Budget Issues

For most federal programs, the cash basis of the federal budget provides adequate information on absolute and comparative costs on which to base decisions. However, in some cases, such as federal insurance programs, the consequences of current decisions may not be seen for years. As a result, cash-based budgeting may provide not only incomplete but misleading information as to the cost of these programs. Some contend that budgeting for them should move toward an accrual basis under which the net present value of the expected cost of the risk assumed by the government would be recognized at the time that the commitment is extended. The Chairman of the House Budget Committee asked GAO to review whether the current cash-based reporting provides complete information on these programs and whether accrual concepts--similar to those used for loans and loan guarantees under the Credit Reform Act of 1990--could be used to improve budgeting for these programs. This report (1) examines the shortcomings of cash-based budgeting for insurance programs, (2) identifies how accrual-based budgeting could improve the recognition of insurance program costs and their economic impact, (3) examines approaches that could be used to incorporate accrual-based information in the budget, and (4) identifies implementation issues that can be anticipated in changing to accrual-based budgeting for these programs.

GAO noted that: (1) the cash-based budget does not adequately reflect the government's cost or the economic impact of federal insurance programs because generally costs are recognized when claims are paid rather than when the commitment is made; (2) in any particular year, the cost of the government's insurance commitments may be understated or overstated because the time between the receipt of program collections, the occurrence of an insured event, and the final payment of a claim can extend over many budget periods; (3) decisionmaking is best informed if the government recognizes the costs of its commitments at the time it makes them; (4) for insurance programs, accrual-based budgeting which would recognize the expected long-term cost of the insurance commitment at the time the insurance is extended offers the potential to overcome a number of the deficiencies of cash-based budgeting by improving cost recognition; (5) in most cases, the risk-assumed approach to accrual would be analogous to a premium rate-setting process in that it looks at the long-term expected cost of an insurance commitment at the time the insurance commitment is extended; (6) in practical terms, however, attempts to improve cost recognition occur on a continuum since insurance programs and insurable events vary significantly; (7) the challenges involved in bringing accrual-based estimates into the budget are significant and dictate beginning with an informational and analytic step; (8) development of models to generate reasonably reliable risk-assumed estimates is made difficult by the nature of the risks insured by the government, frequent program modifications, and the sufficiency of data on potential losses; (9) the potential benefits of accrual-based budgeting for federal insurance programs warrant continued effort in the development of risk-assumed cost estimates; (10) supplemental reporting of risk-assumed estimates in the budget as they are developed over a number of years would help policymakers understand the extent and nature of the estimation uncertainty and evaluate whether a more comprehensive accrual-based budgeting approach should be adopted; (11) supplemental reporting of risk-assumed estimates in the budget would parallel the new accounting treatment required under accounting standards developed by the Federal Accounting Standards Advisory Board (FASAB); and (12) in requiring the disclosure of risk-assumed estimates as supplemental information to agency financial statements, FASAB recognized the usefulness of these estimates to better inform budget decisions.

Recommendations

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

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