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FASAB Hearing—March 25, 2009

Joseph DioGuardi—text

 

All right, we’ll ask our next speaker up.  Another Your Honorable, then.

 

            MR. DIOGUARDI:  I was an accountant before I became an Honorable.

            [Laughter]

            MR. ALLEN:  Thank you.  We don’t often get a copy of a book from those speaking before our Board.

 

            MR. DIOGUARDI:  I also prepared a new brochure that updates some of the things that I’ve been doing since writing the book Unaccountable Congress:  It Doesn’t Add Up.

 

            MR. DIOGUARDI:  By the way, if anybody else wants a copy of the book, please take one.  Thank you, Mr. Chairman.  Well, we’ve got economists, actuaries, politicians, accountants.  But, let’s not forget the people.  One of the reasons that I ran for Congress came out of my experience at a great firm, Arthur Andersen.  I spent 22 years of my life there.  And let’s not forget that Chuck Bowsher and David Walker came out of Arthur Andersen to become two successive Comptroller Generals, and I came out of Arthur Andersen to run for Congress.  The firm had a tremendous impact on the public sector. 

 

            MR. ALLEN:  After then it just went down hill.

            [Laughter]

            MR. DIOGUARDI:  Well, I would say that Arthur Andersen had a problem with prosecutorial hubris.  The Justice Department went after a firm with 50,000 employees, when they could have gone after the three partners in Houston handling Enron.  When

the case went to the Supreme Court, the verdict was in favor of Arthur Andersen nine to zero, but by then the firm’s reputation was killed.  That happens to individuals, by the way, as well as to firms.  And there’s a lesson to be learned in that, but that’s not for this session.

 

            But let me remind you of the greatness of Arthur Andersen for us today.  The firm not only spawned good people; it spawned great ideas.  And I want to remind you where the idea for the FASAB came from.  Your board was formed as a result of the bill that I introduced in Congress twice, in 1986, and in 1987.  President Bush signed it into law in 1990.  Arthur Andersen saw the need for generally-accepted accounting principles (GAAP) at the federal level before Congress did.  No one thought that we would have a separate FASAB to do that, but we understood there needed to be a better focus on GAAP for the federal government. 

 

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            By the way, I had to make the decision to leave the firm, not knowing I could be elected.  When you are in an accounting firm, you have to leave before you run.  Otherwise the public may think that you’re being supported by the firm, and this would hurt the independence that these firms stand for.  So I left.  And, thank God, I was lucky enough to win as a Republican in a Democratic district.  I tell many of my friends that I was the accidental Congressman, because if my party thought that I would win, they wouldn’t have given me the nomination to run.  I was the “sacrificial lamb.”  But, I fooled them by winning, and now I’m here today with four years of great experience in Congress on the Banking and the Government Operations Committees.  (I think they’ve changed their names somewhat today.) 

 

            But before entering Congress, I was one of the partners on a team led by Arthur Andersen’s Managing Partner, Harvey Kapnick, that was hired by the Treasury Department to re-do the books of New York City, so that the Treasury Department would feel comfortable in bailing out New York City.  And once we did that, under the leadership of the investment banker Felix Rohatyn, who was managing the bailout plan at the time (and I think that we still need him today, by the way), Mr. Kapnick was smart enough to take this team of Arthur Andersen partners (including me and Mr. Mort Egol, who had a lot to do with the firm’s publications on public sector financial reporting) to try to piece together the financial statements of the United States of America.

 

            So the firm, on its own nickel, prepared the consolidated financial statements of the United States of America and published them in this booklet, Sound Financial Reporting in the Public Sector, in 1975.  (They followed up in the next year with Sound Financial Management in the Public Sector.)  The firm continued to prepare these statements for five years and then turned it over to the Treasury Department.  This became a prototype statement that led to the one prepared by the Treasury today that you have seen publicized each year.

 

            And, by the way, I came down to Washington from New York a day early, yesterday, so that I could read a hard copy of the financial statements of the United States of America for 2008.  And let me tell you, we need a better format.

 

            [Laughter]

            MR. DIOGUARDI:  But when you think about the important financial accounting

exercise that Arthur Andersen went through, and then you think about the Treasury

taking it up, and now I’m reading this statement and the first thing that hits me is, we don’t have a liability for Social Security on the books.  I could understand that, politically, some didn’t want to publicize a $50 plus trillion obligation for Social Security and Medicare, but I still believe that there has to be a liability recorded, and I’ll tell you why in a minute.  But I couldn’t understand why the FASAB didn’t at least put the non-public portion of the national debt represented by Treasury bills on the financial statements.  So I asked one of your staff.  And the answer given to me was, well, we use

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consolidation accounting principles, and therefore we eliminated that $4 trillion liability in consolidation against the Social Security trust fund.

 

            I said to myself, “Boy, that doesn’t make common sense or sound like fiscal reality.”  You have to have at least the bonded debt, even though a big part of it is held in the trust funds, on the books of the United States of America.  And if you have to do it by calling it deferred income, so be it.  Some of you belong to country clubs and other social clubs.  If you pay your dues in advance, they can’t all be put in income.  A portion has to be set aside or deferred as income in order to match those revenues against related expenditures.  That’s simple accounting, and why anybody would say that it shouldn’t apply to the U.S. government is beyond me.

 

            But let me give you the answer that Arthur Andersen had in insisting, in 1975, why they put the full accrual for Social Security on the books.  And, by the way, if you don’t have these Arthur Andersen booklets on public sector reporting, I’d be pleased to

make copies and send them to you, because I think that there’s a lot here that great

accountants have come up with.  I was only a young partner at the time, but I learned a

lot from Leonard Spacek and Harvey Kapnick, who pioneered this work. 

            And now let me read note 13 on accruing the liability for Social Security in the original 1975 prototype statement, “The Consolidated Financial Statements of the United States of America.”  (And, by the way, I did come here to speak mainly about fiscal sustainability, but the treatment of the liability for Social Security seems to be getting a lot of your attention, and so I thought that I should lead off with this.)

 

            “An accrual for Social Security benefits is reflected in

             the accompanying financial statement because of the

             fears that such benefits could not be terminated or

             substantially curtailed without serious social and political

             implications.  (Social Security receipts and disbursements

             are also included in the unified budget.)  Further, in principle,

             the consolidated financial statements and the accumulated

             deficit should reflect the liability for the amount of future

             benefits that will not be covered by future contributions

             under present law.  Under this principle, inclusion of an

             accrual would seem to be both proper and required.  It is

             recognized that the Social Security Act states that payments

             should be made only to the extent of the trust funds, and

             that covered individuals who have not contributed to the

             fund have no contractual right to receive benefits.  However,

             this does not negate the need to accrue a liability.”

I could go on and on and give you what the compromise was and how they

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decided to put the liability for Social Security on the financial statements in stages.  But for now let me just say that this is a very important issue. 

 

            The other important issue is the 800 pound gorilla that is not in this room.  It’s over there in Congress, and it’s over there in the Treasury Department.  And you are in effect a hostage to that.  Because this organization, unlike the proposal that I had in my bill, is now funded by political entities that may think differently about the things that we are discussing here today.  The Treasury Department, I understand, gives you 25 percent of your budget; Congress through the CBO gives you another 25; and there are another two such entities.  I’m not saying that that is wrong, but there is a perception that the rules that you are making here could be influenced if one of those entities did not like the end result.  And I saw that first hand when I introduced the bill for a Chief Financial Officer, which evolved from my days in the accounting profession.  When I brought the concept to Congress, there was an intention that the CFO would not be subject to politics.  It was intended that the CFO, not just the deputy CFOs, would be extremely qualified individuals, and that the CFO would not be part of the Treasury Department, would not be part of Congress, but would act in an independent way.  This would be much like the Comptroller General, who has a 15-year term, not coterminus with anybody’s election, or even something like the Federal Reserve System, where accounting standards, like monetary policy, would be divorced from politics once and for all.

 

            And that concept was first espoused by Leonard Spacek of Arthur Andersen in

one of his 250 speeches, as a Managing Partner of the firm prior to Harvey Kapnick.  He saw the need for independence and objectivity in the private sector, when publicly traded corporations were trying to game the system by picking alternative accounting principles, whether it be for depreciation or the way in those days that they accounted for the investment tax credit.  Spacek concluded that the only answer was an “accounting court,”  a body that would take away the promulgation of accounting principles and standards from those who would appear, in the public’s eyes, to have a conflict with doing this.

 

            I come here today not to tell you that this is my final stop.  This is my first stop.  I am now the spokesman, 20 years after leaving Congress for Truth in Government.  That’s what I do as a volunteer.  You might ask, How do I make a living?  I’m on the boards of private companies that are preparing to go public, so I do make a living as a CPA.

 

            But I spent 22 years at Arthur Andersen, 4 years in Congress, and now 20 years as a public advocate for fiscal responsibility, and decided to write a book that would trigger a public outcry on the lack of fiscal responsibility and financial accountability in Washington.  This was not an easy book to write, and I used somewhat outrageous chapter titles to get key points across.  If we can’t get the people to do something about what’s happening, all your work is for naught.

 

            Which gets me to another problem I saw as I read the U.S. Consolidated Financial

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Statements for 2008.  What this statement doesn’t do is consider the many constituencies that you have for financial information.  You have the people.  You have the press.  You have the political elite who hopefully will make decisions based on good information.  And you have sophisticated users—economists, actuaries, academics—that need it.  So

you need to address that.  You need to in some way come up with financial information

that is targeting those people, so that they can use it for whatever they need. 

            This is one of the reasons that one of the bills I introduced in the House in 1988, was to mandate that the Treasury Department distribute a simple one-page financial statement with the tax return forms that they would send to all the taxpayers in January of each year.  You want more of our money?  Tell us how you spent it last year.

 

            Now, one would think that this would be an easy thing to do.  And I even designed something that you probably saw in the brochure that I gave you, where I presented prior year’s financial information in the form of a credit card statement, because I realized that most people don’t own shares of stock.  (If they do, they do only indirectly in their pension system.)  So I said, what about starting off with your balance due at the beginning of the year—your share of the national debt.  (You can do it by family or you can do it by individual.)  And now we add what we purchased for you, for your share of defense, Social Security, etc.  We go right down the line, listing all the major expenditure items disaggregated.

 

            Then there’s a finance charge—your share of the interest on the national debt.  And, by the way, before we get to that, what did you pay us?  Here’s your share of income taxes, payroll taxes, and excise taxes.  And finally we end at the bottom with a reconciliation—from the beginning of the year to the end of the year—concluding with your share of the national debt at the end of the preceding fiscal year.

 

            Now, it’s not perfect.  But it was a simple way to convey to the public that the

deficits are creating additional debt that has to be paid by someone in your family.  And,

on second thought, it should be a family thing, because the family goes on to future

generations even as individual members pass away.

            But the answer from the Treasury was that it would be too expensive to include

even one piece of paper with the 100 million tax return forms that are sent out each year.  So, again, conventional political thinking trumped common sense.  Obviously, Treasury didn’t want to do it, because they didn’t want taxpayers to focus on the fast accumulating national debt in individual or family terms.  Politicians have gamed the system.  And let me tell you how they’ve done it form an accountant’s perspective, since there are many accountants here at the FASAB.

 

            What is the operating cycle of the United States of America?  I was the chairman of an AGA (Association of Government Accountants) task force in 1993.  After I wrote Unaccountable Congress, they called me and asked how can we change the budget

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process?  I said that it wouldn’t be easy, but that they should appoint me to chair a task force on “Truth in Budgeting and Accounting.”  And you’ll see in the brochure (that I handed out earlier) a four-page AGA Task Force report containing six recommendations for changing the budgeting process. 

 

            Now, I know from your staff that the FASAB is not mandated to consider or change the budget process.  And, while I can understand that, one might ask why?  The United States government has an operating cycle that is three to four years.  And what we’re talking about here today is only the end of the cycle.  It starts with budgeting and spending.  Then come the accounting and reporting.  That’s the three- to four-year operating cycle I mentioned earlier.  But if you don’t take generally-accepted accounting

principles and reflect them in the budget process, the cats are out of the house.  (When you go on a vacation and you have four cats, it’s very difficult to get them into the van once you have let them out of the house.)

 

            What we have done is let the politicians determine, through the budget process, what the accounting principles are and what our nation’s unrecorded and unfunded commitments are.  And, by the time it comes down the line to you, where you are focused on preparing financial statements, you’re basically dealing with a foundation for financial reporting that is very porous, as I said in my written comments to you.

 

            And, while this will not change tomorrow, we need to understand that if you don’t integrate accrual concepts under generally accepted accounting principles (even with some modifications for the federal government) into the budget process, then the financial reporting process is already compromised and may even become meaningless—because we’ve already appropriated and spent the taxpayers’ money and have also already committed a lot to be spent later.  Now you are left only with disclosing what was spent or committed.  Hopefully, with a report on fiscal sustainability, we can point the way to the future and get the public interested in what went on at the beginning of that cycle, so that they will then become active in the whole process.  I think that this is the most valuable result that comes from what you are doing here today.  And, by the way, I agreed with most of your board’s conclusions, as I said in my written statement, which I’ll be happy to repeat here.  In any case, they are there for you to read and to understand my thinking on each of the issues to which I responded.

 

            What you are doing that’s most valuable is trying to give information to the most

important constituency of all, the people.  Why is that important?  Because unless they

are informed and unless they get motivated, and in some cases even angry, you’re not going to get the changes we need to stop the financial tsunami that will dwarf the next generation.  I’ve listened to the economists, and they can talk all they want about economic philosophy.  You’ve got to go back to accounting.  And, now, I will take a few minutes to tell you who I disagree with and why I disagree with them.

 

MR. ALLEN:  I was about to phrase that just a little bit differently.  We have your

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written comments, and as you indicated, you agreed with, on the projection or

sustainability with most of what we have there.  I was going to ask you to respond to some of the issues, particularly the issues, since you say, appropriately, that the most important people we’re trying to communicate with are citizens.  There have been a number of comments, including one that this would just be confusing if you show the chart that you have.

 

            Go ahead and respond, but we’re most interested in how we can improve what we’re doing to respond to the citizens and others.

 

            MR. DIOGUARDI:  Okay.  Let me in five minutes tell you what I think.

            MR. ALLEN:  Go ahead, we started you a little bit late.  We’ll go until 5 after.

            MR. DIOGUARDI:  Well, I’m supposed to go on until 12:15, I think.

            MR. ALLEN:  Yes, sorry.

            MR. DIOGUARDI:  Don’t shortchange an accountant, please.  It didn’t add up—the time, that is.

 

            [Laughter]

            MR. DIOGUARDI:  David Walker, the former Comptroller General, who

testified earlier today, said that he doesn’t see the need to record the unfunded liability for Social Security and Medicare of approximately $53 trillion.  But he’s right on the money when he says that it’s ridiculous that we’re not putting at least the entire bonded debt of $10 trillion on the books.  And, that’s something you need to address, whether you call the trust fund surpluses that have been spent and replaced with Treasury bonds, deferred income, or something else—it has to be done.  But I disagree with Walker that there’s “no exchange” regarding Social Security and Medicare, and that therefore no liability needs to be recorded for the estimated $53 trillion mentioned above.  He’s looking at a concept that he may have become familiar with in Washington, and he may have forgotten what he learned at Arthur Andersen.  While the concept of “exchange” may be a valid legal concept, Walker is saying that if you can’t show that there’s something exchanged, like services for benefits, then a liability should not be recorded for Social Security and Medicare.

 

            I disagree with that.  We have politicians running around using rhetoric like accountability and transparency.  They even throw terms around like lock box and trust fund.  People have taken them at their word.  People have voted for them.  There’s been an exchange of political capital here, even moral capital, not necessarily personal services or financial capital.  And to get back to the title of Mr. Spacek’s book, where Arthur Andersen pulled all his speeches together—it is Fairness in Accounting and in Financial

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Reporting.  Fairness is the key word.  Are we being fair to the next generation and to other constituencies by not indicating what the real liability for Social Security and

Medicare is? 

            So I disagree with Mr. Walker.  We have something called moral capital and

political capital.  It’s been extended and taken, and that’s why we need to report a liability for Social Security and Medicare.

 

            And, by the way, he should be the last one to suggest this, because every time the Pete Peterson Foundation, which he serves as President, takes out an ad in the paper—like the big two-page ads in The New York Times–$53 trillion of liabilities for Social Security and Medicare are put where everyone can see them.  (Now he’s up to, in a recent article in The Washington Post, $56 trillion.)  You can’t speak out of both sides of your mouth.  If you’re going to advertise to the public that the debt for Social Security and Medicare is $53 trillion—and we’re not saying funding (let us not confuse funding with reporting)—then you’ve got to report it as such.  And he should know that political reality better than most.

 

            Also, I heard the economists who testified before me say that you can’t fund these liabilities.  But no one is talking about funding $53 trillion.  We’re talking about reporting it, putting it on the books and financial reports where all can see it, and not disguise it.  Put it right where it can be seen.  If you need a foot note to explain it a little more, do it.  But you need to record it.

 

            Now let me respond to another issue mentioned by one of the economists who testified earlier.  He said that you don’t have to worry about anything, because if we have deficits and we’ve got bonds, the money basically comes back to the public as expenditures and it’s a wash.  It sounds like the consolidated financial statement rules

mentioned earlier as a reason not to record a liability for that portion of our bonded debt in the trust funds.  It’s again an inane result.  What he failed to tell you is that we don’t spend all of our money in the United States.  We’re in a global economy now.  We don’t

know how much of what we’re borrowing is being spent abroad, like the expense for the Iraq war.  So our citizens are not benefiting from that, financially.

 

            And of one of the other important things that you need to do with the statement for fiscal sustainability (which I put in my written testimony to you) is recognize that the most important thing in the future for us is whether the United States is going to be competitive.  Is the United States going to win this global economic battle (now that we’re in a global economy), so that we don’t become a hostage to China, Japan, or any other foreign nation?  And we are almost there with respect to the money that we have borrowed from them (and I hope that we are able to continue to borrow from them in the short term).  But somehow we’ve got to break that chain of debt, especially from China, because it’s not the right thing.  If we want to be the leader of the free world, we cannot be a hostage to other nations that do not embrace our values.

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            So, therefore, one of the questions you asked was, Should we report on the foreign debt?  Absolutely.  Loud and clear.  Put it in there graphically.  I think that you’ve concluded the same thing.  You need to show that clearly.

 

            But there are other things.  What are the expenditures for national defense and Research & Development for the United States compared to other countries?  We need to find things that show us that while we may be in a deep deficit position now, that we are still competitive enough because of these factors and that we’re going to come out of

deficit spending.  Because we’re spending an inordinate amount of our money on defense and not being reimbursed by others (e.g., Iraq may never pay us back), this has to be understood now, because it is going to reduce the competitiveness of the United States of America in the long run.

 

Another earlier speaker said that “it is what it is,” regarding intergenerational equity.  He said that we used to have three kids in a family; now we have two.  I don’t accept that.  We still have an obligation to at least report on intergenerational inequity.

 

But if you want to think about it in positive terms, you should think about what made this country great to begin with—how we overcame all these deficits and how we overcame our huge national debt without going under so far.  (Although we’re thinking that this could be a much bigger problem in the future.)  We are the most productive country in the world.  We have had the technological edge that put us there.  And it offset all the waste that we have seen and many of these deficits.  So who’s to say in the future, if we do the right things that two people cannot become three or more with technology? And we need to report where we stand now before we can plan for the right things—that’s why your role is so important.

 

            So the issue is not to look at just the size of the family, look at the potential of two people to become three, four, five, and six, if we are competitive, and if we give them the tools they need in order to be productive in technological terms.  U.S. companies like Microsoft and Google—that’s what’s keeping this country ahead of the game.  But we need to provide good financial information to stay on track for fiscal sustainability.

 

            So with that, let me conclude, and then I’ll take any questions you want.  You’re

going to hear a lot more from me, because I’m now taking Truth in Government public. 

We’re going to become—and I just spoke to David Walker and he is thinking the same thing—that it’s not enough just to inform people.  You need to create a grassroots lobby, just like Howard Jarvis did in the ‘70s with Proposition 13 in California.  And I’m going

to now convert Truth in Government to a 501(c)(4) advocacy organization.  And we’re going to make sure your information gets to the right people, so that they can act on it.  Because without them acting on it, nothing is going to change.

 

 

            So let me just now go back.  (I took some notes over coffee this morning.)  I think

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that we need to be careful.  As I said, too many people are throwing around the words “accountability” and “transparency.”  And they don’t know what they really mean or entail.  You can’t have accountability without good accounting and financial management systems.  You can’t have transparency if you’re going to throw a thick book of financial statements like this at anybody and say, “We reported to you.”

 

            Now, let me tell you what happened to me as a new Congressman in 1985.  I kept holding my voting card up and saying, “This is the most expensive credit card in the world.”  (I don’t know whether you know that a House Member’s voting card is the same shape as a credit card.)  So every speech I gave, I took it out of my pocket to remind my colleagues that they were passing on a debt to the next generation, and much of it was not even reported.  That’s why I put the Congressional voting card on the cover of the my book with the inscription:  “Credit line unlimited, expiration date never, bill to future generations.”

 

            A senior member came to me one day and said, “Joe, we get this quarterly report from the House Clerk, and I don’t understand it.”  He handed me this book, and I see all

these checks listed with no captions or categories.  I was dumbfounded and said that I didn’t know what it was.  So I called up the Office of the Clerk, and I asked, “What is this?” He said, “Well this is our way to report to you and the people what every

Congressional office is spending in Washington and in their districts.”

            You know what they were doing?  They were listing every check that a Congressman spent in his or her office with no totals and no cross tabulations.  But they thought that they were disclosing everything.  You had to have your own calculator to put it together.

 

            And that’s when I realized that we were in trouble.  The powers in the U.S. Congress were reporting to themselves by listing every check in the check register.  They wanted you to think that they were being transparent by reporting this way to you.  That’s one of the reasons that I became so interested in this and said, things will have to change.  I was the one who recommended that an independent audit of the House be done.  The first one was done by Price Waterhouse in 1994.  And we now know that they couldn’t do a “clean” audit in the House, until the books were straightened out a couple of years later.

 

            But look at what you just heard from David Walker.  Over half of the information in this year’s Consolidated Financial Statements of the United States of America is unauditable.  The Defense Department still doesn’t have a set of books that we can audit.  And it’s almost 20 years after the CFO Act was passed requiring this.  And one of the things that you are trying to do is to get the information out faster to the public.  That may be a mistake.  Maybe we need to get better information out to the public and take a little

more time.  Because now the cycle has been reduced.  It used to be nine months, I think,

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before your financial statement was out.  Now it’s down to three months.

            MALE SPEAKER:  Forty-five days.

            MR. DIOGUARDI:  Forty-five days.  Well, can anybody do an audit in 45 days,

especially in a system where we know the books are in shambles, particularly in some of the federal government’s biggest agencies?

 

            So we have a basic problem.  You need to have audits of this.  You need to have independent audits.  Why not a consortium of outside accountants, hired by the U.S. government to do this, so that people know this is being prepared by a third party—to be objective and fair?

 

            I could go on and on, but you want to have lunch.  About some questions, I’d be happy to answer your questions.  You have my book, you have my written testimony, and you have my business card with information on where to reach me after this hearing.

 

            MR. ALLEN:  Actually, that’s great.  We do want to try and get as many people involved, and we do want to try and present the financial statements in an understandable format.  So any additional written comments based on your reading, or after reading the comprehensive financial report, I’m sure Treasury and all of us will be interested in it.

 

            I’d like to start with a concept that you just touched on that seems to be at the heart, when I say some of us are from Mars and some of us are from Venus, or whatever that may be, it centers on the concept of what drives financial reporting.  In the broader perspective, not just the federal government, but in industry or anywhere you have financial reporting, it’s centered on the concept of, do you account for things based on a

legal construct.  In other words, if it’s a liability, do you legally have to pay it, or do you try and capture something that, people have used the word “an economic substance,” or any understanding between different parties?  For example, you know, something you have, a loan to the bank is probably a legal obligation.  Something you have promised

your employees to pay health benefits is an understanding, it’s not a legally enforceable thing.  What’s at the heart, or what should drive financial reporting?

 

            MR. DIOGUARDI:  Well, I think you heard it before that you don’t need to have a legal obligation to report a liability.  And when there have been so many promises made (and Social Security and Medicare are the big ones), it just seems to me that these promises can be measured in accounting terms as fixed and determinable, and when you have a liability that is fixed and determinable, you should report it.  This is basic accounting.  And there’s no question that actuaries can compute this liability.  They may have some different approaches to it and some may say, by the way, as Harvey Kapnick did, that you don’t have to put it all on the books immediately.  Let’s look at what we’re doing with other pension systems and roll it out, maybe over 30 years, i.e., cut the amount in 30 parts to follow what’s going on in the private sector (and I believe that is

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what they did with civil service and military pensions).  And don’t forget that was 1975, when Kapnick said that, and things may have changed since then.

 

            The point is, you don’t necessarily have to report it on the balance sheet all at once.  But there should be recognition that this is a liability.  Politicians have been elected on it.  People have been promised this, and you have people that understand it as a trust fund, even though everybody here understands that it’s not really a trust fund.

 

            So my feeling is that it is fixed and determinable, even though it’s not a legal liability.  Even though the law does say that if the Social Security fund runs out of money, there’s no obligation to pay it, I daresay it’s not going to be a good answer, because there certainly is a moral commitment to pay.  So my feeling is that while the liability for Social Security and Medicare may not be a debt obligation like a Treasury bill, we need to show it as a liability.

 

            And let me, just as an aside, say that it’s incredible to me that in 1983, the Commission that was set up to save Social Security raised the rate of the FICA tax and the tax base.  And we accumulated a lot of money.  And yet politicians have run around saying, they have reduced our income taxes. What they did is they took the money from the payroll taxes and substituted it for the general fund.  And how did they do that?  By taking the money out of the Social Security “trust fund” and using it in the general fund of the budget.  Not exactly as advertised after we told the public that it’s a trust fund.  But now they are saying we’ve reduced your income taxes, but what we really did is increase the taxes on the poorest people in America.  The payroll tax is the most regressive tax of all.  You could be homeless, work two weeks, pay Social Security, and you can’t get a refund for that.  It’s worse than a sales tax in terms of being regressive.

 

            So it seems to me that’s wrong—morally wrong.  You can’t on the one hand say we’re reducing your taxes, but then borrow to spend anyway (like the Governor of New York did for his three terms, leaving New York with the biggest debt of any State in America and with a bond rating that is now lower than all other States except one, because we spent a lot of money that we did not have). 

 

            In effect, that’s what the federal government is doing.  But worse than that, Congress took the money out of the Social Security trust fund that was put there by payroll taxes on some of the poorest people in America, and we used it for the general fund.

 

            Now, I don’t know that this is described in this year’s U.S. financial statements anywhere.  I didn’t see it.  But believe me, this is a political device that has to be

corrected at some point.  That’s why I wrote the book.  I say in my book that Social

 Security is a shell game, a “Ponzi scheme” defrauding the next generation.  We don’t need Mr. Madoff to understand what we did with Social Security.

 

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So, yes, record it as a liability.  And if you don’t, I think you do it at your own peril, because people are going to say, well, how come we are hearing about this $53 trillion or $56 trillion liability for Social Security and Medicare, and it’s not on the books of the United States?

 

MR. ALLEN:  Nancy?

MS. FLEETWOOD:  I was looking at your comments, and also you touched on it today.  One of the things that you mentioned in your written comment was that you were very supportive of the fiscal sustainability statement.

 

MR. DIOGUARDI:  Yes.

MS. FLEETWOOD:  But you also added, which I thought was sort of fascinating, the idea, you commented on the fact that we talked about doing the debt, and you thought that would be really good.  But you also said, and you mentioned it again today, and I was just curious about this, about us doing something even further in comparison on key

indicators with other countries.  I wondered if you could just expand on that a little bit.  Because that wasn’t something that we presented in there, and it’s something that I think was very interesting that you talked about.

 

MR. DIOGUARDI:  That’s why I was surprised that the economists who testified earlier were not thinking about this in global terms.  We’re in a global economy.  And it’s obvious from what’s going on right now that whatever started here in the United States has affected the rest of the world.  So we are global.  And we owe a couple of trillion dollars to China and Japan right now.  And I think that we’re going to have to continue to borrow from them, at least in the short run.

 

            But to the extent that we keep borrowing from foreign nations, is that going to change some of the public policies of the United States of America?  For instance, we saw the Secretary of State recently go to China.  She didn’t mention anything about human rights.  Usually we would.  Why didn’t she?  Well, I would think because we don’t want to upset the Chinese, because we need their money.

 

            So it seems to me that we need to start thinking about the bigger picture.  Are we going to be globally competitive in the future?  What are the financial things that we need to see now that point the way to the fact that we will be globally competitive or will not be globally competitive?  That’s what I was thinking about.  And I mentioned defense, because that’s such a large part of our budget, and a lot of it is being spent abroad, and this country bears an inordinate share of that expense for the free world.

 

            And how much longer can we have a large part of our GDP dedicated to defense without injuring the financial base of this country, and thereby become a hostage to

 others?  I just throw it out as a principle.  I think that you need to go a little bit further

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than you have in looking at those things that would point to whether or not we’re going to continue to be the most productive country in the world by looking at other items, such as R&D expenditures relative to other nations.  And, are we going to continue to be the most independent country in the world?  There are things that we can disclose now that will point the way for us.  And if you talk about sustainability, I see that as part of it.  Maybe not the most important part, but I see it as a key component of measuring our future fiscal sustainability as a free and independent nation.

 

            MS. FLEETWOOD:  I think one of the other speakers mentioned, just in passing, medical expenses.  What is our percentage of spending on medical expenses compared to other countries?  I was thinking that might be another key indicator.

 

            MR. DIOGUARDI:  Absolutely.  And also I mentioned “tax expenditures” in the conclusion of my written comments.  I said, why are we not focusing on the tax revenues we’ve diverted to housing, healthcare, and other tax deductions, so that we really know what the totality of government spending is.  And it’s not that we would set the policy to change it.  But we have to disclose it so that people can understand it and, perhaps, even act on it.  Either people will say, this is not right, or the politicians will say, now we’re spending too much.  I hadn’t realized that those indirect expenditures were getting so high as they are relative to the budget that we are dealing with today.

 

            So that’s another element that has to be disclosed.  You’re dealing with some of the most complex things possible.  And somehow, you have to simplify these things to put them in a context and in a form that will enable us to talk to the average citizen about

it.  And we may have to do it in several different ways.

            For the average person, you’re going to need to come up with a one-pager.  It may break your heart to do it, but I don’t think they’re going to ever read anything that has more than a couple of pages, and it has to be in a format they understand.  That’s why I came up with a credit card statement, because I figured that would be the only thing that most people would understand.  But I don’t have a monopoly on ideas.  You have great people on this board, and I think that you have to start thinking about how can we get this information to all constituencies, as I mentioned at the beginning of my testimony here

today.  You have to be very sophisticated financially to understand the U.S. financial statements the way they are presented today.  I had to take a lot of time to read them. I learned a lot, by the way, yesterday, doing that.  Very informative!

 

            But I didn’t like to hear from Mr. Walker that less than half of the financial information being presented is subject to an audit right now.  (And we’re trying to add some other things like the statement on fiscal sustainability, which has to be dealt with as well.)

            And the Treasury, they have a big responsibility.  The CFO, in my bill, was not supposed to be part of the Treasury, as I said.  It was supposed to be a completely independent office.  And when I saw the final compromise made to pass the bill, I wrote

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an editorial in The Washington Post in 1990 saying that we had now put the fox in the hen house.  And that was basically what we did, because now the CFO is a captive of the political process. 

 

            Once you’re in the Treasury Department, you’re part of the Administration.  Once

you’re in the Congress, even the Congressional Budget Office, you’re part of that function.  You need to somehow become separate from all that and become a higher body like the accounting court that Leonard Spacek talked about.  It’s time that we take the numbers away from politicians.  It’s time that we take the budget process—not the appropriation function, which is political—away from the politicians. 

 

            Remember what happened when President Johnson changed the budged process to disguise the cost of the Vietnam War.  He came up with a “unified budget.”  So now we offset the surpluses from the trust fund against the expenditures of the rest of the budget, and no one has attempted to change that.  That was wrong.  It should have been

changed.

            Remember “Gramm-Rudman”?  The law was passed when I came to the House in 1985.  It was supposed to be a mechanism that would take the deficit and reduce it to zero over four years.  Well, by the time they got to third year, they realized that it wasn’t going to happen, so they extended it to five years.  By the time the fourth year came, they realized that they couldn’t do it, and so they went to six.  Then they realized that they couldn’t do it at all, and Gramm-Rudman was eliminated.

 

            And what happened to the Budget Enforcement Act—“pay as you go” in 1990?  Gone!  Every Congress comes in and changes the budget process the way they want it.  This is ridiculous.

 

            But the reason it’s not changing for the better is that people don’t know enough to speak up.  We haven’t developed a constituency for this.  I would like to think that for the rest of my life, that will be a good role for me to play.  Thank you.

 

            MR. ALLEN:  Thank you very much.  We appreciate that.

            We will reconvene at 1:00 o’clock.

            MR. DIOGUARDI:  You’re doing a good job.  Keep it up.  It’s not going to be easy.  But as Churchill said in The Gathering Storm, “KBO” (Keep Buggering On).  And we do have a “gathering storm,” by the way.

 

            [Luncheon recess]