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Op-Eds With Footnotes

Op-Eds With Footnotes

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Published by Bryan Lawrence
Op-eds published in The Washington Post on government accounting standards, health-care costs, and intergenerational theft. Footnotes provided for people interested in understanding this opaque but important subject.
Op-eds published in The Washington Post on government accounting standards, health-care costs, and intergenerational theft. Footnotes provided for people interested in understanding this opaque but important subject.

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Published by: Bryan Lawrence on Jun 13, 2013
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05/07/2015

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Washington Post Op-Ed – December 29, 2011
By Bryan R. Lawrence
Releasing information on the Friday before a big holiday is a time-tested way to bury bad news. Sowhen the Government Accountability Office’s fiscal 2011 financial statements for the federalgovernment were released on the Friday before Christmas, it made sense to read them closely.
1
 Since 1997, the United States has been a rare example of a government willing to publish financialstatements using accrual accounting, which counts the cost of promises made as well as cash paid out.
2
 And the GAO’s professionalism has won it a reputation for impartiality and effectiveness.That professionalism is evident in GAO’s analysis of the net present value of the Social Security andMedicare promises Washington has made to Americans. “Net present value” means the total thatwould have to be put aside today to pay the costs of these programs in the future. The governmentputs these costs in the appendices, rather than in headlines. But the costs are real.The cost of the promises grew by $2.9 trillion during 2011, from $30.9 trillion to $33.8 trillion.
3
To putthat in context, consider that the total value of companies traded on U.S. stock markets is $13.1 trillion,based on the Wilshire 5000 index, and the value of the equity in U.S. taxpayers’ homes, according toFreddie Mac, is $6.2 trillion.
4
Said another way, there is not enough wealth in America to meet thesepromises.If the government followed corporate accounting rules, that $2.9 trillion increase would be added to the$1.3 trillion cash deficit that has been widely reported. And a $4.2 trillion deficit is something thatAmericans need to know about.The Treasury acknowledges the need to show an accrual-based deficit, but the only retirement accrualsit includes in its “Citizen’s Guide” to the GAO numbers are for promises to direct government employeesand veterans.
5
Promises to the rest of Americans are excluded, even though they are multiples largerthan the $10.2 trillion of government debt held by the public.
6
 The latest GAO numbers are particularly interesting because of a change in accounting standards thatrequires the government to explain why the cost grew by $2.9 trillion. Fully $1.5 trillion of that reflectsthe aging of all 312 million Americans by one year.
7
In the 2001 GAO report, the cost of promises was$17 trillion.
8
The growth in the cost from $17 trillion to $33.8 trillion averages about $1.7 trillion peryear. The GAO doesn’t specify numbers for the other nine years, but one suspects that aging has drivenmost of the growth in the cost of the promises.The cost would have been a lot worse but for two assumptions that the GAO found questionable.First, Medicare’s cost projections assume legally required decreases in reimbursement rates to doctorsthat Congress has ignored for years – the so-called doc-fix. For these projections to be realized,Congress would have to abide by its own cost controls, and allow an immediate 27 percent cut todoctors’ rates, which is very unlikely.
9
 
 
Second, the Medicare projections assume that the 2010 Affordable Care Act (ACA) will reduce healthcare cost growth by 1.1% per year, despite doubts voiced by GAO and a panel appointed by theMedicare board of trustees.
10
 The panel and the GAO recommended inclusion of an alternate scenario in the year-end figures, inwhich the doc-fix continues, and the ACA cost reductions do not materialize. The result is a $12.4 trillionincrease in the cost of the promises, to more than $46 trillion.
11
Given Congress’s history with the doc-fix, and the general paralysis in Washington, it’s hard to argue with the GAO’s lack of confidence inCongress’s ability to honor its own cost controls.If the government were a company, its huge and growing off-balance-sheet liabilities would set off alarm bells. But investor confidence has not been lost – Treasurys can still be sold at very attractiveyields.Confidence has been shaken, though, among the American people. Congress’s approval ratings are atrecord lows.
12
Anger is flaring across the political spectrum, and reflects a deep-seated suspicion thatsomething has broken in our country.In such an environment, is it right to release critical financial information the Friday before Christmas? Isit acceptable that politicians are not required to describe the cost of the promises they have made?In 1990, the government required that companies begin to account for the net present value of retirement promises, not just current-year cash flows. General Motors began complying in 1992; and itrecorded a $33.1 billion (pretax) charge to reflect the value of its promises up to that point, which led towhat was then the largest loss in US corporate history.
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Seventeen years later, the “free-until-accounted-for” promises were a major factor in GM’s bankruptcy.The United States is stronger than General Motors. And the good news is that small changes in health-care cost trends have a large impact on the government’s long-term promises. Our system is fixable.But our politics are toxic, and each side is dug into an ideological trench. In such an environment, whyshould information be buried in an appendix?Americans deserve better. One way for Washington to start earning back our trust is by giving us all theinformation, even if it is unpleasant.
Bryan R. Lawrence is founder of Oakcliff Capital, a New York-based investment partnership.
 
 
1
Prior GAO financial statements can be found athttp://www.gao.gov/financial.html. Their publication dates are asfollows:Fiscal 1997 3/31/98Fiscal 1998 3/31/99Fiscal 1999 3/28/00Fiscal 2000 3/30/01Fiscal 2001 3/29/02Fiscal 2002 3/31/03Fiscal 2003 2/20/04Fiscal 2004 12/14/04Fiscal 2005 12/14/05Fiscal 2006 12/15/06Fiscal 2007 12/17/07Fiscal 2008 12/15/08Fiscal 2009 2/26/10Fiscal 2010 12/21/10Fiscal 2011 12/23/11
2
 
This Time is Different,
by Carmen Reinhart and Kenneth Rogoff, August 2011 edition, page xxviii. Quotesummarizing their research on financial disclosure by more than 100 governments – “
 
Historical data ondomestically issued government debt is remarkably difficult to obtain for most countries, which have often beenlittle more transparent than modern-day banks with their off-balance sheet transactions and other accountingshenanigans.”
3
 http://www.gao.gov/financial/fy2011/11frusg.pdf , page 49. Note that the $33.8 trillion does not includeMedicaid. Medicaid’s lack of dedicated revenues and a trust fund required to generate 75 year projections meansthat GAO does not have projections to value. An estimate of the cost of Medicaid promises ($35.3 trillion as of fiscal 2010) is on page ix of Mary Meeker’s USA Inc. study, available athttp://s3.amazonaws.com/kpcbweb/files/USA_Inc.pdf , and co-signed by George Shultz, Paul Volcker, MichaelBloomberg, Richard Ravitch, and John Doerr.
4
US stock market value based on Wilshire 5000 Total Market index as of 12/28/11 (ticker W5000 on Bloomberg).Real estate value taken from Freddie Mac presentation -http://www.freddiemac.com/investors/pdffiles/investor-presentation.pdf , page 18.
5
Treasury’s accrual accounting, including retirement benefits for government employees and veterans, but not forother Americans, is on Table 1 on page vi of http://www.gao.gov/financial/fy2011/11frusg.pdf. 
6
Publicly held debt is in Chart 5 on page vii of http://www.gao.gov/financial/fy2011/11frusg.pdf. 
7
 http://www.gao.gov/financial/fy2011/11frusg.pdf , page 49, and discussion on pages 140-145.
8
 http://www.gao.gov/special.pubs/01frusg.pdf , page 58.
9
 http://www.washingtonpost.com/national/health-science/medicare-doc-fix-debate-in-congress-less-predictable-this-year/2011/12/23/gIQATqdvDP_story.html.
10
 http://www.gao.gov/financial/fy2011/11frusg.pdf , pages 132-133.
11
 http://www.gao.gov/financial/fy2011/11frusg.pdf , page 134.
12
 http://www.gallup.com/poll/151628/congress-ends-2011-record-low-approval.aspx.
13
General Motors 1993 annual report. $33.1 billion charge is before tax. After-tax was $20.9 billion. Also,http://articles.latimes.com/1993-02-12/business/fi-1334_1_future-retiree-health-benefitson largest ever by UScompany.

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