are to build a revitalized infrastructure for the secondary mortgage market 

and a continued gradual contraction of the GSEs presence in the secondary mortgage market. 

In December 2011, Congress passed the Temporary Payroll Tax Cut Continuation Act of 2011 (TPTCCA), 

which included an increase in the GSEs’ guarantee fees that would expire on October 1, 2021. Under TPTCCA, the 

amount of the fee increase shall not be less than an average increase of 10-basis points above the average fees 

imposed in 2011 for such guarantees. The increased fees are to be remitted to Treasury and not retained by the 

GSEs. 

On September 28, 2012, the GSEs remitted to the Department an amount of $35 million as the first payment of 

these increased fees covering the period of April 1, 2012, through June 30, 2012. This increase in guarantee fees did 

not affect the profitability of the GSEs during that time period. 
88 NOTES TO THE FINANCIAL STATEMENTS 

As of September 30, 2012, and 2011, GSE investments consisted of the following: 

Investments in GSE as of September 30, 2012 

(In billions of dollars) 

Gross 

Investments 

as of 9/30/12 

Cumulative 

Valuation 

(Loss) 

9/30/12 

Fair 

Value 

Fannie Mae Senior Preferred Stock ............. 117.0 (51.3) 65.7 

Freddie Mac Senior Preferred Stock ............ 72.1 (30.2) 41.9 

Fannie Mae Warrants Common Stock ......... 3.1 (2.0) 1.1 

Freddie Mac Warrants Common Stock ........ 2.3 (1.7) 0.6 

Total GSE Investment ................................ 194.5 (85.2) 109.3 

Investments in GSE as of September 30, 2011 

(In billions of dollars) 

Gross 

Investments 

as of 9/30/11 

Cumulative 

Valuation 

(Loss) 

9/30/11 

Fair 

Value 

Fannie Mae Senior Preferred Stock ............. 104.5 (26.7) 77.8 

Freddie Mac Senior Preferred Stock ............ 66.0 (12.4) 53.6 

Fannie Mae Warrants Common Stock ......... 3.1 (2.1) 1.0 

Freddie Mac Warrants Common Stock ........ 2.3 (1.7) 0.6 

Total GSE Investment ................................ 175.9 (42.9) 133.0 
NOTES TO THE FINANCIAL STATEMENTS 89

Note 12. Other Assets 

 

Other Assets as of September 30, 2012, and 2011 

 

(In billions of dollars) 2012 2011

 

Advances and Prepayments ....................................................... 96.5 112.9 

FDIC Receivable from Resolution Activity .................................. 18.9 29.3 

Regulatory Assets ....................................................................... 18.9 19.7 

Other ........................................................................................... 23.3 17.4 

 Total Other Assets ................................................................. 157.6 179.3 

Advances and prepayments are assets that represent funds disbursed in contemplation of the future 

performance of services, receipt of goods, the incurrence of expenditures, or the receipt of other assets. These 

include advances to contractors and grantees, travel advances, and prepayments for items such as rents, taxes, 

insurance, royalties, commissions, and supplies. 

The Federal Deposit Insurance Corporation (FDIC) has the responsibility for resolving failed institutions in an 

orderly and efficient manner. The resolution process involves valuing a failing institution, marketing it, soliciting 

and accepting bid for the sale of the institution, determining which bid is least costly to the insurance fund, and 

working with the acquiring institution through the closing process. FDIC records receivables for resolutions that 

include payments by the Deposit Insurance Fund to cover obligations to insured depositors, advances to 

receiverships and conservatorships for working capital, and administrative expenses paid on behalf of receiverships 

and conservatorships. 

With regard to regulatory assets, the DOE’s Power Marketing Authorities (PMAs) and the TVA record certain 

amounts as assets in accordance with FASB ASC Topic 980, Regulated Operations. The provisions of FASB ASC 

Topic 980 require that regulated enterprises reflect rate actions of the regulator in their financial statements, when 

appropriate. These rate actions can provide reasonable assurance of the existence of an asset, reduce or eliminate the 

value of an asset, or impose a liability on a regulated enterprise. In order to defer incurred costs under FASB ASC 

Topic 980, a regulated entity must have the statutory authority to establish rates that recover all costs, and those rates 

must be charged to and collected from customers. If the PMAs’ or TVA’s rates should become market-based, FASB 

ASC Topic 980 would no longer be applicable, and all of the deferred costs under that standard would be expensed. 

Other items included in “other” are purchased power generating capacity, deferred nuclear generating units, 

nonmarketable equity investments in international financial institutions, and the balance of assets held by the 

experience rated carriers participating in the Health Benefits and Life Insurance Program (pending disposition on 

behalf of OPM). 
90 NOTES TO THE FINANCIAL STATEMENTS 

Note 13. Accounts Payable 

 

Accounts Payable as of September 30, 2012, and 2011 

(In billions of dollars) 2012 2011 

 

Department of Defense ................................................................................. 19.5 26.1 

Department of Veterans Affairs ..................................................................... 9.7 1.1 

Department of the Treasury .......................................................................... 4.9 4.8 

Department of Education .............................................................................. 4.1 4.2 

Department of Justice ................................................................................... 4.1 2.5 

Department of State ...................................................................................... 2.8 1.9 

General Services Administration ................................................................... 2.0 2.7 

Department of Agriculture ............................................................................. 2.0 0.7 

Department of Homeland Security ................................................................ 1.9 2.9 

Tennessee Valley Authority .......................................................................... 1.9 2.4 

Agency for International Development .......................................................... 1.9 1.7 

Department of Energy ................................................................................... 1.7 1.8 

U.S. Postal Service ....................................................................................... 1.7 1.7 

National Aeronautics and Space Administration ........................................... 1.4 1.4 

Department of Housing and Urban Development ......................................... 1.3 1.4 

All other ......................................................................................................... 4.3 6.1 

 Total accounts payable .................................................................... 65.2 63.4 

 

Accounts payable includes amounts due for goods and property ordered and received, services rendered by 

other than Federal employees, accounts payable for cancelled appropriations, and non-debt related interest payable. 
 NOTES TO THE FINANCIAL STATEMENTS 91

Note 14. Federal Debt Securities Held by the Public and 

Accrued Interest 

 

Federal Debt Securities Held by the Public and Accrued Interest 

(In billions of dollars) 

Balance 

September 30,

2011 

Net 

Change

During

Fiscal 

Year 

2012 

Balance 

September 30,

2012 

Average Interest 

Rate 

2012 2011 

 

Treasury securities (public): 

Marketable securities: 

Treasury bills .............................. 1,475.6 137.4 1,613.0 0.1% 0.1% 

Treasury notes ........................... 6,407.0 708.0 7,115.0 2.0% 2.3% 

Treasury bonds .......................... 1,016.4 178.3 1,194.7 5.4% 5.8% 

Treasury inflation-protected 

securities (TIPS) ...................... 705.3 102.2 807.5 1.4% 1.9% 

Total marketable Treasury 

securities .................................... 9,604.3 1,125.9 10,730.2 

 

Nonmarketable securities ............. 522.7 16.7 539.4 2.1% 2.8% 

Net unamortized premiums/ 

(discounts) ............................... (29.5) 10.3 (19.2) 

Total Treasury securities, net 

(public) .......................................... 10,097.5 1,152.9 11,250.4 

 

Agency securities: 

Tennessee Valley Authority .......... 24.4 (0.4) 24.0 

All other agencies ......................... 0.3 - 0.3 

Total agency securities, net of 

unamortized premiums and 

discounts ....................................... 24.7 (0.4) 24.3 

 

Accrued interest payable ............. 51.9 5.7 57.6 

 

Total Federal debt securities 

held by the public and 

accrued interest ....................... 10,174.1 1,158.2 11,332.3 

 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. 
92 NOTES TO THE FINANCIAL STATEMENTS 

Federal debt securities held by the public outside the Government are held by individuals, corporations, State 

or local governments, FRBs, foreign governments, and other entities outside the Federal Government. The above 

table details Government borrowing primarily to finance operations and shows marketable and nonmarketable 

securities at face value less net unamortized premiums and discounts including accrued interest. 

Securities that represent Federal debt held by the public are issued primarily by the Treasury and include: 

 Interest-bearing marketable securities (bills, notes, bonds, and inflation-protected). 

 Interest-bearing nonmarketable securities (government account series held by deposit and fiduciary funds, 

foreign series, State and local government series, domestic series, and savings bonds). 

 Non-interest-bearing marketable and nonmarketable securities (matured and other). 

Section 3111 of Title 31, United States Code (U.S.C.) authorizes the Secretary of the Treasury to use money 

received from the sale of an obligation and other money in the General Fund of the Treasury to buy, redeem, or 

refund, at or before maturity, outstanding bonds, notes, certificates of indebtedness, Treasury bills, or savings 

certificates of the Government. There were no buyback operations in fiscal years 2012 and 2011. 

Gross Federal debt (with some adjustments) is subject to a statutory ceiling (i.e., the debt limit). Prior to 1917, 

the Congress approved each debt issuance. In 1917, to facilitate planning in World War I, Congress and the 

President first enacted a statutory dollar ceiling for Federal borrowing. With the Public Debt Act of 1941 (Public 

Law 77-7), Congress and the President set an overall limit of $65 billion on Treasury debt obligations that could be 

outstanding at any one time; since then, Congress and the President have enacted a number of debt limit increases. 

Most recently, on August 2, 2011, Public Law 112-25 was enacted, which increased the statutory debt limit to 

$14,694.0 billion on August 2, 2011, $15,194.0 billion after close of business on September 21, 2011, and $16,394.0 

billion after close of business on January 27, 2012. Prior to the August 2011 and January 2012 increases, Treasury 

faced a period that required it to depart from its normal debt management procedures and to invoke legal authorities 

to avoid exceeding the statutory debt limit. As of September 30, 2012, and 2011, debt subject to the statutory debt 

limit was $16,027.0 billion and $14,746.6 billion, respectively. The debt subject to the limit includes Treasury 

securities held by the public and Government guaranteed debt of Federal agencies (shown in the table above) and 

intragovernmental debt holdings (shown in the following table). Please see Note 28—Subsequent Events for 

additional information. 
 NOTES TO THE FINANCIAL STATEMENTS 93

 

Intragovernmental Debt Holdings: Federal Debt Securities 

Held as Investments by Government Accounts as of September 30, 2012, 

and 2011 

(In billions of dollars) 

Balance 

2011 

Net 

Change 

During 

Fiscal Year 

2012 

Balance 

2012 

Social Security Administration, Federal Old-Age and 

Survivors Insurance Trust Fund ................................. 2,492.5 94.2 2,586.7 

Office of Personnel Management, Civil Service 

Retirement and Disability Fund .................................. 803.8 22.7 826.5 

Department of Defense, Military Retirement Fund........ 326.0 50.4 376.4 

Department of Health and Human Services, Federal 

Hospital Insurance Fund ............................................. 245.9 (17.6) 228.3 

Department of Defense, Medicare-Eligible Retiree 

Health Care Fund ....................................................... 161.7 14.4 176.1 

Social Security Administration, Federal Disability 

Insurance Trust Fund ................................................... 162.0 (29.7) 132.3 

Department of Health and Human Services, Federal 

Supplementary Medical Insurance Trust Fund........... 70.4 (1.1) 69.3 

Department of Energy, Nuclear Waste Disposal 

Fund ............................................................................ 48.6 1.0 49.6 

Office of Personnel Management, Postal Service 

Retiree Health Benefits Fund ..................................... 43.7 1.6 45.3 

Office of Personnel Management, Employees Life 

Insurance Fund ........................................................... 39.7 1.6 41.3 

Federal Deposit Insurance Corporation Funds ............. 45.6 (4.6) 41.0 

Department of the Treasury, Exchange Stabilization 

Fund ............................................................................ 22.7 - 22.7 

Office of Personnel Management, Employees Health 

Benefits Fund .............................................................. 19.2 2.1 21.3 

Pension Benefit Guaranty Corporation Fund ................ 21.0 0.1 21.1 

Department of Labor, Unemployment Trust Fund......... 16.0 4.7 20.7 

Department of State, Foreign Service Retirement 

and Disability Fund ..................................................... 16.4 0.5 16.9 

Department of Transportation, Airport and Airway 

Trust Fund .................................................................. 8.6 1.8 10.4 

National Credit Union Share Insurance Fund ............... 10.7 (0.4) 10.3 

Department of Transportation, Highway Trust Fund..... 16.3 (6.3) 10.0 

All other programs and funds ........................................ 92.5 (2.1) 90.4 

Subtotal ....................................................................... 4,663.3 133.3 4,796.6 

Total Net Unamortized Premiums/Discounts for 

Intragovernmental .................................................. 47.6 8.7 56.3 

 Total intragovernmental debt holdings, net ........ 4,710.9 142.0 4,852.9 

Intragovernmental debt holdings represent the portion of the gross Federal debt held as investments by 

Government entities such as trust funds, revolving funds, and special funds. This includes trust funds that are 

earmarked funds. For more information on earmarked funds, see Note 24─Earmarked Funds. These 

intragovernmental debt holdings are eliminated in the consolidation of these financial statements. 
94 NOTES TO THE FINANCIAL STATEMENTS 

Note 15. Federal Employee and Veteran Benefits Payable 

 

Federal Employee and Veteran Benefits Payable as of September 30, 2012, 

and 2011 

 

Civilian Military Total

(In billions of dollars) 2012 2011 2012 2011 2012 2011 

 

Pension and accrued 

benefits .............................. 1,772.3 1,619.7 1,482.0 1,361.3 3,254.3 2,981.0 

Post-retirement health and 

accrued benefits ................ 328.1 342.5 833.3 842.3 1,161.4 1,184.8 

Veterans compensation 

and burial benefits ............. N/A N/A 1,761.6 1,533.7 1,761.6 1,533.7 

Life insurance and accrued 

benefits .............................. 47.2 44.6 10.6 11.1 57.8 55.7 

FECA benefits ...................... 27.0 24.2 8.6 8.3 35.6 32.5 

Liability for other benefits ..... 0.8 1.6 2.5 2.9 3.3 4.5 

Total Federal employee 

and veteran benefits 

payable ............................ 2,175.4 2,032.6 4,098.6 3,759.6 6,274.0 5,792.2 

 

Change in Pension and Accrued Benefits 

Civilian Military Total

(In billions of dollars) 2012 2011 2012 2011 2012 2011 

 

Actuarial accrued pension 

liability, beginning of 

fiscal year .............................. 1,619.7 

 

1,632.9 1,361.3 1,262.7 2,981.0 2,895.6 

Pension expense: 

Expected normal costs ............ 36.3 36.8 34.3 24.9 70.6 61.7 

Interest on pension liability 

during the period ................... 74.4 78.3 64.8 62.6 139.2 140.9 

Prior (or past) service cost 

from plan amendments or 

new plans .............................. 0.1 - - - 0.1 - 

Actuarial (gains)/losses (from 

experience) ........................... 9.7 (70.6) (3.2) 0.1 6.5 (70.5) 

Actuarial (gains)/losses (from 

assumption changes) ............ 109.6 15.9 77.2 62.0 186.8 77.9 

Total pension expense .......... 230.1 60.4 173.1 149.6 403.2 210.0 

Less benefits paid ................. (77.5) (73.6) (52.4) (51.0) (129.9) (124.6) 

Actuarial accrued 

pension liability, end of 

fiscal year .............................. 1,772.3 1,619.7 1,482.0 1,361.3 3,254.3 2,981.0 

 
 NOTES TO THE FINANCIAL STATEMENTS 95

Change in Post-Retirement Health and Accrued Benefits 

 

(In billions of dollars) Civilian Military Total 

2012 2011 2012 2011 2012 2011 

Actuarial accrued postretirement health benefits 

liability, beginning of fiscal 

year ........................................... 342.5 355.5 842.3 904.7 1,184.8 1,260.2 

Post-retirement health 

benefits expense: 

Prior (and past) service costs 

from plan amendments or 

new plans ................................ - - (31.9) (15.9) (31.9) (15.9) 

Normal costs .............................. 13.8 14.5 21.4 24.0 35.2 38.5 

Interest on liability ...................... 16.4 17.8 41.7 45.8 58.1 63.6 

Actuarial (gains)/losses (from 

experience) ............................. (21.2) (17.9) (12.3) (1.1) (33.5) (19.0) 

Actuarial (gains)/losses (from 

assumption changes) .............. (9.8) (13.8) (6.8) (94.0) (16.6) (107.8) 

Total post-retirement health 

benefits expense .................. (0.8) 0.6 12.1 (41.2) 11.3 (40.6) 

Less claims paid ........................ (13.6) (13.6) (21.1) (21.2) (34.7) (34.8) 

Actuarial accrued postretirement health 

benefits liability, end of 

fiscal year ............................ 328.1 342.5 833.3 842.3 1,161.4 1,184.8 

 

The Government offers its employees life and health insurance, as well as retirement and other benefits. The 

liabilities for these benefits, which include both actuarial amounts and amounts due and payable to beneficiaries and 

health care carriers, apply to civilian and military employees. 

OPM administers the largest civilian plan. DOD administers the largest military plan. Other significant pension 

plans with more than $10 billion in accrued benefits payable include those of the Coast Guard (DHS), Foreign 

Service (Department of State), TVA, USPS, and HHS. 

Change in Civilian Life Insurance and Accrued Benefits 

(In billions of dollars) 2012 2011 

Actuarial accrued life insurance benefits liability, 

beginning of fiscal year ......................................................... 44.6 44.0 

Life insurance benefits expense: 

New entrant expense ............................................................... 0.3 0.4 

Interest on liability ..................................................................... 2.1 2.1 

Actuarial (gains)/losses (from experience) ............................... - (0.5) 

Actuarial (gains)/losses (from assumption changes) ............... 0.7 (0.9) 

Total life insurance benefits expense .................................... 3.1 1.1 

Less costs paid ......................................................................... (0.5) (0.5) 

Actuarial accrued life insurance benefits liability, end 

of fiscal year ...................................................................... 47.2 44.6 

 
96 NOTES TO THE FINANCIAL STATEMENTS 

Significant Long-Term Economic Assumptions Used in Determining 

Pension Liability and the Related Expense 

Civilian Military 

2012 2011 2012 2011

FERS CSRS FERS CSRS 

Rate of interest ..................................... 4.70% 4.30% 4.90% 4.60% 4.60% 4.80% 

Rate of inflation .................................... 2.50% 2.50% 2.40% 2.40% 2.60% 2.50% 

Projected salary increases ................... 2.60% 2.60% 3.10% 3.10% 3.00% 3.30% 

Cost of living adjustment ...................... 2.00% 2.50% 1.90% 2.40% - - 

 

Significant Long-Term Economic Assumptions Used in Determining 

Post-Retirement Health Benefits and the Related Expense 

 

 

Civilian Military 

2012 2011 2012 2011 

 

Rate of interest ................................................ 4.70% 4.90% 4.60% 4.90% 

Single equivalent medical trend rate ............... - - 5.10% 5.20% 

Ultimate medical trend rate ............................. 4.40% 4.35% 5.35% 5.25% 

 

Significant Long-Term Economic Assumptions Used in Determining Life 

Insurance Benefits and the Related Expense 

Civilian 

2012 2011 

 

Rate of interest ................................................ 4.50% 4.80% 

Rate of increase in salary ................................ 2.60% 3.10% 

 

With the implementation of SFFAS No. 33, Pension, Other Retirement Benefits, and Other Postemployment 

Benefits: Reporting the Gains and Losses from Changes in Assumptions and Selecting Discount Rates and Valuation 

Dates, agencies are required to separately present gains and losses from changes in long-term assumptions used to 

estimate liabilities associated with pensions, ORB, and OPEB on the Statement of Net Cost. SFFAS No. 33 also 

provides a standard for selecting the discount rate assumption for present value estimates of Federal employee 

pension, ORB, and OPEB liabilities. In addition, SFFAS No. 33 provides a standard for selecting the valuation date 

for estimates of Federal employee pension, ORB, and OPEB liabilities that will establish a consistent method for 

such measurements. 

DOD’s long-term ultimate medical trend rate for post-retirement health benefits liability is 5.35 percent for 

fiscal year 2012 and 5.25 percent for fiscal year 2011. For disclosure and comparison purposes, DOD’s estimate of a 

single equivalent medical trend rate for fiscal year 2012 is 5.10 percent and for fiscal year 2011 is 5.2 percent, which 

is an approximation of the single equivalent rate that would produce that same actuarial liability as the actual rates 

used. Please refer to the individual financial statements of DOD for further details regarding Military Retirement 

Health Benefits-Medical Trend. 
 NOTES TO THE FINANCIAL STATEMENTS 97

Civilian Employees 

Pensions 

OPM administers the largest civilian pension plan, which covers substantially all full-time, permanent civilian 

Federal employees. This plan includes two components of defined benefits. These are the Civil Service Retirement 

System (CSRS) and the Federal Employees’ Retirement System (FERS). The basic benefit components of the CSRS 

and the FERS are financed and operated through the Civil Service Retirement and Disability Fund (CSRDF). 

CSRDF monies are generated primarily from employees’ contributions, agency contributions, payments from 

the General Fund, and interest on investments in Treasury securities. See Note 24—Earmarked Funds. 

The Federal Retirement Thrift Investment Board administers the Thrift Savings Plan (TSP) Fund. The TSP 

Fund investment options include two fixed income funds (the G and F Funds), three stock funds (the C, S, and I 

Funds) and five lifecycle funds (L 2050, L 2040, L 2030, L 2020, and L Income). The L Funds diversify participant 

accounts among the G, F, C, S, and I Funds, using professionally determined investment mixes (allocations) that are 

tailored to different time horizons. Treasury securities held in the G Fund are included in Federal debt securities held 

by the public and accrued interest on the Balance Sheets. The G Fund held $153.9 billion and $139.3 billion in nonmarketable Treasury securities as of September 30, 2012, and 2011, respectively. 

Post-Retirement Health Benefits 

The post-retirement civilian health benefit liability is an estimate of the Government’s future cost of providing 

post-retirement health benefits to current employees and retirees. Although active and retired employees pay insurance 

premiums under the Federal Employees Health Benefits Program (FEHB), these premiums cover only a portion of the 

costs. The OPM actuary applies economic assumptions to historical cost information to estimate the liability. 

Life Insurance Benefits 

One of the largest other employee benefits is the Federal Employee Group Life Insurance (FEGLI) Program. 

Employee and annuitant contributions and interest on investments fund a portion of this liability. The actuarial life 

insurance liability is the expected present value of future benefits to pay to, or on behalf of, existing FEGLI 

participants. The OPM actuary uses interest rate, inflation, and salary increase assumptions that are consistent with 

the pension liability. 

Workers’ Compensation Benefits 

The DOL determines both civilian and military agencies’ liabilities for future workers’ compensation benefits 

for civilian Federal employees, as mandated by the Federal Employees’ Compensation Act (FECA), for death, 

disability, medical, and miscellaneous costs for approved compensation cases, and a component for incurred, but not 

reported, claims. The FECA liability is determined annually using historical benefit payment patterns related to 

injury years to predict the ultimate payments. These estimated payments have been discounted to present value using 

OMB’s interest rate assumptions for 10-year U.S. Treasury notes. For 2012, a 2.29 percent interest rate was assumed 

in year one and 3.14 percent was assumed for year two and thereafter. 

The DOL calculates the FECA liability using wage inflation factors, cost of living adjustments (COLA), and 

medical inflation factors (Consumer Price Index–Medical or (CPIM)). The table below reflects the compensation 

COLAs and CPIMs used in the estimations for various charge-back years. 

Fiscal Year COLA CPIM 

2013 2.83% 3.65% 

2014 2.03% 3.66% 

2015 1.93% 3.72% 

2016 2.00% 3.73% 

2017+ 2.03% 3.80% 
98 NOTES TO THE FINANCIAL STATEMENTS 

Military Employees (Including Veterans) 

Pensions 

The DOD Military Retirement Fund finances military retirement and survivor benefit programs. The increase 

in the Military Retirement Pension liability is due to additional benefit accruals (normal cost), interest on the 

pension liability and assumption and benefit changes. Liabilities in the future will depend on expected changes due 

to interest and benefit accruals, future benefit changes, assumption changes, and actuarial experience. 

This Fund receives income from three sources: monthly normal cost payments from the Services to pay for the 

current years’ service cost; annual payments from Treasury to amortize the unfunded liability and pay for the 

increase in the normal cost attributable to Concurrent Receipt per Public Law 108-136; and investment income. 

The military retirement system consists of a funded, noncontributory, defined benefit plan. It applies to 

military personnel (Departments of Army, Navy, Air Force, and the Marine Corps). This system includes 

nondisability retirement pay, disability retirement pay, and survivor annuity programs. Military personnel who 

remain on active duty for 20 years or longer are eligible for retirement. There are three different retirement benefit 

formulas that are currently being used by the military: Final Pay, High-3 Year Average, and Career Status 

Bonus/Military Retirement Reform Act of 1986. The date an individual enters the military determines which 

retirement system they would fall under and if they have the option to pick their retirement system. For more 

information on these benefits, see DOD’s Websites http://www.dfas.mil/retiredmilitary/plan/estimate/csbredux.html. 

Post-Retirement Health Benefits 

Military retirees and their dependents are entitled to health care in military medical facilities if a facility can 

provide the needed care. Prior to becoming Medicare eligible, military retirees and their dependents also are entitled 

to participate in TRICARE, which reimburses (net of beneficiary copay and deductible requirements) for the cost of 

health care from civilian providers. TRICARE options are available in indemnity, preferred provider organization, 

and health maintenance organization (HMO) designs. 

Since fiscal year 2002, TRICARE, as second payer to Medicare, covers military retirees and their dependents 

after they become Medicare eligible. This TRICARE coverage for Medicare eligible beneficiaries requires that the 

beneficiary enroll in Medicare Part B and is referred to as TRICARE for Life (TFL). Health care under TFL can be 

obtained from military medical facilities on an “as available” basis or from civilian providers. Military retiree health 

care actuarial liability figures include costs incurred in military medical facilities, as well as claims paid to civilian 

providers and certain administrative costs. Costs paid to civilian providers are net of Medicare’s portion of the cost. 

Chapter 56 of Title 10, United States Code (U.S.C.) created the DOD Medicare-Eligible Retiree Health Care 

Fund, which became operative on October 1, 2002. The purpose of this fund is to account for the health benefits of 

Medicare-eligible military retirees, their dependents, and survivors who are Medicare eligible. The Fund receives 

contributions from the Uniformed Services and Treasury, as well as interest earnings on its investments and pays 

costs incurred in military medical facilities, as well as claims for care provided by civilian providers under TFL, 

administration costs associated with processing the TFL claims, and capitated payments for coverage provided by 

U.S. Family Health Plans. 

In addition to the health care benefits for civilian and military retirees and their dependents, the VA also 

provides medical care to veterans on an “as available” basis, subject to the limits of the annual appropriations. In 

accordance with 38 CFR 17.36 (c), VA’s Secretary makes an annual enrollment decision that defines the veterans, 

by priority, who will be treated for that fiscal year subject to change based on funds appropriated, estimated 

collections, usage, the severity index of enrolled veterans, and changes in cost. Accordingly, VA recognizes the 

medical care expenses in the period the medical care services are provided. For the fiscal years 2009 through 2012, 

the average medical care cost per year was $39.0 billion. 

Veterans Compensation and Burial Benefits 

The Government compensates disabled veterans and their survivors. Veterans compensation is payable as a 

disability benefit or a survivor’s benefit. Entitlement to compensation depends on the veteran’s disabilities having 

been incurred in, or aggravated during, active military service; death while on duty; or death resulting from serviceconnected disabilities, if not on active duty. 

Burial benefits include a burial and plot or interment allowance payable for a veteran who, at the time of death, 

is qualified to receive compensation or a pension, or whose death occurred in a VA facility. 
 NOTES TO THE FINANCIAL STATEMENTS 99

The liability for veterans’ compensation and burial benefits payable increased by $227.9 billion in fiscal year 

2012. Substantially all the $227.9 billion increase in the Federal Employee and Veterans Benefits Liabilities relates 

to 1) changes in experience related primarily to increased disability claims filed and processed for presumptive 

disability benefits associated with Vietnam Veterans, including Agent Orange and 2) changes in actuarial liability 

assumptions used to project future cash flows related primarily to higher disability claims rates. 

Several significant actuarial assumptions were used in the valuation of compensation, pension, and burial 

benefits to calculate the present value of the liability. A liability was recognized for the projected benefit payments 

to: (1) those beneficiaries, including veterans and survivors, currently receiving benefit payments; (2) current 

Veterans who will in the future become beneficiaries of the compensation and pension programs; and (3) a 

proportional share of those in active military service as of the valuation date who will become veterans in the Future. 

The Veterans Compensation and Burial benefits liability is a valuation of a long period of estimated cashflows. 

As a result, changes in long-term assumptions can have a dramatic effect on the liability. If those changes to longterm assumptions are in different directions from one period to the next, the changes to net cost from period to 

period are more pronounced as demonstrated over the past several years. 
100 NOTES TO THE FINANCIAL STATEMENTS 

Change in Veterans Compensation and Burial Benefits 

Compensation Burial Total 

(In billions of dollars) 2012 2011 2012 2011 2012 2011 

 

Actuarial accrued liability beginning 

of fiscal year .................................... 1,529.2 1,470.5 4.5 4.3 1,533.7 1,474.8 

 

Current Year Expense: 

Interest on the liability balance ........ 69.3 69.5 0.2 0.2 69.5 69.7 

Prior (and past) service costs from 

program amendments or new 

programs during the period ........... 0.4 - - - 0.4 - 

Actuarial (gain)/losses (from 

experience) .................................... 61.7 (14.4) (0.1) (0.1) 61.6 (14.5) 

Actuarial (gain)/losses 

(from assumption changes) ........... 149.2 55.6 0.1 0.3 149.3 55.9 

Total current year expense............ 280.6 110.7 0.2 0.4 280.8 111.1 

 

Less benefits paid .............................. (52.7) (52.0) (0.2) (0.2) (52.9) (52.2) 

Actuarial accrued liability end of 

fiscal year ........................................ 1,757.1 1,529.2 4.5 4.5 1,761.6 1,533.7 

 

 

Significant Economic Assumptions Used in Determining Veterans Compensation 

and Burial Benefits as of September 30, 2012, and 2011 

2012 2011 

 

Rate of interest .................................................................... 4.31% 4.53% 

Rate of inflation .................................................................... 2.61% 2.78% 

 

Life Insurance Benefits 

The largest veterans’ life insurance programs consist of the following: 

 National Service Life Insurance (NSLI) covers policyholders who served during World War II. 

 Veterans’ Special Life Insurance (VSLI) was established in 1951 to meet the insurance needs of veterans 

who served during the Korean Conflict and through the period ending January 1, 1957. 

 Veterans’ Reopened Insurance (VRI), which provided a 1-year reopening for insurance coverage in 1965 

for those eligible to have obtained NSLI or VSLI and were disabled. 
 NOTES TO THE FINANCIAL STATEMENTS 101

The components of veteran life insurance liability for future policy benefits are presented below. 

Veterans Life Insurance Liability as of September 30, 2012, and 2011 

(In billions of dollars) 2012 2011 

 

Insurance death benefits: 

NSLI ........................................................................................... 5.7 6.2 

VSLI ........................................................................................... 1.5 1.5 

VRI ............................................................................................. 0.2 0.2 

Other .......................................................................................... 0.7 0.6 

Total death benefits ................................................................. 8.1 8.5 

 

Death benefit annuities ................................................................. 0.1 0.1 

Disability income and waiver ........................................................ 0.7 0.7 

Insurance dividends payable ........................................................ 1.6 1.7 

Unearned premiums ..................................................................... 0.1 0.1 

Total veterans life insurance liability .......................................... 10.6 11.1 

 

Insurance dividends payable consists of dividends left on a deposit with VA, related interest payable, and 

dividends payable to policyholders. 

The VA supervises Servicemembers Group Life Insurance and Veterans Group Life Insurance programs that 

provide life insurance coverage to members of the uniformed armed services and veterans who served during the 

Vietnam era or thereafter. The VA also provides certain veterans and/or their dependents with pension benefits, 

based on annual eligibility reviews, if the veteran died or was disabled for nonservice-related causes. The actuarial 

present value of the future liability for pension benefits is a non-exchange transaction and is not required to be 

recorded on the Balance Sheet. The projected amounts of future payments for pension benefits (presented for 

informational purposes only) as of September 30, 2012, and 2011, were $92.8 billion and $89.2 billion, respectively. 
102 NOTES TO THE FINANCIAL STATEMENTS 

Note 16. Environmental and Disposal Liabilities 

Environmental and Disposal Liabilities as of September 30, 2012, and 2011 

(In billions of dollars) 2012 2011 

 

Department of Energy: 

Environmental and disposal liabilities .................................................. 268.4 250.6 

Department of Defense: 

Environmental Restoration ................................................................... 28.4 29.4 

Disposal of Weapon Systems Program ............................................... 24.5 24.9 

Environmental Corrective Other ........................................................... 5.4 5.7 

Base Realignment and Closure ............................................................ 4.3 4.8 

 Total Department of Defense....................................................... 62.6 64.8 

All other agencies ................................................................................. 8.0 8.7 

 Total environmental and disposal liabilities ................................. 339.0 324.1 

 

During World War II and the Cold War, DOE (or predecessor agencies) developed a massive industrial 

complex to research, produce, and test nuclear weapons. This included nuclear reactors, chemical-processing 

buildings, metal machining plants, laboratories, and maintenance facilities that manufactured tens of thousands of 

nuclear warheads and conducted more than one thousand nuclear tests. 

At all sites where these activities took place, some environmental contamination occurred. This contamination 

was caused by the production, storage, and use of radioactive materials and hazardous chemicals, which resulted in 

contamination of soil, surface water, and groundwater. The environmental legacy of nuclear weapons production 

also includes thousands of contaminated buildings and large volumes of waste and special nuclear materials 

requiring treatment, stabilization, and disposal. 

Estimated cleanup costs at sites for which there are no current feasible remediation approaches, such as the 

Nevada nuclear test site, are excluded from the estimates, although applicable stewardship and monitoring costs for 

these sites are included. DOE has not been required through regulation to establish remediation activities for these sites. 

Estimating DOE’s environmental cleanup liability requires making assumptions about future activities and is 

inherently uncertain. The future course of DOE’s environmental cleanup and disposal will depend on a number of 

fundamental technical and policy choices, many of which have not been made. The sites and facilities could be 

restored to a condition suitable for any desirable use, or could be restored to a point where they pose no near-term 

health risks. Achieving the former conditions would have a higher cost, but may or may not, warrant the costs, or be 

legally required. The environmental liability estimates include contingency estimates intended to account for the 

uncertainties associated with the technical cleanup scope of the program. 

DOE’s environmental and disposal liabilities estimates are dependent on annual funding levels and 

achievement of work as scheduled. Congressional appropriations at lower than anticipated levels or unplanned 

delays in project completion would cause increases in life-cycle costs. 

DOE’s environmental and disposal liabilities also include the estimated cleanup and post-closure 

responsibilities, including surveillance and monitoring activities, soil and groundwater remediation, and disposition 

of excess material for sites. The Department is responsible for the post-closure activities at many of the closure sites 

as well as other sites. The costs for these post-closure activities are estimated for a period of 75 years after the 

balance sheet date, i.e., through 2087 in fiscal year 2012 and through 2086 in fiscal year 2011. While some postcleanup monitoring and other long-term stewardship activities post 2087 are included in the liability, there are others 

the Department expects to continue beyond 2087 for which the costs cannot reasonably be estimated. 

A portion of DOE’s environmental and disposal liabilities at various field sites includes anticipated costs for 

facilities managed by DOE’s ongoing program operations which will ultimately require stabilization, deactivation 

and decommissioning. The estimate is largely based upon a cost-estimating model. Site specific estimates are used 

in lieu of the cost-estimating model, when available. Cost estimates for ongoing program facilities are updated each 
 NOTES TO THE FINANCIAL STATEMENTS 103

year. For facilities newly contaminated since fiscal year 1997, cleanup costs allocated to future periods and not 

included in environmental and disposal liabilities amounted to $808.0 million and $920.0 million for fiscal years 

2012 and 2011, respectively. 

Please refer to the financial statements of the DOE for significant detailed information regarding DOE’s 

environmental and disposal liabilities, including cleanup costs. 

DOD follows the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), 

Superfund Amendments and Reauthorization Act, Resource Conservation and Recovery Act (RCRA) and other 

applicable Federal or State laws to clean up contamination. The CERCLA and RCRA require the DOD to clean up 

contamination in coordination with regulatory agencies, current owners of property damaged by the Department, 

and third parties that have a partial responsibility for the environmental restoration. Failure to comply with 

agreements and legal mandates puts the DOD at risk of incurring fines and penalties. 

DOD must restore active installations, installations affected by base realignment and closure, and other areas 

formerly used as Defense sites. DOD also bears responsibility for disposal of chemical weapons and environmental 

costs associated with the disposal of weapons systems (primarily nuclear powered aircraft carriers and submarines). 

DOD uses engineering estimates and independently validated models to estimate environmental costs. The 

engineering estimates are used after obtaining extensive data during the remedial investigation/feasibility phase of 

the environmental project. 

For general PP&E placed into service after September 30, 1997, DOD expenses associated environmental costs 

systematically over the life of the asset using two methods: physical capacity for operating landfills and life 

expectancy in years for all other assets. The Department expenses the full cost to clean up contamination for 

stewardship property, plant, and equipment at the time the asset is placed into service. DOD has expensed the costs 

for cleanup associated with general property, plant, and equipment placed into service before October 1, 1997, 

except for costs intended to be recovered through user charges; for those costs, DOD has expensed cleanup costs 

associated with that portion of the asset life that has passed since it was placed into service. DOD systematically 

recognizes the remaining cost over the remaining life of the asset. The unrecognized portion of the cleanup cost 

associated with general property, plant, and equipment is $3.2 billion and $2.9 billion for fiscal years 2012 and 

2011, respectively. Not all components of DOD are able to compile the necessary information for this disclosure, 

thus the amount reported may not accurately reflect DOD’s total unrecognized costs associated with general 

property, plant, and equipment. DOD is implementing procedures to address these deficiencies. 

DOD is unable to estimate and report a liability for environmental restoration and corrective action for buried 

chemical munitions and agents, because the extent of the buried chemical munitions and agents is unknown at this 

time. DOD is also unable to provide a complete estimate for the Formerly Utilized Sites Remedial Action Program. 

DOD has ongoing studies and will update its estimate as additional liabilities are identified. DOD has the potential 

to incur costs for restoration initiatives in conjunction with returning overseas Defense facilities to host nations. 

However, DOD is unable to provide a reasonable estimate at this time because the extent of required restoration is 

unknown. 

Please refer to the financial statements of the DOD for further detailed information regarding DOD’s 

environmental and disposal liabilities, including cleanup costs. 
104 NOTES TO THE FINANCIAL STATEMENTS 

Note 17. Benefits Due and Payable 

Benefits Due and Payable as of September 30, 2012, and 2011 

(In billions of dollars) 2012 2011 

 

 Federal Old-Age and Survivors Insurance .............................................. 56.8 53.1 

 Federal Supplementary Medical Insurance (Medicare Parts B and D) ... 26.2 25.7 

 Grants to States for Medicaid .................................................................. 24.9 26.1 

 Federal Disability Insurance ....................................................................... 24.4 23.9 

 Federal Hospital Insurance (Medicare Part A) ........................................ 20.2 28.6 

 Supplemental Security Income ................................................................ 5.4 5.2 

 Unemployment Insurance ........................................................................ 2.1 3.2 

 All other benefits programs ...................................................................... 6.2 5.2 

 Total benefits due and payable ............................................................ 166.2 171.0

 

Benefits due and payable are amounts owed to program recipients or medical service providers as of 

September 30 that have not been paid. HHS and the SSA administer the majority of the medical service programs 

and the DOL administers the Unemployment Insurance program. For a description of the programs, see Note 26—

Social Insurance and the Unaudited Required Supplementary Information—Social Insurance section. 
 NOTES TO THE FINANCIAL STATEMENTS 105

Note 18. Insurance and Guarantee Program Liabilities 

Insurance and Guarantee Program Liabilities as of September 30, 2012, 

and 2011 

(In billions of dollars) 2012 2011

 

Insurance and Guarantee Program Liabilities: 

 Pension Benefit Guaranty Corporation - Benefit Pension Plans ....... 105.6 93.0 

 Federal Deposit Insurance Corporation Funds ................................. 26.5 47.4 

 All other insurance and guarantee programs .................................... 24.3 21.3 

Total insurance and guarantee program liabilities ............................ 156.4 161.7 

 

PBGC insures pension benefits for participants in covered defined benefit pension plans. As a wholly-owned 

corporation of the U.S. Government, PBGC’s financial activity and balances are included in the consolidated 

financial statements of the U.S. Government. However, under current law, PBGC’s liabilities may be paid only from 

PBGC’s assets and not from the General Fund of the Treasury or assets of the Government in general. As of 

September 30, 2012, and 2011, PBGC had total liabilities of $119.2 billion and $106.7 billion, and its total liabilities 

exceeded its total assets by $34.4 billion and $26.0 billion, respectively. In addition, as discussed in Note 22—

Contingencies, PBGC reported reasonably possible contingent losses of about $321.8 billion and $250.2 billion as of 

September 30, 2012, and 2011, respectively. Of the total FDIC amount as of September 30, 2012, and 2011, $3.6 

billion and $7.2 billion, respectively, represents the recorded contingent liability and loss provision for institutions 

insured by the Deposit Insurance Fund that are likely to fail. In addition, $21.2 billion and $31.5 billion pertain to 

liabilities due to resolutions of failed or failing institutions and to pending depositor claims as of September 30, 

2012, and 2011 respectively. Another $1.7 billion and $8.2 billion as of September 30, 2012, and 2011 respectively, 

pertains to the Temporary Liquidity Guarantee Program, which guarantees certain newly issued debt and certain 

noninterest-bearing transaction accounts in an effort to counter the system-wide crisis in the nation’s financial 

sector. The remaining amounts represent contingent liabilities for litigation. 

Of the $24.3 billion and $21.3 billion under all other insurance and guarantee programs as of September 30, 

2012, and 2011, respectively, $20.0 billion and $10.3 billion, respectively, pertain to the USDA’s Federal Crop 

Insurance Program. The increase in the estimated indemnities is due to the most severe drought in the farm belt 

since 1988. The Federal Crop Insurance Program is administered by the Federal Crop Insurance Corporation, whose 

mission is to provide an actuarially sound risk management program to reduce agricultural producers’ economic 

losses due to natural disasters. Also, $3.4 billion and $7.4 billion relates to the National Credit Union 

Administration’s Temporary Corporate Credit Union Stabilization Fund as of September 30, 2012, and 2011, 

respectively. This Program guarantees the timely payment of principal and interest on certain unsecured debt of 

participating credit unions. 
106 NOTES TO THE FINANCIAL STATEMENTS 

Note 19. Other Liabilities 

Other Liabilities as of September 30, 2012, and 2011 

(In billions of dollars) 2012 2011 

 

Unearned revenue and assets held for others: 

Unearned fees for nuclear waste disposal (DOE) and other unearned 

revenue .................................................................................................. 56.2 64.4 

Assets held on behalf of others ................................................................ 74.5 69.8

Subtotal .................................................................................................. 130.7 134.2

 

Employee-related liabilities: 

Accrued Federal employees wages and benefits .................................... 40.0 35.2 

Selected DOE contractors' and D.C. employees’ pension benefits ......... 57.0 55.0 

Subtotal .................................................................................................. 97.0 90.2

 

International monetary liabilities and gold certificates: 

Exchange Stabilization Fund .................................................................... 59.7 60.3 

Gold Certificates (Note 2) ......................................................................... 11.0 11.0 

Subtotal .................................................................................................. 70.7 71.3

 

Subsidies and grants: 

Farm and other subsidies ......................................................................... 11.8 12.5 

Grant payments due to State and local governments and others ............ 16.8 18.1

Subtotal .................................................................................................. 28.6 30.6

 

Miscellaneous liabilities: 

Legal and other contingencies ................................................................. 41.9 38.0 

Bonneville Power Administration non-Federal power projects and 

capital lease liabilities, and disposal liabilities ....................................... 13.2 13.5 

Other miscellaneous ................................................................................. 50.5 49.2 

Subtotal .................................................................................................. 105.6 100.7

Total other liabilities ............................................................................ 432.6 427.0 

 

Other liabilities represent liabilities that are not separately identified on the Balance Sheets and are presented 

on a comparative basis by major category. 
NOTES TO THE FINANCIAL STATEMENTS 107

Unearned Revenue and Assets Held for Others 

The Government recognizes a liability when it receives money in advance of providing goods and services or 

assumes custody of money belonging to others. The Government’s unearned revenue from fees DOE has collected 

from utility companies for the future cost of managing the disposal of nuclear waste is about $32.1 billion and $30.0 

billion as of September 30, 2012, and 2011, respectively. Other unearned revenue includes USPS income for such 

things as prepaid postage, outstanding money orders, and prepaid P.O. Box rentals. FDIC collected prepaid 

assessments from the financial institutions to address the Deposit Insurance Fund liquidity needs to pay for projected 

near-term failures and to ensure that the deposit insurance system remained industry-funded. The prepaid collection 

was based on maintaining assessment rates at their current levels through the end of 2010 and adopting a uniform 

three basis point increase in assessment rates effective January 1, 2011. An institution’s quarterly risk-based deposit 

insurance assessment thereafter is offset by the amount prepaid until that amount is exhausted or until June 30, 2013, 

when any amount remaining would be returned to the institution. The DIF’s unearned revenue liability was $9.2 

billion and $20.4 billion as of September 30, 2012, and 2011, respectively. This decrease is due to the recognition of 

assessment revenue for the period. Assets held on behalf of others include funds collected in advance and 

undelivered Defense articles. The Foreign Military Sales program holds $61.8 billion and $58.6 billion as of 

September 30, 2012, and 2011, respectively for articles and services for future delivery to foreign governments. 

Employee-Related Liabilities 

This category includes amounts owed to employees at yearend and actuarial liabilities for certain non-Federal 

employees. Actuarial liabilities for Federal employees and veteran benefits are included in Note 15 and are reported 

on another line on the balance sheet. The largest liability in the employee-related liabilities category is the amount 

owed at the end of the fiscal year to Federal employees for wages and benefits (including accrued annual leave). In 

addition, DOE is liable to certain contractors such as the University of California, which operates the Lawrence 

Livermore National Laboratory, for contractor employee pension and postretirement benefits, which is about $31.4 

billion and $30.2 billion as of September 30, 2012, and 2011, respectively. Also, the Government owed about $10.1 

billion and $9.7 billion as of September 30, 2012, and 2011 respectively, for estimated future pension benefits of the 

District of Columbia’s judges, police, firefighters, and teachers. 

International Monetary Liabilities and Gold Certificates 

Consistent with U.S. obligations in the IMF on orderly exchange arrangements and a stable system of 

exchange rates, the Secretary of the Treasury, with the approval of the President, may use the Exchange 

Stabilization Fund to deal in gold, foreign exchange, and other instruments of credit and securities. 

Gold certificates are issued in nondefinitive or book-entry form to the Federal Reserve banks. The 

Government’s liability incurred by issuing the gold certificates, as reported on the Balance Sheet, is limited to the 

gold being held by the Department of the Treasury at the standard value established by law. Upon issuance of gold 

certificates to the Federal Reserve banks, the proceeds from the certificates are deposited into the operating cash of 

the U.S. Government. All of the Department of the Treasury’s certificates issued are payable to the Federal Reserve 

banks. 

Subsidies and Grants 

The Government supports the public good through a wide variety of subsidy and grant programs in such areas 

as agriculture, medical and scientific research, education, and transportation. USDA programs such as the 

Conservation Reserve, Tobacco Transition Payment, and Direct and Counter-Cyclical Payment programs account 

for the majority of the subsidies due, about $8.1 billion, and $8.9 billion as of September 30, 2012, and 2011, 

respectively. 

The Government awards hundreds of billions of dollars in grants annually. These include project grants that are 

competitively awarded for agency-specific projects, such as HHS grants to fund projects to “enhance the 

independence, productivity, integration and inclusion into the community of people with developmental 

disabilities.” Other grants are formula grants, such as matching grants. Formula grants go to State governments for 

such things as education and transportation programs. These grants are paid in accordance with distribution formulas 

that have been provided by law or administrative regulations. Of the total liability reported for grants as of 

September 30, 2012, and 2011, DOT, Education, and HHS collectively owed their grantees about $13.0 billion and 

$15.0 billion, respectively. Refer to the financial statements and footnotes of the respective agencies for additional 

information. 
108 NOTES TO THE FINANCIAL STATEMENTS 

Miscellaneous Liabilities 

Some of the more significant liabilities included in this category are for (1) legal and other contingencies (see 

Note 22—Contingencies), (2) Bonneville Power Administration liability to pay annual budgets of several power 

projects for its electrical generating capacity, and (3) payables due to derivative contracts and the purchases of 

securities. In addition, many Federal agencies reported relatively small amounts of miscellaneous liabilities that are 

not otherwise classified. 

Note 20. Collections and Refunds of Federal Revenue 

Collections of Federal Tax Revenue for the Year Ended September 30, 2012 

 

Federal 

Tax 

Revenue 

Collections

Tax Year to Which Collections Relate 

(In billions of dollars) 2012 2011 2010 

Prior 

Years 

Individual income and tax 

 withholdings ............................ 2,160.0 1,415.4 699.5 20.7 24.4 

Corporation income taxes .......... 281.5 197.3 73.1 0.7 10.4 

Unemployment taxes ................. 66.6 34.8 18.0 13.7 0.1 

Excise taxes ............................... 82.6 62.2 20.2 - 0.2 

Estate and gift taxes .................. 14.5 0.1 6.8 0.2 7.4 

Railroad retirement taxes ........... 4.8 3.6 1.2 - -

Fines, penalties, interest, and 

 other revenue .......................... 6.3 6.1 0.1 0.1 - 

Customs duties .......................... 30.5 30.5 - - -

Subtotal ................................... 2,646.8 1,750.0 818.9 35.4 42.5 

Less: amounts collected for 

non-Federal entities ........... (0.4) 

Total ................................... 2,646.4 

 

Treasury is the Government’s principal revenue-collecting agency. Collections of individual income and tax 

withholdings include FICA/SECA and individual income taxes. These taxes are characterized as non-exchange 

revenue. 

Excise taxes, also characterized as non-exchange revenue, consist of taxes collected for various items, such as 

airline tickets, gasoline products, distilled spirits and imported liquor, tobacco, firearms, and others. 
NOTES TO THE FINANCIAL STATEMENTS 109

Federal Tax Refunds Disbursed for the Year Ended September 30, 2012 

 Tax Year to Which Refunds Relate 

(In billions of dollars) 

Refunds 

Disbursed 2012 2011 2010 

Prior 

Years 

 

Individual income and tax 

 withholdings ............................... 327.7 0.5 293.5 23.7 10.0 

Corporation income taxes ............. 44.0 5.1 10.6 7.4 20.9 

Unemployment taxes .................... 0.1 - 0.1 - -

Excise taxes .................................. 1.5 0.5 0.8 0.1 0.1 

Estate and gift taxes ..................... 0.5 - 0.2 0.1 0.2 

Customs duties ............................. 1.9 1.9 - - -

Total ............................................ 375.7 8.0 305.2 31.3 31.2 

 

Reconciliation of Revenue to Tax Collections for the Year 

Ended September 30, 2012, and 2011 

(In billions of dollars) 2012 2011

Consolidated revenue per the Statements of Operations and 

 Changes in Net Position ..................................................................... 2,518.2 2,363.8 

Tax refunds ............................................................................................ 375.7 417.6 

First-time Homebuyers Tax Credit ......................................................... - (2.2)

Making work pay credit .......................................................................... (0.3) (13.9)

Earned income tax credit and child tax credit imputed revenue ............ (77.0) (78.3)

Other tax credits and accrual adjustments ............................................ (15.8) (13.9)

Federal Reserve earnings ...................................................................... (82.0) (82.5)

Nontax-related fines and penalties reported by agencies ..................... (52.7) (49.5)

Nontax-related earned revenue ............................................................. (19.7) (16.2)

Collections of Federal tax revenue ........................................................ 2,646.4 2,524.9 

Consolidated revenue in the Statements of Operations and Changes in Net Position is presented on a modified 

cash basis, is net of tax refunds, and includes other nontax related revenue. Earned Income Tax Credit and Child Tax 

Credit, Other tax credits amounts (unaudited), Making work pay credit, and First-time Homebuyer Credit are 

included in gross cost in the Statements of Net Cost as a component of Treasury Collections of Federal tax revenue. 

The table above reconciles total revenue to Federal tax collections. 
110 NOTES TO THE FINANCIAL STATEMENTS 

Collections of Federal Tax Revenue for the Year Ended September 30, 2011 

 

Federal 

Tax 

 Revenue 

Collections

Tax Year to Which Collections Relate 

(In billions of dollars) 2011 2010 2009 

Prior 

Years 

 

Individual income and tax 

 withholdings ............................ 2,102.0 1,357.0 703.9 19.0 22.1 

Corporation income taxes .......... 242.8 165.7 62.6 1.9 12.6 

Unemployment taxes ................. 56.2 30.4 14.3 11.4 0.1 

Excise taxes ............................... 75.7 56.3 19.0 0.1 0.3 

Estate and gift taxes .................. 9.1 - 6.4 0.7 2.0 

Railroad retirement taxes ........... 4.7 3.5 1.2 - -

Fines, penalties, interest, and 

 other revenue .......................... 5.4 5.2 0.1 0.1 - 

Customs duties .......................... 29.9 29.9 - - -

Subtotal ................................... 2,525.8 1,648.0 807.5 33.2 37.1 

Less: amounts collected for 

non-Federal entities .............. (0.9) 

Total ................................... 2,524.9 

 

Federal Tax Refunds Disbursed for the Year Ended September 30, 2011 

 Tax Year to Which Refunds Relate 

(In billions of dollars) 

Refunds

Disbursed 2011 2010 2009 

Prior 

Years 

Individual income and tax 

 withholdings ................................ 344.4 1.1 302.8 26.5 14.0 

Corporation income taxes .............. 67.8 6.3 16.6 6.5 38.4 

Unemployment taxes ..................... 0.1 - 0.1 - -

Excise taxes ................................... 2.2 0.8 1.0 0.2 0.2 

Estate and gift taxes ...................... 1.8 - - 0.4 1.4 

Customs duties .............................. 1.3 0.6 0.3 0.1 0.3 

Total ............................................. 417.6 8.8 320.8 33.7 54.3 

 
NOTES TO THE FINANCIAL STATEMENTS 111

Note 21. Prior-Period Adjustments 

 

Prior-Period Adjustments for the Year Ended September 30, 2012, 

and 2011 

 Changes to Net Position 

(In billions of dollars) 2012 2011 

Prior-period adjustments 

Department of Homeland Security .................................... 0.7 - 

 Total prior-period adjustments ..................................... 0.7 - 

 

For fiscal year 2012, DHS applied a change in accounting principles that changed activity previously classified 

as General PP&E to operating materials and supplies. This change by DHS ultimately resulted in an adjustment to 

beginning of the year cumulative results of operations totaling $711.0 million on their Statement of Changes in Net 

Position. Please refer to DHS audited financial statements for detailed information pertaining to their change in 

accounting principles. 

For fiscal years 2012 and 2011, as discussed in Note 1.V—Reclassifications, one fund in each year that was 

previously reported as an earmarked fund was reclassified to non-earmarked funds and was recorded as a prior 

period adjustment. As shown in the Statement of Changes in Net Position, this reclassification had no effect on the 

total net position. 
112 NOTES TO THE FINANCIAL STATEMENTS 

Note 22. Contingencies 

Financial Treatment of Loss Contingencies 

Loss contingencies that are assessed to be at least reasonably possible are disclosed in this note. Loss 

contingencies involve situations where there is an uncertainty of a possible loss. The reporting of loss contingencies 

depends on the likelihood that a future event or events will confirm the loss or impairment of an asset or the 

incurrence of a liability. Terms used to assess the range for the likelihood of loss are probable, reasonably possible, 

and remote. Loss contingencies that are assessed as probable and measurable are accrued in the financial statements. 

Loss contingencies that are assessed as remote are not reported in the financial statements, nor disclosed in the 

notes. All other material loss contingencies are disclosed in this note. The following table provides criteria for how 

Federal agencies are to account for loss contingencies, based on the likelihood of the loss and measurability.1

Likelihood of future 

outflow or other 

sacrifice of 

resources. 

Loss amount can be 

reasonably 

measured. 

Loss range can be 

reasonably measured. 

Loss amount or range 

cannot be reasonably 

measured. 

Probable 

Future confirming 

event(s) are more 

likely to occur than 

not. 2

Accrue the liability. 

Report on Balance 

Sheet and Statement 

of Net Cost. 

Accrue liability of the 

best estimate or 

minimum amount in loss 

range if there is no best 

estimate, and disclose 

nature of contingency 

and range of estimated 

liability. 

Disclose nature of 

contingency and include 

a statement that an 

estimate cannot be 

made. 

Reasonably possible 

Possibility of future 

confirming event(s) 

occurring is more than 

remote and less than 

likely.

Disclose nature of 

contingency and 

estimated loss amount.

Disclose nature of 

contingency and 

estimated loss range. 

Disclose nature of 

contingency and include 

a statement that an 

estimate cannot be 

made. 

Remote 

Possibility of future 

event(s) occurring is 

slight.

No disclosure No disclosure No disclosure 

 

1

 In addition, a third condition must be met to be a loss contingency: a past event or an exchange transaction must occur. 2

 For loss contingencies related to litigation, probable is defined as the future confirming event or events are more likely than not to occur, with the 

exception of pending or threatened litigation and unasserted claims. For the pending or threatened litigation and unasserted claims, the future confirming 

event or events are likely to occur.
NOTES TO THE FINANCIAL STATEMENTS 113

The Government is subject to loss contingencies that include insurance and litigation cases. These loss 

contingencies arise in the normal course of operations and their ultimate disposition is unknown. Based on 

information currently available, however, it is management’s opinion that the expected outcome of these matters, 

individually or in the aggregate, will not have a material adverse effect on the financial statements, except for the 

insurance and litigation described in the following sections: 

Insurance Contingencies 

At the time an insurance policy is issued, a contingency arises. The contingency is the risk of loss assumed by 

the insurer, that is, the risk of loss from events that may occur during the term of the policy. The Government has 

insurance contingencies that are reasonably possible in the amount of $329.0 billion as of September 30, 2012, and 

$267.0 billion as of September 30, 2011. The major programs are identified below: 

 PBGC reported $321.8 billion and $250.2 billion as of September 30, 2012, and 2011, respectively, for the 

estimated aggregate unfunded vested benefits exposure to the PBGC for private-sector single-employer 

and multiemployer defined benefit pension plans that are classified as a reasonably possible exposure to 

loss. 

 FDIC reported $6.9 billion and $16.5 billion as of September 30, 2012, and 2011, respectively, for 

identified additional risk in the financial services industry that could result in additional loss to the Deposit 

Insurance Fund should potentially vulnerable insured institutions ultimately fail. Actual losses, if any, will 

largely depend on future economic and market conditions. 

Deposit Insurance 

Deposit insurance covers all types of deposit accounts such as checking, NOW and savings accounts, money 

market deposit accounts, and certificates of deposit received at an insured bank, savings association, or credit union. 

The insurance covers the balance of each depositor’s account and shares, dollar-for-dollar, up to the insurance limit, 

including principal and any accrued interest through the date of the insured financial institution’s closing. As a 

result, the Government has the following exposure from Federally-insured financial institutions: 

 FDIC has estimated insured deposits of $7,250.7 billion as of September 30, 2012, and $6,777.0 billion as 

of September 30, 2011, for the Deposit Insurance Fund.

 National Credit Union Administration (NCUA) has estimated insured shares of $834.3 billion as of 

September 30, 2012, and $782.4 billion as of September 30, 2011, for the National Credit Union Share 

Insurance Fund. 
114 NOTES TO THE FINANCIAL STATEMENTS 

Legal Contingencies 

Legal contingencies as of September 30, 2012, and 2011, are summarized in the table below: 

2012 2011

 Estimated Range of Loss

for Certain Cases 2

Estimated Range of Loss

for Certain Cases 2

(In billions of dollars) 

Accrued 

Liabilities 1 Lower End Upper End

Accrued 

Liabilities 1 Lower End Upper End

 

Legal contingencies 

Probable .............. 9.9 9.9 11.1 9.2 9.0 9.7 

Reasonably 

possible ............ 12.8 15.2 12.4 14.6 

 1

 Accrued liabilities are recorded and presented in the related line items of the balance sheet. 2

 Does not reflect the total range of loss; many cases assessed as reasonably possible of an unfavorable outcome did not include

estimated losses that could be determined. 

The Government is party to various administrative claims and legal actions brought against it, some of which 

may ultimately result in settlements or decisions against the Government. 

Management and legal counsel have determined that it is “probable” that some of these actions will result in a 

loss to the Government and the loss amounts are reasonably measurable. The estimated liabilities for these cases are 

$9.9 billion and $9.2 billion as of September 30, 2012, and 2011, respectively, and are included in “Other 

Liabilities” on the Balance Sheet. For example, DOI is subject to various claims and contingencies related to 

lawsuits. For cases in which payment has been deemed probable and for which the amount of potential liability has 

been estimated, about $4.4 billion and $4.7 billion has been accrued in the financial statements as of September 30, 

2012, and 2011, respectively. The Cobell vs. Salazar lawsuit was brought against DOI and Treasury on behalf of 

490,000 individual Indian trust beneficiaries for an historical accounting of their trust accounts and reform of trust 

management systems. On December 7, 2009, the parties announced that a $3.4 billion settlement had been reached. 

On December 8, 2010, the President signed into law H.R. 4783, the Claims Resolution Act of 2010, which 

authorized and funded the settlement. The Government made the two payments provided for in the settlement 

agreement in November 2012—approximately $1.5 billion to an account at a financial institution approved by the 

court, to be further distributed to class members by plaintiff’s claim administrator and a $1.9 billion payment to a 

Treasury account to be used by the Department of the Interior to purchase highly fractioned interests in Indian trust 

lands. Additional settlements were reached with 41 tribes totaling more than $1.0 billion, all of which were paid in 

late fiscal year 2012. 

There are also administrative claims and legal actions pending where adverse decisions are considered by 

management and legal counsel as “reasonably possible” with an estimate of potential loss or a range of potential 

loss. The estimated potential losses for such claims and actions range from $12.8 billion to $15.2 billion as of 

September 30, 2012, and from $12.4 billion to $14.6 billion as of September 30, 2011. 
NOTES TO THE FINANCIAL STATEMENTS 115

Numerous litigation cases are pending where the outcome is uncertain or it is reasonably possible that a loss 

has been incurred and where estimates cannot be made. There are other litigation cases where the plaintiffs have not 

made claims for specific dollar amounts, but the claimed amounts may be significant. The ultimate resolution of 

these legal actions for which the potential loss could not be determined may materially affect the U.S. Government’s 

financial position or operating results. Examples of specific cases are summarized below: 

 Tribal Trust Fund Cases - Numerous cases have been filed in U.S. District Court in which Native American 

Tribes seek a declaration that the United States has not provided the tribes with a full and complete accounting 

of their trust funds, and seek an order requiring the Government to provide such an accounting. It is not possible 

at this time to determine the likelihood of an unfavorable outcome or an estimate of the amount or range of any 

potential loss. 

 Various parties filed administrative claims and lawsuits against the U.S. Army Corps of Engineers as a 

result of Hurricane Katrina in 2005. Most of the Hurricane Katrina tort actions that have been filed are 

consolidated before a single judge sitting in the Eastern District of Louisiana. The court has classified the 

individual cases that have been consolidated into seven categories: Levee, MRGO, Insurance, Responder, 

Dredging Limitations, St. Rita Nursing Home, and Barge. Approximately 565,000 administrative claims 

related to the allegations in this consolidated action have been filed. 

Environmental and Disposal Contingencies 

Environmental and disposal contingencies as of September 30, 2012, and 2011, are summarized in the table 

below: 

 2012 2011

 

Estimated Range of Loss

for Certain Cases 2

Estimated Range of Loss

for Certain Cases 2

(In billions of dollars) 

Accrued 

Liabilities 1 Lower End Upper End

Accrued 

Liabilities 1 Lower End Upper End

 

 Environmental and 

 disposal contingencies

 

Probable ......................... 20.7 20.7 21.0 20.0 20.0 20.2 

Reasonably possible ...... 0.6 0.6 0.2 0.2 

 1

 Accrued liabilities are recorded and presented in the related line items of the Balance Sheet. 

2

 Does not reflect the total range of loss; many cases assessed as reasonably possible of an unfavorable outcome did not include

estimated losses that could be determined. 

The Government is subject to loss contingencies for a variety of environmental cleanup costs for the storage 

and disposal of hazardous material and the operations and closures of facilities at which environmental 

contamination may be present. 

Management and legal counsel have determined that it is “probable” that some of these actions will result in a 

loss to the Government and the loss amounts are reasonably measurable. The estimated liabilities for these cases are 

$20.7 billion and $20.0 billion as of September 30, 2012, and 2011, respectively, and are included in “Other 

Liabilities” on the Balance Sheet. DOE is also subject to Spent Nuclear Fuel litigation for damages suffered by all 

utilities as a result of the delay in beginning disposal of spent nuclear fuel and also damages for alleged exposures to 

radioactive and/or toxic substances. Significant claims for partial breach of contract and a large number of class 

action and/or multiple plaintiff tort suits have been filed with estimated liability amounts of $19.7 billion and $19.1 

billion as of September 30, 2012, and 2011, respectively. 
116 NOTES TO THE FINANCIAL STATEMENTS 

Other Contingencies 

DOT and HHS reported the following other contingencies: 

 The Federal Highway Administration (FHWA) reimburses states for construction costs on projects related 

to the Federal Highway System of roads. FHWA has pre-authorized $44.3 billion and $41.4 billion to the 

states to establish budgets for its construction projects for fiscal years ending September 30, 2012, and 

2011, respectively. Congress has not provided appropriations for these projects and no liability is accrued 

in the consolidated financial statements. 

 Contingent liabilities have been accrued as a result of Medicaid audit and program disallowances that are 

currently being appealed by the States. The Medicaid amounts are $3.9 billion and $3.0 billion for fiscal 

years ending September 30, 2012, and 2011, respectively. 

Treaties 

The U.S. Government is a party to major treaties and other international agreements. These treaties and other 

international agreements address various issues including, but not limited to, trade, commerce, security, and arms 

that may involve financial obligations or give rise to possible exposure to losses. A comprehensive analysis to 

determine any such financial obligations or possible exposure to loss and their related effect on the consolidated 

financial statements of the U.S. Government has not yet been performed. 
NOTES TO THE FINANCIAL STATEMENTS 117

Note 23. Commitments 

 

Long-Term Operating Leases as of September 30, 2012, and 2011 

(In billions of dollars) 2012 2011 

 

General Services Administration .................... 29.5 26.7 

U.S. Postal Service ........................................ 7.0 7.3 

Department of State ....................................... 1.6 1.4 

Department of Defense .................................. 1.6 1.2 

Department of Health and Human Services .. 1.2 1.5 

Department of Agriculture .............................. 0.8 0.8 

Department of the Treasury ........................... 0.7 0.7 

Other operating leases ................................... 4.1 4.3 

Total long-term operating leases ................. 46.5 43.9 

The Government has entered into contractual commitments that require future use of financial resources. It has 

significant amounts of long-term lease obligations and undelivered orders. Undelivered orders represent the value of 

goods and services ordered that have not yet been received. 

The Government has other commitments that may require future use of financial resources. For example, the 

Government has callable subscriptions in certain Multilateral Development Banks (MDBs), which are international 

financial institutions that finance economic and social development projects in developing countries. Callable capital 

stock shares in the MDBs serve as a supplemental pool of resources that may be called, and converted into ordinary 

paid in shares, if the MDB cannot otherwise meet certain obligations through its other available resources. MDBs 

are able to use callable capital as backing to obtain very favorable financing terms when borrowing from world 

capital markets. To date, there has never been a call on this capital for any of the major MDBs and none is 

anticipated. 
118 NOTES TO THE FINANCIAL STATEMENTS 

Undelivered Orders and Other Commitments as of September 30, 2012, 

and 2011 

(In billions of dollars) 2012 2011 

Undelivered Orders: 

 Department of Education ......................................... 230.8 229.2 

 Department of Defense ........................................... 211.7 315.9 

 Department of the Treasury .................................... 186.9 207.1 

 EOP Foreign Military Sales Program ...................... 163.5 121.4 

 Department of Transportation ................................. 104.0 104.7 

 Department of Health and Human Services ............ 91.8 90.3 

 Department of Housing and Urban Development ... 49.7 56.9 

 Department of Agriculture ....................................... 49.1 51.7 

 Department of Homeland Security .......................... 33.3 36.3 

 Department of Energy ............................................. 29.1 45.7 

 Department of State ................................................ 20.8 20.9 

 Export-Import Bank of the United States ................. 17.3 9.7 

Agency for International Development .................... 16.3 15.6 

 National Science Foundation .................................. 11.4 11.6 

 Department of Labor ............................................... 9.9 9.6 

 Department of Veterans Affairs ............................... 9.7 8.7 

All other agencies ...................................................... 57.3 64.6 

Total undelivered orders: ........................................ 1,292.6 1,399.9 

 

Other Commitments: 

Senior GSE Preferred Stock Purchase Agreement .. 273.2 -

Callable capital subscriptions for multilateral 

development banks ................................................. 82.3 72.0 

Fuel purchase obligations ......................................... 7.1 8.5 

Agriculture direct loans and guarantees.................... 6.0 5.9 

Power purchase obligations......................................... 4.3 5.1 

Long-term satellite and systems ................................ 4.2 3.2 

Conservation Reserve Program ................................ 1.8 1.8 

All other commitments ............................................... 5.7 6.8 

Total other commitments ........................................ 384.6 103.3 
NOTES TO THE FINANCIAL STATEMENTS 119

Other Commitments and Risks 

Commitments to GSE 

The SPSPA agreements between Treasury and each GSE, which have no expiration date, provide for Treasury 

to disburse funds to the GSEs if, at the end of any quarter, the FHFA determines that the liabilities exceed its assets. 

At September 30, 2012, Treasury recorded a contingent liability of $9.0 billion with a projected maximum 

remaining potential commitment to the GSEs of $282.3 billion. The recorded contingent liability of $316.2 billion at 

September 30, 2011, constituted the maximum commitment payable at the end of that year. Therefore, the SPSPA 

commitments are $273.2 billion and $0.0 billion as of September 30, 2012, and 2011, respectively. Such accruals are 

adjusted as new information develops or circumstances change. Refer to Note 11—Investments in and Liabilities to 

Government-Sponsored Enterprises for a full description of the SPSPA agreements and related contingent liability. 

Terrorism Risk Insurance Program 

The U. S. Government has entered into agreements that could potentially require claims on Government 

resources in the future. For example, The Terrorism Risk Insurance Act of 2002 (TRIA or the Act) was signed into 

law on November 26, 2002. This law was enacted to address market disruptions resulting from terrorist attacks on 

September 11, 2001. On December 26, 2007, the Terrorism Risk Insurance Program Reauthorization Act of 2007 

(Reauthorization Act) was enacted extending the Program through December 31, 2014. The Act helps to ensure 

available and affordable commercial property and casualty insurance for terrorism risk, and simultaneously allows 

private markets to stabilize. The Terrorism Risk Insurance Program is activated upon the certification of an “act of 

terrorism” by the Secretary of the Treasury in concurrence with the Secretary of State and the Attorney General. If a 

certified act of terrorism occurs, insurers may be eligible to receive reimbursement from the Government for insured 

losses above a designated deductible amount. Insured losses above this amount will be shared between insurance 

companies and the Government. The Act also gives Treasury authority to recoup Federal payments made under the 

Program through policyholder surcharges under certain circumstances and contains provisions designed to manage 

litigation arising from or relating to a certified act of terrorism. There were no claims under TRIA as of September 

30, 2012, or September 30, 2011. 
120 NOTES TO THE FINANCIAL STATEMENTS 

Note 24. Earmarked Funds 

Earmarked Funds as of September 30, 2012 1

(In billions of dollars) 

Federal Old-Age 

and Survivors 

Insurance Trust 

Fund 

Military 

Retirement 

Fund 

Civil Service 

Retirement 

and Disability 

Fund 

MedicareEligible 

Retiree Health 

Care Fund 

(MERHCF) 

Federal

Hospital 

Insurance 

Trust Fund 

(Medicare 

Part A) 

Civil Service 

Health 

Benefits 

Program Trust 

Funds 

Assets: 

Cash and other monetary 

assets ....................................... - - - - - -

Fund balance with Treasury ........ (0.5) - - 0.2 1.5 1.2 

Investments in U.S. Treasury 

securities, net of unamortized 

premiums/discounts ................. 2,586.7 424.2 826.6 201.4 228.3 66.8 

Other Federal assets ................... 25.0 3.7 9.1 2.0 27.5 12.3 

Non-Federal assets ..................... 2.0 0.1 0.2 1.0 1.5 0.9

Total assets .............................. 2,613.2 428.0 835.9 204.6 258.8 81.2 

Liabilities: 

Liabilities due and payable to 

beneficiaries ............................. 56.9 4.0 5.9 0.6 20.2 4.4 

Other Federal liabilities................ 4.7 0.1 0.1 0.1 25.7 0.3 

Other non-Federal liabilities ........ - 1,477.9 1,679.0 533.3 0.6 316.5 

Total liabilities ........................... 61.6 1,482.0 1,685.0 534.0 46.5 321.2 

Total net position ...................... 2,551.6 (1,054.0) (849.1) (329.4) 212.3 (240.0)

Total liabilities and net 

position ............................... 2,613.2 428.0 835.9 204.6 258.8 81.2 

Change in net position: 

Beginning net position ................. 2,462.1 (989.1) (724.2) (346.3) 226.8 (267.8)

Prior-period adjustment ............... - - - - - -

Beginning net position, adjusted .... 2,462.1 (989.1) (724.2) (346.3) 226.8 (267.8)

Investment revenue ..................... 104.0 12.5 34.0 6.3 10.9 1.9 

Individual income taxes ............... 500.1 - - - 204.8 -

Unemployment and excise taxes ... - - - - - -

Other taxes and receipts ............. 0.1 - - - 0.6 -

Miscellaneous earned revenues .... - - - - - -

Other changes in fund 

balance (e.g., appropriations, 

transfers) .................................. 116.7 92.0 33.0 17.9 19.7 10.7 

Non-program expenses ............... - - - - - -

Program net cost ......................... 631.4 169.4 191.9 7.3 250.5 (15.2)

Ending net position ................... 2,551.6 (1,054.0) (849.1) (329.4) 212.3 (240.0)

1

 By law, certain expenses (costs), revenues, and other financing sources related to the administration of the above funds are not charged to the funds 

and are therefore financed and/or credited to other sources.
NOTES TO THE FINANCIAL STATEMENTS 121

Earmarked Funds as of September 30, 2012 1

(In billions of dollars) 

Federal 

Disability 

Insurance 

Trust Fund 

Federal 

Supplementary 

Medical 

Insurance Trust 

Fund (Medicare 

Parts B and D) 

 Exchange 

Stabilization 

Fund 

All Other 

Earmarked 

Funds 

IntraEarmarked 

Fund 

Eliminations 

Total 

Earmarked 

Funds 

Assets: 

Cash and other monetary 

assets ............................... - - 65.8 0.4 - 66.2 

Fund balance with Treasury .. (0.5) 21.8 - 102.2 - 125.9 

Investments in U.S. 

Treasury securities, net 

of unamortized 

premiums/discounts .......... 132.3 69.3 22.7 198.1 - 4,756.4 

Other Federal assets ........... 1.6 30.8 0.1 23.5 (60.8) 74.8 

Non-Federal assets ............. 3.8 7.8 15.3 97.1 - 129.7 

Total assets ...................... 137.2 129.7 103.9 421.3 (60.8) 5,153.0 

Liabilities: 

Liabilities due and payable 

to beneficiaries ................. 24.6 26.2 - 4.2 - 147.0 

Other Federal liabilities ........ 1.3 31.4 - 87.1 (60.8) 90.0 

Other non-Federal liabilities ... - 2.0 59.7 181.7 - 4,250.7 

Total liabilities ................... 25.9 59.6 59.7 273.0 (60.8) 4,487.7 

Total net position .............. 111.3 70.1 44.2 148.3 - 665.3 

Total liabilities and net 

position ....................... 137.2 129.7 103.9 421.3 (60.8) 5,153.0 

Change in net position: 

Beginning net position ......... 141.9 66.4 44.8 133.6 - 748.2 

Prior-period adjustment ....... - - - (0.6) - (0.6) 

Beginning net position, 

adjusted ............................ 141.9 66.4 44.8 133.0 - 747.6 

Investment revenue ............. 6.8 2.9 - 6.0 - 185.3 

Individual income taxes ....... 85.0 - - - - 789.9 

Unemployment and excise 

taxes ................................. - - - 123.0 - 123.0 

Other taxes and receipts ..... - 2.8 - 28.2 (0.8) 30.9 

Miscellaneous earned 

revenues ........................... - - - 6.2 - 6.2 

Other changes in fund 

balance (e.g., 

appropriations, transfers) .. 13.3 225.2 - 48.0 - 576.5 

Non-program expenses ....... - - - 5.1 - 5.1 

Program net cost ................ 135.7 227.2 0.6 191.0 (0.8) 1,789.0 

Ending net position ........... 111.3 70.1 44.2 148.3 - 665.3 

1 By law, certain expenses (costs), revenues, and other financing sources related to the administration of the above funds are not charged to the funds 

and are therefore financed and/or credited to other sources. 
122 NOTES TO THE FINANCIAL STATEMENTS 

Earmarked Funds as of September 30, 2011 1

(In billions of dollars) 

Federal 

Old-Age and 

Survivors 

Insurance

 Trust Fund 

Military 

Retirement 

Fund 

Civil Service 

Retirement

and 

 Disability 

Fund 

MedicareEligible 

 Retiree 

Health 

Care Fund 

 (MERHCF) 

Federal

Hospital 

Insurance

Trust Fund 

(Medicare

Part A) 

Civil Service 

Health 

 Benefits 

Program 

 Trust Funds

Assets:

Cash and other monetary assets ......... - - - - - -

Fund balance with Treasury ................. (0.6) 0.4 - 0.2 0.4 1.3 

Investments in U.S. Treasury 

Securities, net of unamortized 

premiums/discounts .......................... 2,492.5 368.2 803.8 185.9 245.9 62.9 

Other Federal assets ............................ 26.2 3.6 10.7 1.9 37.0 1.1 

Non-Federal assets .............................. 1.9 - 0.3 0.5 6.3 1.0

Total assets ............................................. 2,520.0 372.2 814.8 188.5 289.6 66.3 

Liabilities and net position: 

Liabilities due and payable to 

beneficiaries ...................................... 53.2 0.3 5.5 0.7 28.6 4.3 

Other Federal liabilities......................... 4.7 - 0.1 0.1 33.9 0.3 

Other non-Federal liabilities ................. - 1,361.0 1,533.4 534.0 0.3 329.5 

Total liabilities .................................... 57.9 1,361.3 1,539.0 534.8 62.8 334.1 

Total net position ............................... 2,462.1 (989.1) (724.2) (346.3) 226.8 (267.8)

Total liabilities and net position ............... 2,520.0 372.2 814.8 188.5 289.6 66.3 

Change in net position: 

Beginning net position .......................... 2,370.7 (941.0) (765.6) (406.9) 261.8 (284.3) 

Prior-period adjustment ........................ - - - - - - 

Beginning net position, adjusted ............. 2,370.7 (941.0) (765.6) (406.9) 261.8 (284.3) 

Investment revenue .............................. 106.9 18.0 35.4 9.2 12.4 1.9 

Individual income taxes ........................ 496.5 - - - 192.1 - 

Unemployment and excise taxes ......... - - - - - - 

Other taxes and receipts ...................... - - - - 0.6 - 

Miscellaneous earned revenue ............ - - - - - - 

Other changes in fund balance (e.g., 

appropriations, transfers) .................. 81.7 87.3 31.3 21.1 16.2 10.3 

Non-program expenses ........................ - - - - - -

Program net cost .................................. 593.7 153.4 25.3 (30.3) 256.3 (4.3) 

Ending net position ............................ 2,462.1 (989.1) (724.2) (346.3) 226.8 (267.8)

1

 By law, certain expenses (costs), revenues, and other financing sources related to the administration of the above funds are not charged to the 

funds and are therefore financed and/or credited to other sources.
NOTES TO THE FINANCIAL STATEMENTS 123

Earmarked Funds as of September 30, 2011 1

(In billions of dollars) 

Federal 

Disability 

Insurance 

Trust Fund 

 Federal 

Supplementary 

Medical 

Insurance Trust 

Fund (Medicare 

Parts B and D) 

Exchange 

Stabilization 

Fund 

All Other 

Earmarked 

Funds 

IntraEarmarked 

Fund 

Eliminations 

Total 

Earmarked 

Funds 

Assets: 

Cash and other monetary 

assets ............................... - - 66.7 0.4 - 67.1 

Fund balance with 

Treasury ............................. (0.4) 5.7 - 103.6 - 110.6 

Investments in U.S. 

Treasury Securities, net 

of unamortized 

premiums/discounts .......... 162.0 70.4 22.7 193.4 - 4,607.7 

Other Federal assets ........... 1.8 29.3 0.1 23.0 (67.9) 66.8 

Non-Federal assets ............. 3.8 17.5 15.7 88.2 - 135.2 

Total assets ...................... 167.2 122.9 105.2 408.6 (67.9) 4,987.4 

Liabilities and net position: 

Liabilities due and payable 

to beneficiaries ................. 24.2 25.7 - 5.2 - 147.7 

Other Federal liabilities ........ 1.1 30.4 - 96.7 (67.9) 99.4 

Other non-Federal liabilities ... - 0.4 60.4 173.1 - 3,992.1 

Total liabilities ................... 25.3 56.5 60.4 275.0 (67.9) 4,239.2 

Total net position .............. 141.9 66.4 44.8 133.6 - 748.2 

Total liabilities and net 

position ....................... 167.2 122.9 105.2 408.6 (67.9) 4,987.4 

Change in net position: 

Beginning net position ......... 166.7 53.5 43.8 148.2 - 646.9 

Prior-period adjustment ......... - - - 2.0 - 2.0 

Beginning net position, 

adjusted ............................ 166.7 53.5 43.8 150.2 - 648.9 

Investment revenue ............. 8.2 3.2 - 6.8 - 202.0 

Individual income taxes ....... 84.3 - - - - 772.9 

Unemployment and excise 

taxes ................................. - - - 108.3 - 108.3 

Other taxes and receipts ..... - 1.9 - 19.1 (0.7) 20.9 

Miscellaneous earned 

revenue ............................. - - - 4.9 - 4.9 

Other changes in fund 

balance (e.g., 

appropriations, transfers) .. 10.3 225.6 - 56.7 - 540.5 

Non-program expenses ....... - - - 4.8 - 4.8 

Program net cost ................. 127.6 217.8 (1.0) 207.6 (0.7) 1,545.4 

Ending net position ........... 141.9 66.4 44.8 133.6 - 748.2 

1 By law, certain expenses (costs), revenues, and other financing sources related to the administration of the above funds are not charged to the funds 

and are therefore financed and/or credited to other sources. 
124 NOTES TO THE FINANCIAL STATEMENTS 

Earmarked funds are financed by specifically identified revenues, often supplemented by other financing 

sources, which remain available over time. These specifically identified revenues and other financing sources are 

required by statute to be used for designated activities, benefits, or purposes and must be accounted for separately 

from the Government’s general revenues. Earmarked funds generally include trust funds, public enterprise revolving 

funds (not including credit reform financing funds), and special funds. 

In the Federal budget, the term “trust fund” means only that the law requires a particular fund be accounted for 

separately, used only for a specified purpose, and designated as a trust fund. A change in law may change the future 

receipts and the terms under which the fund’s resources are spent. In the private sector, trust fund refers to funds of 

one party held and managed by a second party (the trustee) in a fiduciary capacity. The activity of earmarked funds 

differs from fiduciary activities primarily in that earmarked fund assets are Government-owned. 

Public enterprise revolving funds include expenditure accounts authorized by law to be credited with offsetting 

collections, mostly from the public, that are generated by and earmarked to finance a continuing cycle of businesstype operations. Some of the financing for these funds may be from appropriations. 

Special funds are Federal funds earmarked by law for a specific purpose. Special funds include the special fund 

receipt account and the special fund expenditure account. 

The tables above depict major earmarked funds chosen based on their significant financial activity and 

importance to taxpayers. All other Government earmarked funds not shown separately are aggregated as “all other.” 

Total assets represent the unexpended balance from all sources of receipts and amounts due to the earmarked 

funds, regardless of source, including related Governmental transactions. These are transactions between two 

different entities within the Government (for example, monies received by one entity of the Government from 

another entity of the Government). 

The intragovernmental assets are comprised of fund balances with Treasury, investments in Treasury 

securities—including unamortized amounts, and other assets that include the related accrued interest receivable on 

Federal investments. These amounts were eliminated in preparing the principal financial statements. 

The non-Federal assets represent only the activity with individuals and organizations outside of the 

Government. 

Most of the earmarked fund assets are invested in intragovernmental debt holdings. The Government does not 

set aside assets to pay future benefits or other expenditures associated with earmarked funds. The cash receipts 

collected from the public for an earmarked fund are deposited in the U.S. Treasury, which uses the cash for general 

Government purposes. Treasury securities are issued to Federal agencies as evidence of its receipts. Treasury 

securities are an asset to the Federal agencies and a liability to the U.S. Treasury and, therefore, they do not 

represent an asset or a liability in the FR. These securities require redemption if a fund’s disbursements exceeds its 

receipts. Redeeming these securities will increase the Government’s financing needs and require more borrowing 

from the public (or less repayment of debt), or will result in higher taxes than otherwise would have been needed, or 

less spending on other programs than otherwise would have occurred, or some combination thereof. See Note 14—

Federal Debt Securities Held by the Public and Accrued Interest for further information related to the investments in 

Federal debt securities. 

Depicted below is a description of the major earmarked funds shown in the above tables, which also 

includes the names of the Government agencies that administer each particular fund. For detailed information 

regarding these earmarked funds, please refer to the financial statements of the corresponding administering 

agencies. For information on the benefits due and payable liability associated with certain earmarked funds, see 

Note 17—Benefits Due and Payable. 

Federal Old-Age and Survivors Insurance Trust Fund 

The Federal Old-Age and Survivors Insurance Trust Fund, administered by the SSA, provides a basic annuity 

to workers to protect them from loss of income at retirement and provide a guaranteed income to survivors in the 

event of the death of a family’s primary wage earner. 

Payroll and self-employment taxes primarily fund the Federal Old-Age and Survivors Insurance Trust Fund. 

Interest earnings on Treasury securities, Federal agencies’ payments for the Social Security benefits earned by military 

and Federal civilian employees, and Treasury payments for a portion of income taxes collected on Social Security 

benefits provide the fund with additional income. The law establishing the Federal Old-Age and Survivors Insurance 

Trust Fund and authorizing the depositing of amounts to the credit of the trust fund is set forth in 42 U.S.C. § 401. 
NOTES TO THE FINANCIAL STATEMENTS 125

Military Retirement Fund 

The Military Retirement Fund, administered by DOD, provides retirement benefits for Army, Navy, Marine 

Corps, and Air Force personnel and their survivors. The fund is financed by DOD contributions, appropriations, and 

interest earnings on Treasury securities. The laws establishing the Military Retirement Fund and authorizing the 

depositing of amounts to the credit of the trust fund are set forth in 10 U.S.C. § 1461-1467. 

Civil Service Retirement and Disability Fund 

The CSRDF covers two Federal civilian retirement systems: the CSRS—for employees hired before 1984, and 

the FERS—for employees hired after 1983. OPM administers the CSRS and the FERS systems. The laws 

establishing the CSRDF and authorizing the depositing of amounts to the credit of the trust fund are set forth in 5 

U.S.C. §§ 8331-8348. Funding sources include: 

 Federal civilian employees’ contributions. 

 Agencies’ contributions on behalf of employees. 

 Appropriations. 

 Interest earnings on Treasury securities. 

Medicare-Eligible Retiree Health Care Fund 

The Department of Defense Medicare-Eligible Retiree Health Care Fund, administered by the Secretary of the 

Treasury and established by 10 U.S.C. § 1111, finances and pays the liabilities under the DOD retiree health care 

programs for military retirees, their dependents and survivors who are Medicare-Eligible. Such beneficiaries include 

qualifying members, former members, and dependents of the Uniformed Services. The assets of the fund are 

comprised of any amounts appropriated to the trust fund, payments to the fund authorized by 10 U.S.C. § 1116, and 

interest earned on investments authorized by 10 U.S.C. § 1117. 

Federal Hospital Insurance Trust Fund 

(Medicare Part A) 

The Federal Hospital Insurance Trust Fund, administered by HHS, finances the Hospital Insurance Program 

(Medicare Part A). This program funds the cost of inpatient hospital and related care for individuals age 65 or older 

who meet certain insured status requirements, and eligible disabled people. 

The Federal Hospital Insurance Trust Fund is financed primarily by payroll taxes, including those paid by 

Federal agencies. It also receives income from interest earnings on Treasury securities and a portion of income taxes 

collected on Social Security benefits. The law establishing the Federal Hospital Insurance Trust Fund and 

authorizing the depositing of amounts to the credit of the trust fund is set forth in 42 U.S.C. § 1395i. 

Civil Service Health Benefits Program Trust Funds 

The Civil Service Health Benefits Program (HBP) provides health benefits to Federal employees and 

dependents as well as to Federal retirees, including USPS retirees, and survivor annuitants. The program is primarily 

operated through three revolving trust funds. The HBP administers a wide variety of health and wellness plans 

including Fee-For-Service and HMO plans. Retired employees can choose to continue coverage upon separation 

from the Government. OPM administers the HBP.
126 NOTES TO THE FINANCIAL STATEMENTS 

The law establishing the first HBP trust fund, the FEHB Fund, and authorizing the depositing of amounts to the 

credit of the trust fund is set forth in 5 U.S.C. § 8909. The FEHB fund is funded on a “pay-as-you-go” basis and 

funding sources include: 

 Federal civilian employees’ contributions. 

 Agencies’ contributions on behalf of employees. 

 Appropriations (for “employer” share related to retirement program annuitants). 

 Interest earnings on Treasury securities. 

The Postal Accountability and Enhancement (Postal Act of 2006) (Public Law No 109-435, Title VIII), made 

significant changes in the funding of future retiree health benefits for employees of the USPS, including the 

requirement for the USPS to make scheduled payments to the third HBP trust fund, the Postal Service Retiree Health 

Benefits (PSRHB) Fund. 

The laws establishing the PSRHB Fund and authorizing the depositing of amounts to the credit of the trust 

fund are set forth in 5 U.S.C. § 8909a. Public Law 109-435 requires the USPS to make scheduled payment 

contributions to the PSRHB Fund ranging from $5.4 billion to $5.8 billion per year from fiscal year 2007 through 

fiscal year 2016. (The fiscal year 2009 payment was subsequently reduced to $1.4 billion.) Thereafter, the USPS 

will make annual payments in the amount of the normal cost payment. The PSRHB Fund is also funded by 

interest earnings on Treasury securities. However, because of fiscal year 2012 Continuing Resolutions enacted by 

Congress, including P.L. 112-74, the USPS had no payment due on September 30, 2011. There were two 

payments due in fiscal year 2012, one for $5.5 billion due by August 1, 2012, and a second payment of $5.6 

billion due by September 30, 2012, a total of $11.1 billion. As of September 30, 2012, USPS has defaulted on 

both payments and OPM has recorded receivables for the total amount of $11.1 billion. At this time, Congress 

has not taken further action on these payments due to the PSRHB from USPS. 

Federal Disability Insurance Trust Fund 

The Federal Disability Insurance Trust Fund provides financial assistance and protection against the loss of 

earnings due to a wage earner’s disability. The SSA administers this trust fund. 

Like the Federal Old-Age and Survivors Insurance Trust Fund, payroll taxes primarily fund the Federal 

Disability Insurance Trust Fund. The fund also receives income from interest earnings on Treasury securities, 

Federal agencies’ payments for the Social Security benefits earned by military and Federal civilian employees, and a 

portion of income taxes collected on Social Security benefits. The law establishing the Federal Disability Insurance 

Trust Fund and authorizing the depositing of amounts to the credit of the trust fund is set forth in 42 U.S.C. § 401. 

Federal Supplementary Medical Insurance Trust Fund 

(Medicare Parts B and D) 

The Federal Supplementary Medical Insurance Trust Fund, administered by HHS, finances the Supplementary 

Medical Insurance Program (Medicare Part B) and the Medicare Prescription Drug Benefit Program (Medicare Part 

D). These programs provide supplementary medical insurance for enrolled eligible participants to cover physician 

and outpatient services not covered by Medicare Part A and to obtain qualified prescription drug coverage, 

respectively. Medicare Part B financing is not based on payroll taxes; it is primarily based on monthly premiums, 

income from the General Fund of the Treasury, and interest earnings on Treasury securities. The law establishing the 

Federal Supplementary Medical Insurance Trust Fund and authorizing the depositing of amounts to the credit of the 

trust fund is set forth in 42 U.S.C. § 1395t. 

Medicare Part D was created by the Medicare Prescription Drug, Improvement, and Modernization Act of 

2003 (Public Law No. 108-173). Medicare Part D financing is similar to Part B; it is primarily based on monthly 

premiums and income from the General Fund of the Treasury, not on payroll taxes. It also receives transfers from 

States. The law creating the Medicare prescription drug account within the Federal Supplementary Medical 

Insurance Trust Fund and authorizing the depositing of amounts to the credit of the trust fund is set forth in 42 

U.S.C. § 1395w-116. 
NOTES TO THE FINANCIAL STATEMENTS 127

Exchange Stabilization Fund (ESF) 

The Exchange Stabilization Fund may be used by the Secretary of Treasury to purchase or sell currencies, to hold 

U.S. foreign exchange and SDR assets, and to provide financing to foreign governments. Appropriations, U.S. SDR 

assets in the International Monetary Fund, investments in Treasury securities, and investments in Foreign Currency 

Denominated assets are the sources of revenues or financing sources to the ESF. The law establishing the ESF account 

and authorizing the use of its funds is section 10 of the Gold Reserve Act of 1934, as amended (31 U.S.C. § 5302). 

All Other Earmarked Funds 

The Government is responsible for the management of numerous earmarked funds that serve a wide variety of 

purposes. The earmarked funds presented on an individual basis in the preceding `table represent the majority of the 

Government’s net position attributable to earmarked funds. All other earmarked activity is aggregated in accordance 

with SFFAS No. 27. For the years ending September 30, 2012, and 2011, there were approximately 623 and 630 

earmarked funds, respectively. The earmarked funds within the “all other” aggregate, along with the agencies that 

administer them, include the following: 

 Unemployment Trust Fund (UTF) and Black Lung Disability Trust Fund (BLDTF)—administered by 

DOL. 

 Railroad Retirement Trust Fund—administered by RRB. 

 National Flood Insurance Program—administered by DHS. 

 Land and Water Conservation Fund, Reclamation Fund, Water and Related Resources Fund, and Lower 

Colorado River Basin Fund—administered by DOI. 

 Highway Trust Fund and Airport and Airway Trust Fund—administered by DOT. 

 Government National Mortgage Association—administered by HUD. 

 National Telecommunications and Information Administration Digital Television Transition and Public 

Safety Fund and Broadband Technology Opportunities Program-Recovery Act Fund—administered by 

the Department of Commerce (DOC). 

 Decommissioning and Decontamination Fund—administered by DOE. 

 Investor Protection Fund—administered by the Securities and Exchange Commission (SEC). 

 Universal Service Fund—administered by the Federal Communication Commission (FCC). 

 Crime Victims Fund—administered by DOJ. 

 Federal Employees’ Life Insurance Fund—administered by OPM. 

 Superfund (Hazardous Substance) and Leaking Underground Storage Tanks—administered by 

Environmental Protection Agency (EPA). 

Unemployment and Excise Taxes 

Unemployment Taxes 

The Unemployment Trust Fund (UTF), within the “all other” aggregate, represents all the earmarked 

unemployment tax revenues shown on the consolidated Statement of Operations and Changes in Net Position. 

The Unemployment Trust Fund provides temporary assistance to workers who lose their jobs. The program is 

administered through a unique system of Federal and State partnerships, established in Federal law, but executed 

through conforming State laws by State officials. DOL administers the Federal operations of the program. 

Employer taxes provide the primary funding source for the UTF and constitute all the earmarked unemployment 

tax revenues as shown on the consolidated Statement of Operations and Changes in Net Position. However, interest 

earnings on Treasury securities also provide income to the fund. For the years ending September 30, 2012, and 2011, 

UTF unemployment tax revenues were $66.5 billion and $56.1 billion, respectively. 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. 
128 NOTES TO THE FINANCIAL STATEMENTS 

Excise Taxes 

There are 10 earmarked funds within the “all other” aggregate that represent all of the earmarked excise tax 

revenue shown on the consolidated Statement of Operations and Changes in Net Position. The Highway Trust Fund 

and the Airport and Airway Trust Fund, combined, represent more than 90 percent of all earmarked excise tax 

revenues. Both of these earmarked funds are administered by the DOT and, for more detailed information regarding 

them, please refer to DOT’s financial statements. 

The Highway Trust Fund was established to promote domestic interstate transportation and to move people and 

goods. The fund provides Federal grants to States for highway construction, certain transit programs, and related 

transportation purposes. The law establishing the Highway Trust Fund and authorizing the depositing of amounts to 

the credit of the trust fund is set forth in 26 U.S.C. § 9503. Funding sources include earmarked excise taxes on 

gasoline and other fuels, certain tires, the initial sale of heavy trucks, and highway use by commercial motor 

vehicles. For the years ending September 30, 2012, and 2011, Highway Trust Fund excise tax revenues were $40.2 

billion and $36.9 billion, respectively. As funds are needed for payments, the Highway Trust Fund corpus 

investments are liquidated and funds are transferred to the Federal Highway Administration, the Federal Transit 

Administration, or other DOT entities, for payment of obligations. 

The Airport and Airway Trust Fund provides for airport improvement and airport facilities maintenance. It also 

funds airport equipment, research, and a portion of the Federal Aviation Administration’s administrative operational 

support. The law establishing the Airport and Airway Trust Fund and authorizing the depositing of amounts to the 

credit of the trust fund is set forth in 26 U.S.C. § 9502. Funding sources include: 

 Taxes received from transportation of persons and property in the air and fuel used in commercial and 

general aviation. 

 International departure taxes. 

 Interest earnings on Treasury securities. 

For the years ending September 30, 2012, and 2011, Airport and Airway Trust Fund excise tax revenues were 

$12.5 billion and $11.5 billion, respectively. These revenue amounts do not reflect any transfers from the Highway 

Trust Fund to the Airport and Airway Trust Fund for fuel which was used in aviation, but which was taxed at 

highway rates under P.L. 109-59 Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for 

Users. 

Miscellaneous Earned Revenues 

Miscellaneous earned revenues due to earmarked funds activity primarily relate to royalties retained by various 

earmarked funds within DOI. 

Intra-Earmarked Fund Eliminations 

The intra-earmarked fund eliminations represent the activity between earmarked funds that are administered 

by different Federal agencies and which are eliminated to produce consolidated earmarked revenues and net costs 

as shown on the Statement of Operations and Changes in Net Position. Significant examples of such intraearmarked fund activity include the financial interchanges and transactions between the Railroad Retirement Trust 

Fund, the Social Security Trust Funds, and the Medicare Trust Funds, which are administered by the RRB, SSA and 

HHS, respectively. The financial interchanges and transactions between RRB’s Railroad Retirement Trust Fund, 

SSA’s Federal Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund, and HHS’ 

Federal Hospital Insurance Trust Fund are intended to put the latter three trust funds in the same position they would 

have been, had railroad employment been covered under the Social Security Act. For further information, see the 

Railroad Retirement program description within Note 26—Social Insurance. 
NOTES TO THE FINANCIAL STATEMENTS 129

Note 25. Fiduciary Activities 

Fiduciary activities are the collection or receipt, and the management, protection, accounting, investment and 

disposition by the Government of cash or other assets in which non-Federal individuals or entities have an 

ownership interest that the Government must uphold. Fiduciary cash and other assets are not assets of the 

Government and accordingly are not recognized on the consolidated Governmentwide Balance Sheet. Examples of 

the Government’s fiduciary activities include the Thrift Savings Plan, which is administered by the Federal 

Retirement Thrift Investment Board, and the Indian Tribal and individual Indian Trust Funds, which are 

administered by the DOI. 

Schedule of Fiduciary Net Assets as of September 30, 2012, 

and 2011 

(In billions of dollars) 2012 2011 

FRTIB-Thrift Savings Plan .............................................. 329.2 281.6 

Department of the Interior ............................................... 4.5 3.8 

All other ........................................................................... 5.7 5.8 

Total fiduciary net assets .............................................. 339.4 291.2 

 

In accordance with the requirements of SFFAS No. 31, Accounting for Fiduciary Activities, fiduciary 

investments in Treasury securities and fund balance with Treasury held by fiduciary funds are to be recognized on 

the Governmentwide Balance Sheet as debt held by the public and as liability for fiduciary fund balance with 

Treasury, respectively. Refer to Note 14—Federal Debt Securities Held by the Public and Accrued Interest for more 

information on Treasury securities. 

As of September 30, 2012, total fiduciary investments in Treasury securities and in non-Treasury securities are 

$158.2 billion and $175.2 billion, respectively. As of September 30, 2011, total fiduciary investments in Treasury 

securities and in non-Treasury securities are $143.9 billion and $145.1 billion, respectively. As of September 30, 

2012, and 2011, the total fiduciary fund balance with Treasury is $1.2 billion. A liability for this fiduciary fund 

balance with Treasury is reflected as other miscellaneous liabilities in Note 19—Other Liabilities. 

As of September 30, 2012, and 2011, collectively, the fiduciary investments in Treasury securities and 

fiduciary fund balance with Treasury held by all Government entities represent $4.3 billion and $4.0 billion, 

respectively, of unrestricted cash included within cash held by Treasury for Governmentwide Operations shown in 

Note 2—Cash and Other Monetary Assets. 

Federal Retirement Thrift Investment Board 

(FRTIB)-Thrift Savings Plan 

The TSP is administered by an independent Government agency, the FRTIB, which is charged with operating 

the TSP prudently and solely in the interest of the participants and their beneficiaries. Assets of the TSP are 

maintained in the Thrift Savings Fund (the Plan). 

The TSP is a retirement savings and investment plan for Federal employees and members of the uniformed 

services. It was authorized by the United States Congress in the Federal Employees’ Retirement System Act of 

1986. The Plan provides Federal employees and members of the uniformed services with a savings and tax benefit 

similar to what many private sector employers offer their employees. The Plan was primarily designed to be a key 

part of the retirement package (along with a basic annuity benefit and Social Security) for employees who are 

covered by the FERS. 
130 NOTES TO THE FINANCIAL STATEMENTS 

As of September 30, 2012, and 2011, the TSP held $329.2 billion and $281.6 billion, respectively, in net 

assets, which included $153.9 billion and $139.3 billion, respectively, of U.S. Government Securities (amounts are 

unaudited). The most recent audited financial statements for the TSP are as of December 31, 2011, and 2010. As of 

December 31, 2011, and 2010, the TSP held $298.1 billion and $281.0 billion, respectively, in net assets, which 

included $147.7 billion and $124.7 billion, respectively, of U.S. Government Securities. These unaudited amounts 

above are included to enhance comparability of the TSP net assets with the remainder of the Government’s fiduciary 

net assets as of September 30, 2012, and 2011. 

Federal employees, who are participants of FERS, the CSRS, or equivalent retirement systems, as provided by 

statute, and members of the uniformed services, are eligible to join the Plan immediately upon being hired. 

Generally, FERS employees are those employees hired on or after January 1, 1984, while CSRS employees are 

employees hired before January 1, 1984, who have not elected to convert to FERS. Each group has different rules 

that govern contribution rates. As of December 31, 2011, and 2010, there were approximately 4.5 million and 4.4 

million participants in the TSP, respectively, with approximately 2.9 million contributing their own money. For 

further information about FRTIB and the TSP, please refer to the FRTIB website at http://www.frtib.gov.

DOI–Indian Trust Funds 

As stated above, DOI has responsibility for the assets held in trust on behalf of American Indian Tribes and 

individuals, and these account for all of DOI’s fiduciary net assets. DOI maintains accounts for Tribal and Other 

Trust Funds (including the Alaska Native Escrow Fund and Individual Indian Money Trust Funds) in accordance 

with the American Indian Trust Fund Management Reform Act of 1994. The fiduciary balances that have 

accumulated in these funds have resulted from land use agreements, royalties on natural resource depletion, other 

proceeds derived directly from trust resources, judgment awards, settlements of claims, and investment income. 

These funds are maintained for the benefit of individual Native Americans as well as for designated Indian tribes. 

DOI maintains separate Financial Statements for these trust funds which were prepared using the cash or modified 

cash basis of accounting, a comprehensive basis of accounting other than GAAP. The independent auditors’ reports 

were qualified as it was not practical to extend audit procedures sufficiently to satisfy themselves as to the fairness 

of the trust fund balances. For further information related to these assets, see the financial statements of the DOI. 

All Other Entities with Fiduciary Activities 

The Government is responsible for the management of other fiduciary net assets on behalf of various nonFederal entities. The component agencies presented individually in the table on the previous page represent the vast 

majority of the Government’s fiduciary net assets. All other component entities with fiduciary net assets are 

aggregated in accordance with SFFAS No. 31. As of September 30, 2012, and 2011, including FRTIB and DOI, 

there are a total of 16 and 15 Federal entities, respectively, with fiduciary activities with a grand total of 59 and 58 

fiduciary funds, respectively. For further information relating to the fiduciary activities of the remaining component 

entities within the “all other” aggregate, please refer to the financial statements for: 

 Small Business Administration 

 Library of Congress 

 Department of the Treasury 

 Department of State 

 Department of Defense 

 Department of Transportation 

 Department of Labor 

 Department of Agriculture 

 Smithsonian Institution 

 Department of Commerce 

 National Labor Relations Board 

 American Battle Monuments Commission 

 Government Accountability Office, and 

 Peace Corps. 
NOTES TO THE FINANCIAL STATEMENTS 131

Note 26. Social Insurance 

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

revenue and estimated future expenditures of the Social Security, Medicare, Railroad Retirement, and Black Lung 

social insurance programs which are administered by the SSA, HHS, RRB, and DOL, respectively. These estimates 

are based on the economic and demographic assumptions presented later in this note as set forth in the relevant 

Social Security and Medicare trustees’ reports and in the agency financial report of HHS and in the relevant agency 

performance and accountability reports for SSA and RRB and the annual financial report for DOL. The projections 

are based on the continuation of program provisions contained in current law. The estimates in the consolidated 

SOSI of the open group measures are for persons who are participants or eventually will participate in the programs 

as contributors (workers) or beneficiaries (retired workers, survivors, and disabled) during the 75-year projection 

period (Black Lung is projected only through September 30, 2040, because the projection period will terminate on 

September 30, 2040). 

Contributions and earmarked taxes consist of: payroll taxes from employers, employees, and self-employed 

persons; revenue from Federal income taxation of Old-Age Survivors and Disability Insurance (OASDI) and 

railroad retirement benefits; excise tax on coal (Black Lung); and premiums from, and State transfers on behalf of, 

participants in Medicare; and reimbursements from the General Fund of the Treasury to the OASDI trust funds to 

make up for reductions in payroll tax revenue due to temporary payroll tax rate reductions. Income for all programs 

is presented from a consolidated perspective. Future interest payments and other future intragovernmental transfers 

have been excluded upon consolidation. Expenditures include scheduled benefit payments and administrative 

expenses. Scheduled benefits are projected based on the benefit formulas under current law. However, current Social 

Security and Medicare law provides for full benefit payments only to the extent that there are sufficient balances in 

the trust funds. 

Actuarial present values of estimated future revenue (excluding interest) and estimated future expenditures for 

the Social Security, Medicare, and Railroad Retirement social insurance programs are presented for three different 

groups of participants: (1) current participants who have attained eligibility age, (2) current participants who have 

not attained eligibility age, and (3) future participants who are new entrants expected to become participants in the 

future. Current participants in the Social Security and Medicare programs form the “closed group” of taxpayers 

and/or beneficiaries who are at least 15 years of age at the start of the projection period. Since the projection period 

for the Social Security, Medicare, and Railroad Retirement social insurance programs consists of 75 years, the 

period covers virtually all of the current participants’ working and retirement years, a period that could be greater 

than 75 years in a relatively small number of instances. Future participants for Social Security and Medicare include 

births during the projection period and individuals below age 15 as of January 1 of the valuation year. Railroad 

Retirement’s future participants are the projected new entrants as of January 1 of the valuation year. 

The present values of future expenditures in excess of future revenue are calculated by subtracting the actuarial 

present values of future scheduled contributions 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. To 

determine a program’s funding shortfall over any given period of time, the starting trust fund balance is subtracted 

from the present value of expenditures in excess of revenues over the period. 
132 NOTES TO THE FINANCIAL STATEMENTS 

The trust fund balances as of the valuation date for the respective programs, including interest earned, are in 

the table shown below. Substantially all of the Social Security (OASDI) and Medicare Hospital Insurance (HI), and 

Supplementary Medical Insurance (SMI) trust fund balances consist of investments in special non-marketable U.S. 

Treasury securities that are backed by the full faith and credit of the U.S. Government. 

Social Insurance Programs Trust Fund Balances 1

 

(In billions of dollars) 2012 2011 2010 2009 2008 

 

Social Security ........................ 2,678 2,609 2,540 2,419 2,238 

Medicare: 

HI ......................................... 244 272 304 321 312 

SMI Part B ........................... 80 71 76 59 53 

SMI Part D ........................... 1 1 1 1 3 

Railroad Retirement ............... 24 26 25 22 33 

Black Lung .............................. (6) (6) (6) (6) (10) 1

 As of the valuation date of the respective programs. 

 

Social Security 

The Old-Age and Survivors Insurance (OASI) program, created in 1935, and the Disability Insurance program, 

created in 1956, collectively referred to as OASDI or “Social Security,” provides cash benefits for eligible U.S. 

citizens and residents. Eligibility and benefit amounts are determined under the laws applicable for the period. 

Current law provides that the amount of the monthly benefit payments for workers, or their eligible dependents or 

survivors, is based on the workers’ lifetime earnings histories. 

The primary financing of the OASDI Trust Funds are taxes paid by workers, their employers, and individuals 

with self-employment income, based on work covered by the OASDI Program. Refer to Unaudited Required 

Supplementary Information—Social Insurance section for additional information on Social Security program 

financing. 

That portion of each trust fund not required to pay benefits and administrative costs is invested, on a daily basis, 

in interest-bearing obligations of the U.S. Government. The Social Security Act authorizes the issuance by the Treasury 

of special nonmarketable, intragovernmental debt obligations for purchase exclusively by the trust funds. Although the 

special issues cannot be bought or sold in the open market, they are redeemable at any time at face value and thus bear 

no risk of fluctuation in principal value due to changes in market yield rates. Interest on the bonds is credited to the 

trust funds and becomes an asset to the funds and a liability to the General Fund of the Treasury. These Treasury 

securities and related interest are eliminated in consolidation at the Governmentwide level. 

Medicare 

The Medicare Program, created in 1965, has two separate trust funds: the HI (Medicare Part A) and SMI 

(Medicare Parts B and D) Trust Funds. HI pays for inpatient acute hospital services and major alternatives to 

hospitals (skilled nursing services, for example) and SMI pays for hospital outpatient services, physician services, 

and assorted other services and products through the Part B account and pays for prescription drugs through the Part 

D account. Though the events that trigger benefit payments are similar, HI and SMI have different earmarked 

financing structures. Similar to OASDI, HI is financed primarily by payroll contributions. Other income to the HI 

Trust Fund includes a small amount of premium income from voluntary enrollees, a portion of the Federal income 

taxes that beneficiaries pay on Social Security benefits and interest credited on Treasury securities held in the HI 

Trust Fund. These Treasury securities and related interest are eliminated in the consolidation at the Governmentwide 

level. 
NOTES TO THE FINANCIAL STATEMENTS 133

For SMI, transfers from the General Fund of the Treasury represent the largest source of income for both Parts 

B and D. Generally, beneficiaries finance the remainder of Parts B and D costs via monthly premiums to these 

programs. With the introduction of Part D drug coverage, Medicaid is no longer the primary payer for beneficiaries 

dually eligible for Medicare and Medicaid. For those beneficiaries, States must pay a portion of their estimated 

foregone drug costs into the Part D account (referred to as State transfers). As with HI, interest received on Treasury 

securities held in the SMI Trust Fund is credited to the fund and these Treasury securities and related interest are 

eliminated in consolidation at the Governmentwide level. Refer to Unaudited Required Supplementary 

Information—Social Insurance section for additional information on Medicare program financing. 

The Medicare Prescription Drug, Improvement, and Modernization Act (MMA), enacted on December 8, 

2003, created the Part D account in the SMI Trust Fund to account for the prescription drug benefit that began in 

2006. The MMA established within SMI two Part D accounts related to prescription drug benefits: the Medicare 

Prescription Drug Account and the Transitional Assistance Account. The Medicare Prescription Drug Account was 

used in conjunction with the broad, voluntary prescription drug benefits that commenced in 2006. The Transitional 

Assistance Account was used to provide transitional assistance benefits, beginning in 2004 and extending through 

2005, for certain low-income beneficiaries prior to the start of the new prescription drug benefit. 

Affordable Care Act (ACA) 

The financial projections for the Medicare program reflect substantial, but very uncertain, cost savings deriving 

from provisions of the Affordable Care Act. However, it is important to note that the improved results for HI and 

SMI Part B since 2010 depend in part on the long-range feasibility of the various cost-saving measures in the 

Affordable Care Act–in particular, the lower increases in Medicare payment rates to most categories of health care 

providers. Without fundamental change in the current delivery system, these adjustments would probably not be 

viable indefinitely. It is possible that health care providers could improve their productivity, reduce wasteful 

expenditures, and take other steps to keep their cost growth within the bounds imposed by the Medicare price 

limitations. For such efforts to be successful in the long range, providers would have to generate and sustain 

unprecedented levels of productivity gains–a very challenging and uncertain prospect. 

A transformation of health care in the United States, affecting both the means of delivery and the method of 

paying for care, is also a possibility. The Affordable Care Act takes important steps in this direction by initiating 

programs of research into innovative payment and service delivery models, such as accountable care organizations, 

patient-centered “medical homes,” improvement in care coordination for individuals with multiple chronic health 

conditions, improvement in coordination of post-acute care, payment bundling, “pay for performance,” and 

assistance for individuals in making informed health choices. If researchers and policy makers can demonstrate that 

the new approaches developed through these initiatives will improve the quality of health care and/or reduce costs, 

then the Secretary of Health and Human Services can adopt them for Medicare without further legislation. Such 

changes have the potential to reduce health care costs and cost growth rates and could, as a result, help lower 

Medicare cost growth rates to levels compatible with the lower price updates payable under current law. 

The ability of new delivery and payment methods to significantly lower cost growth rates is uncertain at this 

time, since specific changes have not yet been designed, tested, or evaluated. Hopes for success are high, but at this 

time there is insufficient evidence to support an assumption that improvements in efficiency can occur of the 

magnitude needed to align with the statutory Medicare price updates. 

The reduction in provider payment updates, if implemented for all future years as required under current law, 

could have secondary impacts on provider participation, beneficiary access to care; quality to services; and other 

factors. These possible impacts are very speculative and at present there is no consensus among experts as to their 

potential scope. Further research and analysis will help to better inform this issue and may enable the development 

of specific projections of secondary effects under current law in the future. 

In addition, the Medicare Part B projections reflect a reduction of almost 31 percent in payment rates for 

physician services in 2013, as estimated in the 2012 Trustee Report, which is assumed to be implemented as 

required under current law. If lawmakers act to prevent this decrease, as they have for 2003 through 2012, and do 

not offset this action with reductions in other provisions of the program, then actual Part B and total SMI costs will 

significantly exceed the projections shown in this report. 

Because knowledge of the potential long-range effects of the productivity adjustments, delivery and payment 

innovations, and certain other aspects of the Affordable Care Act is so limited, in August 2010, the Secretary of the 

Department of Health and Human Services, working on behalf of the Board of Trustees, established an independent 

group of expert actuaries and economists to review the assumptions and methods used by the Trustees to make 

projections of the financial status of the trust funds. The members of the Panel began their deliberations in 
134 NOTES TO THE FINANCIAL STATEMENTS 

November 2010 and were asked to focus their immediate attention on the long-range Medicare cost growth 

assumptions. 

In December 2011, the panel members unanimously recommended a new approach that builds on the 

longstanding “Gross Domestic Product (GDP) plus 1 percent” assumption while incorporating several key 

refinements. Both the Office of the Actuary at Center for Medicare & Medicaid Services (CMS) and the Board of 

Trustees support these recommendations, and they form the basis for the long-range cost growth assumptions used 

in this FR. The new methodology is explained in more detail in section IV.D of the 2012 Medicare Trustees Report. 

The Panel also recommended the continued use of a supplemental analysis, similar to the illustrative 

alternative projection in the 2010 and 2011 Trustees Reports, for the purpose of illustrating the higher Medicare 

costs that would result if the reduction in physician payment rates and the productivity adjustments to most other 

provider payment updates are not fully implemented as required under current law. 1

The SOSI projections are based on current law. Therefore, the productivity adjustments are assumed to occur 

in all future years, as required by the Affordable Care Act. In addition, an approximate 31 percent reduction in 

Medicare payment rates for physician services in January 2013, as estimated in the 2012 Trustee Report, is assumed 

to be implemented as required under current law, despite the virtual certainty that Congress will continue to override 

this reduction. Therefore, it is important to note that the actual future costs for Medicare are likely to exceed those 

shown by these current-law projections. 

The extent to which actual future Part A and Part B costs exceed the projected current-law amounts due to 

changes to the productivity adjustments and physician payments depends on both the specific changes that might be 

legislated and on whether Congress would pass further provisions to help offset such costs. As noted, these 

examples only reflect hypothetical changes to provider payment rates. 

It is likely that in the coming years, Congress will consider, and pass, numerous other legislative proposals 

affecting Medicare. Many of these will likely be designed to reduce costs in an effort to make the program more 

affordable. In practice, it is not possible to anticipate what actions Congress might take, either in the near term or 

over longer periods. Please see Note 28—Subsequent Events for additional information.

The Medicare Board of Trustees, in their annual report to Congress, references an alternative scenario to 

illustrate when possible, the potential understatement of Medicare costs and projection results. This alternative 

scenario assumes that the productivity adjustments are gradually phased down during 2020 to 2034 and that the 

physician fee reductions are overridden. These examples were developed for illustrative purposes only; the 

calculations have not been audited; no endorsement of the illustrative alternative to current law by the Trustees, 

CMS, or the CMS Office of the Actuary, should be inferred; and the examples do not attempt to portray likely or 

recommended future outcomes. Thus the illustrations are useful only as general indicators of the substantial 

impacts that could result from future legislation affecting the productivity adjustments and physician payments 

under Medicare and of the broad range of uncertainty associated with such impacts. The table below contains a 

comparison of the Medicare 75-year present values of income and expenditures under current law with those 

under the alternative scenario illustration. 

 

1

 The Interim Report of the Technical Panel of the Medicare Trustees Report is available at 

http://aspe.hhs.gov/health/medpanel/2010/interim1103.shtml. Once completed, the final 

report will be available at http://aspe.hhs.gov/health/medpanel/2010/. 
NOTES TO THE FINANCIAL STATEMENTS 135

Medicare Present Values (in billions) (Unaudited) 

 

2012 Consolidated 

SOSI 

Illustrative Alternative 

Scenario 1, 2

 

Income 

Part A .................................................... $15,598 $15,600 

Part B 3 ................................................. 5,344 7,435 

Part D 4 ................................................. 2,349 2,351 

Total income ...................................... $23,291 $25,386 

 

Expenditures 

Part A .................................................... $21,179 $25,494 

Part B .................................................... 20,159 28,007 

Part D .................................................... 9,128 9,129 

Total expenditures ............................. $50,466 $62,630 

 

Part A ...................................................... $5,581 $9,895 

Part B ...................................................... 14,815 20,572 

Part D ...................................................... 6,778 6,778 

Excess of expenditures over income..... $27,174 $37,245 

 

1

 These amounts are not presented in the 2012 Trustees’ Report. 

2

 At the request of the Trustees, the Office of the Actuary at CMS has prepared an illustrative set of Medicare Trust 

Fund projections that differ from current law. No endorsement of the illustrative alternative to current law by the 

Trustees, CMS, or the Office of the Actuary should be inferred. 3

 Excludes $14,815 billion and $20,572 billion of General Revenue Contributions from the 2012 Consolidated SOSI 

projection and the Illustrative Alternative Scenario’s projection, respectively; i.e., to reflect Part B income on a 

consolidated Governmentwide basis. 

4

 Excludes $6,778 billion of General Revenue Contributions from both the 2012 Consolidated SOSI projection and the 

Illustrative Alternative Scenario’s projection, respectively; i.e., to reflect Part D income on a consolidated 

Governmentwide basis. 

Note: Amounts may not add due to rounding.

 

As expected, the differences between the current-law projections and the illustrative alternative are substantial 

for Part A and Part B, although both represent a sizeable improvement in the financial outlook for Medicare 

compared to the laws in effect prior to the ACA. This difference in outlook serves as a compelling reminder of the 

importance of developing and implementing further means of reducing health care cost growth in the coming years. 

All Part A fee-for-service providers are affected by the productivity adjustments, so the current law projections 

reflect an estimated 1.1 percent reduction in annual Part A cost growth each year. If the productivity adjustments 

were gradually phased out, as illustrated under the alternative scenario, the present value of Part A expenditures is 

estimated to be roughly 20 percent higher than the current-law projection. As indicated above, the present value of 

Part A income is basically unaffected under the alternative scenario. 

The Part B expenditure projections are significantly higher under the alternative scenario than under current 

law, both because of the assumed gradual phase-out of the productivity adjustments and the assumption that the 

scheduled physician fee reductions would be overridden and based on 1 percent annual increases through 2021, 

based on a recommendation by the 2010-2011 Medicare Technical Review Panel. The productivity adjustments are 

assumed to affect more than half of Part B expenditures at the time their phase-out is assumed to begin. Similarly, 

physician fee schedule services are assumed to be roughly 30 percent higher under the alternative scenario than 

under current law at that time. The combined effect of these two factors results in a present value of Part B 

expenditures under the alternative scenario that is approximately 39 percent higher than the current-law projection. 
136 NOTES TO THE FINANCIAL STATEMENTS 

The Part D projections are basically unaffected under the alternative projection because the services are not 

impacted by the productivity adjustments or the physician fee schedule reductions. The very minor impact is the 

result of a slight change in the discount rates that are used to calculate present values. 

Social Security and Medicare–Demographic and Economic Assumptions 

The Boards of Trustees 2 of the OASDI and Medicare Trust Funds provide in their annual reports to Congress 

short-range (10-year) and long-range (75-year) actuarial estimates of each trust fund. Because of the inherent 

uncertainty in estimates for 75 years into the future, the Boards use three alternative sets of economic and demographic 

assumptions to show a range of possibilities. Assumptions are made about many economic and demographic factors, 

including GDP, earnings, the CPI, the unemployment rate, the fertility rate, immigration, mortality, disability incidence 

and terminations and, for the Medicare projections, health care cost growth. The assumptions used for the most recent 

set of projections shown in Tables 1A (Social Security) and Table 1B (Medicare) are generally referred to as the 

“intermediate assumptions,” and reflect the trustees’ reasonable estimate 3

 of expected future experience. For further 

information on Social Security and Medicare demographic and economic assumptions, refer to SSA’s Performance and 

Accountability Report and HHS’ Agency Financial Report. 

 

2

 There are six trustees: the Secretaries of the Treasury (managing trustee), Health and Human Services, and Labor; the Commissioner of the 

Social Security Administration; and two public trustees who are generally appointed by the President and confirmed by the Senate for a 4-year 

term. By law, the public trustees are members of two different political parties. 3

 Statement of Federal Financial Accounting Standard (SFFAS) No. 33: Pensions, Other Retirement Benefits, and Other Postemployment 

Benefits: Reporting the Gains and Losses From Changes in Assumptions and Selecting Discount Rates and Valuation Dates, effective for fiscal 

years beginning after September 30, 2009, revised SFFAS No. 17: Accounting for Social Insurance, paragraphs 25, 27 (2), and 27 (4), by 

replacing the term “best estimate” with “reasonable estimate.” 
NOTES TO THE FINANCIAL STATEMENTS 137

 

Table 1A 

Social Security – Demographic and Economic Assumptions 

 

Demographic Assumptions

Year 

Total 

Fertility 

Rate 1

Age-Sex 

Adjusted 

Death Rate 2 

(per 100,000) 

Net 

Immigration 3

(persons) 

Period Life 

Expectancy 

at Birth 4

Male Female 

2012 2.04 759.3 960,000 76.1 80.6 

2020 2.04 708.6 1,205,000 77.1 81.3 

2030 2.02 650.4 1,125,000 78.3 82.3 

2040 2.00 598.8 1,075,000 79.4 83.2 

2050 2.00 553.3 1,050,000 80.4 84.0 

2060 2.00 513.2 1,040,000 81.3 84.8 

2070 2.00 477.7 1,035,000 82.2 85.5 

2080 2.00 446.0 1,030,000 83.0 86.2 

2090 2.00 417.7 1,025,000 83.8 86.8 

 Economic Assumptions

Year 

Real 

Wage 

Differential 5

(percent) 

Average 

Annual Wage 

in Covered 

Employment 6

(percent 

change) 

CPI 7

(percent 

change) 

Real 

GDP 8

(percent 

change) 

Total 

Employment 9

(percent 

change) 

Average 

Annual 

Interest 

Rate 10

(percent) 

2012 1.7 3.8 2.0 2.6 1.3 2.4 

2020 1.3 4.1 2.8 2.2 0.6 5.6 

2030 1.1 3.9 2.8 2.0 0.4 5.7 

2040 1.2 4.0 2.8 2.2 0.6 5.7 

2050 1.1 3.9 2.8 2.1 0.5 5.7 

2060 1.1 3.9 2.8 2.1 0.4 5.7 

2070 1.1 3.9 2.8 2.1 0.4 5.7 

2080 1.1 3.9 2.8 2.0 0.4 5.7 

2090 1.2 4.0 2.8 2.0 0.4 5.7 

1 The total fertility rate for any year is the average number of children who would be born to a woman in her lifetime if she were to experience 

the birth rates by age observed in, or assumed for, the selected year, and if she were to survive the entire childbearing period. The assumed 

total fertility rate does not change after 2036. 

2 The age-sex-adjusted death rate is the crude rate that would occur in the enumerated total population as of April 1, 2000, if that population 

were to experience the death rates by age and sex observed in, or assumed for, the selected year. 

3 Net immigration is the number of persons who enter during the year (both legally and otherwise) minus the number of persons who leave 

during the year. It is a summary measure and not a basic assumption; it summarizes the basic assumptions from which it is derived. 4 The period life expectancy at a given age for a given year is the average number of years of life remaining if a group of persons at that exact 

age, born on January 1, were to experience the mortality rate for that year over the course of their remaining lives. 5 The real-wage differential is the difference between the percentage increases, before rounding, in the average annual wage in covered 

employment, and the average annual CPI. 

6 The average annual wage in covered employment is the total amount of wages and salaries for all employment covered by the OASDI program in 

a year divided by the number of employees with any such earnings during the year. It is a summary measure and not a basic assumption; it 

summarizes the basic assumptions from which it is derived.

7 The CPI is the annual average value for the calendar year of the CPI for urban wage earners and clerical workers (CPI-W). 

8 The real GDP is the value of total output of goods and services produced in the U.S., expressed in 2005 dollars. It is a summary measure and 

not a basic assumption; it summarizes the basic assumptions from which it is derived. 9 Total employment is the sum of the U.S. civilian and military employment. It is a summary measure and not a basic assumption; it summarizes the 

basic assumptions from which it is derived. 

10 The average annual interest rate is the average of the nominal interest rates, which, are compounded semiannually, for special public-debt 

obligations issuable to the trust funds in each of the 12 months of the year. It is a summary measure and not a basic assumption; it summarizes 

the basic assumptions from which it is derived. 
138 NOTES TO THE FINANCIAL STATEMENTS 

Table 1B 

Medicare – Demographic and Economic Assumptions 

 

Demographic Assumptions 

Year 

Total 

Fertility 

Rate1

Age-Sex 

Adjusted 

Death Rate2 

(per 100,000) 

Net 

Immigration3

(persons) 

2012 2.04 759.3 960,000 

2020 2.04 708.6 1,205,000 

2030 2.02 650.4 1,125,000 

2040 2.00 598.8 1,075,000 

2050 2.00 553.3 1,050,000 

2060 2.00 513.2 1,040,000 

2070 2.00 477.7 1,035,000 

2080 2.00 446.0 1,030,000 

 

 Economic Assumptions 

Year 

Real 

Wage 

Differential4

(percent) 

Average 

Annual Wage 

in Covered 

Employment 

(percent 

change) 

CPI5

(percent 

change) 

Real 

GDP6

(percent

change) 

Per Beneficiary Cost 

(percent change)7

Real 

Interest 

Rate8

 

HI (percent) 

SMI 

Part B Part D 

2012 1.7 3.8 2.0 2.6 (0.1) 3.9 2.1 0.4 

2020 1.3 4.1 2.8 2.2 3.8 5.3 6.2 2.7 

2030 1.1 3.9 2.8 2.0 4.9 4.8 5.5 2.9 

2040 1.2 4.0 2.8 2.2 5.4 4.5 5.3 2.9 

2050 1.1 3.9 2.8 2.1 4.1 4.1 5.0 2.9 

2060 1.1 3.9 2.8 2.1 4.0 4.1 4.8 2.9 

2070 1.1 3.9 2.8 2.1 4.1 3.9 4.6 2.9 

2080 1.1 3.9 2.8 2.0 3.7 3.8 4.5 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 assumed 

total fertility rate does not change after 2036. 

2 The age-sex-adjusted death rate is the crude rate that would occur in the enumerated total population as of April 1, 2000, if that population 

were to experience the death rates by age and sex observed in, or assumed for, the selected year. 

3 Net immigration is the number of persons who enter during the year (both legally and otherwise) minus the number of persons who leave 

during the year. It is a summary measure and not a basic assumption; it summarizes the basic assumptions from which it is derived. 4 The real-wage differential is the difference between the percentage increases, before rounding, in the average annual wage in covered 

employment, and the average annual CPI. 

5 The CPI is the annual average value for the calendar year of the CPI for urban wage earners and clerical workers. 

6

 The real GDP is the value of total output of goods and services produced in the U.S., expressed in 2005 dollars. It is a summary measure and 

not a basic assumption; it summarizes the effects of the basic assumptions from which it is derived. 7 These increases reflect the overall impact of more detailed assumptions that are made for each of the different types of service provided by the 

Medicare program (for example, hospital care, physician services, and pharmaceutical costs). These assumptions include changes in the payment 

rates, utilization, and intensity of each type of service. 8 The average annual interest rate earned on new trust fund securities, above and beyond the rate of inflation. 
NOTES TO THE FINANCIAL STATEMENTS 139

Railroad Retirement 

The Railroad Retirement and Survivor Benefit program pays full retirement annuities at age 60 to railroad 

workers with 30 years of service. The program pays disability annuities based on total or occupational disability. It 

also pays annuities to spouses, divorced spouses, widow(er)s, remarried widow(er)s, surviving divorced spouses, 

children, and parents of deceased railroad workers. Medicare covers qualified railroad retirement beneficiaries in the 

same way as it does Social Security beneficiaries. The Railroad Retirement and Survivors’ Improvement Act of 

2001 (RRSIA) liberalized benefits for 30-year service employees and their spouses, eliminated a cap on monthly 

benefits for retirement and disability benefits, lowered minimum service requirements from 10 to 5 years, and 

provided for increased benefits for widow(er)s. 

The RRB and the SSA share jurisdiction over the payment of retirement and survivor benefits. RRB has 

jurisdiction if the employee has at least 5 years (if performed after 1995) of railroad service. For survivor benefits, 

RRB requires that the employee’s last regular employment before retirement or death be in the railroad industry. If a 

railroad employee or his or her survivors do not qualify for railroad retirement benefits, the RRB transfers the 

employee’s railroad retirement credits to SSA. 

Payroll taxes paid by railroad employers and their employees are a primary source of income for the Railroad 

Retirement and Survivor Benefit Program. By law, railroad retirement taxes are coordinated with Social Security 

taxes. Employees and employers pay tier I taxes at the same rate as Social Security taxes. Tier II taxes finance 

railroad retirement benefit payments that are higher than Social Security levels. 

Other sources of program income include: financial transactions with the Social Security and Medicare Trust 

Funds, earnings on investments, Federal income taxes on railroad retirement benefits, and appropriations (provided 

after 1974 as part of a phase out of certain vested dual benefits). The financial interchange between RRB’s Social 

Security Equivalent Benefit (SSEB) Account, the Federal Old-Age and Survivors Insurance Trust Fund, the Disability 

Insurance Trust Fund, and the Federal Hospital Insurance Trust Fund is intended to put the latter three trust funds in the 

same position they would have been had railroad employment been covered under the Social Security Act. From a 

Governmentwide perspective, these future financial interchanges and transactions are intragovernmental transfers and 

are eliminated in consolidation. 

Railroad Retirement–Employment, Demographic and Economic Assumptions 

The most recent set of projections are prepared using employment, demographic and economic assumptions 

and reflect the Board Members’ reasonable estimate of expected future experience. 

Three employment assumptions were used in preparing the projections and reflect optimistic, moderate and 

pessimistic future passenger rail and freight employment. The average railroad employment is assumed to be 

226,000 in 2012 under the moderate employment assumption. This employment assumption, based on a model 

developed by the Association of American Railroads, assumes that (1) passenger service employment will remain at 

the level of 45,000 and (2) the employment base, excluding passenger service employment, will decline at a constant 

2.0 percent annual rate for 25 years, at a falling rate over the next 25 years, and remain level thereafter. All the 

projections are based on an open-group (i.e., future entrants) population. 

The moderate (middle) economic assumptions include a long-term cost of living increase of 2.8 percent, an 

interest rate of 7.0 percent, and a wage increase of 3.8 percent. The cost of living assumption reflects the expected 

level of price inflation. The interest rate assumption reflects the expected return on NRRIT investments. The wage 

increase reflects the expected increase in railroad employee earnings. 

Sources of the demographic assumptions including mortality rates and total termination rates, remarriage rates 

for widows, retirement rates and withdrawal rates, are listed in Table 2. For further details on the employment, 

demographic, economic and all other assumptions, refer to the U.S. Railroad Retirement Board Annual Report, and 

the 25th Actuarial Valuation of the Assets and Liabilities under the Railroad Retirement Acts (Valuation Report) as 

of December 31, 2010, with Technical Supplement. 
140 NOTES TO THE FINANCIAL STATEMENTS 

Table 2 

Railroad Retirement Demographic Actuarial Assumptions (Sources) 

Mortality Rates 1 

Mortality after age 

retirement 2010 RRB Annuitants Mortality Table 

Mortality after disability 

retirement 

2010 RRB Disabled Mortality Table for 

Annuitants with Disability Freeze 

2010 RRB Disabled Mortality Table for 

Annuitants without Disability Freeze 

Mortality during active 

service 2006 RRB Active Service Mortality Table 

Mortality of widow 

annuitants 1995 RRB Mortality Table for Widows 

Total Termination 

Rates 2

Termination for spouses 2010 RRB Spouse Total Termination Table 

Termination for disabled 

children 

2004 RRB Total Termination Table for 

Disabled Children 

Widow Remarriage 

Rate 3 1997 RRB Remarriage Table 

Retirement Rates 4 Age retirement See the Valuation Report. 

Disability retirement See the Valuation Report. 

Withdrawal Rates 5 See the Valuation Report. 

1 These mortality tables are used to project the termination of eligible employee benefit payments within the population. 2 Total termination rates are used to project the termination of dependent benefits to spouses and disabled children. 3 This rate is used to project the termination of spousal survivor benefits. 4

 The retirement rates are used to determine the expected annuity to be paid based on age and years of service for both age 

and disability retirees. 

5

 The withdrawal rates are used to project all withdrawals from the railroad industry and resultant effect on the population and

accumulated benefits to be paid. 
NOTES TO THE FINANCIAL STATEMENTS 141

Black Lung–Disability Benefit Program

The Black Lung Disability Benefit Program provides for compensation and medical benefits for eligible coal 

miners who are totally disabled due to pneumoconiosis (black lung disease) as a result of their coal mine 

employment. The same program also provides for survivor benefits for eligible survivors of coal miners who died 

due to pneumoconiosis. DOL operates the Black Lung Disability Benefit Program. BLDTF provides benefit 

payments to eligible coal miners totally disabled by pneumoconiosis and to eligible survivors when no responsible 

mine operator can be assigned the liability. 

Black lung disability benefit payments are funded by excise taxes from coal mine operators based on the sale 

of coal, as are the fund’s administrative costs. These taxes are collected by the Internal Revenue Service (IRS) and 

transferred to the BLDTF, which was established under the authority of the Black Lung Benefits Revenue Act, and 

administered by the Treasury. Prior to October 3, 2008, the Black Lung Benefits Revenue Act provided for 

repayable advances to the BLDTF from the general fund of Treasury, in the event that BLDTF resources were not 

adequate to meet program obligations. 

Black Lung–Demographic and Economic Assumptions 

The demographic assumptions used for the most recent set of projections are the number of beneficiaries and 

their life expectancy. The beneficiary population data is updated from information supplied by the program. The 

beneficiary population is a nearly closed universe in which attrition by death exceeds new entrants by a ratio of more 

than ten to one. SSA Life Tables are used to project the life expectancies of the beneficiary population. 

The economic assumptions used for the most recent set of projections are coal excise tax revenue estimates, 

Federal civilian pay raises, medical cost inflation, and the interest rate on new debt issued by the BLDTF. 

Projections are sensitive to changes in the tax rate and changes in interest rates on debt issued by the BLDTF. 

Estimates of future receipts of the black lung excise tax are based on projections of future coal production and 

sale prices prepared by the Energy Information Agency of DOE. Treasury’s Office of Tax Analysis provides the 

first 11 years of tax receipt estimates. The remaining years are estimated using a growth rate based on both historical 

tax receipts and Treasury’s estimated tax receipts. The coal excise tax rate structure is $1.10 per ton of undergroundmined coal and $0.55 per ton of surface-mined coal sold, with a cap of 4.4 percent of sales price. Based on 

Treasury’s interpretation of the Act, the higher excise tax rates will continue until the earlier of December 31, 2018, 

or the first December 31, in which there exist no (1) balance of repayable debt described in section 9501 of the 

Internal Revenue Code and (2) unpaid interest on the debt. Starting in 2019, the tax rates revert to $0.50 per ton of 

underground-mined coal and $0.25 per ton of surface-mine coal sold, and a limit of 2.0 percent of sales price. 

OMB supplies assumptions for future monthly benefit rate increases based on increases in the Federal pay 

scale and future medical cost inflation based on increases in the CPIM, which are used to calculate future benefit 

costs. During the current projection period, future benefit rate increases 2.9 percent in 2013, 3.8 percent in 2014 

through 2020, 3.9 percent in each year thereafter, and medical cost increases 3.6 percent in 2013, and ranges from 

3.7 percent to 3.8 percent in 2014 through 2017, and 3.9 percent in each year thereafter. Estimates for administrative 

costs for the first 11 years of the projection are supplied by DOL’s Budget Office, based on current year enacted 

amounts, while later years are based on the number of projected beneficiaries. 

Public Law 110-343, Division B—Energy Improvement and Extension Act of 2008, enacted on October 3, 

2008, in section 113, (1) allowed for the temporary increase in coal excise tax rates to continue an additional 5 years 

beyond the current statutory limit, and (2) restructured the BLDTF debt by refinancing the outstanding repayable 

advances (which had higher interest rates) with the proceeds from issuing discounted debt instruments similar in 

form to zero-coupon bonds (which had lower interest rates), plus a one-time appropriation. Public Law 110-343 also 

allowed that any debt issued by the BLDTF subsequent to the refinancing may be used to make benefit payments, 

other authorized expenditures, or to repay debt and interest from the initial refinancing. All debt issued by the 

BLDTF was effected as borrowing from the Treasury’s Bureau of the Public Debt. 

Statement of Changes in Social Insurance Amounts 

The Statement of Changes in Social Insurance Amounts reconciles the change (between the current valuation 

and the prior valuation) in the present value of future revenue less future expenditures for current and future 

participants (the open group measure) over the next 75 years (except Black Lung is projected only through 

September 30, 2040, because the projection period will terminate on September 30, 2040). The reconciliation 

identifies several components of the changes that are significant and provides reasons for the changes. The following 

disclosures relate to the Statement of Changes in Social Insurance Amounts including the reasons for the 
142 NOTES TO THE FINANCIAL STATEMENTS 

components of the changes in the open group measure during the reporting period from the end of the previous 

reporting period for the Government’s social insurance programs. The Statement of Changes in Social Insurance 

Amounts shows two reconciliations: (1) changing from the period beginning on January 1, 2011, to the period 

beginning on January 1, 2012, and (2) changing from the period beginning on January 1, 2010, to the period 

beginning on January 1, 2011. 

Social Security 

All estimates relating to the Social Security Program in the Statement of Changes in Social Insurance Amounts 

represent values that are incremental to the prior change. As an example, the present values shown for economic 

data, assumptions, and methods, represent the additional effect of these new data, assumptions, and methods after 

considering the effects from demography and the change in the valuation period. 

Assumptions Used for the Components of the Changes for the Social Security 

Program 

The present values included in the Statement of Changes in Social Insurance Amounts are for the current and 

prior years and are based on various economic and demographic assumptions used for the intermediate assumptions 

in the Social Security Trustees Reports for these years. Table 1A summarizes these assumptions for the current year. 

Period Beginning on January 1, 2011, and Ending January 1, 2012 

Present values as of January 1, 2011, are calculated using interest rates from the intermediate assumptions of 

the 2011 Social Security Trustees Report. All other present values in this part of the Statement of Changes in Social 

Insurance Amounts are calculated as a present value as of January 1, 2012. Estimates of the present value of changes 

in social insurance amounts due to changing the valuation period and changing demographic data, assumptions, and 

methods are presented using the interest rates under the intermediate assumptions of the 2011 Social Security 

Trustees Report. Since interest rates are an economic estimate and all estimates in the table are incremental to the 

prior change, all other present values in this part of the Statement of Changes in Social Insurance Amounts are 

calculated using the interest rates under the intermediate assumptions of the 2012 Social Security Trustees Report. 

Period Beginning on January 1, 2010, and Ending January 1, 2011 

Present values as of January 1, 2010 are calculated using interest rates from the intermediate assumptions of 

the 2010 Social Security Trustees Report. All other present values in this part of the Statement of Changes in Social 

Insurance Amounts are calculated as a present value as of January 1, 2011. Estimates of the present value of changes 

in social insurance amounts due to changing the valuation period and changing demographic data, assumptions, and 

methods are presented using the interest rates under the intermediate assumptions of the 2010 Social Security 

Trustees Report. Since interest rates are an economic estimate and all estimates in the table are incremental to the 

prior change, all other present values in this part of the Statement of Changes in Social Insurance Amounts are 

calculated using the interest rates under the intermediate assumptions of the 2011 Social Security Trustees Report. 

Changes in Valuation Period 

Period Beginning on January 1, 2011, and Ending January 1, 2012 

The effect on the 75-year present values of changing the valuation period from the prior valuation period 

(2011-85) to the current valuation period (2012-86) is measured by using the assumptions for the prior valuation and 

extending them in the absence of any changes to the current valuation period. Changing the valuation period 

removes a small negative net cashflow for 2011, replaces it with a much larger negative net cashflow for 2086, and 

measures the present values as of January 1, 2012, one year later. Thus, the present value of future net cashflows 

(excluding the combined OASI and DI Trust Fund assets at the start of the period) decreased (became more 

negative) when the 75-year valuation period changed from 2011-85 to 2012-86. 

Period Beginning on January 1, 2010, and Ending January 1, 2011 

The effect on the 75-year present values of changing the valuation period from the prior valuation period 

(2010-84) in the absence of any changes to the current valuation period (2011-85) is measured by using the 

assumptions for the prior valuation and extending them to cover the current valuation period. Changing the valuation 

period removes a small negative net cashflow for 2010 and replaces it with a much larger negative net cashflow for 

2085, and measures the present values as of January 1, 2011, one year later. Thus, the present value of future net 
NOTES TO THE FINANCIAL STATEMENTS 143

cashflows (excluding the combined OASDI and DI Trust Fund assets at the start of the period) decreased (became 

more negative) when the 75-year valuation period changed from 2010-84 to 2011-85. 

Changes in Demographic Data, Assumptions, and Methods 

Period Beginning January 1, 2011, and Ending January 1, 2012 

The ultimate demographic assumptions for the current valuation (beginning on January 1, 2012) are the same 

as those for the prior valuation. However, the starting demographic values, and the way these values transition to the 

ultimate assumptions, were changed. 

 Preliminary birth rate data for 2009 and 2010 are lower than were expected in the prior valuation. During the 

period of transition to their ultimate values, the birth rates in the current valuation are generally lower than 

they were in the prior valuation. 

 The current valuation incorporates final data on legal immigration levels for 2010. The levels are slightly 

lower than the estimates used in the prior valuation. 

 Updated starting population levels and the interaction of these levels with the changes in the fertility and 

immigration assumptions result in higher ratios of retirement age population to working age population than 

in the prior valuation. 

Inclusion of each of these demographic data sets decreases the present value of future net cashflows. 

Period Beginning January 1, 2010, and Ending January 1, 2011 

The ultimate demographic assumptions for the current valuation (beginning on January 1, 2011) are the same 

as those for the prior valuation. However, the starting demographic values were changed. 

 The inclusion of final mortality data for 2007 results in lower starting death rates and faster near-term declines in 

death rates at older ages for the current valuation. 

 Revised historical estimates of net other immigration and final data on legal immigration for 2009 are also used in 

the current valuation. Based on estimates from the Department of Homeland Security for 2007 and 2008 and due 

to the weak U.S. economy since 2008, net other immigration levels for 2007-2010 are assumed negative for the 

current valuation. These levels are significantly lower than the positive estimates used in the prior valuation. 

 Birth rates projected through 2026 are slightly lower in the current valuation; preliminary birth data for 2008 and 

2009 was lower than was expected for the prior valuation. 

 Updated starting values of population levels were incorporated in the current valuation. 

Except for updating starting values of population levels, inclusion of each of these demographic data sets 

decreases the present value of future net cashflows. 

The following demographic methods were changed in the current valuation (beginning on January 1, 2011). 

 The method of determining the initial projected rates of mortality decline was changed to place greater emphasis 

on recent experience. These initial rates of decline are now determined using the most recent 10 years of historical 

data, rather than the most recent 20 years. This change increased the rate of decline in death rates at older ages for 

years following the year of final data (2007) up to the year the ultimate rates of declines are fully in effect (2035). 

 The historical estimates of the other immigrant population by age and sex were improved, resulting in greater 

consistency between the other immigrant population and the total population. 

Both of these changes in demographic methods decrease the present value of future net cashflows. 

Changes in Economic Data, Assumptions, and Methods 

Period Beginning on January 1, 2011, and Ending January 1, 2012 

The ultimate economic assumptions for the current valuation (beginning January 1, 2012) are the same as those 

for the prior valuation except for the assumed annual rate of change in average hours worked. The current valuation 

assumes a decline in average hours worked of 0.05 percent per year rather than no change, as was assumed in the 

prior valuation. This change lowers the ultimate annual real-wage differential by 0.05 percentage point from the 

prior valuation, and decreases the present value of future cashflows. In addition, the starting economic values and 

near-term economic growth rate assumptions were updated to reflect recent developments. 

 For the current valuation, OASDI taxable earnings are lower in the starting year, 2011, than were projected for the 

prior valuation. 

 Price inflation in 2011 was higher than expected, with the cost-of-living adjustment to benefits in December 2011 

being 2.9 percentage points higher than was assumed in the prior valuation. 
144 NOTES TO THE FINANCIAL STATEMENTS 

 The real interest rate is projected to be lower over the first ten years of the current valuation. 

Inclusion of each of these economic revisions decreases the present value of future net cashflows. 

Period Beginning January 1, 2010, and Ending January 1, 2011 

The ultimate economic assumptions for the current valuation (beginning on January 1, 2011) are the same as 

those for the prior valuation. However, the starting economic values and near-term economic growth rate 

assumptions were changed. The economic recovery has been slower than was assumed for the prior valuation. 

 For the current valuation, OASDI taxable earnings are considerably lower for the starting year 2010, than were 

projected for the prior valuation. Even though earnings grow faster after 2010 through 2019, the projected level of 

earnings is lower through 2018 for the current valuation. 

 Unemployment rates are slightly higher over first few years of the projection for the current valuation. 

 The real interest rate is lower over the first few years of the projection for the current valuation. 

Inclusion of each of these economic revisions decreases the present value of future net cashflows. 

A change to the methodology for projecting labor force participation was implemented for the current 

valuation (beginning on January 1, 2011). The assumed effect of gains in life expectancy on labor force participation 

for persons over 40 was doubled, significantly increasing projected participation rates at higher ages. Disability 

prevalence was added as an input variable to the labor force model for persons over normal retirement age, partially 

offsetting increases in the labor force due to changes in life expectancy. Inclusion of these changes to labor force 

participation projections increase the present value of future net cashflows. 

Changes in Methodology and Programmatic Data 

Period Beginning on January 1, 2011, and Ending January 1, 2012 

Several methodological improvements and updates of program-specific data are included in the current 

valuation (beginning on January 1, 2012). The most significant are identified below. 

 Compared to the prior valuation, the ultimate age-adjusted disability incidence rates increased by 2 percent for 

males and 5 percent for females. Inclusion of these changes to disability incidence rates projections increased the 

number of disability beneficiaries. 

 Projected earnings of new beneficiaries were made more consistent with projected economy-wide covered worker 

rates. This change led to increases in projected benefit levels for workers who become eligible for benefits in the 

future. 

 Average benefit levels for retired-worker and disabled-worker beneficiaries were slightly increased for their first 2 

years of benefit entitlement. The method for estimating these average benefit levels was changed to exclude 

beneficiaries who first start receiving benefits 2 or more years after their initial entitlement date, who tend to have 

lower benefits. 

Inclusion of each of these methodological improvements and updates of program-specific data revisions 

decreases the present value of future net cashflows. 

Period Beginning January 1, 2010, and Ending January 1, 2011 

Several methodological improvements and updates of program-specific data are included in the current 

valuation (beginning on January 1, 2011). The most significant are identified below. 

 Disabled worker mortality and termination rates were updated to reflect a more recent historical period. Inclusion 

of these updates decrease the present value of future net cashflows. 

 The historical sample of new beneficiaries, which serves as the basis of average benefit levels, was updated from a 

2006 sample to a 2007 sample. Inclusion of this update increases the present value of future net cashflows. 

 Actual experience of the combined OASI and DI Trust Funds between January 1, 2010 and January 1, 2011 is 

incorporated in the current valuation and is slightly less than projected in the prior valuation. 

Changes in Law or Policy 

Period Beginning on January 1, 2011, and Ending January 1, 2012 

There were no legislative changes, included in the current valuation (beginning on January 1, 2012) and not in 

the prior valuation, that are projected to have a significant effect on the present value of the 75-year net cashflows. 
NOTES TO THE FINANCIAL STATEMENTS 145

Period Beginning January 1, 2010 and Ending January 1, 2011 

There were no legislative changes, included in the current valuation (beginning on January 1, 2011) and not in 

the prior valuation, that are projected to have a significant effect on the present value of the 75-year net cashflows. 

Medicare 

All estimates relating to the Medicare program in the Statement of Changes in Social Insurance Amounts 

represent values that are incremental to the prior change. As an example, the present values shown for demographic 

assumptions, represent the additional effect that these assumptions have, once the effects from the change in the 

valuation period and projection base have been considered. 

Assumptions Used for the Components of the Changes for the Medicare Program 

The present values included in the Statement of Changes in Social Insurance Amounts are for the current and 

prior years and are based on various economic and demographic assumptions used for the intermediate assumptions 

in the Medicare Trustees Reports for these years. Table 1B summarizes these assumptions for the current year. 

Period Beginning on January 1, 2011, and Ending January 1, 2012 

Present values as of January 1, 2011, are calculated using interest rates from the intermediate assumptions of 

the 2011 Medicare Trustees Report. All other present values in this part of the Statement of Changes in Social 

Insurance Amounts are calculated as a present value as of January 1, 2012. Estimates of the present value of changes 

in social insurance amounts due to changing the valuation period, projection base, demographic assumptions, and 

law are determined using the interest rates under the intermediate assumptions of the 2011 Medicare Trustees 

Report. Since interest rates are economic assumptions, the estimates of the present values of changes in economic 

assumptions are presented using the interest rates under the intermediate assumptions of the 2012 Medicare Trustees 

Report. 

Period Beginning on January 1, 2010, and Ending January 1, 2011 

Present values as of January 1, 2010, are calculated using interest rates from the intermediate assumptions of 

the 2010 Medicare Trustees Report. All other present values in this part of the Statement of Changes in Social 

Insurance Amounts are calculated as a present value as of January 1, 2011. Estimates of the present value of changes 

in social insurance amounts due to changing the valuation period, projection base, demographic assumptions, and 

law are determined using the interest rates under the intermediate assumptions of the 2010 Medicare Trustees 

Report. Since interest rates are economic assumptions, the estimates of the present values of changes in economic 

assumptions are presented using the interest rates under the intermediate assumptions of the 2011 Medicare Trustees 

Report. 

Changes in Valuation Period 

Period Beginning on January 1, 2011, and Ending January 1, 2012 

The effect on the 75-year present values of changing the valuation period from the prior valuation period 

(2011-85) to the current valuation period (2012-86) is measured by using the assumptions for the prior valuation 

period and applying them, in the absence of any other changes, to the current valuation period. Changing the 

valuation period removes a small negative net cashflow for 2011 and replaces it with a much larger negative net 

cashflow for 2086. The present value of future net cashflow (including or excluding the combined Medicare Trust 

Fund assets at the start of the period) was therefore decreased (made more negative) when the 75-year valuation 

period changed from 2011-85 to 2012-86. 

Period Beginning on January 1, 2010, and Ending January 1, 2011 

The effect on the 75-year present values of changing the valuation period from the prior valuation period 

(2010-84) to the current valuation period (2011-85) is measured by using the assumptions for the prior valuation 

period and applying them, in the absence of any other changes, to the current valuation period. Changing the 

valuation period removes a small negative net cashflow for 2010 and replaces it with a much larger negative net 

cashflow for 2085. The present value of future net cashflow (including or excluding the combined Medicare Trust 

Fund assets at the start of the period) was therefore decreased (made more negative) when the 75-year valuation 

period changed from 2010-84 to 2011-85. 
146 NOTES TO THE FINANCIAL STATEMENTS 

Change in Projection Base 

Period Beginning January 1, 2011, and Ending January 1, 2012 

Actual revenue and expenditures in 2011 were different than what was anticipated when the 2011 Medicare 

Trustee Report projections were prepared. Part A revenue was slightly higher than estimated and Part A 

expenditures were lower than anticipated, based on actual experience. Part B total revenue and expenditures were 

higher than estimated based on actual experience. For Part D, actual revenue and expenditures were both slightly 

lower than prior estimates. The net impact of the Part A, B, and D projection-base changes is an increase in the 

future net cashflow. Actual experience of the Medicare Trust Funds between January 1, 2011 and January 1, 2012 is 

incorporated in the current valuation and is slightly more than projected in the prior valuation. 

Period Beginning on January 1, 2010, and Ending January 1, 2011 

Actual revenue and expenditures in 2010 were different than what was anticipated when the 2010 Medicare 

Trustees Report projections were prepared. Part A revenue was lower than estimated and Part A expenditures were 

higher than anticipated, due to the impacts of the economic recession. Part B total revenue and expenditures were 

lower than estimated based on actual experience. For Part D, actual revenue and expenditures were both slightly 

lower than prior estimates. The net impact of the Part A, B, and D projection-base changes is a slight decrease in the 

future net cashflow. Actual experience of the Medicare Trust Funds between January 1, 2010, and January 2011 is 

incorporated in the current valuation and is slightly more than projected in the prior valuation. 

Changes in Demographic Data, Assumptions, and Methods 

Period Beginning January 1, 2011, and Ending January 1, 2012 

The demographic assumptions used in the Medicare projections are the same as those used for the OASDI and 

are prepared by the Office of the Chief Actuary at the SSA. 

The ultimate demographic assumptions for the current valuation period are the same as those for the prior 

valuation period. However, the starting demographic values were changed. 

 Preliminary birth rate data for 2009 and 2010 are lower than were expected in the prior valuation. During the 

period of transition to their ultimate values, the birth rates in the current valuation are generally lower than they 

were in the prior valuation. 

 The current valuation incorporates final data on legal immigration levels for 2010. The levels are slightly lower 

than the estimates used in the prior valuation. 

 Updated starting population levels and the interaction of these levels with the changes in the fertility and 

immigration assumptions result in higher ratios of retirement age population to working age population than in the 

prior valuation. 

These changes have little impact on the Part A present values of future expenditures and revenue. However, 

since overall population projections are lower compared to the prior valuation, these changes lower the Part B and 

Part D present values of expenditures. 

Period Beginning January 1, 2010, and Ending January 1, 2011 

The demographic assumptions used in the Medicare projections are the same as those used for the OASDI and 

are prepared by the Office of the Chief Actuary at the SSA. 

The ultimate demographic assumptions for the current valuation period are the same as those for the prior 

valuation period. However, the starting demographic values were changed. 

 The inclusion of final mortality data for 2007 results in lower starting death rates and faster near-term declines in 

death rates at older ages for the current valuation period. Revised historical estimates of net other immigration and 

final data on legal immigration for 2009 are also used in the current valuation. Based on estimates from the 

Department of Homeland Security for 2007 and 2008 and due to the weak U.S. economy since 2008, net other 

immigration levels for 2007-2010 are assumed negative for the current valuation period. These levels are 

significantly lower than the positive estimates used in the prior valuation period. 

 Birth rates projected through 2026 are slightly lower in the current valuation; preliminary birth data for 2008 and 

2009 was lower than was expected for the prior valuation. 

These changes have little impact on the present values of future expenditures and revenue. 
NOTES TO THE FINANCIAL STATEMENTS 147

Changes in Economic and Other Health Care Assumptions

Period Beginning January 1, 2011, and Ending January 1, 2012 

The economic assumptions used in the Medicare projections are the same as those used for the OASDI and are 

prepared by the Office of the Chief Actuary at the SSA. 

The ultimate economic assumptions for the current valuation period are the same as those for the prior 

valuation period. However, the starting economic values and near-term economic growth rate assumptions were 

changed. The economic recovery has been slower than was assumed for the prior valuation period. 

 For the current valuation period, HI taxable earnings are considerably lower for the starting year, 2011, than were 

projected for the prior valuation period. The projected level of taxable earnings grows more slowly through 2017 

for the current valuation period. 

 Price inflation in 2011 was higher than expected, with the cost-of-living adjustment in December 2011 being 2.9 

percentage points higher than was assumed in the prior valuation. 

 The real interest rate is projected to be lower over the first 10 years of the current valuation period. 

Inclusion of each of these economic revisions decrease the present value of future net cashflow. 

The health care assumptions are specific to the Medicare projections. The following health care assumptions 

were changed in the current valuation. 

 Case mix growth assumptions for inpatient hospitals were lowered. 

 Utilization rate and case mix increase assumptions for skilled nursing facilities and home health agencies 

were increased. 

 Growth in hospice services were increased. 

 Increase in average pre-ACA “baseline” growth rate from GDP+1 percent to GDP+1.4 percent to better 

account for the level of payment rate updates for Medicare (prior to the ACA) compared to private health 

insurance and other payers of health insurance in the U.S. 

 Use of the “factors contributing to growth” model, developed by the Office of the Actuary at CMS, for yearby-year growth rate assumptions in long range. 

 Lower assumed growth rate for prescription drug expenditures is the U.S. overall. 

 Explicit projection of Part B services indexed by the CPI (e.g., Ambulatory Surgical Center, lab and DME 

services). 

The net impact of these changes resulted in a decrease in the future net cashflow for total Medicare. For Part A, 

these changes resulted in an increase to the present value of expenditures and a very slight decrease to the present 

value of revenue, with an overall decrease on the future net cashflow. For Part B, these changes increased the 

present value of expenditures. On the other hand, the above-mentioned changes lowered the present value of 

expenditures for Part D. 

Period Beginning January 1, 2010, and Ending January 1, 2011 

The economic assumptions used in the Medicare projections are the same as those used for OASDI and are 

prepared by the Office of the Chief Actuary at the SSA. 

The ultimate economic assumptions for the current valuation period are the same as those for the prior 

valuation period. However, the starting economic values and near-term economic growth rate assumptions were 

changed. The economic recovery has been slower than was assumed for the prior valuation period. 

 For the current valuation period, HI taxable earnings are considerably lower for the starting year, 2010, than were 

projected for the prior valuation period. The projected level of taxable earnings grows more slowly through 2017 

for the current valuation period. 

 Unemployment rates are slightly higher over the first few years of the projection for the current valuation period. 

The interest rates assumed in the short-range period are lower for the current valuation period. 

Inclusion of each of these economic revisions decreases the present value of future net cashflow. 

The health care assumptions are specific to the Medicare projections. The following health care assumptions 

were changed in the current valuation. 

 Utilization rates for certain hospitals were lowered. 

 Components of price updates for hospitals were increased. 

 Components of price updates for home health agency services were lowered. 

 Slightly lower residual assumptions for certain Part B services in the short-range period. 

 Slight refinement in the Part B application of the ACA multifactor productivity adjustments in the long 

range period, which lowers expenditures. 
148 NOTES TO THE FINANCIAL STATEMENTS 

 The utilization assumed for beneficiaries assumed to switch from Medicare Advantage to fee-for-service 

was lowered. 

 The utilization assumed for beneficiaries assumed to switch from fee-for-service to Medicare Advantage 

was increased. 

 Assumed utilization of skilled nursing facility and home health agency services was increased. 

 Reduction in the projected growth in prescription drug spending in the U.S. 

These changes had a net negative impact on the future net cashflow for total Medicare. For Part A, these 

changes resulted in a net increase to the present value of both revenue and expenditures, with an overall increase on 

the future net cashflow. For Part B, these changes resulted in a net increase to the present value of both revenue and 

expenditures with an overall decrease on the future net cashflow. 

Changes in Law or Policy 

Period Beginning January 1, 2011, and Ending January 1, 2012 

Although Medicare legislation was enacted since the prior valuation date, many of the provisions have a 

negligible impact on the present value of the 75-year revenue, expenditures, and net cashflow. However, there were 

three specific provisions enacted that had a fairly substantial impact on the Medicare program. These include the 

sequestration of up to two percent of Medicare provider expenditures per fiscal year from fiscal year 2013 through 

fiscal year 2021, as required by the Budget Control Act of 2011, which reduces the present value of expenditures 

for Medicare; the extension of the 0 percent physician payment update through calendar year 2012 required by the 

Temporary Payroll Tax Cut Continuation Act of 2011 and the Middle Class Tax Relief and Job Creation Act of 

2012, which slightly increases the present value of Part B expenditures; and the reduction in bad debt payments 

required by the Middle Class Tax Relief and Job Creation Act of 2012, which reduces the present value of Part A 

and Part B expenditures. 

Period Beginning January 1, 2010, and Ending January 1, 2011 

Although Medicare legislation was enacted since the prior valuation date, most of the provisions have a 

negligible impact on the present value of the 75-year income, expenditures, and net cashflow. However, the enacted 

changes to the physician payment update very slightly increased the present value of expenditures, and decreased the 

75-year present value of future net cashflow. 

Railroad Retirement 

The largest change in the open group measure of the Railroad Retirement social insurance program is due to 

changes in economic data and assumptions. Selected economic assumptions were updated in 2012 along with the 

following other components of changes in the open group measure. 

Changes in Valuation Period 

Period Beginning January 1, 2011, and Ending January 1, 2012 

There were no changes in this valuation period. 

Period Beginning January 1, 2010, and Ending January 1, 2011 

The change in the valuation period (from 2010-2084 to 2011-2085) had a minimal effect on the social 

insurance open group measure. 

Changes in Demographic Data and Assumptions 

Period Beginning January 1, 2011, and Ending January 1, 2012 

Some demographic assumptions, such as the Annuitants Mortality Table, the Disabled Mortality Table for 

Annuitants with Disability Freeze, The Disabled Mortality Table for Annuitants without Disability Freeze, the 

Active Service Mortality Table, the Spouse Total Termination Table, the probability of a spouse, the rates of 

immediate age retirement, the rates of immediate disability retirement, the rates of eligibility for disability freeze, 

the rates of final withdrawal, service months, salary scales, and family characteristics, were changed between the 

Statement of Social Insurance as of January 1, 2011 and the Statement of Social Insurance as of January 1, 2012. 
NOTES TO THE FINANCIAL STATEMENTS 149

These changes and the changes in demographic data had a relatively small effect (about 0.3 billion) on the open 

group measure between January 1, 2011 and January 1, 2012. 

Period Beginning January 1, 2010, and Ending January 1, 2011 

Demographic assumptions were not changed between 2010 and 2011. Changes in demographic data had a 

minimal effect (less than 0.1 billion) on the open group measure between January 1, 2010 and January 1, 2011. 

Changes in Economic Data and Assumptions 

Period Beginning January 1, 2011, and Ending January 1, 2012 

Both select and ultimate economic assumptions were changed between January 1, 2011, and January 1, 2012. 

The actual COLA of 3.6 percent was used for 2012 in place of the 3.0 percent COLA assumed for 2012 in the prior 

year’s report. Assumed COLAs of 2.0 percent in 2013, 2.4 percent in 2014, and 2.8 percent in 2015 and thereafter 

were used rather than the 3.0 percent COLA assumed in the prior year’s report. A wage increase rate of 3.5 percent 

was used for 2011 rather than the assumed 4 percent wage increase rate used for 2011 in the prior year’s report. A 

wage increase rate of 3.8 percent was used for 2012 and thereafter rather than the 4 percent wage increase rate used 

in the prior year’s report. Also, the actual 2011 investment return of (1.6 percent) was lower than the assumed 7.5 

percent investment rate used for 2011 in the prior year’s report. An assumed investment return of 7 percent was used 

for 2012 and all subsequent years rather than the 7.5 percent rate used in the prior year’s report. Economic data and 

assumptions had the greatest effect on the open group measure, resulting in a change of about $2.2 billion from 

January 1, 2011 to January 1, 2012. 

Period Beginning January 1, 2010, and Ending January 1, 2011 

Ultimate economic assumptions were not changed between the Statement of Social Insurances as of January 1, 

2010, and the Statement of Social Insurance as of January 1, 2011, but the select economic assumptions were. The 

actual COLA of 0.0 percent was used for 2011 in place of the 0.5 percent COLA assumed for 2011 in the prior 

year’s report. A wage increase rate of 2.4 percent was used for 2010 rather than the assumed 4 percent wage 

increase rate used for 2010 in the prior year’s report. Also, the actual 2010 investment return of 14.4 percent was 

higher than the assumed 7.5 percent investment rate used for 2010 in the prior year’s report. Economic data and 

assumptions for Cost of Living Adjustments, wage increase rate, and investment return were updated in 2012 and 

had the greatest effect on the open group measure. 

Changes in Methodology and Programmatic Data 

Period Beginning January 1, 2011, and Ending January 1, 2012 

There were no changes in methodology and programmatic data. 

Period Beginning January 1, 2010, and Ending January 1, 2011 

There were no changes in methodology and programmatic data. 

Changes in Law or Policy 

Period Beginning January 1, 2011, and Ending January 1, 2012 

There were no changes in law or policy. 

Period Beginning January 1, 2010, and Ending January 1, 2011 

There were no changes in law or policy. 

Black Lung 

The significant assumptions used in the projections of the Black Lung social insurance program presented in 

the Statement of Social Insurance are the number of beneficiaries, life expectancy, coal excise tax revenue estimates, 

the tax rate structure, Federal civilian pay raises and medical cost inflation. These assumptions also affect the 

amounts reported on the Statement of Changes in Social Insurance Amounts. 

During fiscal year 2012, the decrease in the open group measure was primarily due to changes in the 

assumptions about coal excise tax revenues and changes in the assumptions about beneficiaries, including cost (not 

associated with medical inflation or Federal civilian pay raises), number, type, age, and life expectancy, which were 
150 NOTES TO THE FINANCIAL STATEMENTS 

offset in part due to the change in the assumption about the interest rate that was used to discount the cash flows 

from 3.375 percent to 2.75 percent. For fiscal year 2012, the coal excise tax revenue projections were revised to 

reflect current year experience and a decrease in future collections. The assumptions about the beneficiaries were 

revised to reflect current year experience and an increase in future costs. The interest rate was revised to reflect the 

Treasury rate at the start of the projection period. 

During fiscal year 2011, the decrease in the open and closed group measure was primarily due to changes in 

the assumptions about coal excise tax revenues, offset in part due to the changes in the assumptions about 

beneficiaries, including costs (not associated with medical inflation or Federal civilian pay raises), number, type, 

age, and life expectancy and the change in the assumption about the interest rate that was used to discount the cash 

flows from 3.75 percent to 3.375 percent. The coal excise tax revenue projections were revised to reflect the fiscal 

year 2011 experience and a decrease in future collections. The assumptions about the beneficiaries were revised to 

reflect the fiscal year 2011 experience and a decrease in future costs. The interest rate was revised to reflect the 

Treasury rate at the start of the projection period. 
NOTES TO THE FINANCIAL STATEMENTS 151

Note 27. Stewardship Land and Heritage Assets 

Stewardship land is federally-owned land that is set aside for the use and enjoyment of present and future 

generations, and land on which military bases are located. Except for military bases, this land is not used or held for 

use in general Government operations. Stewardship land is land that the Government does not expect to use to meet 

its obligations, unlike the assets listed in the Balance Sheets. Stewardship land is measured in non-financial units 

such as acres of land and lakes, and a number of National Parks and National Marine Sanctuaries. Examples of 

stewardship land include national parks, national forests, wilderness areas, and land used to enhance ecosystems to 

encourage animal and plant species, and to conserve nature. This category excludes lands administered by the 

Bureau of Indian Affairs and held in trust. 

The majority of public lands that are under the management of DOI were acquired by the Government during 

the first century of the Nation’s existence between 1781 and 1867. 

Stewardship lands are used and managed in accordance with the statutes authorizing their acquisition or 

directing their use and management. Additional detailed information concerning stewardship land, such as agency 

stewardship policies, physical units by major categories, and the condition of stewardship land, can be obtained from 

the financial statements of DOI, DOC, DOD, and USDA. 

Heritage assets are Government-owned assets that have one or more of the following characteristics: 

 Historical or natural significance. 

 Cultural, educational, or artistic importance. 

 Significant architectural characteristics. 

The cost of heritage assets often is not determinable or relevant to their significance. Like stewardship land, the 

Government does not expect to use these assets to meet its obligations. The most relevant information about heritage 

assets is non-financial. The public entrusts the Government with these assets and holds it accountable for their 

preservation. Examples of heritage assets include the Mount Rushmore National Memorial and Yosemite National 

Park. Other examples of heritage assets include the Declaration of Independence, the U.S. Constitution, and the Bill 

of Rights preserved by the National Archives. Also included are national monuments/structures such as the Vietnam 

Veterans Memorial, the Jefferson Memorial, and the Washington Monument, as well as the Library of Congress. 

Many other sites such as battlefields, historic structures, and national historic landmarks are placed in this category, 

as well. 

Many laws and regulations govern the preservation and management of heritage assets. Established policies by 

individual Federal agencies for heritage assets ensure the proper care and handling of the assets under their control 

and preserve these assets for the benefit of the American public. 

Some heritage assets are used both to remind us of our heritage and for day-to-day operations. These assets are 

referred to as multi-use heritage assets. One typical example is the White House. The cost of acquisition, betterment 

or reconstruction of all multi-use heritage assets is capitalized as general PP&E and is depreciated. 

The Government classifies heritage assets into two broad categories: collection type and non-collection type. 

Collection type heritage assets include objects gathered and maintained for museum and library collections. Noncollection type heritage assets include national wilderness areas, wild and scenic rivers, natural landmarks, forests, 

grasslands, historic places and structures, memorials and monuments, buildings, national cemeteries, and 

archeological sites. 

The discussion of the Government’s heritage assets is not all-inclusive. Rather, it highlights significant heritage 

assets reported by Federal agencies. Please refer to the individual financial statements of the DOC, VA, State, DOD, 

National Archives and Records Administration, and Web sites for the Library of Congress 

(http://www.loc.gov/index.html), the Smithsonian Institution (http://www.si.edu), and the Architect of the Capitol 

(http://aoc.gov) for additional information on multi-use heritage assets, agency stewardship policies, and physical 

units by major categories and conditions. 
152 NOTES TO THE FINANCIAL STATEMENTS 

Note 28. Subsequent Events 

Statutory Debt Limit 

As of September 30, 2012, debt subject to the statutory debt limit was $16,027.0 billion, as stated in Note 14—

Federal Debt Securities Held by the Public and Accrued Interest. As of September 30, 2012, and the issuance date of 

this Financial Report, the statutory debt limit was $16,394.0 billion per Public Law 112-25. On December 26, 2012, 

the Secretary of the Treasury notified the Congress that the statutory debt limit would be reached on December 31, 

2012. On December 31, 2012, Treasury began to depart from its normal debt management procedures and invoke 

legal authorities to avoid exceeding the statutory debt limit. As of the issuance date of this Financial Report, the 

statutory debt limit had not been increased. 

Statement of Social Insurance-Medicare

HHS considered the financial impact of both the reductions in Medicare payment rates for physician services 

and the budget sequestration, which was then expected to take effect, respectively, on January 1, 2013, and January 

2, 2013, when preparing the fiscal year 2012 SOSI for Medicare. For policy changes enacted after the end of the 

fiscal year, but prior to the issuance of the financial statements, the financial statements should disclose the nature of 

the policy changes and, if known, the estimated effect on the projections related to the Statements of Social 

Insurance. The American Taxpayer Relief Act of 2012, enacted on January 2, 2013, included certain provisions 

affecting Medicare. As of the issuance of the Financial Report, the full financial effects of this Act on the Medicare 

SOSI projections are not known. 

Updates to Troubled Asset Relief Program (TARP) 

Investments 

American International Group, Inc. 

During December 2012, Treasury sold the remaining 154 million shares of AIG common stock held by 

Treasury under TARP at a share price of $32.50. The sale of the AIG common stock resulted in proceeds of $5.0 

billion to Treasury under TARP. 

General Motors 

During December 2012, Treasury sold 200 million shares of GM common stock held by Treasury under TARP 

at a share price of $27.50 per share, which resulted in proceeds of $5.5 billion to Treasury under TARP. 

See Note 5—Troubled Asset Relief Program (TARP)—Direct Loans and Equity Investments, Net for further 

information on TARP investments related to AIG and GM. 

Sale of Non-TARP Investments in AIG 

During December 2012, Treasury sold all remaining 80 million shares of AIG common stock held by the 

General Fund at a share price of $32.50 per share. The sale of the AIG common stock resulted in proceeds of $2.6 

billion to the General Fund. See Note 6—Non-TARP Investments in American International Group, Inc. for further 

information on the non-TARP investments in AIG. 
NOTES TO THE FINANCIAL STATEMENTS 153

Hurricane Sandy

In late October 2012. Hurricane Sandy made landfall in the mid-Atlantic region of the United States, impacting 

the physical landscape, the people and the region’s economy. As a result of the storm, the Government launched 

various response and recovery efforts, including power restoration, provisioning of food, fuel shelter, and security, 

reestablishing connectivity, and flood level and damage (e.g., erosion) assessments. The Government is still in the 

process of evaluating the impact of this storm and is unable to quantify damages at this time related to emergency 

relief assistance to the impacted states. 

Emergency Unemployment Compensation Benefits 

Subsequent to September 30, 2012, emergency unemployment compensation benefits, first authorized by the 

Supplemental Appropriations Act, 2008 and extended by the American Recovery and Reinvestment Act of 2009 and 

other authorizing legislation through January 2, 2013, were extended through January 1, 2014, by the American 

Taxpayer Relief Act of 2012. 
154 NOTES TO THE FINANCIAL STATEMENTS 

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REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 155 

United States Government 

Required Supplementary Information 

(Unaudited) For the Years Ended 

September 30, 2012, and 2011 

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

2012 

This section of the FR is prepared pursuant to Statement of Federal Financial Accounting Standard (SFFAS) 

36, Reporting Comprehensive Long-Term Fiscal Projections for the U.S. Government. It is intended to help readers 

assess whether future budgetary resources will be sufficient to sustain public services and to meet future obligations 

as they come due, and the extent to which federal benefits received by current taxpayers will be shifted to future 

taxpayers, assuming that the Federal Government’s current policies for spending and taxation are continued. Such an 

assessment requires prospective information about receipts and spending, the resulting debt, and how these amounts 

relate to the economy. The assessment is also referred to as reporting on “fiscal sustainability.” A sustainable policy, 

as defined in the following analysis, is one where the ratio of federal debt held by the public to GDP (the debt-toGDP ratio) is ultimately stable or declining. This section of the FR does not assess the sustainability of State and 

local government fiscal policy. 

The projections and analysis presented here are extrapolations based on an array of assumptions described in 

detail below. Among these is the assumption that current Federal policy will not change. This assumption is made so 

as to inform the question of whether current fiscal policy is sustainable and, if it is not sustainable, the magnitude of 

needed reforms to make it sustainable. The projections are therefore neither forecasts nor predictions. If policy 

changes are implemented, perhaps in response to projections like those presented here, then actual financial 

outcomes will of course be different than those projected. 

This is the third year that this section has been included in the FR. The methods and assumptions underlying 

the projections are still evolving. 

Statement of Long Term Fiscal Projections 

Table 1 on the following page presents 75-year projections of the Federal Government’s receipts and noninterest spending1

 for both the fiscal year 2012 and fiscal year 2011 Reports. Receipt categories include individual 

income taxes, Social Security and Medicare payroll taxes, and all other receipts. On the spending side, the 

projections are broken down into: (1) discretionary spending that is funded through annual appropriations, such as 

spending for national security, and (2) mandatory (entitlement) spending that is generally financed with permanent 

or multi-year appropriations, such as spending for Social Security and Medicare. This year’s projections for Social 

Security and Medicare are based on the same economic and demographic assumptions as are used for the 2012 

Social Security and Medicare Trustees’ Reports and the Statement of Social Insurance, while comparative 

information presented from last year’s report is based on the 2011 Social Security and Medicare Trustees’ Reports. 

Projections for the other categories are consistent with the economic and demographic assumptions used from the 

trustees’ reports. The projections assume the continuance of current policy without change, which is different than 

current law in cases where lawmakers have in the past periodically changed the law in a predictable way. Current 

policy differences from current law are explained in the section entitled “Departures of Current Policy from Current 

Law”. 

 

1

 For the purposes of this analysis, spending is defined in terms of outlays. In the context of Federal budgeting, spending can either refer to budget 

authority–the authority to commit the government to spend an amount–or to outlays, which reflect actual payments made. 
156 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

The projections in Table 1 are expressed in present value dollars, and as a percentage of the present value of 

GDP2 as of September 20, 2012 and 2011. The present value of a future amount, for example, $1 billion in October 

2087, is the amount of money that if invested on September 30, 2012 in an account earning the government 

borrowing rate would have a value of $1 billion in October 2087.3

 The present value of a receipt or expenditure 

category over 75 years is the sum of the annual present value amounts. When expressing a receipt or expenditure 

category over 75 years as a percent of GDP, the present value dollar amount is divided by the present value of GDP 

over 75 years. Measuring receipts and expenditures as a percentage of GDP is a useful indicator of the economy’s 

capacity to sustain federal government programs. As is true for all past Financial Reports, the assumptions for GDP, 

interest rates, and other economic factors underlying this year’s projections are the same assumptions that underlie 

the most recent Social Security and Medicare Trustees’ Report projections. The use of discount factors consistent 

with the Social Security trustees’ rate allows for consistent present value budget calculations over 75 years between 

this report and the trustees’ reports. Present value calculations under higher and lower interest rate scenarios are 

presented in the “Alternative Scenarios” section. 

 

2

 GDP is a standard measure of the overall size of the economy and represents the total market value of all final goods and services produced 

domestically during a given period of time. The components of GDP are: private sector consumption and investment, government consumption 

and investment, and net exports (exports less imports). Equivalently, GDP is a measure of the gross income generated from domestic production 

over the same time period. 

3

 Present values recognize that a dollar paid or collected in the future is worth less than a dollar today because a dollar today could be invested 

and earn interest. To calculate a present value, future amounts are thus reduced using an assumed interest rate, and those reduced amounts are 

summed. 

Table 1: Long-Term Fiscal Projections of Federal Receipts and Spending 

Receipts: 

75-Year Present Values1

Dollars in Trillions %GDP2

2012 2011 Change 2012 2011 Change

Social Security Payroll Taxes .............. 42.1 39.1 3.0 4.3 4.4 -0.1

Medicare Payroll Taxes ....................... 14.1 13.0 1.1 1.5 1.5 0.0

Individual Income Taxes ...................... 97.5 93.5 4.0 10.0 10.5 -0.5

Other Receipts ..................................... 37.9 34.7 3.2 3.9 3.9 0.0

Total Receipts .................................... 191.6 180.2 11.4 19.7 20.3 -0.5

Non-interest Spending: 

Social Security ..................................... 57.5 51.8 5.7 5.9 5.8 0.1

Medicare Part A3 .................................. 22.7 17.6 5.0 2.2 2.0 0.2

Medicare Parts B&D4 ........................... 22.2 21.1 1.1 2.4 2.4 0.0

Medicaid ............................................... 26.1 24.0 2.2 2.7 2.7 0.0

Security Discretionary .......................... 30.4 28.7 1.7 3.1 3.2 -0.1

Non-security Discretionary ................... 16.1 15.4 0.7 1.7 1.7 -0.1

Other Mandatory .................................. 33.2 28.1 5.1 3.4 3.2 0.3

Total Non-interest Spending ............. 208.2 186.7 21.5 21.4 21.0 0.5

Non-interest Spending less Receipts: 16.5 6.4 10.1 1.7 0.7 1.0 1

75-year present value projections for 2012 are as of 9/30/2012 for the period FY 2013-2087; projections for 2011 are as 

of 9/30/2011 for the period FY 2012-2086. 

2

The 75-year present value of nominal GDP, which drives the calculations above, is $971.3 trillion starting in FY 2013, 

and was $889.8 trillion starting in FY 2012. 

3

Represents portions of Medicare supported by payroll taxes. 

4

Represents portions of Medicare supported by general revenues. Consistent with the President’s Budget, Parts B & D 

are presented net of premiums, and Part D also net of state contributions. 

NOTE: Totals may not equal the sum of components due to rounding. 
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 157 

The projections shown in Table 1 are made over a 75-year time frame, consistent with the time frame featured 

in the Social Security and Medicare trustees’ reports. However, these projections are for fiscal years starting on 

October 1, whereas the trustees’ reports feature calendar-year projections. This difference allows the projections to 

start from the actual budget results from fiscal years 2012 and 2011. 

The overall 75-year present value net excess of non-interest spending over receipts expressed in Table 1 is 

$16.5 trillion (1.7 percent of the 75-year present value of GDP) for the 2012 projections. This imbalance can be 

expressed in terms of funding sources. There is a surplus of receipts over spending of $1.3 trillion or 0.1 percent of 

GDP among programs funded by the government’s general revenues, but an imbalance of $17.9 trillion4

 or 1.8 

percent of GDP among Social Security (OASDI) and Medicare Part A, which are funded by payroll taxes and which 

are not funded in any material respects by the government’s general revenues under current law.5 6

 By comparison, 

the 2011 projections showed that programs funded by the government’s general revenues had an excess of receipts 

over spending of $6.0 trillion or 0.7 percent of GDP while the payroll tax funded programs had an imbalance of 

spending over receipts of $12.4 trillion or 1.4 percent of GDP. 

Table 2 breaks down the sources of the change in the projection of the 75-year present value imbalance of 

spending over receipts from last year. The difference is primarily due to the changes in model technical assumptions, 

such as (i) the inclusion of cost for health insurance exchange subsidies, (ii) the assumption in this year’s Report that 

all of the 2001/2003 tax cuts will be extended indefinitely, rather than being allowed to expire for high income 

taxpayers, and (iii) an improved methodology for projecting Medicare costs. 

 

4

 The 75-year present value earmarked imbalance of $17.9 trillion is comprised of several line items from Table 1 – Social Security outlays net of 

Social Security Payroll Taxes ($15.3 trillion) and Medicare Part A outlays net of Medicare Payroll Taxes ($8.6 trillion) – as well as 

subcomponents of these programs not presented separately in the table. These subcomponents include Social Security and Medicare Part A 

administrative costs that are classified as non-security discretionary spending ($0.6 trillion) and Social Security and Medicare Part A revenue 

other than payroll taxes: taxation of benefits (-$3.0 trillion), Federal employer share (-$1.2 trillion), and other income (-$2.5 trillion). 5

 General fund transfers received by the OASDI trust fund, primarily in 2011 and 2012, to account for lost payroll taxes resulting from enactment 

of the temporary 2 percent reduction of the employee payroll taxes are not included in the 75-year present value of OASDI payroll taxes. Social 

Security and Medicare Part A expenditures can exceed payroll tax revenues in any given year to the extent that there are sufficient balances in the 

respective trust funds, balances that derive from past excesses of payroll tax revenues over expenditures and interest earned on those balances. 

When spending does exceed payroll tax revenues, as has occurred in every year since 2008 for Medicare Part A and 2010 for Social Security, the 

excess spending is financed from general revenues or borrowing. Under current law, benefits for Social Security and Medicare Part A can be paid 

only to the extent that there are sufficient balances in the respective trust funds. In order for the projections here to reflect the full size of these 

program’s commitments to future benefits, the projections assume that all scheduled benefits will be financed with borrowing to the extent 

necessary after the trust funds are exhausted. 

6

 The fiscal imbalances reported in Table 1 are limited to future outlays and receipts. They do not include the initial level of publicly-held debt, 

which was $11.3 trillion, and therefore they do not by themselves answer the question of how large fiscal reforms must be to make fiscal policy 

sustainable, or how those reforms divide between reforms to Social Security and Medicare Part A and to other programs. Other things equal, past 

cash flows (primarily surpluses) for Social Security and Medicare Part A reduced federal debt at the end of 2012 by $3.0 trillion (the trust fund 

balances at that time); the contribution of other programs to federal debt at the end of 2012 was therefore $14.3 trillion. Because the $17.9 trillion 

imbalance between outlays and receipts over the next 75 years for Social Security and Medicare Part A does not take account of the Social 

Security and Medicare Part A trust fund balances, it overstates the magnitude of reforms necessary to make Social Security and Medicare Part A 

solvent over 75 years by $3.0 trillion. The $3.0 trillion combined Social Security and Medicare Part A trust fund balance represents a claim on 

future general revenues. 

Table 2: Components of Change (PV Dollars in Trillions) 

Non-Interest Spending Less Receipts: FY 2011 .................6.4 

Components of Change: 

Change in Model Technical Assumptions ..............................9.0 

Change due to Updated Actuarial Reports ............................2.6 

Change due to Updated Budget Data ....................................-1.9 

Change in Economic and Demographic Assumptions ...........0.9 

Change in Reporting Period ...................................................-0.5 

Total .........................................................................................10.1 

Non-Interest Spending Less Receipts: FY 2012 ................16.5 
158 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

Another large source of change since 2011 was due to the 2012 actuarial reports for Social Security, Medicare, 

and the 2011 actuarial report for Medicaid that raised the 75-year present value imbalance by $2.6 trillion.7 Updated 

actual budget results for fiscal year 2012 lowered the projected 75-year present value imbalance by $1.9 trillion. 

Also reflected in Table 2 are revised economic and demographic assumptions that raised the 75-year present value 

imbalance by $0.9 trillion and the change in the reporting period from 2012-2086 to 2013-2087 that lowered the 75-

year fiscal imbalance by $0.5 trillion. 

The projections presented in this report were finalized prior to the enactment of the American Taxpayer Relief 

Act of 2012 (ATRA) in January 2013. Among the important provisions included in that law are: (i) an extension of 

the 2001/2003 tax cuts for individuals with incomes up to $400,000 and families with incomes up to $450,000, but 

not for higher income individuals and families, (ii) permanent indexation of the Alternative Minimum Tax (AMT) 

for inflation, (iii) a 2-month delay in the implementation of automatic spending cuts called for in the Budget Control 

Act of 2011, and (iv) extension of a number of smaller tax measures. The only significant departure of the ATRA 

from the assumptions underlying the projections in this report is the expiration of the 2001/2003 tax cuts on high 

income earners. Updating the projections in this report to account for ATRA would therefore modestly reduce 

projected long term fiscal imbalances. 

The Sustainability of Fiscal Policy 

One of the important purposes of the Financial Report is to help citizens and policymakers assess whether 

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

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

ultimately stable or declining. 

As is discussed below, the projections in this report indicate that current policy is not sustainable. If current 

policy is left unchanged, the ratio of debt to GDP is projected to rise by a little less than 2 percentage points from 

 

7 The majority of this increase is due to changes in the 2012 Medicare Trustees’ Report, which projected larger imbalances in 2012 than in 2011 

for a variety of reasons including assuming greater utilization of skilled nursing homes and home health agencies over the near term and faster 

growth in health costs per beneficiary over the long run.
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 159 

2013 to 2015 and then to fall each year until 2020 by a total of a little more than 1 percentage point. Growth in debt 

resumes in 2020 over the remainder of the 75-year projection window and eventually reaches 395 percent in 2087. 

Moreover, if the trends that underlie the 75-year projections were to continue, the debt-to-GDP ratio would continue 

to rise into the indefinite future. 

Current Policy Projections for Primary Deficits 

A key determinant of growth in the debt-to-GDP ratio and hence fiscal sustainability is the primary deficit-toGDP ratio. The primary deficit is the difference between non-interest spending and receipts, and the primary deficitto-GDP ratio is the primary deficit expressed as a percent of GDP. As shown in Chart 1, the primary deficit-to-GDP 

ratio grew rapidly in 2009 due to the financial crisis and the recession and the policies pursued to combat both. The 

ratio stayed large from 2010 to 2012 despite shrinking in each successive year, but is projected to fall rapidly 

between 2013 and 2018 as spending reductions called for in the Budget Control Act of 2011 (BCA) take effect and 

the economy recovers, reaching primary balance and remaining relatively flat and near zero through 2021. Between 

2022 and 2039, however, increased spending for Social Security and health programs due to continued aging of the 

population is expected to cause the primary balance to steadily deteriorate and reach 2.3 percent of GDP in 2039. 

After 2039, the projected primary deficit-to-GDP ratio slowly declines to 1.7 percent of GDP in 2087 as the impact 

of the baby boom generation retiring dissipates. 

The revenue share of GDP fell substantially in 2009 and 2010 and remained low in 2011 and 2012 because of 

the recession and tax reductions enacted as part of the 2009 American Recovery and Reinvestment Act (ARRA) and 

the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The share is projected to 

return to near its long-run average as the economy recovers. After the economy has fully recovered around 2019, 

receipts are projected to grow slightly more rapidly than GDP as increases in real incomes cause more taxpayers and 

a larger share of income to fall into the higher individual income tax brackets.8

 This projection assumes that 

Congress and the President will continue to enact legislation that prevents the share of income subject to the 

Alternative Minimum Tax from rising. 

On the spending side, the non-interest spending share of GDP is projected to fall from its current level of 21.3 

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

percent of GDP in 2039 and 22.6 percent of GDP in 2087. The reductions in the non-interest spending share of GDP 

over the next two years are mostly due to the expected reductions in spending for overseas contingency operations, 

caps on discretionary spending and the automatic spending cuts mandated by the BCA, and the subsequent increases 

are principally due to faster growth in Medicare, Medicaid, and Social Security spending (see Chart 1). The 

retirement of the baby boom generation over the next 25 years is projected to increase the Social Security, Medicare, 

and Medicaid spending shares of GDP by about 1.4 percentage points, 1.8 percentage points, and 1.1 percentage 

points, respectively. After 2035, the Social Security spending share of GDP is essentially unchanging while the 

Medicare and Medicaid spending share of GDP continues to increase, albeit at a slower rate, due to projected 

increases in health care costs. 

The ACA significantly affects projected spending for both Medicare and Medicaid. That reform expands health 

insurance coverage, includes many measures designed to reduce health care cost growth, and reduces the annual 

increases in Medicare payment rates. On net, the ACA is projected to substantially reduce federal expenditures over 

the next 75 years. The Medicare spending projections in Table 1 are based on the 2012 Medicare Trustees’ Report’s 

current law projections, and those projections show a substantial slowdown in Medicare cost growth. The 

projections assume that Medicaid cost per unit of service grows at the same rate as Medicare cost growth per unit of 

service, so the ACA is also estimated to substantially slow Medicaid cost growth. These projections are subject to 

much uncertainty about the effectiveness of the ACA’s provisions to reduce health care cost growth. Even if those 

provisions work as intended and as assumed in this projection, Chart 1 shows that there is still a persistent gap 

between projected receipts and projected total non-interest spending. 

 

8 Projected revenues also account for increases (as a share of GDP) in employer-sponsored health insurance costs, which are tax exempt. 
160 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

Current Policy Projections for Debt and Interest Payments 

The primary deficit projections in Chart 1, along with projections for interest rates and GDP, determine the 

projections for the debt-to-GDP ratio that are shown in Chart 2. That ratio was 73 percent at the end of fiscal year 

2012, and under current policy is projected to be 78 percent in 2022, 145 percent in 2042, and 395 percent in 2087. 

The continuous rise of the debt-to-GDP ratio indicates that current policy is unsustainable. 
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 161 

The change in debt held by the public from one year to the next is approximately equal to the unified budget 

deficit, the difference between total spending and total receipts.9 Total spending is non-interest spending plus 

interest spending. Chart 3 shows that the rapid rise in total spending and the unified deficit is almost entirely due to 

projected interest payments on the debt. As a percent of GDP, interest spending was 1.4 percent in 2012, and under 

current policy is projected to reach 5 percent in 2029 and 21 percent in 2087. 

Another way of viewing the deterioration in the financial outlook in this year's report relative to last year's 

report documented in Table 2 is in terms of the projected debt-to-GDP ratio in 2086. This ratio is projected to reach 

388 percent in this year's report, which compares with 287 percent projected in last year's report. 

The Fiscal Gap 

The fiscal gap measures how much the primary surplus (receipts less non-interest spending) must increase in 

order for fiscal policy to achieve a target debt-to-GDP ratio in a particular future year. In these projections, the fiscal 

gap is estimated over a 75-year period, from 2013 to 2087, and the target debt-to-GDP ratio is equal to the ratio at 

the beginning of the projection period, in this case the debt-to-GDP ratio at the end of fiscal year 2012 (73 percent of 

GDP). 

Table 3 reports that the 75-year fiscal gap under current policy is estimated at 2.7 percent of GDP, which is 

13.5 percent of the 75-year present value of projected receipts and 12.4 percent of the 75-year present value of noninterest spending. As noted in Table 1, the difference between projected programmatic (non-interest) spending and 

receipts is 1.7 percent of GDP. However, eliminating this primary deficit of 1.7 percent of GDP is not sufficient to 

stabilize the debt-to-GDP ratio. Because interest rates are assumed to exceed the growth rate of GDP, reaching 

primary balance would leave debt rising relative to GDP. In order to fully close the fiscal gap, annual primary 

surpluses over the next 75 years must average 1.0 percent of GDP. 

The Cost of Delay in Closing the 75-Year Fiscal Gap 

The longer policy action to close the fiscal gap is delayed, the larger the post-reform primary surpluses must be 

to stabilize the debt-to-GDP ratio by the end of the 75 year period. Varying the years in which reforms are initiated 

while holding constant the ultimate target ratio of debt to GDP helps to illustrate the cost of delaying policy changes 

that close the fiscal gap. The reforms considered here increase the primary surplus relative to current policy by a 

fixed percent of GDP starting in the reform year. Three such policies are considered, each one beginning in a 

different year. The analysis shows that the longer policy action is delayed, the larger the post-reform primary surplus 

must be to bring the debt-to-GDP ratio to 73 percent of GDP in 2087. Future generations are harmed by policy delay 

because delay necessitates higher primary surpluses during their lifetimes, and those higher primary surpluses must 

be achieved through some combination of lower government benefits and higher taxes. 

Table 3 

Costs of Delaying Fiscal Reform 

Period of Delay Change in Average Primary Surplus 

No delay: Reform in 2013 ........................ 2.7 percent of GDP between 2013 and 2087 

Ten Years: Reform in 2023 ...................... 3.2 percent of GDP between 2023 and 2087 

Twenty Years: Reform in 2033 ................ 4.1 percent of GDP between 2033 and 2087 

NOTE: Reforms taking place in 2012, 2022, and 2032 from the 2011 Report were 1.8, 2.2, and 2.8 percent of GDP. 

As previously shown in Chart 1, under current policy, primary deficits occur in nearly every year of the 

projection period. Table 3 shows primary surplus changes necessary to make the debt-to-GDP ratio in 2087 equal to 

its level in 2012 under each of the three policies. If reform begins in 2013, then it is sufficient to raise the primary 

surplus share of GDP by 2.7 percentage points in every year between 2013 and 2087 in order to have a debt-to-GDP 

ratio in 2087 equal to the level in 2012. This raises the average 2013-2087 primary surplus-to-GDP ratio from -1.7 

percent to +1.0 percent. 

 

9

 Debt held by the public is also affected by certain transactions not included in the unified budget deficit, such as changes in Treasury’s cash 

balances and the nonbudgetary activity of Federal credit financing accounts. These transactions are assumed to hold constant at about 0.6 percent 

of present value GDP. 
162 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

In contrast to a reform that begins immediately, if reform is begun in 2023 or 2033, the primary surplus must 

be raised by 3.2 percent and 4.1 percent of GDP, respectively, in order to reach a debt-to-GDP ratio in 2087 equal to 

the level in 2012. The difference between the primary surplus increase necessary if reform begins in 2023 and 2033 

(3.2 and 4.1 percent of GDP, respectively) rather than in 2013 (2.7 percent of GDP) is a measure of the additional 

burden policy delay would impose on future generations. The costs of delay are due to increases in the debt-to-GDP 

ratio between 2012 and the year reform is initiated, which in turn increase the amount of interest that must be 

covered with the primary surplus. Delaying reform increases the cost of reaching the target debt-to-GDP ratio even 

if the target year is extended beyond 2087, since the starting debt-to-GDP ratio will be higher. 

These estimates likely understate the cost of delay because they assume interest rates will not rise as the debtto-GDP ratio grows. If a higher debt-to-GDP ratio causes the government borrowing rate to rise, making it more 

costly for the government to service its debt and simultaneously slowing private investment, the primary surplus 

required to return the debt-to-GDP ratio to its 2012 level will also increase. This dynamic may accelerate with 

higher ratios of debt to GDP, potentially leading to the point where there may be no feasible level of taxes and 

spending that would reduce the debt-to-GDP ratio to its 2012 level. The potential impact of changes in interest rates 

is explored in the “Alternative Scenarios” section. 

Assumptions Used and Relationship to Other Financial Statements 

A fundamental assumption underlying the projections is that current Federal policy—as defined below—does 

not change. The projections are therefore neither forecasts nor predictions. If policy changes are enacted, perhaps in 

response to projections like those presented here, then actual fiscal outcomes will of course be different than those 

projected. 

Even if policy does not change, actual expenditures and receipts could differ materially from those projected 

here. This is because the long-range projections are inherently uncertain and because simplifying assumptions are 

made. One key simplifying assumption, for example, is that interest rates paid on public debt remain unchanged, 

regardless of the amount of debt outstanding. To the contrary, it is likely that future interest rates would increase if 

the debt rises as shown in these projections. To help illustrate this uncertainty, present value calculations under 

higher and lower interest rate scenarios are presented in the “Alternative Scenarios” section. 

The projections in this section focus on future cash flows, and do not reflect either the accrual basis or the 

modified-cash basis of accounting. These cash-based projections reflect receipts or spending at the time cash is 

received or when a payment is made by the Government. In contrast, accrual-based projections would reflect 

amounts in the time period in which income is earned or when an expense n is incurred. The cash basis accounting 

underlying this section is consistent with methods used to prepare the SOSI and the generally cash-based Federal 

budget. 

The following bullets summarize the assumptions used for the key categories of receipts and spending 

presented in Table 1 and in the related analysis: 

 Social Security: Projected Social Security (OASDI) spending is net of administrative expenses, which are 

classified as discretionary spending, and is based on the projected expenditures in the 2012 Social Security 

Trustees’ Report for benefits and the RRB-SSA-CMS Financial Interchange. The projections of Social 

Security payroll taxes and future Social Security spending begin with actual budget data for fiscal year 

2012. The projected growth rates for future spending and payroll taxes are equal to the spending and tax 

growth rate projections underlying the latest 2012 Social Security Trustees’ Report. 

 Medicare: Projected Medicare spending is also net of administrative expenses and is based on projected 

incurred expenditures from the 2012 Medicare Trustees Report. However, some adjustments to the Trustees 

Report projections are made. Medicare Part B and D premiums, as well as State contributions to Part D, are 

subtracted from gross spending in measuring Part B and Part D outlays, just as they are subtracted from 

gross cost to yield net cost in the financial statements.10 Here, as in the Federal budget, premiums are 

treated as “negative spending” rather than receipts since they represent payment for a service rather than 

payments obtained through the Government’s sovereign power to tax. This is similar to the financial 

statement treatment of premiums as “earned” revenue as distinct from all other sources of revenue, such as 

taxes. The projections start with actual fiscal year 2012 Medicare spending and assume spending growth 

accords with the growth rates projected in the Medicare Trustees Report. Medicare Part A payroll taxes are 

projected similarly. As discussed in Note 26, there is uncertainty about whether the reductions in health 

 

10 Medicare Part B and D premiums and State contributions to Part D are subtracted from the Part B and D spending displayed in Table 1. The 

total 75-year present value of these subtractions is $7.8 trillion, or 0.8 percent of GDP. 
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 163 

care cost growth projected in the Medicare Trustees Report will be fully achieved. Note 26 illustrates this 

uncertainty by considering Medicare cost growth assumptions under varying policy assumptions. 

 Medicaid: The Medicaid spending projections start with the projections from the 2011 Actuarial Report on 

the Financial Outlook for Medicaid prepared by the Office of the Actuary, CMS.11 Those projections end in 

2020. After 2020, it is assumed that Medicaid benefits grow at the same rate per beneficiary as do Medicare 

benefits, as is consistent with the experience since 1987. Between 1987 and 2011, the average annual 

growth rate of outlays per beneficiary for Medicaid and Medicare were within 0.2 percentage points of each 

other. The projections through 2020 account for the effects of the ACA to reflect higher future enrollment, 

as calculated by CMS, and reflect other adjustments to align the base projections with the latest budget 

data. The Medicaid projections do not reflect any change in the interpretation of the ACA due to the June 

2012 Supreme Court ruling on the law, as the CMS actuarial report predates the ruling and its estimated 

impact was still under development by CMS when the current projections were finalized. Medicaid 

beneficiaries are expected to grow at the assumed rate of population growth after the end of the projection 

window in the Medicaid actuarial report. 

 Other Mandatory Spending: Other mandatory spending is projected in two steps. First, spending prior to 

the automatic spending cuts called for by the BCA is projected and, second, the effect of the BCA is 

projected. With regard to pre-BCA spending: (a) Current mandatory spending components that are judged 

permanent under current policy are assumed to increase by the rate of growth in nominal GDP starting in 

2013, implying that such spending will remain constant as a percentage of GDP;(b) Special assumptions 

are made for temporary mandatory spending authorized by ARRA and other stabilization measures, 

including temporary expansions in unemployment insurance benefits, TARP, the purchase of government 

sponsored enterprise (GSE) preferred stock, and higher net spending for the FDIC—the 75-year present 

value of projected spending for this category totals $0.1 trillion; and (c) Projected new spending for 

insurance exchange subsidies starting in 2014 follows the most recent Mid-Session Review projections 

until 2022, and then grows in accordance with growth in the projected non-elderly population and growth 

in health care costs as projected for the Medicare program. 

 Discretionary Spending: Through 2021, discretionary spending other than for Overseas Contingency 

Operations (OCO) is dictated by the spending caps and automatic spending cuts called for by the BCA. 

After 2021, this spending is assumed to grow at the same rate as nominal GDP, and thus plateaus at a longterm level of 5.0 percent of GDP. Projected OCO spending steadily declines and is fully phased out by 

2026. The 75-year present value of OCO spending totals $0.5 trillion, or under half of one tenth of a 

percent of present value GDP, and the present value of the BCA automatic spending cuts is -$0.4 trillion 

 Receipts (Other than Social Security and Medicare): It is assumed that individual income taxes will 

equal the same share of wages and salaries as in the Administration’s latest Mid-Session Review adjusted 

baseline projection. That baseline follows all of the assumptions underlying current policy without change 

in these projections of current policy without change, and incorporates the effects of the economic recovery 

and bracket creep. After reaching about 20.5 percent of wages and salaries in 2022, individual income taxes 

increase gradually to almost 27 percent of wages and salaries in 2087 as real taxable incomes rise over time 

and an increasing share of total income is taxed in the higher tax brackets. The ratio of all other receipts 

combined to GDP is projected to rise over the next several years as the economy recovers, and to then level 

off at 4 percent of GDP, the historical average between 1979 and 2010. 

 Interest Spending: Interest spending is determined by projected interest rates and the level of outstanding 

debt held by the public. The long-run interest rate assumptions convert those in the 2012 Social Security 

Trustees Report12 to a fiscal year basis. The average interest rate over the projection period is 5.5 percent. 

These rates are also used to convert future cash flows to present values as of the start of fiscal year 2013. 

Departures of Current Policy from Current Law 

The long-term fiscal projections are made on the basis of current Federal policy, which in some cases is 

different from current law. The projections are made without regard to the statutory limit on outstanding Federal 

debt. In addition, the projections also assume continued discretionary appropriations throughout the projection 

period, the continued payment of Social Security and Medicare benefits beyond the projected point of trust fund 

 

11 Christopher J. Truffer, John D. Klemm, Christian J. Wolfe, and Kathryn E. Rennie 2011 Actuarial Report on the Financial Condition for 

Medicaid, Office of the Actuary, Centers for Medicare and Medicaid Services, United States Department of Health and Human Services. 12 As indicated in the more detailed discussion of Social Insurance in Note 26 to the financial statements. 
164 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

exhaustion, extension of the 2001/2003 tax cuts, indexing of the current thresholds for the AMT, and the 

reauthorization of many mandatory programs with expiration dates prior to the end of the 75-year projection period. 

As is true in the Medicare trustees’ report and in the Statement of Social Insurance,13 the projections assume 

reductions in Medicare physician fees will occur as scheduled under current law. 

Alternative Scenarios 

The long-run outlook for the budget is extremely uncertain. This section illustrates this inherent uncertainty by 

presenting alternative scenarios that vary several key assumptions. 

There are many dimensions to the projections for which reasonable variations could be considered. Some of 

the key issues concern long-run economic and demographic assumptions. The long-run fiscal gap is partly the result 

of demographic patterns that have emerged over the last 50 years with lower birth rates and reduced mortality. The 

population is aging rapidly and will continue to do so over the next several decades, which puts pressure on 

programs such as Social Security, Medicare, and Medicaid nursing care. A shift in projected fertility, mortality, or 

immigration rates could have important long-run effects on the projections. Higher than projected immigration, 

fertility, or mortality rates would improve the long-term fiscal outlook. Conversely, lower than projected 

immigration, fertility, or mortality rates would result in deterioration in the long-term fiscal outlook. The remainder 

of this section will focus on two important variables that can also impact fiscal projections: the growth rate of health 

care costs and interest rates. 

Effect of Changes in Health Care Cost Growth 

One of the most important assumptions underlying the projections is the projected growth of health care costs. 

Enactment of the ACA in 2010 reduced the projected long-run growth rates of health care costs, but these growth 

rates are still highly uncertain. As an illustration of the dramatic effect of variations in health care cost growth rates, 

Table 4 shows the effect on the cost of closing the fiscal gap as well as delaying closure of the fiscal gap of per 

capita health care cost growth rates that are one percentage point higher or two percentage points higher than the 

growth rates in the base projection. If reform is initiated in 2013, eliminating the fiscal gap requires that the 2013-

2087 primary surplus increase by an average of 2.7 percent of GDP in the base case, 5.6 percent of GDP if per capita 

health cost growth is 1 percentage point higher, and 8.7 percent of GDP if per capita health cost growth is 2 

percentage points higher. The cost of delaying reform is also increased if health care cost growth is higher, due to 

the fact that debt accumulates more rapidly during the period of inaction. For example, the lower part of Table 4 

shows that delaying reform initiation from 2013 to 2023 requires that 2023-2087 primary surpluses be higher by an 

average of 0.6 percent of GDP in the base case, 1.2 percent of GDP if per capita health cost growth is 1 percentage 

point higher, and 1.8 percent of GDP if per capita health cost growth is 2 percentage points higher. The dramatic 

deterioration of the long-run fiscal outlook caused by higher health care cost growth shows the critical importance of 

managing health care cost growth, including through effective implementation of the ACA. 

 

13 To prevent the reductions in Medicare physician fees that would have otherwise taken place, since 2003 Congress has repeatedly enacted 

statutes with temporary “physician fee relief” provisions, which increase health care expenditures. Since 2003, the majority of these statutes have 

also included other provisions that would reduce expenditures associated with Medicare or other types of health care ( “health care cost savings 

provisions”) The assumption here that future reductions in Medicare payments for physicians’ services will occur as scheduled under current law 

has the same budgetary effect as the assumption that the reductions will be overridden by enactment of new temporary physician fee relief 

provisions but the resulting costs will be paid for through enactment of new health care cost savings provisions.  
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 165 

Table 4 

Impact of Alternative Health Cost Scenarios on Cost of Delaying Fiscal Reform 

Scenario 

Primary Surplus 

Increase (% of GDP) 

Starting in: 

2013 2023 2033 

Base Case ........................................................................ 2.7 3.2 4.1

1% pt. higher per person health cost growth .................... 5.6 6.7 8.5

2% pt. higher per person health cost growth .................... 8.7 10.5 13.2

Increments to 

Required Primary 

Surplus if Reform is 

Delayed From 2013 to: 

2023 2033 

Base Case ........................................................................ 0.6 1.4

1% pt. higher per person health cost growth .................... 1.2 2.9

2% pt. higher per person health cost growth .................... 1.8 4.5

NOTE: Increments may not equal the subtracted difference of the components due to rounding. 

Effects of Changes in Interest Rates 

A higher debt-to-GDP ratio is likely to increase the interest rate on Government debt, making it more costly for 

the Government to service its debt. Table 5 displays the effect of several alternative scenarios using different 

nominal interest rates than assumed in the base case on the cost of closing the fiscal gap as well as delaying closure 

of the fiscal gap. If reform is initiated in 2013, eliminating the fiscal gap requires that the 2013-2087 primary surplus 

increase by an average of 2.7 percent of GDP in the base case, 2.9 percent of GDP if the interest rate is 0.5 

percentage point higher in every year, and 3.2 percent of GDP if the interest rate is 1.0 percentage points higher in 

every year. The cost of delaying reform is also increased percent of GDP if the interest rate is 1.0 percentage points 

higher in every year. The cost of delaying reform is also increased if interest rates are higher, due to the fact that 

interest paid on debt accumulates more rapidly during the period of inaction. For example, the lower part of Table 5 

shows that delaying reform initiation from 2013 to 2023 requires that 2023-2087 primary surpluses be higher by an 

average of 0.6 percent of GDP in the base case, 0.7 percent of GDP if the interest rate is 0.5 percentage point higher 

in every year, and 0.9 percent of GDP if the interest rate is 1.0 percentage points higher in every year. To show the 

effects of achieving primary balance and lowering long-term debt-to-GDP and interest rates, lowering nominal 

interest rates by one-half percentage point from the base projection starting in 2013 lowers the cost of reform over 

the three periods, to 2.4 percent of GDP per year starting in 2013, 2.8 percent per year starting in 2023, and 3.5 

percent per year starting in 2033. 
166 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

Table 5 

Impact of Alternative Interest Rate Scenarios on Cost of Delaying Fiscal Reform 

Scenario 

Primary Surplus 

Increase 

(% of GDP) 

Starting in: 

2013 2023 2033 

Base Case: Average of 5.5 percent over 75 years ................ 2.7 3.2 4.1

0.5 percent higher interest rate in each year .......................... 2.9 3.6 4.7

1.0 percent higher interest rate in each year .......................... 3.2 4.1 5.5

0.5 percent lower interest rate in each year ........................... 2.4 2.8 3.5

Increments to Required 

Primary Surplus if 

Reform is Delayed From 

2013 to: 

2023 2033 

Base Case: Average of 5.5 percent over 75 years ................ 0.6 1.4

0.5 percent higher interest rate in each year .......................... 0.7 1.8

1.0 percent higher interest rate in each year .......................... 0.9 2.3

0.5 percent lower interest rate in each year ........................... 0.4 1.1

NOTE: Increments may not equal the subtracted difference of the components due to rounding. 

Other key economic assumptions in this report include the future growth rate of real GDP, which itself depends 

on assumptions such as future growth in the labor force and labor productivity. Historically, U.S. labor productivity 

has increased at a rate of about 2 percent or more per year, but there have been periods when productivity grew less 

rapidly and other periods in which it grew faster. Productivity growth has averaged 2.5 percent per year over the last 

15 years, which is above its long-run trend. In these projections, the rate of productivity growth is conservatively 

assumed to be somewhat below its long-run trend. It is unlikely that higher productivity growth will be sufficient to 

resolve the long-run budget problem. Faster growth will lead to higher wages, which will lead to more tax revenue 

in the near term, but these gains will be partly offset by higher payments for Social Security and other benefit 

programs for which benefits are tied to wages. Inflation is not a major factor in these calculations. Changes in the 

trend rate of inflation have offsetting effects on future revenues and future spending, so the budget effect is about 

neutral in the long run. 

Fiscal Projections in Context 

The United States Government’s debt as a percentage of GDP is relatively large compared with central 

government debt of other countries, but far from the largest among the countries in the Organization for Economic 

Co-operation and Development (OECD). Based on historical data as reported by the OECD for all of its 31 member 

countries, the debt-to-GDP ratio in 2009 ranged from 6 percent of GDP to 126 percent of GDP, with the United 

States in the higher echelon.14 However, each country is different in how it finances its sovereign debt, how robustly 

its economy grows, how government responsibilities are shared between central and local governments, and how 

current policies compare with the past policies that determine the current level of debt, so there is a very imperfect 

relationship between the current level of central government debt and the sustainability of overall government 

 

14 Central Government Debt, OECD National Accounts Statistics (database) available at http://www.oecd-ilibrary.org/finance-andinvestment/total-central-government-debt-2010_20758294-2010-table1. 
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 167 

policy. Past accrual of debt is certainly important, but current policies and their implications for future debt 

accumulation are too. 

Several countries do produce long-range fiscal projections, among them, Australia, New Zealand, Canada, the 

United Kingdom, Denmark, Sweden, Norway, and the Netherlands.15 However, in addition to the reasons discussed 

above, comparisons are difficult because coverage and the time horizon over which projections are made vary across 

countries. The projection periods tend to be less than 75 years, and the projections are not always updated annually. 

Some of the countries have determined that their policies are sustainable in the long run, although the recent 

financial crisis will have worsened the near-term budget outlook in almost every country. 

Conclusion 

The United States took a potentially significant step towards fiscal sustainability in 2010 by reforming its 

system of health insurance through enactment of the ACA. The legislated changes for Medicare, Medicaid, and 

other health coverage hold the prospect of lowering the long-term growth trend for health care costs and 

significantly reducing the long-term fiscal gap. Furthermore, enactment of the Budget Control Act in August 2011 

placed limits on future discretionary spending and established a process to further reduce projected deficits by at 

least $1.2 trillion from 2013 through 2021. But even with the new laws, the projections in this Report indicate that if 

policy remains unchanged the debt-to-GDP ratio will continually increase over the next 75 years and beyond, which 

implies current policies are not sustainable and must ultimately change. Subject to the important caveat that policy 

changes are not so abrupt that they slow the economic recovery, the sooner policies are put in place to avert these 

trends, the smaller are the revenue increases and/or spending decreases necessary to return the Government to a 

sustainable fiscal path. 

 

15 The OECD released a policy brief in October 2009 (available at http://www.oecd.org/dataoecd/40/26/43836144.pdf) describing the efforts of 

different member countries to produce long-term fiscal projections. 
168 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

Social Insurance 

The social insurance programs consisting of Social Security, Medicare, Railroad Retirement, and Black Lung 

were developed to provide income security and health care coverage to citizens under specific circumstances as a 

responsibility of the Government. Because taxpayers rely on these programs in their long-term planning, social 

insurance program information should indicate whether the current law provisions of the programs can be sustained, 

and more generally what effect they will likely have on the Government’s financial condition. The resources needed 

to run these programs are raised through taxes and fees. Eligibility for benefits depends in part on earnings and time 

worked by the individuals. Social Security benefits are generally redistributed intentionally toward lower-wage 

workers (i.e., benefits are progressive). In addition, each social insurance program has a uniform set of entitling 

events and schedules that apply to all participants. 

Social Security and Medicare 

Social Security 

The OASI Trust Fund was established on January 1, 1940, as a separate account in the Treasury. The DI Trust 

Fund, another separate account in the Treasury, was established on August 1, 1956. OASI pays cash retirement 

benefits to eligible retirees and their eligible dependents and survivors, and the much smaller DI fund pays cash 

benefits to eligible individuals who are unable to work because of medical conditions and certain family members of 

such eligible individuals. Though the events that trigger benefit payments are quite different, both trust funds have 

the same earmarked financing structure: primarily payroll taxes and income taxes on benefits. All financial 

operations of the OASI and DI Programs are handled through these respective funds. The two funds are often 

referred to as the combined OASDI Trust Funds. At the end of calendar year 2011, OASDI benefits were paid to 

approximately 55 million beneficiaries. 

The primary financing source for these two funds are taxes paid by workers, their employers, and individuals 

with self-employment income, based on work covered by the OASDI Program. Since 1990, employers and 

employees have each paid 6.2 percent of taxable earnings and the self-employed paid 12.4 percent of taxable 

earnings. However, in 2011 and 2012, payroll tax rates paid by employees and the self-employed were each reduced 

by 2 percentage points and the General Fund of the Treasury reimbursed the OASDI trust fund for the resulting 

reduction in payroll tax revenues. Payroll taxes are levied on wages and net earnings from self-employment up to a 

specified maximum annual amount, referred to as maximum taxable earnings ($110,100 in 2012), that increases 

each year with economy-wide average wages. 

Legislation passed in 1984 subjected up to half of OASDI benefits to tax and allocated the revenue to the 

OASDI Trust Funds. In 1993 legislation upped the potentially taxed portion of benefits to 85 percent and allocated 

the additional revenue to the Hospital Insurance Trust Fund. 

Medicare 

The Medicare Program, created in 1965, has two separate trust funds: the Hospital Insurance Trust Fund (HI, 

Medicare Part A) and the Supplementary Medical Insurance Trust Funds (SMI, Medicare Parts B and D 1

). HI pays 

for inpatient acute hospital services and major alternatives to hospitals (skilled nursing services, for example). SMI 

pays for hospital outpatient services, physician services, and assorted other services and products through the Part B 

account and for prescription drugs through the Part D account. Though the events that trigger benefit payments are 

similar, HI and SMI have different earmarked financing structures. Similar to OASDI, HI is financed primarily by 

payroll contributions. Currently, employers and employees each pay 1.45 percent of earnings, while self-employed 

workers pay 2.9 percent of their net earnings. Beginning in 2013, employees and self-employed individuals with 

earnings above certain thresholds will pay an additional HI tax of 0.9 percent on earnings above those thresholds. 

Other income to the HI Trust Fund includes a small amount of premium income from voluntary enrollees, a portion 

of the Federal income taxes that beneficiaries pay on Social Security benefits (as explained above), and interest 

 

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. 
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 169

credited on Treasury securities held in the HI Trust Fund. As is explained in the next section, these Treasury 

securities and related interest have no effect on the consolidated statement of Governmentwide finances. 

For SMI, transfers from the General Fund of the Treasury financed 75 percent and 74 percent of 2012 program 

costs for Parts B and D, respectively. Premiums paid by beneficiaries and, for Part D State transfers, financed the 

remainder of expenditures. With the introduction of Part D drug coverage, Medicaid is no longer the primary payer 

of drug benefits for beneficiaries dually eligible for Medicare and Medicaid. For those beneficiaries, States must pay 

the Part D account a portion of their estimated foregone drug costs for this population (referred to as State transfers). 

As with HI, interest received on Treasury securities held in the SMI Trust Fund is credited to the fund. These 

Treasury securities and related interest have no effect on the consolidated statement of Governmentwide finances. 

See Note 26—Social Insurance, for additional information on Medicare program financing. 

Figure 1 

Social Security, Medicare, and Governmentwide Finances 

Social Security, Medicare, and Governmentwide Finances 

The current and future financial status of the separate Social Security and Medicare Trust Funds is the focus of 

the trustees’ reports, a focus that may appropriately be referred to as the “trust fund perspective.” In contrast, the 

Government primarily uses the unified budget concept as the framework for budgetary analysis and presentation. It 

represents a comprehensive display of all Federal activities, regardless of fund type or on- and off-budget status, and 

has a broader focus than the trust fund perspective that may appropriately be referred to as the “budget perspective” 

or the “Governmentwide perspective.” Social Security and Medicare are among the largest expenditure categories of 

the U.S. Federal budget. Together, they now account for more than a third of all Federal spending and the 

percentage is projected to rise dramatically for the reasons discussed below. This section describes in detail the 

important relationship between the trust fund perspective and the Governmentwide perspective. 

Surplus 

Borrowed 

Interest 

Credited 

Benefit 

Taxes 

Interest 

Credited 

Surplus 

Borrowed 

General 

Government 

Expenditures, 

Net Interest 

SMI Trust 

Fund 

Account 

Other 

Government

Accounts 

HI, OASDI 

Trust Fund 

Accounts 

Supplementary 

Medical Insurance 

Premiums and 

State Transfers 

Income Taxes 

Benefit Taxes 

Other Revenues 

Borrowing from 

the Public 

Payroll Taxes 

Hospital Insurance 

Premiums 

HI, OASDI, SMI 

Benefits 

Other 

Government 

Transfers 

E 

X 

P 

E 

N 

D 

I 

T 

U 

R 

E 

S 

M 

E 

A 

N 

S 

O 

F 

F 

I 

N 

A 

N 

C 

I 

N 

G 
170 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

Figure 1 is a simplified graphical depiction of the interaction of the Social Security and Medicare Trust Funds 

with the rest of the Federal budget.2 The boxes on the left show sources of funding, those in the middle represent the 

trust funds and other Government accounts (of which the General Fund is a part) into which that funding flows, and 

the boxes on the right show simplified expenditure categories. The figure is intended to illustrate how the various 

sources of program revenue flow through the budget to beneficiaries. The general approach is to group revenues and 

expenditures that are linked specifically to Social Security and/or Medicare separately from those for other 

government programs. 

Each of the trust funds has its own sources and types of revenue. With the exception of General Fund transfers 

to SMI, each of these revenue sources represents revenue from the public that are earmarked specifically for the 

respective trust fund and cannot be used for other purposes. In contrast, personal and corporate income taxes and 

other revenue go into the General Fund of the Treasury and are drawn down for any Government program for which 

Congress has approved spending.3

 The arrows from the boxes on the left represent the flow of the revenues into the 

trust funds and other Government accounts. 

The heavy line between the top two boxes in the middle of Figure 1 represents intragovernmental transfers to 

the SMI Trust Fund from other Government accounts. The Medicare SMI Trust Fund is shown separately from the 

two Social Security trust funds (OASI and DI) and the Medicare HI Trust Fund to highlight the unique financing of 

SMI. SMI is currently only one of the programs that is funded through transfers from the General Fund of the 

Treasury, which is part of the other Government accounts (the Part D account also receives transfers from the 

States). The transfers finance roughly three-fourths of SMI Program expenses. The transfers are automatic; their size 

depends on how much the program requires, not on how much revenue comes into the Treasury. If General Fund 

revenues become insufficient to cover both the mandated transfer to SMI and expenditures on other general 

Government programs, Treasury would have to borrow to make up the difference. In the longer run, if transfers to 

SMI increase beyond growth in general revenues as shown below, they are projected to increase significantly in 

coming years—then Congress must either raise taxes, cut other Government spending, reduce SMI benefits, or 

borrow even more. 

The dotted lines between the middle boxes of Figure 1 also represent intragovernmental transfers but those 

transfers arise in the form of “borrowing/lending” between the Government accounts. Interest credited to the trust 

funds arises when the excess of program income over expenses is loaned to the General Fund. The vertical lines 

labeled Surplus Borrowed represent these flows from the trust funds to the other Government accounts. These loans 

reduce the amount the General Fund has to borrow from the public to finance a deficit (or likewise increase the 

amount of debt paid off if there is a surplus). However, the General Fund has to credit interest on the loans from the 

trust fund programs, just as if it borrowed the money from the public. The credits lead to future obligations for the 

General Fund (which is part of the other Government accounts). These transactions are indicated in Figure 1 by the 

vertical arrows labeled Interest Credited. The credits increase trust fund income exactly as much as they increase 

credits (future obligations) in the General Fund. From the Governmentwide standpoint, 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. 

How loans from the trust funds to the General Fund and later repayments of those loans affect tax income and 

expenditures of the General Fund is uncertain. Two extreme cases bracket the possibilities. At one extreme, each 

dollar the trust funds loan to the General Fund might reduce borrowing from the public by a dollar at the time the 

loan is extended, in which case the General Fund could repay all trust fund loans by borrowing from the public 

without raising the level of public debt above the level that would have occurred in the absence of the loans. At the 

other extreme, each dollar the trust funds loan to the General Fund might result in some combination of higher 

General Fund spending and lower General Fund revenues amounting to one dollar at the time the loans are extended, 

in which case General Fund loan repayments to the trust funds might initially be financed with borrowing from the 

public but must at some point be financed with a combination of higher general fund taxes and lower General Fund 

 

2

 The Federal unified budget encompasses all Government financing and is synonymous with a Governmentwide perspective. 3

 Other programs also have dedicated revenues in the form of taxes and fees (and other forms of receipt) and there are a large number of 

earmarked trust funds in the Federal budget. Total trust fund receipts account for about 40 percent of total Government receipts with the Social 

Security and Medicare Trust Funds accounting for about two-thirds of trust fund receipts. For further discussion, see the report issued by the 

Government Accountability Office, Federal Trust and Other Earmarked Funds, GAO-01-199SP, January 2001. In the figure and the discussion 

that follows, all other programs, including these other earmarked trust fund programs, are grouped under “Other Government Accounts” to 

simplify the description and maintain the focus on Social Security and Medicare. 
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 171

spending than would have occurred in the absence of the loans. In this latter extreme, trust fund loans result in 

additional largess (i.e., higher spending and/or lower taxes) in General Fund programs at the time the loans are 

extended, but ultimately that additional largess is financed with additional austerity (i.e., lower spending and/or 

higher taxes) in General Fund programs at later dates. The actual impact of trust fund loans to the General Fund and 

their repayment on General Fund programs is at one of these two extremes or somewhere in between. 

Actual dollar amounts roughly corresponding to the flows presented in Figure 1 are shown in Table 1 for fiscal 

year 2012. 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 ($323.5 billion) and interest credits ($126.6 billion) received by the trust funds appear as negative entries 

under “Other Government” and are thus offsetting when summed for the total budget column. These two 

intragovernmental transfers are the key to the differences between the trust fund and budget perspectives. 

From the Governmentwide perspective, only revenues received from the public (and States in the case of 

Medicare, Part D) and expenditures made to the public are important for the final balance. Trust fund revenue from 

the public consists of payroll taxes, benefit taxes, and premiums. For HI, the difference between total expenditures 

made to the public ($258.2 billion) and revenues ($229.7 billion) was ($28.5 billion) in 2012, indicating that HI had 

a relatively small negative effect on the overall budget outcome in that year. For the SMI account, revenues from the 

public (premiums) were relatively small, representing about a quarter of total expenditures made to the public in 

2012. The difference ($214.6 billion) resulted in a net draw on the overall budget balance in that year. For OASDI, 

the difference between total expenditures made to the public ($773.2 billion) and revenues from the public ($613.3 

billion) was ($159.9) billion in 2012, indicating that OASDI had a negative effect on the overall budget outcome in 

that year. OASDI payroll tax revenues were reduced by $112.2 billion in fiscal year 2012 by a temporary 2 

percentage point reduction in the payroll tax rate paid by employees and self-employed individuals called for by 

Public Laws 111-312, 112-78 and 112-96. 

The trust fund perspective is captured in the bottom section of each of the three trust fund columns. For HI, 

total expenditures exceeded total revenues by $16.5 billion in 2012, as shown at the bottom of the first column. This 

cash deficit was made up by calling in past loans made to the General Fund (i.e., by redeeming Trust Fund assets). 

For SMI, total expenditures exceeded total revenues by $1.1 billion. The total revenue for SMI is $290.9 billion 

($77.4 + $213.5), which includes $210.6 billion transferred from other Government accounts (the General Fund). 

Transfers to the SMI Program from other Government accounts (the General Fund), amounting to about 72 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 $837.9 billion exceeded total expenditures of $773.2 billion by $64.7 

billion. Total revenues for OASDI included $224.6 billion of transfers from the General Fund, principally interest 

credits and $112.4 billion in credits called for by Public Laws 111-312, 112-78 and 112-96 to make up for the 

reduction in payroll tax revenues attributable to the temporary payroll tax rate reductions. 
172 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

Cashflow Projections 

Background 

Economic and Demographic Assumptions. The Boards of Trustees 4 of the OASDI and Medicare Trust Funds 

provide in their annual reports to Congress short-range (10-year) and long-range (75-year) actuarial estimates of 

each trust fund. Because of the inherent uncertainty in estimates for 75 years into the future, the Boards use three 

alternative sets of economic and demographic assumptions to show a range of possibilities. The economic and 

demographic assumptions used for the most recent set of intermediate projections for Social Security and Medicare 

are shown in the “Social Security” and “Medicare” sections of Note 26—Social Insurance. 

 

4 There are six trustees: the Secretaries of the Treasury (managing trustee), Health and Human Services, and Labor; the Commissioner of the 

Social Security Administration; and two public trustees who are appointed by the President and confirmed by the Senate for a 4-year term. By 

law, the public trustees cannot both be members of the same different political party. 

Table 1 

Revenues and Expenditures for Medicare and Social Security 

Trust Funds and the Total Federal Budget 

for the Fiscal Year ended September 30, 2012 

 Trust Funds 

(In billions of dollars) HI SMI 

 

OASDI Total All Other Total 1 

 

Revenues from the public and States: 

Payroll and benefit taxes, State grants... 223.4 613.3 836.7 836.7 

Premiums ............................................... 6.3 66.3 72.6 72.6 

Other taxes and fees .............................. 11.1 11.1 1,528.7 1,539.8 

Total ........................................................ 229.7 77.4 613.3 920.4 1,528.7 2,449.1 

 

Total expenditures to the public 2 .............. 258.2 292.0 773.2 1,323.4 2,215.2 3,538.5 

 

Net results—budget perspective 3......... (28.5) (214.6) (159.9) (403.0) (686.4) (1,089.4)

 

Revenues from other Government 

accounts: 

Transfers ................................................ 0.7 210.6 112.2 323.5 (323.5) 

Interest credits ........................................ 11.3 2.9 112.4 126.6 (126.6) 

Total ........................................................ 12.0 213.5 224.6 450.1 (450.1) 

 

Net results—trust fund perspective

(change in trust fund balance) 3

 .......... (16.5) (1.1) 64.7 47.1 N/A N/A 

 

1 This column is the sum of the preceding two columns and shows data for the total Federal budget. The figure $1,089.4 billion 

was the total Federal deficit in fiscal year 2012. 

2

 The OASDI figure includes $4.7 billion transferred to the Railroad Retirement Board for benefit payments and is, therefore, 

an expenditure to the public. 

3

 Net results are computed as revenues less expenditures. 

Notes: Amounts may not add due to rounding. 

 “N/A” indicates not applicable. 
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 173

Beneficiary-to-Worker Ratio. The expenditure projections for both the OASDI and Medicare Programs reflect 

the aging of the large baby-boom generation, born in the years 1946 to 1964, and its ultimate passing. Chart 1 shows 

that the number of OASDI beneficiaries per 100 covered workers is projected to grow rapidly from 35 in 2012 to 49 

in 2035 as the baby boom generation enter their retirement years and receives benefits. After 2035 the baby boom’s 

influence will have dissipated, and it is projected that the beneficiary-worker ratio will continue to rise but at a 

slower pace due to increasing longevity, reaching 52 beneficiaries per 100 workers in 2086. (In rough terms, the 

beneficiary-to-worker ratio at any point in time reflects the birth rates experienced by the generations who are 

retired; the birth rates of the baby boom generations’ parents were much higher than those of the baby boomer 

generations and the generations to follow them.) A similar demographic pattern confronts the Medicare Program. 

Chart 1—OASDI Beneficiaries per 100 Covered Workers 

1970-2086 
174 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

Social Security Projections 

Income and Expenditures. Chart 2 shows historical values and actuarial estimates of combined OASDI annual 

noninterest income and expenditures for 1970-2086. The estimates are for the open-group population of all workers 

and beneficiaries projected to be alive in each year. The expenditure projections in Chart 2 and all subsequent charts 

assume all scheduled benefits are paid regardless of whether the income and assets are available to finance them. 

Chart 2—OASDI Income (Excluding Interest) and Expenditures 

1970-2086 

(In billions of dollars) 

Social Security’s surplus of noninterest income over expenditures was positive every year between 1984 and 

2009, negative in 2010 through 2012, and is projected to grow ever more negative over the next 75 years. This 

pattern reflects the aging of the population documented in Chart 1, as well as growth of the economy and growth in 

the price level. As described above, surpluses that occurred prior to 2010 were “loaned” to the General Fund and 

accumulated, with interest, increasing reserve spending authority for the trust fund. The reserve spending authority 

represents an obligation for the General Fund. Social Security began using interest credits to meet full benefit 

obligations in 2010, and is projected to begin drawing down trust fund balances starting in 2021 and to exhaust those 

balances in 2033. After trust fund exhaustion, noninterest income will continue to flow into the fund and will be 

sufficient to finance 75 percent of scheduled benefits in 2033 and 73 percent of scheduled benefits in 2086. 
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 175

Income and Expenditures as a Percent of Taxable Payroll. Chart 3 shows annual noninterest income and 

expenditures expressed as percentages of taxable payroll, commonly referred to as the income rate and cost rate, 

respectively. Dividing noninterest income and expenditures by taxable payroll serves to isolate the effect of 

demographics on Social Security finances, and usefully gauges Social Security’s financial imbalances against the 

size of the Social Security tax base. The time path of the cost rate in Chart 3 closely parallels that of the beneficiaryto-worker ratio in Chart 1. 

Chart 3—OASDI Income (Excluding Interest) and Expenditures 

as a Percent of Taxable Payroll 

1970-2086 
176 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

Income and Expenditures as a Percent of GDP. Chart 4 shows estimated annual noninterest income and 

expenditures, expressed as percentages of GDP, the total value of goods and services produced in the United States. 

This alternative perspective shows the size of the OASDI Program in relation to the capacity of the national 

economy to sustain it. The gap between expenditures and income generally widens with expenditures generally 

growing as a share of GDP and income declining slightly relative to GDP. Social Security’s expenditures are 

projected to grow from 5.01 percent of GDP in 2012 to 6.10 percent in 2086. In 2086, expenditures are projected to 

exceed income by 1.54 percent of GDP. 

Chart 4—OASDI Income (Excluding Interest) and Expenditures 

as a Percent of GDP 

1970-2086 
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 177

Sensitivity Analysis. Actual future income from OASDI payroll taxes and other sources and actual future 

expenditures for scheduled benefits and administrative expenses will depend upon a large number of factors: the size 

and composition of the population that is receiving benefits, the level of monthly benefit amounts, the size and 

characteristics of the work force covered under OASDI, and the level of workers’ earnings. These factors will 

depend, in turn, upon future marriage and divorce rates, birth rates, death rates, migration rates, labor force 

participation and unemployment rates, disability incidence and termination rates, retirement age patterns, 

productivity gains, wage increases, cost-of-living increases, and many other economic and demographic factors. 

This section presents estimates that illustrate the sensitivity of long-range expenditures and income for the 

OASDI Program to changes in selected individual assumptions. In this analysis, the intermediate assumption is used 

as the reference point, and one assumption at a time is varied. The variation used for each individual assumption 

reflects the levels used for that assumption in the low-cost (Alternative I) and high-cost (Alternative III) projections. 

For example, when analyzing sensitivity with respect to variation in real wages, income and expenditure projections 

using the intermediate assumptions are compared to the outcome when projections are done by changing only the 

real wage assumption to either low-cost or high-cost alternatives. 

The low-cost alternative is characterized by assumptions that generally improve the financial status of the 

program (relative to the intermediate assumption) such as slower improvement in mortality (beneficiaries die 

younger). In contrast, assumptions under the high-cost alternative generally worsen the financial outlook. One 

exception occurs with the CPI assumption (see below). 

Table 2 shows the effects of changing individual assumptions on the present value of estimated OASDI 

expenditures in excess of income (the shortfall of income relative to expenditures in present value terms). The 

assumptions are shown in parentheses. For example, the intermediate assumption for the annual rate of reduction in 

age-sex-adjusted death rates is 0.77 percent. For the low-cost alternative, a slower reduction rate (0.39 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 $11,278 billion to $9,595 billion, a 15 

percent smaller shortfall. The high-cost death rate assumption (1.18 percent) results in an increase in the shortfall, 

from $11,278 billion to $13,069 billion, a 16 percent increase in the shortfall. Clearly, alternative death rate 

assumptions have a substantial impact on estimated future cashflows in the OASDI Program. 

A higher fertility rate means more workers relative to beneficiaries over the projection period, thereby 

lowering the shortfall relative to the intermediate assumption. An increase in the rate from 2.0 to 2.3 percent results 

in a 9 percent smaller shortfall (i.e., expenditures less income), from $11,278 billion to $10,217 billion. 

Higher real wage growth results in faster income growth relative to expenditure growth. Table 2 shows that a 

real wage differential that is 0.59 percentage point greater than the intermediate assumption of 1.12 causes the 

shortfall to drop from $11,278 billion to $9,177 billion, a 19 percent decline. 

The CPI change assumption operates in a somewhat counterintuitive manner, as seen in Table 2. A lower rate 

of change results in a higher shortfall. This arises as a consequence of holding the real wage assumption constant 

while varying the CPI so that wages (the income base) are affected sooner than benefits. If the rate is assumed to be 

1.8 percent rather than 2.8 percent, the shortfall increases about 5 percent, from $11,278 billion to $11,853 billion. 

The effect of net immigration is similar to fertility in that, over the 75-year projection period, higher immigration 

results in proportionately more workers (taxpayers) than beneficiaries. The low-cost assumption for net immigration 

results in a 4 percent drop in the shortfall, from $11,278 billion to $10,836 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 is 14 percent lower, decreasing from $11,278 billion to $9,653 billion, when the real interest rate 

is 3.4 percent rather than 2.9 percent. The shortfall is 18 percent higher, increasing to $13,303 billion, when the real 

interest rate is 2.4 percent rather than 2.9 percent. 
178 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

Table 2 

Present Values of Estimated OASDI Expenditures in Excess of Income 

Under Various Assumptions, 2012-2086 

(Dollar values in billions; values of assumptions shown in parentheses) 

Financing Shortfall Range 

Assumption Low Intermediate High 

Average annual reduction in death rates ..... 9,595

(0.39)

11,278

(0.77)

13,069

(1.18)

Total fertility rate .......................................... 10,217

(2.3)

11,278

(2.0)

12,313

(1.7)

Real wage differential .................................. 9,177

(1.71) 

11,278

(1.12) 

12,745

(0.5) 

CPI change .................................................. 10,696

(3.8)

11,278

(2.8)

11,853

(1.8)

Net immigration ............................................ 10,836

(1,375,000)1 11,278

(1,080,000)1 11,789

(790,000)1

Real interest rate .......................................... 9,653

(3.4) 

11,278

(2.9) 

13,303

(2.4) 1

 Amounts represent the average annual net immigration over the 75-year projection period. 

Source: 2012 OASDI Trustees Report and SSA. 

Medicare Projections 

Medicare Legislation. The Affordable Care Act as amended by the Health Care and Education Reconciliation 

Act of 2010 (the “Affordable Care Act” or ACA) significantly improves projected Medicare finances. The most 

important cost saving provision in the ACA is a revision in payment rate updates for Parts A and B services other 

than for physicians’ services. Relative to payment rates made under prior law that were generally based on the rate 

at which prices for inputs used to provide Medicare services increase, the ACA reduces those payment rate updates 

by the rate at which productive efficiency in the overall economy increases, which is projected to average 1.1 

percent per year. The ACA also achieves substantial cost savings by benchmarking payment rates for private health 

plans providing Parts A and B services (Part C or Medicare Advantage) to more closely match per beneficiary costs. 

Partly offsetting these changes was an increase in prescription drug coverage. In addition, the ACA increases Part A 

revenues by: (a) taxing high-cost employer-provided health care plans and thereby giving employers incentives to 

increase the share of compensation paid as taxable earnings, and (b) imposing a new 0.9 percent surtax on earnings 

in excess of $200,000 (individual tax return filers) or $250,000 (joint tax return filers) starting in 2013. 

The ACA substantially reduces the Medicare cost projections. Growth in Medicare cost per beneficiary in 

excess of growth in per capita GDP is referred to as “excess cost growth.” In the 2009 Financial Report, the last 

Report released prior to the passage of the ACA, excess cost growth was assumed to be about 1 percentage point—

that is, Medicare expenditures per beneficiary were assumed to grow, on average, about one percentage point faster 

than per capita GDP over the long range. That assumption for excess cost growth in Medicare was optimistic in the 

sense that it is smaller than in recent history; excess cost growth averaged 1.6 percentage points between 1990 and 

2007. 5

 In this year’s Financial Report, as in the 2010 and 2011 Reports, long-term excess cost growth is essentially 

 

5 Congressional Budget Office, the Long-Term Budget Outlook, June 2011. 
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 179

zero. As a result, the long term projected Medicare spending share of GDP in this Report is driven primarily by the 

same demographic trends that drive the OASDI spending share of GDP. 

The 2012 Medicare Trustees’ Report warns that the “actual future costs for Medicare are likely to exceed those 

shown by the current-law projections” that underlie both the Trustees’ Report and this Financial Report. This 

warning is due in part to concerns the new productivity-based downward adjustments to Medicare payment rate 

updates may not be sustainable, leading to substantial uncertainty about the adequancy of future Medicare payments 

rates. This concern is reinforced by the fact that statutory adjustments to payment rates for Medicare physicians’ 

services mandated by a 1996 Medicare reform have been consistently overridden by new law. 

Changes in Projection Methods. For the 2012 Medicare Trustees Report, based on the recommendation of the 

2010-2011 Medicare Technical Review Panel, the Board of Trustees adopted a long-range pre-ACA baseline cost 

growth assumption of “GDP plus 1.4 percent” and a “factors contributing to growth” model, which creates specific, 

year-by-year declining growth rates during the last 50 years of the projection period. 

The ACA permanently reduces the annual increases in Medicare rates for most categories of health service 

providers by the increase in economy-wide productivity. Thus, the long-range cost growth rate for affected providers 

is set equal to the pre-ACA baseline growth assumptions, minus the increase in economy-wide multifactor 

productivity (1.1 percent). For the 2012 report, the Medicare Technical Panel concluded that the slower payment 

updates would have a small, net downward effect on growth in the volume and intensity of services. Based on this 

conclusion, the growth rates are further adjusted by (0.1 percent) annually. 

On net, changes for 2012 resulted in a decrease in the future net cashflow for total Medicare for Part A, these 

changes resulted in an increase to the present value of expenditures and a very slight decrease on the present value 

of revenue, with an overall decrease on the future net cashflow. For Part B, these changes increased the present 

value of expenditures. 
180 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

Total Medicare. Chart 5 shows expenditures and current-law noninterest revenue sources for HI and SMI 

combined as a percentage of GDP. The total expenditure line shows Medicare costs rising to 6.73 percent of GDP by 

2086. Revenues from taxes and premiums (including State transfers under Part D) are expected to increase from 

1.93 percent of GDP in 2012 to 3.02 percent of GDP in 2086. Payroll tax income increases gradually as a percent of 

GDP because the new tax on earnings in excess of $250,000 for joint tax return filers and $200,000 for individual 

tax return filers applies to an increasing share of earnings because the $250,000 and $200,000 thresholds are not 

indexed for price changes. Premiums combined for Parts B and D of SMI are approximately fixed as a share of Parts 

B and D costs, so they also increase as a percent of GDP. General revenue contributions for SMI, as determined by 

current law, are projected to rise as a percent of GDP from 1.39 percent to 2.97 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 58 percent in 2012 to 50 percent in 2086) while general revenues will rise (from 42 percent 

to 50 percent). The gap between total noninterest Medicare income (including general revenue contributions) and 

expenditures begins around 2012 and then steadily continues to widen, reaching 0.7 percent of GDP by 2086. 

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

as a Percent of GDP 

1970-2086 
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 181

Medicare, Part A (Hospital Insurance)─ Income and Expenditures. Chart 6 shows historical and actuarial 

estimates of HI annual income (excluding interest) and expenditures for 1970-2086 in nominal dollars. The 

estimates are for the open-group population. 

Chart 6—Medicare Part A Income (Excluding Interest) and Expenditures 

1970-2086 

(In billions of dollars) 
182 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

Medicare, Part A Income and Expenditures as a Percent of Taxable Payroll. Chart 7 illustrates income 

(excluding interest) and expenditures as a percentage of taxable payroll over the next 75 years. The chart shows that 

the expenditure rate exceeds the income rate in 2008, and cash deficits continue thereafter. Trust fund interest 

earnings and assets provide enough resources to pay full benefit payments until 2024 with general revenues used to 

finance interest and loan repayments to make up the difference between cash income and expenditures during that 

period. Pressures on the Federal budget will thus emerge well before 2024. Present tax rates would be sufficient to 

pay 87 percent of scheduled benefits after trust fund exhaustion in 2024 and 69 percent of scheduled benefits in 

2086. 

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

as a Percent of Taxable Payroll 

1970-2086
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 183

Medicare, Part A Income and Expenditures as a Percent of GDP. Chart 8 shows estimated annual noninterest 

income and expenditures, expressed as percentages of GDP, and the total value of goods and services produced in 

the United States. This alternative perspective shows the size of the HI Program in relation to the capacity of the 

national economy to sustain it. Medicare Part A’s expenditures are projected to grow from 1.7 percent of GDP in 

2012, to 2.16 percent in 2030, and to 2.71 percent by 2086. The gap between expenditure and income shares of GDP 

widens and peaks at 0.87 percent in 2046 and then commences a slight decline, reaching 0.85 percent of GDP in 

2086. 

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

as a Percent of GDP 

1970-2086 
184 REQUIRED SUPPLEMENTARY 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 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 

1970-2086 

(In billions of dollars) 
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 185

Medicare Part B and Part D Premium and State Transfer Income and Expenditures as a Percent of GDP. 

Chart 10 shows expenditures for the Supplementary Medical Insurance Program over the next 75 years expressed as 

a percentage of GDP, providing a perspective on the size of the SMI Program in relation to the capacity of the 

national economy to sustain it. SMI expenditures as a share of GDP are expected to grow rapidly from 2.03 percent 

in 2012 to 3.35 percent in 2035, and then grow more slowly reaching 4.02 in 2086. This growth pattern reflects 

growth in Medicare spending per beneficiary that is positive for the first half of the projection period before turning 

negative as a result of provisions in the ACA and population ageing that is rapid through 2035 as the baby boom 

generation move into their advanced years and then slows to a modest pace consistent with increasing longevity. 

Premium and State transfer income grows from about 0.50 in 2012 to 1.06 percent of GDP in 2086, so the portion 

financed by General Fund transfers to SMI is projected to be about 75 percent throughout the projections period. 

Chart 10—Medicare Part B and Part D Premium and State Transfer 

Income and Expenditures as a Percent of GDP 

1970-2086 

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 
186 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

growth in health care cost. For the low-cost alternative, the slower growth in health costs causes the shortfall to drop 

from $5,581 billion to a surplus of $533 billion, a 110 percent change. The high-cost assumption results in a near 

tripling of the shortfall, from $5,581 billion to $15,332 billion. 

Variations in the next four assumptions in Table 3 result in relatively minor changes in net HI expenditures. 

The higher or lower fertility assumptions cause an approximate 7 percent change in the shortfall relative to the 

intermediate case. The higher or lower real wage growth rate results in about a 13 and 5 percent respectively, change 

in the shortfall relative to the intermediate case. Wages are a key cost factor in the provision of health care. Higher 

wages also result in greater payroll tax income. HI expenditures exceed HI income by a wide and increasing margin 

in the future (Charts 6 to 8). CPI and net immigration changes have very little effect on net HI expenditures. Higher 

immigration decreases the net shortfall modestly as higher payroll tax revenue offsets higher medical care 

expenditures. 

Table 3 also shows that the present value of net HI expenditures is 18 percent lower if the real interest rate is 

3.4 percent rather than 2.9 percent and 20 percent higher if the real interest rate is 2.4 percent rather than 2.9 percent. 

Table 3 

Present Values of Estimated Medicare Part A Expenditures in Excess of 

Income Under Various Assumptions, 2012-2086 

(Dollar values in billions; values of assumptions shown in parentheses) 

 Financing Shortfall Range 

Assumption1 Low Intermediate High 

Average annual growth in health costs 2 ............ (533)

(3.3)

5,581

(4.3)

15,332

(5.3)

Total fertility rate 3 ............................................... 5,199

(2.3) 

5,581

(2.0) 

5,947

(1.7) 

Real wage differential ......................................... 4,839

(1.7)

5,581

(1.1)

5,860

(0.5)

CPI change ......................................................... 5,316

(3.8)

5,581

(2.8)

5,812

(1.8)

Net immigration ................................................... 5,509

(1,375,000)4

5,581

(1,080,000)4

5,663

(790,000)4

Real interest rate ................................................. 4,558

(3.4)

5,581

(2.9)

6,713

(2.4) 1

 The sensitivity of the projected HI net cashflow to variations in future mortality rates also is of interest. At this time, 

however, relatively little is known about the relationship between improvements in life expectancy and the associated 

changes in health status and per beneficiary health expenditures. As a result, it is not possible at present to prepare 

meaningful estimates of the Part A, mortality sensitivity. 

2

 Annual growth rate is the aggregate cost of providing covered health care services to beneficiaries. The low-cost and 

high-cost alternatives assume that costs increase 1 percent slower or faster, respectively, than the intermediate 

assumption, relative to growth in taxable payroll. 3

 The total fertility rate for any year is the average number of children who would be born to a woman in her lifetime if she 

were to experience the birth rates by age observed in, or assumed for, the selected year and if she were to survive the 

entire childbearing period. 

4

 Amount represents the average annual net immigration over the 75-year projection period. 
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 187

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 $14,815 billion to $10,735 

billion and in Part D from $6,778 billion to $4,778 billion, about a 28 percent and 30 percent difference for Part B 

and Part D, respectively. The high-cost assumption increases Governmentwide resources needed to $21,162 billion 

for Part B and to $9,949 billion for Part D, about a 43 percent and a 47 percent difference for Part B and Part D, 

respectively. 

Table 4 

Present Values of Estimated Medicare Parts B and D Future Expenditures 

Less Premium Income and State Transfers Under Three Health Care Cost 

Growth Assumptions, 2012-2086 

(In billions of dollars) 

 Governmentwide Resources Needed 

Medicare Program1

Low 

(3.3) 

Intermediate 

(4.3) 

High 

(5.3) 

Part B ............................................................. 10,735 14,815 21,162 

Part D ............................................................. 4,778 6,778 9,949 

 1

 Annual growth rate is the aggregate cost of providing covered health care services to beneficiaries. The low and high 

scenarios assume that costs increase one percent slower or faster, respectively, than the intermediate assumption. 

Source: Centers for Medicare and Medicaid Services. 

Sustainability of Social Security and Medicare 

75-Year Horizon 

According to the 2012 Medicare Trustees Report, the HI Trust Fund is projected to remain solvent until 2024 

and, according to the 2012 Social Security Trustees Report, the OASDI Trust Funds are projected to remain solvent 

until 2033. In each case, some general revenues must be used to satisfy the authorization of full benefit payments 

until the year of exhaustion. This occurs when the trust fund balances accumulated during prior years are needed to 

pay benefits, which leads to a transfer from general revenues to the trust funds. Moreover, under current law, 

General Fund transfers to the SMI Trust Fund will occur into the indefinite future and will continue to grow with the 

growth in health care expenditures. 

The potential magnitude of future financial obligations under these three social insurance programs is, 

therefore, important from a unified budget perspective as well as for understanding generally the growing resource 

demands of the programs on the economy. A common way to present future cashflows is in terms of their present 

value. This approach recognizes that a dollar paid or collected next year is worth less than a dollar today because a 

dollar today could be saved and earn a year’s worth of interest. 

Table 5 shows the magnitudes of the primary expenditures and sources of financing for the three trust funds 

computed on an open-group basis for the next 75 years and expressed in present values. The data are consistent with 

the Statements of Social Insurance included in the principal financial statements. For HI, revenues from the public 

are projected to fall short of total expenditures by $5,581 billion in present value terms which is the additional 

amount needed in order to pay scheduled benefits over the next 75 years. 6 From the trust fund perspective, the 

amount needed is $5,337 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 $21,593 billion less than total expenditures for the two 

 

6

 Interest income is not a factor in this table as dollar amounts are in present value terms. 
188 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

accounts, an amount that, from a budget perspective, will be needed to keep the SMI program solvent for the next 75 

years. From the trust fund perspective, however, the present values of total revenues and total expenditures for the 

SMI Program are roughly equal due to the annual adjustment of revenue from other Government accounts to meet 

program costs. 7

 For OASDI, projected revenues from the public fall short of total expenditures by $11,278 billion in 

present value dollars, and, from the trust fund perspective, by $8,600 billion. 

From the Governmentwide perspective, the present value of the total resources needed for the Social Security 

and Medicare Programs over and above current-law funding sources (payroll taxes, benefit taxes, and premium 

payments from the public) is $38,454 billion. From the trust fund perspective, which counts the trust funds ($3,003 

billion in present value) and the general revenue transfers to the SMI Program ($21,593 billion in present value) as 

dedicated funding sources, additional resources needed to fund the programs are $13,858 billion in present value. 

Table 5 

Present Values of Costs Less Revenues of 75-Year Open-Group Obligations 

HI, SMI, and OASDI 

(In billions of dollars, as of January 1, 2012) 

 SMI 

 HI Part B Part D OASDI Total 

Revenues from the public: 

Taxes ......................................... 15,598 - - 45,198 60,796

Premiums, State transfers ......... - 5,344 2,349 - 7,693

Total ........................................ 15,598 5,344 2,349 45,198 68,489

Total costs to the public............ 21,179 20,159 9,128 56,477 106,943 

Net results — budget 

perspective*

.............................. 5,581 14,815 6,778 11,278 38,454

Revenues from other 

Government accounts ............... - 14,815 6,778 - 21,593

Trust fund balance as of 

1/1/2012 .................................... 244 80 1 2,678 3,003 

Net results — trust fund 

perspective*

.............................. 5,337 (80) (1) 8,600 13,858 

*Net results are computed as costs less revenues. 

Note: Details may not add to totals due to rounding. 

Source: 2012 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 $11.3 trillion in present value will 

be needed above currently scheduled taxes to pay for scheduled benefits ($8.6 trillion from the trust fund 

perspective). Yet, a 75-year projection can be a misleading indicator of all future financial flows. For example, 

when calculating unfunded obligations, a 75-year horizon includes revenue from some future workers but only a 

fraction of their future benefits. In order to provide a more complete estimate of the long-run unfunded obligations 

of the programs, estimates can be extended to the infinite horizon. The open-group infinite horizon net obligation is 

the present value of all expected future program outlays less the present value of all expected future program tax and 

premium revenues. Such a measure is provided in Table 6 for the three trust funds represented in Table 5. 

 

7 The SMI Trust Fund has $81 billion of existing assets. 
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 189

From the budget or Governmentwide perspective, the values in line 1 plus the values in line 4 of Table 6 

represent the value of resources needed to finance each of the programs into the infinite future. The sums are shown 

in the last line of the table (also equivalent to adding the values in the second and fifth lines). The total resources 

needed for all the programs sums to $66.3 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 2012. 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 $20.5 trillion is needed to sustain the OASDI program into the 

infinite future, while an additional $4.9 trillion is needed to sustain the HI program. However, looking just at present 

values ignores timing differences in the underlying projected cashflows; the HI Trust Fund is projected to remain 

solvent only until 2024. As described above, from the trust fund perspective, the SMI Program is fully funded, from 

a Governmentwide basis, the substantial gap that exists between premiums and State transfer revenue and program 

expenditures in the SMI Program ($23.6 trillion and $14.3 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 2086, captures 

the full lifetime benefits, and taxes and premiums of all current and future participants. The shorter horizon 

understates the total financial needs by capturing relatively more of the revenues from current and future workers 

and not capturing all of the benefits that are scheduled to be paid to them. 

Table 6 

Present Values of Costs Less Tax, Premium and State Transfer Revenue 

through the Infinite Horizon, HI, SMI, OASDI 

(In trillions of dollars as of January 1, 2012) 

 SMI 

HI Part B Part D OASDI Total 

Present value of future costs less 

future taxes, premiums, and State 

transfers for current participants .......... 10.1 12.4 4.9 24.3 51.7 

Less current trust fund balance .............. 0.2 0.1 - 2.7 3.0 

Equals net obligations for past and 

current participants ............................... 9.9 12.3 4.9 21.6 48.7 

Plus net obligations for future 

participants ........................................... (5.0) 11.3 9.4 (1.1) 14.6 

Equals net obligations through the 

infinite future for all participants ........... 4.9 23.6 14.3 20.5 63.3 

 

Present values of future costs less the 

present values of future income over 

the infinite horizon ................................ 5.1 23.7 14.3 23.2 66.3 

 Details may not add to totals due to rounding. 

Source: 2012 OASDI and Medicare Trustees’ Reports. 
190 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

Railroad Retirement, Black Lung, and Unemployment 

Insurance 

Railroad Retirement 

The Railroad Retirement Board (RRB) was created in the 1930s to establish a retirement benefit program for 

the Nation’s railroad workers. As the Social Security Program legislated in 1935 would not give railroad workers 

credit for service performed prior to 1937, legislation was enacted in 1934, 1935, and 1937 (collectively the 

Railroad Retirement Acts of the 1930s) to establish a railroad retirement program separate from the Social Security 

Program. 

Railroad retirement pays full retirement annuities at age 60 to railroad workers with 30 years of service. The 

program pays disability annuities based on total or occupational disability. It also pays annuities to spouses, 

divorced spouses, widow(er)s, remarried widow(er)s, surviving divorced spouses, children, and parents of deceased 

railroad workers. Medicare covers qualified railroad retirement beneficiaries in the same way as it does Social 

Security beneficiaries. 

Payroll taxes paid by railroad employers and their employees provide a primary source of income for the 

Railroad Retirement and Survivors’ Benefit Program. By law, railroad retirement taxes are coordinated with Social 

Security taxes. Employees and employers pay tier I taxes at the same rate as Social Security taxes. Tier II taxes 

finance railroad retirement benefit payments that are higher than Social Security levels. 

Other sources of program income include: the RRB-SSA-CMS Financial Interchanges with the Social Security 

and Medicare trust funds, earnings on investments, Federal income taxes on railroad retirement benefits, and 

appropriations (provided after 1974 as part of a phase out of certain vested dual benefits). See Note 26—Social 

Insurance, for additional information on railroad retirement program financing. 

The RRSIA liberalized benefits for 30-year service employees and their spouses, eliminated a cap on monthly 

benefits for retirement and disability benefits, lowered minimum service requirements from 10 to 5 years, and 

provided for increased benefits for widow(er)s. Per the RRSIA, amounts in the Railroad Retirement Account and the 

SSEB Account that are not needed to pay current benefits and administrative expenses may be transferred to the 

NRRIT or used to offset transfers from the NRRIT to the Railroad Retirement Account. The NRRIT’s sole purpose 

is to manage and invest railroad retirement assets. NRRIT’s Board of Trustees is empowered to invest trust assets in 

nongovernmental assets, such as equities and debt, as well as in Government securities. Prior to RRSIA, all 

investments were limited to Government securities. 

Since its inception, NRRIT has received $21.3 billion from RRB (including $19.2 billion in fiscal year 2003, 

pursuant to RRSIA) and returned $13.6 billion. During fiscal year 2012, the NRRIT made net transfers of $2.0 

billion to the RRB to pay retirement benefits. Administrative expenses of the trust are paid out of trust assets. The 

balance as of September 30, 2012, and 2011, of non-Federal securities and investments of the NRRIT are 

disclosed in Note 9—Debt and Equity Securities. 

Cashflow Projections 

Economic and Demographic Assumptions. The economic and demographic assumptions used for the most 

recent set of projections are shown in the “Railroad Retirement” section of Note 26—Social Insurance.

Income and Expenditures. Chart 11 shows, in dollars, estimated railroad retirement income (excluding interest 

and financial interchange income) and expenditures for the period 2012-2086 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. 
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 191

Chart 11—Estimated Railroad Retirement Income 

(Excluding Interest and Financial Interchange Income) and Expenditures 

2012-2086 

(In billions of dollars) 

As Chart 11 shows, expenditures are expected to exceed tax income for the entire projection period. The 

imbalances continue to widen until about 2021, decrease slightly for the next 15 years, and then begin to grow 

steadily after 2036. 
192 REQUIRED SUPPLEMENTARY 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 2021 but then begin to decrease somewhat steadily 

as expenditures fall. Tax rates begin to decline after 2036, stabilizing in 2066 through 2076, and declining thereafter. 

Compared to last year, projected tax rates are lower, on average. The tier II tax rate is determined from a tax rate 

table based on the average account benefit ratio. 

Chart 12—Estimated Railroad Retirement Income 

(Excluding Interest and Financial Interchange Income) and Expenditures 

as a Percent of Tier II Taxable Payroll 

2012-2086 
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 193

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 6.1 percent smaller shortfall of income to expenditures, and the high-cost scenario has a 

7.3 percent higher shortfall. A higher discount rate reduces future values relative to a lower rate. As seen in the 

table, the shortfall is 26.5 percent lower if the interest rate is 10 percent rather than 7.0 percent and 64.5 percent 

higher when the interest rate is 4.0 percent rather than 7.0 percent. 

Table 7 

Present Values of Railroad Retirement Expenditures in Excess of Income 

under Various Employment and Interest Rate Assumptions, 2012-2086 

(Dollar values in billions; values of assumptions shown in parentheses) 

 

Assumption Low Middle High 

Employment 1 ............... 100.4 

(-0.5%) 

107.0 

(-2.0%) 

114.8 

(-3.5%) 

 

Interest rate ................... 78.6 

(10.0%) 

107.0 

(7.0%) 

176.0 

(4.0%) 

1

 The low and middle employment scenarios have passenger service employment remaining at 45,000 workers per year 

and the remaining employment base declining at 0.5 percent and 2.0 percent, respectively, for the next 25 years. The 

high-cost scenario has passenger service employment declining by 500 per workers per year until a level of 35,000 is 

reached with the remaining employment base declining by 3.5 percent per year for 25 years, at a reducing rate over the 

next 25 years, and remaining level thereafter. 

Source: Railroad Retirement Board 

Sustainability of Railroad Retirement 

Table 8 shows the magnitudes of the primary expenditures and sources of financing for the Railroad 

Retirement Program computed on an open-group basis for the next 75 years and expressed in present values as of 

January 1, 2012. The data are consistent with the Statements of Social Insurance. 

From a Governmentwide perspective, revenues are expected to fall short of expenditures by approximately 

$107.0 billion, which represents the present value of resources needed to sustain the Railroad Retirement Program. 

From a trust fund perspective, when the trust fund balance and the financial interchange and transfers are included, 

the combined balance of the NRRIT, the Railroad Retirement Account, and the SSEB Account show a slight 

surplus. 
194 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

Table 8 

Present Values of 75-Year Projections of Revenues and Expenditures for the 

Railroad Retirement Program 1, 2

(In billions of present value dollars as of January 1, 2012) 

Estimated future income (excluding interest) 3 received from or on behalf of: 

Current participants who have attained retirement age ............................................. 6.6 

Current participants not yet having attained retirement age ...................................... 55.6 

Those expected to become participants .................................................................... 77.9 

All participants ............................................................................................................ 140.0 

Estimated future expenditures: 4

Current participants who have attained retirement age ............................................. 118.8 

Current participants not yet having attained retirement age ...................................... 94.7 

Those expected to become participants .................................................................... 33.5 

All participants ............................................................................................................ 247.0 

Net obligations from budget perspective (expenditures less income)................. 107.0 

Railroad Retirement Program assets (mostly investments stated at market) 5 ......... 24.2 

Financial interchange from Social Security Trust ...................................................... 84.2 

Net obligations from trust fund perspective............................................................ (1.4) 

1

 Represents combined values for the Railroad Retirement Account, SSEB Account, and NRRIT, based on middle 

employment assumption. 

2

 The data used reflect the provisions of RRSIA of 2001. 3

 Future income (excluding interest) includes tier I taxes, tier II taxes, and income taxes on benefits. 

4

 Future expenditures include benefits and administrative expenditures. 

5

 The value of the fund reflects the 7.0 percent interest rate assumption. The RRB uses the relatively high rate due to 

investments in private securities. 

Note: Detail may not add to totals due to rounding. Employee and beneficiary status are determined as of 1/1/2011, 

whereas present values are as of 1/1/2012. 

Black Lung 

The Federal Coal Mine Health and Safety Act of 1969 created the Black Lung Disability Benefit Program to 

provide compensation, medical, and survivor benefits for eligible coal miners who are totally disabled due to 

pneumoconiosis (black lung disease) arising out of their coal mine employment. The survivor benefits are available 

only for eligible survivors of coal miners who died due to pneumoconiosis. DOL operates the Black Lung Disability 

Benefit Program. The BLDTF provides benefit payments to eligible coal miners totally disabled by pneumoconiosis 

and to eligible survivors when no responsible mine operator can be assigned the liability. The beneficiary population 

is a nearly closed universe in which attrition by death exceeds new entrants by a ratio of more than ten to one. 

Excise taxes on coal mine operators, based on the sale of coal, are the primary source of financing black lung 

disability payments and related administrative costs. The Black Lung Benefits Revenue Act provided for repayable 

advances to the BLDTF from the General Fund of the Treasury, in the event that BLDTF resources were not 

adequate to meet program obligations. Prior to legislation enacted in 2008 that allowed for the restructuring of 

BLDTF debt, the trust fund had accumulated large liabilities from significant and growing shortfalls of excise taxes 

relative to benefit payments and interest expenses. 
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 195

The Energy Improvement and Extension Act of 2008 (Public Law 110-343), enacted on October 3, 2008, 

contained several provisions that significantly improved the BLDTF’s financial position, including: 

 Continuation of a previously-enacted increase in coal excise tax rates for an additional 5 years, through 

December 2018; 

 Provision for the restructuring of BLDTF debt by refinancing the outstanding repayable advances with 

proceeds from issuing new debt instruments with lower interest rates; and 

 Establishment of a one-time appropriation that significantly reduced the outstanding debt of the BLDTF. 

This Act also allowed that any debt issued by the BLDTF subsequent to the refinancing may be used to make 

benefit payments, other authorized expenditures, or to repay debt and interest from the initial refinancing. All debt 

issued by the BLDTF was effected as borrowing from the Treasury’s Bureau of the Public Debt. 

On September 30, 2012, total liabilities of the BLDTF exceeded assets by $6.0 billion. Prior to the enactment 

of Public Law 110-343, this shortfall was funded by repayable advances to the BLDTF, which are repayable with 

interest. Pursuant to Public Law 110-343, any shortfall will be financed with debt instruments similar in form to 

zero-coupon bonds. 

From the budget or consolidated financial perspective, Chart 13 shows projected black lung expenditures 

(excluding interest) and excise tax collections for the period 2013-2040. The significant assumptions used in the 

most recent set of projections are shown in the “Black Lung” section of Note 26—Social Insurance. The projected 

decrease in cash inflows in the year 2019 and, thereafter, is the result of a scheduled reduction in the tax rate on the 

sale of coal. This rate reduction is projected to result in a 38.8 percent decrease in the amount of excise taxes 

collected between the years 2018 and 2019. 
196 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

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

2013-2040 

(In millions of dollars) 
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 197

Table 9 

Present Values of 28-Year Projections of Expenditures and Revenues 

for the Black Lung Disability Benefit Program 

(In billions of present value dollars, as of September 30, 2012) 

 

Projected future expenditures.......................................................................................... 2.7 

Projected future tax income ............................................................................................. 6.7 

Net obligations from budget perspective (expenditures less income) ............................. (4.0) 

Accumulated balance due General Fund ........................................................................ 5.7 

Net obligations from trust fund perspective .................................................................. 1.7 

Note: Detail may not add to totals due to rounding. 

Source: Department of Labor projections and Treasury Department calculations 

Table 9 shows present values of 28-year projections of expenditures and revenues for the Black Lung 

Disability Benefit Program computed as of September 30, 2012. Cashflows were discounted using the rates on the 

debt in the BLDTF. From a Governmentwide (budget) perspective, the present value of expenditures is expected to 

be less than the present value of income by $4.0 billion (a surplus). From a trust fund perspective, a large balance 

($5.7 billion) is owed to the General Fund. From that perspective, when that accumulated balance is combined with 

the cashflow surplus, the program has a shortfall of $1.7 billion in present value dollars. This compares to a shortfall 

of $1.9 billion reported in last year’s Financial Report. 

Unemployment Insurance 

The Unemployment Insurance Program was created in 1935 to provide temporary partial wage replacement to 

workers who lost their jobs. The program is administered through a unique system of Federal and State partnerships 

established in Federal law but administered through conforming state laws by state agencies. The program includes 

the 50 U.S. states and Puerto Rico, U.S. Virgin Islands, and the District of Columbia. DOL interprets and enforces 

Federal law requirements and provides broad policy guidance and program direction, while program details such as 

benefit eligibility, duration, and amount of benefits are established through individual state unemployment insurance 

statutes and administered through State unemployment insurance agencies. 

The program is financed through the collection of Federal and state unemployment taxes that are credited to 

the UTF and reported as Federal tax revenue. The fund was established to account for the receipt, investment, and 

disbursement of unemployment taxes. Federal unemployment taxes are used to pay for Federal and state 

administration of the Unemployment Insurance Program, veterans’ employment services, state employment 

services, and the Federal share of extended unemployment insurance benefits. Federal unemployment taxes also are 

used to maintain a loan account within the UTF, from which insolvent state accounts may borrow funds to pay 

unemployment insurance benefits. 

Chart 14 shows the projected cash contributions and expenditures over the next 10 years under expected 

economic conditions (described below). The significant assumptions used in the projections include total 

unemployment rates, civilian labor force levels, percent of unemployed receiving benefits, total wages, distribution 

of benefit payments by State, State tax rate structures, State taxable wage bases, and interest rates on UTF 

investments. These projections, excluding interest earnings, indicate a negative net cashflow until 2013 followed by 

positive net cashflow for the remainder of the projection period. 

The Worker, Homeownership, and Business Assistance Act of 2009, was enacted on November 6, 2009. This 

Act extended unemployment benefits to eligible recipients up to 14 additional weeks in all States. It also extended a 

total of up to 20 additional weeks in States with unemployment of 8.5 percent or greater. It also amended section 

3301 of the Internal Revenue Code of 1986 to extend the 0.2 percent Federal Unemployment Tax Act surtax on 

covered employers through June 30, 2011. No benefits are payable for weeks of unemployment commencing before 

the date of enactment of the Act. 
198 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

Public Law 111-205 Unemployment Compensation Extension Act of 2010, enacted on July 22, 2010, amends 

the Supplemental Appropriation Act, 2008 with respect to the state-established individual emergency unemployment 

compensation account and to apply to claims for Emergency Unemployment Compensation (EUC) payments the 

terms and conditions of state unemployment compensation law relating to availability of work, active search for 

work, and refusal to accept work. The Act extends the final dates for entering a federal-state agreement under the 

EUC program through November 30, 2010. The Act also postpones the termination of the program until April 30, 

2011, and amends the Assistance for Unemployed Workers and Struggling Families Act to extend until December 1, 

2010, and requires Federal payments to states cover 100 percent of EUC. 

Chart 14—Estimated Unemployment Trust Fund Cashflow 

Using Expected Economic Conditions 

2013-2022 

(In billions of dollars) 

Table 10 shows present values of 10-year projections of revenues and expenditures for the Unemployment 

Insurance Program using a discount rate of 3.24 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 7.8 percent during fiscal year 2013, decreasing to below 6 percent in fiscal year 

2017 and thereafter. Under Recovery Scenario One (lower than expected unemployment rates), the unemployment 

rate decreases from 7.31 percent in fiscal year 2013 while net cash inflows peak in fiscal year 2013 and continue to 

be positive through 2022. Under Recovery Scenario Two, net cash outflows including interest earnings and expenses 

Source: Department of Labor 
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 199

are projected in fiscal years 2013 through 2015. Net cash inflows are reestablished in fiscal year 2016 and peak in 

fiscal year 2018 with a drop in the unemployment rate to 7.65 percent and then lower rates for fiscal years 2019 

through 2022. 

Each scenario uses an open-group that includes current and future participants of the Unemployment Insurance 

Program. Table 10 shows the impact on the UTF projections of varying projected unemployment rates. For example, 

in Recovery Scenario Two, while tax income is projected to increase as higher layoffs result in higher employer 

taxes, benefit outlays increase even more. From the Governmentwide (budget) perspective, under expected 

conditions, the present value of income exceeds the present value of expenditures by $37.5 billion. From the same 

perspective, under Recovery Scenario Two, the present value of income exceeds the present value of expenditures 

by $3.6 billion. From a trust fund perspective, which takes into account the ($12.9) billion trust fund balance, the 

program has a surplus of $24.6 billion under expected conditions. As explained below, the negative trust fund 

balance reflects loans extended by the General Fund to the states. 

Table 10 

Present Values of 10-Year Projections of Expenditures and Revenues for 

Unemployment Insurance Under Three Alternative Scenarios 

for Economic Conditions 

(In billions of present value dollars, as of September 30, 2012) 

 Economic Conditions 

 Expected 

Recovery 

Scenario 

One 

Recovery 

Scenario 

Two 

 

Projected future expenditures.................................... 403.0 384.3 507.6 

Projected future cash income .................................... 440.5 426.2 511.2 

Net obligations from budget perspective 

(expenditures less income) ..................................... (37.5) (41.9) (3.6) 

Trust fund assets ....................................................... (12.9) (12.9) (12.9) 

Net obligations from trust fund perspective 1 ............. (24.6) (29.0) 9.3 

1 Net obligations from the trust fund perspective equals net obligations from the budget perspective minus trust fund 

assets. The negative values in this line are indicative of surpluses. 

Note: Detail may not add to totals due to rounding. 

Source: Department of Labor. 

Unemployment Trust Fund Solvency 

Each state’s accumulated UTF net assets or reserve balance should provide a defined level of benefit payments 

over a defined period. To be minimally solvent, a State’s reserve balance should provide for one year’s projected 

benefit payment needs based on the highest levels of benefit payments experienced by the State over the last 20 

years. A ratio of 1.0 or greater indicates a state is minimally solvent. States below this level are vulnerable to 

exhausting their funds in a recession. States exhausting their reserve balance borrow funds from the Federal 

Unemployment Account to make benefit payments. 

Chart 15 presents the State by State results of this analysis as of September 30, 2012. As the chart illustrates, 

38 state funds plus the funds of Puerto Rico and the Virgin Islands were below the minimal solvency ratio of 1.0 at 

September 30, 2012.
200 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

Chart 15—Unemployment Trust Fund Solvency as of September 30, 2012 
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 201 

Deferred Maintenance and Repairs 

Deferred maintenance and repairs are the estimated cost to bring Government-owned property, plant, and 

equipment to an acceptable condition, resulting from not performing maintenance on a timely basis. Deferred 

maintenance and repairs exclude the cost of expanding the capacity of assets or upgrading them to serve needs 

different from those originally intended. The consequences of not performing regular maintenance and repairs could 

include increased safety hazards, poor service to the public, higher costs in the future, and inefficient operations. 

Estimated deferred maintenance and repairs cost are not accrued in the Statements of Net Cost or recognized as a 

liability on the Balance Sheets. 

The amounts disclosed for deferred maintenance and repairs are allowed to be measured using one of the 

following three methods: 

 Condition assessment surveys are periodic inspections of the Government-owned property to determine 

the current condition and estimated cost to bring the property to an acceptable condition. 

 Life-cycle cost forecast is an acquisition or procurement technique that considers operation, maintenance, 

and other costs in addition to the acquisition cost of assets. 

 Management analysis method is founded on inflation-adjusted reductions in maintenance funding since the 

base year. 

The amounts disclosed in the table below have all been measured using the condition assessment survey 

method. The standards for acceptable operating condition and the changes in these standards and changes in asset 

condition vary widely between the Federal entities. 

Some deferred maintenance and repairs have been deemed critical. Such amounts and conditions are defined 

by the individual agencies with responsibility for the safekeeping of these assets. The critical maintenance amount is 

not included in the low or high estimates amounts and is reported separately. Low and high estimates are based on 

the materiality of the estimated cost of returning the asset to the acceptable condition versus the total value of the 

corresponding asset. 

 

 Deferred Maintenance and Repairs as of September 30, 2012, and 2011 

Deferred Maintenance and Repairs 

Cost Range 

Low 

Estimate 

High 

Estimate 

Critical 

Maintenance 

(In billions of dollars) 2012 2011 2012 2011 2012 2011 

 

Asset category: 

Buildings, structures and 

facilities ................................... 31.5 31.3 34.5 36.4 106.3 97.6 

Furniture, fixtures and 

equipment ............................... 0.1 0.1 0.1 0.1 1.3 2.5 

Other general property, plant, 

and equipment ........................ 5.3 5.1 5.3 5.1 0.7 0.8 

Heritage assets .......................... 0.9 0.9 0.8 0.9 1.7 1.2 

Stewardship land ....................... 5.8 3.6 8.4 5.2 - - 

Total deferred maintenance .... 43.6 41.0 49.1 47.7 110.0 102.1 

 
202 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

Please refer to the individual financial statements of DOI, DOD, USDA, DOE, and VA for detailed significant 

information on deferred maintenance and repairs, including the standards used for acceptable operating condition 

and changes in asset condition. 

Other Claims for Refunds 

Management has estimated amounts that may be paid out as other claims for tax refunds. This estimate represents 

an amount (principal and interest) that may be paid for claims pending judicial review by the Federal courts or, 

internally, by appeals. The total estimated payout (including principal and interest) for claims pending judicial review 

by the Federal courts is $6.1 billion and $8.1 billion for fiscal years 2012 and 2011, respectively. For those under 

appeal, the estimated payout is $5.3 billion and $7.5 billion for fiscal years 2012 and 2011, respectively. There are also 

unasserted claims for refunds of certain excise taxes. Although these refund claims have been deemed to be probable, 

they do not meet the criteria in SFFAS No. 5 for reporting the amounts in the balance sheets or for disclosure in the 

Notes to the Financial Statements. However, they meet the criteria in SFFAS No. 7 for inclusion as Required 

Supplementary Information. To the extent judgments against the Government for these claims prompt other similarly 

situated taxpayers to file similar refund claims, these amounts could become significantly greater. 

Tax Assessments 

The Government is authorized and required to make inquiries, determinations, and assessments of all taxes that 

have not been duly paid. Unpaid assessments result from taxpayers filing returns without sufficient payment, as well 

as enforcement programs such as examination, under-reporter, substitute for return and combined annual wage 

reporting. Assessments with little or no future collection potential are called write-offs. Although compliance 

assessments and write-offs are not considered receivables under Federal accounting standards, they represent legally 

enforceable claims of the Government. There is, however, a significant difference in the collection potential between 

compliance assessments and receivables. 

Compliance assessments and pre-assessment work in process are $89.6 billion and $105.0 billion for fiscal 

years 2012 and 2011, respectively. The amount of allowance for uncollectible amounts pertaining to compliance 

assessments cannot be reasonably estimated, and thus the net realizable value of the value of the pre-assessment 

work-in-process cannot be determined. The amount of assessments agencies have statutory authority to collect at the 

end of the period but that have been written off and excluded from accounts receivable are $125.1 billion and $106.6 

billion for fiscal years 2012 and 2011, respectively. 
REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 203 

Risk Assumed 

Risk assumed information is important for all Federal insurance and guarantee programs, except social 

insurance, life insurance, and loan guarantee programs. Risk assumed is generally measured by the present value of 

unpaid expected losses net of associated premiums, based on the risk inherent in the insurance or guarantee coverage 

in force. In addition to the liability for unpaid insurance claims included in Note 18─Insurance and Guarantee 

Program Liabilities, for events that have already occurred, the Government also is required to report as 

supplementary information risk assumed amounts and the periodic changes in those amounts. 

The assessments of losses expected based on the risk assumed are based on actuarial or financial methods that 

include information and assumptions applicable to the economic, legal, and policy environment in force at the time 

the assessments are made. Management has estimated the loss amounts based on the risk assumed as well as the 

periodic changes. 

Please refer to the individual financial statements of the PBGC, USDA, and NCUA for further detailed 

information, including information as to the indicators of the range of uncertainty around expected estimates and the 

indicators of the sensitivity of the estimates to changes in major assumptions. We note that this table does not 

include all federal insurance and guarantee programs. 

Risk Assumed Information as of September 30, 2012, and 2011 

(In billions of dollars) 2012 2011 

 

 Present value of unpaid expected losses, 

 net of associated premiums:

Pension Benefit Guaranty Corporation .......... 321.7 250.2 

Department of Agriculture ................................ 18.3 8.8 

National Credit Union Administration ............. 3.4 7.4 

All other ......................................................... 0.9 0.9 

Total ................................................................ 344.3 267.3 

Periodic changes in risk assumed amounts: 

Pension Benefit Guaranty Corporation .......... 71.5 60.2 

Department of Agriculture ............................. 9.5 1.3 

National Credit Union Administration ............ (4.0) (0.1) 

All other ......................................................... - (1.1)

Total ................................................................ 77.0 60.3 
204 REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 

This page is intentionally blank. 
OTHER ACCOMPANYING INFORMATION (UNAUDITED) 205 

United States Government 

Other Accompanying Information 

(Unaudited) For the Years Ended 

September 30, 2012, and 2011 

Unexpended Budget Balances 

The Federal budget and budget process largely use obligational accounting–a distinct administrative control 

through which Federal agencies control, monitor, and report on the status of funds at their disposal. Unexpended 

budget balances consist of the unobligated and obligated, but unliquidated, budget balances. 

Unobligated budget balances, including amounts for trust funds, are the cumulative amount of budget balances 

that are not obligated and that remain available for obligation. In 1-year accounts, the unobligated balance is not 

available for new obligations after the end of the fiscal year. In multiyear accounts, the unobligated balance may be 

carried forward and remains available for obligation for the period specified. In no-year accounts, the unobligated 

balance is carried forward until specifically rescinded by law or the head of the agency concerned determines that 

the purposes for which it was provided have been accomplished and disbursements have not been made against the 

appropriation for 2 consecutive years. The total unobligated budget balances as of September 30, 2011, and 2010, 

are $829.4 billion and $885.1 billion, respectively. 

Obligated budget balances are the cumulative budget balances that have been obligated but not liquidated. The 

obligated balance can be carried forward for a maximum of 5 years after the appropriation has expired. The total 

obligated budget balances as of September 30, 2011, and 2010, are $1,428.5 billion and $1,530.9 billion, 

respectively. 

The President’s Budget is located at www.whitehouse.gov/omb; unexpended budget balances are shown in the 

supporting documentation section under “Balances of Budget Authority.” The President’s Fiscal Year 2013 Budget 

(issued on February 13, 2012) includes the actual unobligated and obligated amounts for fiscal year 2011. The 

President’s Budget with fiscal year 2012 actual amounts is expected to be published in February 2013. 

Tax Burden 

The Internal Revenue Code provides for progressive tax rates, whereby higher incomes are generally subject to 

higher tax rates. The following tables present the latest available information on income tax and related income, 

deductions, and credit for individuals by income level and for corporations by size of assets. 
206 OTHER ACCOMPANYING INFORMATION (UNAUDITED) 

Individual Income Tax Liability for Tax Year 2010 

 

Adjusted Gross Income 

(AGI) 

Number of 

Taxable 

Returns 

(In thousands)

AGI

(In millions 

of dollars)

Total

Income 

Tax 

(In millions 

of dollars)

Average 

AGI per Return 

(In whole 

dollars)

Average 

Income 

Tax per Return

(In whole 

dollars)

Income Tax as

a Percentage

 of AGI 

Under $15,000 ...................... 37,602 87,421 1,587 2,325 42 1.8%

$15,000 under $30,000 ........ 30,858 681,419 14,314 22,082 464 2.1%

$30,000 under $50,000 ........ 25,605 1,000,098 47,754 39,059 1,865 4.8%

$50,000 under $100,000 ...... 30,533 2,171,323 167,026 71,114 5,470 7.7%

$100,000 under $200,000 .... 13,998 1,869,639 224,423 133,565 16,033 12.0%

$200,000 under $500,000 .... 3,472 985,431 192,826 283,822 55,537 19.6%

$500,000 or more ................. 825 1,293,811 303,745 1,568,256 368,176 23.5%

Total ................................... 142,893 8,089,142 951,675 

Corporation Income Tax Liability for Tax Year 2009 

 

Total Assets 

(In thousands of dollars)

Income Subject 

to Tax 

(In millions of dollars)

Total Income Tax 

after Credits

(In millions of dollars)

Percentage of Income

Tax after Credits to 

Taxable Income 

Zero assets .............................. 45,444 13,840 30.5% 

$1 under $500 .......................... 6,280 1,088 17.3% 

$500 under $1,000 ................... 3,273 734 22.4% 

$1,000 under $5,000 ................ 11,116 3,043 27.4% 

$5,000 under $10,000 .............. 6,206 2,002 32.3% 

$10,000 under $25,000 ............ 9,865 3,237 32.8% 

$25,000 under $50,000 ............ 8,968 2,883 32.1% 

$50,000 under $100,000 .......... 12,209 3,925 32.1% 

$100,000 under $250,000 ........ 20,445 6,430 31.5% 

$250,000 under $500,000 ........ 24,838 7,492 30.2% 

$500,000 under $2,500,000 ..... 91,990 26,347 28.6% 

$2,500,000 or more .................. 654,215 133,974 20.5% 

Total....................................... 894,849 204,995 
OTHER ACCOMPANYING INFORMATION (UNAUDITED) 207 

Tax Gap 

The tax gap is the difference between what taxpayers should pay and what they actually pay due to not filing 

tax returns, not paying their reported tax liability on time, or failing to report their correct tax liability. The tax gap, 

about $450.0 billion based on updated fiscal year 2006 estimates, represents the amount of noncompliance with the 

tax laws. Underreporting of income tax, employment taxes, and other taxes represents 84 percent of the gross tax 

gap. The IRS remains committed to finding ways to increase compliance and reduce the tax gap, while minimizing 

the burden on the vast majority of taxpayers who pay their taxes accurately and on time. 

The tax gap is the aggregate amount of tax (i.e., excluding interest and penalties) that is imposed by the tax 

laws for any given tax year but is not paid voluntarily and timely. The tax gap arises from three types of 

noncompliance: not filing required tax returns on time or at all (the nonfiling gap), underreporting the correct 

amount of tax on timely filed returns (the underreporting gap), and not paying on time the full amount reported on 

timely filed returns (the underpayment gap). Of these three components, only the underpayment gap is observed; the 

nonfiling gap and the underreporting gap must be estimated. Each instance of noncompliance by a taxpayer 

contributes to the tax gap, whether or not the IRS detects it, and whether or not the taxpayer is even aware of the 

noncompliance. Obviously, some of the tax gap arises from intentional (willful) noncompliance, and some of it 

arises from unintentional mistakes. 

The collection gap is the cumulative amount of assessed tax, penalties, and interest that has been assessed over 

many years, but has not been paid by a certain point in time and which the IRS expects to remain uncollectible. In 

essence, it represents the difference between the total balance of unpaid assessments and the net taxes receivable 

reported on the IRS’ balance sheet. The tax gap and the collection gap are related and overlapping concepts, but they 

have significant differences. The collection gap is a cumulative balance sheet concept for a particular point in time, 

while the tax gap is like an income statement item for a single year. Moreover, the tax gap estimates include all 

noncompliance, while the collection gap includes only amounts that have been assessed (a small portion of all 

noncompliance). 
208 OTHER ACCOMPANYING INFORMATION (UNAUDITED) 

Unmatched Transactions and Balances 

(In millions of dollars) 

Fiscal Year 

2012 

Fiscal Year 

2011 

Change in intragovernmental unmatched balances: 

Debt/investment ........................................................................... (0.5) (6.5) 

Interest payable/receivable .......................................................... (6.5) (1.5) 

Loans payable/receivable ............................................................ 17.6 (27.9) 

Benefit program contributions payable/receivable ....................... 160.8 (44.6) 

Accounts payable/receivable ....................................................... (1,267.5) 5,863.4 

Advances from/to others and deferred credits/prepayments ...... 97.2 416.7 

Transfers payable/receivable ....................................................... 134.6 14.2 

 (864.3) 6,213.8 

 

Unmatched intragovernmental transactions: 

Federal securities interest revenue/expense─investment 

 exchange ................................................................................... 6.5 1.0 

Borrowings interest revenue/expense─exchange ....................... 71.3 1.4 

Borrowings gains/losses .............................................................. 9.3 0.4 

Nonexpenditure transfers-in/out .................................................. 35.9 (671.0) 

Expenditure transfers-in/out ......................................................... 122.8 (26.0) 

Transfers-in/out without reimbursement ...................................... (1,013.2) 328.5 

Imputed financing source/cost ..................................................... (17.8) 5.3 

Benefit program revenue/cost ...................................................... (725.2) (775.6) 

 (1,510.4) (1,136.0) 

 

General fund transactions: 

Fund balance with Treasury ........................................................ 5,656.4 13,671.8 

Appropriations of unavailable special or trust fund receipts─

transfers-out/in .......................................................................... (50.9) 146.1 

Appropriations received/warrants ................................................ 2,361.2 (7,486.2) 

Other taxes and receipts/trust fund warrants ............................... 3,588.0 1,862.7 

Custodial and non-entity collections transferred out/in ................ (54,161.4) 45,405.0 

Other General Fund transactions ................................................ 65,725.2 (45,775.6) 

 23,118.5 7,823.8 

 

Net intra-agency reporting errors and restatements ...................... (568.4) 2,685.1 

 

Unmatched transactions and balances, net .................................. 20,175.4 15,586.7 

( ) Parentheses indicate a decrease to Net Position. 
OTHER ACCOMPANYING INFORMATION (UNAUDITED) 209 

The Statement of Operations and Changes in Net Position includes an amount for unmatched transactions and 

balances that result from the consolidation of Federal reporting entities. Transactions between Federal entities must 

be eliminated in consolidation to calculate the financial position of the U.S. Government. Many of the amounts 

included in the table represent intragovernmental activity and balances that differed between Federal agency trading 

partners and often totaled significantly more in the absolute than the net amounts shown. In addition, included in the 

“General Fund Transactions” section are certain intragovernmental accounts, primarily related to agency 

unreconciled transactions with the General Fund, totaling hundreds of billions of dollars. The table also reflects 

other consolidating adjustments and other adjustments that contributed to the unmatched transactions and balances 

amount. 

Unmatched transactions and balances between Federal entities impact not only in the period in which 

differences originate but also in the periods where differences are reconciled. As a result, it would not be proper to 

conclude that increases or decreases in the unmatched amounts shown in the “Unmatched Transactions and 

Balances” table reflect improvements or deteriorations in the Government’s ability to reconcile intragovernmental 

transactions. The Federal community considers the identification and accurate reporting of intragovernmental 

activity a priority. 
210 OTHER ACCOMPANYING INFORMATION (UNAUDITED) 

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REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION (UNAUDITED) 211

United States Government 

Required Supplementary Stewardship 

Information (Unaudited) for the Years 

Ended September 30, 2012, and 2011 

Stewardship Investments 

Stewardship investments focus on Government programs aimed at providing long-term benefits by improving 

the Nation’s productivity and enhancing economic growth. These investments can be provided through direct 

Federal spending or grants to State and local governments for certain education and training programs, research and 

development, and federally financed but not federally owned property, such as bridges and roads. When incurred, 

these investments are included as expenses in determining the net cost of operations. Stewardship investments for 

the current year and for the immediately preceding 4 years are shown below in Table 11. 

Table 11 

Stewardship Investments for the Years Ended 

September 30, 2008, through 2012 

(In billions of dollars) 

Fiscal 

Year 

2012 

Fiscal 

Year 

2011 

Fiscal 

Year 

2010 

Fiscal 

Year 

2009 

Fiscal 

Year 

2008 

Investments in non-Federal physical 

property ............................................. 68.1 69.9 66.7 65.1 57.8 

Investments in human capital .............. 87.1 91.9 122.3 60.3 77.2 

Research and development: 

Investments in basic research ........... 34.2 35.7 31.5 27.4 27.6 

Investments in applied research ........ 29.1 28.8 26.2 19.1 21.4 

Investments in development .............. 67.0 71.7 77.3 101.0 79.2 

Total investments ............................ 285.5 298.0 324.0 272.9 263.2 
212 REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION (UNAUDITED) 

Non-Federal Physical Property 

The Government makes grants and provides funds for the purchase, construction, and/or major renovation of 

State and local government physical properties. Costs for non-Federal physical property programs are included as 

expenses in the Statements of Net Cost and are reported as investments in Table 11. They are measured on the same 

accrual basis of accounting used in the Financial Report statements. DOT, HUD, and EPA had $56.6 billion (83 

percent), $4.2 billion (6 percent), and $4.2 billion (6 percent), respectively, of the total non-Federal physical 

property investments in fiscal year 2012 as shown in Table 11. Within DOT, the Federal Highway Administration 

invested $42.6 billion during fiscal year 2012, primarily via reimbursement from the Highway Trust Fund, for 

States’ construction costs of interstate and national highways. The States’ contribution is 10 percent for the Interstate 

System and 20 percent for most other programs. 

Human Capital 

The Government runs several programs that invest in human capital. Those investments go toward increasing 

and maintaining a healthy economy by educating and training the general public. Costs do not include training 

expenses for Federal workers. 

Education, VA, and DOL had $61.9 billion (71 percent), 12.2 billion (14 percent), and $6.7 billion (8 percent), 

respectively, of the total human capital investments in fiscal year 2012 as shown in Table 11. In comparison over the 

past 5 years, Education had an increase in human capital investments in fiscal years 2008 and 2010, due to an 

increase in the net cost for the Federal Family Education Loan, Direct Loan, Grant Programs, and Other Programs, 

including the American Recovery and Reinvestment Act of 2009; while VA increased in fiscal years 2009 through 

2012 due to implementation of the Post 9/11 GI Bill. Education administers a wide variety of programs related to 

general public education and training programs that are intended to increase or maintain national economic 

productive capacity. The Office of Federal Student Aid administers need-based financial assistance programs for 

students pursuing postsecondary education and makes available Federal grants, direct loans, and work-study funding 

to eligible undergraduate and graduate students. 

The significant human capital programs administered by DOL relate to grants for job training and employment 

programs. The significant human capital programs administered by VA 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 $ 18.5 billion (54 percent) and $ 13.1 billion (45 percent), 

of the total basic and applied research investments, respectively, in fiscal year 2012 as shown in Table 11. HHS also 

had similar R&D investment amounts (and percentage contributions) in each of the preceding 4 years. 

Within HHS, the National Institutes of Health (NIH) conducts almost all (98 percent) of the Department’s 

basic and applied research. The NIH Research Program includes all aspects of the medical research continuum, 

including basic and disease-oriented research, observational and population-based research, behavioral research, and 

clinical research, including research to understand both health and disease states, to move laboratory findings into 
REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION (UNAUDITED) 213

medical applications, to assess new treatments or compare different treatment approaches; and health services 

research. 

The NIH regards the expeditious transfer of the results of its medical research for further development and 

commercialization of products of immediate benefit to improved health as an important mandate. 

With regard to development, the DOD and NASA had $ 59.7 billion (89 percent) and $3.6 billion (5 percent), 

respectively, of total development investments in fiscal year 2012, as shown in Table 11. Development is comprised 

of five stages: advanced technology development, advanced component development and prototypes, system 

development and demonstration, management support, and operational systems development. Major outputs of 

DOD development are: 

 Hardware and software components, and complete weapon systems ready for operational and 

developmental testing and field use, and 

 Weapon systems finalized for complete operational and developmental testing. 

NASA development includes activities to extend the our knowledge of Earth, its space environment, and the 

universe, and to invest in new aeronautics and advanced space transportation technologies that support the 

development and application of technologies critical to the economic, scientific, and technical competitiveness of 

the United States. 
214 REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION (UNAUDITED) 

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APPENDIX A 215

Appendix A: Reporting Entity 

This appendix lists the organizations and agencies encompassed in the reporting entity for this publication as 

well as some organizations excluded from the reporting entity. The reporting entity is a specifically defined group of 

agencies, principally Cabinet departments and other agencies of the executive branch, as stated in the law and 

accounting guidance. 

The determination as to which organizations and agencies will be included in the reporting entity is governed 

by Federal laws and is also based on guidance issued by the Federal Accounting Standards Advisory Board (the 

Board) in their Statement of Federal Financial Accounting Concept No. 2, Entity and Display, which provides 

criteria for determining what should be included in the reporting entity for a consolidated Governmentwide report. 

The Board is now considering more specific guidance on the reporting entity for this report. 

There are a total of 150 organizations and agencies included in the Financial Report of the United States 

Government. The lists below describe three groups of entity/fund types that comprise the reporting entity for the 

Financial Report and include entities from all three branches of Government. 

Twenty-Four Chief Financial Officer Act Agencies

Department of Agriculture 

 www.usda.gov 

Department of Commerce 

 www.doc.gov 

Department of Defense 

 www.defense.gov 

Department of Education 

www.ed.gov 

Department of Energy 

 www.doe.gov 

Department of Health and Human Services 

 www.hhs.gov 

Department of Homeland Security 

 www.dhs.gov 

Department of Housing and Urban Development 

 www.hud.gov 

Department of the Interior 

 www.doi.gov 

Department of Justice 

 www.usdoj.gov 

Department of Labor 

 www.dol.gov 

Department of State 

 www.state.gov 

Department of Transportation 

 www.dot.gov 

Department of the Treasury 

 www.treasury.gov 

Department of Veterans Affairs 

www.va.gov 

Environmental Protection Agency 

www.epa.gov 

General Services Administration 

www.gsa.gov 

National Aeronautics and Space Administration 

www.nasa.gov 

National Science Foundation 

www.nsf.gov 

Office of Personnel Management 

www.opm.gov 

Small Business Administration 

www.sba.gov 

Social Security Administration 

www.ssa.gov 

U.S. Agency for International Development 

www.usaid.gov 

U.S. Nuclear Regulatory Commission 

www.nrc.gov 
216 APPENDIX A 

Eleven Additional Significant Entities

Export-Import Bank of the United States 

www.exim.gov 

Farm Credit System Insurance Corporation 

www.fcsic.gov 

Federal Communications Commission 

www.fcc.gov 

Federal Deposit Insurance Corporation 

www.fdic.gov 

National Credit Union Administration 

www.ncua.gov 

Pension Benefit Guaranty Corporation 

www.pbgc.gov 

Railroad Retirement Board 

www.rrb.gov 

Securities and Exchange Commission 

www.sec.gov 

Smithsonian Institution 

www.si.edu 

Tennessee Valley Authority 

www.tva.gov 

U.S. Postal Service 

www.usps.gov 

One Hundred Fifteen Additional Entities/Funds

Abraham Lincoln Bicentennial Commission* 

Administrative Conference of the United States 

Advisory Council on Historic Preservation 

African Development Foundation 

American Battle Monuments Commission 

Antitrust Modernization Commission* 

Appalachian Regional Commission 

Architect of the Capitol 

Architectural and Transportation Barriers Compliance 

 Board 

Armed Forces Retirement Home 

Barry Goldwater Scholarship and Excellence in 

 Education Foundation 

Broadcasting Board of Governors 

Bureau of Consumer Financial Protection 

Central Intelligence Agency 

Chemical Safety Hazard Investigation Board 

Christopher Columbus Fellowship Foundation 

Commission for the Preservation of America’s 

 Heritage Abroad 

Commission of Fine Arts 

Commission on Civil Rights 

Commission on International Religious Freedom 

Commission on Security and Cooperation in Europe 

Commission on Weapons of Mass Destruction* 

Committee for Purchase from People Who Are Blind 

 or Severely Disabled 

Commodity Futures Trading Commission 

Congressional Budget Office 

Congressional-Executive Commission on the People’s 

 Republic of China 

Consumer Product Safety Commission 

Corporation for National and Community Service 

Council of the Inspectors General on Integrity and 

 Efficiency 

Court of Appeals for Veterans Claims 

Court Services and Offender Supervision Agency 

 for DC 

DC Courts 

DC Courts–Defender Services 

Defense Nuclear Facilities Safety Board 

Delta Regional Authority 

Denali Commission 

Dwight D. Eisenhower Memorial Commission 

Eisenhower Exchange Fellowship Program 

Election Assistance Commission 

Environmental Dispute Resolution Fund 

Equal Employment Opportunity Commission 

Executive Office of the President 

Farm Credit Administration 

Federal Election Commission 

Federal Financial Institutions Examination Council 

 Appraisal Subcommittee 

Federal Housing Finance Agency 

Federal Labor Relations Authority 

Federal Maritime Commission 

Federal Mediation and Conciliation Service 

Federal Mine Safety and Health Review Commission 

Federal Trade Commission 

Financial Crisis Inquiry Commission* 

Foreign Military Sales Program 

Government Accountability Office 

Government Printing Office 

Harry S. Truman Scholarship Trust Fund 

Indian Law and Order Commission 

Institute of American Indian and Alaska Native Culture 

 and Arts Development 

Institute of Museum and Library Services 

Interagency Council on the Homeless 

Inter-American Foundation 

International Trade Commission 

James Madison Memorial Fellowship Foundation 

Japan-United States Friendship Commission 
APPENDIX A 217

John C. Stennis Center 

John F. Kennedy Center for the Performing Arts 

Library of Congress 

Marine Mammal Commission 

Medicaid and Children’s Health Insurance Program 

 Payment and Access Commission 

Medicare Payment Advisory Commission 

Merit Systems Protection Board 

Millennium Challenge Corporation 

Morris K. Udall Scholarship Foundation 

National Archives and Records Administration 

National Capital Planning Commission 

National Commission on Libraries and Information 

 Science* 

National Council on Disability 

National Endowment for the Arts 

National Endowment for the Humanities 

National Gallery of Art 

National Labor Relations Board 

National Mediation Board 

National Railroad Retirement Investment Trust 

National Transportation Safety Board 

Neighborhood Reinvestment Corporation 

Northern Border Regional Commission 

Nuclear Waste Technical Review Board 

Occupational Safety and Health Review Commission 

Office of Compliance 

Office of Government Ethics 

Office of Navajo and Hopi Indian Relocation 

Office of Special Counsel 

Office of the Director of National Intelligence 

Office of the Federal Coordination for Alaska Natural 

 Gas Transportation Projects 

Office of the Nuclear Waste Negotiator* 

Open World Leadership Center 

Overseas Private Investment Corporation 

Patient Centered Outcomes Research Trust Fund 

Peace Corps 

Presidio Trust 

Public Defender Service 

Ronald Reagan Centennial Commission 

Recovery Act Accountability and Transparency Board 

Selective Service System 

Senate Preservation Fund 

St. Lawrence Seaway Development Corporation 

State Justice Institute 

U.S. Capital Preservation Commission 

U.S. China Security Review Commission 

U.S. Holocaust Memorial Museum 

U.S. Institute of Peace 

U.S. Trade and Development Agency 

Vietnam Education Foundation 

White House Commission on the National Moment of 

 Remembrance* 

Woodrow Wilson International Center for Scholars

*These entities are no longer active and have either returned all remaining fund balances to Treasury during fiscal 

year 2012 or have remaining fund balances pending final return to Treasury as of September 30, 2012. 

Legislative and Judicial Branches 

There are no legal or other requirements for the legislative or judicial branches to prepare consolidated audited 

financial statements or to provide accrual-based accounting data for inclusion in the Governmentwide financial 

statements. Therefore, these consolidated statements do not include accrual-based accounting data for such entities 

as the U.S. Courts or the Congress. Some legislative branch entities voluntarily prepare and submit such information 

(e.g., Government Accountability Office, Government Printing Office, and Library of Congress). The President’s 

Budget includes cash-based outlay data for the legislative and judicial branches and, to a limited extent, this outlay 

data is also a part of the information contained in this report. 

 

Entities Excluded from These Statements 

The following entities are not part of the Governmentwide reporting entity based on an assessment of these 

entities in accordance with the indicative criteria stated in SFFAC No. 2, Entity and Display. However, this list is 

not all inclusive of all entities excluded from these statements. 

American International Group (AIG) 

Board of Governors of the Federal Reserve System 

 (Including the Federal Reserve Banks) 

Citigroup 

Federal Home Loan Banks 

Federal Home Loan Mortgage Corporation 

 (Freddie Mac) 

Federal National Mortgage Association (Fannie Mae) 

Thrift Savings Fund 

The Financing Corporation 

GMAC Financial (Ally Financial) 

National Railroad Passenger Corporation 

 (does business as Amtrak) 

Public-Private Investment Funds 

Resolution Funding Corporation 

Student Loan Marketing Association 
218 APPENDIX A 

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APPENDIX B 219

Appendix B: Acronyms 

This appendix lists the acronyms used in the Financial Statements and Notes to the Financial Statements 

section of this Financial Report. 

 

ABS Asset-Backed Securities 

ACA Affordable Care Act 

ACH Automated Clearinghouse 

AIFP Automotive Industry Financing Program 

AIG American International Group, Inc. 

AMT Alternative Minimum Tax 

ARRA American Recovery and Reinvestment Act of 2009 

ASC Accounting Standards Codification 

ATRA American Taxpayer Relief Act of 2012 

BLDTF Black Lung Disability Trust Fund 

CCC Commodity Credit Corporation 

CDCI Community Development Capital Initiative 

CERCLA Comprehensive Environmental Response, Compensation, and Liability Act 

CMS Centers for Medicare and Medicaid Services 

COLA Cost of Living Adjustments 

CPI Consumer Price Index 

CPIM Consumer Price Index–Medical 

CPP Capital Purchase Program 

CSRDF Civil Service Retirement and Disability Fund 

CSRS Civil Service Retirement System 

DHS Department of Homeland Security 

DI Disability Insurance 

DIF Deposit Insurance Fund 

DIP Debtor in Possession 

DOC Department of Commerce 

DOD Department of Defense 

DOE Department of Energy 

DOI Department of the Interior 

DOJ Department of Justice 

DOL Department of Labor 

DOT Department of Transportation 

Education Department of Education 

EESA Emergency Economic Stabilization Act of 2008 

EPA Environmental Protection Agency 

EOP Executive Office of the President 

ESF Exchange Stabilization Fund 

EUC Unemployment Account 

EUCA Emergency Unemployment Compensation Account 

Ex-Im Bank Export-Import Bank 

FAA Federal Aviation Administration 

Fannie Mae Federal National Mortgage Association 

FASAB Federal Accounting Standards Advisory Board 

FCC Federal Communications Commission 

FCRA Federal Credit Reform Act of 1991 

FDIC Federal Deposit Insurance Corporation 

FECA Federal Employees’ Compensation Act 

FEGLI Federal Employees’ Group Life Insurance 

FEHB Federal Employees Health Benefits Program 

FERS Federal Employees’ Retirement System 

 

 
220 APPENDIX B 

 

FERSA Federal Employees’ Retirement System Act of 1986 

FFAS Farm and Foreign Agricultural Services 

FFEL Federal Family Education Loan 

FHA Federal Housing Administration 

FHFA Federal Housing Financing Agency 

FHWA Federal Highway Administration 

FICA Federal Insurance Contribution Act 

FR Financial Report of the United States Government 

FR System Federal Reserve System 

FRBNY Federal Reserve Bank of New York 

FRBs Federal Reserve banks 

Freddie Mac Federal Home Loan Mortgage Corporation 

FRTIB Federal Retirement Thrift Investment Board 

FSA Farm Service Agency 

FUA Federal Unemployment Account 

FUTA Federal Unemployment Tax Act 

GAAP U.S. Generally Accepted Accounting Principles 

GAO U.S. Government Accountability Office 

GDP Gross Domestic Product 

Ginnie Mae Government National Mortgage Association 

GM General Motors 

GSA General Services Administration 

GSE Government-Sponsored Enterprises 

HBP Health Benefits Program 

HEA Higher Education Act of 1965 

HERA Housing and Economic Recovery Act of 2008 

HFA Housing Financing Agencies 

HHS Department of Health and Human Services 

HI Hospital Insurance 

HUD Department of Housing and Urban Development 

IMF International Monetary Fund 

IRS Internal Revenue Service 

LAC Latest Acquisition Cost 

MAC Moving Average Cost 

MBS Mortgage-Backed Securities 

MDBs Multilateral Development Banks 

MERHCF Medicare Eligible Retiree Health Care Fund 

MMA Medicare Prescription Drug, Improvement, and Modernization Act 

MRF Military Retirement Fund 

NAB New Arrangement to Borrow 

NASA National Aeronautics and Space Administration 

NCUA National Credit Union Administration 

NIH National Institutes of Health 

NRRIT National Railroad Retirement Investment Trust 

NSLI National Service Life Insurance 

NTIA National Telecommunications and Information Administration 

NYSE New York Stock Exchange 

OASDI Old-Age, Survivors, and Disability Insurance 

OASI Old-Age and Survivors Insurance 

OMB Office of Management and Budget 

OPEB Other Postemployment Benefits 

OPM Office of Personnel Management 

ORB Other Retirement Benefits 

PBGC Pension Benefit Guaranty Corporation 

PCF Periodic Commitment Fee 

PEFCO Private Export Funding Corporation 

 
APPENDIX B 221

 

PMAs Power Marketing Authorities 

PP&E Property, Plant, and Equipment 

PPIF Public Private Investment Funds 

PPIP Public Private Investment Program 

PPO Preferred Provider Organization 

PSRHB Postal Service Retiree Health Benefits 

QFI Qualified Financial Institution 

R&D Research and Development 

RCRA Resource Conservation and Recovery Act 

RD Rural Development 

REDUX Military Retirement Reform Act of 1986 

RRB Railroad Retirement Board 

RRSIA Railroad Retirement and Survivors Improvement Act 

RSI Required Supplementary Information 

SAFETEA-LU Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users 

SAFRA Student Aid and Fiscal Responsibility Act 

Sallie Mae Student Loan Marketing Association 

SBA Small Business Administration 

SCSIA Statement of Changes in Social Insurance Amounts 

SDRs Special Drawing Rights 

SDRCs SDR Certificates 

SEC Securities and Exchange Commission 

SECA Self-Employment Contributions Act 

SFFAC Statement of Federal Financial Accounting Concept 

SFFAS Statement of Federal Financial Accounting Standards 

SFP Supplementary Financing Program 

SLMA Student Loan Marketing Association 

SMI Supplementary Medical Insurance 

SOMA System Open Market Account 

SOSI Statement of Social Insurance 

SPSPA Senior Preferred Stock Purchase Agreements 

SSA Social Security Administration 

SSEB Social Security Equivalent Benefit 

TALF Term Asset-Backed Loan Facility 

TARP Troubled Asset Relief Program 

TFL TRICARE for Life 

TIP Targeted Investment Program 

TIPS Treasury Inflation-Protected Securities 

TPTCCA Temporary Payroll Tax Cut Continuation Act of 2011 

Treasury Department of the Treasury 

TRIA Terrorism Risk Insurance Act 

TSP Thrift Savings Plan 

TVA Tennessee Valley Authority 

TVARS Tennessee Valley Authority Retirement System 

U.S.C. United States Code 

USDA United States Department of Agriculture 

USPS United States Postal Service 

UTF Unemployment Trust Fund 

VA Department of Veterans Affairs 

VRI Veterans Reopened Insurance 

VSLI Veterans Special Life Insurance 

 
222 APPENDIX B 

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U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 223

United States Government Accountability Office

Washington, DC 20548 

Independent Auditor’s Report 

The President 

The President of the Senate 

The Speaker of the House of Representatives 

The Secretary of the Treasury, in coordination with the Director of the Office of Management 

and Budget, is required to annually submit audited financial statements for the U.S. government 

to the President and Congress. GAO is required to audit these statements.1

 This report includes 

(1) our report on the accompanying U.S. government’s accrual-based consolidated financial 

statements for the fiscal years ended September 30, 2012 and 2011; the 2012, 2011, 2010, 

2009, and 2008 Statements of Social Insurance; and the 2012 and 2011 Statements of 

Changes in Social Insurance Amounts and (2) our associated reports on internal control over 

financial reporting and on compliance with selected provisions of laws and regulations. As used 

in this report, accrual-based financial statements refer to all of the consolidated financial 

statements and notes, except for those related to the Statements of Social Insurance and the 

Statements of Changes in Social Insurance Amounts.2

Management of the federal government is responsible for (1) preparing annual consolidated 

financial statements in conformity with U.S. generally accepted accounting principles (U.S. 

GAAP); (2) establishing, maintaining, and evaluating internal control to provide reasonable 

assurance that the control objectives of the Federal Managers’ Financial Integrity Act (FMFIA) 

are met;3

 and (3) complying with laws and regulations. Also, the 24 Chief Financial Officers 

(CFO) Act agencies are responsible for implementing and maintaining financial management 

 

1

The Government Management Reform Act of 1994 has required such reporting, covering the executive branch of 

government, beginning with financial statements prepared for fiscal year 1997. 31 U.S.C. 331(e). The federal 

government has elected to include certain financial information on the legislative and judicial branches in the 

consolidated financial statements as well. 

2

The accrual-based consolidated financial statements for the fiscal years ended September 30, 2012 and 2011, 

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

Reconciliations of Net Operating Cost and Unified Budget Deficit, (4) Statements of Changes in Cash Balance from 

Unified Budget and Other Activities, and (5) Balance Sheets, including the related notes to these financial statements. 

Most revenues are recorded on a modified cash basis. The 2012, 2011, 2010, 2009, and 2008 Statements of Social 

Insurance, and the 2012 and 2011 Statements of Changes in Social Insurance Amounts, including the related notes, 

are also included in the consolidated financial statements. Both the Statements of Social Insurance and the 

Statement of Changes in Social Insurance Amounts do not interrelate with the accrual-based consolidated financial 

statements.

3

31 U.S.C. 3512 (c), (d) (commonly referred to as FMFIA). This act requires executive agency heads to evaluate and 

report annually to the President and Congress on the adequacy of their internal control and accounting systems and 

on actions to correct significant problems. 
224 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

systems that substantially comply with the requirements of the Federal Financial Management 

Improvement Act of 1996 (FFMIA).4

 Appendix I discusses the objectives, scope, and 

methodology of our work. 

In summary, we found the following: 

 Certain material weaknesses5

 in internal control over financial reporting and other limitations 

on the scope of our work resulted in conditions that continued to prevent us from expressing 

an opinion on the accompanying accrual-based consolidated financial statements for the 

fiscal years ended September 30, 2012 and 2011.6

 

 Significant uncertainties (discussed in Note 26 to the consolidated financial statements), 

primarily related to the achievement of projected reductions in Medicare cost growth 

reflected in the 2012, 2011, and 2010 Statements of Social Insurance, prevented us from 

expressing an opinion on those statements as well as on the 2012 and 2011 Statements of 

Changes in Social Insurance Amounts. The Statements of Social Insurance for 2009 and 

2008 are presented fairly, in all material respects, in conformity with U.S. GAAP.7

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

year 2012. 

 Our tests of compliance with selected provisions of laws and regulations for fiscal year 2012 

were limited by the material weaknesses and other scope limitations discussed in this report. 

Significant Matters of Emphasis 

Before discussing our conclusions on the consolidated financial statements, the following key 

items deserve emphasis in order to put the information contained in the consolidated financial 

statements and the Management’s Discussion and Analysis section of the 2012 Financial 

Report of the United States Government (2012 Financial Report) into context. 

 

4

FFMIA, which is reprinted in 31 U.S.C. 3512 note. 

5

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

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

detected and corrected on a timely basis. A deficiency in internal control exists when the design or operation of a 

control does not allow management or employees, in the normal course of performing their assigned functions, to 

prevent, or detect and correct misstatements on a timely basis. 

6

We previously reported that certain material weaknesses prevented us from expressing an opinion on the accrualbased consolidated financial statements of the U.S. government for fiscal years 1997 through 2011. Also for these 

years, we previously reported that (1) material weaknesses resulted in ineffective internal control over financial 

reporting, and (2) our tests of compliance with selected provisions of laws and regulations were limited by material 

weaknesses and, for some years, other scope limitations. 

7

The valuation date is January 1 for all social insurance programs except the Black Lung program, which has a 

valuation date of September 30. 
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 225

The Federal Government’s Actions to Stabilize Financial Markets and to Promote Economic 

Recovery 

The accrual-based consolidated financial statements for fiscal year 2012 include, as they did for 

fiscal year 2011, substantial assets and liabilities resulting from the federal government’s 

actions to stabilize financial markets and to promote economic recovery. Key actions that the 

federal government has taken to stabilize financial markets and to promote economic recovery 

are discussed in the related Notes to the consolidated financial statements. 

The ultimate cost of all of the federal government’s market stabilization and economic recovery 

actions and the effect of such actions on its financial condition will not be known for some time. 

As of September 30, 2012, the federal government’s actions to stabilize the financial markets 

and to promote economic recovery resulted in reported federal government assets of over 

$152 billion (e.g., investments in the Federal National Mortgage Association (Fannie Mae) and 

the Federal Home Loan Mortgage Corporation (Freddie Mac),8

 and the Troubled Asset Relief 

Program (TARP) equity investments)9

 (reported net of about $109 billion in valuation losses). In 

addition, the federal government reported incurring certain liabilities resulting from these 

actions. In valuing these and certain other assets and liabilities, management considered and 

selected assumptions and data that it believed provided a reasonable basis for the estimated 

values reported in the accrual-based consolidated financial statements. However, as discussed 

in Note 1 to the consolidated financial statements, there are many factors affecting these 

assumptions and estimates that are inherently subject to substantial uncertainty arising from the 

uniqueness of certain transactions and the likelihood of future changes in general economic, 

regulatory, and market conditions. As such, there will be differences between the estimated 

values as of September 30, 2012, and the actual results, and such differences may be material. 

These differences will also affect the ultimate cost of the federal government’s actions. 

Long-Term Fiscal Challenges 

Increased attention to risks that could affect the federal government’s financial condition is 

made more important because of the nation’s longer-term fiscal challenges. The comprehensive 

long-term fiscal projections presented in the unaudited Required Supplementary Information 

section of the 2012 Financial Report show that—absent policy changes—the federal 

government continues to face an unsustainable fiscal path. The oldest members of the babyboom generation are already eligible for Social Security retirement benefits and for Medicare 

benefits. Under these projections, spending for the major health and retirement programs will 

increase in coming decades as more members of the baby-boom generation become eligible for 

benefits and the health care cost for each enrollee increases. Over the long term, the structural 

imbalance between spending and revenue will lead to continued growth of debt held by the 

public as a share of gross domestic product (GDP); this means the current structure of the 

federal budget is unsustainable. 

 

8

The Housing and Economic Recovery Act of 2008 authorized the Department of the Treasury (Treasury) to 

purchase, until December 31, 2009, any amount of Fannie Mae or Freddie Mac securities, whether debt or equity. 

Pub. L. No. 110-289, § 1117, 112 Stat. 2654, 2683-88 (July 30, 2008). 9

TARP was established by Treasury under authority provided in the Emergency Economic Stabilization Act of 2008, 

Pub. L. No. 110-343, 122 Stat. 3765 (Oct. 3, 2008). The act requires the U.S. Comptroller General to annually audit 

TARP’s financial statements as well as report at least every 60 days on a variety of areas associated with oversight of 

TARP. To obtain copies of the TARP financial statement audits and the 60-day reports, see GAO’s website at 

http://www.gao.gov/docsearch/featured/financialmarketsandhousing.html. 
226 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

These projections, with regard to Social Security and Medicare, are based on the same 

assumptions underlying the information presented in the Statement of Social Insurance and 

assume that the provisions in law designed to slow the growth of Medicare costs are sustained 

and remain effective throughout the projection period. If, however, the cost containment 

measures are not sustained over the long term—a concern expressed by the Trustees of the 

Medicare trust funds, the Centers for Medicare & Medicaid Services’ (CMS) Chief Actuary, the 

Congressional Budget Office, and others—spending on federal health care programs will grow 

much more rapidly. GAO also prepares long-term federal fiscal simulations which continue to 

show debt rising as a share of GDP.10 Under GAO’s Alternative simulation,11 which uses the 

CMS Office of the Actuary’s alternative health care cost projections, future spending in excess 

of receipts would be greater and debt held by the public as a share of GDP would grow more 

quickly than the projections in the 2012 Financial Report. 

In January 2013, the American Taxpayer Relief Act of 2012 was enacted,12 which affected taxes 

and made some changes to the Budget Control Act of 2011.13 Congress will be considering 

further legislative changes to address the fiscal challenges. 

Equity Interests in Certain Financial Organizations and Commercial Entities 

As discussed in Note 1 to the consolidated financial statements, the financial statements do not 

include the assets, liabilities, or results of operations of any financial organizations or 

commercial entities in which the Department of the Treasury (Treasury) holds either a direct, 

indirect, or beneficial equity interest. Treasury and the Office of Management and Budget (OMB) 

have determined that none of these organizations or entities meet the criteria for a federal 

entity. The federal government’s investments in and any liabilities to such organizations and 

entities, however, are valued and reported on the Balance Sheet. 

Disclaimers of Opinion on the Accrual-Based Consolidated Financial Statements 

Because of the federal government’s inability to demonstrate the reliability of significant portions 

of the U.S. government’s accompanying accrual-based consolidated financial statements for 

fiscal years 2012 and 2011, principally resulting from limitations related to certain material 

weaknesses in internal control over financial reporting and other limitations on the scope of our 

work, we are unable to, and we do not, express an opinion on such accrual-based consolidated 

financial statements. As a result of these limitations, readers are cautioned that amounts 

reported in the accrual-based consolidated financial statements and related notes may not be 

reliable. 

 

10GAO, The Federal Government’s Long-Term Fiscal Outlook: Fall 2012 Update, GAO-13-148SP (Washington, D.C.: 

Dec. 3, 2012). 

11GAO’s Fall 2012 Alternative simulation incorporates the CMS Office of the Actuary’s alternative projections for 

health care cost growth, which assume physician payments are not reduced as specified under current law and 

certain cost controls are not maintained over the long term. Also in this simulation, expiring tax provisions other than 

the Social Security payroll tax reductions are extended to 2022 and the alternative minimum tax exemption amount is 

indexed to inflation through 2022. In the Alternative simulation, discretionary spending follows the original 

discretionary spending caps set by the Budget Control Act of 2011, but not the lower caps triggered by the automatic 

enforcement procedures. Over the long term, discretionary spending and revenue are held at their historical average 

share of GDP. 

12The American Taxpayer Relief Act of 2012, Pub. L. No. 112-240, 126 Stat. 2313 (Jan. 2, 2013). 13The Budget Control Act of 2011, Pub. L. No. 112-25, § 302, 125 Stat. 240, 256-59 (Aug. 2, 2011). 
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 227

The federal government did not maintain adequate systems or have sufficient, reliable evidence 

to support certain material information reported in the accompanying accrual-based 

consolidated financial statements. The underlying material weaknesses in internal control, which 

generally have existed for years, contributed to our disclaimer of opinion on the accrual-based 

consolidated financial statements. Specifically, these weaknesses concerned the federal 

government’s inability to 

 satisfactorily determine that property, plant, and equipment and inventories and related 

property, primarily held by the Department of Defense (DOD), were properly reported in the 

accrual-based consolidated financial statements; 

 reasonably estimate or adequately support amounts reported for certain liabilities, such as 

environmental and disposal liabilities, or determine whether commitments and contingencies 

were complete and properly reported; 

 support significant portions of the reported total net cost of operations, most notably related 

to DOD, and adequately reconcile disbursement activity at certain federal entities; 

 adequately account for and reconcile intragovernmental activity and balances between 

federal entities; 

 ensure that the federal government’s accrual-based consolidated financial statements were 

(1) consistent with the underlying audited entities’ financial statements, (2) properly 

balanced, and (3) in conformity with U.S. GAAP; and 

 identify and either resolve or explain material differences between (1) certain components of 

the budget deficit reported in Treasury’s records that are used to prepare the Reconciliation 

of Net Operating Cost and the Unified Budget Deficit, the Statement of Changes in Cash 

Balance from Unified Budget and Other Activities, and the Fiscal Projections for the U.S. 

Government (included in the unaudited Required Supplementary Information section of the 

2012 Financial Report) and (2) related amounts reported in federal entities’ financial 

statements and underlying financial information and records. 

These material weaknesses continued to (1) hamper the federal government’s ability to reliably 

report a significant portion of its assets, liabilities, costs, and other related information; (2) affect 

the federal government’s ability to reliably measure the full cost as well as the financial and 

nonfinancial performance of certain programs and activities; (3) impair the federal government’s 

ability to adequately safeguard significant assets and properly record various transactions; and 

(4) hinder the federal government from having reliable financial information to operate in an 

efficient and effective manner. Due to these material weaknesses and to other limitations on the 

scope of our work discussed below, additional issues may exist that could affect the accrualbased consolidated financial statements that were not identified. Appendix II describes these 

material weaknesses in more detail and highlights the primary effects of these material 

weaknesses on the accompanying accrual-based consolidated financial statements and on the 

management of federal government operations. 
228 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

Disclaimers of Opinion on the Statements of Social Insurance for 2012, 2011, and 2010, 

and Unqualified Opinions for 2009 and 2008, and Disclaimers of Opinion on the 

Statements of Changes in Social Insurance Amounts for 2012 and 2011

Because of significant uncertainties (discussed in Note 26 to the consolidated financial 

statements), primarily related to the achievement of projected reductions in Medicare cost 

growth reflected in the 2012, 2011, and 2010 Statements of Social Insurance, we were unable 

to obtain sufficient evidence to support the amounts presented in the 2012, 2011, and 2010 

Statements of Social Insurance and the 2012 and 2011 Statements of Changes in Social 

Insurance Amounts. Consequently, we are unable to, and we do not, express opinions on the 

2012, 2011, and 2010 Statements of Social Insurance as well as on the 2012 and 2011 

Statements of Changes in Social Insurance Amounts. 

These significant uncertainties include the following. 

 Medicare projections in the 2012, 2011, and 2010 Statements of Social Insurance were 

based on benefit formulas in current law and included a significant decrease in projected 

Medicare costs from the 2009 Statement of Social Insurance related to (1) reductions in 

Medicare payment rates for physician services (totaling almost 31 percent in January 2013, 

as estimated in the 2012 Medicare Trustees Report) and (2) productivity improvements for 

most other categories of Medicare providers, based on full implementation of the provisions 

of the Patient Protection and Affordable Care Act, as amended (PPACA).14 However, there 

are significant uncertainties concerning the achievement of these projected decreases in 

Medicare costs. 

 Management has noted that actual future costs for Medicare are likely to exceed those 

shown by the current-law projections presented in the 2012, 2011, and 2010 Statements of 

Social Insurance due, for example, to the likelihood of modifications to the scheduled 

reductions in Medicare payment rates for physician services.15 The extent to which actual 

future costs exceed the projected current-law amounts due to changes to the scheduled 

reductions in Medicare payment rates for physician services and productivity adjustments 

depends on both the specific changes that might be legislated and whether such legislation 

would include further provisions to help offset such costs. 

 Management has developed an illustrative alternative projection intended to provide 

additional context regarding the long-term sustainability of the Medicare program and to 

illustrate the uncertainties in the Statement of Social Insurance projections. The present 

value of future estimated expenditures in excess of future estimated revenue for Medicare, 

included in the illustrative alternative projection, exceeds the $27.2 trillion estimate in the 

2012 Statement of Social Insurance by $10.1 trillion. 

 

14PPACA, Pub. L. No. 111-148, 124 Stat. 119 (Mar. 23, 2010), as amended by the Health Care and Education 

Reconciliation Act of 2010, Pub. L. No. 111-152, 124 Stat. 1029 (Mar. 30, 2010). 15Statutes have been enacted with provisions that prevented scheduled reductions in Medicare payment rates for 

physician services from taking effect from 2003 through 2013, including the most recent provision enacted in the 

American Taxpayer Relief Act of 2012. Some of these statutes also included provisions that reduced the federal 

government’s spending on other categories of health care, which had the effect of helping to offset the increased 

costs related to the physician payment updates. 
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 229

Projections of Medicare costs are sensitive to assumptions about future decisions by 

policymakers and about the behavioral responses of consumers, employers, and health care 

providers as policy, incentives, and the health care sector change over time. Such secondary 

impacts are not fully reflected in the Statement of Social Insurance projections but could be 

expected to influence the excess cost growth rate16 used in the projections. Key drivers of 

uncertainty about the excess cost growth rate include the future development and deployment 

of medical technology, the evolution of personal income, and the cost and availability of 

insurance, as well as federal policy changes, such as the implementation of PPACA. The work 

of the 2010 Medicare Technical Review Panel17 may provide additional guidance to 

management concerning ways to improve future Statement of Social Insurance projections and 

related disclosures. 

As a result of the uncertainties discussed previously, readers are cautioned that amounts 

reported in the 2012, 2011, and 2010 Statements of Social Insurance and related Notes to such 

financial statements may not fairly present, in all material respects, the financial condition of the 

federal government’s social insurance programs, in conformity with U.S. GAAP. These 

uncertainties also affect the projected Medicare and Medicaid costs reported in the Fiscal 

Projections for the U.S. Government and Social Insurance information included in the unaudited 

Required Supplementary Information section of the 2012 Financial Report and summarized in 

Management’s Discussion and Analysis. The Required Supplementary Information section of 

the 2012 Financial Report includes unaudited information concerning how changes in various 

assumptions would change the present value of future estimated expenditures in excess of 

future estimated revenue. As discussed in that section, Medicare projections are very sensitive 

to changes in the health care cost growth assumption. 

In our opinion, the Statements of Social Insurance for 2009 and 2008 present fairly, in all 

material respects, the financial condition of the federal government’s social insurance programs, 

in conformity with U.S. GAAP. 

The Statement of Social Insurance presents the actuarial present value of the federal 

government’s estimated future revenue to be received from or on behalf of participants and 

estimated future expenditures to be paid to or on behalf of participants, based on benefit 

formulas in current law and using a projection period sufficient to illustrate the long-term 

sustainability of the social insurance programs.18 In preparing the Statements of Social 

Insurance, management considers and selects assumptions and data that it believes provide a 

reasonable basis for the assertions in the statement. However, because of the large number of 

factors that affect the Statement of Social Insurance and the fact that such assumptions are 

 

16The excess cost growth rate is the increase in health care spending per person relative to the growth of GDP per 

person after removing the effects of demographic changes on health care spending. 

17In August 2010, the Secretary of Health and Human Services, working on behalf of the Board of Trustees, 

established an independent panel of expert actuaries and economists to review the assumptions and methods used 

by the Trustees to make projections of the financial status of the trust funds (commonly referred to as the 2010 

Technical Review Panel on the Medicare Trustees Report). In December 2011, the panel members unanimously 

recommended a new approach that builds on certain long-standing assumptions while incorporating several key 

refinements. Based on the recommendations, the Medicare Trustees adopted new methods for projecting long-range 

Medicare costs in the 2012 Trustees Report. See section IV.D of the 2012 Medicare Trustees Report for details of the 

new methodology. 

18The projection period used for the Social Security, Medicare, and Railroad Retirement social insurance programs is 

75 years. For the Black Lung program, the projections are through September 30, 2040.
230 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

inherently subject to substantial uncertainty (arising from the likelihood of future events, 

significant uncertainties, and contingencies), there will be differences between the estimates in 

the Statement of Social Insurance and the actual results, and those differences may be 

material. In addition to the inherent uncertainty that underlies the expenditure projections 

prepared for all parts of Medicare, the Supplementary Medical Insurance Part D projections 

have an added uncertainty in that they were prepared using very little program experience upon 

which to base the estimates. 

The scheduled future benefits presented in the Statement of Social Insurance are based on 

benefit formulas in current law. However, consistent with the respective annual Trustees 

Reports, the Social Security and Medicare programs are not projected to be sustainable under 

current financing arrangements. Also, the law concerning these programs can be changed at 

any time. Payment of Social Security and Medicare Hospital Insurance (Part A) benefits is 

limited by law to the balances in the respective trust funds. Consequently, future scheduled 

benefits are limited to future revenues plus existing trust fund assets. As discussed in the 

unaudited Required Supplementary Information section of the 2012 Financial Report, the Social 

Security and Medicare Hospital Insurance (Part A) trust funds are, based on achievement of the 

cost reductions discussed above, projected to be exhausted in 2033 and 2024, respectively, at 

which time they will be unable to pay the full amount of scheduled future benefits. For Social 

Security, as of January 1, 2012, future revenues were projected to be sufficient to pay 75 

percent of scheduled benefits in 2033, the year of projected trust fund exhaustion, and 

decreasing to 73 percent of scheduled benefits in 2086. Similarly, for Medicare Hospital 

Insurance (Part A), as of January 1, 2012, future revenues were projected to be sufficient to pay 

87 percent of scheduled benefits in 2024, the year of projected trust fund exhaustion, and then 

decreasing to 69 percent of scheduled benefits in 2086. 

Other Limitations on the Scope of Our Work

For fiscal years 2012 and 2011, there were limitations on the scope of our work in addition to 

the material weaknesses that contributed to our disclaimer of opinion on the accrual-based 

consolidated financial statements. Treasury and OMB depend on representations from certain 

federal entities to provide their representations to us regarding the U.S. government’s 

consolidated financial statements. Treasury and OMB were unable to provide us with adequate 

representations regarding the U.S. government’s accrual-based consolidated financial 

statements for fiscal years 2012 and 2011 primarily because of insufficient representations 

provided to them by certain federal entities. 

Material Weaknesses Resulted in Ineffective Internal Control over Financial Reporting 

The material weaknesses discussed in this report resulted in ineffective internal control over 

financial reporting. Consequently, the federal government’s internal control did not provide 

reasonable assurance that misstatements, losses, or noncompliance material in relation to the 

consolidated financial statements would be prevented or detected and corrected on a timely 

basis. The federal government is responsible for establishing and maintaining effective internal 

control over financial reporting and evaluating its effectiveness. Internal control over financial 

reporting is a process effected by those charged with governance, management, and other 

personnel, the objectives of which are to provide reasonable assurance that (1) transactions are 

properly recorded, processed, and summarized to permit the preparation of the financial 
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 231

statements in conformity with U.S. GAAP, and assets are safeguarded against loss from 

unauthorized acquisition, use, or disposition and (2) transactions are executed in accordance 

with laws governing the use of budget authority and with other laws and regulations that could 

have a direct and material effect on the financial statements. 

In planning and performing our audit, we considered internal control over financial reporting. We 

did not consider all internal controls relevant to operating objectives as broadly established 

under FMFIA, such as those controls relevant to preparing statistical reports and ensuring 

efficient operations. We do not express an opinion on the effectiveness of internal control over 

financial reporting because the purpose of our work was to determine our procedures for 

auditing the financial statements, not to express an opinion on internal control. Based on the 

scope of our work and the effects of the other limitations on the scope of our audit noted 

throughout this report, our internal control work would not necessarily identify all deficiencies in 

internal control, including those that might be material weaknesses or significant deficiencies.19

Further, our internal control work may not be sufficient for other purposes. 

In addition to the material weaknesses that contributed to our disclaimer of opinion on the 

accrual-based consolidated financial statements, which were discussed previously, we found 

the following four other material weaknesses in internal control. These other material 

weaknesses were the federal government’s inability to 

 determine the full extent to which improper payments occur and reasonably assure that 

appropriate actions are taken to reduce improper payments, 

 identify and resolve information security control deficiencies and manage information 

security risks on an ongoing basis, 

 effectively manage its tax collection activities, and 

 effectively monitor and report loans receivable and loan guarantee liabilities. 

These material weaknesses are discussed in more detail in appendix III, including the primary 

effects of the material weaknesses on the accompanying accrual-based consolidated financial 

statements and on the management of federal government operations. 

We also found a significant deficiency in the federal government’s internal control over 

management of federal grants related to deficiencies at certain federal entities. This significant 

deficiency is discussed in more detail in appendix IV. 

Further, individual federal entity financial statement audit reports identified additional control 

deficiencies that were reported by the entities’ auditors as either material weaknesses or 

significant deficiencies at the individual entity level. We do not consider these additional 

deficiencies to represent material weaknesses or significant deficiencies with respect to the 

consolidated financial statements. 

 

19A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a 

material weakness, yet important enough to merit attention by those charged with governance. 
232 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

Compliance with Laws and Regulations 

Our work to test compliance with selected provisions of laws and regulations that have a direct 

and material effect on the consolidated financial statements was limited by the material 

weaknesses and other scope limitations discussed in this report. U.S. generally accepted 

government auditing standards and OMB guidance require auditors to report on entities’ 

compliance with selected provisions of laws and regulations. Certain individual entity audit 

reports contain instances of noncompliance. None of these instances were deemed to be 

reportable noncompliance with regard to the accompanying consolidated financial statements. 

We caution that other noncompliance may have occurred and not been detected. Further, the 

results of our limited procedures may not be sufficient for other purposes. Our objective was not 

to, and we do not, express an opinion on compliance with laws and regulations. 

Required Supplementary Information, Required Supplementary Stewardship Information, 

and Other Information 

U.S. generally accepted accounting principles require that required supplementary information 

(RSI)20 and required supplementary stewardship information (RSSI)21 be presented in the 2012 

Financial Report to supplement the financial statements. This information, although not a part of 

the financial statements, is required by the Federal Accounting Standards Advisory Board 

(FASAB), which considers it to be an essential part of financial reporting for placing the financial 

statements in appropriate operational, economic, or historical context. We were unable to apply 

certain limited procedures to the RSI and RSSI in accordance with U.S. generally accepted 

government auditing standards because of the material weaknesses and other scope limitations 

discussed in this report. We did not audit and we do not express an opinion or provide any 

assurance on the RSI or RSSI. 

Other information included in the 2012 Financial Report contains a wide range of information, 

some of which is not directly related to the consolidated financial statements.22 This information 

is presented for purposes of additional analysis and is not a required part of the consolidated 

financial statements, RSI, or RSSI. An objective of our audit was to form an opinion on the 

consolidated financial statements. We did not audit and do not express an opinion or provide 

any assurance on the other information in the 2012 Financial Report. 

Readers are cautioned that the material weaknesses and scope limitations discussed in this 

audit report, including those related to our disclaimers of opinion on the 2012, 2011, and 2010 

Statements of Social Insurance and the 2012 and 2011 Statements of Changes in Social 

Insurance Amounts, affect the reliability of certain information contained in the RSI, RSSI, and 

other information that is taken from the same data sources as the accrual-based consolidated 

financial statements; the 2012, 2011, and 2010 Statements of Social Insurance; and the 2012 

and 2011 Statements of Changes in Social Insurance Amounts. 

 

20RSI is comprised of Management’s Discussion and Analysis and information in the Required Supplementary 

Information section of the 2012 Financial Report. 21RSSI is comprised of information on stewardship investments in the Required Supplementary Stewardship 

Information section of the 2012 Financial Report. 22Other information is comprised of information in the 2012 Financial Report other than the consolidated financial 

statements, RSI, RSSI, the auditor’s report, and the Statement of the Comptroller General of the United States.
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 233

CFO Act Agency Financial Management Systems 

The federal government’s ability to efficiently and effectively manage and oversee its day-to-day 

operations and programs relies heavily on the ability of entity financial management systems to 

produce complete, reliable, timely, and consistent financial information for use by executive 

branch agencies and Congress.23 FFMIA was designed to lead to system improvements that 

would result in CFO Act agency managers routinely having access to reliable, useful, and timely 

financial-related information to measure performance and increase accountability throughout the 

year. FFMIA requires auditors, as part of the 24 CFO Act agencies’ financial statement audits, 

to report whether those agencies’ financial management systems substantially comply with 

(1) federal financial management systems requirements, (2) applicable federal accounting 

standards, and (3) the federal government’s U.S. Standard General Ledger at the transaction 

level. For both fiscal years 2012 and 2011, auditors for 11 of the 24 CFO Act agencies reported 

that the agencies’ financial management systems did not substantially comply with one or more 

of the three FFMIA requirements. Agency management at the 24 CFO Act agencies also 

annually report on FFMIA compliance. For fiscal years 2012 and 2011, agency management at 

9 and 7 of the CFO Act agencies, respectively, reported that their agencies’ financial 

management systems were not in substantial compliance with one or more of the three FFMIA 

requirements. Based on agency financial reports, the differences in the assessments of 

substantial compliance between the auditors and agency management reflected differences in 

views between management and the auditors on the impact reported deficiencies had on 

agencies’ financial management systems. Long-standing financial management systems 

weaknesses at several large CFO Act agencies, along with the size and complexity of the 

federal government, continue to present a formidable management challenge in providing 

accountability to the nation’s taxpayers and have contributed significantly to the material 

weaknesses and other limitations that have resulted in our disclaimers of opinion on the accrualbased consolidated financial statements. 

_ _ _ _ _ 

We provided a draft of this report to Treasury and OMB officials, who provided technical 

comments, which have been incorporated as appropriate. Treasury and OMB officials 

expressed their continuing commitment to address the problems this report outlines. 

Robert F. Dacey 

Chief Accountant 

U.S. Government Accountability Office 

January 9, 2013 

 

23FFMIA defines the term “financial management systems” to include the financial systems and the financial portions 

of mixed systems necessary to support financial management, including automated and manual processes, 

procedures, controls, data, hardware, software, and support personnel dedicated to the operation and maintenance 

of system functions.
234 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

Appendix I 

Objectives, Scope, and Methodology

Our objectives were to audit the consolidated financial statements for the fiscal years ended 

September 30, 2012 and 2011, including the Statements of Changes in Social Insurance 

Amounts for 2012 and 2011, and the 2012, 2011, 2010, 2009, and 2008 Statements of Social 

Insurance, along with reporting on internal control over financial reporting and on compliance 

with selected provisions of laws and regulations. 

The Chief Financial Officers Act of 1990 (CFO Act), as expanded by the Government 

Management Reform Act of 1994 (GMRA), requires the inspectors general of the 24 CFO Act 

agencies to be responsible for annual audits of agencywide financial statements prepared by 

these agencies.24 GMRA requires GAO to be responsible for the audit of the U.S. government’s 

consolidated financial statements,25 and the Accountability of Tax Dollars Act of 2002 (ATDA) 

requires most other executive branch entities to prepare and have audited annual financial 

statements.26 The Office of Management and Budget and the Department of the Treasury 

(Treasury) have identified 35 federal entities that are significant to the U.S. government’s 

consolidated financial statements, consisting of the 24 CFO Act agencies, several other federal 

executive branch agencies, and some government corporations (35 significant entities).27 Our 

work was performed in coordination and cooperation with the inspectors general and 

independent public accountants for these 35 significant entities to achieve our respective audit 

objectives. Our audit approach regarding the accrual-based consolidated financial statements 

primarily focused on determining the current status of the material weaknesses that contributed 

to our disclaimer of opinion on the accrual-based consolidated financial statements and the 

other material weaknesses affecting internal control that we had reported in our report on the 

consolidated financial statements for fiscal year 2011.28 We also separately audited the financial 

statements of certain federal entities and federal agency components, including the following. 

 We audited and expressed an unqualified opinion on the Internal Revenue Service’s (IRS) 

fiscal years 2012 and 2011 financial statements.29 In fiscal years 2012 and 2011, IRS 

collected about $2.5 trillion and $2.4 trillion, respectively, in tax payments and paid about 

$373 billion and $416 billion, respectively, in refunds to taxpayers. For fiscal year 2012, we 

continued to report a material weakness in internal control over unpaid tax assessments that 

resulted in ineffective internal control over financial reporting. In addition, we reported a 

significant deficiency in IRS’s internal control over financial reporting systems. Due to the 

cumulative effects of corrective actions taken by IRS over the years and in fiscal year 2012, 

deficiencies related to financial reporting systems no longer collectively constitute a material 

weakness as we reported in each of our previous audits of IRS’s financial statements. 

 

2431 U.S.C. 3521(e). GMRA authorized the Office of Management and Budget to designate agency components that 

also would receive a financial statement audit. See 31 U.S.C. 3515(c). 25GMRA, Pub. L. No. 103-356, § 405(c), 108 Stat. 3410, 3416-17 (Oct. 13, 1994), codified at 31 U.S.C. 331 (e)(2). 26ATDA, Pub. L. No. 107-289, 116 Stat. 2049 (Nov. 7, 2002), codified at 31 U.S.C. 3515. 27See Treasury Financial Manual, volume I, part 2, chapter 4700, for a listing of the 35 entities. 28For our report on the U.S. government’s consolidated financial statements for fiscal year 2011, see Department of 

the Treasury, 2011 Financial Report of the United States Government (Washington, D.C.: December 2011), 211-

231, which can be found on GAO’s website at www.gao.gov/financial.html. 29GAO, Financial Audit: IRS’s Fiscal Years 2012 and 2011 Financial Statements, GAO-13-120 (Washington, D.C.: 

Nov. 9, 2012). 
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 235

However, these deficiencies, which include both recurring and newly identified issues, are 

collectively important enough to merit the attention of those charged with governance. We 

also reported that we found no reportable noncompliance in fiscal year 2012 with the 

selected provisions of laws and regulations we tested. Further, we 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, 2012 and 2011.30 For these 2 fiscal years, the schedules reported 

(1) approximately $11.3 trillion (2012) and $10.1 trillion (2011) of federal debt held by the 

public;31 (2) about $4.8 trillion (2012) and $4.7 trillion (2011) of intragovernmental debt 

holdings;32 and (3) about $245 billion (2012) and $251 billion (2011) of interest on federal 

debt held by the public. We reported that as of September 30, 2012, BPD had effective 

internal control over financial reporting relevant to the Schedule of Federal Debt. Further, we 

reported that we found no reportable noncompliance in fiscal year 2012 with selected 

provisions of laws related to the Schedules of Federal Debt we tested. 

 We audited and expressed unqualified opinions on the fiscal years 2012 and 2011 financial 

statements of the U.S. Securities and Exchange Commission (SEC) and its Investor 

Protection Fund (IPF).33 We also reported that as of September 30, 2012, although SEC’s 

internal controls could be improved, SEC had effective internal control over financial 

reporting for both the entity as a whole and the IPF. In addition, we reported that we found 

no reportable noncompliance for either SEC or IPF in fiscal year 2012 with the selected 

provisions of laws and regulations we tested. 

 We audited and expressed an unqualified opinion on the fiscal years 2012 and 2011 

financial statements of the Federal Housing Finance Agency (FHFA).34 We reported that 

FHFA had effective internal control over financial reporting as of September 30, 2012, and 

we found no reportable noncompliance in fiscal year 2012 with the selected provisions of 

laws and regulations we tested. 

 We audited and expressed an unqualified opinion on the Office of Financial Stability’s (OFS) 

fiscal years 2012 and 2011 financial statements for the Troubled Asset Relief Program 

(TARP).35 We reported that OFS had effective internal control over financial reporting as of 

September 30, 2012, and we found no reportable noncompliance in fiscal year 2012 with the 

selected provisions of laws and regulations we tested. 

 

30GAO, Financial Audit: Bureau of the Public Debt’s Fiscal Years 2012 and 2011 Schedules of Federal Debt, GAO13-114 (Washington, D.C.: Nov. 8, 2012). 

31The public holding federal debt is comprised of individuals, corporations, state and local governments, the Federal 

Reserve Banks, foreign governments, and central banks. 

32Intragovernmental debt holdings represent federal debt issued by Treasury and held by certain federal government 

accounts such as the Social Security and Medicare trust funds. 

33GAO, Financial Audit: Securities and Exchange Commission Fiscal Years 2012 and 2011 Financial Statements, 

GAO-13-122R (Washington, D.C.: Nov. 15, 2012). 

34GAO, Financial Audit: Federal Housing Finance Agency’s Fiscal Years 2012 and 2011 Financial Statements, GAO13-124R (Washington, D.C.: Nov. 15, 2012). 

35GAO, Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Years 2012 and 2011 

Financial Statements, GAO-13-126R (Washington, D.C.: Nov. 9, 2012). 
236 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

 We audited and expressed an unqualified opinion on the fiscal years 2012 and 2011 

financial statements of the Bureau of Consumer Financial Protection (CFPB).36 We reported 

that CFPB had effective internal control over financial reporting as of September 30, 2012, 

and we found no reportable noncompliance for fiscal year 2012 with the selected provisions 

of laws and regulations we tested. 

In addition, we considered the CFO Act agencies’ and certain other federal entities’ fiscal years 

2012 and 2011 financial statements and the related auditors’ reports prepared by the inspectors 

general or contracted independent public accountants. Financial statements and audit reports 

for the 35 significant entities provide information about the operations of each of these entities. 

The entity audit reports also contain details regarding any audit findings and related 

recommendations for the respective entity. We did not audit, and we do not express an opinion 

on, any of these individual federal entity financial statements. 

We considered the Department of Defense’s (DOD) assertion in the DOD Agency Financial 

Report for Fiscal Year 2012 regarding its noncompliant financial systems and lack of reasonable 

assurance that internal controls over financial reporting were effective. In addition, in the DOD 

Inspector General’s fiscal year 2012 report on internal control over financial reporting, the 

Inspector General cited material weaknesses in several areas, including (1) property, plant, and 

equipment; (2) inventory and operating material and supplies; (3) environmental liabilities; 

(4) intragovernmental eliminations; and (5) material amounts of unsupported accounting entries 

needed to prepare DOD’s annual consolidated financial statements. 

Because of the significance of the amounts presented in the Statements of Social Insurance 

and Statements of Changes in Social Insurance Amounts related to the Social Security 

Administration (SSA) and the Department of Health and Human Services (HHS), our audit 

approach regarding these statements focused primarily on these two agencies. For each federal 

entity preparing a Statement of Social Insurance and Statement of Changes in Social Insurance 

Amounts,37 we considered the entity’s 2012, 2011, 2010, 2009, and 2008 Statements of Social 

Insurance and the 2012 and 2011 Statements of Changes in Social Insurance Amounts, as well 

as the related auditor’s reports prepared by the inspectors general or contracted independent 

public accountants. We believe our audit, including internal control and substantive audit 

procedures, reperformance procedures, and review of the other auditors’ Statement of Social 

Insurance-related audit work, provides a reasonable basis for our opinions on the 2009 and 

2008 Statements of Social Insurance. 

We performed sufficient audit work to provide this report on the consolidated financial 

statements, internal control, and compliance with selected provisions of laws and regulations. 

We considered the limitations on the scope of our work regarding the accrual-based 

consolidated financial statements; the 2012, 2011, and 2010 Statements of Social Insurance; 

and the 2012 and 2011 Statements of Changes in Social Insurance Amounts in forming our 

conclusions. Our work was performed in accordance with U.S. generally accepted government 

auditing standards. 

 

36GAO, Financial Audit: Bureau of Consumer Financial Protection’s Fiscal Years 2012 and 2011 Financial 

Statements, GAO-13-125R (Washington, D.C.: Nov. 15, 2012). 37These entities are SSA, HHS, the Railroad Retirement Board, and the Department of Labor.
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 237

Appendix II 

Material Weaknesses Contributing to Our Disclaimer of Opinion on the Accrual-Based 

Consolidated Financial Statements 

The continuing material weaknesses discussed below contributed to our disclaimer of opinion 

on the federal government’s accrual-based consolidated financial statements. The federal 

government did not maintain adequate systems or have sufficient, reliable evidence to support 

information reported in the accompanying accrual-based consolidated financial statements, as 

described below. 

Property, Plant, and Equipment and Inventories and Related Property 

The federal government could not satisfactorily determine that property, plant, and equipment 

(PP&E) and inventories and related property were properly reported in the accrual-based 

consolidated financial statements. Most of the PP&E and inventories and related property are 

the responsibility of the Department of Defense (DOD). As in past years, DOD did not maintain 

adequate systems or have sufficient records to provide reliable information on these assets. 

Certain other entities reported continued deficiencies in internal control procedures and 

processes related to PP&E. 

Deficiencies in internal control over such assets could affect the federal government’s ability to 

fully know the assets it owns, including their location and condition, and its ability to effectively 

(1) safeguard assets from physical deterioration, theft, or loss; (2) account for acquisitions and 

disposals of such assets and reliably report asset balances; (3) ensure that the assets are 

available for use when needed; (4) prevent unnecessary storage and maintenance costs or 

purchase of assets already on hand; and (5) determine the full costs of programs that use these 

assets. 

Liabilities and Commitments and Contingencies 

The federal government could not reasonably estimate or adequately support amounts reported 

for certain liabilities. For example, DOD was not able to estimate with assurance key 

components of its environmental and disposal liabilities. In addition, DOD could not support a 

significant amount of its estimated military postretirement health benefits liabilities included in 

federal employee and veteran benefits payable. These unsupported amounts related to the cost 

of direct health care provided by DOD-managed military treatment facilities. Further, the federal 

government could not determine whether commitments and contingencies, including any related 

to treaties and other international agreements entered into to further the federal government’s 

interests, were complete and properly reported. 

Problems in accounting for liabilities affect the determination of the full cost of the federal 

government’s current operations and the extent of its liabilities. Also, deficiencies in internal 

control supporting the process for estimating environmental and disposal liabilities could result 

in improperly stated liabilities as well as adversely affect the federal government’s ability to 

determine priorities for cleanup and disposal activities and to appropriately consider future 

budgetary resources needed to carry out these activities. In addition, to the extent disclosures of 
238 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

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 

Reported net costs were affected by the previously discussed material weaknesses in reporting 

assets and liabilities; material weaknesses in financial statement preparation, as discussed 

below; and the lack of adequate disbursement reconciliations at certain federal entities. As a 

result, the federal government was unable to support significant portions of the reported total net 

cost of operations, most notably those related to DOD. 

With respect to disbursements, DOD and certain other federal entities reported continued 

material weaknesses and significant deficiencies in reconciling disbursement activity. For fiscal 

years 2012 and 2011, unreconciled disbursement activity, including unreconciled differences 

between federal entities’ and the Department of the Treasury’s (Treasury) records of 

disbursements and unsupported federal entity adjustments, totaled billions of dollars, which 

could also affect the balance sheet. 

Unreliable cost information affects the federal government’s ability to control and reduce costs, 

assess performance, evaluate programs, and set fees to recover costs where required or 

authorized. If disbursements are improperly recorded, this could result in misstatements in the 

financial statements and in certain data provided by federal entities for inclusion in The Budget 

of the United States Government (President’s Budget) concerning obligations and outlays. 

Accounting for and Reconciliation of Intragovernmental Activity and Balances 

Although progress has been made, federal entities continue to be unable to adequately account 

for and reconcile intragovernmental activity and balances. The federal government’s progress 

varies by category.38 The Office of Management and Budget (OMB) and Treasury require the 

chief financial officers (CFO) of 35 significant entities to reconcile, on a quarterly basis, selected 

intragovernmental activity and balances with their trading partners. In addition, these entities are 

required to report to Treasury, their respective inspectors general, and GAO on the extent and 

results of intragovernmental activity and balance-reconciliation efforts as of the end of the fiscal 

year. 

As in prior years, a substantial number of the entities did not adequately perform the required 

year-end reconciliations for fiscal year 2012. Based on trading partner information provided to 

Treasury in the 35 significant entities’ closing packages, Treasury provided a Material 

Differences Report to each entity showing amounts for certain intragovernmental activity and 

balances that significantly differed from those of the entity’s corresponding trading partners as of 

the end of the fiscal year. Entities are required to complete their Material Differences Reports, 

including providing explanations of the reasons for certain differences. Based on our review of 

completed Material Differences Reports for fiscal year 2012, we continue to note that amounts 

reported by federal entity trading partners for certain intragovernmental accounts were not in 

agreement by significant amounts. We noted that several CFOs cited differing accounting 

methodologies, accounting errors, and timing differences for unreconciled amounts reported in 

 

38Treasury has grouped intragovernmental activities and balances into five broad categories. 
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 239

their Material Differences Reports. Some CFOs indicated that they did not know the reason for 

the differences. In addition, some CFOs confirmed the balance or activity, but differences 

continued to exist. 

Further, there continue to be hundreds of billions of dollars of unreconciled differences between 

the General Fund of the U.S. Government and federal entity trading partners related to 

appropriations and other intragovernmental transactions. The ability to reconcile such 

transactions is hampered because only some of the General Fund of the U.S. Government is 

reported in Treasury’s department-level financial statements. As a result of these 

circumstances, the federal government’s ability to determine the impact of these differences on 

the amounts reported in the accrual-based consolidated financial statements is significantly 

impaired. 

During fiscal year 2012, Treasury expanded its ongoing efforts to help resolve and eliminate 

material differences in intragovernmental activity and balances. These efforts included 

developing and implementing a formalized resolution plan and related corrective actions 

intended to address long-standing intragovernmental challenges. As part of its plan, Treasury 

monitors entities’ reconciliation efforts and compliance with Treasury Financial Manual

guidance. For example, Treasury began a pilot program with 14 entities that included providing 

them with quarterly metrics/scorecards highlighting differences requiring attention. In fiscal year 

2013, Treasury plans to expand the distribution of the quarterly metrics/scorecards to include all 

35 significant entities. Further, Treasury is in the process of establishing separate reporting for 

the General Fund, which includes intragovernmental transactions. Resolving the 

intragovernmental transactions problem remains a difficult challenge and will require a strong 

and sustained commitment by federal entities to timely resolve differences with their trading 

partners, as well as continued strong leadership by OMB and Treasury. 

Preparation of Consolidated Financial Statements 

While Treasury, in coordination with OMB, implemented corrective actions during fiscal year 

2012 to address certain internal control deficiencies detailed in our previously issued report, the 

federal government continued to have inadequate systems, controls, and procedures to ensure 

that the consolidated financial statements are consistent with the underlying audited entity 

financial statements, properly balanced, and in conformity with U.S. generally accepted 

accounting principles (U.S. GAAP). During our fiscal year 2012 audit, we found the following.39

 Treasury’s process for compiling the consolidated financial statements generally 

demonstrated that amounts in the Statement of Social Insurance and the Statement of 

Changes in Social Insurance Amounts were consistent with the underlying federal entities’ 

financial statements and that the Balance Sheet and the Statement of Net Cost were also 

consistent with the 35 significant federal entities’ financial statements prior to eliminating 

intragovernmental activity and balances. However, Treasury’s process did not ensure that 

the information in the remaining three principal financial statements (Statement of 

Operations and Changes in Net Position, Reconciliation of Net Operating Cost and Unified 

 

39Most of the issues we identified in fiscal year 2012 existed in fiscal year 2011, and many have existed for a number 

of years. Most recently, in June 2012, we reported the issues we identified to Treasury and OMB and provided 

recommendations for corrective action. See GAO, Management Report: Improvements Needed in Controls over the 

Preparation of the U.S. Consolidated Financial Statements, GAO-12-529 (Washington, D.C.: June 27, 2012). 
240 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

Budget Deficit, and Statement of Changes in Cash Balance from Unified Budget and Other 

Activities) was fully consistent with the underlying information in the 35 significant federal 

entities’ audited financial statements and other financial data. 

 For fiscal year 2012, auditors reported internal control deficiencies at several entities 

regarding entities’ financial reporting processes that could affect information included in the 

respective entities’ closing packages.40 Further, Treasury had to record significant 

adjustments to correct errors found in federal entities’ audited closing package information. 

To ensure consistency of underlying entity information and financial data with the U.S. 

government’s consolidated financial statements, entity auditors are required to separately 

audit and report on the financial information that the 35 significant federal entities send to 

Treasury through closing packages. 

 Treasury is unable to properly balance the accrual-based consolidated financial statements. 

To make the fiscal years 2012 and 2011 consolidated financial statements balance, 

Treasury recorded net increases of $20.2 billion and $15.6 billion, respectively, to net 

operating cost on the Statements of Operations and Changes in Net Position, which were 

identified as “Unmatched transactions and balances.”41 Treasury recorded an additional net 

$1.8 billion and $6.0 billion of unmatched transactions in the Statement of Net Cost for fiscal 

years 2012 and 2011, respectively. The material weakness in federal entities’ ability to 

account for and reconcile intragovernmental activity and balances, discussed above, 

significantly contributes to the unmatched transactions and balances and consequently 

impairs Treasury’s ability to fully eliminate such intragovernmental activity and balances. 

 The federal government has not established and implemented effective processes and 

procedures for identifying and reporting all items needed to (1) prepare the Statement of 

Changes in Cash Balance from Unified Budget and Other Activities and (2) reconcile the 

operating results to the budget results. Typical reconciling items would include both accrualbased costs that are not yet recognized in the unified budget deficit and budget costs that 

are not yet recognized in the net operating cost. 

 Over the past several years, significant actions have been taken to assist in ensuring that 

financial information is reported or disclosed in the consolidated financial statements in 

conformity with U.S. GAAP. However, Treasury’s reporting of certain financial information 

required by U.S. GAAP continues to be impaired. Due to certain control deficiencies noted in 

this report—for example, commitments and contingencies related to treaties and other 

international agreements—Treasury is precluded from determining if additional disclosure is 

required by U.S. GAAP in the consolidated financial statements, and we are precluded from 

determining whether the omitted information is material. Further, Treasury's ability to report 

information in conformity with U.S. GAAP will also remain impaired until federal entities, 

such as DOD, can provide Treasury with complete and reliable information required to be 

reported in the consolidated financial statements. 

 

40The closing package methodology links federal entities’ audited consolidated department-level financial statements 

to certain of the U.S. government’s consolidated financial statements. 41Although Treasury was unable to determine how much of the unmatched transactions and balances, if any, relates 

to net operating cost, it reported this amount as a component of net operating cost in the accompanying consolidated 

financial statements. 
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 241

 The consolidated financial statements include financial information for the executive, 

legislative, and judicial branches, to the extent that federal entities within those branches 

have provided Treasury such information. However, as we have reported in past years, 

undetermined amounts of assets, liabilities, costs, and revenues are not included, and the 

federal government did not provide evidence that the excluded financial information was 

immaterial. 

 Other internal control deficiencies existed in the process for preparing the consolidated 

financial statements, involving (1) inadequate design and ineffective implementation of 

policies and procedures related to certain areas, such as analysis of federal entity-provided 

data, journal vouchers, and calendar year-end entities and (2) inadequate processes for 

monitoring and assessing internal controls over the preparation of the consolidated financial 

statements. As a result, we identified errors in draft consolidated financial statements that 

were subsequently corrected. 

 

 As in previous years, Treasury did not have adequate systems and personnel to address the 

magnitude of the fiscal year 2012 financial reporting challenges it faced, such as control 

deficiencies in its process for preparing the consolidated financial statements noted above. 

We found that there were not enough personnel in Treasury’s Financial Management 

Service with specialized financial reporting experience to help ensure reliable financial 

reporting. In addition, the federal government does not perform interim compilations at the 

government-wide level, which leads to almost all of the compilation effort being performed 

during a condensed time period at the end of the year. Treasury has taken various steps to 

begin to address these issues, including (1) obtaining and utilizing certain interim financial 

information from federal entities in preparing initial financial statement drafts, (2) supplementing 

staff during the financial report preparation process, and (3) considering opportunities 

resulting from the ongoing consolidation of operations of Treasury’s Financial Management 

Service and Bureau of the Public Debt. 

Until these internal control deficiencies have been fully addressed, the federal government’s 

ability to ensure that the consolidated financial statements are consistent with the underlying 

audited federal entities’ financial statements, properly balanced, and in conformity with U.S. 

GAAP will be impaired. Resolving these internal control deficiencies remains a difficult 

challenge and will require a strong and sustained commitment from Treasury and OMB as they 

continue to execute and implement their corrective action plans.

Components of the Budget Deficit 

Both the Reconciliation of Net Operating Cost and Unified Budget Deficit and the Statement of 

Changes in Cash Balance from Unified Budget and Other Activities report a unified budget 

deficit for fiscal years 2012 and 2011 of about $1.1 trillion and $1.3 trillion, respectively.42 The 

budget deficit is calculated by subtracting actual budget outlays (outlays) from actual budget 

receipts (receipts). Also, the Fiscal Projections for the U.S. Government included in the 

 

42The budget deficit, receipts, and outlays amounts are reported in Treasury's Monthly Treasury Statement and the 

President’s Budget. 
242 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

unaudited Required Supplementary Information section of the 2012 Financial Report use such 

outlays and receipts. 

For several years, we have been reporting significant unreconciled differences between the total 

net outlays reported in selected federal entities’ Statements of Budgetary Resources (SBR) and 

Treasury’s central accounting records used to compute the budget deficit reported in the 

consolidated financial statements. Unreconciled net outlays of about $55 billion and $31 billion 

existed for fiscal years 2012 and 2011, respectively. OMB and Treasury have recognized that it 

will take a coordinated effort to establish effective processes and procedures for identifying, 

resolving, and explaining material differences in this and other components of the deficit 

between Treasury’s central accounting records and information reported in entity financial 

statements and underlying entity financial information and records. Until these types of 

differences are reconciled in a timely manner by the federal government, their effect on the U.S. 

government’s consolidated financial statements will continue to be unknown. In fiscal year 2012, 

Treasury began to develop a methodology for reconciling operating revenue to budget receipts 

on a government-wide basis. In addition, an external organization performed a broad review of 

the government-wide financial report preparation process and provided several 

recommendations for improvements, including some related to reconciling components of the 

budget deficit. Treasury stated that it will consider these recommendations in developing its 

methodology. 

In fiscal year 2012, we again noted that several entities’ auditors reported internal control 

deficiencies (1) affecting the entities’ SBRs and (2) related to monitoring, accounting, and 

reporting of budgetary transactions. These control deficiencies could affect the reporting and 

calculation of the net outlay amounts in the entities’ SBRs. In addition, such deficiencies may 

also affect the entities’ ability to report reliable budgetary information to Treasury and OMB and 

may affect the unified budget deficit reported in the accrual-based consolidated financial 

statements. The unified budget deficit is also reported by Treasury in its Combined Statement of 

Receipts, Outlays, and Balances,

43 and in other federal government publications. 

 

43Treasury’s Combined Statement of Receipts, Outlays, and Balances presents budget results and cash-related 

assets and liabilities of the federal government with supporting details. Treasury represents this report as the 

recognized official publication of receipts and outlays of the federal government based on entity reporting. 
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 243

Appendix III 

Other Material Weaknesses 

Material weaknesses in internal control discussed in this report resulted in ineffective controls 

over financial reporting. In addition to the material weaknesses discussed in appendix II that 

contributed to our disclaimer of opinion on the accrual-based consolidated financial statements, 

we found the following four other material weaknesses in internal control. 

Improper Payments 

Reducing improper payments is critical to safeguarding federal funds.44 During fiscal year 2012, 

the federal government continued to make progress in identifying and reporting on improper 

payments. Entities reported improper payment estimates for nine additional programs when 

compared to fiscal year 2011.45 Most notably, the Department of Health and Human Services 

(HHS) reported an estimated improper payment amount for the Children’s Health Insurance 

Program of $704 million. Nevertheless, the federal government continues to face challenges in 

determining the full extent of improper payments. For example, four federal entities did not 

report fiscal year 2012 estimated improper payment amounts for 10 risk-susceptible programs, 

including HHS’s Temporary Assistance for Needy Families. The Improper Payments Information 

Act of 2002 (IPIA), as amended by the Improper Payments Elimination and Recovery Act of 

2010 (IPERA),46 requires federal executive branch entities to (1) review all programs and 

activities, (2) identify those that may be susceptible to significant improper payments, (3) estimate 

the annual amount of improper payments for those programs and activities, (4) implement 

actions to reduce improper payments and set reduction targets, and (5) report on the results of 

addressing the foregoing requirements. IPERA also established a requirement for entity 

inspectors general to report annually on entities’ compliance, as defined in IPERA. In March 

2012, the inspectors general began issuing their reports under this requirement covering fiscal 

year 2011. The reports identified issues such as improper risk assessment methods used by 

entities to identify programs and activities susceptible to significant improper payments, 

estimates not being reported for susceptible programs, and improper payment reduction targets 

not being set. 

 

44Under the Improper Payments Information Act of 2002, as amended, improper payments are statutorily defined as 

any payment that should not have been made or that was made in an incorrect amount (including overpayments and 

underpayments) under statutory, contractual, administrative, or other legally applicable requirements. It includes any 

payment to an ineligible recipient, any payment for an ineligible good or service, any duplicate payment, any payment 

for a good or service not received (except for such payments where authorized by law), and any payment that does 

not account for credit for applicable discounts. 

45Of the nine programs, the Office of Management and Budget (OMB) excluded four programs from its governmentwide totals because those programs did not have OMB-approved sampling methodologies for estimating improper 

payments. 

46IPIA, Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002), as amended by IPERA, Pub. L. No. 111-204, 124 Stat. 

2224 (July 22, 2010), and reprinted in 31 U.S.C. 3321 note. As of the date of this report, H.R. 4053, the Improper 

Payments Elimination and Recovery Improvement Act of 2012, was awaiting the President’s signature. The Act would 

require federal entities to take additional steps to identify and prevent improper payments. The Act would enact into 

law elements of the President’s “Do Not Pay List” initiative by requiring entities to review prepayment and pre-award 

procedures and ensure a thorough review of available databases to determine program or award eligibility before the 

release of any federal funds. The Act would also direct OMB to annually identify a list of high-priority federal programs 

for greater levels of oversight and review and would require each entity responsible for one of these high-priority 

programs to annually submit a program report to its inspector general and make a report copy available to the public. 
244 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

The Office of Management and Budget (OMB) reported total federal entity improper payment 

estimates of $107.7 billion in fiscal year 2012. This is a decrease from the prior year revised 

estimate of $115.7 billion as reported by federal entities.47 These estimates represented about 

4.4 percent and 4.7 percent of reported outlays for the associated programs in fiscal years 2012 

and 2011, respectively. Decreases in reported estimates of improper payments were mostly 

attributable to four major programs: the decreases for the Department of Labor’s Unemployment 

Insurance and the Department of the Treasury’s Earned Income Tax Credit programs were 

attributable to decreases in reported outlays, and the decreases for HHS’s Medicaid and the 

Social Security Administration’s Old-Age, Survivors, and Disability Insurance programs were 

attributable to decreases in reported error rates.48 It is important to note that, pursuant to OMB 

implementing guidance, reported improper payment estimates include overpayments, 

underpayments, and payments for which adequate documentation was not found, and may also 

include amounts of payments for years prior to the current fiscal year. 

In addition to the issues reported by entity inspectors general as noted above, entity auditors 

continued to report internal control deficiencies over financial reporting, such as financial system 

limitations and information system control weaknesses, which significantly increase the risk that 

improper payments may occur and not be detected promptly. 

Until the federal government has implemented effective processes to determine the full extent to 

which improper payments occur and appropriate actions are taken across entities and programs 

to effectively reduce improper payments, the federal government will not have reasonable 

assurance that the use of federal funds is adequately safeguarded. 

Information Security 

Although progress has been made, serious and widespread information security control 

deficiencies reported during fiscal year 2012 continue to place federal assets at risk of 

inadvertent or deliberate misuse, financial information at risk of unauthorized modification or 

destruction, sensitive information at risk of inappropriate disclosure, and critical operations at 

risk of disruption. Specifically, control deficiencies were identified related to (1) security 

management; (2) access to computer resources (data, equipment, and facilities); (3) changes to 

information system resources; (4) segregation of incompatible duties; and (5) contingency 

planning. We have reported information security as a high-risk area across government since 

February 1997. 

Such information security control deficiencies unnecessarily increase the risk that data recorded 

in or transmitted by federal financial management systems are not reliable and available. A 

primary reason for these deficiencies is that federal entities generally have not yet fully 

institutionalized comprehensive security management programs, which are critical to identifying 

information security control deficiencies, resolving information security problems, and managing 

information security risks on an ongoing basis. The federal government has taken important 

actions to improve information security, such as enhancing performance measures and 

 

47In their fiscal year 2012 Performance and Accountability Reports (PAR) and Annual Financial Reports (AFR), three 

federal entities updated their fiscal year 2011 improper payment estimates to reflect changes since issuance of their 

fiscal year 2011 PARs and AFRs. These updates increased the government-wide improper payment estimate for 

fiscal year 2011 from $115.3 billion to $115.7 billion. 

48Reported error rates reflect the estimated improper payments as a percentage of total program outlays.
U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 245

reporting processes necessary for monitoring and assessing the effectiveness of agencies’ 

information security programs. In addition, the administration established goals to achieve, by 

the end of fiscal year 2014, 95 percent use of (1) trusted Internet connections to consolidate 

external telecommunication access points; (2) continuous monitoring of federal information 

systems; and (3) strong authentication through the increased use of federal smart card 

credentials, such as Personal Identity Verification and Common Access Cards. Until entities 

identify and resolve information security control deficiencies and manage information security 

risks on an ongoing basis, federal data and systems, including financial information, will remain 

at risk. 

Tax Collection Activities 

During fiscal year 2012, a material weakness continued to affect the federal government's ability 

to effectively manage its tax collection activities. Due to financial system limitations, as well as 

errors and delays in recording taxpayer information, the federal government’s records did not 

always reflect the correct amount of taxes owed by the public to the federal government. Such 

errors and delays may cause undue burden and frustration to taxpayers who either have 

already paid taxes owed or who owe significantly lower amounts. Collectively, these deficiencies 

indicate that internal controls were not effective in (1) ensuring that reported amounts of taxes 

receivable and other tax assessments were accurate on an ongoing basis and could be relied 

upon by management as a tool to aid in making and supporting resource allocation decisions 

and (2) supporting timely and reliable financial statements, accompanying notes, and required 

supplementary information and other information without extensive supplemental procedures 

and adjustments. 

Loans Receivable and Loan Guarantee Liabilities 

Internal control deficiencies were identified at certain federal entities that accounted for the 

majority of the reported balances for loans receivable and loan guarantee liabilities. The 

deficiencies related to monitoring and reporting loan and loan-related activity, and to credit 

subsidy estimation and related financial reporting processes. In fiscal year 2012, the 

Department of Education, which accounted for the largest reported balance of loans receivable, 

experienced internal control deficiencies related to the implementation of new debt management 

collection and direct loan servicing systems. The department’s deficiencies affected, among 

other things, its ability to process certain types of transactions, prepare certain system 

reconciliations in a timely manner, and properly report interest accruals. 

Such deficiencies and issues, and complexities associated with estimating the costs of lending 

and other loan-related financing activities, significantly increase the risk that misstatements in 

entity and government-wide financial statements could occur and go undetected. Further, 

control deficiencies related to estimating the costs of lending and other loan-related financing 

activities can adversely affect the federal government’s ability to support annual budget 

requests for these programs, make future budgetary decisions, manage program costs, and 

measure the performance of lending activities. 
246 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 

Appendix IV 

Significant Deficiency 

In addition to the material weaknesses discussed in appendixes II and III, we found a significant 

deficiency in the federal government’s internal control over management of federal grants, 

related to deficiencies at certain federal entities. Also, we reported a significant deficiency in 

fiscal year 2011 regarding loans receivable and loan guarantee liabilities. We considered the 

control deficiencies in loans receivable and loan guarantee liabilities to be a material weakness 

in fiscal year 2012, as noted above, as additional control deficiencies in this area were identified 

in fiscal year 2012. 

Federal Grants Management 

In fiscal year 2012, federal grants management internal control deficiencies, primarily regarding 

inadequate monitoring and oversight of grant programs, were identified at several federal 

entities. For example, the auditor of one federal entity that awards and manages significant 

amounts of grants reported that related information and communication systems did not collect 

and disseminate timely, reliable, and relevant information to those charged with making 

informed decisions regarding grants. Additionally, another entity’s auditor reported that effective 

monitoring procedures over certain grant activities and the maintenance of related 

documentation have not been implemented. These internal control deficiencies could adversely 

affect the federal government’s ability to ensure that grant funds are being used in accordance 

with applicable program laws and regulations. 

(198709)