Understanding Similarities and Differences between Accrual and	 
Cash Deficits: Update for Fiscal Year 2006 (22-JAN-07,		 
GAO-07-341SP).							 
                                                                 
This document updates selected information in Understanding	 
Similarities and Differences between Accrual and Cash Deficits	 
(GAO-07-117SP) and should be read in conjunction with that	 
document. Importantly, emphasis should not be placed on the	 
precise numbers for either a single year accrual deficit or the  
change from year to year. Furthermore, for the 10th consecutive  
year, the government was unable to demonstrate the reliability of
significant portions of the 2006 Financial Report of the United  
States Government from which the data in this update were taken. 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-341SP					        
    ACCNO:   A65089						        
  TITLE:     Understanding Similarities and Differences between       
Accrual and Cash Deficits: Update for Fiscal Year 2006		 
     DATE:   01/22/2007 
  SUBJECT:   Accountability					 
	     Auditing standards 				 
	     Budget cuts					 
	     Budget deficit					 
	     Budget outlays					 
	     Deficit reduction					 
	     Economic analysis					 
	     Federal funds					 
	     Fiscal policies					 
	     Future budget projections				 
	     Payments						 
	     Strategic planning 				 

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GAO-07-341SP

Understanding Similarities and Differences between

Accrual and Cash Deficits

Update for Fiscal Year 2006

How Did the Accrual and Cash Measures Change in Fiscal Year 2006?

The following pages update selected information in Understanding
Similarities and Differences between Accrual and Cash Deficits (
[1]GAO-07-117SP ) and should be read in conjunction with that document.
Importantly, emphasis should not be placed on the precise numbers for
either a single year accrual deficit or the change from year to year.
Furthermore, for the 10^th consecutive year, the government was unable to
demonstrate the reliability of significant portions of the 2006 Financial
Report of the United States Government, hereafter referred to as the
Financial Report, from which the data in this update were taken.^1

Both the unified budget deficit--sometimes called the "cash deficit"--and
the net operating cost--sometimes called the "accrual deficit"--declined
in 2006, but the accrual deficit declined more than the cash deficit (see
fig. 1). The cash deficit declined by about $70 billion while the accrual
deficit declined by over $300 billion. These changes are explained in the
following pages.^2

     Figure 1: Cash and Accrual Surpluses/Deficits (Fiscal Years 2001-2006)

Billions of dollars

^200 127

-800                                                   -760      
-1,000                                                           
         2001             2002          2003      2004      2005         2006 
Fiscal year                                                                
         Cash surplus/deficit                                                 
        Accrual surplus/deficit                                               
Source: Treasury.                                                          

^1 For more  information regarding  the reliability  of federal  financial
data, see GAO's auditor  report in Financial Report  of the United  States
Government  (Washington,   D.C.:   Dec.  15,   2006)   and  page   16   of
[2]GAO-07-117SP .

^2 These changes do not represent  a change in the fundamental drivers  of
the long-term fiscal outlook. For more  information on the drivers of  the
longterm fiscal outlook, see GAO,  The Nation's Long-Term Fiscal  Outlook:
September 2006 Update, [3]GAO-06-1077R (Washington, D.C.: Sept. 15, 2006).

Accrual and Cash Deficits, Fiscal Year 2006 [4]GAO-07-341SP

Understanding Similarities and Differences between
Accrual and Cash Deficits

Update for Fiscal Year 2006

What Drove the Change in Cash andAccrual Deficits in Fiscal Year 2006?

The decline in 2006 in both cash and accrual deficits was primarily driven
by an increase in federal revenue by almost 12 percent--or about $255
billion. Because revenue is measured similarly in the budget and financial
statements, the increase in revenue reduced both the cash and accrual
deficits.

However, cash outlays and accrual-based expenses are measured differently
and moved in different directions.^3 Cash outlays increased in 2006
whereas accrual-based expenses declined.^4 This decline was primarily
driven by changes in assumptions that are the basis for actuarial
estimates for certain accrued long-term liabilities. These changes are
discussed below.

                     Veteran and military employee benefits

     o Veterans compensation: Veterans compensation expenses (in excess of
       cash outlays) declined by over $160 billion. The large change is due
       primarily to changes in the Department of Veterans Affairs' (VA)
       interest rate assumptions, which are used to discount future benefit
       payments. In 2006, market-based interest rates used by VA increased.
       Higher interest rates reduce the present value estimate of future
       benefit payments and related expenses.
     o Military employee benefits: Military employee benefit expenses (in
       excess of cash outlays) declined by about $95 billion in 2006. This
       was primarily the result of changes in assumptions underlying the
       military health benefit liability. In 2005, the military retiree
       health expense included a larger increase due to changes in
       assumptions for drug and other costs than in 2006. Additionally in
       2006, the military retiree health expense declined because actual
       experience was better than assumed.

Insurance

     o The $50 billion change in insurance expenses (in relation to cash
       outlays) is primarily attributable to the National Flood Insurance
       Program. In 2005, insurance costs increased primarily due to expenses
       accrued for Hurricanes Katrina and Rita, which were paid in 2006.
     o Expenses (in excess of cash outlays) related to the Pension Benefit
       Guaranty Corporation also declined in part because the airline relief
       provision in the Pension Protection Act of 2006^5 caused some large
       plans that were previously classified as "probable" terminations to be
		 changed to "reasonably possible," which reduced the estimated losses
		 and removed them from the estimated liability.

                       Environmental cleanup and disposal

o One area where expenses (in excess of cash outlays) grew is
environmental cleanup, which recorded an increase of about $35 billion
over the previous year. The Department of Energy (DOE) accounts for the
largest portion of the increase. According to DOE, this increase resulted
from a variety of factors such as regulatory changes and changes in the
assumptions it uses about the timing, scope, and technical approach used
to clean up or dispose of hazardous waste. For example, DOE's estimated
costs increased significantly because of the additional 7-year delay to
2017 for opening the permanent geologic repository for spent nuclear fuel
and radioactive waste at Yucca Mountain.

Because accrual deficits are sensitive to changes in interest rates and
other assumptions, any large change in the accrual deficit needs to be
examined to evaluate whether it represents a fundamental change in the
longer term consequences of today's policy decisions. Cash deficits are
also sensitive to factors unrelated to fundamental changes in policy such
as changes in dates when cash is scheduled to be paid or received. For
example, in 2006 legislation was passed to delay Medicare payments from
the last week of September 2006 into October 2006, effectively shifting
about $4 billion in outlays from fiscal year 2006 to fiscal year 2007.^6
However, these types of changes have been smaller for the cash deficit
than for the accrual deficit.

How Do You Get to the Cash Deficit From the Accrual Deficit?

The Financial Report includes a statement called Reconciliation of Net
Operating Cost and Unified Budget Deficit that provides a crosswalk
between the net operating cost (accrual deficit) and the unified budget
deficit (cash budget deficit). Figure 2 summarizes this crosswalk. It
shows components of the accrual deficit that are not in the cash
deficit--costs incurred, but not yet paid--such as changes in liabilities
for pensions and retiree health benefits for civilian and military
employees and future compensation for veterans. The change in the
liability is generally equal to accrued expenses less cash payments made
to cover expenses. The figure also shows components of the cash deficit
that are not in the accrual deficit--the largest of which are outlays to
purchase various capital assets.

^6 Deficit Reduction Act of 2005 (Pub. L. No. 109-171, section 5203, 120
STAT. 47-48 (2006)).

             Figure 2: Crosswalk between Accrual and Cash Deficits

Source: Treasury.

Notes: Data reported in the unaudited Financial Report for fiscal year
2006. As discussed in the Financial Report, the federal government
restated its fiscal year 2005 reconciliation statement to correct for
errors that occurred during the preparation of the originally issued
statement. Because of certain material weaknesses discussed in GAO's audit
report, the restated amounts may not be reliable.

^a Nearly all of this increase was attributable to the Department of
Defense (DOD). Because DOD's financial statements are unauditable and the
2005 numbers were restated by a large amount, it is unclear what exactly
drove the large change.

^b The final deficit number published in the President's budget was
slightly lower--$318.3 billion--due to subsequent adjustments. However, we
use the numbers reported in the Financial Report since it contains the
reconciliation between cash and accrual deficits.

          [8]GAO-07-341SP Accrual and Cash Deficits, Fiscal Year 2006

References

Visible links
1. http://www.gao.gov/cgi-bin/getrpt?GAO-07-117SP
2. http://www.gao.gov/cgi-bin/getrpt?GAO-07-117SP
3. http://www.gao.gov/cgi-bin/getrpt?GAO-06-1077R
4. http://www.gao.gov/cgi-bin/getrpt?GAO-07-341SP
5. http://www.gao.gov/cgi-bin/getrpt?GAO-07-117SP
6. http://www.gao.gov/cgi-bin/getrpt?GAO-07-341SP
7. http://www.gao.gov/cgi-bin/getrpt?GAO-07-341SP
8. http://www.gao.gov/cgi-bin/getrpt?GAO-07-341SP
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