Fiscal Year 2011 U.S. Government Financial Statements: The Federal Government Faces Continuing Financial Management and Long-Term Fiscal Challenges
Published: 2012-03-01T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: GAO annually audits the consolidated financial statements of the U.S. government. The Congress and the President need reliable, useful, and timely financial and performance information to make sound decisions and conduct effective oversight of federal government programs and policies.
However, over the years, certain material weaknesses in internal control over financial reporting have prevented GAO from expressing an opinion on the accrual-based consolidated financial statements. Unless these weaknesses are adequately addressed, they will, among other things, continue to (1) hamper the federal governments ability to reliably report a significant portion of its assets, liabilities, costs, and other related information; and (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.
This testimony presents the results of GAOs audit for fiscal year 2011 and discusses certain of the federal governments significant long-term fiscal challenges.
section_title: What GAO Found
paragraphs: Three long-standing major impediments continued to prevent GAO from expressing an opinion on the federal governments accrual-based consolidated financial statements: (1) serious financial management problems at the Department of Defense (DOD) that have prevented DODs financial statements from being audited, (2) federal entities inability to adequately account for and reconcile intragovernmental activity and balances, and (3) the federal governments ineffective process for preparing the consolidated financial statements. GAO also reported material weaknesses involving billions of dollars in improper payments, information security, and tax collection activities. Also, GAO was prevented from expressing opinions on the 2011 and 2010 Statements of Social Insurance and the 2011 Statement of Changes in Social Insurance Amounts because of significant uncertainties primarily related to the achievement of projected reductions in Medicare cost growth reflected in the statements.
GAO is encouraged by the commitment of DOD leaders to improving DODs financial management and achieving auditiability and by the congressional attention being given to this important matter. The Congress set statutory deadlines for DOD auditability, convened a congressional panel to focus on the issue, and held several hearings on DOD financial management. The Secretary of Defense accelerated the timeline for DOD auditability, setting a 2014 deadline for audit readiness of the Statement of Budgetary Resources, and DOD has issued a plan for meeting that date, which GAO is in the process of reviewing. The plan emphasizes the importance of leadership, including senior leaders and field commanders, to achieving DODs goals, and it links accountability to performance appraisals. To meet their financial management and auditability goals, DOD and its components will need to overcome significant challenges, including implementation of its financial improvement plan, deployment of supporting automated systems, and assessment and resolution of gaps in workforce skills.
The Department of the Treasury (Treasury) furthered its commitment to resolve unreconciled differences between federal entities regarding intragovernmental activity and balances, which included several short- and long-term initiatives. In addition, Treasury, in coordination with the Office of Management and Budget (OMB), implemented corrective actions during 2011 to address certain deficiencies regarding the preparation of the consolidated financial statements. Fully addressing the numerous issues in these areas will require a strong and sustained commitment by federal entities and leadership by Treasury and OMB.
The 2011 Financial Report of the United States Government included comprehensive long-term fiscal projections for the U.S. government, which provides a much needed perspective on the federal governments long-term fiscal position and outlook. These, like GAOs simulations, include the savings provided by the Budget Control Act of 2011. While assuming that the savings as a share of gross domestic product continue beyond the decade leads to an improvement in the long-term fiscal path, it does not make the path sustainable. Addressing the long-term fiscal imbalance is made more difficult by the need to balance achieving the goals of sustaining economic growth in the near term, while producing a plan to change the federal governments long-term fiscal path.
section_title: What GAO Recommends
paragraphs: Over the years, GAO has made numerous recommendations directed at improving federal financial management. The federal government has generally taken or plans to take actions to address GAOs recommendations.

section_title: Letter
paragraphs: I appreciate the opportunity to be here today to discuss our report on the  U.S. government’s consolidated financial statements for fiscal years 2011  and 2010. During fiscal year 2011, the federal government continued to  face economic and fiscal challenges in a slow growth economy with high  unemployment. Dealing with the government’s long-term fiscal challenges  will require sustained attention and difficult decisions to address serious  deficit and debt issues. These fiscal issues further highlight the need for  the federal government to operate as effectively and efficiently as  possible. Therefore, the Congress, the administration, and federal  managers must have ready access to reliable and complete financial and  performance information for individual federal entities and the federal  government as a whole. Even though significant progress has been made  in federal financial management since the enactment of key reforms in  the 1990s, our report on the U.S. government’s consolidated financial  statements illustrates that much work remains to improve federal financial  management. I would like to commend you, Mr. Chairman, and this  Subcommittee, for continuing the annual tradition of oversight hearings on  this important subject. Your involvement is critical to assuring continued  progress.
Our testimony today discusses the following major issues relating to the  consolidated financial statements for fiscal years 2011 and 2010: (1) the  results of our audit, including continued major impediments to an opinion  on the accrual-based consolidated financial statements and certain  significant uncertainties that prevented us from expressing opinions on  the 2011 and 2010 Statements of Social Insurance,2011 Statement of Changes in Social Insurance Amounts; (2) the effects  of the last economic recession and the federal government’s actions to  stabilize financial markets and promote economic recovery on the federal  government’s financial condition; and (3) challenges posed by the federal  government’s long-term fiscal outlook.   as well as on the  Both the consolidated financial statements and our related audit report  are included in the fiscal year 2011 Financial Report of the United States  Government (Financial Report). provide our report on the consolidated financial statements, internal  control, and compliance with selected provisions of laws and regulations.  We considered the limitations on the scope of our work in forming our  conclusions. We conducted our audit in accordance with U.S. generally  accepted government auditing standards. Our audit report would not be  possible without the commitment and professionalism of inspectors  general throughout the federal government who are responsible for  annually auditing the financial statements of individual federal agencies.  The Financial Report is available at  http://www.gao.gov/financial/fy2011financialreport.html and through the  Department of the Treasury (Treasury) at  http://www.fms.treas.gov/fr/index.html.
Also, see GAO, Understanding the Primary Components of the Annual Financial Report  of the United States Government, GAO-09-946SP (Washington, D.C.: September 2009).
subsections: section_title: Results of Our Audit of the U.S. Government’s Consolidated Financial Statements for Fiscal Years 2011 and 2010
paragraphs: The federal government was unable to demonstrate the reliability of  significant portions of the U.S. government’s accrual-based consolidated  financial statements for fiscal years 2011 and 2010, principally resulting  from limitations related to certain material weaknesses in internal control  over financial reporting. As a result, we were unable to provide an opinion  on such statements. Further, significant uncertainties, primarily related to  the achievement of projected reductions in Medicare cost growth  reflected in the 2011 and 2010 Statements of Social Insurance, prevented  us from expressing opinions on those statements, as well as on the 2011  Statement of Changes in Social Insurance Amounts. Given the  importance of social insurance programs, such as Medicare and Social  Security to the federal government’s long-term fiscal outlook, the  Statement of Social Insurance is critical to understanding the federal  government’s financial condition and fiscal sustainability.
The federal government did not maintain adequate systems or have  sufficient, reliable evidence to support certain material information  reported in the U.S. government’s accrual-based consolidated financial  statements. The underlying long-standing material weaknesses in internal  control contributed to our disclaimers of opinion on the U.S.  government’s accrual-based consolidated financial statements for the  fiscal years ended 2011 and 2010. Those material weaknesses relate to  the federal government’s inability to  satisfactorily determine that property, plant, and equipment and  inventories and related property, primarily held by the Department of  Defense (DOD), were properly reported in the accrual-based  consolidated financial statements;  reasonably estimate or adequately support amounts reported for  certain liabilities, such as environmental and disposal liabilities, or  determine whether commitments and contingencies were complete  and properly reported;  support significant portions of the reported total net cost of operations,  most notably related to DOD, and adequately reconcile disbursement  activity at certain federal entities; adequately account for and reconcile intragovernmental activity and  balances between federal entities; ensure that the federal government’s accrual-based consolidated  financial statements were (1) consistent with the underlying audited  entities’ financial statements, (2) properly balanced, and (3) in  conformity with U.S. generally accepted accounting principles  (GAAP); and  identify and either resolve or explain material differences between (1)  certain components of the budget deficit reported in Treasury’s  records that are used to prepare the Reconciliation of Net Operating  Cost and Unified Budget Deficit, the Statement of Changes in Cash  Balance from Unified Budget and Other Activities, and the Fiscal  Projections for the U.S. government (included in the Supplemental  Information section of the Financial Report) and (2) related amounts  reported in federal entities’ financial statements and underlying  financial information and records.
These material weaknesses continued to (1) hamper the federal  government’s ability to reliably report a significant portion of its assets,  liabilities, costs, and other related information; (2) affect the federal  government’s ability to reliably measure the full cost as well as the  financial and nonfinancial performance of certain programs and activities;  (3) impair the federal government’s ability to adequately safeguard  significant assets and properly record various transactions; and (4) hinder  the federal government from having reliable financial information to  operate in an efficient and effective manner.
In addition to the material weaknesses that contributed to our disclaimer  of opinion on the accrual-based consolidated financial statements, we  found the following three other material weaknesses in internal control.These other material weaknesses were the federal government’s inability  to determine the full extent to which improper payments occur and  reasonably assure that appropriate actions are taken to reduce  improper payments, identify and resolve information security control deficiencies and  manage information security risks on an ongoing basis, and effectively manage its tax collection activities.
subsections: section_title: Addressing Impediments to an Opinion on the Accrual-Based Consolidated Financial Statements
paragraphs: Three long-standing major impediments continued to prevent us from  expressing an opinion on the U.S. government’s accrual-based  consolidated financial statements: (1) serious financial management  problems at DOD that have prevented DOD’s financial statements from  being auditable, (2) the federal government’s inability to adequately  account for and reconcile intragovernmental activity and balances  between federal entities, and (3) the federal government’s ineffective  process for preparing the consolidated financial statements. In addition,  while improvements were made, financial management issues at the  Department of Homeland Security (DHS) also contributed to our inability  to express an opinion on the U.S. government’s accrual-based  consolidated financial statements. Extensive efforts by DOD and other  entity officials and cooperative efforts between entity chief financial  officers, Treasury officials, and Office of Management and Budget (OMB)  officials will be needed to resolve these obstacles to achieving an opinion  on the U.S. government’s accrual-based consolidated financial  statements.
DOD leadership has, with oversight and reinforcement from Congress,  committed DOD to the long-term goal of full financial statement  auditability. The National Defense Authorization Act for Fiscal Year 2010,  as amended, requires that DOD’s financial statements be validated as   a date that has been DOD’s  ready for audit by September 30, 2017,stated goal since 2008. DOD’s Financial Improvement and Audit  Readiness (FIAR) Plan and semiannual status reports define the  activities, corrective actions, and interim milestones necessary to achieve  auditability and the availability of reliable, useful, and timely information  for management decision making. The most recent update of the plan  also emphasizes the importance of leadership, including senior leaders  and field commanders, to achieving DOD’s goals, and it links  accountability to performance appraisals.
Under its FIAR Plan, DOD is focusing on improving controls and  processes relied on to provide financial information in two areas it says  are most critical to managing its operations: (1) budgetary information and  (2) accountability over its military equipment. With respect to budgetary  information, in October 2011, the Secretary of Defense directed the DOD  Comptroller to provide him with a plan to achieve audit readiness for the  Statement of Budgetary Resources (SBR) by the end of 2014. The SBR  is important because it is intended to show the flow of money in and out  of DOD consistent with the budgetary information reported in the Budget   The Secretary’s directive also called  of the United States Government.for increased emphasis on accountability for assets, a full review of  DOD’s financial controls over the next 2 years and the establishment of  interim goals, mandatory training for audit and key financial efforts, and  establishing a pilot certification program for financial managers by the end  of calendar year 2012.
DOD recently updated its FIAR Guidance, which provides a standardized  methodology for DOD components to follow in planning and carrying out  their FIAR efforts aimed at achieving audit readiness. However, as we  reported in September 2011, we found that the Air Force and the Navy  were not always effectively implementing the FIAR Guidance, presenting   Specifically, we found  a risk of not achieving DOD’s overall FIAR goals. that although the Air Force asserted audit readiness for its military  equipment and the Navy asserted audit readiness for its civilian pay,  neither of these areas were audit-ready because the Air Force and Navy  had not fully carried out FIAR Guidance procedures. We recommended  actions for improving the development, implementation, documentation,  and oversight of DOD’s financial management improvement efforts. In  addition, the Marine Corps’ attempt to achieve an audit opinion on its  SBR is still in process. In that regard, we recently recommended that the  Marine Corps develop a risk-based remediation plan and confirm that its  actions fully respond to auditor recommendations and that DOD direct  other military services to consider key lessons learned in their audit  readiness plans as appropriate.
GAO, DOD Financial Management: Improvement Needed in DOD Components’  Implementation of Audit Readiness Effort, GAO-11-851 (Washington, D.C.: Sept. 13,  2011). checkbook with a bank account.) Because of the fundamental importance  of the reconciliation, GAO reviewed the processes used by the Navy,  Marine Corps, and the Defense Finance and Accounting Service, which  processes much of DOD components’ financial data, including  transactions that affect FBWT. We recommended that the Navy and  Marine Corps improve policies and procedures that guide the FBWT  reconciliation process, provide training to communicate these policies and  procedures to staff, and resolve system deficiencies.
The effective implementation of Enterprise Resource Planning (ERP)  systems will be critical to the success of all of DOD’s planned long-term  financial improvement efforts. ERP systems are integrated, multifunction  systems that perform business-related tasks such as general ledger  accounting and supply chain management. DOD considers their  implementation essential to transforming its business operations.  However, DOD continues to encounter difficulties in implementing its  planned ERP systems on schedule and within budget. For example, in  October 2010, we reported that six of nine critical DOD ERPs   We also  experienced schedule delays ranging from 2 to 12 years. reported that five of these ERPs incurred cost increases totaling an  estimated $6.9 billion. We made eight recommendations to DOD aimed at  improving schedule and cost practices and the development of  performance measures to evaluate whether the ERPs’ intended goals are  being accomplished.
Another key to effectively transforming DOD’s financial management will  be its ability to ensure that it has sufficient staff with the appropriate skills  necessary to carry out financial and budgetary accounting duties. To that  end, DOD is establishing a Financial Management Certification Program  to be mandatory for its personnel in financial management positions.  However, DOD has not yet performed a competency gap analysis for its   Further,  financial management workforce as we reported in July 2011.
GAO, DOD Business Transformation: Improved Management Oversight of Business  System Modernization Efforts Needed, GAO-11-53 (Washington, D.C.: Oct. 7, 2010). the House Armed Services Committee (HASC) Panel on Defense  Financial Management and Auditability Reform, which held several  hearings on DOD financial management, recently reported that DOD  personnel in other functional areas, such as logistics and acquisition,  should also have the skills necessary to maintain appropriate controls and  ensure that financial-related information is accurately recorded. The  HASC Panel made several recommendations about DOD’s workforce,  including recommending that DOD assess its financial management  workforce with respect to existing skills and the critical skills and  competencies that will be needed over the next decade.
While we are encouraged by DOD’s recent plans and efforts to  fundamentally transform its financial management operations, several  DOD business practices, including financial management, remain on  GAO’s list of high-risk programs designated as vulnerable to waste, fraud,  abuse, and mismanagement or in need of transformation. size, complexity, and interrelated nature of DOD’s financial management  and other business process control deficiencies, the sustained  commitment by DOD’s leaders will be critical to effectively building on  DOD’s initial momentum to transform its financial management operations  and ultimately achieve auditability. Further, we agree with the  recommendation by the HASC Panel on Defense Financial Management  and Auditability Reform that strong congressional oversight must   To assist Congress in its oversight efforts, we plan to  continue.reassess the FIAR Plan, associated guidance, and DOD’s related actions  as they continue to evolve.
GAO, High-Risk Series: An Update, GAO-11-278 (Washington, D.C.: February 2011). reporting entity as if the entity were a single enterprise. Therefore, when  preparing the consolidated financial statements, intragovernmental  activity and balances between federal entities and between federal  entities and the General Fund should be in agreement and must be  subtracted out, or eliminated, from the financial statements. If the two  federal entities engaged in an intragovernmental transaction do not both  record the same intragovernmental transaction in the same year and for  the same amount, the intragovernmental transactions will not be in  agreement, resulting in errors in the consolidated financial statements.
Treasury has grouped intragovernmental activity and balances into the  following five categories and established focus groups to work with  federal entity personnel to identify and resolve reported unreconciled  differences.
Fiduciary activities include investments in Treasury securities with  the Bureau of the Public Debt (BPD), borrowing from BPD and the  Federal Financing Bank and related interest receivable and payable,  interest expense and revenue, and federal loans receivable and  payable.
Benefit activities include contributions by federal entities into  employee benefit programs (retirement, life insurance, workers’  compensation, and health benefits) administered by the Office of  Personnel Management and the Department of Labor.
Buy/Sell activities between entities include buy and sell costs and  revenues, accounts receivable and payable, and advances to and  from others.
Transfers of funds include transfers payable and receivable, and  transfers in and out without reimbursement.
General Fund transactions and balances include fund balance with  Treasury, appropriations received and warrants, and custodial and  non-entity collections.
The federal government has made progress in reconciling  intragovernmental differences and the degree of progress varies by  category. However, the federal government continues to be unable to  adequately account for and reconcile intragovernmental activity and  balances. For both fiscal years 2011 and 2010, amounts reported by  federal entity trading partners for certain intragovernmental accounts  were not in agreement by significant amounts. OMB and Treasury require  the CFOs of 35 significant federal entities to reconcile, on a quarterly  basis, selected intragovernmental activity and balances with their trading  partners. A substantial number of the entities did not adequately perform  the required year-end reconciliations for fiscal years 2011 and 2010.
Further, there continue to be hundreds of billions of dollars of  unreconciled differences between the General Fund of the U.S.  government and federal entity trading partners related to appropriation  and other intragovernmental transactions. Currently, federal entities  report their activity with the General Fund; however, the General Fund  activity is not centrally accounted for, and therefore, there is no existing  reporting process for which entities can confirm and reconcile all of their  activity and balances with the General Fund. As a result of these  circumstances, the federal government’s ability to determine the impact of  the unreconciled differences between trading partners on the amounts  reported in the accrual-based consolidated financial statements is  significantly impaired.
Over the years, we have identified and reported on numerous  intragovernmental activities and balances issues and have made several  related recommendations to Treasury. Treasury has taken or plans to  take actions to address these recommendations. During fiscal year 2011,  Treasury furthered its commitment to resolve differences in  intragovernmental activity and balances, which included several short-  and long-term initiatives. For example, Treasury expanded focus groups’  monitoring and outreach efforts that included quarterly analysis and  ongoing collaboration with entities to resolve intragovernmental  differences. Such focus groups made significant progress in  understanding reasons for material differences and determining corrective  actions to be taken, which resulted in adjustments to eliminate certain  differences. Also, Treasury identified deficiencies in the intragovernmental  process and is planning to develop governmentwide systems to improve  intragovernmental transactions data. Further, Treasury is currently  working to develop a complete set of financial statements for the General  Fund, including intragovernmental transactions that will be audited.  Resolving the intragovernmental transactions problem remains a difficult  challenge and will require a strong and sustained commitment by federal  entities, as well as continued strong leadership by Treasury and OMB.
While Treasury, in coordination with OMB, implemented corrective  actions during fiscal year 2011 to address certain internal control  deficiencies detailed in our previously issued report, the federal  government continued to have inadequate systems, controls, and  procedures to ensure that the consolidated financial statements are  consistent with the underlying audited entity financial statements, properly  balanced, and in conformity with GAAP. For example,
Treasury’s process did not ensure that the information in certain of the  accrual-based consolidated financial statements was fully consistent  with the underlying information in 35 significant federal entities’  audited financial statements and other financial data.
To make the fiscal years 2011 and 2010 consolidated financial  statements balance, Treasury recorded net increases of $15.6 billion  and $0.8 billion, respectively, to net operating cost on the Statement  of Operations and Changes in Net Position, which it labeled  “Unmatched transactions and balances.” Treasury recorded an  additional net $6.0 billion and $3.8 billion of unmatched transactions in  the Statement of Net Cost for fiscal years 2011 and 2010,  respectively.
Treasury’s reporting of certain financial information required by GAAP  continues to be impaired, and will remain so until federal entities, such  as DOD, can provide Treasury with complete and reliable information  required to be reported in the consolidated financial statements.
Until these and other internal control deficienciesaddressed, the federal government’s ability to ensure that the  consolidated financial statements are consistent with the underlying  audited federal entities’ financial statements, properly balanced, and in  conformity with U.S. GAAP will be impaired. Resolving some of these  internal control deficiencies will be a difficult challenge and will require a   have been fully  strong and sustained commitment from Treasury and OMB as they  continue to execute and implement their corrective action plans.
Improvements in DHS’s financial management during fiscal year 2011  contributed to DHS receiving a qualified opinion on its Balance Sheet and  Statement of Custodial Activity for the fiscal year. These statements  were qualified because of certain matters related to property, plant, and  equipment; environmental liabilities; and other related balances. This  qualified opinion represents a significant achievement for DHS. However,  the remainder of its financial statements for fiscal year 2011 were not  subjected to audit by the agency auditors, and the auditor was unable to  form an opinion on DHS’s internal control over financial reporting due to  pervasive material internal control weaknesses over key financial  reporting processes. It will be important that DHS continues to resolve its  internal control deficiencies and build upon the progress it has  accomplished as it moves forward to expand the audit to all financial  statements and achieve its ultimate goal of obtaining a clean audit opinion  on the full set of financial statements and on internal control over financial  reporting.
section_title: Significant Uncertainties Result in Disclaimers of Opinion on the 2011 and 2010 Statements of Social Insurance as well as on the 2011 Statement of Changes in Social Insurance Amounts
paragraphs: Significant uncertainties, primarily related to the achievement of projected  reductions in Medicare cost growth reflected in the 2011 and 2010  Statements of Social Insurance, prevented us from expressing opinions  on the 2011 and 2010 Statements of Social Insurance, as well as on the  2011 Statement of Changes in Social Insurance Amounts.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   The  using a projection period sufficient to illustrate the long-term sustainability  of the social insurance programs.
The significant uncertainties, discussed in further detail in Note 26 to the  consolidated financial statements, include:
Medicare projections in the 2011 and 2010 Statements of Social  Insurance were based on full implementation of the provisions of the Patient Protection and Affordable Care Act, as amended (PPACA),including a significant decrease in projected Medicare costs from the  2009 Statement of Social Insurance related to (1) reductions in  physician payment rates (totaling almost 30 percent in January 2012)  and (2) productivity improvements for most other categories of  Medicare providers. However, there are significant uncertainties  concerning the achievement of these projected decreases in Medicare  costs.
Management has noted that actual future costs for Medicare are likely  to exceed those shown by the current-law projections presented in the  2011 and 2010 Statements of Social Insurance due to the likelihood of  modifications to the scheduled reductions. The extent to which actual future costs exceed the projected current-law amounts due to  changes to the physician payments and productivity adjustments  depends on both the specific changes that might be legislated and on  whether legislation would include other provisions to help offset such  costs.
Management has developed an illustrative alternative projection  intended to provide additional context regarding the long-term  sustainability of the Medicare program and to illustrate the  uncertainties in the Statement of Social Insurance projections. The  present value of future estimated expenditures in excess of future  estimated revenue for Medicare included in the illustrative alternative  projection exceeds the $24.6 trillion estimate in the 2011 Statement of  Social Insurance by $12.4 trillion.
Projections of Medicare costs are sensitive to assumptions about future  decisions by policymakers and about the behavioral responses of  consumers, employers, and health care providers as policy, incentives,  and the health care sector change over time. For example, behavioral  responses of health care providers could affect Medicare beneficiaries’  access to care. Such secondary impacts are not reflected in the  Statement of Social Insurance projections but could be expected to  influence the excess cost growth rate used in the projections. Key  drivers of uncertainty about the excess cost growth rate include the future  development and deployment of medical technology, the evolution of  personal income, and the cost and availability of insurance, as well as  federal policy change, such as the PPACA. In August 2010, the Secretary  of the Department of Health and Human Services, working on behalf of  the Board of Trustees, established an independent panel of expert  actuaries and economists to review the assumptions and methods used  by the Trustees to make projections of the financial status of the trust  funds. The work of the 2010 Technical Review Panel on the Medicare  Trustees Report could provide additional guidance to management  concerning ways to incorporate secondary impacts into future Statement  of Social Insurance projections and related disclosures.
As noted in our audit report, in preparing the Statements of Social  Insurance, management considers and selects assumptions and data that  it believes provide a reasonable basis for the assertions in the statement.  The statement is not a forecast or prediction, but is intended to illustrate  the potential impact of the continuation of current scheduled benefits and  financing. The Financial Report includes a summary of the assumptions  used by management and unaudited information concerning how  changes in various key assumptions, such as health care cost growth,  would affect the Statement of Social Insurance. Both the Statement of  Social Insurance projections and the illustrative alternative estimate  summarized in Note 26 in the Financial Report indicate that the Social  Security and Medicare programs are not sustainable under current  financing arrangements.
section_title: Effects of the Last Economic Recession and Stabilization Efforts on the Federal Government’s Financial Condition
paragraphs: The federal government’s financial condition continued to be significantly  affected by the last economic recession and the federal government’s  actions to stabilize financial markets and promote economic recovery,  among other factors. For fiscal year 2011, the federal government  reported a net operating cost of about $1.3 trillion and a unified budget  deficit of approximately $1.3 trillion. In addition, federal debt held by the  public increased to about 68 percent of gross domestic product (GDP) as  of September 30, 2011.
The federal government undertook an array of unprecedented actions to  help stabilize the financial markets and promote economic recovery. As of  September 30, 2011, the federal government reported assets of over  $295 billion, which is net of about $95 billion in valuation losses, as a  result of these actions. In addition, the federal government reported  incurring significant liabilities resulting from these actions as of  September 30, 2011, including approximately $316 billion of liabilities for  future payments to the Federal National Mortgage Association (Fannie  Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac).  Because the valuation of these assets and liabilities is based on  assumptions and estimates that are inherently subject to substantial  uncertainty arising from the uniqueness of certain transactions and the  likelihood of future changes in general economic, regulatory, and market  conditions, actual results may be materially different from the reported  amounts.
Actions taken to stabilize financial markets—including aid to the  automotive industry—increased the government’s costs and contributed  to growing federal debt held by the public. The economic downturn and  the nature and magnitude of the actions taken to stabilize the financial  markets and to promote economic recovery, as well as challenges in the  housing market, will continue to affect the federal government’s near-term  budget and debt outlook. In addition, the future structure of Fannie Mae  and Freddie Mac and the roles they will serve in the mortgage markets  may also affect the federal government’s financial condition.
The ultimate cost of the federal government’s actions to stabilize the  financial markets and promote economic recovery will not be known for  some time as these uncertainties are resolved and further federal  government actions are taken in fiscal year 2012 and later. Looking  ahead, the federal government will face the challenge of determining the  most expeditious manner in which to bring closure to its financial  stabilization initiatives while optimizing its investment returns.
section_title: Long-Term Fiscal Challenges
paragraphs: The 2011 Financial Report includes comprehensive long-term fiscal  projections for the U.S. government that, consistent with GAO  simulations, show that without changes in current policy, the federal  government continues to face an unsustainable fiscal path. Such  reporting provides a much needed perspective on the federal  government’s long-term fiscal position and outlook. The projections  included in the Financial Report and our simulations both reflect an  improvement resulting from provisions of the Budget Control Act of 2011  (BCA). The BCA set limits on discretionary spending for fiscal years  2012-2021 and created the Joint Select Committee on Deficit Reduction.  Under the enacted discretionary spending limits, discretionary spending  as a share of the economy in 2021 would be lower than any level seen in  the last 50 years. The fact that the Joint Select Committee did not reach  agreement on a package triggered automatic procedures that would lead  to additional spending reductions. Together, the provisions of the BCA  would reduce deficits over the 2012-2021 decade by $2.1 trillion—largely  through reductions in discretionary spending. Both the Financial Report  and GAO’s simulations assume these reductions occur, and that the  savings as a share of GDP continue beyond the decade. Even with the  reductions from the BCA, the government continues to face a significant  structural imbalance between revenues and spending, driven on the  spending side largely by rising health care costs and the aging of the U.S.  population. We have already begun to see the impact of this structural  imbalance—Social Security is now in a negative cash flow position. The  growing gap between revenues and spending that is built into the current  structure of the budget leads to continued growth in debt held by the  public as a share of GDP; this is not sustainable. Changing this path will  not be easy, and it will likely require difficult decisions affecting both  federal spending and revenue. While delay increases the size of the  changes that must be made, it is also important to recognize current  economic conditions. Addressing the long-term fiscal imbalance is made  more difficult by the need to balance achieving the goals of sustaining  economic growth in the near term, while producing a plan to change the  federal government’s long-term fiscal path.
section_title: Closing Comments
paragraphs: In closing, even though progress has been made in improving federal  financial management activities and practices, much work remains given  the federal government’s long-term fiscal challenges and the need for the  Congress, the administration, and federal managers to have reliable,  useful, and timely financial and performance information to effectively  meet these challenges. Sound decisions on the current and future  direction of vital federal government programs and policies are more  difficult without reliable, useful, and timely financial and performance  information. DOD, in particular, faces many difficult challenges in this  area. We are encouraged by DOD’s efforts toward addressing its long- standing financial management weaknesses and its efforts to achieve  auditability. However, sustained and diligent DOD top management  oversight toward achieving financial management capabilities, including  audit readiness, will be critical going forward. Moreover, in addition to  annual financial statements that can pass the scrutiny of a financial audit,  the civilian CFO Act agencies must continue to strive toward routinely  producing reliable, useful, and timely financial and performance data to  help guide decision makers on a day-to-day basis. Federal entities’  improvement of financial management systems will be essential to  achieve this goal for their agency and the government as a whole.
The last economic recession and the federal government’s actions to  stabilize financial markets continued to significantly affect the federal  government’s financial condition. Continued focus and attention is needed  to ensure (1) that sufficient internal controls and transparency are  established and maintained for all financial stabilization efforts; and (2)  that all related financial transactions are reported on time, accurately, and  completely. In addition, the federal government will face the challenge of  determining the most expeditious manner in which to bring closure to its  financial stabilization initiatives while optimizing its investment returns.
Further, of utmost concern are the federal government’s long-term fiscal  challenges that result from large and growing structural deficits that are  driven on the spending side primarily by rising health care costs and  known demographic trends. This unsustainable path must be addressed  by policymakers.
Finally, I want to emphasize the value of sustained congressional interest  in federal financial management issues, as demonstrated by this  Subcommittee’s leadership. It will be key that, going forward, the  appropriations, budget, authorizing, and oversight committees continue to  support improvement efforts and to hold the top leadership of federal  entities accountable for resolving the remaining problems.
Mr. Chairman and Ranking Member Towns, this concludes my prepared  statement. I would be pleased to respond to any questions that you or  other members of the Subcommittee may have at this time.
section_title: GAO Contacts and Acknowledgments
paragraphs: For further information regarding this testimony, please contact Robert F.  Dacey, Chief Accountant, or Gary T. Engel, Director, Financial  Management and Assurance, at (202) 512-3406. Key contributions to this  testimony were also made by staff on our Consolidated Financial  Statement audit team.
section_title: Appendix I: Chief Financial Officers (CFO) Act Agencies: Fiscal Year 2011 Audit Results and Principal Auditors
paragraphs: Principal auditor  Office of Inspector General (OIG)
Reported noncompliance with applicable laws and regulations and/or substantial noncompliance with  one or more of the Federal Financial Management Improvement Act requirements.  The auditors expressed an unqualified opinion on the Department of Health and Human Services’  fiscal year 2011 accrual-based financial statements, but were unable to express opinions on the  department’s 2011 Statement of Social Insurance and 2011 Statement of Changes in Social  Insurance Amounts.  For fiscal year 2011, only the Consolidated Balance Sheet and the related Statement of Custodial  Activity of the Department of Homeland Security were subject to audit. The auditors expressed a  qualified opinion on these two financial statements.
The auditors of the Department of State’s fiscal year 2011 financial statements issued a qualified  opinion because of the effect of certain matters related to after-employment actuarial liabilities and  benefit plan assets and net position balances.
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