Contents 

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

A Citizen’s Guide ............................................................................................................................3 

Management’s Discussion and Analysis......................................................................................13 

Statement of the Comptroller General of the United States......................................................31 

Financial Statements 

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

 Statements of Operations and Changes in Net Position................................................................35 

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

 Statements of Changes in Cash Balance from Unified Budget and Other Activities ...................37 

 Balance Sheets..............................................................................................................................38 

 Statements of Social Insurance.....................................................................................................39 

Notes to the Financial Statements 

 Note 1. Summary of Significant Accounting Policies..................................................................49 

 Note 2. Cash and Other Monetary Assets.....................................................................................54 

 Note 3. Accounts and Taxes Receivable, Net...............................................................................55 

 Note 4. Loans Receivable and Loan Guarantee Liabilities, Net...................................................56 

 Note 5. Inventories and Related Property, Net .............................................................................60 

 Note 6. Property, Plant, and Equipment, Net ...............................................................................61 

 Note 7. Securities and Investments...............................................................................................63 

 Note 8. Other Assets.....................................................................................................................63 

 Note 9. Accounts Payable.............................................................................................................64 

 Note 10. Federal Debt Securities Held by the Public and Accrued Interest .................................65 

 Note 11. Federal Employee and Veteran Benefits Payable ..........................................................68 

 Note 12. Environmental and Disposal Liabilities.........................................................................74 

 Note 13. Benefits Due and Payable ..............................................................................................76 

 Note 14. Insurance Program Liabilities........................................................................................76 

 Note 15. Other Liabilities.............................................................................................................78 

 Note 16. Collections and Refunds of Federal Revenue ................................................................80 

 Note 17. Prior Period Adjustments...............................................................................................83 

 Note 18. Contingencies ................................................................................................................84 

 Note 19. Commitments.................................................................................................................88 

 Note 20. Earmarked Funds ...........................................................................................................90 

 Note 21. Indian Trust Funds.........................................................................................................99 

 Note 22. Social Insurance...........................................................................................................101 

 Note 23. Stewardship Land ........................................................................................................108 

 Note 24. Heritage Assets ............................................................................................................108 

Supplemental Information (Unaudited) 

 Social Insurance .........................................................................................................................111 

 Social Security and Medicare.....................................................................................................111 

 Railroad Retirement, Black Lung, and Unemployment Insurance .............................................132 

 Deferred Maintenance ................................................................................................................145 

 Unexpended Budget Balances....................................................................................................146 

 Tax Burden.................................................................................................................................146 

 Tax Gap ......................................................................................................................................147 

 Other Claims for Refunds...........................................................................................................148 

 Risk Assumed.............................................................................................................................148 

 Unmatched Transactions and Balances ......................................................................................149 
Stewardship Information (Unaudited) ......................................................................................151 

 Stewardship Investments ............................................................................................................151 

 Non-Federal Physical Property...................................................................................................151 

 Human Capital............................................................................................................................152 

 Research and Development ........................................................................................................152 

Appendix 

 Significant Government Entities Included 

 and Excluded from the Financial Statements...........................................................................155 

Government Accountability Office Auditor’s Report..............................................................159 
List of Social Insurance Charts 

Chart 1 OASDI Beneficiaries per 100 Covered Workers, 1970-2081....................................117 

Chart 2 OASDI Income (Excluding Interest) and Expenditures, 1970-2081 .........................118 

Chart 3 OASDI Income (Excluding Interest) and Expenditures 

 as a Percent of Taxable Payroll, 1970-2081 ............................................................119 

Chart 4 OASDI Income (Excluding Interest) and Expenditures 

 as a Percent of GDP, 1970-2081..............................................................................120 

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

 as a Percent of GDP, 1970-2081..............................................................................123 

Chart 6 Medicare Part A Income (Excluding Interest) and Expenditures, 1970-2081 ...........124 

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

 as a Percent of Taxable Payroll, 1970-2081 ............................................................125 

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

 as a Percent of GDP, 1970-2081..............................................................................126 

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

 1970-2081................................................................................................................127

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

 as a Percent of GDP, 1970-2081..............................................................................128 

Chart 11 Estimated Railroad Retirement Income (Excluding Interest and 

 Financial Interchange Income) and Expenditures, 2007-2081 ................................134 

Chart 12 Estimated Railroad Retirement Income (Excluding Interest and 

 Financial Interchange Income) and Expenditures as a Percent of 

 Tier II Taxable Payroll, 2007-2081 .........................................................................135 

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

 2008-2040................................................................................................................139

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

 Fund Balance, 2008-2040........................................................................................140 

Chart 15 Estimated Unemployment Fund Cashflow Using Expected Economic 

 Conditions, 2008-2017 ............................................................................................142 

Chart 16 Unemployment Trust Fund Solvency as of September 30, 2007...............................144 
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THE NATION BY THE NUMBERS: A Citizen’s Guide 

 

3

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

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

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

investigate abuses, and consequently to control them."

President Thomas Jefferson to Treasury Secretary Albert Gallatin, 1802

The Nation by the Numbers: 

A Citizen’s Guide 

A Summary of the FY 2007 Financial Report of the U.S. Government 

Financial Condition of the U.S. Government: 

An Overview 

The Fiscal Year 2007 Financial Report of the United States Government (Report) provides the President, 

Congress, and the American people a comprehensive view of how the Federal Government is managing 

taxpayer dollars. This Citizen’s Guide is a summary of that Report, which attempts to make sense of the 

trillions of dollars that the Government receives from taxpayers and spends through thousands of 

Government programs and services, such as national defense, Social Security, Medicare, and education 

each year, dwarfing even the largest companies worldwide. 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. Table 1 summarizes several key indicators of the Government’s financial health. 

billions of dollars 2005 2006 2007

Gross Costs $ (3,127.7) (3,174.6) $ (3,157.3) $ 

Total Taxes and Other Revenues $ 2,440.8 2,185.5 $ 2,627.3 $ 

Net Operating Cost 1 $ (449.5) (760.2) $ (275.5) $ 

Assets 1,447.9 $ 1,496.5 $ 1,581.1 $ 

Less: Liabilities, comprised of:

Federal Debt held by the Public (4,624.2) $ (4,867.5) $ (5,077.7) $ 

Federal Employee & Veteran Benefits (4,491.8) $ (4,679.0) $ (4,769.1) $ 

Other Liabilities (798.8) $ (866.4) $ (940.1) $ 

Total Liabilities (9,914.8) $ (10,412.9) $ (10,786.9) $ 

Net Position (Assets Net of Liabilities) $ (8,916.4) (8,466.9) $ (9,205.8) $ 

Closed Group (current participants)

3 $ (44,147) (40,038) $ (45,062) $ 

Open Group (current + future participants)

 4 $ (38,851) (35,689) $ (40,948) $ 

Unified Budget Deficit (318.6) $ (247.7) $ (162.8) $ 

1 To tal Net Operating Co s t includes Earned Revenues (o ffs et agains t Gro s s Co s ts ) and 'Unmatched Trans actio ns and 

Balances ' no t s ho wn in this table.

3 includes current participants (i.e., receiving and/o r are eligible to receive benefits ) ages 15 and o ver at the s tart o f the perio d.

2 pres ent value o f 75-year actuarial pro jectio ns o f benefit payments under current law fo r So cial Security, Medicare, and o ther

s o cial ins urance pro grams in exces s o f their s cheduled co ntributio ns and earmarked taxes . No t co ns idered liabilities o n the 

balance s heet. 

4 includes all current and future pro jected participants (i.e., individuals receiving and/o r eligible to receive benefits ages 15 and 

o ver at the s tart o f the perio d, P LUS participants es timated to receive and/o r be eligible fo r benefits o ver the 75-yr ho rizo n).

Table 1: The Nation By the Numbers - An Overview

Budget Results

Social Insurance Exposures (not included on the balance sheet): 2
THE NATION BY THE NUMBERS: A Citizen’s Guide 

 

4 

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

o the President’s Budget (Budget), the Government’s primary financial planning and control tool, 

describes how the Government spent and plans to spend its money. The unified budget deficit, 

from Table 1 on the previous page shows that the Government spent $163 billion more than it 

received in fiscal year 2007 on a 

cash basis. 

o the Financial Report of the 

United States Government 

(Report) includes the accrualbased cost of operations, the 

sources used to finance those 

costs, how much the Government 

owns and owes, and the outlook 

for its social insurance programs. 

Table 1 shows that the 

Government’s costs exceeded its 

revenues by $275.5 billion for 

fiscal year 2007. 

 The Budget's emphasis is on initiatives and how resources will be used, focusing on the 

Government's spending surplus or deficit. The Report focuses on the Government's net operating 

cost - how resources have been used to fund programs and services. How does the Government’s 

largely cash-based spending deficit differ from the largely accrual-based net operating cost? 

o The Budget shows receipts, or cash paid to the Government (e.g., income tax payments and 

national park fees received); while the Report presents revenue, or amounts that the Government 

has earned, some of which has not yet been received1

. 

o The Budget reports cash outlays when the Government makes payments to individuals, 

businesses or other parties. The financial statements reflect costs in the period in which resources 

are consumed or liabilities increased. 

o From Table 2, almost the entire difference between these two reports can be explained by a single 

item. The Budget does not include $90.1 billion in postemployment benefits earned by, but not 

yet due to be paid to, employees in fiscal year 2007. 

o Similarly, the Budget does not include an estimated $36.8 billion of additional clean-up costs that 

the Government will eventually have to pay to 

fund environmental efforts (e.g., EPA Superfund). 

o Conversely, the Budget does include more than 

$13 billion in net spending for Capitalized Fixed 

Assets. For Budget purposes, the entire purchase 

price for major assets, such as buildings or aircraft 

carriers must be shown as a cost in the year of 

outlay. However, due to their estimated 

longevity, agencies capitalize and depreciate (i.e., 

spread) the cost of these assets over their ‘useful 

lives’ in the financial statements. 

Together, the Budget and the Report present a complementary perspective on the Nation’s financial 

health and provide a valuable management tool for the country’s leaders. The following pages will provide 

some insight into how the Government managed taxpayer dollars in 2007 and the prospects for the future. 

 

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

2006 2007

$247.7 $162.8

($20.8) ($13.5)

($10.2) ($0.6)

$449.5 $275.5

Unified Budget Deficit

Net Operating Cost

Table 2: The Nation By the Numbers 

Budget Deficit vs. Net Operating Cost

Other

Capitalized Fixed Assets, Net 

Dollars in billions

Unfunded Postemployment 

Programs $187.2 $90.1 

Increase in 

Environmental Liabilities $45.4 $36.8
THE NATION BY THE NUMBERS: A Citizen’s Guide 

 

5

What Does This Mean to Me?

Gross Domestic Product (GDP). GDP is 

one of the ways to measure the size of an 

economy. The GDP is the total market value 

of all final goods and services produced 

within a country during a period of time 

(usually a calendar year).

Chart A

Current Trends Are Not Sustainable

---

10.0

20.0

30.0

40.0

50.0

60.0

70.0

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

Net Interest

Other

Government

Medicaid

Medicare

Social Security

Total Revenues

Percent of GDP

The Government’s Financial Position and Condition 

Financial position refers to the Government’s financial health as of a distinct point in time (September 

30 of each year), based on past events. The Government’s financial statements provide a number of ‘vital 

signs’ of its health, including the assets that the Government owns, the liabilities owed, and the cost of 

running the Government’s many operations and services. How and why the Government’s financial 

position changed during the year, as discussed in the ‘Financial Highlights’ section of this Report, are also 

important indicators. As of the end of 2007, the Government's net position (assets net of liabilities) was a 

net liability of $9.2 trillion. 

By comparison, the Government’s financial or fiscal condition not only considers the Government’s 

current and past performance, but also its capacity to meet future demands and responsibilities. For 

example, the growing responsibilities associated with future social insurance benefits (e.g., Social Security, 

Medicare) is a well-documented issue that impacts every citizen in the Nation, due in great part to the aging 

of the ‘baby boom’ generation and rising health care costs. The 

Statement of Social Insurance (SOSI) compares the resources that 

the Government expects to receive for these programs from 

dedicated sources (e.g., earmarked taxes, premiums) to what it 

expects to have to pay out in benefits over the next 75 years in 

current dollar terms. 

Chart A forecasts the Government’s historical major spending 

programs and revenues over the next 75 years as a percent of 

Gross Domestic Product (GDP). The projection that revenue as 

a percent of GDP will remain relatively constant in future years 

is based on historical data and trends that are not expected to change. Since World War II Federal revenues 

as a share of GDP have been roughly constant at around 18 percent of GDP. Whenever taxes have risen 

above this range, policy actions have tended to pull them back.

Simply said, 

holding revenues 

constant, required 

Medicare, Medicaid, and 

Social Security spending 

and the related deficit 

financing costs will far 

exceed the 

Government’s ability to 

pay. Projections show 

that by 2070, total 

Government 

expenditures are 

projected to be 50 

percent of GDP. Such 

levels of expenditures 

have only been 

witnessed once before, 

during World War II, 

when Government expenditures reached a record high of 44 percent of GDP. And by 2080, expenditures 

are projected to approach 60 percent of GDP. This would cause dramatic increases in deficit spending, and 

consequently, as explained later, Federal debt needed to finance them.

The spending for social insurance programs, in particular, is projected to grow at an alarming rate 

under current law. The precise amounts of the Government’s future social insurance responsibilities are far 

from certain, as they are based on complex calculations and many assumptions, e.g., age, life expectancy, 

and the cost of health care. However, the magnitude of the problem and the need for a solution are evident 

and could have a significant impact on the economy in the future unless action is taken in the near future. 
THE NATION BY THE NUMBERS: A Citizen’s Guide 

 

6 

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

-500

-400

-300

-200

-100

0

100

200

300

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0 Legend

Deficit/Surplus Level (right scale)

Share of GDP (left scale)

Fiscal Years

FEDERAL BUDGET BALANCE

Projected

FY 2008

to 2012

% GDP BILLIONS $

Source of Projections: FY 2008 Mid-Session Review

Image 1

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

-500

-400

-300

-200

-100

0

100

200

300

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0 Legend

Deficit/Surplus Level (right scale)

Share of GDP (left scale)

Fiscal Years

FEDERAL BUDGET BALANCE

Projected

FY 2008

to 2012

% GDP BILLIONS $

Source of Projections: FY 2008 Mid-Session Review

Image 1

The Economy 

The fiscal year 2007 unified budget deficit decreased $85 billion to $162.8 billion, the third 

consecutive annual decrease. The decrease was due almost entirely to a substantial increase in revenue. 

Net cost across agencies nearly broke even as the three largest increases (at the Departments of Health and 

Human Services and Defense, and the Social Security Administration) almost entirely offset the four 

largest decreases (at the Departments of Agriculture, Education, Homeland Security, and Veterans Affairs). 

 U.S. economic growth edged up in fiscal 2007, but growth was partly restrained by continued 

weakening in the residential homebuilding sector and growing financial market uncertainty. Employment 

gains tapered off through the year, although the unemployment rate remained low. Inflation rose in the first 

half of the year, due in part to swings in oil and gasoline prices, as well as noticeable increases in food 

prices, but declined in the second half. 

The Financial and Housing Markets 

Financial market turbulence this past summer reflected concern over growing mortgage defaults and a 

realization that some mortgage-backed securities contained substantially more risk than originally assumed. 

This caused some investors to move to less risky investments (e.g., Treasury debt). The uncertainty created 

by those difficulties prompted market participants to reappraise values of assets in a broader array of 

markets for equities, sovereign debt, and corporate debt. A widening of spreads reflected this repricing of 

risk: for example, the spread between the Baa corporate bond yield and the comparable U.S. Treasury yield 

widened to a two year high in mid-September 2007. 
THE NATION BY THE NUMBERS: A Citizen’s Guide 

 

7

Chart B

Debt held by the Public

(as a percent of GDP)

0

100

200

300

400

500

600

700

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

Percent of GDP

WWII 

109% of GDP

The Government’s Debt 

 The Government must borrow from the public at home and abroad to fund its deficits. The projected 

increases in interest expenditures as a percent of GDP in Chart A above and in total public debt in Chart B 

indicate that the anticipated social insurance spending shortfall could have a dramatic and extended impact 

on the Government’s financial health. As shown in Chart B, under current policy, the confluence of these 

trends would cause the Government’s debt levels to more than triple by 2040 (well above even the WWII 

peak of 109 percent), to double again by 2060, and approach six times GDP levels by 2080. At some point 

before the debt reaches such 

unprecedented levels, the 

world’s financial markets 

would likely cease lending to 

the United States. Although 

the precise point at which 

this would occur is unknown, 

it is clear that these projected 

debt levels cannot be 

sustained indefinitely. As 

indicated earlier, such 

dramatic projections are 

based on a wide array of 

assumptions about the future. 

Nonetheless, it is clear that 

action will be required in the 

future to bridge this 

emerging fiscal imbalance. 

However, debt held by 

the public accounts for only 

approximately half of the Government’s gross debt. The other half is primarily held in the form of special 

nonmarketable securities by various parts of the Government. This intragovernmental debt does not appear 

on the balance sheet because, under current accounting principles, claims of one part of the Government 

against another are eliminated when consolidated governmentwide financial statements are prepared so that 

the statements do not appear to be inflated. Accounting principles prevent such ‘left hand owing the right 

hand’ amounts from distorting results. 

Gross Federal debt, excluding some adjustments, is subject to the statutory debt limit. Prior to 1917, 

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

established a dollar ceiling for Federal borrowing, which has been periodically increased over the years 

(most recently from $9.0 trillion to $9.8 trillion in 2007). At the end of fiscal year 2007, the amount of 

debt subject to the limit was $8.9 trillion, $893.7 billion under the limit. 

Financial Highlights 

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

Budget, focusing on the impact of surpluses and deficits. While this primarily cash-based discussion of the 

Government’s net outlays (deficit) or net receipts (surplus) tells an important part of the story, the rest is 

told by the changes in its assets and liabilities. The Government Accountability Office (GAO) is 

responsible for conducting the audit of the Government’s financial statements. For FY 2007, GAO has 

again issued an audit opinion ‘disclaimer’, as it has in each of the past eleven years, on the consolidated 

financial statements for the fiscal years ended September 30, 2007 and 2006. This means that the auditors 

did not have sufficient information to determine whether the financial results were reliable. Material 

weaknesses in internal control and other scope limitations resulted in conditions that prevented GAO from 

forming and expressing an opinion. However, FY 2007 marks the first year that the Government earned an 

unqualified audit opinion on a Report component - - the Statement of Social Insurance (SOSI). 
THE NATION BY THE NUMBERS: A Citizen’s Guide 

 

8 

The following highlights the Federal Government’s financial results for FY 2007 and shows how the 

various statements relate to each other. 

2007 2006 (in billions) 2007 2006

Gross Cost (3,157.3) $ (3,127.7) $ Net Position (beginning) $ (8,466.9) (8,916.4) $ 

(-) Earned Revenue 247.8 226.4 (+) Revenue 2,627.3 2,440.8 

(=) Net Cost 1 $ (2,901.3) (2,909.5) $ (-) Net Cost 1 (2,901.3) (2,909.5) 

Net Operating Cost 2 (449.5) (275.5) 

(=) Net Position (end) 3 $ (8,916.4) (9,205.8) $ 

2007 2006

$ (247.7) (162.8) $ 

2007 2006

Net Operating Cost 2 $ (275.5) $ (449.5)

 27.9 43.6 

 $ 69.7 $ 43.6 

Unified Budget Deficit 4 $ (247.7) (162.8) $ 

2007 2006

Assets:

Cash 5 $ 97.9 128.0 $ 

Property 691.1 688.5

Other 710.1 762.0 

Total Assets 1581.1 1496.5

Liabilities: 2007 2006

Debt held by the Public 5077.7 4867.5 Social Security $ (6,449) (6,763) $ 

Postemployment Benefits 4769.1 4679.0 Medicare (34,085) $ (32,305) $ 

Other 940.1 866.4

(-) Total Liabilities (10,786.9) (10,412.9)

Net Position 3 $ (8,916.4) (9,205.8) $ 

 201.8

Expenditures for future Scheduled Benefits, Net of 

Contributions and Earmarked Taxes

Increase (Decrease) in 

operating cash balance, Net

(=) Operating Cash (end) 5

 26.1 15.7 

Image 2

V

(+) Operating Cash (begin)

Navigating the Government's Financial Statements

I II

Statements of Net Cost Statements of Operations and 

Changes in Net Position

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

cash component of the “Cash and other monetary assets” line on the Balance Sheet. 

(in billions)

 112.7

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

Government’s reported assets and liabilities.

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

Balance from Unified Budget and Other Activities to show how the Federal Government’s spending deficit is related to its Net Operating Cost.

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

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

How does 

the deficit 

relate to 

cash?

Increase (Decrease) in 

Postemployment 

Liabilities, Environmental 

Liabilities, Other, Net: 

(in billions)

(in billions) How does 

Net 

Operating 

Cost affect 

Net 

Position?

IV How does 

cost differ 

from the 

budget 

deficit?

III

Reconciliation of Net Operating Cost & Unified 

Budget Deficit

Statements of Changes in Cash Balance from 

Unified Budget Deficit & Other Activities

Unified Budget Deficit 4

2 . Net Operating Cost is the Government's net cost, less any 'unearned' revenue (e.g., taxes, fees). The 'Reconciliation Statement' shows the primary differences between the 

Government's accrual-based Net Operating Cost and cash-based unified budget deficit. Net Operating Cost includes t$6.7 billion adjustment for unreconciled transactions.

Balance Sheet

(in billions)

Net 

Position 

also shown 

in II

What does 

the Govt 

own and 

owe?

What about Social Security and Medicare?

VI

Statement of Social Insurance (SOSI)*

*Note - The SOSI presents actuarial estimates of the present value 

of future expenditures, in excess of contributions over a 75-yr 

period. SOSI amounts are future sustainability estimates over an 

extended period. These amounts are for future benefit payments 

not yet due and therefore are NOT reflected in the balance sheet 

or other principal statements. 
THE NATION BY THE NUMBERS: A Citizen’s Guide 

 

9

Revenue: "What Came In"

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

income statement, shows the Government’s ‘bottom line’ (i.e., its net revenues and costs). The 

Government’s revenue is mostly comprised of individual and corporate income taxes. In 2007, revenues 

grew to $2.6 trillion, establishing a new record. 

 

Facts and Figures: 

 2007 marked the fourth consecutive fiscal year of substantial revenue growth. A combination of solid 

economic growth and improved corporate tax yields have contributed to revenue collections that 

exceed 2003 levels by 46 percent. 

 In 2007, the Government collected $2.6 trillion. Cash collections have increased by an average of 

$200 billion per year since 2003, contributing to a reduction of both the unified budget deficit and net 

operating cost. 

Chart C

Individual, Corporate, and Total Revenue

$-

$400.0

$800.0

$1,200.0

$1,600.0

$2,000.0

$2,400.0

$2,800.0

2003 2004 2005 2006 2007

Dollars in Billions

Total Revenue 

Individual Income Tax Revenue

Corporate Tax Revenue
THE NATION BY THE NUMBERS: A Citizen’s Guide 

 

10 

Cost: "What Went Out"

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

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

majority of total revenues. The government’s ‘bottom line’ is its net operating cost. The Government must 

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

statutory debt limit. 

Facts and Figures: 

 Gross costs, which increased slightly to $3.2 trillion in 2007, have increased by an average of 5.7 

percent over the past five years, including a slight decline in 2006. 

 The Departments of Health and Human Services, and Defense, as well as the Social Security 

Administration and interest on public debt, accounted for approximately three-fourths of the 

Government’s total net costs in FY 2007. 

 Much of the annual fluctuation in actuarial costs stems from the methodology and assumptions used by 

the Department of Veterans Affairs to calculate post-employment benefit liabilities. 

Chart E

Net Cost of the U.S. Government: 2007

Department of 

Health and 

Human 

Services

22.9%

All O ther 

Entities

24.6%

Interest on 

Debt Held by

the Public

8.2%

Social 

Security

Admin

21.5%

Department of 

Defense

22.8%

$0

$100

$200

$300

$400

$500

$600

$700

Dollars in Billions

HHS DoD SSA Interest

on Public

Debt

Chart D

Net Cost Comparison 

2003

2004

2005

2006

2007
THE NATION BY THE NUMBERS: A Citizen’s Guide 

 

11

What Does This Mean to Me?

Federal Debt held by the Public

Based on current estimates, every 

citizen’s share of the Federal debt is 

over $17 thousand.

Nearly half of the U.S. public debt is 

held by foreign countries, so a 

substantial portion of government 

interest payments go abroad.

Assets: "What We Own" 

The Government’s total assets, most of which are property, plant, and equipment, increased $84.6 billion to 

$1.6 trillion in 2007.

Facts and Figures: 

 Net property, plant, and equipment has been the Government’s largest asset over the past seven fiscal 

years, comprising more than 40 percent of total assets in FY 2007. 

 In addition to the $1.6 trillion in total assets, the Government owns certain other assets such as 

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

structures). 

. 

Liabilities: "What We Owe" 

Total Liabilities increased $374.0 billion to nearly $10.8 trillion in fiscal year 2007. Most of this total is 

comprised of Federal debt held by (owed to) the public and accrued interest, and Federal employee and 

veteran benefits payable. 

Facts and Figures: 

 Debt held by the public and accrued interest, which 

increased $210.2 billion to $5.1 trillion in 2007, 

accounted for nearly 50 percent of the Government’s 

total liabilities. 

 After nearly doubling as a share of GDP over a 15-year 

period throughout the mid-1990s to about 50 percent in 

1993, smaller deficits and a period of surpluses in the 

late 1990s led to a decline in the public debt as a 

percentage of GDP to 36.9 percent in 2007. 

 Federal employee and veteran benefits payable 

make up another 44 percent of total liabilities. 

These liabilities have increased dramatically in recent years, from $2.6 trillion at fiscal year-end 1999, 

to $4.8 trillion in 2007. 

 As of the end of 2007, the Government's liabilities exceeded its assets (net position) by $9.2 trillion. 

2003

2004

2005

2006

2007

$-

$1,000.0

$2,000.0

$3,000.0

$4,000.0

$5,000.0

$6,000.0

Dollars in Billions

Chart F

Liabilities by Type

Other Liabilities

Environmental &

disposal liabilities

Fed employee &

veteran benefits

payable

Federal debt

securities held by

the public
THE NATION BY THE NUMBERS: A Citizen’s Guide 

 

12 

Looking Ahead 

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

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

President’s Management Agenda (PMA) is creating a results-oriented Government where agencies and 

programs are managed professionally and efficiently to achieve the results expected by the Congress and 

the American people. 

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

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

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

results. PMA standards for success are used to measure agencies’ progress and achievement in meeting 

overall goals. Agency ratings and other related information are discussed in the Report and are available 

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

Find Out More 

You will find details and more in-depth information on the issues discussed here in the full Financial 

Report of the U.S. Government. As the information in this Report potentially impacts every U.S. citizen, 

all are encouraged to explore the facts contained herein and to ask questions about how the Government 

manages taxpayer money. 

This Report and other information about the Nation’s finances are available on the Internet at: 

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

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

www.gao.gov
MANAGEMENT’S DISCUSSION AND ANALYSIS 13

Qualified Disclaimer

Energy Justice GSA

Commerce Labor NSF

Education Treasury NRC Defense

HHS VA OPM DHS 1

HUD USAID SBA State

Interior EPA SSA NASA

1 Balance Sheet and Custodial Statement Audit Only

FY 2007 CFO Act Agency Audit Results

Unqualified

USDA 

Transportation 

MANAGEMENT’S DISCUSSION AND 

ANALYSIS 

Introduction 

The 2007 Financial Report of the United States Government (Report) provides the President, Congress, and the 

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

condition, its revenues and costs, assets and liabilities, and other obligations and commitments. The Report also 

discusses important financial issues and significant conditions that may affect future operations. Due to its broad 

impact on practically every United States citizen, particular emphasis is given in this year's Report to the 

Government's capacity to sustain the funding and pay the earned benefits of key social insurance programs, such as 

Social Security and Medicare. This Report presents historical data as well as forward-looking projections of how 

retirement of the 'baby boom' generation and continually rising health-care costs could potentially lead to the erosion 

the Government's financial health. 

Pursuant to 31 U.S.C. § 331(e)(1), the 

Department of the Treasury must submit the 

Report, which is subject to audit by the 

Government Accountability Office (GAO), to 

Congress no later than six months after the 

September 30 fiscal year-end. To encourage 

more timely and relevant reporting, the Office 

of Management and Budget (OMB) accelerated 

both the individual agency and 

governmentwide reporting deadlines to 45 days 

and 75 days after year-end, respectively. 

The Financial Report of the U.S. Government is prepared from the audited financial statements of specifically 

designated Federal agencies, including the Cabinet Departments and many smaller, independent agencies (see 

organizational chart on the next page). For FY 2007, GAO has again issued an audit opinion ‘disclaimer’, as it has 

in each of the past eleven years, on the consolidated financial statements for the fiscal years ended September 30, 

2007 and 2006. This means that sufficient information was not available for the auditors to determine whether the 

financial results were reliable. However, in FY 2007, 19 of 24 of the most prominent agencies earned unqualified 

opinions on the financial statement audits. FY 2007 also marks the first year that the Government earned an 

unqualified audit opinion on a Report component - - the Statement of Social Insurance (SOSI), indicating the 

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

The fiscal year 2007 Financial Report consists of: 

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

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

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

• Supplemental and Stewardship Information; and 

• GAO’s Audit Report. 

Mission & Organization 

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

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

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

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

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

providing veteran benefits and services, facilitating commerce, supporting housing and the transportation systems, 

protecting the environment, contributing to the security of energy resources, and helping States provide education. 
14 MANAGEMENT’S DISCUSSION AND ANALYSIS 

The following chart provides an abbreviated overview of how the U.S. Government is organized. 

THE CONSTITUTION

EXECUTIVE BRANCH 

THE PRESIDENT 

THE VICE PRESIDENT 

EXECUTIVE OFFICE OF THE PRESIDENT 

White House Office 

Office of the Vice President 

Council of Economic Advisers 

Council on Environmental Quality 

National Security Council 

Office of Administration 

Office of Management and Budget 

Office of National Drug Control Policy 

Office of Policy Development 

Office of Science and Technology Policy 

Office of the U.S. Trade Representative 

LEGISLATIVE BRANCH 

THE CONGRESS 

SENATE HOUSE

Architect of the Capitol 

United States Botanic Garden 

Government Accountability Office 

Government Printing Office 

Library of Congress 

Congressional Budget Office 

THE UNITED STATES GOVERNMENT

JUDICIAL BRANCH 

THE SUPREME COURT OF THE 

UNITED STATES 

United States Courts of Appeals 

United States District Courts 

Territorial Courts 

United States Court of International Trade 

United States Court of Federal Claims 

United States Court of Appeals for the 

 Armed Forces 

United States Tax Court 

United States Court of Appeals 

for Veterans Claims 

Administrative Office of the United States Courts

Federal Judicial Center 

United States Sentencing Commission 

INDEPENDENT ESTABLISHMENTS AND GOVERNMENT CORPORATIONS 

African Development Foundation 

Broadcasting Board of Governors 

Central Intelligence Agency 

Commodity Futures Trading 

 Commission 

Consumer Product Safety Commission 

Corporation for National and 

 Community Service 

Defense Nuclear Facilities Safety 

 Board 

Environmental Protection Agency * 

Equal Employment Opportunity 

 Commission 

Export-Import Bank of the U.S. * 

Farm Credit Administration 

Farm Credit System Insurance Corporation * 

Federal Communications 

 Commission * 

Federal Deposit Insurance 

 Corporation * 

Federal Election Commission 

Federal Housing Finance Board 

Federal Labor Relations Authority 

Federal Maritime Commission 

Federal Mediation and 

 Conciliation Service 

Federal Mine Safety and 

 Health Review Commission 

Federal Reserve System 

Federal Retirement Thrift 

 Investment Board 

Federal Trade Commission 

General Services Administration *

Inter-American Foundation 

Merit Systems Protection Board 

National Aeronautics and 

 Space Administration * 

National Archives and Records 

 Administration 

National Capital Planning 

 Commission 

National Credit Union 

 Administration * 

National Foundation on the Arts 

 and the Humanities 

National Labor Relations Board 

National Mediation Board 

National Railroad Passenger 

 Corporation (Amtrak) 

National Science Foundation * 

National Transportation Safety 

 Board 

Nuclear Regulatory Commission * 

Occupational Safety and Health 

 Review Commission 

Office of the Director of National 

 Intelligence 

Office of Government Ethics 

Office of Personnel Management * 

Office of Special Counsel 

Overseas Private Investment 

 Corporation 

Peace Corps 

Pension Benefit Guaranty 

 Corporation * 

Postal Rate Commission 

Railroad Retirement Board * 

Securities and Exchange 

 Commission * 

Selective Service System 

Small Business Administration * 

Smithsonian* 

Social Security Administration *

Tennessee Valley Authority * 

Trade and Development Agency

U.S. Agency for International 

 Development * 

U.S. Commission on Civil 

Rights 

U.S. International Trade 

 Commission 

U.S. Postal Service * 

DEPARTMENT 

OF 

VETERANS 

AFFAIRS *

DEPARTMENT 

OF THE 

TREASURY * 

DEPARTMENT 

OF 

TRANSPORTATION *

DEPARTMENT 

OF 

STATE * 

DEPARTMENT 

OF 

LABOR * 

DEPARTMENT 

OF HOUSING 

AND URBAN 

DEVELOPMENT * 

DEPARTMENT 

OF THE 

INTERIOR * 

DEPARTMENT 

OF 

JUSTICE * 

DEPARTMENT 

OF HOMELAND 

SECURITY * 

DEPARTMENT 

OF HEALTH 

AND HUMAN 

SERVICES * 

DEPARTMENT 

OF 

DEFENSE * 

DEPARTMENT 

OF 

EDUCATION * 

DEPARTMENT 

OF 

ENERGY * 

DEPARTMENT 

OF 

COMMERCE * 

DEPARTMENT 

OF 

AGRICULTURE * 
MANAGEMENT’S DISCUSSION AND ANALYSIS 15

What Does This Mean to Me?

Gross Domestic Product (GDP). GDP is 

one of the ways to measure the size of an 

economy. The GDP is the total market value 

of all final goods and services produced 

within a country during a period of time 

(usually a calendar year).

The Government’s Financial Condition 

A complete assessment of the Government’s financial or 

fiscal condition requires analysis of historical results, projections 

of future revenues and expenditures, and an assessment of the 

long-term fiscal sustainability of programs and services. As 

discussed later in this Report, the Government’s financial 

statements show its financial position at the end of the fiscal year, 

explain how and why the financial position changed during the 

year, and provide insight into how the Government’s financial 

condition may change in the future. In particular, the Statement 

of Social Insurance (SOSI) compares the actuarial present 

value of the Government’s anticipated future benefits 

expenditures to its expected collections (e.g., taxes and premiums) for Social Security, Medicare and other social 

insurance programs over a 75-year period. Expected expenditures, as well as future revenues for other major 

programs, including defense, Medicaid and education, while not presented in the SOSI, will also affect the 

Government’s future fiscal condition. 

 The natural starting point for assessing the Government’s long-term financial condition is its current financial 

position, both in absolute terms and in relation to the economy as a whole. Gross Domestic Product (GDP) 

measures the size of the Nation’s economy in terms of the total value of all final goods and services that are 

produced in a year. It serves as a useful indicator of the economy’s capacity to sustain the Government’s many 

programs. For example, in fiscal year 2007: 

• Offsetting cash-based Government expenditures of $2.7 trillion and receipts of $2.6 trillion 

(approximately 20 percent and 19 percent of GDP, respectively) yields the fiscal year 2007 unified budget 

deficit of $162.8 billion. 

• The Government borrows from the public to finance the gap between expenditures and revenues (spending 

deficit). The accumulated value, including interest, of public debt was 37 percent of GDP at the end of 

fiscal year 2007. 

• The social insurance programs and Medicaid have become a large share of Government expenditures. 

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

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

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

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

Budget Deficit vs. Net Cost 

 Each year, the Administration issues two 

reports that detail financial results for the 

Government. The President’s Budget (Budget), the 

Government’s primary financial planning and 

control tool, describes how the Government spent 

and plans to spend its money. By comparison, the 

accrual-based Financial Report of the United 

States Government (Report) includes the cost of 

operations, the sources used to finance those costs, 

how much the Government owns and owes, and the 

outlook for its social insurance programs. 

The fiscal year 2007 unified budget deficit 

decreased $85 billion to $162.8 billion, the third 

consecutive annual decrease. The decrease was due 

2006 2007

$247.7 $162.8

($20.8) ($13.5)

($10.2) ($0.6)

$449.5 $275.5

$45.4 $36.8 

Unfunded Postemployment 

Programs

Net Operating Cost

Dollars in Billions

Table 3: Budget Deficit vs. Net Operating Cost

Unified Budget Deficit

Capitalized Fixed Assets, Net 

Other

Increase in 

Environmental Liabilities

$187.2 $90.1 
16 MANAGEMENT’S DISCUSSION AND ANALYSIS 

 National Economic Indicators FY 2006 FY 2007

Real GDP growth 2.4% 2.8%

Residential construction growth -8.5% -16.3%

Average monthly payroll job increase (thousands) 199 135

Unemployment rate ( percent, end of period) 4.6% 4.7%

Consumer price index (CPI) 2.1% 2.8%

CPI, excluding food and energy 2.9% 2.1%

Treasury constant-maturity 10-year rate, (end of period) 4.7% 4.5%

Moody's Baa bond rate (end of period) 6.4% 6.6%

Table 4: Economic Indicators

almost entirely to a $186.5 billion increase in revenue. Net cost across agencies nearly broke even as the three 

largest increases ( $103 billion at the Departments of Health and Human Services and Defense, and the Social 

Security Administration) almost entirely offset the four largest decreases ($109 billion at Departments of 

Agriculture, Education, Homeland Security, and Veterans Affairs). The Government’s 2007 total Net Operating 

Cost was $275.5 billion, down $174.0 billion from 2006. The significant differences between these two measures 

are summarized in Table 1 and discussed further in the Financial Analysis section of this document. 

The Economy in Fiscal 2007 

As noted in Table 4, 

U.S. economic growth 

edged up in fiscal year 

2007, although quarterly 

figures were volatile and 

on average growth 

remained below the 

economy’s potential. 

Growth was partly 

restrained by continued 

weakening in the 

residential homebuilding 

sector and a dramatic 

increase in financial 

turbulence as risk spreads 

widened sharply. Employment gains tapered off through the year, although the unemployment rate remained at low 

levels. Inflation was affected by swings in oil and gasoline prices, rising in the first half of the year and declining in 

the second half, and also by noticeable increases in food prices. Partly as a result of lower headline inflation in the 

second half, real wage growth picked up. Corporate profits remained relatively healthy. Federal tax receipts grew 

solidly in FY2007 and spending growth was modest, and, as a result, the Federal unified budget deficit fell to $163 

billion, about 1.2 percent of GDP. 

After rising at an annual average rate of 2.4 percent during fiscal year 2006, real GDP growth edged up to 2.8 

percent over the four quarters of fiscal 2007. Growth was stronger in the second half of fiscal 2007, averaging over 

4 percent. Residential fixed investment declined at double-digit rates in each of the fiscal year’s four quarters, 

reflecting sharply weaker housing demand. Nonresidential fixed investment started the year on a decline but picked 

up in the second half. 

The following discusses key points about economic performance in fiscal 2007. 

• Consumer spending growth averaged a 2.9 percent annual rate during fiscal 2007. Spending was faster 

during the first half of fiscal 2007 but slowed in the second half. Still, the annual rate was faster than the 

2.7 percent rise over the four quarters of fiscal 2006. 

• Exports contributed more strongly to overall economic growth in fiscal 2007, growing by 10.2 percent, 

after rising 8.4 percent in fiscal 2006. 

• Labor markets continue to be relatively robust (although growth in jobs slowed throughout the year). 

Nonfarm payroll employment expanded at an average rate of 135,000 jobs per month in fiscal 2007, down 

from the 199,000 average in fiscal 2006. Since the employment trough of August 2003, the economy has 

created more than 8 million new jobs. 

• The unemployment rate declined to a 2007 low of 4.4 percent in March, but has since increased to 4.7 

percent as of September. 

• Overall inflation, as measured by the consumer price index (CPI) advanced 2.1 percent in fiscal 2006, then 

rose by 2.8 percent in fiscal 2007. 

• Financial market turbulence over the summer reflected a repricing of risk in the sub-prime mortgage 

market. The uncertainty created by those difficulties prompted market participants to reappraise values of 

assets in a broader array of markets for equities, sovereign debt, and corporate debt. 

o A widening of spreads reflected this repricing of risk: for example, the spread between the Baa 

corporate bond yield and the comparable U.S. Treasury yield widened to a two year high in midSeptember 2007. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 17

Chart G

Debt Held by the Public as a % of Nominal GDP

0

10

20

30

40

50

60

70

80

90

1950

1960

1970

1980

1990

2000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Fiscal Year

Percent of Nominal GDP

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

1990-2007

by year

1950-2000

by decade

Federal Debt 

As indicated earlier, the 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 (spending in excess of receipts). During a budget surplus (receipts exceed spending), the Government 

typically uses those excess funds to reduce the debt borrowed from the public. Over time, the debt held by the public 

generally represents the total of all cash-based deficits minus all cash-based surpluses. 

At the end of fiscal year 2007, the Government had incurred $9.0 trillion in debt, comprised of: debt held by 

(or owed to) the public (i.e., public debt) and intragovernmental debt (i.e., debt the Government owes to itself). 

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

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

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

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

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

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

Gross Federal debt (with some adjustments) is subject to a statutory ceiling (i.e., the debt limit). Prior to 1917, 

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

dollar ceiling for Federal borrowing, which has been periodically increased over the years (most recently from $9.0 

trillion to $9.8 trillion in 2007). At the end of fiscal year 2007, the amount of debt subject to the limit was $8.9 

trillion, $893.7 billion under the limit. 

Public Debt as a Percentage of GDP 

The Federal debt 

held by the public (public 

debt) as a share of GDP 

(Chart G) compares a 

country’s debt level to the 

size of its economy over 

time. In the late 1970s, 

increasing budget deficits 

spurred an increase in 

public debt, which 

essentially doubled as a 

share of GDP over a 15-

year period, reaching 

about 50 percent in 1993. 

The budget controls 

instituted by the Congress 

and the President, 

together with economic 

growth, contributed to 

declining deficits and 

emerging surpluses at the 

end of the 1990s. This 

improved fiscal performance led to a decline in the public debt, (from 43 percent of GDP to about 33 percent from 

1998 through 2001). In fiscal years 2002 through 2004, the debt-to-GDP ratio started to rise slightly, due to many 

factors, including increased spending for homeland security and defense commitments, a decline in receipts owing 

to the recession and lower stock market value, tax cuts, and the expiration of the budget controls from the late 1990s. 

The public debt-GDP ratio has increased each year since 2001, peaking at 37.4 percent in 2004, and then gradually 

declining to 36.9 percent in 2007, still far below the roughly 50 percent ratio of the mid-1990s. 
18 MANAGEMENT’S DISCUSSION AND ANALYSIS 

Social Insurance Trust Funds

 Social Security:

• Old-Age and Survivors Insurance (OASI) pays 

retirement and survivors benefits, 

• Disability Insurance (DI) pays disability benefits. 

 Medicare: 

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

inpatient hospital and related care. 

• Part B: Supplementary Medical Insurance (SMI), 

which pays for physician and outpatient services 

• Part D, SMI prescription drug benefit program. 

Chart H 

Current Trends Are Not Sustainable

(as a percent of GDP)

---

10.0

20.0

30.0

40.0

50.0

60.0

70.0

1970

1980

1990

2000

2010

2020

2030

2040

2050

2060

2070

2080

Percent of GDP

Interest

Other

Government

Medicaid

Medicare

Social Security

Total Revenues

The Long-Term Fiscal Outlook 

The Government’s long-term financial condition will depend largely on two factors: the aging of the 

population, and the growth rate of future health care costs. Consider the following: 

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

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

Social Security. In just three years, they will start to become eligible for Medicare. 

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

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

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

• Over the last three decades, Medicare spending has grown at more than twice the overall rate of economic 

growth and the Medicare Trustees assume that in the future Medicare expenditures will continue to outpace 

overall economic growth in the future. 

• Social Security, Medicare, and 

Medicaid combined expenditures are 

projected to grow from 40 percent of 

total Government expenditures to 

more than 50 percent by 2030. 

• Under current conditions, 

Government revenues will ultimately 

be sufficient to cover only 31 percent 

of anticipated expenditures.

• Chart H shows the Government’s 

historical and projected long-term 

expenditures for Social Security and 

Medicare, as well as Medicaid, 

Interest on the Debt Held by the 

Public, and other purposes, and 

compares them to total projected 

revenue as a constant percent of 

GDP2

 The projection that revenue as a percent of GDP will remain relatively constant in future years is based on 

historical data and trends that are not expected to change. Since World War II, Federal revenues as a share of GDP 

have been roughly constant at around 18 percent of GDP. Whenever taxes have risen above this range, policy 

actions have tended to pull them back.

Projections show that by 2070, total Government expenditures are projected to be 50 percent of GDP. Such 

levels of expenditures have only been witnessed once before, during World War II, when Government expenditures 

reached a record high of 44 percent of GDP. And by 2080, 

expenditures are projected to approach 60 percent of GDP. This 

would cause dramatic increases in deficit spending, and 

consequently, as explained later, Federal debt needed to finance 

them. 

Much uncertainty surrounds the future of these programs 

and their impact on Government finances. Despite this 

uncertainty, projections such as these are critical to assessing 

whether future Government revenue will be sufficient to meet 

future expenses. At a glance, it is clear that the potential exists 

for these programs, particularly social insurance programs, to 

have a significant adverse impact on the Nation’s future financial 

condition. 

 

2

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

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

the same rate of growth as GDP. Supplemental appropriations are assumed to be phased out over the next ten years. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 19

Chart J: 

Debt held by the Public

(as a percent of GDP)

0

100

200

300

400

500

600

700

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

Percent of GDP

WWII 

109% of GDP

Chart I

Total Government Noninterest Revenue and Social Security and Medicare Outlays

(percent of GDP)

0.000

5.000

10.000

15.000

20.000

25.000

1970

1976

1982

1988

1994

2000

2006

2012

2018

2024

2030

2036

2042

2048

2054

2060

2066

2072

2078

Year

Percent of GDP

Average Historical Revenues

Social Security+Medicare O utlays

Actual Historical Projections

Historical data are from 2007 Analytical Perspectives based on fiscal year data. Social Security and Medic

the 2007 Trustees Reports based on calendar year data.

Total Non-interest 

Government Revenue

Social Insurance 

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

Social Insurance (SOSI) reports: (1) the actuarial present value of all future contributions, tax, and other income, 

(excluding interest), received from or on behalf of current and future participants; (2) the estimated future scheduled 

expenditures paid to or on behalf of current and future participants; and (3) the estimated future excess of future 

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

the supplemental information in this report are based on each program’s official actuarial trust fund calculations. 

The social insurance trust funds account for all related program income and expenses. Social Security and 

Medicare taxes, premiums, and other income are credited to the funds; fund disbursements may only be made for 

benefit payments and program administrative costs. Any excess revenues (surpluses) are invested in special nonmarketable 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 

benefits. 

As shown in Chart I, over the 

next two decades, Medicare and 

Social Security expenditures are 

projected to increase from their 

current 7 percent of GDP to about 

13 percent. By 2080, they are 

projected to equal nearly 18 

percent of GDP, only slightly less 

than the historical average of 

revenue from all sources (18.3 

percent). Simply said, holding 

revenues constant, current 

spending will far exceed the 

Government’s ability to pay. 

Unsustainable Debt 

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

revenues. Increased borrowing leads to higher debt service (net interest) which in turn can make it more difficult to 

balance expenditures and revenues in the future. Chart J shows that by 2030, public debt is projected to rise to 68 

percent of GDP, surpassing the non-wartime peak of 49 percent in 1993. By 2040, public debt is projected to be 128 

percent of GDP, well above the 

World War II peak of 109 percent, 

and by 2080, debt is projected to 

approach 600 percent of GDP. 

At some point before the debt 

reaches such unprecedented levels, 

the world’s financial markets 

would likely cease lending to the 

United States. Although the 

precise point at which this would 

occur is unknown, these projected 

debt levels cannot be sustained 

indefinitely. Many economists 

believe that persistent debt / GDP 

levels over 100% are unhealthy. 

The U.S. is projected to surpass 

that mark within the next 30 years, 

with the debt/GDP ratio at that 

point on a continually and dramatically rising trajectory (more than 10 percentage points per decade through 2080). 

Avoiding the catastrophic consequences of this fiscal path will require action to bring program expenditures in line 

with available resources. How soon those actions are taken will greatly influence their ultimate impact on the 

Nation. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

 

20 

Financial Position and Results of Operations 

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

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

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

future initiatives. 

Accrual-Based Results and Basis of Accounting 

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

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

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

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

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

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

Prepared on a ‘cash basis’

• Initiative-based: focus on current and future 

initiatives planned and how resources will 

be used to fund them. 

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

received, National Park fees collected , 

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

benefit checks sent. 

Prepared on an ‘accrual basis’

• Retrospective – prior and present resources 

used to implement initiatives. 

• Revenue: recognized when earned, but not 

necessarily received. 

• Costs: recognized when owed, but not 

necessarily paid. 

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

revenues when earned, some of which has not yet been received; and costs when incurred, not paid) as prescribed by 

U. S. generally accepted accounting principles (GAAP) for Federal entities.3

 

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

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

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

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

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

Reconciliation of Net Operating Revenue (or Cost) and Unified Budget Deficit). 

Reporting Entity 

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

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

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

voluntarily submit financial reports. 

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

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

Federal Retirement Thrift Investment Board; fiduciary funds owned by Federal employees; and governmentsponsored but privately-owned enterprises, including the Federal Home Loan Banks, the Federal National Mortgage 

Association, and the Federal Home Loan Mortgage Corporation. A list of the significant agencies and entities 

contributing to this report is included in the Appendices. 

Limitations of the Financial Statements 

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

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

 

3 Under GAAP, most U.S. Government revenues are recognized on a ‘modified cash’ basis, or when they become measurable.
MANAGEMENT’S DISCUSSION AND ANALYSIS 21

Determining the Government’s Net Position: 

“Where We Are” 

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

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

net outlays (deficit) or net receipts (surplus) tells only part of the story. The Government’s net position is driven 

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

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

The Government’s Statement of 

Operations and Changes in Net Position, 

much like a corporation’s income 

statement, shows the Government’s 

‘bottom line’. Chart K shows that the 

Government has incurred a total net 

operating cost (i.e., costs have exceeded its 

revenues) over the past several years. The 

Government’s revenues last exceeded its 

costs in fiscal years 1999 and 2000 in 

concert with the budget surplus. 

The Government nets its costs against 

both earned revenues from Government 

programs (e.g., Social Security 

withholdings, national park entry fees) and 

taxes, which account for the vast majority 

of total revenues. In addition, the 

Government distinguishes revenues that are earmarked for specific purposes (e.g., Medicare premiums) from those 

for general purpose spending. The Government’s ‘bottom line’ is its net operating cost, or total costs in excess of 

revenues. The Government must issue debt to finance any costs as they are paid that cannot be covered by revenues, 

subject to the statutory debt limit. 

The Reconciliation of Net Operating Cost and Unified Budget Deficit Statement shows how the 

Government’s net operating cost relates to the more widely-known budget deficit. Most of this difference is 

attributable to accruals of actuarial costs for the estimated present value of the Federal Government's future 

postemployment benefit payments.. Chart K shows that the Government’s total net cost includes an ‘actuarial’ 

element (e.g., the estimated annual change in long-term postemployment benefit liabilities). These actuarial costs, 

in recent years, have accounted for the vast majority of the difference between the primarily cash-based budget and 

the primarily accrual-based financial reports. Chart K shows the impact that actuarial costs have on total costs. 

Changes in assumptions used to project 

actuarial costs, such as interest rates and 

the Department of Veterans Affairs (VA’s) 

annual estimates of veterans' compensation 

and burial benefits, can cause those 

projections, and consequently total costs, 

to fluctuate year to year. 

Revenue: “What Came In” 

The Statement of Net Costs reports 

‘earned’ revenue generated by Federal 

programs. In fiscal year 2007, more than 

20 percent of these revenues were 

attributable to Medicare premiums paid by 

program participants. The Statement of 

Operations and Changes in Net Position 

shows the Government’s taxes and other 

Chart K 

Revenues & Costs

($4.0)

($3.0)

($2.0)

($1.0)

$0.0

$1.0

$2.0

$3.0

03 04 05 06 07 03 04 05 06 07 03 04 05 06 07

Dollars in Trillions

Actuarial

Total 

Net Cost Net 

Operating 

Cost

Fiscal Years

Chart L 

Individual, Corporate, and Total Revenue

$-

$400.0

$800.0

$1,200.0

$1,600.0

$2,000.0

$2,400.0

$2,800.0

2003 2004 2005 2006 2007

Dollars in Billions

Total Revenue 

Individual Income Tax Revenue

Corporate Tax Revenue
MANAGEMENT’S DISCUSSION AND ANALYSIS 

 

22 

revenues (i.e., revenues other than ‘earned’). A combination of solid economic growth and improved corporate tax 

yields have contributed to revenue growth of nearly 50 percent since 2003. Personal income and corporate profits 

before tax rose 6.2 percent and 6.7 

percent, respectively in 2007 4

, and 

have increased by an average of 5.3 

percent and 14.2 percent per year, 

respectively, since fiscal year 2001, 

including revenue decreases in 

2001and 2002. These trends, in part, 

contributed to an increase in taxes 

and other revenues to a new record 

high (see Table 5). 

Chart L and Table 5 show that individual and corporate income tax revenues account for the majority (nearly 

90 percent) of total revenues. In 2007, the Government collected $2.6 trillion. Cash collections have increased by 

an average of $200 billion per year since 2003, contributing to a reduction of both the budget deficit and net 

operating cost. 

 

Cost: “What Went Out” 

The Statement of Net Cost also shows 

how much it costs to operate the Federal 

Government, recognizing expenses when 

they happen, regardless of when payment is 

made (accrual basis). It shows the derivation 

of the Government’s net cost of operations or 

the difference between costs of goods 

produced and services rendered by the 

Government during the fiscal year. This 

amount, in turn, is offset against the 

Government’s taxes and other revenue in the

Statement of Operations and Changes in 

Net Position to calculate the ‘bottom line’ or 

net operating cost. 

In fiscal year 2007, the Government’s 

‘bottom line’ net operating cost totaled $275.5 

billion, a nearly 40 percent 

reduction from 2006, when total 

costs exceeded revenues by 

$449.5 billion. Table 6 shows 

that, along with interest on debt 

held by the public, the source of 

two-thirds of the Government’s 

costs in FY 2007 comes from 

three Federal entities: the 

Departments of Health and 

Human Services (HHS), 

Defense (DoD), and the Social 

Security Administration (SSA). 

Chart M shows that HHS and 

DoD have incurred the largest 

agency shares of the 

Government’s total net cost of 

operations in recent years, 

mostly attributable to the continued global war on terror and changes in actuarial liabilities related to Military 

 

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

Department of Commerce.

$0

$100

$200

$300

$400

$500

$600

$700

Dollars in Billions

HHS DoD SSA Interest on

Public Debt

Chart M

Net Cost Comparison: 

2003

2004

2005

2006

2007

$ %

$2,440.8 $2,627.3 186.5 $ 7.6%

Individual Tax Revenue $1,846.1 $1,999.8 153.7 $ 8.3%

$350.0 $367.2 17.2 $ 4.9%

$244.7 $260.3 15.6 $ 6.4%

Taxes & Other Revenue

Corporate Tax Revenue

Other Revenue

Table 5: Revenues

Dollars in Billions 2006 2007

Increase (Decrease)

$ %

Gross Cost

HHS (678.8) $ (718.6) $ (39.8) $ 5.9%

DoD (658.0) $ (689.6) $ (31.6) $ 4.8%

SSA (593.1) $ (626.4) $ (33.3) $ 5.6%

Interest on Federal Debt (221.5) $ (238.9) $ (17.4) $ 7.9%

Other Federal Agencies (976.3) $ (883.8) $ 92.5 $ -9.5%

($3,127.7) ($3,157.3) $ 0.9% (29.6)

Less: Earned Revenue $226.4 $247.8 21.4 $ 9.5%

Net Cost ($2,901.3) ($2,909.5) $ 0.3% (8.2)

Less: Taxes & Other Revenue 2,440.8 $ 2,627.3 $ 186.5 $ 7.6%

($449.5) ($275.5) $ -38.7% 174.0 1

 Net Operating Cost includes adjustment for Unreconciled Transactions

Table 6: Gross and Net Cost 

Dollars in Billions

2006 2007 Increase (Decrease)

Total Gross Cost

Net Operating Cost 1 
MANAGEMENT’S DISCUSSION AND ANALYSIS 23

Retirement Fund and Health Benefits. HHS and SSA combine to make up nearly half of the 2007 total net cost of 

operations, the bulk of which are attributable to these agencies’ administration of the Government’s major social 

insurance programs, e.g., Social Security and Medicare. The Statement of Social Insurance (SOSI) and the related 

information in this report discuss the current costs and future sustainability of these programs in greater detail. 

Among cabinet agencies, the Department of Housing and Urban Development (HUD) experienced the greatest 

percentage increase in its net cost (+ 26.4 

percent), while VA experienced the greatest 

cost decrease (- 47.8 percent). Both 

changes resulted from each agency’s need to 

estimate future costs and liabilities based on 

complex assumptions and cost models. 

HUD’s cost increase, in large part, stems 

from the annual reestimation of long-term 

credit program costs, which can be impacted 

by both performance and economic factors5

. 

Similarly, VA considers several variables 

(e.g., number of eligible recipients, discount 

rates, and life expectancy) in estimating its 

actuarial liability for future veterans’ 

compensation benefits. Because a small 

change in key assumptions produces the large 

actuarial cost fluctuations shown in chart N, 

reported annual VA actuarial costs are not useful in predicting future annual costs. The change in VA’s actuarial 

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

(nearly 60 percent in 2007). In turn, in 2007, the net decrease in total actuarial costs accounted for nearly 60 percent 

of the $174.0 billion decrease in total net operating cost. 

 

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

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

liabilities, as presented in the Balance Sheet. It is important to note that the balance sheet does not include the 

financial value of the Government’s sovereign powers to tax, regulate commerce, and set monetary policy. It also 

excludes its control over 

nonoperational resources, 

including national and natural 

resources, for which the 

Government is a steward. As 

noted earlier, the Government 

distinguishes between resources 

and spending that are 

earmarked for specific purposes 

versus those intended for 

general purposes. In 2007, 

earmarked funds accounted for 

less than 6 percent of the 

Government’s total Net 

Position. In addition, as was the 

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

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

Medicare, Unemployment, National Flood Insurance, and Land and Water Conservation). Moreover, the 

Government’s exposures are broader than the liabilities presented on the balance sheet, including such items as the 

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

and contingencies. These exposures are discussed in this section as well as in the supplemental disclosures of this 

Report. 

 

5 FY 2007 Department of Housing and Urban Development Performance and Accountability Report, p. 72.

Chart N 

Annual Change in VA Actuarial Cost

($52)

($ 136) ($ 167)

($57)

$228

($300)

($200)

($100)

$0

$100

$200

$300

2003 2004 2005 2006 2007

Dollars in Billions

$ %

$ 1,581.1 1,496.5 $ $ 5.7% 84.6

Less: Liabilities, comprised of:

Debt to the Public 4,867.5 $ 5,077.7 $ 210.2 $ 4.3%

Other Liabilities 866.4 $ 940.1 $ 73.7 $ 8.5%

Total Liabilities 10,412.9 $ 10,786.9 $ $ 3.6% 374.0

$ 90.1

Assets

1.9%

Net Position 

(Assets Net of Liabilities) $ (9,205.8) (8,916.4) $ (289.4) $ 3.2%

Federal Employee & 

Veterans Benefits $ 4,769.1 4,679.0 $ 

Table 7: Assets and Liabilities

Net Position 

Dollars in Billions 2006 2007 Increase (Decrease)
MANAGEMENT’S DISCUSSION AND ANALYSIS 

 

24 

Eligible participants (age 62 and over)

Participants who have not yet attained 

eligibility age (62)

FUTURE participants (under age 15 and 

births during reporting period)

+

“Open” 

Group

“Closed” 

Group

Image 3 

Social Insurance - ‘Open’ vs. ‘Closed’ Group

Eligible participants (age 62 and over)

Participants who have not yet attained 

eligibility age (62)

FUTURE participants (under age 15 and 

births during reporting period)

+

“Open” 

Group

“Closed” 

Group

Image 3 

Social Insurance - ‘Open’ vs. ‘Closed’ Group

Assets – “What We Own”

During 2007, nearly all Government asset balances increased. Net property, plant, and equipment 

($691.1billion in FY 2007) has been the Government’s largest asset over the past several fiscal years, accounting for 

more than 40 percent of $1,581.1 billion in total assets in 2007. In addition, the Government owns certain other 

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

historic structures). 

Liabilities – “What We Owe” 

Chart O and Table 7 show the major components of liabilities, or what the Government owes, as of September 

30, for fiscal years 2003 through 2007. The largest liability in recent years has been Federal debt held by the public 

and accrued interest, the balance of which increased to $5,077.7 billion in 2007. The increase in tax revenues 

enabled the Government to borrow a smaller amount of cash from the public this year. Over the past seven fiscal 

years, Federal debt securities held by the public and accrued interest have moved in tandem with the budget results.

The Statements of Changes in Cash 

Balance from Unified Budget and Other 

Activities reports how the annual unified 

budget surplus or deficit relates to the 

Federal Government’s borrowing and 

changes in operating cash, and explains how 

a budget surplus or deficit normally affects 

changes in debt balances. 

The Government’s net borrowings from 

the public increased by $206.3 billion in 

fiscal year 2007 and by a combined $740 

billion in the past three years to help finance 

just over 100% of the budget deficit during 

that time. Typically, budget surpluses have 

resulted in borrowing reductions, and budget 

deficits have yielded borrowing increases. 

However, the Government’s debt operations are much more complex than this would imply. Each year, trillions of 

dollars of debt matures and new debt takes its place. In 2007, new borrowings were $4.5 trillion and maturing debts 

repaid were $4.3 trillion. 

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

more than 80 percent since fiscal year 1999, to $4,769.1 billion as of fiscal year-end, 2007 (representing nearly half 

of the Government’s total reported liabilities in recent years), with civilian benefits payable accounting for more 

than a third of total employee and veteran benefits. The Office of Personnel Management (OPM) administers the 

largest civilian pension plan, covering about 90 percent of all Federal civilian employees, including nearly 2 million 

current employees and 2.4 million annuitants6

. The military pension plan covers nearly 3 million current employees 

(including active service, reserve and national guard, and civilians) and approximately 2 million annuitants7

. 

Environmental and disposal liabilities increased $36.8 billion to $342.0 billion in 2007, mainly due to the 

increases in environmental management baseline estimates at the Department of Energy. 

The Government’s Exposures: What 

Lies Ahead 

The SOSI provides additional perspective on the 

Government’s long term estimated exposures and 

costs. However, it should be noted that the 

Government’s financial statements do not reflect 

future costs implied by any current policy, such as 

national defense, the global war on terrorism, and 

disaster recovery. For the ‘social insurance’ 

programs (e.g., Social Security, Medicare Parts A, B, 

and D), the Statement of Social Insurance (SOSI)

 

6 OPM FY 2007 Performance and Accountability Report, p. 1. 7 DoD FY 2007 Agency Financial Report, p. 5 

2003

2004

2005

2006

2007

$-

$1,000.0

$2,000.0

$3,000.0

$4,000.0

$5,000.0

$6,000.0

Dollars in Billions

Chart O

Liabilities by Type

Other Liabilities

Environmental &

disposal liabilities

Fed employee &

veteran benefits

payable

Federal debt

securities held

by the public
MANAGEMENT’S DISCUSSION AND ANALYSIS 25

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

Dollars in Billions

2003

2004

2005

2006

2007

Chart P 

Net Social Insurance Responsibilities 

(closed group)

Social Security

Medicare Part A

Medicare Part B

Medicare Part D

shows the estimated future scheduled benefit expenses net of contributions and tax income (excluding interest), 

based on each program’s actuarial trust fund report. 

Table 8 shows estimated net social insurance and other exposures for both the ‘open-group’ and ‘closedgroup’ population, which differ based on the population measured. As shown in Image 3, the ‘closed group’ 

pertains to individuals age 14 and over on January 1 of the valuation year and/or those who have met or will meet 

other eligibility requirements during the projection period (typically 75 years). In short, it represents an estimate of 

the responsibility, under current law, of future taxpayers to pay benefits to current participants. By comparison, the 

‘open group’ is comprised of workers who will enter covered employment during the period, as well as those 

already in covered employment at the beginning of that period. That is, it represents the ‘closed group’ plus all 

future projected participants who will make contributions to postemployment benefit plans and/or will be eligible for 

benefits over the 75-year projection period). Since the open group's contributions will significantly exceed benefits 

earned during the projection period, it can be expected that the net social insurance benefits for the open group 

($40,948 billion in 2007) would be less than that for the closed group ($45,062 billion). 

Although not included in Table 8, nor 

shown on the balance sheet, the 

Government incurs other exposures, such 

as contingencies for unadjudicated claims 

and commitments for long-term leases. 

Details of these exposures may be found in 

Notes 18 and 19 to the financial 

statements. 

This forward-looking information 

combined with other financial statements 

and information provides both a short- and 

long-term view of significant financial 

issues facing the Government. As 

indicated above, however, it should be 

noted that significant differences exist 

between balance sheet liabilities and the 

exposures from the SOSI, which limit their 

comparability: 

• The Balance Sheet presents a 

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

prior actions and events have impacted its assets and liabilities. 

• The SOSI presents the calculated net present value of future estimated revenues and expenditures over an 

extended period. They represent an assessment of the extent to which the social insurance programs are out of 

balance under current financing arrangements relative to scheduled benefit obligations. Since they are not 

liabilities, and therefore do not impact either an entity’s current assets or liabilities, they are not included on the 

balance sheet according to Federal accounting standards. 

While comparability of liabilities to ‘other 

exposures’ is limited, their significance can 

be analyzed in other contexts. For 

example, Table 8 also compares the 

Government’s current net position 

($9,205.8 billion net liability) to its 

estimated future social insurance exposures. 

While these exposures are currently not 

considered Government liabilities, they do 

have the potential to become liabilities in 

the future. As discussed earlier, the 

foreseeable future suggests an 

unsustainable fiscal path. Difficult choices 

will be necessary in order to address their 

large and growing long-term fiscal gap. 

Delay is costly and choices will be more 

difficult. 

$ %

Closed Group (Net):

Social Security $ (16,265) (14,976) $ $ 8.6% (1,289)

Medicare: - $ 

Part A $ (12,044) (12,153) $ $ -0.9% 109

Part B $ (10,347) (10,630) $ $ -2.7% 283

Part D $ (6,273) (6,257) $ $ 0.3% (16)

Subtotal - Medicare $ (28,664) (29,040) $ $ -1.3% 376

Other $ (133) (131) $ $ 1.8% (2)

$ 1,581 1,497 $ $ 5.7% 85

$ 10,787 10,413 $ $ 3.6% 374

$ (9,206) (8,916) $ (289) $ 3.2%

Assets

Liabilities

Net Position

$ (38,851)

Net Position

Total Social Exposures, Net 

(Open Group) $ (2,097) (40,948) $ 5.4%

$ (917) (45,062) $ 

Billions of Dollars

Table 8: Long-Term Exposures Compared to Net Position

2006 2007 Increase (Decrease)

2.1% Total Social Insurance 

Exposures, Net (Closed Group) $ (44,145)
26 MANAGEMENT’S DISCUSSION AND ANALYSIS

The President’s Management Agenda: How We Define 

and Measure Financial Management Success 

Launched in August 2001, the President’s Management Agenda (PMA) provides Federal agencies with a 

concise set of clear and measurable financial management performance goals that allow Federal managers, 

Congress, and the public to gauge whether taxpayer funds are being properly accounted for and wisely spent. These 

performance measures include, among others, the achievement of clean audit opinions, the elimination of material 

weaknesses in internal control, timely financial reporting, the disposal of excess real property, the elimination of 

improper payments, and the reduction in government costs through the strategic use of financial data. What follows 

is an overview of fiscal year 2007 results for three of the seven Government-wide PMA initiatives: 1) Improving 

Financial Performance, 2) Eliminating Improper Payments, and 3) Real Property Asset Management.8

These initiatives are managed by the Office of Management and Budget’s (OMB’s) Office of Federal Financial 

Management (OFFM). OFFM has also developed a “Framework for Improving Financial Performance” to provide 

direction and clarity on how these financial management improvement goals will be met. The Framework (as 

depicted in the below diagram) is intended to provide the public with a simple tool for identifying: 1) the ultimate 

objective (or “apex”) of the Government’s financial management improvement efforts (i.e., the financial 

management goals of the PMA); 2) the priority projects currently underway in the Federal financial community to 

help support and facilitate PMA goals (i.e., current Government-wide financial management reform activities); and 

3) the day-to-day financial management activities or core activities that help ensure a strong foundation is in place 

for achieving the PMA’s success.

The Framework is also described in OFFM’s 2007 Federal Financial Management Report that was submitted 

to the Congress on January 31, 2007. The most recent reports are available at 

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

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

performance under these initiatives, and agencies’ performance under their individual programs.9

 

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

4) Budget and Performance Integration. 

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

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

the agency level. 
 MANAGEMENT’S DISCUSSION AND ANALYSIS 27

Fiscal Year 2007 Results 

Improving Financial Performance 

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

required by the rigorous reporting guidelines set by the Office of Management and Budget (OMB). Since 2001, 

agencies are required to complete the financial report 45-days after the end of the fiscal year, compared to the 

previous five month (150 days) window for completion. The accelerated deadline results in more immediate 

availability of financial information to agency decision-makers and requires agencies to employ rigorous disciplines 

throughout the year to ensure readiness for year-end reporting. 

In addition to timely reporting, the results from fiscal year 2007 show that the Federal Government is 

improving the validity of its financial information. Of the 24 major Federal agencies, 19 received clean opinions, 

one more than the 18 clean opinions reported last year at this time. Although five agencies—DHS, DoD, DOT, 

EPA, and NASA—restated their fiscal year 2006 financial statements, their audit opinions for fiscal year 2007 either 

remained the same or improved. Table 9 below includes the audit results for fiscal year 2007. 

Table 9: Summary of FY 2007 Financial Statement Results by Agencies 

CFO Act Agencies: FY 2007 Audit Opinion 

Department of Agriculture (USDA) Qualified 

Department of Commerce (DOC) Unqualified 

Department of Defense (DOD) Disclaimer 

Department of Education (Education) Unqualified 

Department of Energy (DOE) Unqualified 

Department of Health and Human Services (HHS) Unqualified 

Department of Homeland Security (DHS) Disclaimer 

Department of Housing and Urban Development (HUD) Unqualified 

Department of the Interior (DOI) Unqualified 

Department of Labor (DOL) Unqualified 

Department of Justice (DOJ) Unqualified 

Department of State (State) Disclaimer 

Department of Transportation (DOT) Unqualified 

Department of the Treasury (Treasury) Unqualified 

Department of Veterans Affairs (VA) Unqualified 

Agency for International Development (USAID) Unqualified 

Environmental Protection Agency (EPA) Unqualified 

General Services Administration (GSA) Unqualified 

National Aeronautics and Space Administration (NASA) Disclaimer 

National Science Foundation (NSF) Unqualified 

Nuclear Regulatory Commission (NRC) Unqualified 

Office of Personnel Management (OPM) Unqualified 

Small Business Administration (SBA) Unqualified 

Social Security Administration (SSA) Unqualified 

In addition to these results, the total number of material weaknesses Government-wide declined from 41 to 

39. This is the fourth year in a row that material weaknesses have declined, with a more than 35% decrease in 

weaknesses since 2001. In fiscal year 2007, five additional agencies received a clean opinion with no material 

weaknesses, including the Departments of Justice, the Interior, Energy, the Small Business Administration and the 

U.S. Agency for International Development. This brings the total number of agencies realizing this important 
28 MANAGEMENT’S DISCUSSION AND ANALYSIS

Chart K: Error Rate Reduction for Programs Reported Between 

FY 2004 and FY 2006

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

FY 2004 FY 2005 FY 2006 FY 2007

Fiscal Year

Percentage

FY 2004

FY 2005

FY 2006

Total

accomplishment to 13, up from just seven in 2001. The decrease in weaknesses this year is more notable in light of 

recent changes to government audit guidelines that lower materiality thresholds and have the effect of characterizing 

more audit findings as “material weaknesses.”10 In other words, while auditing standards are getting tougher, 

Federal agencies are more than keeping pace by continuing to decrease the number of material findings. 

Eliminating Improper Payments 

Fiscal Year 2007 was also an important year for the initiative of identifying, measuring, and eliminating 

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

totals allows the public to understand the extent of payment errors and assess the Government’s efforts to eliminate 

them. With this year’s financial reports, Federal agencies are now reporting improper payment measurements for 

nearly 86% of all high-risk outlays (up from 81% in fiscal year 2006), with error rates reported on 13 new programs, 

including the Medicaid Fee-for-Service and School Lunch programs. 

The results from the 

past three years of reporting on 

improper payments demonstrate 

that once an agency has 

measured and reported program 

errors, it is able to implement 

corrective actions to reduce 

those errors in subsequent years. 

As illustrated in Chart K,11 Error 

Rate Reduction for Programs 

Reported Between FY 2004 and 

FY 2006, the error rate for the 

first programs measured, in 

fiscal year 2004, was 3.9% (or 

$45.1 billion in improper 

payments). For these programs, 

the error rate has declined to 

3.1% (or a $7.9 billion reduction 

in improper payments). Similar 

to the progress achieved in programs that first reported in fiscal year 2004, programs that first reported in fiscal 

years 2005 and 2006 have seen improper payments cut in half, representing a $2.3 billion reduction. 

With 13 additional programs reporting in fiscal year 2007, the preliminary Government-wide error rate 

increased to 3.5% or $54.9 billion. The cause of the majority of the errors in these 13 new programs is insufficient 

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

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

whether the payment was appropriate or made in error. As has been the case in other programs, it is anticipated that 

the errors in these 13 programs will decrease significantly after correcting the root cause of the insufficient 

documentation errors. 

Asset Management 

Under the PMA Real Property Asset Management initiative, agencies continue to make significant progress 

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

Executive Order 13327, Federal Real Property Asset Management. In fiscal year 2007, Executive agencies reported 

more than 1.2 million assets, including land, buildings, and structures, to the Government-wide real property 

inventory, which provides a more complete picture of the Government’s asset inventory; where the assets are 

located; and how and whether the assets are being used effectively to help serve agencies’ missions and objectives. 

Having a more complete inventory picture and performance information means that agencies, and the Government 

as a whole, can make smarter asset management decisions. Agencies are moving forward with improving asset 

condition, increasing asset utilization, and disposing of unneeded assets. 

 

10 Statement of Auditing Standards 112, Communicating Internal Control Related Matters Identified in an Audit

11 The table does not include programs reporting for the first time in FY 2007. 
 MANAGEMENT’S DISCUSSION AND ANALYSIS 29

Law/Policy

Federal Managers' Finanical 

Integrity Act of 1982

requires the head of each executive agency to annually prepare a 

statement reporting the effectiveness of the agency’s internal 

control and whether its systems comply with the federal 

financial system requirements. 

What it Does

Federal Financial Management 

Improvement Act of 1996

provides instruction to agencies in implementing the FMFIA 

provides instruction for complying with the federal financial 

system requirements.

ensuring that Federal financial management systems provide 

accurate, reliable, and timely financial management information 

to the government’s managers.

OMB Circular A-123

OMB Circular A-127

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

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

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

rightsizing the Government’s real property assets. To this end, Executive agencies have disposed of more than $4.5 

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

assets by the close of fiscal year 2009. 

Systems, Controls, & Legal Compliance 

Systems 

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

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

systems that meet Federal requirements. In fiscal year 2007, however, there was some progress in agencies 

implementing and maintaining these complex systems. The number of agencies in compliance with the Federal 

Financial Management Improvement Act (FFMIA) increased to 13 from 8 compared to last year. 

The cause for the recent progress is mainly attributable to the Financial Management Line of Business 

(FMLoB) initiative. It is intended to help agencies implement financial systems that are complaint with Federal 

requirements and to improve the cost, quality, and performance in the Government’s financial management systems 

by leveraging shared solutions and implementing Government-wide reforms that improve efficiency of financial 

operations. OMB expects this initiative to help agencies meet Federal standards and achieve efficiencies, while 

delivering cost savings to the tax payers. 

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

standardizing common business processes across the Government, creating opportunities for agencies to move 

financial systems to shared service providers, and increasing transparency by establishing performance measures to 

evaluate the results of these efforts. Through the FMLoB and other information-sharing initiatives, the Federal 

financial community is working to ensure that mistakes of the past are not repeated and that agencies initiating 

complex modernization efforts have a clear understanding of significant risks and appropriate mitigation strategies. 

Controls 

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

Effective internal control helps to 

ensure that programs are managed 

with integrity and resources are 

used efficiently and effectively 

through three objectives: 

effective and efficient operations, 

reliable financial reporting, and 

compliance with applicable laws 

and regulations. The 

safeguarding of assets is a 

subcomponent of each objective. 

The OMB Circular No. A-123 (A-123), Management’s Responsibility for Internal Control, is the policy 

document that implements the requirements of the Federal Managers’ Financial Integrity Act (FMFIA). The A-123 

primarily focuses on providing agencies with a framework for assessing and managing risks more strategically and 

effectively. The A-123 contains multiple appendices that address, at a more detailed level, one or more of the 

objectives of effective internal control. Appendix A provides a methodology for agency management to assess, 

document, test, and report on the internal control over financial reporting. Appendix B requires agencies to maintain 
30 MANAGEMENT’S DISCUSSION AND ANALYSIS

internal control that reduces the risk of fraud, waste, and error in government charge card programs. Appendix C 

implements the requirements of the Improper Payment Information Act, which includes the measurement and 

remediation of improper payments. 

In fiscal year 2007, agencies continued to implement the requirements of FMFIA and the A-123 and have made 

much progress. The 24 major CFO Act agencies completed the second year of the more rigorous assessment of the 

internal control over financial reporting as required by the A-123 Appendix A. Furthermore, pursuant to the A-123 

Appendix C, federal agencies are now reporting improper payment measurements for nearly 86% of all high-risk 

outlays and reported error rates for 13 new programs (see Eliminating Improper Payments section for more details). 

During fiscal year 2008, OMB will facilitate a forum on the better integration and leverage of internal control 

reviews being performed throughout departments and agencies through the exploration of alternate frameworks and 

implementation strategies. Due to the myriad of legislative and regulatory requirements, internal control reviews, to 

satisfy those legislative and regulatory requirements, have been layered upon each other rather than being 

integrated. This forum is intended to facilitate discussions of alternatives and best practices between the financial, 

acquisition, and information technology communities. 

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

continued diligence and commitment is needed. However, effective internal control is not only a challenge at the 

agency level, but it is also a challenge at the Government-wide level. Consequently, GAO has issued an adverse 

opinion on the effectiveness of the internal control for the Government as a whole, in its report. 

Legal Compliance 

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

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

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

selected laws and regulations related to financial reporting. Certain individual agency audit reports contain 

instances of noncompliance. None of these instances were material to the Government-wide financial statements. 

However, GAO reported that its work on compliance with laws and regulations was limited by the material 

weaknesses and scope limitations discussed in its report. 

 Additional Information 

The Report’s appendices contain the names and web sites of the significant Government entities included in 

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

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

limited to: 

• the Budget of the United States Government, 

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

Government, 

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

• the Economic Report of the President, and 

• the Trustees’ Reports for the Social Security and Medicare Programs. 

The FY 2007 Financial Report, as well as those from previous years, may be accessed online at: 

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

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

www.gao.gov
STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 31

December 17, 2007 

The President 

The President of the Senate 

The Speaker of the House of Representatives 

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

2007 and 2006 is enclosed. In summary we found the following: 

• Certain material weaknesses in financial reporting and other limitations on the scope 

of our work resulted in conditions that, for the 11th consecutive year, prevented us 

from expressing an opinion on the financial statements other than the Statement of 

Social Insurance, which are referred to as the federal government’s accrual basis 

consolidated financial statements.1

 About $895 billion, or 57 percent, of the federal 

government’s reported total assets as of September 30, 2007, and approximately $740 

billion, or 25 percent, of the federal government’s reported net cost for fiscal year 

2007 relate to 4 of the 24 Chief Financial Officers (CFO) Act agencies’ fiscal year 

2007 financial statements that were disclaimed on or not audited and to certain 

unsupported assets and costs of a fifth CFO Act agency.2 

• The 2007 Statement of Social Insurance is presented fairly, in all material respects, in 

conformity with U.S. generally accepted accounting principles; we disclaim an 

opinion on the 2006 Statement of Social Insurance.3

• The federal government did not maintain effective internal control over financial 

reporting (including safeguarding assets) and compliance with significant laws and 

regulations as of September 30, 2007. 

 

1

 Most revenues reported in the accrual basis consolidated financial statements are recorded on a modified 

cash basis. 

2

 The CFO Act agencies that received disclaimers of opinions on all of their fiscal year 2007 financial 

statements were the Department of Defense, Department of State, and the National Aeronautics and Space 

Administration. For the Department of Homeland Security for fiscal year 2007, only the Consolidated 

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

express an opinion on these two financial statements. For the Department of Agriculture (USDA) for fiscal 

year 2007, the auditor was unable to obtain sufficient, appropriate evidence to support certain amounts 

reflected on USDA’s consolidated balance sheet and statement of net cost, and therefore qualified its 

opinion on the department’s financial statements.

3

 We disclaimed an opinion on the fiscal year 2006 consolidated financial statements, including the 

Statement of Social Insurance. 

United States Government Accountability Office

Washington, DC 20548 

Comptroller General

of the United States
32 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 

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

regulations in fiscal year 2007 was limited by the material weaknesses and scope 

limitations discussed in our report. 

While significant progress has been made in improving financial management since the 

U.S. government began preparing consolidated financial statements 11 years ago, three 

major impediments continue to prevent us from rendering an opinion on the accrual basis 

consolidated financial statements: (1) serious financial management problems at the 

Department of Defense, (2) the federal government’s inability to adequately account for 

and reconcile intragovernmental activity and balances between federal agencies, and (3) 

the federal government’s ineffective process for preparing the consolidated financial 

statements. Until the problems outlined in our audit report are adequately addressed, they 

will continue to have adverse implications for the federal government and American 

taxpayers. 

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

transparency and accountability over the federal government’s operations, financial 

condition, and fiscal outlook. Fiscal year 2007 marked the second year in which the 

Statement of Social Insurance has been presented as a basic financial statement.4 As 

noted above, this year, we were able to render an unqualified opinion on the 2007 

Statement of Social Insurance. This is a significant accomplishment for the federal 

government. This statement shows that projected scheduled benefits exceed earmarked 

revenues by approximately $41 trillion5

 in present value terms for the next 75-year 

period.6 

Considering this projected gap in social insurance, in addition to reported liabilities (e.g., 

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

implicit commitments and contingencies that the federal government has pledged to 

support, the federal government’s fiscal exposures totaled approximately $53 trillion as 

of September 30, 2007, up more than $2 trillion from September 30, 2006, and an 

increase of more than $32 trillion from about $20 trillion as of September 30, 2000.7

 This 

translates into a current burden of about $175,000 per American or approximately 

$455,000 per American household. 

 

4

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

Railroad Retirement, and Black Lung. 

5

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

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

approximately $45 trillion. 

6

 Black Lung’s long-range actuarial projections are through 2040 when the program is scheduled to 

terminate (i.e., a 33-year period). 7

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

statements and related footnotes. 
STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 33

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

earmarked funds activity separately from nonearmarked funds activity.8

 For fiscal year 

2007, earmarked funds revenue and nonearmarked funds revenue totaled about $1,153 

billion and $1,667 billion, respectively. In addition, for fiscal year 2007, earmarked funds 

had reported net operating revenue of approximately $194 billion, and nonearmarked 

funds reported net operating cost of approximately $469 billion.9

 

Further enhancements to accounting and financial reporting standards are needed to 

effectively convey the long-term financial condition of the U.S. government and annual 

changes therein. For example, the federal government’s financial reporting should be 

expanded to disclose the reasons for significant changes during the year in scheduled 

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

Sustainability10—providing a long-term look at the sustainability of social insurance 

programs in the context of all federal programs—and other sustainability information, 

including intergenerational equity.11, 12 In addition, there is a need for a combined report 

on the performance and financial accountability of the federal government as a whole. 

This report would include, among other things, key outcome-based national indicators 

(e.g., economic, security, social, and environmental) which could be used to help assess 

the nation’s and other governmental jurisdictions’ position and progress. 

 - - - - 

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

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

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

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

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

management reform. 

 

8

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

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

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

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

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

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

9

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

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

to earmarked funds over revenues. 

10 The Statement of Fiscal Sustainability would show the relationship between the present value of 

projected revenues and outlays for social insurance and for all other federal programs. 

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

financial burdens to sustain federal responsibilities. 

12 The Federal Accounting Standards Advisory Board is currently considering possible changes to social 

insurance reporting and has initiated a project on fiscal sustainability reporting. 
34 STATEMENT OF THE COMPTROLLER GENERAL OF THE UNITED STATES 

Our audit report begins on page 159. Our guide13 to the Financial Report of the United 

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

Financial Report. In addition, our guide14

 on Understanding Similarities and Differences 

between Accrual and Cash Deficits provides a useful perspective on the different 

purposes cash and accrual measures serve in providing a comprehensive picture of the 

federal government’s fiscal condition today and over time. These guides are available on 

GAO’s Web site at www.gao.gov. 

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

and Gary T. Engel, Director, Financial Management and Assurance. If you have any 

questions, please contact me on (202) 512-5500 or them on (202) 512-2600. 

David M. Walker 

Comptroller General 

of the United States 

cc: The Majority Leader of the Senate 

 The Minority Leader of the Senate 

 The Majority Leader of the House 

 The Minority Leader of the House 

(198465) 

 

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

Government, GAO-05-958SP (Washington, D.C.: September 2005). 14 GAO, Understanding Similarities and Differences between Accrual and Cash Deficits, GAO-07-117SP 

(Washington, D.C.: December 2006). In January 2007, we issued an update to this guide for fiscal year 

2006, GAO-07-341SP (Washington, D.C.: January 2007). 
FINANCIAL STATEMENTS 35

Financial Statements 

of the United States Government 

for the Years Ended September 30, 2007, 

and September 30, 2006 

Statements of Net Cost 

These statements present the net cost from October 1 through September 30, fiscal years 2007 and 2006 

Government operations, which include the operations related to earmarked funds, funds financed by specifically 

identified revenues, often supplemented by other financing sources, which remain available over time. For the 

purposes of this document, “Government” refers to the United States Government. It categorizes costs by Chief 

Financial Officer Act entities and other significant entities. Costs and earned revenues are generally presented by 

department on an accrual basis, while the budget presents costs and revenues by obligations and outlays generally on 

a cash basis. In the Statements of Net Cost, the costs and earned revenues are divided between the corresponding 

departments and entities mentioned above, providing greater accountability by showing the relationship of the 

agencies’ net cost to the Governmentwide net cost. The focus of the budget of the United States is by agency. 

Budgets are prepared, defended, and monitored by agency. In reporting by agency, we are assisting the external 

users in assessing the budget integrity, operating performance, stewardship, and systems and control of the Federal 

Government. 

These statements contain the following three components: 

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

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

price. 

• Net cost—This is computed by subtracting earned revenue from gross cost. 

Net cost for Governmentwide reporting purposes includes the General Services Administration (GSA) and the 

Office of Personnel Management (OPM) agency allocations, and is net of intragovernmental eliminations. For this 

reason, individual agency net cost amounts will not agree with the agency’s financial statements. Because of their 

specific functions, most of the costs originally associated with GSA and OPM have been allocated to and reflected 

in the costs of their user agencies. The remaining costs for GSA and OPM on the Statements of Net Cost are the 

administrative operating costs, the expenses from prior and past costs from health and pension plan amendments, 

and the actuarial gains and losses for these agencies. Health and pension benefits that are not reported in the 

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

the Department of the Treasury (Treasury) held by the public is part of Treasury’s responsibilities, but because of its 

importance, and the dollar amounts, it is reported separately in these statements. 

Statements of Operations and Changes in Net Position 

These statements report the results of Government operations which include the results of earmarked fund 

operations. They include unearned revenues that are generated principally by the Government’s sovereign power to 

tax, levy duties, and assess fines and penalties. These statements also cover the cost of Government operations, net 

of revenue earned from the sale of goods and services to the public (earned revenues). They further include any 

adjustments and unreconciled transactions that affect the net position. 
36 FINANCIAL STATEMENTS 

Revenue 

Individual income tax and tax withholdings include Federal Insurance Contributions Act (FICA)/SelfEmployment Contributions Act (SECA) taxes and other taxes including payroll taxes collected from other agencies. 

These taxes are characterized as “unearned” revenue. 

Excise taxes consist of taxes collected for various items, such as airline tickets, gasoline products, distilled 

spirits and imported liquor, tobacco, firearms, and others. These are also characterized as “unearned” revenue. 

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

associated cost. Therefore, unlike other earned revenues, miscellaneous earned revenues are not subtracted from 

gross cost to derive net cost. It also includes rents and royalties on the Outer Continental Shelf Lands resulting from 

the leasing and development of mineral resources on public lands. 

Earmarked revenues are from specifically identified “earmarked” activities during the year. Earmarked 

revenues are required by statute to be used for designated activities, benefits or purposes and must be accounted for 

separately from the rest of the Government’s non-earmarked revenues. Refer to Note 20—Earmarked Funds for 

detailed information. 

Intragovernmental interest represents interest earned from the investment of surplus earmarked revenues, 

which finance the deficit spending of non-earmarked operations. These investments are recorded as 

Intragovernmental debt holdings and included in Note 10, in the table titled Intragovernmental Debt Holdings: 

Federal Debt Securities Held as Investments by Government Accounts. These interest payments, and the associated 

investments, are eliminated in the consolidation process. 

Net Cost of Government Operations 

The net cost of Government operations (which is gross cost less earned revenue) flows through from the 

Statements of Net Cost. The net cost associated with earmarked activities is separately reported. 

Intragovernmental Transfers 

Intragovernmental transfers reflect amounts required by statute to be transferred from the General Fund of the 

Treasury to earmarked funds, as well as contributions to earmarked funds made by Federal agencies on behalf of 

their employees, beneficiaries, or others. 

Other-Unmatched Transactions and Balances 

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

due to unreconciled differences, agency reporting errors, and timing differences in the consolidated financial 

statements. Refer to Note 1—Summary of Significant Accounting Policies and the Supplemental Information—

Unmatched Transactions and Balances for detailed information. 

Net Position, Beginning of Period 

The net position, beginning of period, reflects the net position reported on the prior year’s balance sheet as of 

the end of that fiscal year. The net position for earmarked funds is shown separately. 

Prior period adjustments are revisions to adjust the beginning net position and balances presented on the prior 

year financial statements. Refer to Note 1B—Basis of Accounting and Revenue Recognition, and Note 17—Prior 

Period Adjustments for detailed information. 
FINANCIAL STATEMENTS 37

Net Position, End of Period 

The net position, end-of-period, amount reflects the net position as of the end of the fiscal year. The net 

position for earmarked funds is shown separately. 

Reconciliations of Net Operating Cost and Unified Budget 

Deficit 

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

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

share transaction data. 

These statements report the reconciliation of the results of operations (net operating cost) on the Statements of 

Operations and Changes in Net Position to the unified budget deficit in the President’s budget. 

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

of accounting measures used in the Financial Report. These statements begin with the net results of operations (net 

operating cost), where operating revenues are reported on a modified cash basis of accounting and the net cost of 

Government operations on an accrual basis of accounting and reports activities where the bases of accounting for the 

components of net operating cost and the unified budget deficit differed. 

Components of Net Operating Cost Not Part of the 

Budget Deficit 

This information includes the operating components, such as the changes of benefits payable for veterans, 

military and civilian employees, and the environmental liabilities and depreciation expense not included in the 

budget results. 

Components of the Budget Deficit Not Part of 

Net Operating Cost 

This information includes the budget components, such as capitalized fixed assets, changes in accounts and 

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

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

difference that is needed to balance this statement to the unified budget deficit. 

Statements of Changes in Cash Balance from Unified 

Budget and Other Activities 

The primary purpose of these statements is to report how the annual unified budget deficit relates to the change 

in the Government’s operating cash balance and debt held by the public. It explains why the unified budget deficit 

normally would not result in an equivalent change in the Government’s operating cash balance. 

These statements reconcile the unified budget deficit to the change in operating cash during the fiscal year and 

explain how the budget deficits (fiscal years 2007 and 2006) were financed. A budget deficit is the result of outlays 

(expenditures) exceeding receipts (revenue) during a particular fiscal year. 
38 FINANCIAL STATEMENTS 

In depicting how the unified budget deficits were financed, these statements show that in fiscal years 2007 and 

2006, the greatest amounts were net new borrowings from the public. Other transactions also required cash 

disbursements and are not part of the repayments of the debt. These other transactions, such as the payment of 

interest on debt held by the public, required cash payments and contributed to the use of cash. These statements 

show the differences between accrual and cash budgetary basis, mainly because of timing differences in the financial 

statements.

Balance Sheets 

The balance sheets show the Government’s assets and liabilities. When combined with stewardship 

information, this information presents a more comprehensive understanding of the Government’s financial position. 

All of the line items on the balance sheets are described in the Notes to the Financial Statements. The net position 

for earmarked funds is shown separately. 

Assets 

Assets included on the balance sheets are resources of the Government that remain available to meet future 

needs. The most significant assets that are reported on the balance sheets are property, plant, and equipment; 

inventories; and loans receivable. There are, however, other significant resources available to the Government that 

extend beyond the assets presented in these financial statements. Those resources include stewardship assets, 

including natural resources, and the Government’s sovereign powers to tax, regulate commerce, set monetary policy 

and the power to print additional currency. 

Liabilities and Net Position 

Liabilities are obligations of the Government resulting from prior actions that will require financial resources. 

The most significant liabilities reported on the balance sheets are Federal debt securities held by the public and 

accrued interest and Federal employee and veteran benefits payable. Liabilities also include environmental and 

disposal liabilities and social insurance benefits due and payable as of the reporting date. 

As with reported assets, the Government’s responsibilities, policy commitments, and contingencies are much 

broader than these reported balance sheet liabilities. They include the social insurance programs in the Statements of 

Social Insurance and are disclosed in the Supplemental Information—Social Insurance section and a wide range of 

other programs under which the Government provides benefits and services to the people of this Nation, as well as 

certain future loss contingencies. 

The magnitude and complexity of social insurance programs, coupled with the extreme sensitivity of 

projections relating to the many assumptions of the programs, produce a wide range of possible results. Note 22—

Social Insurance describes the social insurance programs, reports long-range estimates that can be used to assess the 

financial condition of the programs, and explains some of the factors that impact the various programs. Using this 

information, readers can apply their own judgment as to the condition and sustainability of the individual programs. 

Each of the social insurance programs has an associated trust fund to account for its activity. The collection of 

earmarked taxes and other earmarked revenue is credited to the corresponding trust fund that will use these funds to 

meet a particular Government purpose. If the collections from taxes and other sources exceed the payments to the 

beneficiaries, the excess revenue is invested in Treasury securities or “loaned” to the Treasury’s General Fund; 

therefore, the trust fund balances do not represent cash. An explanation of the trust funds for social insurance and 

many of the other large trust funds is included in Note 20—Earmarked Funds. That note also contains information 

about trust fund receipts, disbursements, and assets. 

The Government has entered into contractual commitments requiring the future use of financial resources and 

has unresolved contingencies where existing conditions, situations, or circumstances create uncertainty about future 

losses. Commitments as well as contingencies that do not meet the criteria for recognition as liabilities on the 

balance sheets, but for which there is at least a reasonable possibility that losses have been incurred, are disclosed in 

Note 18—Contingencies and Note 19—Commitments. 
FINANCIAL STATEMENTS 39

Because of its sovereign power to tax and borrow, and the country’s wide economic base, the Government has 

unique access to financial resources through generating tax revenues and issuing Federal debt securities. This 

provides the Government with the ability to meet present obligations and those that are anticipated from future 

operations and are not reflected in net position. 

Statements of Social Insurance 

The Statements of Social Insurance provide estimates of the status of the most significant Social Insurance 

programs; Social Security, Medicare, Railroad Retirement, and Black Lung social insurance programs, which are 

administered by the Social Security Administration (SSA), the Department of Health and Human Services (HHS), 

the Railroad Retirement Board (RRB), and the Department of Labor (DOL), respectively. The estimates are 

actuarial present values1

 of the projections and are based on the economic and demographic assumptions 

representing the trustees’ best estimates as set forth in the relevant Social Security and Medicare trustees’ reports 

and in the relevant agency performance and accountability reports for the Railroad Retirement Board and the 

Department of Labor (Black Lung).

 

1 Present values recognize that a dollar paid or collected 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 

This page is intentionally blank.
FINANCIAL STATEMENTS 41

United States Government 

Statements of Net Cost 

for the Years Ended September 30, 2007, and September 30, 2006 

Gross 

Cost 

Earned 

Revenue 

Net 

Cost 

Gross 

Cost 

Earned 

Revenue 

Net 

Cost 

(In billions of dollars) 2007 2006 

 

Department of Health & Human Services ... 718.6 51.8 666.8 678.8 51.4 627.4 

Department of Defense .................................... 689.6 25.1 664.5 658.0 24.1 633.9 

Social Security Administration..................... 626.4 0.3 626.1 593.1 0.3 592.8 

Interest on Treasury Securities held by 

the public................................................... 238.9 - 238.9 221.5 - 221.5 

Department of Agriculture............................ 98.6 12.1 86.5 109.0 11.4 97.6 

Department of the Treasury......................... 86.9 6.3 80.6 85.5 4.1 81.4 

Department of Transportation...................... 66.2 0.5 65.7 66.6 0.6 66.0 

Department of Energy ................................. 67.5 4.3 63.2 70.9 5.1 65.8 

Department of Education............................. 66.3 4.5 61.8 97.3 4.7 92.6 

Department of Veterans Affairs ................... 63.1 3.7 59.4 117.3 3.5 113.8 

Department of Housing and Urban 

Development............................................. 54.0 0.9 53.1 43.0 1.0 42.0 

Department of Labor.................................... 50.1 - 50.1 48.2 - 48.2 

Department of Homeland Security .............. 51.1 7.1 44.0 63.4 6.8 56.6 

Department of Justice.................................. 28.8 1.0 27.8 28.6 1.0 27.6 

Office of Personnel Management................ 36.2 15.5 20.7 34.8 15.1 19.7 

Department of the Interior ............................. 18.6 2.0 16.6 20.0 2.9 17.1 

National Aeronautics and Space 

Administration ........................................... 16.3 0.1 16.2 19.2 - 19.2 

Department of State .................................... 18.4 3.4 15.0 16.0 2.2 13.8 

Environmental Protection Agency ............... 10.0 0.4 9.6 9.9 0.3 9.6 

Agency for International Development ........ 9.7 0.3 9.4 10.5 0.1 10.4 

Department of Commerce ........................... 9.6 1.9 7.7 9.9 1.7 8.2 

Federal Communications Commission........ 7.9 0.4 7.5 7.9 0.3 7.6 

National Science Foundation....................... 5.7 - 5.7 5.7 - 5.7 

Railroad Retirement Board.......................... 15.7 10.3 5.4 12.1 5.0 7.1 

Small Business Administration .................... 1.3 0.4 0.9 1.7 0.3 1.4 

Federal Deposit Insurance Corporation....... 1.7 0.9 0.8 1.8 0.1 1.7 

Tennessee Valley Authority......................... 10.9 10.4 0.5 9.5 10.0 (0.5) 

U.S. Nuclear Regulatory Commission......... 1.0 0.6 0.4 1.0 0.6 0.4 

National Credit Union Administration........... 0.3 0.1 0.2 0.2 0.1 0.1 

General Services Administration .................. 0.6 0.5 0.1 0.9 0.5 0.4 

Export-Import Bank of the United States..... 0.5 0.9 (0.4) - 1.3 (1.3) 

Pension Benefit Guaranty Corporation........ 1.5 6.1 (4.6) (0.5) 3.8 (4.3) 

U.S. Postal Service...................................... 60.1 73.7 (13.6) 58.9 71.6 (12.7) 

All other entities .............................................. 25.2 2.3 22.9 27.0 (3.5) 30.5 

Total .......................................................... 3,157.3 247.8 2,909.5 3,127.7 226.4 2,901.3 

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, 2007, and September 30, 2006 

 

NonEarmarked

Funds 

Earmarked

Funds Consolidated 

NonEarmarked 

Funds 

Earmarked

Funds Consolidated

(In billions of dollars) 2007 2006 

 

Revenue: 

Individual income tax and tax withholdings ... 1,152.6 847.2 1,999.8 1,045.7 800.4 1,846.1 

Corporation income taxes ............................. 367.2 367.2 350.0 - 350.0 

Unemployment taxes .................................... 39.3 39.3 - 41.4 41.4 

Excise taxes.................................................. 15.3 52.2 67.5 24.5 49.6 74.1 

Estate and gift taxes ..................................... 26.0 26.0 27.4 - 27.4 

Customs duties ............................................. 18.2 18.2 24.7 - 24.7 

Other taxes and receipts............................... 57.9 21.7 79.6 42.8 17.2 60.0 

Miscellaneous earned revenues ................... 29.7 29.7 17.1 - 17.1 

Intragovernmental interest ............................ 192.7 192.7 - 185.3 185.3 

Total revenue ................................................ 1,666.9 1,153.1 2,820.0 1,532.2 1,093.9 2,626.1 

Eliminations................................................... (192.7) (185.3) 

Consolidated revenue ................................... 2,627.3 2,440.8 

 

Net Cost: 

Net cost......................................................... 1,622.6 1,286.9 2,909.5 1,635.6 1,265.7 2,901.3 

Intragovernmental interest ............................ 192.7 192.7 185.3 - 185.3 

Total net cost ................................................ 1,815.3 1,286.9 3,102.2 1,820.9 1,265.7 3,086.6 

Eliminations................................................... (192.7) (185.3) 

Consolidated net cost.................................... 2,909.5 2,901.3 

 

Intragovernmental transfers ......................... (327.6) 327.6 (343.8) 343.8 

 

Other – Unmatched transactions and 

balances (Note 1)......................................... 6.7 6.7 11.0 11.0 

 

Net Operating (Cost)/Revenue...................... (469.3) 193.8 (275.5) (621.5) 172.0 (449.5) 

 

 

Net position, beginning of period................. (9,335.6) 419.2 (8,916.4) (8,714.1) 247.2 (8,466.9) 

Prior period adjustments – Changes in 

Accounting Principles(Note 17).................. (15.0) 1.1 (13.9) - - - 

Net Operating (Cost)/Revenue...................... (469.3) 193.8 (275.5) (621.5) 172.0 (449.5) 

Net position, end of period ........................... (9,819.9) 614.1 (9,205.8) (9,335.6) 419.2 (8,916.4) 

 

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, 2007, and September 30, 2006 

(In billions of dollars) 2007 2006 

 

Net operating cost..................................................................................... (275.5) (449.5) 

Components of Net Operating Cost Not Part of the Budget Deficit:

Increase in Liability for Military Employee Benefits (Note 11): 

Increase in military pension liabilities ....................................................... 61.7 71.7 

(Decrease) Increase in military health liabilities ....................................... (3.4) 3.3 

Increase (Decrease) in other military benefits.......................................... 2.0 (0.1) 

Increase in liability for military employee benefits .................................... 60.3 74.9 

 

(Decrease) Increase in Liability for Veterans Compensation (Note 11):

(Decrease) Increase in liabilities for veterans........................................... (26.8) 45.4 

Increase (Decrease) in liabilities for survivors.......................................... 0.8 (14.3) 

(Decrease) in liabilities for burial benefits................................................. (0.1) 0.1 

(Decrease) Increase in liability for veteran's compensation ..................... (26.1) 31.2 

 

Increase in Liabilities for Civilian Employee Benefits (Note 11): 

Increase in civilian pension liabilities ........................................................ 37.3 75.1 

Increase in civilian health liabilities........................................................... 16.4 4.6 

Increase in other civilian benefits ............................................................. 2.2 1.6 

Increase in liabilities for civilian employee benefits .................................. 55.9 81.3 

 

Increase in Environmental Liabilities (Note 12): 

Increase in Energy's environmental liabilities........................................... 33.3 40.5 

Increase in all others' environmental liabilities ......................................... 3.5 4.9 

Increase in environmental liabilities.......................................................... 36.8 45.4 

 

Depreciation expense.................................................................................. 45.3 82.9 

Property, plant, and equipment disposals and revaluations ...................... 10.9 2.4 

Increase in benefits due and payable ......................................................... 4.4 12.3 

(Decrease) in insurance programs.............................................................. (1.9) (20.4) 

Increase in other liabilities........................................................................... 23.7 21.0 

Seigniorage and sale of gold ...................................................................... (0.8) (0.7) 

Increase (Decrease) in accounts payable................................................... 7.8 (9.5) 

(Increase) in accounts and taxes receivable............................................... (19.0) (2.7) 

Components of the Budget Deficit Not Part of Net Operating Cost: 

Capitalized Fixed Assets: 

Department of Defense............................................................................. (29.1) (76.4) 

Civilian Agencies ...................................................................................... (29.7) (27.3) 

Total Capitalized Fixed Assets............................................................... (58.8) (103.7) 

 

Decrease (Increase) in inventory ................................................................ 4.2 (9.3) 

(Increase) in Securities and Investments.................................................... (13.4) (6.4) 

(Increase) Decrease in other assets ........................................................... (10.0) 1.2 

Principal repayments of precredit reform loans .......................................... 8.5 3.4 

 

All Other Reconciling Items ..................................................................... (15.1) (1.5) 

 

Unified budget deficit................................................................................ (162.8) (247.7) 

 

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, 2007, and September 30, 2006 

(In billions of dollars) 2007 2006 

 

Unified budget deficit .................................... (162.8) (247.7)

 

Adjustments for Noncash Outlays Included in the Budget: 

Interest accrued by Treasury on debt held by 

the public............................................................. (189.4) (177.6) 

Subsidy expense (Note 4)............................. 9.3 34.3 

 

Items Affecting the Cash Balance Not Included in the Budget: 

Net Transactions from Financing Activity: 

Repayment of debt held by the public ............ 4,340.4 4,248.5 

Borrowings from the public ......................... (4,547.3) (4,485.5) 

Total ........................................................ (206.9) (237.0) 

 

Net Transactions from Monetary Activity: 

Increase in special drawing rights .............. 0.6 0.4 

(Decrease) Increase in other monetary 

assets ...................................................... (0.2) 2.4 

(Decrease) in loans to the IMF ............................ (2.2) (6.5) 

Total .................................................................... (1.8) (3.7) 

 

Net Transactions from Other Activities: 

Net direct loan activity ................................ 2.8 (3.7) 

Interest paid by Treasury on debt held by 

the public ................................................. 186.1 171.4 

Net guaranteed loan activity....................... 4.9 (46.9) 

(Increase) in allocations of special 

drawing rights .......................................... (0.4) (0.1) 

Decrease in deposit fund balances ............ 3.9 1.0 

Decrease in miscellaneous liabilities .............. 0.8 0.2 

Seigniorage and other equity...................... (0.8) (0.7) 

NRRIT non-Federal securities1

................... 2.6 2.1 

Prior period adjustment .............................. - (2.7) 

Total ........................................................ 199.9 120.6 

 

Disposition of deficit...................................... (188.9) (263.4)

 

Increase in Cash held by Treasury for 

Government operations ............................. 26.1 15.7 

 

Cash held by Treasury for 

Governmentwide operations: (Note 2)

Balance beginning of period ............................ 43.6 27.9 

Balance end of period ................................... 69.7 43.6 

 1 For more information, see Railroad Retirement in the Supplemental Information-Social Insurance section. The amount for the 

change in the National Railroad Retirement Investment Trust non-Federal Securities reflected above is based on NRRIT amounts 

reported as of August 31. This differs from the amounts reflected in Note 7, Securities and Investments, for NRRIT which are as of 

September 30. 

The accompanying notes are an integral part of these financial statements. 
FINANCIAL STATEMENTS 45

United States Government 

Balance Sheets 

as of September 30, 2007, and September 30, 2006 

(In billions of dollars) 2007 2006 

Assets: 

Cash and other monetary assets (Note 2) ..................................... 128.0 97.9 

Accounts and taxes receivable, net (Note 3).................................. 87.8 68.8 

Loans receivable, net (Note 4) ....................................................... 231.9 220.8 

Inventories and related property, net (Note 5)................................ 277.1 281.3 

Property, plant, and equipment, net (Note 6) ................................. 691.1 688.5 

Securities and investments (Note 7) .............................................. 99.8 83.8 

Other assets (Note 8) ..................................................................... 65.4 55.4 

Total assets.................................................................................. 1,581.1 1,496.5 

Stewardship property, plant, and equipment 

Stewardship Land (Note 23) and Heritage Assets (Note 24) 

Liabilities: 

Accounts payable (Note 9) ............................................................. 66.2 58.4 

Federal debt securities held by the public and accrued interest 

(Note 10)...................................................................................... 5,077.7 4,867.5 

Federal employee and veteran benefits payable (Note 11) ........... 4,769.1 4,679.0 

Environmental and disposal liabilities (Note 12)............................. 342.0 305.2 

Benefits due and payable (Note 13)............................................... 133.7 129.3 

Insurance program liabilities (Note 14)........................................... 70.9 72.8 

Loan guarantee liabilities (Note 4).................................................. 69.1 66.4 

Other liabilities (Note 15)................................................................ 258.2 234.3 

Total liabilities .............................................................................. 10,786.9 10,412.9 

Contingencies (Note 18) and Commitments (Note 19) 

Net position: 

Earmarked funds (Note 20) ............................................................ 614.1 419.2 

Non-earmarked funds..................................................................... (9,819.9) (9,335.6) 

Total net position....................................................................... (9,205.8) (8,916.4) 

Total liabilities and net position ................................................. 1,581.1 1,496.5 

The accompanying notes are an integral part of these financial statements. 
46 FINANCIAL STATEMENTS 

United States Government 

Statements of Social Insurance 

Present Value of Long-Range (75 Years, except Black Lung) Actuarial Projections 

 **********UNAUDITED*********

(In billions of dollars) 2007 2006 2005 2004 2003

Federal Old-Age, Survivors and Disability Insurance (Social Security): (Note 22) 

Revenue (Contributions and Earmarked Taxes) from: 

Participants who have attained age 62......................................... 477 533 464 411 359

Participants ages 15-61................................................................ 17,515 16,568 15,290 14,388 13,576

Future participants (under age 15 and births during period).............. 16,121 15,006 13,696 12,900 12,213

All current and future participants.............................................. 34,113 32,107 29,450 27,699 26,147

Expenditures for Scheduled Future Benefits for: 

Participants who have attained age 62......................................... (6,329) (5,866) (5,395) (4,933) (4,662)

Participants ages 15-61................................................................ (27,928) (26,211) (23,942) (22,418) (21,015)

Future participants (under age 15 and births during period).............. (6,619) (6,480) (5,816) (5,578) (5,398)

All current and future participants.............................................. (40,876) (38,557) (35,154) (32,928) (31,075)

Present value of future expenditures in excess of future 

revenue ..................................................................................... (6,763)1 (6,449)2 (5,704)3 (5,229)4 (4,927)5

Federal Hospital Insurance (Medicare Part A): (Note 22) 

Revenue (Contributions and Earmarked Taxes) from: 

Participants who have attained eligibility age 65 .......................... 178 192 162 148 128

Participants who have not attained eligibility age 15-64 ............... 5,975 5,685 5,064 4,820 4,510

Future participants (under age 15 and births during period))............. 4,870 4,767 4,209 4,009 3,773

All current and future participants.............................................. 11,023 10,644 9,435 8,976 8,411

Expenditures for Scheduled Future Benefits for: 

Participants who have attained eligibility age 65 .......................... (2,558) (2,397) (2,179) (2,168) (1,897)

Participants who have not attained eligibility age 15-64 ............... (15,639) (15,633) (12,668) (12,054) (10,028)

Future participants (under age 15 and births during period))............. (5,118) (3,904) (3,417) (3,246) (2,653)

All current and future participants.............................................. (23,315) (21,934) (18,264) (17,468) (14,577)

Present value of future expenditures in excess of future 

revenue ..................................................................................... (12,292)1 (11,290)2 (8,829)3 (8,492)4 (6,166)5

Federal Supplementary Medical Insurance (Medicare Part B): (Note 22) 

Revenue (Premiums) from: 

Participants who have attained eligibility age 65 .......................... 433 409 363 332 283

Participants who have not attained eligibility age 15-64 ............... 3,184 3,167 2,900 2,665 2,148

Future participants (under age 15 and births during period))............. 1,172 906 924 891 688

All current and future participants.............................................. 4,789 4,481 4,187 3,889 3,119

Expenditures for Scheduled Future Benefits for: 

Participants who have attained eligibility age 65 .......................... (1,834) (1,773) (1,622) (1,475) (1,306)

Participants who have not attained eligibility age 15-64 ............... (12,130) (12,433) (11,541) (10,577) (8,845)

Future participants (under age 15 and births during period))............. (4,257) (3,407) (3,408) (3,277) (2,622)

All current and future participants.............................................. (18,221) (17,613) (16,571) (15,329) (12,773)

Present value of future expenditures in excess of future 

 revenue6

......................................................................................... (13,432)1 (13,131)2 (12,384)3 (11,440)4 (9,653)5

Federal Supplementary Medical Insurance (Medicare Part D): (Note 22) 

Revenue (Premiums and State Transfers) from: 

Participants who have attained eligibility age 65 .......................... 167 173 185 176

Participants who have not attained eligibility age 15-64 ............... 1,627 1,700 1,790 1,857

Future participants (under age 15 and births during period))............. 611 492 572 618

All current and future participants.............................................. 2,405 2,366 2,547 2,651

Expenditures for Scheduled Future Benefits for: 

Participants who have attained eligibility age 65 .......................... (794) (792) (880) (773)

Participants who have not attained eligibility age 15-64 ............... (7,273) (7,338) (7,913) (7,566)

Future participants (under age 15 and births during period))............. (2,699) (2,121) (2,440) (2,431)

 

All current and future participants.............................................. (10,766) (10,250) (11,233) (10,770)

 

Present value of future expenditures in excess of future 

 revenue6

......................................................................................... (8,361)1 (7,884)2 (8,686)3 (8,119)4

Totals do not necessarily 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 

Present Value of Long-Range (75 Years, except Black Lung) Actuarial Projections 

 **********UNAUDITED*********

(In billions of dollars) 2007 2006 2005 2004 2003

Railroad Retirement: (Note 22) 

Revenue (Contributions and Earmarked Taxes) from: 

Participants who have attained eligibility .................................. 5 5 4 4 4 

Participants who have not attained eligibility ............................ 41 40 37 37 40 

Future participants.................................................................... 54 56 41 39 41 

All current and future participants.......................................... 100 100 82 80 85 

Expenditures for Scheduled Future Benefits for: 

Participants who have attained eligibility .................................. (93) (92) (84) (81) (80) 

Participants who have not attained eligibility ............................ (86) (84) (73) (72) (73) 

Future participants.................................................................... (26) (25) (16) (14) (14) 

All current and future participants.......................................... (205) (201) (173) (167) (167) 

Present value of future expenditures in excess of future revenue 7... (105)1 (101)2 (91)3 (87)4 (83)5

 

Black Lung (Part C): (Note 22) 

Present value of future revenue in excess of future expenditures 8... 5 9 4 10 5 11 4 12 4 13

 

Total present value of future expenditures in excess of 

future revenue ........................................................................... (40,948) (38,851) (35,689) (33,363) (20,825) 

 

Social Insurance Summary 

Participants who have attained eligibility age: 

Revenue (e.g., Contributions and earmarked taxes) ................ 1,260 1,312 1,178 1,071 774 

Expenditures for scheduled future benefits .............................. (11,608) (10,920) (10,160) (9,430) (7,945) 

Present value of future expenditures in excess of future 

revenue..................................................................................... (10,348) (9,608) (8,982) (8,359) (7,172) 

Participants who have attained age 15 up to eligibility age: 

Revenue (e.g., Contributions and earmarked taxes) ................ 28,342 27,160 25,081 23,767 20,274 

Expenditures for scheduled future benefits .............................. (63,056) (61,696) (56,138) (52,686) (39,959) 

Present value of future expenditures in excess of future 

revenue..................................................................................... (34,714) (34,536) (31,057) (28,919) (19,686) 

 

Closed group – Total present value of future expenditures 

in excess of future revenue...................................................... (45,062) (44,145) (40,039) (37,278) (26,857) 

 

Future participants (under age 15 and births during period): 

Revenue (e.g., Contributions and earmarked taxes) ................ 22,828 21,227 19,442 18,457 16,715 

Expenditures for scheduled future benefits .............................. (18,714) (15,933) (15,092) (14,542) (10,683) 

Present value of future revenue in excess of future 

expenditures ............................................................................. 4,114 5,294 4,350 3,915 6,032 

 

Open group – Total present value of future expenditures in 

excess of future revenue.......................................................... (40,948) (38,851) (35,689) (33,363) (20,825) 

 

Totals do not necessarily 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 

Present Value of Long-Range (75 Years, except Black Lung) Actuarial Projections 

 **********UNAUDITED*********

(In billions of dollars) 2007 2006 2005 2004 2003 1 The projection period is 1/1/2007 - 12/31/2081 and the valuation date is 1/1/2007. 2 The projection period is 1/1/2006 - 12/31/2080 and the valuation date is 1/1/2006. 3 The projection period is 1/1/2005 - 12/31/2079 and the valuation date is 1/1/2005. 4 The projection period is 1/1/2004 - 12/31/2078 and the valuation date is 1/1/2004. 5 The projection period is 1/1/2003 - 12/31/2077 and the valuation date is 1/1/2003. 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’ (CMS) Financial Report but are not income from the Governmentwide perspective of this report. 7 These amounts approximate the present value of the future financial interchange and the future transfers from the General Fund of the 

Treasury to the Social Security Equivalent Benefit (SSEB) Account (see discussion of Railroad Retirement Program in the required 

supplemental information section of this report). They are included as income in the Railroad Retirement Financial Report but are not 

income from the Governmentwide perspective of this report. 

8

 Does not include interest expense accruing on the outstanding debt.

9 The projection period is 9/30/2007 - 9/30/2040 and the valuation date is 9/30/2007. 10 The projection period is 9/30/2006 - 9/30/2040 and the valuation date is 9/30/2006. 11 The projection period is 9/30/2005 - 9/30/2040 and the valuation date is 9/30/2005. 12 The projection period is 9/30/2004 - 9/30/2040 and the valuation date is 9/30/2004. 13 The projection period is 9/30/2003 - 9/30/2040 and the valuation date is 9/30/2003. 

Totals do not necessarily equal the sum of components due to rounding. 

The accompanying notes are an integral part of these financial statements. 
NOTES TO THE FINANCIAL STATEMENTS 49

United States Government 

Notes to the Financial Statements 

for the Years Ended September 30, 2007, 

and September 30, 2006 

Note 1. Summary of Significant Accounting Policies 

A. Reporting Entity 

This Financial Report includes the financial status and activities of the executive branch, the legislative branch 

(the U.S. Senate and the U.S. House of the Representatives report on a cash basis), and the judicial branch (which 

also reports on a cash basis) of the Government. The judicial branch reports on a limited basis primarily related to 

budget activity because it is not required by law to submit financial statement information to Treasury. The 

Appendix section of this report contains a list of significant Government entities included in the Financial Report, as 

well as examples of entities excluded. The excluded entities are not part of the Financial Report because they are 

Government sponsored enterprises, such as the Federal National Mortgage Association (Fannie Mae), the Federal 

Home Loan Mortgage Corporation (Freddie Mac), etc.; or their activities are not included in the Federal budget's 

totals, such as the Thrift Savings Fund, and the Board of Governors of the Federal Reserve System. 

Material intragovernmental transactions are eliminated in consolidation, except as described below in this note 

and in the Supplemental Information—Unmatched Transactions and Balances. The financial reporting period ends 

September 30 and is the same as used for the annual budget.

B. Basis of Accounting and Revenue Recognition 

These financial statements were prepared using U.S. Generally Accepted Accounting Principles (GAAP), 

primarily based on Statements of Federal Financial Accounting Standards (SFFAS). Under these principles: 

• Expenses are generally recognized when incurred except that the costs of social insurance programs including 

Social Security, Medicare, Railroad Retirement, Black Lung, and Unemployment Insurance are recognized only 

for amounts currently due and payable. 

• Nonexchange (unearned) revenues, including taxes, duties, fines, and penalties, are recognized when collected 

and adjusted to the change in net measurable and legally collectable amounts receivable. Related refunds and 

other offsets, including those that are measurable and legally payable, are netted against nonexchange revenue. 

• Exchange (earned) revenues are recognized when the Government provides goods and services to the public for 

a price. Exchange revenues include user charges such as admission to Federal parks and premiums for certain 

Federal insurance. 

The basis of accounting used for budgetary purposes, which is primarily on a cash and obligation basis and 

follows budgetary concepts and policies, differs from the basis of accounting used for the financial statements which 

follow U.S. GAAP. See the Reconciliations of Net Operating Cost and Unified Budget Deficit in the Financial 

Statements section. 

Beginning in fiscal year 2006, the Federal Government has implemented the requirements of new standards 

related to earmarked funds, social insurance, heritage assets and stewardship land, and required Governmentwide 

reporting. 
50 NOTES TO THE FINANCIAL STATEMENTS 

• Earmarked funds: 

As required by SFFAS No. 27,1

 the Federal Government now separately identifies: (1) earmarked fund 

activities in the statement of operations and changes in net position: and (2) the portion of net position attributable to 

earmarked fund activities on the balance sheet. 

• Social Insurance: 

As required by SFFAS Nos. 17, 25, 26, and 28,2

 the Statements of Social Insurance and related note on 

significant underlying assumptions were reclassified from required supplemental stewardship information to basic 

information. For further information on social insurance, see Note 22—Social Insurance. 

• Heritage Assets and Stewardship Land: 

As required by SFFAS No. 29,3

 information related to heritage assets and stewardship land was reclassified 

from required supplemental stewardship information to basic information. For further information on stewardship 

land and heritage assets, see Note 23—Stewardship Land, and Note 24—Heritage Assets, respectively. 

• Governmentwide Reporting: 

SFFAS No. 324

 amends standards issued prior to January 2003 to specify disclosure requirements appropriate 

for the Financial Report based on the guidance contained in Statements of Federal Financial Accounting Concepts 

No. 4 (SFFAC 4). Some disclosure requirements contained in previously issued standards were modified to allow 

aggregation and reduce detail for Governmentwide reporting while other disclosure requirements were eliminated 

because of excessive detailed information required that is inappropriate for a Governmentwide report consistent with 

the guidance contained in SFFAC 4. 

C. Direct Loans and Loan Guarantees 

Direct loans obligated and loan guarantees committed after fiscal year 1991 are reported based on the present 

value of the net cashflows estimated over the life of the loan or guarantee. The difference between the outstanding 

principal of the direct loans and the present value of their net cash inflows is recognized as a subsidy cost allowance; 

the present value of estimated net cash outflows of the loan guarantees is recognized as a liability for loan 

guarantees. 

The subsidy expense for direct or guaranteed loans disbursed during a year is the present value of estimated net 

cash outflows for those loans or guarantees. A subsidy expense also is recognized for modifications made during the 

year to loans and guarantees outstanding and for reestimates made as of the end of the year to the subsidy 

allowances or loan guarantee liability for loans and guarantees outstanding. 

Direct loans obligated and loan guarantees committed before fiscal year 1992 are valued under two different 

methodologies within the Government: the allowance-for-loss method and the present-value method. Under the 

allowance-for-loss method, the outstanding principal of direct loans is reduced by an allowance for uncollectible 

amounts; the liability for loan guarantees is the amount the agency estimates would more likely than not require 

future cash outflow to pay default claims. 

Under the present-value method, the outstanding principal of direct loans is reduced by an allowance equal to 

the difference between the outstanding principal and the present value of the expected net cashflows. The liability 

for loan guarantees is the present value of expected net cash outflows due to the loan guarantees. 

D. Accounts and Taxes Receivable 

Accounts receivable represents claims to cash or other assets from entities outside the Government that arise 

from the sale of goods or services, duties, fines, certain license fees, recoveries, or other provisions of the law. 

The category taxes receivable consists primarily of uncollected tax assessments, penalties, and interest when 

taxpayers have agreed the amounts are owed or a court has determined the assessments are owed. The balance sheets 

 

1

 SFFAS No. 27, Identifying and Reporting Earmarked Funds. 2

 SFFAS No. 17, Accounting for Social Insurance, No. 25, Reclassification of Stewardship Responsibilities and Eliminating the Current Services 

Assessment; SFFAS No. 26, Presentation of Significant Assumptions for the Statement of Social Insurance: Amending SFFAS 25, and SFFAS 

No. 28, Deferral of the Effective Date of Reclassification of the Statement of Social Insurance: Amending SFFAS 25 and 26. 3

 SFFAS No. 29, Heritage Assets and Stewardship Land. 

4

 SFFAS No. 32, Consolidated Financial Report of the United States Government Requirements: Implementing SFFAC 4 “Intended Audience 

and Qualitative Characteristics for the Consolidated Financial Report of the United States Government.” 
NOTES TO THE FINANCIAL STATEMENTS 51

do not include unpaid assessments when neither taxpayers nor a court have agreed that the amounts are owed 

(compliance assessments) or the Government does not expect further collections due to factors such as the 

taxpayer’s death, bankruptcy, or insolvency (writeoffs). Taxes receivable are reported net of an allowance for the 

estimated portion deemed to be uncollectible. 

E. Inventories and Related Property 

Inventories within the Government are valued using historical cost, net realizable value, and latest acquisition 

cost (see Note 5—Inventories and Related Property, Net). Historical cost methods include first-in-first-out, weighted 

average, and moving average. Estimated repair costs reduce the value of inventory held for repair. Excess, obsolete, 

and unserviceable inventories are valued at estimated net realizable value. When latest acquisition cost is used to 

value inventory held for sale, it is adjusted for holding gains and losses in order to approximate historical cost. 

The related property portion of the inventory and related property line includes operating materials and 

supplies, stockpile materials, commodities, seized and monetary instruments, and forfeited property. Operating 

materials and supplies are valued at historical cost, latest acquisition cost, and standard price using the purchase and 

consumption method of accounting. Operating materials and supplies that are valued at latest acquisition cost and 

standard pricing are not adjusted for holding gains and losses. 

F. Property, Plant, and Equipment 

Property, plant, and equipment used in Government operations are carried at acquisition cost, with the exception 

of Department of Defense (DOD) military equipment (e.g., ships, aircraft, combat vehicles, and weapons). DOD 

comprises approximately 69 percent of the Government’s reported property, plant, and equipment as of September 30, 

2007. DOD uses an estimation methodology for military equipment based on internal DOD records to calculate a value 

for military equipment. DOD identified the universe of military equipment by accumulating information relating to 

program funding and associated military equipment, equipment useful life, and program acquisitions and disposals to 

create a baseline. The equipment baseline is updated using expenditure information and information related to 

acquisition and logistics to identify acquisitions and disposals. All property, plant, and equipment is capitalized if the 

acquisition costs (or estimated acquisition cost for DOD) are in excess of capitalization thresholds that vary 

considerably between the federal entities. Depreciation and amortization expense applies to property, plant, and 

equipment reported on the balance sheets except for land, unlimited duration land rights and construction in progress. 

Depreciation and amortization are recognized using the straight-line method over the estimated useful lives of the 

assets. All property, plant, and equipment are assigned useful lives depending on their category and vary considerably 

between the Federal entities. The cost of acquisition, betterment, or reconstruction of all multi-use heritage assets is 

capitalized as general property, plant, and equipment and is depreciated. Construction in progress is used for the 

accumulation of the cost of construction or major renovation of fixed assets during the construction period. The assets are 

transferred out of construction in progress when the project is substantially completed. Internal User (internal use) 

software includes purchased commercial off-the-shelf software, contractor-developed software, and software that was 

internally developed by agency employees. 

In fiscal year 2007, NASA made a change in its accounting policy for property, plant, and equipment to reclassify 

costs previously categorized as general property, plant, and equipment to Research and Development (R&D) expenses. 

Accordingly, NASA applied the provisions of Statement of Financial Accounting Standards (SFAS) No. 2, Accounting 

for R&D Costs to account for its R&D projects. The cumulative effect of this change in accounting principle is a decrease 

in the property, plant, and equipment balance by $12.7 billion for those costs not meeting the criteria of general property, 

plant, and equipment and a corresponding decrease to the Net Position. 

Please refer to the individual financial statements of the National Aeronautics and Space Administration (NASA) for 

a discussion relating to an accounting principle change related to property, plant and equipment.

Please refer to the individual financial statements of DOD, the Department of Energy (DOE), the Tennessee Valley 

Authority (TVA), the United States Postal Service (USPS), NASA, and the General Services Administration (GSA) for 

significant detailed information on the useful lives and related capitalization thresholds for property, plant, and equipment. 

These agencies comprise 85 percent of the Government’s total reported net property, plant, and equipment of $691.1 

billion as of September 30. 
52 NOTES TO THE FINANCIAL STATEMENTS 

G. Federal Employee and Veteran Benefits Payable 

Generally, Federal employee and veteran benefits payable are recorded during the time employee services are 

rendered. The related liabilities for defined benefit pension plans, post-retirement health benefits, life insurance 

benefits, Federal Employee and Compensation Act benefits and veterans’ compensation and burial benefits are 

recorded at estimated present value of future benefits, less any estimated present value of future normal cost 

contributions. The estimated present value for veteran’s pension benefits is disclosed but is not included in the 

Federal employee and veteran benefits payable line. However, the estimated present value for veteran health benefits 

is not estimated; these benefits are expensed when services are provided. 

Normal cost is the portion of the actuarial present value of projected benefits allocated as an expense for 

employee services rendered in the current year. Actuarial gains and losses (and prior service cost, if any) are 

recognized immediately in the year they occur, without amortization. 

H. Environmental and Disposal Liabilities 

Environmental and disposal liabilities are recorded at the estimated current cost of removing, containing, 

treating and/or disposing of radioactive waste, hazardous waste, chemical and nuclear weapons, and other 

environmental contaminations, assuming the use of current technology. Hazardous waste is a solid, liquid, or 

gaseous waste that, because of its quantity or concentration, presents a potential hazard to human health or the 

environment. Remediation consists of removal, decontamination, decommissioning, site restoration, site monitoring, 

closure and post-closure cost, treatment, and/or safe containment. Where technology does not exist to clean up 

radioactive or hazardous waste, only the estimable portion of the liability, typically monitoring and safe 

containment, is recorded. 

I. Deferred Maintenance 

Deferred maintenance is maintenance that was not performed when it should have been or scheduled 

maintenance that was delayed or postponed. Maintenance is the act of keeping fixed assets in acceptable condition, 

including preventative maintenance, normal repairs, and other activities needed to preserve the assets, so they 

continue to provide acceptable services and achieve their expected life. Maintenance excludes activities aimed at 

expanding the capacity of assets or otherwise upgrading them to serve needs different from those originally 

intended. Deferred maintenance expenses are not accrued in the Statements of Net Cost or recognized as liabilities 

on the balance sheets. However, deferred maintenance information is disclosed in the Supplemental Information 

section of this report. 

J. Contingent Liabilities 

Liabilities for contingencies are recognized on the balance sheets when both: 

• A past transaction or event has occurred. 

• A future outflow or other sacrifice of resources is probable and measurable. 

The estimated contingent liability may be a specific amount or a range of amounts. If some amount within the 

range is a better estimate than any other amount within the range, then that amount is recognized. If no amount 

within the range is a better estimate than any other amount, then the minimum amount in the range is recognized. 

Contingent liabilities that do not meet the above criteria for recognition, but for which there is at least a 

reasonable possibility that a loss may have been incurred, are disclosed in Note 18—Contingencies. 
NOTES TO THE FINANCIAL STATEMENTS 53

K. Commitments 

In the normal course of business, the Government has a number of unfulfilled commitments that may require 

the use of its financial resources. Note 19—Commitments describes the components of the Government’s actual 

commitments that need to be disclosed because of their nature and/or their amount. They include long-term leases, 

undelivered orders, and other commitments. 

Discussion of treaties and other international agreements entered into by the United States Government are 

included in the Commitments section. 

L. Social Insurance 

A liability for social insurance programs (Social Security, Medicare, Railroad Retirement, Black Lung, and 

Unemployment) is recognized for any unpaid amounts currently due as of the reporting date. No liability is 

recognized for future benefit payments not yet due. For further information, see the Supplemental Information—

Social Insurance section, and Note 20—Earmarked Funds. 

M. Related Party Transactions 

Federal Reserve banks (FRBs) and private banks, which are not part of the reporting entity, serve as the 

Government’s depositary and fiscal agents. They process Federal payments and deposits to Treasury’s account and 

service Treasury securities. FRBs owned $774.5 billion and $764.6 billion of Treasury securities held by the public 

as of September 30, 2007, and 2006, respectively. FRB earnings that exceed statutory amounts of surplus 

established for FRBs are paid to the Government and are recognized as nonexchange revenue. Those earnings 

totaled $32.0 billion and $29.9 billion for the years ended September 30, 2007, and 2006, respectively. The primary 

source of these earnings is from interest earned on Treasury securities held by the FRBs. Also, as described in Note 

15—Other Liabilities, the FRB holds certificates and special drawing rights certificates. 

FRBs issue Federal Reserve notes, the circulating currency of the United States. Specific assets owned by 

FRBs, typically Treasury securities, collateralize these notes. Federal Reserve notes are backed by the full faith and 

credit of the Government. 

The Government does not guarantee payment of the liabilities of Government-sponsored enterprises such as 

the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, which are privately 

owned. These enterprises also are excluded from the reporting entity. 

N. Unmatched Transactions and Balances 

The reconciliation of the change in net position requires that the difference between ending and beginning net 

position equals the excess of revenues over net cost, plus or minus prior period adjustments. 

The unmatched transactions and balances are needed to bring the change in net position into balance. The 

primary factors affecting this out of balance situation are: 

• Unmatched intragovernmental transactions and balances between Federal agencies, 

• General fund transactions, 

• Timing differences and errors in Federal agencies’ reporting. 

Refer to the Supplemental Information—Unmatched Transactions and Balances for detailed information. 

O. Reclassifications 

Certain fiscal year 2006 amounts have been reclassified to conform to the fiscal year 2007 presentation.
54 NOTES TO THE FINANCIAL STATEMENTS 

Note 2. Cash and Other Monetary Assets 

 

Cash and Other Monetary Assets as of September 30 

 (In billions of dollars) 2007 2006 

 

Unrestricted Cash: 

Cash held by Treasury for Governmentwide operations .................... 69.7 43.6 

Other ................................................................................................... 18.9 13.2 

Restricted Cash..................................................................................... 1.0 2.9 

Total cash ........................................................................................... 89.6 59.7 

International monetary assets ............................................................... 13.9 15.3 

Gold ....................................................................................................... 11.0 11.0 

Foreign Currency................................................................................... 13.5 11.9 

Total cash and other monetary assets................................................ 128.0 97.9 

 

Cash 

Total cash consists of: 

• Unrestricted cash, includes cash held by the Department of the Treasury for Governmentwide operations 

(Operating Cash) and all other unrestricted cash held by the Federal agencies. Operating cash represents balances 

from tax collections, customs duties, other revenue, Federal debt receipts; and other various receipts net of cash 

outflows for budget outlays and other payments. Operating Cash includes balances invested with commercial 

depositaries in Treasury Tax and Loan Accounts (including funds invested through the Term Investment Option 

program and the Repo Pilot program). 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 in agencies’ books, such as 

undeposited collections, deposits in transit, demand deposits, amounts held in trust, imprest funds, and amounts 

representing the balances of petty cash. 

• Restricted cash is restricted due to the imposition on cash deposits by law, regulation, or agreement. All cash held 

by depositary institutions is either insured (for balances up to $100,000) by the Federal Deposit Insurance 

Corporation or collateralized by securities pledged by the depositary institution or through securities held under 

reverse repurchase agreements. 

International Monetary Assets 

International monetary assets include the U.S. reserve position in the International Monetary Fund (IMF) and 

U.S. holdings of Special Drawing Rights (SDRs) 

The U.S. reserve position in the IMF reflects the reserve asset portion of the financial subscription that the 

United States has paid in as part of its participation in the IMF. The IMF promotes international monetary 

cooperation and a stable payments system to facilitate growth in the world economy. Its primary activities are 

surveillance of member economies, financial assistance as appropriate, and technical assistance. 

Only a portion of the U.S. financial subscriptions to the IMF is made in the form of reserve assets; the 

remainder is provided in the form of a letter of credit from the United States to the IMF. 

The balance available under the letter of credit totaled $53.2 billion and $48.1 billion for the years ended 

September 30, 2007, and 2006, respectively. The U.S. reserve position in the IMF has a U.S. dollar equivalent of 

$4.5 billion and $6.6 billion for the years ended September 30, 2007, and 2006, respectively.
NOTES TO THE FINANCIAL STATEMENTS 55

SDRs are international monetary reserves issued by the IMF. These interest-bearing assets can be obtained by 

IMF allocations, transactions with IMF member countries, interest earnings on SDR holdings, or U.S. reserve 

position in the IMF. SDR holdings are an asset of Treasury’s Exchange Stabilization Fund (ESF), which held SDRs 

totaling $9.4 billion and $8.7 billion equivalent for the years ended September 30, 2007, and 2006, respectively. 

The IMF allocates SDRs to its members in proportion to each member’s quota in the IMF. The SDR Act of 

1968 authorized the Secretary of the Treasury to issue SDR Certificates (SDRCs) to the Federal Reserve in 

exchange for dollars. The amount of SDRCs outstanding cannot exceed the dollar value of SDR holdings. The 

Secretary of the Treasury determines when Treasury will issue or redeem SDRCs. SDRCs outstanding totaled $2.2 

billion for the years ended September 30, 2007, and 2006, respectively, and are included in Note 15—Other 

Liabilities. 

As of September 30, 2007, and 2006, other liabilities included $7.6 billion and $7.2 billion, respectively, of 

interest-bearing liability to the IMF for SDR allocations. The SDR allocation item represents the cumulative total of 

SDRs distributed by the IMF to the United States in allocations that occurred in 1970, 1971, 1972, 1979, 1980, and 

1981. 

Foreign Currency 

Foreign currency is translated into U.S. dollars at the exchange rate at fiscal yearend. The foreign currency is 

maintained by various U.S. Federal agencies and foreign banks. Foreign Currency was previously included in the 

International Monetary assets line in the prior years published Financial Reports. The data for fiscal year 2006 has 

been moved to the Foreign Currency line for comparison. 

Gold 

Gold is valued at the statutory price of $42.2222 per fine troy ounce. The number of fine troy ounces was 

261,498,900 as of September 30, 2007, and 2006, respectively. The market value of gold on the London Fixing as of 

the reporting date was $743 and $599 per fine troy ounce for the years ended September 30, 2007, and 2006, 

respectively. Gold totaling $11.0 billion for the years ending September 30, 2007, and 2006, respectively, was 

pledged as collateral for gold certificates issued and authorized to the FRBs by the Secretary of the Treasury. 

Treasury may redeem the gold certificates at any time. See Note 15—Other Liabilities. 

Note 3. Accounts and Taxes Receivable, Net 

Accounts receivable includes related interest receivable of $6.3 billion and $5.4 billion for the years ended 

September 30, 2007, and 2006, respectively, and represents claims to cash or other assets from entities outside the 

Government. An allowance for estimated losses due to uncollectible amounts is established when it is more likely 

than not the receivables will not be totally collected. The allowance method varies among the agencies in the 

Government and is usually based on past collection experience and are 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. Accounts receivable are net of an 

allowance for uncollectible accounts. The allowance amounts are $14.3 billion and $12.5 billion for the years ended 

September 30, 2007 and 2006, respectively. 

Accounts receivable for HHS increased by $8.4 billion due to the first time recording of a receivable for 

Medicare Part D overpayments to plans in 2006 and an estimate for the first nine months of the calendar year 2007. 

Taxes receivable are the gross tax receivables net of allowance for doubtful accounts. Gross taxes receivable 

consist primarily of assessments, penalties, and related interest that were not paid or abated and which the taxpayers 

have agreed the amounts are owed or a court has determined the assessments are owed. The allowance for doubtful 

accounts is based on projections of collectibility from a statistical sample of unpaid tax assessments. 
56 NOTES TO THE FINANCIAL STATEMENTS 

Note 4. Loans Receivable and Loan Guarantee Liabilities, Net 

The Government uses two methods, direct loans and loan guarantee programs, to accomplish the same goals. 

These goals are to promote the Nation’s welfare by making direct Federal loans and guaranteeing non-federal loans 

to segments of the population not served adequately by non-federal institutions. For those unable to afford credit at 

the market rate, Federal credit programs provide subsidies in the form of direct loans offered at an interest rate lower 

than the market rate. For those to whom non-federal financial institutions are reluctant to grant credit because of the 

high risk involved, Federal credit programs guarantee the payment of these non-federal loans and absorb the cost of 

defaults. 

The amount of the long-term cost of post-1991 direct loans and loan guarantees outstanding equals the subsidy 

cost allowance for direct loans and the liability for loan guarantees as of the fiscal yearend. The amount of the longterm cost of pre-1992 direct loans and loan guarantees equals the allowance for uncollectible amounts (or present 

value allowance) for direct loans and the liability for loan guarantees. The long-term cost is based on all direct loans 

and guaranteed loans disbursed in this fiscal year and previous years that are outstanding as of the end of this fiscal 

year. It includes the subsidy cost of these loans and guarantees estimated as of the time of loan disbursement and 

subsequent adjustments such as modifications, reestimates, amortizations, and writeoffs. 

 

 Accounts and Taxes Receivable as of September 30 

 

(In billions of dollars) 2007 2006 

Department of Health and Human Services.......................................... 13.0 3.2 

Department of Agriculture...................................................................... 8.9 8.6 

Social Security Administration ............................................................... 8.0 7.6 

Department of Defense.......................................................................... 7.5 7.9 

Pension Benefit Guaranty Corporation.................................................. 5.8 2.0 

Department of Energy............................................................................ 3.9 4.0 

Department of Interior............................................................................ 1.9 2.5 

Tennessee Valley Authority................................................................... 1.7 1.4 

Department of Treasury......................................................................... 1.7 1.0 

Department of Veterans Affairs ............................................................. 1.3 1.2 

Department of Labor.............................................................................. 1.1 1.1 

All other departments............................................................................. 5.1 5.6 

Accounts receivable, net........................................................................ 59.9 46.1 

 

Gross taxes receivable .......................................................................... 101.5 94.3 

Allowance for doubtful accounts............................................................ (73.6) (71.6) 

Taxes receivable, net............................................................................. 27.9 22.7 

 

Total accounts and taxes receivable, net............................................ 87.8 68.8 

 
NOTES TO THE FINANCIAL STATEMENTS 57

 

Direct Loans and Loan Guarantees as of September 30 

Face Value 

of Loans 

Outstanding 

Long-term Cost 

of 

Loans and 

Guarantees 

Outstanding 

Net Loans 

Receivable 

Amount 

Guaranteed 

by the 

Government 

Subsidy 

Expense for the 

Fiscal 

Year Ended 

September 30 

(In billions of dollars) 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 

Direct Loan Programs: 

Federal Direct Student Loans - Education. 108.0 101.6 8.8 8.3 99.2 93.3 (0.5) 6.6 

Electric Loans - USDA............................... 36.0 34.2 1.1 1.6 34.9 32.6 - (0.3) 

Rural Housing Services - USDA ................ 27.1 26.8 6.9 7.0 20.2 19.8 0.1 1.0 

Federal Family Education Loans - 

Education....................................................... 23.7 21.2 7.1 7.6 16.6 13.6 - - 

Water and Environmental Loans - USDA ... 9.3 8.7 0.8 0.8 8.5 7.9 - - 

Farm Loans - USDA .................................. 6.6 6.7 0.3 0.5 6.3 6.2 - 0.1 

Housing and Urban Development.............. 3.9 3.9 (0.9) (0.4) 4.8 4.3 (0.1) (0.2) 

Housing for the Elderly and Disabled - 

HUD............................................................. 4.6 5.5 - (0.1) 4.6 5.6 - - 

Export-Import Bank Loans ......................... 7.3 8.4 2.9 2.9 4.4 5.5 - - 

U.S. Agency for International 

Development........................................... 6.7 7.2 2.3 2.4 4.4 4.8 5.8 - 

Telecommunications Loans - USDA.......... 4.0 4.0 (0.3) - 4.3 4.0 (0.1) - 

Foreign Military Financing Program........... 3.2 3.7 0.2 - 3.0 3.7 - - 

All Other Direct Loan Programs................. 29.4 29.3 8.7 9.8 20.7 19.5 0.3 1.2

Total........................................................ 269.8 261.2 37.9 40.4 231.9 220.8 5.5 8.4

 

Guaranteed Loan Programs: 

Federal Housing Administration Loans - 

HUD ................................................................ 438.8 434.2 7.4 3.5 400.0 395.8 (1.0) (1.4) 

Federal Family Education Loans - 

Education................................................ 363.3 324.6 50.8 52.6 359.2 321.0 4.9 28.0 

Small Business Loans - SBA..................... 71.5 67.2 1.7 1.6 58.4 54.6 - - 

Export-Import Bank Guarantees.................. 50.2 49.4 1.3 1.3 50.2 49.4 0.1 0.2 

Veterans Housing Benefit Programs - VA .. 207.6 203.2 3.8 3.3 24.9 61.3 0.1 (0.8) 

Rural Housing Services - USDA ................ 17.9 15.9 0.7 0.6 16.1 14.3 - 0.1 

Israeli Loan Guarantee Program - AID....... 12.7 12.9 1.4 1.2 12.7 12.9 - - 

Overseas Private Investment Corporation 

Credit Program ....................................... 4.1 4.1 0.5 0.6 4.1 4.1 - - 

Federal Ship Financing Fund (Title XI) - 

DOT ........................................................ 2.7 2.9 0.3 0.3 2.9 2.9 - - 

Business and Industry Loans - USDA......... 3.7 3.9 0.3 0.3 2.7 2.9 0.1 - 

Export Credit Guaranteed Programs - 

USDA ........................................................ 2.4 3.0 0.2 0.2 2.3 2.9 (0.3) (0.3) 

All Other Guaranteed Loan Programs ....... 18.5 18.2 0.7 0.9 16.6 16.6 (0.1) 0.1 

Total Guaranteed Loan Programs .......... 1,193.4 1,139.5 69.1 66.4 950.1 938.7 3.8 25.9 

 
58 NOTES TO THE FINANCIAL STATEMENTS 

Net loans receivable includes related interest and foreclosed property, and is included in the assets section of 

the balance sheets. Foreclosed property is property that is transferred from borrowers to a Federal credit program, 

through foreclosure or other means, in partial or full settlement of post-1991 direct loans or as a compensation for 

losses that the Government sustained under post-1991 loan guarantees. Please refer to the individual financial 

statements of the Department of Veterans Affairs (VA) and the Department of Housing and Urban Development 

(HUD) for significant detailed information regarding foreclosed property. 

The total subsidy expense is the cost of direct loans and loan guarantees recognized during the fiscal year. It 

consists of the subsidy expense incurred for direct and guaranteed loans disbursed during the fiscal year, for 

modifications made during the fiscal year of loans and guarantees outstanding, and for reestimates as of the end of 

the fiscal year of the cost of loans and guarantees outstanding. This expense is included in the Statements of Net 

Cost. 

Major Loan Programs 

The Department of Education (Education) has two major education loan programs. The first major education 

loan program, the Federal Direct Student Loan Program, established in fiscal year 1994, offers four types of 

education loans: Stafford, Unsubsidized Stafford, PLUS for parents, and consolidation loans. Evidence of financial 

need is required for a student to receive a subsidized Stafford loan. The other three types of loans are available to 

borrowers at all income levels. These loans usually mature 9 to 13 years after the student is no longer enrolled. They 

are unsecured. The second major education loan program, the Federal Family Education Loan Program established 

in fiscal year 1965, is a guaranteed loan program. Like the Federal Direct Student Loan Program, it offers four types 

of loans: Stafford, Unsubsidized Stafford, PLUS for parents, and consolidation loans. 

The USDA offers direct and guaranteed loans through credit programs in the Farm and Foreign Agricultural 

Services (FFAS) Mission Area through the Farm Service Agency (FSA), and the Commodity Credit Corporation 

(CCC), and in the Rural Development Mission Area (RD). 

The FFAS delivers commodity, credit, conservation, disaster and emergency assistance programs that help 

strengthen and stabilize the agricultural economy. 

The FSA offers direct and guaranteed loans to farmers who are unable to obtain private commercial credit and 

through this supervised credit to graduate its borrowers to commercial credit. The CCC offers both guarantee credit 

and direct credit programs for buyers of U.S. exports, suppliers, and sovereign countries in need of food assistance. 

The RD provides affordable housing and essential community facilities to rural communities through its 

housing loan and grant programs. These programs include: 

• Very low- and low-to-moderate-income home ownership loans and guarantees. 

• Very low-income housing repair loans. 

• Multifamily housing loans and guarantees. 

• Domestic farm labor housing loans. 

• Housing site loans. 

• Credit sales of acquired property. 

The Rural Utilities Program administers a variety of loan programs for electric energy, telecommunications, 

and water and environmental projects in rural America. 

The Department of Housing and Urban Development, Federal Housing Administration (FHA) provides 

mortgage insurance to encourage lenders to make credit available to expand home ownership. FHA predominately 

serves borrowers that the conventional market does not serve adequately. This includes first-time homebuyers, 

minorities, low-income families, and residents of under-served areas. 

The VA’s Veterans Housing Benefit Program provides partial guarantee of residential mortgage loans issued to 

eligible veterans, reservists, and service members by private lenders. This guarantee allows veterans, reservists, and 

service members to purchase a home without a substantial down payment. 

The Export-Import Bank (EXIM) aids in financing and promoting U.S. exports. To accomplish its objectives, 

the bank’s authority and resources are used to: 

• Assume commercial and political risk that exporters or private institutions are unwilling or are unable to 

undertake. 

• Overcome maturity and other limitations in private sector financing. 

• Assist U.S. exports to meet foreign officially-sponsored export credit competition. 

• Provide leadership and guidance in export financing to the U.S. exporting and banking communities and to 

foreign borrowers. 

The average repayment terms for these loans are approximately 7 years. 
NOTES TO THE FINANCIAL STATEMENTS 59

The Department of Defense (DOD), on behalf of the Executive Office of the President, provided military 

assistance to certain countries under the authorities of the Foreign Assistance Act of 1961, as amended, and the 

Arms Export Control Act of 1976, as amended. 

The U.S. Agency for International Development (USAID) provides economic assistance to selected countries 

in support of U.S. efforts to promote stability and security interests in strategic regions of the world. 

Other loan programs include the Small Business Administration general business loan guarantees and disaster 

loans, and the Farm Service Agency’s farm ownership, emergency, and disaster loans and loans and guarantees 

made by the DOD under its Military Housing Privatization, and Armament Retooling and Manufacturing Support 

Initiatives. 

Government-sponsored enterprises have the authority to request borrowings totaling $10 billion, subject to the 

approval of the Secretary of the Treasury. 

Certain amounts, as of September 30, 2006, for the face value of loans outstanding, the long term cost of direct 

loans outstanding and net loan receivable amounts included in All Other Direct Loans were reclassified into the 

Federal Direct Student Loans-Education and Export-Import Bank Loans programs to reflect the amounts that were 

misclassified in the prior year. The reclassifications are summarized in the table below:

Direct Loan Programs as of September 30, 2006 

(In billions of dollars) 

Face Value 

of Loans 

Outstanding 

Long-Term 

Cost of Loans

Outstanding 

Net Loans 

Receivable 

 

Federal Direct Student Loans- Education... 0.6 - 0.6 

Export-Import Bank Loans .......................... 2.4 1.4 1.0 

All Other Direct Loan Programs .................. (3.0) (1.4) (1.6) 

Total.......................................................... - - - 

 

The reclassifications did not affect the total amounts for the face value of loans outstanding, the long term cost 

of direct loans outstanding, and the net loan receivable amounts as of September 30, 2006.

Please refer to the individual financial statements of the agencies specified above for significant detailed 

information regarding direct and guaranteed loans. 
60 NOTES TO THE FINANCIAL STATEMENTS 

Note 5. Inventories and Related Property, Net 

 

Inventories and Related Property as of September 30 

Defense

All 

Others Total Defense 

All 

Others Total 

(In billions of dollars) 2007 2006 

 

Inventory purchased for resale ................. 86.5 0.7 87.2 86.5 0.7 87.2 

Inventory and operating material and 

supplies held for repair ........................... 48.5 0.6 49.1 48.1 0.5 48.6 

Inventory—excess, obsolete, and 

unserviceable ......................................... 7.3 - 7.3 9.8 0.1 9.9 

Operating materials and supplies held 

for use..................................................... 124.0 5.8 129.8 130.5 4.6 135.1 

Operating materials and supplies held 

in reserve for future use ......................... - 0.2 0.2 - 0.2 0.2 

Operating materials and supplies— 

excess, obsolete, and unserviceable ..... 2.4 0.2 2.6 2.1 (0.2) 1.9 

Stockpile materials.................................... - 43.9 43.9 0.1 42.9 43.0 

Stockpile materials held for sale ............... 0.9 0.3 1.2 1.0 0.3 1.3 

Forfeited property...................................... - 0.2 0.2 - 0.2 0.2 

Other related property............................... 0.6 0.8 1.4 0.8 0.8 1.6 

Total allowance for inventories and 

related property ...................................... (45.3) (0.5) (45.8) (47.2) (0.5) (47.7)

Total inventories and related property, net .. 224.9 52.2 277.1 231.7 49.6 281.3 

 

Inventory is tangible personal property that is (1) held for sale, principally to Federal agencies, (2) in the 

process of production for sale, or (3) to be consumed in the production of goods for sale or in the provision of 

services for a fee. 

Inventory purchased for resale is the cost or value of tangible personal property purchased by an agency for 

resale. DOD values approximately 63 percent of its resale inventory using the moving average cost (MAC) method. 

An additional 9 percent (fuel inventory) is reported using the first-in-first-out method. DOD reports the remaining 

28 percent of resale inventories at an approximation of historical cost using latest acquisition cost (LAC) adjusted 

for holding gains and losses. 

Inventory held in reserve for future sale is inventory not readily available, or inventory that will be needed in 

the future. Inventory and operating materials and supplies held for repair are damaged inventory that require repair 

to make them suitable for sale (inventory) or is more economic to repair than to dispose of (operating materials and 

supplies). 

Inventory—excess, obsolete, and unserviceable consists of: 

• Excess inventory is that which exceeds the demand expected in the normal course of operations and which does 

not meet management’s criteria to be held in reserve for future sale. 

• Obsolete inventory is that which no longer is needed due to changes in technology, laws, customs, or operations. 

• Unserviceable inventory is inventory damaged beyond economic repair. 

Excess, obsolete, and unserviceable inventory is reported at net realizable value. 

Please refer to the individual financial statements of DOD and GSA for significant detailed information 

regarding inventory held for future sale. 

Operating materials and supplies held for use are tangible personal property to be consumed in normal 

operations. 

Operating materials and supplies held in reserve for future use are materials retained because they are not 

readily available in the market or because they will not be used in the normal course of operations, but there is more 

than a remote chance that they will eventually be needed. DOD, which accounts for most of the reported operating 
NOTES TO THE FINANCIAL STATEMENTS 61

materials and supplies held for use, uses LAC, MAC and Standard Price under the purchase and consumption 

methods of accounting and does not adjust for holding gains and losses. The DOD valuation methods do not 

approximate historical cost. 

Operating materials and supplies—excess, obsolete, and unserviceable consists of: 

• Excess operating materials and supplies are materials that exceed the demand expected in the normal 

course of operations, and do not meet management’s criteria to be held in reserve for future use. 

• Obsolete operating materials and supplies are materials no longer needed due to changes in technology, 

laws, customs, or operations. 

• Unserviceable operating materials and supplies are materials damaged beyond economic repair. 

DOD, which accounts for most of the reported excess, obsolete, and unserviceable operating materials and 

supplies, revalues it to a net realizable value of zero through the allowance account. 

Please refer to the individual financial statements of DOD and NASA for significant detailed information 

regarding operating materials and supplies. 

Stockpile materials include strategic and critical materials held in reserve for use in national defense, 

conservation, or national emergencies due to statutory requirements; for example, nuclear materials and oil, and 

stockpile materials that are authorized to be sold. The majority of the amount reported by the DOD is stockpile 

materials held for sale, and the amount reported by others is stockpile materials held in reserve, with the majority of 

it being reported by DOE. Please refer to their individual financial statements for more information on stockpile 

materials. 

Other related property consists of: 

• Commodities include items of commerce or trade that have an exchange value used to stabilize or 

support market prices. Please refer to the financial statements of the USDA for detailed information 

regarding commodities. 

• Seized monetary instruments are comprised only of monetary instruments that are awaiting judgment to 

determine ownership. The related liability is included in other liabilities. Other property seized by the 

Government, such as real property and tangible personal property, is not considered a Government asset. 

It is accounted for in agency property-management records until the property is forfeited, returned, or 

otherwise liquidated. Please refer to the individual financial statements of the Department of Justice 

(Justice), Treasury, and the Department of Homeland Security (DHS) for significant detailed information 

regarding seized property. 

• Forfeited property is comprised of monetary instruments, intangible property, real property, and tangible 

personal property acquired through forfeiture proceedings; property acquired by the Government to 

satisfy a tax liability; and unclaimed and abandoned merchandise. Please refer to the individual financial 

statements of Justice, Treasury, and DHS for significant detailed information regarding forfeited 

property. 

• Other property not classified above. 

Note 6. Property, Plant, and Equipment, Net 

The category of property, plant, and equipment consists of tangible assets including land, buildings, structures, 

Internal Use software, and other assets used to provide goods and services. Depreciation and amortization is 

recognized using the straight-line method over the estimated useful lives of the assets. 
62 NOTES TO THE FINANCIAL STATEMENTS 

 

Property, Plant, and Equipment as of September 30, 2007 

Cost 

Accumulated 

Depreciation/ 

Amortization Net 

(In billions of dollars) Defense

All 

Others Defense

All 

Others Defense 

All 

Others

Buildings, structures, and 

facilities.................................... 173.3 189.3 101.5 96.9 71.8 92.4 

Furniture, fixtures, and 

equipment................................ 728.1 151.0 359.7 84.5 368.4 66.5 

Construction in progress ............ 19.5 34.5 N/A N/A 19.5 34.5 

Land ........................................... 10.5 11.3 N/A N/A 10.5 11.3 

Internal Use software ................. 9.3 10.6 5.8 4.9 3.5 5.7 

Assets under capital lease......... 1.0 1.7 0.5 0.7 0.5 1.0 

Leasehold improvements........... 0.6 4.4 0.3 2.4 0.3 2.0 

Other property, plant, and 

equipment................................ 0.1 8.6 - 5.5 0.1 3.1 

Subtotal ................................... 942.4 411.4 467.8 194.9 474.6 216.5 

Total property, plant, and 

equipment, net ................... 1,353.8 662.7 691.1 

 

Property, Plant, and Equipment as of September 30, 2006 

Cost 

Accumulated 

Depreciation/ 

Amortization Net 

(In billions of dollars) Defense

All 

Others Defense

All 

Others Defense 

All 

Others 

Buildings, structures, and 

facilities.................................... 167.9 180.2 98.4 91.9 69.5 88.3 

Furniture, fixtures, and 

equipment................................ 700.4 127.7 338.6 76.6 361.8 51.1 

Construction in progress ............ 20.0 47.2 N/A N/A 20.0 47.2 

Land ........................................... 10.5 11.0 N/A N/A 10.5 11.0 

Internal User software................ 8.7 8.9 5.3 3.8 3.4 5.1 

Assets under capital lease......... 0.6 1.6 0.5 0.6 0.1 1.0 

Leasehold improvements........... 0.3 4.4 0.2 2.5 0.1 1.9 

Other property, plant, and 

equipment................................ 0.1 50.8 - 33.4 0.1 17.4 

Subtotal ................................... 908.5 431.8 443.0 208.8 465.5 223.0 

Total property, plant, and 

equipment, net ................... 1,340.3 651.8 688.5 

 

For physical quantity information related to multi-use heritage assets, refer to Note 24—Heritage Assets. 

Please refer to the individual financial statements of DOD, DOE, USPS, NASA, GSA and TVA for significant 

detailed information for property, plant and equipment. These agencies comprise 85 percent of the Government’s 

total reported net property, plant, and equipment of $691.1 billion as of September 30, 2007. 
NOTES TO THE FINANCIAL STATEMENTS 63

Note 7. Securities and Investments 

 

Securities and Investments as of September 30 

 

(In billions of dollars) 2007 2006 

 

Securities and investments: 

Pension Benefit Guaranty Corporation ................................................. 45.9 35.5 

Railroad Retirement Board *.................................................................. 32.0 28.6 

Exchange Stabilization Fund................................................................. 10.0 9.3 

Tennessee Valley Authority................................................................... 9.6 8.5 

All other ................................................................................................ 2.3 1.9 

Total Securities and Investments........................................................ 99.8 83.8 

 * For more information, see the Social Insurance, Railroad Retirement, segment in the Supplemental Information section. 

 

These securities and investments do not include nonmarketable Treasury securities, which have been 

eliminated in consolidation. They are presented at cost, net of unamortized premiums and discounts. The Pension 

Benefit Guaranty Corporation (PBGC) invests primarily in fixed maturity and equity securities. As discussed in the 

Railroad Retirement section of Supplemental Information—Social Insurance, the National Railroad Retirement 

Investment Trust manages and invests railroad retirement assets that are to be used to pay retirement benefits to the 

Nation’s railroad workers under the Railroad Retirement Program, a social insurance program. Treasury’s Exchange 

Stabilization Fund invests primarily in foreign currency, bonds, and bills. TVA balance includes $8.4 billion and 

$7.5 billion for years ending September 30, 2007, and 2006, respectively, relates to the Tennessee Valley Authority 

Retirement System. 

Note 8. Other Assets 

 

Other Assets as of September 30 

 

(In billions of dollars) 2007 2006 

 

Advances and prepayments .................................................................... 30.5 29.9 

Other ........................................................................................................ 34.9 25.5 

Total other assets.................................................................................. 65.4 55.4 

 

Other assets include advances and prepayments which represent funds disbursed in contemplation of the future 

performance of services, receipt of goods, the incurrence of expenditures, or the receipt of other assets. These 

include advances to contractors and grantees, travel advances, and prepayments for items such as rents, taxes, 

insurance, royalties, commissions, and supplies. 

Other items included in other assets are regulatory assets, purchased power generating capacity, deferred 

nuclear generating units, nonmarketable equity investments in international financial institutions, the balance of 

assets held by the experience-rated carriers participating in the Health Benefits and Life Insurance Program carriers 

(pending disposition on behalf of OPM), and receivables from bank and thrift resolutions. 
64 NOTES TO THE FINANCIAL STATEMENTS 

Note 9. Accounts Payable 

 

Accounts Payable as of September 30 

(In billions of dollars) 2007 2006 

 

Department of Defense................................................................................. 29.7 27.4 

Department of Agriculture............................................................................. 4.4 4.2 

Department of Veterans Affairs..................................................................... 3.9 0.8 

Department of Homeland Security................................................................ 3.0 2.8 

Department of Justice ................................................................................... 2.8 2.3 

Tennessee Valley Authority .......................................................................... 2.7 1.1 

Department of the Treasury.......................................................................... 2.5 0.7 

Agency for International Development.......................................................... 2.4 2.3 

U.S. Postal Service ....................................................................................... 2.0 2.0 

Department of State...................................................................................... 2.0 1.3 

General Services Administration................................................................... 1.8 2.0 

Department of Energy................................................................................... 1.4 1.3 

Department of Interior ................................................................................... 1.1 1.1 

Department of Labor ..................................................................................... 1.1 0.9 

National Aeronautics and Space Administration........................................... 1.0 1.7 

All other departments.................................................................................... 4.4 6.5 

Total accounts payable .............................................................................. 66.2 58.4 

 

The accounts payable table includes accounts payable for goods and property ordered and received, services 

rendered by other than Federal employees, and accounts payable for cancelled appropriations. 
 NOTES TO THE FINANCIAL STATEMENTS 65

Note 10. Federal Debt Securities Held by the Public and 

Accrued Interest 

Definitions of Debt 

Debt Held by the Public⎯Federal debt held outside the Government by individuals, 

corporations, State or local governments, Federal Reserve banks, foreign governments, and 

central banks. 

Intragovernmental Debt Holdings⎯Federal debt held by Government trust funds, revolving 

funds, and special funds.
66 NOTES TO THE FINANCIAL STATEMENTS 

 

Federal Debt Securities Held by the Public and Accrued Interest 

(In billions of dollars) 

Balance 

September

30, 2006 

Net 

Change

During 

Fiscal Year

2007 

Balance 

September 

30, 2007 

Average 

Interest 

Rate 

2007 

Average

Interest

Rate 

2006 

 

Treasury Securities (Public): 

Marketable securities: 

Treasury bills ................................ 908.5 46.1 954.6 4.6% 5.0% 

Treasury notes.............................. 2,445.3 10.8 2,456.1 4.4% 4.2% 

Treasury bonds............................. 534.5 26.4 560.9 7.4% 7.6% 

Treasury inflation-protected 

securities (TIPS)......................... 395.5 61.3 456.8 2.3% 2.3% 

Total marketable Treasury 

securities ................................. 4,283.8 144.6 4,428.4 

 

Nonmarketable securities ............. 559.3 61.6 620.9 4.9% 5.0% 

Net unamortized premium/ 

(discounts)............................... (40.2) 0.8 (39.4) 

Total Treasury securities, net 

(public) .................................. 4,802.9 207.0 5,009.9 

 

Agency Securities: 

Tennessee Valley Authority.......... 22.9 (0.3) 22.6 

All other agencies ......................... 0.2 0.2 0.4 

Total agency securities, net of 

unamortized premiums and 

discounts ................................. 23.1 (0.1) 23.0 

Accrued interest payable ............. 41.5 3.3 44.8 

 

Total Federal debt securities 

held by the public and 

accrued interest ....................... 4,867.5 210.2 5,077.7 

 Types of marketable securities: 

Bills – Short-term obligations issued with a term of 1 year or less. 

Notes – Medium-term obligations issued with a term of at least 1 year, but not more than 10 years. 

Bonds – Long-term obligations of more than 10 years. 

TIPS – Term of more than 5 years. 

This table details Government borrowing to finance operations and shows marketable and nonmarketable 

securities at face value less net unamortized discounts including accrued interest. 

Securities that represent Federal debt held by the public are issued primarily by the Treasury and include: 

• Interest-bearing marketable securities (bills, notes, bonds, and inflation-protected). 

• Interest-bearing nonmarketable securities (foreign series, State and local government series, domestic series, 

and savings bonds). 

• Non interest-bearing marketable and nonmarketable securities (matured and other). 

Section 3111 of Title 31, United States Code (U.S.C.) authorizes the Secretary of the Treasury to use money 

received from the sale of an obligation and other money in the General Fund of the Treasury to buy, redeem, or 

refund, at or before maturity, outstanding bonds, notes, certificates of indebtedness, Treasury bills, or savings 

certificates of the Government. There were no buyback operations in fiscal years 2007 and 2006. 
 NOTES TO THE FINANCIAL STATEMENTS 67

As of September 30, 2007, and 2006, respectively, $8,921.3 billion and $8,420.3 billion of debt were subject to a 

statutory limit (31 U.S.C. § 3101). That limit was $9,815.0 billion as of September 30, 2007, and $8,965.0 billion as of 

September 30, 2006. The debt subject to the limit includes Treasury securities held by the public and Government 

guaranteed debt of Federal agencies (shown in the table above) and intragovernmental debt holdings (shown in the table 

below). 

Intragovernmental debt holdings represent the portion of the gross Federal debt held as investments by 

Government entities. This includes trust funds that are earmarked funds. For more information on earmarked funds, 

see Note 20─Earmarked Funds. These intragovernmental debt holdings are eliminated in the consolidation of these 

financial statements. 

 

Intragovernmental Debt Holdings: Federal Debt Securities 

Held as Investments by Government Accounts as of September 30 

(In billions of dollars) 

Balance 

2006 

Net 

Change 

During 

Fiscal Year 

2007 

Balance 

2007 

 

Social Security Administration, Federal Old-Age and 

Survivors Insurance.................................................... 1,793.1 175.2 1,968.3 

Office of Personnel Management, Civil Service 

Retirement and Disability............................................ 689.9 11.8 701.7 

Department of Health and Human Services, Federal 

Hospital Insurance...................................................... 302.2 17.2 319.4 

Social Security Administration, Federal Disability 

Insurance .................................................................... 202.2 11.6 213.8 

Department of Defense, Military Retirement Fund........ 181.8 8.4 190.2 

Department of Defense, Medicare-Eligible Retiree 

Health Care Fund ....................................................... 72.7 19.5 92.2 

Department of Labor, Unemployment........................... 66.2 8.7 74.9 

Federal Deposit Insurance Corporation Funds.............. 49.3 1.4 50.7 

Department of Energy, Nuclear Waste Disposal .......... 36.5 2.9 39.4 

Department of Health and Human Services, Federal 

Supplementary Medical Insurance ............................. 32.3 6.9 39.2 

Pension Benefit Guaranty Corporation Fund ................ 36.6 (0.8) 35.8 

Office of Personnel Management, Employees' Life 

Insurance .................................................................... 31.3 1.7 33.0 

Office of Personnel Management, Postal Service 

Retiree Health Benefits Fund ..................................... - 25.5 25.5 

Housing and Urban Development, Federal Housing .... 22.0 0.4 22.4 

Department of Treasury, Exchange Stabilization 

Fund............................................................................ 15.7 0.7 16.4 

Office of Personnel Management, Employees' 

Health Benefits ........................................................... 14.8 1.1 15.9 

Department of State, Foreign Services Retirement 

and Disability Fund ..................................................... 13.9 0.5 14.4 

Department of Transportation, Highway Trust Fund..... 11.0 1.2 12.2 

Department of Veterans Affairs, National Service 

Life Insurance Fund...................................................... 10.2 (0.4) 9.8 

All other programs and funds ........................................ 82.2 1.0 83.2 

Subtotal....................................................................... 3,663.9 294.5 3,958.4 

Unamortized net (discounts)/premiums ........................ (1.2) 4.9 3.7 

 Total intragovernmental debt holdings, net........... 3,662.7 299.4 3,962.1 
68 NOTES TO THE FINANCIAL STATEMENTS 

Note 11. Federal Employee and Veteran Benefits Payable 

The Government offers its employees life and health insurance, as well as retirement and other benefits. These 

benefits, which include both actuarial amounts and amounts due and payable to beneficiaries and health care 

carriers, apply to civilian and military employees. 

The Federal Government administers more than 40 pension plans. OPM administers the largest civilian plan. 

DOD, meanwhile, administers the largest military plan. Other significant pension plans with more than $10 billion 

in accrued benefits payable include those of the Coast Guard and the Foreign Service. The changes in the accrued 

post-retirement pension and health benefit liability and components of related expense for the years ended 

September 30, 2007, and 2006, respectively, are presented below. 

 

Federal Employee and Veteran Benefits Payable as of September 30 

 

Civilian Military Total

(In billions of dollars) 2007 2006 2007 2006 2007 2006 

 

Pension and accrued 

benefits .............................. 1,386.3 1,349.0 1,028.8 967.1 2,415.1 2,316.1 

Post-retirement health and 

accrued benefits ................ 311.6 295.2 833.8 837.2 1,145.4 1,132.4 

Veterans compensation 

and burial benefits ............. N/A N/A 1,127.7 1,153.8 1,127.7 1,153.8 

Life insurance and accrued 

benefits .............................. 35.9 34.2 13.1 13.5 49.0 47.7 

FECA benefits ...................... 15.9 14.4 8.7 8.7 24.6 23.1 

Liability for other benefits ..... 0.5 1.5 6.8 4.4 7.3 5.9 

Total Federal employee 

and veteran benefits 

payable............................ 1,750.2 1,694.3 3,018.9 2,984.7 4,769.1 4,679.0 

 

 

Change in Pension and Accrued Benefits 

(In billions of dollars) Civilian Military Total

 

Actuarial accrued pension liability as of September 30, 2006 ........ 1,349.0 967.1 2,316.1 

Pension Expense: 

Prior (and past) service costs from plan amendments.................... 0.4 1.6 2.0 

Assumption change......................................................................... 1.2 26.5 27.7 

Normal costs................................................................................. 27.3 17.8 45.1 

Interest on pension liability during the period ............................... 82.5 57.1 139.6 

Actuarial (gains)/losses................................................................. (10.6) 2.2 (8.4)

Total pension expense............................................................... 100.8 105.2 206.0 

Less benefits paid......................................................................... 63.5 43.5 107.0 

Actuarial accrued pension liability as of September 30, 2007 ..... 1,386.3 1,028.8 2,415.1 

 
 NOTES TO THE FINANCIAL STATEMENTS 69

Significant Long-Term Economic Assumptions Used in Determining 

Pension Liability and the Related Expense 

Civilian Military 

(In percentages) 2007 2006 2007 2006 

 

Rate of interest................................................................... 6.25% 6.25% 6.00% 6.00%

Rate of inflation .................................................................. 3.50% 3.50% 3.00% 3.00%

Projected salary increases................................................. 4.25% 4.25% 3.75% 3.75%

 

Change in Post-Retirement Health and Accrued Benefits 

 

(In billions of dollars) Civilian Military Total 

 

Actuarial accrued post-retirement health benefits 

liability, as of September 30, 2006................................ 295.2 837.2 1,132.4 

Prior period adjustments ..................................................... 0.4 - 0.4 

Corrected beginning post-retirement health benefits 

liability............................................................................... 295.6 837.2 1,132.8 

 

Post-Retirement Health Benefits Expense: 

Normal costs..................................................................... 11.3 20.3 31.6 

Interest on liability............................................................. 18.2 53.0 71.2 

Change in medical inflation rate assumption 

(gains)/losses................................................................. - (41.2) (41.2) 

Other actuarial (gains)/losses........................................... (1.7) (16.7) (18.4) 

Total post-retirement health benefits expense .............. 27.8 15.4 43.2 

Less claims paid............................................................... 11.8 18.8 30.6 

Actuarial accrued post-retirement health benefits 

liability, as of September 30, 2007.............................. 311.6 833.8 1,145.4 

 

 

Significant Long-Term Economic Assumptions Used in 

Determining Post-Retirement Health Benefits and the Related 

Expense 

 

 

Civilian Military 

(In percentages) 2007 2006 2007 2006 

 

Rate of interest................................................ 6.25% 6.25% 6.00% 6.25% 

Rate of health care cost inflation..................... 7.00% 7.00% 6.25% 6.25% 

 
70 NOTES TO THE FINANCIAL STATEMENTS 

Separate boards of actuaries for OPM and DOD determine the actuarial assumptions used in calculating the 

pension liability and the post-retirement health benefit liability for the civilian and military personnel. The boards 

use generally accepted actuarial methodologies. The board for OPM uses a fixed rate of inflation and projected 

salary increases over all years for both the pension and post-retirement health benefit liabilities. These rates are 

shown in the tables above. The Board approves the long term assumptions for interest, inflation, and across-theboard salary increases shown in the table above. The DOD Board approves the assumptions used for the Medicareeligible portion of the military post-retirement health benefit liabilities. DOD uses a range of rates for the health care 

cost inflation increases, varying by year and type of service, with an ultimate rate for the long term as shown in the 

table above. 

The long-term ultimate rate for fiscal year 2007 of 6.25 percent is shown in the tables above. For disclosure 

and comparison purposes, DOD’s estimate of a single equivalent fixed rate of health care cost inflation for fiscal 

year 2007 is 6.9 percent, which is an approximation of the single equivalent rate that would produce that same 

actuarial liability as the actual rates used. 

Civilian Employees 

Pensions 

OPM administers the largest civilian pension plan, which covers approximately 90 percent of all Federal 

civilian employees. This plan includes two components of defined benefits. These are the Civil Service Retirement 

System (CSRS) and the Federal Employees’ Retirement System (FERS). The basic benefit components of the CSRS 

and the FERS are financed and operated through the Civil Service Retirement and Disability Fund (CSRDF). 

CSRDF monies are generated primarily from employees’ contributions, agency contributions, payments from 

the General Fund, and interest on investments in Treasury securities. See Note 20—Earmarked Funds. 

The Federal Retirement Thrift Investment Board, an independent Government agency, administers the Thrift 

Savings Plan (TSP) Fund. The TSP Fund includes the C-Fund, S-Fund, F-Fund, I-Fund, and G-Fund, and the newly 

established L-Funds. These financial statements exclude the TSP because the CSRS and FERS employees own its 

assets. 

Treasury securities held in the G-Fund are included and classified as Treasury securities held by the public. 

There are no limits on the percentage of contribution to the plan for CSRS and FERS employees, as long as they do 

not exceed the Internal Revenue Service elective deferral limit, which is $15,500 for 2007. FERS participants 

received the following: Agency Automatic (1 percent) Contributions; Agency Matching Contributions; and vesting 

is immediate for agency automatic contributions and attributable earnings. Vesting is generally 3 years for agency 

matching contributions and attributable earnings. To receive the maximum agency Matching Contribution, FERS 

employees must contribute at least five percent of the basic pay each pay period during the year. (The first five 

percent of the basic pay each pay period is matched dollar-for-dollar on the first percent, and 50 cents on the dollar 

for the next two percent.) CSRS employees do not receive any agency contributions. 

The G-Fund held $81.4 billion and $72.2 billion in nonmarketable Treasury securities as of September 30, 

2007, and 2006, respectively. The Federal Government’s related liability is included in total Federal debt securities 

held by the public and accrued interest in the balance sheets. 

The L-Funds, established August 1, 2005, diversifies participant accounts among the G, F, C, S, and I Funds, 

using professionally determined investment mixes (allocations) that are tailored to different time horizons. 

Health Benefits 

The post-retirement civilian health benefit liability is an estimate of the Government’s future cost of providing 

post-retirement health benefits to current employees and retirees. Although active and retired employees pay an 

insurance premium under the Federal Employees Health Benefits Program, these premiums cover only a portion of 

the costs. The OPM actuary applies economic assumptions to historical cost information to estimate the liability, 

which is then reduced by certain operating costs and premiums received during the year. 

Life Insurance Benefits 

One of the largest other employee benefits is the Federal Employee Group Life Insurance Program. Employee 

and annuitant contributions and interest on investments fund a portion of this liability. The actuarial life insurance 

liability is the expected present value of future benefits to pay to, or on behalf of, existing Life Insurance Program 

participants. The OPM actuary uses interest rate, inflation, and salary increase assumptions that are consistent with 

the pension liability. 
 NOTES TO THE FINANCIAL STATEMENTS 71

Workers’ Compensation Benefits 

The Department of Labor (DOL) determines both civilian and military agencies’ liabilities for future workers’ 

compensation benefits for civilian Federal employees, as mandated by the Federal Employees Compensation Act 

(FECA) for death, disability, medical, and miscellaneous costs for approved compensation cases, and a component 

for incurred but not reported claims. The FECA liability is determined annually using historical benefit payment 

patterns related to a specific incurred period to predict the final payment related to the period. These estimated 

payments have been discounted to present value using the Office of Management and Budget’s economic 

assumptions for 10-year U.S. Treasury notes and bonds. For 2007, a 4.93 percent interest rate was assumed and 5.08 

percent was assumed for year two and thereafter. 

The DOL calculates the FECA liability using wage inflation factors (cost of living adjustments or COLA) and 

medical inflation factors (consumer price index – medical or CPIM). The table below is the compensation COLAs 

and CPIMs used in the estimations for various charge back years. 

Fiscal Year COLA CPIM 

2007 N/A N/A 

2008 2.63% 3.74% 

2009 2.90% 4.04% 

2010 2.47% 4.00% 

2011 2.37% 3.94% 

2012+ 2.30% 3.94% 

Military Employees (Including Veterans) 

Pensions 

The DOD Military Retirement Fund (MRF) finances military retirement and survivor benefit programs. The 

increase in Military Retirement Pension is primarily due to interest on the pension liability. The increase is due 

largely to the unfunded liability amortization schedule adopted by the Board of Actuaries. The prior plan funded the 

original unfunded liability over a 50-year period with increasing payments, which did not cover the interest on the 

unfunded liability, and therefore caused an increase in the total liability. The revised plan, effective in fiscal year 

2008, will fund the original unfunded liability over a 42-year period with higher payments. Under the revised plan, 

the expectation is that the unfunded liability will begin decreasing in fiscal year 2008. Actual results depend on 

future benefit changes, assumption changes, and actuarial experience. 

Projected revenues into the MRF come from three sources: interest earnings on MRF assets, monthly DOD 

contributions, and annual contributions from the Treasury Department. Beginning with fiscal year 2005, the 

contributions made by Treasury were increased by an amount equal to the annual expense for the new concurrent 

receipt provision of the fiscal year 2004 National Defense Authorization Act. 

The military retirement system consists of a funded, noncontributory, defined benefit plan. It applies to the 

Departments of the Army, Navy, Air Force, and Marine Corps. This system includes nondisability retirement pay, 

disability retirement pay, and retirement pay for reserve service and survivor annuity programs. Military personnel 

(Army, Navy, Marine Corps, and Air Force) who remain on active duty for 20 years or longer are eligible for 

retirement. There are three different retirement systems that are currently being used by the military: Final Pay, 

High-3 Year Average, and the Military Retirement Reform Act of 1986 (REDUX). The date each individual enters 

the military determines which retirement system they would fall under and if they have the option to pick their 

retirement system. 

Final Pay Retirement System: Final Pay applies to individuals who entered the Service before September 8, 

1980. Each year of service is worth 2.5 percent towards the retirement multiplier. The longer an individual stays on 

active duty, the higher the multiplier and the higher the retirement income, up to the maximum of 75 percent of pre2007 retirements. Starting with 2007 retirements, the retirement multiplier is not limited for individuals with more 

than 30 years of service. This multiplier is applied against the final basic pay of the individual’s career. A cost of 

living adjustment (COLA) is given annually based on the increase in the CPI. 
72 NOTES TO THE FINANCIAL STATEMENTS 

High-Year Average Retirement System: High-3 Year Average applies to members who first entered the Service 

after September 8, 1980, but before August 1, 1986. It also applies to individuals who entered on or after August 1, 

1986, who do not elect the REDUX retirement system with the $30,000 career status bonus (CSB) at their 15th year 

of service. The High-3 Year Average calculation is similar to the Final Pay except the High-3 Year Average uses the 

multiplier against basic pay for the highest 36 months of the individual’s career. A COLA is given annually based 

on the increase in the CPI. 

CSB/REDUX Retirement System: The REDUX applies to those who entered the Service on or after September 

8, 1980, and who elected to receive the $30,000 CSB at their 15th year of service. Under the CSB/REDUX 

retirement system, each of the first 20 years of service is worth 2 percent towards the retirement multiplier and each 

year after 20 years of service is worth 3.5 percent. The retirement multiplier under this retirement system is applied 

against the average basic pay for the highest 36 months of the individual’s basic pay. A COLA is given annually 

based on the increase in the CPI minus 1 percent. Members retiring under CSB/REDUX receive a one-time catchup 

at age 62 that restores the retired pay to what it would have been at that point had the member retired under High-3 

Year Average. Thereafter, CSB/REDUX members receive reduced (i.e., based on the increase in the CPI minus 1 

percent) COLAs for life. 

On October 30, 2000, the Floyd D. Spence National Defense Authorization Act (NDAA) for fiscal year 2001 

(Public Law No. 106-398) was signed into law. This law amended the effective date of NDAA for fiscal year 2000 

(Public Law No. 106-65), which extended participation in the TSP to members of the uniformed services. Members 

may contribute from their pay, and their contributions and earnings attributable to their TSP belong to them even if 

they do not serve the 20 or more years ordinarily required to receive retirement pay. 

Health Benefits 

Military benefits entitle retirees and their dependents to health care in military medical facilities if a facility can 

provide the needed care. Until they reach age 65, military retirees and their dependents also are entitled to be 

reimbursed for the cost of health care from civilian providers. A premium is charged to enroll in DOD’s civilian care 

program. In addition, there are deductible and copayment requirements for civilian care. Medicare, and since fiscal 

year 2002, Tricare as secondary payer, covers military retirees after they reach 65 years of age. 

Military retiree health care figures include the cost of education and training, staffing, buildings and 

equipment, as well as the operation and maintenance of medical facilities. They also include claims paid to civilian 

providers and the cost of administering the program. 

Chapter 56 of Title 10, U.S.C. created the DOD Medicare-Eligible Retiree Health Care Fund effective October 

1, 2002. The purpose of this fund is to account for the health benefits of Medicare-eligible members and former 

members of the DOD Uniformed Services who are entitled to retirement or retainer pay, and their eligible 

dependents who are Medicare eligible. 

In addition to the health care benefits for civilian and military retirees and their dependents, the VA also 

provides medical care to veterans on an “as available” basis, subject to the limits of the annual appropriations. In 

accordance with 38 CFR 17.36 (c), VA’s Secretary makes an annual enrollment decision that defines the veterans, 

by priority, who will be treated for that fiscal year subject to change based on funds appropriated, estimated 

collections, usage, the severity index of enrolled veterans, and changes in cost. VA recognizes the medical care 

expenses in the period the medical care services are provided. For the time period 2003 through 2007, the average 

medical cost per year was $27.1 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 in active duty. 

Burial benefits include a burial and plot or interment allowance payable for a veteran who, at the time of death, 

is qualified to receive compensation or a pension, or whose death occurred in a VA facility. 

The liability for veteran’s compensation and burial benefits payable decreased by $26.1 billion in fiscal year 

2007 and increased by $31.2 billion in fiscal year 2006. The primary factors contributing to these fluctuations were 

changes in interest rates and other actuarial assumptions; various assumptions in the actuarial model, such as the 

number of veterans and dependents receiving payments; and life expectancy. 
 NOTES TO THE FINANCIAL STATEMENTS 73

Veterans Compensation and Burial Benefits as of September 30 

(In billions of dollars) 2007 2006 

 

Veterans................................................................................................ 944.0 970.8 

Survivors............................................................................................... 179.9 179.1 

Burial benefits ....................................................................................... 3.8 3.9 

Total compensation and burial benefits payable ............................... 1,127.7 1,153.8 

Significant Economic Assumptions Used in Determining Veterans 

Compensation and Burial Benefits as of September 30 

(In percentages) 2007 2006 

 

Rate of interest ..................................................................................... 4.48% 4.76% 

Rate of inflation..................................................................................... 2.90% 4.10% 

Life Insurance Benefits 

The largest veterans life insurance programs consist of the following: 

• National Service Life Insurance (NSLI) covers policyholders who served during World War II. 

• Veterans Special Life Insurance (VSLI) was established in 1951 to meet the insurance needs of veterans who 

served during the Korean Conflict and through the period ending January 1, 1957. 

• Veterans Reopened Insurance (VRI), which provided a 1-year reopening for insurance coverage in 1965 for 

those eligible to have obtained NSLI or VSLI and were disabled. 

The components of veteran life insurance liability for future policy benefits are presented below: 

 Veteran Life Insurance Liability as of September 30 

 

 (In billions of dollars) 2007 2006 

 

Insurance Death Benefits: 

NSLI ...................................................................................... 8.2 8.6 

VSLI ...................................................................................... 1.6 1.6 

VRI ........................................................................................ 0.3 0.3 

Other ..................................................................................... 0.5 0.4 

 10.6 10.9 

 

Death benefit annuities ......................................................... 0.1 0.2 

Disability income & waiver .................................................... 0.5 0.5 

Insurance dividends payable ................................................ 1.9 1.9 

Total veterans life insurance liability................................... 13.1 13.5 

 

Insurance Dividends Payable consists of dividends left on deposit with VA, related interest payable, and 

dividends payable to policyholders. 
74 NOTES TO THE FINANCIAL STATEMENTS 

The VA supervises Service members’ Group Life Insurance and Veterans’ Group Life Insurance programs that 

provide life insurance coverage to members of the uniformed armed services and veterans who served during the 

Vietnam era or thereafter. The VA also provides certain veterans and/or their dependents with pension benefits, 

based on annual eligibility reviews, if the veteran died or was disabled for nonservice-related causes. The actuarial 

present value of the future liability for pension benefits is a nonexchange transaction and is not required to be 

recorded on the balance sheet. The projected amounts of future payments for pension benefits as of September 30, 

2007, and 2006 were $81.4 billion and $97.0 billion, respectively. 

As of September 30, 2006, $13.5 billion of Military FECA Benefits were reclassified to Military Life 

Insurance to correct their classification in the prior year. The reclassification did not affect total Military Employee 

and Veteran Benefits Payable as of September 30, 2006. 

Note 12. Environmental and Disposal Liabilities 

Environmental and Disposal Liabilities as of September 30 

(In billions of dollars) 2007 2006 

 

Department of Energy: 

Environmental Management Program ................................................. 188.6 159.1 

Legacy Environmental Liabilities - other .............................................. 29.4 28.1 

Active and Surplus Facilities ................................................................ 29.2 27.6 

High-level Waste and Spent Nuclear Fuel ........................................... 16.4 15.5 

Total Department of Energy............................................................... 263.6 230.3 

Department of Defense: 

Environmental Restoration................................................................... 33.1 33.5 

Disposal of Weapon Systems Program ............................................... 31.4 30.2 

Base Realignment and Closure............................................................ 5.1 4.1 

Environmental Corrective Other........................................................... 2.9 2.2 

Total Department of Defense............................................................. 72.5 70.0 

All other agencies ................................................................................. 5.9 4.9 

Total environmental and disposal liabilities ....................................... 342.0 305.2 

 

During World War II and the Cold War, DOE (or predecessor agencies) developed a massive industrial 

complex to research, produce, and test nuclear weapons. The nuclear weapons complex included nuclear reactors, 

chemical-processing buildings, metal machining plants, laboratories, and maintenance facilities. 

At all the sites where these activities took place, some environmental contamination occurred. This 

contamination was caused by the production, storage, and use of radioactive materials and hazardous chemicals, 

which resulted in contamination of soil, surface water, and groundwater. The environmental legacy of nuclear 

weapons production also includes thousands of contaminated areas and buildings, and large volumes of waste and 

special nuclear materials requiring treatment, stabilization, and disposal. 

Of those environmental liabilities, this report presents only cleanup costs from Federal operations known to 

result in hazardous and radioactive waste that the Government is required to clean up by Federal, State, or local 

statutes and/or regulations. Some of these statutes are the Comprehensive Environmental Response, Compensation, 

and Liability Act (CERCLA); the Resource Conservation and Recovery Act; the Nuclear Waste Policy Act of 1982, 

which provides for permanent disposal of the Nation’s high-level radioactive waste and spent nuclear fuel; and 

Public Law No. 105-204, which requires a plan for the conversion of depleted uranium hexafluoride. 

DOE is responsible for managing the legacy of contamination from the nuclear weapons complex. The 

environmental management baseline estimate includes projections of the technical scope, schedule, and costs for 

environmental restoration; managing nuclear materials waste treatment, storage and disposal activities; and postcleanup monitoring and stewardship at each installation. The baseline estimate includes costs for related activities 
 NOTES TO THE FINANCIAL STATEMENTS 75

such as landlord responsibilities, program management, and legally prescribed grants and cooperative agreements 

for participation and oversight by Native American tribes, regulatory agencies, and other stakeholders. Active and 

surplus facilities represent anticipated remediation costs for those facilities that are conducting ongoing operations 

but ultimately will require stabilization, deactivation, and decommissioning. 

Estimated cleanup costs at sites for which there are no current feasible remediation approach are excluded from the 

baseline estimates, although applicable stewardship and monitoring costs for these sites are included. Significant projects 

not included are the nuclear explosion test areas (e.g., Nevada test site). 

Estimating DOE’s environmental cleanup liability requires making assumptions about future activities and is 

inherently uncertain. The future course of DOE’s environmental management program will depend on a number of 

fundamental technical and policy choices to be made in the future. The sites and facilities could be restored to a 

pristine condition suitable for any desirable use, or could be restored to a point where they pose no near-term health 

risks. Achieving pristine conditions would have a higher cost but may, or may not, warrant the costs and potential 

ecosystem disruption, or be legally required. The environmental estimates include contingency estimates intended to 

account for the uncertainties associated with the technical cleanup scope of the program. 

DOE’s environmental liability estimates are dependent on annual funding levels and achievement of work as 

scheduled. Congressional appropriations at lower than anticipated levels or unplanned delays in project completion 

would cause increases in the estimates. 

DOE is also required to recognize closure and post-closure costs for its active and surplus facilities and 

environmental corrective action costs for current operations. The cleanup cost associated with active and surplus 

facilities that is allocated to operating periods beyond the balance sheet date is identified as the unrecognized 

portion. The DOE unrecognized portion of the cleanup cost associated with active and surplus facilities is $760.0 

million and $505.0 million for fiscal years 2007 and 2006, respectively. The unrecognized portion of the cleanup 

cost is recognized over a predetermined period of time. 

Please refer to the financial statements of the Department of Energy for significant detailed information 

regarding DOE’s environmental and disposal liabilities, including cleanup costs. 

DOD is required by law to adhere to CERCLA and the Superfund Amendment and Reauthorization Act to 

clean up contamination resulting from waste disposal practices, leaks, spills, and other activities that have created a 

public health or environmental risk. CERCLA requires DOD to clean up contamination in coordination with 

regulatory agencies, other responsible parties, and current property owners. 

DOD must restore active installations, installations affected by base realignment and closure, and other areas 

formerly used as defense sites. DOD also bears responsibility for disposal of chemical weapons and environmental 

costs associated with the disposal of weapons systems (primarily nuclear powered aircraft carriers and submarines). 

DOD is responsible, as well, for training range and other nonrange unexploded ordnance cleanup. 

DOD is currently using two independently validated estimating models, in addition to engineering estimates, to 

report its environmental liabilities. The models are the Remedial Action Cost Engineering Requirements (RACER) 

and the Department of Navy Normalization of Data System (NORM). DOD uses the models to estimate cost during 

the preliminary assessment and initial site investigation phases of restoration projects. Engineering estimates are 

generally used to estimate cost from the remedial investigation/feasibility phase of the project forward. DOD is also 

required to recognize closure and post-closure costs for its general property, plant, and equipment and environmental 

corrective action costs for current operations. The cleanup cost associated with general property, plant, and 

equipment that is allocated to operating periods beyond the balance sheet date is identified as the unrecognized 

portion. The DOD unrecognized portion of the cleanup cost associated with general property, plant, and equipment 

is $1,589.1 million and $1,527.4 million for fiscal years 2007 and 2006, respectively. The unrecognized portion of 

the cleanup costs is recognized over a predetermined period of time. 

Please refer to the financial statements of the DOD for further detailed information regarding DOD’s 

environmental and disposal liabilities, including cleanup costs. 
76 NOTES TO THE FINANCIAL STATEMENTS 

Note 13. Benefits Due and Payable 

These amounts are the benefits owed to program recipients or medical service providers as of the fiscal 

yearend that have not been paid. For a description of the programs, see the Supplemental Information—Social 

Insurance section. 

Benefits Due and Payable as of September 30 

(In billions of dollars) 2007 2006 

 

Federal Old-Age and Survivors Insurance ................................................ 44.1 41.6 

Federal Supplementary Medical Insurance (Medicare Part B).................. 22.2 21.1 

Federal Disability Insurance ...................................................................... 21.7 20.9 

Federal Hospital Insurance (Medicare Part A) ......................................... 19.4 19.8 

Grants to States for Medicaid .................................................................... 19.4 19.2 

Supplemental Security Income.................................................................. 4.2 3.5 

Unemployment Insurance.......................................................................... 1.3 1.1 

All Other Benefit Programs........................................................................ 1.4 2.1 

Total benefits due and payable............................................................... 133.7 129.3 

 

Note 14. Insurance Program Liabilities 

Insurance Program Liabilities as of September 30 

(In billions of dollars) 2007 2006 

 

Insurance Program Liabilities: 

Pension Benefit Guaranty Corporation - Benefit Pension Plans......... 69.3 69.1 

Department of Homeland Security - National Flood Insurance 

Program ............................................................................................ 1.5 3.6 

All Other Insurance Programs............................................................. 0.1 0.1 

Total Insurance Programs ................................................................ 70.9 72.8 

 

Insurance programs are Federal programs that provide protection to individuals or entities against specified 

risks except for those Federal employees or veterans discussed in Note 11—Federal Employee and Veteran Benefits 

Payable. These funds are commonly held in revolving funds with the Federal Government, and losses sustained by 

participants are paid from these funds. Many of these programs receive appropriations to pay excess claims and/or 

have authority to borrow from the Treasury. Insurance programs do not include social insurance, loan guarantee 

programs, and programs designed to benefit only current, former, and dependents of Federal employees. 

PBGC insures pension benefits of participants in covered defined benefit pension plans. As a wholly owned 

corporation of the U.S. Government, PBGC’s financial activity and balances are included in the consolidated 
 NOTES TO THE FINANCIAL STATEMENTS 77

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, 2007, PBGC had total liabilities of $82.5 billion, and its total liabilities exceeded its total assets by 

$14.1 billion. In addition, as discussed in Note 18—Contingencies, PBGC reported reasonably possible contingent 

losses of about $65.7 billion. 

The Federal Emergency Management Agency (FEMA) of DHS administers the National Flood Insurance 

Program (NFIP). The NFIP is administered through sale or continuation-in-force of insurance in communities that 

enact and enforce appropriate flood plain management measures. This liability represents an estimate of NFIP losses 

that are unpaid at the balance sheet date and is based on the loss and loss adjustment expense factors, including 

interest payments, inherent in the NFIP insurance underwriting operations experience and expectations. 
78 NOTES TO THE FINANCIAL STATEMENTS 

Note 15. Other Liabilities 

The other liabilities line item is comprised of liabilities that are not separately identified on the balance sheet. 

The table below presents other liabilities on a comparative basis by major category. Those that do not fit into these 

major categories are reported in the miscellaneous liabilities category. 

Other Liabilities 

(In billions of dollars) 2007 2006 

 

Employee-related liabilities 

Accrued Federal employees wages and benefits .................................... 31.2 30.0 

Selected DOE contractors' and D.C. employees' pension benefits ......... 28.8 28.4 

Subtotal.................................................................................................. 60.0 58.4 

 

Unearned revenue and assets held for others 

DOE's unearned fees for nuclear waste disposal and other unearned 

revenue.................................................................................................. 33.6 35.4 

Assets held on behalf of others................................................................ 38.7 23.2 

Subtotal.................................................................................................. 72.3 58.6 

 

Subsidies and grants 

Farm and other subsidies......................................................................... 17.9 20.0 

Grant payments due to State and local governments and others............ 13.1 13.0 

Subtotal.................................................................................................. 31.0 33.0 

 

International monetary liabilities and gold certificates (see Note 2)... 20.8 20.4 

Miscellaneous liabilities 

Legal and other contingencies ................................................................. 24.7 17.9 

Bonneville Power Administration Non-Federal Power Projects and Capital 

lease liabilities, and disposal liabilities.......................................................... 12.5 13.2 

Other miscellaneous ................................................................................ 36.9 32.8 

Subtotal.................................................................................................. 74.1 63.9 

Total Other Liabilities .......................................................................... 258.2 234.3 

 

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 11 and are reported 

on a separate line on the balance sheet. The largest liability in the employee-related liabilities category is the amount 

owed at the end of the fiscal year to Federal employees for wages and benefits (including accrued annual leave). In 

addition, DOE is liable to certain contractors such as the University of California, which operates the Lawrence 

Livermore National Laboratory, for contractor employee pension and postretirement benefits, which is about $12.3 

billion and $12.0 billion as of September 30, 2007, and 2006, respectively. Also, the Federal Government owed 

about $9.0 billion and $9.1 billion as of September 30, 2007, and 2006 respectively, for estimated future pension 

benefits of the District of Columbia’s judges, police, firefighters, and teachers. 
NOTES TO THE FINANCIAL STATEMENTS 79

Unearned Revenue and Funds Held for Others 

The Federal Government recognizes a liability when it receives money in advance of providing goods and 

services or assumes custody of money belonging to others. The Federal 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 

$24.8 billion and $23.3 billion as of September 30, 2007, and 2006, respectively. Other unearned revenue includes 

U.S. Postal Service income for such things as prepaid postage, outstanding money orders, and prepaid P.O. Box 

rentals. Assets held on behalf of others include funds collected in advance and undelivered defense articles and 

services for future delivery to foreign governments. 

Subsidies and Grants 

The Federal Government supports the public good through a wide variety of subsidy and grant programs in 

such areas as agriculture, medical and scientific research, education, and transportation. Department of Agriculture 

programs such as the Conservation Reserve, Tobacco Transition Payment, and Direct and Counter-Cyclical Payment 

programs account for the majority of the subsidies due, about $11.5 billion, and $13.5 billion as of September 30, 

2007, and 2006 respectively. 

The Federal Government awards hundreds of billions of dollars in grants annually. These include project 

grants that are competitively awarded for agency-specific projects, such as the Department of Health and Human 

Services’ 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, 2007, and September 30, 2006, the Departments of 

Transportation, Education, and Health and Human Services collectively owed their grantees about $11.6 billion and 

$10.9 billion, respectively. Refer to the financial statements and footnotes of the respective agencies for additional 

information. 

Miscellaneous Liabilities 

Some of the more significant liabilities included in this category are for: (1) legal and other contingencies (see 

Note 18— Contingencies) (2) Bonneville Power Administration liability to pay annual budgets of several power 

projects for its electrical generating capacity, and (3) capital leases and disposal liabilities. In addition, many Federal 

agencies reported relatively small amounts of miscellaneous liabilities that are not otherwise described. 
80 NOTES TO THE FINANCIAL STATEMENTS 

Note 16. Collections and Refunds of Federal Revenue 

Collections of Federal Revenue for the Year Ended September 30, 2007 

 

Tax Year to Which Collections Relate 

(In billions of dollars) 

Federal 

Revenue 

Collections 2007 2006 2005 

Prior 

Years 

Individual income and tax 

 withholdings ............................ 2,201.5 1,408.6 750.6 23.9 18.4 

Corporation income taxes.......... 395.3 253.4 116.3 2.9 22.7 

Unemployment taxes ................. 39.4 21.9 9.8 7.6 0.1 

Excise taxes............................... 69.9 51.8 17.8 0.1 0.2 

Estate and gift taxes .................. 27.0 - 16.2 1.6 9.2 

Railroad retirement taxes........... 4.7 3.6 1.1 - - 

Federal Reserve earnings.......... 32.0 26.2 5.8 - - 

Fines, penalties, interest, and 

 other revenue.......................... 9.5 9.1 0.4 - - 

Custom duties ............................ 26.3 26.3 - - - 

Subtotal ................................... 2,805.6 1,800.9 918.0 36.1 50.6 

Less: amounts collected for 

non-federal entities............. (0.5) 

Total ................................... 2,805.1 

 

Treasury is the Government’s principal revenue-collecting agency. Collections of individual income tax and tax 

withholdings consist of Federal Insurance Contributions Act/Self-Employment Contributions Act and other taxes 

including payroll taxes collected from other agencies.
NOTES TO THE FINANCIAL STATEMENTS 81

Federal Tax Refunds Disbursed for the Year Ended September 30, 2007 

 Tax Year to Which Refunds Relate 

(In billions of dollars) 

Refunds 

Disbursed 2007 2006 2005 

Prior 

Years 

 

Individual income and tax 

 withholdings ............................... 261.1 1.8 235.2 17.8 6.3 

Corporation income taxes............. 28.2 1.2 8.2 4.3 14.5 

Unemployment taxes .................... 0.1 - 0.1 - - 

Excise taxes.................................. 2.4 0.4 0.6 0.3 1.1 

Estate and gift taxes ..................... 1.0 - 0.3 0.5 0.2 

Custom duties ............................... 6.9 5.6 0.2 0.3 0.8 

Total............................................ 299.7 9.0 244.6 23.2 22.9 

 

Reconciliation of Collections to Revenue 

(In billions of dollars) 2007 2006 

 

Total revenue per the Statements of Operations and Changes in 

 Net Position......................................................................................... 2,627.3 2,440.8 

Tax refunds ............................................................................................ 299.7 278.9 

Earned Income Tax Credit and Child Tax Credit Imputed Revenue ..... (58.4) (57.0) 

Nontax related fines and penalties reported by agencies...................... (33.8) (23.4) 

Nontax related earned revenue ............................................................. (29.7) (17.1) 

Collections of Federal revenue .............................................................. 2,805.1 2,622.2 

 

Total revenue in the Statements of Operations and Changes in Net Position is presented on a modified cash 

basis, is net of tax refunds, and includes Earned Income Tax Credit (EITC) payments and other nontax related 

revenue. EITC and Child Tax Credit amounts (unaudited) are included in gross cost in the Statements of Net Cost as 

a component of Treasury. 

On the other hand, collections of Federal revenue reported in the table in this Note are reported on a gross cash 

basis. The table above reconciles total revenue to collections. 
82 NOTES TO THE FINANCIAL STATEMENTS 

Collections of Federal Revenue for the Year Ended September 30, 2006 

 

Tax Year to Which Collections Relate 

(In billions of dollars) 

Federal 

Revenue 

Collections 2006 2005 2004 

Prior 

Years 

 

Individual income and tax 

 withholdings ............................ 2,034.2 1,309.4 690.8 17.3 16.7 

Corporation income taxes.......... 380.4 259.1 103.8 1.7 15.8 

Unemployment taxes ................. 41.6 22.8 10.1 8.6 0.1 

Excise taxes............................... 74.8 55.5 19.0 0.1 0.2 

Estate and gift taxes .................. 28.7 0.1 18.8 1.2 8.6 

Railroad retirement taxes........... 4.7 3.6 1.1 - - 

Federal Reserve earnings.......... 29.9 24.1 5.8 - - 

Fines, penalties, interest, and 

 other revenue.......................... 2.4 2.0 0.4 - - 

Custom duties ............................ 25.9 25.9 - - - 

Subtotal ................................... 2,622.6 1,702.5 849.8 28.9 41.4 

Less: Amounts collected for 

non-federal entities ............... (0.4) 

Total ................................... 2,622.2 

 

Federal Tax Refunds Disbursed for the Year Ended September 30, 2006 

 Tax Year to Which Refunds Relate 

(In billions of dollars) 

Refunds

Disbursed 2006 2005 2004 

Prior 

Years 

 

Individual income and tax 

 withholdings ................................ 245.2 0.6 225.5 13.5 5.6 

Corporation income taxes.............. 30.5 1.2 8.8 3.9 16.6 

Unemployment taxes ..................... 0.1 - 0.1 - - 

Excise taxes................................... 0.7 - 0.5 - 0.2 

Estate and gift taxes ...................... 1.3 0.5 0.2 0.3 0.3 

Custom duties ................................ 1.1 1.1 - - - 

Total............................................. 278.9 3.4 235.1 17.7 22.7 

 
NOTES TO THE FINANCIAL STATEMENTS 83

Note 17. Prior Period Adjustments 

 

Prior Period Adjustments 

to Fiscal Years 2007 and 2006 

 Decreases to Net Position 

(In billions of dollars) 2007 2006

 

Prior Period Adjustments 

National Aeronautics and Space Administration............... (12.7) - 

Agency for International Development.............................. (1.9) - 

Other prior period adjustments ......................................... 0.7 - 

Total prior period adjustments........................................ (13.9) - 

 

For fiscal year 2007, NASA recorded prior period adjustments for $12.7 billion (net decrease), primarily to 

reflect a change in accounting principle for property, plant and equipment to reclassify costs previously categorized 

as general property, plant, and equipment to Research and Development (R&D) expenses. After a detailed review of 

all items previously categorized as property, plant, and equipment, NASA concluded certain projects are more 

properly classified as R&D, and should not be classified, in their entirety, as capital assets under the classification of 

property, plant, and equipment. Accordingly, NASA applied the provisions of Statement of Federal Financial 

Accounting Standards (No. 2), Accounting for R&D Costs to account for its R&D projects. NASA believes the 

recognition and measurement requirements of SFFAS No. 2 result in reporting financial information that is more 

relevant and accurate. In fiscal year 2007, AID changed its accounting principles as it relates to parent/child 

reporting. As a result, the fiscal year 2007 beginning balance for total assets, total liabilities, and net position has 

changed as follows: Total assets decreased by $2.35 billion. This decrease is primarily attributable to a $2.3 billion 

decrease in the Fund Balance with Treasury. Total liabilities decreased by $427.6 million. This decrease is mostly 

due to a decrease of $426 million in accounts payable. Net position decreased by $1.9 billion. 
84 NOTES TO THE FINANCIAL STATEMENTS 

Note 18. Contingencies 

Financial Treatment of Loss Contingencies 

Loss contingencies that are assessed to be at least reasonably possible are disclosed in this note. Loss 

contingencies involve situations where there is an uncertainty of a possible loss. The reporting of loss contingencies 

depends on the likelihood that a future event or events will confirm the loss or impairment of an asset or the 

incurrence of a liability. Terms used to assess the range for the likelihood of loss are probable, reasonably possible, 

and remote. Loss contingencies that are assessed as probable and measurable are accrued in the financial statements. 

Loss contingencies that are assessed as remote are not reported in the financial statements, nor disclosed in the 

notes. All other material loss contingencies are disclosed in this note. For an overview of the standards that provide 

criteria for how Federal agencies are to account for loss contingencies, based on the likelihood of the loss and 

measurability,1

 see the following table. 

Likelihood of future 

outflow or other 

sacrifice of 

resources. 

Loss amount can be 

reasonably 

measured. 

Loss range can be 

reasonably measured. 

Loss amount or range 

cannot be reasonably 

measured. 

Probable. 

Future confirming 

event(s) are more 

likely to occur than 

not.2

Accrue the liability. 

Reported on Balance 

Sheet & Statements of 

Net Cost. 

Accrue liability of best 

estimate or minimum 

amount in loss range if 

there is no best 

estimate, and disclose 

nature of contingency 

and range of estimated 

liability. 

Disclose nature of 

contingency and include 

a statement that an 

estimate cannot be 

made. 

Reasonably possible. 

Possibility of future 

confirming event(s) 

occurring is more than 

remote and less than 

likely.

Disclose nature of 

contingency and 

estimated loss amount. 

Disclose nature of 

contingency and 

estimated loss range. 

Disclose nature of 

contingency and include 

a statement that an 

estimate cannot be 

made. 

Remote. 

Possibility of future 

event(s) occurring is 

slight.

No disclosure. No disclosure. No disclosure. 

 

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 85

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. For example, the 

estimated aggregate unfunded vested benefits exposure to Pension Benefit Guaranty Corporation (PBGC) for 

private-sector single-employer and multiemployer defined pension plans that is classified as reasonably possible, is 

$65.7 billion and $73.4 billion for 2007 and 2006, respectively. 

Insurance in Force 

Insurance in Force is the accumulation of policy limits for all policies issued and outstanding at a point in time. 

The Federal Government has Insurance in Force in the amount of $1,157.3 billion for 2007, and $1,048.6 billion for 

2006. These amounts represent estimated maximum exposure to insurance claims and guarantee programs. The 

major types are identified below: 

• Department of Homeland Security (DHS) reported $1,100.0 billion and $994.1 billion for 2007 and 2006, 

respectively for the National Flood Insurance Program (NFIP). 

• Export-Import Bank of the United States (EXIM) reported $39.1 billion and $36.4 billion for 2007 and 

2006, respectively for Export Credit Insurance (ECI). 

Deposit Insurance 

Deposit Insurance covers all types of deposits accounts such as checking, NOW and savings accounts, money 

market deposit accounts, and certificates of deposits (CDs) received at an insured bank, savings association, or credit 

union. The insurance covers the balance of each depositor’s account, dollar-for-dollar, up to the insurance limit, 

including principal and any accrued interest through the date of the insured financial intuition’s closing. As a result, 

the Federal Government has aggregated insured deposit exposure estimated at approximately $4,800.2 billion for 

2007, and $4,627.1 billion for 2006. However, these amounts represent maximum possible losses assuming all the 

FDIC and NCUA member depository institutions were to fail and the acquired assets provided no recovery of funds. 

Actual losses have generally been a very small fraction of the aggregate estimated insured deposits. The breakdown 

by agency is identified below: 

• Federal Deposit Insurance Corporation (FDIC) has estimated insured deposits of $4,239.0 billion for 2007, 

and $4,094.7 billion for 2006, respectively for the Deposit Insurance Fund (DIF).

• National Credit Union Administration (NCUA) has estimated insured deposits of $561.2 billion for 2007, 

and $532.4 billion for 2006, respectively for the National Credit Union Share Insurance Fund (NCUSIF).
86 NOTES TO THE FINANCIAL STATEMENTS 

Legal Contingencies 

The Legal Contingencies as of September 30, 2007, and 2006, are summarized in the table below: 

 2007 2006

 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............ 6.4 6.4 8.0 3.7 2.8 4.3 

Reasonably 

possible .......... 3.6 6.6 7.6 9.5 

 

1

 Accrued liabilities are recorded and presented in the related line items of the balance sheet. 2

 Does not reflect the total range of loss; many cases assessed as reasonably possible of an unfavorable outcome did not include

estimated losses that could be determined. 

The Federal Government is party to various administrative claims and legal actions brought against it, some of 

which may ultimately result in settlements or decisions against the Federal Government. 

Management and legal counsel have determined that it is “probable” that some of these actions will result in a 

loss to the Federal Government and the loss amounts are reasonably measurable. The estimated liabilities for these 

cases are $6.4 billion and $3.7 billion for 2007 and 2006, respectively, and are recorded in the balance sheet line 

items “Insurance Liabilities,” or “Other Liabilities.” A few of the major cases are summarized below: 

• Department of Health and Human Services (HHS) has accrued $4.1 billion for contingent liabilities related to 

administrative proceedings, legal actions, and tort claims as of September 30, 2007. For example, HHS Centers 

for Medicare and Medicaid Services has accrued $2.0 billion for contingent liability to providers for previous 

years’ disputed cost report adjustments for disproportionate share hospitals. 

• The United States Postal Service (USPS) has accrued $0.7 billion as of September 30, 2007, including 

contingencies arising from labor cases, equal employment opportunity cases, environmental issues, and property 

damage claims. 

There are also administrative claims and legal actions pending where adverse decisions are considered by 

management and legal counsel as “reasonably possible” with an estimate of possible liability or a range of possible 

liability. The estimated potential losses for such claims and actions range from $3.6 billion to $6.6 billion for 2007, 

and from $7.6 billion to $9.5 billion for 2006. Two of the major cases are summarized below: 

• Department of Agriculture (USDA) reported pending class action discrimination suit in the range of $2.9 billion 

to $3.0 billion as of September 30, 2007. 

• Department of the Interior (DOI) has allegations and claims in the range of $0.3 billion to $2.7 billion related to 

tribes and individual Indians, the trust territory in the Pacific Islands, the operation of wildlife refuges, and 

reclamation projects, the general management and law enforcement of Interior-managed land, and the use of 

natural resources as of September 30, 2007. 

Numerous litigation cases are pending where the outcome is uncertain or there is at least a reasonable 

possibility that a loss has been incurred and where estimates cannot be made. There are other litigation cases where 

the plaintiffs have not made claims for specific dollar amounts, but the claimed amounts may be significant. The 

ultimate resolution of these legal actions for which the potential loss could not be determined may materially affect 

the U.S. Government’s financial position or operating results. Examples of specific cases are summarized below: 

• Native Americans allege that DOI and Department of the Treasury have breached trust obligations with respect 

to the management of the plaintiffs’ individual Indian monies. The plaintiffs have not made claims for specific 

dollar amounts in the Federal district court proceedings, but in public statements have asserted that the class is 

owed tens of billions of dollars. 
NOTES TO THE FINANCIAL STATEMENTS 87

• Numerous complaints have arisen as a result of Hurricane Katrina. These New Orleans Federal Tort Claims Act 

(FTCA) cases allege personal injury, wrongful death, and property damages as a result of massive flooding 

caused by the hurricane. There are over 475,000 administrative claims filed in relation to Hurricane Katrina and 

300 related suits in Federal district courts. Additional suits are expected. The range of potential loss is $10 

billion to an amount perhaps several times larger. 

Environmental and Disposal Contingencies 

The Environmental and Disposal Contingencies as of September 30, 2007, and 2006, are summarized in the 

table below: 

 2007 2006

 

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 ....................... 11.2 11.2 11.3 7.0 7.0 7.4 

Reasonably possible .... 0.3 0.8 0.5 0.5 

 

1

 Accrued liabilities are recorded and presented in the related line items of the balance sheet. 2

 Does not reflect the total range of loss; many cases assessed as reasonably possible of an unfavorable outcome did not include

estimated losses that could be determined. 

The Government is subject to loss contingencies for a variety of environmental cleanup costs for the storage 

and disposal of hazardous material and the operations and closures of facilities at which environmental 

contamination may be present and remediation costs. 

Management and legal counsel have determined that it is “probable” that some of these actions will result in a 

loss to the Federal Government and the loss amounts are reasonably measurable. The estimated liabilities for these 

cases are $11.2 billion and $7.0 billion for 2007 and 2006, respectively, and are recorded in the balance sheet line 

item “Other Liabilities.” Department of Energy (DOE) is subject to Spent Nuclear Fuel litigation for damages 

suffered by all utilities as a result of the delay in beginning disposal of spent nuclear fuel. Significant claims for 

partial breach of contract have been filed with estimated liability amounts of $11.1 billion and $6.8 billion for 2007 

and 2006, respectively. 

Other Contingencies 

Example of other contingencies include those reported by Department of Transportation (DOT). The major 

contingencies are summarized below: 

• DOT’s Federal Highway Administration (FHWA) reported $46.2 billion and $45.0 billion respectively, for 

2007 and 2006 for Advance Construction Projects. 

• DOT’s Federal Transit Administration (FTA) reported $3.9 billion and $1.4 billion for 2007 and 2006 

respectively, for Full Funding Agreements.
88 NOTES TO THE FINANCIAL STATEMENTS 

Note 19. Commitments 

The Government has entered into contractual commitments that require future use of financial resources. It has 

significant amounts of long-term lease obligations and undelivered orders as shown in the following table. 

Undelivered orders represent the value of goods and services ordered that have not yet been received. 

The Government has other contractual commitments that may require future use of financial resources. For 

example, the Government has callable subscriptions in the Multilateral Development Banks (MDB), which are 

autonomous international financial entities that finance economic and social development projects in developing 

countries. Callable capital resembles promissory notes to honor MDB debts if the MDB cannot otherwise meet its 

obligations through its other available resources. MDBs are able to use callable capital as backing to obtain very 

favorable financing terms when borrowing from world capital markets. Treasury officials do not anticipate any calls 

on MDB subscriptions. To date, there has never been a call on this capital for any of the major MDBs. 

 

Commitments as of September 30 

Operating 

Leases

Operating 

Leases 

(In billions of dollars) 2007 2006 

 

General Services Administration.......................... 23.1 22.9 

U.S. Postal Service .............................................. 8.4 8.4 

Department of Justice .......................................... 3.1 0.9 

Department of State............................................. 1.8 - 

Department of Health and Human Services ........ 1.6 1.1 

Department of Defense........................................ 1.1 0.4 

Department of Homeland Security....................... 0.9 1.8 

Other Operating Leases....................................... 4.5 4.3 

Total long-term operating leases....................... 44.5 39.8 

 
NOTES TO THE FINANCIAL STATEMENTS 89

Commitments as of September 30 

Undelivered Orders 

(In billions of dollars) 2007 2006 

 

 Department of Defense.......................................... 309.8 173.6 

 Department of Transportation.................................... 72.2 67.6 

 Department of Health and Human Services .......... 72.1 68.6 

 Department of Housing and Urban Development ... 65.2 72.0 

 Department of the Treasury................................... 55.8 51.1 

 Department of Education ....................................... 48.2 47.6 

 Department of Agriculture...................................... 34.9 36.0 

 Department of Homeland Security......................... 29.9 28.2 

 Department of Energy............................................ 12.2 11.1 

 Agency of International Development.................... 12.0 11.6 

 Department of State............................................... 11.3 8.9 

 Department of Justice ............................................ 9.0 8.6 

 Environmental Protection Agency.......................... 8.0 9.2 

 National Science Foundation................................. 7.7 7.3 

 Department of the Interior...................................... 6.9 6.6 

 All other agencies .................................................. 24.2 37.0 

Total undelivered orders....................................... 779.4 645.0 

 

 Other Commitments 

 2007 2006 

 

Callable capital subscriptions for multilateral 

 development banks.............................................. 62.2 62.1 

Sales of Surplus Power........................................... 21.2 23.4 

Long-term Satellite and Systems............................ 7.7 6.4 

Power Purchase Obligations................................... 4.8 4.3 

Grant Programs - Airport Improvement Program.... 4.8 3.8 

Fuel Purchase Obligations...................................... 3.1 3.0 

Agriculture Direct Loans and Guarantees............... 2.7 2.3 

Conservation Reserve Program.............................. 1.9 2.0 

All other commitments ............................................ 1.4 2.7 

Total other commitments...................................... 109.8 110.0 

 

As of September 30, 2006, $20 billion of the Other Commitments amount for the Department of Agriculture’s 

Direct Loans and Guarantees were reclassified to USDA’s undelivered orders to correct their classification in the 

prior year. The reclassification did not affect total Commitments amounts as of September 30, 2006.

Other Commitments and Risks 

The U.S. Government is a party to major treaties and other international agreements. These treaties and other 

international agreements address various issues including, but not limited to, trade, commerce, security, and arms 

that may involve financial obligations or give rise to possible exposure to losses. A comprehensive analysis to 

determine any such financial obligations or possible exposure to loss and their related effect on the consolidated 

financial statements of the U.S. Government has not yet been performed. 

In addition, the United States Government has entered into other agreements that could potentially require 

claims on Government resources in the future. Examples include war risk and terrorism risk insurance.
90 NOTES TO THE FINANCIAL STATEMENTS 

Note 20. Earmarked Funds 

Earmarked funds are financed by specifically identified revenues, often supplemented by other financing 

sources, which remain available over time. These specifically identified revenues and other financing sources are 

required by statute to be used for designated activities, benefits, or purposes and must be accounted for separately 

from the Government’s general revenues. Earmarked funds generally include trust funds, public enterprise revolving 

funds (not including credit reform financing funds) and special funds. 

In the Federal budget, the term “trust fund” means only that the law requires a particular fund be accounted for 

separately, used only for a specified purpose, and designated as a trust fund. A change in law may change the future 

receipts and the terms under which the fund’s resources are spent. In the private sector, trust fund refers to funds of 

one party held and managed by a second party (the trustee) in a fiduciary capacity. The activity of earmarked funds 

differs from fiduciary activities primarily in that earmarked fund assets are Government-owned. 

Public enterprise revolving funds include expenditure accounts authorized by law to be credited with offsetting 

collections, mostly from the public, that are generated by and earmarked to finance a continuing cycle of businesstype operations. Some of the financing for these funds may be from appropriations. 

Special funds are Federal funds earmarked by law for a specific purpose. Special funds include the special fund 

receipt account and the special fund expenditure account. 

The following tables depict major earmarked funds separately chosen based on their significant financial 

activity and importance to taxpayers. All other Federal Government earmarked funds not separately shown are 

aggregated as “all other.” 

Total assets represent the unexpended balance from all sources of receipts and amounts due to the earmarked 

funds, regardless of source, including related Governmental transactions. These are transactions between two 

different entities within the Government (for example, monies received by one entity of the Government from 

another entity of the Government). 

The intragovernmental assets are comprised of fund balances with Treasury, investments in Federal debt 

securities – including unamortized amounts, and other assets which includes the related accrued interest receivable 

on Federal investments. These amounts were eliminated in preparing the principal financial statements. 

The non-federal assets represent only the activity with individuals and organizations outside of the 

Government. 

Most of the earmarked fund assets are invested in intragovernmental debt holdings. The Federal Government 

does not set aside assets to pay future benefits or other expenditures associated with earmarked funds. The cash 

receipts collected from the public for an earmarked fund are deposited in the U.S. Treasury, which uses the cash for 

general Government purposes. Treasury securities are issued to Federal agencies as evidence of its receipts. 

Treasury securities are an asset to the Federal agencies and a liability to the U.S. Treasury and, therefore, they do not 

represent an asset or a liability in the Financial Report of the U.S. Government. These securities require redemption 

if a fund’s disbursements exceed its receipts. Redeeming these securities will increase the Government’s financing 

needs and require more borrowing from the public (or less repayment of debt), or will result in higher taxes than 

otherwise would have been needed, or less spending on other programs than otherwise would have occurred, or 

some combination thereof. See Note 10—Federal Debt Securities Held by the Public and Accrued Interest for 

further information related to the investments in Federal debt securities. 
NOTES TO THE FINANCIAL STATEMENTS 91

Earmarked Funds as of September 30, 20071,2

 

(In billions of dollars) 

Federal OldAge & 

Survivors 

Insurance 

Trust Fund 

Military 

Retirement 

Fund 

Civil Service 

Retirement

& Disability 

Fund 

MedicareEligible 

Retiree Health 

Care Fund 

(MERHCF) 

Federal 

Hospital 

Insurance 

Trust Fund 

(Medicare 

Part A) 

Federal 

Employees 

Health Benefits 

Program Fund

 

Assets: 

Cash and other monetary 

assets................................... - - - - - - 

Fund balance with 

 Treasury................................ (0.9) - - - - 0.9 

Investments in U.S. Treasury 

 Securities .............................. 1,968.3 215.4 701.7 108.4 319.4 41.3 

Other Federal assets............... 25.0 2.8 9.8 1.1 25.4 0.9 

Non-federal assets .................. 2.3 - 0.3 - 1.0 0.7 

Total assets.......................... 1,994.7 218.2 711.8 109.5 345.8 43.8 

 

Liabilities: 

Liabilities due and payable to 

beneficiaries ......................... 44.1 3.5 4.8 0.6 19.4 3.8 

Other Federal liabilities............ 3.9 - 0.1 0.1 29.5 0.3 

Other non-federal liabilities...... - 1,025.3 1,320.5 516.7 1.9 302.5 

Total liabilities....................... 48.0 1,028.8 1,325.4 517.4 50.8 306.6 

Total net position.................. 1,946.7 (810.6) (613.6) (407.9) 295.0 (262.8) 

Total liabilities and net 

position ........................... 1,994.7 218.2 711.8 109.5 345.8 43.8 

 

Change in Net Position: 

Beginning net position............. 1,771.9 (758.7) (591.6) (453.5) 287.9 (273.5) 

Prior period adjustment ........... (5.0) - - - - - 

Beginning net position, 

adjusted................................ 1,766.9 (758.7) (591.6) (453.5) 287.9 (273.5) 

Investment revenue................. 97.4 10.3 37.2 4.4 16.3 1.0 

Revenue from the public ......... 553.4 - - - 199.7 - 

Other changes in fund 

balance (e.g., transfers) ....... 10.6 43.1 31.2 27.3 (0.3) 49.9 

Non-program expenses........... - - - - - - 

Program expenses .................. 481.6 105.3 90.4 (13.9) 208.6 40.2 

Ending net position............... 1,946.7 (810.6) (613.6) (407.9) 295.0 (262.8) 

1

 The presentation of earmarked funds was changed in fiscal year 2007 to present only the significant earmarked funds and to show intra-earmarked 

fund eliminations. The disclosure for fiscal year 2006 earmarked funds was also changed for consistency with the fiscal year 2007 presentation. 2

 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.
92 NOTES TO THE FINANCIAL STATEMENTS 

Earmarked Funds as of September 30, 20071,2

(In billions of dollars) 

Federal 

Disability 

Insurance 

Trust Fund 

Unemployment 

Trust Fund 

Federal 

Supplementary 

Medical 

Insurance Trust 

Fund (Medicare 

Parts B and D) 

All Other 

Earmarked 

Funds 

IntraEarmarked 

Fund 

Eliminations 

Total 

Earmarked 

Funds 

 

Assets: 

Cash and other monetary 

assets ............................... - - 0.1 21.8 - 21.9 

Fund balance with 

 Treasury ............................ (0.4) 0.1 8.8 64.8 - 73.3 

Investments in U.S. 

Treasury securities ........... 213.8 74.9 39.2 169.4 - 3,851.8 

Other Federal assets........... 2.7 1.2 32.9 17.4 (53.9) 65.3 

Non-federal assets .............. 2.8 1.5 10.8 93.3 - 112.7 

Total assets ...................... 218.9 77.7 91.8 366.7 (53.9) 4,125.0 

 

Liabilities: 

Liabilities due and payable 

to beneficiaries ................. 21.7 1.3 22.2 2.0 - 123.4 

Other Federal liabilities........ 1.0 1.4 24.8 62.0 (53.9) 69.2 

Other non-federal liabilities.. 2.3 - 0.9 148.2 - 3,318.3 

Total liabilities ................... 25.0 2.7 47.9 212.2 (53.9) 3,510.9 

Total net position .............. 193.9 75.0 43.9 154.5 - 614.1 

Total liabilities and net 

position ....................... 218.9 77.7 91.8 366.7 (53.9) 4,125.0 

 

Change in Net Position: 

Beginning net position ......... 183.0 66.4 41.6 145.7 - 419.2 

Prior period adjustment ....... 5.0 - 0.1 1.0 - 1.1 

Beginning net position, 

adjusted............................ 188.0 66.4 41.7 146.7 - 420.3 

Investment revenue............. 11.0 3.3 2.1 9.6 - 192.7 

Revenue from the public...... 94.1 40.9 - 72.3 - 960.4 

Other changes in fund 

balance (e.g., transfers).... (1.6) (3.5) 159.0 12.4 (0.5) 327.6 

Non-program expenses ...... - - - (2.2) - (2.2) 

Program net cost ................ 97.6 32.1 158.9 88.7 (0.5) 1,289.1 

Ending net position ........... 193.9 75.0 43.9 154.5 - 614.1 

1

 The presentation of earmarked funds was changed in fiscal year 2007 to present only the significant earmarked funds and to show intra-earmarked 

fund eliminations. The disclosure for fiscal year 2006 earmarked funds was also changed for consistency with the fiscal year 2007 presentation. 2 By law, certain expenses (costs), revenues, and other financing sources related to the administration of the above funds are not charged to the funds 

and are therefore financed and/or credited to other sources. 
NOTES TO THE FINANCIAL STATEMENTS 93

Earmarked Funds as of September 30, 20061,2

(In billions of dollars) 

Federal OldAge & 

Survivors 

Insurance 

Trust Fund 

Military 

Retirement 

Fund 

Civil Service 

Retirement & 

Disability 

Fund 

MedicareEligible 

Retiree Health 

Care Fund 

(MERHCF) 

Federal 

Hospital 

Insurance 

Trust Fund 

(Medicare 

Part A) 

Federal 

Employees 

Health 

Benefits 

Program 

Fund 

 

Assets: 

Cash and other monetary 

assets ............................... - - - - - - 

Fund balance with 

 Treasury ............................ (0.8) - - - 1.0 0.9 

Investments in U.S. 

Treasury securities ........... 1,793.1 208.4 689.9 85.4 302.2 14.8 

Other Federal assets........... 23.1 - 9.9 - 24.7 0.8 

Non-federal assets .............. 2.1 - 0.3 - 0.9 0.4 

Total assets ...................... 1,817.5 208.4 700.1 85.4 328.8 16.9 

 

Liabilities: 

Liabilities due and payable 

to beneficiaries ................. 41.7 3.4 4.5 - 19.8 3.5 

Other Federal liabilities........ 3.9 - - - 20.5 0.3 

Other non-federal liabilities.. - 963.7 1,287.2 538.9 0.6 286.6 

Total liabilities ................... 45.6 967.1 1,291.7 538.9 40.9 290.4 

Total net position .............. 1,771.9 (758.7) (591.6) (453.5) 287.9 (273.5) 

Total liabilities and net 

position ....................... 1,817.5 208.4 700.1 85.4 328.8 16.9 

 

Change in Net Position: 

Beginning net position ......... 1,595.5 (697.6) (549.0) (477.7) 266.8 (271.2) 

Investment revenue............. 89.4 12.3 36.6 4.1 15.5 0.6 

Revenue from the public...... 530.0 - - - 180.4 7.4 

Other changes in fund 

balance (e.g., transfers).... 9.1 39.4 46.4 27.7 11.0 24.4 

Non-program expenses....... - - - - 2.9 17.1 

Program net cost ................. 452.1 112.8 125.6 7.6 182.9 17.6 

Ending net position ........... 1,771.9 (758.7) (591.6) (453.5) 287.9 (273.5) 

1

 The presentation of earmarked funds was changed in fiscal year 2007 to present only the significant earmarked funds and to show intra-earmarked 

fund eliminations. The disclosure for fiscal year 2006 earmarked funds was also changed for consistency with the fiscal year 2007 presentation. 2 By law, certain expenses (costs), revenues, and other financing sources related to the administration of the above funds are not charged to the funds 

and are therefore financed and/or credited to other sources. 
94 NOTES TO THE FINANCIAL STATEMENTS 

Earmarked Funds as of September 30, 20061,2

(In billions of dollars) 

Federal 

Disability 

Insurance 

Trust 

Fund 

Unemployment Trust

Fund 

Federal 

Supplementary 

Medical 

Insurance 

Trust Fund 

(Medicare 

Parts B and D) 

All Other 

Earmarked 

Funds 

IntraEarmarked 

Fund 

Eliminations

Total 

Earmarked 

Funds 

 

Assets: 

Cash and other monetary 

assets ............................... - - 0.1 19.5 - 19.6 

Fund balance with 

Treasury ........................... (0.3) 0.1 27.8 62.4 - 91.1 

Investments in U.S. 

Treasury securities ........... 202.2 66.2 33.1 159.5 - 3,554.8 

Other Federal assets........... 2.6 1.1 22.6 18.1 (43.4) 59.5 

Non-federal assets .............. 2.8 1.4 2.4 86.0 - 96.3 

Total assets ...................... 207.3 68.8 86.0 345.5 (43.4) 3,821.3 

 

Liabilities: 

Liabilities due and payable 

to beneficiaries ................. 20.9 1.1 21.1 1.7 - 117.7 

Other Federal liabilities........ 0.7 1.3 23.0 45.9 (43.4) 52.2 

Other non-federal liabilities.. 2.7 - 0.3 152.2 - 3,232.2 

Total liabilities ................... 24.3 2.4 44.4 199.8 (43.4) 3,402.1 

Total net position .............. 183.0 66.4 41.6 145.7 - 419.2 

Total liabilities and net 

position ....................... 207.3 68.8 86.0 345.5 (43.4) 3,821.3 

 

Change in Net Position: 

Beginning net position .... 175.1 54.5 9.3 141.5 - 247.2 

Investment revenue ........ 10.5 2.8 1.6 11.9 - 185.3 

Revenue from the 

public ............................ 90.0 41.4 - 59.4 - 908.6 

Other changes in fund 

balance (e.g., 

transfers) ...................... (1.5) (1.8) 182.0 7.6 (0.5) 343.8 

Non-program expenses .. - - 2.1 10.3 - 32.4 

Program net cost............. 91.1 30.5 149.2 64.4 (0.5) 1,233.3 

Ending net position....... 183.0 66.4 41.6 145.7 - 419.2 

1

 The presentation of earmarked funds was changed in fiscal year 2007 to present only the significant earmarked funds and to show intra-earmarked 

fund eliminations. The disclosure for fiscal year 2006 earmarked funds was also changed for consistency with the fiscal year 2007 presentation. 2

 By law, certain expenses (costs), revenues, and other financing sources related to the administration of the above funds are not charged to the funds 

and are therefore financed and/or credited to other sources. 
NOTES TO THE FINANCIAL STATEMENTS 95

Depicted below is a description of the major earmarked funds shown in the above tables, which also includes 

the names of the Government agencies that administer each particular fund. For detailed information regarding these 

earmarked funds, please refer to the financial statements of the corresponding administering agencies. For 

information on the benefits due and payable liability associated with certain earmarked funds see Note 13—Benefits 

Due and Payable. 

Federal Old-Age and Survivors Insurance Trust Fund 

The Federal Old-Age and Survivors Insurance Trust Fund, administered by 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. 

Military Retirement Fund 

The Military Retirement Fund provides retirement benefits for Army, Navy, Marine Corps, and Air Force 

personnel and their survivors. The fund is financed by DOD contributions, appropriations, and interest earned on 

investments in Federal debt securities. DOD administers the Military Retirement Fund. The laws establishing the 

Military Retirement Fund and authorizing the depositing of amounts to the credit of the trust fund are set forth in 10 

U.S.C. § 1461-1467. 

Civil Service Retirement and Disability Fund 

The CSRDF covers two Federal civilian retirement systems: CSRS—for employees hired before 1984, and 

FERS—for employees hired after 1983. OPM administers the CSRS and the FERS systems. The laws establishing 

the CSRDF and authorizing the depositing of amounts to the credit of the trust fund are set forth in 5 U.S.C. § 8334-

8348. Funding sources include: 

• Federal civilian employees’ contributions. 

• Agencies’ contributions on behalf of employees. 

• Appropriations. 

• Interest earned on investments in Treasury securities. 

Medicare-Eligible Retiree Health Care Fund 

The Medicare-Eligible Retiree Health Care Fund, administered by DOD and established by 10 U.S.C. § 1111, 

finances and pays the liabilities under the DOD retiree health care programs for Medicare-eligible beneficiaries. 

Such beneficiaries include qualifying members, former members, and dependents of the Uniformed Services. The 

assets of the fund are comprised of any amounts appropriated to the fund, payments to the fund authorized by 10 

U.S.C. § 1116, and interest on investments authorized by 10 U.S.C. § 1117. 
96 NOTES TO THE FINANCIAL STATEMENTS 

Federal Hospital Insurance Trust Fund 

(Medicare Part A) 

The Federal Hospital Insurance Trust Fund finances the Hospital Insurance Program (Medicare Part A). This 

program funds the cost of inpatient hospital and related care for individuals age 65 or older who meet certain insured 

status requirements, and eligible disabled people. HHS administers the program. 

The Federal Hospital Insurance Trust Fund is financed primarily by payroll taxes, including those paid by 

Federal agencies. It also receives income from interest earnings on Treasury securities and a portion of income taxes 

collected on Social Security benefits. The law establishing the Federal Hospital Insurance Trust Fund and 

authorizing the depositing of amounts to the credit of the trust fund is set forth in 42 U.S.C. § 1395i. 

Federal Employees Health Benefits Program Fund 

The Federal Employees Health Benefits Program (HEPB) provides health benefits to Federal employees and 

dependents as well as to Federal retirees and survivor annuitants. FEHB administers a wide variety of health and 

wellness plans including Fee-For-Service and Health Maintenance Organization plans. Retired employees can 

choose to continue coverage upon separation from the Federal Government. OPM administers the HEBP. The law 

establishing the FEHB Program Fund and authorizing the depositing of amounts to the credit of the trust fund are set 

forth in 5 U.S.C. § 8909. The FEHB 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 earned on investments in Treasury securities. 

Federal Disability Insurance Trust Fund 

The Federal Disability Insurance Trust Fund provides assistance and protection against the loss of earnings due 

to a wage earner’s disability in the form of money payments. SSA administers the Federal Disability Insurance Trust 

Fund. 

Like the Federal Old-Age and Survivors Insurance Trust Fund, payroll taxes primarily fund the Federal 

Disability Insurance Trust Fund. The fund also receives income from interest earnings on Treasury securities, 

Federal agencies’ payments for the Social Security benefits earned by military and Federal civilian employees, and a 

portion of income taxes collected on Social Security benefits. The law establishing the Federal Disability Insurance 

Trust Fund and authorizing the depositing of amounts to the credit of the trust fund is set forth in 42 U.S.C. § 401. 

Unemployment Trust Fund 

The Unemployment Trust Fund (UTF) provides temporary assistance to workers who lose their jobs. The 

program is administered through a unique system of Federal and State partnerships, established in Federal law, but 

executed through conforming State laws by State officials. DOL administers the Federal operations of the program. 

Taxes on employers provide the primary funding source for the UTF and constitute all the earmarked 

unemployment tax revenues as shown on the consolidated Statement of Operations and Changes in Net Position. For 

the years ending September 30, 2007, and 2006, UTF unemployment tax revenues were $39.2 billion and $41.4 

billion, respectively. However, interest earned on investments in Treasury securities also provides income to the 

fund. Appropriations have supplemented the fund’s income during periods of high and extended unemployment. 

The law establishing the UTF and authorizing the depositing of amounts to the credit of the trust fund is set forth in 

42 U.S.C. § 1104. 
NOTES TO THE FINANCIAL STATEMENTS 97

Federal Supplementary Medical Insurance Trust Fund 

(Medicare Parts B and D) 

The Federal Supplementary Medical Insurance Trust Fund finances the Supplementary Medical Insurance 

Program (Medicare Part B) and the Medicare Prescription Drug Benefit Program (Medicare Part D) that provides 

supplementary medical insurance for enrolled eligible participants to cover physician and outpatient services not 

covered by Medicare Part A and to obtain qualified prescription drug coverage, respectively. HHS administers the 

programs. 

Medicare Part B financing is not based on payroll taxes; it is based on monthly premiums and income from the 

General Fund of the Treasury. The law establishing the Federal Supplementary Medical Insurance Trust Fund and 

authorizing the depositing of amounts to the credit of the trust fund is set forth in 42 U.S.C. § 1395t. 

Medicare Part D was created by the Medicare Prescription Drug, Improvement, and Modernization Act of 

2003 (P.L. No. 108-173). Medicare Part D financing is similar to Part B; it is based on monthly premiums and 

income from the General Fund of the Treasury, not on payroll taxes. The law creating the Medicare prescription 

drug account within the Federal Supplementary Medical Insurance Trust Fund and authorizing the depositing of 

amounts to the credit of the trust fund is set forth in 42 U.S.C. § 1395w-116. 

All Other Earmarked Funds 

The above funds represent the Government’s major earmarked activity. All other earmarked activity is 

aggregated as “all other” in accordance with SFFAS No. 27. This “all other” aggregate includes earmarked funds 

that are designated as significant funds by the agencies in their respective financial statements. For the years ending 

September 30, 2007 and 2006, there were approximately 223 and 217 agency-designated significant earmarked 

funds, respectively. These funds address a variety of issues and are managed by a widespread number of agencies. 

Some of the funds that comprise the “all other” earmarked funds include the following: 

• Department of the Treasury-Exchange Stabilization Fund

• Railroad Retirement Board-Railroad Retirement Trust Fund

• Federal Communications Commission-Universal Service Fund

• United States Department of Agriculture-Federal Crop Insurance Corporation Fund and Funds for 

Strengthening Markets, Income, and Supply 

• Environmental Protection Agency-Superfund (Hazardous Substance) and Leaking Underground Storage 

Tanks 

• Department of Commerce-U.S. Patent and Trademark Office 

• Department of the Interior-Land and Water Conservation Fund, Historical Preservation Fund and 

Reclamation Fund 

• Department of Veterans Affairs-Medical Care 

• Department of Homeland Security-Customs User Fees, Immigration Examination Fees and the National 

Flood Insurance Program 

• Department of Housing and Urban Development-Government National Mortgage Association. 

In addition to the above “all other” earmarked funds, also depicted below are the descriptions of three nonmajor earmarked funds (included in the “all other” aggregate) that contribute all of the earmarked excise tax revenue 

as shown on the consolidated Statement of Operations and Changes in Net Position. The descriptions also include 

the names of the Government agencies that administer each of these funds. For detailed information regarding these 

three earmarked funds, please refer to the financial statements of the corresponding administering agencies. 

The Highway Trust Fund was established to promote domestic interstate transportation and to move people and 

goods. The fund provides Federal grants to States for highway construction, certain transit programs, and related 

transportation purposes. DOT administers programs financed by the Highway Trust Fund. The law establishing the 

Highway Trust Fund and authorizing the depositing of amounts to the credit of the trust fund is set forth in 26 

U.S.C. § 9503. Funding sources include earmarked 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, 2007 and 

2006, Highway Trust Fund excise tax revenues were $39.2 billion and $38.8 billion, respectively. As funds are 

needed for payments, the Highway Trust Fund Corpus investments are liquidated and funds are transferred to the 
98 NOTES TO THE FINANCIAL STATEMENTS 

Federal Highway Administration, the Federal Transit Administration, or other DOT entity, for payment of 

obligations. 

The Airport and Airway Trust Fund provides for airport improvement and airport facilities maintenance. It also 

funds airport equipment, research, and a portion of the Federal Aviation Administration’s administrative operational 

support. DOT administers the Airport and Airway Trust Fund. The law establishing the Airport and Airway Trust 

Fund and authorizing the depositing of amounts to the credit of the trust fund is set forth in 26 U.S.C. § 9502. 

Funding sources include: 

• Taxes received from transportation of persons and property in the air and fuel used in commercial and general 

aviation. 

• International departure taxes. 

• Interest earned on investments in Treasury securities. 

For the years ending September 30, 2007 and 2006, Airport and Airway Trust Fund excise tax revenues were 

$12.4 billion and $10.2 billion, respectively. The above tables do not reflect any transfers from the Highway Trust 

Fund to the Airport and Airway Trust Fund for fuel which was used in aviation, but which was taxed at highway 

rates under P.L. 109-59 (SAFETEA-LU). 

The Black Lung Disability Trust Fund (BLDTF) provides disability benefits to coal miners who are totally 

disabled due to pneumoconiosis (black lung disease) and death benefits for the eligible survivors of those miners 

who die from the disease. Excise taxes on coal mine operators, based on the sale of coal, partially fund black lung 

disability payments as well as related administrative and interest costs. For the years ending September 30, 2007 and 

2006, Black Lung Disability Trust Fund excise tax revenues were $0.6 billion and $0.6 billion, respectively. 

Intragovernmental advances to the BLDTF that must be repaid with interest, fund the shortfall. DOL administers the 

BLDTF. The law establishing the BLDTF and authorizing the depositing of amounts to the credit of the trust fund is 

set forth in 26 U.S.C. § 9501. 

Intra-Earmarked Fund Eliminations 

The intra-earmarked fund eliminations represent the activity between earmarked funds that are administered by 

different Federal agencies and which are eliminated to produce consolidated earmarked revenues and net costs as 

shown on the Statement of Operations and Changes in Net Position. Significant examples of such intra-earmarked 

fund activity include the financial interchanges and transactions between the Railroad Retirement Trust Fund, the 

Social Security and Medicare Trust Funds, which are administered by the Railroad Retirement Board (RRB), SSA and 

HHS, respectively. The financial interchanges and transactions between RRB’s Railroad Retirement Trust Fund, SSA’s 

Federal Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund, and HHS’ Federal 

Hospital Insurance Trust Fund are intended to put the latter three trust funds in the same position they would have been 

had railroad employment been covered under the Social Security Act. For further information, see the Railroad 

Retirement program description within Note 22—Social Insurance. 

As of September 30, 2006, various reclassifications were made to certain line items to correct their 

presentation. The following reclassifications were made:

• A net $2.5 billion was reclassified from total Liabilities Due and Payable to total Other non-Federal Liabilities. 

This net amount is comprised of the following reclassifications:

• $3.4 billion of Other non-Federal Liabilities were reclassified to Liabilities Due and Payable for the Military 

Retirement Fund;

• $3.2 billion of Liabilities Due and Payable were reclassified to Other non-Federal Liabilities for All Other 

Earmarked Funds; and

• $2.7 billion of Liabilities Due and Payable were reclassified to Other non-Federal Liabilities for the Federal 

Disability Trust Fund.

• $4 billion of Cash and Other Monetary Assets for All Other Earmarked Funds were reclassified to Fund 

Balance with Treasury for All Other Earmarked Funds.

These reclassifications did not affect total assets or liabilities for Earmarked Funds as of September 30, 2006.
NOTES TO THE FINANCIAL STATEMENTS 99

Note 21. Indian Trust Funds 

DOI has responsibility for the assets held in trust on behalf of American Indian tribes and individuals. 

DOI, through the Office of the Special Trustee (OST), holds trust funds in accounts for Indian tribes. It 

maintains over 1,800 accounts for Tribal and Other Trust Funds (including the Alaska Native Escrow Fund). The 

OST was established by the American Indian Trust Fund Management Reform Act of 1994 (Public Law 103-412) 

and was created to improve the accountability and management of Indian funds held in trust by the Federal 

Government. 

The balances that have accumulated in the Tribal and Other Trust Funds have resulted from judgment awards, 

settlements of claims, land use agreements, royalties on natural resource depletion, and other proceeds derived 

directly from trust resources and investment income. 

The trust fund balances included in the Trust Funds Held for Indian Tribes and Other Trust Funds contain two 

categories: trust funds held for Indian tribes (considered non-federal funds) and trust funds held by DOI for future 

transfer to a tribe upon satisfaction of certain conditions or where the corpus of the fund is non-expendable 

(considered Federal funds). 

The following tables depict the U.S. Government as trustee for Indian Trust Funds Held for Indian Tribes and 

Other Trust Funds. The Other Trust Funds included in the following tables ($289.9 million and $284.2 million for 

fiscal years 2007 and 2006, respectively, identified in DOI’s financial statements) and trust funds considered Federal 

funds are included in DOI’s financial statements, and other DOI special reports. 

U.S. Government as Trustee for Indian Trust Funds Held for Indian Tribes 

and Other Special Trust Funds 

Statement of Assets and Trust Fund Balances as of September 30 

(In millions of dollars) 2007 2006 

Assets 

Current Assets: 

Cash and cash equivalents ...................................................................... 602.5 503.4 

Investments .............................................................................................. 2,278.2 2,417.8 

Total assets............................................................................................ 2,880.7 2,921.2 

Trust fund balances, held for Indian Tribes and by DOI ..................... 2,880.7 2,921.2 

 

 

Tribal and Other Trust Funds 

Statement of Changes in Trust Fund Balances – Cash Basis 

For the Fiscal Years Ended September 30, 2007, and 2006 

(In millions of dollars) 2007 2006 

Receipts ...................................................................................................... 339.2 338.9 

Interest received.......................................................................................... 139.3 121.6 

Gain (loss) on disposition of investments, net ............................................ 0.6 - 

Disbursements ............................................................................................ (519.6) (421.1) 

Increase (decrease) in trust fund balances, net.......................................... (40.5) 39.4 

Trust fund balances, beginning of year....................................................... 2,921.2 2,881.8 

Trust fund balances, end of year.............................................................. 2,880.7 2,921.2 

 
100 NOTES TO THE FINANCIAL STATEMENTS 

OST also maintains over 370,000 open Individual Indian Monies (IIM) accounts. The IIM fund is primarily a 

deposit fund for individuals who have a beneficial interest in the trust funds. The IIM account-holders realize 

receipts primarily from royalties on natural resource depletion, land use agreements, and enterprises that have a 

direct relationship to trust fund resources and investment income. Funds related to the IIM Trust Fund are included 

in the following tables. 

 

U.S. Government as Trustee for Indian Trust Funds Held for Individual 

Indian Monies Trust Funds 

Statement of Assets and Trust Fund Balances as of September 30 

(In millions of dollars) 2007 2006 

Assets: 

Cash and cash equivalents ...................................................................... 48.3 61.9 

Investments .............................................................................................. 372.6 353.9 

Accrued interest receivable...................................................................... 2.8 2.5 

Total assets............................................................................................ 423.7 418.3 

Trust fund balances, held for individual Indians.................................. 423.7 418.3 

 

 

Individual Indian Monies Trust Funds 

Statement of Changes in Trust Fund Balances – Modified Cash Basis 

For the Fiscal Years Ended September 30, 2007, and 2006 

(In millions of dollars) 2007 2006 

Receipts ..................................................................................................... 303.7 355.1 

Interest received......................................................................................... 20.8 20.5 

Gain (loss) on disposition of investments, net ........................................... 0.4 (2.7) 

Disbursements ........................................................................................... (319.5) (374.5) 

Increase (decrease) in trust fund balances, net......................................... 5.4 (1.6) 

Trust fund balances, beginning of year...................................................... 418.3 419.9 

Trust fund balances, end of year............................................................. 423.7 418.3 

 

The amounts presented in the four tables of this note were prepared using a cash basis of accounting, which is a 

comprehensive basis of accounting other than GAAP. Receivables and payables are not recorded, and investment 

premiums and discounts are not amortized in the Trust Funds Held for Indian Tribes and Other Trust Funds. 

Receipts are recorded when received and disbursements when paid, and investments are stated at historical cost. The 

only basis of accounting difference between the Trust Funds Held for Indian Tribes and Other Trust Funds and the 

IIM Trust Fund is that the latter records the receivables and payables related to accrued interest and dividends when 

earned, including amortization of investment discounts and premiums, and investments are stated at amortized cost. 
NOTES TO THE FINANCIAL STATEMENTS 101

Note 22. Social Insurance 

The Statements of Social Insurance provide estimates of the status of the Social Security, Medicare, Railroad 

Retirement and Black Lung social insurance programs which are administered by the SSA, HHS, RRB, and DOL, 

respectively. The estimates are actuarial present values of the projections and are based on the economic and 

demographic assumptions presented later in this note as set forth in the relevant Social Security and Medicare 

trustees’ reports and in the agency financial report of HHS and in the relevant agency performance and 

accountability reports for SSA, RRB and DOL (Black Lung). The projections are based on the continuation of 

program provisions contained in current law. The estimates in the consolidated Statements of Social Insurance are 

for persons who are participants or eventually will participate in the programs as contributors (workers) or 

beneficiaries (retired workers, survivors, and disabled) during a 75-year time period (Black Lung is projected only 

through September 30, 2040 when the program will terminate). 

Contributions and earmarked taxes consist of payroll taxes from employers, employees, and self-employed 

persons; revenue from Federal income taxation of OASDI and railroad retirement benefits; excise tax on coal (Black 

Lung); and premiums from, and State transfers on behalf of, participants in Medicare. Income for all programs is 

presented from a consolidated perspective. Future interest payments and other future intragovernmental transfers 

have been excluded upon consolidation. Expenditures include scheduled benefit payments and administrative 

expenses. Scheduled benefits are projected based on the benefit formulas under current law. However, current Social 

Security and Medicare law does not provide for full benefit payments after the trust funds are exhausted. 

Future participants for Social Security and Medicare include births during the projection period and individuals 

below age 15 as of January 1 of the valuation year. Railroad Retirement’s future participants are the projected new 

entrants as of January 1 of the valuation year. 

The present values of future expenditures less future revenue is the current amount of funds needed to cover 

projected shortfalls, excluding the starting trust fund balances, over the projection period. They are calculated by 

subtracting the actuarial present values of future scheduled contributions and dedicated tax income by and on behalf 

of current and future participants from the actuarial present value of the future scheduled benefit payments to them 

or on their behalf. For these calculations, the trust fund balances at the beginning of the valuation period are not 

included. The trust fund balances in billions of dollars, as of the valuation date, for the respective programs, 

including interest earned, are shown in the following table. Substantially all of the OASDI, HI, and SMI trust fund 

balances consist of investments in special non-marketable U.S. Treasury securities that are guaranteed for principal 

and interest by the full faith and credit of the U.S. Government. 

 ***************UNAUDITED****************

Social Insurance Program 

2007 2006 2005 2004 2003 

 

Social Security........................ 2,048 1,859 1,687 1,531 1,378 

Medicare................................. 

HI ......................................... 300 285 268 256 235 

SMI Part B ........................... 38 23 19 24 34 

SMI Part D ........................... 1 - - - - 

Railroad Retirement ............... 32 30 28 26 22 

Black Lung.............................. (10) (10) (9) (8) (8) 

The projection period for future participants covers the next 75 years for the Social Security, Medicare, and 

Railroad Retirement programs. The projection period for current participants in the Social Security and Medicare 

programs (i.e., those age 14 and over on January 1 of the valuation year, referred to as the “closed group”) would 

theoretically cover all of their working and retirement years, a period that could be greater than 75 years in a 

relatively small number of instances. 
102 NOTES TO THE FINANCIAL STATEMENTS 

Social Security – Program Description 

The OASDI program, created in 1935, collectively referred to as “Social Security,” provides cash benefits for 

eligible U.S. citizens and residents. Eligibility and benefit amounts are determined under the laws applicable for the 

period. Current law provides that the amount of the monthly benefit payments for workers, or their eligible 

dependents or survivors, is based on the workers’ lifetime earnings histories. 

The primary financing of these two funds are taxes paid by workers, their employers, and individuals with selfemployment income, based on work covered by the OASDI Program. Refer to the Social Insurance segment in the 

Supplemental Information section for additional information on social security program financing. 

That portion of each trust fund not required to pay benefits and administrative costs is invested, on a daily basis, 

in interest-bearing obligations of the U.S. Government. The Social Security Act authorizes the issuance by the Treasury 

of special nonmarketable, intragovernmental debt obligations for purchase exclusively by the trust funds. Although the 

special issues cannot be bought or sold in the open market, they are redeemable at any time at face value and thus bear 

no risk of fluctuations in principal value due to changes in market yield rates. Interest on the bonds is credited to the 

trust funds and becomes an asset to the funds and a liability to the General Fund of the Treasury. These Treasury 

securities and related interest are eliminated in consolidation at the Governmentwide level. 

Medicare – Program Description 

The Medicare Program, created in 1965, has two separate trust funds: the Hospital Insurance (HI, Medicare 

Part A) and Supplementary Medical Insurance (SMI, Medicare Parts B and D) Trust Funds. HI pays for inpatient 

acute hospital services and major alternatives to hospitals (skilled nursing services, for example) and SMI pays for 

hospital outpatient services, physician services, and assorted other services and products through the Part B account 

and pays for prescription drugs through the Part D account. Though the events that trigger benefit payments are 

similar, HI and SMI have different earmarked financing structures. Similar to OASDI, HI is financed primarily by 

payroll contributions. Other income to the HI fund includes a small amount of premium income from voluntary 

enrollees, a portion of the Federal income taxes that beneficiaries pay on Social Security benefits and interest 

credited on Treasury securities held in the HI Trust Fund. These Treasury securities and related interest are excluded 

in the consolidation at the Governmentwide level. 

For SMI, transfers from the General Fund of the Treasury represent the largest source of income for both Parts 

B and D. Beneficiaries finance the remainder of Parts B and D costs via monthly premiums to these programs. With 

Part D drug coverage, Medicaid will no longer be the primary payer for beneficiaries dually eligible for Medicare 

and Medicaid. For those beneficiaries, States must pay the Part D account a portion of their estimated foregone drug 

costs for this population (referred to as State transfers). As with HI, interest received on Treasury securities held in 

the SMI Trust Fund is credited to the fund and these Treasury securities and related interest are eliminated in 

consolidation at the Governmentwide level. Refer to the Social Insurance segment in the Supplemental Information 

section for additional information on Medicare program financing. 

The Medicare Modernization Act (MMA), enacted on December 8, 2003, created the new Part D account in 

the SMI Trust Fund to account for the new 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. 

SMI Part B Physician Update Factor 

The projected Part B expenditure growth reflected in the accompanying 2007 Statement of Social Insurance is 

significantly reduced as a result of the structure of physician payment updates under current law. In the absence of 

legislation, this structure would result in multiple years of significant reductions in physician payments, totaling an 

estimated 41 percent over the next 9 years. Reductions of this magnitude are not feasible and are very unlikely to 

occur fully in practice. For example, Congress has overridden scheduled negative updates for each of the last 5 years 

in practice. However, since these reductions are required in the future under the current-law payment system, they 

are reflected in the accompanying 2007 Statement of Social Insurance as required under GAAP. Consequently, the 

projected actuarial present values of Part B expenditure shown in the accompanying 2007 Statement of Social 

Insurance, is likely understated. 
NOTES TO THE FINANCIAL STATEMENTS 103

The potential magnitude of the understatement of Part B expenditures due to the physician payment 

mechanism can be illustrated using two hypothetical examples of changes to current law. These examples were 

developed by management for illustrative purposes only; the calculations have not been audited, and the examples 

do not attempt to portray likely or recommended future outcomes. Thus, the illustrations are useful only as general 

indicators of the substantial impacts that could result from future legislation on physician payments under Medicare 

and of the broad range of uncertainty associated with such impacts. Under current law, the projected 75-year present 

value of future Part B expenditures is $18.2 trillion. An alternative scenario indicated that if Congress were to set 

future physician payment updates at zero percent per year, then absent other provisions to offset these costs, the 

projected present value would increase to $22.6 trillion. Similarly, if Congress were to set future physician payment 

updates equal to the Medicare Economic Index (projected to be 2 to 2.5 percent per year), the present value would 

be $25.4 trillion. 

The extent to which actual future Part B costs could exceed the projected current-law amounts due to physician 

payments depends on both the level of physician payment updates that might be legislated and on whether Congress 

would pass further provisions to help offset such costs (as it did, for example, in the Deficit Reduction Act in 2006). 

As noted, these examples only reflect hypothetical changes to physician payments. It is likely that in the coming 

years Congress will consider and pass numerous other legislative proposals affecting Medicare. Many of these 

would likely be designed to reduce costs in an effort to make the program more affordable. In practice, it is not 

possible to anticipate what actions Congress might take, either in the near term or over longer periods. 

Hospice Benefits Mis-Posting 

Beginning in May 2005, expenditures for certain Part A hospice benefits were posted to the Part B account of 

the SMI trust fund, rather than from the HI trust fund. Correction of this mis-posting will increase Part A 

expenditures and reduce Part B expenditures in 2008 and later years, compared to the projections shown in the 2007 

Medicare Trustees Report. It also resulted in adjustments to the HI and SMI trust funds to account for the 

misallocated hospice expenditures during fiscal years 2005 through 2007. The present values displayed in the 

Statement of Social Insurance have been revised to include the estimated impact of correcting this mis-posting. As a 

result, the summation of the present value of future expenditures in excess of future revenue amounts for Parts A, B, 

and D included in the 2007 consolidated Statement of Social Insurance is less than the summation of the related 

amounts included in the 2007 Medicare Trustees Report, by an amount that is insignificant relative to the Trustees 

Report. 

Social Security and Medicare – Demographic and Economic Assumptions 

The Boards of Trustees1 of the OASDI and Medicare Trust Funds provide in their annual reports to Congress 

short-range (10-year) and long-range (75-year) actuarial estimates of each trust fund. Because of the inherent 

uncertainty in estimates for 75 years into the future, the Boards use three alternative sets of economic and demographic 

assumptions to show a range of possibilities. Assumptions are made about many economic and demographic factors, 

including gross domestic product (GDP), earnings, the consumer price index (CPI), the unemployment rate, the fertility 

rate, immigration, mortality, disability incidence and terminations, and for the Medicare projections, health care cost 

growth. The assumptions used for the most recent set of projections shown in Tables 1A (Social Security) and Table 

1B (Medicare) are generally referred to as the “intermediate assumptions,” and reflect the trustees’ best estimate of 

expected future experience. For further information on Social Security and Medicare demographic and economic 

assumptions, refer to SSA’s performance and accountability report and HHS’ agency financial report.

 

1

 There are six trustees: the Secretaries of Treasury (managing trustee), Health and Human Services, and Labor; the Commissioner of the Social 

Security Administration; and two public trustees who are generally appointed by the President and confirmed by the Senate for a 4-year term. By 

law, the public trustees are members of two different political parties. 
104 NOTES TO THE FINANCIAL STATEMENTS 

 

Table 1A 

Social Security – Demographic and Economic Assumptions 

 

Demographic Assumptions 

Period Life 

Expectancy 

at Birth4

Year 

Total 

Fertility 

Rate1

Age-Sex 

Adjusted 

Death Rate2

Net 

Immigration3

(persons) Male Female 

2007 2.04 839.8 1,075,000 75.1 79.7 

2010 2.03 825.3 1,000,000 75.5 79.9 

2020 2.02 764.5 950,000 76.7 80.7 

2030 2.00 705.4 900,000 77.7 81.6 

2040 2.00 652.8 900,000 78.6 82.4 

2050 2.00 606.6 900,000 79.5 83.1 

2060 2.00 565.7 900,000 80.3 83.8 

2070 2.00 529.3 900,000 81.1 84.5 

2080 2.00 496.8 900,000 81.9 85.1 

 

 Economic Assumptions 

Year 

Real 

Wage 

Differential5

(percent) 

Average 

Annual Wage 

in Covered 

Employment6

(percent 

change) 

CPI7

(percent 

change) 

Real 

GDP8

(percent 

change) 

Total 

Employment9

(percent 

change) 

Average 

Annual 

Interest 

Rate10

(percent) 

2007 2.7 4.6 1.9 2.6 1.0 4.6 

2010 1.4 4.2 2.8 2.6 0.8 5.7 

2020 1.0 3.8 2.8 2.1 0.4 5.7 

2030 1.1 3.9 2.8 2.0 0.3 5.7 

2040 1.1 3.9 2.8 2.0 0.4 5.7 

2050 1.1 3.9 2.8 2.0 0.3 5.7 

2060 1.1 3.9 2.8 1.9 0.3 5.7 

2070 1.1 3.9 2.8 1.9 0.3 5.7 

2080 1.1 3.9 2.8 1.9 0.3 5.7 

 1 The total fertility rate for any year is the average number of children who would be born to a woman in her lifetime if she were to 

experience the birth rates by age observed in, or assumed for, the selected year, and if she were to survive the entire 

childbearing period. The ultimate total fertility rate of 2.0 is assumed to be reached in 2031. 2 The age-sex-adjusted death rate is a weighted average of age-sex-specific death rates (deaths per 100,000) in a year where 

the weights are the number of people in the corresponding age-sex group as of April 1, 2000. The death rate is a summary 

measure and not a basic assumption; it summarizes the effects of the basic assumptions from which it is derived. 3 Net immigration is the number of persons who enter during the year (both legally and otherwise) minus the number of persons 

who leave during the year. 

4 The period life expectancy for a group of persons born in a given year is the average that would be attained by such persons if

the group were to experience in succeeding years the death rates by age observed in, or assumed for, the given year. It is a 

summary measure and not a basic assumption; it summarizes the effects of the basic assumptions from which it is derived. 5 The real-wage differential is the difference between the percentage increases, before rounding, in the average annual wage in 

covered employment, and the average annual CPI. 

6 The average annual wage in covered employment is the total amount of wages and salaries for all employment covered by the 

OASDI program in a year divided by the number of employees with any such earnings during the year.

7 The calendar price index (CPI) is the annual average value for the calendar year of the CPI for urban wage earners and clerical

workers. 

8 The real Gross Domestic Product (GDP) is the value of total output of goods and services, expressed in 2000 dollars. It is a 

summary measure and not a basic assumption; it summarizes the effects of the basic assumptions from which it is derived. 9 Total employment represents total of civilian and military employment in the U.S. economy. 10 The average annual interest rate is the average of the nominal interest rates, which, in practice, are compounded semiannually 

for special-issue Treasury obligations sold only to the trust funds in each of the 12 months of the year. 
NOTES TO THE FINANCIAL STATEMENTS 105

Table 1B 

Medicare – Demographic and Economic Assumptions 

 

Demographic Assumptions 

Year 

Total 

Fertility 

Rate1

Age-Sex 

Adjusted 

Death Rate2

Net 

Immigration3

(persons) 

2007 2.04 839.8 1,075,000 

2010 2.03 825.3 1,000,000 

2020 2.02 764.5 950,000 

2030 2.00 705.4 900,000 

2040 2.00 652.8 900,000 

2050 2.00 606.5 900,000 

2060 2.00 565.7 900,000 

2070 2.00 529.3 900,000 

2080 2.00 496.8 900,000 

 

 Economic Assumptions 

Per Beneficiary Cost 

(percent change)7

SMI 

Year 

Real 

Wage 

Differential4

(percent) 

Average 

Annual Wage 

in Covered 

Employment 

(percent 

change) 

CPI5

(percent 

change) 

Real 

GDP6

(percent) HI Part B Part D 

Real 

Interest 

Rate8

(percent) 

2007 2.7 4.6 1.9 2.6 6.4 6.2 0.1 2.9

2010 1.4 4.2 2.8 2.6 5.0 4.6 8.6 2.8

2020 1.0 3.8 2.8 2.1 4.5 4.7 7.6 2.9

2030 1.1 3.9 2.8 2.0 5.8 5.6 5.5 2.9

2040 1.1 3.9 2.8 2.0 5.8 5.4 5.2 2.9

2050 1.1 3.9 2.8 2.0 4.9 4.8 4.9 2.9

2060 1.1 3.9 2.8 1.9 4.7 4.8 4.6 2.9

2070 1.1 3.9 2.8 1.9 4.6 4.5 4.4 2.9

2080 1.1 3.9 2.8 1.9 4.3 4.3 4.3 2.9

 1 The total fertility rate for any year is the average number of children who would be born to a woman in her lifetime if she were to experience 

the birth rates by age observed in, or assumed for, the selected year, and if she were to survive the entire childbearing period. The ultimate 

total fertility rate of 2.0 is assumed to be reached in 2031. 

2 The age-sex-adjusted death rate is a weighted average of age-sex-specific death rates (deaths per 100,000) in a year where the weights are 

the number of people in the corresponding age-sex group as of April 1, 2000. The death rate is a summary measure and not a basic 

assumption; it summarizes the effects of the basic assumptions from which it is derived. 3 Net immigration is the number of persons who enter during the year (both legally and otherwise) minus the number of persons who leave 

during the year. 

4 The real-wage differential is the difference between the percentage increases, before rounding, in the average annual wage in covered 

employment, and the average annual CPI. 

5 The calendar price index (CPI) is the annual average value for the calendar year of the CPI for urban wage earners and clerical workers. 6

 The real Gross Domestic Product (GDP) is the value of total output of goods and services, expressed in 2000 dollars. It is a summary 

measure and not a basic assumption; it summarizes the effects of the basic assumptions from which it is derived. 7 These increases reflect the overall impact of more detailed assumptions that are made for each of the different types of service provided by the 

Medicare program (for example, hospital care, physician services, and pharmaceutical costs). These assumptions include changes in the payment 

rates, utilization, and intensity of each type of service. 8 The average annual interest rate earned on new trust fund securities, above and beyond the rate of inflation. 
106 NOTES TO THE FINANCIAL STATEMENTS 

Railroad Retirement – Program Description 

The Railroad Retirement and Survivor Benefit program pays full retirement annuities at age 60 to railroad 

workers with 30 years of service. The program pays disability annuities based on total or occupational disability. It 

also pays annuities to spouses, divorced spouses, widow(er)s, remarried widow(er)s, surviving divorced spouses, 

children, and parents of deceased railroad workers. Medicare covers qualified railroad retirement beneficiaries in the 

same way as it does Social Security beneficiaries. The Railroad Retirement and Survivors’ Improvement Act of 

2001 (RRSIA), liberalized benefits for 30-year service employees and their spouses, eliminated a cap on monthly 

benefits for retirement and disability benefits, lowered minimum service requirements from 10 to 5 years, and 

provided for increased benefits for widow(er)s. 

The RRB and the SSA share jurisdiction over the payment of retirement and survivor benefits. RRB has 

jurisdiction if the employee had at least 5 years (if performed after 1995) of railroad service. For survivor benefits, 

RRB requires that the employee’s last regular employment before retirement or death be in the railroad industry. If a 

railroad employee or his or her survivors do not qualify for railroad retirement benefits, the RRB transfers the 

employee’s railroad retirement credits to SSA. 

Payroll taxes paid by railroad employers and their employees are a primary source of income for the Railroad 

Retirement and Survivor Benefit Program. By law, railroad retirement taxes are coordinated with Social Security 

taxes. Employees and employers pay tier I taxes at the same rate as Social Security taxes. Tier II taxes finance 

railroad retirement benefit payments that are higher than Social Security levels. 

Other sources of program income include: financial transactions with the Social Security and Medicare Trust 

Funds, earnings on investments, Federal income taxes on railroad retirement benefits, and appropriations (provided 

after 1974 as part of a phase out of certain vested dual benefits). The financial interchanges and transactions between 

RRB’s Social Security Equivalent Benefit (SSEB) Account, the Federal Old-Age and Survivors Insurance Trust Fund, 

the Disability Insurance Trust Fund, and the Federal Hospital Insurance Trust Fund are intended to put the latter three 

trust funds in the same position they would have been had railroad employment been covered under the Social Security 

Act. From a Governmentwide perspective, these future financial interchanges and transactions are intragovernmental 

transfers and are excluded in the consolidation. 

Railroad Retirement – Employment, Demographic and Economic Assumptions 

The most recent set of projections are prepared using employment, demographic and economic assumptions 

and reflect the Board Members’ best estimate of expected future experience. 

Three employment assumptions were used in preparing the projections and reflect optimistic, moderate and 

pessimistic future passenger rail and freight employment. The average railroad employment is assumed to be 

232,000 in 2007. This employment assumption, based on a model developed by the Association of American 

Railroads, assumes that (1) passenger service employment will remain at the level of 43,000 and (2) the employment 

base, excluding passenger service employment, will decline at a constant 2.5 percent annual rate for 25 years, at a 

falling rate over the next 25 years, and remain level thereafter. All the projections are based on an open group (i.e., 

future entrants) population. 

The moderate (middle) economic assumptions include a long-term cost of living increase of 3.0 percent, an 

interest rate of 7.5 percent, and a wage increase of 4 percent. The cost of living assumption reflects the expected 

level of price inflation. The interest rate assumption reflects the expected return on National Railroad Retirement 

Investment Trust (NRRIT) investments. The wage increase reflects the expected increase in railroad employee 

earnings. 

The demographic assumptions, including rates for mortality and total termination rates, remarriage rates for 

widows, retirement rates and withdrawal rates are listed in Table 2. For further details on the employment, 

demographic, economic and all other assumptions, refer to the Railroad Retirement System Annual Report, June 

2007 and the 23rd Actuarial Valuation of the Assets and Liabilities under the Railroad Retirement Acts (Valuation 

Report) as of December 31, 2004, with Technical Supplement. 
NOTES TO THE FINANCIAL STATEMENTS 107

Table 2 

Railroad Retirement Demographic Actuarial Assumptions 

Mortality after age 

retirement 2004 RRB Annuitants Mortality Table 

2004 RRB Disabled Mortality Table for 

Mortality after disability Annuitants with Disability Freeze 

retirement 2004 RRB Disabled Mortality Table for 

Annuitants without Disability Freeze 

Mortality during active 

service 1994 RRB Active Service Mortality Table 

Mortality Rates1 

Mortality of widow 

annuitants 1995 RRB Mortality Table for Widows 

Termination for spouses 2004 RRB Spouse Total Termination Table Total Termination 

Rates2 Termination for disabled 

children 

2004 RRB Total Termination Table for 

Disabled Children 

Widow Remarriage 

Rate3 1997 RRB Remarriage Table 

Age retirement See the Valuation Report Retirement Rates4

Disability retirement See the Valuation Report 

Withdrawal Rates5 See the Valuation Report 

1 These mortality tables are used to project the termination of eligible employee benefit payments within the population. 2 Total termination rates are used to project the termination of dependent benefits to spouses and disabled children. 3 This rate is to project the termination of spousal survivor benefits. 4

 The retirement rates are used to determine the expected annuity to be paid based on age and years of service for both age 

and disability retirees. 

5

 The withdrawal rates are used to project all withdrawals from the railroad industry and resultant effect on the population and

accumulated benefits to be paid. 

Black Lung – Program Description

The Black Lung Disability Benefit Program provides compensation for medical and survivor benefits for 

eligible coal miners who are disabled due to pneumoconiosis (black lung disease) arising out of their coal mine 

employment. The DOL operates the Black Lung Disability Benefit Program. The Black Lung Disability Trust Fund 

(BLDTF) provides benefit payments to eligible coal miners disabled by pneumoconiosis when no responsible mine 

operator can be assigned the liability. 

Excise taxes on coal mine operators, based on the sale of coal, are the primary source of financing black lung 

disability payments and related administrative costs. Though excise tax revenues currently exceed costs (and are 

expected to in the future), that was not always the case. The Black Lung Benefits Revenue Act provides for 

repayable advances to the BLDTF from the General Fund of the Treasury, in the event that BLDTF resources are 

not adequate to meet program obligations. During earlier years of the program, general revenues were needed to pay 

for cash shortfalls in the program. 

Black Lung – Demographic and Economic Assumptions 

The demographic assumptions used for the most recent set of projections are the number of beneficiaries and 

their life expectancy. The beneficiary population data is updated from information supplied by the program. The 

beneficiary population is a nearly closed universe in which attrition by death exceeds new entrants by a ratio of more 

than ten to one. Life tables are used to project the life expectancies of the beneficiary population. 

The economic assumptions used for the most recent set of projections are coal excise tax revenue estimates, 

the tax rate structure, Federal civilian pay raises, medical cost inflation, and the interest rate on new repayable 

advances from the Treasury. 
108 NOTES TO THE FINANCIAL STATEMENTS 

Estimates of future receipts of the black lung excise tax are based on projections of future coal production and 

sale prices prepared by the Energy Information Agency of DOE. Treasury’s Office of Tax Analysis provides the 

first 11 years of tax receipt estimates. The remaining years are estimated using a growth rate based on both historical 

tax receipts and Treasury’s estimated tax receipts. The coal excise tax rate structure is $1.10 per ton of undergroundmined coal and $0.55 per ton of surface-mined coal sold, with a cap of 4.40 percent of sales price, through 

December 31, 2013. Starting in 2014, the tax rates revert to $0.50 per ton of underground-mined coal and $0.25 per 

ton surface-mine coal sold, and a limit of 2 percent of sales price. 

OMB supplies assumptions for future monthly benefit rate increases based on increases in the Federal pay 

scale and future medical cost inflation based on increases in the consumer price index-medical, which are used to 

calculate future benefit costs. During the current projection period, future benefit rate increases range from 2.50 

percent to 4.20 percent, and medical cost increases range from 3.80 percent to 4.10 percent. Estimates for 

administrative costs for the first 11 years of the projection are supplied by DOL’s Budget Office, while later years 

are based on the number of projected beneficiaries. Estimates for future interest on advances are based on the 

interest rates on outstanding advances ranging from 4.5 percent to 13.9 percent and new borrowings ranging from 

5.2 percent to 5.6 percent. 

Note 23. Stewardship Land 

Stewardship land refers to federally-owned land that is set aside for the use and enjoyment of present and 

future generations and land on which military bases are located. Except for military bases, this land is not used or 

held for use in general Government operations. Stewardship land is land that the Government does not expect to use 

to meet its obligations, unlike the assets listed in the balance sheets. Stewardship land is measured in non-financial 

units such as acres of land and lakes, number of National Parks and square miles of National Marine Sanctuaries. 

Examples of stewardship land include national parks, national forests, wilderness areas, and land used to enhance 

ecosystems to encourage animal and plant species and to conserve nature. This category excludes lands administered 

by the Bureau of Indian Affairs and held in trust. 

Most stewardship land managed by the Government was once part of the 1.8 billion acres of public domain 

land acquired between 1781 and 1867. Stewardship land accounts for 28 percent of the current U.S. landmass. 

DOI uses units as a measure to more accurately reflect the major categories of uses of stewardship land. As of 

fiscal year 2007, they have 548 national wildlife refuges, 391 park units, 126 geographic management areas, 87 fish 

hatcheries, and many other categories. At the end of fiscal year 2007, the Department of Agriculture’s Forest 

Services managed an estimated 192.8 million acres of public land, while DOC had 13 National Marine Sanctuaries, 

which included near–shore coral reefs and open ocean, covering a total of 19 thousand square miles. 

Stewardship lands are used and managed in accordance with the statutes authorizing their acquisition or 

directing their use and management. Additional detailed information concerning stewardship land can be obtained in 

the financial statements of DOI, DOC, DOD, and USDA. 

Note 24. Heritage Assets 

Heritage assets are Government-owned assets that have one or more of the following characteristics: 

• Historical or natural significance. 

• Cultural, educational, or artistic importance. 

• Significant architectural characteristics. 

The cost of heritage assets often is not determinable or relevant to their significance. Like stewardship land, the 

Government does not expect to use these assets to meet its obligations. The most relevant information about heritage 

assets is nonfinancial. The public entrusts the Government with these assets and holds it accountable for their 

preservation. Examples of heritage assets include Mount Rushmore National Memorial and Yosemite National Park. 

Other examples of heritage assets include the Declaration of Independence, the U.S. Constitution, and the Bill of 

Rights preserved by the National Archives. Also included are national monuments/structures such as the Vietnam 

Veterans Memorial, the Jefferson Memorial, and the Washington Monument, as well as the Library of Congress. 

Many other sites such as battlefields, historic structures, and national historic landmarks are placed in this category, 

as well. 
NOTES TO THE FINANCIAL STATEMENTS 109

Many laws and regulations have been put in place that govern the preservation and management of heritage 

assets. Established policies, by individual Federal agencies, for heritage assets ensure the proper care and handling 

of the assets under their controls and preserve these assets for the benefit of the American public. 

Some heritage assets are used both to remind us of our heritage and for day-to-day operations. These assets are 

referred to as multi-use heritage assets. One typical example is the White House. The cost of acquisition, betterment 

or reconstruction of all multi-use heritage assets is capitalized as general property, plant, and equipment and is 

depreciated. 

The discussion of the Government’s heritage assets is not all-inclusive. Rather, it highlights significant heritage 

assets reported by Federal agencies. 

The Government classifies heritage assets into two broad categories: 

• Collection type 

• Non-collection type 

Collection type heritage assets include objects gathered and maintained for museum and library collections. 

Non-collection type heritage assets include national wilderness areas, wild and scenic rivers, natural landmarks, 

forests, grasslands, historic places and structures, memorials and monuments, buildings, national cemeteries and 

archeological sites. 

Please refer to the individual financial statements of the Department of the Interior, the Department of 

Agriculture-Forest Service, the National Archives and Records Administration, and the websites for the Library of 

Congress (http://www.loc.gov/index.html) and Smithsonian Institution (http://www.si.edu), for additional 

information on multi-use heritage assets, agency stewardship policies, and physical units by major categories and 

conditions. 
110 NOTES TO THE FINANCIAL STATEMENTS 

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 SUPPLEMENTAL INFORMATION (UNAUDITED) 111

United States Government 

Supplemental Information (Unaudited) 

for the Years Ended September 30, 2007, 

and September 30, 2006 

Social Insurance

The social insurance programs were developed to provide income security and health care coverage to citizens 

under specific circumstances as a responsibility of the Government. Because taxpayers rely on these programs in 

their long-term planning, social insurance program information should indicate whether they are sustainable under 

current law, as well as what their effect will be on the Government’s financial condition. The resources needed to 

run these programs are raised through taxes and fees. Eligibility for benefits rests in part on earnings and time 

worked by the individuals. Social Security benefits are generally redistributed intentionally toward lower-wage 

workers (i.e., benefits are progressive). In addition, each social insurance program has a uniform set of entitling 

events and schedules that apply to all participants. 

Social Security and Medicare 

Social Security 

The Federal Old-Age and Survivors Insurance (OASI) Trust Fund was established on January 1, 1940, as a 

separate account in the Treasury. The Federal Disability Insurance (DI) Trust Fund, another separate account in the 

Treasury, was established on August 1, 1956. OASI pays cash retirement benefits to eligible retirees and their 

eligible dependents and survivors, and the much smaller DI fund pays cash benefits to eligible individuals who are 

unable to work due to medical conditions. Though the events that trigger benefit payments are quite different, both 

trust funds have the same earmarked financing structure: primarily payroll taxes and income taxes on benefits. All 

financial operations of the OASI and DI Programs are handled through these respective funds. The two funds are 

often referred to as simply the combined OASDI Trust Funds. At the end of calendar year 2006, OASDI benefits 

were paid to approximately 49 million beneficiaries. 

The primary financing of these two funds are taxes paid by workers, their employers, and individuals with selfemployment income, based on work covered by the OASDI Program. Since 1990, employers and employees have 

each paid 6.2 percent of taxable earnings. The self-employed pay 12.4 percent of taxable earnings. Payroll taxes are 

computed on wages and net earnings from self-employment up to a specified maximum annual amount, referred to 

as maximum taxable earnings ($97,500 in 2007), that increases each year with economy-wide wages. 

Since 1984, up to one-half of OASDI benefits have been subject to Federal income taxation. Effective for 

taxable years beginning after 1993, the maximum percentage of benefits subject to taxation was increased from 50 

percent to 85 percent. The revenue from income taxes on up to 50 percent of benefits is allocated to the OASDI 

Trust Funds and the rest is allocated to the Hospital Insurance (HI) Trust Fund. 
112 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Medicare 

The Medicare Program, created in 1965, also has two separate trust funds: the Hospital Insurance (HI, 

Medicare Part A) and Supplementary Medical Insurance (SMI, Medicare Parts B and D) Trust Funds.1 HI pays for 

inpatient acute hospital services and major alternatives to hospitals (skilled nursing services, for example) and SMI 

pays for hospital outpatient services, physician services, and assorted other services and products through the Part B 

account and pays for prescription drugs through the Part D account. Though the events that trigger benefit payments 

are similar, HI and SMI have different earmarked financing structures. Similarly to OASDI, HI is financed primarily 

by payroll contributions. Employers and employees each pay 1.45 percent of earnings, while self-employed workers 

pay 2.9 percent of their net earnings. Other income to the HI fund includes a small amount of premium income from 

voluntary enrollees, a portion of the Federal income taxes that beneficiaries pay on Social Security benefits (as 

explained above), and interest credited on Treasury securities held in the HI Trust Fund. These Treasury securities 

and related interest are excluded upon consolidation at the Governmentwide level. 

For SMI, transfers from the General Fund of the Treasury represent the largest source of income covering 

about 74 percent and 78 percent of program costs for Parts B and D, respectively. Beneficiaries pay monthly 

premiums that finance approximately 26 percent and 28 percent of costs for Parts B and D, respectively. With Part D 

drug coverage, Medicaid will no longer be the primary payer for beneficiaries dually eligible for Medicare and 

Medicaid. For those beneficiaries, States must pay the Part D account a portion of their estimated foregone drug 

costs for this population (referred to as State transfers). As with HI, interest received on Treasury securities held in 

the SMI Trust Fund is credited to the fund. These Treasury securities and related interest are excluded upon 

consolidation at the Governmentwide level. Refer to Note 22—Social Insurance, for additional information on 

Medicare program financing. 

Social Security, Medicare, and Governmentwide Finances 

The current and future financial status of the separate Social Security and Medicare Trust Funds is the focus of 

the trustees’ reports, a focus that may appropriately be referred to as the “trust fund perspective.” In contrast, the 

Federal Government primarily uses the unified budget concept as the framework for budgetary analysis and 

presentation. It represents a comprehensive display of all Federal activities, regardless of fund type or on- and offbudget status, and has a broader focus than the trust fund perspective that may appropriately be referred to as the 

“budget perspective” or the “Governmentwide perspective.” Social Security and Medicare are among the largest 

expenditure categories of the U.S. Federal budget. Together, they now account for more than a third of all Federal 

spending and the percentage is projected to rise dramatically for the reasons discussed below. This section describes 

in detail the important relationship between the trust fund perspective and the Governmentwide perspective.

Figure 1 is a simplified graphical depiction of the interaction of the Social Security and Medicare Trust Funds 

with the rest of the Federal budget.2

 The boxes on the left show sources of funding, those in the middle represent the 

trust funds and other Government accounts (of which the General Fund is a part) into which that funding flows, and 

the boxes on the right show simplified expenditure categories. The figure is intended to illustrate how the various 

sources of program revenue flow through the budget to beneficiaries. The general approach is to group revenues and 

expenditures that are linked specifically to Social Security and/or Medicare separately from those for other Federal 

programs. (For ease of understanding, these other Federal programs are referred to here as other Government

programs.) 

 

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. 2

 The Federal unified budget encompasses all Federal Government financing and is synonymous with a Governmentwide perspective. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 113

Each of the trust funds has its own sources and types of revenue. With the exception of General Fund transfers 

to SMI, each of these revenue sources is earmarked specifically for the respective trust fund, and cannot be used for 

other purposes. In contrast, personal and corporate income taxes and other revenue go into the General Fund of the 

Treasury and are drawn down for any Government program for which Congress has approved spending.3

 The arrows 

from the boxes on the left represent the flow of these revenues into the trust funds and other Government accounts. 

The heavy line between the top two boxes in the middle of Figure 1 represents intragovernmental transfers 

between the SMI Trust Fund and other Government accounts. The Medicare SMI Trust Fund is shown separately 

from the two Social Security trust funds (OASI and DI) and the Medicare HI Trust Fund to highlight the unique 

financing of SMI. SMI is currently the only one of the four programs that is funded through transfers from the 

General Fund of the Treasury, which is part of the other Government accounts (the Part D account will receive 

transfers from the States). The transfers finance roughly three-fourths of SMI Program expenses. While the transfers 

currently support the Part B account, general fund transfers are expected to finance about three-fourths of expenses 

in the Part D account. The transfers are automatic; their size depends on how much the program requires, not on 

how much revenue comes into the Treasury. If General Fund revenues become insufficient to cover both the 

mandated transfer to SMI and expenditures on other general Government programs, Treasury would have to borrow 

to make up the difference. In the longer run, if transfers to SMI are increasing––as shown below, they are projected 

to increase significantly in coming years—then Congress must either raise taxes, cut other Government spending, 

reduce SMI benefits, or borrow even more. 

The dotted lines between the middle boxes of Figure 1 also represent intragovernmental transfers but those 

transfers arise in the form of “borrowing/lending” between the Government accounts. Interest credited to the trust 

funds arises when the excess of program income over expenses is loaned to the General Fund. The vertical lines 

labeled Surplus Borrowed represent these flows from the trust funds to the other Government accounts. These loans 

reduce the amount the General Fund has to borrow from the public to finance a deficit (or likewise increase the 

amount of debt paid off if there is a surplus). But the General Fund has to credit interest on the loans from the trust 

fund programs, just as if it borrowed the money from the public. The credits lead to future obligations for the 

General Fund (which is part of the other Government accounts). These transactions are indicated in Figure 1 by the 

vertical arrows labeled Interest Credited. The credits increase trust fund income exactly as much as they increase 

credits (future obligations) in the General Fund. So from the standpoint of the Government as a whole, at least in an 

accounting sense, these interest credits are a wash. 

It is important to understand the additional implications of these loans from the trust funds to the other 

Government accounts. When the trust funds get the receipts that they loan to the General Fund, these receipts 

provide additional authority to spend on benefits and other program expenses. The General Fund, in turn, has taken 

on the obligation of paying interest on these loans every year and repaying the principal when trust fund income 

from other sources falls below expenditures—the loans will be called in and the General Fund will have to reduce 

other spending, raise taxes, or borrow more from the public to finance the benefits paid by the trust funds. 

 

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, we group all other programs, including these other earmarked trust fund programs, under “Other Government Accounts” to simplify 

the description and maintain the focus on Social Security and Medicare. 
114 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Figure 1 

Social Security, Medicare, and Governmentwide Finances 

Surplus 

Borrowed 

Interest 

Credited 

Benefit 

Taxes 

Interest 

Credited 

Surplus 

Borrowed 

General 

Government 

Expenditures, 

Net Interest 

SMI Trust 

Fund 

Account 

Other 

Government

Accounts 

HI, OASDI 

Trust Fund 

Accounts 

Supplementary 

Medical Insurance 

Premiums and 

State Transfers 

Income Taxes 

Benefit Taxes 

Other Revenues 

Borrowing from 

Public 

Payroll Taxes 

Hospital Insurance 

Premiums 

HI, OASDI, SMI 

Benefits 

Other 

Government 

Transfers 

E 

X 

P 

E 

N 

D 

I 

T 

U 

R 

E 

S 

M 

E 

A 

N 

S 

O 

F 

F 

I 

N 

A 

N 

C 

I 

N 

G 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 115

Actual dollar amounts roughly corresponding to the flows presented in Figure 1 are shown in Table 1 for fiscal 

year 2007. The first three columns show revenues and expenditures for HI, SMI, and OASDI, respectively, and the 

fourth column is the sum of these three columns. The fifth column has total revenues and expenditures for all other 

Government programs, which includes the General Fund account, and the last column is the sum of the “combined” 

and “other Government” columns. In Table 1, revenues from the public (left side of Figure 1) and expenditures to 

the public (right side of Figure 1) are shown separately from transfers between Government accounts (middle of 

Figure 1). Note that the transfers ($179.8 billion) and interest credits ($124.5 billion) received by the trust funds 

appear as negative entries under other Government and are thus offsetting when summed for the total budget 

column. These two intragovernmental transfers are key to the differences between the trust fund and budget 

perspectives. 

From the Governmentwide perspective, only revenues received from the public (and States in the case of 

Medicare, Part D) and expenditures made to the public are important for the final balance. Trust fund revenue from 

the public consists of payroll taxes, benefit taxes, and premiums. For HI, the difference between total expenditures 

made to the public ($202.8 billion) and revenues ($202.4 billion) was ($0.4 billion) in 2007, 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 

2007. The difference, ($175.3 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 ($585.3 billion) and revenues from the public ($665.4 

billion) was $80.1 billion in 2007, indicating that OASDI had a positive effect on the overall budget outcome in that 

year. 

The trust fund perspective is captured in the bottom section of each of the three trust fund columns. For HI, 

total revenues exceeded total expenditures by $16.4 billion 2007, as shown at the bottom of the first column. This 

surplus would be added to the beginning trust fund (not shown) that leads to budget obligations in future years. For 

SMI, total revenues of $238.0 billion ($56.8 + $181.2), including $179.2 billion transferred from other Government 

accounts (the General Fund), exceeded total expenditures by $5.9 billion. Transfers to the SMI Program from other 

Government accounts (the General Fund), amounting to about 75 percent of program costs, are obligated under 

current law and therefore appropriately viewed as revenue from the trust fund perspective. For OASDI, total 

revenues of $771.8 billion ($665.4 + $106.4), including interest and a small amount of other Government transfers, 

exceeded total expenditures of $585.3 billion by $186.5 billion. 
116 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Cashflow Projections 

Background 

Economic and Demographic Assumptions. The Boards of Trustees4 of the OASDI and Medicare Trust Funds 

provide in their annual reports to Congress short-range (10-year) and long-range (75-year) actuarial estimates of 

each trust fund. Because of the inherent uncertainty in estimates for 75 years into the future, the Boards use three 

alternative sets of economic and demographic assumptions to show a range of possibilities. The economic and 

demographic assumptions used for the most recent set of intermediate projections for Social Security and Medicare 

are shown in the “Social Security” and “Medicare” sections of Note 22—Social Insurance. 

 

4 There are six trustees: the Secretaries of Treasury (managing trustee), Health and Human Services, and Labor; the Commissioner of the Social 

Security Administration; and two public trustees who are appointed by the President and confirmed by the Senate for a 4-year term. By law, the 

public trustees are members of two different political parties. 

Table 1 

Annual Revenues and Expenditures for Medicare and Social Security 

Trust Funds and the Total Federal Budget, Fiscal Year 2007 

(In billions of dollars) 

 Trust Funds 

Revenue and Expenditure Categories HI SMI 

 

OASDI 

Combined 

Other 

Government Total1 

 

Revenues from the Public: 

Payroll and benefit taxes ........................ 198.6 665.4 864.0 - 864.0 

Premiums ............................................... 3.9 49.8 - 53.7 - 53.7 

Other taxes and fees .............................. 7.0 - 7.0 - 7.0 

Total ..................................................... 202.4 56.8 665.4 924.6 1,643.0 2567.6 

 

Total expenditures to the public2............... 202.8 232.1 585.3 1,020.2 1,710.3 2,730.5 

 

Net results for budget perspective3 ...... (0.4) (175.3) 80.1 (95.5) (67.3) (162.8) 

 

Revenues from Other Government 

Accounts: 

Transfers ................................................ 0.6 179.2 - 179.8 (179.8) - 

Interest credits........................................ 16.1 2.0 106.4 124.5 (124.5) - 

Total ..................................................... 16.8 181.2 106.4 304.3 (304.3) - 

 

Net results for trust fund 

perspective3 .......................................... 16.4 5.9 186.5 208.8 N/A N/A 

 1 This column is the sum of the preceding two columns and shows data for the total Federal budget. The figure $162.8 was the 

total Federal deficit in fiscal year 2007. 

2

 The OASDI figure includes $4.0 billion transferred to the Railroad Retirement Board for benefit payments and is therefore an 

expenditure to the public. 

3

 Net results are computed as revenues less expenditures. 

Notes: Details may not add to totals due to rounding. 

 “N/A” indicates not applicable. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 117

Beneficiary-to-Worker Ratio. Underlying the pattern of expenditure projections for both the OASDI and 

Medicare Programs is the impending demographic change that will occur as the large baby-boom generation, born in 

the years 1946 to 1964, retires or reaches eligibility age. The consequence is that the number of beneficiaries will 

increase much faster than the number of workers who pay taxes that are used to pay benefits. The pattern is 

illustrated in Chart 1 which shows the ratio of OASDI beneficiaries to 100 covered workers for the historical period 

and estimated for the next 75 years. In 2006, there were about 30 beneficiaries for every 100 workers. By 2030, 

there will be about 46 beneficiaries for every 100 workers. A similar demographic pattern confronts the Medicare 

Program. For example, for the HI Program, there were about 26 beneficiaries for every 100 workers in 2007; by 

2030, there are expected to be about 42 beneficiaries for every 100 workers. This ratio for both programs will 

continue to increase to about 50 beneficiaries for every 100 workers by the end of the projection period, after the 

baby-boom generation has moved through the Social Security system as well as declining birth rates and increasing 

longevity. 

Chart 1—OASDI Beneficiaries per 100 Covered Workers 

1970-2081 

10

15

20

25

30

35

40

45

50

55

1970 1976 1982 1988 1994 2000 2006 2012 2018 2024 2030 2036 2042 2048 2054 2060 2066 2072 2078

Calendar Year

Historical Data

Source: www.ssa.gov/OACT/TR/TR07
118 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Social Security Projections 

Nominal Income and Expenditures. Chart 2 shows historical values and actuarial estimates of combined 

OASDI annual income (excluding interest) and expenditures for 1970-2081 in nominal dollars. The estimates are for 

the open-group population. That is, the estimates include taxes paid from, and on behalf of, workers who will enter 

covered employment during the period, as well as those already in covered employment at the beginning of that 

period. These estimates also include scheduled benefit payments made to, and on behalf of, such workers during that 

period. Note that expenditure projections in Chart 2 and subsequent charts are based on current-law benefit 

formulas, regardless of whether the income and assets are available to finance them. 

Chart 2—OASDI Income (Excluding Interest) and Expenditures 

1970-2081 

(In billions of nominal dollars) 

$0

$5,000

$10,000

$15,000

$20,000

$25,000

1970 1976 1982 1988 1994 2000 2006 2012 2018 2024 2030 2036 2042 2048 2054 2060 2066 2072 2078

Calendar Year

Historical Data

2017: Crossover Year

Expenditures

Income

Source: www.ssa.gov/OACT/TR/TR07

Currently, Social Security tax revenues exceed benefit payments and will continue to do so until 2017, when 

revenues are projected to fall below benefit payments, after which the gap between expenditures and revenues 

continues to widen. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 119

Income and Expenditures as a Percent of Taxable Payroll. Chart 3 shows annual income (excluding interest 

but including both payroll and benefit taxes) and expenditures expressed as percentages of taxable payroll, 

commonly referred to as the income rate and cost rate, respectively. 

The OASDI cost rate is projected to decline slightly until about 2008. It then begins to increase rapidly and 

first exceeds the income rate in 2017, producing cashflow deficits thereafter. As described above, surpluses that 

occur prior to 2017 are “loaned” to the General Fund and accumulate, with interest, reserve spending authority for 

the trust fund. The reserve spending authority represents an obligation for the General Fund. Beginning in 2017, 

Social Security will start using interest credits to meet full benefit obligations. The Government will need to raise 

taxes, reduce benefits, increase borrowing from the public, and/or cut spending for other programs to meet its 

obligations to the trust fund. By 2041, the trust fund reserves (and thus reserve spending authority) are projected to 

be exhausted. Even if a trust fund's assets are exhausted, however, tax income will continue to flow into the fund. 

Present tax rates would be sufficient to pay 75 percent of scheduled benefits after trust fund exhaustion in 2041 and 

70 percent of scheduled benefits in 2081. 

Chart 3—OASDI Income (Excluding Interest) and Expenditures 

as a Percent of Taxable Payroll 

1970-2081 

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1970 1976 1982 1988 1994 2000 2006 2012 2018 2024 2030 2036 2042 2048 2054 2060 2066 2072 2078

Source: www.ssa.gov/OACT/TR/TR07 Calendar Year

Historical Data

Expenditures

Income

2041: Year Trust Fund Exhausted

2017: First Year Expenditures

Exceed Noninterest Income

Cash Deficit Covered by

Interest and Trust Fund Assets
120 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Income and Expenditures as a Percent of GDP. Chart 4 shows estimated annual income (excluding interest) 

and expenditures, expressed as percentages of GDP, the total value of goods and services produced in the United 

States. This alternative perspective shows the size of the OASDI Program in relation to the capacity of the national 

economy to sustain it. The gap between expenditures and income widens continuously with expenditures generally 

growing as a share of GDP and income declining slightly relative to GDP. Social Security’s expenditures are 

projected to grow from 4.3 percent of GDP in 2007 to 6.3 percent in 2081. In 2081, expenditures are projected to 

exceed income by 1.8 percent of GDP. 

Chart 4—OASDI Income (Excluding Interest) and Expenditures 

as a Percent of GDP 

1970-2081 

2%

3%

4%

5%

6%

7%

8%

1970 1976 1982 1988 1994 2000 2006 2012 2018 2024 2030 2036 2042 2048 2054 2060 2066 2072 2078

Source: www.ssa.gov/OACT/TR/TR07 Calendar Year

Historical Data

Expenditures

Income

2017: First Year Expenditures

Exceed Noninterest Income

Sensitivity Analysis. Actual future income from OASDI payroll taxes and other sources and actual future 

expenditures for scheduled benefits and administrative expenses will depend upon a large number of factors: the size 

and composition of the population that is receiving benefits, the level of monthly benefit amounts, the size and 

characteristics of the work force covered under OASDI, and the level of workers’ earnings. These factors will 

depend, in turn, upon future marriage and divorce rates, birth rates, death rates, migration rates, labor force 

participation and unemployment rates, disability incidence and termination rates, retirement age patterns, 

productivity gains, wage increases, cost-of-living increases, and many other economic and demographic factors. 

This section presents estimates that illustrate the sensitivity of long-range expenditures and income for the 

OASDI Program to changes in selected individual assumptions. In this analysis, the intermediate assumption is used 

as the reference point, and one assumption at a time is varied. The variation used for each individual assumption 

reflects the levels used for that assumption in the low cost (Alternative I) and high cost (Alternative III) projections. 

For example, when analyzing sensitivity with respect to variation in real wages, income and expenditure projections 

using the intermediate assumptions are compared to the outcome when projections are done by changing only the 

real wage assumption to either low cost or high cost alternatives. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 121

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 0.71 percent. For the low cost alternative, a slower reduction rate (0.30 percent) is 

assumed as it means that beneficiaries die at a younger age relative to the intermediate assumption, resulting in 

lower expenditures. Under the low cost assumption, the shortfall drops from $6,763 billion to $5,233 billion, a 23 

percent smaller shortfall. The high cost death rate assumption (1.26 percent) results in an increase in the shortfall, 

from $6,763 billion to $8,595 billion, a 27 percent increase in the shortfall. Clearly, alternative death rate 

assumptions have a substantial impact on estimated future cashflows in the OASDI Program. 

A higher fertility rate means more workers relative to beneficiaries over the projection period, thereby 

lowering the shortfall relative to the intermediate assumption. An increase in the rate from 2.0 to 2.3 results in an 11 

percent smaller shortfall (i.e., expenditures less income), from $6,763 billion to $6,016 billion. 

Higher real wage growth results in faster income growth relative to expenditure growth. Table 2 shows that a 

real wage differential that is 0.5 greater than the intermediate assumption of 1.1 results in a drop in the shortfall from 

$6,763 billion to $5,757 billion, a 15 percent decline. 

The CPI change assumption operates in a somewhat counterintuitive manner, as seen in Table 2. A lower rate 

of change results in a higher shortfall. This arises as a consequence of holding the real wage assumption constant 

while varying the CPI so that wages (the income base) are affected sooner than benefits. If the rate is assumed to be 

1.8 percent rather than 2.8 percent, the shortfall rises about 7 percent, from $6,763 billion to $7,218 billion. 

The effect of net immigration is similar to fertility in that, over the 75-year projection period, higher immigration 

results in proportionately more workers (taxpayers) than beneficiaries. The low-cost assumption for net immigration 

results in a 7 percent drop in the shortfall, from $6,763 billion to $6,266 billion, relative to the intermediate case; and 

the high-cost assumption results in a 5 percent higher shortfall. 

Finally, Table 2 shows the sensitivity of the shortfall to variations in the real interest rate or, in present value 

terminology, the sensitivity to alternative discount rates. Assuming a higher discount rate results in a lower present 

value. The shortfall of $5,120 billion is 24 percent lower when the real interest rate is 3.6 percent rather than 2.9 

percent, and 39 percent higher when the real interest rate is 2.1 percent rather than 2.9 percent. 
122 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Table 2 

Present Values of Estimated OASDI Expenditures in Excess of Income 

Under Various Assumptions, 2007-2081 

(Dollar values in billions; values of assumptions shown in parentheses) 

Shortfall 

Assumption Low Intermediate High 

 

Average annual reduction in death rates .. 5,233 

(0.30) 

6,763 

(0.71) 

8,595 

(1.26) 

Total fertility rate........................................ 6,016 

(2.3) 

6,763 

(2.0) 

7,488 

(1.7) 

Real wage differential................................ 5,757 

(1.6) 

6,763 

(1.1) 

7,482 

(0.6) 

CPI change................................................ 6,301 

(1.8) 

6,763 

(2.8) 

7,218 

(3.8) 

Net immigration ......................................... 6,266 

(1,300,000) 

6,763 

(900,000) 

7,112 

(672,500) 

Real interest rate....................................... 5,120 

(3.6) 

6,763 

(2.9) 

9,414 

(2.1) Numbers in parentheses are the values of the assumptions used in the respective scenario. 

Source: 2007 OASDI Trustees Report and SSA. 

Medicare Projections 

Recent Medicare Legislation. On December 8, 2003, President Bush signed into law the Medicare Prescription 

Drug, Improvement, and Modernization Act of 2003. The 2003 law has a major impact on the operations and 

finances of Medicare. The law added a prescription drug benefit to Medicare beginning in 2006 and a new 

prescription drug account in the SMI Trust Fund. The benefit can be obtained through a private drug-only plan, a 

private preferred-provider organization or health maintenance organization, or through an employer-sponsored 

retiree health plan. The preferred-provider organizations are new to the Medicare Program and operate on a regional 

basis. The Federal Government assumes some of the costs of providing prescription drug coverage to people eligible 

for both Medicare and Medicaid. 

The legislation also includes provisions not related to the prescription drug benefit. It includes increases in 

Medicare provider reimbursements, higher Medicare Part B premiums for people at higher income levels, and an 

expansion of tax-deductible health savings accounts. The 2003 legislation is expected to have a significant effect on 

future Medicare finances as seen below and earlier in the Statement of Social Insurance. 

Health Care Cost Growth. In addition to the growth in the number of beneficiaries per worker, the Medicare 

Program has the added pressure of expected growth in the use and cost of health care per person. Continuing 

development and use of new technology is expected to cause health care expenditures to grow faster than GDP in 

the long run. For the intermediate assumption, health care expenditures per beneficiary are assumed to grow, on 

average, about one percentage point faster than per capita GDP over the long range. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 123

Total Medicare. It is important to recognize the rapidly increasing long-range cost of Medicare and the large 

role of general revenues and beneficiary premiums in financing the SMI Program. Chart 5 shows expenditures and 

current-law noninterest revenue sources for HI and SMI combined as a percentage of GDP. The total expenditure 

line shows Medicare costs rising to 11.3 percent of GDP by 2081. Revenues from taxes and premiums (including 

State transfers under Part D) are expected to increase from 1.9 percent of GDP in 2007 to 3.2 percent of GDP in 

2081. Payroll tax income declines gradually as a percent of GDP as growth in the number of workers paying such 

taxes slows and wages as a portion of compensation declines, offset by higher premiums combined for Parts B and 

D of SMI as a percent of GDP. General revenue contributions for SMI, as determined by current law, are projected 

to rise as a percent of GDP from 1.3 percent to 4.7 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 60 

percent in 2007 to 41 percent in 2081) while general revenues will rise (from 40 percent to 59 percent). The gap 

between total noninterest Medicare income (including general revenue contributions) and expenditures begins 

around 2010 and then steadily continues to widen, reaching 3.4 percent of GDP by 2081. 

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

as a Percent of GDP 

1970-2081 

0%

2%

4%

6%

8%

10%

12%

1970 1976 1982 1988 1994 2000 2006 2012 2018 2024 2030 2036 2042 2048 2054 2060 2066 2072 2078

Calendar Year

Source: www.ssa.gov/OACT/TRSUM/trsummary.html

Historical Data

General Revenue

Transfers to SMI

(Part B+Part D)

HI Deficit

 Premiums

and state transfers

Payroll Taxes Tax on Benefits

Total Noninterest Income

Total Medicare Expenditures
124 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Medicare, Part A (Hospital Insurance)─Nominal Income and Expenditures. Chart 6 shows historical and 

actuarial estimates of HI annual income (excluding interest) and expenditures for 1970-2081 in nominal dollars. The 

estimates are for the open-group population. The figure reveals a widening gap between projected income and 

expenditures. 

Chart 6—Medicare Part A Income (Excluding Interest) and Expenditures 

1970-2081 

(In billions of nominal dollars) 

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

1970 1976 1982 1988 1994 2000 2006 2012 2018 2024 2030 2036 2042 2048 2054 2060 2066 2072 2078

Calendar Year

Historical Data

Expenditures

Income

Shortfall

Source: www.ssa.gov/OACT/TRSUM/images/LD_ChartC.html and CMS
 SUPPLEMENTAL INFORMATION (UNAUDITED) 125

Medicare, Part A Income and Expenditures as a Percent of Taxable Payroll. Chart 7 illustrates income 

(excluding interest) and expenditures as a percentage of taxable payroll over the next 75 years. The chart shows that 

the expenditure rate exceeds the income rate in 2007, and cash deficits continue thereafter. Trust fund interest 

earnings and assets provide enough resources to pay full benefit payments until 2019 with general revenues used to 

finance interest and loan repayments to make up the difference between cash income and expenditures during that 

period. Pressures on the Federal budget will thus emerge well before 2019. Present tax rates would be sufficient to 

pay 79 percent of scheduled benefits after trust fund exhaustion in 2019 and 29 percent of scheduled benefits in 

2081. 

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

as a Percent of Taxable Payroll 

1970-2081 

0%

2%

4%

6%

8%

10%

12%

14%

1970 1976 1982 1988 1994 2000 2006 2012 2018 2024 2030 2036 2042 2048 2054 2060 2066 2072 2078

Calendar Year

Historical Data

Expenditures

Income

2019: Trust Fund Exhausted

Deficit Covered by Trust

Fund Interest and Assets

Source:www.ssa.gov/OACT/TRSUM/images/LD_ChartC.html and CMS
126 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Medicare Part A Income and Expenditures as a Percent of GDP. Chart 8 shows estimated annual income 

(excluding interest) and expenditures, expressed as percentages of GDP, the total value of goods and services 

produced in the United States. This alternative perspective shows the size of the HI Program in relation to the 

capacity of the national economy to sustain it. Medicare Part A’s expenditures are projected to grow from 1.5 

percent of GDP in 2007, to 2.6 percent in 2030, and to 5.0 percent by 2081. The gap between expenditures and 

income widens continuously with expenditures growing as a share of GDP and income declining slightly relative to 

GDP. By 2081, expenditures are projected to exceed income by 3.5 percent of GDP. 

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

as a Percent of GDP 

1970-2081 

0%

1%

2%

3%

4%

5%

6%

1970 1976 1982 1988 1994 2000 2006 2012 2018 2024 2030 2036 2042 2048 2054 2060 2066 2072 2078

Source:www.ssa.gov/OACT/TRSUM/images/LD_ChartC.html and CMS Calendar Year

Expenditures

Income

Historical Data
 SUPPLEMENTAL INFORMATION (UNAUDITED) 127

Medicare, Parts B and D (Supplementary Medical Insurance). Chart 9 shows historical and actuarial estimates 

of Medicare Part B and Part D premiums (and Part D State transfers) and expenditures for each of the next 75 years, 

in nominal dollars. The gap between premiums and State transfer revenues and program expenditures, a gap that will 

need to be filled with transfers from general revenues, grows throughout the projection period. 

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

1970-2081 

(In billions of nominal dollars) 

$0

$5,000

$10,000

$15,000

$20,000

$25,000

1970 1976 1982 1988 1994 2000 2006 2012 2018 2024 2030 2036 2042 2048 2054 2060 2066 2072 2078

Source: Centers for Medicare & Medicaid Services Calendar Year

Historical Data

 Expenditures

Part B + Part D

Premium Income

+ State Transfers

 General Fund

Transfers Needed
128 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Medicare Part B and Part D Premium and State Transfer Income and Expenditures as a Percent of GDP. 

Chart 10 shows expenditures for the Supplementary Medical Insurance Program over the next 75 years expressed as 

a percentage of GDP, providing a perspective on the size of the SMI Program in relation to the capacity of the 

national economy to sustain it. In 2007, SMI expenditures are expected to be $231 billion or 1.7 percent of GDP. 

After 2007, this percentage is projected to increase steadily reaching 6.2 percent in 2081. This reflects growth in the 

volume and intensity of Medicare services provided per beneficiary throughout the projection period, including the 

prescription drug benefits, together with the effects of the baby boom retirement. Premium and State transfer income 

grows from about 0.4 percent in 2007 to 1.4 percent of GDP in 2081, so the portion financed by General Fund 

transfers to SMI is projected to be about 75 percent throughout the projection period. 

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

as a Percent of GDP 

1970-2081 

0%

1%

2%

3%

4%

5%

6%

7%

1970 1976 1982 1988 1994 2000 2006 2012 2018 2024 2030 2036 2042 2048 2054 2060 2066 2072 2078

Source: Centers for Medicare & Medicaid Services Calendar Year

Historical Data

Total SMI 

Expenditures

Premium Income

 Part B+Part D

+ State Transfers

 General Fund

 Transfers Needed

to Part B and Part D

Medicare Sensitivity Analysis. This section illustrates the sensitivity of long-range cost and income estimates 

for the Medicare Program to changes in selected individual assumptions. As with the OASDI analysis, the 

intermediate assumption is used as the reference point, and one assumption at a time is varied. The variation used for 

each individual assumption reflects the levels used for that assumption in the low cost and high cost projections (see 

description of sensitivity analysis for OASDI). 

Table 3 shows the effects of changing various assumptions on the present value of estimated HI expenditures 

in excess of income (the shortfall of income relative to expenditures in present value terms). The assumptions are 

shown in parentheses. Clearly, net HI expenditures are extremely sensitive to alternative assumptions about the 

growth in health care cost. For the low cost alternative, the slower growth in health costs causes the shortfall to drop 

from $12,292 billion to $5,053 billion, a 61 percent smaller shortfall. The high cost assumption results in a near 

doubling of the shortfall, from $12,292 billion to $24,051 billion. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 129

Variations in the next four assumptions in Table 3 result in relatively minor changes in net HI expenditures. 

The higher or lower fertility assumptions cause a less than 2 percent change in the shortfall relative to the 

intermediate case. The higher real wage growth rate results in about a 7 percent greater shortfall while a lower 

growth rate reduces the shortfall by about 9 percent. Wages are a key cost factor in the provision of health care. 

Higher wages also result in greater payroll tax income. HI expenditures exceed HI income by a wide and increasing 

margin in the future (Charts 6 to 8). As a result, an assumed higher real wage differential has a larger impact on HI 

expenditures than HI income, thereby increasing the shortfall of income relative to expenditures. CPI and net 

immigration changes have very little effect on net HI expenditures. Higher immigration increases the net shortfall 

modestly as higher payroll tax revenue is more than offset by higher medical care expenditures. 

Table 3 also shows that the present value of net HI expenditures is 25 percent lower if the real interest rate is 

3.6 percent rather than 2.9 percent and 40 percent higher if the real interest rate is 2.1 percent rather than 2.9 percent. 

Table 3 

Present Values of Estimated Medicare Part A Expenditures in Excess of 

Income Under Various Assumptions, 2007-2081 

(Dollar values in billions; values of assumptions shown in parentheses) 

Shortfall 

Assumption1 Low Intermediate High 

Average annual growth in health costs2 ............. 5,053 

(3.1) 

12,292 

(4.1) 

24,051 

(5.1) 

Total fertility rate3 ................................................ 12,091 

(2.3) 

12,292 

(2.0) 

12,503 

(1.7) 

Real wage differential ......................................... 13,376 

(1.6) 

12,292 

(1.1) 

11,411 

(0.6) 

CPI change ......................................................... 12,230 

(1.8) 

12,292 

(2.8) 

12,299 

(3.8) 

Net immigration................................................... 12,516 

(1,300,000) 

12,292 

(900,000) 

12,149 

(672,500) 

Real interest rate................................................. 9,264 

(3.6) 

12,292 

(2.9) 

17,269 

(2.1) 1

 The sensitivity of the projected HI net cashflow to variations in future mortality rates is also of interest. At this time, 

however, relatively little is known about the relationship between improvements in life expectancy and the associated 

changes in health status and per beneficiary health expenditures. As a result, it is not possible at present to prepare 

meaningful estimates of the Part A mortality sensitivity. 

2

 Annual growth rate is the aggregate cost of providing covered health care services to beneficiaries. The low cost and 

high cost alternatives assume that costs increase 1 percent slower or faster, respectively, than the intermediate 

assumption, relative to growth in taxable payroll. 3

 The total fertility rate for any year is the average number of children who would be born to a woman in her lifetime if she 

were to experience the birth rates by age observed in, or assumed for, the selected year and if she were to survive the 

entire childbearing period. 
130 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Table 4 shows the effects of various assumptions about the growth in health care costs on the present value of 

estimated SMI (Medicare Parts B and D) expenditures in excess of income. As with HI, net SMI expenditures are 

very sensitive to changes in the health care cost growth assumption. For the low cost alternative, the slower assumed 

growth in health costs reduces the Governmentwide resources needed for Part B from $13,432 billion to $9,448 

billion and in Part D from $8,361 billion to $5,833 billion, about a 30 percent difference in each case. The high-cost 

assumption increases Governmentwide resources needed to $19,756 billion for Part B and to $12,362 billion for Part 

D, just over a 47 percent increase in each case. 

Table 4 

Present Values of Estimated Medicare Parts B and D Future Expenditures 

Less Premium Income and State Transfers Under Three Health Care Cost 

Growth Assumptions, 2007-2081 

(In billions of dollars) 

 Governmentwide Resources Needed 

Medicare Program1

Low 

(4.1) 

Intermediate 

(5.1) 

High 

(6.1) 

Part B ............................................................. 9,448 13,432 19,756 

Part D............................................................. 5,833 8,361 12,362 

 1

 Annual growth rate is the aggregate cost of providing covered health care services to beneficiaries. The low and high 

scenarios assume that costs increase one percent slower or faster, respectively, than the intermediate assumption. 

Source: Centers for Medicare & Medicaid Services. 

Sustainability of Social Security and Medicare 

75-Year Horizon 

According to the 2007 Medicare Trustees Report, the HI Trust Fund is projected to remain solvent until 2019 

and, according to the 2007 Social Security Trustees Report, the OASDI Trust Funds are projected to remain solvent 

until 2041. In each case, some general revenues must be used to satisfy the authorization of full benefit payments 

until the year of exhaustion. This occurs when the trust fund balances accumulated during prior years are needed to 

pay benefits, which leads to a transfer from general revenues to the trust funds. Moreover, under current law, 

General Fund transfers to the SMI Trust Fund will occur into the indefinite future and will continue to grow with the 

growth in health care expenditures. 

The potential magnitude of future financial obligations under these three social insurance programs is therefore 

important from a unified budget perspective as well as for understanding generally the growing resource demands of 

the programs on the economy. A common way to present future cashflows is in terms of their present value. This 

approach recognizes that a dollar paid or collected next year is worth less than a dollar today, because a dollar today 

could be saved and earn a year’s-worth of interest (see footnote 1). 

Table 5 shows the magnitudes of the primary expenditures and sources of financing for the three trust funds 

computed on an open-group basis for the next 75 years and expressed in present values. The data are consistent with 

the Statements of Social Insurance included in the principal financial statements. For HI, revenues from the public 

are projected to fall short of total expenditures by $12,292 billion in present value terms which is the additional 

amount needed in order to pay scheduled benefits over the next 75 years. 5 From the trust fund perspective, the 

amount needed is $11,992 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 $21,793 billion less than total expenditures for the two 

accounts, an amount that, from a budget perspective, will be needed to keep the SMI program solvent for the next 75 

years. From the trust fund perspective, however, the present values of total revenues and total expenditures for the 

SMI Program are roughly equal due to the annual adjustment of revenue from other Government accounts to meet 

 

5

 Interest income is not a factor in this table as dollar amounts are in present value terms. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 131

program costs.6 For OASDI, projected revenues from the public fall short of total expenditures by $6,763 billion in 

present value dollars and, from the trust fund perspective, by $4,715 billion. 

From the Governmentwide perspective, the present value of the total resources needed for the Social Security 

and Medicare Programs equals $40,848 billion, in addition to payroll taxes, benefit taxes, and premium payments 

from the public. From the trust fund perspective, which counts the trust funds and the general revenue transfers to 

the SMI Program as dedicated funding sources additional resources in the amount of $16,668 billion in present value 

terms are needed, beyond the $21,793 billion in present value of required general revenue transfers already 

scheduled for the SMI Program and the $2,387 billion to honor the trust fund investments in Treasury securities. 

Table 5 

Present Values of Costs Less Revenues of 75-Year Open Group Obligations 

HI, SMI, and OASDI 

(In billions of dollars, as of January 1, 2007) 

 SMI 

 HI Part B Part D OASDI Total 

Revenues from the Public: 

Taxes......................................... 11,023 - - 34,113 45,136 

Premiums, State transfers......... - 4,789 2,405 - 7,194 

Total........................................ 11,023 4,789 2,405 34,113 52,330 

 

Total costs to the public.......... 23,315 18,221 10,766 40,876 93,178 

 

Net results for Governmentwide (budget) perspective*

..... 12,292 13,432 8,361 6,763 40,848 

 

Revenues from other 

Government accounts ............... - 13,432 8,361 - 21,793 

Trust fund as of 1/1/2007............. 300 38 1 2,048 2,387 

 

Net results for trust fund 

perspective*

.............................. 11,992 (38) (1) 4,715 16,668 

*Net results are computed as costs less revenues. 

Note: Details may not add to totals due to rounding. 

Source: 2007 OASDI and Medicare Trustees’ Reports. 

Infinite Horizon 

The 75-year horizon represented in Table 5 is consistent with the primary focus of the Social Security and 

Medicare Trustees’ Reports. For the OASDI Program, for example, an additional $6.8 trillion in present value will 

be needed above currently scheduled taxes to pay for scheduled benefits ($4.7 trillion from the trust fund 

perspective). Yet, a 75-year projection is not a complete representation of all future financial flows through the 

infinite horizon. For example, when calculating unfunded obligations, a 75-year horizon includes revenue from 

some future workers but only a fraction of their future benefits. In order to provide a more complete estimate of the 

long-run unfunded obligations of the programs, estimates can be extended to the infinite horizon. The open-group 

infinite horizon net obligation is the present value of all expected future program outlays less the present value of all 

expected future program tax and premium revenues. Such a measure is provided in Table 6 for the three trust funds 

represented in Table 5. 

From the budget or Governmentwide perspective, the values in line 1 plus the values in line 4 of Table 6 

represent the value of resources needed to finance each of the programs into the infinite future. The sums are shown 

in the last line of the table (also equivalent to adding the values in the second and fifth lines). The total resources 

 

6

 The SMI Trust Fund also has a very small amount of existing assets. 
132 SUPPLEMENTAL INFORMATION (UNAUDITED) 

needed for all the programs sums to more than $90 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 2007. 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 $30.2 trillion and $13.5 trillion, respectively, are needed to sustain 

the programs into the infinite future. As described above, from the trust fund perspective, the SMI Program is fully 

funded. The substantial gap that exists between premiums and State transfer revenue and program expenditures in 

the SMI Program ($26.8 trillion + $17.1 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 2081 captures 

the full lifetime benefits and taxes and premiums of all current and future participants. The shorter horizon 

understates financial needs by capturing relatively more of the revenues from current and future workers and not 

capturing all of the benefits that are scheduled to be paid to them. 

Table 6 

Present Values of Costs Less Tax, Premium and State Transfer Revenue 

through the Infinite Horizon, HI, SMI, OASDI 

(In trillions of dollars as of January 1, 2007) 

 SMI 

HI Part B Part D OASDI Total 

Present value of future costs less 

future taxes and premiums and State 

transfers for current participants .......... 12.0 10.3 6.3 16.3 44.9 

Less current trust fund ............................ 0.3 - - 2.0 2.3 

Equals net obligations for past and 

current participants............................... 11.7 10.3 6.3 14.3 42.6 

Plus net obligations for future 

participants ........................................... 18.5 16.5 10.8 (0.8) 45.0 

Equals net obligations through the 

infinite future for all participants ........... 30.2 26.8 17.1 13.5 87.6 

 

Present value of future costs less the 

present values of future income over 

the infinite horizon ................................ 30.5 26.8 17.1 15.7 90.1 

 Details may not add to totals due to rounding. 

Source: 2007 OASDI and Medicare Trustees’ Reports. 

Railroad Retirement, Black Lung, and Unemployment 

Insurance 

Railroad Retirement 

The RRB was created in the 1930s to establish a retirement benefit program for the nation’s railroad workers. 

As the Social Security Program legislated in 1935 would not give railroad workers credit for service performed prior 

to 1937, legislation was enacted in 1934, 1935, and 1937 (collectively the Railroad Retirement Acts of the 1930s) to 

establish a railroad retirement program separate from the Social Security Program. 

Railroad retirement pays full retirement annuities at age 60 to railroad workers with 30 years of service. The 

program pays disability annuities based on total or occupational disability. It also pays annuities to spouses, 

divorced spouses, widow(er)s, remarried widow(er)s, surviving divorced spouses, children, and parents of deceased 

railroad workers. Medicare covers qualified railroad retirement beneficiaries in the same way as it does Social 

Security beneficiaries. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 133

Payroll taxes paid by railroad employers and their employees provide a primary source of income for the 

Railroad Retirement and Survivors’ Benefit Program. By law, railroad retirement taxes are coordinated with Social 

Security taxes. Employees and employers pay tier I taxes at the same rate as Social Security taxes. Tier II taxes 

finance railroad retirement benefit payments that are higher than Social Security levels. 

Other sources of program income include: financial interchanges with the Social Security and Medicare trust 

funds, earnings on investments, Federal income taxes on railroad retirement benefits, and appropriations (provided after 

1974 as part of a phase out of certain vested dual benefits). Refer to Note 22—Social Insurance, for additional 

information on railroad retirement program financing. 

The Railroad Retirement and Survivors Improvement Act of 2001 (RRSIA) liberalized benefits for 30-year 

service employees and their spouses, eliminated a cap on monthly benefits for retirement and disability benefits, 

lowered minimum service requirements from 10 to 5 years, and provided for increased benefits for widow(er)s. Per 

the RRSIA, amounts in the Railroad Retirement Account and the Social Security Equivalent Benefit (SSEB) 

Account that are not needed to pay current benefits and administrative expenses are transferred to the National 

Railroad Retirement Investment Trust (NRRIT) whose sole purpose is to manage and invest railroad retirement 

assets. NRRIT’s Board of Trustees is empowered to invest trust assets in nongovernmental assets, such as equities 

and debt, as well as, in Government securities. Prior to RRSIA, all investments were limited to Government 

securities. 

Since its inception, NRRIT has received $21.3 billion from RRB (including $19.2 billion in fiscal year 2003, 

pursuant to RRSIA) and returned $5.0 billion. During fiscal year 2007, the NRRIT made net transfers of $1.4 billion 

to the RRB to pay retirement benefits. Administrative expenses of the trust are paid out of trust assets. The balance 

as of September 30, 2007, and 2006, of non-federal securities and investments of the NRRIT are disclosed in Note 

7—Securities and Investments. 

Cashflow Projections 

Economic and Demographic Assumptions. The economic and demographic assumptions used for the most 

recent set of projections are shown in the “Railroad Retirement” section of Note 22—Social Insurance.

Nominal Income and Expenditures. Chart 11 shows, in nominal dollars, estimated railroad retirement income 

(excluding interest and financial interchange income) and expenditures for the period 2007-2081 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. 
134 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Chart 11—Estimated Railroad Retirement Income 

(Excluding Interest and Financial Interchange Income) and Expenditures 

2007-2081 

(In billions of nominal dollars) 

$0

$10

$20

$30

$40

$50

$60

$70

2007 2011 2015 2019 2023 2027 2031 2035 2039 2043 2047 2051 2055 2059 2063 2067 2071 2075 2079

Calendar Year

Income (excluding interest and financial interchange)

Expenditures

Source: Railroad Retirement Board

As Chart 11 shows, expenditures are expected to exceed tax income for the entire projection period. The 

imbalances continue to widen until about 2020, hold steady for the next 15 years, and begin to grow steadily after 

2035. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 135

Income and Expenditures as a Percent of Taxable Payroll. Chart 12 shows estimated expenditures and income 

as a percent of tier II taxable payroll. The imbalances grow until 2017 but then begin to decrease steadily as 

expenditures fall. Tax rates begin to decline after 2035, stabilizing after 2062. Compared to last year, projected tax 

rates are slightly lower, on average. The tier II tax rate is determined from a tax rate table based on the average 

account benefit ratio. 

Chart 12—Estimated Railroad Retirement Income 

(Excluding Interest and Financial Interchange Income) and Expenditures 

as a Percent of Tier II Taxable Payroll 

2007-2081 

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2011 2015 2019 2023 2027 2031 2035 2039 2043 2047 2051 2055 2059 2063 2067 2071 2075 2079

Calendar Year

Income

Expenditures

Source: Railroad Retirement Board
136 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Sensitivity Analysis. Actual future income from railroad payroll taxes and other sources and actual future 

expenditures for scheduled benefits and administrative expenses will depend upon a large number of factors as 

mentioned above. Two crucial assumptions are employment growth and the interest rate. Table 7 shows the 

sensitivity of the shortfall in the Railroad Retirement Program to variations in these two assumptions. The low-cost 

employment scenario has a 4.5 percent smaller shortfall of income to expenditures, and the high-cost scenario has a 

3.6 percent higher shortfall. A higher discount rate reduces future values relative to a lower rate. As seen in the 

table, the shortfall is 29.8 percent lower if the interest rate is 11 percent rather than 7.5 percent and 72.1 percent 

higher when the interest rate is 4 percent rather than 7.5 percent. 

Table 7 

Present Values of Railroad Retirement Expenditures in Excess of Income 

Under Various Employment and Interest Rate Assumptions 

(Dollar values in millions; values of assumptions shown in parentheses) 

 

Assumption Low Middle High 

Employment1 ................ 99,803 

(1.0%) 

104,489 

(2.5%) 

108,210 

(4.0%) 

 

Interest rate................... 73,305 

(11%) 

104,489 

(7.5%) 

179,789 

(4%) 

1

 The low and middle employment scenarios have passenger service employment remaining at 43,000 workers per year 

and the remaining employment base declining at 1.0 percent and 2.5 percent, respectively, for the next 25 years. The 

high cost scenario has passenger service employment declining by 500 per workers per year until a level of 35,000 is 

reached with the remaining employment base declining by 4.0 percent per year for 25 years, at a reducing rate over the 

next 25 years, and remaining level thereafter. 

Source: Railroad Retirement Board. 

Sustainability of Railroad Retirement 

Table 8 shows the magnitudes of the primary expenditures and sources of financing for the Railroad 

Retirement Program computed on an open-group basis for the next 75 years and expressed in present values as of 

January 1, 2007. The data are consistent with the statements of social insurance. 

From a Governmentwide perspective, revenues are expected to fall short of expenditures by approximately 

$104.5 billion, which represents the present value of resources needed to sustain the Railroad Retirement Program. 

From a trust fund perspective, when the trust fund balance and the financial interchange and transfers are included, 

the combined balance of the NRRIT, the Railroad Retirement Account, and the SSEB Account show a slight 

surplus. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 137

Table 8 

Present Values of 75-Year Projections of Revenues and Expenditures for the 

Railroad Retirement Program1,2

(In billions of present-value dollars as of January 1, 2007) 

Estimated Future Income (Excluding Interest)3 Received from or on Behalf of: 

Current participants who have attained retirement age............................................. 4.7 

Current participants not yet having attained retirement age...................................... 41.0 

Those expected to become participants.................................................................... 54.1 

All participants............................................................................................................ 99.8 

Estimated Future Expenditures:4

Current participants who have attained retirement age............................................. 92.8 

Current participants not yet having attained retirement age...................................... 86.0 

Those expected to become participants.................................................................... 25.5 

All participants............................................................................................................ 204.3 

Net obligations from budget perspective (expenditures less income)................. 104.5 

Railroad Retirement Program assets (mostly investments stated at market)5 .......... 32.0 

Financial Interchange from Social Security Trust ...................................................... 73.4 

Net Obligations from Trust Fund Perspective......................................................... (0.9) 

1

 Represents combined values for the Railroad Retirement Account, SSEB Account, and NRRIT, based on middle 

employment assumption. 

2

 The data used reflect the provisions of RRSIA of 2001. 3

 Future income (excluding interest) includes tier I taxes, tier II taxes, and income taxes on benefits. 

4

 Future expenditures include benefits and administrative expenditures. 

5

 The value of the fund reflects the 7.5 percent interest rate assumption. The RRB uses the relatively high rate due to 

investments in private securities. 

Note: Detail may not add to totals due to rounding. Employee and beneficiary status are determined as of 1/1/2006 

whereas present values are as of 1/1/2007. 
138 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Black Lung 

The Federal Coal Mine Health and Safety Act of 1969 created the Black Lung Disability Benefit Program to 

provide compensation and medical benefits for eligible coal miners who are disabled due to pneumoconiosis (black 

lung disease) arising out of their coal mine employment. The DOL operates the Black Lung Disability Benefit 

Program. The 1977 Black Lung Amendments established a Black Lung Disability Trust Fund (BLDTF) to provide 

benefit payments to eligible coal miners disabled by pneumoconiosis when no responsible mine operator can be 

assigned the liability. The beneficiary population has been declining as the incidence of black lung disease has 

fallen, and the group of miners affected by the disease (and their widows) has been dying at a more rapid rate than 

new awards have been made. 

Excise taxes on coal mine operators, based on the sale of coal, is the primary source of financing black lung 

disability payments and related administrative costs. The Black Lung Benefits Revenue Act provides for repayable 

advances to the BLDTF from the General Fund of the Treasury in the event that BLDTF resources are not adequate 

to meet program obligations. On September 30, 2007, total liabilities of the BLDTF exceed assets by $10.1 billion. 

This deficit fund balance represents the accumulated shortfall of excise taxes necessary to meet benefit payment and 

interest expenses. This shortfall was funded by repayable advances to the BLDTF which are repayable with interest. 

Estimates for future interest on advances are based on the interest rates on outstanding advances ranging from 4.5 

percent to 13.9 percent and new borrowings ranging from 5.2 percent to 5.6 percent. 

From the budget or consolidated financial perspective, Chart 13 shows projected black lung expenditures 

(excluding interest) and excise tax collections for the period 2008-2040. The significant assumptions used in the 

most recent set of projections are shown in the “Black Lung” section of Note 22—Social Insurance. Analysts project 

that a scheduled reduction in taxes on coal sales will decrease cash inflows by 51 percent between the years 2013 to 

2015. After 2015, cash surpluses widen due to a declining beneficiary population and increasing revenues. However, 

the picture dramatically changes when including projected interest payments that the program must make. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 139

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

2008-2040 

(In millions of nominal dollars) 

$0

$100

$200

$300

$400

$500

$600

$700

$800

2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040

Fiscal Years

Cash Income

Cash Outflow

(benefits and administrative

costs)

Source: Department of Labor
140 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Chart 14 shows the projected financial status of the program from a trust fund perspective that includes interest 

outflows from the program to the General Fund. Trust fund net outflows (benefits plus interest payments less cash 

income from excise taxes) grow without bound, as a result of projected interest payments on the large accumulated 

liability to the General Fund. This deficit fund balance represents the accumulated shortfall between excise taxes and 

benefit payment plus interest expenses. 

Chart 14—Estimated Black Lung Trust Fund 

Net Outflow and End of Year Fund Balance 

2008-2040 

(In millions of nominal dollars) 

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040

Fiscal Year

-$60,000

-$50,000

-$40,000

-$30,000

-$20,000

-$10,000

$0

Trust Fund Net Outflow (Benefit and Admin 

Expenditures plus Interest less Cash Inflow) (left 

scale)

Source: Department of Labor

End-of-Year Fund Balance (right scale)

 

Table 9 shows present values of 33-year projections of expenditures and revenues for the Black Lung Program 

computed as of September 30, 2007, using a discount rate equivalent to 6.21 percent. (The discount rate is higher 

than the current Government borrowing rate because the program borrowed from the General Fund during periods 

of relatively high interest rates). From a Governmentwide (budget) perspective, the present value of expenditures is 

expected to be less than the present value of income by $3.8 billion (a surplus). From a trust fund perspective, a 

large balance ($10.0 billion) is owed to the General Fund. From that perspective, when that accumulated balance is 

combined with the cashflow surplus, the program shows a negative balance of $6.2 billion in present value dollars. 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 141

Table 9 

Present Values of 33-Year Projections of Revenues and Expenditures 

for the Black Lung Program (In billions of present value dollars, as of September 30, 2007) 

 

Estimated future tax income............................................................................................ 6.7 

Estimated future expenditures......................................................................................... 2.9 

Net obligations from budget perspective (expenditures less income)............................. (3.8) 

Accumulated balance due General Fund........................................................................ 10.0 

Net obligations from trust fund perspective..................................................................... 6.2 

Note: Detail may not add to totals due to rounding. 

Source: Department of Labor projections and Treasury Department calculations. 

Unemployment Insurance 

The Unemployment Insurance Program was created in 1935 to provide temporary partial wage replacement to 

unemployed workers who lost their jobs. The program is administered through a unique system of Federal and State 

partnerships established in Federal law but administered through conforming State laws by State agencies. DOL 

interprets and enforces Federal law requirements and provides broad policy guidance and program direction, while 

program details such as benefit eligibility, duration, and amount of benefits are established through individual State 

unemployment insurance statutes and administered through State unemployment insurance agencies. 

The program is financed through the collection of Federal and State unemployment taxes that are credited to 

the Unemployment Trust Fund (UTF) and reported as Federal tax revenue. The fund was established to account for 

the receipt, investment, and disbursement of unemployment taxes. Federal unemployment taxes are used to pay for 

Federal and State administration of the Unemployment Insurance Program, veterans’ employment services, State 

employment services, and the Federal share of extended unemployment insurance benefits. Federal unemployment 

taxes are also used to maintain a loan account within the UTF, from which insolvent State accounts may borrow 

funds to pay unemployment insurance benefits. 
142 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Chart 15 shows the projected cash contributions and expenditures over the next 10 years under expected 

economic conditions (described below). The significant assumptions used in the projections include total 

unemployment rates, civilian labor force levels, percent of unemployed receiving benefits, total wages, distribution 

of benefit payments by State, State tax rate structures, State taxable wage bases, and interest rates on UTF 

investments. These projections, excluding interest earnings, indicate positive net cash inflows until 2015, when net 

outflows begin. 

Chart 15—Estimated Unemployment Fund Cashflow 

Using Expected Economic Conditions 

2008-2017 

(In billions of nominal dollars) 

$30

$35

$40

$45

$50

$55

$60

$65

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Fiscal Years 

Cash Inflow

Cash Outflow 

Source: Department of Labor 
 SUPPLEMENTAL INFORMATION (UNAUDITED) 143

Table 10 shows present values of 10-year projections of revenues and expenditures for the Unemployment 

Insurance Program using a discount rate of 6.04 percent, the average of the interest rates underlying the 10-year 

projections. Three sets of numbers are presented in order to show the effects of varying economic conditions as 

reflected in different assumptions about the unemployment rate. For expected economic conditions, the estimates are 

based on an unemployment rate of 4.65 percent during fiscal year 2008, increasing to 4.80 percent in fiscal year 

2009 and thereafter. Under the mild recessionary scenario, the unemployment rate peaks at 7.43 percent in fiscal 

year 2010 and declines gradually until reaching 4.80 percent in 2016. Finally, under the deep recession scenario, the 

unemployment rate is assumed to peak at 10.14 percent in 2011 and gradually fall to 5.25 percent by the end of the 

projection period. 

Each scenario uses an open group that includes current and future participants of the Unemployment Insurance 

Program. Table 10 shows that, as economic conditions worsen, while tax income is projected to increase as higher 

layoffs result in higher employer taxes, benefit outlays increase much faster. From the Governmentwide (budget) 

perspective, under expected conditions, the present value of income exceeds the present value of expenditures by 

$11 billion. From the same perspective, under a deep recession scenario, the present value of expenditures exceeds 

the present value of income by $60 billion. From a trust fund perspective, the program has nearly $75 billion in 

assets. When combined with the present value of net cash income under expected economic conditions, the program 

has a surplus of $86 billion. 

Table 10 

Present Values of 10-Year Projections of Revenues and Expenditures for 

Unemployment Insurance Under Three Alternative Scenarios 

for Economic Conditions 

(In billions of present value dollars, as of September 30, 2007) 

 Economic Conditions 

Expected 

Mild 

Recession 

Deep 

Recession 

 

Future cash income................................................... 346.4 411.4 467.3 

Future expenditures................................................... 335.3 413.9 526.9 

Net obligations from budget perspective 

(expenditures less income)..................................... (11.1) 2.6 59.6 

Trust fund assets ....................................................... 74.8 74.8 74.8 

Net obligations from trust fund perspective1.............. (85.9) (72.3) (15.2) 

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: Data for the present value calculations are from the Department of Labor. 

Unemployment Trust Fund Solvency 

Each State’s accumulated UTF net assets or reserve balance should provide a defined level of benefit payments 

over a defined period. To be minimally solvent, a State’s reserve balance should provide for 1 year’s projected 

benefit payment needs based on the highest levels of benefit payments experienced by the State over the last 20 

years. A ratio of 1.0 or greater prior to a recession indicates a State is minimally solvent. States below this level are 

vulnerable to exhausting their funds in a recession. States exhausting their reserve balance must borrow funds from 

the Federal Unemployment Account (FUA) to make benefit payments. During periods of high-sustained 

unemployment, balances in the FUA may be depleted. In these circumstances, FUA is authorized to borrow from the 

Treasury General Fund. 

Chart 16 presents the State by State results of this analysis as of September 30, 2007. As the chart illustrates, 

25 State funds were below the minimal solvency ratio on September 30, 2007. 
144 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Chart 16—Unemployment Trust Fund Solvency as of September 30, 2007 

01234

Alabama

Alaska

Arizona

Arkansas

California

Colorado

Connecticut

Delaware

District of Columbia

Florida

Georgia

Hawaii

Idaho

Illinois

Indiana

Iowa

Kansas

Kentucky

Louisiana

Maine

Maryland

Massachusetts

Michigan

Minnesota

Mississippi

Missouri

Montana

Nebraska

Nevada

New Hampshire

New Jersey

New Mexico

New York

North Carolina

North Dakota

Ohio

Oklahoma

Oregon

Pennsylvania

Puerto Rico

Rhode Island

South Carolina

South Dakota

Tennessee

Texas

Utah

Vermont

Virgin Islands

Virginia

Washington

West Virginia

Wisconsin

Wyoming

Years of benefit payments held in reserve
SUPPLEMENTAL INFORMATION (UNAUDITED) 145

Deferred Maintenance 

Deferred maintenance is the estimated cost to bring Government-owned property to an acceptable condition, 

resulting from not performing maintenance on a timely basis. Deferred maintenance excludes the cost of expanding 

the capacity of assets or upgrading them to serve needs different from those originally intended. The consequences 

of not performing regular maintenance could include increased safety hazards, poor service to the public, higher 

costs in the future, and inefficient operations. Estimated deferred maintenance costs are not accrued in the 

Statements of Net Cost or recognized as a liability on the balance sheets. 

The amounts disclosed for deferred maintenance are allowed to be measured using the following three 

methods: 

• Condition assessment surveys are periodic inspections of the Government-owned property to determine the 

current condition and estimated cost to bring the property to an acceptable condition. 

• Life-cycle cost forecast is an acquisition or procurement technique that considers operation, maintenance, and 

other costs in addition to the acquisition cost of assets. 

• Management analysis method is founded on inflation-adjusted reductions in maintenance funding since the base 

year. 

The amounts disclosed on the table below have all been measured using the condition assessment survey 

method. The standards for acceptable operating condition and the changes in these standards and changes in asset 

condition vary widely between the Federal entities. 

Some deferred maintenance has been deemed critical. Such amounts and conditions are defined by the 

individual agencies with responsibility for the safekeeping of these assets. Low and high estimates are based on the 

materiality of the estimated cost of returning the asset to the acceptable condition versus the total value of the 

corresponding asset. 

 

 Deferred Maintenance as of September 30 

Deferred Maintenance 

Cost Range 

Low 

Estimate 

High 

Estimate 

Critical 

Maintenance 

(In billions of dollars) 2007 2006 2007 2006 2007 2006 

 

Asset Category: 

Buildings, structures and 

facilities ................................... 89.9 25.3 97.2 32.1 12.5 11.7 

Furniture, fixtures and 

equipment ............................... 0.2 0.4 0.3 0.4 0.2 0.1 

Other general property, plant, 

and equipment ........................ 6.4 1.6 6.4 1.6 0.2 0.1 

Heritage assets.......................... 3.9 1.7 5.3 2.9 0.2 - 

Total deferred maintenance.... 100.4 29.0 109.2 37.0 13.1 11.9 

 

Please refer to the individual financial statements of DOD, USDA, DOE, VA, DOI, and NASA for detailed 

significant information on deferred maintenance, including the standards used for acceptable operating condition 

and changes in asset condition. These agencies comprise 80 percent of the Government’s total reported net property, 

plant, and equipment of $691.1 billion as of September 30, 2007. There is a vast difference in amounts reported 

from fiscal year 2006 to fiscal year 2007 because this year, DOD changed its methodology for reporting deferred 

maintenance. In prior years, the amount was based upon the annual deferred sustainment (maintenance). This year, 
146 SUPPLEMENTAL INFORMATION (UNAUDITED) 

the amount is based upon the cumulative deferred amount for facility restoration and modernization and thus is 

significantly larger than previous years. While restoration and modernization is not precisely equivalent to deferred 

maintenance, the values are generally representative of the magnitude of the deferred maintenance requirements. 

Unexpended Budget Balances 

Unexpended budget balances consist of the unobligated and obligated, but unliquidated, budget balances. 

Unobligated budget balances, including amounts for trust funds, are the cumulative amount of budget balances 

that are not obligated and that remain available for obligation. In 1-year accounts, the unobligated balance is not 

available for new obligations after the end of the fiscal year. In multiyear accounts, the unobligated balance may be 

carried forward and remains available for obligation for the period specified. In no-year accounts, the unobligated 

balance is carried forward until specifically rescinded by law or until the purposes for which it was provided have 

been accomplished. The total unobligated budget balances for fiscal years 2006 and 2005 are $463.3 billion and 

$458.0 billion, respectively. 

Obligated budget balances are the cumulative budget balances that have been obligated but not liquidated. The 

obligated balance can be carried forward for a maximum of 5 years after the appropriation has expired. The total obligated 

budget balances for fiscal years 2006 and 2005 are $977.6 billion and $911.3 billion, respectively. 

The President’s Budget with fiscal year 2007 actuals is expected to be published in February 2008. The 

President’s fiscal year 2008 Budget (issued on February 5, 2007), includes the estimates of the unobligated and 

obligated amounts for fiscal year 2007. However, these estimated amounts are expected to differ from the actual 

amount due to compilation differences, which include correction of errors or reclassifications due to nonbudgetary 

or expired amounts, and other changes upon completion of final OMB review, and are therefore not reported. 

Tax Burden 

The Internal Revenue Code provides for progressive tax rates, whereby higher incomes are generally subject to 

higher tax rates. The following tables present the latest available information on income tax and related income, 

deductions, and credit for individuals by income level and for corporations by size of assets. 

Individual Income Tax Liability for Tax Year 2005 

 

Adjusted Gross Income 

(AGI) 

Number of 

Taxable 

Returns AGI

Total 

Income 

Tax 

Average 

AGI per Return 

Average 

Income 

Tax per Return

Income Tax as 

a Percentage

 of AGI 

(In thousands 

of dollars)

(In millions 

of dollars)

(In millions 

of dollars)

(In whole 

dollars)

(In whole 

dollars)

Under $15,000 ................... 36,889 197,723 3,239 5,360 88 1.6% 

$15,000 under $30,000 ...... 29,739 655,562 23,308 22,044 784 3.6% 

$30,000 under $50,000 ...... 24,596 961,071 60,187 39,075 2,447 6.3% 

$50,000 under $100,000 .... 28,867 2,033,408 179,382 70,441 6,214 8.8% 

$100,000 under $200,000 .. 10,831 1,434,585 190,599 132,452 17,598 13.3% 

$200,000 or more............... 3,541 2,081,299 471,549 587,772 133,168 22.7% 

Total ................................ 134,463 7,363,648 928,264 
SUPPLEMENTAL INFORMATION (UNAUDITED) 147

Corporation Income Tax Liability for Tax Year 2004 

 

Total Assets 

Income Subject 

to Tax 

Total Income Tax 

after Credits

Percentage of Income 

Tax after Credits to 

Taxable Income 

(In thousands of dollars) (In millions of dollars) (In millions of dollars)

Zero assets .............................. 15,385 4,076 26.5% 

$1 under $500.......................... 8,436 1,536 18.2% 

$500 under $1,000................... 4,081 960 23.5% 

$1,000 under $5,000................ 12,215 3,519 28.8% 

$5,000 under $10,000.............. 7,562 2,446 32.3% 

$10,000 under $25,000............ 10,694 3,511 32.8% 

$25,000 under $50,000............ 10,076 3,282 32.6% 

$50,000 under $100,000.......... 12,037 3,918 32.5% 

$100,000 under $250,000........ 23,779 7,529 31.7% 

$250,000 or more..................... 753,124 193,658 25.7% 

Total....................................... 857,389 224,435 

Tax Gap 

The tax gap is the aggregate amount of tax (i.e., excluding interest and penalties) that is imposed by the tax 

laws for any given tax year but is not paid voluntarily and timely. The Internal Revenue Service (IRS) currently 

projects that the annual Federal gross tax gap is estimated at $345.0 billion. This estimate is based on the results of 

the National Research Program (NRP). The NRP was a study conducted to measure the compliance rate of the 

individual filers based on examination of a statistical sample of their filed returns for tax year 2001. The tax gap 

arises from three types of noncompliance: not filing timely tax returns (the nonfiling gap), underreporting the correct 

amount of tax on timely-filed returns (the underreporting gap), and not paying on time the full amount reported on 

timely-filed returns (the underpayment gap). Of these three components, only the underpayment gap is observed; the 

nonfiling gap and the underreporting gap must be estimated. Each instance of noncompliance by a taxpayer 

contributes to the tax gap, whether or not the IRS detects it, and whether or not the taxpayer is even aware of the 

noncompliance. The tax gap does not include underpayments by corporate taxpayers or include taxes that should 

have been paid on income from the illegal sector of the economy. 

Underreporting of income tax, employment taxes, and other taxes represents 82 percent of the tax gap. The 

single largest subcomponent of underreporting involves individuals understating their income, taking improper 

deductions, overstating business expenses, and erroneously claiming credits. Individual underreporting represents 

about half of the total tax gap. Individual income tax also accounts for about half of all tax liabilities. 

The collection gap is the cumulative amount of assessed tax, penalties, and interest that the IRS expects to 

remain uncollectible. In essence, it represents the difference between the total balance of unpaid assessments and the 

net taxes receivable reported on the IRS’ balance sheet. The tax gap and the collection gap are related and 

overlapping concepts, but they have significant differences. The collection gap is a cumulative balance sheet concept 

for a particular point in time, while the tax gap is like an income statement item for a single year. Moreover, the tax 

gap estimates include all noncompliance, while the collection gap includes only amounts that have been assessed (a 

small portion of all noncompliance). 
148 SUPPLEMENTAL INFORMATION (UNAUDITED) 

Other Claims for Refunds 

Management has estimated amounts that may be paid out as other claims for tax refunds. This estimate represents 

an amount (principal and interest) that may be paid for claims pending judicial review by the Federal courts or, 

internally, by appeals. The total estimated payout (including principal and interest) for claims pending judicial review 

by the Federal courts is $8.8 billion and $14.8 billion for fiscal years 2007 and 2006, respectively. For those under 

appeal, the estimated payout is $5.9 billion and $7.1 billion for fiscal years 2007 and 2006, respectively. There are also 

unasserted claims for refunds of certain excise taxes. Although these refund claims have been deemed to be probable, 

they do not meet the criteria in SFFAS No. 5 for reporting the amounts in the balance sheets or for disclosure in the 

Notes to the Financial Statements. However, they meet the criteria in SFFAS No. 7 for inclusion as supplemental 

information. To the extent judgments against the Government for these claims prompt other similarly situated 

taxpayers to file similar refund claims, these amounts could become significantly greater. 

Risk Assumed 

Risk assumed information is important for all Federal insurance and guarantee programs, except those relating 

to social insurance, life insurance and loan guarantee programs. Risk assumed is generally measured by the present 

value of unpaid expected losses net of associated premiums based on the risk inherent in the insurance or guarantee 

coverage in force. In addition to the liability for unpaid insurance claims included in Note 14─Insurance Program 

Liabilities, for events that have already occurred, the Federal Government is also required to report as 

supplementary information risk assumed amounts and the periodic changes in those amounts. 

The assessments of losses expected based on the risk assumed are based on actuarial or financial methods 

applicable to the economic, legal and policy environment in force at the time the assessments are made. 

Management has estimated the loss amounts based on the risk assumed as well as the periodic changes for the 

following insurance programs. 

Please refer to the individual financial statements of the Pension Benefit Guaranty Corporation, the Department 

of Homeland Security, and the National Credit Union Administration for other significant detailed information. 

Risk Assumed Information as of September 30 

(In billions of dollars) 2007 2006 

 

 Present Value of unpaid expected losses, 

 net of associated premiums:

Pension Benefit Guaranty Corporation.......... 65.7 73.4

Department of Homeland Security ................. 0.6 - 

National Credit Union Administration............. 0.1 0.1 

Total ................................................................ 66.4 73.5 

Periodic changes in risk assumed amounts: 

Pension Benefit Guaranty Corporation.......... (7.6) (35.1)

Total ................................................................ (7.6) (35.1)
SUPPLEMENTAL INFORMATION (UNAUDITED) 149

Unmatched Transactions and Balances 

 

(In millions of dollars) 

Fiscal Year 

2007 

Fiscal Year 

2006 

Change in Intra-Governmental Unmatched Balances 

Debt/Investments................................................................... 2,137.0 1,231.4 

Interest Payable/Receivable.................................................. (73.6) 77.7 

Loans Payable/Receivable.................................................... 5,602.4 (1,178.0) 

Benefit Program Contributions Payable/Receivable ............. 53.3 (128.8) 

Accounts Payable/Receivable............................................... (2,093.7) 10,271.5 

Advances from/to Others & Deferred Credits/Prepayments.... (209.1) (855.5) 

Transfers Payable/Receivable............................................... (523.3) (379.8) 

 4,893.0 9,038.5 

 

Unmatched Intra-Governmental Transactions 

Federal Securities Interest Revenue/Expense– 

Investment Exchange ........................................................ (830.0) 2,206.2 

Borrowings Interest Revenue/Expense–Exchange............... (1,058.1) 397.0 

Borrowings Gains/Losses...................................................... (6.8) (16.5) 

Nonexpenditure Transfers–In/Out ......................................... 6,600.1 1,409.5 

Expenditure Transfers–In/Out ............................................... (855.8) (615.0) 

Transfers–In/Out Without Reimbursement............................ 5,508.6 7,386.2 

Imputed Financing Source/Cost ............................................ (8.9) (7.6) 

Benefit Program Revenue/Cost............................................. 1,961.7 (950.1) 

 11,310.8 9,809.7 

 

General Fund Transactions 

Fund Balance with Treasury .................................................. (18,149.1) (39,241.6) 

Appropriations of Unavailable Special or Trust Fund 

 Receipts-Transfer Out.......................................................... 2,781.4 1,407.6 

Appropriations of Unavailable Special or Trust Fund 

 Receipts-Transfer In ............................................................ (1,585.4) (8,357.6) 

Other General Fund Transactions ......................................... (13,101.4) 25,661.7 

 (30,054.5) (20,529.9) 

 

Net Intra-Agency Reporting Errors* ........................................... 7,171.3 (9,309.0) 

 

Unmatched Transactions and Balances, Net........................ (6,679.4) (10,990.7) 

*Includes reporting errors for DHS (5,371.0) million in fiscal year 2006 

( )Parentheses indicate a decrease to Net Position. 
150 SUPPLEMENTAL INFORMATION (UNAUDITED) 

The Statement of Operations and Changes in Net Position includes an amount for unmatched transactions and 

balances that result from the consolidation of Federal reporting entities. Transactions between Federal entities must be 

eliminated in consolidation to calculate the financial position of the U.S. Government. Many of the amounts included in the 

table represent intra-governmental activity and balances that differed between Federal agency trading partners and often 

totaled significantly more than the net amounts shown. In addition, included in the “General Fund Transactions” section 

are certain intra-governmental accounts, primarily related to unreconciled transactions with the General Fund, totaling 

hundreds of billions of dollars. The table also reflects other consolidating adjustments and other adjustments that 

contributed to the unmatched transactions and balances amount. 

Unmatched transactions and balances between Federal entities impact not only in the period in which differences 

originate but also in the periods where differences are reconciled. As a result, it would not be proper to conclude that 

increases or decreases in the unmatched amounts shown in the table above reflect improvements or deteriorations in the 

Government’s ability to reconcile intra-governmental transactions. The Federal community considers the identification 

and accurate reporting of intra-governmental activity a priority. 
STEWARDSHIP INFORMATION (UNAUDITED) 151

United States Government 

Stewardship Information (Unaudited) 

for the Years Ended September 30, 2007, 

and September 30, 2006 

Stewardship Investments 

Stewardship investments focus on Government programs aimed at providing long-term benefits by improving 

the Nation’s productivity and enhancing economic growth. These investments can be provided through direct 

Federal spending or grants to State and local governments for certain education and training programs, research and 

development, and federally financed but not federally-owned property, such as bridges and roads. When incurred, 

these investments are included as expenses in determining the net cost of operations. Stewardship investments for 

the current year and for the immediately preceding 4 years are shown below in Table 11. The amounts reported in 

fiscal year 2007 for investments in prior years (fiscal years 2006-2003) are restated due to agencies continuously 

reviewing, correcting, and updating this data. 

 Table 11 

Stewardship Investments 

for the Years Ended September 30 

 

 

(In billions of dollars) 

Fiscal 

Year 

2007 

Restated

Fiscal 

Year 

2006 

Restated

Fiscal 

Year 

2005 

Restated 

Fiscal 

Year 

2004 

Restated

Fiscal 

Year 

2003 

 

Investments in non-federal physical 

property ............................................. 56.1 54.4 51.9 54.8 49.1 

Investments in human capital .............. 76.1 107.4 88.1 76.6 71.0 

Research and development: 

Investments in basic research........... 25.0 24.2 24.1 22.5 21.2 

Investments in applied research........ 17.1 18.4 18.3 18.0 16.7 

Investments in development.............. 18.6 23.8 16.6 15.1 14.1 

Total investments............................ 192.9 228.2 199.0 187.0 172.1 

Non-Federal Physical Property 

The Government makes grants and provides funds for the purchase, construction, and/or major renovation of 

State and local government physical properties. Cost for non-federal physical property programs are included as 

expenses in the Statements of Net Cost and are reported as investments in Table 11. They are measured on the same 

accrual basis of accounting used in the Financial Report statements. 

DOT, HUD, and the Environmental Protection Agency (EPA) had $46.7 billion (83 percent), $3.6 billion (7 

percent), and $3.2 billion (6 percent), respectively, of the total non-federal physical property investments in fiscal 
152 STEWARDSHIP INFORMATION (UNAUDITED) 

year 2007 as shown in Table 11. These same agencies also had similar investment amounts (and percentage 

contributions) in each of the preceding 4 years. 

Within DOT, the Federal Highway Administration invested $33.7 billion during fiscal year 2007, primarily via 

reimbursement from the Highway Trust Fund, of states’ construction costs related to interstate and national 

highways. The States’ contribution is 10 percent for the Interstate System and 20 percent for most other programs. 

These highway programs have not typically resulted in significant transfers of property to State or local 

governments. 

The significant programs administered by HUD relate to grants for property renovation and public housing 

programs. The significant programs administered by the EPA relate to grants for the nation’s drinking water and 

clean water infrastructure. Neither of these programs typically transfers property to State or local governments. 

Human Capital 

The Government runs several programs that invest in human capital. Those investments go toward increasing 

and maintaining a healthy economy by educating and training the general public. Costs do not include training 

expenses for Federal workers. 

Education, DOL, and VA had $61.8 billion (81 percent), $5.9 billion (8 percent), and $3.5 billion (5 percent), 

respectively, of the total human capital investments in fiscal year 2007 as shown in Table 11. These same agencies 

also had similar investment amounts (and percentage contributions) in each of the preceding 4 years, with the 

exception of Education in fiscal year 2007, where there was a decrease in FFEL and Direct Loan subsidy reestimates and subsidy transfers due to decreased loan consolidation activity during the year. 

Education administers a wide variety of programs related to general public education and training programs 

that are intended to increase or maintain national economic productive capacity. Within Education, approximately 

32 percent of the annual investment in fiscal year 2007 relates to Federal student aid, either in the form of direct or 

guaranteed loans or grants to eligible undergraduate and graduate students. The remaining investments primarily 

relate to grants for Elementary, Secondary, and Special Education programs as well as for various departmental 

initiatives (e.g., charter schools, foreign language assistance, etc.). 

The significant human capital programs administered by DOL relate to grants for job training and employment 

programs. The significant human capital programs administered by VA also relate to grants for job training and 

rehabilitation programs for veterans. 

Research and Development 

Federal investments in research and development (R&D) comprise those expenses for basic research, applied 

research, and development that are intended to increase or maintain national economic productive capacity or yield 

other future benefits. 

• Investments in basic research are for systematic studies to gain knowledge or understanding of the 

fundamental aspects of phenomena and of observable facts without specific applications toward processes 

or products in mind. 

• Investments in applied research are for systematic studies to gain knowledge or understanding necessary 

for determining the means by which a recognized and specific need may be met. 

• Investments in development are the systematic use of the knowledge and understanding gained from 

research for the production of useful materials, devices, systems, or methods, including the design and 

development of prototypes and processes. 

With regard to basic and applied research, HHS had $15.9 billion (64 percent) and $11.0 billion (65 percent), 

of the total basic and applied research investments, respectively, in fiscal year 2007 as shown in Table 11. HHS also 

had similar R&D investment amounts (and percentage contributions) in each of the preceding 4 years. 

Within HHS, the National Institutes of Health (NIH) conducts almost all (97 percent) of the department’s basic 

and applied research. The NIH Research Program includes all aspects of the medical research continuum, including 

basic and disease-oriented research, observational and population-based research, behavioral research, and clinical 

research, including research to understand both health and disease states, to move laboratory findings into medical 

applications, to assess new treatments or compare different treatment approaches; and health services research. 

The NIH regards the expeditious transfer of the results of its medical research for further development and 

commercialization of products of immediate benefit to improved health as an important mandate. 
STEWARDSHIP INFORMATION (UNAUDITED) 153

With regard to development, NASA and DOD had $8.9 billion (50 percent) and $7.3 billion (41 percent), 

respectively, of total development investments in fiscal year 2007, as shown in Table 11. DOD changed its 

methodology for reporting yearly investments in research and development during fiscal year 2007 which affected 

the current and prior 4 years. As a result, the total amount of investments in development (Table 11) have been 

restated. Development is comprised of five stages: advanced technology development, advanced component 

development and prototypes, system development and demonstration, management support, and operational systems 

development. NASA development programs include activities to extend our knowledge of Earth, its space 

environment, and the universe, and to invest in new aeronautics and advanced space transportation technologies that 

support the development and application of technologies critical to the economic, scientific, and technical 

competiveness of the United States. Some outcomes and future outcomes of this development are: 

• The Constellation Systems program to develop, demonstrate, and deploy the capabilities to transport crew and 

cargo for missions to the lunar surface and safely return the crew to Earth, 

• Robotic spacecraft that use electrical power for propulsion, data acquisition, and communication to accurately 

place themselves in orbit around the surfaces of bodies about which we may know relatively little, 

• The Fundamental Aeronautics Program conducts development technology to enable revolutionary capabilities 

for the future of aviation. NASA will develop advanced tools and capabilities that will enable whole new classes 

of aircraft that not only meet the noise and emissions requirements of the future but that also provide fast, 

efficient, and economical flight, 

• The MARS Exploration program has been developed to conduct a rigorous, incremental, discovery-driven 

exploration of MARS to determine the planet’s physical, dynamic, and geological characteristics, investigate the 

Martian climate in the context of understanding habitability, and investigate whether MARS ever had the 

potential to develop and harbor any kind of life, 

• The development and demonstration of space-based measurements, providing information about the Earth-Sun 

systems not available by other means. 

Major outcomes of DOD development are: 

• Hardware and software components, or complete weapon systems, ready for operational and developmental 

testing and field use, and 

• Weapon systems finalized for complete operational and developmental testing.
154 STEWARDSHIP INFORMATION (UNAUDITED) 

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APPENDIX 155

Appendix: Significant Government Entities Included and 

Excluded from the Financial Statements 

This appendix provides the reader a clear understanding of which organizations and agencies are encompassed 

in the reporting entity for this publication. The reporting entity is a specifically defined group of agencies, 

principally cabinet departments and other agencies of the executive branch, as stated in the law and accounting 

guidance. 

The determination as to which organizations and agencies will be included in the reporting entity is governed 

by Federal laws and is also based on guidance issued by the Federal Accounting Standards Advisory Board in their 

Statement of Federal Financial Accounting Concept (SFFAC) 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 148 organizations and agencies included in the Financial Report of the United States 

Government. The lists below describe three groups of entity types that comprise the reporting entity for the 

Financial Report. 

Significant Entities Included in these Statements: 

Twenty-Four CFO Act Agencies Required to Submit Data

Department of Agriculture 

 www.usda.gov 

Department of Commerce 

 www.doc.gov 

Department of Defense 

 www.defenselink.mil 

Department of Education 

www.ed.gov 

Department of Energy 

 www.doe.gov 

Department of Health and Human Services 

 www.hhs.gov 

Department of Homeland Security 

 www.dhs.gov 

Department of Housing and Urban Development 

 www.hud.gov 

Department of the Interior 

 www.doi.gov 

Department of Justice 

 www.usdoj.gov 

Department of Labor 

 www.dol.gov 

Department of State 

 www.state.gov 

Department of Transportation 

 www.dot.gov 

Department of the Treasury 

 www.ustreas.gov 

Department of Veterans Affairs 

www.va.gov 

Environmental Protection Agency 

www.epa.gov 

General Services Administration 

www.gsa.gov 

National Aeronautics and Space Administration 

www.nasa.gov 

National Science Foundation 

www.nsf.gov 

Office of Personnel Management 

www.opm.gov 

Small Business Administration 

www.sba.gov 

Social Security Administration 

www.ssa.gov 

U.S. Agency for International Development 

www.usaid.gov 

U.S. Nuclear Regulatory Commission 

www.nrc.gov 
156 APPENDIX 

Eleven Additional Significant Entities Required to Submit Data

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 

Other Entities Included in these Statements: 

One Hundred Thirteen Additional Entities Included in these Statements

Abraham Lincoln Bicentennial Commission 

Advisory Council on Historic Preservation 

African Development Foundation 

American Battle Monuments Commission 

America’s Education Goals Panel 

Antitrust Modernization Commission 

Appalachian Regional Commission 

Appalachian Regional Development Fund 

Architect of the Capitol 

Architectural and Transportation Barriers Compliance 

 Board 

Armed Forces Retirement Home 

Barry Goldwater Scholarship and Excellence in 

 Education Foundation 

Botanic Garden 

Broadcasting Board of Governors 

Central Intelligence Agency 

Chemical Safety Hazard Investigation Board 

Christopher Columbus Fellowship Foundation 

Commission for the Preservation of America’s 

 Heritage Abroad 

Commission of Fine Arts 

Commission on Affordable Housing and Health 

 Facility Needs for Seniors in the 21st Century 

Commission on Civil Rights 

Commission on International Religious Freedom 

Commission on Ocean Policy 

Commission on Online Child Protection 

Commission on Review of Overseas Military Facility 

 Structure-United States 

Commission on Security & Cooperation–Europe 

Committee for Purchase from People who are Blind 

 or Severely Disabled 

Commodity Futures Trading Commission 

Community Management Staff 

Congressional Budget Office 

Congressional-Executive Commission on the People’s 

 Republic of China 

Consumer Product Safety Commission 

Corporation for National & Community Service 

Court of Appeals for Veterans Claims 

Court Services and Offender Supervision Agency 

 for DC 

DC Courts 

DC Courts–Defender Services 

Defense Nuclear Facilities Safety Board 

Delta Regional Authority 

Denali Commission 

Dwight D. Eisenhower Memorial Commission 

Eisenhower Exchange Fellowship Program 

Election Assistance Commission 

Environmental Dispute Resolution Fund 

Equal Employment Opportunity Commission 

Executive Office of the President 

Farm Credit Administration 

Federal Election Commission 

Federal Financial Institutions Examination Council 

 Appraisal Subcommittee 

Federal Housing Finance Board 

Federal Labor Relations Authority 

Federal Maritime Commission 

Federal Mediation and Conciliation Service 

Federal Mine Safety and Health Review Commission 

Federal Trade Commission 

Government Accountability Office 

Government Printing Office 
APPENDIX 157

Harry S. Truman Scholarship Trust Fund 

Institute of Museum Services 

Interagency Council on the Homeless 

Inter-American Foundation 

International Trade Commission 

James Madison Memorial Fellowship Foundation 

Japan-United States Friendship Commission 

John C. Stennis Center 

John F. Kennedy Center for the Performing Arts 

Judiciary Office Building Development 

Library of Congress 

Marine Mammal Commission 

Medicare Payment Advisory Commission 

Merit Systems Protection Board 

Military Sales Program 

Millennium Challenge Corporation 

Morris K. Udall Scholarship Foundation 

National Archives and Records Administration 

National Capital Planning Commission 

National Commission on Libraries and Information 

 Science 

National Commission on Terrorist Attacks upon 

 the United States 

National Council on Disability 

National Endowment for the Arts 

National Endowment for the Humanities 

National Gallery of Art 

National Labor Relations Board 

National Mediation Board 

National Railroad Retirement Investment Trust 

National Transportation Safety Board 

National Veterans Business Development Corporation 

Neighborhood Reinvestment Corporation 

Nuclear Waste Technical Review Board 

Occupational Safety & Health Review Commission 

Office of Compliance 

Office of Government Ethics 

Office of Navajo & Hopi Indian Relocation 

Office of Special Counsel 

Office of the Federal Coordination for Alaska Natural 

 Gas Transportation Projects 

Open World Leadership Center Funds 

Overseas Private Investment Corporation 

Panama Canal Commission 

Peace Corps 

Presidio Trust 

Public Defender Service 

Selective Service System 

Senate Preservation Fund 

St. Lawrence Seaway Development Corporation 

State Justice Institute 

U.S. Capital Preservation Commission 

U.S. China Security Review Commission 

U.S. Holocaust Memorial Museum 

U.S. Institute of Peace 

U.S. Trade and Development Agency 

Vietnam Education Foundation 

White House Commission on the National Moment of 

 Remembrance 

Woodrow Wilson International Center for Scholars 

Legislative and Judicial Branches 

There are no legal or other requirements for the legislative branch or judicial branch to prepare audited 

financial statements or to provide accrual-based accounting data for inclusion in the Governmentwide financial 

statements. Therefore, these consolidated statements do not include accrual-based accounting data for the U.S. 

Courts or the Congress. Some Congressional agencies voluntarily prepare and submit such information (examples: 

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. 
158 APPENDIX 

Entities Excluded from these Statements are: 

These specific entities are not considered part of the Governmentwide reporting entity based on the individual 

assessment of the entities with respect to the indicative criteria stated in SFFAC No. 2, Entity and Display: 

Army and Air Force Exchange Service 

Board of Governors of the Federal Reserve System 

 (Including the Federal Reserve Banks) 

Federal Home Loan Banks 

Federal Retirement Thrift Investment Board 

 (Including the Thrift Savings Fund) 

Federal National Mortgage Association (Fannie Mae) 

Financing Corporation 

Federal Home Loan Mortgage Corporation 

 (Freddie Mac) 

Marine Corps Exchange 

Navy Exchange Service Command 

Resolution Funding Corporation 

Student Loan Marketing Association (SLMA or Sallie 

 Mae) 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 159

The President 

The President of the Senate 

The Speaker of the House of Representatives 

The Secretary of the Treasury, in coordination with the Director of the Office of 

Management and Budget, is required annually to submit financial statements for the U.S. 

government to the President and the Congress. GAO is required to audit these 

statements.1

 This is our report on the accompanying U.S. government’s consolidated 

financial statements for the fiscal years ended September 30, 2007 and 2006, and our 

associated reports on internal control and compliance with significant laws and 

regulations. As used in this report, accrual basis financial statements refer to all of the 

consolidated financial statements and notes, except for those related to the Statement of 

Social Insurance.2

The federal government is responsible for (1) preparing annual consolidated financial 

statements in conformity with U.S. generally accepted accounting principles (GAAP); (2) 

establishing, maintaining, and assessing internal control to provide reasonable assurance 

that the control objectives of the Federal Managers’ Financial Integrity Act (FMFIA)3

 are 

met; and (3) complying with significant laws and regulations. Also, the 24 Chief 

Financial Officers (CFO) Act agencies are responsible for implementing and maintaining 

financial management systems that substantially comply with Federal Financial 

Management Improvement Act of 1996 (FFMIA)4

 requirements. Our objective was to 

 

1

 The Government Management Reform Act of 1994 has required such reporting, covering the executive 

branch of government, beginning with financial statements prepared for fiscal year 1997. 31 U.S.C. 331(e). 

The federal government has elected to include certain financial information on the legislative and judicial 

branches in the consolidated financial statements as well. 2

 The accrual basis consolidated financial statements for the fiscal years ended September 30, 2007 and 

2006 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 2007 and 2006 

Statements of Social Insurance, including the related notes, are also included in the consolidated financial 

statements. The Statements of Social Insurance do not interrelate to the accrual basis consolidated financial 

statements. 

3

 31 U.S.C. 3512 (c), (d) (commonly referred to as FMFIA). This act requires executive agency heads to 

evaluate and report annually to the President and the Congress on the adequacy of their internal control and 

accounting systems and on actions to correct significant problems. 4

 31 U.S.C. 3512 note (Federal Financial Management Improvement Act). 

United States Government Accountability Office

Washington, DC 20548 

Comptroller General

of the United States
160 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

audit the consolidated financial statements for the fiscal years ended September 30, 2007 

and 2006. Appendix I discusses the scope and methodology of our work. 

A significant number of material weaknesses5

 related to financial systems, fundamental 

recordkeeping and financial reporting, and incomplete documentation continued to (1) 

hamper the federal government’s ability to reliably report a significant portion of its 

assets, liabilities, costs, and other related information; (2) affect the federal government’s 

ability to reliably measure the full cost as well as the financial and nonfinancial 

performance of certain programs and activities; (3) impair the federal government’s 

ability to adequately safeguard significant assets and properly record various transactions; 

and (4) hinder the federal government from having reliable financial information to 

operate in an economical, efficient, and effective manner. We found the following: 

• Certain material weaknesses in financial reporting and other limitations on the 

scope of our work6

 resulted in conditions that continued to prevent us from 

expressing an opinion on the accompanying accrual basis consolidated financial 

statements for the fiscal years ended September 30, 2007 and 2006.7 

• The 2007 Statement of Social Insurance8

 is presented fairly, in all material 

respects, in conformity with GAAP; we disclaim an opinion on the 2006 

Statement of Social Insurance.9 

• The federal government did not maintain effective internal control over financial 

reporting (including safeguarding assets) and compliance with significant laws 

and regulations as of September 30, 2007. 

 

5

 A material weakness is a significant deficiency, or combination of significant deficiencies, that results in 

more than a remote likelihood that a material misstatement of the financial statements will not be prevented 

or detected. A significant deficiency is a control deficiency, or combination of control deficiencies, that 

adversely affects the entity’s ability to initiate, authorize, record, process, or report financial data reliably in 

accordance with generally accepted accounting principles such that there is more than a remote likelihood 

that a misstatement of the entity’s financial statements that is more than inconsequential will not be 

prevented or detected. A control deficiency exists when the design or operation of a control does not allow 

management or employees, in the normal course of performing their assigned functions, to prevent or 

detect misstatements on a timely basis. 

6

 Three major impediments continue to prevent us from rendering an opinion on the accrual basis 

consolidated financial statements: (1) serious financial management problems at the Department of 

Defense, (2) the federal government’s inability to adequately account for and reconcile intragovernmental 

activity and balances between federal agencies, and (3) the federal government’s ineffective process for 

preparing the consolidated financial statements. 

7

 We previously reported that certain material weaknesses prevented us from expressing an opinion on the 

consolidated financial statements of the U.S. government for fiscal years 1997 through 2006. 8

 The valuation date is January 1 for all social insurance programs except the Black Lung program, for 

which the valuation date is September 30. 

9

 We disclaimed an opinion on the fiscal year 2006 consolidated financial statements, including the 

Statement of Social Insurance. 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 161

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

regulations in fiscal year 2007 was limited by the material weaknesses and scope 

limitations discussed in this report. 

Significant Matter of Emphasis—The Nation’s Long-Term Fiscal Challenge

Before discussing our disclaimer of opinion on the accrual basis consolidated financial 

statements and unqualified opinion on the Statement of Social Insurance, the following 

key items deserve emphasis in order to put the information contained in the financial 

statements and the Management’s Discussion and Analysis section of the 2007 Financial 

Report of the United States Government (2007 Financial Report) into context. Despite 

continued improvement in both the reported annual net operating cost and cash-based 

budget deficit, the U.S. government’s total reported liabilities, net social insurance 

commitments, and other fiscal exposures continue to grow and now total approximately 

$53 trillion—up more than $2 trillion during fiscal year 2007 and more than $32 trillion 

from about $20 trillion in fiscal year 2000. The fiscal and cash flow implications of our 

large and growing Social Security and Medicare commitments will be felt as the large 

“baby boom” generation leaves the work force and collects benefits. In fact, the first 

boomers already have filed for early retirement benefits. The budget and economic 

implications of the baby boom generation’s retirement will only intensify as the baby 

boomers age. Given these and other factors, it seems clear that our nation is on an 

imprudent and unsustainable long-term fiscal path that is getting worse with the passage 

of time. The issues raised by this long-term fiscal challenge are issues of significance 

that affect every American. Leadership and the efforts of many people will be needed to 

put our nation on a more prudent and sustainable longer-term fiscal path. 

DISCLAIMER OF OPINION ON THE ACCRUAL BASIS CONSOLIDATED 

FINANCIAL STATEMENTS

Because of the federal government’s inability to demonstrate the reliability of significant 

portions of the U.S. government’s accompanying accrual basis consolidated financial 

statements for fiscal years 2007 and 2006, principally resulting from certain material 

weaknesses, and other limitations on the scope of our work, described in this report, we 

are unable to, and we do not, express an opinion on such financial statements. 

As a result of these limitations, readers are cautioned that amounts reported in the accrual 

basis consolidated financial statements and related notes may not be reliable. These 

material weaknesses and other scope limitations also affect the reliability of certain 

information contained in the accompanying Management’s Discussion and Analysis and 

other financial management information—including information used to manage the 

government day to day and budget information reported by federal agencies—that is 

taken from the same data sources as the accrual basis consolidated financial statements. 
162 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

We have not audited and do not express an opinion on the Management’s Discussion and 

Analysis, Stewardship Information, Supplemental Information, or other information 

included in the accompanying fiscal year 2007 Financial Report. 

Limitations on the Scope of Our Work

For fiscal years 2007 and 2006, there were limitations on the scope of our work in 

addition to the material weaknesses that contributed to our disclaimer of opinion on the 

accrual basis consolidated financial statements. First, the Department of the Treasury 

(Treasury) and the Office of Management and Budget (OMB) depend on certain federal 

agencies’ representations to provide their representations to us regarding the U.S. 

government’s consolidated financial statements. Treasury and OMB were unable to 

provide us with adequate representations regarding the U.S. government’s accrual basis 

consolidated financial statements primarily because of insufficient representations 

provided to them by one CFO Act agency for fiscal year 2007, and two CFO Act 

agencies for fiscal year 2006.10 Second, Treasury was unable to provide the final accrual 

basis consolidated financial statements and certain supporting documentation in time for 

us to complete all of our planned auditing procedures related to the compilation of these 

financial statements. 

Material Weaknesses Contributing to Our Disclaimer of Opinion on the Accrual Basis 

Consolidated Financial Statements

The federal government did not maintain adequate systems or have sufficient, reliable 

evidence to support certain material information reported in the accompanying accrual 

basis consolidated financial statements, as briefly described below. The underlying 

material weaknesses in internal control, which generally have existed for years, 

contributed to our disclaimer of opinion on the accrual basis consolidated financial 

statements. Appendix II describes the material weaknesses in more detail and highlights 

the primary effects of these material weaknesses on the accompanying accrual basis 

consolidated financial statements and on the management of federal government 

operations. The material weaknesses that contributed to our disclaimer of opinion on the 

accrual basis consolidated financial statements were the federal government’s inability to: 

• satisfactorily determine that property, plant, and equipment and inventories and 

related property, primarily held by the Department of Defense (DOD), were 

properly reported in the consolidated financial statements; 

• implement effective credit reform estimation and related financial reporting 

processes at certain federal credit agencies; 

 

10 The agencies are the Department of Defense, for fiscal years 2007 and 2006, and the Department of 

Homeland Security for fiscal year 2006. 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 163

• reasonably estimate or adequately support amounts reported for certain liabilities, 

such as environmental and disposal liabilities, or determine whether commitments 

and contingencies were complete and properly reported; 

• support significant portions of the total net cost of operations, most notably 

related to DOD, and adequately reconcile disbursement activity at certain 

agencies; 

• adequately account for and reconcile intragovernmental activity and balances 

between federal agencies; 

• ensure that the federal government’s consolidated financial statements were (1) 

consistent with the underlying audited agency financial statements, (2) properly 

balanced, and (3) in conformity with GAAP; and 

• identify and either resolve or explain material differences that exist between 

certain components of the budget deficit reported in Treasury’s records, used to 

prepare the Reconciliation of Net Operating Cost and Unified Budget Deficit and 

Statement of Changes in Cash Balance from Unified Budget and Other Activities, 

and related amounts reported in federal agencies’ financial statements and 

underlying financial information and records. 

Due to the material weaknesses and the additional limitations on the scope of our work 

discussed above, there may also be additional issues that could affect the accrual basis 

consolidated financial statements that have not been identified. 

UNQUALIFIED OPINION ON THE 2007 STATEMENT OF SOCIAL INSURANCE 

In our opinion, the 2007 Statement of Social Insurance presents fairly, in all material 

respects, the financial condition of the U.S. government’s social insurance programs, in 

conformity with GAAP. We disclaim an opinion on the 2006 Statement of Social 

Insurance11 and have not audited and do not express an opinion on the Statements of 

Social Insurance for 2005, 2004, and 2003, and other information related to such 

statements, that is included in the accompanying fiscal year 2007 Financial Report. 

As discussed in Note 22 to the consolidated financial statements, the Statement of Social 

Insurance presents the actuarial present value of the federal government’s estimated 

future revenue to be received from or on behalf of participants and estimated future 

expenditures to be paid to or on behalf of participants, based on benefit formulas in 

current law and using a projection period sufficient to illustrate the long-term 

 

11 Beginning in fiscal year 2006, the Statement of Social Insurance became a principal financial statement 

and was audited as part of the applicable federal agencies’ financial statements. We disclaimed an opinion 

on the fiscal year 2006 consolidated financial statements, including the Statement of Social Insurance. For 

fiscal year 2007, we designed our audit to provide an opinion on the 2007 consolidated Statement of Social 

Insurance. 
164 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

sustainability of the social insurance programs.12 In preparing the Statement of Social 

Insurance, management considers and selects assumptions and data that it believes 

provide a reasonable basis for the assertions in the statement. However, because of the 

large number of factors that affect the Statement of Social Insurance and the fact that 

such assumptions are inherently subject to substantial uncertainty (arising from the 

likelihood of future changes in general economic, regulatory, and market conditions, as 

well as other more specific future events, significant uncertainties, and contingencies), 

there will be differences between the estimates in the Statement of Social Insurance and 

the actual results, and those differences may be material. The Supplemental Information 

section of the 2007 Financial Report includes unaudited information concerning the 

effects of changes in various assumptions on the present value of future estimated 

expenditures in excess of future revenue. As discussed in that section, Medicare 

projections are very sensitive to changes in the health care cost growth assumption. 

In addition to the inherent uncertainty that underlies the expenditure projections prepared 

for all parts of Medicare, the Supplementary Medical Insurance (SMI) Part D projections 

have an added uncertainty in that they were prepared using very little program experience 

upon which to base the estimates, and the SMI Part B projections assume significant 

reductions in physician payments, as required under current law, which may or may not 

occur. The Congress has overridden scheduled reductions in physician payments 

calculated for each of the last 5 years, including for 2007.13 No legislation has been 

enacted to override scheduled reductions in payments for 2008.14 It is not possible to 

anticipate what other actions the Congress might take, either in the near or long-term, to 

alter the scheduled reductions in physician payments. If scheduled reductions continue to 

be overridden in the future, actual SMI Part B expenditures could be materially more than 

the amounts presented in the 2007 Statement of Social Insurance. 

The scheduled future benefits reported in the Statement of Social Insurance are based on 

benefit formulas in current law. However, consistent with the respective annual Trustees 

Reports, the Social Security and Medicare programs are not sustainable under current 

financing arrangements. Also, the law concerning these programs can be changed at any 

time by the Congress. In fact, payment of Social Security and Medicare Hospital 

Insurance (Part A) benefits are limited by law to the balances in the respective trust 

funds. Consequently, future scheduled benefits are limited to future revenues plus 

existing trust fund assets. As discussed in Supplemental Information, the Social Security 

and Medicare Part A trust funds are projected to be exhausted in 2041 and 2019, 

respectively, at which time they will be unable to pay the full amount of scheduled future 

benefits. For Social Security, projected future revenues would be sufficient to pay 75 

percent of scheduled benefits in 2041, the year of trust fund exhaustion, and decreasing to 

70 percent of scheduled benefits in 2081. Similarly, for Medicare Part A, projected 

 

12 The projection period used for the Social Security, Medicare, and Railroad Retirement social insurance 

programs is 75 years. For the Black Lung program, the projections are through 2040, when the program is 

scheduled to terminate. 

13 Pub. L. No. 109-432, div. B, title I, § 101(a), 120 Stat. 2922, 2975 (Dec. 20, 2006). 

14 As of December 10, 2007, the House of Representatives had passed a bill, H.R. 3162, that would modify 

the method of calculating physician fee schedules, but the Senate had not passed any such legislation. 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 165

future revenues would be sufficient to pay 79 percent of scheduled benefits in 2019, the 

year of trust fund exhaustion, and decreasing to 29 percent of scheduled benefits in 2081. 

Management’s Discussion and Analysis and Supplemental Information included in the 

accompanying fiscal year 2007 Financial Report contains information directly related to 

the Statements of Social Insurance. We did not audit and do not express an opinion on 

this information. However, we compared the information that directly related to the 

Statements of Social Insurance for consistency with the Statements of Social Insurance 

and discussed the methods of measurement and presentation of such information with 

Treasury officials. Based on this limited work, we found no material inconsistencies with 

the Statements of Social Insurance or GAAP. 

ADVERSE OPINION ON INTERNAL CONTROL

Because of the effects of the material weaknesses discussed in this report, in our opinion, 

the federal government did not maintain effective internal control as of September 30, 

2007, to meet the following objectives: (1) transactions are properly recorded, processed, 

and summarized to permit the preparation of the financial statements and stewardship 

information in conformity with GAAP, and assets are safeguarded against loss from 

unauthorized acquisition, use, or disposition; and (2) transactions are executed in 

accordance with laws governing the use of budget authority and with other significant 

laws and regulations that could have a direct and material effect on the financial 

statements and stewardship information. Consequently, the federal government’s internal 

control did not provide reasonable assurance that misstatements, losses, or 

noncompliance material in relation to the financial statements or to stewardship 

information would be prevented or detected on a timely basis. Our adverse opinion on 

internal control over financial reporting and compliance is based upon the criteria 

established under FMFIA. 

In addition to the material weaknesses that contributed to our disclaimer of opinion on the 

accrual basis consolidated financial statements, which were discussed above, we found 

the following three other material weaknesses in internal control as of September 30, 

2007. These weaknesses are discussed in more detail in appendix III, including the 

primary effects of the material weaknesses on the accompanying accrual basis 

consolidated financial statements and on the management of federal government 

operations. These other material weaknesses were the federal government’s inability to: 

• determine the full extent to which improper payments occur; 

• identify and resolve information security control weaknesses and manage 

information security risks on an ongoing basis; and 

• effectively manage its tax collection activities. 
166 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

Further, we found the following significant deficiencies15 in internal control as of 

September 30, 2007, which are discussed in more detail in appendix IV. These 

significant deficiencies involve the following areas: 

• preparing the Statement of Social Insurance for certain programs, and 

• monitoring and oversight regarding certain federal grants and entities that offer 

Medicare health plan options. 

Individual federal agency financial statement audit reports identify additional control 

deficiencies, which were reported by agency auditors as either material weaknesses or 

significant deficiencies at the individual agency level. We do not deem these additional 

deficiencies to be material weaknesses or significant deficiencies at the governmentwide 

level. Also, due to the issues noted throughout this report, additional material 

weaknesses and significant deficiencies may exist that have not been reported. 

COMPLIANCE WITH SIGNIFICANT LAWS AND REGULATIONS

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

related to financial reporting was limited by the material weaknesses and scope 

limitations discussed in this report. U.S. generally accepted government auditing 

standards and OMB guidance require auditors to report on the agency’s compliance with 

significant laws and regulations. Certain individual agency audit reports contain 

instances of noncompliance. None of these instances were deemed to be reportable 

noncompliances with regard to the accompanying consolidated financial statements. 

We caution that other noncompliance may have occurred and not been detected. Further, 

the results of our limited procedures may not be sufficient for other purposes. Our 

objective was not to, and we do not, express an opinion on compliance with significant 

laws and regulations. 

 

15 In fiscal year 2006 and in prior years, we reported that individual federal agency financial statement audit 

reports identified reportable conditions in internal control, some of which were reported by agency auditors 

as being material weaknesses at the individual agency level, but did not represent material weaknesses at 

the governmentwide level. Reportable conditions involved matters coming to the auditor’s attention that, 

in the auditor’s judgment, should be communicated because they represent significant deficiencies in the 

design or operation of internal control, and could adversely affect an agency’s ability to meet key control 

objectives. In May 2006, the American Institute of Certified Public Accountants issued Statement on 

Auditing Standards (SAS) 112, and subsequently made conforming changes to the Statements on Standards 

for Attestation Engagements (AT) 501. AT 501 eliminated the term reportable condition and it is no longer 

used. AT 501 also established standards related to a new definition for the terms “material weakness” and 

“significant deficiency,” as defined in footnote 5, and the auditor’s responsibilities for identifying, 

evaluating, and communicating matters related to an entity’s internal control over financial reporting. 

Under these new standards, the auditor is required to communicate control deficiencies that are considered 

to be material weaknesses or significant deficiencies in internal controls. 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 167

AGENCY FINANCIAL MANAGEMENT SYSTEMS

To achieve the financial management improvements envisioned by the CFO Act, FFMIA, 

and the President’s Management Agenda, federal agencies need to modernize their 

financial management systems to generate reliable, useful, and timely financial and 

performance information throughout the year and at year-end. As discussed throughout 

this report, serious financial management weaknesses have contributed significantly to 

our inability to determine the reliability of the accrual basis consolidated financial 

statements. The size and complexity of the federal government and the long-standing 

nature of its financial management systems weaknesses continue to present a formidable 

management challenge in providing accountability to the nation’s taxpayers. 

FFMIA requires auditors, as part of the 24 CFO Act agencies’ financial statement audits, 

to report whether agencies’ financial management systems substantially comply with (1) 

federal financial management systems requirements, (2) applicable federal accounting 

standards, and (3) the federal government’s Standard General Ledger at the transaction 

level. For fiscal years 2007 and 2006, auditors for 13 and 17 of the 24 CFO Act agencies, 

respectively, reported that the agencies’ financial management systems did not 

substantially comply with one or more of these three FFMIA requirements. Although 

this represents an improvement, the majority of federal agencies’ financial management 

systems are still unable to routinely produce reliable, useful, and timely financial 

information. Consequently, the federal government’s capacity to manage with timely and 

objective data is limited, thereby hampering its ability to effectively administer and 

oversee its major programs. 

OMB CIRCULAR NO. A-123, Management’s Responsibilities for Internal Control

In December 2004, OMB revised OMB Circular No. A-123, Management’s 

Responsibility for Internal Control, which became effective for fiscal year 2006. In fiscal 

year 2006, agencies began to implement the more rigorous requirements of the revised 

OMB Circular No. A-123, which include management identification, assessment, testing, 

correction, and documentation of internal controls over financial reporting for each 

account or group of accounts, as well as an annual assurance statement from the agency 

head as to whether internal control over financial reporting is effective. 

OMB recognized that due to the complexity of some agencies, implementation of these 

new requirements may span more than 1 year. Accordingly, certain agencies have 

adopted multi-year implementation plans. According to OMB’s Federal Financial 

Management Report for 2007, 16 of the 24 CFO Act agencies have performed 

assessments required by OMB Circular No. A-123 for all key processes, while the 

remaining 8 CFO Act agencies are phasing in implementation of the requirements by 

testing a portion of the key processes and providing plans for testing the remaining 

processes within 3 years. Also, according to that report, to achieve its strategic goal of 

improving effectiveness of internal control over financial reporting, OMB has developed 

priority actions that include updating guidance, as necessary, based on lessons learned 
168 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

from agencies’ implementation of the circular. It will be important that OMB continue to 

monitor and oversee federal agencies’ implementation of these new requirements. 

- - - - - 

We provided a draft of this report to Treasury and OMB officials, who provided technical 

comments, which have been incorporated as appropriate. Treasury and OMB officials 

expressed their continuing commitment to address the problems this report outlines. 

David M. Walker 

Comptroller General 

of the United States 

December 10, 2007 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 169

APPENDIX I 

Objectives, Scope, and Methodology

The Government Management Reform Act of 1994 expanded the requirements of the 

Chief Financial Officers (CFO) Act of 1990 by making the inspectors general of 24 major 

federal agencies16 responsible for annual audits of agencywide financial statements 

prepared by these agencies and GAO responsible for the audit of the U.S. government’s 

consolidated financial statements. The Accountability of Tax Dollars (ATD) Act of 

200217 requires most other executive branch agencies to prepare and have audited annual 

financial statements. The Office of Management and Budget (OMB) and the Department 

of the Treasury (Treasury) have identified 35 agencies18 that are significant to the U.S. 

government’s consolidated financial statements. Our work was performed in 

coordination and cooperation with the inspectors general and independent public 

accountants for these 35 agencies to achieve our joint audit objectives. Our audit 

approach regarding the accrual basis consolidated financial statements focused primarily 

on determining the current status of the material weaknesses that contributed to our 

disclaimer of opinion on the accrual basis consolidated financial statements and the other 

material weaknesses affecting internal control that we had previously reported in our 

report on the consolidated financial statements for fiscal year 2006.19 Our work included 

separately auditing the financial statements of the following significant federal agencies 

and federal agency components: 

• We audited and expressed an unqualified opinion on the Internal Revenue Service’s 

(IRS) fiscal years 2007 and 2006 financial statements. In fiscal years 2007 and 2006, 

IRS collected about $2.7 trillion and $2.5 trillion, respectively, in tax payments and 

paid about $292 billion and $277 billion, respectively, in refunds to taxpayers.20 For 

fiscal year 2007, we continued to report material internal control weaknesses that 

resulted in ineffective internal control. We also reported a significant deficiency. 

Our tests of IRS’s compliance with selected provisions of significant laws and 

regulations disclosed one area of noncompliance. We also found that IRS’s financial 

management systems did not substantially comply with the three requirements of the 

Federal Financial Management Improvement Act of 1996. 

 

16 31 U.S.C. 901(b), 3521(e). The 1994 act authorized the Office of Management and Budget to designate 

agency components that also would receive a financial statement audit. 31 U.S.C. 3515(c); see footnote 1. 17 Pub. L. No. 107-289, 116 Stat. 2049 (Nov. 7, 2002); see 31 U.S.C. 3515. 

18 See Treasury Financial Manual, volume I, part 2, chapter 4700, for a listing of the 35 agencies. 

19 For our report on the U.S. government’s consolidated financial statements for fiscal year 2006, see U. S. 

Department of the Treasury, Fiscal Year 2006 Financial Report of the United States Government

(Washington, D.C.: Dec. 2006), pp. 149-168, which can be found on GAO’s Internet site at www.gao.gov. 20 GAO, Financial Audit: IRS’s Fiscal Years 2007 and 2006 Financial Statements, GAO-08-166 

(Washington, D.C.: Nov. 9, 2007). 
170 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

• We audited and expressed an unqualified opinion on the Schedules of Federal Debt 

managed by Treasury’s Bureau of the Public Debt (BPD) for the fiscal years ended 

September 30, 2007 and 2006.21 For these 2 fiscal years, the schedules reported (1) 

approximately $5.0 trillion (2007) and $4.8 trillion (2006) of federal debt held by the 

public;22 (2) about $3.9 trillion (2007) and $3.7 trillion (2006) of intragovernmental 

debt holdings;23 and (3) about $239 billion (2007) and $222 billion (2006) of interest 

on federal debt held by the public. We reported that as of September 30, 2007, BPD 

had effective internal control over financial reporting and compliance with laws and 

regulations relevant to the Schedule of Federal Debt. Further, we reported that there 

was no reportable BPD noncompliance in fiscal year 2007 with a selected provision 

of law we tested. 

• We audited and expressed unqualified opinions on the fiscal years 2007 and 2006 

financial statements of the United States Securities and Exchange Commission 

(SEC).24 For fiscal year 2007, we reported that SEC did not have effective internal 

control over financial reporting because of a material weakness. We also reported 

three significant deficiencies. Although certain compliance controls should be 

improved, SEC maintained effective internal control over compliance with significant 

laws and regulations. Further, we reported that there was no reportable 

noncompliance with selected provisions of laws and regulations we tested. 

• We audited and expressed unqualified opinions on the December 31, 2006 and 2005, 

financial statements of the funds administered by the Federal Deposit Insurance 

Corporation (FDIC), including the Deposit Insurance Fund (DIF)25 and the FSLIC 

Resolution Fund.26 We reported that as of December 31, 2006, FDIC had effective 

internal control over financial reporting and compliance with significant laws and 

regulations. In addition, we performed certain procedures and tests of internal control 

over certain material balances of the funds administered by FDIC as of September 30, 

2007. 

 

21 GAO, Financial Audit: Bureau of the Public Debt’s Fiscal Years 2007 and 2006 Schedules of Federal 

Debt, GAO-08-168 (Washington, D.C.: Nov. 7, 2007). 22 The public holding federal debt is comprised of individuals, corporations, state and local governments, 

the Federal Reserve Banks, and foreign governments and central banks. 

23 Intragovernmental debt holdings represent federal debt issued by Treasury and held by certain federal 

government accounts such as the Social Security and Medicare trust funds. 24 GAO, Financial Audit: Securities and Exchange Commission’s Financial Statements for Fiscal Years 

2007 and 2006, GAO-08-167 (Washington, D.C.: Nov. 16, 2007). 25 On February 8, 2006, the President signed into law the Federal Deposit Insurance Reform Act of 2005. 

Among its provisions, the act called for the merger of the Bank Insurance Fund (BIF) and Savings 

Association Insurance Fund (SAIF) into a single deposit insurance fund. In accordance with the act, FDIC 

merged BIF and SAIF into the newly established DIF on March 31, 2006. The financial results of the 

newly formed DIF were retrospectively applied as though they had been combined at the beginning of the 

reporting year as well as for prior periods presented for comparative purposes. 26 GAO, Financial Audit: Federal Deposit Insurance Corporation Funds’ 2006 and 2005 Financial 

Statements, GAO-07-371 (Washington, D.C.: Feb. 13, 2007). 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 171

In addition, we considered the CFO Act agencies’ and certain other federal agencies’ 

fiscal years 2007 and 2006 financial statements and the related auditors’ reports prepared 

by the inspectors general or contracted independent public accountants. Financial 

statements and audit reports for these agencies provide information about the operations 

of each of these entities. We did not audit, and we do not express an opinion on, any of 

these individual federal agency financial statements. 

We considered the Department of Defense’s (DOD) assertion that DOD management 

prepared and submitted pursuant to the provisions of the National Defense Authorization 

Act for Fiscal Year 2002.27 In accordance with section 1008 of this act, DOD reported 

that certain major deficiencies related to (1) noncompliant systems, (2) financial 

processes, and (3) business processes continued to impact the department’s ability to 

prepare reliable financial statements. In addition, DOD refers to its ongoing efforts to 

address related material weaknesses reported by the DOD Inspector General. In the DOD 

Inspector General’s fiscal year 2007 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; and (4) intragovernmental eliminations. 

Because of the significance of the amounts included in the Statement of Social Insurance 

related to the Social Security Administration (SSA) and the Department of Health and 

Human Services (HHS), our audit approach regarding the Statement of Social Insurance 

focused primarily on these two agencies. For each federal agency preparing a Statement 

of Social Insurance,28 we considered the agencies’ fiscal year 2007 and 2006 financial 

statements and the related auditors’ reports prepared by the inspectors general or 

contracted independent public accountants. We performed sufficient audit work, 

including internal control and substantive audit procedures, reperformance procedures, 

and review of the other auditors’ Statement of Social Insurance-related audit work, to 

support our opinion on the 2007 Statement of Social Insurance. 

We performed sufficient audit work to provide this report on the consolidated financial 

statements, internal control, and compliance with selected provisions of significant laws 

and regulations. We considered the limitations on the scope of our work regarding the 

accrual basis consolidated financial statements in forming our conclusions. Our work 

was performed in accordance with U.S. generally accepted government auditing 

standards. 

 

27 Pub. L. No. 107-107, §1008, 115 Stat. 1012, 1204 (Dec. 28, 2001). 

28 These agencies include SSA, HHS, the Railroad Retirement Board, and the Department of Labor. 
172 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

APPENDIX II 

Material Weaknesses Contributing to Our Disclaimer of Opinion on the Accrual Basis 

Consolidated Financial Statements

The continuing material weaknesses discussed below contributed to our disclaimer of 

opinion on the federal government’s accrual basis consolidated financial statements. The 

federal government did not maintain adequate systems or have sufficient, reliable 

evidence to support information reported in the accompanying accrual basis consolidated 

financial statements, as described below. 

Property, Plant, and Equipment and Inventories and Related Property

The federal government could not satisfactorily determine that property, plant, and 

equipment (PP&E) and inventories and related property were properly reported in the 

consolidated financial statements. Most of the PP&E and inventories and related 

property are the responsibility of DOD. As in past years, DOD did not maintain adequate 

systems or have sufficient records to provide reliable information on these assets. Other 

agencies, most notably the National Aeronautics and Space Administration, reported 

continued weaknesses in internal control procedures and processes related to PP&E. 

Without reliable asset information, the federal government does not fully know the assets 

it owns and their location and condition and cannot effectively (1) safeguard assets from 

physical deterioration, theft, or loss; (2) account for acquisitions and disposals of such 

assets; (3) ensure that the assets are available for use when needed; (4) prevent 

unnecessary storage and maintenance costs or purchase of assets already on hand; and (5) 

determine the full costs of programs that use these assets. 

Loans Receivable and Loan Guarantee Liabilities

Federal agencies that account for the majority of the reported balances for direct loans 

and loan guarantee liabilities continue to have internal control weaknesses related to their 

credit reform estimation and related financial reporting processes. While progress in 

addressing these long-standing weaknesses was reported by certain federal credit 

agencies, certain deficiencies in the Department of Agriculture’s credit reform processes 

contributed to its auditor being unable to obtain sufficient, appropriate evidence to 

support related accounts. As such, for fiscal year 2007, we have added this area to the list 

of material weaknesses contributing to our disclaimer of opinion on the accrual basis 

consolidated financial statements. 

These issues and the complexities associated with estimating the costs of lending 

activities significantly increase the risk that material misstatements in agency and 

governmentwide financial statements could occur and go undetected. Moreover, these 

weaknesses continue to adversely affect the federal government’s ability to support 

annual budget requests for federal lending programs, make future budgetary decisions, 

manage program costs, and measure the performance of lending activities. 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 173

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 the past, 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. This year, the auditor’s report on the financial statements 

that include the estimated military postretirement health benefits liabilities had not been 

issued as of the date of this report. Further, the federal government could not determine 

whether commitments and contingencies, including those related to treaties and other 

international agreements entered into to further the U.S. government’s interests, were 

complete and properly reported. 

Problems in accounting for liabilities affect the determination of the full cost of the 

federal government’s current operations and the extent of its liabilities. Also, weaknesses 

in internal control supporting the process for estimating environmental and disposal 

liabilities could result in improperly stated liabilities as well as affect the federal 

government’s ability to determine priorities for cleanup and disposal activities and to 

appropriately consider future budgetary resources needed to carry out these activities. In 

addition, if disclosures of commitments and contingencies are incomplete or incorrect, 

reliable information is not available about the extent of the federal government’s 

obligations. 

Cost of Government Operations and Disbursement Activity

The previously discussed material weaknesses in reporting assets and liabilities, material 

weaknesses in financial statement preparation, as discussed below, and the lack of 

adequate disbursement reconciliations at certain federal agencies affect reported net 

costs. As a result, the federal government was unable to support significant portions of 

the total net cost of operations, most notably related to DOD. 

With respect to disbursements, DOD and certain other federal agencies reported 

continued weaknesses in reconciling disbursement activity. For fiscal years 2007 and 

2006, there was unreconciled disbursement activity, including unreconciled differences 

between federal agencies’ and Treasury’s records of disbursements and unsupported 

federal agency adjustments, totaling billions of dollars, which could also affect the 

balance sheet. 

Unreliable cost information affects the federal government’s ability to control and reduce 

costs, assess performance, evaluate programs, and set fees to recover costs where 

required. If disbursements are improperly recorded, this could result in misstatements in 

the financial statements and in certain data provided by federal agencies for inclusion in 

The Budget of the United States Government (hereafter referred to as “the President’s 

Budget”) concerning obligations and outlays. 
174 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

Accounting for and Reconciliation of Intragovernmental Activity and Balances

Federal agencies are unable to adequately account for and reconcile intragovernmental 

activity and balances. OMB and Treasury require the chief financial officers (CFO) of 35 

executive departments and agencies to reconcile, on a quarterly basis, selected 

intragovernmental activity and balances with their trading partners. In addition, these 

agencies are required to report to Treasury, the agency’s inspector general, and GAO on 

the extent and results of intragovernmental activity and balances reconciliation efforts as 

of the end of the fiscal year. 

A substantial number of the agencies did not adequately perform the required 

reconciliations for fiscal years 2007 and 2006. For these fiscal years, based on trading 

partner information provided to Treasury via agencies’ closing packages, Treasury 

produced a “Material Difference Report” for each agency showing amounts for certain 

intragovernmental activity and balances that significantly differed from those of its 

corresponding trading partners as of the end of the fiscal year. Based on our analysis of 

the “Material Difference Reports” for fiscal year 2007, we noted that a significant 

number of CFOs were unable to adequately explain the differences with their trading 

partners or did not provide adequate documentation to support responses on the CFO 

Representations. For both fiscal years 2007 and 2006, amounts reported by federal 

agency trading partners for certain intragovernmental accounts were not in agreement by 

significant amounts. In addition, a significant number of CFOs cited differing accounting 

methodologies, accounting errors, and timing differences for their material differences 

with their trading partners. Some CFOs simply indicated that they were unable to explain 

the differences with their trading partners with no indication when the differences will be 

resolved. As a result of the above, the federal government’s ability to determine the 

impact of these differences on the amounts reported in the accrual basis consolidated 

financial statements is significantly impaired. 

In 2006, OMB issued Memorandum No. M-07-03, Business Rules for Intragovernmental 

Transactions (Nov. 13, 2006), and Treasury issued the Treasury Financial Manual 

Bulletin No. 2007-03, Intragovernmental Business Rules (Nov. 15, 2006). This guidance 

added criteria for resolving intragovernmental disputes and major differences between 

trading partners for certain intragovernmental transactions and called for the 

establishment of an Intragovernmental Dispute Resolution Committee. OMB is currently 

working with the Chief Financial Officers Council to create the Intragovernmental 

Dispute Resolution Committee.29 Treasury is also taking steps to help resolve material 

differences in intragovernmental activity and balances. For example, Treasury is 

requiring federal agencies to provide a plan of action on how the agency is addressing 

certain of its unresolved material differences. Resolving the intragovernmental 

transactions problem remains a difficult challenge and will require a strong commitment 

 

29 The U.S. Chief Financial Officers Council is an organization of the CFOs and Deputy CFOs of the 

largest federal agencies and senior officials of OMB and Treasury who work collaboratively to improve 

financial management in the U.S. Government. 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 175

by federal agencies to fully implement the required business rules and continued strong 

leadership by OMB and Treasury. 

Preparation of Consolidated Financial Statements

While further progress was demonstrated in fiscal year 2007, the federal government 

continued to have inadequate systems, controls, and procedures to ensure that the 

consolidated financial statements are consistent with the underlying audited agency 

financial statements, properly balanced, and in conformity with U.S. generally accepted 

accounting principles (GAAP). In addition, as discussed in our scope limitation section of 

this report, Treasury could not provide the final fiscal year 2007 accrual basis 

consolidated financial statements and adequate supporting documentation in time for us 

to complete all of our planned auditing procedures. During our fiscal year 2007 audit, we 

found the following:30

• Treasury has showed progress by demonstrating that amounts in the Statement of 

Social Insurance were consistent with the underlying federal agencies’ audited 

financial statements and that the Balance Sheet and the Statement of Net Cost 

were consistent with federal agencies’ financial statements prior to eliminating 

intragovernmental activity and balances. However, Treasury’s process for 

compiling the consolidated financial statements did not ensure that the 

information in the remaining three principal financial statements and notes were 

fully consistent with the underlying information in federal agencies’ audited 

financial statements and other financial data. 

• At the federal agency level, for fiscal year 2007, auditors for many of the CFO 

Act agencies reported material weaknesses or other significant deficiencies 

regarding agencies’ financial reporting processes which, in turn, could affect the 

preparation of the consolidated financial statements. For example, auditors for 

several agencies reported that a significant number of adjustments were required 

to prepare the agencies’ financial statements. These and other auditors are also 

required to separately audit financial information sent by the federal agencies to 

Treasury via a closing package. In connection with preparing the consolidated 

financial statements, Treasury had to create adjustments to correct significant 

errors found in agencies’ audited closing package information. 

 

30 Most of the issues we identified in fiscal year 2007 existed in fiscal year 2006, and many have existed for 

a number of years. In July 2007, we reported the issues we identified to Treasury and OMB and provided 

recommendations for corrective action in GAO, Financial Audit: Significant Internal Control Weaknesses 

Remain in the Preparation of the Consolidated Financial Statements of the U.S. Government, GAO-07-805 

(Washington, D.C.: July 23, 2007). 
176 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

• To make the fiscal years 2007 and 2006 consolidated financial statements 

balance, Treasury recorded net decreases of $6.7 billion and $11 billion, 

respectively, to net operating cost on the Statement of Operations and Changes in 

Net Position, which it labeled “Other - Unmatched transactions and balances.”31

An additional net $2.5 billion and $10.4 billion of unmatched transactions were 

recorded in the Statement of Net Cost for fiscal years 2007 and 2006, 

respectively. Treasury is unable to fully identify and quantify all components of 

these unreconciled activities. 

• The federal government could not demonstrate that it had fully identified and 

reported all items needed to reconcile the operating results, which for fiscal year 

2007 showed a net operating cost of $275.5 billion, to the budget results, which 

for the same period showed a unified budget deficit of $162.8 billion. 

• Treasury’s elimination of certain intragovernmental activity and balances 

continues to be impaired by the federal agencies’ problems in handling their 

intragovernmental transactions. As previously discussed, amounts reported for 

federal agency trading partners for certain intragovernmental accounts were not in 

agreement by significant amounts. This resulted in the need for intragovernmental 

elimination entries by Treasury that recorded the net differences between trading 

partners as “Other – Unmatched transactions and balances,” in order to force the 

Statements of Operations and Changes in Net Position into balance. In addition, 

differences in other intragovernmental accounts, primarily related to transactions 

with the General Fund, have not been reconciled, still remain unresolved, and 

total hundreds of billions of dollars. Therefore, the federal government continues 

to be unable to determine the impact of unreconciled intragovernmental activity 

and balances on the accrual basis consolidated financial statements. 

• We have consistently reported that certain financial information required by 

GAAP was not disclosed in the consolidated financial statements. In 2006, the 

Federal Accounting Standards Advisory Board issued a new standard that 

eliminated or lessened the disclosure requirements for the consolidated financial 

statements related to certain information that Treasury had not been reporting.32

While Treasury made progress in addressing some of the remaining omitted 

information, there continue to be disclosures required by GAAP that are excluded 

from the consolidated financial statements. Also, certain material weaknesses 

noted in this report, for example, commitments and contingencies related to 

treaties and other international agreements, preclude Treasury from determining if 

a disclosure is required by GAAP in the consolidated financial statements and us 

 

31 Although Treasury was unable to determine how much of the unmatched transactions and balances, if 

any, relate to net operating cost, it reported this amount as a component of net operating cost in the 

accompanying consolidated financial statements. 32 SFFAS No. 32, Consolidated Financial Report of the United States Government Requirements: 

Implementing Statement of Federal Financial Accounting Concepts 4 “Intended Audience and Qualitative 

Characteristics for the Consolidated Financial Report of the United States Government” (Washington, 

D.C.: Sept. 28, 2006). 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 177

from determining if the omitted information is material. Further, Treasury's ability 

to report information in accordance with GAAP will also remain impaired until 

federal agencies, such as DOD, can provide Treasury with complete and reliable 

information required to be reported in the consolidated financial statements. 

• Other internal control weaknesses existed in Treasury’s process for preparing the 

consolidated financial statements, involving inadequate or ineffective (1) 

documentation of certain policies and procedures; (2) management reviews of 

adjustments and key iterations of the financial statements, notes, and management 

discussion and analysis provided to GAO for audit; (3) supporting documentation 

for certain adjustments made to the consolidated financial statements; (4) 

processes for monitoring the preparation of the consolidated financial statements; 

and (5) spreadsheet controls. 

• The consolidated financial statements include financial information for the 

executive, legislative, and judicial branches, to the extent that federal agencies 

within those branches have provided Treasury such information. However, as we 

have reported in past years, there continue to be undetermined amounts of assets, 

liabilities, costs, and revenues that are not included, and the federal government 

did not provide evidence or disclose in the consolidated financial statements that 

the excluded financial information was immaterial. 

• As in previous years, Treasury did not have adequate systems and personnel to 

address the magnitude of the fiscal year 2007 financial reporting challenges it 

faced, such as weaknesses in Treasury’s process for preparing the consolidated 

financial statements noted above. We found that personnel at Treasury’s Financial 

Management Service had excessive workloads that required an extraordinary 

amount of effort and dedication to compile the consolidated financial statements; 

however, there were not enough personnel with specialized financial reporting 

experience to help ensure reliable financial reporting by the reporting date. In 

addition, the federal government does not perform quarterly compilations at the 

governmentwide level, which leads to almost all of the compilation effort being 

performed during a condensed time period at the end of the year. 

During fiscal year 2007, Treasury, in coordination with OMB, continued to develop and 

implement corrective action plans and milestones for short-term and long-range solutions 

for certain internal control weaknesses we have reported regarding the process for 

preparing the consolidated financial statements. Resolving some of these internal control 

weaknesses will be a difficult challenge and will require a strong commitment from 

Treasury and OMB as they execute and implement their corrective action plans. 
178 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

Components of the Budget Deficit

Both the Reconciliation of Net Operating Cost and Unified Budget Deficit and Statement 

of Changes in Cash Balance from Unified Budget and Other Activities report a budget 

deficit for fiscal years 2007 and 2006 of $162.8 billion and $247.7 billion, respectively.33

The budget deficit is calculated by subtracting actual budget outlays (outlays) from actual 

budget receipts (receipts). 

For several years, we have been reporting material unreconciled differences between the 

total net outlays reported in selected federal agencies’ Statement of Budgetary Resources 

(SBR) and Treasury’s central accounting records used to compute the budget deficit34

reported in the consolidated financial statements. OMB and Treasury have continued to 

work with federal agencies to reduce these material unreconciled differences. However, 

billions of dollars of differences still exist in this and other components of the deficit 

because the federal government does not have effective processes and procedures for 

identifying, resolving, and explaining material differences in the components of the 

deficit between Treasury’s central accounting records and information reported in agency 

financial statements and underlying agency financial information and records. Until these 

differences are timely reconciled by the federal government, their effect on the U.S. 

government’s consolidated financial statements will be unknown. 

In fiscal year 2007, we again noted that several agencies’ auditors reported internal 

control weaknesses (1) affecting the agencies’ SBRs, and (2) relating to monitoring, 

accounting, and reporting of budgetary transactions. These weaknesses could affect the 

reporting and calculation of the net outlay amounts in the agencies’ SBRs. In addition, 

such weaknesses also affect the agencies’ ability to report reliable budgetary information 

to Treasury and OMB and may affect the unified budget outlays reported by Treasury in 

its Combined Statement of Receipts, Outlays, and Balances,

35 and certain amounts 

reported in the President’s Budget. 

 

33 The budget deficit, receipts, and outlays amounts are reported in Treasury's Monthly Treasury Statement 

and the President's Budget. 

34 See GAO's audit report on its audit of the federal government's fiscal year 2006 financial statements that 

was incorporated in the 2006 Financial Report of the U.S. Government published by Treasury. Also, see 

GAO, Financial Audit: Process for Preparing the Consolidated Financial Statements of the U.S. 

Government Needs Improvement, GAO-04-45 (Washington, D.C.: Oct. 30, 2003). 35 Treasury’s Combined Statement of Receipts, Outlays, and Balances presents budget results and cash 

related assets and liabilities of the federal government with supporting details. Treasury represents this 

report as the recognized official publication of receipts and outlays of the federal government based on 

agency reporting. 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 179

APPENDIX III 

Other Material Weaknesses

The federal government did not maintain effective internal control over financial 

reporting (including safeguarding assets) and compliance with significant laws and 

regulations as of September 30, 2007. In addition to the material weaknesses discussed 

in appendix II that contributed to our disclaimer of opinion on the accrual basis 

consolidated financial statements, we found the following three other material 

weaknesses in internal control. 

Improper Payments

Although showing progress under OMB's continuing leadership, agencies’ fiscal year 

2007 reporting under the Improper Payments Information Act of 2002 (IPIA)36 does not 

reflect the full scope of improper payments. For fiscal year 2007, federal agencies’ 

estimates of improper payments, based on available information, totaled about $55 

billion.37 The increase from the prior year estimate of $41 billion38 was primarily 

attributable to a component of the Medicaid program reporting improper payments for the 

first time totaling about $13 billion for fiscal year 2007, which we view as a positive step 

to improve transparency over the full magnitude of improper payments.

Major challenges remain in meeting the goals of the act and ultimately better ensuring the 

integrity of payments.39 For fiscal year 2007, four agency auditors reported 

noncompliance issues with IPIA related to agencies’ risk assessments, sampling 

methodologies, implementing corrective action plans, and recovering improper payments. 

We also identified issues with agencies’ risk assessments such as not completing risk 

assessments of all programs and activities or not conducting annual reviews of any 

programs and activities. OMB's current guidance allows for annual risk assessments to 

be conducted less often than annually (generally every 3 years) for programs where 

baselines are already established, are in the process of being measured, or are scheduled 

to be measured by an established date. For fiscal year 2007, we noted that 4 agencies 

were implementing a 3-year cycle for conducting risk assessments. Furthermore, select 

agencies have not reported improper payment estimates for 14 risk-susceptible federal 

programs with total program outlays of about $170 billion for fiscal year 2007. Lastly, 

 

36 Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002). The IPIA requires federal agencies to review all 

programs and activities, identify those that may be susceptible to significant improper payments, estimate 

and report the annual amount of improper payments for those programs, and implement actions to costeffectively reduce improper payments. 

37 The $55 billion includes 19 newly reported programs with improper payment estimates totaling about 

$16 billion. Of the 19 programs, 5 reported zero improper payment estimates for fiscal year 2007. 

38 In their fiscal year 2007 Performance and Accountability Reports (PAR), selected federal agencies 

updated their fiscal year 2006 improper payment estimates to reflect changes since issuance of their fiscal 

year 2006 PARs. These updates decreased the governmentwide improper payment estimate for fiscal year 

2006 from $42 billion to $41 billion.

39 GAO, Improper Payments: Agencies' Efforts to Address Improper Payment and Recovery Auditing 

Requirements Continue, GAO-07-635T (Washington, D.C.: Mar. 29, 2007). 
180 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

we found that major management challenges and internal control weaknesses continue to 

plague agency operations and programs susceptible to significant improper payments. 

For example, in the Department of Education’s fiscal year 2007 Performance and 

Accountability Report, the Office of Inspector General reported that its recent 

investigations continue to uncover problems, including inadequate attention to improper 

payments and failure to identify and take corrective action to detect and prevent 

fraudulent activities by grantees. 

Information Security

Although progress has been made, serious and widespread information security control 

weaknesses continue to place federal assets at risk of inadvertent or deliberate misuse, 

financial information at risk of unauthorized modification or destruction, sensitive 

information at risk of inappropriate disclosure, and critical operations at risk of 

disruption. GAO has reported information security as a high-risk area across government 

since February 1997. During fiscal year 2007, federal agencies did not consistently 

implement effective controls to prevent, limit, or detect unauthorized access to computing 

resources. Specifically, agencies did not always (1) identify and authenticate users to 

prevent unauthorized access; (2) enforce the principle of least privilege to ensure that 

authorized access was necessary and appropriate; (3) apply encryption to protect sensitive 

data on networks and portable devices; (4) log, audit, and monitor security-relevant 

events; and (5) restrict physical access to information assets. In addition, agencies did not 

consistently configure network devices and services to prevent unauthorized access and 

ensure system integrity, such as patching key servers and workstations in a timely 

manner; assign incompatible duties to different individuals or groups so that one 

individual does not control all aspects of a process or transaction; and maintain or test 

continuity of operations plans for key information systems. Such information security 

control weaknesses unnecessarily increase the risk that the reliability and availability of 

data that are recorded in or transmitted by federal financial management systems could be 

compromised. A primary reason for these weaknesses is that federal agencies have not 

yet fully institutionalized comprehensive security management programs, which are 

critical to identifying information security control weaknesses, resolving information 

security problems, and managing information security risks on an ongoing basis. The 

administration has taken important actions to improve information security, such as 

issuing extensive guidance on information security and requiring agencies to perform 

specific actions to protect certain personally identifiable information. However, until 

agencies effectively and fully implement agencywide information security programs, 

federal data and systems, including financial information, will remain at risk. 
GOVERNMENT ACCOUNTABILITY OFFICE REPORT 181

Tax Collection Activities

During fiscal year 2007, material internal control weaknesses and systems deficiencies 

continued to affect the federal government’s ability to effectively manage its tax 

collection activities, an issue that has been reported in our financial statement audit 

reports for the past 10 years. Due to errors and delays in recording taxpayer information, 

payments, and other activities, taxpayers were not always credited for payments made on 

their taxes owed, which could result in undue taxpayer burden. In addition, the federal 

government did not always follow up on potential unreported or underreported taxes and 

did not always pursue collection efforts against taxpayers owing taxes to the federal 

government. Moreover, the federal government did not have cost benefit information, 

related cost-based performance measures, or a systematic process for ensuring it is using 

its resources to maximize its ability to collect what is owed and minimize the 

disbursements of improper tax refunds. As a result, the federal government is vulnerable 

to loss of tax revenue and exposed to potentially billions of dollars in losses due to 

inappropriate refund disbursements. 
182 GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

APPENDIX IV 

Significant Deficiencies

In addition to the material weaknesses discussed in appendices II and III, we found the 

following significant deficiencies in internal control. 

Preparation of the Statement of Social Insurance

Deficiencies were identified in certain controls over spreadsheets used by HHS to prepare 

its Statement of Social Insurance. This federal agency contributes the majority of the 

amounts reported on the consolidated Statement of Social Insurance. Such control 

deficiencies could result in misstatements to the Statement of Social Insurance. 

Monitoring and Oversight 

Federal Grants

The federal government annually awards grants totaling hundreds of billions of dollars. 

Control deficiencies were identified at several federal agencies regarding the monitoring 

and oversight of grants. For example, the auditor for one federal agency that awards and 

manages significant amounts of grants reported issues with obtaining documentation to 

evidence the agency's ongoing monitoring of open grants. These control deficiencies 

could adversely affect the federal government's ability to ensure that grant funds are 

being spent in accordance with applicable program laws and regulations. 

Medicare Advantage Organizations

Under the Medicare Advantage program, HHS approves private companies to offer 

health plan options to Medicare enrollees that include all Medicare-covered services. 

Control deficiencies were identified at HHS regarding oversight of these Medicare 

Advantage Organizations (MAOs). These involved (1) the MAO review selection 

methodology, (2) documentation to support monitoring reviews, (3) review and approval 

of MAOs' corrective action plans, and (4) information in HHS' tracking system used to 

monitor the status of MAO oversight. These control deficiencies could adversely affect 

the federal government's ability to ensure that MAOs are in compliance with regulations 

established within applicable Medicare law. 

(198465)