Understanding Similarities and Differences between Accrual and	 
Cash Deficits: Update for Fiscal Year 2007 (31-JAN-08,		 
GAO-08-410SP).							 
                                                                 
The unified budget deficit--sometimes called the "cash		 
deficit"--and the net operating cost-- sometimes called the	 
"accrual deficit"--are two key measures of the government's	 
annual fiscal position. The cash deficit provides information on 
the government's current cash flow and borrowing needs. The	 
accrual deficit provides information on the current cost of	 
government-- the amount of resources used to produce goods or	 
deliver services during the fiscal year-- regardless of when cash
is used.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-410SP					        
    ACCNO:   A80335						        
  TITLE:     Understanding Similarities and Differences between       
Accrual and Cash Deficits: Update for Fiscal Year 2007		 
     DATE:   01/31/2008 
  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-08-410SP



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Understanding Similarities and Differences Between Accrual and Cash 
Deficits: Update for Fiscal Year 2007: 

How Did the Accrual and Cash Measures Change in Fiscal Year 2007? 

The unified budget deficitï¿½sometimes called the ï¿½cash deficitï¿½ï¿½and the 
net operating costï¿½sometimes called the ï¿½accrual deficitï¿½ï¿½are two key 
measures of the governmentï¿½s annual fiscal position. The cash deficit 
provides information on the governmentï¿½s current cash flow and 
borrowing needs. The accrual deficit provides information on the 
current cost of governmentï¿½the amount of resources used to produce 
goods or deliver services during the fiscal yearï¿½regardless of when 
cash is used.[Footnote 1]

Both deficit measures improved in 2007, but the accrual deficit 
improved more than the cash deficit (see fig. 1). The cash deficit 
decreased by about $85 billion or 34.3 percent while the accrual 
deficit decreased by $174 billion or 38.7 percent.[Footnote 2]

Figure 1: Cash and Accrual Surplus/Deficits (Fiscal Years 2000-2007): 

This figure is a combination line chart showing cash and accrual 
surplus/deficits between fiscal years 2000 and 2007. The X axis 
represents the fiscal year, and the Y axis represents billions of 
dollars. 

[See PDF for image] 

Source: Department of the Treasury. 

Notes: Data reported in the Financial Report of the United States 
Government, hereafter referred to as the Financial Report, for fiscal 
years 2001 through 2007. GAO disclaimed an opinion on the U.S. 
governmentï¿½s consolidated financial statements for these years, other 
than the 2007 Statement of Social Insurance. As such, the reported 
amounts may not be reliable.

[End of figure] 

Importantly, emphasis should not be placed on the precise numbers for 
either a single year accrual deficit or the change from year to year. 
For the 11th consecutive year, the government was unable to demonstrate 
the reliability of significant portions of the 2007 Financial Report, 
from which the data in this update were taken.[Footnote 3] 

What Drove the Change in Cash and Accrual Deficits in Fiscal Year 2007? 

The decrease in both cash and accrual deficits in 2007 was driven by 
growth in federal receipts and revenue that exceeded growth in outlays 
and accrual-based costs. Revenue and cash receipts each increased by 
around 7 percent. Total cash outlays increased by only 3 percent in 
2007 and accrual-based costs remained relatively stable. 

The difference between cash receipts that are reported in the budget 
and revenue, which is recorded on a modified cash basis in the 
consolidated financial statements, has typically been smallï¿½averaging 
1.2 percent of revenue from fiscal years 2000 to 2006. Revenue exceeded 
cash receipts by about $25 billion on average in those years, but in 
2007 the difference increased to almost $60 billionï¿½more than 2 percent 
of revenue. This difference can not be explained. GAO has previously 
recommended that the Department of the Treasury explain and document 
the differences between the operating revenue reported in the 
consolidated financial statements and unified budget receipts.[Footnote 
4] 

Traditionally, the significant differences between cash and accrual 
deficits have been on the spending side. Differences arise when a cost 
is accrued (and affects the accrual deficit) in one fiscal year but the 
cash outlay is paid (and affects the cash deficit) in a different 
fiscal year. In 2007, the largest increases in both cash outlays and 
accrual-based costs were at the Department of Defense (DOD), the 
Department of Health and Human Services, and the Social Security 
Administration.[Footnote 5] Cash outlays and accrual-based costs 
decreased at a number of cabinet agencies, most notably at the 
Departments of Education, Agriculture, and Homeland Security. At the 
Department of Veterans Affairs (VA), cash-based outlays increased while 
accrual-based costs decreased. In fact, the decrease in VAï¿½s costs 
account for about one-third of the $174 billion improvement in the 
accrual deficit. This decrease was primarily driven by changes in 
assumptions that are the basis for actuarial estimates for certain 
accrued long-term liabilities. These and other significant changes that 
caused the accrual deficit to improve relative to the cash deficit are 
discussed below. 

* Veterans compensation: Veterans compensation costs (in excess of cash 
outlays) declined by just over $57 billion in 2007. In the past, much 
of the volatility in the veterans compensation liability was caused by 
changes in the interest rate assumption. For 2007, the large change was 
primarily caused by changes in VAï¿½s inflation assumption. VA reduced 
the inflation rate used to calculate future benefits, which 
substantially reduced the present value estimate of future benefit 
payments and related accrual-based costs. 

* Civilian employee benefits: Civilian employee benefit costs (in 
excess of cash outlays) declined by more than $25 billion in 2007. The 
decline is primarily because of an actuarial gain, which occurs when 
actual experience is better than assumed. In 2007, the actual costof- 
living allowance and general salary increase were lower than previously 
assumed for 2006 thereby reducing the accrual-based costs. 

Because accrual deficits are highly sensitive to changes in inflation, 
interest, 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 budgetary consequences of todayï¿½s 
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. However, these types of technical 
changes have resulted in smaller effects on the cash deficit than 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 
deficitï¿½costs incurred, but not yet paidï¿½such as changes in liabilities 
for pensions and retiree health benefits for civilian and military 
employees and veterans compensation. The change in the liability is 
generally equal to accrual-based costs less cash payments made to cover 
costs. The figure also shows components of the cash deficit that are 
not in the accrual deficitï¿½the largest of which are outlays to purchase 
various capital assets. 

Figure 2: Crosswalk between Accrual and Cash Deficits: 

This figure is a table if information showing a "crosswak" between 

accrual and cash deficits. 

Net operating costs; 
Dollars in millions: 2006: -$449.5; 
Dollars in millions: 2007: -$275.5. 

Components of accrual deficit not part of the cash budget deficit: 
Changes in liability for military employee benefits; 
Dollars in millions: 2006: $74.9; 
Dollars in millions: 2007: $60.3. 

Components of accrual deficit not part of the cash budget deficit: 
Changes in liability for veterans compensation; 
Dollars in millions: 2006: $31.2; 
Dollars in millions: 2007: -$26.1. 

Components of accrual deficit not part of the cash budget deficit: 
Changes in liability for civilian employee benefits; 
Dollars in millions: 2006: $81.3; 
Dollars in millions: 2007: $55.9. 

Components of accrual deficit not part of the cash budget deficit: 
Changes in environmental liabilities; 
Dollars in millions: 2006: $45.4; 
Dollars in millions: 2007: $36.8. 

Components of accrual deficit not part of the cash budget deficit: 
Depreciation expense[A]; 
Dollars in millions: 2006: $82.9; 
Dollars in millions: 2007: $45.3. 

Components of accrual deficit not part of the cash budget deficit: 
Changes in insurance liabilities; 
Dollars in millions: 2006: -$20.4; 
Dollars in millions: 2007: -$1.9. 

Components of accrual deficit not part of the cash budget deficit: 
Increase in accounts and taxes receivable; 
Dollars in millions: 2006: -$2.7; 
Dollars in millions: 2007: -$19.0. 

Components of accrual deficit not part of the cash budget deficit: 
Other; 
Dollars in millions: 2006: $25.5; 
Dollars in millions: 2007: $46.0. 

Components of accrual deficit not part of the cash budget deficit: 
Total; 
Dollars in millions: 2006: $318.1; 
Dollars in millions: 2007: $197.3. 

Components of cash budget deficit not part of the accrual deficit: 
Outlays for capitalized fixed assets [A]; 
Dollars in millions: 2006: -$103.7; 
Dollars in millions: 2007: -$58.8. 

Components of cash budget deficit not part of the accrual deficit: 
Other; 
Dollars in millions: 2006: -$11.1; 
Dollars in millions: 2007: -$10.7. 

Components of cash budget deficit not part of the accrual deficit: 
Total; 
Dollars in millions: 2006: -$114.8; 
Dollars in millions: 2007: -$69.5. 

All other reconciling differences: Net amount of all other reconciling 
differences; 
Dollars in millions: 2006: -$1.5; 
Dollars in millions: 2007: -$15.1. 

Unified budget deficit (ie., cash deficit); 
Dollars in millions: 2006: -$247.7[B]; 
Dollars in millions: 2007: -$162.8. 

Information available on [hyperlink, 
http://www.fms.treas.gov/fr/index.html]: 

Source: Department of the Treasury. 

Notes: Data reported in the 2007 Financial Report. GAO disclaimed an 
opinion on the U.S. governmentï¿½s fiscal year 2006 and 2007 consolidated 
financial statements other than for the fiscal year 2007 Statement of 
Social Insurance. As such, the reported amounts may not be reliable. 

[A] Nearly all of the decrease in the depreciation component and 
outlays for capitalized fixed assets was attributable to DOD. Because 
DODï¿½s financial statements have been unauditable, it is unclear what 
exactly drove the large change. However, looking at depreciation and 
acquisition of capital assets together shows that they account for a 
small share of the difference between the net operating cost and 
unified budget deficit in fiscal year 2007. 

[B] The final deficit number published in the Budget of the United 
States Government was slightly higherï¿½$248.2 billionï¿½because of 
subsequent adjustments. However, we use the numbers reported in the 
Financial Report since it contains the reconciliation between cash and 
accrual deficits.

[End of figure] 

[End of section] 

Footnotes: 

[1] The following pages update selected information in Understanding 
Similarities and Differences between Accrual and Cash Deficits (GAO-07-
117SP) and should be read in conjunction with that document. 

[2] Despite recent improvements in the budget deficit, the long-term 
outlook remains unsustainable. See GAO, The Nationï¿½s Long-Term Fiscal 
Outlook: August 2007 Update, GAO-07-1261R (Washington, D.C.: Sept. 28, 
2007). 

[3] For more information regarding the reliability of federal financial 
data, see GAOï¿½s auditor report in the 2007 Financial
Report of the United States Government (Washington, D.C.: Dec. 10, 
2007). 

[4] GAO, Financial Audit: Process for Preparing the Consolidated 
Financial Statements of the U.S. Government Needs Improvement, GAO-04-
45 (Washington, D.C.: Oct. 30, 2003). 

[5] Amounts reported in the consolidated financial statements for 
agenciesï¿½ net costs include allocations from the General Services 
Administration and Office of Personnel Management and thus do not match 
the costs reported in individual agenciesï¿½ financial statements.

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