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U.S. Department of State

Diplomacy in Action

Notes to Principal Financial Statements


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ORGANIZATION

Congress established the U.S. Department of State (" Department of State " or " Department "), the senior executive department of the United States Government in 1789, replacing the Department of Foreign Affairs, which was established in 1781. The Department advises the President in the formulation and execution of foreign policy. As head of the Department, the Secretary of State is the President's principal advisor on foreign affairs. The Department's primary objective is to promote the security and well-being of the United States.

1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Reporting Entity and Basis of Consolidation

The accompanying principal financial statements (statements) present the financial activity for the Department of State. The statements include the accounts of all funds under Department control that have been established and maintained to account for the resources entrusted to Department management, or for which the Department acts as a fiscal agent or custodian. The Department maintains General Funds, Special Funds, Revolving Funds, Trust Funds, and Deposit Funds.

  • General and Special Funds are used to record financial transactions under Congressional appropriations or other authorization for spending general revenues.
  • Revolving Funds are established by law to finance a continuing cycle of operations. Receipts derived from such operations are usually available in their entirety for the Fund to use without further action by Congress.
  • Trust Funds are credited with receipts that are generated by the terms of a trust agreement or statute. At the point of collection, these receipts are either available immediately or unavailable depending upon statutory requirements. The largest trust fund is the Foreign Service Retirement and Disability Fund (FSRDF).
  • Deposit Funds are established for: (1) amounts received for which the Department is acting as a fiscal agent or custodian; (2) unidentified remittances; (3) monies withheld from payments for goods and services received; and (4) monies held awaiting distribution on the basis of a legal determination.

Basis of Presentation

The accompanying statements have been prepared to report the financial position and results of operations for the Department of State. These statements are prepared as required by the Government Management and Reform Act (GMRA) of 1994 and presented in accordance with form and content requirements contained in Office of Management and Budget (OMB) Bulletin No. 01-09, Form and Content of Agency Financial Statements. OMB Bulletin No. 01-09 defines the form and content for annual financial statements that are required to be submitted to the Director of OMB. The statements presented herein are in addition to the financial reports prepared by the Department in accordance with OMB and U.S. Department of the Treasury (Treasury) directives to monitor and control the status and use of budgetary resources.

The statements have been prepared from the Department's books and records, and are in accordance with the Department's accounting policies (the significant policies are summarized below in this Note). The Department's accounting policies follow accounting principles generally accepted in the United States of America (GAAP). GAAP for Federal entities is the hierarchy of accounting principles prescribed in the American Institute of CPAs' Statement of Auditing Standards No. 91, Federal GAAP Hierarchy.

Basis of Accounting

Transactions are recorded on both an accrual and budgetary basis. Under the accrual basis, exchange revenues are recognized when earned, and expenses are recognized when a liability is incurred. Budgetary accounting facilitates compliance with legal constraints and controls over the use of Federal funds.

Budgets and Budgetary Accounting

Congress annually enacts one-year appropriations that provide the Department with the authority to obligate funds within the respective fiscal year for necessary expenses to carry out mandated program activities. In addition, Congress enacts multi-year appropriations and appropriations that are available until expended. All appropriations are subject to OMB apportionment as well as Congressional restrictions. The Department also implements internal restrictions to ensure efficient and proper use of all appropriations. One-year and multi-year appropriations are canceled and cannot be used for disbursements if five years have passed since the appropriation was last available for obligation.

Revenues and Other Financing Sources

Department operations are financed through appropriations, reimbursement for the provision of goods or services to other Federal agencies, proceeds from the sale of property, certain consular-related and other fees, and donations. In addition, the Department collects passport, visa, and other consular fees that are not retained by the Department but are deposited directly to a Treasury account. The passport and visa fees are reported as earned revenues on the Statement of Net Cost and as a transfer-out of financing sources on the Statement of Changes in Net Position.

For financial statement purposes, appropriations are recorded as a financing source (i.e., Appropriations Used) and reported on the Statement of Changes in Net Position at the time they are recognized as expenditures. Appropriations expended for capitalized property and equipment are recognized when the asset is purchased. The applicable depreciation expense is recorded over the asset's useful life as described below in Property and Equipment — Real Property and Property and Equipment — Personal Property.

Work performed for other Federal agencies under reimbursable agreements is initially financed through the account providing the service and is subsequently reimbursed. Reimbursements are recognized as revenue when earned, i.e., goods have been delivered or services rendered, and the associated costs have been incurred.

Administrative support services at overseas posts are provided to other Federal agencies through the International Cooperative Administrative Support Services (ICASS). ICASS bills for the services it provides to agencies at overseas posts. These billings are recorded as revenue to ICASS and must cover all overhead costs, operating expenses, and replacement costs for capital assets needed to carry on the operation.

Proceeds from the sale of real property, vehicles, and other personal property are recognized as revenue when the proceeds are credited to the account from which the asset was funded. For non-capitalized property, the full amount realized is recognized as revenue. For capitalized property, revenue or loss is determined by whether the proceeds received were more or less than the net book value of the asset sold. The Department retains proceeds of sale, which are available for purchase of the same or similar category of property.

The Department is authorized to collect and retain specific user fees for machine-readable visas, expedited passport processing, and fingerprint checks on immigrant visa applicants. These revenues are recognized in the American Citizens and U.S. Borders Program as the fees are collected. The Department is also authorized to credit the respective appropriations with (1) fees for the use of Blair House; (2) lease payments and transfers from the International Center Chancery Fees held in Trust to the International Center Project; (3) registration fees for the Office of Defense Trade Controls;(4) reimbursement for international litigation expenses; and (5) reimbursement for training foreign government officials at the Foreign Affairs Service Institute.

Generally, donations received in the form of cash or financial instruments are recognized as revenue at their fair value in the period received. Contributions of services are recognized if the services received (a) create or enhance non-financial assets, or (b) require specialized skills that are provided by individuals possessing those skills, which would typically need to be purchased if not donated. Works of art, historical treasures, and similar assets that are added to collections are not recognized at the time of donation. If subsequently sold, proceeds from the sale of these items are recognized in the year of sale.

The Department receives most of the funding it needs to support the Repatriation Loan Program through an annual appropriation and permanent, indefinite borrowing authority. The appropriation has two components: (1) a subsidy portion for the present value of long-term cash flow, and (2) estimated expenses to administer the program. Appropriations are recognized as used at the time the loans are obligated and administrative expenses are incurred.

Fund Balances with Treasury

The Fund Balances with Treasury are available to pay accrued liabilities and finance authorized commitments relative to goods, services, and benefits. The Department does not maintain cash in commercial bank accounts for the funds reported in the Balance Sheet, except for the Emergencies in the Diplomatic and Consular Services, Office of Foreign Missions, and the International Center, which maintains a commercial account for lease fees held in trust — see Note 8, "Cash and Other Monetary Assets". Treasury processes domestic receipts and disbursements. The Department operates three Financial Service Centers, which are located in Paris, Bangkok, and Charleston, South Carolina, and provide financial support for the Department and other Federal agencies' operations overseas. The U.S. Disbursing Officer at each Center has the delegated authority to disburse funds on behalf of the Treasury.

Accounts Receivable

Intragovernmental Accounts Receivable are due principally from other Federal agencies for ICASS services, reimbursable agreements, and Working Capital Fund (WCF) services. Accounts Receivable from non-Federal entities are primarily the result of International Boundary and Water Commission (IBWC) receivables for Mexico's share of IBWC activities, Repatriation Loans, and travel advances.

Accounts Receivable from non-Federal entities are subject to the full debt collection cycle and mechanisms, e.g., salary offset, referral to collection agents, and Treasury offset. In addition, Accounts Receivable from non-Federal entities are assessed interest, penalties and administrative fees if they become delinquent. Interest and penalties are assessed at the Current Value of Funds Rate established by Treasury. Except for amounts assessed on FSRDF accounts, any interest, penalties or fees collected are not retained but are treated as miscellaneous receipts and are deposited directly to a Treasury account. Amounts assessed on FSRDF accounts are credited to the FSRDF.

Allowances for uncollectible Accounts Receivable are based on criteria established for each type of receivable. Due to the relatively small number and dollar amount of non-Federal receivables, accounts are independently assessed to determine whether they are collectible and need an offsetting allowance. All Intragovernmental Accounts Receivable are considered collectible. However, an allowance may be established to recognize billing disputes. Similar to non-Federal receivables, Intragovernmental receivables are independently assessed to determine collectibility and the need for an offsetting allowance.

Interest Receivable

Interest earned on investments, but not received as of September 30, is recognized as interest receivable.

Loans Receivable

The Department provides Repatriation Loans for destitute American citizens overseas whereby the Department becomes the lender of last resort. These loans provide assistance to pay for return transportation, food and lodging, or medical expenses. The borrower executes a promissory note without collateral. Consequently, the loans are made anticipating a low rate of recovery. Interest, penalties, and administrative fees are assessed if the loan becomes delinquent.

Advances and Prepayments

Payments made in advance of the receipt of goods and services are recorded as advances or prepayments, and recognized as expenses when the related goods and services are received. Advances are made principally to Department employees for official travel, miscellaneous prepayments and advances to other entities for future services, and salary advances to Department employees transferring to overseas assignments. Advances and prepayments are reported as Other Assets on the Balance Sheet.

Valuation of Investments

The FSRDF investments consist solely of special issues of U.S. Government securities, which are redeemable on demand at par. For financial statement purposes, the investments are therefore valued at par. Interest on investments is paid semi-annually on June 30 and December 31.

The investments of the Gift Funds consist of U.S. guaranteed securities. These investments are reported at the acquisition cost, which equals the face value plus or minus the unamortized premium or discount. Premiums and discounts are amortized over the life of the Treasury bill using the straight-line method.

The Department administers the Israeli-Arab Scholarship and Eisenhower Exchange Fellowship Programs. The Israeli-Arab Scholarship Program provides grants and scholarships to Israeli-Arab students for degree programs at universities and colleges in the United States. The Eisenhower Exchange Fellowship Program honors the late president and increases educational opportunities for young leaders in preparation for and enhancement of their professional careers and advancement of peace through international understanding. The Israeli-Arab Scholarship Fund and Eisenhower Exchange Fellowship Program Trust Fund investments consist of market-based U.S. Treasury Securities. Interest on investments is paid semiannually at various rates. Investments are valued at their par value, net of unamortized premiums and discounts. Premiums and discounts are amortized over the life of the security on an effective interest basis. See Note 5, "Investments."

Works of Art and High Value Furnishings

The Department has collections of art and furnishings that are held for public exhibition, education, and official entertainment for visiting Chiefs of State, Heads of Government, Foreign Ministers, and other distinguished foreign and American guests. The Department has six separate collections: the Diplomatic Reception Rooms, the Art Bank, Art in Embassies, Curatorial Services Program, the Library Rare and Special Book Collection, and the Secretary of State's Register of Culturally Significant Property.

[Text version of a photo: Photo of a picture; Art Bank Program, U.S. Department of State photo. Caption reads: "Judith Miller, Water Lillies/Greenbrook Sanctuary #1."]

The collections consist of items that were donated, purchased using donated or appropriated funds, or are on loan from individuals, organizations, or museums. The Department provides protection and preservation services for these collections.

The items that the Department owns are considered heritage assets (see " Required Supplementary Stewardship Information — Heritage Assets "). In accordance with SFFAS No. 6, no value is assigned to these assets in the Consolidated Balance Sheet. Purchases of items for collections are recorded as an expense in the year of purchase. Proceeds from disposals are recognized as revenue in the year of sale and are designated for future collection acquisitions.

Inventories

The Department's Consolidated Balance Sheet reflects inventories held by WCF's Publishing Services, and the Supply Services Center and Stock Account. The WCF inventory consists primarily of paper and ink used for printing and reproduction services (Publishing Services), furniture held for sale to bureaus in the Department (Supply Services Center and Stock Account), and publications held for sale.

The WCF's Publishing Services inventory is valued at the latest acquisition cost. The Supply Services Center and Stock Account inventory is valued monthly using a weighted moving average. The inventory value of the publications held for sale is based on the cost of production. Recorded values are adjusted for the results of periodic physical inventories.

Property and Equipment—Real Property

Real property assets primarily consist of facilities used for U.S. diplomatic missions abroad and capital improvements to these facilities, including unimproved land; residential and functional-use buildings such as embassy/consulate office buildings; office annexes and support facilities; and construction-in-progress. Title to these properties is held under various conditions including fee simple, restricted use, crown lease, and deed of use agreement. Some of these properties are considered historical treasures and are considered multi-use heritage assets. These items are reported on the Balance Sheet and included on the Required Supplemental Information—Heritage Assets.

[Text version of two photos: Outside views of the mission building; Overseas Buildings Operations, U.S. Department of State photo. Caption reads: "The Tangier Old Legation, the first property that the United States Government acquired for a diplomatic mission, was presented as a gift to the American people by Sultan Moulay Suliman in 1821."]

Since 1997, additions to the real property asset accounts have been based on historical costs. Construction-in-Progress represents the costs incurred for new facilities, major rehabilitations, or other improvements in the design or construction stage. After these projects are completed, costs are transferred to Buildings and Structures or Leasehold Improvements as appropriate. The Department capitalizes construction of new buildings and all building acquisitions regardless of cost. The Department also capitalizes improvements greater than $250,000.

Prior to 1997, historical cost information for most of the Department's overseas properties was either unavailable or incomplete. The Department therefore estimated the value of overseas real property assets as of September 30, 1996.

The Department also owns several domestic real properties, including the National Foreign Affairs Training Center (Arlington, Va.); the International Center (Washington, D.C.); the Charleston Financial Services Center (S.C.); the Beltsville Information Management Center (Md.); the Florida Regional Center (Ft. Lauderdale); and consular centers in Charleston (S.C.); Portsmouth (N.H.) and Williamsburg (Ky.). These properties have been recorded at either actual or estimated historical cost.

The International Boundary and Water Commission (IBWC) has buildings and structures related to its boundary preservation, flood control, and sanitation programs. IBWC's buildings and structures are capitalized at cost.

Depreciation of buildings and other structures is computed on a straight-line basis, and depreciated principally over a 30-year period.

Property and Equipment—Personal Property

In general, personal property and equipment with an acquisition cost of $25,000 or more, and a useful life of two or more years is capitalized at cost. However, there are exceptions to this capitalization policy. All vehicles are capitalized, and ADP software costing over $500,000 with a useful life of two or more years is capitalized.

[Text version of a photo: Left to right sport utility vehicle and sedan; Bureau of Diplomatic Security and Foreign Missions, U.S. Department of State photo. No caption.]

Depreciation of property and equipment is calculated on a straight-line basis over the asset's estimated life with a 5% salvage value. For all property except vehicles, depreciation is not recorded until the fiscal year after the item is put into service. Vehicles are depreciated over periods ranging from 3 to 6 years, and depreciation begins when the vehicle is put into service. Other personal property and equipment is depreciated over periods generally ranging from 5 to 8 years. Telecommunication equipment is depreciated over 20 years. ADP software is amortized over the lesser of its estimated useful life or seven years.

Capital Leases

Leases are accounted for as capital leases if they meet one of the following criteria: (1) the lease transfers ownership of the property by the end of the lease term; (2) the lease contains an option to purchase the property at a bargain price; (3) the lease term is equal to or greater than 75% of the estimated useful life of the property; or (4) the present value of the minimum lease payment equals or exceeds 90% of the fair value of the leased property. The initial recording of the lease's value (with a corresponding liability) is the lesser of the net present value of the lease payments or the fair value of the leased property. Capital leases are amortized over the term of the lease.

Grants

The Department awards educational, cultural exchange, and refugee assistance grants to various individuals, universities, and not-for-profit organizations. Budgetary obligations are recorded when grants are awarded. Grant funds are disbursed in two ways: Grantees draw funds commensurate with their immediate cash needs via the Department of Health and Human Services (HHS) Payments Management System (PMS); or grantees submit invoices. In both cases, the expense is recorded upon disbursement.

Accounts Payable and Other Liabilities

Accounts payable and other liabilities represent the amounts accrued for employees' salaries; employee and annuitant benefits; contracts for goods and services received but unpaid at the end of the fiscal year; and unearned revenue from the sale of real property. The Department changed its method for computing the value of overseas and domestic accounts payable for FY 2002 and FY 2001, respectively. Overseas accounts payable are estimated based upon historical experience. Domestic accounts payable are based upon actual disbursements. The Department believes the new methodology more accurately reflects the financial position and results of operations.

Annual, Sick and Other Leave

Annual leave is accrued as it is earned, and the accrual is reduced as leave is taken. At the end of each fiscal year, the balance in the accrued annual leave liability account is adjusted to reflect current pay rates. The amount of the adjustment is recorded as an expense. Current or prior year appropriations are not available to fund annual leave earned but not taken. Funding occurs in the year the leave is taken and payment is made. Sick leave and other types of non-vested leave are expensed as taken.

Employee Benefit Plans

Retirment Plans: Civil Service employees participate in either the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS). Members of the Foreign Service participate in either the Foreign Service Retirement and Disability System (FSRDS) or the Foreign Service Pension System (FSPS).

Employees covered under CSRS contribute 7.00% (7.40% prior to January 14, 2001) of their salary; the Department contributes 8.51%. Employees covered under CSRS also contribute 1.45% of their salary to Medicare insurance; the Department makes a matching contribution. On January 1, 1987, FERS went into effect pursuant to Public Law 99-335. Most employees hired after December 31, 1983, are automatically covered by FERS and Social Security. Employees hired prior to January 1, 1984, were allowed to join FERS or remain in CSRS. Employees participating in FERS contribute 0.80% (1.20% prior to January 14, 2001) of their salary, with the Department making contributions of 10.70%. FERS employees also contribute 6.20% to Social Security and 1.45% to Medicare insurance. The Department makes matching contributions to both. A primary feature of FERS is that it offers a Thrift Savings Plan (TSP) into which the Department automatically contributes 1% of pay and matches employee contributions up to an additional 4%.

Foreign Service employees hired prior to January 1, 1984, participate in FSRDS with certain exceptions. FSPS was established pursuant to Section 415 of Public Law 99-335, which became effective June 6, 1986. Foreign Service employees hired after December 31, 1983, participate in FSPS with certain exceptions. FSRDS employees contribute 7.00% (7.40% prior to January 14, 2001) of their salary; the Department contributes 8.51%. FSPS employees contribute 1.30% (1.70% prior to January 14, 2001) of their salary; the Department contributes 20.34%. Both FSRDS and FSPS employees contribute 1.45% of their salary to Medicare; the Department matches their contributions. Similar to FERS, FSPS also offers the TSP described above.

Foreign Service Nationals (FSNs) and Third Country Nationals (TCNs) at overseas posts who were hired prior to January 1, 1984, are covered under CSRS. FSNs and TCNs hired after that date are covered under a variety of local government plans in compliance with the host country's laws and regulations. In cases where the host country does not mandate plans or the plans are inadequate, employees are covered by a privately managed pension plan that conforms to the prevailing practices of comparable employers.

Health Insurance: Most American employees participate in the Federal Employees Health Benefits Program (FEHBP), a voluntary program that provides protection for enrollees and eligible family members in case of illness and/or accident. Under FEHBP, the Department contributes the employer's share of the premium as determined by the U.S. Office of Personnel Management (OPM).

Life Insurance: Unless specifically waived, employees are covered by the Federal Employees Group Life Insurance Program (FEGLIP). FEGLIP automatically covers eligible employees for basic life insurance in amounts equivalent to an employee's annual pay, rounded up to the next thousand dollars plus $2,000. The Department pays one-third and employees pay two-thirds of the premium. Enrollees and their family members are eligible for additional insurance coverage but the enrollee is responsible for the cost of the additional coverage.

Other Post Employment Benefits: The Department does not report CSRS, FERS, FEHBP or FEGLIP assets, accumulated plan benefits, or unfunded liabilities applicable to its employees; OPM reports this information. As required by SFFAS No. 5, Accounting for Liabilities of the Federal Government, the Department reports the full cost of employee benefits for the programs that OPM administers. The Department recognizes an expense and imputed financing source for the annualized unfunded portion of CSRS, post-retirement health benefits, and life insurance for employees covered by these programs. The Department recognized $70.2 million and $70.6 million in 2002 and 2001, respectively, for unfunded pension and post-retirement benefits. The additional costs are not actually owed or paid to OPM, and thus are not reported on the Balance Sheet as a liability, but instead are reported as an imputed financing source from costs absorbed from others on the Statement of Changes in Net Position.

Future Workers' Compensation Benefits

The Federal Employees' Compensation Act (FECA) provides income and medical cost protection to cover Federal employees injured on the job or who have incurred a work-related occupational disease, and beneficiaries of employees whose death is attributable to job-related injury or occupational disease. The U.S. Department of Labor (DOL) administers the FECA program. DOL initially pays valid claims and bills the employing Federal agency. DOL calculates the actuarial liability for future workers' compensation benefits and reports to each agency its share of the liability.

The present value of the liability for 2002 and 2001 was computed using a discount rate of 5.2% and 5.21%, respectively, for all years; in 2002 and 2001, the Department's liability changed by ($.4) million and $6.7 million, respectively. The total actuarial liability that the Department is responsible totaled $56.2 million as of September 30, 2002 and $56.6 million as of September 30, 2001.

Valuation of FSN Separation Liability

Separation payments are made to eligible FSN employees who voluntarily resign, retire, or lose their jobs due to a reduction in force, and are in countries that require a voluntary separation payment. The amount required to finance the current and future costs of FSN separation pay is determined annually.

Actuarial Present Value of Projected Plan Benefits for the Foreign Service Retirement and Disability Program

The Department's financial statements present the Pension Actuarial Liability of the Foreign Service Retirement and Disability Program (the "Plan") as the actuarial present value of projected plan benefits, as required by the SFFAS No. 5, Accounting for Liabilities of the Federal Government. The Pension Actuarial Liability represents the future periodic payments provided for current employee and retired Plan participants, less the future employee and employing Federal agency contributions, stated in current dollars.

Future periodic payments include benefits expected to be paid to (1) retired or terminated employees or their beneficiaries; (2) beneficiaries of employees who have died; and (3) present employees or their beneficiaries, including refunds of employee contributions as specified by Plan provisions. Total projected service is used to determine eligibility for retirement benefits. The value of voluntary, involuntary, and deferred retirement benefits is based on projected service and assumed salary increases. The value of benefits for disabled employees or survivors of employees is determined by multiplying the benefit the employee or survivor would receive on the date of disability or death, by a ratio of service at the valuation date to projected service at the time of disability or death.

An actuary from the Treasury determines the Pension Actuarial Liability. The Pension Actuarial Liability is calculated by applying actuarial assumptions to adjust the projected Plan benefits to reflect the discounted time value of money and the probability of payment (by means of decrements such as death, disability, withdrawal or retirement) between the valuation date and the expected date of payment.

For 2002 and 2001, the valuation included assumed average rates of return on investments of 6.75%, inflation of 3.75%, and salary increases of 4.25%. The Plan uses the aggregate entry age normal actuarial cost method, whereby the present value of projected benefits for each employee is allocated on a level basis (such as a constant percentage of salary) over the employee's service between entry age and assumed exit age. The portion of the present value allocated to each year is referred to as the normal cost.

In March 2001, the Board of Actuaries announced a change in the dynamic economic assumptions used to calculate the actuarial liability. The economic assumptions reflect predictions about the long-term relationships among inflation, interest on investments, and salary adjustments. The new assumptions reflect recent financial experience and indicate a less optimistic view of the Board regarding long-term interest earnings in relation to the other two factors.

The calculation of normal cost considers both economic and demographic assumptions. Based on the new economic assumptions, the plan actuary revised the normal cost percentages. The table below presents the normal costs for FY 2002 and FY 2001.

 

FY 2002 FY 2001
Normal Costs:    

FSRDS

FSPS

30.65%

21.57%

27.43%

21.04%

Actuarial assumptions are based on the presumption that the Plan will continue. If the Plan terminates, different actuarial assumptions and other factors might be applicable for determining the actuarial present value of accumulated plan benefits.

Net Position

The Department's net position contains the following components:

1. Unexpended Appropriations — the sum of undelivered orders and unobligated balances. Undelivered orders represent the amount of obligations incurred for goods or services ordered, but not yet received. An unobligated balance is the amount available after deducting cumulative obligations from total budgetary resources. As obligations for goods or services are incurred, the available balance is reduced.

2. Cumulative Results of Operations — include (1) the accumulated difference between revenues and financing sources less expenses since inception; (2) the Department's investment in capitalized assets financed by appropriation; (3) donations; and (4) unfunded liabilities, whose liquidation may require future Congressional appropriations or other budgetary resources.

Foreign Currency

Accounting records for the Department are maintained in U.S. dollars, while a significant amount of the Department's overseas expenditures are in foreign currencies. For accounting purposes, overseas obligations and disbursements are recorded in U.S. dollars based on the rate of exchange as of the date of the transaction. Foreign currency payments are made by the U.S. Disbursing Officers located at the Department's three Financial Service Centers.

2 Accounting Changes

Changes Implemented

In 2002 and 2001, the Department implemented revised financial statement reporting requirements and new Statement of Federal Financial Accounting Standards (SFFAS). None of the changes had a material effect on the Department's financial position or results of operations.

On September 25, 2001, OMB issued Bulletin 01-09 (Bulletin), Form and Content of Agency Financial Statements. This Bulletin provides guidance for preparing agency financial statements and supersedes OMB Bulletin No. 97-01, Form and Content of Agency Financial Statements, as amended. It contains significant changes. The requirements contained in the Bulletin are phased in beginning with FY 2001, are effective in their entirety for the preparation of financial statements for fiscal years beginning after September 30, 2001 (i.e., FY 2002 and beyond), and significantly affect how the Department reports on its programs.

The major changes required by the Bulletin for FYs 2002 and 2001 reporting are as follows.

  • Integrated Reporting. Combined performance and accountability reports that present both performance and financial reports are required for FY 2002 and subsequent years.

  • Accelerated Reporting. For FY 2002, performance and accountability reports must be submitted to OMB and the Congress by February 1, 2003.

  • Budget Integration. The Statement of Budgetary Resources is revised to improve the linkage between this statement and the Budget of the United States Government.

  • Financial Statement Formats. Significant changes in labeling and formatting of line items on the Statement of Changes in Net Position, Statement of Budgetary Resources, and Statement of Financing are effective to facilitate an understanding of the flow of information between statements. Labeling and formatting of line items on the Balance Sheet are streamlined to improve usefulness to readers of the financial statements.

  • Comparative Reporting. The preparation of comparative financial statements is required. A comparative Balance Sheet and Statement of Net Cost are required for reporting periods beginning with FY 2001. However, comparative Statements of Changes in Net Position, Budgetary Resources, and Financing (and related footnotes) are not required until fiscal year 2003 and beyond. Also, information presented in the Financial Highlights Section (pages 38-44) of the Management Discussion and Analysis, Required Supplementary Stewardship Information (Pages 240-244) and Required Supplementary Information (Pages 245 -251) are presented on a comparative basis when the information is meaningful to the user of the financial report.

New SFFASs were adopted by the Department as follows.

NEW SFFASS
SFFAS Effective Reporting Period Description
SFFAS No. 21 Reporting Corrections of Errors and Changes in Accounting Principles FY 2002 SFFAS No. 21 amends SFFAS No. 7. SFFAS No. 7 did not allow reporting entities, when presenting prior period financial statements for comparative purposes, to restate prior period fiinancial statements to show the effect of accounting errors. SFFAS No. 21 requires that when material errors are discovered in prior period financial statements, all statements presented must be restated to correct the error.
SFFAS No. 22 Change in Certain Requirements for Reconciling Obligations and Net Cost of Operations FY 2001 SFFAS No. 22 deletes the requirement in SFFAS No. 7 paragraph 80 that requires increases and decreases in receivables from the public related to exchange revenues be reported as a nonbudgetary resource, and makes other conforming changes.
SFFAS No. 18 Amendments to Accounting Standards for Direct Loans and Loan Guarantees FY 2001 SFFAS No. 18 amends certain portions of SFFAS No. 2, Accounting for Direct Loans and Loan Guarantees, by adding the following requirements: (a) report subsidy reestimates in two components: interest rate reestimates and technical/default reestimates, (b) display in a note to the financial statements a reconciliation between the beginning and ending balances of loan guarantee liability and the subsidy cost allowance for direct loans, and (c) provide disclosure and discussion for changes in program subsidy rates, subsidy expense, and subsidy reestimates.
SFFAS No. 10 Accounting for Internal Use Software FY 2001 SFFAS No. 10 provides accounting standards for internal use software. It classifies internal use software as "general property, plant, and equipment" as defined in SFFAS No. 6, Accounting for Property, Plant and Equipment, and requires software costs meeting certain criteria to be capitalized whether purchased as commercial off-the-shelf (COTS), or developed by a contractor or internally developed. SFFAS No. 10 provides guidance regarding the types of cost elements to capitalize, the timing of capitalization, and other issues. Under SFFAS No. 10, agencies are to determine their own dollar value capitalization thresholds. The Department established a threshold of $500 thousand.
     

Changes to be Implemented

As indicated above, the requirements contained in OMB Bulletin 01-09 are effective in their entirety for the preparation of financial statements for fiscal years 2002 and beyond. Future significant changes that the Department will implement are as follows.

  • Accelerated Reporting. For FY 2004, OMB is accelerating further the due dates for performance and accountability reports. Performance and accountability reports for FY 2004 must be submitted to OMB and the Congress by November 15, 2004.

  • Interim Financial Reporting. In FY 2003, unaudited financial statements shall be prepared and submitted to OMB on a quarterly basis (i.e., December 31, March 31, and June 30) no later than 45 days after the end of the reporting period.

3 ASSETS

The Department's assets are classified as entity assets and non-entity assets. Entity assets are those assets that the Department has authority to use for its operations. Non-entity assets are those held by the Department but are not available for use in its operations. The vast majority of the Department's assets are entity assets. The non-entity assets consist primarily of lease fees collected by the Department for the International Chancery Center; and amounts in the Bosnia Federation Defense Fund. Total non-entity assets at September 30, 2002 and 2001 were $11.4 million and $11.1 million, respectively. These items are included in amounts reported as Cash and Other Monetary Assets (See Note 8, " Cash and Other Monetary Assets " for further information).

4 FUND BALANCES WITH TREASURY

Fund Balances with Treasury at September 30, 2002 and 2001, are summarized below (Dollars in Thousands).

2002 2001
Appropriated Funds $8,574,965 $7,387,602
Revolving Funds 156,665 125,769
Trust Funds 105,478 103,752
Other Funds 100,031 34,996
Total $8,937,139 $7,652,119

5 INVESTMENTS

The Department has activities that have the authority to invest excess cash resources. A description of those activities, the investments made and a listing of the outstanding investments follow. Although funds in the Chancery Development Trust Account and the Bosnia Federation Defense Fund are invested, because they are considered non-entity assets the investments for these funds are not shown in this section, but are described in Note 8, " Cash and Other Monetary Assets."

Foreign Service Retirement and Disability Fund (FSRDF)

Treasury initially invests FSRDF receipts in special, non-marketable U.S. Government securities. These special-issue Certificates of Indebtedness mature on the following June 30. On June 30, the Treasury rolls over the Certificates of Indebtedness into special, non-marketable bonds, with maturities spread over 15 years and a yield equaling the average of all marketable Treasury securities. All securities are purchased and redeemed at par, regardless of market conditions. Interest is paid semi-annually on December 31 and June 30. Maturity dates on these securities range from 2003 through 2016, and interest rates range from 4.375% to 9.25%.

Israeli-Arab Scholarship and Eisenhower Exchange Fellowship Program Trust Funds

The Israeli-Arab Scholarship and Eisenhower Exchange Fellowship Program Trust Funds are invested in market-based securities, issued at either a premium or a discount, and are redeemable for par at maturity. The discounts and premiums on these investments are amortized over the life of the security using the effective interest method. Maturity dates on these securities range from 2003 to 2011; interest rates range from 5.0% to 7.875%.

Gift Funds

The Gift Funds invest in U.S. Government non-marketable, market-based securities, which are issued at either a premium or a discount, and are redeemable for par at maturity. The discounts and premiums on these investments are amortized over the life of the Treasury bill using the straight-line method. Maturity dates on these securities range from 2002 to 2003; interest rates range from 1.48% to 1.55%.

Summary of Investments

Investments at September 30, 2002 and 2001, are summarized below (Dollars in Thousands). All investments are classified as Intragovernmental Securities.

At September 30, 2002
Par
Amoritzation
Method
Unamoritized
(Discount)
Investments
(net)
Market
Value
Non-Market, PAr Value
FSRDF Certificate of Indebtedness
$1,306,221
n/a
$-
$1,306,221
$1,306,221
FSRDF Special Bonds
10,428,019
n/a
-
10,428,019
10,428,019
Subtotal
$11,734,240
$-
$11,734,240
$11,734,240
Non-Market, Market Based
Israeli-Arab Scholarship, Notes
4,277
Interest
176
4,453
4,857
Eisenhower Exchange Fellowship, Notes
7,395
Interest
(42)
7,353
8,086
Gift Funds, Bills
4,721
Straight-Line
(30)
4,691
4,651
Subtotal
$16,393
$104
$16,497
$17,594
Total Investments
$11,750,633
$104
$11,750,737
$11,751,834

At September 30, 2001
Par
Amoritzation
Method
Unamoritized
(Discount)
Investments
(net)
Market
Value
Non-Market, PAr Value
FSRDF Certificate of Indebtedness
$46,054
n/a
$-
$46,054
$46,054
FSRDF Special Bonds
11,145,560
n/a
-
11,145,560
11,145,560
Subtotal
$11,191,614
$-
$11,191,614
$11,191,614
Non-Market, Market Based
Israeli-Arab Scholarship, Notes
4,277
Interest
238
4,515
4,834
Eisenhower Exchange Fellowship, Notes
7,512
Interest
(428)
7,512
8,013
Gift Funds, Bills
3,233
Straight-Line
(43)
3,190
3,158
Subtotal
$15,022
$(233)
$14,789
$16,005
Total Investments
$11,206,636
$(233)
$11,206,403
$11,207,619

6 ACCOUNTS RECEIVABLE

The Department's Accounts Receivable at September 30, 2002 and 2001, are summarized below (Dollars in Thousands)

2002
2001
 
Entity
Accounts
Receivable

Non-entity
Accounts
Receivable

Allowance for
Uncollectible
Accounts
Receivable
Net
Receivables
Accounts
Receivable
Allowance
for Esitmated
Uncollectible
Net
Receivables
Intragovernmental
$313,337
$-
$(46)
$313,291
$174,956
$(4,571)
$170,385
Non-Federal
51,273
-
(5,924)
45,349
43,039
(928)
42,111
Total
$364,610
$-
$(5,970)
$358,640
$217,995
$(5,499)
$212,496

7 LOANS RECEIVABLE

Repatriation Direct Loan Program

Repatriation loan obligations made prior to 1992 and the resulting direct loans are reported net of an allowance for uncollectible loans or estimated losses. The loss allowance estimates amounts that the Department does not expect to recover on loans made prior to 1992. These allowances are based upon historical experience.

The Federal Credit Reform Act governs Repatriation loan obligations made after 1991, and the resulting direct loans. The Act requires that the present value of the subsidy costs (i.e., interest rate differentials, interest subsidies, estimated delinquencies, and defaults, fee offsets, and other cash flows) associated with the loans be recognized as a cost in the year the loan is disbursed. An analysis of loans receivable, the nature and amounts of the subsidy, and the administrative costs associated with the loans are summarized below.

Repatriation Loans Obligated Prior to 1992 (Dollars in Thousands)

At September 30:

2002
2001
Loans Receivable Gross
$516
$430
Interest and Penalty Receivable
86
85
Allowance for Uncollectible Loans
(572)
(490)
Net Loans Receivable
$30
$25

Repatriation Loans Obligated after 1991 (Dollars in Thousands)

At September 30, 2002:

Fiscal Year
Loans
Receivable
Gross
Interset, Penalty
And Administrative
Chrages Receivable

Allowance for
Subsidy Cost

Net Present Value
Of Assets Related
To Direct Loans
1992
$105
$34
$97
$42
1993
104
19
86
37
1994
79
18
68
29
1995
163
42
143
62
1996
530
214
521
223
1997
445
109
388
166
1998
564
75
447
192
1999
322
33
248
107
2000
312
27
237
102
2001
390
52
310
132
2002
338
27
256
109
Total
$3,352
$650
$2,801
$1,201

At September 30, 2001:

Fiscal Year
Loans
Receivable
Gross
Interset, Penalty
And Administrative
Chrages Receivable

Allowance for
Subsidy Cost

Net Present Value
Of Assets Related
To Direct Loans
1992
$106
$39
$101
$44
1993
110
21
91
40
1994
79
17
67
29
1995
178
43
155
66
1996
549
206
529
226
1997
449
105
388
166
1998
591
69
462
198
1999
393
40
303
130
2000
393
31
297
127
2001
328
20
243
105
Total
$3,176
$591
$2,636
$1,131

Total Amount of Direct Loans Disbursed (Post-1991)

In 2002, the Department disbursed approximately $710,000 in repatriation loans. In 2001, it disbursed approximately $642,000.

Subsidy Expense for Post-1991 Repatriation Loans

The subsidy expense for the 2002 and 2001 loan program contains the following components (Dollars in Thousands):

2002 2001
Interest Differential - -
Default $568 $514
Fees - -
Total $568 $514

Subsidy Rates for Direct loans

The Department uses a subsidy rate of 80%. Because the Department has complied with the provisions of the Debt Collection Improvement Act, it has received collections much higher than anticipated.

Schedule for Reconciling Subsidy Cost Allowance Balances (Dollars in Thousands)

 

Beginning balance of the subsidy cost allowance - "October 1, 2001

$ 2,636

Add: subsidy expense for loans disbursed during 2002

568

Adjustments

Ending balance for the subsidy cost allowance "before re-estimates

3,204

Effect of subsidy re-estimate by component:

Interest rate re-estimate

Technical/default re-estimate

(403)

Ending balance of the subsidy cost allowance

$ 2,801

The above schedule reflects the effect of re-estimates; however, the Department has not performed re-estimates as part of its budget process. The above re-estimates are for financial reporting purposes only, and are more fully described below under the Accounts Payable to Treasury section.

Administrative Expenses

Total administrative expense was approximately $607,000 in 2002 and 2001.

Accounts Payable to Treasury

The Department estimates a subsidy rate based upon collections of 20%. Over the past several years, however, the actual collection rate has been closer to 40%. As a result, the subsidy allowance established at 80% understated the net credit program receivable. A re-estimate of the subsidy rate will correct this by reducing the amount of subsidy allowance. The Department, however, has not yet completed the re-estimation of the subsidy. For financial reporting purposes, the Department reduced the subsidy allowance by approximately $402,000 in 2002, and established that amount as a payable to Treasury. The total amount payable to Treasury is approximately $4.8 million, which represents the cumulative effect of subsidy re-estimates since 1992. Although the Department has not re-estimated, the subsidy allowance reduction is consistent with the reporting requirements of the Federal Financial Accounting Standards.

Accounts payable also includes a payable to Treasury of $0.7 million resulting from the collection of Pre-Credit Reform loans.

Borrowings from Treasury (Dollars in Thousands)

2002 2001
Begining Balance, October 1 $(191) $(341)
Borrowing, Net of Repayments (65) 150
Ending Balance, September 30 $(256) $(191)

8 CASH AND OTHER MONETARY ASSETS

The Cash and Other Monetary Assets at September 30, 2002 and 2001, are summarized below (Dollars in Thousands). There are no restrictions on entity cash. Non-Entity cash is restricted as discussed below.

2002
2001
Entity Assets Non-Entity
Assets
Total Entity Assets Non-Entity
assets
Total
Bosnia Federation Defense Fund $- $309 $309 $- $672 $672
Chancery Development
Cash - 2 2 - 2 2
Treasury Bills, at par - 11,169 11,169 - 10,745 10,745
Unamortized Discount - (88) (88) - (346) (346)
Cash-Imprest and Other Funds 1,400 - 1,400 1,399 - 1,399
Total $1,400 $11,392 $12,792 $1,399 $11,073 $12,472

The Bosnia Federation Defense Fund is a depository account, which contains funds that have been donated by various foreign governments to assist the Federation of Bosnia and Herzegovina in establishing a military balance that will promote lasting peace in the region. A corresponding liability for these amounts is reflected as Funds Held in Trust.

Lease fees collected from foreign governments by the Department for the International Chancery Center are deposited into an escrow account called the Chancery Development Trust Account. The funds are unavailable to the Department at time of deposit, and do not constitute expendable resources until funds are necessary for additional work on the Center project. The Chancery Development Trust account invests in one-year marketable Treasury bills issued at discount and redeemable for par at maturity. A corresponding liability for these amounts is reflected as Funds Held in Trust.

9 INVENTORY

Inventory held at September 30, 2002 and 2001, is summarized below (Dollars in Thousands).

2002 2001
Inventory Held for Current Sale:
Publishing Services-Raw Materials $1,797 $961
Publishing Services-Publications for sale 3,279 3,278
Inventory for Resale 2,708 2,688
Total $7,784 $6,927

The inventories of Raw Materials are valued using the latest acquisition cost. Publications for Sale are valued at cost of production. Inventories for resale are valued at cost for items held in the European Logistics Support Office's Expedited Logistics Program, and the weighted moving average method is used for items in the Material Management Branch.

10 PROPERTY AND EQUIPMENT, NET

Property and equipment balances at September 30, 2002 and 2001, are shown in the following table (Dollars in Thousands):

2002
2001
Major Classes
cost
accumulated
depreciation
net value
cost
accumulated
depreciation
net value
Real Property
Overseas-
Land and Land Improvements
$1,904,743
$(95)
$1,904,648
$1,864,051
$(45)
1,864,006
Buildings and Structures
3,768,927
(2,210,702)
1,558,225
3,702,237
(2,045,870)
1,656,367
Assets Under Capital Lease
120,940
(43,819)
77,121
94,342
(46,876)
47,466
Leasehold Improvements
52,634
(14,418)
38,216
50,474
(10,890)
39,584
Domestic-
Structures, Facilities and Leaseholds
521,350
(172,862)
348,488
510,134
(155,679)
354,455
Construction-in-Progress
58,484
-
58,484
56,484
-
56,484
Land and Land Improvements
80,654
(3,836)
76,818
80,654
(3,523)
77,131
Subtotal-Real Property
$7,394,646
$(2,445,732)
$4,948,914
$6,870,755
$(2,262,883)
$4,607,872
Personal Property:
Vehicles
$174,369
$(112,291)
$62,078
$172,337
$(97,384)
$74,953
Communication Equipment
45,072
(11,121)
33,951
43,632
(9,879)
33,753
ADP Equipment
21,528
(15,577)
5,951
20,307
(12,640)
7,667
Reproduction Equipment
13,325
(10,036)
3,289
12,970
(9,268)
3,702
Security
67,289
(25,032)
42,257)
-
-
-
Software-in-Development
33,476
-
33,476
37,073
-
37,073
Other Equipment
327,130
(25,076)
302,054
140,208
(34,762)
105,446
Subtotal-Personal Property
327,130
(25,076)
302,054
140,208
(34,762)
105,446
Total
$8,154,043
$(2,654,193)
$5,499,850
$7,297,282
$(2,426,816)
$4,870,466

11 OTHER ASSETS

The Department's other assets at September 30, 2002 and 2001, are summarized below (Dollars in Thousands).

2002 2001
Salary Advances to Employees $7,296 $5,221
Travel Advances to Employees 12,705 14,048
Prepayments 12,000 12,009
Other Advances 47,346 40,839
Total Other Assets $79,347 $72,117

12 LIABILITIES

The Department's liabilities are classified as covered by budgetary resources or not covered by budgetary resources. Liabilities not covered by budgetary resources result from the receipt of goods and services, or occurrence of eligible events in the current or prior periods, for which revenue or other funds to pay the liabilities have not been made available through appropriations or current earnings of the Department. The major liabilities in this category include assessments from international organizations, unfunded actuarial liability for FSRDF, future workers' compensation benefits, capital leases, and accrued annual leave. Liabilities not covered by budgetary resources at September 30, 2002 and 2001, are summarized below (Dollars in Thousands).

2002 2001
Intragovernmental Liabilities    
Accounts Payable $- $-
Other Liabilities 17,966 17,929
Total Intragovernmental Liabilities $17,966 $17,929
Foreign Service Retirement Actuarial Liability 324,776 424,884
Liability to International Organizations 1,065,172 1,650,006
Capital Lease Liability 92,010 63,058
Funds Held in Trust 13,592 11,073
Federal Employees' Compensation Act Benefits 56,259 56,645
Accrued Annual leave 180,926 171,950
Other Liabilities 8,621 8,621
Total Liabilities not Covered by Budgetary Resources $1,759,322 $2,404,166

Other Liabilities consists primarily of accrued employee benefits.

13 FOREIGN SERVICE RETIREMENT ACTUARIAL LIABILITY

The Foreign Service Retirement and Disability Fund finances the operations of the FSRDS and the FSPS. The FSRDS and the FSPS are defined-benefit single-employer plans. FSRDS was originally established in 1924; FSPS in 1986.

The FSRDS is a single-benefit retirement plan. Retirees receive a monthly annuity from FSRDS for the rest of their lives. FSPS provides benefits from three sources: a basic benefit (annuity) from FSPS, Social Security, and the Thrift Savings Plan.

The following table presents the calculation of the combined FSRDS and FSPS Pension Actuarial Liability and the assumptions used in computing it for the years ended September 30, 2002 and 2001 (Dollars in Millions).

For the Year Ended September 30, 2002 2001
Pension Acturial Liability, Begining of Year $11,766.9 $11,475.9
Add Pension Expense:
Normal Cost 198.0 185.9
Interest on Pension Liability 780.3 789.1
Prior Service Costs - -
Acturial Losses/(Gains) 79.0 (92.3)
Total Pension Expense 1,057.3 882.7
Less Payments for Beneficiaries (Annunities and Refunds) (612.4) (591.7)
Pension Actuarial Liability, End of Year 12,211.8 11,766.9
Less: Net Assets Available for Benefits (11,887.0) (11,342.0)
Actuarial Unfunded Pension Liability for Projected Plan Benefits $324.8 $424.9
Acuarial Assumptions
Rate of Return on Investments 6.75% 6.75%
Rate of Inflation 3.75% 3.75%
Salary of Increase 4.25% 4.25%

Net Assets Available for Benefits at September 30, 2002 and 2001, consist of the following (Dollars in Thousands):

2002 2001
Fund Balance with Treasury $0 $6
Receivables 203,793 199,501
Investments in USG Securities 11,734,240 11,191,614
Total Assets 11,938,033 11,391,121
Less:FSRDF Liabilities (51,009) (49,105)
Net Assets Available for Benefits $11,887,024 $11,342,016

14 LIABILITIES TO INTERNATIONAL ORGANIZATIONS

The Department reports an unfunded liability for the accumulated arrears assessed by the United Nations (UN), its affiliated agencies, and other international organizations in the amount of $303.5 million and $895.1 million for 2002 and 2001, respectively, for regular budget assessments and international peacekeeping. These financial commitments mature into obligations (as that term is used in domestic law) only when funds are authorized and appropriated by Congress. As of September 30, 2002, a total of $926 million had been appropriated by Congress for payment of the U.S. arrearage. These amounts, however, were made available subject to certifications by the Secretary of State that certain legislative requirements were met. A payment of $100 million was made in FY 2000; a payment of $475 million and a credit of $107 million were made in FY 2002; and payments totaling $211.9 million were made in early FY 2003. Thus, $32.1 million of appropriations for arrearage payments remain.

The financial statements also report an unfunded liability of $761.6 and $755.0 million at September 31, 2002 and 2001, respectively, for the current year 2002 and 2001 unfunded or restricted annual assessments from the United Nations, its affiliated agencies and several other international organizations, as well as for peacekeeping. It has been the Department's policy to pay annual assessments for the UN and certain international organizations out of the following fiscal year's appropriation, usually in the last quarter of the calendar year (i.e., the 2002 calendar year assessment is paid from the Department's 2003 appropriation). The Liability to International Organizations at September 30, 2002 and 2001, is summarized below (Dollars in Thousands).

2002 2001

Accumulated Arrears

$ 303,525 $ 895,05
Unfunded Annual Assessments 761,647 754,952
Liability to International Organizations $1,065,172 $1,650,006

[Text version of a photo: View from inside a building looking toward ceiling/skylight and far end of room with flags of the world lining the walls on either side. No caption, no photo credit.]

15 LEASES

The Department is committed to over 9,000 leases, which cover office and functional properties, and residential units at diplomatic missions overseas. The majority of these leases are short-term, operating leases. In most cases, management expects that the leases will be renewed or replaced by other leases.

Personnel from other U.S. Government agencies occupy some of the leased facilities (both residential and non-residential). These agencies reimburse the Department for the use of the properties. Reimbursements are received for approximately $36.2 million of the lease costs.

Capital Leases

The Department has various long-term leases (more than 10 years) for overseas real property that meet the criteria as a capital lease in accordance with SFFAS No. 6, Accounting for Property, Plant, and Equipment. Assets that meet the definition of a capital lease and their related lease liability, are initially recorded at the present value of the future minimum lease payments or fair market value, whichever is less. In general, capital assets are depreciated over the estimated remaining life of the asset, and the related liability is amortized over the term of the lease, which can result in a different value in the asset versus the liability.

Following is a summary of Net Assets Under Capital Leases and future minimum lease payments as of September 30 (Dollars in Thousands).

  2002 2001

Net Assets Under Capital Leases:

   

Land and Buildings

$120,940 $ 94,342
Accumulated Depreciation (43,819) (46,876)
Net Assets under Capital Leases $ 77,121 $ 47,466

Future Minimum Lease Payments:

2002 2001
Fiscal Year Lease Payments Fiscal Year Lease Payments

2003 $8,467 2002 $5,944
2004 $6,899 2003 5,250
2005 $6,899 2004 4,466
2006 $6,899 2005 4,466
2007 $6,899 2006 4,192
2008 and thereafter $467,166 2007 and thereafter 125,529
Total Minimum Lease Payments $502,649 $149,847
Less:Amounts Representing Interest (410,639) (86,789)
Obligations under Capital Leases $92,010 $63,058

Operating Leases

The Department leases real property in overseas locations under operating leases. These leases expire in various years. Minimum future rental payments under operating leases having remaining terms in excess of one year as of September 30, 2002 for each of the next 5 years and in aggregate are as follows (Dollars in Thousands).

Operating Lease "Year Ended September 30" Amounts

2003

$ 273,831
2004 191,941
2005 117,524
2006 66,198
2007 38,807
2008 and thereafter 84,759
Total Minimum Future Lease Payments $ 773,060

16 COMMITMENTS AND CONTINGENCIES

Commitments

In addition to the future lease commitments discussed in Note 15, "Leases," the Department is committed under obligations for goods and services which have been ordered but not yet received (undelivered orders — see Note 17, "Unexpended Appropriations" and Note 19, "Statement of Budgetary Resources") at fiscal yearend.

Contingencies

Rewards for Justice Program. The Department conducts Counter-Terrorism, Counternarcotics, and War Criminals rewards programs. The Counter-Terrorism Rewards Program offers rewards up to $5 million for information preventing acts of international terrorism against United States persons or property, or leading to the arrest or conviction of terrorist criminals responsible for such acts. The Counternarcotics Rewards Program offers rewards up to $2 million. The War Criminals Rewards Program offers rewards up to $5 million for information leading to the arrest and/or conviction of war criminals from the former Yugoslavia.

[Text version of a photo: Rewards for Justice Program poster depicting a stack of bundled paper currency and reading "Saving lives is one good reason to turn in a terrorist ... here are 25 million more!"; U.S. Department of State photo. No caption.]

The Department is a party in various administrative proceedings, legal actions, environmental suits, and claims brought by and against it. Some of the actions are not related directly to Department programs but the Department is involved because of its status as the U.S. Government's foreign policy agency. In the opinion of management and legal counsel, the ultimate resolution of these proceedings, actions, and claims will not materially affect the financial position or results of operations of the Department.

Claims Filed in Response to Embassy Bombings: Nearly 4,000 Kenyan nationals filed administrative tort claims against the Department alleging that Department negligence was responsible for the damages they suffered when terrorists bombed the American Embassy in Nairobi, Kenya on August 7, 1998. These claims are for sums ranging from $150 to $10,000,000 and total approximately $1.5 billion. Two lawsuits, in the amounts of $1 billion and $500 million, arising from these tort claims were dismissed this year by the Federal District Court in Washington, D.C. One of the cases has been appealed to the D.C. Circuit Court of Appeals, and the other will probably be appealed to that court in the near future. In addition, the families of eleven of the twelve Americans killed in the bombing also filed administrative tort claims with the Department alleging that Department negligence led to the death of their family members in Nairobi. These claims, including those by the estates of the deceased, are for a total of $117 million. The Department is vigorously defending against all of the tort claims and lawsuits. Any settlements or judgments in excess of $2,500 would be funded and paid from the Judgment Fund maintained by the Treasury.

Dillingham Construction International, Inc. v. the Department of State: Dillingham Construction International, Inc. seeks approximately $22 to $27 million in claims (including interest) arising from construction of the U.S. Embassy chancery building in Singapore. The litigation is before the Court of Federal Claims, where the Department is represented by the Commercial Litigation Branch, Civil Division, Department of Justice. Document discovery and depositions have been largely completed. Decisions were issued in November on a number of cross-motions for partial summary judgment. These decisions were largely favorable to the Government. The Department will continue to vigorously defend against these claims.

North American Free Trade Agreement (NAFTA) Arbitrations: NAFTA allows Canadian and Mexican investors to bring arbitration proceedings against the United States for breaches of certain NAFTA provisions. These cases raise allegations of expropriation as well as other claims of treatment inconsistent with international law or specific treaty commitments that provide investment protections. The United States has successfully defended itself against two claims submitted to arbitration under Chapter 11 of the NAFTA. The United States is currently defending itself against four claims submitted to arbitration and four claims not yet submitted under Chapter 11 of NAFTA. These claims total approximately $2.7 billion. The United States has also received notice of another claim not submitted in the amount of either $5.8 billion or $13.6 billion, depending on how one interprets the notice. The U.S. Government intends to vigorously contest these claims. In no case is the Department a named respondent in these arbitrations. The Department's involvement is due to its unique experience with international arbitration, particularly with respect to these types of claims. Any adverse award in any of these cases would be paid out of the Judgment Fund.

Certain legal matters to which the Department is a party are administered and, in some instances, litigated and paid by other U.S. Government agencies. Generally, amounts to be paid under any decision, settlement, or award pertaining to these legal matters are funded from the Judgment Fund. None of the amounts paid under the Judgment Fund on behalf of the Department in 2002 and 2001 had a material effect on the financial position or results of operations of the Department.

17 UNEXPENDED APPROPRIATIONS

Unexpended Appropriations include the amount of unobligated appropriations and undelivered orders outstanding for Congressional appropriations provided to the Department. As these accounts incur obligations, the available balance of the appropriation is reduced.

Unobligated balances are the amount of appropriations or other authority that remains after deducting cumulative obligations. The unobligated balance is classified as unavailable for all expired accounts and for amounts appropriated subject to certain conditions. Undelivered orders represent the amount of obligations incurred for goods or services ordered but not yet received. Unexpended Appropriations at September 30, 2002 and 2001, are summarized below (Dollars in Thousands).

2002 2001
Unexpended Appropriations:

(1) Unobligated

(a) Available

$ 1,692,029 $ 1,795,905

(b) Unavailable

404,026 962,017

(2) Undelivered Orders

5,057,968 3,203,922
Total $ 7,154,023 $ 5,961,844

18 STATEMENT OF NET COST

The Statement of Net Cost reports the Department's gross and net cost for its major programs. The net cost of operations is the gross (i.e., total) cost incurred by the Department, less any exchange (i.e., earned) revenue.

The Consolidating Schedule of Net Cost categorizes costs and revenues by major program and responsibility segment. A responsibility segment is the component that carries out a mission or major line of activity, and whose managers report directly to top management. For the Department, a Bureau (e.g., Bureau of African Affairs) is considered a responsibility segment. For presentation purposes, Bureaus have been summarized and reported at the Under Secretary level (e.g., Under Secretary for Political Affairs). For 2000 and beyond, a new responsibility segment has been added for the Under Secretary for Public Diplomacy and Public Affairs as a result of the merger of the former USIA. Information on the Bureaus (or equivalent) that report to each Under Secretary can be found on the Organization Chart for the Department provided in the MD&A Section of this report.

The presentation of major programs is based on the Department's Strategic Plan established pursuant to the Government Performance and Results Act of 1993. As outlined in the Strategic Plan, the United States conducts relations with foreign governments and others to pursue U.S. national interests, and create a more secure, prosperous, democratic world. These national interests are:

  • National Security — Secure peace; deter aggression; prevent, diffuse, and manage crises; halt the proliferation of weapons of mass destruction; and advance arms control and disarmament.

  • Economic Prosperity — Expand exports; open markets; assist American business; foster economic growth; and promote sustainable development.

  • Democracy — Increase foreign government adherence to democratic practices and respect for human rights.

  • Global Issues: Environment, Population and Health — Improve the global environment; stabilize world population growth; and protect human health.

  • Humanitarian Response — Provide humanitarian assistance to victims of crisis and disaster.

  • American Citizens and U.S. Borders — Protect American citizens abroad and safeguard the borders of the United States.

  • Law Enforcement — Combat international terrorism, crime, and narcotics trafficking.

National interests are reported as programs to the extent that it is practicable. Exceptions include National Security, Economic Prosperity, Democracy, and Global Issues. These national interests are primarily carried out through the Department's Diplomatic Relations and International Organizations programs, which have been combined and are reported as such on the Statement of Net Cost. Diplomatic Readiness relates to the Department's responsibilities for managing infrastructure, information, and human resources. The ability of the Department to advance national and foreign policy interests depends on the quality of these items—the two largest and most visible of which are Diplomatic Security and Overseas Buildings Operations.

Executive Direction and Other Costs Not Assigned relate to high-level executive direction (e.g., Office of the Secretary, Office of the Legal Adviser), international commissions, general management, and certain administrative support costs that cannot be directly traced or reasonably allocated to a particular program. For the year ended September 30, 2002 and 2001, these consist of costs and earned revenue for the table (Dollars in Thousands) on page 229 [second table below].

Department of State
Consolidating Schedule of Net Cost

For the year ended September 30, 2002
(dollars in thousands)
Under Secretary For
Arms Control, Int'l Security
Economic Business and Agriculture
Global Affairs
Political Affairs
Public Diplomacy and Public Affairs
Management Cosular Affairs
Eliminations
Total
Diplomatic Relations and International Organizations
Total Cost
$459,894
$39,240
$93,277
$4,299,542
$341,067
$203
$(130,507)
$5,102,716
Earned Revenue
(51,835)
(3,565)
(9,164)
(250,546)
(27,261)
(24)
130,507
(211,888)
Net Program Costs
408,059
35,675
84,113
4,048,996
313,806
179
0
4,890,828
American Citizens and U.S. Borders
Total Cost
0
0
187
918,739
226,421
678,345
(262,836)
1,560,856
Earned Revenue
0
0
(31)
(191,398)
(38,544)
(1,082,455)
262,836
(1,049,592)
Net Program Costs
0
0
156
727,341
187,877
(404,110)
0
511,264
Humanitarian Response
Total Cost
0
0
845,150
33
58
0
(36)
845,205
Earned Revenue
0
0
418
0
0
0
36
454
Net Program Costs
0
0
845,568
33
58
0
0
845,659
Law Enforcement
Total Cost
0
0
647,152
65,750
2,268
0
(2,408)
712,762
Earned Revenue
0
0
(11,442)
(3,742)
(23)
0
2,408
(12,799)
Net Program Costs
0
0
635,710
62,008
2,245
0
0
699,963
Executive Direction and Other Costs Not Assigned
Total Cost
3,736
3,242
60,734
3,226,783
440,256
4,065
(1,122,520)
2,616,296
Earned Revenue
(2,296)
(1,993)
(37,328)
(2,010,766)
(271,413)
(2,498)
1,101,023
(1,225,271)
Net Program Costs
1,440
1,249
23,406
1,216,017
168,843
1,567
(21,497)
1,391,025
Total Cost
463,630
42,482
1,646,500
8,510,847
1,010,070
682,613
(1,518,307)
10,837,835
Total Revenue
(54,131)
(5,558)
(57,547)
(2,456,452)
(337,241)
(1,084,977)
1,496,810
(2,499,096)
Total Net Cost
409,499
36,924
1,588,953
6,054,395
672,829
(402,364)
(21,497)
8,338,739

2002
2001
Program
Total Prior to Eliminations
Intra-Departmental Eliminations
Total
Total Prior to Eliminations
Intra-Departmental Eliminations
Total
Costs:
Executive Direction $1,681,836 $117,887 $1,563,949 $1,443,466 $95,253 $1,348,213
FSRDF 1,057,328 314,864 742,464 1,048,597 309,143 739,454
ICASS 906,142 692,376 213,766 798,319 625,548 172,771
International Commisions 93,510 (2607) 96,117 85,668 4,107 81,561
Total Costs 3,738,816 1,122,520 2,616,296 3,376,050 1,034,051 2,341,999
Earned Revenue
Executive Direction 235,115 117,887 117,228 205,239 95,253 109,986
FSRDF 1,157,436 293,367 864,069 1,127,325 285,318 842,007
ICASS 920,918 692,376 228,542 854,320 625,548 228,772
International Commisions 12,825 (2,607) 15,432 21,023 4,107 16,916
Total Earned Revenue 2,326,294 1,101,023 1,225,271 2,207,907 1,010,226 1,197,681
Total Net Cost for Executuive Direction and Other Costs
Not Assigned 1,412,522 21,497 1,391,025 1,168,143 23,825 1,144,318

Program Costs

These costs include the full cost of resources consumed by a program, both direct and indirect, to carry out its activities. Direct costs can be specifically identified with a program. Indirect costs include resources that are commonly used to support two or more programs, and are not specifically identified with any program. Indirect costs are assigned to programs through allocations. Full costs also include the costs of goods or services received from other Federal entities (referred to as inter-entity costs), whether or not the Department reimburses that entity.

Indirect Costs: Indirect costs consist primarily of Diplomatic Readiness charges for central support functions performed in 2002 and 2001 under the Under Secretary for Management by the following organizations (Dollars in Thousands):

Bureau (or equivalent)
2002
2001

Bureau of Diplomatic Security

$ 782,344
$ 730,771

Office of Overseas Buildings Operations

643,675
634,550

Bureau of Administration

513,562
432,687

Bureau of Information Resource "Management

298,470
187,592

Bureau of Personnel

265,282
216,416

Bureau of Resource Management

(95,662)
241,122

Foreign Service Institute

106,424
87,861

Medical Services and Other

157,442
194,672
Total Central Support Costs
$ 2,671,537
$ 2,725,671

These support costs were distributed to programs on the basis of a program's total base salaries for its full-time employees, as a percentage of total base salaries for all full-time employees, except for the Office of Overseas Buildings Operations. Since the Office of Overseas Buildings Operations supports overseas operations, its costs were allocated based on the percentage of budgeted cost by program for the regional bureaus. The distribution of support costs to programs in 2002 and 2001 was as follows (Dollars in Thousands):

Program Receiving Allocation
2002
2001

Diplomatic Relations

$ 947,337
$ 1,009,655

American Citizens and Border Security

721,816
671,127

Executive Direction and Other Costs "not Assigned

770,751
806,809

International Organizations

193,610
198,655

Law Enforcement

38,011
39,412

Humanitarian Response

12
13
Total
$ 2,671,537
$ 2,725,671

Since the cost incurred by the Under Secretary for Management and the Secretariat are primarily support costs, these costs were distributed to the other Under Secretaries to show the full costs under the responsibility segments that have direct control over the Department's programs. One exception within the Under Secretary for Management is the Bureau of Consular Affairs, which is responsible for the American Citizens and U.S. Borders program. As a result, these costs were not allocated and continue to be reported as the Under Secretary for Management.

The Under Secretary for Management/Secretariat costs (except for the Bureau of Consular Affairs) were allocated to the other Department responsibility segments based on the percentage of total costs by organization for each program. The allocation of these costs to the other Under Secretaries and to the Bureau of Consular Affairs was as follows (Dollars in Thousands):

Under Secretary
2002
2001

Political Affairs

$ 2,817,597 $ 3,118,384

Public Diplomacy

502,608 505,136

Management (Consular Affairs)

344,715 361,051

Arms Control, International Security "Affairs

191,111 164,841

Global Affairs

63,456 110,010

Economic, Business and Agriculture "Affairs

18,090 17,782
Total $ 3,937,577 $ 4,277,204

Inter-Entity Costs and Imputed Financing: The Department is an agency of the U.S. Government, which performs many services for other U.S. Government agencies, especially overseas. Conversely, other U.S. Government agencies make financial decisions and report certain financial matters on behalf of the U.S. Government as a whole, including matters to which the Department may be an interested party.

To measure the full cost of activities, SFFAS No. 4, Managerial Cost Accounting, requires that total costs of programs include costs that are paid by other U.S. Government entities, if material. As provided by SFFAS No. 4, OMB issued a Memorandum in April 1998, entitled "Technical Guidance on the Implementation of Managerial Cost Accounting Standards for the Government." In that Memorandum, OMB established that reporting entities should recognize inter-entity costs for (1) employees' pension benefits; (2) health insurance, life insurance, and other benefits for retired employees; (3) other post-retirement benefits for retired, terminated and inactive employees, including severance payments, training and counseling, continued health care, and unemployment and workers' compensation under the Federal Employees' Compensation Act; and (4) payments made in litigation proceedings. This requirement to recognize specific inter-entity costs was extended in September 2001 and September 2000 to FY 2002 and 2001 financial statements by Bulletin 01-09 and OMB Memorandum M-00-14, "Technical Amendments to OMB Bulletin 97-01, Form and Content of Agency Financial Statements," respectively.

The Department recognizes an imputed financing source on the Statement of Changes in Net Position for the value of inter-entity costs paid by other U.S. Government entities. This consists of all inter-entity amounts as reported below except for the Federal Workers' Compensation Benefits (FWCB). For FWCB, the Department recognizes its share of the change in the actuarial liability for FWCB as determined by the Department of Labor (DoL). The Department reimburses DoL for FWCB paid to current and former Department employees.

The following inter-entity costs and imputed financing sources were recognized in the Statement of Net Cost and Statement of Changes in Net Position, respectively, for the year ended September 30, 2002 and 2001. (Dollars in Thousands):

Inter-Entity Cost
2002
2001

Other Post-Employment Benefits:

Civil Service Retirement Program

$ 17,912 $ 17,245

Federal Employees Health Benefits "Program

52,179 43,574

Federal Employees Group Life Insurance "Program

114 195

Litigation funded by Treasury Judgment "Fund

13,875 9,600

Subtotal - Imputed Financing Source

$ 84,080 $ 70,614

Future Workers' Compensation Benefits

7,619 6,729
Total Inter-Entity Costs $ 91,699 $ 77,343

Intra-departmental Eliminations. Intra-departmental eliminations of cost and revenue were recorded against the program that provided the service. Therefore the full program cost was reported by leaving the reporting of cost with the program that received the service.

Earned Revenues

Earned revenues occur when the Department provides goods or services to the public or another Federal entity. Earned revenues are reported regardless of whether the Department is permitted to retain all or part of the revenue. Specifically, the Department collects but does not retain passport, visa, and certain other consular fees. Earned revenues for the year ended September 30, 2002 and 2001, consist of the following (Dollars in Thousands):

2002
2001
Program
Total
Prior To
Eliminations
Intra-Departmental
Eliminations
Total
Total
Prior To
Eliminations
Intra-Departmental
Eliminations
Total
Consular Fees:
Passport, Visa and Other Consular "fees"
$ 523,863
$ —
$ 523,863
$ 535,568
$ —
$ 535,568

Machine Readable Visa

368,875
368,875
417,517
417,517

Expedited Passport

65,286
65,286
65,950
65,950

Fingerprint Processing, Diversity "Lottery, and Affadavit of Support

12,289
12,289
4,091
4,091
Subtotal - Consular Fees
$ 970,313
$ —
$ 970,313
$ 1,023,126
$ —
$ 1,023,126

FSRDF

$ 1,157,436
$ 293,367
$ 864,069
$ 1,127,325
$ 285,318
$ 842,007
ICASS
920,918
692,376
228,542
854,320
625,548
228,772
Reimbursable Agreements With "Federal Agencies
692,225
338,911
353,314
769,694
377,066
392,628
Working Capital Fund
252,037
172,157
79,880
159,497
134,555
24,942
Other
2,978
2,978
4,227
4,227
Total
$3,995,907
$1,496,811
$2,499,096
$3,938,189
$1,422,487
$2,515,702

Pricing Policies

Generally, a Federal agency may not earn revenue from outside sources unless it obtains specific statutory authority. Accordingly, the pricing policy for any earned revenue depends on the revenue's nature, and the statutory authority under which the Department is allowed to earn and retain (or not retain) the revenue. Earned revenue that the Department is not authorized to retain is deposited into the Treasury's General Fund.

The FSRDF finances the operations of the Foreign Service Retirement and Disability System (FSRDS) and the Foreign Service Pension System (FSPS). The FSRDF receives revenue from employee/employer contributions, a U.S. Government contribution, and interest on investments. By law, FSRDS participants contribute 7.00% (7.40% prior to January 14, 2001) of their base salary, and each employing agency contributes 8.51%; FSPS participants contribute 1.30% (1.70% prior to January 14, 2001) of their base salary and each employing agency contributes 20.34%. Employing agencies report employee/employer contributions biweekly. Total employee/employer contributions for 2002 and 2001 were $171.3 million and $160.6 million, respectively.

The FSRDF also receives a U.S. Government contribution to finance (1) FSRDS benefits not funded by employee/employer contributions; (2) interest on FSRDS unfunded liability; and (3) FSRDS disbursements attributable to military service. The U.S. Government contributions for 2002 and 2001 were $216.0 million and $210.4 million, respectively. FSRDF cash resources are invested in special non-marketable securities issued by the Treasury. Total interest earned on these investments in 2002 and 2001 was $770.1 million and $755.8 million, respectively.

Consular Fees are established primarily on a cost recovery basis and are determined by periodic cost studies. Reimbursable Agreements with Federal agencies are established and billed on a cost-recovery basis. ICASS billings are computed on a cost- recovery basis; billings are calculated to cover all operating, overhead, and replacement of capital assets, based on budget submissions, budget updates, and other factors. In addition to services covered under ICASS, the Department provides administrative support to other agencies overseas for which the Department does not charge. Areas of support primarily include buildings and facilities, diplomatic security (other than the local guard program), overseas employment, communications, diplomatic pouch, receptionist and selected information management activities. The Department receives direct appropriations to provide this support; individual costs for these activities have not been determined.

Gross Cost and Earned Revenue by Budget Functional Classification (BFC)

The Department's costs and revenue are included in the Financial Report of the United States Government - Fiscal 2002 (formerly the Consolidated Financial Statements of the United States Government), which is published by the Department of the Treasury. The Financial Report of the United States Government - Fiscal 2002 presents gross costs and earned revenue by BFC. Following is the Department's gross cost and earned revenue by BFC for the years ended September 30, 2002 and 2001 (Dollars in Thousands and reported net of intra-departmental eliminations):

2002
2001
Budget Functional Classification Gross Cost Earned Revenue Net Cost GrossCost Earned Revenue Net Cost
International Affairs $9,691,926 $1,621,693 $8,070,233 $9,024,425 $1,652,795 $7,371,630
Income Security 1,065,979 864,069 201,910 890,635 849,341 41,294
Natural Resources 79,960 13,334 66,626 71,783 13,566 58,217
Total $10,837,865 $2,499,096 $8,338,769 $9,986,843 $2,515,702 $7,471,141

19 STATEMENT OF BUDGETARY RESOURCES

The Statement of Budgetary Resources reports information on how budgetary resources were made available and their status as of September 30, 2002. Intra-departmental transactions have not been eliminated in the amounts presented.

The Budgetary Resources section presents the total budgetary resources available to the Department. For 2002, the Department received approximately $17.8 billion in budgetary resources, primarily consisting of the following:

Source of Budgetary Resources
2002
Budget Authority:
Direct or related appropriations $11.8 billion
Authority financed fro Trust Fund 1.1 billion
Spending authority from providing goods and services 2.3 billion
Unobligated Balances-Begining of Year 0.3 billion
Total Budgetary Resources $17.8 billion

The Department received permanent indefinite appropriations of $35.5 million and $34.7 million for 2002 and 2001, respectively. The permanent indefinite appropriation provides payments to the Foreign Service Retirement and Disability Fund to finance the interest on the unfunded pension liability for the year and disbursements attributable to military service.

Information on U.S. Government agencies' budgets is reported in the Budget of the United States Government, Fiscal Year 2003 - Appendix (Appendix). The Appendix includes for each agency (including the Department), among other things, budget schedules for the agency's accounts. Information on budgetary resources and their status will be displayed in the Program and Financing (P&F) Schedule under each account. Amounts presented in the P&F Schedules are in millions of dollars. Each agency is responsible for submitting the data presented in the P&F Schedules via the MAX system. The information submitted for "2002 Actual" via MAX has been reconciled with the information presented in the Statement of Budgetary Resources. Amounts shown on the Statement of Budgetary Resources will differ from "2002 Actual" reported in the P&F Schedules for the Department's accounts as follows:

  • The Budget Authority reported on the Statement of Budgetary Resources includes $1.2 billion the Department received for 2002 to administer programs related to International Security Assistance. Amounts for these programs will not be presented under the Department in the Appendix. Instead, these amounts will be reported in the Appendix under the section titled International Assistance Programs.

  • The Unobligated Balances—Beginning of Year reported on the Statement of Budgetary Resources includes $305 million adjustment (increase) pertaining to undelivered orders that will not be reported in the Appendix.

  • The Unobligated Balances--Beginning of Year reported on the Statement of Budgetary Resources includes $112.0 million of unavailable unobligated balances (primarily for expired annual accounts) that will not be reported in the Appendix. These unavailable unobligated balances in expired accounts (2000 and prior) remain available for adjustment, liquidation of obligations and other purposes authorized by law, until such amounts are closed as required by law (Public Law 101-510) and any remaining amounts will be returned to the General Fund of the U.S. Treasury. However, they are not available to incur new obligations since their period of availability to do such has expired. Consequently, the P&F Schedule reports only available unobligated balances (versus unavailable) as budgetary resources available for obligation.

  • The Unobligated Balance---End of Year reported on the Statement of Budgetary Resources includes $80.4 million of unavailable unobligated balances (primarily for expired annual accounts) that will not be reported in the Appendix. These unavailable unobligated balances in expired accounts (2001 and prior) remain available for adjustment, liquidation of obligations and other purposes authorized by law until the accounts are closed as required by law (Public Law 101-510) and any remaining amounts are returned to the General Fund of the U.S. Treasury. However, they are not available to incur new obligations since their period of availability to do such has expired. Consequently, the P&F Schedule reports only available unobligated balances (versus unavailable) as budgetary resources available for obligation.

  • The Unobligated Balance, Available and Unavailable - End of Year reported on the Statement of Budgetary Resources includes a $230 million adjustment (increase) pertaining to undelivered orders that will not be reported in the Appendix.

  • The Obligated Balance, Net—Beginning of Year reported on the Statement of Budgetary Resources includes a $305 million adjustment (decrease) pertaining to undelivered orders that will not be reported in the Appendix.

  • The Obligated Balance, Net - End of Year reported on the Statement of Budgetary Resources includes a $230 million adjustment (decrease) pertaining to undelivered orders that will not be reflected in the Appendix.

The Appendix is organized by major subordinate organizations or program areas within the agency, and then by the nature of account(s) (e.g., general, special, revolving, trust, etc.) within organization or program area. The Department's section consists of the following areas: Administration of Foreign Affairs, International Organizations and Conferences, International Commissions, and Other. The Combining Schedule of Budgetary Resources appearing as Required Supplementary Information on pages 245 -246 presents amounts in the Combined Statement of Budgetary Resources by these areas.

The format of the Statement of Budgetary Resources changed for FY 2002. The new format requires separate disclosure of credit reform programs. Due to the immateriality of the Department's credit reform program, the credit reform information is being presented in this note versus the principal statement (Dollars in Thousands).

Credit Reform 2002
Budget Authority
Appropriations 1,219
Borrowing Authority 153
Unobligated Balance, begining of year 2,056
Spending Authority from Offsetting Collections Earned
Collected 287
Receivable from Federal Sources 362
Total Budgetary Resources 4,077
Obligations Incurred:
Direct Obligations 1,929
Unobligated Balance, Available:
Exempt from Apportionment 1,524
Unobligated Balance Not Available:
Other 624
Total Status of Budgetary Resources 4,077
Obligated Balance, Net as of 10/1/01 169
Obligated Balance, 9/30/02
Undelivered Orders 957
Accounts Payable 1
Outlays:
Disbursements 779
Collections (288)

The amount of budgetary resources obligated for undelivered orders for all activities was approximately $5.6 billion as of September 30, 2002. This includes amounts for revolving and trust funds of $472 million.

20 STATEMENT OF FINANCING

Accrual-based measures used in the Statement of Net Cost differ from the obligation-based measures used in the Statement of Budgetary Resources. The Statement of Financing for the year ended September 30, 2002, presents information to reconcile these different measures. In doing so, the Statement of Financing provides assurance that the financial information is consistent with similar amounts found in budget reports. The Statement of Financing reconciles obligations of budget authority to the accrual-based net cost of operations. The Net Cost of Operations as presented on the Statement of Financing is determined by netting the obligations as adjusted and non-budgetary resources and making adjustments for the total resources that do not fund net cost of operations, the total costs that do not require resources, and financing sources yet to be provided. The Net Cost of Operations that results from the reconciliation on the Statement of Financing equals the Net Cost of Operations reported on the Statement of Net Cost. Intra-departmental transactions have not been eliminated in the amounts presented.

21 CUSTODIAL ACTIVITY

The Department administers certain activities associated with the collection of non-exchange revenues, which are deposited and recorded directly to the General Fund of the Treasury. The Department does not retain the amounts collected. Accordingly, these amounts are not considered or reported as financial or budgetary resources for the Department. At the end of each fiscal year, the accounts are closed and the balances are brought to zero by Treasury. Specifically, the Department collects interest, penalties and handling fees on accounts receivable; fines for Munitions Control violations; international contributions for ice patrol activities; and other miscellaneous receipts. In 2002 and 2001, the Department collected $6.2 million and $4.3 million, respectively, in custodial revenues that were transferred to the Treasury.

22 DEDICATED COLLECTIONS

The Department administers nine Trust Funds that receive dedicated collections. In the U.S. Government budget, Trust Funds are accounted for separately and used only for specified purposes. A brief description of these Funds and their purpose follows.

Foreign Service Retirement and Disability Fund (19X8186)

The Foreign Service Retirement and Disability Fund (FSRDF) was established in 1924 to provide pensions to retired and disabled members of the Foreign Service. The FSRDF's revenues consist of contributions from active participants and their U.S. Government agency employers; appropriations; and interest on investments. Monthly annuity payments are made to eligible retired employees or their survivors. Separated employees without title to an annuity may take a refund of their contributions. P.L. 96-465 limits the amount of administrative expense that can be charged to the fund to $5,000. The total costs for administering FSRDF was $2.9 million in both 2002 and 2001. Cash is invested in U.S. Treasury securities until it is needed for disbursement.

Foreign Service National Separation Liability Trust Fund (FSNSLTF) (19X8340)

FSNSLTF funds separation liabilities to foreign service national (FSNs) and personal service contractor (PSCs) employees who voluntarily resign, retire, or lose their jobs due to a reduction in force. The liability is applicable only in those countries that, due to local law, require a lump-sum voluntary separation payment based on years of service. The FSNSLTF was authorized in 1991 and initially capitalized with a transfer from the Department. Contributions are made to the FSNSLTF by the Department's appropriations, from which the FSNs and PSCs are paid. Once the liability to the separating FSN or PSC is computed in accordance with the local compensation plan, the actual disbursement is made from the FSNSLTF.

Conditional and Unconditional Gift Funds (19X8821 and 19X8822)

The Department maintains two Trust Funds for receiving and disbursing donations. It is authorized to accept gifts from private organizations and individuals in the form of cash, gifts-in-kind, and securities. Gifts are classified as Restricted or Unrestricted Gifts. Restricted Gifts must be used in the manner specified by the donor. Unrestricted Gifts can be used for any expense normally covered by an appropriation, such as representational purposes or embassy refurbishment.

Israeli-Arab Scholarship Program (19X8271)

The Israeli-Arab Scholarship Program provides grants and scholarships to Israeli-Arab students for degree programs at universities and colleges in the United States. This program was authorized by Section 214 of the Foreign Relations Authorization Act, Fiscal Years 1992 and 1993 (P.L. 102-138). A permanent endowment of $4.9 million was established in 1992.

Eisenhower Exchange Fellowship Program Trust Fund (95X8276)

The Eisenhower Exchange Fellowship Act of 1990 (P.L. 101-454) authorized a permanent endowment for the Eisenhower Exchange Fellowship Program to honor the late president by increasing educational opportunities for young leaders who wish to prepare for and enhance their professional careers and advance peace through international understanding. The 1992 Department of State and Related Agencies Appropriations Act provided $5.0 million to establish a permanent endowment for the Program, and appropriated the interest and earnings. The 1995 Department of State and Related Agencies Appropriations Act made an additional payment of $2.5 million to the endowment.

Miscellaneous Trust Funds, Information and Exchange Programs (19X8166, 19X8167, and 19X8272)

Funds advanced by other governments, business concerns, and private organizations to the Department are used to send experts abroad to perform requested services; give foreign nationals scientific, technical, or other training; purchase films and other products owned or controlled by the Department; and for international exhibitions.

Financial data of the Trust Funds as of and for the years ending September 30, 2002 and 2001, is summarized on the following pages (Dollars in Thousands). Intra-departmental transactions have not been eliminated in the amounts presented.

FSRDF
FSNSLTF
Gift Funds
Israeli-Arab Scholarship
Eisenhower Exchange Fellowship
Misc. Trsut Fund
For the year ending September 30, 2002:
Assets:
Fund Balances with Treasury
$ -
$95,130
$7,581
$530
$105
$2,133
Investments
11,734,240
-
3,980
4,454
7,353
711
Other Assets
203,793
-
8
105
-
4
Total Assets
11,938,033
95,130
11,569
5,089
7,458
2,848
Liabilities:
Payable to Beneficiaries
41,283
-
-
-
-
-
Actuarial Liability
12,211,800
-
-
-
-
-
Other Liabilities
9,726
4,934
3,146
-
-
50
Net Postition (Deficit)
(324,776)
90,196
8,423
5,089
7,458
2,798
Total Liabilities and Net Position
$11,938,033
$95,130
$11,569
$5,089
$7,458
$2,848
Revenues and Financing:
Exchange Revenue:
Intragovernmental
$1,133,237
$9,606
$-
$-
$-
$-
Governmental
24,199
-
-
-
-
-
Non Exchange Revenue:
Intragovernmental
-
-
88
263
730
15
Governmental
-
-
33,582
-
-
-
Other Financing
-
-
-
-
-
-
Total Revenue and Financing
1,157,436
9,606
33,670
263
730
15
Expenses:
Program Expenses
-
8,651
33,495
402
356
515
Actuarial Expenses
1,057,328
-
-
-
-
-
Total Expenses
$1,057,328
$8,651
$33,495
$402
$356
$515

FSRDF
FSNSLTF
Gift Funds
Israeli-Arab Scholarship
Eisenhower Exchange Fellowship
Misc. Trsut Fund
For the year ending September 30, 2001
Assets:
Fund Balances with Treasury
$ 6
$91,770
$8,046
$608
$1
$3,321
Investments
11,91,614
-
3,190
4,515
7,083
-
Other Assets
199,501
84
23
105
-
4
Total Assets
11,391,121
91,854
11,259
5,228
7,084
3,325
Liabilities:
Payable to Beneficiaries
39,459
-
-
-
-
-
Actuarial Liability
11,766,900
-
-
-
-
-
Other Liabilities
9,646
2,613
3,011
-
-
27
Net Postition (Deficit)
(424,884)
89,241
8,248
5,228
7,084
3,298
Total Liabilities and Net Position
$11,391,121
$91,854
$11,259
$5,228
$7,084
$3,325
Revenues and Financing:
Exchange Revenue:
Intragovernmental
$1,101,795
$8,814
$-
$-
$-
$-
Governmental
25,530
-
-
-
-
-
Non Exchange Revenue:
Intragovernmental
-
-
127
466
476
18
Governmental
-
-
2,703
-
-
-
Other Financing
-
-
-
(466)
-
-
Total Revenue and Financing
1,127,325
8,814
2,830
-
476
18
Expenses:
Program Expenses
-
7,963
7,229
382
382
1,037
Actuarial Expenses
882,673
-
-
-
-
-
Other Expenses - - - - - -
Total Expenses
$882,673
7,962
7,229
382
382
1,037

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