Summary of the 2009 Financial Report of the US

NEW YORK (March 11, 2010) - Unchecked spending and the federal government's growing liabilities and unfunded promises continue to pose a serious threat to America’s economic future, according to the Peter G. Peterson Foundation's (PGPF) summary of the 2009 Financial Report of the U.S. Government. The PGPF summary, released today, closely examines the key areas of the latest federal financial statement, including: the economy, the budget, the debt, challenges ahead, and the economic recovery. The annual federal financial report is considered a more comprehensive account of the federal budget's future costs and liabilities, both funded and unfunded.

In the wake of the recent economic crisis, the Treasury reported a record deficit in fiscal year 2009 of $1.4 trillion. Over the course of a single year, the federal government’s total liabilities, unfunded promises, such as Medicare and Social Security and other commitments and contingencies, rose to $62.3 trillion, up from $56.4 trillion in 2008 and $20.4 trillion in 2000, only a decade ago. Policies designed to promote economic recovery 2008 and 2009, including stimulus spending and tax credits, also contributed to a troubling and deteriorating Federal budget situation.

The fiscal year 2009 figures do not include the operations of the Federal Reserve, Fannie Mae and Freddie Mac. In addition, the figures do not include the Treasury’s decision in late calendar 2009 (early fiscal 2010) to guarantee approximately $5 trillion in Fannie Mae and Freddie Mac debt.

“Facing the worst financial crisis since the Great Depression, our government took a variety of actions to stabilize the financial system, create jobs, stimulate economic growth, and prevent further decline,” said David M. Walker, President & CEO of the Peter G. Peterson Foundation. "Although these actions created additional burdens, the real threat to our nation’s future is not today’s deficits and debt. It is the large and growing structural imbalance that will exist even after the economy turns around, unemployment levels decline and the overseas wars are over. These structural deficits are fueled, in large part, by tens of trillions in unfunded social insurance promises and rising health care costs. Over this past decade, the sum of America’s liabilities and unfunded promises has risen from $20.4 trillion in 2000 to $62.3 trillion in 2009. Escalating federal deficits and debt threaten our economy, our international standing and our ability to make critical investments in areas like research, infrastructure, and education. The Treasury department’s latest figures demonstrate that we must take immediate steps to address the longer-term structural deficits that threaten our economy and jeopardize the welfare of future generations.”

Please see the full Peter G. Peterson Summary Report of the 2009 Financial Report of the U.S. Government below:

PETER G. PETERSON FOUNDATION SUMMARY REPORT:
THE 2009 FINANCIAL REPORT OF THE U.S. GOVERNMENT

OVERVIEW

The 2009 Financial Report of the U.S. Government provides a comprehensive review of the country’s current financial condition. The annual report aims to provide transparency in the federal government’s finances for both policy makers and the general public. It provides information about the cost of the government’s operations, sources of financing for those operations, amounts owed and owned by the government, a summary of social insurance obligations, and the outlook for the government’s fiscal sustainability. Because it is prepared on an accrual basis, the report provides a more complete perspective on the federal government’s finances than the federal budget, which is largely cash based and reflects the government’s receipts and payments.

The 2009 Financial Report of the U.S. reflects the impact of the worst financial crisis since the Great Depression on the federal balance sheet. In 2009, the federal government’s net operating costs (the amount by which expenses exceed revenues) increased by roughly $250 billion to $1.3 trillion, from $1 trillion in 2008. (These amounts differ from the reported deficits because the financial statement includes changes in liabilities that are not accounted for in the budget deficit figures.) The large deficits and net operating costs in those two years reflect the unprecedented actions taken by the federal government to stabilize the financial system and to mitigate the impact of the recession, higher mandatory spending for unemployment insurance, as well as sharply lower revenue levels due to the recession.

The Peter G. Peterson Foundation has used the Treasury’s 2009 Financial Report of the U.S. to illustrate the major fiscal exposures, including current liabilities and the present value of unfunded promises for social insurance obligations of the federal government. This presentation provides perspective on the magnitude of explicit and implicit liabilities and promises facing the United States over the next 75 years, assuming that current laws do not change. In 2009, those exposures increased by almost $6 trillion, to $62.3 trillion, or 8 percent of gross domestic product (GDP) over the period.

Major Fiscal Exposures

While the economic recovery policies in 2008 and 2009 (the Housing and Economic Recovery Act of 2008, the Emergency Stabilization Act of 2008, and the American Recovery and Reinvestment Act of 2009) increased federal spending and contributed to larger budget deficits in those years, they were also designed to boost economic activity, promote job growth, and prevent further economic decline. While there is significant attention focused on the government’s efforts to promote short-term economic recovery, the report warns, “However, even as the Government continues its current efforts to foster economic stability, it cannot lose sight of the long-term fiscal challenges associated with its social insurance programs. The nation must change course and bring social insurance expenses and resources in balance before the deficit and debt reach unprecedented heights. Delays will only increase the magnitude of the reforms needed and will place more of the burden on future generations.”

KEY DATA

The Financial Report of the U.S. focuses on the following areas: the economy, the budget, the debt, challenges ahead, and the economic recovery.

Economy

As a result of the recession, which lasted from December 2007 to the middle of 2009, GDP dropped by 6.4 percent in the second quarter — the largest single-quarter drop in recent history. The unemployment rate grew from 6.2 percent in September 2008 to 9.8 percent a year later, the highest it has been since 1983. The consumer price index (CPI) was negative throughout 2009 which corresponded to lower energy prices, a slower economy and slower food price inflation.

Federal Budget

The Treasury reported revenues of $2.2 trillion in 2009 were lower than the previous year by $463 billion as a result of the recession and the tax provisions in the economic stimulus package. The recession also contributed to lower corporate profits and individual income levels. Net costs of operations (which reflect current spending and changes to liabilities) decreased by $206 billion in 2009 to about $3.4 trillion. The total costs of all programs increased by $282 billion, however a reduction in the veterans’ benefits liabilities of $488 billion (due to a change in the methodology and other assumptions) caused such increases. Higher costs reflected medical and Social Security benefit payments to new retirees and stimulus support to businesses and individuals. For the difference between the budget deficit and the “bottom line” net operating cost, refer to Table 2 below. Budget Deficit vs Operating Net Cost

Debt

By the end of 2009, gross federal debt totaled roughly $12 trillion — of which $7.6 trillion was debt held by the public, and $4.4 trillion was intragovernmental debt (or debt held by government accounts, such as Social Security and Medicare trust funds). Gross federal debt is subject to a statutory limit. The President and the Congress must act to increase in the limit. Within the past four months, there have been two increases in the debt limit. In December 2009 it was raised to $12.4 trillion and in February 2010 it was raised again to $14.3 trillion.

Challenges Ahead

Over the course of just one year, the Treasury estimates show that the cost of major fiscal exposures rose from $56.4 to $62.3 trillion (see Table 1). The unfunded promises to future Social Security and Medicare beneficiaries account for about $46 trillion of the 2009 total (about $38 trillion for Medicare and about $8 trillion for Social Security), or 5.8 percent of GDP. (These unfunded promises are the difference between actuarial projections of expenditures and receipts over the next 75 years calculated on a present value basis. Absent policy change, the gap between programmatic spending and revenue will continue to grow relative to the size of the total economy. The growing deficits will cause the debt level to grow, and along with that, higher interest costs on that debt.

Economic Recovery

The U.S. economy is fragile as it rebounds from the financial crisis, and several pieces of legislation in 2008 and 2009 were enacted to help stimulate the economy and create jobs (see Table 3). Additional up-to-date information on the distribution of funding for the American Recovery and Reinvestment Act of 2009 (ARRA) is available online at: www.recovery.gov. Economic Stimulus Legislation

NOTE: Cash Basis vs. Accrual Basis

Cash basis accounting records revenues when received and spending costs when paid out. Accrual basis accounting, on the other hand, records revenues (received and expected to be received in the future) and costs when they are incurred (and not necessarily when paid out)

The government’s “bottom line” net operating costs are the difference between revenues and net costs (as determined by accrual basis accounting). Net operating costs tend to be higher than the unified budget deficit in that they include cost accruals for government employees’ benefits in the future.

About PGPF

Founded by the Chairman Emeritus of The Blackstone Group with a commitment of $1 billion, the Foundation is dedicated to increasing public awareness of the nature and urgency of key economic challenges threatening America's future and to accelerating action on them. To address these challenges successfully, we work to bring Americans together to find sensible, long-term solutions that transcend age, party lines and ideological divides in order to achieve real results. For more information, see www.PGPF.org