The Financial Report of the United States Government provides useful information on the government’s financial position at the end of the fiscal year and changes that have occurred over the course of the year. However, in evaluating the nation’s fiscal condition, it is critical to look beyond the short-term results and consider the overall long-term financial condition and long-term fiscal imbalance of the government—that is, the sustainability of the federal government’s programs, commitments, and responsibilities in relation to the resources expected to be available. More important than the large increase in the government’s net operating cost in fiscal year 2005 and persistent short-term budget deficits, fiscal simulations by GAO and others show that over the long term, we face large and growing structural deficits due primarily to known demographic trends, rising health care costs, and lower federal revenues relative to the economy. As I have testified before, the current financial reporting model does not clearly, comprehensively, and transparently show the wide range of responsibilities, programs, and activities that may either obligate the federal government to future spending or create an expectation for such spending. Thus, it provides a potentially unrealistic and misleading picture of the federal government’s overall performance, financial condition, and future fiscal outlook. The federal government’s gross debt in the U.S. government’s consolidated financial statements was about $8 trillion as of September 30, 2005. This number excludes such items as the current gap between the present value of future promised and funded Social Security and Medicare benefits, veterans’ health care, and a range of other liabilities (e.g., federal employee and veteran benefits payable), commitments, and contingencies that the federal government has pledged to support. Including these items, the federal government’s fiscal exposures now total more than $46 trillion, representing close to four times gross domestic product (GDP) in fiscal year 2005 and up from about $20 trillion or two times GDP in 2000. About one third of the approximately $26 trillion increase resulted from enactment of the Medicare prescription drug benefit in fiscal year 2004. (See table 1.) The federal government’s current fiscal exposures translate into a burden of about $156,000 per American or approximately $375,000 per full-time worker, up from $72,000 and $165,000 respectively, in 2000. Furthermore, these amounts do not include future costs resulting from Hurricane Katrina or the conflicts in Iraq and Afghanistan. In addition to the approximately $46 trillion of estimated fiscal exposures discussed above, there are exposures that are not included in those figures because the amounts of the exposures are not currently estimable. For example, the Department of Energy, in the footnotes to its fiscal year 2005 financial statements, disclosed that its environmental liability estimates do not include cleanup costs at sites for which there is no current feasible remediation approach, such as the nuclear explosion test area at the Nevada Test Site. It is important to understand the nature and extent of these types of additional exposures in the long-term fiscal planning for the federal government. Additionally, tax expenditure amounts are not required to be disclosed, nor are they disclosed, in agency or the U.S. government’s consolidated financial statements. Tax expenditures are reductions in tax revenues that result from preferential provisions, such as tax exclusions, credits, and deductions. These revenue losses reduce the resources available to fund other programs or they require higher tax rates to raise a given amount of revenue. As we reported in September 2005, the number of tax expenditures more than doubled since 1974, and the sum of tax expenditure revenue loss estimates tripled in real terms to nearly $730 billion in 2004. Under the most recent estimates, this has risen to more than $775 billion in 2005. Enhanced reporting on tax expenditures would ensure greater transparency and accountability for revenue forgone by the federal government and provide a more comprehensive picture of the federal government’s policies and fiscal position. Further, additional changes are needed to communicate important information to users about current operating results and the long-term financial condition of the U.S. government and annual changes therein. In particular, the government’s financial statements should clearly communicate to the user: the on-budget or operating results versus unified budget results for the year; the long-term sustainability of federal government programs—areas to consider include the relationship of the federal government’s existing commitments/responsibilities, including social insurance, to appropriate measures, such as GDP and per capita amounts, the government's long-term fiscal imbalance in relation to appropriate measures, such as GDP, and the magnitude of the potential alternatives for resolving the long term deficits, such as the rate of tax increases or spending reductions necessary to balance the government's long-term finances; inter-generational equity issues, e.g., assessing the extent to which different age groups may be required to assume financial burdens for commitments already made; and a liability at the governmentwide level for funds held by Social Insurance trust funds. Another tool that would serve to more effectively communicate the federal government’s finances to the public would be a Summary Annual Report. Such a report would summarize, in a clear, concise, and transparent manner, key financial and performance information included in the Financial Report of the United States Government. The federal government’s financial condition and long-term fiscal imbalance present enormous challenges to the nation’s ability to respond to emerging forces reshaping American society, the United States’ place in the world, and the future role of the federal government. GAO’s long-term simulations illustrate the magnitude of the fiscal challenges associated with an aging society and the significance of the related challenges the government will be called upon to address. Figures 1 and 2 present these simulations under two different sets of assumptions. In figure 1, we start with the Congressional Budget Office’s (CBO) 10-year baseline— constructed according to the statutory requirements for that baseline. Consistent with these requirements, discretionary spending is assumed to grow with inflation for the first 10 years and all tax cuts currently scheduled to expire are assumed to expire. After 2016, discretionary spending is assumed to grow at the same rate as the economy, and revenue is held constant as a share of GDP at the 2016 level. In figure 2, two assumptions are changed: (1) discretionary spending is assumed to grow at the same rate as the economy after 2006 rather than merely with inflation, and (2) all expiring tax provisions are extended. For both simulations, Social Security and Medicare spending is based on the 2005 Trustees’ intermediate cost projections, and we assume that benefits continue to be paid in full after the trust funds are exhausted. Medicaid spending is based on CBO’s December 2005 long-term projections under midrange assumptions. As these simulations illustrate, absent policy changes on the spending or revenue side of the budget, the growth in spending on federal retirement and health entitlements will encumber an escalating share of the government’s resources. Indeed, when we assume that all the temporary tax reductions are made permanent and discretionary spending keeps pace with the economy, our long-term simulations suggest that by 2040 federal revenues would be adequate to pay only some Social Security benefits and interest on the federal debt. Neither slowing the growth in discretionary spending nor allowing the tax provisions to expire—nor both together—would eliminate the imbalance. Although revenues will be part of the debate about our fiscal future, assuming no changes to Social Security, Medicare, Medicaid, and other drivers of the long-term fiscal gap would require at least a doubling of taxes—and that seems to be highly implausible. Accordingly, substantive reform of Social Security and our major health programs is critical to recapturing our future fiscal flexibility. Ultimately, the nation will have to decide what level of federal benefits and spending it wants and how it will pay for these benefits. Our current path also will increasingly constrain our ability to address emerging and unexpected budgetary needs and increase the burdens that will be faced by future generations. Continuing on this fiscal path will mean escalating and ultimately unsustainable federal deficits and debt that will serve to threaten the standard of living for the American people and ultimately our national security. As these simulations illustrate, regardless of the assumptions used, the problem is too big to be solved by economic growth alone or by making modest changes to existing spending and tax policies. Rather, a fundamental reexamination, reprioritization, and reengineering of major spending programs, tax policies, and government priorities will be important to recapture our fiscal flexibility and update our programs and priorities to respond to emerging social, economic, and security changes. Ultimately, this will likely require a national discussion about what Americans want from their government and how much they are willing to pay for those things. According to Statement of Federal Financial Accounting Standards (SFFAS) No. 21, Reporting Corrections of Errors and Changes in Accounting Principles, prior period financial statements presented should only be restated for corrections of errors, when such errors caused the financial statements to be materially misstated. Errors in financial statements can result from mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared. We continue to have concerns about the identification of misstatements in federal agencies’ prior year financial statements. At least 7 of the 24 CFO Act agencies restated certain of their fiscal year 2004 financial statements to correct errors. During fiscal year 2005, we reviewed the causes and nature of the restatements made by several Chief Financial Officers (CFO) Act agencies in fiscal year 2004 to their fiscal year 2003 financial statements and recommended improvements in internal controls and audit procedures to prevent or detect future similar errors. Generally, the reasons for the restatements we reviewed were agencies’ lack of effective internal controls over the processing and reporting of certain transactions and the failure of the auditors to design and/or perform adequate audit procedures to detect such errors.