Fiscal Exposures
Improving the Budgetary Focus on Long-Term Costs and Uncertainties Gao ID: GAO-03-213 January 24, 2003GAO and other budget experts have discussed that the current time horizons and content of the federal budget could be enhanced to more comprehensively reflect the government's commitments or signal emerging problems. GAO was asked to (1) provide information on the range and nature of responsibilities, programs, and activities that may explicitly or implicitly expose the government to future spending and (2) present and discuss options for increasing the attention paid to these items in the budget and budget process. GAO recommends that OMB report annually on fiscal exposures. Where possible, OMB should report the estimated costs-"exposure level"-of certain activities in the Program and Financing schedules of the budget. In a few select areas, the ultimate objective might be to include costs directly in the budget when doing so would enhance up-front control of spending. Congress may wish to consider exploring options for improving the budgetary information and the attention given to fiscal exposures. If more explicit congressional consideration is desired, as estimates improve, Congress may wish to develop budget process mechanisms that prompt more deliberation.
The federal government undertakes a wide range of responsibilities, programs, and activities that may either obligate the government to future spending or simply create an expectation for spending. GAO uses the concept of "fiscal exposure" (risk) to provide a framework to consider these long-term costs and uncertainties. Fiscal exposures vary widely as to source, extent of the government's legal obligation, likelihood of occurrence, and magnitude. These exposures include items such as retirement benefits, environmental cleanup costs, and future social insurance benefits. Given this variety, it is useful to think of a spectrum extending from explicit liabilities to implicit promises embedded in current policy or public expectations. Fiscal exposures warrant budgetary attention and oversight. Demographic trends, in particular, argue for considering the long-term sustainability and flexibility of the government's fiscal position. Regardless of whether the government is legally required or simply compelled by circumstances, some exposures may encumber future budgets and constrain fiscal policy. Not capturing the long-term costs of current decisions limits Congress's ability to control the government's fiscal exposures at the time decisions are made. Current budget reporting, however, does not always fully capture or require explicit consideration of some fiscal exposures. For some exposures, such as environmental cleanup costs, the government's commitment occurs years before the cash consequences are reflected in the budget. Other potential draws on future resources, such as life-cycle costs for fixed assets and disaster assistance, may not flow from commitments of a strictly legal nature but from public expectations. Determining how to improve the budgetary attention to fiscal exposures is complicated by difficulties in (1) determining the scope of items to be considered and (2) estimating costs. The variety of fiscal exposures and the difficulties in estimating their costs suggest that an across-the-board approach may not be the best way to proceed. Improved supplemental information may be helpful to increase transparency without introducing additional uncertainty and complexities into the budget. In cases where the extent of the government's obligation or ultimate costs (or both) is unclear, supplemental reporting may be the most appropriate approach. Beyond increasing supplemental reporting, providing more opportunities to consider fiscal exposures in the budget process may help facilitate explicit consideration of certain exposures. Finally, in some cases where there is an explicit liability and accepted, reasonable cost estimates exist, additional steps may be taken to directly incorporate costs in the budget when doing so would enhance up-front control of spending.
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Report to the Chairman, Committee on the Budget, House of
Representatives:
January 2003:
Fiscal exposures:
Improving the Budgetary Focus on Long-Term Costs and Uncertainties:
GAO-03-213:
GAO Highlights:
Highlights of GAO-03-213, a report to the Committee on the Budget,
House
of Representatives:
January 2003:
Fiscal Exposures:
Improving the Budgetary Focus on Long-Term Costs and Uncertainties:
Why GAO Did This Study:
GAO and other budget experts have discussed that the current time
horizons
and content of the federal budget could be enhanced to more
comprehensively
reflect the government‘s commitments or signal emerging problems. GAO
was
asked to (1) provide information on the range and nature of
responsibilities,
programs, and activities that may explicitly or implicitly expose the
government to future spending and (2) present and discuss options for
increasing the attention paid to these items in the budget and budget
process.
What GAO Found:
The federal government undertakes a wide range of responsibilities,
programs,
and activities that may either obligate the government to future
spending or
simply create an expectation for spending. GAO uses the concept of
’fiscal
exposure“ (risk) to provide a framework to consider these long-term
costs and
uncertainties.
Fiscal exposures vary widely as to source, extent of the government‘s
legal
obligation, likelihood of occurrence, and magnitude. These exposures
include
items such as retirement benefits, environmental cleanup costs, and
future
social insurance benefits. Given this variety, it is useful to think of
a
spectrum extending from explicit liabilities to implicit promises
embedded
in current policy or public expectations.
Fiscal exposures warrant budgetary attention and oversight. Demographic
trends,
in particular, argue for considering the long-term sustainability and
flexibility
of the government‘s fiscal position. Regardless of whether the
government is
legally required or simply compelled by circumstances, some exposures
may
encumber future budgets and constrain fiscal policy. Not capturing the
long-term
costs of current decisions limits Congress‘s ability to control the
government‘s
fiscal exposures at the time decisions are made.
Current budget reporting, however, does not always fully capture or
require
explicit consideration of some fiscal exposures. For some exposures,
such as
environmental cleanup costs, the government‘s commitment occurs years
before
the cash consequences are reflected in the budget. Other potential
draws on
future resources, such as life-cycle costs for fixed assets and
disaster
assistance, may not flow from commitments of a strictly legal nature
but from
public expectations.
Determining how to improve the budgetary attention to fiscal exposures
is
complicated by difficulties in (1) determining the scope of items to be
considered and (2) estimating costs. The variety of fiscal exposures
and the
difficulties in estimating their costs suggest that an across-the-board
approach may not be the best way to proceed. Improved supplemental
information
may be helpful to increase transparency without introducing additional
uncertainty and complexities into the budget. In cases where the extent
of
the government‘s obligation or ultimate costs (or both) is unclear,
supplemental
reporting may be the most appropriate approach. Beyond increasing
supplemental
reporting, providing more opportunities to consider fiscal exposures in
the
budget process may help facilitate explicit consideration of certain
exposures.
Finally, in some cases where there is an explicit liability and
accepted,
reasonable cost estimates exist, additional steps may be taken to
directly
incorporate costs in the budget when doing so would enhance up-front
control
of spending.
What GAO Recommends:
GAO recommends that OMB report annually on fiscal exposures. Where
possible,
OMB should report the estimated costs”’exposure level“”of certain
activities
in the Program and Financing schedules of the budget. In a few select
areas,
the ultimate objective might be to include costs directly in the budget
when
doing so would enhance up- front control of spending.
Congress may wish to consider exploring options for improving the
budgetary
information and the attention given to fiscal exposures. If more
explicit
congressional consideration is desired, as estimates improve, Congress
may
wish to develop budget process mechanisms that prompt more
deliberation.
www.gao.gov/cgi-bin/getrpt?GAO-03-213.
To view the full report, including the scope and methodology, click on
the
link above. For more information, contact Paul Posner at (202) 512-9573
or
posnerp@gao.gov.
Contents:
Letter:
Results In Brief:
Background:
Objectives, Scope, and Methodology:
Fiscal Exposure Could Be Considered on Several Levels:
Fiscal Exposures are Wide-Ranging and Varied:
Fiscal Exposures Involve Complex Measurement and Budgeting Challenges:
Diversity of Fiscal Exposures Suggests that Tailored Approaches Would
Be More Feasible than an Across-the-Board Approach:
Conclusion:
Recommendations for Executive Action:
Matters for Congressional Consideration:
Agency Comments and Our Evaluation:
Figures:
Figure 1: Composition of Spending as a Share of GDP Assuming
Discretionary Spending Grows with GDP and the Tax Cuts Do Not Sunset:
Figure 2: Spectrum of Fiscal Exposures:
Figure 3: Social Security, Medicare, and Medicaid Spending as a Percent
of Gross Domestic Product:
Figure 4: Overview of Possible Approaches:
Figure 5: Possible Options For Improving Supplemental Reporting:
Figure 6: Possible Options for Providing Opportunities For Explicit
Consideration of Fiscal Exposures:
Figure 7: Possible Options for Incorporating Costs Directly into the
Primary Budget Data:
Abbreviations:
CBO: Congressional Budget Office:
DOD: Department of Defense:
GDP: gross domestic product:
OMB: Office of Management and Budget:
Letter:
January 24, 2003:
The Honorable Jim Nussle
Chairman
Committee on the Budget
House of Representatives:
Dear Mr. Chairman,
As the central process by which the President and Congress select among
competing demands for federal funds, the budget should provide complete
cost information and adequate signals about emerging problems. For many
programs, the current budget does this. It does not, however, always
help policymakers consider the long-term costs associated with some
activities that explicitly or implicitly commit the government to
future spending or otherwise affect the long-term fiscal outlook of the
nation. This may limit the attention given to the future sustainability
and flexibility of the government‘s fiscal position and the cost
effectiveness of existing programs.
You requested that we: (1) provide information on the range and nature
of certain responsibilities, programs, and activities that may
explicitly or implicitly expose the government to future spending and
(2) present and discuss options for increasing attention paid to these
items in the budget and the budget process. As discussed with your
staff, this report covers a number of issues surrounding long-term
costs and uncertainties that present risk for the fiscal future,
including:
* the concept and different dimensions of fiscal exposures (risks):
* the range and nature of specific fiscal exposures facing the federal
government:
* the complexities and challenges surrounding cost measurement and
budgeting for fiscal exposures and:
* approaches for increasing the attention given to fiscal exposures in
the budget and the budget process.
Results In Brief:
The federal government undertakes a wide range of responsibilities,
programs, and activities that may either obligate the government to
future spending or create an expectation for spending. In particular,
demographic trends facing the nation argue for considering the long-
term sustainability and flexibility of the government‘s fiscal
position. Profound demographic changes, with the impending retirement
of the baby boom generation, will have significant implications not
only for the Social Security, Medicare, and Medicaid programs but also
for the budget and the economy as a whole. The approaching demographic
tidal wave also serves to reinforce the importance of looking beyond
short-term budgetary consequences. The savings and loan crisis in the
1980s and the resulting multibillion dollar bailout serve as a vivid
reminder of the shortcomings and consequences when the federal budget
does not adequately signal emerging problems.
Current budget reporting, however, is not designed to promote the
recognition and explicit consideration of some of these exposures. For
some claims, such as environmental cleanup and disposal costs, the
government‘s commitment occurs years before the cash consequences are
reflected in the budget. Other potential draws on future resources,
such as future social insurance benefits or disaster assistance, may
not flow from commitments of a strictly legal nature but from
expectations that the public holds about the government‘s
responsibilities. For example, while the federal budget shows annual
Social Security tax receipts exceeding annual cash benefit payments,
the fiscal year 2001 consolidated Financial Report of the United States
Government estimates the net present value of Social Security‘s
negative cash flow over a 75-year period as $4.2 trillion.[Footnote 1]
Concerns have been raised that such potential draws on future federal
resources extending beyond current budget time frames may not be
readily apparent in current budget reporting and process.
Policy choices that may have significant implications for long-term
budget flexibility and for which future growth paths are uncertain can
affect either spending or revenue; thus, fiscal exposures could be
thought of on several levels. Aggregate projections of the cost of the
government‘s current programs and policies provide important context
for decision making. This construct, however, may be too broad to
highlight specific areas for reform. To help address this concern, this
report looks below the aggregate level on the spending side to provide
insights on the range and nature of specific fiscal exposures.
In this report, we use the term ’fiscal exposure“ to provide a
conceptual framework for considering the wide range of
responsibilities, programs, and activities that may explicitly or
implicitly expose the federal government to future spending. The budget
treatment of items that could be considered fiscal exposures varies--
some have been captured in budget obligations and some have not. Fiscal
exposures include not only liabilities,[Footnote 2]
contingencies,[Footnote 3] and financial commitments[Footnote 4] that
are identified on the balance sheet or in the accompanying notes, but
also responsibilities and expectations for government spending that do
not meet the recognition and disclosure requirements for that
statement. We use the term implicit exposures in this report to refer
to exposures that stem not from a legal obligation of the federal
government but rather from implied commitments embedded in the
government‘s current policies or in the public‘s expectations about the
role of government.[Footnote 5]
Fiscal exposures vary widely as to source, extent of the government‘s
legal obligation, likelihood of occurrence, and magnitude. Their
ultimate costs may or may not be measurable. Given this variety, it is
useful to think of fiscal exposures as falling on a spectrum extending
from explicit liabilities to the implicit promises embedded in current
policy or public expectations. Some, such as environmental cleanup and
disposal costs and postretirement benefits, are reported in the
financial statements as liabilities. Some are reported as financial
commitments--such as contracted goods or services that have not yet
been delivered--or contingencies--such as insurance--that depend on
future events. Others, such as future social insurance benefits, are
not explicitly stated or reported as liabilities but rather are implied
by current decisions or public expectations about the role of
government and shown as stewardship responsibilities.
The budgetary treatment of these items varies--some have been included
in the budget and some have not. Some liabilities reported on the
financial statements, such as accounts payable and loan guarantees, are
included in the budget because agencies must have budget authority to
cover them. Others, such as environmental and disposal liabilities, are
not included in primary budget data[Footnote 6] beyond the amount for
current cleanup activities. Some implicit exposures, such as the cost
of future Social Security benefits, are not included in primary budget
data for the budget year but are captured in long-range budget
projections. Other implicit exposures, such as the risk assumed by
insurance programs, may not be captured in either primary budget data
or in long-range budget projections.
This variety increases the difficulty of determining how and to what
extent fiscal exposures should be handled in the budget and budget
process. Specifically, budgeting for fiscal exposures is complicated by
difficulties in
(1) determining the scope of programs that should be considered and
(2) estimating costs. There is no technical definition of fiscal
exposures and no universal agreement on which and to what extent
specific activities should be considered fiscal exposures or how they
should be treated in the budget and budget process. Further, the
complexity and uncertainty surrounding some exposures creates
significant cost estimation challenges, which in turn raises concerns
about using these estimates as the sole basis of budget and other
policy decisions. These issues need to be considered carefully to avoid
subjecting the primary budget data to large and volatile reestimates.
Nevertheless, information on the existence and estimated cost of fiscal
exposures needs to be considered along with other factors when making
policy decisions. Not capturing the long-term costs of current
decisions limits Congress‘s ability to control the government‘s
exposure at the time decisions are made.
The variety of fiscal exposures, the difficulties in estimating their
costs, and the range of uncertainty surrounding such cost estimates
suggest that an across-the-board approach may not be the best way to
proceed and that approaches may evolve over time. A framework organized
around possible objectives can facilitate consideration and analysis of
various approaches to help improve the attention given to fiscal
exposures. The three possible objectives used to structure this
analysis are (1) improving transparency, (2) prompting more
deliberation, and (3) improving budget incentives.
If the primary objective is to improve the transparency of fiscal
exposures, then supplemental reporting would help promote this
objective. One option for increased supplemental reporting would be to
require, on an annual basis, a report on fiscal exposures. Another
option would be to report, where appropriate, the future estimated
costs of certain exposures as a new budget concept--“exposure level“--
as a notational item in the Program and Financing schedule of the
President‘s budget. If, however, the primary objective is to prompt
more explicit deliberation of exposures, then budget process mechanisms
could be designed to provide opportunities for such consideration--
especially as the amount and quality of cost information is improved
over time. For example, as more information on costs is provided, the
budget resolution could include limits on creating new or expanding
existing exposures, with points of order permitted against legislation
violating such limits. Another option would be to establish triggers to
signal when the costs of existing exposures exceed some predetermined
amount. Any process mechanisms--whether points of order or triggers--
would need to take into account the uncertainty inherent in all long-
range estimates and be designed accordingly. Finally, if the primary
objective is to change budgetary incentives, then estimates of the
future costs of exposures might be included directly into the primary
budget data. For example, accrual-based measurement could be used to
record estimated costs when doing so would enhance obligations-based
control by recognizing costs up front at the time decisions are made
that might encumber future resources. The general approaches outlined
and the various options for implementing them achieve the three
objectives to differing degrees and also vary in the implementation
challenges they present.
We are recommending that the Office of Management and Budget (OMB)
report annually on fiscal exposures, including a concise list and
description of such exposures, cost estimates, where possible, and an
assessment of methodologies and data used to produce cost estimates for
such exposures. In addition, where possible, OMB should report the
estimated costs associated with certain exposures as a new budget
concept--“exposure level“--as a notational item in the Program and
Financing schedule of the President‘s budget. For select areas where an
explicit liability exists and there are accepted cost estimation
methodologies, the ultimate objective might be to include the accrual
costs directly in the primary budget data when doing so would enhance
obligation-based control. These steps should complement and support
continued and improved reporting of long-range projections and analysis
of the budget as a whole to assess fiscal sustainability and
flexibility.
If more explicit congressional consideration of the potential costs of
certain exposures is desired, Congress may wish, as estimates improve
over time, to develop budget process mechanisms that prompt more
deliberation about fiscal exposures while recognizing the uncertainty
inherent in estimating some long-term costs.
Background:
A primary focus of current federal budget reporting is the cash
implications of the government‘s obligations over a period of 1 to 10
years. The federal budget is an obligation-based budget designed to
ensure that agencies do not incur legal obligations unless and until
Congress provides authority for that purpose. Obligation-based
budgeting involves three stages
(1) Congress must enact budget authority up front before government
officials can obligate the government to make outlays, (2) government
officials commit the government to make outlays by entering into
legally binding agreements, and (3) outlays (cash disbursements) are
made to liquidate obligations. However, with limited
exceptions,[Footnote 7] the amounts to be obligated are measured on a
cash or cash equivalent basis and the unified budget deficit/
surplus[Footnote 8]--a key focus of the policy debate--represents the
difference between cash receipts and cash outlays in a given year. As a
result, the U.S. budget is often referred to as cash-based as well as
obligation-based.
For many programs, the cash-and obligation-based budget provides
sufficient information on and control over the government‘s spending
commitments. However, this focus does not require explicit
consideration of some responsibilities, programs, or activities that
may result in future spending. For some programs, obligations and cash
outlays do not reflect the magnitude of the government‘s commitment of
future resources at the time decisions are being made. We and other
federal budget experts have raised concerns that, in these cases, the
current budget may neither adequately reflect the extent of the
government‘s commitment nor signal emerging problems.
Demographic trends facing the United States argue for considering the
long-term sustainability and flexibility of the government‘s fiscal
position. Profound demographic changes with the impending retirement of
the baby boom generation will have significant implications not only
for the Social Security, Medicare, and Medicaid programs but also for
the budget and the economy as a whole. The share of the population that
is age 65 or older is climbing and is expected to surpass 20 percent by
2035. Our recent simulations show that absent policy changes, social
insurance and health programs will encumber an increasing share of the
government‘s resources, thus restricting fiscal flexibility to address
other needs. As shown in figure 1, our long-term budget simulations
show that the aging of the baby boom generation and rising per capita
health care spending will, absent meaningful reform, lead to massive
fiscal challenges in future years. Assuming, for example, that recent
tax reductions are made permanent and discretionary spending keeps pace
with the economy, by midcentury, federal revenues may only be adequate
to pay Social Security and interest on the federal debt. As a result,
major spending reductions, tax increases, or some combination of the
two would be necessary to obtain balance.
Figure 1: Composition of Spending as a Share of GDP Assuming
Discretionary Spending Grows with GDP and the Tax Cuts Do Not Sunset:
[See PDF for image]
[End of figure]
One need not look only to implications of the demographic shift to see
the disconnection between how some exposures appear in the budget in
the short term and the long term. The savings and loan crisis and the
resulting bailout serve as a vivid reminder of the shortcomings of the
federal budget in signaling emerging problems. During the 1980s, as
hundreds of institutions became insolvent and the government‘s
liabilities mounted, the federal budget failed to provide timely
information on the rising deposit insurance costs accruing to the
government. Although we and some industry analysts raised concerns
about these rapidly increasing deposit insurance costs, corrective
action was delayed and the government‘s total costs increased. Since
the federal budget did not record outlays until the institutions were
closed and depositors paid, it provided little incentive to act
promptly. Indeed, budget treatment may have created incentives to delay
closing insolvent institutions, which raised the government‘s ultimate
costs. Delayed budget recognition obscured the program‘s, as well as
the government‘s, underlying financial condition and limited the
usefulness of the budget process as a means for Congress to assess the
problem.
Recent performance reforms also reinforce the need for full cost
information to assess and manage program performance. These reforms
emphasize the need for complete cost information--not just cash flows-
-to assess and manage performance. However, for some activities, such
as deferred compensation, the current budgetary focus on annual cash
flows does not match full costs with the goods and services provided by
the government. By making it more difficult to assess and compare the
costs associated with a given level of performance, the failure to
align budgetary cost recognition with the consumption of resources may
hamper the government‘s performance and accountability reform efforts.
Objectives, Scope, and Methodology:
The Chairman of the House Committee on the Budget asked us to
(1) provide information on the range and nature of responsibilities,
programs, and activities that may explicitly or implicitly expose the
government to future spending and (2) present and discuss options for
increasing attention paid to these items in the budget and the budget
process. Although some tax preferences may have uncertain or
accelerating future growth paths that have significant implications for
the long term, this report deals only with spending.
To identify examples of programs and activities that may either
directly obligate the government to future spending or simply create an
expectation for such spending, we reviewed the consolidated Financial
Report of the United States Government, relevant literature, the
President‘s budget documents, and prior GAO work. To begin construction
of the spectrum of fiscal exposures, we reviewed the generally accepted
federal accounting standards, including the basis of conclusions for
federal liabilities, contingencies, and stewardship responsibilities.
Data on estimated exposures were drawn from the fiscal year 2001
consolidated Financial Report of the United States Government, agency
financial statements, and the President‘s budget. Although we used
generally accepted federal accounting standards as an initial framework
in constructing the spectrum of fiscal exposures outlined in the
report, we also considered additional items that may implicitly expose
the government to future spending but may not be fully captured in the
financial statements or the budget. In order to identify ideas and
describe various approaches for improving the budgetary attention given
to fiscal exposures, we reviewed relevant literature and our prior
work, including discussions with budget experts. We also drew upon our
previous work looking at the experiences of other nations with accrual
budgeting[Footnote 9] and the recognition of fiscal risks, such as
federal insurance.[Footnote 10]
Our list of fiscal exposures is meant to be illustrative to provide
perspective on the range and nature of responsibilities, programs, and
activities that may explicitly or implicitly expose the government to
future spending. It should not be interpreted either as all-inclusive
or universally agreed upon. Further, although this report notes that
the concept of fiscal exposure can be thought of broadly, its main
focus is the long-term costs and uncertainties associated with certain
items that may expose the government to future spending. Rather than
looking at the broad fiscal outlook, it focuses only on certain parts
of the spending side of the budget. As such, it does not consider all
federal spending and general revenues that would need to be considered
in order to assess long-term fiscal sustainability. We have discussed
long-term fiscal sustainability issues in numerous reports and
testimonies.[Footnote 11] As part of this work, our simulations of the
long-term economic impact of federal budget policy show that the
nation‘s economic future depends, in part, upon today‘s budget and
fiscal policy choices. This report builds on this previous work by
looking below the aggregate level to the long-term costs associated
with certain specific spending items.
Our work was done in Washington, D.C., in accordance with generally
accepted government auditing standards. Comments on a draft of this
report from OMB staff are discussed and incorporated as appropriate.
The remainder of this report discusses a number of issues, including:
* the concept and different dimensions of fiscal exposures (risks):
* the range and nature of specific fiscal exposures facing the federal
government:
* the complexities and challenges surrounding cost measurement and
budgeting for fiscal exposures and:
* approaches for increasing the attention given to fiscal exposures in
the budget and the budget process.
Fiscal Exposure Could Be Considered on Several Levels:
We use the term fiscal exposure to provide a conceptual framework for
considering the wide range of responsibilities, programs, and
activities that may explicitly or implicitly expose the federal
government to future spending. The treatment of items that could be
considered fiscal exposures in the current cash-and obligation-based
budget varies--some have been captured in budget obligations and some
have not. Fiscal exposures include not only liabilities, contingencies,
and financial commitments that are identified on the balance sheet or
accompanying notes, but also responsibilities and expectations for
government spending that do not meet the recognition or disclosure
requirements for that statement.[Footnote 12] By extending beyond
conventional accounting and fiscal analysis, the concept of fiscal
exposure is meant to provide a broad perspective on long-term costs and
uncertainties. The aim is not to provide strict definitional
guidelines, but rather to improve understanding of the exposures
associated with certain activities.
It is possible to think about fiscal exposure on several levels.
Aggregate budget projections of the government‘s current programs and
policies provide important context for considering the implications of
specific decisions. For example, long-range (approximately 75 year)
current service projections and simulations, such as those provided by
our model and in the Analytical Perspectives of the President‘s budget,
provide a broad context for considering the sustainability and
flexibility of the government‘s future fiscal position. However, such
constructs are likely to be too broad to highlight specific areas for
reform. Further, the aggregate outlook is driven largely by Social
Security, Medicare, and Medicaid. As a result, it provides little or no
information to guide choices--or even signal growth--outside those
areas.
While Social Security, Medicare, and Medicaid are large drivers, there
are other exposures and it is important for policymakers to have
information on their long-term costs. The budgetary treatment of these
exposures varies--some have been included in the budget and some have
not. For some federal programs, the government‘s commitment or resource
use occurs years before the cash spending consequences are reflected in
the budget. Even though some of these exposures stem from liabilities
and are reported in the financial statements, their recognition in the
cash-and obligation-based budget may be delayed. Beyond explicit
liabilities, there are implicit and/or contingent[Footnote 13]
exposures that may encumber future budgets or reduce fiscal
flexibility. Including this range provides a more complete picture of
the extent of exposure facing the government. For this report, we
discuss fiscal exposures in terms of the long-term costs associated
with certain spending items.[Footnote 14]
In addition to the fiscal exposures from spending covered in this
report, certain tax expenditures[Footnote 15] may have uncertain or
accelerating future growth paths that have significant implications for
the long term. According to OMB, the largest reported tax expenditures
tend to be associated with the individual income tax. For example, an
exclusion is provided for employer contributions for medical insurance.
In its special analysis on tax expenditures included in the Analytical
Perspectives of the President‘s budget, OMB includes estimates of the
revenue effects, outlay equivalents, and present value of revenue
effects, but states that the meaningfulness of tax expenditure
estimates is uncertain. OMB notes that estimates are uncertain because
of the arbitrariness of the baseline and the fact that each estimate is
calculated assuming that all other parts of the tax code remain
unchanged.
Fiscal Exposures are Wide-Ranging and Varied:
The federal government undertakes a wide range of responsibilities,
programs, and activities that may either obligate the government to
future spending or create an expectation for such spending. Specific
fiscal exposures vary widely as to source, likelihood of occurrence,
magnitude, and strength of the government‘s legal obligation. They may
be explicit or implicit; they may currently exist or be contingent on
future events. Their ultimate costs may or may not be reasonably
measurable. Given this breadth, it is useful to think of fiscal
exposures as lying on a spectrum extending from explicit liabilities to
the implicit promises embedded in current policy or public
expectations. Figure 2 shows a spectrum of responsibilities, programs,
and activities that may be viewed as fiscal exposures.
Figure 2: Spectrum of Fiscal Exposures:
[See PDF for image]
[A] A liability represents a probable and measurable future outflow of
resources arising from past transactions and events. A liability is
recorded on the face of the balance sheet only when an item is
identifiable, its occurrence is probable, and its cost can be
reasonably estimated.
[B] Commitments refer to contractual obligations that require the
future
use of resources. For example, although a liability generally is not
recognized on the balance sheet when a contract is signed because the
contracted goods or services have not been delivered, this transaction
may be recognized as a commitment in the notes. In contrast, budgetary
accounting would record obligations at the time the government enters
into a contract and allows for deobligation if the contract is not
fulfilled. Budgetary accounting records obligations when an order is
placed, contract awarded, service rendered, or similar trnsaction takes
place that will require payment.
[C] A contingency is an existing condition, situation, or set of
circumstances involving uncertainty as to possible gains or losses. The
uncertainty will ultimately be resolved when one or more future events
occur or fail to occur. Contingencies are disclosed in the notes of the
financial statements if any of the conditions for liability recognition
are not met and there is at least a reasonable possibility that a loss
may have been incurred. Contingencies that are classified as remote are
not required to be disclosed.
[D] In this report, the term implicit exposures refers to exposures
that
stem not from a legal obligation of the federal government but rather
from implied commitments embedded in the government‘s current policies
or in the public‘s expectations about the role of government.
[E] Due and payable amounts are the benefits owed to program recipients
as of the fiscal year end that have not yet been paid.
[F] Undelivered orders represent the value of goods and services
ordered
that have not yet been received.
[G] The term net future benefit payments is used in this report to
represent the net present value of negative cashflow. Net present value
of the negative cashflow is the current amount of funds needed to cover
projected shortfalls, excluding trust fund balances, over a 75-year
period. This estimate of cashflows is for an open system, meaning that
it includes births during the period and individuals below the age of
15 as of January 1 of the valuation year. The valuation date for the
amount included in the figure was January 1, 2001. The trust fund
balances at the beginning of the valuation period that were eliminated
for this consolidation were: $1,049 billion for Social Security, $177
billion for Medicare Part A, and $44 billion for Medicare Part B. This
is a different measure from the actuarial balance in the Trustees‘
Report.
[H] Includes Railroad Retirement and Black Lung (Part C). See footnote
g.
Trust fund balances at the beginning of the valuation period that were
eliminated for consolidation were: $19 billion for Railroad Retirement
and a negative balance of $7.2 billion for Black Lung.
[I] Federal insurance programs are listed three times in figure 2.
Under
federal accounting standards, a liability is recognized based on
insured events that have been identified by the end of the accounting
period. The standard requires recognition of expected unpaid net claims
inherent in insured events that have already occurred, including (1)
reported claims, (2) claims incurred but not yet reported and (3) any
changes in contingent liabilities that meet criteria for recognition. A
contingency is an existing condition, situation, or set of
circumstances involving uncertainty as to a possible loss.
Contingencies that do not meet the conditions for liability recognition
are disclosed in the notes to the financial statements. Contingencies
that are classified as remote are not required to be disclosed. The
risk assumed by federal insurance programs represents the cost of
claims inherent in the government‘s commitment. Estimation of the cost
of the risk assumed by the federal government can be thought of as
analogous to premium rate setting in that it would look at the long-
term expected costs of the insurance commitment at the time the
insurance commitment is extended. The risk assumed by the government is
essentially that portion of the full risk-based premium not charged to
the insured.
[End of figure]
While our list of fiscal exposures provides some perspective on the
range and magnitude of exposures facing the federal government, it is
neither meant to be comprehensive nor to represent a universally
agreed-upon list. The cost data should be viewed in a similar way.
Although most of the cost data in this figure were drawn from the
consolidated Financial Report of the United States Government for
fiscal year 2001, they should be used with caution. In auditing these
statements, we were unable to determine the reliability of significant
portions of the government‘s assets, liabilities, and costs due to
serious financial management weaknesses. These weaknesses may affect
the reliability of estimates reported for certain exposures, such as
military postretirement health benefits and environmental cleanup and
disposal costs.
Along the spectrum of fiscal exposures there is great variation in the
extent and magnitude of a government‘s legal obligation, the certainty
of expected costs, their treatment in the budget, and the recognition
of these items in the financial statements. Some, such as deferred
employee compensation or environmental cleanup and disposal costs, are
reported as liabilities on the balance sheet. For financial statement
reporting purposes, liabilities are viewed as representing probable and
measurable outflows of resources arising from past transactions and
events. Others that relate to a past event but are contingent on future
events, such as pending litigation, generally are disclosed as
contingencies. Others, such as undelivered goods or services previously
contracted for, are disclosed as financial commitments in the notes to
the financial statements. Some, such as future social insurance
benefits and some disaster assistance, do not flow from legal
obligations but are implied by current policies and/or expectations
about the role of government and are shown as stewardship
responsibilities.[Footnote 16]
In this report, we use the term implicit exposures to refer to the last
category of exposures that stem not from a legal obligation of the
federal government but rather from implied commitments embedded in the
government‘s current policies or in the public‘s expectations about the
role of government.While social insurance and health programs represent
significant implicit exposures, other activities may also create
expectations for future spending. For example, incrementally funded
capital projects[Footnote 17] create an expectation for future spending
since there is an expectation that partially funded capital projects
will be completed. In general, the decision to purchase a building or
another fixed asset implicitly commits the government to the life-cycle
costs associated with its future operation and maintenance. Further,
the earmarking of taxes or the establishment of trust funds creates an
expectation of future spending for the designated purpose. Even an
activity that appears to decrease government involvement, such as
privatization, may carry with it an implicit assumption that the
government will step in if necessary to provide the service or good.
Clearly, the range and nature of activities that may create an
expectation for future spending increase the difficulty of determining
the parameters of what constitutes a fiscal exposure.
The budgetary treatment of these items varies--some have been included
in the budget and some have not. Some liabilities reported on the
financial statements, such as accounts payable and loan guarantees, are
included in the budget because agencies must have budget authority to
cover them. Changes in the debt level generally are reflected in the
annual deficit or surplus. Others, such as environmental and disposal
liabilities, are not included in primary budget data[Footnote 18]
beyond the amount for current cleanup activities. Some implicit
exposures, such as the cost of future Social Security benefits, are not
included in primary budget data for the budget year but are captured in
long-range budget projections. Other implicit exposures, such as the
risk assumed by insurance programs, may not be captured in either
primary budget data or in long-range budget projections.
Despite the challenges of determining what should be considered a
fiscal exposure, efforts to improve the information on and incentives
to consider these exposures are important. Failure to understand and
address fiscal exposures can have significant consequences. Even those
exposures that are not legal obligations of the government may imply
future government spending--and that should be considered in making a
program or budget decision. Whether the government is legally required
or simply compelled by circumstances to provide funding, these
exposures can encumber future budgets and reduce fiscal flexibility.
Understanding these items can also be important to efforts to improve
government performance. For some items, such as deferred compensation,
the budgetary focus on annual cash flows does not match the full costs
of an employee with the services the employee provides. For example,
federal employees earn their pension while they are working but receive
pensions after they have stopped working. The accruing cost of the
pensions earned by current employees is really part of the costs of the
goods and services they provide, but the budget does not capture the
full extent of these costs and total budget outlays include only the
cash payments made to current retirees. By making it more difficult to
assess and compare the costs associated with a given level of
performance, the failure to align budgetary cost recognition with the
consumption of resources may hamper the government‘s efforts to assess
its performance.
Several exposures provide insight into challenges facing the
government:
A closer look at some fiscal exposures--although not necessarily
representative of all fiscal exposures--provides a sense of the issues
facing the government. For example, the government faces a large and
rapidly growing exposure for certain social insurance and health
programs. Social Security, Medicare, and the federal portion of
Medicaid are expected to grow considerably in the future due to the
aging of the population and impending retirement of the large baby boom
generation. Figure 3 shows the total draw on the economy represented by
federal spending on Social Security, Medicare, and Medicaid. Taken
together, they represent an unsustainable burden on future generations.
Although significant information is available on the estimated future
costs of Social Security and Medicare, the annual budget is not
currently structured to fully capture these growing costs. Current
reporting of annual budget data focuses on cash to current
beneficiaries and thus does not capture the funding shortfall for
future benefits. For example, fiscal year 2001 Social Security tax
receipts exceeded cash benefit payments by more than $94 billion and
increased the unified federal surplus. The fiscal year 2001
consolidated Financial Report of the United States Government, however,
shows the net present value of Social Security‘s negative cash flow
over a 75-year period as $4.2 trillion.[Footnote 19] Similarly, the
budgetary treatment of Medicare focuses on the annual cash paid to
current beneficiaries and cash revenues from current workers. As a
result, Medicare‘s significant and growing actuarial shortfalls are not
reflected in the annual budget.
Figure 3: Social Security, Medicare, and Medicaid Spending as a
Percent of Gross Domestic Product:
[See PDF for image]
Note: Projections based on intermediate assumptions of the 2002
Trustees‘ Reports and Congressional Budget Office‘s June 2002 long-term
projections under midrange assumptions. Spending includes only the
federal portion of Medicaid.
[End of figure]
Pensions and retiree health care costs of civilian and military
employees of the federal government and veterans‘ benefits payable
comprise another large fiscal exposure. Together, these future benefits
represent a liability of nearly $3.4 trillion for fiscal year 2001.
Changes in benefits may result in long-term costs. For fiscal year
2001, a $293 billion increase in the military postretirement health
benefits liability is attributed to provisions of the fiscal year 2001
National Defense Authorization Act (Public Law 106-398) that expand
certain benefits to Medicare-eligible Department of Defense (DOD)
retirees, their dependents, and survivors.
Some of the accruing costs of postretirement benefits are captured in
the budget authority and outlays for agencies. The full cost of pension
benefits was recognized in budget authority and outlays at the agency
level beginning in 1985 for military personnel and for civilian
employees hired since 1984. Beginning in 2003, DOD will budget on an
accrual basis for the retiree health care costs for Medicare-eligible
military retirees. In these cases, payments are made between accounts
within the budget so that outlays are recorded as program costs but do
not affect total budget outlays and the deficit/surplus. However, for
most civilian employees hired before 1984, less than half the
government‘s share of accruing pension costs are recognized in the
budget and none of the accruing costs of retiree health benefits for
civilian or military retirees under the age of 65 are recognized in the
budget as earned. In an effort to improve the budgetary treatment of
accruing employee benefits, the Administration proposed that agencies
be required to request budget authority for the government‘s full share
of the accruing costs of all pension and retiree health benefits for
their employees and pay it to the benefit paying funds.
Environmental cleanup costs resulting from federal operations represent
another fiscal exposure. These constitute an explicit liability since
the federal government is legally required to clean up hazardous wastes
that result from its operations. These costs, however, usually are not
paid until many years after the government has committed to the
operation generating the waste. As required under generally accepted
federal accounting standards, the fiscal year 2001 consolidated
financial statement reported a liability of $307 billion for estimated
environmental cleanup and disposal costs.[Footnote 20] Although a
liability for future costs is reported on the financial statements,
current budget guidance requires agencies to request only the budget
authority expected to be obligated during the budget year for cleanup
activities. As a result, these future costs are not shown in the budget
and may not even be provided in backup materials to policymakers at the
time decisions are being made to undertake the operations that may
generate environmental cleanup costs. For example, when a weapon system
using nuclear materials is built, there would be no disposal costs
shown in the budget since the disposal would not occur until some time
after that budget period.[Footnote 21]
Federal insurance is provided to individuals and businesses against a
wide variety of risks, ranging from natural disasters under the flood
and crop insurance programs to bank and employer bankruptcies under the
deposit and pension insurance programs. While the face value of
insurance overstates the likely cost to the government, these programs
do expose the government to future, and potentially significant, draws
on resources that may not be adequately reflected in the budget at the
time the decision to extend the insurance is being made. We have
previously reported[Footnote 22] that current budget reporting may not
signal policymakers to the risk assumed by the government at the time
the decision to extend the insurance is made. For example, at the time
budget decisions were being made for fiscal year 2003, the budget
showed a positive budget estimate (i.e., revenues) for the Pension
Benefit Guaranty Corporation of about $1.3 billion. The financial
statements available at the same time showed an estimated liability for
future benefits of $13.5 billion and a positive net position of about
$7.8 billion. At the same time, OMB estimated the future cost of the
risk assumed by the government for vested covered benefits as $51
billion.[Footnote 23] Clearly, these different estimates provided
significantly different pictures of the program‘s health and its
potential draw on future resources.
The government‘s purchase and ownership of government-owned facilities
and other assets may create an expectation for future spending. If
budget authority for a capital project is not fully funded at the time
the commitment to buy the asset is made, the government‘s costs will
likely be understated. Future Congresses and administrations may be
forced to choose between having an incomplete and unusable asset and
continuing to fund the project. In cases where funding is provided for
only part of a project and that part by itself is not usable, then
policymakers may feel compelled to continue funding to complete the
project.[Footnote 24] Moreover, the total life-cycle cost of an asset
includes not only all initial direct and indirect acquisition costs but
also all periodic or continuing costs of operation and maintenance over
the asset‘s expected useful life and any costs to decommission or
dispose of the asset. While OMB requires agencies to develop capital
asset plans for major acquisitions and encourages long-term agency
capital plans--both of which should include life-cycle costs--these
plans are not routinely provided to Congress. Budget authority
generally is provided only for the acquisition costs associated with
capital asset purchases, not for the life-cycle costs necessary to
operate, maintain, and dispose of the asset. While this may be
appropriate for budget control purposes, the result, in most cases, is
that the budgetary focus is on the initial cost of assets even if this
cost represents only a fraction of the total costs flowing from the
purchase decision.
Other exposures facing the government also present significant
definitional and measurement challenges because (1) the existence and
scope of the government‘s commitment prior to the occurrence of the
underlying event is unclear, (2) the occurrence and timing of the
underlying event is unknown, and (3) the ultimate costs are difficult
to predict. Examples include the bailout of large institutions or
disaster relief.[Footnote 25] The extent of the government‘s commitment
to cover these costs may not be explicitly stated before the event but
rather may be implied by the role of government. Not only is the extent
of the government‘s commitment unknown before the occurrence of the
event, the timing and magnitude of these exposures are contingent upon
the occurrence or nonoccurrence of some future event. For example, even
in cases where it is not explicitly required by law, the federal
government may be expected to provide for the financial losses that
arise from catastrophes and major disasters such as earthquakes,
hurricanes, terrorist attacks, and epidemics, the timing and magnitude
of which are unknown until they occur. There may also be an expectation
that the federal government would intervene to bailout the losses of
state and local governments and large institutions of economic
significance.
Fiscal Exposures Involve Complex Measurement and Budgeting Challenges:
Determining the appropriate budgetary treatment for fiscal exposures is
complicated by uncertainties. First, there is definitional uncertainty
i.e., uncertainty about what constitutes an exposure certain enough to
include as a claim on budgetary resources. In addition, there are
difficulties in estimating future costs. The extent to which either or
both of these factors contribute to the uncertainty about future costs
varies among fiscal exposures. As a result, policymakers should
consider both the degree of certainty of the government‘s obligation
and the availability of reasonable cost estimates when weighing the
trade-offs associated with various approaches to help increase the
attention paid to particular exposures when making budget decisions.
Whether an exposure is certain enough to be included as a claim on
budgetary resources is a key question. As noted earlier, the extent of
the government‘s obligation varies along the spectrum of fiscal
exposures. Some fiscal exposures are reported as liabilities of the
federal government and represent legal obligations to make payments;
others are not. For example, the $3.3 billion in publicly held debt is
a clear financial liability. On the other hand, generally accepted
federal accounting standards do not view future social insurance
benefits as a liability, except for the amount due and payable at
fiscal year end. The standard, however, also requires that
supplementary stewardship information be reported to facilitate an
assessment of the program‘s long-term sustainability and the ability of
the program and the nation to raise resources from future program
participants to pay for benefits.[Footnote 26] The standard for social
insurance is a compromise between parties with widely divergent views
about the government‘s obligation to make future benefit payments.
Proponents of the standard point out that the underlying laws
establishing a claim to payment can (and have been) changed and there
is no legal obligation by the government to pay benefits once the trust
funds that finance these programs have been exhausted. Others, however,
believe that a liability should be recognized for the net benefits
expected to be paid in future periods to current participants. Any
changes in budgetary treatment would require similar discussion and
compromises concerning which items should be recognized as exposures.
There may be further disagreement over which of these exposures should
be directly recognized in the primary budget data.[Footnote 27]
Finally, even if agreement can be reached that an exposure
theoretically should be included in the primary budget data, reasonable
cost estimates may not be available. For some exposures, estimates
could be generated given time and attention; for others that are
contingent on future events, estimates are more problematic.
Several factors affect whether reasonable cost estimates are currently
available or can be generated. The generation of reasonable cost
estimates depends not only on the development of appropriate
methodologies but also on the acceptance and quality of underlying
assumptions and data. Estimates for some exposures, such as pension
benefits, are based on accepted methodologies and are reported as
liabilities in financial statements. The future costs of some exposures
are inherently more difficult to estimate than others. For example,
some exposures, such as bank and pension insurance, are dependent on
many economic and behavioral variables. Since these are inherently
uncertain, there will always be some uncertainty surrounding the
estimated future costs of such programs. Lack of adequate data may also
be a factor in the reliability of cost estimates. For example,
postretirement health benefits and environmental cleanup and disposal
costs are reported as liabilities on the balance sheet because they are
considered to meet the criteria of probable and reasonably measurable,
but audits have revealed weaknesses that may affect the reliability of
these reported amounts. The fiscal year 2000 liability for military
postretirement health benefits could not be accurately estimated
because some of the underlying costs and demographic and workload data
used to develop the estimate were not reliable. The estimate for
environmental cleanup costs is uncertain, in part, because the
dimensions of the cleanup problem remain unclear and the technology to
address the problem is evolving.
Generally speaking, the more direct and explicit the fiscal exposure,
and thus the more certain the existence of a claim and its ultimate
costs, the greater the suitability of including estimated costs
directly into the primary budget data when doing so would enhance up-
front control of spending. Even when agreement can be reached that an
explicit liability exists, efforts may be needed to develop reasonable
cost estimates. For exposures that are implicit and/or contingent on
future events, cost estimation challenges and underlying questions
about the existence of a government commitment raise substantial
questions. Perhaps most challenging are those exposures that are both
implicit and contingent on unknown events, such as bailouts or disaster
relief. In these cases, the government may not have any current legal
obligation and the magnitude and timing of the underlying event is
unknown. These exposures are very difficult to estimate and uncertain
as to whether they really represent claims to future resources.
Diversity of Fiscal Exposures Suggests that Tailored Approaches Would
Be More Feasible than an Across-the-Board Approach:
The variety of certainties (and uncertainties) associated with fiscal
exposures suggests that no single approach to increasing attention to
these future costs will work in all cases. Various approaches might be
considered in a framework organized around three possible objectives:
(1) improving the transparency of fiscal exposures, (2) prompting more
deliberation about fiscal exposures, and (3) improving budget
incentives to address fiscal exposures. Several broad approaches for
helping to achieve these objectives discussed here are (1) improving
supplementary reporting, (2) providing opportunities for explicit
consideration in the budget process, and (3) incorporating the costs of
fiscal exposures into the primary budget data. A number of options
could be used to implement each of these approaches. Figure 4 displays
how different approaches could be used to achieve a primary objective
by providing illustrative options for implementing each approach. These
options are meant to illustrate how different approaches may be used
depending on the primary objective to be achieved and what may be
feasible to implement. Not only do these approaches achieve the various
objectives to differing degrees, but they also vary in the
implementation challenges involved.
Figure 4: Overview of Possible Approaches:
[See PDF for image]
[End of figure]
The diverse nature of exposures and the significant differences in the
strength of the government‘s underlying obligation, combined with the
varying quality and amount of cost information available outside the
budget process, suggest that across-the-board changes in budget
reporting or process would not be appropriate. Instead, targeted
approaches for different types of fiscal exposures would be most useful
for incorporating a longer-term perspective into the budget. Changes in
the information provided, the budgetary process, or budgetary
incentives could be tailored selectively for different categories of
fiscal exposures to address specific budgetary objectives and
implementation challenges. A discussion of each of the three approaches
and related options follows.
Approach I: Improve Supplemental Reporting:
Improved supplemental reporting on fiscal exposures would make
information more accessible to decisionmakers without introducing
additional uncertainty and complexity directly into the budget. With
this approach, estimates of the government‘s exposure would be reported
in various budget documents, but the current basis of reporting primary
budget data--budget authority, obligations, outlays, and the deficit/
surplus--would not be changed. This type of supplemental information is
currently available in various places for some programs. For example,
the stewardship section in the Analytical Perspectives of the
President‘s budget has included long-range (75 year) budget projections
assuming continuation of current policies as well as a discussion of
the government‘s balance sheet, which includes some liabilities not yet
included in the primary budget data. The stewardship section of
financial statements contains information to facilitate the assessment
of the long-term sustainability of social insurance programs. In some
cases, improving supplemental reporting may simply be a matter of
highlighting or expanding existing analytical work. For example, long-
range projections and simulations of the budget as a whole could be
continued and improved, including analysis to help assess driving
factors, such as demographics and economic changes, and to improve
understanding of the range and magnitude of alternatives.
As outlined in figure 5, improved supplemental reporting on fiscal
exposures could be achieved in a number of ways. In addition to the
continuation and further development of long-range projections of the
budget as a whole, three options to consider include (1) providing
special analyses for certain, significant fiscal exposures in the
Analytical Perspectives of the President‘s budget, (2) reporting
estimated costs of certain fiscal exposures as a separate notational
line--“exposure level“--in the Program and Financing schedule of the
President‘s budget, or
(3) requiring a report on fiscal exposures.
Figure 5: Possible Options For Improving Supplemental Reporting:
[See PDF for image]
[End of figure]
Federal government insurance programs provide a prime example of where
special analysis of a particular type of exposure may be appropriate.
Our previous work has shown that the current cash-and obligation-based
budget generally provides incomplete or misleading information on the
government‘s cost of federal insurance programs.[Footnote 28] One
reform option would be to require an estimate of the budget authority
likely to be needed to cover an estimate of the cost of the risk
assumed[Footnote 29] by the government. However, given the difficulties
in estimating the cost of risk assumed, we concluded that supplemental
reporting of the cost of the risk assumed by federal insurance programs
had several attractive features. It would allow time to (1) assess the
reliability of cost estimates, (2) develop and refine estimation
methodologies, and (3) formulate cost-effective reporting. As another
example, supplemental analysis could be provided for uncertain
exposures, such as future operation and maintenance costs associated
with asset acquisitions.
While providing a special analysis in the Analytical Perspectives would
provide additional information, it is not as directly linked to
specific budget proposals as is possible. Another option would be to
routinely report the future estimated costs of certain exposures as a
separate notational line in the Program and Financing schedule of the
President‘s budget. This would move beyond the current budget practice
of generally including only budget authority, obligations, and outlays
for initial acquisition costs of an asset to adding a new measure that
reports the ’exposure level“ as a notational item in the Program and
Financing schedule. For example, an estimate of the future operating
and maintenance costs associated with capital acquisitions could be
reported as the ’exposure level“ in the Program and Financing schedule
for capital accounts that include the initial capital acquisition
costs. Similarly, the future funding needs associated with
incrementally funded projects could be included in the Program and
Financing schedule of the budget account that includes the capital
acquisition. This type of notational approach in the Program and
Financing schedule could also be used for future environmental cleanup
costs associated with an asset acquisition. In these cases, the
’exposure level“ could be used to capture the exposure associated with
the capital acquisitions in each year.[Footnote 30] As opposed to cash,
the ’exposure level“ might be reported in present value terms.
Including exposure levels as part of the budget presentations at the
account level directly in the budget documents would make such
information available along with the initial acquisition costs, rather
than in an additional document. Specifying the estimated potential
future costs associated with current decisions would promote
transparency.
Another approach, which could stand alone or be done along with
including exposure levels in the Program and Financing schedule, would
be to require a report on fiscal exposures. For example, such a report
could provide a concise list and description of fiscal exposures, cost
estimates, where possible, and an assessment of the methodologies and
data used to produce cost estimates. Explicitly and directly
integrating the report on specific fiscal exposures with long-range
projections and analysis of the budget as a whole would increase its
usefulness for assessing the potential implications for long-range
fiscal sustainability and flexibility. If this type of report was
issued as part of or near the time of the release of the President‘s
budget, it could be used to help inform and provide long-term context
to budget deliberations.
These types of supplemental reporting have the advantage of providing
policymakers with a long-term perspective when making current decisions
and enabling those concerned about exposures to raise questions and
challenges in the budget debate. However, they do not in themselves
change incentives or require explicit consideration of costs. This is
because estimates of future costs would not directly affect spending or
the overall budget totals. Since this information would be excluded
from the primary budget data, it may or may not be used in budget
decisions. As a result, there may be little incentive to improve cost
estimates or to fully consider these potential costs. However, the
uncertainties around such cost estimates may argue for proceeding
gradually with efforts to further incorporate them into the budget.
Supplemental reporting would allow time to improve cost estimation
methodologies and increase users‘ comfort levels with the estimates.
Such reporting might then be seen as a first step toward more explicit
consideration in the budget. In addition, because the primary budget
data are not affected, this type of supplemental reporting would avoid
increasing the gap between the deficit and borrowing needs.
Approach II: Provide Opportunities for Explicit Consideration of Fiscal
Exposures in the Budget Process:
Further along the continuum from supplemental reporting to including
costs in the primary budget data are budget process changes. Budget
process mechanisms would go beyond simply providing more information on
fiscal exposures to establishing opportunities for explicit
consideration of these exposures. Two possible options to consider are
shown in figure 6. Congress could modify budget rules to provide for a
point of order against any proposed legislation that creates new
exposures or increases the estimated costs of existing exposures over
some specified level. Alternatively, revised rules could provide for a
point of order against any proposed legislation that does not include
estimates of the potential costs of fiscal exposures created by the
legislation. A second budget process option would be to establish
triggers that require some action when the estimated future costs of a
given exposure rise above some specified threshold.
Figure 6: Possible Options for Providing Opportunities For Explicit
Consideration of Fiscal Exposures:
[See PDF for image]
[End of figure]
A key advantage of permitting points of order with respect to fiscal
exposures is that they could result in explicit consideration of these
potential costs without subjecting the primary budget data to increased
uncertainty from estimation difficulties. It would be similar to
procedural rules for Social Security that permit points of order
against the consideration of legislation that would weaken the
program‘s financial condition. A different point of order method would
be to permit a point of order that could block legislation lacking
appropriate cost information about an exposure. This would be similar
to unfunded mandates legislation that permits a point of order to be
raised against proposed legislation that imposes mandates if a
Congressional Budget Office mandates estimate has not been published in
the committee report or the Congressional Record.[Footnote 31] This
alternative would provide a greater incentive to improve cost
information than simply requiring supplemental information because it
presents congressional members with an opportunity to challenge the
creation of programs without sufficient information on long-term costs.
Despite the potential benefits of permitting some type of point of
order, such a budget process change is not without significant
implementation challenges. Criteria would have to be agreed on for
determining which activities and programs would be considered as fiscal
exposures subject to a point of order. Mechanisms also would need to be
developed to deal with the uncertainties and volatility inherent in
cost estimates associated with fiscal exposures. Further, this type of
budget process change would increase the complexity of an already
complicated process. Since many activities--including most capital
acquisitions--routinely would result in exposures, such as life-cycle
costs, a point of order may become burdensome and potentially ignored.
Points of order also are limited because they apply only to new
legislation and then only if raised. Further, they can be waived or
overruled by a vote of the Members. Finally, a budget process change
establishing a point of order would require an amendment to the
Congressional Budget Act of 1974 or a change to committee rules.
A different budget process approach would be to establish triggers that
address the growth in existing exposures. In this case, triggers would
be established to signal when the future costs of exposures rise above
a certain level. Reaching the trigger threshold would require some
action.[Footnote 32] One possible trigger could be the future costs of
a specific exposure exceeding a specified dollar amount, but other
thresholds are also possible. For example, for the Medicare program,
these might be a specified floor in the trust fund, such as the balance
falling below 1-year‘s worth of payments, the percentage of gross
domestic product devoted to Medicare, or program spending per enrollee.
The use of triggers would require agreement not only on the limits but
on what will happen when the limits are reached. A trigger could be
’hard“--including specific provisions that would automatically go into
effect if the trigger is reached--or ’soft“--requiring some action to
be taken to address costs or reaffirm acceptance of the increase in
potential fiscal exposure.[Footnote 33] For example, reaching a trigger
could require the policymakers to propose how to deal with growth in
the Medicare program. This type of ’soft“ trigger would help ensure
that Congress and the President periodically review and decide how to
address exposures.
Like a point of order, the key benefit of a trigger is that it would
require explicit consideration of exposures facing the government
without adding uncertainty to primary budget data. However, like points
of order, establishing triggers would increase the complexities of an
already complex budget process. Further, the implementation issues
associated with determining the trigger threshold and the type of
action required would have to be addressed.[Footnote 34] A budget
process change establishing a trigger would require an amendment to the
Congressional Budget Act of 1974 or a change to committee rules.
Approach III: Incorporate Cost Estimates of Fiscal Exposures Directly
into the Primary Budget Data:
Incorporating the estimated future costs of fiscal exposures directly
into the budget would represent the greatest change outlined in our
spectrum. For example, as shown in figure 7, accrual-based costs could
be used to measure budget authority needed and possibly outlays for
select programs when doing so would enhance obligation-based control.
Since estimated costs would be incorporated directly into the primary
budget data, these options are most suitable for explicit exposures for
which reasonable cost estimates are available.
Figure 7: Possible Options for Incorporating Costs Directly into the
Primary Budget Data:
[See PDF for image]
[End of figure]
The budget‘s measurement basis can greatly affect the timing of when a
program or activity appears in the budget. Accrual-based measurement
recognizes cost at the time the activity generating the revenue,
consuming the resources, or increasing the liability takes place
regardless of when the associated cash flows occur. Conversely, cash-
based measurement recognizes receipts and outlays at the time cash is
received or paid regardless of when the activity generating the
revenue, consuming the resources, or increasing the liability occurs.
The U.S. budget is neither accrual nor pure cash; it is obligation
based. Obligation-based budgeting is designed to ensure that agencies
do not incur legal obligations unless and until Congress provides
authority for agencies for that purpose. However, with limited
exceptions, the amounts to be obligated are measured on a cash or cash
equivalent basis and the deficit/surplus--a key focus of the policy
debate--represents the difference between cash receipts and cash
outlays in a given year. As a result, the U.S. budget is often referred
to as cash based as well as obligation based. Cash measurement for
budgeting has the advantage of being recognized as an accepted measure
of the government‘s impact on the economy, which is an important gauge
of fiscal policy.
Although the current cash-and obligation-based budget has several
benefits, the United States has recognized the contribution accrual-
based measurement can make to budgeting. Since about 1955, interest has
been accrued in the budget for Treasury securities held by the public.
Even before 1955, a portion of the accruing costs for civilian employee
pensions had been recognized in the budget. We have advocated the
selective use of accrual measures in the budget to better reflect costs
at the time decisions were made. The budget has been modified gradually
to use accrual-based measurement for certain programs in areas where
doing so would enhance up-front recognition of costs. For example, the
accruing costs of military pension benefits have been included in the
budget at the program level since 1985 and the Federal Credit Reform
Act of 1990 changed the method of controlling and accounting for credit
programs to an accrual basis to provide more timely recognition of
their costs.
Prior to credit reform, obligations measured on a cash basis for credit
programs sent the wrong signals about the government‘s exposure. The
full amount of direct loans was reported as an outlay, ignoring the
fact that many would be repaid. In contrast, for loan guarantees,
initially no outlays were reported, ignoring the fact that some
guaranteed loans would be defaulted upon and require budget outlays.
Consequently, the use of cash-based measurement overstated the cost of
direct loans in the year they were made and understated the costs of
loan guarantees in the year they were issued. This deficient reporting
skewed cost comparisons between credit and grant programs with similar
purposes but different funding approaches. The relative cost of credit
programs and other federal spending was misrepresented. Credit reform
addressed the shortfalls of cash-based measurement for credit programs
by requiring the budget to include the estimated cost to the federal
government over the entire life of the loan or loan guarantee,
calculated on a net present value basis. By incorporating accrual cost
measures in the budget for credit programs, credit reform improved cost
comparisons and better reflected the government‘s ultimate costs at the
time decisions to extend the credit were being made.
Similar concerns about the shortcomings of cash-based measurements for
other programs that involve cash flows over many years, such as
pensions and insurance, stimulated interest in whether further
incorporation of accruals in the budget would be useful. We reviewed
the experiences of six countries that had adopted, or planned to adopt,
accrual-based budgeting.[Footnote 35] In this work, we noted that the
use of accrual-based measurement selectively within the obligation-
based budget would result in earlier cost recognition for some major
exposures such as employee retirement benefits, insurance, and
environmental clean-up costs. In these cases, if reasonable cost
estimates are available, the use of accrual-based measurement would
help reinforce the up-front control focus of the obligation-based
budget.
However, we also noted some limitations and concerns. We pointed out
that relative to the obligation-based budget, accrual-based measurement
would delay cost recognition of capital assets by spreading the costs
over the life of the assets[Footnote 36] and for some government
activities, such as salaries and grants, there generally would not be
significant differences between cash and accrual amounts. Further, the
use of accrual measurement needs to be considered carefully to avoid
subjecting the primary budget data to large and volatile reestimates.
We also pointed out that accrual budgeting based on current federal
accounting standards would not recognize social insurance benefits
because those standards do not view social insurance as a liability
beyond the amount due and payable to current beneficiaries at the end
of the period. We suggested alternative budgetary approaches could be
used to recognize the future costs of Social Security benefits. For
example, Social Security outlays could be recorded in the same amount
as Social Security receipts to reflect the government‘s commitment to
spend those amounts on benefits in the future. Such an approach may
serve to prompt earlier recognition of future claims supported by
earmarked receipts. On the other hand, this approach would represent a
significant change in budgetary treatment and could reduce fiscal
discipline for spending in programs financed by earmarked receipts.
Two methods could be used to incorporate accrual-based costs directly
into the budget for fiscal exposures. One method (the aggregate outlay
method) would be to use accrual-based measurement to recognize costs in
both budget authority needed and net outlays. Under this method, the
accrued cost of the fiscal exposure would be included in the budget
totals and therefore in the budget deficit/surplus. This method is
similar to that used for credit programs under credit reform. Another
method (the aggregate budget authority method) would use accrual-based
measurement to recognize costs in budget authority at the account level
and in the aggregate budget totals. Accrued costs would also be
reflected in net outlays at the account level but then would be offset
by a transfer within the budget to another account. Aggregate net
outlays and thus the deficit/surplus would continue to be reported on a
cash basis. This is similar to the method currently used for some
employee pension costs.
A key advantage of budgeting for the accruing costs of exposures is the
recognition of the government‘s costs at the time decisions are being
made to commit the government. This earlier recognition of costs
improves the information available to policymakers about the costs
associated with current decisions and may improve the incentives to
manage these costs. However, this benefit is dependent on reasonable,
unbiased estimates of the government‘s costs. For some programs, such
as life insurance, reasonable cost estimates may be available, but for
other programs such as deposit insurance, health care costs, or social
insurance benefits, estimates are less certain. Because the future
costs of some exposures are dependent upon many economic and technical
variables that cannot be known in advance, there will always be
uncertainty in cost estimates. Such uncertainty makes using accrual-
based measurement directly in the budget more difficult. Budgeting for
accruing costs may make sense for some exposures but not for others
because the certainty of the government‘s commitment and the
availability of reasonable, unbiased estimates varies across the
different fiscal exposures.
Using accrual-based measurement in the budget has the potential to
increase the complexity of the budget in several ways. Complexity may
be increased through the use of (1) sophisticated estimation models,
(2) multiple budget accounts and/or presentations to reflect cash flows
and program reserves, and (3) procedures to handle reestimates of costs
reported as budget authority and/or outlays. Although recognition of
costs may be improved, general understanding of budget data and the
budget process may decline. Further, if estimates are seen as short-
term gaming or overly erratic, credibility is eroded. Stopping short of
using accrual-based measurement for aggregate outlays and measuring
only budget authority and agency outlays on an accrual basis would
mitigate some of the potential problems associated with accrual
budgeting while providing information on future costs. For example, if
aggregate outlays remain on a cash basis and only budget authority and
agency outlays are accrual based, there would be no need for
nonbudgetary accounts[Footnote 37] that are necessary to hold reserves
under an aggregate outlay approach. This aggregate budget authority
option also would avoid introducing estimation uncertainty into the
budget deficit/surplus that with limited exception is calculated as net
cash outlays. However, since the accrual-based cost would not be
reflected in the budget deficit/surplus, it is unclear how much this
approach would affect the budget decision-making process.
Conclusion:
Today‘s budget decisions, in part, shape the choices and resources
available to future decisionmakers and taxpayers. Accordingly, today‘s
budget decisions involve tradeoffs between satisfying current needs and
fulfilling stewardship responsibilities to future generations‘ budget
and economy. The federal government undertakes a wide range of
responsibilities, programs, and activities that may obligate the
government to future spending or simply create an expectation for such
spending. Current budget reporting, however, is not always designed to
promote the recognition and explicit consideration of some of these
’fiscal exposures.“ These exposures range from explicit liabilities to
the implicit promises embedded in current policy or public
expectations. Failure to understand and address these exposures can
have significant consequences. Regardless of whether the government is
legally required or simply compelled by circumstances to provide
funding in the future, these exposures may encumber future budgets and
constrain fiscal policy. Not capturing the long-term costs of current
decisions limits Congress‘s ability to control the government‘s fiscal
exposures at the time decisions are made.
The diversity of items that could be considered fiscal exposures
increases the difficulty of determining which items should be
considered and how and to what extent they should be handled in the
budget process. Specifically, budgeting for fiscal exposures is
complicated by difficulties in (1) determining which items should be
considered fiscal exposures and
(2) estimating their costs. Despite these challenges, the potentially
significant effects of these items on the nation‘s future fiscal
condition warrant efforts to improve disclosure and oversight.
The diversity of fiscal exposures suggests that across-the-board
changes in budget reporting or process would not be the most
appropriate way to proceed. Instead, it would be more useful to look at
different types of fiscal exposures and tailor changes to address
specific budgetary objectives and implementation challenges. Improved
supplemental reporting would be helpful in increasing awareness without
introducing uncertainty and complexity into the primary budget data. In
cases where the extent of the government‘s obligation or ultimate costs
(or both) is unclear, supplemental reporting may be the most
appropriate approach. Beyond simply increasing awareness, adapting the
budget process to facilitate explicit consideration of fiscal exposures
might be possible. Finally, for exposures where the government‘s
obligation is explicit and reasonable cost estimates are available,
additional steps could be taken to directly incorporate costs in some
primary budget data when doing so would enhance up-front control of
spending. The direct incorporation of accrual-based measures in the
budget may be appropriate for selected exposures where such treatment
would enhance obligation-based control by prompting the recognition of
expected future costs of decisions when they are made.
With complete and highly visible reporting of fiscal exposures,
decisionmakers are better positioned to address future costs and to
help prevent unexpected changes in fiscal policy. Since today‘s
decisions affect the choices and resources available for the future,
improvements in budgeting for fiscal exposures are critically
important.
Recommendations for Executive Action:
OMB should report annually on fiscal exposures, including a concise
list and description of such exposures, cost estimates, where possible,
and an assessment of methodologies and data used to produce cost
estimates for such exposures. In addition, where possible, OMB should
report the estimated costs associated with certain exposures as a new
budget concept--“exposure level“--as a notational item in the Program
and Financing schedule of the President‘s budget. For select areas
where an explicit liability exists and there are accepted cost-
estimation methodologies, the ultimate objective might be to include
the costs directly in the budget when doing so would enhance
obligation-based control. OMB also should ensure that agencies focus on
improving cost estimates for fiscal exposures. These steps should
complement and support continued and improved reporting of long-range
projections and analysis of the budget as a whole to assess fiscal
sustainability and flexibility.
Matters for Congressional Consideration:
Congress may wish to consider exploring options for improving the
information available and the attention given to fiscal exposures in
the budget and budget process. If more explicit congressional
consideration is desired, as estimates improve, Congress may wish to
develop budget process mechanisms that prompt more deliberation about
fiscal exposures while recognizing the uncertainty inherent in
estimating some long-term costs.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Office of Management and
Budget for comment. In consultation with OMB staff, they commended GAO
for tackling the important problem of the government‘s exposure to
future fiscal demands. OMB staff agreed that our concept of ’fiscal
exposure“ is a valuable one, noting that it focuses attention on the
fact that 1-year‘s surplus or deficit is not the only, or even the
best, measure of the government‘s fiscal condition. They noted that the
Administration endorses the view that long-range fiscal exposures
should be more prominently highlighted in the budget documents and in
the budget process, and noted that some of the specific recommendations
are more or less consistent with legislation the Administration has
proposed to Congress (accruals for pensions and retiree health care).
OMB staff, however, raised two general concerns that are discussed
below. First, they questioned whether the broad conceptual framework
used to describe fiscal exposures had been fully developed to
sufficiently cover all future spending. Secondly, they argued that the
analysis of ideas for improving the recognition of fiscal exposures in
the budget could be improved by more fully considering the various
purposes of the federal budget, such as resource allocation and
controlling spending. In addition, they provided specific comments that
we have incorporated in the report as appropriate.
OMB staff stated that the term ’exposure“ is particularly laudable
because it captures the contingent nature of some future budgetary
requirements, which are critical to distinguish from the more definite,
legally binding requirements that are categorized as ’liabilities“ on
the financial statements. OMB staff also noted that the draft
appropriately emphasizes that fiscal exposures lie along a continuum
and recognized that this heterogeneity requires that different fiscal
exposures be addressed in different ways for the budget documents.
They, however, commented that the discussion of fiscal exposures could
be improved by explicitly recognizing that in concept all, or virtually
all, future spending appears on the continuum of fiscal exposure. For
example, OMB staff pointed out that the Constitution establishes a
responsibility to ’provide for the common defense“ and the authority
for an Army and a Navy, and more than two centuries of experience have
created an expectation that this responsibility will be met and the
cost will be high. They stated that while the future costs of these
functions do not appear in the financial statements, they are no less
basic expectations of government than others that do appear there. We
agree that it is important to model the long-term outlook for the
budget as a whole at the macro level. Indeed, we have been doing such
long-term modeling since 1992 and we commend OMB‘s efforts to present
long-term scenarios in the Analytical Perspectives of the President‘s
budget. While long-term modeling simulates the long-term implications
of all current spending and revenue policies, the fiscal exposure
concept is intended to highlight a discrete subset of programs and
activities whose long-term costs and uncertainties warrant greater
attention in current budgetary deliberations.
OMB staff also stated that a number of the ideas and recommendations in
the draft are very good, and point to improvements that should be made
in the budget. OMB staff, however, argued that the analysis of
recommendations should more explicitly consider their effects on the
main purposes of budgetingto allocate resources, control agency
spending, and set aggregate fiscal policy. We agree that the various
purposes of the budget should be considered in assessing the merits of
approaches and options for improving the budget treatment of fiscal
exposures. We did, in fact, structure our discussion of potential
approaches for improving the budget treatment of fiscal exposures
around objectives of budget reforms. As part of our illustrative
examples, we provided insights into the potential issues for the
multiple, and sometimes conflicting, purposes of the federal budget. We
agree, however, that these issues warrant further investigation if
specific reforms are pursued.
As agreed with your office, unless you release this report earlier, we
will not distribute it until 30 days from the date of this letter. At
that time we will send copies to the Ranking Minority Member of the
House Committee on the Budget and the chairmen and ranking minority
members of the Senate Committee on the Budget. We are also sending
copies to the Directors of the Office of Management and Budget and the
Congressional Budget Office. Copies will also be made available to
others upon request. In addition, the report is available at no charge
on GAO‘s Web site at http://www.gao.gov.
This report was prepared under the direction of Christine Bonham,
Assistant Director, Strategic Issues, who may be reached at (202) 512-
9576. Elizabeth McClarin was a major contributor to this report. Please
contact me at (202) 512-9573 if you or your staff have any questions
concerning this report.
Sincerely yours,
Paul L. Posner
Managing Director, Strategic Issues
Federal Budget Analysis:
Signed by Paul L. Posner:
FOOTNOTES
[1] Net present value of the negative cash flow is the current amount
of funds needed to cover projected shortfalls, excluding trust fund
balances, over a 75-year period. The trust fund balance at the
beginning of the valuation period (January 1, 2001) was $1,049 billion.
The net present value of negative cash flows shown in this report is
from the fiscal year 2001 consolidated Financial Report of the United
States Government and is a different measure from the actuarial balance
in the Trustees‘ Report.
[2] For financial statement reporting, a liability represents a
probable and measurable future outflow of resources arising from past
transactions or events. A liability is recorded on the face of the
balance sheet when an item is identifiable, its occurrence is probable,
and its cost can be reasonably estimated.
[3] For financial statement reporting, a contingency is an existing
condition, situation, or set of circumstances involving uncertainty as
to possible gains or losses. The uncertainty will ultimately be
resolved when one or more future events occur or fail to occur.
Contingencies are disclosed in the notes of the financial statements if
any of the conditions for liability recognition are not met and there
is at least a reasonable possibility that a loss may have been
incurred. Contingencies that are classified as remote are not required
to be disclosed.
[4] For financial statement reporting, financial commitments refer to
contractual obligations that require the future use of resources. For
example, although a liability generally is not recognized on the
balance sheet when a contract is signed because the contracted goods or
services have not been delivered, this transaction may be recognized as
a commitment in the notes. In contrast, budgetary accounting would
record obligations at the time the government enters into a contract
and allows for deobligation if the contract is not fulfilled. Budgetary
accounting records obligations when an order is placed, contract
awarded, service rendered, or similar transaction takes place that will
require payment.
[5] Some of these implicit exposures, such as the costs of future
social insurance benefits, are discussed in the stewardship section of
the government‘s consolidated financial statement.
[6] In this report, primary budget data refers to budget authority,
obligations, outlays, and the deficit/surplus.
[7] The U.S. budget uses accrual measures to recognize the government‘s
cost for certain programs. One example is the treatment of credit
programs for which budget authority, obligations, and outlays are
measured on an accrual basis. Interest on Treasury debt held by the
public is almost entirely on an accrual basis.
[8] Under the budget concepts set forth in the Report of the
President‘s Commission on Budget Concepts, the unified budget is a
comprehensive budget in which receipts and outlays from federal and
trust funds are consolidated. When these fund groups are consolidated
to display budget totals, transactions that are outlays of one fund
group for payment to another fund group (that is, intrafund
transactions) are deducted to avoid double counting.
[9] U.S. General Accounting Office, Accrual Budgeting: Experiences of
Other Nations and Implications for the United States, GAO/AIMD-00-57
(Washington, D.C.: Feb. 18, 2000).
[10] U.S. General Accounting Office, Budget Issues: Budgeting for
Federal Insurance Programs, GAO/AIMD-97-16 (Washington, D.C.: Sept. 30,
1997).
[11] For example, U.S. General Accounting Office, Budget Issues: Long-
Term Fiscal Challenges. Testimony before the Committee on the Budget,
U.S. Senate, GAO-02-467T (Washington, D.C.: Feb. 27, 2002) and U.S.
General Accounting Office, Long-Term Budget Issues: Moving From
Balancing the Budget to Balancing Fiscal Risk, GAO-01-385T (Washington,
D.C.: Feb. 6, 2001).
[12] In this report, the term implicit exposures refers to exposures
that stem not from a legal obligation of the federal government but
rather from implied commitments embedded in the government‘s current
policies or in the public‘s expectations about the role of government.
Some implicit exposures, such as the costs of future social insurance
benefits, are discussed in the stewardship section of the government‘s
consolidated financial statement.
[13] In this report, the term contingent exposures refers to exposures
that are based on the occurrence or nonoccurrence of some future event.
[14] For a more in-depth look at the fiscal exposure associated with
environmental liabilities, see U.S. General Accounting Office, Long-
Term Commitments: Improving the Budgetary Focus on Environmental
Liabilities, GAO-03-219 (Washington, D.C.: Jan. 24, 2003).
[15] Tax expenditures are revenue losses attributable to a provision of
the federal tax laws that allows a special exclusion, exemption, or
deduction from gross income or that provides a special credit,
preferential tax rate, or deferral of tax liability.
[16] Some implicit exposures, such as the costs of future social
insurance benefits, are discussed in the stewardship section of the
government‘s consolidated financial statement.
[17] An incrementally funded capital project is a project for which the
budget authority provided is for only part of the estimated cost of the
capital acquisition or part of a usable asset. For more information,
see U.S. General Accounting Office, Budget Issues: Incremental Funding
of Capital Asset Acquisitions, GAO-01-432R (Washington, D.C.: Feb. 26,
2001).
[18] In this report, primary budget data refers to budget authority,
obligations, outlays, and the deficit/surplus.
[19] Net present value of the negative cash flow is the current amount
of funds needed to cover projected shortfalls, excluding trust fund
balances, over a 75-year period. The trust fund balance at the
beginning of the valuation period (January 1, 2001) was $1,049 billion.
The net present value of negative cash flows shown in this report is
from the fiscal year 2001 consolidated Financial Report of the United
States Government and is a different measure from the actuarial balance
in the Trustees‘ Report.
[20] About 98 percent of the $307 billion in environmental liabilities
that were reported in fiscal year 2001 were associated with the
Department of Energy and DOD. The Department of Energy, which received
a clean opinion on its financial statements, reported environmental
liabilities of $238 billion. DOD reported $63 billion in environmental
liabilities. Auditors, however, were unable to render an opinion on
DOD‘s fiscal year 2001 financial statements, in part, because of DOD‘s
inability to comply with requirements for environmental liabilities.
[21] Unlike what is required in the budget, current federal accounting
standards require agencies to estimate and report the full liability of
cleanup costs for weapon systems when they are deemed probable and
measurable.
[22] See GAO/AIMD-97-16.
[23] According to OMB, this estimate is for the future costs of vested
covered benefits and does not assume future growth in such benefits.
[24] As part of our prior work on incremental funding, we reviewed
selected agency budget justifications and other agency data to identify
the extent to which capital projects were incrementally funded. The
2001 report identified civilian nondefense capital projects with total
estimated costs of $176 billion and determined that about $76 billion
(44 percent) of total costs were incrementally funded--an amount that
does not include high technology projects. Incremental funding can be
justified for such projects because funding provided on an incremental
basis can provide useful knowledge even if no additional funding is
provided. This review also found that data supporting capital
acquisitions in general may be incomplete and/or unclear, thus making
it difficult to determine future costs or whether the funding provided
would produce a usable asset. See GAO-01-432R.
[25] Another issue associated with implicit, contingent exposures, such
as bailouts and disaster relief, is that recognition of these potential
costs may create moral hazards in that private parties may make too
little effort to diminish their risk.
[26] For example, stewardship information generally includes narrative
and/or graphic presentation of items including (1) long-range cashflow
projections, (2) long-range projections of the ratio of contributors to
beneficiaries and (3) actuarial present values of (a) future benefits
for and (b) contributions and tax income from or on behalf of current
and future program participants.
[27] In this report, primary budget data refers to budget authority,
obligations, outlays, and the deficit/surplus.
[28] See GAO/AIMD-97-16.
[29] The estimation of the cost of the risk assumed by the federal
government would be analogous to premium rate setting in that it would
look at the long-term expected costs of the insurance commitment at the
time the insurance commitment is extended. The risk assumed by the
government is essentially that portion of the full risk-based premium
not charged to the insured.
[30] See GAO-03-219.
[31] Unfunded Mandate Reform Act of 1995, Pub. L. 104-4, §423.
[32] U.S. General Accounting Office, Medicare Reform: Issues Associated
With General Revenue Financing, GAO/T-AIMD-00-126 (Washington, D.C.:
Mar. 27, 2000).
[33] Rules established by the current Congress can be changed by a
subsequent Congress.
[34] Such a procedure would require some assurance of unbiased
estimates.
[35] See GAO/AIMD-00-57.
[36] Accrual budgeting for capital assets based on depreciation matches
budget costs with the provision of goods and services but, without
compensating controls, raises issues about up-front cost recognition
and control over capital asset acquisitions.
[37] Nonbudgetary accounts appear in the budget document for
information purposes but are not included in the budget totals for
budget authority or outlays. They account for transactions of the
government that do not belong within the budget because they are a
means of financing and do not represent a cost to the government.
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