Financial Management

In a report on the government's consolidated financial statements for fiscal year 1997, GAO noted that the Department of Veterans Affairs' (VA) estimated liability for veterans' compensation benefits was materially understated primarily because it did not include estimates for anticipated changes in disability ratings and for incurred claims not yet reported. (See GAO/AIMD-98-127, Mar. 1998.) Because of these limitations, VA's methodology for computing the liability did not comply with Statement of Federal Financial Accounting Standards (SFFAS) No. 5, which prescribes accounting standards for the federal government's liabilities. VA revised its model to comply with SFFAS No. 5 before issuing its own audited financial statements for the Department in April 1998. Using the revised model, VA's estimated liability as of September 30, 1997, in its April 1998 report was $466 billion--an increase of $270 billion over that reported in the government's consolidated financial statements for fiscal year 1997. This report discusses the improvements that VA has made to the model and makes recommendations for additional improvements that should enhance the reliability of estimates produced by the model.

GAO noted that: (1) VA's revised model resulted in an estimate for fiscal year (FY) 1997 that was much more consistent with SFFAS No. 5 than that previously used because it included estimates for anticipated changes in disability ratings and for incurred but not reported claims; (2) during GAO's review, VA officials were informed that the model needed further refinements to comply more fully with SFFAS No. 5; (3) specifically, the revised model did not include 1.5 million current active military personnel, some of whom have sustained injuries and may qualify for future benefits; (4) instead, it only included those who had separated from active military service as of September 30, 1997; (5) in response, VA modified its model for FY 1998 by including the current military population, which, according to VA officials, will further increase the liability estimate by about $12 billion; (6) the VA Office of the Inspector General is currently testing the underlying data used in the model as part of its audit of the FY 1998 financial statements; (7) GAO also noted certain limitations in the data used in the model to develop the estimated liability; (8) VA's FY 1997 liability estimate was based on 1 to 3 years of experience for various data elements; (9) studying the experience over such a limited time period may not fully represent the universe of veterans and therefore could cause distortions in predicting future benefits; (10) in addition, VA did not group claimants by conflict-related exposures, such as Agent Orange; (11) therefore, the model did not reflect the impact of such events on future benefits; (12) VA's model did not consider the time lag between date of discharge and date of the initial award, although a veteran's likelihood of filing a claim decreases the longer he/she is out of the service; (13) these data, if considered along with age and beneficiary type, would provide a better basis for predicting the likelihood that a veteran would seek a compensation award; and (14) with better experience data over a more extended period of time, VA's model would be more predictive, resulting in a more reasonable liability estimate.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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