Why America Has Two Debt Ceilings | Commentary
In what is being hailed as the “great bipartisan act” of 2014, members of Congress and the president agreed on Feb. 15 to suspend the federal government’s debt limit through March 2015. The suspension applied to the $17.2 trillion in debt that is measured by currently outstanding U.S. Treasury bills. But this did not take into consideration America’s other “debt ceiling” — the one that is approaching $78 trillion and that unfortunately has no statutory limit.
The $61 trillion difference between these two numbers is the result of the U.S. government’s use of two contrasting accounting systems. The statutory debt limit that was passed through March 2015 uses a cash basis accounting system. This means that the Treasury Department records financial transactions when income is received and expenses are paid.
But this is not the case with the $78 trillion number, which is measured by what the highly respected accounting profession calls generally accepted accounting principles. GAAP is based on the “accrual” method of accounting used in the private sector and enforced by the Securities and Exchange Commission to protect investors in publicly traded companies. Under GAAP, expenses are recorded when government is obligated to pay, either when billed or contractually liable, even before payment is made. So, for example, under GAAP, the unfunded obligations that the U.S. government has incurred for programs such as Social Security, Medicare and federal pensions must be treated as expenses from the day those promises are made. They must also be shown as a liability on the books of the U.S. government and in its financial reports. Cash basis accounting does not recognize these expenses until they are paid — hence the $61 trillion discrepancy between the two debt figures. It is well-known that accrual/GAAP accounting is considered a better way to measure a large and complex entity’s financial condition and the results of its operation, not only in financial terms but in an economic sense.
For years our politicians have been indirectly referring to accrual-based accounting in the context of cash basis debt ceiling debates. This is because our elected officials are not talking in “cash basis language” when they speak about promises that have already been made to the American people as a reason to raise the nation’s cash basis statutory debt ceiling. They are essentially using accrual accounting standards and logic to make the case for increasing the statutory cash basis debt ceiling.
If our federal government was using accrual-based, generally accepted accounting principles, the risky financial condition of the U.S. government would be clearer. Our federal government has incurred an unfunded obligation of nearly $39.7 trillion in Social Security and Medicare net expenditures. This number is supplemented by the outstanding U.S. debt “on the books” of $17.2 trillion (mainly U.S. Treasury securities), by the $4 trillion in non-entitlement net expenditures that would be incurred over 75 years if our leaders simply did nothing to halt the growing tide of annual deficits, and by the $17 trillion that is calculated to be the long-term costs of Medicaid expansion over 75 years due to the increase in enrollees as a result of the Affordable Care Act of 2010. The total is more than $78 trillion in what should be labeled “the long-term national debt of the United States.” This huge number is actually hiding in plain sight in the actuarial reports on the financial outlook of Medicaid and in the 2013 Financial Report of the United States Government. It paints a more accurate picture of the U.S. government’s true financial condition than merely recording our nation’s finances on the cash basis system of accounting.
Most troubling about the recurring statutory debt ceiling debate is that it distracts from what should be the focus of any long-term promises. By debating and accounting under the obviously deficient limits of a cash basis system, Congress has neatly avoided thinking about the future. And by not revealing to the American people what we truly owe on the basis of generally accepted accounting principles, they have largely kept citizens “in the dark” about the economic danger that our dent-ridden fiscal path puts us on.
Unless we call for change, future disputes over raising the debt ceiling will continue to distract the public from “who” the real focus should be in the debate over debt, deficits and the size of government: our children and their descendants. To even begin to bring clarity to our fiscal predicament, we need an honest discourse with the American people. This will entail spelling out the unfunded obligations that our government has incurred and placing the focus back on the real victims of a government that fails to address its current fiscal profligacy and impending financial insolvency.
This Article was Originally Published in: Roll Call