**Note: We are republishing each of the 22 challenges from Catherine’s fiscal cliff article – one a week. Helps to digest them bit by bit!**
Challenge #2 Legality
By Catherine Austin Fitts
A significant portion of federal government spending operates in violation of the laws governing federal financial management and reporting and the United States Constitution which stipulates that no payments can be made that are not provided for in an appropriations bill approved by Congress. Specifically, Article 1, Clause 7 states: “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.
Let me give you some examples my own experience:
We [my company, Hamilton Securities Group] were blessed with an advisory board of very capable and committed pension fund leaders. In April 1997, we had an advisory board meeting….I gave a presentation on the extraordinary waste in the federal budget. As an example, we demonstrated why we estimated that the prior year’s federal investment in the Philadelphia, Pennsylvania area had a negative return on investment. It was, however, possible to finance places with private equity and then reengineer the government investment to a positive return and, as a result, generate significant capital gains. Hence, it was possible to use U.S. pension funds to increase retirees’ retirement security significantly by investing in American communities, small business and farms — all in a manner that would reduce debt and improve skills and job creation. This was important as one of the chief financial concerns in America at that time was ensuring that our retirement plans performed financially to a standard that would meet the needs of beneficiaries and retirees. It was also critical to reduce debt and create new jobs as we continued to move manufacturing and other employment abroad. If not, we would be using our workforce’s retirement savings to finance moving their jobs and their children’s jobs abroad.
The response from the pension fund investors was quite positive until the President of the CalPers pension fund — the largest in the country — said, “You don’t understand. It’s too late. They have given up on the country. They are moving all the money out in the fall (of 1997). They are moving it to Asia.” He did not say who “they” were but did indicate that it was urgent that I see Nick Brady (former Chairman of Dillon Read and former U.S. Secretary of the Treasury) — as if our data that indicated that there was hope for the country might make a difference. I thought at the time that he meant that the pension funds and other institutional investors would be shifting a much higher portion of their investment portfolios to emerging markets. I was naive. He was referring to something much more significant.
The federal fiscal year starts on October 1st of each year. Typically the appropriation committees in the House and Senate vote out their recommendations during the summer. When they return from vacation after Labor Day, the various committees reconcile and a final bill is passed in September. Reconciling all the various issues is a bit like pushing a pig through a snake. Finalizing the budget each fall can make for a tense time. When the new bill goes into effect, new policies start to emerge as the money to back them starts to flow. October 1st is always a time of new shifts and beginnings.
In October 1997, the federal fiscal year started. It was the beginning of at least $4 trillion going missing from federal government agency accounts between October 1997 and September 2001. The lion’s share of the missing money disappeared from the Department of Defense accounts. HUD also had significant amounts missing. According to HUD OIG reports, HUD had “undocumentable adjustments” of $17 billion in fiscal year 1998, and $59 billion in 1999. The HUD OIG refused to finalize audited financial statements in fiscal year 1999, refused to find out the basis of the undocumentable adjustments or to get the money back and refused to disclose the amount of undocumentable adjustments in subsequent fiscal years.
Here is more I wrote in the process of trying to hold a Congressman on the budget and appropriations committees accountable:
In June 2001 the Senate Governmental Affairs Committee, published its study, “Government at the Brink.” The study describes the failure of federal government agencies to maintain reliable financial systems and/or to publish as independent annual audited financial statements as required by law. The President’s initial 2002 budget (before increases for 9-11) proposed that approximately 85% of all federal appropriations be awarded to the very same agencies the Thompson study states either (a) fail to maintain reliable financial systems, (b) fail to publish trustworthy or, in some cases, any, independent certified financial statements (as required by law), or both.
At that same time, Congressman Steve Horn (R-Calif.), Chairman of the House Government Reform subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations issues a report card regarding attempts by federal agencies to produce reliable annual audited financial statements.
Congressman Horn’s Financial Management Report Card
Agencies Rated D or F, Fiscal Year 2001 (Ended 9/30)
- Environmental Protection Agency
- Small Business Administration
- Department of Health and Human Services
- Department of Housing and Urban Development
- Department of the Interior
- Department of Veterans Affairs
- Department of Commerce ?Department of Education
- Department of the Treasury
- Nuclear Regulatory Commission
- Department of Justice
- Department of State
- Department of Transportation
- Agency for International Development
- Department of Agriculture
- Department of Defense
- Federal Emergency Management Administration
- National Aeronautics and Space Administration
Other reports from sources like agency inspectors general and government whistleblowers charge that the problems are much deeper than mere accounting: they allege stolen and missing inventory (planes, tanks, etc.) and in some cases actually admit that they rely on black budget funding (i.e., funding that is “off balance sheet” and not subject to Congressional oversight). The existence of such reports requires that we ask whether the very government officials and contractors who are paid handsomely to protect and manage our resources in accordance with the law are looting the federal government.
Total undocumented accounting adjustments for reported periods for the Department of Defense (fall of 1997 to date) amount to a whopping $3.3 trillion, or $11,700 for every American. (Many American families don’t even have $11,700 in savings in their bank accounts.) The Department of Defense has failed to produce independent audited financial statements since the requirement went into effect in 1995. HUD’s Inspector General refused to certify HUD’s fiscal 1999 financial statements. Since both agencies have refused to explain the undocumented adjustments in adequate detail for some years and declined to report or make public undocumented adjustments, we have no evidence to document that large amounts of assets or money are not being stolen.
The missing money problem is systemic and bipartisan. In “Treasury Checks and Unbalances,” that appeared in the April 2004 edition of Insight magazine, Kelly Patricia O’Meara demonstrated this fact quite conclusively. As she reports, according to the GAO (General Accounting Office), the year end financial reports submitted by four U.S. Secretaries of the Treasury were unreliable and essentially “unauditable” despite the assurances of the accuracy of these reports by these Treasury officials.
Kelly continues: “It is the job of the U.S. General Accounting Office (GAO) to audit the federal government’s financial statements, and this year, as in all previous years in which the auditing requirement was in force, “certain material weaknesses in internal control and in selected accounting and reporting practices resulted in conditions that continued to prevent us from being able to provide Congress and American citizens an opinion as to whether the consolidated financial statements of the U.S. government are fairly stated.” Indeed, the GAO further reports, “As a result of material deficiencies in the federal government’s systems, record-keeping, documentation and financial reporting, readers are cautioned that amounts reported in the consolidated financial statements and related notes may not be reliable.”
So the books can’t be audited and what information is made available “may not be reliable.”
Contrast this with the statements of the various Secretaries of the Treasury.
Robert E. Rubin, 1997 — “We believe that the publication of these audited statements is an important step in providing American citizens with more information about the operations of their government.”
Robert E. Rubin, 1998 — “We believe that the publication of this financial report is an important step in providing the American public with useful information about their government’s assets, liabilities and operations.”
Lawrence H. Summers, 1999 — “We are committed to producing and reporting financial information that meets the highest standards of integrity and to provide to the American people the accountability and professionalism they expect from their government.”
Paul H. O’Neill, 2000 — “I am committed to producing and reporting financial information that meets the highest standards of integrity and to provide the American people the accountability and professionalism that they expect from the government.”
Paul H. O’Neill, 2001, Unauditable?”I believe that the American people deserve the highest standards of accountability and professionalism from their government, and I will not rest until we achieve them.”
John W. Snow, 2002 — “I intend to continue the commitment to producing and reporting financial information that meets the highest standards of integrity and to provide the American people the accountability and professionalism that they expect from their government.”
Remember — these unreliable and essentially “unauditable” financial reports from the U.S. Treasury were being issued before the bailouts.
A Congressman, who was on the budget and appropriations subcommittee in 2002, told me that he was helpless to address trillions in unconstitutional transactions. How then is Congress supposed to grapple with them in 2013?