fasab public hearing

7/30/2019 FASAB Public Hearing

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Reporting Entity Proposal Is

Unconstitutional and Violatesthe Antifraud Provisions

August 28, 2013

Federal Accounting StandardsAdvisory Board Public Hearing

Joseph H. Marren


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Execut ive Summary

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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


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Fear and Greed

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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


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A l l Repo rt ing Must Comply w i th

the Statement and Account Clause

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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


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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


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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


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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


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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


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FASABs Proposed Rule Is Designed

to Influence Voters Choices

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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


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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


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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


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Key Assumpt ions

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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


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It aintwhat you dont know that gets you in

trouble. Its what you know for sure thatjust aintso.

- Mark Twain

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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)

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(Trillions of Dollars)

The Presidents Budget

Under Budget Account ing $1.32 Has Been

Spen t fo r Every $1.00 of Revenue


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GovtIns t itu ted Acc rual Accoun t ing

Because Cash Account ing So Poo r

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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


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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)

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Financ ial Report Shows $1.42 Has Been

Spent fo r Every $1.00 o f Revenue

Statements of Net Cost


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Assets

Cash $0.2

Receivables 1.0

Inventories 0.3

Property, plant & equipment 0.9

Other 0.4

Total Assets 2.7

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Financial Reports Balance Sheet Indicates

Net Liability about the Size of Nations GDP

Balance Sheet as of September 30, 2012


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)


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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

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Total Soc ial Insu rance Credit Card Balance

is Mass ive and Grow ing Rapidly


Statements of Social Insurance Plus MedicaidPV of Open Group Obligations as of Jan. 1

Alternative Scenario For Medicare for 2010, 2011 & 2012


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FASAB is Uncons t i tut ional

Execu tive Veto is No t Perm itted

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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


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FASAB Rules

are A lso Uncons t itut ional

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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


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Anti f raud Prov isions are Inherent

In the Statement and Accoun t Clause

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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


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Overview of

the Municipal Securi t ies Market

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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


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Mun icipal Secu r i t ies A re Subject

to the Ant i fraud Provis ions

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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


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Government Pens ion Fund ing

Obligat ions are Fron t Page News

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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


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Congress and the SEC are Focused

On the Pens ion Disc losure Issue

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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


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In the Matter o f

State of New Jersey

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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


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The Importance o f In fo rmation in

Evaluating NJs Overall Finances

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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


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In the Matter o f

State of Il l ino is

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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.


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What Was the Sign i f icance of

Info rmat ion to Investo rs?

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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


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FASAB Has Hit the Trifecta!

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Proposed Reporting

Entity exposure draft

violates the antifraudprovisions

Disclosure by Stateand federalgovernmentsregarding Medicaidviolates the antifraudprovisions

Federal financialdisclosure relatingto Social Securityand Medicareviolates theantifraud provisions


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Repo rt ing Ent i ty Proposal

Violates An t i f raud Prov isions

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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


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Medicaid Disc losures By

All Fifty States are Fraudulent.

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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


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And Violate the

Ant i f raud Provis ions

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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


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Medicaid Obl igat ions For Top

Twelve States Are EnormousIn Bi l l ions of Dol lars

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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


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Feds Reporting for Medicaid

Violates the Ant i f raud Prov isions

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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


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Medicare & Soc ial Secu r i ty Repo rt ing

Violates An t i f raud Prov isions

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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


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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)

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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


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Assets

Cash $0.2

Receivables 1.0Inventories 0.3

Property, plant & equipment 0.9

Other 0.4

Total Assets 2.7

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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


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)


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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


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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

fasab public hearing

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