Notes to Principal Financial Statements (Dollars in Thousands)

Note 1. Description of the Reporting Entity

For purposes of these financial statements, the Offices, Boards and Divisions (OBDs) and the U. S. Marshals Service reporting entity is composed of six separate groupings of Department components: U. S. Attorneys, U. S. Trustees, U. S. Marshals Service, Executive Office for Immigration Review, Legal Activities and General Programs. Following is a description of each of the six groupings:

A. U. S. Attorneys serve as the Nation's principal litigators and represent the Government in each of the Nation's 94 judicial districts. The Attorneys responsibilities include: the prosecution of criminal cases brought by the Federal Government; the prosecution and defense of civil cases in which the United States is a Party; and the collection of debts owed the Federal Government which are administratively uncollectible.

B. U. S. Trustees supervise the administration of bankruptcy cases and private trustees in the Federal Bankruptcy Courts. Activities of the U. S. Trustees are: assuring that bankruptcy cases are administered with dispatch and that all parties comply with their legal obligations; assuring that the cost of administering bankruptcy cases is appropriately monitored, assets are not dissipated, and distributions to creditors are maximized; and to assure that private trustees adhere to fiduciary standards and observe consistent national procedures and policies to assure that violations of applicable criminal laws are referred to law enforcement and regulatory agencies.

C. U. S. Marshals Service protects the Federal judiciary and witnesses, executes warrants and court orders, manages seized assets and maintains custody and transportation of unsentenced prisoners. Programs supported by the U. S. Marshals Service include: Support of U. S. Prisoners, Fees and Expenses of Witnesses and Court Security.

D. Executive Office for Immigration Review (EOIR) was established to improve the immigration hearing and appeal process and provide a uniform interpretation and application of immigration law to ensure fair treatment for all involved parties. EOIR's functions include immigration hearings, review of immigration hearings and employment discrimination, document fraud and employer sanction hearings.

E. Legal Activities encompasses several offices, boards and divisions. These components and their descriptions are:

• Office of the Solicitor General represents the Federal Government in cases before the Supreme Court; decides cases the Government should ask the Supreme Court to review; and decides what position the Government should take in the cases before the court.
• Tax Division represents the United States and its Federal officials in all civil and criminal litigation arising under the internal revenue laws, other than proceedings in the U. S. Tax court.
• Criminal Division develops, enforces and exercises general oversight for Federal criminal laws, except those assigned to other divisions.
• Civil Division represents the interests of the United States, its departments and agencies, Cabinet officers and other Federal employees. The Division confronts significant policy issues, which often rise to constitutional dimensions, in defending and enforcing various Federal programs and actions.
• Environment and Natural Resources Division defends environmental challenges to government programs and activities and represents the United States in all matters concerning the protection, use, and development of the Nation's natural resources and public lands, wildlife protection, Indian rights and claims, and the acquisition of Federal property.
• Office of Legal Counsel assists in the Attorney General's role as legal adviser to the Executive Branch; drafts legal opinions of the Attorney General rendered in response to requests from the President and heads of the executive departments; and provides written opinions and informal advice in response to requests from the various agencies of the Government as well as offices within the Department and from Presidential staff and advisors.
• Civil Rights Division vindicates the constitutional and Federal rights of persons who have been subjected to discrimination on the basis of race, color, gender, disability, religion, familial status, and national origin.
• INTERPOL - United States National Central Bureau provides the communication link between the U. S. Federal, State and local law enforcement community and the 176 member nations of the International Criminal Police Organization (INTERPOL).
• Independent Counsel are appointed to investigate allegations of senior Executive branch officials violating Federal law.
• Antitrust Division enforces the antitrust laws and seeks to prevent antitrust violations by providing information concerning the antitrust laws and the Division's enforcement policies to the public and business community. The Division appears before Federal regulatory agencies to advocate more competition and less regulation, advise other Executive Branch departments and agencies, and provide recommendations to Congress on legislation affection competition.
• Community Relations Service provides services directly to communities as they struggle with racial and ethnic conflicts and tensions. The Service provides assistance in preventing and resolving disputes and difficulties arising from discriminatory practices based on race, color, or national origin which impair the rights of citizens or which disrupt or threaten to disrupt peaceful relations among citizens.
• Foreign Claims Settlement Commission protects the rights of U. S. citizens abroad and promotes the international rule of law through adjudication of claims by U. S. nationals against foreign governments.
• U. S. Parole Commission makes decisions on grants and denials of parole, conditions of parole, supervision of parolees and mandatory releases, recommittal in event of violation of conditions of supervision, and termination of supervision.
• Office of the Pardon Attorney receives and reviews all Federal petitions for clemency, such as commutation of sentences and pardons.

F. General Programs encompasses several offices, boards and divisions. These components and their descriptions are:

Department Leadership includes the Office of the Attorney General, the Office of the Deputy Attorney General, and the Office of the Associate Attorney General. These offices conduct the following activities: advise the President on Constitutional matters and legal issues involving the execution of the laws of the United States; formulate and implement policies and programs that advance the administration of justice in the United States; and coordinate criminal justice matters with Federal, State, and local law enforcement and criminal agencies.

• Executive Support consists of the Offices of Policy Development, Public Affairs, and Legislative Affairs. These offices serve as the liaison between the Department and Congress coordinating Department and Administration policy initiatives in the areas of civil and criminal justice, and ensuring that the public and the news media are kept informed about the activities and policies of the Department.
• Intelligence Policy & Professional Responsibility consists of the Offices of Intelligence Policy and Review, and Professional Responsibility. These offices are responsible for assisting the Attorney General and other senior Department and Executive Branch officials in ensuring that the national security-related activities of the United States are consistent with relevant law, and overseeing the investigation of allegations of criminal and ethical misconduct by the Department's attorneys, criminal investigators, or other law enforcement personnel.
• Justice Management Division provides advice to senior Department officials and develops departmental policies in the areas of management and administration; ensures compliance by the Department components with departmental and other Federal policies and regulations; and provides a full range of management and administrative support services.
• Office of the Inspector General promotes efficient and effective management within the Department of Justice and detects and deters wrongdoing in its programs and operations by the use and coordination of investigative, inspection, and audit resources.
• Community Oriented Policing Services (COPS) is dedicated to improving the quality of life in neighborhoods and communities throughout the Nation through the activity of the COPS grants program, whereby State and local governments are provided grants to place more uniformed officers on the street.

Note 2. Summary of Significant Accounting Policies

A. Basis of Presentation

These financial statements have been prepared to report the financial position and results of operations of the U. S. Department of Justice (the Department) Offices, Boards and Divisions (OBDs) and the U. S. Marshals Service. These statements have been prepared from the books and records of the Department in accordance with the form and content for entity financial statements specified by the Office of Management and Budget (OMB) Bulletin 94-01, Form and Content of Agency Financial Statements, dated November 16, 1993, and Department accounting policies which are summarized in this note. However, the Department received a waiver with respect to certain provisions of Bulletin 94-01 and accordingly did not prepare the Statement of Cash Flows and the Statement of Budgetary Resources and Actual Expenses. These statements are different from the financial reports, also prepared for the Department pursuant to OMB directives, that are used to monitor and control the use of the Department budgetary resources.

Until all Statements of Federal Financial Accounting Standards, which will constitute generally accepted accounting principles for the Federal Government, become effective, the following hierarchy shall constitute an other comprehensive basis of accounting and was used to prepare these financial statements:

1. Statements of Federal Financial Accounting Standards which are effective.
2. Financial statement form and content requirements included in OMB Bulletin 94-01.
3. Accounting standards contained in the U. S. Department of Justice accounting policy, procedures manuals, and/or related guidance as of March 29, 1991.
4. Accounting principles published by authoritative standard setting bodies and other authoritative sources (1) in the absence of other guidance in the first three parts of this hierarchy, and (2) if the use of such accounting standards improve the meaningfulness of these financial statements.

B. Basis of Accounting

The financial statements have been prepared on an accrual basis of accounting. Transactions are recorded on an accrual and a budgetary accounting basis. Under the accrual method, revenues are recognized when earned and expenses are recognized when a liability is incurred, without regard to receipt or payment of cash. Budgetary accounting facilitates compliance with legal constraints and controls over the use of Federal funds.

C. Basis of Consolidation

The accompanying consolidated financial statements include all funds and programs under the OBDs and U. S. Marshals Service's control, with the exceptions of the Working Capital Fund and the Asset Forfeiture Program for which separate financial statements are prepared. All significant intra-fund balances amongst components of the reporting entity have been eliminated in consolidation. The consolidated financial statements do not include centrally administered assets and liabilities related to the Federal Government as a whole, such as General Services Administration owned property and equipment, and borrowings from the Public by the U. S. Treasury, which may in part be attributable to the OBDs and U. S. Marshals Service.

D. Revenues and Other Financing Sources

The OBDs and the U. S. Marshals Service receive the majority of funding needed to support its programs through Congressional appropriations. They receive both annual and multi-year appropriations that may be used, within statutory limits, for operating and capital expenditures. Additional amounts are obtained through reimbursements for services.

Appropriations are recognized as revenues at the time the related program or administrative expenses are incurred. Appropriations expended for property and equipment are recognized as revenue and depreciation expense over the estimated useful life of the asset. Other revenues are recognized when earned, i.e., when services are rendered. The majority of services rendered by the OBDs and U. S. Marshals Service entails legal activities provided to other Department of Justice bureaus and other government agencies.

E. Fund Balance with the U. S. Treasury and Cash

Funds with the U. S. Treasury represent primarily appropriated, revolving, and trust funds available to pay current liabilities and finance future authorized purchases. The OBDs and the U. S. Marshals Service do not, for the most part, maintain cash in commercial bank accounts. Certain receipts, however, are processed by commercial banks for deposit to individual accounts maintained at the U. S. Treasury. Cash receipts and disbursements are processed by the U. S. Treasury as directed by authorized Department of Justice accountable officers.

F. Investments in U. S. Government Securities

The U. S. Trustees is the only component covered in these financial statements with investment authority. Investments in U. S. Government Securities are recorded at face value. Premiums and/or discounts are amortized through the end of the reporting period. The U. S. Trustees intent is to hold investments to maturity, unless securities are needed to sustain operations. No provision is made for unrealized gains or losses on these securities because, in the majority of cases, they are held to maturity.

G. Advances and Prepayments

Advances and prepayments classified as assets on the Statement of Financial Position include the excess amount of funds disbursed to grantees over the total of expenditures made by those grantees to third parties based upon year end data. This amount also includes the current balance of travel advances issued to Federal employees in advance of official travel. Amounts issued are limited to meals and incidental expenses expected to be incurred by the employees during official travel.

H. Property and Equipment

Buildings in which the OBDs and the U. S. Marshals Service operate are provided by the General Services Administration (GSA), which charges rent equivalent to the commercial rental rates for similar properties. Depreciation on buildings and equipment provided by the GSA is not recognized by the Department. Leasehold improvements are depreciated over the term of the remaining portion of the lease.

Acquisitions of $25,000 and over are capitalized and depreciated, based on historical cost, using the straight-line method over the estimated useful lives of the assets which, for most equipment, range from 5 to 25 years. Equipment with an acquisition cost of less than $25,000 is expensed when purchased.

I. Liabilities

Liabilities represent the amount of monies or other resources that are likely to be paid by the OBDs and the U. S. Marshals Service as the result of a transaction or event that has already occurred. However, no liability can be paid by a Department entity absent proper budget authority. Liabilities for which an appropriation has not been enacted are classified as liabilities not covered by budgetary resources and there is no certainty that corresponding future appropriations will be enacted. Liabilities arising from other than contracts can be abrogated by the Government, acting in its sovereign capacity.

J. Annual, Sick, and Other Leave

Annual and compensatory leave is expensed with an offsetting liability as it is earned and the liability is reduced as leave is taken. Each year, the balance in the accrued annual leave liability account is adjusted to reflect current pay rates. To the extent current or prior year appropriations are not available to fund annual and compensatory leave earned but not taken, funding will be obtained from future financing sources.

Sick leave and other types of non-vested leave are expensed as taken.

K. Retirement Plans

With few exceptions, employees hired before January 1, 1984, are covered by the Civil Service Retirement System (CSRS) and employees hired after that date are covered by the Federal Employees Retirement System (FERS).

For employees covered by the CSRS, the Department contributes 7 percent of the employee's gross pay for normal retirement or 7 ½ percent for hazardous duty retirement. For employees covered by the FERS, the Department contributes approximately 13 percent of the employee's gross pay. All employees are eligible to contribute to the Federal Thrift Savings Plan (TSP). For those employees covered by the FERS, a TSP is automatically established, and the Department is required to contribute an additional 1 percent of gross pay to this plan and match employee contributions up to 4 percent. No matching contributions are made to the TSPs established by the CSRS employees. The total amount of contributions paid into employees' TSPs by the OBDs and U. S. Marshals Service for fiscal year 1996, is approximately $33.8 million. The Department does not report CSRS or FERS assets, accumulated plan benefits, or unfunded liabilities, if any, which may be applicable to their employees. Such reporting is the responsibility of the Office of Personnel Management.

L. Accrued Unfunded Workers' Compensation Liability

The Federal Employees' Compensation Act (FECA) provides income and medical cost protection to covered Federal civilian employees injured on the job, employees who have incurred a work-related occupational disease, and beneficiaries of employees whose death is attributable to a job-related injury or occupational disease. Claims incurred for benefits for OBDs and U. S. Marshals Service employees under FECA are administered by the Department of Labor (DOL) and are ultimately paid by the OBDs and U. S. Marshals Service. The future workers' compensation liability has two components, (1) unpaid billings, and (2) an amount of estimated unbilled claims. The unbilled claims are estimated by applying actuarial procedures. The DOL calculated the liability of the Federal Government for future compensation benefits, which includes the expected liability for death, disability, medical, and miscellaneous costs for approved compensation costs. The liability was determined using the paid-losses extrapolation method calculated over the next 23-year period. This method utilizes historical benefit payment patterns related to a specific incurred period to predict the ultimate payments related to that period. The projected annual benefit payments was discounted to present value. The resulting Federal Government liability was then distributed by agency. The future compensation benefits liability is recorded for reporting purposes only. This liability constitutes an extended future estimate of cost which will not be obligated against budgetary resources until the fiscal year in which the cost is actually billed to the OBDs and U. S. Marshals Service.

M. Contingencies and Commitments

The OBDs and the U. S. Marshals Service are involved in various administrative proceedings, legal actions, and claims arising in the ordinary course of business. 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 OBDs and the U. S. Marshals Service.

Commitments include items such as $1.7 billion in undelivered orders, the majority of which is attributed to the Community Oriented Policing Services award program.

N. Comparative Data

Comparative data for the prior year have not been presented because this is the first year for which financial statements have been prepared for the OBDs and the U. S. Marshals Service.

Note 3. Fund Balance with the U. S. Treasury

The Fund Balance with the U. S. Treasury reported in the financial statements represents the unexpended cash balance on the OBDs and the U. S. Marshals Service books at September 30, 1996. A complete list of applicable Treasury Symbols is provided in the Supplemental Section of this financial statement.

Note 4. Investments

Investments are short term non-marketable Federal debt securities issued by the Bureau of Public Debt and purchased exclusively though Treasury's Financial Management Service. When securities are purchased, the investment is recorded at face value. Premiums and/or discounts are amortized through the end of the reporting period.

The following schedule shows the investment balance at September 30, 1996:

Note 5. Property and Equipment, Net

The Property and Equipment balance as of September 30, 1996 was:

Property and equipment consists of vehicles, including cars, trucks, vans, buses and airplanes, ADP software and equipment, other office equipment such as copiers, and security equipment. Items are depreciated using the straight line method. Service lives range from 5 to 25 years.

Note 6. Net Position

The Net Position for the OBDs and the U. S. Marshals Service reporting entity, as of September 30, 1996, is broken down as follows:

Note 7. Other Liabilities

1. Other Liabilities Covered by Budgetary Resources:

2. Other Liabilities Not Covered by Budgetary Resources:

Note 8. Future Funding Requirements

Future funding requirements are funding needs that will be met by future appropriations. For the OBDs and the U. S. Marshals Service, future funding requirements include accrued leave and unfunded workers' compensation. All amounts are current liabilities except for the Federal Employment Compensation Act (FECA) liability of approximately $110.5 million. The unfunded workers' compensation liability estimates for FECA benefits include the expected liability for death, disability, medical and miscellaneous costs for approved compensation cases. The liability is determined using the paid losses extrapolation method calculated over the next 23-year period. This method utilizes historical benefit payment patterns related to a specific incurred period to predict the ultimate payments related to that period. The 1996 annual benefits have been discounted to present value utilizing interest rates from 5.10 percent to 6.21 percent as detailed by the November 1996 OMB economic assumptions. Leave and unfunded workers' compensation for the current period of $16.9 million and $14 million, respectively, are included in the Statement of Operations and Changes in Net Position as Future Compensation Benefits Cost in the line item Other Expenses. The total amount of leave and unfunded workers' compensation is approximately $105.2 and $110.5 million, respectively. The following is a summary of the unfunded liabilities as of September 30, 1996:

Note 9. Expenses by Offices, Boards and Division and U. S. Marshals Service

Expenses by program, as of September 30, 1996, were as follows:

Note 10. Operating Expenses

The categories that comprise the majority of Operating Expenses consist of: Personnel Services and Benefits; Contractual Services; Rent, Communications, Utilities, and Miscellaneous; and Grants and Subsidies.

* Other Services consist of obligations for contractual services with the private sector that are not otherwise classified. It includes obligations for auditing of financial statements when done by contract with the private sector; typing and stenographic service contracts with the private sector; tuition; and fees for abstracting land titles, premiums on insurance, and surety bonds.

The majority of grants entail those given by the Community Oriented Policing Services whereby State and local governments are provided grants to place more uniformed officers on the street. Subsidies are gratuities to prisoners upon discharge or to individuals released on probation. Subsidies include cash payments, government-furnished transportation obtained through transportation requests or through purchase, and payment for the transportation of personal effects.

Note 11. Non-Operating Changes

Changes in the net position other than excess of revenues over total expenses, as of September 30, 1996, were as follows:

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