February of 2019, Mark Skidmore and Catherine Austin Fitts published the report “Should We Care about Secrecy in Financial Reporting?” (Skidmore and Fitts, 2019), which provided a review and assessment of the state of federal government financial reporting and the lack of transparency therein. Since that report was published, several new developments have emerged. In this document, we provide an update on the state of federal government financial reporting on both uses and sources of revenue. We begin with a discussion of uses. On the uses side, we discuss new information from the Office of the Inspector General (OIG) regarding 170 unsupported journal voucher adjustments tallying to $2.1 trillion. These 170 adjustments were briefly mentioned in a 2016 OIG document for the fiscal year 2015 Army General Fund financial report in which the Army was found to have $6.5 trillion in unsupported journal voucher adjustments in that year. We also discuss a request by the Department of Defense to conceal future spending projections.
On the sources side of the ledger, we offer a preliminary evaluation of federal government debt issuance and redemptions by the United States Department of Treasury (Treasury). Recall that we identified through official federal government sources $21 trillion in unsupported journal voucher adjustments over the 1998-2015 period (Kotlikoff and Skidmore, 2017). As discussed in the past, one potential explanation for the ongoing enormous unverified transactions is that the federal government has spent far more than is officially recognized. If this is the case, then we must ask from where the funds came. One possibility is that there has been much more debt issuance than the official debt records indicate. It is important to note that while we have an official record of debt from the issuer (the U.S. government), to our knowledge it is impossible to tally debt from the debt holder side as there is no comprehensive record of who actually owns government securities. Treasury does, however, report a tally of total debt issuance and redemptions on a daily, monthly, and annual basis.
In 2019, the federal government reported a total debt of about $22 trillion. In the same year, total debt issuance was $91 trillion, whereas total redemptions were about $90 trillion. The difference between issuance and redemptions (about $1 trillion) reflects the new borrowing that occurred in 2019. The remaining $90 trillion in debt issuance is due to debt turnover; when bills, notes, bonds, and other debt instruments come to term, Treasury must issue a new debt to replace the redeemed funds. The amount of debt turnover in any given year depends greatly on the composition of the debt with regard to term-length. Long-term debt requires less turnover and reissuance to service, whereas servicing short-term debt requires significant turnover and thus reissuance. In this report, we offer an initial assessment of what total issuance should be to service the official debt of $22 trillion and compare that figure to the $91 trillion in total issuance as reported by Treasury. Our preliminary evaluation suggests that the Treasury may be servicing far more than $22 trillion in official debt. Though this assessment is still a work in progress, we present initial findings to stir further inquiry and solicit ideas and feedback on what may be happening with federal debt issuance and redemptions.
Uses
FOIA Request—Army Unsupported Journal Voucher Adjustments
In 2016, the OIG issued the document “Army General Fund Adjustments Not Adequately Documented or Supported (U.S. Department of Defense, 2016)” which indicated that in fiscal year 2015 the Army general fund had $6.5 trillion in unsupported accounting adjustments. Given that the Army’s general fund budget was approved at $122 billion, $6.5 trillion is an astounding figure that is 54 times authorized spending. As discussed previously, unsupported accounting adjustments are typically a small fraction of (rather than many multiples of) authorized spending. The OIG report provided little detail regarding the nature of the unsupported adjustments. However, on page 6 of the document, there is a reference to 170 unsupported adjustments that accounted for $2.1 of the $6.5 trillion summarized in the report. The following was stated in the document:
We determined that 236, totaling $2 trillion, of the 263 third quarter JV [journal voucher] adjustments in our sample and 170, totaling $2.1 trillion, of the 194 yearend JV adjustments in our sample, were in fact unsupported because the adjustments:
forced general ledger amounts to agree with other data sources without reconciling the differences or determining which data source was correct; corrected errors or reclassified amounts to other accounts without adequately documenting why the adjustments were needed; or changed general ledger data without adequate documentation to support the adjustments.
While it is unlikely that the OIG would respond to a request for detailed information about the nature of the entire $6.5 trillion in unsupported adjustments, it seemed to be a good strategy to request and expect a response for more information regarding the 170 unsupported adjustments tallying to $2.1 trillion. In July of 2019, Mark Skidmore submitted a Freedom of Information Act (FOIA) request asking for more detail about these unsupported adjustments: the dollar magnitudes of each item, the explanation from the Army regarding the nature of the questionable transactions, and descriptions of why the OIG considered the adjustments to be unsupported (Skidmore, 2019). On March 31, 2020, Dr. Skidmore received a response with a document that contained the dollar amounts and some information about the nature of each transaction. The original FOIA request (Skidmore, 2019) and the OIG’s response document (Office of the Inspector General, 2020) can be found at the Solari Missing Money website.
The document provided by the OIG offered brief and incomplete explanations for each of the 170 unsupported adjustments. The explanations were oftentimes cut off, making the full explanation unavailable. The explanations were diverse, including but not limited to “data call,” “bringing balances into agreement,” reversing other journal vouchers, “identifying errors and reasonableness checks,” “disclosing the population of adjustments,” “abnormal balances,” “reconcile general ledger disconnects,” and “customer is unable to provide information.” Below, we list the 10 largest unsupported adjustments, which tally to about $1.15 trillion.
Top 10 Unsupported Journal Voucher Adjustments
JVID Stated Purpose Amount
FY 2015- ELECTRA- Sept This JV is created to disclose the population of adjustments that Departmental Accounting submitted as Report Data Type (ROT) transactions. $ 177,417,491,279
20153780029 The purpose of this adjustment is to bring AT21A99 first Quarter, FY 2014, beginning balances for the Component Level entity trial balances into agreement with the FY 2013 Post Closing balances as reflected in the Defense Departmental Reporting System (DDRS). $ 165,989,255,290
20153780057 The purpose of this adjustment is to reverse iV 5006. After the GTAS implementation, this trial balance populated BS 2020 GTAS Component Trial Balance Staging Area in DDRS-B. This adjustment is causing GTAS Edits to fail in DDRS-B for BS 2020. Once thi [explanation cut off] $ 165,989,255,290
20153780055 This adjustment is being performed to bring in the beginning balances for the program level AT21AF1 trial balance (Level 4). Datacalls are applied to this entity at the program group level (Level 3), as the customer is unable to provide information at the [explanation is cut-off] $ 163,114,566,279
20153824165 DATA CALL: The Military Equipment - Financial Statement Tool (ME-FST) is the system that was developed to maintain and update military equipment valuation data. ASA (FM&C), Financial Reporting provided Departmental Reporting with a spreadsheet of the ME [explanation cut off] $ 92,674,067,778
20154592104 GTAS No SBR Impact: Adjustments made in DDRS-AFS have been reported back into DDRS-B for the purpose of GTAS reporting. This JV will reverse those balances in DORS-B. By the criteria used in support of the accounting entries metrics, this journal voucher i [explanation cut off] $ 88,409,257,166
20155331826 GTAS No SBR Impact: Adjustments made in DDRS-AFS have been reported back into DDRS-B for the purpose of GTAS reporting. This JV will reverse those balances in DORS-B. By the criteria used in support of the accounting entries metrics, this journal voucher i [explanation cut off] $ 88,409,257,166
20156103709 Category H _ Reasonableness Checks - The purpose of this adjustment to clear an abnormal balance submitted against GLAC
7190000.9010 (Other Gains? No Budgetary Impact). Review of 2nd quarter FY 2015 DDRS-B JV1$20155327873 shows that GLAC 7190 was used in [explanation cut off] $ 86,114,452,693
20155014900 FUNDING Category H - Identified Errors and Reasonableness Checks. SBA/SBR Impact. GFEBS is submitting funding changes against GLACs 109000.9000 (Fund Balance with Treasury under a Continuing Resolution (CRA)) and GLACs 439500.9000 (Authority Unavailable) $ 74,121,430,756
20156103679 DATA CALL: The Military Equipment - Financial Statement Tool (ME-FST) is the system that was developed to maintain and update military equipment valuation data. ASA (FM&C), Financial Reporting provided Departmental Reporting with a spreadsheet of the ME [explanation cut off] $ 48,863,576,811
Total Value of Top 10 Unsupported Adjustments $ 1,151,102,610,508
While this documentation allows us to ask additional questions, the actual content is not very informative. In some cases, amounts appear twice, perhaps to embed corrections on each side of a given ledger. Some of the adjustments can be described as “plugs” in the sense that budgets did not agree with actual spending. Presumably, these adjustments were made in order to reconcile accounts. In one case, the explanation indicates that a customer was unable to provide adequate information, but the statement is cut off so that we cannot know what it was the customer could not provide. While many of the explanations sound reasonable, they are not when one considers the magnitudes of the adjustments in the context of the $122 billion budget. As one example, there is a $163 billion unsupported adjustment that was the result of a customer not being able to provide adequate information. While it is sometimes the case that a customer is unable to provide adequate documentation, the $163 billion magnitude is much too large to report as unsupported and then ignore it thereafter. Another $74 billion unsupported adjustment is due to “errors and reasonableness checks.” This one error is more than half of authorized spending in fiscal year 2015. Under normal circumstances, an unsupported transaction of this magnitude would be a considered a red flag for potential fraud.
Unfortunately, without additional information it is impossible to assess any further. Ordinarily, it would be reasonable to expect an auditor to track down and verify unsupported adjustments of these magnitudes, and yet for some reason, these enormous adjustments are reported as unsupported and to our knowledge remain so without any further inquiry. Public confidence depends wholly on the degree to which the public believes our authorities are offering reliable financial statements. In our assessment, with unsupported adjustments of this magnitude, the Army’s financial statements cannot be relied upon. Further, we are unable to verify on our own because we do not have access to transaction-level data and associated documentation, nor the resources to pursue inquiry. Keep in mind that these 170 unverified transactions accounting for $2.1 trillion represent just a third of the $6.5 trillion documented in the original OIG report.
Also recall that high-level government authorities recently implemented Federal Accounting Standards Advisory Board (FASAB) Standard 56, which allows the creation of two financial statements, one for the public that contains misleading information, and another accurate report that can only be seen by a limited number of officials with the proper security clearances (Skidmore and Fitts, 2019). Importantly, FASAB Standard 56 provides little to no constraint on the degree to which federal government financial statements can be modified to conceal expenditures that are deemed to be a matter of national security.
Secrecy in Future Spending
On March 30, 2020, Steven Aftergood reported in “Secrecy News” (Aftergood, 2020) that the Department of Defense (DOD) has requested that Congress rescind the requirement to produce an unclassified version of the Future Years Defense Program (FYDP) database. The stated concern is that publishing the FYDP might reveal sensitive information. While the proposal would preserve a classified version of the FYDP, note that the request also includes a repeal of the requirement that DOD officials certify that the data used to construct the FYDP are accurate. Aftergood concludes that removal of this budgeting requirement “would make it even harder for Congress and the public to refocus and reconstruct the defense budget.” Currently, the degree to which the proposed changes would reduce transparency is unclear, but if the opacity of the DOD budget increases, it will become even more difficult to assess actual DOD spending. FASAB Standard 56 already makes it impossible for the public to know with any degree of certainty what actual spending was for the DOD or any other federal agency or entity. If the request to rescind the FYDP requirement is granted, and it reduces the availability of information on spending plans, citizens will not be able to verify the legality of past spending due to Standard 56 nor have access to future spending plans due to the elimination of FYDP.
Sources—How Much Annual Debt Issuance Is Needed to Service the Federal Debt?
Poster Comment:
More at source