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 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.[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.
government�s 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 small�averaging
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 billion�more 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 VA�s 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 VA�s 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 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. 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
deficit�costs incurred, but not yet paid�such 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 deficit�the 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. government�s 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
DOD�s 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 higher�$248.2 billion�because 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 Nation�s 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 GAO�s 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
agencies� net costs include allocations from the General Services
Administration and Office of Personnel Management and thus do not match
the costs reported in individual agencies� financial statements.
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