Point of View »Harris Sherline: Talking Numbers

Harris Sherline: Talking Numbers

By Harris R. Sherline | Posted on 11/16/2008

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Government takes liberties with financial accountability. But there's a reckoning ahead.

Numberspeak makes most people’s eyes glaze over. But, as has often been said, the devil is in the details and, unfortunately, the only way to understand much of what goes on in government is through the numbers that are released for public consumption.

It’s always been surprising to me how people in government can get away with misrepresenting financial information while those who do the same thing in private life can be prosecuted for fraud. Take financial reporting: The federal government imposes so many reporting requirements on public companies through the Securities and Exchange Commission and various other agencies that it is often difficult, if not impossible, for them to comply, and even when they do, it is usually not easy to interpret. But the government does not have to meet the same standards in its own financial reporting.

Here’s an accounting primer (in 67 words): The principal difference between government and corporate accounting is that business financial statements must include the amounts it owes for goods and services it purchased during the period (month, quarter, year). It’s called accrual accounting. On the other hand, governmental financial reporting is generally prepared on the cash basis and do not show the largest portion of their liabilities on the financial statements it issues.

What does this mean? Looking at the big picture, it means the financial statements the federal government releases do not include the amounts it expects to pay in the future for the Social Security and health-care programs, such as Medicare and Medicaid, and various other obligations, like publicly held debt, military and civilian pensions, federal insurance, loan guarantees and leases.

Former U.S. Comptroller General David M. Walker, currently president of the Peter G. Peterson Foundation, has prepared A Citizens Guide to the Financial Condition of the United States Government, which notes that in 2007 the major fiscal exposures to the government amounted to $52.7 trillion.

“The dollar figures used when discussing the federal budget are almost too large to comprehend,” the report says. “To translate the estimated $52.7 trillion in major fiscal exposures — our federal fiscal hole — into more understandable numbers, the Government Accountability Office calculated the burden as equivalent to $175,000 per person living in the United States; $410,000 per full-time worker; $455,000 per household.”

The guide also notes, among other things, “… about 42 percent of the (federal) budget is devoted to Social Security, Medicare and Medicaid. Because these programs provide significant benefits to older people, that percentage will grow as the population ages.” Medicare and Medicaid will also experience rapid growth. As baby boomers become eligible for these benefits, the budgets for these programs will consume ever greater percentages of the federal budget.

These huge amounts do not show up in the financial reporting the public usually sees when politicians talk about fiscal policies, prepare and approve budgets, or generally discuss the federal government’s financial situation. It’s amazing but, for the most part, these “unfunded liabilities” are treated as if they don’t exist. The government seems to operate on the theory that out of sight is out of mind. But they do exist, and they are coming due much faster than most people realize. When that happens, we will not be able to fund them without these commitments consuming the entire discretionary budget. In other words, we won’t be able to buy or pay for anything else.

Since most people do not have the resources to pay their share of these federal obligations, where will the money come from? The primary sources are either increased taxes, borrowing or printing money. If the choice is to raise taxes, the amount would be great enough to cripple the economy and chances are it would be so politically risky that politicians would likely turn to one or both of the other alternatives: borrowing or printing the money, both of which would be highly inflationary and would undoubtedly result in hyperinflation.

We are in a trap of our own making and very few of our political leaders have been willing to deal with this challenge. If we don’t stop hiding the facts from the public and face up to reality, we will eventually cross the line into hyperinflation.

Executives of large corporations who are guilty of this sort of financial misrepresentation often go to jail. Perhaps some of the leading political charlatans should also go to jail for hiding the financial facts from the public. The question is: Where do we start and who should be at the head of the line?

Harris R. Sherline is a retired CPA and former chairman and CEO of Santa Ynez Valley Hospital who has lived in Santa Barbara County for more than 30 years. He stays active writing opinion columns and his own blog, Opinionfest.com.

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