Reporting Entity Proposal Is Unconstitutional and Violates the Antifraud Provisions

Joseph H. Marren

August 28, 2013

Federal Accounting Standards Advisory Board Public Hearing

Executive Summary
My remarks will focus on both the proposal and the larger picture of how FASAB pronouncements result in fraudulent reporting. I will also 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 controlled financial reporting and thereby public opinion to minimize their accountability for spending Current financial reporting as well as the proposed rule violate numerous private rights protected by our Constitution Also, in 2012 the Supreme Court decided the Obamacare case based on financial facts that are simply untrue
1

Fear and Greed

Just as fear and greed are the primary motivators on Wall Street they 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 to endear themselves to their constituents Fear of severe negative career consequences needs to be introduced into our leaders political calculus - Applying the rule of law will restore accountability

All Reporting Must Comply with the Statement and Account Clause
The Statement and Account Clause (Article I, Section 9, clause 7) of our Constitution provides that: a regular Statement and Account of the receipts and Expenditures of all public Money shall be published from time to time The federal government is falsely reporting total receipts, total expenditures and the resulting deficit These three figures are not subject to the plenary power of Congress

No Report Complies or Reflects the Nations Economic Reality

Combined Statement of Receipts, Outlays and Balances Presidents Budget The Financial Report of the United States Government

Cash-based financials that do not include any social insurance costs It is not known or used by the associated with public including the media, not obligations that must central to any discussion of the be paid by law in the nations finances and is not viewed future and does not as a major publication by any include all government recent Congress or Administration entities It is cash-based

Accrual-based financials published by the Treasury and OMB that has two major flaws

And As a Result Private Rights Are Violated And Democracy Is Broken

Right to Vote See FEC v. Akins Freedom of Speech See FEC v. Citizens United Right to Political Accountability See New York v. U.S.

Equal Protection See South Dakota v. Dole

Due Process See Caperton v. A.T. Massey Coal Co. Right to Financial Information See Richmond Newspapers, Inc. v. Virginia
5

Fiscal Information is Critical to Voting Rights

The Framers of the Constitution deemed fiscal
information essential if the electorate was to exercise any control over its representatives and meet their new responsibilities as citizens of the Republic
- Max Rosenn, Circuit Judge, Opinion of the Court and Supreme Court Justice Douglas including this quote in his dissenting opinion in U.S. v. Richardson

Accounting More Important Than State of 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

FASABs Proposed Rule Is Designed to Influence Voters Choices

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 FEC v. Citizens United

The fact that Congress is using laws governing federal financial reporting to influence voters choices doesnt make it any less dangerous

Accountability 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

Secrecy was the Evil at which 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

10

Key Assumptions
Neither policy option of raising taxes or cutting spending is being advocated 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 national security matters is not being questioned
No commentary is made or intended about the validity or need for any government program All figures are in trillions of dollars (some rounding exists)

11

It aint what you dont know that gets you in trouble. Its what you know for sure that just aint so.
- Mark Twain

12

The Presidents Budget Under Budget Accounting $1.32 Has Been Spent for Every $1.00 of Revenue
(Trillions of Dollars)

Fiscal Year Ended 9/30

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
$11.3 $11.9 $12.7 $13.4 $14.1 $14.4 $13.9 $14.6 $15.2 $15.8

GDP
(Quarterly-Current Dollars per BEA)

Presidents Budget
Revenues Outlays Budget Deficit 1.8 2.2 (0.4) 1.9 2.3 (0.4) 2.2 2.5 (0.3) 2.4 2.7 (0.2) 2.6 2.7 (0.2) 2.7 3.1 (0.5) 2.1 3.5 (1.4) 2.2 3.5 (1.3) 2.3 3.6 (1.3) 2.5 3.5 (1.1)

13

Govt Instituted Accrual Accounting Because Cash Accounting So Poor

The [OMB] and the Congressional appropriations committees have been unwilling to change the accounting basis of the federal budget to the accrual basis The accounting underlying the Presidents Budget obfuscates federal fiscal accountability[It] understate[s]the headline numbers that dominate Congressional and public discussion and form 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
14

Financial Report Shows $1.42 Has Been Spent for Every $1.00 of Revenue
(Trillions of Dollars)

Statements of Net Cost

Fiscal Year Ended 9/30

GDP (Quarterly-Current
Dollars per BEA)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
$11.3 $11.9 $12.7 $13.4 $14.1 $14.4 $13.9 $14.6 $15.2 $15.8

Presidents Budget

Revenues Outlays
Budget Deficit
Additional Accrued Expenses Recorded in Financial Report

1.8 2.2
(0.4)

1.9 2.3
(0.4)

2.2 2.5
(0.3)

2.4 2.7
(0.2)

2.6 2.7
(0.2)

2.7 3.1
(0.5)

2.1 3.5
(1.4)

2.2 3.5
(1.3)

2.3 3.6
(1.3)

2.5 3.5
(1.1)

(0.1) (0.3)

0.2 (0.6)

0.4 (0.8)

0.2 (0.4)

0.1 (0.3)

0.6 (1.0)

(0.2) (1.3)

0.8 (2.1)

0.0 (1.3)

0.2 (1.3)
15

Net Operating Cost

Financial Reports Balance Sheet Indicates Net Liability about the Size of Nations GDP
Balance Sheet as of September 30, 2012
(Trillions of Dollars)

Assets
Cash Receivables Inventories Property, plant & equipment Other Total Assets $0.2 1.0 0.3 0.9 0.4 2.7

Liabilities
Federal debt securities held by the public and accrued interest
Federal employee and veteran benefits payable

(11.3) (6.3)

Other
Total Liabilities Net Liability (Net Position)

(1.2)
(18.8) ($16.1)

16

Total Social Insurance Credit Card Balance is Massive and Growing Rapidly
Statements of Social Insurance Plus Medicaid
(Trillions of Dollars)

PV of Open Group Obligations as of Jan. 1 Alternative Scenario For Medicare for 2010, 2011 & 2012 2003 2004 $5.2 8.5 11.4 8.1 15.8 20.7 28.1 33.3 2005 $5.7 8.8 12.4 8.7 29.9 35.6 2006 $6.5 11.3 13.1 7.9 32.3 38.8 2007 $6.8 12.3 13.4 8.4 34.1 40.8 2008 $6.6 12.7 15.7 7.9 36.3 42.9 2009 $7.7 13.8 17.2 7.2 38.1 45.8 2010 $7.9 7.3 20.6 7.2 35.2 43.1 24.2 $20.7
$2.9

2011 $9.2 8.5 21.0 7.5 37.0 46.2 24.0

2012 $11.3 9.9 20.6 6.8 37.2 48.5 26.1

Social Security Medicare Part A Part B Part D Total Medicare Total Net Obligation Per SOSI Medicaid

$4.9 6.2 9.7

Total Social Insurance Net Obligation

Increase in Net Obligation (a)

$33.3 $12.5

$35.6 $2.3

$38.8 $3.2

$40.8 $2.1

$42.9 $2.0

$45.8 $2.9

$67.3 $21.5

$70.2 $74.6 $2.8 $4.5

17

FASAB is Unconstitutional Executive Veto is Not Permitted

FASAB was created because OMB claimed constitutional issue. Bowsher unwilling to sue the Executive branch and Congress unwilling to use power of the purse to stop Executive branch from poaching its responsibilities FASAB violates the separation of powers requirement See
Bowsher v. Synar and Clinton v. City of New York

If OMB really thought they had correct legal position why have they never requested an opinion from the Office of Legal Counsel?

Reasonable probability that the Sup. Court would rule 1921 Acts delegation of auth. to the Comp. Genl to make up acct prin. for Agencies violates req. for passage of laws by Congress and presentment to President
18

FASAB Rules are Also Unconstitutional

Financial statements need to consolidate: - All entities that are funded with public money including the Federal Reserve, Fannie Mae & Freddie Mac - The full cost of the Nations social ins. programs including Medicare, Medicaid and Social Security There are no exceptions for entities/programs funded with public money that our politicians want to avoid accountability for by excluding them, putting them off balance sheet or describing them only in footnotes Standards promulgated by FASAB do not comply with the U.S. Constitution and violate the antifraud provisions of the securities laws

19

Antifraud Provisions are Inherent In the Statement and Account Clause

A government of the people, by the people and for the people with an explicit provision in its constitution requiring the publication of a Statement and Account of the Receipts and Expenditures of all public Money does not need an antifraud amendment to that constitution requiring the federal government to publish truthful figures

To a certain extent Congress recognized the importance of the antifraud provisions by making the issuance of municipal securities subject to them

20

Overview of the Municipal Securities Market

The municipal securities market is very diverse, with close to 44,000 state and local issuers, and with a total face amount of $3.7 trillion The Government Accounting Standards Board (GASB) establishes GAAP, which are used by many state and local governments

The SEC lacks authority to prescribe standards in the municipal securities market

21

Municipal Securities Are Subject to the Antifraud Provisions

The securities laws were enacted with broad exemptions for municipal securities from all their provisions, except for: The antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5

Generally, these prohibit fraudulent or deceptive practices by issuers including making any untrue statement of a material fact or omitting to state a material fact necessary in order to make statements made not misleading

22

Government Pension Funding Obligations are Front Page News

Detroits bankruptcy has focused the nation on the importance of this issue Underfunding for state and other municipal government pension benefits 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

23

Congress and the SEC are Focused On the Pension Disclosure Issue
In 2011 legislation entitled Public Employee Pension Transparency Act, was introduced in Congress The legislation would require states to report their pension finances 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 and disclosure violations - The SEC has brought actions against two states

24

In the Matter of State of New Jersey

In 2010 the SEC found that New Jersey violated Section 17(a) in connection with the sale of over $26 billion in bonds from 2001 through 2007
State made material misrepresentations and omissions that created the fiscal illusion that its pension plans were being adequately funded and masked the fact that NJ was unable to contribute to the plans without raising taxes or cutting other services, or otherwise impacting the budget

25

The Importance of Information in Evaluating NJs Overall Finances

As of June 30, 2009, the two largest pension funds had an unfunded 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 was important to investors in evaluating New Jerseys overall financial condition and future financial prospects

26

In the Matter of State of Illinois

In 2013 the SEC found that in connection with multiple bond offerings raising over $2.2B from 2005 through 2009 the State misled bond investors about the adequacy of the statutory plan to fund its pension obligations and the risks created by the States underfunding of its pension systems As of 2011 Illinois Pension Systems were unfunded by $83 billion. In April 2012, the State acknowledged that [u]nsustainable pension costs are squeezing core programs in education, public safety, and human services, in addition to limiting [the States] ability to pay [its] bills.
27

What Was the Significance of Information to Investors?

The SEC determined that reasonable investors would have considered information regarding the underfunding of Illinois pensions, the risks created by that underfunding, and the financial condition of the pension plans to be important factors in the investment decision-making process Reasonable investors would have viewed such information as significantly altering the total mix of information available regarding the States future financial prospects

28

FASAB Has Hit the Trifecta!

Proposed Reporting Entity exposure draft violates the antifraud provisions

Disclosure by State and federal governments regarding Medicaid violates the antifraud provisions

Federal financial disclosure relating to Social Security and Medicare violates the antifraud provisions

29

Reporting Entity Proposal Violates Antifraud Provisions

Federal Reserve System, Fannie Mae and Freddie Mac have total assets of $3.3, $3.2 and $2.0 trillion. They are material to the 9/30/12 balance sheet with assets of $2.7 trillion Reasonable investors in government securities would view the availability of consolidated information as significantly altering the total mix of information available regarding the Nations future financial prospects

30

Medicaid Disclosures By All Fifty States are Fraudulent.

No state or the District of Columbia records the full cost of its share 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 reported in the 2012 Financial Report the fifty states and District of Columbias aggregate net present value obligation for Medicaid is $19.7 trillion Both the $26.1 and $19.7 trillion figures are significantly understated See Marrens memo
31

And Violate the Antifraud Provisions

Omitting the disclosure of material facts clearly violates the antifraud provisions as a matter of law All states and the District of Columbia have inadequate financial disclosure regarding an aggregate Medicaid obligation that at approximately $20 trillion is over five times the size of the $3.7 trillion municipal securities market or the $4 trillion pension underfunding issue

32

Medicaid Obligations For Top Twelve States Are Enormous

In Billions of Dollars

New York - $3,158 California - $2,562 Texas - $1,150 Pennsylvania - $1,035 Illinois - $902 Florida - $797 All Other States & Wash DC - $6,464;

Ohio - $750 Massachusetts - $733 New Jersey - $635 Michigan - $576 North Carolina - $497 Minnesota - $441 Grand Total - $19,700
33

Feds Reporting for Medicaid Violates the Antifraud Provisions

In the Required Supplementary Information in the back of the 250 page 2010 Financial Report was a $24.2 trillion net present value cost for the feds for Medicaid. - Under the Supreme Courts buried facts doctrine this practice is a clear violation Prior to 2010 the federal government had never published in any financial statement any estimate of the net present value cost of Medicaid CBO presented long-term Medicaid projections for the first time in Nov. 2007 - The Medicaid program has existed since the 1960s

34

Medicare & Social Security Reporting Violates Antifraud Provisions

The net present value cost of Medicare and Social Security has been reported in the Statements of Social Insurance for many years - The total adjusted cost for both as reported in the Social Insurance Credit Card schedule found earlier in the presentation was $48.5 trillion - However, SOSI does not inter-relate with the other financial statements Reasonable investors in government securities would clearly consider inter-related information as significantly altering the total mix of information available regarding the Nations future financial prospects
35

Adding All Social Insurance Costs Reveals Feds Spent $3.96 for Every $1.00 of Revenue
(Trillions of Dollars)
Fiscal Year Ended 9/30

Adjusted Statements of Net Cost Open Group - (Alternative Scenario for Medicare for 2010, 2011 & 2012)
2003 $11.3 2004 $11.9 2005 $12.7 2006 $13.4 2007 $14.1 2008 $14.4 2009 $13.9 2010 $14.6 2011 $15.2 2012 $15.8

GDP
(Quarterly-Current Dollars per BEA)

Presidents Budget Revenues Outlays Budget Deficit

Additional Accrued Expenses Recorded in Financial Report

1.8 2.2 (0.4)

1.9 2.3 (0.4)

2.2 2.5 (0.3)

2.4 2.7 (0.2)

2.6 2.7 (0.2)

2.7 3.1 (0.5)

2.1 3.5 (1.4)

2.2 3.5 (1.3)

2.3 3.6 (1.3)

2.5 3.5 (1.1)

(0.1) (0.3) 2.9 (3.2)

0.2 (0.6) 12.5 (13.2)

0.4 (0.8) 2.3 (3.1)

0.2 (0.4) 3.2 (3.6)

0.1 (0.3) 2.1 (2.4)

0.6 (1.0) 2.0 (3.0)

(0.2) (1.2) 2.9 (4.1)

0.8 (2.1) 21.5 (23.6)

0.0 (1.3) 2.8 (4.1)

0.2 (1.3) 4.5 (5.8)

Net Operating Cost

Increase in Present Value of Social Insurance Obligations

Operating Deficit

36

Adding PV of All Social Ins. Obligations Increases Total Net Obligation to 5.7x the Size of Nations GDP
Balance Sheet as of September 30, 2012
(Trillions of Dollars)

Assets
Cash Receivables Inventories Property, plant & equipment Other Total Assets $0.2 1.0 0.3 0.9 0.4 2.7

Liabilities
Federal debt securities held by the public and accrued interest Federal employee and veteran benefits payable Other Total Liabilities Net Liability (Net Position) Present Value of Social Insurance Obligations Total Net Obligation
(47)

(11.3) (6.3) (1.2) (18.8) ($16.1) (74.6) ($90.7)

37

Questions to Consider
What do you think the electorates reaction will be if they learn that the governments financials are fraudulent? 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? Are all those that aided and abetted in fraudulent financial reporting likely to be afforded immunity from criminal/civil litigation? 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 this fall if the Congress and the President continue to use fraudulent figures?
38

Enron on Steroids Reporting Is Unconstitutional and Must Stop

FASAB is an unconstitutional political creation that is incapable of making correct decisions regarding proper accounting for the feds The Supreme Court is our only hope for returning the governments financial reporting to the requirements called for in our Constitution Once all parties must deal with the truth, the hard political choices will be made to put our finances in order In closing my hope is that you view my remarks as being in keeping with Jesuit tradition of searching for the truth in the world.even if that truth is not what you want to find
39