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United States Government Accountability Office: 

February 2005:

21st CENTURY CHALLENGES: 

Reexamining the Base of the Federal Government: 

GAO-05-325SP: 

Contents: 

Preface:

Section 1: Introduction:

Section 2: Twelve Reexamination Areas:

National Defense:

Education and Employment:

Financial Regulation and Housing:

Health Care:

Homeland Security:

International Affairs:

Natural Resources, Energy, and the Environment:

Retirement and Disability Policy:

Scientific and Technological Innovation:

Transportation:

Governance:

Tax System:

Section 3: Where Do We Go From Here?

Table:

Table 1: Illustrative Generic Reexamination Criteria:

Figures:

Figure 1: Composition of Spending as a Share of GDP Under Baseline 
Extended:

Figure 2: Composition of Spending as a Share of GDP Assuming 
Discretionary Spending Grows with GDP after 2005 and All Expiring Tax 
Provisions Are Extended:

Figure 3: Forces Shaping the United States and Its Place in the World:

Figure 4: Twelve Reexamination Areas:

Figure 5: Selected Reforms and Reexamination Approaches:

Figure 6: Reexamination Maturity Model:

[End of section]

Preface: 

The Government Accountability Office has long had a statutory 
responsibility for monitoring the condition of the nation's finances. 
Recently, in our role as the auditor of the U.S. government's 
consolidated financial statements, we included an emphasis paragraph in 
our audit report for the fiscal year ended September 30, 2004 
expressing our concerns that the fiscal policies in place today will--
absent unprecedented changes in tax and/or spending policies--result in 
large, escalating, and persistent deficits that are economically 
unsustainable over the long term. This conclusion is based on the 
results of GAO's long-term budget model, which the agency has used 
since 1992.

Over the long term, the nation's growing fiscal imbalance stems 
primarily from the aging of the population and rising health care 
costs. These trends are compounded by the presence of near-term 
deficits arising from new discretionary and mandatory spending as well 
as lower revenues as a share of the economy. Absent significant changes 
on the spending and/or revenue sides of the budget, these long term 
deficits will encumber a growing share of federal resources and test 
the capacity of current and future generations to afford both today's 
and tomorrow's commitments. Continuing on this unsustainable path will 
gradually erode, if not suddenly damage, our economy, our standard of 
living and ultimately our national security.

Addressing the nation's long-term fiscal imbalances constitutes a major 
transformational challenge that may take a generation to resolve. Given 
the size of our projected deficit we will not be able to grow our way 
out of this problem--tough choices will be required. In addition, 
traditional incremental approaches to budgeting will need to give way 
to more fundamental and periodic reexaminations of the base of 
government, ultimately covering discretionary and mandatory programs as 
well as the revenue side of the budget. The nature and magnitude of the 
fiscal, security, and economic and other adjustments that need to be 
considered are not amenable to "quick fixes;" rather they will likely 
require an iterative, thoughtful process of disciplined changes and 
reforms over many years. Nonetheless, the magnitude of and potential 
disruption from related changes can be mitigated if the necessary 
policy changes are made sooner rather than later.

While prompted by fiscal necessity, such a fundamental review of major 
program and policy areas can also serve the vital function of updating 
the federal government's programs and priorities to meet current and 
future challenges. Many current federal programs and policies, in fact, 
were designed decades ago to respond to trends and challenges that 
existed at the time of their creation. Given our recent entry into a 
new century, we have been reminded of how much has changed in the past 
several decades--whether it be rapid shifts in the security threats 
facing the nation, the aging of our population, the globalization of 
economic transactions, escalating health care costs, increased 
environmental concerns, or the significant advances in technologies and 
transportation systems. Moreover, given the fiscal constraints we are 
likely to face for many years to come, such a reexamination may very 
well be essential to address newly emergent needs without unduly and 
unfairly burdening future generations of taxpayers.

Having identified the major fiscal challenge facing the nation, and 
given our role in supporting the Congress, we believe that GAO also has 
an obligation to provide policymakers with support in identifying 
issues and options that could help to address these fiscal pressures. 
In this report, we build on our past and pending work--90 percent of 
which is requested by the Congress or required by law--to provide 
policy makers with a comprehensive compendium of those areas throughout 
government that could be considered ripe for reexamination and review. 
This report is consistent with other GAO products, such as our high-
risk series and budget options reports, where we pull together our 
insights and previous work for the Congress to help in its budget and 
programmatic deliberations and oversight activities.[Footnote 1]

This report is intended to help the Congress in reviewing and 
reconsidering the base of federal spending and tax programs. It is 
intended as one input among many that Congress will receive as it 
decides what its agenda will be for oversight and program review. We 
have framed the issues presented as illustrative questions for 
policymakers to consider as a supplement to their own efforts. The 
questions are drawn from GAO's issued work, our strategic plan prepared 
in consultation with the Congress, input from several inspectors 
general and the institutional knowledge of our staff. They cover 
discretionary spending, mandatory spending, including entitlements, as 
well as tax policies and programs. While answers to these questions may 
draw on the work of GAO and others, only elected officials can and 
should decide which questions to address as well as how and when to 
address them.

The report is organized in three sections. The first section sets the 
stage by providing the rationale for reexamining the base of the 
federal government and the scope of GAO's effort. The second section is 
organized around 12 areas of federal activity and includes narratives 
discussing emerging changes in each area as well as several 
illustrative reexamination questions for each area. The third section 
provides some perspective on various strategies, processes, and 
approaches that should be considered as a possible means to address the 
issues and questions raised in this report.

GAO stands ready to assist the Congress in addressing the much needed 
base-line review of existing federal programs, policies, functions, and 
activities.

The report was prepared under the direction of Paul Posner, Managing 
Director for Federal Budget and Intergovernmental Issues in our 
Strategic Issues team, with the assistance of every GAO team. Ty 
Mitchell and John Forrester of our Strategic Issues team were the key 
staff responsible for the development and publication of this document. 
Copies of this report are available upon request. In addition this 
document will be available at no charge on the GAO Web site at 
[Hyperlink, http://www.gao.gov].

Signed by: 

David M. Walker: 
Comptroller General of the United States:

[End of section]

Chapter 1: Introduction: 

The federal government's financial condition and long-term fiscal 
outlook present enormous challenges to the nation's ability to respond 
to emerging forces reshaping American society, the United States' place 
in the world, and the future role of the federal government. The near-
term deficits are daunting--a $412 billion unified budget deficit in 
fiscal year 2004 (including a $567 billion on-budget deficit and a $155 
billion off-budget surplus) and a $368 billion deficit (not including 
any supplemental appropriations) forecast for fiscal year 2005 by the 
Congressional Budget Office (CBO). If these near-term deficits 
represented only a short-term phenomenon prompted by such factors as 
economic downturn or national security crises--there would be less 
cause for concern. However, deficits have grown notwithstanding the 
relatively strong rebound of the economy from the recession in 2001, 
and the incremental costs of responding to the nation's global war 
against terrorism and homeland security represent only a relatively 
small fraction of current and projected deficits. Morever, based on the 
U.S. Government Accountability Office's (GAO) long-range fiscal 
simulations, the current fiscal condition is but a prelude to a much 
more daunting long-term fiscal outlook.

Over the next few decades, as the baby boom generation retires, federal 
spending on retirement and health programs--Social Security, Medicare, 
Medicaid, and other federal pension, health, and disability programs--
will grow dramatically. Other federal fiscal commitments, ranging from 
explicit liabilities, such as environmental cleanup requirements to 
more implicit obligations presented by lifecycle costs of capital 
acquisitions, will also bind the nation's fiscal future. Absent policy 
changes on the spending and/or revenue sides of the budget, a growing 
imbalance between expected federal spending and tax revenues will mean 
escalating and ultimately unsustainable federal deficits and debt that 
serve to threaten our future national security as well as the standard 
of living for the American people. Ultimately, the nation will have to 
decide what level of federal benefits and spending it wants and how it 
will pay for these benefits.

The nation's long-term fiscal outlook is daunting under many different 
policy scenarios and assumptions. For instance, under a fiscally 
restrained scenario, if discretionary spending grew only with inflation 
over the next 10 years and all existing tax cuts expire when scheduled 
under current law, spending for Social Security and health care 
programs would grow to consume over three-quarters of federal revenue 
by 2040. (See fig. 1.) On the other hand, if discretionary spending 
grew at the same rate as the economy in the near term and if all tax 
cuts were extended, federal revenues may just be adequate to pay 
interest on the growing federal debt by 2040. (See fig. 2.) Numerous 
alternative scenarios can be developed incorporating different 
combinations of possible policy choices and economic assumptions, but 
these two scenarios can be viewed as "bookends" showing a range of 
possible outcomes.[Footnote 2]

Figure 1: Composition of Spending as a Share of GDP under Baseline 
Extended:

[See PDF for image] 

Notes: In addition to the expiration of tax cuts, revenue as a share of 
GDP increases through 2015 due to (1) real bracket creep, (2) more 
taxpayers becoming subject to the alternative minimum tax (AMT), and 
(3) increased revenue from tax-deferred retirement accounts. After 
2015, revenue as a share of GDP is held constant.

[End of figure] 

Figure 2: Composition of Spending as a Share of GDP Assuming 
Discretionary Spending Grows with GDP after 2005 and All Expiring Tax 
Provisions Are Extended:

[See PDF for image] 

Notes: Although expiring tax provisions are extended, revenue as a 
share of GDP increases through 2015 due to (1) real bracket creep, (2) 
more taxpayers becoming subject to the AMT, and (3) increased revenue 
from tax-deferred retirement accounts. After 2015, revenue as a share 
of GDP is held constant.

[End of figure] 

Addressing the projected fiscal gaps shown here will prompt 
policymakers to examine the advisability, affordability, and 
sustainability of existing programs, policies, functions, and 
activities throughout the entire federal budget--spanning 
discretionary spending, mandatory spending, including entitlements, 
and tax policies and programs. Neither slowing the growth of 
discretionary spending nor allowing tax cuts to expire--nor both 
options combined--would by themselves eliminate our long-term fiscal 
imbalance. Additional economic growth is critical and will help to ease 
the burden, but the projected fiscal gap is so great that it is 
unrealistic to expect that we will grow our way out of the problem. 
Clearly, tough choices will be required. Changes in existing budget 
processes and financial, fiscal, and performance metrics will be 
necessary to facilitate these choices.

Early action to change existing programs and policies would yield the 
highest fiscal dividends and provide a longer period for prospective 
beneficiaries to make adjustments in their own planning. The longer we 
wait, the more painful and difficult the choices will become. By 
waiting, an important window is lost during which today's relatively 
large workforce can increase saving and begin preparing for the 
necessary changes in fiscal policy, Social Security, health care and 
other reforms that may very well be part of the solution to this coming 
fiscal crunch. However, the long-term challenge is fast becoming a 
short term one as the retirement of the baby boomers' generation will 
begin as early as 2008 and since overall work force growth has already 
begun to slow.

Emerging Forces Will Test Existing Policy Frameworks:

These challenges would be difficult enough if all we had to do is fund 
existing commitments. But the nation and the world have and will 
continue to change in fundamental ways. As a result, a wide range of 
emerging needs and demands can be expected to compete for a share of 
the budget pie. Whether it be national security, homeland security, 
transportation, education, environmental cleanup, or public health, a 
society with a growing population will generate new claims for federal 
actions on both the spending and tax sides of the budget. For example, 
the nation's population itself is projected to grow by about 50 percent 
over the next 50 years, generating new needs for public and private 
resources. Addressing the burdens of existing commitments and providing 
expanded economic resources are two important strategies to enable 
future generations to regain the fiscal flexibility to address these 
needs.

More broadly, major forces are at work that will require the federal 
government to rethink its entire approach to policy design, priorities, 
and management to remain relevant to our changing society. In short, 
government will need to change to become as dynamic as the nation and 
the changing environment in which it must operate.

GAO's Strategic Plan for Serving the Congress and the Nation (2004-
2009), which was prepared in close consultation with the Congress, 
highlights some of the major forces (See fig. 3.), in addition to the 
large and growing fiscal imbalances that are at work to reshape our 
nation and the role of the federal government.

Figure 3: Forces Shaping the United States and Its Place in the World:

Large and Growing Long-term Fiscal Imbalance-The U.S. government's 
long-term financial condition and fiscal outlook present enormous 
challenges to the nation's ability to respond to forces that shape 
American society, the United States' place in the world, and the role 
of the federal government. The short-term deficits are but a prelude to 
a projected worsening long-term fiscal outlook driven largely by known 
demographic trends and rising health care costs.

Evolving National and Homeland Security Policies-The dissolution of the 
Soviet Union in 1991 and the emergence of the more diffuse threats 
posed by terrorism to the nation's national and homeland security have 
led to major shifts in strategic threats. While these new security 
concerns are already prompting changes in defense postures and 
international relationships, preparedness and responses to these new 
threats also carry wide ranging and unprecedented implications for 
domestic policies, programs, and infrastructures.

Increasing Global Interdependence-The rapid increase in the movement of 
economic and financial goods, people, and information has prompted more 
widespread realization that the nation is no longer self-contained, 
either in its problems or their solutions. The growing interdependence 
of nations, while carrying clear economic and social benefits, also 
places new challenges on the national agenda and tasks policymakers to 
recognize the need to work in partnerships across boundaries to achieve 
vital national goals.

The Changing Economy-The shift to a knowledge-based economy and the 
adoption of new technology has created the potential for higher 
productivity but posed new challenges associated with sustaining the 
investment in human capital and research and development that is so 
vital to continued growth. While the sustainability of U.S. economic 
growth has been aided by trade liberalization and increased market 
competition in key sectors, the sustainability of growth over the 
longer term will require a reversal of the declining national savings 
rate that is so vital to fueling capital investment and productivity 
growth.

Demographic Shifts-An aging and more diverse population will prompt 
higher spending on federal retirement and health programs. Unless there 
is strength in the underlying sources of productivity-education, 
technology and research and development-low labor force growth will 
lead to slower economic growth and federal revenue growth over the 
longer term. As labor becomes ever more scarce, a greater share of the 
work force will be comprised of foreign-born workers, women, and 
minorities with broad-scale implications for education, training, child 
care, and immigration policies.

Science and Technology Advances-Rapid changes in science and technology 
present great opportunities to improve the quality of life and the 
economy, whether it be finding new sources of energy, curing diseases, 
or enhancing the nation's information and communications capacities. 
However, technologies raise their own unique vulnerabilities, risks, 
and privacy and equity concerns that must be addressed by policymakers.

Quality of Life Trends-Large segments of the population enjoy greater 
economic prosperity than ever before, and the well being of many 
Americans has improved dramatically thanks to breakthroughs in health 
care and improvements in environmental protection. However, these 
improvements have not been evenly distributed across the nation, as 
more than 40 million Americans lacking health insurance demonstrate. 
Prosperity has prompted its own stresses, as population growth and 
sprawl create demand for new transportation and communication 
infrastructure.

Diverse Governance Structures and Tools-To deliver on the public's 
needs and wants, the nation's system will be pressed to adapt its 
existing policy-making processes and management systems. The governance 
structures and management processes that emerge will be shaped by the 
above forces (e.g., increasing interdependency, scientific and 
technological changes, and security threats), and will depend on having 
sufficient foresight, a continuous reexamination and updating of 
priorities, ongoing oversight, and reliable and results-oriented 
national performance indicators.

Source: GAO.

[End of figure]

As the pace of change accelerates in every aspect of American life, 
these forces work to present government with new and more complex 
challenges and demands. As the federal role has grown in addressing a 
wide range of needs, the public has come to expect higher levels of 
performance and greater responsiveness by public officials and 
programs.

If government is to effectively address these trends, it cannot accept 
all of its existing programs, policies, and activities as "givens." 
Many of our programs were designed decades ago to address earlier 
challenges, informed by labor markets, security conditions, economic 
theories, life expectancies, health conditions, organizational 
structures, technologies, transportation systems, management models, 
and compensation strategies of prior eras. Outmoded commitments and 
operations constitute an encumbrance on the future that can erode the 
capacity of the nation to better align its government with the needs 
and demands of a changing world and society.

Accordingly, rethinking the base of existing federal spending and tax 
programs, policies, and activities by reviewing their results and 
testing their continued relevance and relative priority for a changing 
society is an important step in this process of fiscal responsibility 
and national renewal. A periodic reexamination offers the prospect of 
addressing emerging needs by weeding out programs and policies that are 
outdated or ineffective. Those programs and policies that remain 
relevant could be updated and modernized by improving their targeting 
and efficiency through such actions as redesigning allocation and cost-
sharing provisions, consolidating facilities and programs, and 
streamlining and reengineering operations and processes. The tax 
policies and programs financing the federal budget can also be reviewed 
with an eye toward both the overall level of revenues that should be 
raised as well as the mix of taxes that are used.

We recognize that this will not be a simple or easy process. Such a 
process reverses the focus of traditional incremental reviews, where 
disproportionate scrutiny is given to proposals for new programs or 
activities, not those that are already in the base. Taking a hard look 
at existing programs and carefully reconsidering their goals and their 
financing is a challenging task. Reforming programs and activities 
leads to winners and losers, notwithstanding demonstrated shortfalls in 
performance and design. Given prior experience and political 
tendencies, there is little real "low-hanging fruit" in the federal 
budget. Moreover, given the wide range of programs and issues covered, 
the process of rethinking government programs and activities may take a 
generation to unfold.

We are convinced, however, that reexamining the base offers compelling 
opportunities to both redress our current and projected fiscal 
imbalance while better positioning government to meet the new 
challenges changing expectations of this new century. In this regard, 
the management and performance reforms enacted by the Congress in the 
past 15 years have provided new tools to gain insight into the 
financial, program, and management performance of federal agencies and 
activities. The information being produced as a result can provide a 
strong basis to support the review and reprioritization being suggested 
in this report.

GAO's 21st Century Questions:

This report is intended to help the Congress address current fiscal 
demands as well as future fiscal challenges by providing a series of 
illustrative questions that could help support a fundamental and broad-
based reexamination initiative. Drawing on GAO's institutional 
knowledge and extensive program evaluation and performance assessment 
work for the Congress, we present over 200 specific 21st century 
questions illustrating the types of hard choices our nation needs to 
face as it reexamines what the federal government does and how it does 
it.

In developing the 21st century questions, we reflected on the inventory 
of future forces working to reshape American society, our place in the 
world, and the various roles and responsibilities of the federal 
government that were presented in GAO's latest Strategic Plan for 
Serving the Congress and the Nation (2004-2009). This plan outlines 
specific trends, as described above, that have no geopolitical 
boundaries and are expected to challenge what the federal government 
does and how it does business in the future. These trends, along with 
GAO's institutional knowledge and issued work, helped us identify those 
federal program areas, activities and policy frameworks whose 
relevance, rationale, and relative priority are likely to be tested in 
the future. This process was carried out in 12 broad areas, discussed 
in section 2. We also drew on the collective knowledge and experiences 
of many others familiar with the various program areas discussed in the 
next section. We made a concerted effort to solicit input from within 
the accountability community, including various inspectors general as 
well as consult with various congressional members, officials, and 
staff.

The specific questions raised for each area were informed by a set of 
generic evaluation criteria that are useful to evaluate any government 
program, policy, function or activity. The criteria are framed as 
questions in table 1 and are designed to address the legislative basis 
for the program, its purpose and continued relevance, its effectiveness 
in achieving goals and outcomes, its efficiency and targeting, its 
affordability, its sustainability, and its management. We used these 
criteria to generate specific 21st century questions about those 
programs and priorities already identified. The resultant 21st century 
questions illustrate the kinds of issues that a reexamination and 
review initiative needs to address.

Table 1: Illustrative Generic Reexamination Criteria:

Relevance of purpose and the federal role; Does it relate to an issue 
of nationwide interest? If so, is a federal role warranted based on the 
likely failure of private markets or state and local governments to 
address the underlying problem or concern? Does it encourage or 
discourage these other sectors from investing their own resources to 
address the problem?

Have there been significant changes in the country or the world that 
relate to the reason for initiating it?

If the answer to the last question is 'yes,' should the activity be 
changed or terminated, and if so, how? If the answer is unclear as to 
whether changes make it no longer necessary, then ask, when, if ever, 
will there no longer be a need for a federal role? In addition, ask, 
"would we enact it the same way if we were starting over today?" Has it 
been subject to comprehensive review, reassessment, and re-
prioritization by a qualified and independent entity? If so, when? Have 
there been significant changes since then? If so, is another review 
called for?

Is the current mission fully consistent with the initial or updated 
statutory mission (e.g., no significant mission creep or morphing)? Is 
the program, policy, function, or activity a direct result of specific 
legislation?

Measuring success; How does it measure success? Are the measures 
reasonable and consistent with the applicable statutory purpose? Are 
the measures outcome-based, and are all applicable costs and benefits 
being considered? If not, what is being done to do so?

If there are outcome-based measures, how successful is it based on 
these measures?

Targeting benefits; Is it well targeted to those with the greatest 
needs and the least capacity to meet those needs?

Affordability and cost effectiveness; Is it affordable and financially 
sustainable over the longer term, given known cost trends, risks, and 
future fiscal imbalances?

Is it using the most cost-effective or net beneficial approaches when 
compared to other tools and program designs?

What would be the likely consequences of eliminating the program, 
policy, function, or activity? What would be the likely implications if 
its total funding was cut by 25 percent?

Best practices; If it fares well after considering all of these 
questions, is the responsible entity employing prevailing best 
practices to discharge its responsibilities and achieve its mission 
(e.g., strategic planning, organizational alignment, human capital 
strategy, financial management, technology management, acquisitions/
sourcing strategy, change management, knowledge management, client/
customer service, risk management)?

Source: GAO.

[End of table]

When taken together, these questions can usefully illustrate the 
breadth of issues that can be addressed through a systematic 
reexamination process. Importantly, the questions cover the three major 
areas--discretionary spending, mandatory spending including 
entitlements, and tax policies.

[End of section]

Chapter 2: Twelve Reexamination Areas: 

This section provides short narratives describing the emerging forces 
prompting the need to reexamine the goals, designs, and strategies 
underlying the portfolio of programs in each of 12 broad reexamination 
areas. As shown in figure 4, the reexamination areas correspond with 
major federal missions and governmentwide processes.

Figure 4: Twelve Reexamination Areas:

Mission Areas: 
Defense; 
Education & Employment; 
Financial Regulation & Housing; 
Health Care; 
Homeland Security; 
International Affairs; 
Natural Resources, Energy & Environment; 
Retirement & Disability; 
Science & Technology; 
Transportation.

Crosscutting Areas: Governance; 
Crosscutting Areas: Tax System.

Source: GAO.

[End of figure]

For each area, a summary of challenges and illustrative 21st century 
reexamination questions demonstrate the type of review needed. 
Questions are neither exhaustive nor representative of the highest 
priorities. Nor are they intended to prescribe solutions or constitute 
GAO findings regarding the program areas they discuss. They do, 
however, provide examples of the types of questions--based on current 
trends, future fiscal realities, and GAO's work and expertise--that a 
fundamental reexamination of the base of federal government policies, 
programs, functions, and activities could address for each of the 12 
areas. The questions were selected for their fiscal significance, their 
balance between a strategic and operational level, and their 
relationship to GAO's strategic plan for serving the Congress.

National Defense Challenges for the 21st Century:

In the past 15 years, the world has experienced dramatic changes in the 
overall security environment, with the focus shifting from conventional 
threats posed during the Cold War era to more unconventional and 
asymmetric threats evidenced in the events of September 11, 2001. To 
respond to these events and the ensuing global war on terrorism, the 
Department of Defense (DOD) has been given a significant infusion of 
funds, with an annual appropriation totaling over $400 billion for 
fiscal year 2005 and supplemental funding for homeland defense and 
overseas military operations approximating $190 billion over the past 3 
fiscal years. In addition to providing additional resources to enhance 
war-fighting capabilities, the Congress has also taken steps to fund 
enhanced compensation and benefit programs for active duty and reserve 
personnel.

As DOD seeks to meet the demands of the new security environment, it 
continues to bear the costs of the past by implicitly maintaining or 
continuing to pursue many programs and practices from the Cold War era. 
In this context, the magnitude of funding and potential for current 
investments and operations to turn into long-term financial commitments 
are prompting real questions about the affordability and sustainability 
of the rate of growth in defense spending. For example, in September 
2004, the Congressional Budget Office reported that carrying out 
current defense plans would require annual funding to be sustained over 
the longer term at higher real (inflation-adjusted) levels than have 
occurred since 1980, excluding supplemental appropriations. Many 
factors should be considered, including reassessing the base and rate 
of growth in defense and related spending. Failure to do so will result 
in significant waste today and opportunity costs over time. Moreover, 
the recent 9/11 Commission Report suggests that changes are needed 
across the government to strengthen national security institutions and 
move beyond the legacy of the Cold War, including reforming the 
nation's intelligence organizations and capabilities. As such, meeting 
the nation's defense needs in the 21st century may prompt decision 
makers to reexamine fundamental aspects of the nation's national 
security programs such as how DOD plans and budgets, organizes its 
forces, manages the total force, acquires new capabilities, positions 
our forces, and considers alternatives to past approaches.

In addition to maintaining readiness and sustaining the current force, 
DOD is faced with identifying capabilities, including critical 
technologies, needed to meet the demands of the new security 
environment, as well as determining the best way to provide those 
capabilities and retain the U.S. military's technological superiority. 
Striking an affordable balance between current and future needs will be 
an ongoing challenge, particularly with the federal government's 
current and projected fiscal imbalance. The upcoming quadrennial 
defense review will provide an opportunity for DOD to move beyond the 
legacy of the past, assess the capabilities required to meet current, 
emerging and future threats, establish near-term and long-term 
priorities, and adopt realistic funding plans.

To adapt to the new security environment, DOD is currently embarked on 
an effort to transform its war-fighting capabilities and how it does 
business to support the war fighter. DOD's civilian and military 
leaders appear committed to reform; however, the department faces 
significant challenges in accomplishing its transformation goals.

The following challenges and illustrative questions provide a framework 
for thinking about these issues in the future.

To successfully transform itself, DOD must overcome cultural resistance 
to change and the inertia of various organizations, policies, and 
practices that became well rooted in the Cold War era. Longstanding 
organizational and budgetary problems need to be addressed, such as the 
existence of stove-piped or siloed organizations, the involvement of 
many layers and players involved in decision-making, the allocation of 
budget allocations on a proportional rather than strategic basis among 
the military services, and the use of traditional approaches to basing 
forces and replacing or enhancing capabilities (typically on a platform 
by platform rather than a joint basis). DOD's current approach to 
planning and budgeting often results in a mismatch between programs and 
budgets. And it does not always fully consider long-term resource 
implications and the opportunity cost of selecting one alternative over 
another.

How should the historical allocation of resources across services and 
programs be changed to reflect the results of a forward-looking 
comprehensive threat/risk assessment as part of DOD's capabilities-
based approach to determining defense needs?

Can DOD afford to invest in transformational systems such as the Future 
Combat System and national missile defense at the same time it 
continues to pursue large investments in legacy systems such as the FA-
22 and new systems like the Joint Strike Fighter, especially if cost 
growth and schedule delays continue at historical rates?

Are sufficient investments being made in capabilities that cross 
service lines, such as joint communications and interoperable systems? 
For example, is the Global Information Grid well enough defined and 
understood to enable sound investments to be made in its key components 
such as the Transformational Satellite?

Given the global availability of rapidly advancing technology, does DOD 
need to reconsider its approach for identifying critical technologies 
and protecting those technologies from being exploited in order to 
maintain its military superiority?

The global war on terrorism has required the military forces to operate 
differently from the ways it was organized, equipped, staffed and 
deployed to operate under post-Cold War planning assumptions based on 
regional threats. Current operations have required significant numbers 
of ready forces, both active and reserve, to be mobilized for long 
periods and created demand for certain skills, such as military police, 
that exceeds the available supply. While DOD has taken steps to meet 
short term operational needs, it has not yet determined how it will 
meet the longer term challenges of reorganizing its forces and 
identifying the capabilities it will need to protect the country from 
current, emerging, and future conventional and unconventional security 
threats.

Do the role, size, and structure of forces and capabilities comprising 
the strategic triad need to be adjusted to meet the challenges of 
providing strategic deterrence in the new security and fiscal 
environment?

Are the active and reserve components appropriately sized, structured, 
and used to meet the current and future national security demands? Is 
the current business model sustainable for the reserve component?

What is the appropriate role for contractors, especially in forward 
deployment and conflict areas, to maximize the capabilities of military 
and contract personnel and to ensure effective integration of 
contractors into military operations and support cost-effectively?

Does DOD's plan for realigning forces at overseas locations and 
redeploying some forces from overseas to stateside locations provide a 
significantly improved capability to respond to global threats in the 
new security environment considering diplomatic, operational, and cost 
considerations?

DOD's military personnel outlays are large and growing, increasing from 
about $76 billion to an estimated $109 billion between fiscal years 
2000 and 2005. In fact, personnel costs comprise the second largest 
component of DOD's total fiscal year 2005 budget. The growth in 
military personnel costs has been fueled in part by increases in basic 
pay, housing allowances, recruitment and retention bonuses, incentive 
pays and allowances, and other special pays. Furthermore, DOD's costs 
to provide benefits, such as health care, have continued to spiral 
upward. Expanded health care to reservists and their families and 
retirees has been the primary cost driver in growing benefits costs. 
Also, a large portion of DOD's compensation-related costs is in the 
form of benefits and deferred compensations. In some cases, such 
benefits exceeded those offered by private sector organizations. As the 
total and per capita cost to DOD for military pay and benefits grows, 
questions arise as to whether DOD has the right pay and compensation 
strategies to cost-effectively sustain the total force in the future. 
Regarding its civilian workforce, DOD is preparing to implement a 
congressionally authorized personnel system, which will change the way 
civilian employees are hired, assigned, compensated, promoted, 
disciplined, and, if necessary, fired.

Given the growing encumbrance of pay and benefit costs, especially 
health care, within DOD's budget, how might DOD's recruitment, 
retention, and compensation strategies (including benefit programs) be 
reexamined and revised to ensure that DOD maintains a total military 
and civilian workforce with the mix of skills needed to execute the 
national security strategy while using resources in a more targeted, 
evidence-based, and cost-effective manner?

Is DOD pursuing the design and implementation of its new national 
security personnel system initiatives in a manner that maximizes the 
chance of success?

Given its size and mission, DOD is one of the largest and most complex 
organizations to manage in the world. While the unparalleled combat 
effectiveness of U.S. forces has been well evidenced in the Persian 
Gulf and elsewhere, DOD has not been effective in managing its ongoing 
business operations. Complicating DOD's efforts are numerous systems 
problems and a range of other longstanding weaknesses in the key 
business areas of strategic planning and budgeting, human capital 
management, infrastructure, supply chain management, financial 
management, information technology, weapons systems acquisition, and 
contracting. For example, 8 individual items on GAO's list of high-risk 
government operations and several of the governmentwide high-risk areas 
apply to key DOD business operations. These problems that continue to 
result in substantial waste and inefficiency adversely affect mission 
performance and result in a lack of transparency and accountability.

Does DOD need to create a senior management position responsible and 
accountable for taking a strategic, integrated, and sustained approach 
to managing the day-to-day business operations of the department, 
including ongoing efforts to transform DOD's business operations and 
address the many related and longstanding high-risk areas? Should 
specific qualifications requirements and periods of tenure or terms be 
established for selected DOD positions related to key business 
operations?

Are current organizations aligned and empowered to meet the demands of 
the new security environment as efficiently as possible? What kinds of 
economies of scale and improvements in delivery of support services 
would result from combining, realigning, or otherwise changing selected 
support functions (e.g., combat support, training, logistics, 
procurement, infrastructure, or health care delivery)?

Education and Employment Challenges for the 21st Century:

The shift to a global economy and changes in technology, the nature of 
work, and workforce demographics are challenging customary federal 
approaches to education and employment. The global economy and advances 
in technology enable work to be shifted to other countries or render 
some jobs obsolete. If we are to compete effectively in a growing, 
knowledge-based economy, our educational system must equip children 
with appropriate skills to meet high standards and provide means for 
adults to continue to learn new skills and enhance their existing 
abilities. This will require ensuring that diverse populations have 
access to postsecondary, vocational, and adult education. As an 
increasingly volatile job market creates and eliminates jobs, federal 
programs that train new workers or support workers who lose their jobs 
must also be capable of responding to sudden changes in the economy. 
Federal efforts to protect workers must account for changes in the 
nature of work: membership in organized labor has declined, traditional 
work arrangements are giving way to alternatives such as temporary 
employment and teleworking, and lifelong service with a single employer 
is becoming much less common.

Changes in workforce demographics pose additional challenges. The U.S. 
labor force has more than doubled in the past 50 years but is now 
growing at a much slower rate. Women, who helped fuel past workforce 
growth, are expected to join the workforce at a constant rate, and baby 
boomers are likely to begin retiring in large numbers in less than 5 
years. As a result, those leaving jobs are expected to outnumber those 
seeking jobs in certain industries. The tighter job market will 
challenge federal efforts to ensure that employers have enough workers 
with the right skills to help promote economic growth. This trend also 
underscores the importance of addressing current pension, disability, 
health, and immigration policies. With regard to the latter, it will be 
important to consider whether the number of visas allowed for both 
employment and education may affect long-term competitiveness, and our 
ability to build bridges with other nations, their people, and their 
cultures while addressing our national and homeland security needs.

The following challenges and illustrative questions provide a framework 
for thinking about these issues in the future.

With rapid advances in technology, increases in global trade, and the 
availability of highly educated foreign workers, U.S. workers 
increasingly need advanced skills to remain competitive. Determining 
what skills workers need and providing the right opportunities for 
acquiring those skills will depend, in part, on building partnerships 
among the multiple federal agencies and other key nonfederal players 
that support employment training, industries, and employers. In 
developing these partnerships, avoiding redundancy and ensuring 
sufficient numbers of workers with the right skills will be crucial. 
This challenge may become more difficult to address if labor markets 
tighten over the next 20 years as the baby boom generation retires, 
labor force participation rates for women remain flat, and immigrants 
face potential difficulties in obtaining visas given heightened 
security concerns. These shortages will have implications for the 
broader economy and budget as well as the Department of Labor's efforts 
to ensure that employers have sufficient numbers of workers with the 
right skills.

Should federally funded training programs operated across multiple 
federal agencies--9 federal agencies administer 44 such programs--be 
better integrated and restructured in order to increase their cost 
effectiveness?

How can existing policies and programs be reformed to ensure that 
employers have sufficient numbers of workers with the right skills (for 
example, modifying pension policies and regulations so that workers can 
work part-time and still receive a pension)?

Many of the federal government's higher education policy tools--
especially its grant and loan programs--were designed decades ago to 
meet the needs of traditional students in traditional academic 
settings. However, they may not be well suited to an increasingly 
diverse population that includes working adults, single parents, 
students with disabilities, and increasing numbers of minorities. In 
addition, these tools may not be structured to take advantage of the 
potential for cost savings or widening access provided by distance 
education technologies. The adoption of tax policy tools in the last 
decade has resulted in some of these policies working at cross-purposes 
to traditional grant and loan programs. For example, under the Higher 
Education Act, students seeking federal grants and loans are penalized 
for having saved funds to pay for their education, while the Internal 
Revenue Code has encouraged saving by exempting individuals from 
federal income taxation on interest income used to pay for 
postsecondary education.

Is there a need for better coordination--or integration--among higher 
education policy tools (such as grants, loans, and tax preferences) or 
periodic examination of those policy tools that are not routinely 
subject to periodic reauthorization or appropriation, such as the Hope 
and Lifetime Learning tax credits, for which tax filers claimed nearly 
$5 billion in 2002?

Higher education is increasingly global in nature as students study 
outside their country of origin with greater frequency and universities 
have become multinational institutions. While the United States has 
long been the global leader in higher education--and the most desired 
destination of foreign students seeking higher education--recent 
graduate enrollments have fallen, and institutions in other countries 
have captured an increasing share of the international student 
population. The adoption of tighter security requirements has widely 
been argued as contributing to the decreased enrollments of foreign 
students in the United States.

How can the United States balance immigration policies--such as worker 
and student visa programs--to address employers' need for workers with 
particular skills, particularly math and science, the nation's need to 
maintain global leadership in areas such as science and higher 
education, and the nation's homeland security requirements?

The large achievement gap between students of different backgrounds has 
persisted for four decades despite a significant federal investment in 
educating disadvantaged students during that time. Many disadvantaged 
children start school with fewer skills than their more advantaged 
peers. Research shows that early intervention helps children succeed in 
school and is particularly effective for the most disadvantaged 
students. It is less clear whether current levels of coordination among 
the myriad federal and state programs efficiently produce desired 
results for particular subgroups of children. For example, systematic 
information is not available on the total number of preschool children 
receiving subsidies through various federal programs and/or 
participating in state-funded preschool. This prevents a comprehensive 
assessment of how fully the combination of federal and state programs 
addresses preschoolers' needs. Recent legislative initiatives, such as 
the No Child Left Behind Act with its emphasis on accountability, may 
help change this trend and could be aided by retargeting of federal 
investments. The Elementary and Secondary Education Act was passed in 
1965 to provide assistance to states in educating disadvantaged 
students through Title I, the largest federal program for elementary 
and secondary education. However, since about 90 percent of school 
districts receive these Title I funds to improve the education of 
disadvantaged students, including a growing number with limited English 
proficiency, an opportunity exists to improve targeting of funds to 
school districts having the greatest number and percentage of 
disadvantaged children.

Is there a need to reexamine the federal investment for early childhood 
programs (e.g., funds provided under the Child Care and Development 
Block grant and certain expenditures under Title I) to better 
coordinate them and support state and local efforts to prepare 
disadvantaged children to succeed in school?

In light of the increasing diversity of the nation's school age 
population, should the Department of Education reexamine whether there 
are opportunities to better target limited resources such as Title I 
funds so that the needs of disadvantaged students including those with 
limited English proficiency are better addressed?

Federal agencies that help employers provide safe, healthy, and 
productive workplaces, such as the Occupational Safety and Health 
Agency (OSHA), will have to adapt to both changes in workforce 
demographics--the rising proportion of older workers in general and 
immigrant workers in some occupations--and the rise of nontraditional 
workplace arrangements, such as increased use of independent 
contractors not covered by most worker protection laws.

Do recent changes in the labor force makeup and work arrangements--such 
as the growing use of telework and the increasing number of independent 
contractors--warrant a reconsideration of the Department of Labor's 
focus, such as through OSHA, on traditional workplaces as part of its 
efforts to ensure worker safety?

Financial Regulation and Housing Challenges for the 21st Century:

Increased global interdependency and rapid technological advancement in 
the financial services industry pose significant challenges to U.S. 
regulatory institutions charged with ensuring well-functioning markets 
and to government agencies charged with managing loan guarantee or 
mortgage insurance programs that, to some extent, compete with the 
private sector. Globalization has become increasingly prevalent as 
technology allows money to be moved around the world literally at the 
push of a button, challenging regulators whose authority is defined by 
national borders. Households can invest in companies worldwide and can 
be defrauded or have their identities stolen from almost anywhere. The 
financial services sector has been and continues to be one of the most 
technologically sophisticated, whether in adapting technology to new 
uses or providing incentives to develop state-of-the-art products to 
solve a range of risk management problems. Lastly, immigration 
patterns, demographic trends, and a range of quality-of-life issues are 
important factors pushing up housing prices and related rents in 
certain regions and local real estate markets, which quickly outpace 
wage growth and put increasing strain on housing affordability in those 
areas.

The following challenges and illustrative questions provide a framework 
for thinking about these issues in the future.

The present federal financial regulatory structure evolved largely as a 
result of periodic ad hoc responses to crises such as financial panics. 
In the last few decades, however, the financial services industry, 
especially as represented by the largest firms, has evolved, becoming 
more global, more concentrated, complex, and consolidated across 
sectors, and increasingly converging in terms of product offerings. 
Multiple specialized regulators bring critical skills to bear in their 
areas of expertise but have difficulty seeing the total risk exposure 
at large conglomerate firms or identifying and preemptively responding 
to risks that cross industry lines.

Is it time to modernize our financial regulatory system by 
consolidating various federal regulatory agencies to promote a more 
coherent and integrated structure, specify goals more clearly, and 
provide sufficient resources along with the flexibility and incentives 
to prospectively target resources to risk? To what extent can 
specialized or consolidated regulators effectively address companywide 
and systemic risks that arise from the potential failure of large, 
diversified financial firms?

The need to improve consumers' financial literacy--their ability to 
make informed judgments and effective decisions about the management of 
money and credit--has become increasingly important. Consumers are 
faced with an increasingly complicated array of options for managing 
their personal finances and selecting investments and credit products. 
In addition, available data show that many consumers are not adequately 
saving for their retirement, despite concerns about the adequacy of 
Social Security, private pensions, and retiree health benefits. At the 
same time, unsecured consumer debt (especially credit card debt) has 
grown rapidly in the past two decades, bankruptcy filings have 
increased substantially, and predatory lending has become a growing 
concern.

What role should the federal government take in improving financial 
literacy among consumers, and what are the most effective strategies 
for doing so? Where are there gaps or overlaps in federal financial 
literacy programs? How many agencies should be involved? Can 
disclosures be improved and what are the limitations of improved 
disclosures in protecting consumers?

Government-sponsored enterprises (GSE) were created throughout the 20TH 
century to address perceived market imperfections in financing housing, 
agriculture, and higher education. With the federal benefits they have 
been provided, the GSEs have linked local lending markets and national 
capital markets. Two of the housing GSEs, Fannie Mae and Freddie Mac, 
have played a critical role in establishing a nationwide secondary 
mortgage market and increasing efficiency through greater 
standardization of mortgage products. However, with rapid developments 
spurred by technical change, the private marketplace has evolved 
dramatically. While one GSE, Sallie Mae, has undergone privatization, 
the other GSEs have used their special federally provided status and 
related benefits to expand into new activities. These entities are also 
taking on more risk and using more sophisticated and less transparent 
risk management strategies. The public benefits and potential risks to 
taxpayers from such expansion, as well as from the continued existence 
of the GSEs, are a subject of great debate.

Is the current federal GSE regulatory framework appropriately 
structured, and do the regulators have the necessary authorities to 
address the risks of the GSEs? For example, should the Office of 
Federal Housing Enterprise Oversight be combined with the other housing 
GSE regulators into one comprehensive housing GSE regulator? What is 
the GSE track record in achieving homeownership goals, especially for 
low-income and protected groups? Do the GSEs continue to serve an 
important public policy purpose? Should their mission focus be 
restrained to limit expansion into new activities, or adjusted in any 
way? Should they be privatized?

New information-based technologies are transforming the credit markets 
at a rapid pace. Private sector financial institutions have been using 
credit scoring and other tools to make finer distinctions among 
potential risks, allowing them to measure and price risk more 
effectively. Government lenders, loan guarantors, and insurers have 
been slower to adopt similar tools for their decision making. While 
federal credit programs can adopt some of the new technologies to 
better measure risk, lags in such adoption increase the prospect of 
adverse selection--if the private sector and GSEs take a larger share 
of lower risk customers, government programs will be left to take on 
the less well understood and potentially riskier remainder.

Do federal lending programs need to be reexamined to address the 
increased risks and potential costs to the government? For example, 
should the Federal Housing Administration (FHA) continue to fully 
guarantee mortgages or move to a partial guarantee? If the cost of 
credit is linked more closely with risk, what role might the federal 
government play in reducing the cost of borrowing for those borrowers 
with little or no credit history? For example, should FHA focus more of 
its activities on those with little or no credit history?

Homeownership continues to be one of the primary means for many 
families to accumulate wealth in this country, and is also thought to 
contribute to stable and vital communities. While the overall 
homeownership rate is at a historic high, in certain subpopulations the 
rate lags behind. Numerous tools have been applied to increase home 
ownership in the United States. Some of these tools are broadly based, 
such as the tax deduction for home mortgage interest and GSEs and their 
effect on mortgage interest rates. Both of these attract capital away 
from other sectors of the economy and toward the housing sector. Other 
tools are more narrowly focused on particular areas or populations, 
such as the FHA mortgage insurance program and other loan programs 
administered by the U.S. Department of Housing and Urban Development 
(HUD) and USDA's Rural Housing Service (RHS). In addition, lenders and 
others have developed mortgage products that permit households to 
become homeowners sooner than would be the case otherwise.

To what extent do the tools and incentives increase spending on housing 
rather than promote affordable housing? Can the tools and incentives 
provided to homeownership be better targeted toward increasing home 
ownership among selected groups with less capacity to access credit 
markets? For example, should the cap on the mortgage interest deduction 
be more precisely targeted?

What are the potential risks of recent homeownership initiatives for 
borrowers, financial institutions, and taxpayers? Are the recent 
increases in the home ownership rate sustainable; i.e., how will 
families and financial markets cope with increases in mortgage interest 
rates and slower growth in home equity?

A number of programs provided by HUD, RHS, and other agencies, as well 
as other tools and incentives, are designed to provide decent rental 
housing affordable to target populations. Over the years, the emphasis 
of these incentives has shifted from the supply side (production 
subsidies) to the demand side (vouchers). In recent years, most 
construction of federally financed affordable rental housing has 
resulted from tax provisions. In addition, a number of federally 
assisted units are eligible to leave some older subsidy programs in the 
next two decades. Finally, the costs of HUD's housing choice voucher 
program continue to grow, driven in part by the difference between the 
eligible population's income growth and the cost of privately owned 
rental housing; this gap is increasing rapidly in certain markets. HUD 
and its public housing agency partners have struggled to balance the 
competing demands of maintaining assistance for a specified number of 
households while controlling the increasing costs of doing so.

What are the advantages and disadvantages of demand-based subsidies 
(vouchers) versus supply-based incentives (production or financing 
subsidies) for providing affordable housing to target populations? To 
what extent are these advantages and disadvantages dependent on local 
housing market conditions? To the extent that market forces drive the 
housing voucher's program cost, how might the Congress best reconcile 
the competing demands of continued assistance to a targeted number of 
households while addressing the long-term budget implications?

Health Care Challenges for the 21st Century:

Between 1992 and 2002, overall health care spending rose from $827 
billion to about $1.6 trillion; it is projected to nearly double to 
$3.1 trillion in the following decade. This price tag results, in part, 
from advances in expensive medical technology, including new drug 
therapies, and the increased use of high-cost services and procedures. 
Many policymakers, industry experts, and medical practitioners contend 
that the U.S. health care system--in both the public and private 
sectors--is in crisis. In the public sector, long-term simulations of 
the federal budget show a large and growing structural deficit 
resulting, in large part, from known demographic trends and rising 
health care costs. Since Medicare spending is driven by both these 
factors, its burden on the budget and the economy will balloon--
tripling by 2035 and quintupling by 2075. One of the fastest-growing 
segments of health care in both the public and private sectors is 
prescription drugs. In 2004 the Medicare Trustees estimated that over a 
75-year period the federal share of the new Medicare benefit would be 
$8.1 trillion in current dollar terms. In the private sector, employers 
and other private purchasers of health care services find that the 
soaring cost of health insurance premiums poses a threat to their 
competitive position in an increasingly global market, often 
contributing to company decisions to outsource American jobs overseas, 
to hire part-time rather than full-time workers, and to minimize cash 
wage increases and pension costs.

Despite the significant share of the economy consumed by health care, 
U.S. health outcomes continue to lag behind other industrialized 
nations. The United States now spends over 15 percent of its gross 
domestic product on health care--far more than other major 
industrialized nations. Yet relative to these nations, the United 
States performs below par in such measures as rates of infant 
mortality, life expectancy, and premature and preventable deaths. 
Moreover, evidence suggests that the American people are not getting 
the best value for their health care dollars. Studies show that quality 
is uneven across the nation, with a large share of patients not 
receiving clinically proven, effective treatments. At the same time, 
access to basic health care coverage remains an elusive goal for nearly 
45 million Americans without insurance, with a growing percentage of 
workers losing their employer-based coverage. Many more millions of 
Americans are underinsured or have lost some of the benefits their 
health plans previously afforded.

The following challenges and illustrative questions provide a framework 
for thinking about these issues in the future.

Defining differences between needs, wants, affordability, and 
sustainability is fundamental to rethinking the design of our current 
health care system. Americans with good health insurance have access to 
an array of advanced technology procedures at world-class health 
facilities, but clinical studies suggest that not all of this care is 
desirable or needed. Rising health costs are compelling both public and 
private payers to examine whether these procedures can continue to be 
financed without better accounting for their clinical effectiveness. 
Additional health care spending over time will draw resources away from 
other economic sectors and could have adverse economic implications for 
all levels of governments, individuals, and other private purchasers of 
health care.

How can we perform a systematic reexamination of our current health 
care system? For example, could public and private entities work 
jointly to establish formal reexamination processes that would (1) 
define and update as needed a minimum core of essential health care 
services, (2) ensure that all Americans have access to the defined 
minimum core services, (3) allocate responsibility for financing these 
services among such entities as government, employers, and individuals, 
and (4) provide the opportunity for individuals to obtain additional 
services at their discretion and cost?

The impact that federal health care outlays have on the federal budget 
cannot be overstated. Medicare and Medicaid--entitlement programs for 
which federal spending is mandatory--are consuming increasing shares of 
the federal budget and shrinking the government's flexibility to pay 
for other federal obligations, such as national and homeland security, 
environmental cleanup, and disaster assistance. Today, Medicare and 
Medicaid's combined share of the federal budget--at 20 percent--has 
more than doubled in the last 2 decades. Moveover, long-term care for 
chronic illness will be a growing challenge as the aged population 
continues to grow. In addition, health care expenditures for the 
Departments of Defense (DOD) and Veterans Affairs (VA) are increasing. 
DOD's health care spending has gone from about $12 billion in 1990 to 
about $26 billion in 2003--in part, to meet additional demand resulting 
from program eligibility expansions for military retirees, reservists, 
and the dependents of those 2 groups and for the increased needs of 
active duty personnel involved in conflicts in Iraq, Bosnia, and 
Afghanistan. VA's expenditures have also grown--from about $12 billion 
in 1990 to about $24 billion in 2003--as an increasing number of 
veterans look to the VA to supply their health care needs.

How can we make our current Medicare and Medicaid programs sustainable? 
For example, should the eligibility requirements (e.g., age, income 
requirements) for these programs be modified?

How can the federal government best leverage its purchasing power for 
health care products and services?

What options are there for rethinking the federal, state, and private 
insurance roles in financing long-term care?

How can the benefits, eligibility, and health delivery systems of VA 
and DOD be optimally structured to ensure quality and efficiency? For 
example, should changes in eligibility and the benefit structure of VA 
and the military health system be considered?

With billions of federal dollars going to DOD and VA for health care, 
what options are available to reduce spending growth through increased 
collaboration in, and integration of, health care delivery between 
those two agencies?

In the past several decades, the responsibility for financing health 
care has shifted away from the individual patient. In 1962, nearly 
half--46 percent--of health care spending was financed by individuals. 
The rest was financed by a combination of private health insurance and 
public programs. By 2002, the amount of health care spending financed 
by individuals' out-of-pocket spending at the point of service was 
estimated to have dropped to 14 percent. Tax preferences for insured 
individuals and their employers have also shifted some of the financial 
burden for private health care to all taxpayers. Tax policies permit 
the value of employees' health insurance premiums to be excluded from 
the calculation of their taxable earnings and exclude the value of the 
premium from the employers' calculation of payroll taxes for both 
themselves and employees. Health savings accounts and other consumer-
directed plans, which shift more of health financing to the individual, 
also have tax preferences. These tax exclusions represent a significant 
source of forgone federal revenue and work at cross-purposes to the 
goal of moderating health care spending.

How can health care tax incentives be designed to encourage employers 
and employees to better control health care cost? For example, should 
tax preferences for health care be designed to cap the health insurance 
premium amount that can be excluded from an individual's taxable 
income?

What reforms will encourage the private health insurance market to 
sufficiently pool risk and offer alternative levels of affordable 
coverage to ensure that all Americans have access to essential health 
care coverage? For example, are there alternatives to employer-based 
coverage through professional organizations, trade associations, or 
other entities?

The variation by geographic region in Americans' use of health care 
services suggests, in part, quality and efficiency problems. Studies of 
Medicare patients in different geographic areas have found that despite 
receiving a greater volume of care, patients in higher use areas did 
not have better health outcomes or experience greater satisfaction with 
care than those living in lower use areas. Public and private payers 
are experimenting with payment reforms designed to foster the delivery 
of care that is clinically proven to be effective. Ideally, identifying 
and rewarding efficient providers and encouraging inefficient providers 
to emulate best practices will result in better value for the dollars 
spent on care. However, implementing performance-based payment reforms, 
among other strategies, on a systemwide basis, will depend on system 
components that are not currently in place nationwide--such as 
compatible information systems to facilitate the production and 
dissemination of medical outcome data, safeguards to insure the privacy 
of electronic medical records, improved transparency through increased 
measurement and reporting efforts, and incentives to encourage adoption 
of evidence-based practices. These same system components would be 
required to develop medical practice standards, which could serve as 
the underpinning for effective medical malpractice reform. Policymakers 
would need to consider the extent to which federal leadership could 
foster these system components.

How can technology be leveraged to reduce costs and enhance quality 
while protecting patient privacy?

How can industry standards for acceptable care be established and 
payment reforms be designed to bring about reductions in unwarranted 
medical practice variation? For example, what can or should the federal 
government do to promote uniform standards of practice for selected 
procedures and illnesses?

How can a medical information infrastructure be fostered, complete with 
privacy safeguards, that will help reduce the occurrence of medical 
errors and malpractice litigation and will furnish health outcomes data 
to better inform consumer choice?

What reforms will help control health care costs associated with 
medical liability without undercutting provider accountability?

The attacks of September 11, 2001, and subsequent anthrax incidents--as 
well as disease outbreaks, such as the West Nile virus and SARS--have 
elevated to priority status concerns about the quality and availability 
of the nation's public health resources at the federal, state, and 
local levels. In recent years, it has been apparent that, despite 
improvements, the nation's public health infrastructure remains too 
fragmented and uncoordinated and lacks the capacity to effectively 
manage a large epidemic or bioterrorist attack. Since fiscal year 2002, 
substantial federal funding has gone to state and local governments to 
improve disease surveillance systems, laboratory capacity, 
communication systems, and workforces. Federal funds directed at basic 
biomedical research to improve treatment and vaccinations for 
infectious diseases caused by biological agents have also been 
substantial. In an era of growing demand and shrinking resources, 
however, it may be prudent to determine how best to target the nation's 
public health dollars.

What are the most effective strategies for tracking emerging infectious 
diseases and targeting resources to prepare for treating these 
diseases?

How can our international agreements encourage the equitable sharing of 
financial responsibility for developing pharmaceuticals and other 
medical technologies and eradicating AIDS and other worldwide disease 
outbreaks? For example, what can be done to facilitate more 
international burden-sharing for prescription drug research and 
development currently financed through public expenditures and higher 
U.S. prices?

Global interdependence and efficient transportation systems have 
heightened U.S. vulnerability to a broad range of infectious diseases, 
such as SARS and avian influenza. Moreover, HIV/AIDS, tuberculosis, and 
malaria are increasingly viewed as a threat to economic growth and 
political stability in many nations. The number of people with HIV/AIDS 
will grow significantly by 2010, driven by the spread of the disease in 
five populous and strategically significant countries--China, India, 
Nigeria, Russia, and Ethiopia. To combat the spread of these diseases, 
the United States pursues multiple approaches, including partnerships 
with international organizations, such as taking the lead in support of 
the World Health Organization (WHO). At the same time, the United 
States also supports numerous bilateral programs to strengthen other 
countries' health care systems. The increasingly global spread of 
infectious diseases presents a challenge to these approaches and 
prompts the need to reexamine the balance between and possible 
integration of these approaches.

Should the United States reexamine its central role in supporting WHO 
in global efforts to control the spread of emerging diseases such as 
SARS and encourage other nations to provide more support to WHO with 
their personnel and resources? Do U.S. commitments to infectious 
disease interventions abroad, such as those for HIV/AIDS, need to be 
reexamined to better ensure human well-being, economic growth, and 
political stability in many nations? For example, can better 
coordination or integration of current multilateral and bilateral 
approaches to combating disease achieve greater effectiveness and 
efficiency?

Homeland Security Challenges for the 21st Century:

The terrorist attacks of September 11, 2001, evoked with stunning 
clarity the face and intent of enemies very different from those the 
nation has faced before--terrorists such as al Qaeda, willing and able 
to attack us in our territory using tactics designed to take advantage 
of our relatively open society and individual freedoms. In the 3 years 
since the attacks, the nation has begun confronting the enemy abroad 
and domestically at the federal, state, local, and private levels. For 
example, the Congress enacted legislation creating the Department of 
Homeland Security (DHS) and strengthening other security measures in 
law enforcement and border and transportation security. Military action 
destroyed many terrorist sanctuaries and support networks. The new 
Northern Command provided additional resources and authority for 
homeland defense. Law enforcement disrupted terrorist cells and worked 
with international authorities to identify and disrupt other terrorist 
threats and target terrorist financing. National strategies, such as 
the National Strategy for Homeland Security, set initiatives in many 
homeland security areas. A series of homeland security presidential 
decision directives provided further guidance and objectives in areas 
such as critical infrastructure protection, national warning systems, 
and national preparedness goals and metrics.

However, the threat of terrorism will persist well into the 21st 
century. Terrorists are dispersed in loosely organized, self-financed, 
international networks of terrorists, some of which are cross-national. 
Domestic terrorist groups remain a security threat, though currently to 
a much lesser extent than the international terrorist movement. We must 
fundamentally reexamine our approaches to terrorism and homeland 
security--the nature of the terrorist threat, its long-term impact, and 
the impact of our strategies. While most believe we are safer than we 
were on the day of the September 11 attacks, we still are not safe.

The following challenges and illustrative questions provide a framework 
for thinking about these issues in the future.

Defining an acceptable, achievable (within constrained budgets) level 
of risk is an imperative to address current and future threats. Many 
have pointed out, as did the Gilmore and 9/11 Commissions, that the 
nation will never be completely safe and total security is an 
unachievable goal. Risks have been exposed in many aspects of normal 
life, with perhaps many of the greatest dangers posed in areas that 
Americans have simply taken for granted, such as air and water 
supplies, food production chains, information systems, airports and 
train stations, ports, borders, and shopping malls. However, we cannot 
afford to protect everything against all threats--choices must be made 
about protection priorities given the risk and how to best allocate 
available resources. While risk-based allocation decision-making is 
still evolving, we must take a more systematic, reasonable approach to 
allocating resources. Adoption of management system standards, such as 
the National Fire Protection Association 1600 standard for national 
preparedness, can also aid in assessing risk and defining key homeland 
security activities.

What is an acceptable level of risk to guide homeland security 
strategies and investments, particularly federal funding? For example, 
how should risk be managed in making sound threat, risk, and 
criticality assessments, developing countermeasure options, and 
implementing those options considered the most effective and the most 
efficient? What criteria should be used to target federal funding for 
homeland security in order to maximize results and mitigate risk within 
available resource levels?

Confronting asymmetric threats requires new international and domestic 
strategies and related tactics on our part. International and domestic 
terrorists will not be defeated by conventional force projection and 
weapons systems, law enforcement, or infrastructure protection alone. 
Instead, our tactics will hinge more on intelligence, diplomatic 
efforts, and domestic partnerships across many actors. Understanding 
the underlying causes of terrorism--the isolation and alienation that 
feeds violence--and focusing on mitigating those causes is likely to be 
the only way to truly diminish the levels of terrorism globally and 
domestically. For example, the international terrorist movement draws 
on a hatred of what is seen as the corrupting influences of western 
culture and values. Instigators of terrorism can find recruits for 
violent actions among those who see themselves with little or nothing 
to lose. Thus, efforts to confront ideological differences and offer 
hope for the future are essential to the long-term effectiveness of 
combating terrorism. Public diplomacy will be challenged to target and 
better reach audiences in areas where new threats are emerging.

What new international and domestic strategies and related tactics will 
effectively confront the asymmetric tactics we now face and, for the 
longer term, address the root causes of terrorism? For example, how can 
we best anticipate, and thus counter, asymmetric threats such as 
suicide attacks, biological and chemical terrorism, and cyber attacks? 
What approaches will address the root causes of terrorism, whether from 
domestic or international groups? For example, should the current U.S. 
approach to overseas broadcasting be realigned to target and better 
reach audiences in areas where new threats are?

Establishing effective federal, state, and local government; private 
sector; nongovernmental; and nation-state partnerships is crucial to 
addressing risk across the nation. The Constitution requires the 
federal government to "provide for the common defense" and to "repel 
invasions." Many would interpret those requirements to justify homeland 
security and related counterterrorism activities as an inherently 
governmental obligation. However, the vast majority of the targets that 
require protection are those owned by the private sector--critical 
infrastructure such as water and power sources and information systems. 
Many of the emergency response and recovery capabilities are those with 
nonfederal or not-for-profit entities, such as public health 
facilities.

Are existing incentives sufficient to support private sector protection 
of critical infrastructure it owns, and what changes might be 
necessary? How can intelligence and information on threats be shared 
with other levels of government and other critical entities, yet be 
held secure?

Measuring progress in the current war on terrorism is very much a work 
in progress. Measures in use--such as the number of terrorists detained 
or arrested worldwide or kept on the run--may be extremely limited or 
meaningless without knowing if such actions seriously destroy, degrade, 
or disrupt terrorists' plans or seriously degrade or dissuade their 
recruitment efforts and community support. The apparent lack of 
international terrorist attacks within our borders since the September 
2001 attacks suggests positive results from our homeland security 
actions, but it may also simply reflect terrorist choice of the time 
and place of another attack. Small-scale domestic terrorist attacks 
still occur. Fully addressing the range of threats posed by terrorism 
and its causes requires more sophisticated ways to gauge progress.

What is the most viable way to approach homeland security results 
management and accountability? For example, how should progress in the 
current war on terrorism be measured and assessed? What are the 
appropriate goals for prevention, vulnerability reduction, and response 
and recovery? Who is accountable for the many components of homeland 
security when many partners and functions and disciplines are involved? 
How can these actors be held accountable and by whom?

Traditionally, state and local governments have had the primary 
responsibility for financing first responders' preparation for and 
response to disasters, whether natural or manmade, which are generally 
local in their cause and effect. Prior to September 11, 2001, the 
federal government's role was limited primarily to providing guidance, 
some grants for planning, mitigation, and equipment, and disaster 
response and recovery assistance after such major disasters as 
hurricanes, earthquakes, and floods. Since September 11, 2001, the 
federal government has provided billions of dollars to state and local 
governments for planning, equipment, and training to enhance the 
capabilities of first responders to respond to both smaller scale 
natural disasters and terrorist attacks. However, the federal financial 
assistance provided in the last several years has not been guided by a 
clear risk-based strategic plan that outlines the role of federal, 
state, and local governments in identifying, enhancing, maintaining, 
and financing critical first responder capabilities for emergencies. 
Moreover, while planning and assistance has largely been focused on 
single jurisdictions and their immediately adjacent neighbors, well-
documented problems with first responders from multiple organizations 
to communicate at the site of an incident and the potential for large 
scale terrorist incidents have generated a debate on the extent to 
which first responders should be focusing their planning and 
preparation on a regional and multi-governmental basis. In addition, no 
standards have been established on which to determine the equipment, 
skills, and capacities that first responders need given the risks 
individual locations may face. In the absence of risk-based performance 
standards that could be used to establish baseline capabilities and 
critical capacities, state and local governments have used their own 
criteria for determining how federal grant funds should be spent. The 
absence of standards has also made it difficult for first responders to 
define the gap between what is and what should be and measure their 
progress in achieving defined performance goals.

What should be the role of federal, state, and local governments in 
identifying risks--from nature or man--in individual states and 
localities and establishing standards for the equipment, skills, and 
capacities that first responders need?

What costs should be borne by federal, state, and local governments or 
the private sector in preparing for, responding to, and recovering from 
disasters large and small--whether the acts of nature or man, 
accidental or deliberate?

To what extent and how should the federal government encourage and 
foster a role for regional or multistate entities in emergency planning 
and response?

International Challenges for the 21st Century:

The United States faces rising challenges and threats to its national 
and economic security. These threats include terrorism, regional 
conflicts, and global instability sparked by growing gaps between the 
"haves" and "have nots," as well as by corruption, ethnic hatred, and 
disease. At the same time, the world grows increasingly interconnected 
through more open markets, rapidly developing technology, and efficient 
transportation systems.

In this environment, advancing and protecting U.S. international 
interests requires the use of all available instruments of power--
military, diplomatic, and economic. The United States has periodically 
employed its armed forces and civilian agencies, often in conjunction 
with U.S. allies and the international community, to address various 
threats to regional and international peace and stability. The United 
States also maintains a vast network of embassies and consulates at 
about 260 locations around the world, staffed by about 60,000 U.S. and 
foreign national employees, to carry out foreign policy and public 
diplomacy programs. In addition, the United States seeks to advance its 
interests by participating in a wide variety of multilateral 
organizations. While trying to anticipate and address emerging threats, 
the U.S. government also seeks to promote foreign policy goals, 
national and economic security objectives, sound trade policies, and 
other strategies to advance the interests of the United States and its 
trading partners and allies. The 21st century will bring increased 
challenges in balancing security concerns with the desire to maintain 
strong economic and cultural ties essential to domestic well being.

The following challenges and illustrative questions provide a framework 
for thinking about these issues in the future.

The continuing proliferation of biological, chemical, and nuclear 
weapons and delivery systems poses serious threats to the security of 
the United States and its allies. The increasing likelihood that a 
rogue regime or terrorists will attempt to threaten or attack the 
United States or its allies with weapons of mass destruction (WMD) will 
challenge the U.S. nonproliferation and counterproliferation efforts 
and preparations for the consequences of WMD use. For example, the 
great majority of Russian chemical weapons remain vulnerable to theft 
or diversion by terrorists or rogue states.

Do U.S. efforts to reduce or prepare for such WMD threats need to be 
reexamined? For example, does U.S. nonproliferation assistance, 
currently provided almost exclusively to Russia, need to be extended to 
other countries, such as Libya, that have WMD assets that must be 
eliminated or secured? What U.S. and international responses are needed 
to better deal with the increased security threats posed by rogue 
states and terrorists seeking to acquire and use WMD? How can the 
United States better work with our allies and others to prevent the 
spread of WMD?

Protecting U.S. strategic interests in the face of new tests has 
presented challenges for alliances established decades ago. For 
example, serious disagreement with North Atlantic Treaty Organization 
(NATO) allies France and Germany over U.S. policy in Iraq exposed 
fundamental differences over how the alliance should respond to 
security threats. Conflict interventions to make or keep peace, 
stabilize failed states, and end terrorist regimes have dominated U.S. 
foreign policy actions in recent years. Such interventions will likely 
continue to play a prominent role in efforts to stabilize regions where 
U.S. interests are undermined or threatened.

Do we need to reexamine the U.S. force structure used for nation 
building and peacekeeping activities by the United Nations, NATO, and 
other international institutions? Should the United States have a 
separate force devoted to such functions? What role should the United 
Nations, NATO, and other international institutions perform in 
connection with such functions?

Increasing global interdependency and shifting trade patterns create a 
range of challenges for policymakers. The high level of U.S. trade 
deficits, rapid increases in imports from nations such as China, and 
the increase in services trade have led to questions about the best way 
to ensure that trade is fair and contributes to the well-being of the 
American people. To date, new trade concerns, such as offshoring of 
high-tech services and currency interventions, have generally not been 
dealt with directly by traditional U.S. trade policy tools, such as 
trade agreements, and will challenge policymakers to develop new 
strategies for dealing with them. Moreover, the globalization of 
economic activity is bringing an increasing share of the U.S. economy 
under the domain of international agreements. Economic activity 
historically viewed as isolated from international trade agreements, 
such as local government procurement practices, may come under the 
scrutiny of other parties to the trade agreements, and increasingly be 
subject to their enforcement machinery.

Does the U.S. portfolio of international trade policy tools, such as 
its heavy reliance on industry-specific trade agreements, need to be 
reexamined for its effectiveness and relevance in addressing new trade 
concerns such as offshoring and currency interventions?

What types of policy commitments and programs, such as agricultural 
subsidies and import restrictions on textiles, may need to be 
reexamined for their consistency with broader international trade 
goals?

Although the United States' commitment to foreign aid has spanned more 
than half a century, questions persist about the effectiveness of 
bilateral U.S. aid to developing countries and multilateral aid 
provided by international financial institutions. The United States 
recently established a new foreign assistance program, the Millennium 
Challenge Account (MCA), to function alongside the U.S. Agency for 
International Development. MCA's goal is to reduce global poverty 
through economic growth in countries that govern justly, invest in 
their people, and encourage economic freedom. However, like other 
foreign assistance efforts, MCA will face challenges such as 
inconsistent political will, ineffective donor coordination, and 
limited capacity of recipient nations to absorb donor resources. 
Moreover, few, if any, countries that have received bilateral aid have 
significantly reduced poverty, and rapid advances in technology have 
caused poorer countries to fall further behind. Regarding multilateral 
aid, the World Bank and International Monetary Fund (IMF) did not 
prevent or quickly resolve the recent financial crisis in Argentina, 
although Argentina had implemented reform programs funded by those 
institutions since at least the early 1990s. Similarly, despite 9 years 
of ongoing efforts by the World Bank and IMF, the debt problems of the 
poorest nations will likely continue for decades.

Should the United States reevaluate its approach to reducing world 
poverty? For example, what role should continued bilateral U.S. aid or 
support of loans and grants through multilateral agencies play? Should 
certain existing multilateral development loans be forgiven? Are 
international financial institutions structured to achieve the long-
term financial health and stability of the countries they seek to help?

U.S. embassies and consulates are on the front lines, conducting 
diplomatic activities and operating programs that are critical to 
achieving a wide range of foreign policy interests. In addition to 
interacting with foreign governments, embassies and consulates conduct 
public diplomacy, promote trade, screen visa applicants wishing to 
visit the United States, assist American citizens overseas, and play a 
key role in fostering military alliances and providing military and 
economic aid. Security priorities after 9/11 have further complicated 
their mission. The demands placed on embassies and consulates by a 
rapidly changing world challenge their existing ways of organizing 
themselves and matching their resources and skills to meet those 
demands. While there have been attempts to review how overseas resource 
allocations are made, the rapidly changing world prompts the need to 
continually reexamine mission priorities to determine the "who, where, 
and when," as well as the mix of U.S. government and nongovernmental 
personnel that should be overseas. Concerns over security for staff 
assigned overseas and fiscal pressures will also prompt the 
consideration of alternative ways of doing business overseas, such as 
streamlining or outsourcing functions and performing functions from the 
United States or other remote locations.

How can the U.S. presence overseas be rationalized to "right place" as 
well as "right size" embassies and consulates and ensure secure and 
cost-effective overseas operations while continuing to meet key foreign 
policy objectives and priorities?

Natural Resources, Energy, and the Environment Challenges for the 21st 
Century:

Following passage of major environmental legislation in the 1970s, the 
nation made a number of gains in its air and water quality, and 
expressed a commitment to improved management of our natural resources. 
As the nation moves into the 21st century, it is becoming increasingly 
apparent that the current approach to natural resource use (including 
energy) and environmental protection may need modification to 
successfully address the long-term stresses affecting so many of our 
nation's and the world's natural ecosystems. Evidence of this stress 
can be found on many fronts, including depleted fresh water supplies, 
deteriorating fisheries, multiple energy crises, and accelerated loss 
of biodiversity. Similarly, the globalization of agribusiness coupled 
with increasing concentration in the nation's agriculture sector raises 
questions about whether the historic agriculture subsidy and support 
structures remain appropriate.

In this context, the broad, long-term challenge is determining how the 
nation can reconcile the desire for consumption today with the need to 
protect resources to sustain the future. From the available evidence, 
there is reason to reexamine existing programs to determine the balance 
between supporting the needs of today's economy with our stewardship 
obligations to the generations to come. Federal regulatory and economic 
programs, policies, and approaches devised and implemented decades ago 
may need to be reassessed, and new approaches, such as pricing 
strategies, need to be considered to ration scarce resources. Natural 
resource, energy, and environmental concerns are inextricably linked.

The following challenges and illustrative questions provide a framework 
for thinking about these issues in the future.

Land use planning practices that do not adequately consider land, 
water, and petroleum availability can contribute to sprawling 
development and a host of problems. Such practices have had a part in 
automobile usage reaching new highs each year, open space dwindling, 
air pollution becoming more difficult to control, and the reliance on 
imported oil continuing to climb. Likewise, population growth, 
particularly in arid regions of the country, may soon face a limiting 
obstacle--the availability of fresh water. In fact, water managers in 
36 states expect water shortages to occur within the next 10 years 
under even normal conditions. In many parts of the country, drought 
conditions are giving an early indication of what may occur on a much 
more widespread basis in the future. Federal transportation and other 
incentive structures have played a role in current land use planning 
results. In this context, it may be time to examine land use planning 
and associated federal incentive structures to ensure that they are not 
having unintended consequences. Relatedly, federal natural resource 
allocation and usage decisions are distorted when the federal 
government does not charge fair market value when offering these 
resources for sale. Whether it be oil and gas, timber, grazing rights, 
or water, the federal government has a history of selling its assets at 
much lower prices than others or perhaps even below the cost of 
delivering the asset. When this occurs, the federal government 
shortchanges the Treasury and distorts markets for these resources.

Can alternative federal approaches to transportation, land management, 
and water policies be adjusted to better promote sustainable management 
of our nation's land and water resources? For example, given projected 
water supply shortages, is there a need to reassess the balance between 
urban expansion in water-scarce regions and continuance of existing 
crop irrigation practices? Additionally, should steps be taken to 
ensure that user fees commensurate with fair market value or the costs 
of providing services are collected when federal natural resources are 
sold?

The nation's energy consumption is significant and growing. Today, 
according to our analysis of U.S. Department of Energy (DOE) data, 
total U.S. energy consumption is equivalent to about 790 billion 
gallons of gasoline per year, which is nearly 2,800 gallons consumed by 
every man, woman, and child each year. Energy consumption is expected 
to increase about 30 percent over the next 20 years. As a result of 
these ever-increasing demands, energy reliability, affordability, 
efficiency, and sustainability remain a concern. Not only has our 
nation experienced multiple energy crises, but our systems remain 
perpetually on the cusp of critical supply/demand imbalances. These 
imbalances can quickly lead to price volatility that burdens consumers 
and the industry and adversely affects our economy. While there are 
differences of opinion as to how long the nation can rely on finite 
fossil energy supplies to meet the majority of its energy needs, there 
seems little doubt that at some point the nation will need to 
transition to alternatives. Enhanced conservation could delay this 
transition point, but many believe that without a vision for a 
sustainable energy future, our nation's energy markets in the 21st 
century will likely continue to experience the turmoil of the past with 
increasing frequency. The recent collapse of the energy grid in 
northeastern and midwestern states and the cascading blackouts that 
followed, as well as the increases in gasoline and heating oil prices, 
may be early warning signs of more pressing problems to come. In this 
context, in addition to aggressively pursuing opportunities to increase 
production, it may be time to consider placing a similar emphasis on 
and investment in demand reduction strategies and development of 
alternative or renewable energy supplies and technologies. Preparing 
the nation for its long-term energy future may be dependent on an 
approach that adequately balances all its options.

To what extent are federal energy policies and incentive structures 
adequately preparing the nation to satisfy its energy needs over the 
long term? What is the appropriate balance between efforts to promote 
enhanced production of fossil fuels, alternative renewable energy 
sources, and energy conservation?

While the nation has made great strides in improving the quality of our 
air and water, questions are increasingly being raised about whether 
the current policies, strategies, regulatory approaches, and 
organizational structures--that in some cases were put in place in the 
1970s--will be up to the challenge of protecting our air and water 
quality in the decades to come. Our nation's urbanized areas are 
continually battling to keep air pollution in check, and the regional 
dimensions of air-quality problems are being increasingly exposed by 
concerns over the spread of pollution from coal-fired power plants and 
other industrial sources in the Midwest into the Northeast states. 
Likewise, it continues to be a challenge to restore and protect 
national treasures such as the Chesapeake Bay and the Great Lakes. 
Despite hundreds of millions of dollars being spent, efforts to restore 
these waters to healthy conditions are not showing as much progress as 
hoped. In addition, the nation faces a more than $150 billion burden 
over the next two decades to repair, replace, and upgrade the nation's 
over 55,000 community drinking water and wastewater systems to protect 
public health. A reexamination of current approaches to address these 
problems may be in order to better achieve overall environmental 
outcomes while providing more flexibility in achieving them. The 
establishment and institutionalization of a science-based, widely 
accepted set of environmental indicators to improve the quality of air 
and water quality data is an essential prerequisite to evaluate 
alternative approaches.

Does the existing federal regulatory approach for controlling air and 
water pollution need to be modernized to generate improved results? In 
particular, can the current prescriptive "command and control" 
regulatory structure be changed to more cost effectively reduce 
pollution and better protect the environment?

Is there a way for the federal government to implement environmental 
regulations more efficiently and effectively by taking into account the 
cumulative costs of multiple environmental regulations to state, local, 
and tribal governments while at the same time ensuring benefits to 
human health and the environment?

It is also unclear whether current agricultural practices and the 
federal policies that have promoted them remain appropriate and 
sustainable. When federal agricultural policies were first implemented, 
the United States was a largely rural nation. Farming and its related 
federal support were the lifeblood of many rural communities. Today, 
the U.S. agricultural sector is dominated by a relatively small number 
of agribusiness giants and very large farming operations that operate 
globally. For example, while there are still over 2 million farms in 
the United States, less than 10 percent of them provide 70 percent of 
the nation's food and fiber and account for the vast majority of the 
$60 billion worth of agricultural exports that help sustain the sector. 
Federal support for agriculture exceeds $25 billion annually. Critics 
question the need for this level of subsidies, which mostly go to 
larger producers, particularly considering the government's current and 
projected fiscal imbalance. In addition, while the Congress recently 
passed legislation to phase out support to tobacco growers, large 
subsidies remain for a number of crops that are often criticized in the 
international marketplace as being anticompetitive. Furthermore, 
farming and livestock operations have become highly concentrated, and 
the associated fertilizer, pesticide, and animal waste run-off are 
being increasingly recognized as major contributors to water pollution. 
Finally, rural communities have changed as well. Farming is no longer 
the dominant activity in many rural communities, and many of the large-
scale electrification and related infrastructure development programs 
are logical candidates for reexamination. Accordingly, new approaches 
to agricultural programs and policies better oriented to modern 
challenges may be in order.

Do current federal agricultural policies and programs, which largely 
rely on subsidies, remain relevant to the modern agricultural sector? 
In addition, are current policies contributing to unfair trade 
practices?

Can these policies and programs be sustained? Could alternative 
approaches produce desired results more economically, effectively, and 
efficiently? For example, could the federal crop insurance program be 
expanded to play a larger role in the federal safety net for farmers?

Are government supports for or ownership of energy production and 
electricity generation in rural areas and particular regions still 
necessary given fundamental changes in the past 50 years in energy 
market infrastructure?

According to the combined estimates from DOE, DOD, and the U.S. 
Environmental Protection Agency (EPA), it could cost in excess of $500 
billion in current dollars to clean up (1) the radioactive wastes 
accumulated during 50 years of nuclear weapons production at DOE 
facilities, (2) unexploded ordnance, discarded munitions, and related 
contamination at current or former U.S. military sites, and (3) 
hundreds of thousands of Superfund and other hazardous waste sites 
created by private sector activities. Some of the contamination in 
these sites may take 50 to 70 years to clean up; at other sites, the 
contamination is so extensive that it may be irreversible and the site 
may be irretrievable. Frequently, the progress in cleaning up these 
sites does not meet expected time frames and the costs dramatically 
exceed available funding levels. For example, DOE's projects for 
treating and storing radioactive and hazardous waste, a by-product of 
nuclear weapons production at DOE facilities, are estimated to cost 
more than $140 billion and could take decades to complete. Furthermore, 
the current approaches to cleaning up DOE, DOD, and EPA sites are not 
consistent and, in some cases, not especially efficient or effective; 
development of more innovative incentives and approaches may be needed. 
The enormity of this task, combined with the fiscal constraints facing 
the nation, raises questions about whether existing cleanup standards 
are realistic.

Does the current pace and cost of nuclear and hazardous materials 
cleanup activities at DOE, DOD, and EPA sites suggest the need for 
alternative approaches to address these issues? Can the nation afford 
to cleanup radioactive and hazardous waste sites to the standards 
currently being applied? For example, are there opportunities for DOE 
to apply risk factors, just as EPA assigns risk factors to Superfund 
sites, to determine the most cost-effective approach to clean up a 
site, possibly resulting in disposal of more waste at current sites 
rather than moving it to the planned underground repository?

Retirement and Disability Policy Challenges for the 21st Century:

One of the great American achievements of the 20TH century was the 
development of a comprehensive national social insurance system. A core 
element of the system was a sturdy retirement component--with Social 
Security as a foundation, supplemented by a private pension system and 
individual savings arrangements--which sought to conquer the long-
standing economic fear of poverty in old age. For the last half 
century, millions of American workers were able to look forward to 
their retirement as a time of dignity, respect, and security. The 
Congress later extended these social insurance protections to those 
workers who were unable to engage in gainful economic activity because 
of disability. Indeed, insuring workers and their families from the 
potentially devastating income loss caused by unexpected injury, 
illness, or death removed another great risk to their economic well-
being.

The challenges facing retirement and disability programs are long-term, 
severe, and structural in nature. A successful policy response to these 
challenges will require a fundamental and comprehensive reassessment of 
each of the key components of our national retirement and disability 
system.

The following challenges and illustrative questions provide a framework 
for thinking about these issues in the future.

Social Security faces severe, long-term, structural financing 
challenges that if not addressed, could lead to the depletion of its 
trust funds. The unfunded obligation for the Old Age, Survivors, and 
Disability Insurance (OASDI) trust funds for the next 75 years is $3.7 
trillion in present value as of 2004. Projected tax income to the OASDI 
trust funds will begin to fall short of outlays in 2018 and, by 2042, 
trust fund balances will be insufficient to fully finance benefits 
promised under the current program. Social Security faces this long-
term financing shortfall largely because of several concurrent 
demographic trends, namely that people are living longer, spending more 
time in retirement, and having fewer children. For example, average 
time in retirement grew from 11.5 years in 1950 to 18 years for the 
average male worker as of 2003. Women are also having fewer children. 
In the 1960s, the fertility rate was an average of 3 children per 
woman, but by 2030 it is expected to fall to 1.95--a rate that is below 
replacement. Taken together, these trends threaten the financial 
solvency and sustainability of Social Security as well as the federal 
budget as a whole. Social Security could be brought into balance over 
the next 75 years in various ways, including an immediate increase in 
payroll taxes of 15 percent or an immediate reduction in currently 
promised benefits of 13 percent (or some combination of the two). 
Ensuring the sustainability of the system beyond 75 years will require 
even larger changes. Encouraging older workers to extend their labor 
force participation can also improve program solvency while 
contributing to overall economic growth. Lastly, highlighting the need 
for early action, even greater adjustments in scheduled benefits and 
revenues will be required the longer Social Security's financial 
challenges remain unaddressed.

How should Social Security be reformed to provide for long-term program 
solvency and sustainability while also ensuring adequate benefits (for 
example, increase the retirement age, restructure benefits, increase 
taxes, and/or create individual accounts)?

How can existing policies and programs be reformed to encourage older 
workers to work longer and to facilitate phased retirement approaches 
to employment (for example, more flexible work schedules or receiving 
partial pensions while continuing to work)?

Serious weaknesses have become manifest in our nation's private pension 
system. Despite sustained large federal tax subsidies, total pension 
coverage continues to hover at about half of the total private sector 
labor force. The number of traditional defined benefit plans in which 
employers rather than employees bear the risk of investment has been 
contracting for decades, and recent plan terminations by bankrupt 
sponsors of large defined benefit plans have threatened the solvency of 
the Pension Benefit Guaranty Corporation (PBGC), the federal agency 
that insures certain benefits under such plans. Recognizing the long-
term challenges facing PBGC, GAO has placed PBGC's single-employer 
pension program on its high-risk list of programs needing further 
attention and congressional action. As of the end of fiscal year 2004, 
the agency's single-employer pension program registered a net negative 
accumulated position of $23.3 billion. While growth in the number and 
coverage of defined contribution plans--where each worker has an 
individual account that receives contributions--has somewhat mitigated 
the decline of more traditional defined benefit plans, these plans have 
also experienced problems. Many workers covered by defined contribution 
pension plans continue to choose not to participate, potentially 
leaving them with an inadequate retirement income. The risk burden of 
defined contribution plans requires individual employees to be 
knowledgeable about investment and other retirement decisions, yet 
information and education are not always available. Large holdings of 
company stock in such plans may add to employees' risk that their 
retirement savings will be inadequate to provide levels of income 
needed in retirement. Finally, workers receiving their retirement 
benefit in a lump sum and the ability to withdraw or borrow money from 
retirement saving plans prior to retirement to supplement current 
consumption can drain workers' accounts of needed benefits well before 
retirement. Policymakers will need to consider how to best encourage 
wider pension coverage and adequate and secure pension benefits that 
are preserved for retirement purposes for the current and the future 
labor force, and how such pensions might best interact with changes to 
the Social Security program.

What changes should be made to enhance the retirement income security 
of workers while protecting the fiscal integrity of the PBGC insurance 
program (for example, increasing transparency in connection with 
underfunded plans, modifying PBGC's premium structure and insurance 
guarantees, reforming plan funding rules, or restricting benefit 
increases and the distribution of lump sum benefits in connection with 
certain underfunded plans)?

How can existing policies be reformed to encourage income preservation 
strategies so that retirement income lasts an individual's entire life 
(for example, benefit annuitization)?

Meanwhile, federal disability programs, such as those at the Social 
Security Administration (SSA) and the Department of Veterans Affairs 
(VA), have experienced significant growth over the past decade and are 
expected to grow even more as increasing numbers of baby boomers reach 
their disability-prone years. Moreover, the composition of the 
disability rolls has changed significantly, with a larger proportion of 
beneficiaries with mental impairments receiving benefits today than in 
the past. At the same time, recent scientific advances as well as 
economic and social changes have redefined the relationship between 
impairments and work. Advances in medicine and technology have reduced 
the severity of some medical conditions and have allowed individuals to 
live with greater independence and function in work settings. Moreover, 
the nature of work has changed in recent decades as the national 
economy has moved away from manufacturing-based jobs to service-and 
knowledge-based employment. Given the projected slowdown in the growth 
of the nation's labor force, it is imperative that those who can work 
are supported in their efforts to do so. Yet federal disability 
programs remain mired in concepts from the past and are poorly 
positioned to provide meaningful and timely support for workers with 
disabilities. Further, in light of a congressionally established 
commission to study the appropriateness of veterans' benefits, VA may 
be faced with the need to reform its eligibility criteria. Over the 
last decade, GAO has built a body of work examining these issues and, 
more recently, has called for the fundamental transformation and 
modernization of federal disability programs, including SSA's 
Disability Insurance and Supplemental Security Income programs and VA's 
disability programs. In January 2003, GAO added modernizing federal 
disability programs to its high-risk list.

How can federal disability programs, and their eligibility criteria, be 
brought into line with the current state of science, medicine, 
technology, and labor market conditions (for example, which jobs are 
based on knowledge and skills rather than on strength and endurance)? 
How can such programs better facilitate the participation of people 
with disabilities in the workforce and society (for example, earlier 
intervention in providing vocational rehabilitation or assistive 
technology devices such as voice synthesizers or standing wheelchairs)?

What options could be considered for reforming VA's current disability 
benefits structure for veterans (such as revisiting the definition of 
service-connected benefits) that would ensure appropriate and adequate 
benefits?

Scientific and Technological Innovation Challenges for the 21st 
Century:

For society and government, developments in science and technology 
present great opportunities to improve the quality of life, the 
performance of the economy and the government, and the relationship of 
government to its citizens. Advances in science and technology in the 
United States have historically been fueled by combined public and 
private sector research and development investments of about $284 
billion annually. These investments, along with the nation's strong 
research and development infrastructure and intellectual property 
protections, have long ensured the United States a leadership position 
in the development and commercialization of scientific advances and 
have helped nurture entrepreneurship and dissemination of information 
on new technologies. The benefits of applying technological innovation, 
such as information technology, in the United States, have not only 
resulted in many positive outcomes but have also presented many new 
challenges, concerns, and vulnerabilities.

The following challenges and illustrative questions provide a framework 
for thinking about these issues in the future.

As the pace of innovation has quickened over the past 30 years, 
competition in the global economy has also accelerated and other 
nations are increasingly gaining in their ability to commercialize 
technological advances, educate highly skilled technical workforces, 
and offer world-class research opportunities to the best and brightest 
minds. These strides in global scientific and technological innovation 
are beginning to challenge the United States' preeminent position.

How can the federal government develop a more coordinated and targeted 
approach to setting the U.S. research agenda that also ensures the best 
return on investment? For example, can the current patchwork of federal 
investments in scientific research provided by multiple agencies and 
programs be integrated or better coordinated to more effectively and 
efficiently identify and prioritize critical emerging technologies?

Are different kinds of federal incentives needed to encourage greater 
private sector collaboration and nurture interdisciplinary research and 
development approaches that can enhance U.S. competitiveness and 
productivity? For example, does the current research tax credit 
actually stimulate private sector research spending that would not have 
occurred otherwise? Are the types of research being done by businesses 
that claim most of the tax credit enhancing U.S. competitiveness and 
productivity?

Can existing program structures and funding processes maintain the 
nation's position as a critical collaborator in jointly funded 
international scientific research and ensure that the United States can 
continue to attract global investments in new technologies? For 
example, how can the U.S. nanotechnology research and development 
effort effectively collaborate with global nanotechnology research and 
development efforts without compromising the nation's intellectual 
property or competitiveness?

Compounding these external challenges are domestic demographic and 
educational changes that have reduced the size and quality of the U.S. 
scientific workforce, such as the lagging performance of U.S. students 
in science, math, and engineering; the large numbers of U.S. scientists 
reaching retirement age; and reduced numbers of foreign-born scientists 
and researchers coming to the United States because of heightened 
security concerns and opportunities in other nations.

How can the United States better develop a world-class technical and 
scientific domestic workforce that is not as dependent on large inflows 
of international students and researchers? For example, are different 
educational tools or targeted funding strategies needed to enhance U.S. 
student achievements in math and the sciences?

Do current workforce retraining programs provide adequate incentives to 
help the United States develop lifelong learning strategies and 
proactive training programs that will meet the needs of a rapidly 
changing technological environment? For example, should the federal 
government consider providing training tax credits to employers or 
individuals so that U.S. workers can obtain the training they need to 
stay current in a knowledge-based economy?

Information technology advancements have contributed to substantial 
gains in U.S. productivity, opened the workforce to people who were 
previously barred because of physical disabilities or geographic 
distances, and have begun to alter the way citizens interact with their 
government. However, interconnectivity has also raised the potential 
for unauthorized access to personal and confidential data and created 
new vulnerabilities to the nation's critical operations and the 
infrastructures they support.

How can the federal government effectively utilize advanced 
technologies to further enhance homeland security while also protecting 
the privacy of U.S. citizens? For example, should the federal 
government encourage states to use biometric technologies that could 
help ensure that drivers licenses are issued only to authorized and 
authenticated individuals?

What cybersecurity technologies can be applied to protect critical 
infrastructures from attack given current threat assessments and what 
implementation challenges, such as effective information sharing among 
key public and private stakeholders, will have to be addressed?

Similarly, despite many successes in the exploration of space, the loss 
of life, unsuccessful missions, and unforeseen cost overruns have 
recently increased the level of concern over the benefits of such 
exploration, particularly with regard to human space flight activities. 
Since its inception, the National Aeronautics and Space Administration 
(NASA) has undertaken programs that have greatly advanced scientific 
and technological knowledge. However, a painful symbol of the difficult 
environment in which NASA must perform its mission, as well as the 
risks associated with human space exploration, is the recent loss of 
Shuttle Columbia and its crew. The complexities NASA faces in returning 
the remaining three shuttles to flight so that construction can resume 
on the International Space Station and the debate over the potential 
cost and the federal government's role in implementing the 
administration's vision for space exploration are emblematic of the 
challenges the nation will need to resolve in the years ahead.

What objectives are both appropriate and affordable for the U.S. space 
program? For example, can all existing programs continue to be 
effectively implemented at current resource levels and without 
substantial involvement by the private sector?

Transportation Challenges for the 21st Century:

The nation's economic vitality and the quality of life of its citizens 
depend significantly on the soundness, security, and availability of 
its physical infrastructure. The nation's transportation system 
presents particularly complex policy challenges, because it encompasses 
many modes--air, water, highway, transit, and rail--on systems owned, 
funded, and operated by both the public and private sectors. Increasing 
passenger and freight travel has led to growing congestion, and 
policymakers face the challenge of maintaining the safety and condition 
of the transportation system while preventing congestion from 
overwhelming it. Transportation decisions are inextricably linked with 
economic, environmental, and energy policy concerns, and coordination 
across levels of government and different sectors is daunting and 
complex. New security imperatives in a world after 9/11 present 
additional challenges for all modes of transportation that must be 
addressed in a rapidly changing demographic and technological 
landscape. Successfully addressing transportation needs in the face of 
these complex, crosscutting challenges requires strategic and 
intermodal approaches, effective tools and programs, and coordinated 
solutions involving all levels of government and the private sector.

These requirements, in combination with the looming fiscal crisis faced 
by all levels of government, challenge the nation to fundamentally 
reexamine existing government transportation programs and commitments, 
to ask whether existing program constructs and financing mechanisms are 
relevant to the challenges of the 21st century, and to make tough 
choices in setting priorities and linking resources to results.

The following challenges and illustrative questions provide a framework 
for thinking about these issues in the future.

The transportation grant programs funded by the Highway Trust Fund--
including the nation's highway and transit programs--have evolved 
slowly since the Trust Fund was created in 1956. While the program was 
created for the purpose of constructing the interstate highway system, 
and the interstate is complete, the basic construct of the program, in 
terms of its financing and delivery mechanisms, has not changed. In 
addition, this and other federal transportation programs do not have 
the mechanisms to link funding levels with the accomplishment of 
specific performance-related goals and outcomes, such as improvements 
in mobility and security. Most highway grant funds are apportioned by 
formula, without regard to the needs or capacity of recipients. Because 
many state and local governments select most projects receiving this 
funding, there is little assurance that the projects selected and 
funded best meet the nation's mobility and security needs.

How narrowly or broadly should the federal role and interest in the 
nation's transportation system be defined? For example, should federal 
programs and spending be more closely aligned with specific national 
interests and purposes, such as interstate freight mobility or national 
and homeland defense? Concurrently, should responsibilities and 
authority for projects that support regional mobility and other needs 
be devolved to state and local governments along with the revenue 
sources that support them?

Should the federal transportation formula grant programs for state and 
local governments be revised to better consider factors such as need, 
performance, capacity, and level of effort by the states and 
localities?

Transportation programs and funding mechanisms are largely stovepiped 
by modes of transportation. For example, while passenger and freight 
travel occurs on all modes, federal funding and planning requirements 
focus largely on highway, transit, and aviation passenger travel. This 
framework makes it difficult for intermodal projects and other modal 
projects (e.g., freight or passenger rail) to be integrated into the 
transportation system.

Can intermodal solutions to the needs of modes such as freight, air, 
and passenger rail service be effectively carried out within the 
framework of the existing trust funds and other transportation programs 
or is another model needed? Do the existing tools and delivery 
mechanisms, such as existing trust funds dedicated only to certain 
modes of transportation, have the wherewithal to provide intermodal, 
efficient, cost-effective solutions to mobility and security 
challenges?

While the trust funds were originally based on the concept of having 
users pay for the transportation systems, this concept is beginning to 
fray. Revenues to the Highway Trust Fund, which funds the majority of 
highway and surface transportation safety spending and a large portion 
of transit spending, are drawn from fuel taxes and user fees. The 
purchasing power of these revenues is declining and future fuel tax 
revenues will be further eroded by the increasing fuel efficiency of 
vehicles. Aviation Trust Fund revenues are also declining, in part 
because of lower cost airline tickets and other factors. The Federal 
Aviation Adminstration will face significant challenges in supporting 
its four major accounts, which include operations, facilities and 
equipment, airport improvement program, and research, engineering, and 
development. Many experts question whether the current financing scheme 
for transportation is ultimately sustainable. As a result, 
decisionmakers are increasingly looking more to the general fund to 
finance transportation programs, and state and local governments are 
increasingly relying on property and sales taxes to fund transportation 
improvements.

Should the federal government continue to provide public financing 
through grant programs or develop alternative, targeted, market-driven 
incentives, such as credit enhancements, to stimulate private 
financing, particularly in areas such as freight, maritime, and 
aviation where a mix of private and public beneficiaries exist?

The use of tolls, congestion pricing, and user fees holds promise for 
helping to solve congestion and mobility problems and provide new 
revenues for infrastructure improvements. However, the availability of 
competing federal grant funds and federal restrictions on tolling, 
pricing, and fees can work at cross purposes by dissuading state and 
local governments and transportation service providers from adopting 
these tools.

What other mechanisms are available--e.g., tolls, pricing, demand 
management, or user fees--that could be used to a greater degree than 
today to help finance the nation's transportation infrastructure that 
are both sustainable and would promote efficiency in the use of 
infrastructure and better capture revenue from beneficiaries?

Governance Capacity to Meet Challenges in the 21st Century:

The federal government must address and adapt to a range of major 
trends and challenges in the nation and the world--a long-term, 
structural fiscal imbalance; a transformation from an industrially 
based to a knowledge-based economy; revolutionary changes in technology 
that have altered how we communicate and do business globally; greater 
reliance on market forces and competition; and changing national 
security threats. To respond to these trends and challenges, government 
must have the institutional capacity to plan more strategically, 
identify and react more expediently, and focus on achieving results.

There are signs of transformation as the Congress has established 
agencies that can meet evolving challenges. For example, recognizing 
growing security threats, the Congress created the Department of 
Homeland Security to fundamentally transform how the government is 
structured to respond to these threats and has recently restructured 
the intelligence community to ensure the nation has the critical 
information it needs to defeat these threats. Likewise, agencies 
including the Federal Bureau of Investigation (FBI), GAO, National 
Aeronautics and Space Administration (NASA), the Department of Defense 
(DOD), and the U.S. Postal Service are undertaking major efforts to 
transform their operations. Furthermore, the government is partnering 
with the private sector to devise a comprehensive set of key national 
indicators to provide the nation with quality data that the public, 
media, policymakers, and both government and nongovernment institutions 
can use to assess the nation's progress in addressing key challenges.

Yet, in many cases, the government is still trying to do business in 
ways that are based on conditions, priorities, and approaches that 
existed decades ago and are not well suited to addressing 21st century 
challenges. For example, some agencies do not yet have all the 
necessary abilities, more flexible legal authorities, and leadership 
and management capabilities to transform their cultures and operations. 
Consequently, to successfully navigate transformations across the 
government, it must fundamentally reexamine not only its business 
processes, but also its outmoded organizational structures, management 
approaches, and in some cases, outdated missions.

The following challenges and illustrative questions provide a framework 
for thinking about these issues in the future.

To be a leading democracy in the information age may very well mean 
producing unique public sources of objective, independent, 
scientifically grounded, and widely shared quality information so that 
we know where the United States stands now and what the trends are on 
both an absolute and relative bases--including comparisons with other 
nations. By ensuring that the best facts are made more accessible and 
usable by the many different members of our society, we increase the 
probability of well-framed problems, good decisions, and effective 
solutions. The stakes are high, including considerations regarding 
allocating scarce public resources, strengthening the economy, creating 
jobs, stimulating future industries, enhancing security, promoting 
safety, strengthening our competitive edge, and sustaining the 
environment.

Is the federal government effectively informed by a key national 
indicator system about the position and progress of the nation as a 
whole--both on an absolute and relative bases compared to other 
nations--as a guide to helping set agency and program goals and 
priorities?

Is the federal statistical system adapting effectively to the nation's 
needs for information? Is it effective at all levels and sectors of 
society to meet evolving information requirements? Are the large 
amounts of data that it collects being effectively disseminated to the 
widest possible audiences, with due consideration to privacy and 
confidentiality issues?

Most major outcomes of federal activities are supported by multiple 
programs and tools that, in turn, are often sponsored by many different 
federal agencies. Although these individual programs address common or 
similar performance goals, they result in an overly fragmented delivery 
network and at times work at cross purposes. For example, federal food 
safety programs are carried out by 12 agencies with differing 
enforcement criteria and inspection practices. The fragmentation of 
federal programs reflects a policymaking process that is overly 
stovepiped by agency and program, with insufficient focus on how 
individual programs contribute to overarching, crosscutting goals and 
missions. As a result, the capacity to periodically reexamine the 
alignment and relevance of policy portfolios in a changing society is 
limited. The Government Performance and Results Act (GPRA) provided for 
a governmentwide performance plan to address these issues, but this 
plan has not yet been developed by the executive branch. Furthermore, 
the federal government lacks a governmentwide strategic plan to provide 
a framework for addressing crosscutting goals.

How can the executive branch and the Congress have a more strategic, 
crosscutting focus on policy and budget decisions to address goals that 
cut across conventional agency and program boundaries? Can the 
governmentwide performance plan required by GPRA be implemented to 
provide the necessary crosscutting focus?

How can agencies partner or integrate their activities in new ways, 
especially with each other, on crosscutting issues, share 
accountability for crosscutting outcomes, and evaluate their individual 
and organizational contributions to these outcomes? How can agencies 
more strategically manage their portfolio of tools and adopt more 
innovative methods to contribute to the achievement of national 
outcomes? For example, how can the myriad federal food safety programs 
managed across several federal agencies be consolidated to better 
promote safety and the integrity of the nation's food supply?

Increasingly, the government relies on new networks and partnerships to 
achieve critical results and develop public policy, often including 
multiple federal agencies, domestic and international non-or quasi-
government organizations, for-profit and not-for-profit contractors, 
and state and local governments. The federal government uses an array 
of different tools and program designs to work in this environment, 
such as direct service delivery, loans and loan guarantees, tax 
preferences, insurance programs, grants, and regulations. Ranging from 
education to homeland security, a complex network of governmental and 
nongovernmental entities shape the actual outcomes achieved, whether it 
be through formal partnerships in grant programs or through independent 
actions of each acting locally to address common problems. 
Notwithstanding the increased linkages in our system, each level of 
government often makes decisions on these interrelated programs 
independently, with little interaction or intergovernmental dialogue. 
While the magnitude of the nation's challenges calls for a concerted 
effort across sectors, there are insufficient opportunities for leaders 
of those sectors to come together to reach consensus about the kinds of 
mutual commitments that are necessary.

How can greater coordination and dialogue be achieved across all levels 
of government to ensure a concerted effort by the public sector as a 
whole in addressing key national challenges and problems? For example, 
what mechanisms might usefully bring together leaders across 
governments to address joint problems, perhaps through establishing 
commissions or other vehicles for promoting dialogue?

More specifically, government has also begun to fundamentally change 
who does its business--recognizing that it could better partner with 
the private sector in new, more cost-effective ways. Agencies are 
assessing what functions and transactions the private sector could 
perform and asking their employees to compete with private entities for 
this business to improve quality and reduce costs. But the government 
does not yet know how this trend is affecting its workforce and its 
ability to refocus more on strategic needs or the extent to which it 
has delivered real cost savings. Collecting and evaluating data to 
ensure such transformations are implemented effectively and deliver the 
desired results will be critical.

Has the government's approach to competitive sourcing--using the 
private sector to do more of the government's business--proven 
successful? Should it be modified to improve results and reduce costs 
in a timely, fair, and equitable manner? For example, should federal 
agencies be more consistent in determining what work is inherently 
governmental and, therefore should be performed by federal employees? 
For work that is not inherently governmental, should agencies be 
required to develop plans for competing this work in order to achieve 
measurable efficiencies and performance improvements?

Performance, mission, cost, schedule, and other risks are inherent in 
major federal programs and investments such as weapons systems, 
homeland security, federal buildings and other infrastructure, 
transportation subsidies, environmental clean-up, and information 
technology systems. Despite these risks, federal agencies often lack 
comprehensive risk management strategies that are well integrated with 
program, budget, and investment decisions. As one example among many, 
homeland security investments are designed to reduce risks to the 
nation's communities and assets, but the availability of a common set 
of analytical tools and procedures on how agency management should use 
them can be improved to better align the allocation of homeland 
security resources with risk-related measures, such as relative risk 
and risk reduction per dollar invested. Governmentwide guidance 
generally does not fully integrate risk management into all aspects of 
decision-making such as policy making, program planning, 
implementation, and monitoring. More broadly, the Congress and the 
executive branch face a series of difficult and contentious trade-offs 
as they re-examine, re-prioritize, and restructure the base of federal 
programs in response to current budget demands and long-term fiscal 
challenges and the changing risk profiles faced by programs and 
agencies change. As was discussed in section 1, much of the base of the 
federal government was put in place in response to the wants, needs, 
and affordabilities of an earlier era. For example, some risks to 
farmers and to the aging population as discussed elsewhere in this 
section have changed over the decades, as have the tools for evaluating 
and communicating risk about costs and other outcomes. A more thorough 
and disciplined approach to identifying and managing risk across the 
federal government could help in structuring and informing the daunting 
decisions that need to be made.

How could the federal government consistently apply a comprehensive 
risk management framework to help guide federal programs and apply 
resources efficiently and to best effect? For example, can the Office 
of Management and Budget and the Department of Homeland Security 
develop guidance for Homeland Security to better align federal 
investments in preparedness with the potential risk and threat facing 
the nation's assets and communities? To what extent should federal 
agencies, such as DOD or NASA, consider and report on the uncertainty 
of cost estimates for major procurements in budget requests? To what 
extent can changing risks be monitored across federal programs and how 
can these changes be used to review the base of ongoing federal 
commitments?

A range of individual agencies need to successfully complete their 
specific transformation initiatives. For example, the U.S. Postal 
Service is under increasing financial pressure as the Internet, 
electronic bill payment, and growing competition from private delivery 
companies are changing the nation's communication and delivery sectors 
and adversely affecting mail volume. Yet the Postal Service's ability 
to address these challenges is hindered by an outmoded business model 
that relies on mail volume growth to cover rising costs. The service is 
working to cut costs, improve productivity, reduce its workforce, and 
make other needed changes, but it will need attention and support as it 
adapts a new and more competitive business model.

How should agencies, including the U.S. Postal Service, transform their 
services, infrastructure, legal framework, operations, and workforce to 
keep pace with rapid changes in technology as well as in the 
communications, labor, and other sectors of the economy?

What are the specific leadership models that can be used to improve 
agency management and address transformation challenges? For example, 
should we create chief operating officer or chief management officer 
positions with term appointments within selected agencies to elevate, 
integrate, and institutionalize responsibility and authority for 
business management and transformation efforts?

The government has not transformed, in many cases, how it motivates and 
compensates its employees to achieve maximum results within available 
resources and existing authorities. Even though people are critical to 
any agency's successful transformation, define its culture, develop its 
knowledge, and are its most important asset, a number of agencies still 
try to manage this asset with a "one-size-fits-all" approach. For 
example, employees are compensated through an outmoded system that (1) 
rewards length of service rather than individual performance and 
contributions, (2) automatically provides across-the-board annual pay 
increases, even to poor performers, and (3) compensates employees 
living in various localities without adequately considering the local 
labor market rates for these employees. To address these problems and 
provide the services the public expects, the federal civil service 
system must be reformed governmentwide, and this reform must be guided 
by a set of consistent principles, criteria, and practices.

How should the federal government update its compensation systems to be 
more market-based and performance-oriented? For example, should poor 
performers be guaranteed pay increases? How can these systems ensure 
pay comparability and provide reasonable annual pay adjustments while 
also competing for critical occupations or in higher cost locations? In 
addition, how can the government make an increasing percentage of 
federal compensation "at risk" or dependent on achieving individual and 
organizational results by, for example, providing more compensation as 
one-time bonuses rather than as permanent salary increases?

More than 30 federal agencies control about $328 billion in real 
property assets worldwide, and maintain a "brick and mortar" buildings 
and office presence in 11 regions across the nation. But this 
organization and infrastructure reflects a business model and the 
technological and transportation environment of the 1950s. Many of 
these assets are no longer needed; others are not effectively aligned 
with, or responsive to, agencies' changing missions; and many others 
are in an alarming state of deterioration, potentially costing 
taxpayers tens of billions of dollars to restore and repair. The 
Congress and several agencies have recognized and begun to address this 
issue, but this financial liability still looms.

In a modern society with advanced telecommunications and electronic 
information capabilities, does the government still need 11 regions? 
Which agencies still need a physical presence in all major cities?

What opportunities exist to more strategically manage the federal 
government's real property assets, such as disposing of excess federal 
facilities or better leveraging surplus in the private sector to make 
the federal portfolio more relevant to current missions and less 
costly?

Tax System Challenges in the 21st Century:

American taxpayers paid about $1.9 trillion in combined federal taxes, 
including income, payroll, and excise taxes, in fiscal year 2004. These 
taxes, along with over $4 trillion in deficit borrowing, funded the 
federal government. The tax revenue raised represented about 16 percent 
of gross domestic product--at the low end of the range of federal taxes 
as a share of GDP for the last 40 years.

Beyond funding government, any tax system, including the current one, 
has profound effects on the economy as a whole and on individual 
taxpayers, both for today and tomorrow. Taxes affect decisionmaking 
throughout the economy, including decisions concerning how much and 
where to work, save, and invest. These decisions, in turn, affect 
economic growth and future income, and thus future tax revenues.

Concerns about the tax system's effect on future economic performance 
are one driver of the current debate about the future of that system. 
The U.S. position in the worldwide economy has fundamentally changed 
and the structure and composition of our economy has shifted. U.S. 
workers and firms must now succeed in a world of fast-paced 
technological change and constantly evolving global competition. Also, 
as noted in section 1, the imbalance between federal revenues and 
expenditures, if allowed to persist long term, will affect economic 
growth. Addressing the imbalance will require greater scrutiny of both 
tax revenues and expenditures.

The following challenges and illustrative questions provide a framework 
for thinking about these issues in the future.

The success of our tax system hinges very much on the public's 
perception of its fairness and understandability. Fairness is 
ultimately a matter of personal judgment about issues such as how 
progressive tax rates should be and what constitutes ability to pay. 
Fairness also depends on the extent to which taxpayers believe their 
friends, neighbors, and business competitors are complying with the tax 
laws and actually paying their taxes. Compliance is influenced by the 
effectiveness of the Internal Revenue Service's (IRS) enforcement 
efforts but also by Americans' attitudes about the tax system and 
government. Disturbing recent polls indicate that about 1 in 5 
respondents say it is acceptable to cheat on their taxes.

Given our current tax system, what tax rate structure is most likely to 
raise sufficient revenue to fund government and satisfy the public's 
perception of reasonableness and fairness?

How can we best strengthen enforcement of tax laws to give taxpayers 
confidence that their friends, neighbors, and business competitors are 
paying their fair share? For example, can we increase compliance with 
the tax laws and reduce the need for IRS enforcement activities through 
greater use of withholding and information reporting? Would improved 
compliance data allow IRS to better allocate its enforcement resources? 
Could increased penalties and disclosure reduce the use of abusive tax 
shelters?

Over the years the federal tax system and especially the federal income 
tax has become more complex, less transparent, and subject to frequent 
revision. Some complexity is understandable in an economy as diverse 
and sophisticated as ours. However, tax system complexity and frequent 
revisions make it more difficult and costly for taxpayers who want to 
comply to do so and for IRS to explain and enforce the tax laws. Many 
argue that complexity creates opportunities for tax evasion, through 
vehicles such as tax shelters, which in turn motivate further changes 
in tax laws and regulations and perhaps more complexity. A lack of 
transparency also risks creating disrespect for the tax system and the 
government.

What opportunities exist to streamline and simplify the current tax 
system and thereby make it more transparent to taxpayers, reduce 
opportunities for tax evasion, and decrease the compliance burden on 
taxpayers? For example, can the Alternative Minimum Tax be eliminated? 
Can the Earned Income Tax Credit eligibility rules be simplified? Could 
the measurement of income be simplified?

The growing complexity of the tax system stems in part from the 
extensive use of tax incentives to promote social and economic 
objectives. The tax system includes hundreds of billions of dollars of 
such incentives--the same magnitude as total discretionary spending. 
For instance, the Low Income Housing Tax Credit is the federal 
government's largest program for creating new affordable housing units 
and the Earned Income Credit is its largest cash assistance program for 
low-income families. However, tax incentives do not compete in the 
annual budget process and effectively are "fully funded" before any 
discretionary spending is considered. Further, relatively little is 
known about the effectiveness of tax incentives in achieving the 
objectives intended by the Congress. As far back as 1994, GAO concluded 
these incentives deserved more scrutiny.

Which tax incentives need to be reconsidered because they fail to 
achieve the objectives intended by the Congress, their costs outweigh 
their benefits, they duplicate other programs, or other more cost-
effective means exist for achieving their objectives? For example, 
could health-related tax incentives, including the treatment of 
employer-provided health insurance, which has been estimated to be over 
$180 billion in both income and certain payroll taxes, be better used 
to promote broader health care access, more efficient health care 
delivery, and more effectively control costs?

Rather than reconsider specific types of tax incentives, is it time to 
consider another 1986-style tax reform (broadening and simplifying the 
tax base by eliminating many tax preferences thus allowing tax rates to 
be minimized)?

Incentives for savings are a particular concern. Private sector savings 
are near historical lows and government savings, due to federal budget 
deficits, are negative. Low rates of domestic saving force the nation 
to rely on foreign lenders to finance new investment. The tax code 
includes many incentives intended to increase savings to finance 
retirement, health care, higher education, and so on. These savings 
incentives, which exempt some income from tax, have moved the current 
tax system in the direction of a consumption base. These incentives, 
however, are complex and, although not completely settled, researchers 
have raised questions about how much, if any, net new savings they 
stimulate.

How effective are existing tax incentives at increasing savings for 
their targeted purposes? How effective are they at increasing overall 
national savings? Could the myriad savings incentives (IRAs, health 
savings accounts, several education savings incentives, etc.) that 
complicate the current tax system be consolidated and simplified while 
promoting increased savings?

The debate about the future tax system is partly about whether the 
goals for the nation's tax system can be best achieved using the 
current structure, which is heavily dependent on income taxes, or a 
fundamentally reformed structure, which might include more dependence 
on consumption taxes, a flatter rate schedule, and fewer tax 
incentives. Increasing globalization, which makes it easier to move 
assets, income, and jobs across international borders, is another 
motivator for the debate. As policymakers grapple with such issues, 
they will have to balance multiple objectives such as economic growth, 
equity, simplicity, transparency, and administrability while raising 
the needed revenue. The appropriate balance among these objectives may 
also be affected by (1) how, if at all, to take into account that, 
including both the employer and the employee share, an estimated two-
thirds of taxpayers would pay more in 2004 in payroll taxes--which are 
levied to fund social security and Medicare benefits--than they pay in 
income taxes and (2) whether and how to tax wealth.

Is the federal income-based tax system sustainable and administrable in 
a global economy? How should we tax the income of U.S. multinational 
corporations that is earned outside of the U.S.?

Should the basis of the existing system or any new reforms be changed 
from an income to a consumption base (today we actually have a hybrid 
system)? Would such a change help respond to challenges posed by 
demographic, economic, and technological changes? How would such a 
change affect savings and work incentives?

Regardless of whether a consumption tax is created, the current income 
tax is revised, or other fundamental tax system changes are made, how 
should the burden be allocated among taxpayers? Who should pay more and 
who should pay less? How can burden be distributed according to 
policymakers' decisions while minimizing complexity and preserving the 
desired benefits of any fundamental tax policy changes?

How would the interrelationships between the federal and state and 
local tax systems and with the payroll tax system be taken into account 
when changing the federal tax system? How should wealth be taxed, if at 
all, in either an income or consumption based tax system and in any 
conversion to a consumption tax? How should transfers of wealth be 
taxed, if at all?

[End of section]

Section 3: Where Do We Go From Here?

The reexamination questions posed in this report constitute both a 
challenge and an opportunity. Given the size of the fiscal imbalances 
looming in the future, business as usual will not suffice. The real 
question is not whether we deal with the fiscal imbalance, but how and 
when. Our policy process will be challenged to act with more foresight 
to take early action on problems that may not constitute an urgent 
crisis but pose important longer term threats to the nation's fiscal, 
economic, security, and societal future. To address these issues, 
policymaking institutions will also be challenged to shift from the 
traditional focus on incremental changes in spending or revenues to 
look more fundamentally at the underlying relevance, relative priority 
and results of various federal programs, policies, functions, and 
activities in addressing current and emerging national needs and 
problems across all major areas of the federal budget--discretionary 
spending, entitlements and other mandatory spending, and tax policies 
and programs.

While not easy, the periodic reexamination of existing portfolios of 
federal programs offers the prospect of weeding out ineffective or 
outdated programs while strengthening and updating those programs that 
are retained. Thus, such a process addresses not only fiscal imbalances 
but also can improve the responsiveness and effectiveness of government 
in addressing 21st century needs and challenges. As discussed in 
section 1 of this report, the nation's current fiscal policy path is 
unsustainable. The questions posed in section 2 of this report can be 
considered as one input among many that Congress will receive as it 
decides how to address these issues. While answers can draw on the work 
of GAO and others, only elected officials can and should decide 
whether, how, and when to move forward.

Fiscal Challenges Prompt the Need for a New Approach:

The stakes associated with federal programs are large, both for 
beneficiaries of those programs and the nation's taxpayers. These 
programs serve important constituencies and provide significant current 
benefits. Accordingly, challenging the underlying basis, rationale, and 
results achieved by these programs is never simply an analytic 
exercise, but rather a political process involving players with 
strongly felt views and differing interests.

The conflicts and uncertainties entailed in budgeting and policymaking 
are often mitigated by focusing decisions on incremental changes in 
resources each year. As a result, this incremental process focuses 
disproportionate attention on proposed changes to existing programs and 
proposals for new programs, with the base of programs being taken as 
"given." This traditional process helps ensure stability and certainty 
in federal funding commitments and helps target the limited time and 
attention of policymakers on new proposals or proposals to change 
existing activities. While this approach may be appropriate in periods 
of stability and fiscal strength, it may be insufficient during a time 
of change and fiscal challenge.

Moreover, the process routinely examines only the one-third of federal 
spending subject to the annual appropriations process. By definition, 
entitlement programs and tax expenditures are generally not reviewed or 
reauthorized annually, and many of these programs are not even subject 
to periodic reauthorization to ensure that they are periodically 
reviewed. As the nation enters a period when the existing portfolio of 
programs is unaffordable and unsustainable at current levels of 
taxation, a more fundamental review of all major existing spending and 
tax policies and programs is not only appropriate but essential.

The size of the problem is so large that across-the-board approaches to 
distributing cuts broadly across many individual programs and accounts 
cannot really work. In addition, such approaches can result in 
retaining fat while cutting muscle--specifically, across-the-board 
cuts risk cutting effective programs while leaving ineffective, 
outdated, or lower priority programs in the base. An across-the-board 
approach also constitutes a missed opportunity to address at a 
fundamental level the drivers of long-term deficits. Given the size of 
the long-term fiscal imbalances, all major spending and revenue 
programs in the budget should be subject to periodic reviews and 
reexamination. While it is important to focus on the major programs 
driving the long-term outlook--Medicare, Medicaid and Social Security-
-our recent fiscal history suggests that exempting major areas from 
reexamination and review can undermine the credibility and political 
support for the entire process. Given the size of the long-term fiscal 
imbalances, it is highly unlikely that this problem can be "solved" by 
reforms in any one sector.

Building Support for a Reexamination Process:

We recognize that reexamining the base is a challenging process for 
both leaders and stakeholders alike. Just as the traditional process 
limits choices and political conflict, putting entire programs up for 
review periodically can increase the stakes and conflict associated 
with budget decisions. Accordingly, a process to review established 
programs and priorities will need to be supported by a strong and 
publicly compelling rationale.

The challenge for leaders is to frame the fiscal challenges as 
something with important consequences for the values and interests that 
affect American citizens, both now and in the future. As participants 
at GAO's recent budget forum noted, leaders have been able to make a 
compelling case for fiscal sacrifice before, but it is never 
easy.[Footnote 3] While current deficits are troubling, they are but a 
prelude to the daunting long-term fiscal challenges highlighted in 
section 1 that are significant, structural and unsustainable in nature. 
However, long-term issues can be difficult to address, particularly 
when the most significant impact is beyond the 10 year baseline time 
horizon.

Effective and sustained leadership will be necessary to gain support 
among the public and other key players for addressing these long-term 
fiscal issues. Taking a long-term perspective can provide important 
dividends for leaders in making the case to the broader public for 
initiating a reexamination process sooner rather than later. Early 
action can turn the power of compounding from an enemy to an ally, as 
reduced deficits usher in reduced debt, interest costs and economic 
growth. Moreover, early action can enable leaders to phase in changes 
over many years to permit future program beneficiaries to more easily 
adjust to policy changes by altering their own private choices for 
savings, retirement, or other issues. Finally, reexamination can also 
be used as a way to free funding for new programs and investments, 
thereby providing more immediate support for the exercise.

Perhaps the most compelling reason to begin the review process now is 
the dire consequences of waiting for a crisis. If we wait for deficits 
to rise to levels that seriously alarm markets or other economic actors 
to the point of approaching or reaching a "tipping point," the nation 
will be forced to adopt major and precipitous policy actions that would 
have significant disruptive consequences for the lives of retirees and 
workers alike.

Given the severity of the nation's fiscal challenges and the wide range 
of federal programs, the hard choices that need to be considered may 
take a generation to address. Beginning the reexamination and review 
process now would enable decision makers to be more strategic and 
selective in choosing areas for review over a period of years. 
Reexamining selected parts of the budget base, over time rather than 
all at once, will lengthen the process, but it may also make the 
process more feasible and less burdensome for decision makers. And by 
phasing in change to programs or policies that might otherwise have 
prohibitively high costs of transition, the burden of change can be 
spread out over longer time periods.

Notwithstanding the challenges associated with reexamination, 
reviewing the base of programs and operations has ample precedent. The 
federal government, in fact, has reexamined and reformed selected 
programs and priorities in the past. From a programmatic perspective, 
such reexaminations have included, for example, the 1983 Social 
Security reform, the 1986 tax reform, and the 1996 welfare reform. They 
have also included reforms such as the creation of the Department of 
Homeland Security and, most recently, the ongoing reorganization of the 
U.S. intelligence community. From a broader fiscal standpoint, the 
1990s featured significant deficit reduction measures adopted by the 
Congress and supported by the President that made important changes to 
discretionary spending, entitlement program growth, and revenues that 
helped eliminate deficits and bring about budgetary surpluses.

Some may be skeptical as to whether our political system is able to 
address long-term problems or commitments. However, such skepticism 
ignores past examples of attention to long-term goals. The interstate 
highway program took a generation to plan and complete. The Social 
Security system was created with very long time horizons in mind and 
has undergone major restructuring in both 1977 and 1983, with an eye 
toward improving the program's longer-term sustainability. As a nation, 
we also anticipated, and as a result met, the educational capacity 
needs of the baby boom all the way from primary school to college.

States and other nations also have engaged in reexamination exercises. 
States have variously examined their bases, through cutback management, 
performance and strategic planning, budget reform, and privatization/
contracting out. In recent years, various states have reexamined their 
various programs and priorities through such mechanisms as efficiency 
commissions and reprioritization exercises. For instance, the state of 
Washington adopted what it calls a statewide results-based approach to 
budgeting called "Priorities of Government" to address a budgetary 
shortfall of $2.4 billion for the 2003-2005 biennium. Under this 
system, programs and activities were reviewed and ranked based on their 
relative contribution to eleven broader performance goals, leading to 
cuts for programs below the line of available revenues.

Other nations, too, have undertaken comprehensive reexamination 
efforts. New Zealand, Australia, Canada, and the Netherlands, for 
example, have undergone performance-based budgeting and performance 
management reforms aimed at reprioritizing the base of their respective 
governmental activity and budget that spanned a number of years. In 
Canada, an OECD study concluded that a program review exercise 
delivered $18.8 billion in savings above previously-planned reductions 
(cumulative over 3 years) announced in the 1995 and 1996 budgets and to 
that extent certainly contributed to achieving--and in fact exceeding-
-the original deficit-to-GDP target of 3 percent by 1996-97. In the 
Netherlands, reconsideration reviews are conducted on particular 
programs selected for each budget cycle, with participation by working 
groups of central budget and departmental staff as well as external 
experts, resulting in a public report with recommendations to be 
considered in the budget process. According to OECD, the process has 
been in place since 1981 and has lead to significant savings as well as 
many reforms of major policy areas.[Footnote 4]

Multiple Approaches Can Facilitate Reexamination:

In our system a successful reexamination process will in all likelihood 
rely on multiple approaches over a period of years. Rules and process 
can play a role in facilitating decisions and supporting leaders in 
making tough choices. However, processes cannot by themselves force 
decisions. Leadership, a sense of stewardship for the future, and an 
agreement that tough choices and meaningful actions are required and 
essential for success.

Some congressional observers believe a deceptively simple approach may 
hold the most promise: reliance on the existing reauthorization, 
oversight, appropriations, and budget processes. They have been 
deployed to review and change existing programs on a selective or 
episodic basis, but each also is perceived to have certain constraints 
that have prompted calls for change:

* The reauthorization process. The reauthorization process affords the 
Congress the opportunity to probe into the effectiveness of a program 
and to terminate or make any changes before providing funding for the 
reauthorized program. Reauthorization is the purview of authorizing 
committees in the Congress and authorizations generally precede 
appropriations. However, some programs have authorizations that are 
permanent and do not expire while others are subject to periodic 
reauthorizations, are funded by permanent appropriations, such as the 
Veterans Affairs Pensions Benefits program. Furthermore, concerns have 
been expressed that the authorization process has increasingly been 
made less effective by the continuation of funding in appropriations 
bills even when programs' authorizations have expired, such as the 
Federal Bureau of Investigation (FBI) and the Federal Prison System, 
which were funded in fiscal year 2005 with expired authorizations of 
appropriations.

* The oversight process. Although oversight can and does occur with 
authorizations and appropriations, the Congress also has a separate 
oversight process available outside the traditional reauthorization/
appropriations discussions. This oversight process provides the 
Congress the means to hold agencies accountable for the economy, 
efficiency, and effectiveness of existing policies, programs, and 
agency operations. The committees primarily responsible for exercising 
this oversight are the Senate Committee on Homeland Security and 
Governmental Affairs and the House Committee on Government Reform, 
although authorizing committees also engage in oversight reviews and 
hearings in connection with matters within their jurisdiction. GAO and 
agencies' inspectors general support congressional oversight with 
analysis, evaluations, investigations, and reviews of various programs 
and operations. Concerns have been expressed by a number of observers 
regarding the need to increase attention to oversight in the Congress 
and the lack of legislative follow-through for findings of oversight 
investigations and hearings.

* The appropriations process. For the approximately one-third of the 
federal budget that is subject to the annual appropriations process, 
this process gives the Congress the opportunity to annually review 
programs and operations. Although this process does not touch the major 
drivers of the long-term deficit (e.g., Medicare, Medicaid, Social 
Security) it does cover programs important to citizens and the nation 
(e.g., defense, homeland security, health research, transportation, 
national parks, education, environment). The squeeze created by the 
growth in mandatory spending increases the need to ensure that this 
part of the budget is reexamined and adapted to the 21st century.

* The budget process. The congressional budget process is the annual 
vehicle through which the Congress articulates both an overall fiscal 
stance--overall targets for spending and revenue--and its priorities 
across various broad categories. The process provides the overall 
constraints for spending and revenue actions by the Congress for each 
year and the rules of procedure that can be used to constrain new 
entitlement and tax legislation not assumed in the annual budget 
resolution. Directions contained in the budget resolution for 
reconciliation legislation trigger the review of existing programs by 
directing congressional committees to propose cuts to meet savings 
targets contained in the resolution. The budget rules that were 
grounded in statute--including discretionary spending caps and "PAYGO" 
limits on mandatory spending and tax cuts--and enforced by executive 
actions if violated, expired at the end of fiscal year 2002; the only 
constraints are those contained and enforced through congressional 
budget resolutions, and reinforced by points of order.

Other specific approaches and processes have been proposed to 
supplement the existing congressional processes and entities. While 
these are generally aimed at addressing perceived limitations with 
existing processes and to prompt greater incentives or support for 
review and reexamination, each have their own set of potential benefits 
as well as limitations that have historically constrained their use or 
success:

* Special temporary commissions. Special temporary commissions have 
been convened to formulate recommendations for specific policy or 
functional areas. Temporary commissions are appealing because they 
provide a safe haven for developing policy alternatives, often are 
bipartisan in nature, may involve both executive and legislative branch 
representatives, and typically include experts both within and outside 
of government. Most commissions are designed to address issues in a 
timely manner and then are dissolved. Commissions can be very 
promising, but their ultimate success depends on the extent to which 
the Congress and the executive branch agree about the need for action, 
on the need to use a nontraditional approach to reach agreement or to 
develop a specific proposal, and on their general willingness to 
address the recommendations of such commissions. This can be seen in 
the differing results of some examples: Social Security reform (e.g., 
Greenspan Commission and Moynihan Commission), terrorism and 
intelligence reform (e.g., 9-11 Commission), military base realignment 
and closures (e.g., BRAC Commission), and Medicare (e.g., Breaux 
Commission).

* Sunset provisions. Proposals have been made to institute across-the-
board provisions terminating all existing programs after a certain 
number of years to trigger their reexamination. Although numerous 
specific programs contain fixed period authorizations that are like 
sunset provisions, such as the federal highway funding and the 
Temporary Assistance for Needy Families (TANF) program, a broad federal 
sunset law has never been adopted. Concerns about this approach include 
the burden of a crosscutting provision and the lack of targeting those 
programs most in need of reexamination. In addition, some have noted 
that fixed-period authorizations are, in effect, sunset provisions. The 
reauthorization process can offer the same opportunity for 
reexamination--and if appropriations are not forthcoming in the absence 
of a reauthorization, then fixed-term authorizations effectively 
constitute sunsets.

* Executive reorganization authority. In the past, the Congress has 
provided the president with authority to propose and gain fast-track 
consideration of changes in structures and responsibilities of federal 
agencies and programs. However, such authority has been progressively 
limited over the years. The fundamental issue raised by granting 
reorganization authority to the President is whether and how the 
Congress wishes to change the nature of its normal deliberative process 
when addressing Presidential proposals to restructure the federal 
government. The Congress may want to consider different tracks for 
proposals that propose significant policy changes versus those that 
focus more narrowly on government operations.

* Biennial Budgeting. Shifting appropriations to a biennial cycle has 
been proposed as a way to promote more systematic congressional 
oversight and review in the "off" year. However, skeptics note that 
whether this reform in fact frees more congressional time depends on 
whether the budget remains relatively unchanged during the off year. 
The Congress has been passing annual supplemental appropriations in 
recent years and this is expected to continue for several more years. 
Moreover, some argue that reducing appropriations reviews to once every 
other year would serve to reduce the opportunities for the Congress to 
routinely examine and review programs and executive operations. 
Although some states use biennial budgeting (e.g., Texas, Connecticut, 
and Ohio), their experiences are mixed, with the governor having more 
budgeting power than the President.

Performance and analytic tools may be as important as or more important 
than specific process reforms in facilitating reexamination. In this 
regard, the performance metrics and plans ushered in by the Government 
Performance and Results Act of 1993 (GPRA) have led to a growing supply 
of increasingly sophisticated measures and data on the results achieved 
by various federal programs. Agencies and OMB have been working over 
the years to strengthen the links between this information and the 
budget. Under the Program Assessment Rating Tool (PART), for example, 
OMB plans to rate the effectiveness of each program in the budget over 
a 5-year period.

While these initiatives provide a foundation for a baseline review of 
federal policies, programs, functions, and activities, several changes 
are in order to support the type of reexamination we have in mind. 
First, the PART focus on individual programs will provide important new 
assessments, but it needs to be supplemented by a more crosscutting 
assessment of the relative contribution of portfolios of programs and 
tools to broader outcomes. Most key performance goals of importance--
ranging from low income housing to food safety to counterterrorism--are 
addressed by a wide range of discretionary, entitlement, tax, and 
regulatory approaches that cut across a number of agencies. While OMB 
is moving to include some crosscutting assessments in the fiscal year 
2006 PART, fully developing the governmentwide performance plan 
provided for under GPRA would provide a more systematic vehicle for 
addressing the performance of programs cutting across agencies to 
broader goals. Second, the Congress could consider the need to focus 
its oversight and review on these important overarching goals and 
missions by considering adopting a performance agenda of its own. One 
potential approach we have suggested is a performance resolution that 
could be included as part of the annual budget resolution to help 
target congressional activity on key program areas or performance 
problems. Once program areas or problems are selected, special 
collaborative initiatives among GAO, CRS, CBO, IGs, and even OMB could 
be undertaken to identify and evaluate various performance issues and 
alternatives for congressional consideration, including identifying 
specific programs ripe for reorganization, consolidation, or other 
reforms.

Conclusion:

As the foregoing discussion suggests, there are a range of available 
reexamination approaches and strategies. Assuming that reexamination is 
pursued by the Congress adopted as a congressional objective, we 
suggest that the challenge for the Congress is at least threefold: (1) 
building support within the Congress itself, the Administration, and 
ultimately the broader public to justify a base-line reexamination of 
existing federal policies, programs, functions, and activities as 
discussed in section 1, (2) identifying those areas that congressional 
and executive leaders agree need review along the lines of the 
illustrative questions offered in section 2, and (3) choosing 
reexamination approaches and strategies that are appropriate for the 
particular areas being examined as discussed in this section.

The choice among reexamination approaches will be informed by many 
factors. Initially, the choice of reexamination tools or approaches may 
be determined depending on such factors as how frequently an issue 
arises and the degree of political support and complexity. For example, 
a commission may be well suited to moving along ideas for problems that 
occur infrequently and that require "cover" to reach political 
agreement, such as Social Security reform. The reauthorization and 
oversight processes may be better suited for problems that occur more 
frequently, but not every year, as is the case with TANF 
reauthorization and oversight hearings on the activities of federal 
agencies. The appropriations process may be more conducive to policy 
matters requiring congressional action every year, such as the funding 
of national defense. In fact, a mix of different approaches has often 
been used to reexamine and reform specific policy areas in the recent 
past, as shown in figure 5.

Figure 5: Selected Reforms and Reexamination Approaches:

Congress has enacted major reforms in recent years which were promoted 
and considered through the use of various reexamination processes and 
tools:

Intelligence reform-The Intelligence Reform and Terrorism Prevention 
Act of 2004 aimed to unify, coordinate, and make more effective the 
U.S. intelligence community. Congress drew on the reexamination agenda 
put forward by the National Commission on Terrorist Attacks Upon the 
United States (9-11 Commission), in developing the actual legislation 
through its committee system.

Department of Homeland Security-The Homeland Security Act of 2002 
brought together 22 organizations and created the Department of 
Homeland Security. In its proposal for a Department of Homeland 
Security, the President included several provisions similar to those 
proposed by reexamination effort of the U.S. Commission on National 
Security/21st Century (Hart-Rudman Commission). Congress tailored the 
actual legislation following hearings and consideration by its 
authorizing and oversight committees.

Farm reform-The Federal Agriculture Improvement and Reform Act of 1996 
changed the federal government's approach to farm support from a policy 
based on managing crop production and supporting farm income to a 
policy that allows producers flexibility in what they plant. The need 
for new legislation was triggered by the provision in permanent law 
that would have rebased subsidies to levels authorized in 1949-leading 
to higher subsidies and federal costs.

Social Security reform-The 1983 Amendments to the Social Security Act 
made changes in Social Security coverage, financing, and benefit 
structure. The reform was made necessary by projections showing 
insufficient fund assets to pay all benefits. A bipartisan executive-
legislative commission developed the proposal that led to legislation 
receiving widespread bipartisan congressional support.

Source: GAO.

[End of figure]

Other important factors that will drive the specific approaches used 
include the public's readiness and familiarity with the issues being 
reexamined, the need for some kind of budgetary constraint or incentive 
to prompt review, the desire for consensus among stakeholders, and the 
stage of development of the issue itself.

Figure 6 demonstrates how different approaches might be appropriate at 
differing stages of the development of an issue, ranging from the need 
to simply raise awareness about the related, perhaps not widely 
perceived, reexamination issues all the way to the need to develop 
specific proposals for dealing with relatively well-defined problems. 
Studies by GAO or other independent and qualified organizations could 
be used to raise public awareness of issues and problems ("agenda 
setting"). Congressional hearings and other forums (e.g., regional 
sessions) could be used to educate the broader public about the need 
for change. When prioritizing the issue among other concerns, the 
Congress might use the occasion of the annual budget resolution, the 
oversight agenda, or perhaps develop a new performance resolution to 
rank its reexamination and review priorities. For developing policy 
proposals, the Congress can rely on existing authorization processes, 
or can rely on a temporary special commission to develop new policy 
proposals or recommendations for particularly complex or controversial 
areas. As a reexamination unfolds, then, a combination of approaches 
may be needed.

Figure 6: Reexamination Maturity Model:

Different developmental stages of reexamination:
* Agenda setting--raising awareness of issues by collecting information 
and defining the nature, timing and scope of new issues and problems 
with existing programs; 
May require different reexamination approaches, such as: 
* Studies by GAO or other independent and qualified organizations.

Different developmental stages of reexamination: 
* Educating--informing the broader public about need for change; 
May require different reexamination approaches, such as: 
* Congressional hearings or other forums.

Different developmental stages of reexamination: 
* Prioritizing and aggregating--validating the basis for problem 
definition, and prioritizing and grouping assessments of current 
programs; 
May require different reexamination approaches, such as: 
* Leadership prioritization initiatives; 
* Annual congressional budget resolution/oversight agenda.

Different developmental stages of reexamination: 
* Developing policy proposals--providing a menu of options, exploring 
differences, making recommendations; 
May require different reexamination approaches, such as: 
* Temporary special commissions; 
* Reauthorization process; 
* Executive reorganization authority.

Source: GAO.

[End of table]

Regardless of the specific combination of reexamination approaches 
adopted, the ultimate success of this process will depend on several 
important overarching conditions:

* Sustained leadership to champion changes and reforms through the many 
stages of the policy process.

* Broad based input by a wide range of stakeholders.

* Reliable data and credible analysis from a broad range of sources 
that provides a compelling fact based rationale for changing the base 
of programs and policies for specific areas.

* Clear and transparent processes for engaging the broader public in 
the debate over the recommended changes.

In conclusion, our nation faces large, growing and structural long-term 
fiscal imbalances that we cannot simply grow our way out of. Rather, 
hard choices based on a fundamental reexamination of government 
policies, programs, functions, and activities will be necessary in 
order to address our long-term fiscal imbalance. This will include 
consideration of what the federal government should do, how it should 
do business, and how it should be financed in the future. The 
resolution of these problems must invariably entail difficult political 
choices among competing programs that promise benefits to many 
Americans but are collectively unaffordable at current revenue levels. 
However, given the fiscal challenges, a reexamination of government can 
be expected, whether initiated through a public decision making process 
or forced on us by a crisis.

The questions provided in this volume are designed to illustrate the 
kinds of issues that such a review can address, not the answers that 
such a process will reach. Such a review will be difficult and the 
process may take a generation or more to unfold. The reexamination 
process will in fact proceed through various processes and venues. 
However, the nation will be better served if such a process begins 
sooner rather than later.

FOOTNOTES

[1] GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: 
January 2005) and Opportunities for Congressional Oversight and 
Improved Use of Taxpayer Funds, GAO-04-649 (Washington, D.C., May 7, 
2004).

[2] To view alternative scenarios between these "bookends," see the 
section on The Nation's Long-Term Fiscal Challenge on GAO's Web site 
(www.gao.gov/special.pubs/longterm/).

[3] GAO, Comptroller General's Forum: The Long-Term Fiscal Challenge, 
GAO-05-282SP (Washington, D.C.: February 2005).

[4] Organisation for Economic Co-operation and Development, 
Reallocation: The Role of Budget Institutions (GOV/PUMA/SBO (2003)15), 
May 16, 2003.

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To Report Fraud, Waste, and Abuse in Federal Programs:

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470:

Public Affairs:

Jeff Nelligan, managing director,

NelliganJ@gao.gov

(202) 512-4800

U.S. Government Accountability Office,

441 G Street NW, Room 7149

Washington, D.C. 20548: