The Federal Enron.... and assorted political dirt.
WSJ Editorial
Feb. 14., '02
The Federal Enron....
Members of Congress are having a gay old time accusing Enron executives of "economic terrorism" and "selling souls." But while Washington is stringing up accountants in Lafayette Park, the pot may want to consider the color of its own financial books.
The little-known but scary truth is that the federal government also disguises some of its liabilities, or simply leaves them off balance sheets altogether. Exposing this isn't as much fun as watching Houston millionaires take the Fifth, but in the long run this is likely to cost more Americans more money than anything Enron did. If nothing else, the practices deserve more sunshine and public debate.
For example, U.S. obligations to the International Monetary Fund currently stand at $46 billion, up from $33 billion in 1999, but you won't find those figures in the federal budget. So far as Treasury is concerned, IMF expenditures neither increase the deficit nor reduce the surplus. This government commitment of taxpayer money is therefore left off the ledger. The U.S. might remember this the next time it lectures the IMF about "transparency."
Or take the railroad retirement bill that President Bush quietly signed into law just before Christmas. This permits the federal government to invest surplus retirement funds in the stock market. Standard accounting procedures would score that as a federal expenditure, yet Congress directed the Congressional Budget Office not to regard it as such, arguing that doing so would lead to an increase in federal borrowing. The CBO obliged, and so, presto, the railroad retirement fund -- a federal entitlement guaranteed by law -- costs nothing. It's a Beltway free lunch.
Other faux freebies, per federal accounting rules, include government-sponsored enterprises (GSEs) such as Fannie Mae and the Federal Home Loan Banks. Washington pretends that GSEs are private companies, like Cisco or Enron, which allows the government to keep its contingent obligations to these entities off the books. To the extent that Fannie Mae's earnings accrue to the owners, it is a private firm. But unlike Cisco, Fannie Mae enjoys a special relationship with the government, one that includes an implicit understanding that it will never be allowed to fail.
Everyone knows that Washington, if it ever needs to, will pay out cash to prevent a default on obligations issued by GSEs, something that the Treasury's past treatment of the farm credit system will attest to. According to the Office of Management and Budget's 2001 report, those obligations currently stand at $3.1 trillion. Still, Washington insists on keeping that figure off the official balance sheet and concealing it from taxpayers who would ultimately have to foot the bill.
Testifying before a House finance committee last spring, CBO Director Dan Crippen politely informed lawmakers that their funny bookkeeping does have consequences. "The federal subsidy to GSEs is unusual in that it is not explicitly appropriated by the Congress, nor does it appear in the budget as outlays," said Mr. Crippen. "Nevertheless, it is real. It represents costs to the American public."
Even when programs are handled on-budget, the government plays by different rules. An enduring example is the treatment of federal insurance programs such as Social Security and Medicare. Social Security taxes are included in the budget as revenue, but its attendant future liabilities are omitted. This is why the consolidated financial statement issued by Treasury last year shows zero obligations for Social Security (and Medicare). Zero. Buried somewhere in the footnotes you'll find disclosures of anticipated outlays, but the balance sheet itself is innocent of any liability, a habit not unlike a certain energy company's.
Enron executives are also said to have kept "black-box" partnerships off of financial statements, a situation that allowed them to hide debt while inflating the firm's profits. The scam has a familiar ring. Jeffrey Skilling could have used government "surplus" mathematics as a model. For everyone else, a dollar spent to purchase a car cannot also be used to buy a sweater. The federal budget, however, routinely spends the same dollar twice. Beltway accounting rules allow the exact same tax dollar simultaneously to reflect, say, a decrease in the deficit and an increase in the Social Security trust fund.
This sort of double-counting may help keep up political appearances, but it works only in theory and only for so long. Eventually, the government will find itself in an Enron-like situation, with retirees thinking they have government-held assets -- after all, that's what the balance sheets say -- that turn out to be only political promises.
We're all for politicians devoting time to such an obscure but vital subject as accounting. But then let's go all the way and clean up both public and private shenanigans. Shady bookkeeping shouldn't be rejected in Texas but permitted in Washington. With Ken Lay and friends illustrating the imminent dangers of staying our current course, the politicians have a chance to clean up their own books after they scour Enron's. |
