Imagine that Uncle Sam suddenly morphed into Samuel Smith, CEO of Federal Enterprises, Inc., a conglomerate with 2.8 million employees in 2009, $2.2 trillion in revenues in 2010, and a proposed budget of $3.7 trillion for 2012. If this private company were run the way Washington works, newspaper headlines soon would scream: “MR. SMITH GOES TO ATTICA.”
Washington’s routine accounting methods would trigger indictments against similarly behaved business executives. In fact, people have been convicted for operating as Washington has for decades.
• Consider the Obama administration and the previous Democratic Congress’s mishandling of $500 billion in Medicare funds. If Republicans proposed to reduce Medicare’s cotton-ball budget by 1 percent, Democrats would scream, “Dachau!” And yet Democrats, of all people, swiped half a trillion dollars from Medicare to finance Obamacare. Democrats also claim that this sum will underwrite Medicare benefits. Which is it?
Rep. John Shimkus (R., Ill.) grilled Health and Human Services secretary Kathleen Sebelius about this before the House Energy and Commerce Subcommittee on Health. He wondered how, in essence, the Obama administration could move $500 billion from its left pocket (Medicare) to its far-left pocket (Obamacare) and somehow finance $1 trillion worth of Medicare and Obamacare.
“Your law cuts $500 billion in Medicare,” Shimkus reminded Sebelius at a March 3 hearing. “Then you’re also using the same $500 billion to say you’re funding health-care [reform]. Your own actuary says you can’t do both.”
“So,” the eight-term congressman continued, “are you using it [the $500 billion] to save Medicare, or are you using it to fund health-care reform? Which one?”
Secretary Sebelius confessed: “Both.”
“So, you’re double-counting,” Shimkus replied.
“The same dollar can’t be used twice,” observed Health Subcommittee chairman Rep. Joe Pitts (R., Pa.). “This is the largest of the many budget gimmicks Democrats used to claim Obamacare would reduce the deficit.”
As any college business major knows, such double counting would earn a big, fat F on an accounting final. Far worse, this is illegal.
This Medicare flim-flam parallels WorldCom’s double counting of revenues, among the defunct telecommunications company’s $11 billion in accounting fabrications. Such graft transformed Bernard Ebbers from WorldCom’s CEO into federal prisoner No. 56022-054. He is at Oakdale Penitentiary in Louisiana, serving 25 years for fraud, conspiracy, and filing false statements.
• Meanwhile, Democrats and Republicans maintain a misallocation-of-funds conspiracy within a Ponzi scheme called Social Security.
In 2009 — the year before benefit payments began to outpace payroll-tax revenues, seven years sooner than officials projected — Heritage Foundation analyst David John reports, Social Security received $689.1 billion in payroll-tax revenues. It paid beneficiaries $685.8 billion, leaving a $3.3 billion surplus.
The Treasury took this $3.3 billion and placed a non-negotiable Special Issue Treasury Note of equal nominal value into the Social Security Trust Fund. These self-IOUs (literally stored in a filing cabinet in Parkersburg, W. Va.) obligate future Congresses to tax or borrow money to pay these retiree-benefit bonds decades hence.
And then the Treasury let Congress spend this $3.3 billion on everything from ethanol to education to the EPA.
Such chicanery smacks of embezzlement under Section 664 of the Employee Retirement Income Security Act (ERISA). On March 9, the Ninth Circuit Court of Appeals endorsed the convictions of executives Sigmund Eriksen and Raymond Eriksen, as Judge Milan D. Smith, Jr.’s opinion states, “stemming from their misappropriation of employee 401(k) contributions to pay their company’s operating expenses.” Staffers at Lunde Electric Company, a now-sunk Seattle maritime electrical-repair firm, eventually were made whole. Nonetheless, this father and son each must endure two years of probation, a $20,000 fine, and 240 hours of community service.
• The Securities and Exchange Commission and Section 448 of the Internal Revenue Code require that nearly all companies with revenues exceeding $5 million use accrual accounting to reflect current finances and long-term liabilities. Despite being elephantine, the federal government instead employs cash-basis accounting — as do dry cleaners and shoe-repair shops.
“Since cash-basis accounting ignores government obligations to spend money in the future, it gives a disastrously incomplete and inaccurate picture of where the government really stands,” wrote CPA and former congressman Joseph DioGuardi (R., N.Y.) in his book Unaccountable Congress.
Similarly, Title 17, Part 210 of the Code of Federal Regulations features this Securities and Exchange Commission rule: “Financial statements filed with the Commission which are not prepared in accordance with generally accepted accounting principles will be presumed to be misleading or inaccurate.” Thus, if presented by a private company, Uncle Sam’s books would be considered dodgy, if not cooked.
As Washington struggles to cap a giant geyser of red ink, it should stop practicing accounting that, in business, would be considered criminal.
— Deroy Murdock is a nationally syndicated columnist with the Scripps Howard News Service and a media fellow with the Hoover Institution on War, Revolution and Peace at Stanford University.