How the Government Cooks the Books

...More than a third have funding below 50 percent...

...The cost is spread over years as civil servants retire...

...The number we identify as the deficit—the $200 billion-ish figure we hear— includes only a fraction of our actual debt...

...It's a form of borrowing that doesn't show up in the annual budget, but is still very real...

...Actually, it was slouching towards bankruptcy...

...Before we can get the accounting right, we need Congress to come right out and say what Social Security is...

...Pensions used to be a far simpler matter than they are today...

...In Missouri last year, members of the legislature voted themselves and state workers a $13 million increase in retirement benefits...

...If these kinds of issues were up for discussion, there might be a little more outrage about our real debt— whether it's caused by a pension increase or the sale of a revenue-producing piece of land...

...In 1818, Congress established its first federal employee pension program: a meanstested plan for Revolutionary War veterans...

...The additional debts will eventually come due...

...Yet because of the way the government keeps its books, these huge liabilities totaling several hundred billion dollars are not even acknowledged in each year's solemn announcement of the budget deficit, nor are they counted as part of the national debt...

...For a congressman or senator, being on the wrong side of the federal bureaucracy can make it harder to help constituents cut through red tape, win grants, or recover lost Social Security checks or refunds from the IRS...

...For instance, the government has promised to pay out trillions of dollars in Social Security payments, but none of that accumulating debt shows up in Phillip Longman is the author of Born to Pay: The New Politics of Aging America, to be published by Houghton Mifflin in August...

...It makes sense...

...Governments that don't use accrual accounting can find themselves swamped by debt...

...Of course, those big liabilities can be paid off over a period of years...

...More than five thousand separate state and local pension plans cover nearly 12 million public employees...

...The federal government agreed to the bailout only if New York switched to accrual accounting...

...For years, the city had been accruing enormous long-term liabilities—especially public-employee pensions—that went unreported in its annual budget...

...When the government spends money to maintain a highway, the appropriation is entered in the books as a one-time expense for this year...

...It found that the accrual-basis deficit for the previous year was more than $95 billion...

...Even a small state like West Virginia has amassed $1.5 billion in unfunded pension liabilities for its teachers...

...Everyone came to see the budget of the City of New York...

...The same is true of state and local government...

...That's not a huge difference, but it is likely to grow...

...Congress underfunded the program and now we're picking up the tab...

...Another kind of debt—a pension, which can cost millions more—can be incurred without a vote by the taxpayers and with only a bare majority of the legislature...

...It's hard to picture accountants as bombthrowers, but the GASB manifesto, which includes a call for accrual accounting, could have radical implications for the federal government...

...So accountants using the accrual method take that into consideration by calculating how much should be set aside each year to help pay off those long-term expenditures...

...shipbuilders...

...In 1984, the government declared a deficit of $185.3 billion, but Arthur Andersen & Co...

...Under accrual accounting, liabilities are reported as they are accumulated, rather than when they are paid off...

...It insures loans to students, farmers, small businessmen, veterans, shipbuilders, home buyers, rural utilities...

...In 1961, 25 percent of the money the city collected from taxes was paid out to retired city workers...

...But there was a little-known twist...

...Were the federal government to adopt GASB's rules, it would have to report that its real deficits are roughly $150 billion larger than it now admits...

...Compounding the problem are the actuarial table writers who guessed wrong about how many teachers would opt for early retirement...

...Financed by public accounting firms, the municipal securities industry, plus state and local governments, GASB was founded in 1984 after years of what its chairman, James F. Antonio, characterizes as "smoke, fire, and brimstone!' GASB's mission is to set what are known as "generally accepted accounting principles" for public entities...

...The unfunded liabilities of public employee pension systems are a "quiet" crisis, which makes them all the more dangerous...

...It's a cost we incur today, but, under the current system of accounting, So how big are the deficits...

...Yet even if there is no perfect accounting method, that doesn't mean we can't start asking the right questions...

...In 1983, the state government passed "super safety" benefits for 10,000 state employees...

...If the public understands a bit about the real debt it's running up, perhaps it will, like those curious New Yorkers at the turn of the century, pay attention to the writing on the wall...

...Unfortunately, our current system of accounting brings out the worst in politicians of all stripes— encouraging them to spend now and pay later...

...We could stand to rekindle some of that curiosity...

...Estimates of their unfunded liabilities are difficult to come by, since different jurisdictions use different accounting methods and assumptions...

...There are risks that the government should assume that private industry won't, like covering bank loans...

...Unlike when the government sells bonds, under-funding today doesn't crowd out private borrowers or raise interest rates...

...Even The New York Times was excited...

...Last year's $220.7 billion deficit was a measure of annual losses, of how much red ink was spilled during the time it takes the earth to revolve around the sun...

...So what about next year...

...Bomb throwers To really understand the budget, you have to understand the accounting on which it is based...

...For this reason, the federal government requires all publicly held companies to disclose their finances using an "accrual" basis rather than simply counting up annual receipts and expenses...

...Throughout government, accountants are making pivotal decisions that demand scrutiny...

...don't start paying until tomorrow...

...When these companies fail, the federal government assumes a retiree's pension up to $22,380 per year...

...Between 1981 and 1986, as the government lifted regulations and left the thrifts free to make speculative investments, the number of insolvent thrifts increased from 16 to 445...

...Yearly defaults on this program alone, which were running less than $100 million through 1984, climbed to $1.4 billion last year...

...The same is true of flood insurance, which has lost money every year for 20 years and has only crept into the black after a 200 percent increase in premiums...

...The government doesn't have to pay all those pensions at once, of course...

...The much-heralded, nonpartisan, professional Congressional Budget Office still tallies up the federal budget on a year-to-year basis, just like New York City did...

...Backdoor borrowing Which programs account for the difference between the budget deficit Arthur Andersen found and the one we've all read about...

...Federal workers, except those at the top levels of management, earn as much or more than their counterparts in the private sector, and have higher pensions as well...

...Retired federal employees, by themselves, are a weighty constituency...

...Too emotional" When we talk about accounting, we're really talking about politics—the choices and sacrifices that we, as a society, have to make...

...But by undercharging today's beneficiaries, we put off costs until tomorrow...

...All the pain comes later...

...No current funds need be appropriated...

...While columnists such as David Broder have written about vibrant, well-managed state governments, the truth is that they, too, are encumbered with enormous pension debt...

...Virtually no private sector plan replaces such a high percentage of a retiree's previous salary...

...Its usefulness depends on the kind of questions one wants answered...

...Even to get such a proposition on the ballot requires a two-thirds majority in the legislature...

...All totaled, the commitments made to federal employees are staggering, despite recent legislation reducing military pensions for those who have yet to enlist...

...But already—long before the enormous baby-boom generation reaches retirement age—we are seeing an increase in the number of plans in default...

...Wary bankers denied the city further credit, forcing it to to beg the Ford administration for relief...

...Two years later, another exhibit of New York's budget, blown up and pasted on boards drew a million spectators wanting to know where their tax dollars were going...

...The more money the government borrows in any given year the less there is available for consumers and industry...

...By 1975, the city was broke...

...If Congress is to fulfill its promise to insure these pensions, it will have to put up more money...

...then the calculations are fairly straightforward...

...They know it's important to keep public employees appeased...

...He is also a research consultant at Americans for Generational Equity...

...Civil servants don't finance these benefits themselves...

...But defaults on government-backed loans will place big pressures on an already tight federal budget, even if they won't necessarily bankrupt us...

...By 1975, that figure had jumped to 40 percent...

...It's still bean counting, but it's bean counting with vision...

...Like New York City in the seventies, the federal government is kidding itself...

...Barring a depression, probably not...

...When we sell land, we're ignoring future revenues those assets could have produced...

...The pensions of those who are currently in uniform will cost $444.3 billion, according to the Treasury Department...

...It would be nice if there was one simple accounting technique that could clean up the government's books...

...But as pedestrian as accounting may seem, it is still a developing science...

...Ultimately, the way we add up government spending is as political and as important as the spending itself...

...Eventually the feds came through with $4.5 billion in federal loan guarantees...

...The private pensions that the federal government insures— "defined-benefit plans" — are legally required to have minimal reserves that are invested and making money...

...But a recent study by Robert Inman, published by the National Bureau for Economic Research, found that the unfunded liabilities of teachers' pensions amounted to more than $400 billion in 1980...

...In each of five states—California, Texas, Florida, New York, and Virginia—they and their beneficiaries totaled over 100,000 in October 1985...

...Nothing could have been more hypocritical...

...Over the past five years, the FSLIC's insurance fund has dwindled from a $6.3 billion surplus to a yawning deficit...

...the National Association of Letter Carriers, $1.4 million...

...So does the Office of Management and Budget, controlled by the White House...

...But that only covers 12 percent of the system's current costs, let alone the costs of future pensions...

...While it's better than our current system, even accrual accounting has its flaws...

...Today's budgets create tomorrow's liabilities...

...lbday the federal government operates 38 separate retirement programs for its employees and their dependents...

...During the first half of the seventies, the City of New York used simple cash-flow accounting to keep its books and each year proudly reported a balanced budget...

...If the federal government followed the practice of private pension plans by amortizing these liabilities over a 40-year period (that is, pre-paying them in yearly installments) the cost would come to roughly 85 percent of each year's payroll, or approximately $43 billion, according to the Grace Commission...

...But getting the books to reflect that is very difficult...

...These insurance programs expose future taxpayers to a total, contingent liability estimated by the Office of Management and Budget to exceed $3 trillion...

...No voter, certainly no householder or housewife, can merely stroll through this exposition without receiving a certain understanding of the kind of men who ought to be selected to attend to the several branches of such an immense concern," the Times opined...

...Is it a promise that can never be broken, or something else, like food stamps...

...Fred Wolf of the General Accounting Office says that accounting for Social Security's unfunded liabilities is so politically charged that his office prefers not to take a position...

...In California, for example, the constitution states that any bond issue more than $300,000 must go to the voters for a referendum...

...Just keep track of the cash-flow...

...The least we could do is to admit to this backdoor borrowing...

...Since then the fishing, maritimefreight, and off-shore drilling industries have been pummeled, making many of the ships the Administration helped underwrite unnecessary and unprofitable...

...Are we going to have to pay all those policyholders...

...It's just too emotional," he says...

...The bill quickly cleared the Senate and the House with no debate...

...But federal funds to train America's next crop of electrical engineers go on the books as an expense, not an asset...

...A president who crosses the federal bureaucracy had better worry that his initiatives and executive orders will be quietly ignored or subverted...

...Right now its cumulative deficit stands at more than $10 billion...

...But we do need to see it clearly...

...With public employee pensions, you get the full benefit of an employee's service this year...

...The ruse can be worth it to politicians...

...This year, the PBGC will take in $425 million and pay out $690 million...

...What about ten or 20 years from now...

...The measure sped through the legislature and was signed into law in three days...

...The GAO estimates that the FSLIC will need at least $8 billion in new revenue just to cover near-term costs...

...Founded in 1974, it stands behind private pension plans the way FSLIC stands behind thrifts...

...It looked at things such as the pensions we've promised and weapons systems commitments...

...Take insurance...

...It's pork barreling without the stigma...

...But the full cost of that service doesn't come due for many years into the future," said Antonio...

...To eliminate that deficit would have required a 113 percent increase in individual taxes—assuming that such an increase did not itself cause a recession or depression...

...Government insurance programs typically have no reserves or woefully insufficient ones...

...Individual teachers contribute 8 percent of their salaries to the fund, and local districts match that amount...

...Then, of course, public employee unions make substantial contributions to candidates they like...

...The recent collapse of the LTV Corporation added another $420 million...

...The GAO has lambasted the crop insurance program, pointing to annual losses of $100 million...

...Most of these programs are very small, ranging from accounts for former presidents and their widows to the National Oceanic and Atmospheric Administration Corps Retirement system...

...One hotbed of reformist accounting is the Government Accounting Standards Board (GASB...

...Nationally, they are 1.9 million strong...

...Pork without the smell Underfunded pensions aren't unique to the federal government...

...State employees with 30 years experience can retire at age 55 with full benefits...

...The annual budget for a favorite social program like the Small Business Administration hides the fact that many of those who receive SBA loans will default...

...Accounting is supposed to give an accurate and useful description of how an institution is taking in money and spending it...

...HOW THE GOVERNMENT COOKS THE BOOKS The budget deficit is bigger than you think by Phillip Longman I n October, 1908, a landmark exhibit opened in a private gallery on lower Broadway in New York...

...PBGC's long-term deficit is now $2.4 billion and growing...

...It insures bank depositors and the pension programs of 40 million Americans...

...It was the Progressive movement at its peak, and literally millions of Americans—not just a few green eye-shade types—wanted to see what was in their public budgets...

...Or take the Federal Savings and Loan Insurance Corporation (FSLIC), which insures the savings of thrift institution depositors...

...The National Education Association doled out $2.9 million to congressional candidates during the 1985-86 election cycle...

...Held over by popular demand, the exhibit soon inspired similar displays throughout the country, fueling a genuinely popular movement...

...The liabilities of the civilian CSRS pension fund are even larger—$537 billion as of September 1985...

...For the same reason, 25 states use accrual systems, and ten are converting to them...

...Indecent exposure Besides pensions, there are other costs we've pushed off until the future that don't show up in the annual budget deficit...

...The rest comes out of general revenues...

...Pictures that Tell Stories of a City's Waste" was the draw...

...So how big are the deficits...

...Similarly, big Pentagon costs such as military pensions and weapons systems will cost us later, even if they aren't on this year's books...

...Needless to say, the hemorrhaging has gotten worse under Reagan...

...The federal government is the nation's largest insurer, but it doesn't charge high enough premiums to cover the vast risks it has assumed...

...If anything, politicians have learned to love big pensions—seeing them as an easy way to help their public-employee constituents without being accused of being big spenders...

...We don't have to stand in line to see the budget...

...That's why no constituency is storming the state house in Sacramento or Baton Rouge, demanding that the pensions of the 1990s be reined in...

...That liability rose 250 percent during the seventies...

...Under our current system, the Reagan administration has proposed selling land and other public assets, pointing to big revenue increases...

...The cost was $300 million...

...The Pension Benefit Guarantee Corporation (PBGC) is similarly underfunded...

...In 1986, the bankrupt WheelingPittsburgh steel company dumped $476 million of its pension liabilities on the PBGC...

...The rest is a familiar story...

...Buried in the document was an extraordinary political statement...

...In 1975, Arthur Andersen & Co., one of the country's "Big-8" accounting firms, developed a consolidated financial statement for the U.S...

...By not amortizing these pensions now, we put off the hard choices—leaving them to future taxpayers who may be forced to choose between paying the retirement benefits for someone who worked on Atoms for Peace or building a new space program...

...government using accrual accounting and other generally accepted accounting principles...

...The idea of the exhibition is to show with striking tables and in graphic form what the city is doing, what it needs to do, and how it is day by day wasting a large part of its income," it reported...

...That's because Congress, unlike Mutual of Omaha, doesn't build up big reserves, enough to cover the benefits it is likely to pay out...

...This is absurdity...

...Of the 50 largest plans offered by Fortune 500 companies in 1983, none offered replacement ratios of more than 44 percent...

...For a few veterans, such as the bill's sponsor, state senator Richard M. Webster, annual retirement benefits will exceed their current annual salary...

...Each day, entitlement programs, such as Social Security and Medicare, obligate the government to pay benefits far into the future, as workers build up claims by paying into them...

...Back when the federal government did little more than guard the coasts and deliver the mail, annual cash-flow accounting could provide an adequate picture...

...You'd better sit down...

...According to the show's ebullient sponsors, 62,808 attended...

...GASB officials say the biggest culprit is unfunded pension liabilities, the commitment we've made to today's public employees about the money they will receive upon retirement...

...The Social Security system's $4.647 trillion in unfunded liabilities were listed as "contingent" expenses, like banking insurance, that we may or may not have to pay...

...But the deficit figure—bandied about by columnists and congressmen trying to prove a point—is ultimately misleading, because it ignores the liabilities accrued, but not yet due...

...Indeed, since the end of World War II, nearly all the growth in federal spending as a percentage of GNP, excluding interest costs, has been in programs that promise to pay future benefits...

...Liberals have their own way of cloaking tomorrow's bills...

...We need a new budget debate...

...Yet the average private sector plan has assets equal to only 77 percent of its actual liability, according to a study by Richard Ippolito of the Labor Department...

...The government had admitted to a deficit of only $6.1 billion...

...In 1984 the government declared a deficit of $185.3 billion, but Andersen found it to be $333.4 billion...

...Most private pension plans still appear to be well-funded...

...Civil servants hired before 1983, for example, may retire at age 55, after 30 years of service, with an annual pension equal to 56 percent of their average salary during their peak three years of earnings...

...Since more than a quarter of the electorate is employed by the public sector, these unions command voting blocs no prudent candidate can ignore...

...That's an important number to know, of course...

...Even when the comptroller's office did make projections about future retirement benefits, it did so using life and disability tables developed near the turn of the century—when a cop was unlikely to live two decades in retirement...

...That's true even in states that have a reputation for fiscal responsibility...

...According to David Cox, a consultant to the California Assembly's Public Employee Committee, part of the problem is that when the fund was created in 1972, the contribution rate was intentionally set low to win political support for the program and "ease the shock" of its cost...

...Government isn't a business, of course...

...Nothing loses more votes than garbage or snow piling up on the street, or teachers, firemen, and policemen threatening to strike...

...If the questions are short-term—"How much money do we have now?," "How much will we have at the end of the year...

...found it to be $333.4 billion...

...Not everyone has ignored the problem...

...Just accounting for a single, relatively simple item, like highway maintenance, is a real intellectual challenge...

...But that doesn't cover the cost...

...Any government can borrow from the future by underfunding its pension programs without having to admit how high the deficits are...

...Under accrual accounting, weapons are listed as assets—solid, worth a certain price—even if they are totally useless on the battlefield and have to be replaced...

...Ideally, you would have an accounting method that could measure how a little money spent now on highways is actually saving a whole lot later on...

...each year's budget deficit...

...Many states have also put off pension funding...

...Last year the Treasury Department came up with a massive financial statement of the federal government's assets and liabilities...

...This kind of politicking has left the California State Teacher's Retirement System in deep trouble...

...Today we debate the deficit ad nauseam, but we are evading a fundamental problem...

...But the expansion of government services has created a series of long term obligations extending years, even decades...

...To answer the fundamental question of whether an institution is living beyond its means, one has to know how fast capital assets are likely to wear out, what it will cost to replace them, and what big contracts will come due...

...Consider the Maritime Administration, which was authorized in 1972 to guarantee loans to U.S...

...The majority of federal workers, however, are covered by two giant programs, the Civil Service Retirement System (CSRS) and the Military Retirement System (MRS...

...Their misfortune is now ours...

...Rather than pay some of these costs now, Congress (and many states) impose these obligations on future taxpayers, hoping that somehow, the money will be there...

...Civilian employees set aside 7 percent of their salary for their retirement...

...Voters must be told when and by what means the principal and interest will be repaid...