Budget Process: Comments on H.R. 853

Published by the Government Accountability Office on 1999-05-12.

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

                          United States General Accounting Office

GAO                       Testimony
                          Before the Committee on Rules, House of Representatives

For Release on Delivery
Expected at
9:30 a.m.
                          BUDGET PROCESS
May 12, 1999

                          Comments on H.R. 853
                          Statement of Susan J. Irving
                          Associate Director, Budget Issues
                          Accounting and Information Management Division

Mr. Chairman and Members of the Committee:

It is a pleasure to return to talk with you again about the congressional
budget process--and especially whether and how it should be changed to
meet the fiscal situation presented today.

Attached to my testimony today is a list of testimony statements we have
issued on the budget process over the past 5 years. In addition, I was
fortunate to participate in your September 1997 briefing on budget
enforcement procedures in the House of Representatives. 1

As we have discussed before, everyone involved in the budget process
shares some frustration with it. The public finds it confusing. Executive
branch agencies say it is burdensome and time-consuming. Members of the
Congress say it seems too lengthy with too many votes on authorizations,
budget resolutions, reconciliation, appropriations, emergency
supplementals, and the debt limit.

In one sense, of course, nothing could be more important than debates
about the budget. Budgeting is the process by which we as a nation resolve
the large number of often conflicting objectives that citizens seek to
achieve through government action. The budget determines the fiscal
policy stance of the government--that is, the relationship between spending
and revenues. And it is through the budget process that the Congress and
the President reach agreement about the areas in which the federal
government will be involved and in what way.

Because the decisions are so important, we expect a great deal from our
budget and budget process. We want the budget to be clear and
understandable. We want a process that presents the Congress and the
American people with a framework in which to understand the significant
choices and the information necessary to make the best informed decisions
about federal tax and spending policy.

In addition to these broad goals, the budget process has also been expected
to respond to the budget challenges of a particular time. The 1974 Budget
and Impoundment Control Act was designed to reassert the Congress’ role
in setting overall federal fiscal policy and in establishing spending

    The Congressional Budget Process committee print, September 26, 1997.

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                         priorities. The act sought not to achieve a particular outcome but to
                         impose a structure and a timetable on the budget debate. It was neutral as
                         to fiscal policy.

                         It was not until the enactment of the Balanced Budget and Emergency
                         Deficit Control Act (also known as Gramm-Rudman-Hollings or GRH) in
                         1985 that the budget process was designed to achieve a particular goal.
                         Both GRH and the 1987 amendments to it sought to achieve a specific
                         outcome: a balanced budget by a time certain. However, GRH sought to
                         use a change in process to force agreement on substance--and measured
                         against its stated objective of a balanced budget, it did not succeed.

                         The 1990 Budget Enforcement Act (BEA) took a different tack toward the
                         same end. While it also sought to achieve a balanced budget, it used
                         process to enforce a previously reached agreement. It was designed to
                         limit congressional actions that would increase the deficit. On its own
                         terms BEA succeeded, but its ambition was limited. It did not seek to
                         control economic or demographic-driven growth in existing entitlement
                         programs--and that is the area of greatest growth today.

                         Nevertheless, the combination of fiscal discipline and economic growth led
                         to the first balanced budget in nearly 30 years. Today, therefore, a different
                         fiscal situation has emerged. After nearly 30 years of unified budget
                         deficits, current projections are for “surpluses as far as the eye can see.” At
                         the same time, the country faces a demographic tidal wave that will--absent
                         a change in policy--overwhelm the budget.

                         This is a new set of challenges for the budget process: almost 30 years of
                         projected surpluses followed by--absent changes in Social Security and
                         Medicare--a reappearance of large and growing deficits. These
                         circumstances present an opportune time to reexamine the budget process.
                         Such an examination should be guided by a number of key principles.

General Criteria for a   In the past we have suggested four broad goals or criteria for a budget
                         process.2 The process should
Budget Process

                          Budget Process: Evolution and Challenges (GAO/T-AIMD-96-129, July 11, 1996) and Budget Process:
                         History and Future Directions (GAO/T-AIMD-95-214, July 13, 1995).

                         Page 2                                                                      GAO/T-AIMD-99-188
                        • provide information about the long-term impact of decisions while
                          recognizing the differences between short-term forecasts, medium-term
                          projections, and longer-term simulations;
                        • provide information and be structured to focus on important macro
                        • provide information necessary to make informed trade-offs between
                          missions and between the different tools of government; and
                        • be enforceable, provide for control and accountability, and be

                        Each of these is important, and they are related--but they cannot all be
                        maximized in a single process. Trade-offs are necessary. Today, in the
                        context of H.R. 853, your staff asked me to focus especially on the
                        importance of the long-term perspective, on increasing the understanding
                        and recognition of long-term commitments and insurance commitments in
                        the budget, and on how this relates to the need for control, accountability,
                        and transparency.

Long-Term Perspective   A long-term perspective is important in the budget debate in both a macro
                        and a micro sense. By macro I mean the nation’s economic health. The
and Commitment          nation’s economic future depends in large part upon today’s budget and
Recognition             investment decisions.3 Therefore, we believe that at the macroeconomic
                        level, the budget should provide a long-term framework and should be
                        grounded on a linkage of fiscal policy with the long-term economic

                        The micro aspect of this longer-term perspective relates to those programs
                        and activities where a longer time horizon is necessary to understand the
                        fiscal and spending implications of commitments for specific purposes.
                        Examples include retirement programs, Medicare, and pension insurance--
                        and even some discretionary programs whose design implies continued
                        funding. Although BEA’s multiyear focus represented significant progress
                        in this regard, planning for longer-range economic goals and looking at the
                        costs of some commitments requires looking much further ahead. For
                        these programs, even very rough projections may be better than ignoring
                        the long term.

                            Budget Issues: Long-Term Fiscal Outlook (GAO/T-AIMD/OCE-98-83, February 25, 1998).

                        Page 3                                                                        GAO/T-AIMD-99-188
                  Since the bill before you deals with both of these aspects of the long term,
                  let me discuss each.

Long-Term Macro   Beginning in 1992, congressional leaders have requested that we provide a
                  long-term macro perspective by modeling the implications of different
Perspective       fiscal policy paths for the nation’s economy over a long-term period, which
                  has ranged from 50 to 75 years. We have periodically updated these
                  simulations to account for changes in the fiscal and economic
                  environment. For the last 4 years the Congressional Budget Office (CBO)
                  has also produced long-term simulations and the President’s budget has
                  included long-term simulations by the Office of Management and Budget
                  (OMB). The CBO and GAO results have been quite similar.

                  Looking at the simulations since 1992 tells the dual story of today’s fiscal
                  challenge: (1) the outlook has improved greatly from earlier simulations
                  and (2) looking out over the longer term, the current situation is not
                  sustainable. In 1992, modeling a continuation of the then-current fiscal and
                  budget policy resulted in a deficit exceeding 20 percent of gross domestic
                  product (GDP) by the year 2020. In contrast, today’s update shows the
                  benefits of the difficult policy choices made by the Congress and the
                  President and of a healthy economy: in 2020, the model indicates a surplus
                  of 1.5 percent of GDP and does not show a deficit reemerging until 2028.
                  However, this improved outlook does not mean that the fiscal challenges
                  facing the country have been met. In fact, the current situation is still not
                  sustainable over the long term. Our most recent model results indicate that
                  if current policy were continued, by 2063 federal revenue will cover only
                  health care, Social Security, and interest spending. To continue all other
                  spending at current policy levels would require federal borrowing and/or
                  revenue increases. As the Comptroller General pointed out earlier this
                  year,4 absent any policy changes, budgetary flexibility declines drastically
                  over time and there is increasingly less room for programs for national
                  defense, the youth, infrastructure, and law enforcement. This is true even
                  if we assume that the entire unified budget surplus is saved and used to
                  reduce debt (and thus interest) from current levels.

                  We believe these simulations provide a useful perspective that is often
                  lacking in budget debates. They tell us that the surplus is temporary.

                   See, for example, Social Security and Surpluses: GAO’s Perspective on the President’s Proposals
                  (GAO/T-AIMD/HEHS-99-95, February 23, 1999).

                  Page 4                                                                         GAO/T-AIMD-99-188
Perhaps more important, they alert us to the fact that even if the surplus is
“saved,” we face an unsustainable outlook. These simulations also provide
a context within which to look at longer-term projections for individual
programs such as Social Security and Medicare. Both of these programs
use trust fund financing and accounting. As a result, we get a picture of
their financial outlook by looking at the trust funds--for example, we know
that under the current tax and benefit structure, Social Security’s annual
cash receipts will fall short of annual cash outlays in 2014 and that the
Social Security Trust Fund will be insolvent in 2034. The Trustees’ report
does look 75 years out. However, in analyzing Social Security and
considering alternative program changes, it is a mistake to look only at the
trust fund; it is important to also recognize how Social Security fits into the
budget and the economy and to understand how it grows as a share of both.

Although we consider these simulations--and other long-term “projections”
--to provide critically important context for budget deliberations, we would
also stress that they must be interpreted carefully. Given the range of
uncertainty about economic changes and the response to these changes,
these simulations cannot be viewed as forecasts of budgetary or economic
outcomes 50 years in the future. Indeed, the dramatic improvement in the
outlook over the last 7 years shows how sensitive these results are to
unanticipated shifts in economic growth or to policy actions. The
simulations, therefore, should be seen as illustrative of direction and
magnitude given current information about demographic and budgetary
trends and the functioning of the economy.

In this spirit, the approach taken in H.R. 853 has much to recommend it.
Requiring reports on 75-year budgetary trends for the budget as a whole
can help provide the necessary long-term context. Few of the
government’s commitments are truly transient. For example, embedded in
numerous programs and policy decisions are long-term relationships with
states and in the international community that have fundamental
implications for the cost of government over time. The inclusion in the
budget of OMB’s reports and comparisons between the President’s policy
proposals and current law will focus more attention on the long term and
on how the President would seek to address looming problems. Having a
CBO report as well will permit the Congress and other observers to make
comparisons with the OMB current law report, providing an independent
view. Although we do not make budget projections or estimates, as long as
it is useful to the Congress we will continue our work on the long term as
well. Given the level of uncertainty involved in long-term modeling--and
the need to be aware of how sensitive results are to different assumptions

Page 5                                                       GAO/T-AIMD-99-188
                        about how the economy works--it has proven useful to have several
                        different entities develop and maintain the ability to simulate the long term.
                        In the past, the few players in this arena have collaborated and shared
                        techniques, data, and analyses. This has increased the confidence that can
                        be placed in the direction and magnitude of the results. I am sure this will
                        continue, especially if the requirements in H.R. 853 are enacted to ensure
                        the continued efforts of OMB and CBO.

Long-Term Focus at      The budget was not designed to and does not provide complete information
                        on long-term cost implications stemming from some of the government’s
Micro Level Needed in   commitments when they are made. We have long advocated that
Budget                  policymakers need information on the long-term cost consequences of
                        today’s commitments. For programs as large as Social Security and
                        Medicare this is important both for macro policy and for resource
                        allocation. However, it is also important to understand the long-term
                        implications of the commitments for those programs too small to drive the
                        long-term outlook. A budget is about the allocation of scarce resources.
                        Such decisions reflect a number of factors including beliefs about the
                        appropriate role of government in various areas, judgment about the likely
                        success of a program in achieving certain goals, and the cost of a program.
                        It is important that Members of the Congress and the President--and
                        citizens--be able to compare program costs on a consistent basis.

                        A budget should be structured to permit informed programmatic decision-
                        making across a wide range of approaches--for example, insurance, credit,
                        asset sales, capital, grants, and direct service. This is less difficult if
                        policymakers know what the cost of a given decision will be. Although for
                        many programs BEA’s multiyear time frame has represented great progress,
                        there are programs and activities where a longer time horizon is necessary
                        to understand the spending implications of the government’s commitment--
                        and this commitment affects future budgetary flexibility.

                        H.R. 853’s requirement for reports on long-term budgetary trends should
                        also be helpful in this area. While long-term information on Social Security
                        and Medicare has been available in Trustees’ reports--and is often cited in
                        the debate--these are not the only programs in which the government has
                        made long-term commitments. Civilian, military, and veterans’ retirement
                        benefits constitute another large category of the federal government’s
                        commitments. While some have been recognized in the budget, none of the
                        costs of civilian or military retiree health benefits are recognized in the
                        budget as they are earned. The same is true for veterans’ pensions and

                        Page 6                                                       GAO/T-AIMD-99-188
benefits. As the result of new accounting standards that require its
reporting, information on the long-term liabilities of these other retirement
and benefit programs is now being made available in annual financial
statements. This information can supplement the information included in
the budget as decisionmakers consider the costs of these programs.

Programs with an apparently shorter time horizon than pension and health
commitments could also benefit from a longer-term perspective. As I noted
above, many government programs and policies imply costs over a
relatively long period of time. For some of these--e.g., pensions--long-term
costs may be easy to calculate. For others, such as decisions about the
nation’s role in the world or some intergovernmental commitments, costs
are more difficult the estimate. Unfortunately for analysts, ease of
calculation does not always correlate with importance.

Federal insurance provided to individuals and businesses against a wide
variety of risks is a prime example of the type of program that may carry
long-term cost implications. In 1997, we reported that the current cash-
based budget generally provides incomplete and misleading information on
the cost and fiscal impact of federal insurance programs. 5 The use of
accrual concepts, such as budgeting for the cost of the risk assumed by the
government as in H.R. 853, has the potential to better inform budget
choices. In our report, we supported supplemental reporting of these cost
estimates in the budget, as required by H.R. 853. We believe this
supplemental reporting will allow time to validate estimation
methodologies and increase the users’ comfort levels with accrual
estimates before considering whether to move to a more comprehensive
approach of incorporating the risk-assumed estimates into the budget

H.R. 853 requires that estimates of the risk assumed by the government in
these programs be disclosed in the budget. It also sets fiscal year 2006 as a
date certain for moving to the comprehensive approach. We recognize that
setting a date for inclusion in budget numbers may well increase agencies’
attention to and efforts to develop good quality estimates. However, the
bill also sunsets this provision at the end of fiscal year 2007--thereby
including these numbers in the budget for only 2 years. This seems

  Budget Issues: Budgeting for Federal Insurance Programs (GAO/AIMD-97-16, September 30, 1997).
See also Budget Issues: Budgeting for Federal Insurance Programs (GAO/T-AIMD-98-147, April 23,

Page 7                                                                      GAO/T-AIMD-99-188
                      problematic for two reasons. First, the knowledge that the numbers would
                      only be used in the budget for 2 years could reduce the pressure to do the
                      hard work necessary to develop good estimates. Second, changing the
                      basis of budget numbers for only 2 years is likely to be both burdensome
                      and confusing. This is not to say that there should be no reexamination of a
                      change of this magnitude. Certainly it makes sense after some number of
                      years of experience for the Congress and the President to consider
                      progress under budgeting on a risk-assumed basis and make a decision
                      whether to continue or not. However, our experience with credit reform--
                      which is easier than estimating risk-assumed costs for insurance--tells us
                      that a 2-year trial is too short for making such a judgment .

                      Whatever approach to implementation is finally decided upon, I must stress
                      that the calculation of the risk-assumed costs is complex. Some programs
                      will be better able to make the estimates than others. H.R. 853 also calls for
                      OMB, CBO, and GAO to report on the advisability and appropriate
                      implementation of budgeting for the risk-assumed costs. These reports
                      should play a significant role in a final decision about when these numbers
                      are ready to be incorporated into the budget.

Role of Long-Term     Incorporating a long-term perspective into the budget process advances the
                      goals of control, accountability, and transparency. Transparency is a
Perspective in        complex goal. At times it demands simplicity--and I would be the first to
Increasing Control,   admit that incorporating long-term cost estimates is unlikely to simplify the
                      budget process. However, transparency can also mean “no hidden costs”
Accountability, and   or “few surprises.” This aspect of transparency is advanced by
Transparency          understanding and disclosing the long-term cost implications of as much of
                      the budget as is possible. The Congress, the President, and the taxpayers
                      have a right to the best information possible about the cost of the future
                      commitments that they are making.

                      These long-term cost estimates are also important for control and
                      accountability. The Congress and the President are best able to control the
                      cost of a program when it is created or modified. For example, cash-based
                      budgeting for insurance programs provides not only incorrect, but also
                      misleading, information about the expected cost of these programs to the
                      federal government. If these costs were available--even as rough estimates
                      --at the time an insurance program was proposed, policymakers could
                      consider design elements that might reduce costs.

                      Page 8                                                       GAO/T-AIMD-99-188
Technical Comments   Since BEA’s limits on budget authority and outlays remain in effect through
                     2002, care must be taken in designing the relationship between BEA and
on H.R. 853          any changes in the budget laws that take effect before its expiration. For
                     example, H.R. 853 is clear in its repeal of the current requirement to adjust
                     the spending limits for emergencies. The interaction between the existing
                     spending limits on budget authority and/or outlays and any joint resolution
                     on the budget vetoed by the President is less clear. BEA contains a number
                     of different limits on budget authority and/or outlays. For fiscal years
                     2001and 2002, it contains budget authority and outlay limits for
                     discretionary programs and separate outlay limits for highway and mass
                     transit programs.

                     However, under H.R. 853, if a joint resolution is enacted into law, it would
                     specify subtotals of new budget authority and outlays for nondefense and
                     defense discretionary spending, direct spending, emergencies, and other
                     subsets of spending if deemed necessary. If the President signs the joint
                     resolution and it is enacted, these subtotals would replace the current law’s
                     spending limits. However, H.R. 853 contains “fall-back” procedures for
                     expediting a concurrent resolution if the President vetoes the joint
                     resolution. While this is a workable way for dealing with the possibility of a
                     presidential veto, failure to enact the joint resolution on the budget means
                     that BEA’s limits on discretionary, highway, and mass transit are still in
                     effect. This would lead to a situation in which the concurrent resolution
                     would contain subtotals for defense, nondefense, and emergencies while
                     the governing law contained statutory limits on discretionary, highway, and
                     mass transit spending. It would appear that the concurrent resolution on
                     the budget’s subtotals for defense, nondefense, and emergencies would
                     serve as a blueprint/guide for congressional action on spending, revenue,
                     and debt without the force of law.

                     Technical Issues in Approach to Insurance Budgeting: I have previously
                     discussed insurance budgeting and our support for having the Congress
                     encourage the development and reporting of annual risk-assumed cost
                     estimates with the idea of moving toward a comprehensive accrual-based
                     budgeting approach when feasible. H.R. 853 definitely moves in that
                     direction. I do have two technical concerns. The first is related to the
                     budget accounting for administrative costs described in the bill. Although
                     the bill is somewhat unclear on some issues, it appears that the goal is to
                     make the administrative costs a part of the risk-assumed cost, a feature
                     that has been considered as desirable. The bill specifies that all funding
                     for administrative expenses will be displayed in the program account and

                     Page 9                                                       GAO/T-AIMD-99-188
that the financing account will transfer to the program account the
amounts necessary to pay the administrative costs. The financing account
is the nonbudgetary account that accounts for all cash flows related to the
insurance program, including premiums. The bill specifies that in
calculating the risk-assumed cost of insurance, administrative expenses are
to be subtracted from premiums. Presumably, although the bill is not clear
on this point, this is the financing source that the financing account will use
to pay the administrative expenses to the program account. I would be
happy to work with your staff to clarify how administrative costs are to be

The second technical concern relates to the financing of reestimates. The
bill specifies that the amount of the reestimate shall be paid from the
program account to the financing account. It is silent as to whether the
program account receives a permanent appropriation for the reestimate or
whether some other financing source is envisioned. As you know, in credit
reform a permanent appropriation was provided for reestimates, but some
have raised the issue that this does not provide agencies an incentive to
make good initial estimates. Again, I will be happy to discuss this issue in
greater depth with your staff.

GAO Report Requirement: Finally, I note that the bill would require that we
study, at least every 5 years, the provisions of law that provide mandatory
spending, and recommend the appropriate form of financing for activities
or programs financed by such provisions of law. Current law requires this
study but leaves the timing open--it must be revised “from time to time.”
We have issued reports under this requirement three times since mid-1987
and have found that it requires so significant a commitment of time and
staff that it constrains our ability to do other work. Therefore, I would like
to talk with your staff about how to provide the information in which you
are interested promptly and efficiently.

Mr. Chairman, this concludes my statement. I would be happy to answer
any questions that you or the Members of the Committee may have.

Page 10                                                      GAO/T-AIMD-99-188
Page 11   GAO/T-AIMD-99-188
Related GAO Testimonies

                   Budget Issues: Budgeting for Federal Insurance Programs
                   (GAO/T-AIMD-98-147, April 23, 1998).

                   Budget Issues: Long-Term Fiscal Outlook (GAO/T-AIMD/OCE-98-83,
                   February 25, 1998).

                   Budget Process: Evolution and Challenges (GAO/T-AIMD-96-129, July 11,

                   Budget Process: History and Future Directions (GAO/T-AIMD-95-214,
                   July 13, 1995).

                   Budget Process: Biennial Budgeting for the Federal Government
                   (GAO/T-AIMD-94-112, April 28, 1994).

                   Budget Process: Some Reforms Offer Promise (GAO/T-AIMD-94-86,
                   March 2, 1994).

(935315)   Leter   Page 12                                                   GAO/T-AIMD-99-188
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