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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.