of 40
7/30/2019 FASAB Public Hearing
1/40
Reporting Entity Proposal Is
Unconstitutional and Violatesthe Antifraud Provisions
August 28, 2013
Federal Accounting StandardsAdvisory Board Public Hearing
Joseph H. Marren
7/30/2019 FASAB Public Hearing
2/40
Execut ive Summary
1
My remarks will focus on both the proposal and the larger pictureof how FASAB pronouncements result in fraudulent reporting. I willalso briefly describe why FASAB is an unconstitutional entity
Our political leaders have subverted the democratic process to
protect their self interests.The Legislative and Executive branches have controlledfinancial reporting and thereby public opinion to minimizetheir accountability for spending
Current financial reporting as well as the proposed rule violatenumerous private rights protected by our ConstitutionAlso, in 2012 the Supreme Court decided the Obamacarecase based on financial facts that are simply untrue
7/30/2019 FASAB Public Hearing
3/40
Fear and Greed
2
Just as fear and greed are the primary motivators on Wall Streetthey heavily influence the actions of our political leaders
To date there have not been any downside implications for the
Legislative and Executive branches for fraudulent reporting- Politicians have spent enormous sums in an effort toendear themselves to their constituents
Fear of severe negative career consequences needs to beintroduced into our leaders political calculus- Applying the rule of law will restore accountability
7/30/2019 FASAB Public Hearing
4/40
A l l Repo rt ing Must Comply w i th
the Statement and Account Clause
3
The Statement and Account Clause(Article I, Section 9, clause 7) of ourConstitution provides that:
a regular Statement andAccount of the receipts and
Expenditures of all public
Money shall be published from
time to time
The federal government isfalsely reporting totalreceipts, total
expenditures and theresulting deficit
These three figures arenot subject to the plenary
power of Congress
7/30/2019 FASAB Public Hearing
5/40
4
No Report Compl ies o r Reflects
the Nations Economic Reality
Combined Statement of
Receipts, Outlays and
Balances
Presidents
Budget
The Financial Report
of the United States
Government
It is cash-based
It is not known or used by thepublic including the media, not
central to any discussion of thenations finances and is not viewedas a major publication by any
recent Congress or Administration
Cash-based financialsthat do not include anysocial insurance costs
associated withobligations that must
be paid by law in thefuture and does not
include all governmententities
Accrual-based financialspublished by the Treasury
and OMB that has two majorflaws
7/30/2019 FASAB Public Hearing
6/40
5
Right to VoteSee FEC v. Akins
Freedom of SpeechSee FEC v. Citizens United
Right to Political AccountabilitySee New York v. U.S.
Equal ProtectionSee South Dakota v. Dole
Due ProcessSee Caperton v. A.T. Massey Coal Co.
Right to Financial InformationSee Richmond Newspapers, Inc. v. Virginia
And As a Result Private Rights Are
Violated And Democ racy Is B roken
7/30/2019 FASAB Public Hearing
7/40
6
Fiscal In fo rmation
is Cri t ical to Vot ing Righ ts
The Framers of the Constitution deemed fiscal
information essential if the electorate was to exerciseany control over its representatives and meet their new
responsibilities as citizens of the Republic
- Max Rosenn, Circuit Judge, Opinion of the Court andSupreme Court Justice Douglas including this quote in his
dissenting opinion in U.S. v. Richardson
7/30/2019 FASAB Public Hearing
8/40
7
Account ing More Impo rtant
Than State o f the Union
Article II, section 3 requires the President from time to time to
give the Congress Information on the State of the Union, and
presumably the Framers could have utilized the same informal
procedure with regard to the accounting if they had so wished.Instead, they chose to have the statement published, indicating
that they wanted it to be more permanent and widely-circulated
than the Presidents message. The connotation must be that the
statement was for the benefit and education of the public as well
as coordinate branches of government.
- Max Rosenn, Circuit Judge, Opinion of the Court
7/30/2019 FASAB Public Hearing
9/40
FASABs Proposed Rule Is Designed
to Influence Voters Choices
8
The Constitution confers upon voters, not Congress, the power to
choose Members of the House of Representatives and it is a very
dangerous business for Congress to use election laws to influence
voters choices.- Justice Kennedy in Opinion of the Court in FECv. Citizens United
The fact that Congress is using laws governing federal financialreporting to influence voters choices doesnt make it any less
dangerous
7/30/2019 FASAB Public Hearing
10/40
Accoun tabi l i ty Has Disappeared
When you couple enormous off balance sheet
entities funded with public money and massive
mandatory spending with inadequate financial
reporting accountability disappears altogether
9
7/30/2019 FASAB Public Hearing
11/40
10
Secrecy was the Evil atwhich
Art. I, Sec. 9, Cl. 7 was aimed
Secrecy has, of course, some constitutional sanction.
Article I, Sec 5 Cl 3 provides that Each House shall
keep a Journal of its Proceedings and from time to time
publish the same, excepting such Parts as may in their
Judgment require SecrecyBut the difference was
great when it came to an accounting of public Money.
- Justice Douglas
7/30/2019 FASAB Public Hearing
12/40
Key Assumpt ions
11
No attempt is made to assign blame for the current state of the
nations finances to any politician or political party
The authority to suppress financial information related to nationalsecurity matters is not being questioned
No commentary is made or intended about the validity or need forany government program
All figures are in trillions of dollars (some rounding exists)
Neither policy option of raising taxes or cutting spending is beingadvocated
7/30/2019 FASAB Public Hearing
13/40
It aintwhat you dont know that gets you in
trouble. Its what you know for sure thatjust aintso.
- Mark Twain
12
7/30/2019 FASAB Public Hearing
14/40
Fiscal Year
Ended 9/30 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
GDP(Quarterly-CurrentDollars per BEA) $11.3 $11.9 $12.7 $13.4 $14.1 $14.4 $13.9 $14.6 $15.2 $15.8
Presidents Budget
Revenues 1.8 1.9 2.2 2.4 2.6 2.7 2.1 2.2 2.3 2.5
Outlays 2.2 2.3 2.5 2.7 2.7 3.1 3.5 3.5 3.6 3.5
BudgetDeficit
(0.4) (0.4) (0.3) (0.2) (0.2) (0.5) (1.4) (1.3) (1.3) (1.1)
13
(Trillions of Dollars)
The Presidents Budget
Under Budget Account ing $1.32 Has Been
Spen t fo r Every $1.00 of Revenue
7/30/2019 FASAB Public Hearing
15/40
GovtIns t itu ted Acc rual Accoun t ing
Because Cash Account ing So Poo r
14
The accounting underlying the Presidents Budget obfuscatesfederal fiscal accountability[It] understate[s]the headline
numbers that dominate Congressional and public discussion andform perceptions of the governments financial health
That false picture nurtures financial profligacyCash basis
accounting in the Presidents Budget is the spearhead of reckless
fiscal policy
The [OMB] and the Congressional appropriations committees
have been unwilling to change the accounting basis of thefederal budget to the accrual basis
7/30/2019 FASAB Public Hearing
16/40
Fiscal Year
Ended 9/30 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
GDP (Quarterly-CurrentDollars per BEA)
$11.3 $11.9 $12.7 $13.4 $14.1 $14.4 $13.9 $14.6 $15.2 $15.8
Presidents Budget
Revenues 1.8 1.9 2.2 2.4 2.6 2.7 2.1 2.2 2.3 2.5
Outlays 2.2 2.3 2.5 2.7 2.7 3.1 3.5 3.5 3.6 3.5
Budget Deficit (0.4) (0.4) (0.3) (0.2) (0.2) (0.5) (1.4) (1.3) (1.3) (1.1)
Additional
AccruedExpenses
Recorded in
Financial Report (0.1) 0.2 0.4 0.2 0.1 0.6 (0.2) 0.8 0.0 0.2
Net Operating
Cost(0.3) (0.6) (0.8) (0.4) (0.3) (1.0) (1.3) (2.1) (1.3) (1.3)
15
(Trillions of Dollars)
Financ ial Report Shows $1.42 Has Been
Spent fo r Every $1.00 o f Revenue
Statements of Net Cost
7/30/2019 FASAB Public Hearing
17/40
Assets
Cash $0.2
Receivables 1.0
Inventories 0.3
Property, plant & equipment 0.9
Other 0.4
Total Assets 2.7
16
Financial Reports Balance Sheet Indicates
Net Liability about the Size of Nations GDP
Balance Sheet as of September 30, 2012
(Trillions of Dollars)
LiabilitiesFederal debt securities held bythe public and accrued interest
(11.3)
Federal employee and veteranbenefits payable
(6.3)
Other (1.2)
Total Liabilities (18.8)
Net Liability (Net Position) ($16.1)
7/30/2019 FASAB Public Hearing
18/40
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Social Security $4.9 $5.2 $5.7 $6.5 $6.8 $6.6 $7.7 $7.9 $9.2 $11.3
Medicare
Part A 6.2 8.5 8.8 11.3 12.3 12.7 13.8 7.3 8.5 9.9
Part B 9.7 11.4 12.4 13.1 13.4 15.7 17.2 20.6 21.0 20.6Part D 8.1 8.7 7.9 8.4 7.9 7.2 7.2 7.5 6.8
Total Medicare 15.8 28.1 29.9 32.3 34.1 36.3 38.1 35.2 37.0 37.2
Total Net ObligationPer SOSI
20.7 33.3 35.6 38.8 40.8 42.9 45.8 43.1 46.2 48.5
Medicaid 24.2 24.0 26.1
Total Social InsuranceNet Obligation
$20.7 $33.3 $35.6 $38.8 $40.8 $42.9 $45.8 $67.3 $70.2 $74.6
Increase in NetObligation (a)
$2.9 $12.5 $2.3 $3.2 $2.1 $2.0 $2.9 $21.5 $2.8 $4.5
17
Total Soc ial Insu rance Credit Card Balance
is Mass ive and Grow ing Rapidly
(Trillions of Dollars)
Statements of Social Insurance Plus MedicaidPV of Open Group Obligations as of Jan. 1
Alternative Scenario For Medicare for 2010, 2011 & 2012
7/30/2019 FASAB Public Hearing
19/40
FASAB is Uncons t i tut ional
Execu tive Veto is No t Perm itted
18
FASAB was createdbecause OMB claimedconstitutional issue.
Bowsher unwilling tosue the Executivebranch and Congressunwilling to use powerof the purse to stop
Executive branch frompoaching itsresponsibilities
FASAB violates theseparation of powersrequirementSeeBowsher v. Synar andClinton v. City of New York
If OMB really thoughtthey had correctlegal position whyhave they never
requested an opinionfrom the Office ofLegal Counsel?
Reasonableprobability that theSup. Court would
rule 1921 Actsdelegation of auth.to the Comp. Genlto make up acctprin. for Agencies
violates req. forpassage of laws byCongress andpresentment toPresident
7/30/2019 FASAB Public Hearing
20/40
FASAB Rules
are A lso Uncons t itut ional
19
Financial statementsneed to consolidate:- All entities that are
funded with publicmoney including the
Federal Reserve,Fannie Mae & FreddieMac
- The full cost of theNations social ins.programs includingMedicare, Medicaid andSocial Security
There are noexceptions forentities/programs
funded with publicmoney that ourpoliticians want toavoid accountabilityfor by excluding
them, putting themoff balance sheet ordescribing them onlyin footnotes
Standardspromulgated byFASAB do not
comply with theU.S. Constitutionand violate theantifraudprovisions of the
securities laws
7/30/2019 FASAB Public Hearing
21/40
Anti f raud Prov isions are Inherent
In the Statement and Accoun t Clause
20
A government of the people, by the people and for the people
with an explicit provision in its constitution requiring thepublication of a Statement and Account of the Receipts and
Expenditures of all public Money does not need an antifraudamendment to that constitution requiring the federal governmentto publish truthful figures
To a certain extent Congress recognized the importance of theantifraud provisions by making the issuance of municipal securitiessubject to them
7/30/2019 FASAB Public Hearing
22/40
Overview of
the Municipal Securi t ies Market
21
The Government Accounting Standards Board (GASB)
establishes GAAP, which are used by many state and localgovernments
The SEC lacks authority to prescribe standards in the municipalsecurities market
The municipal securities market is very diverse, with close to44,000 state and local issuers, and with a total face amount of$3.7 trillion
7/30/2019 FASAB Public Hearing
23/40
Mun icipal Secu r i t ies A re Subject
to the Ant i fraud Provis ions
22
The securities laws were enacted with broad exemptions formunicipal securities from all their provisions, except for:
Generally, these prohibit fraudulent or deceptive practices byissuers including making any untrue statement of a material fact or
omitting to state a material fact necessary in order to makestatements made not misleading
The antifraud provisions of Section 17(a) of the Securities
Act, Section 10(b) of the Exchange Act and Rule 10b-5
7/30/2019 FASAB Public Hearing
24/40
Government Pens ion Fund ing
Obligat ions are Fron t Page News
23
Detroits bankruptcy has focused the nation on the importance of
this issue
Underfunding for state and other municipal government pensionbenefits may exceed $4 trillion
- See U.S. Senate Committee on Finance, State and Local Government Defined
Benefit Plans: The Pension Crisis that Threatens America, at 1, Jan 2012
7/30/2019 FASAB Public Hearing
25/40
Congress and the SEC are Focused
On the Pens ion Disc losure Issue
24
In 2011 legislation entitled Public Employee Pension
Transparency Act, was introduced in Congress
The legislation would require states to report their pensionfinances and provide an express ban on federal bailouts
- See Sara Murray, GOP Bill Takes Aim at Pension Disclosure, Wall Street Journal,Feb. 22, 2011
The SEC formed a specialized group within its Division of
Enforcement to focus on public pension accounting anddisclosure violations
- The SEC has brought actions against two states
7/30/2019 FASAB Public Hearing
26/40
In the Matter o f
State of New Jersey
25
In 2010 the SEC foundthat New Jersey violated
Section 17(a) inconnection with the saleof over $26 billion inbonds from 2001 through2007
State made materialmisrepresentations and omissions
that created the fiscal illusion thatits pension plans were beingadequately funded and masked thefact that NJ was unable tocontribute to the plans without
raising taxes or cutting otherservices, or otherwise impacting thebudget
7/30/2019 FASAB Public Hearing
27/40
The Importance o f In fo rmation in
Evaluating NJs Overall Finances
26
As of June 30, 2009, the two largest pension funds had anunfunded actuarial accrued liability of approximately $27 billion
The SEC found that information regarding the States under
funding of the pension plans and their financial health wasimportant to investors in evaluating New Jerseys overall financial
condition and future financial prospects
7/30/2019 FASAB Public Hearing
28/40
In the Matter o f
State of Il l ino is
27
In 2013 the SEC found that inconnection with multiple bond
offerings raising over $2.2B from2005 through 2009 the Statemisled bond investors about theadequacy of the statutory plan tofund its pension obligations and
the risks created by the Statesunderfunding of its pensionsystems
As of 2011 Illinois Pension
Systems were unfunded by
$83 billion. In April 2012, theState acknowledged that[u]nsustainable pensioncosts are squeezing coreprograms in education,public safety, and humanservices, in addition tolimiting [the States] ability to
pay [its] bills.
7/30/2019 FASAB Public Hearing
29/40
What Was the Sign i f icance of
Info rmat ion to Investo rs?
28
The SEC determined that reasonable investors would haveconsidered information regarding the underfunding of Illinois
pensions, the risks created by that underfunding, and thefinancial condition of the pension plans to be important factors inthe investment decision-making process
Reasonable investors would have viewed such information as
significantly altering the total mix of information available regardingthe States future financial prospects
7/30/2019 FASAB Public Hearing
30/40
FASAB Has Hit the Trifecta!
29
Proposed Reporting
Entity exposure draft
violates the antifraudprovisions
Disclosure by Stateand federalgovernmentsregarding Medicaidviolates the antifraudprovisions
Federal financialdisclosure relatingto Social Securityand Medicareviolates theantifraud provisions
7/30/2019 FASAB Public Hearing
31/40
Repo rt ing Ent i ty Proposal
Violates An t i f raud Prov isions
30
Federal Reserve System,
Fannie Mae and FreddieMac have total assets of$3.3, $3.2 and $2.0 trillion.They are material to the9/30/12 balance sheet with
assets of $2.7 trillion
Reasonable investors in
government securities would viewthe availability of consolidatedinformation as significantly alteringthe total mix of information availableregarding the Nations future
financial prospects
7/30/2019 FASAB Public Hearing
32/40
Medicaid Disc losures By
All Fifty States are Fraudulent.
31
No state or the District of Columbia records the full cost of itsshare of Medicaid costs in its income statement or balance sheet
Between 2005 and 2008 federal contributions averaged
57% and state contributions averaged 43%
Based on the $26.1 trillion federal government obligation reportedin the 2012 Financial Report the fifty states and District ofColumbias aggregate net present value obligation for Medicaid is
$19.7 trillion
Both the $26.1 and $19.7 trillion figures are significantlyunderstatedSee Marrens memo
7/30/2019 FASAB Public Hearing
33/40
And Violate the
Ant i f raud Provis ions
32
Omitting the disclosure
of material facts clearlyviolates the antifraudprovisions as a matter oflaw
All states and the District of Columbia
have inadequate financial disclosureregarding an aggregate Medicaidobligation that at approximately $20trillion is over five times the size of the$3.7 trillion municipal securities market
or the $4 trillion pension underfundingissue
7/30/2019 FASAB Public Hearing
34/40
Medicaid Obl igat ions For Top
Twelve States Are EnormousIn Bi l l ions of Dol lars
33
New York - $3,158 Ohio - $750
California - $2,562 Massachusetts - $733
Texas - $1,150 New Jersey - $635
Pennsylvania - $1,035 Michigan - $576
Illinois - $902 North Carolina - $497
Florida - $797 Minnesota - $441
All Other States & Wash DC - $6,464; Grand Total - $19,700
7/30/2019 FASAB Public Hearing
35/40
Feds Reporting for Medicaid
Violates the Ant i f raud Prov isions
34
In the RequiredSupplementaryInformation in the back
of the 250 page 2010Financial Report was a$24.2 trillion net presentvalue cost for the fedsfor Medicaid.
- Under the SupremeCourts buried factsdoctrine this practice isa clear violation
Prior to 2010 thefederal governmenthad never published
in any financialstatement anyestimate of the netpresent value cost ofMedicaid
CBO presentedlong-term Medicaidprojections for the
first time in Nov.2007- The Medicaidprogram hasexisted since the
1960s
7/30/2019 FASAB Public Hearing
36/40
Medicare & Soc ial Secu r i ty Repo rt ing
Violates An t i f raud Prov isions
35
The net present value cost of Medicare and Social Security hasbeen reported in the Statements of Social Insurance for manyyears
- The total adjusted cost for both as reported in the Social
Insurance Credit Card schedule found earlier in thepresentation was $48.5 trillion- However, SOSI does not inter-relate with the otherfinancial statements
Reasonable investors in government securities would clearlyconsider inter-related information as significantly altering the totalmix of information available regarding the Nations future financial
prospects
7/30/2019 FASAB Public Hearing
37/40
Fiscal Year Ended 9/30 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
GDP(Quarterly-CurrentDollars per BEA)
$11.3 $11.9 $12.7 $13.4 $14.1 $14.4 $13.9 $14.6 $15.2 $15.8
Presidents Budget
Revenues 1.8 1.9 2.2 2.4 2.6 2.7 2.1 2.2 2.3 2.5
Outlays 2.2 2.3 2.5 2.7 2.7 3.1 3.5 3.5 3.6 3.5
Budget Deficit (0.4) (0.4) (0.3) (0.2) (0.2) (0.5) (1.4) (1.3) (1.3) (1.1)
Additional Accrued
Expenses Recorded
in Financial Report (0.1) 0.2 0.4 0.2 0.1 0.6 (0.2) 0.8 0.0 0.2
Net Operating Cost (0.3) (0.6) (0.8) (0.4) (0.3) (1.0) (1.2) (2.1) (1.3) (1.3)
Increase in PresentValue of SocialInsurance Obligations
2.9 12.5 2.3 3.2 2.1 2.0 2.9 21.5 2.8 4.5
Operating Deficit (3.2) (13.2) (3.1) (3.6) (2.4) (3.0) (4.1) (23.6) (4.1) (5.8)
36
(Trillions of Dollars)
Add ing A l l Soc ial Insurance Cos ts Reveals
Feds Spent $3.96 fo r Every $1.00 of Revenue
Adjusted Statements of Net CostOpen Group - (Alternative Scenario for Medicare for 2010, 2011 & 2012)
Add ing PV of A l l Soc ial Ins Obl igat ion s
7/30/2019 FASAB Public Hearing
38/40
Assets
Cash $0.2
Receivables 1.0Inventories 0.3
Property, plant & equipment 0.9
Other 0.4
Total Assets 2.7
37
Add ing PV of A l l Soc ial Ins . Obl igat ion s
Increases To tal Net Ob ligation to
5.7x the Size of Nations GDPBalance Sheet as of September 30, 2012
(Trillions of Dollars)
LiabilitiesFederal debt securities held bythe public and accrued interest
(11.3)
Federal employee and veteranbenefits payable
(6.3)
Other (1.2)
Total Liabilities (18.8)
Net Liability (Net Position) ($16.1)Present Value of SocialInsurance Obligations (47)
(74.6)
Total Net Obligation ($90.7)
7/30/2019 FASAB Public Hearing
39/40
38
Have responsible federal officials committed a high crime or
misdemeanor under our Constitution by publishing fraudulent financials?
What do you think Congress reaction will be if the electorate holds them
accountable?
What do you think the electorates reaction will be if they learn that the
governments financials are fraudulent?
Quest ions to Consider
Have the litigants and their lawyers in last years Obamacare case
(Medicaid issue) committed a fraud on the U.S. Supreme Court?
What type of budget and debt ceiling compromise can be reached thisfall if the Congress and the President continue to use fraudulent figures?
Are all those that aided and abetted in fraudulent financial reportinglikely to be afforded immunity from criminal/civil litigation?
E St id R ti I
7/30/2019 FASAB Public Hearing
40/40
39
FASAB is an unconstitutional political creation that is incapable ofmaking correct decisions regarding proper accounting for the feds
Once all parties must deal with the truth, the hard political choiceswill be made to put our finances in order
In closing my hope is that you view my remarks as being inkeeping with Jesuit tradition of searching for the truth in theworld.even if that truth is not what you want to find
Enron on Steroids Reporting Is
Uncons t itut ional and Must Stop
The Supreme Court is our only hope for returning the governmentsfinancial reporting to the requirements called for in our Constitution