$21 Trillion in Federal Government “Unsupported Adjustments”

Mark Skidmore

(with Catherine Austin Fitts)

Outline

• Facts, Background, & Examples

• Questions & Limited Evaluation

• Relevance & What We Can Do

How Do We Know the Things We Know?

• Epistemology—a study of the nature of knowledge, justification, and the rationality of belief.

• Approaches• Faith/Revelation

• Rely in knowledgeable people/entities

• Evidence of integrity/honor/competence

• Logic/Reason/Clear Thinking• Careful with assumptions

• Experience/Observation• Careful with accuracy of information and analysis

• Triangulate as Best We Can

Who We Are• Mark Skidmore,

• Professor of Agricultural, Food and Resource Economics, MSU• Department Outreach and Research Award Winner

• Professor of Economics, MSU• Morris Chair in State and Local Government Finance and Policy (endowed chair)

• Familiar with public finance and public budgeting processes• Director of the North Central Regional Center for Rural Development• Research/Outreach funded by USDA, USAID, DHHS, NSF, Lincoln Institute of Land Policy, and

Urban Institute

• Catherine Austin Fitts• Dillon, Read, and Co. (1978-1989)

• Managing Director and Member, Board of Directors (1986-1989)• U.S. Department of Housing and Urban Development (1989-1990)

• Assistant Secretary of Housing-Federal Housing Commissioner• Hamilton Securities Group, Inc. (1991-1998)

• President and Founder• Portfolio strategy for Federal Housing Administration related to $400 billion of mortgage insurance and

related securities and real estate assets and liabilities• Solari, Inc. (1998-present)

• President and publisher of The Solari Report• International Award for Journalism, Club De Periodistas de Mexico (2018)

The Constitution

“No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.” ~ Article I, Section 9, Clause 7, The US Constitution

July 2016 (I learned of the report in May 2017)

• Office of the Inspector General publishes a report for the Army, FY2015: “Army General Fund Adjustments Not Adequately Documented or Supported”

• $122 billion in authorized spending

• $6.5 trillion in unsupported adjustments

• This is what got my attention.

What is an unsupported adjustment?

According to the GAO's Comptroller General, "Journal vouchers are summary-level accounting adjustments made when balances between systems cannot be reconciled. Often these journal vouchers are unsupported, meaning they lack supporting documentation to justify the adjustment or are not tied to specific accounting transactions…. For an auditor, journal vouchers are a red flag for transactions not being captured, reported, or summarized correctly."

Background

• See Forbes article by Laurence Kotlikoff and Mark Skidmore

• All original documents are available at: https://missingmoney.solari.com/dod-and-hud-missing-money-supporting-documentation/

Timeline of Events• Spring-Summer 2017

• Fitts discusses $6.5 trillion in supported adjustments, Army FY2015• Fitts & Skidmore agree to work together• Conduct search for government reports

• Summer-Fall 2017• Contact OIG, OMB, GAO to ask questions & collect information• Make all documents accessible to the public• Links to government reports disabled…eventually restored under new URLs• Some media activity (Forbes, MSU, Michigan Public Radio, USA Watch Dog)

• Early 2018• DOD announces it will conduct its first ever independent audit

• Spring-Summer 2018• New OIG report on unsupported adjustments for DOD FY2018 fully redacted• FASAB—new rules on financial reporting

Summary of What We Compiled

• Unsupported adjustments in HUD and DoD, 1998-2015:• HUD: 1998, 1999, 2014, 2015 ($358 billion)

• Authorized spending ~$30 billion annually

• DoD• Army: 2000, 2002, 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2015 ($11.5

trillion) • Authorize spending ~$120 billion annually

• Navy: 1998, 2000 ($1 trillion)• Authorized spending ~$140 billion annually

• Air Force: 2000, 2009, 2012, 2015 ($3.4 trillion)• Authorized spending ~$140 billion annually

• DoD as a whole: 1998, 1999, 2000 ($5.1 trillion)• Authorized spending ~500-600 billion annually

• Total unsupported adjustments we found = ~$21 trillion

Background & Examples

• September 10, 2001• Secretary of State Donald Rumsfeld publicly acknowledges that the Pentagon

could not account for $2.3 trillion (Google it…here is one CBS News report). Significant News at the Time.

• September 11, 2001• September 10 News Overwhelmed by the Emergency/Tragedy.

“According to some estimates, we cannot track $2.3 trillion in transactions. We cannot share

information from floor to floor in this building because it's stored on dozens of technological

systems that are inaccessible or incompatible."

-‐Remarks as Delivered by Secretary of Defense Donald H. Rumsfeld, The Pentagon,

Monday, September 10, 2001

Examples from FY2015 Army Report

• 170 unsupported adjustments = $2.1 trillion• What were the 170 adjustments?• This amount is roughly equivalent to the GDP of India

• $794 billion increase in fund balance with Treasury (appears to be a transfer of funds from Treasury to Army)

• From where did these funds come if this represents an actual transaction?

• $929 billion increase in accounts payable• What entities have or are due to receive funds?

• Thousands of records erased…no indication of the value of these erased records

• How much?

Attempts to Reach OIG and Other Gov’t Offices (OMB, GAO)

• Multiple phone calls, e-mails, LinkedIn• Able to talk with people, but not anybody who could answer questions

• FOIA requests• So far no useful information

• At one point all the links to the key reports were disabled, and then they came back under new URLs

Other Interesting Examples

• These examples are strange in that they indicate $ trillions in both supported (or approved) adjustments and unsupported (not approved) adjustments.

• https://missingmoney.solari.com/wp-content/uploads/2017/01/01-120.pdf: page 1, FY2000 adjustments $4.4 trillion of which $1.1 trillion was unsupported. FY1999 adjustments $7.6 trillion of which $2.3 was unsupported.

• https://missingmoney.solari.com/wp-content/uploads/2017/01/08-055.pdf: page 5, 379 adjustments valued at $2.3 trillion in first three quarters of FY2007 of which 102 adjustments for $1.1 trillion are not property approved or erroneous.

• According to these two reports:• $3.3 trillion, $5.3 trillion, and $2.2 trillion in adjustments were found to be appropriate. And• $1.1 trillion, $2.3 trillion, and $1.1 trillion were found to be troublesome.

Explanations in the Reports and by Officials

Explanations for Adjustments

• “failure to correct system deficiencies”• Result: data unreliable and lacked an audit trail

• “incorrect data entry”

• “omission of restated balances”

• “erased records”

• “budget execution adjustments…to establish correct beginning balances”

• “unsupported by reliable explanatory information”

• “poor existing systems”

• “complexity of operations and contracts”

• “Transactions counted multiple times and are “unsupported”

• “changes in property book”

Norquist and the Property Book

• See the C-Span video in which David Norquist, Comptroller of the DOD, offered an explanation to Congressman Walter Jones regarding the nature of the $6.5 trillion in unsupported adjustments for the Army in fiscal year 2015. You can view his testimony here. To summarize, Norquist says that unsupported adjustments are the result of changes in the “property book” that can amount to hundreds of billions of dollars. According to Norquist, since the system that tracks the property book is not integrated with the system that tracks the general fund ledger, large unsupported adjustments are required for reconciliation.

• Follow-up questions:

1) The report highlighting unsupported adjustments of $6.5 trillion does indicate that $164 billion in undocumentable adjustments were needed to address issues related to “property” (see page 27 of the report). Which properties, equipment, etc. required such enormous changes in valuation?

2) Moreover, the $164 billion accounts for about 2 percent of the $6.5 trillion. Why were an additional $6.3 trillion in unsupported adjustments needed?

DoD Begins First-ever Independent Audit

• Recently, Senator Grassley indicated that a clean independent audit is not attainable: https://www.politico.com/story/2018/02/05/pentagon-logistics-agency-review-funds-322860. Note what Senator Grassley states near the end of the article:

I think the odds of a successful DoD audit down the road are zero," Grassley said in an interview. "The feeder systems can’t provide data. They are doomed to failure before they ever get started."

• I think is possible. The budgets of the states of California, New York, and Texas are roughly equivalent to the DOD budget (Air Force, Army, Navy).

• Independent audits every year with little in the way of unsupported adjustments, etc.

• And state budgets are complex…many departments spread over a large geographies, with buying and selling of land, buildings, and equipment/machinery. They also have complex intergovernmental transfers from federal government and to schools and municipalities, which must be tracked and accounted for.

FY2017 OIG Report Is Released

• Fully Redacted

https://home.solari.com/wp-content/uploads/2018/06/Financial-Statement-Compilation-of-Adjustments-and-Information-Technolog....pdf

Full Redacted Report

OIG Mission and Vision

New Federal Accounting Standards Adopted

• July 2018 (https://fas.org/sgp/news/2018/07/fasab-review.pdf)• Federal Accounting Standards Advisory Board Recommendation Implemented

• Is This Constitutional?

• Is This in Compliance with Financial Reporting Laws?

The objective of this Statement is to balance the need for financial reports to be publicly available with the need to prevent the disclosure of classified national security information or activities in publicly issued General Purpose Federal Financial Report s (GPFFRs).

This Statement allows financial presentation and disclosure to accommodate user needs in a manner that does not impede national security. This Statement permits modifications that do not affect net results of operations or net position. In addition, this Statement allows a component reporting entity to be excluded from one reporting entity and consolidated into another reporting entity, and the effect of the modification may change the net results of operations and/or net position.

Possible Explanation for the Enormous Unsupported Adjustments

Range possible explanations:

On one end of the spectrum—enormous but fully justified accounting adjustments with no significant fraud

Other end—Fraud cloaked in opaque budgeting systems

Or something in between….triangulate

Faith/Revelation

Logic/Reasoning/Clear Thinking

Experience/Observation

Examples of Creative Funding

• Blank Check: The Pentagon’s Black Budget (1991) by Tim Weiner In the 1970s, Army Intelligence moved funds from Treasury in to black operations with something called “form 1080”. Intelligence Officer completes “form 1080” to request a fund transfer from Treasury. The request is approved by a higher level authority (General) and funds not otherwise authorized by Congress moved to support “black” operations. (In the tens or hundreds of $ billions)

• Federal Reserve Secretly Loans $ TrillionsIn 2011, Senator Bernie Sanders reported that a partial evaluation of the Federal Reserve by the General Accountability Office (GAO) revealed that the Federal Reserve had secretly loaned as much as $16 trillion to US and foreign banks as well as corporations as part of the financial crisis bailout. You can read the full GAO report here. While these funds have been largely repaid, the report reveals that some Federal Reserve activities can be and are hidden from public view. (in the $trillions)

Implications

• DOD Authorized Budget Increased from $583 Billion in FY2017 to $686 Billion in FY2019.

• Federal Office of Personnel Management recommends pension cuts for federal employees and retirees https://m.govexec.com/pay-benefits/2018/05/opm-proposes-legislation-cut-benefits-current-and-former-feds/148022/?oref=govexec_breaking_alert

• ~$21 Trillion in Overall Debt…Rising Interest Rates…Rising Interest Payments• In FY2019

• Authorized Federal Budget ~$4.4 trillion• Revenue ~3.4 trillion• Federal Deficit Year over Year ~$1 trillion (actual year over year deficit is $1.47 trillion)• Interest Payments ~$500 billion

• Reliable Data/Reporting Informs and Is Critical to the Political Process. Uncertainty, Unreliable Data, Lack of Transparency Stifles Economic Activity and Distorts the Political Process, and Erodes Trust

Implications• Dollar as Reserve Currency

• Relies on Confidence in the Financial and Governance Systems

• Branding is Important• Linked to Society for Worldwide

Interbank Financial Telecommunications System (SWIFT) international payment network

• Is Confidence Eroding?• China

• Introduced Cross-border Interbank Payment System (CIPs) (2015-2016)• Petro-yuan introduced (2018)

• Russia trying to avoid use of dollars in trade• European Union

• https://www.wsj.com/articles/europe-plans-special-vehicle-to-maintain-companies-ties-to-iran-avoid-u-s-sanctions-1537855415

• https://www.bloomberg.com/news/articles/2018-08-27/eu-looking-to-sidestep-u-s-sanctions-with-payments-system-plan

• https://www.zerohedge.com/news/2018-09-25/europe-unveils-special-purpose-vehicle-bypass-swift-jeopardizing-dollars-reserve

• Additional reading: • https://www.zerohedge.com/news/2018-09-25/ghostly-budget

What We Can Do?• Share information and increase transparency

• Your pension fund trustees, Members of the board or management of your bank, Members of the board or management of investment firms you use, Your financial advisor or money manager, Members of the board or management of any institution or business dependent on federal funding, Members of the leading US rating agencies, Your state and local officials, Your Congressional representatives and their staff, Your insurance provider

• Ask specific answerable questions

• Learn "how the money" works in your county and city or townExplore opportunities to become more resilient locally with or without federal funds

Ideas and Suggestions Are Appreciated

THANK YOU

mskidmor@msu.edu

517-353-9172