Testimony on H.R. 3929 and Other Budgetary Matters

Published by the Government Accountability Office on 1990-04-19.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

         .   ”

                                   Unite d S ta tes G e n e r a l A c c o u n tin g O ffice       /f/i/,     I-
                                   T e s tim o n y


    For R e l e a s e               Testim o n y         o n H .R.       3 9 2 9 a n d O th e r
    o n Delivery                    B u d g e tary       M a tters
    E xpecte d      at
    9 :3 0 a .m .
    April     19, 1990

                                    S ta te m e n t    of
                                    Charles         A . Bowsher
                                    C o m p troller,G p n e r a l
                                    o f th e Unite d              S ta tes
                                   B e fo r e    th e
                                   S u b c o m m i tte e     o n th e Legislative                 P rocess
                                   C o m m itte e        o n Rules
                                   H o u s e o f R e p r e s e n ta tives

    G A O /T-A F M D - 9 0 - 2 0                                                                           G A O Form 160 (12/87)
Mr.       Chairman              and     Members                of    the       Subcommittee:

           I am pleased                      to     have         this       opportunity                  to     present                     our      views         on
H.R.       3929,          entitled                the       "Budget            Process            Reform          Act             of        1990,"         and         on
other           matters          concerning                    the      budget.

           The budgetary                      problems               facing           the        Congress                 and      the            American
people           are      so different                     and       so much more                   complex                than             they     were          a
few years                ago     that         a reexamination                         of     established                     concepts                 and
procedures                is     required.                     Current          practices                are         not          successfully
resolving                these        problems.

           The      problem             centers                on the          huge        deficits             in         the         federal             funds
portion            of     the     budget                that        developed               in    the      1980s             as a by-product
of     conflicting                policies                 that         were      not        resolved                in      the        budget
process.                 Taxes        were          cut        and government                     spending                 was increased                       and
those           actions          were         not         reconciled.                   The situation                        continues                    today.
Instead            of     dealing             with         the       real       issues            through             the          political
process,            we resorted                     to     formula             budgeting--the                     Gramm-Rudman-
Hollings                (GRH) process--                    and discovered                        that     doesn't                  work            very      well,

           If      current            trends              continue,             the        public         debt             will         reach
$4 trillion                by the             mid-1990s,                 consuming                $250        billion                  to     $300
bilJion            per     year         of        the      nation's             scarce            supply          of         savings                that
should           be flowing                  into         productive              capital               investment.                     'This
represents                     an enormous              threat             to         the        nation's             future             economic
growth          and            international                 competitiveness.

           In    the            narrower             context              of managing                     the      federal               budget,            this
growth          of     debt             means        that      interest                     costs         consume               a growing               share               of
available             general               revenues.                 By the                 mid-1990s,                interest                 could            well
become          the            largest         single          item          in        the        federal             funds         portion                of         the
budget.              Meanwhile,                 a growing                  list             of    needs         goes            unmet          and
problems             go unresolved.                          The deficit                         constrains                our      ability                to
respond          to domestic                    problems,                  such          as cleaning                   up toxic                 waste            and
repairing             deteriorating.                        roads          and bridges.                         And        it      limits            our
ability          to        advance             our      national                  interests                 abroad,               such      as in
responding                 to      developments                  in        Eastern                Europe.

           Budget               Director             Darman          acknowledged                         some of               these          issues            in
his       introductory                     essay        in     the         1991          budget,             when he talked                          about             the
"hidden          PACMEN" waiting                            to consume                   billions               for        the      government's
liabilities                     and unmet             needs.              But          the        budget          itself            makes            only         a
very       small           down          payment            on these                  problems.                 For      example,                 of       the
hundreds             of         billions             needed          to     resolve                 the      bankruptcy                   of     the
savings          and            loan       insurance             fund,                less        than       $20       billion              has        been
reflected                 in      the      budget.


            It      is       clear           that       the      country              faces            critical                  fiscal             issues
requiring                far-reaching                       decisions               by the             federal                  government.                       To
make        those         decisions                   wisely,           policy                 makers          need             reliable             and
complete              information                     presented                in     an understandable                                 format                 that
focuses             on the            key       issues.                And      they            need          a process                 that         encourages
conscientious                        negotiation                 in      the        search             for        agreement                that                serves
the        national                interest.                 Unfortunately,                        current                 practices                 do not
satisfy             these            needs.

Structural                Problems

            There         are         major           structural                problems                 in     the             current          unified
budget           with          its      exclusive                focus          on a single,                         cash          surplus                or
deficit             total.              By merging                   growing              trust          fund             surpluses                 (of         which
Social           Security               is      the         largest)            with            general              operating                 amounts,                 it
gives         the        illusion               that         progress               has        been          made          in      reducing                the
deficit.                 The discouraging                            reality              is      that         the         deficit             in         general
operations                is         larger           today           ($276         billion)                 than          when         we began                  the
GRH process                    ($266          billion).                  (See        attachment                      I)

            Also,         the         budget's               failure            to highlight                         the         investment                     and
enterprise                activities                   of      the      government,                      coupled                 with      the            inherent
limitations                   of      a cash-based                     budget,             creates              a bias               against               needed

capital         investment                  and        an incentive                     to move enterprise                             operations
such      as the            $40     billion             per     year            Postal        Service              off         budget.

          Our    concern             about             these       problems                has      led       us to            propose'              a
restructuring                  of     the        budget         into            general,            trust,          and             enterprise
sections,         with             each         divided         into            operating               and    capital                 parts.              (See
attachment             II)

  Understatement                    of Costs

          Furthermore,                    the       budget's           almost              exclusive              focus              on cash
transactions                 means          that       many costs      are                  greatly            understated,                       a few
                                                            ., -
are     overstated,                 and         others     are totally                      ignored.                For             example,             the
exposure         to possible                       losses       on federal                  credit            and        insurance
programs         now stands                   at       almost         $6 trillion.                        The current
presentation                 of     the       budget           does         not     give          proper          visibility                    to       this
exposure         and         its     budgetary                 consequences,                      nor      does          it         encourage
appropriate             action             to       control           the         exposure.                While              the     government
will      probably            experience                  losses            on only           a small             portion               of      this
total       exposure,               the         risk      of    very            substantial                losses              is      real,         as we
saw when         the         government's                   savings               and      loan         deposit               insurance
commitments             suddenly                 turned         into            a major           fiscal          problem               with         the
bankruptcy             of     the      Federal              Savings              and      Loan          Insurance               Corporation

lManaging         the Cost                 of Government:       Proposals                                 for Reforming                         Federal
 Budgeting          Practices                 (GAO/AFMD-90-l/October                                     1989).

            When GAO recently                                testified                on its             audit         of         FSLIC's               final
financial                 statements,                     we reported                   that           at      least             $325      billion                 would
be needed                 to pay             off        FSLIC's           obligations,                        much of which                           will         have
to     come         from         the         U.S.         Treasury.                  And         the         $325      billion              could                 easily
go to        $400           billion,                 or      even        to half            a trillion                      if      the     economy                  turns
against             us.          There             is      still         no reliable                        information                   on how these
costs        will           affect             the        budget.               To date,                 less         than          $20     billion                  has
been        included                  in     the        budget         estimates.

          Closely                related                to this           problem,                but         on a smaller                       scale,              is
the     practice                 of        treating                new loan             guarantees                   as cost-free                            because
they        involve              no cash                outlays           in      the       first             year.               But      this              is
deceptive.                   During                fiscal           years        1983            to     1989,          guaranteed                       loan-
terminations                     for         default               increased               sharply,               from            about          $5 billion
to     about         $11         billion.

          GAO believes                        the         government                 should             provide                  timely,              on-budget
funding             for      deposit                 and       other           insurance                programs                  when      it         determines
that        insurance                  fees         and premiums                     are         insufficient                       to     cover              expected
losses.              We should                     also        fund       other            major             costs       as the             liabilities
are     incurred,                  such            as the           costs        of        the        federal            retirement                      systems.

          The budget                       also         needs         a better              focus             on major                  unmet          needs.              It
is     encouraging                     that         Budget            Director              Darman              took         a step              in      this
direction                 with         his         "hidden            PACMEN" discussion                               in         the      1991          budget.
We Hope             that         this         kind          of presentation                           will       become                 a permanent

feature             of        the        budget         and        that          it         will        be strengthened                         and
systematized.                            For    Congress              and             the          public            to      understand              the
implications                        of    these         issues,             it         needs            at         least           rough      estimates                of
costs,            an indication                      of      the      timeframe                       in      which           action          will         be
needed,             and        suggestions                   of     how the                   costs           will           be reflected                  in
future            budgets.

A Formula                Budget             Process
that        Does         Not Work               Well

            The      third               problem          area        in         budgeting                    is       the     GRH process
itself.              In our November   1989                                report                   on GRH procedures,2                              we noted
that        the      act's   focus on annual                                     cash          deficit                 targets             encourages
short-term                 "fixes"              with         too      little                 consideration                         given        to     real,
long-term                solutions.                    For         example,                  slipping                 pay      days         from       the      end
of     one        fiscal             year       to     the         beginning                   of      another                is     a savings
illusion.                  Similarly,                  asset          sales             produce                 an immediate                    cash
infusion             and         help          reduce         the         short-term                        deficit,                but     sometimes             at
the       price          of         increasing               by an even                      bigger            amount               the     long-term
deficit.                   Moving              $30     billion             in          borrowings                     for      the         savings          and
loan        rescue             effort           to     an off-budget                           Resolution                    Funding           Corporation
adds        about          $3 billion                  to Treasury                      interest                    costs          over      the       long-run.

*Deficit   Reductions    for Fiscal                                            Year 1990:     Compliance  with                                          the
 Balanced   Budget    and Emergency                                            Deficit  Control    Act of 1985
  (GAO/AFMD-90-40,     November   15,                                          1989).

. .

                 We also                noted          that            the      GRH process                        does        not            address              the
      growing           deficit                 in     the         nontrust                fund         side            of         the        budget             where             the
      long-term            problem                   lies,             and      the        fact         that            the         act’s           unusual                  budget
      accounting                  requirements                         contribute                 to         unrealistic                       deficit

                 I should                also          mention                 that        GRH’s          mechanistic                          approach
      basically            treats                all         nonexempt                 programs                    alike            in        the        sequestration
      formula,            regardless                        of    their             relative              needs               or     effectiveness.                                 More
      importantly,                      I sense              that            formula             budgeting                   somehow                weakens                  the
      legislative                  process              and            long-term               public                confidence                     in’the
      government              .         Surely,              government                    accountability                                is    lessened                     and
      public        confusion                    increased                    when         4 years                 of technical                      compliance
      with       GRH provisions                         has            not      resulted                in         deficit                reduction                    in     the
      general           operations                     of        the      government.

                 This      is           why we think                         that      a different                         approach                 to      budgeting
      is     needed,              one      that         builds                upon         the         successful                    experience                        of     the
      1987       budget            summit              agreement,                     which            produced                a 2-year,                    bipartisan
      agreement            on macro                    budget                categories.                      If        such         an approach                        could            be
      regularized,                      progress                 could          be achieved                        in      streamlining                          the
      process,           extending                     the        time          horizon,                and minimizing                              uneconomical
      decisions.                   It      is        through              a bipartisan                        discussion                       of    the          budget
      deficit           and        its      causes,                    a discussion                     that            takes             into       account
      commitments                  and      unmet                needs,             that         the     deficit                   problem                will          be
      properly           addressed.

THE FEATURES OF H.R.                                  3929

             Now let                 me turn          to H.R.                  3929.             As you         know,       the      bill           would
repeal              the        GRH law          and      substitute                        a new deficit                  reduction                 approach
termed              "pay-as-you-go."                           Instead                    of having             statutory            deficit
targets               (as       in GRH),              OMB and                  the        Congressional                 Budget           Office             (CBO)
would          be required                     to calculate                          new deficit                targets           each         year        using
the        bill's              pay-as-you-go                   formula.                      Essentially,                 the      targets             would
be the              difference                between               (1)         baseline               revenues           and      (2)         baseline
outlays              minus            inflation.3                    These                targets            would      be further                  reduced
by $10              billion            in      the     first              three            budget            cycles       under          the        law.

             Under             the     provisions               of         H.R.            3929,         the      off-budget                Social
Security                surpluses               would,          unlike                    under        the      GRH law,           not         be
included                  in    the         computation                   of     the        deficit.

             The bill's                     approach           is         similar                to    the      "outlay          freeze"
approach               which           attempts            to hold                    outlay           growth          below       inflationary
rates.               This        allows              revenues              to         "catch           up"      over      time      and         reduce         the
deficit.                   However,             H.R.       3929            does            not        require          an inflexible                  outlay
freeze              because            it     contains               a provision                       allowing           outlay            increases              to
be offset                  by revenue                 increases                  from            new legislation.

3Baseline   amounts basically     are                                                 projections                 assuming     continuation
 of present   law and adjustments                                                     for inflation                  and entitlements

            H.R.           3929     contains                no sequestration                         procedure                    (as        in     GRH) to
enforce             the      required              cutbacks.                Instead,                 it     would              rely          upon        the
legislative                  process              to      enforce          adherence                 to      the         deficit              targets.
To improve                  congressional                       budgetary              discipline,                  H.R.              3929        contains
provisions                  designed              to make           it     more         difficult                  for         bill          sponsors                to
pass        legislation                    increasing               spending              or     decreasing                      revenues                from
the        levels           approved              in      the     budget          resolutions.

Positive             Features                of    H.R.          3929

            We see           certain              strong          points          in      H.R.            3929,          principally                     the

            --      The      repeal           of GRH would                  reduce              somewhat                 the          formula
                    aspects           of      current             budgeting               practices.                      More
                    accountability                        for     budgetary               results             would              be placed                back
                    in      the     hands          of Congress                  and       the        President.

            --      By excluding                   Social           Security              from        the         pay-as-you-go
                    formula,            the        bill          comes      closer              to    dealing               with          the        federal
                    funds         deficit.

            --      A required                5-year             reconciliation                      feature              would           extend               the
                    time      horizon              of      budgeting,              reducing                 the          incentives                 to     adopt
                    measures           that            produce           short-term                  cash         benefits                but       higher
       *            long-term               costs.

    --   New points-of-order                             would        make       it    more         difficult                for         bill
         sponsors             to        avoid      the      fiscal           restraints               of    the        budget
         resolutions,                    such      as a point-of-order                          against            certain                 bills
         to     exclude                a new or          existing            federal           entity           from         the

    --   Restrictions                    on slipping                 pay    days       and      using           special             asset
         sales         to     report            budget         savings           for        a fiscal            year      would
         eliminate                or     minimize           these          budgetary            gimmicks.

    --   H.R.      3929's              definitions               of    certain            budgeting               terms            (such           as
         "budget            authority")                 would         clarify          some existing                    budget
         scorekeeping                    uncertainties                 and       improve            budgetary

    --   The bill            would          provide          for       somewhat              improved            budgeting                      over
         federal            credit          and deposit                 insurance             programs.

    --   A requirement                    that       outlays           be calculated                    on a gross                  basis
         would       provide              better          disclosure              over        the       magnitude                  of
         federal            spending.

    --   The bill's                restrictive               definition                of     government-sponsored
         enterprises                    (GSE)      is     designed              to prevent              misuse          of         the          GSE
         concept            for        moving        federal           activities               off-budget.

GAO Concerns            About         H.R.         3929

        Despite          these        strengths,                 the       bill        has,          in     our         opinion,              certain
weaknesses           which        can       be summarized                     as follows:

        --   The bill             still        has       a formula                 'feature            in        the      pay-as-you-go

             approach.                This         feature          would,             like          GRH, be subject                          to        a
             new generation                       of    budget          accounting                   gimmicks.                   This         would
             particularly                   affect         calculations                     of       the      baselines                    that
             (under          H.R.         3929)         become          the        starting                point          for      determining
             the       deficit            targets.

        --   H.R.        3929       does       not       set       forth           an easily                understood                  deficit
             reduction              plan.              Whereas          the        GRH law            has          a set         of        stated
             deficit             reduction              targets,            H.R.          3929        has          a formula                for
             computing'and                   recomputing                   the       deficit               reduction               target               each
             year.           This         could         confuse            many people                     and         lessen         support
             for       deficit            reduction.

        --   The pay-as-you-go                          approach            could           be manipulated                         to       allow
             permanent              spending             increases                 that        are        matched               by temporary
             revenue             increases.                This         could         give           the      illusion                of     deficit
             reduction              progress.

        --   The bill’s              credit             budgeting                 provisions                would          exclude                the
   I)        nonsubsidy              portions              of direct                 loan        outlays                from      the

                    budget's                totals.            This        would            lessen          the        budget's
                    comprehensiveness                          as a statement                       of      governmental

             We see          H.R.           3929       as not         going         far        enough             to    resolve            our
concerns              about         formula             budgeting.                 Like            the    GRH procedures,                            the
pay-as-you-go                   procedures                    would        obscure             accountability                     for       budgetary
results             and      encourage                 a new round                of        budgetary              gimmicks.                    It    also
does         not      deal      with           many of the                 concerns                I have          raised         in       my

             I therefore                 would          suggest            that        the         Subcommittee                  consider                  a
more         comprehensive                     bill      which         might           include            many of              H.R.        3929's
provisions                 designed                to enhance              budget            discipline                 (points            of        order,
definitions,                  etc.).                  These      provisions                  in     the      context             of a multiyear
bipartisan                 budget            summit           agreement            could            produce             better
implementation                      of       budget           resolution               targets              than        was the            case
before             adoption            of      the      GRH law.

             I also          urge        consideration                     of GAO's                budget          restructuring
proposal              or     similar             proposals             aimed           at     overcoming                 the      limitations
of     the         current          unified             budget.             Further,                the      treatment                of    costs,
commitments,                  and        unmet          needs         should           be addressed.                        I am convinced
that         sustained              progress             in      overcoming                  the     deficit             requires                that
such         matters          also           be covered               in    budget            reform           legislation.

         This    concludes    my remarks,    Mr.   Chairman.         I a.ppreciate       having
had   this      opportunity    to present    our   views,      and   I would    be glad      to
answer       any questions     you   or members    of ,the     Subcommittee          may have.

A’fTkHm’r              I                                                                                                                                          ATTICIMO'       I

                                                                             Mmkinathe          Federal   Ceficits   With Trust      Fun&

Oollas          in billions
                                                                    Actual                                                                   Estlmlte
                                               i=f 1985             FYlQBd                    FY 1909                 --Ml990          FY 1991        M    1993         M     1995

RevaxlsJ                                       s 734                s         169              s 991                                    s1,137        51,277
OJtlsys                                         946                           990               1.103                                       !.298         1.409

      Tutal     Ceflcit                        s-2&                 SZ                         0 -152                                   S -161        S -132

Fsbral    Fun& Deficit                                                   *                                               -290
Trust Fund Surplusas:
   Social Security                                      9                      17                                               66
  Other TrustFunds                              45                       45                                              65
%btotal,    Trust            Fund
  SW-p clsas                                           54            62                                                  J3l-                               158             188

      Total     Deficit                        sa                   s -221                     S -152                  s -159                         $ -132             $ -110
                                                                                                                        -                              -                  -

Total     Federal          D&t                 S1,817               s2,120                     $2,866                  s3,156           s3*454        S4,012             84,603

Me:           Tutals       may not add cbeto        rcllnding.

Sarras:         Adual        numbKs   we   franCME          tmterlals.              EstiMes       8-e frcmaBOpro.jecl'iCms~
ATTACHMENTII                                                                         ATTACHMENTII

          Fiscal      Year 1988 Budget Results   Restructured    According   to GAO Proposal

Dollars      in billions
                                                  Total         General      Trust      Enterprise
Operating          surplus/deficit      (0)       $-131         $-248        $124         $ -7
Capital      financing        requirements           -24          -23           2              -3
Unified kudget financing
  requirements                                    WZi           g-271        $126         $A