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| Tuesday, February 9, 2010 |
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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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February 4, 2008 12:01 AM ET
The amount of money spent on federal health-care and Social Security programs could lead to “very high levels” of debt and reduce investor confidence in U.S. markets within eight to 10 years if nothing is done, according to the rating agencies. That has led the Heritage Foundation, a conservative think tank, to push for tighter accounting and budgeting standards for those programs in an effort to curb spending. Recent reports from Moody’s Investors Service and Standard & Poor’s speculated that if Medicare and Social Security—two of the largest components of the federal budget—continue to grow at their current pace, the U.S. debt rating will be reduced to A. “On the fiscal front, these are the two largest threats to the long-term financial health of the United States and to the government’s AAA rating,” analyst Steven Hess wrote in Moody’s annual report on U.S. debt, issued Jan. 10. Standard & Poor’s analyst Nikola Swann said two weeks ago that, all things being equal, by 2020 the net U.S. debt would represent roughly 242% of gross domestic product. “If nothing is done about the entitlement programs, eventually that would lead to a downgrade,” Mr. Swann said in an interview. “But we do expect something to be done, eventually.” The S&P report said a downgrade could occur in 2015 at the earliest. Both reports noted that changing political winds could lead to an overhaul of the entitlement programs. However, such an overhaul is not likely this year, with politicians caught up in the heated presidential campaign. Depending on who wins the White House, an overhaul could be possible in 2009. Still, some are jumping on the doom and gloom wagon to push for cutbacks to entitlement spending and more specific budget accounting. Testifying before the Joint Economic Committee a week and a half ago, William Beach, director of the Heritage Foundation’s center for data analysis, said the government should amend its budget rules to include a calculation of future entitlement program spending vs. funding, as well as the current value of spending and funding for those programs. According to the latest fiscal outlook from the Congressional Budget Office, which was released Jan. 23, mandatory outlays for Medicare are projected to go from $436 billion in 2007 to $719 billion in 2015. Social Security outlays are projected to rise from $581 billion last year to $908 billion in 2015. The Treasury Department already calculates future spending and funding when it reports the federal government’s financial status, according to Wendy Payne, executive director of the Federal Accounting Standards Advisory Board (FASAB), which was created in 1990 to develop accounting standards for federal agencies. Further, the idea of requiring similar projections during the budgeting process has “come up from time to time” but not gained much traction, Ms. Payne said. Former Federal Reserve chairman Alan Greenspan reportedly floated the idea years ago, but no definitive proposals have been adopted. The fiscal sustainability project of the FASAB, which includes members from the conservative American Enterprise Institute and the non-partisan Urban Institute, as well as employees of such agencies as the Congressional Budget Office and the Treasury, has endorsed greater disclosure in federal agency financial reporting. The project does not address the budgeting process. Politicians have also been taking a greater interest in the U.S. debt rating, according to Mr. Swann, who noted that previous S&P reports have hinted spending on entitlement programs could lead to a rating downgrade. During a House Budget Committee hearing last Wednesday, Rep. Jim Cooper (D-Tenn.) said the federal government needs to start using the same accounting methods corporations use, including binding accrual of expenses and revenue for entitlements. “We have exempted federal government from regular accounting” in the budgeting process, he said. An aide to Mr. Cooper, who is part of the fiscally conservative Blue Dog Coalition of Democrats, called the current budget accounting process “Enron-style accounting,” adding that “if [corporations] kept their books like we keep ours, they’d be locked up.” Mr. Cooper has been working for three years to include some kind of binding accrual requirement in budget resolutions, to no avail. But funding shortfalls are the underlying issue. Since 2001, Medicare benefits have risen 15.5%, which in turn led to a 6.5% increase in overall federal spending, according to the Moody’s report, which projected that in the next several years, spending on Medicare and Medicaid will continue to grow more rapidly than total federal spending. Moody’s didn’t look at projections for Social Security funding. Other factors besides government debt and spending are used to calculate the sovereign ratings, such as U.S. monetary conditions, labor market, and openness to foreign capital. Mr. Swann added that the protectionist language used by some presidential candidates could hurt the U.S. rating if they followed through on their promises to cut off foreign investment. Many politicians have been leery of foreign investment in the form of state-run wealth funds in China and the Middle East, which has led to protectionist rhetoric. FW
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