Before the Committee on the Budget,

House of Representatives

United States General Accounting Office

GAO

For Release on Delivery

Expected at

10 a.m.

Thursday,

July 19, 2001

BUDGET PROCESS

Considerations for

Updating the Budget

Enforcement Act

Statement of Susan J. Irving

Director, Federal Budget Analysis

GAO-01-991T
Page 1 GAO-01-991T

Mr. Chairman, Mr. Spratt, Members of the Committee:

It is a pleasure to join you as you think about how to extend and adapt the

Budget Enforcement regime. The discretionary spending limits and pay-asyou-go (PAYGO) mechanism established by the Budget Enforcement Act

(BEA) will expire in fiscal year 2002.1

 Perhaps this timing is appropriate:

although most of us would argue that some controls are necessary even in

a time of surplus, the details will be different in a time of surplus than a

time of deficit.

Among the issues your staff asked me to cover is whether—and if so

how—the budget process can be designed to help avoid what has been

described as the year-end “train wreck.” Later in this statement I will talk

about some of the particular ideas that have been proposed in this area.

First, however, I’d like to talk a bit about what a process can and cannot

do. A process can surface important issues; it can seek to focus the debate

on the important choices. But it is not a substitute for substantive

debate—no process can force agreement where one does not exist.

We ask a great deal of our budget process. We use it to determine

aggregate fiscal policy and to allocate resources across different claims.

We use it to drive program management. In the context of the Government

Performance and Results Act of 1993, we turn to the budget to tell us

something about the cost of obtaining a given level of results. Asking the

process to take on the job of avoiding a “train wreck” may be more than

can reasonably be expected.

A year-end “train wreck” is the result of failing to reach agreement—or at

least a compromise acceptable to all parties—earlier in the year. Although

it is possible that reaching agreement on some broad parameters early on

could facilitate a smoother process, it is not clear that such an agreement

will always prevent gridlock—it may just come earlier. The details of

implementing broad agreements are often the subject of heated debate.

 1

Although the overall discretionary spending caps expire in 2002, the Highway and Mass

Transit outlay caps established under Transportation Equity Act for the 21st Century

(TEA-21) continue through 2003, and the conservation caps established as part of the fiscal

year 2001 Interior Appropriations Act were set through 2006. In addition, the sequestration

procedure applies through 2006 to eliminate any projected net costs stemming from

PAYGO legislation enacted through fiscal year 2002.
Page 2 GAO-01-991T

BEA, when first developed and later when it was extended, was a process

established to enforce a previously reached substantive agreement. As we

move from seeking to reduce the deficit to debating how much of the

surplus should be used, agreement on a broad fiscal policy posture might

help. How much of the surplus should be used to meet demands for tax

cuts and/or spending increases and how much for debt reduction? The

Congress and the President seem to have reached a tacit agreement that

the Social Security surplus should be used for debt reduction. While this

agreement sets the outside parameters for the budget debate, it does not

settle either the distribution between tax cuts or spending increases or the

allocation of either one. It is already evident that, by itself, this broad

framework is unlikely to make for smooth sailing.

While an orderly process may be important, and avoiding a “train wreck”

desirable, I believe there are other important issues to consider in

designing the budget process. As I have testified before, the budget

represents the decisions made about a large number of often conflicting

objectives that citizens want the government to address. We should not be

surprised that it generates controversy. As BEA expires and you move

from fighting current deficits to prudent management of surpluses, you

face a wealth of options and choices. I appreciate the invitation to talk

about some of these today. Some of these points are discussed more fully

in our recent BEA compliance report2

 that we prepared at your request,

Mr. Chairman.

In the past, we have suggested four broad principles or criteria for a

budget process.3

 A process should

• provide information about the long-term impact of decisions, both

macro—linking fiscal policy to the long-term economic outlook—and

micro—providing recognition of the long-term spending implications of

government commitments;

• provide information and be structured to focus on important macro tradeoffs—e.g., between investment and consumption;

 2

Budget Issues: Budget Enforcement Compliance Report (GAO-01-777, June 15, 2001).

3

For a fuller discussion of these criteria, see Budget Process: Evolution and Challenges

(GAO/T-AIMD-96-129, July 11, 1996), Budget Process: History and Future Directions

(GAO/T-AIMD-95-214, July 13, 1995), and Budget Process: Comments on H.R. 853

(GAO/T-AIMD-99-188, May 12, 1999).

Principles for a

Budget Process
Page 3 GAO-01-991T

• provide information necessary to make informed trade-offs between

missions (or national needs) and between the different policy tools of

government (such as tax provisions, grants, and credit programs); and

• be enforceable, provide for control and accountability, and be transparent,

using clear, consistent definitions.

The lack of adherence to the original BEA spending constraints in recent

years, the nearing expiration of BEA, and the projection of continued and

large surpluses in the coming years suggest that now may be an opportune

time to think about the direction and purpose of our nation’s fiscal policy.

In a time of actual and projected surpluses, the goal of zero deficit no

longer applies. Rather, discussion shifts toward how to allocate surpluses

among debt reduction, spending increases, and tax cuts. Only then can

limits on subcategories of spending be set. Will the entire social security

surplus be “saved”? What about the Medicare Part A surplus? In our work

on other countries that also have faced the challenge of setting fiscal

policy in times of surplus, we found that as part of a broad fiscal policy

framework some countries adopted fiscal targets such as debt-to-gross

domestic product (GDP) ratios to serve as guides for decision-making.

Complicating the discussion on formulating fiscal policy in a time of

surplus is the fact that the long-term picture is not so good. Despite

current projections that show surpluses continuing over the 10-year

budget window, our long-term budget simulations show a resumption of

significant deficits emerging after the anticipated demographic tidal wave

of population aging hits. These demographic trends serve to emphasize the

importance of the first principle cited above—the need to bring a longterm perspective to bear on budget debates. Keeping in mind these

principles and concerns, a number of alternatives appear promising.

There is a broad consensus among observers and analysts who focus on

the budget both that BEA has constrained spending and that continuation

of some restraint is necessary even with the advent of actual and projected

surpluses. Discussions on the future of the budget process have primarily

focused on revamping the current budget process rather than establishing

a new one from scratch.

Where discussion has moved beyond a general call for continued restraint

to specific control devices, the ones most frequently discussed are

(1) extending the discretionary spending caps, (2) extending the PAYGO

mechanism, and (3) creating a trigger device or a set of rules specifically

Alternatives for

Improving the Budget

Process
Page 4 GAO-01-991T

designed to deal with the uncertainty of budget projections. A new budget

process framework could encompass any or all of these instruments.

BEA distinguished between spending controlled by the appropriations

process—“discretionary spending”—and that which flowed directly from

authorizing legislation provisions of law—“direct spending,” sometimes

called “mandatory.” Caps were placed on discretionary spending—and the

Congress’ compliance with the caps was relatively easy to measure

because discretionary spending totals flow directly from legislative actions

(i.e., appropriations laws). There is broad consensus that, although the

caps have been adjusted, they have served to constrain appropriations.

This consensus combined with the belief that some restraints should be

continued has led many to propose that some form of cap structure be

continued as a way of limiting discretionary appropriations. However, the

actions in the last 2 years have also led many to note that caps can only

work if they are realistic; while caps may be seen as tighter than some

would like, they are not likely to bind if they are seen as totally

unreasonable given current conditions.

Further, some have proposed that any extension of BEA-type caps be

limited to caps on budget authority. Outlays are controlled by and flow

from budget authority—although at different rates depending on the

nature of the programs. Some argue that the existence of both budget

authority and outlay caps has encouraged provisions such as “delayed

obligations” to be adopted not for programmatic reasons but as a way of

juggling the two caps. The existence of two caps may also skew authority

from rapid spendout to slower spendout programs, thus pushing more

outlays to the future and creating problems in complying with outlay caps

in later years. Extending only the budget authority cap would eliminate the

incentive for such actions and focus decisions on that which the Congress

is intended to control—budget authority, which itself controls outlays.

This would be consistent with the original design of BEA.

Eliminating the outlay cap would raise several issues—chief among them

being how to address the control of transportation programs for which no

budget authority cap currently exists, and the use of advance

appropriations to skirt budget authority caps. However, agreements about

these issues could be reached—this is not a case where implementation

difficulties need derail an idea. For example, the fiscal year 2002 budget

proposes a revision to the scorekeeping rule on advance appropriations so

that generally they would be scored in the year of enactment. If the Budget

Committees and CBO agree, this change could eliminate the practice of

Extending Caps on

Discretionary

Spending
Page 5 GAO-01-991T

using advance appropriations to skirt the caps. The obvious advantage to

focusing decisions on budget authority rather than outlays is that the

Congress would not spend its time trying to control that which by design is

the result of its budget authority decisions—the timing of outlays.

There are other issues in the design of any new caps. For example, for

how long should caps be established? What categories should be

established within or in lieu of an overall cap? While the original BEA

envisioned three categories (Defense, International Affairs, and Domestic),

over time categories were combined and new categories were created. At

one time or another caps for Nondefense, Violent Crime Reduction,

Highways, Mass Transit, and Conservation spending existed—many with

different expiration dates. Should these caps be ceilings, or should they—

as is the case for Highways and Conservation—provide for “guaranteed”

levels of funding? The selection of categories—and the design of the

applicable caps—is not trivial. Categories define the range of what is

permissible. By design they limit trade-offs and so constrain both the

Congress and the President.

Because caps are phrased in specific dollar amounts, it is important to

address the question of when and for what reasons the caps should be

adjusted. This is critical for making the caps realistic. For example,

without some provision for emergencies, no caps can be successful. At the

same time, there appears to be some connection between how realistic the

caps are and how flexible the definition of emergency is. As discussed in

last year’s compliance report, the amount and range of spending

considered “emergency” has grown in recent years. There have been a

number of approaches suggested to balance the need to respond to

emergencies and the desire to avoid making the “emergency” label an easy

way to raise caps. In the budget resolution for fiscal year 2001 [H. Con.

Res. 290], the Congress said it would limit emergencies to items meeting

five criteria: (1) necessary, essential, or vital (not merely useful or

beneficial), (2) sudden, quickly coming into being, and not building up

over time, (3) an urgent, pressing, and compelling need requiring

immediate action, (4) unforeseen, unpredictable, and unanticipated, and

(5) not permanent, temporary in nature. The resolution further required

any proposal for emergency spending that did not meet all the criteria to

be accompanied by a statement of justification explaining why the

requirement should be accorded emergency status. The fact that this

provision was ignored during debates on fiscal year 2001 appropriations

bills emphasizes that no procedural hurdle can succeed without the will of

the Congress. Others have proposed providing for more emergency

spending—either in the form of a reserve or in a greater appropriation for
Page 6 GAO-01-991T

the Federal Emergency Management Agency (FEMA)—under any caps. If

such an approach were to be taken, the amounts for either the reserve or

the FEMA disaster relief account would need to be included when

determining the level of the caps. Some have proposed using a 5- or 10-

year rolling average of disaster/emergency spending as the appropriate

reserve amount. Adjustments to the caps would be limited to spending

over and above that reserve or appropriated level for extraordinary

circumstances. Alternatively, with additional up-front appropriations or a

reserve, emergency spending adjustments could be disallowed.4

Even with this kind of provision only the commitment of the Congress and

the President can make any limit on cap adjustments for emergencies

work. States have used this reserve concept for emergencies, and their

experiences indicate that criteria for using emergency reserve funds may

be useful in controlling emergency spending.5

 Agreements over the use of

the reserve would also need to be achieved at the federal level.

This discussion is not exhaustive. Other issues would come up in

extending BEA. Previously, we have reported on two issues—the scoring

of operating leases and the expansion of user fees as offsets to

discretionary spending; because I think they need to be considered, let me

touch on them briefly.

We have previously reported that existing scoring rules favor leasing when

compared to the cost of various other methods of acquiring assets.6

Currently, for asset purchases, budget authority for the entire acquisition

cost must be recorded in the budget up front, in the year that the asset

acquisition is approved. In contrast, the scorekeeping rules for operating

leases often require that only the current year’s lease costs be recognized

and recorded in the budget. This makes the operating lease appear less

costly from an annual budgetary perspective, and uses up less budget

authority under the cap. Alternative scorekeeping rules could recognize

 4

The administration’s fiscal year 2002 budget submission included a proposal to set aside a

reserve for emergency needs in the annual budget and appropriations process, arguing that

this would limit the need for emergency supplementals to extremely rare events.

5

Budgeting for Emergencies: State Practices and Federal Implications (GAO/AIMD-99-250,

Sept. 30, 1999).

6

Budget Issues: Budget Scorekeeping for Acquisition of Federal Buildings

(GAO/T-AIMD-94-189, Sept. 20, 1994).

Miscellaneous

Discretionary

Challenges: Leases

and User Fees
Page 7 GAO-01-991T

that many operating leases are used for long-term needs and should be

treated on the same basis as purchases. This would entail scoring up front

the present value of lease payments covering the same period used to

analyze ownership options. The caps could be adjusted appropriately to

accommodate this change.

Many believe that one unfortunate side effect of the structure of the BEA

has been an incentive to create revenues that can be categorized as “user

fees” and so offset discretionary spending—rather than be counted on the

PAYGO scorecard. The 1967 President’s Commission on Budget Concepts

recommended that receipts from activities that were essentially

governmental in nature, including regulation and general taxation, be

reported as receipts, and that receipts from business-type activities “offset

to the expenditures to which they relate.” However, these distinctions

have been blurred in practice. Ambiguous classifications combined with

budget rules that make certain designs most advantageous has led to a

situation in which there is pressure to treat fees from the public as offsets

to appropriations under BEA caps, regardless of whether the underlying

federal activity is business or governmental in nature. Consideration

should be given to whether it is possible to come up with and apply

consistent standards—especially if the discretionary caps are to be

redesigned. The administration has stated that it plans to monitor and

review the classification of user fees and other types of collections.

The PAYGO requirement prevented legislation that lowered revenue,

created new mandatory programs, or otherwise prevented direct spending

from increasing the deficit unless offset by other legislative actions. As

long as the unified budget was in deficit, the provisions of PAYGO—and its

application—were clear. The shift to surplus raised questions about

whether the prohibition on increasing the deficit also applied to reducing

the surplus. Although the Congress and the executive branch have both

concluded that PAYGO does apply in such a situation, any extension

should eliminate potential ambiguity in the future.

This year, the administration has proposed—albeit implicitly—special

treatment for a tax cut. The budget states that the President’s tax plan and

Medicare reforms are fully financed by the surplus and that any other

spending or tax legislation would need to be offset by reductions in

spending or increases in receipts. It is possible that in a time of budget

surplus, the Congress might wish to modify PAYGO to permit increased

direct spending or lower revenues as long as debt held by the public is

planned to be reduced by some set percentage or dollar amount. Such a

Extending and

Refining PAYGO
Page 8 GAO-01-991T

provision might prevent PAYGO from becoming as unrealistic as overly

tight caps on discretionary spending. However, the design of such a

provision would be important—how would a debt reduction requirement

be specified? How would it be measured? What should be the relationship

between the amount of debt reduction required and the amount of surplus

reduction (i.e., tax cut or direct spending increase) permitted? What, if

any, relationship should there be between this calculation and the

discretionary caps?

While PAYGO constrained the creation or legislative expansion of direct

spending programs and tax cuts, it accepted the existing provisions of law

as given. It was not designed to trigger—and it did not trigger—any

examination of “the base.” Cost increases in existing mandatory programs

are exempt from control under PAYGO and could be ignored. However,

constraining changes that increase the cost of entitlements and

mandatories is not enough. Our long-term budget simulations show that as

more and more of the baby boom generation retires, spending for Social

Security, Medicare, and Medicaid will demand correspondingly larger

shares of federal revenues. The growth in these programs will increasingly

restrict budgetary flexibility. Even if the Social Security surpluses are

saved and used for debt reduction, unified deficits are projected to emerge

in about two decades, and by 2030 Social Security, Medicare, and Medicaid

would require more than three-fourths of federal revenues.7

Previously we suggested some sort of “lookback” procedure to prompt a

reexamination of “the base.” Under such a process, the Congress could

specify spending targets for PAYGO programs for several years. The

President could be required to report in his budget whether these targets

either had been exceeded in the prior year or were likely to be exceeded in

the current or budget years. He could then be required to recommend

whether any or all of this overage should be recouped—and if so, to

propose a way to do so. The Congress could be required to act on the

President’s proposal.

While the current budget process contains a similar point of order against

worsening the financial condition of the Social Security trust funds,8

 it

 7

Long-Term Budget Issues: Moving From Balancing the Budget to Balancing Fiscal Risk

(GAO-01-385T, Feb. 6, 2001).

8

2 U.S.C. 632 (i), and Medicare Reform: Issues Associated With General Revenue Financing

(GAO/T-AIMD-00-126, Mar. 27, 2000).
Page 9 GAO-01-991T

would be possible to link “tripwires” or triggers to measures related to

overall budgetary flexibility or to specific program measures. For example,

if the Congress were concerned about declining budgetary flexibility, it

could design a tripwire tied to the share of the budget devoted to

mandatory spending or to the share devoted to a major program.

Other variations of this type of tripwire approach have been suggested.

The 1999 Breaux-Frist proposal (S. 1895) for structural and substantive

changes to Medicare financing contained a new concept for measuring

“programmatic insolvency” and required congressional approval of

additional financing if that point was reached. Other specified actions

could be coupled with reaching a tripwire, such as requiring the Congress

or the President to propose alternatives to address reforms or, by using

the congressional budget process, requiring the Congress to deal with

unanticipated cost growth beyond a specified tripwire by establishing a

point of order against a budget resolution with a spending path exceeding

the specified amount. One example of a threshold might be the percentage

of GDP devoted to Medicare. The President would be brought into the

process as it progressed because changes to deal with the cost growth

would require enactment of a law.

In previous reports we have argued that the nation’s economic future

depends in large part upon today’s budget and investment decisions.9

 In

fact, in recent years there has been increased recognition of the long-term

costs of Social Security and Medicare.10

While these are the largest and most important long-term commitments—

and the ones that drive the long-term outlook—they are not the only ones

in the budget. Even those programs too small to drive the long-term

outlook affect future budgetary flexibility. For the Congress, the President,

and the public to make informed decisions about these other programs, it

is important to understand their long-term cost implications.

 9

See Budget Process: Evolution and Challenges (GAO/T-AIMD-96-129, July 11, 1996) and

The Deficit and the Economy: An Update of Long-Term Simulations

(GAO/AIMD/OCE-95-119, Apr. 26, 1995), among others.

10Budget of the United States Government, Fiscal Year 2002, OMB, Apr. 9, 2001; The Budget

and Economic Outlook: Fiscal Years 2002-2011, CBO, Jan. 2001; GAO-01-385T, Feb. 6, 2001;

and Medicare: Higher Expected Spending and Call for New Benefit Underscore Need for

Meaningful Reform (GAO-01-539T, Mar. 22, 2001).

Improving the

Recognition of LongTerm Commitments
Page 10 GAO-01-991T

While the budget was not designed to and does not provide complete

information on long-term cost implications stemming from some of the

government’s commitments when they are made, progress can be made on

this front. The enactment of the Federal Credit Reform Act in 1990

represented a step toward improving both the recognition of long-term

costs and the ability to compare different policy tools. With this law, the

Congress and the executive branch changed budgeting for loan and loan

guarantee programs. Prior to the Credit Reform Act, loan guarantees

looked “free” in the budget. Direct loans looked like grant programs

because the budget ignored loan repayments. The shift to accrual

budgeting for subsidy costs permitted comparison of the costs of credit

programs both to each other and to spending programs in the budget.

Information should be more easily available to the Congress and the

President about the long-term cost implications both of existing programs

and new proposals. In 1997 we reported that the current cash-based

budget generally provides incomplete information on the costs of federal

insurance programs.11 The ultimate costs to the federal government may

not be apparent up front because of time lags between the extension of the

insurance, the receipt of premiums, and the payment of claims. While

there are significant estimation and implementation challenges, accrualbased budgeting has the potential to improve budgetary information and

incentives for these programs by providing more accurate and timely

recognition of the government’s costs and improving the information and

incentives for managing insurance costs. This concept was proposed in the

Comprehensive Budget Process and Reform Act of 1999 (H.R. 853), which

would have shifted budgetary treatment of federal insurance programs

from a cash basis to an accrual basis.

There are other commitments for which the cash- and obligation-based

budget does not adequately represent the extent of the federal

government’s commitment. These include employee pension programs,

retiree health programs, and environmental cleanup costs. While there are

various analytical and implementation challenges to including these costs

in budget totals, more could be done to provide information on the longterm cost implications of these programs to the Congress, the President,

and the interested public. At the request of this Committee, we are

continuing to address this issue.

 11Budget Issues: Budgeting for Federal Insurance Programs (GAO/AIMD-97-16, Sept. 30,

1997).
Page 11 GAO-01-991T

As the budgeting horizon expands, so does the certainty of error. Few

forecasters would suggest that 10-year projections are anything but that—

projections of what the world would look like if it continued on a line from

today. And long-term simulations are useful to provide insight as to

direction and order of magnitude of certain trends—not as forecasts.

Nevertheless, budgeting requires forecasts and projections. Baseline

projections are necessary for measuring and comparing proposed changes.

Former Congressional Budget Office (CBO) Director Rudy Penner

suggested that 5-year and 10-year projections are useful for and should be

used for different purposes: 5-year projections for indicating the overall

fiscal health of the nation, and 10-year projections for scorekeeping and

preventing gaming of the timing of costs.

No 10-year projection is likely to be entirely correct; the question

confronting fiscal policymakers is how to deal with the risk that a

projection is materially wrong. This year some commentators and

Members of the Congress have suggested dealing with this risk by using

triggers. Triggers were part of both Gramm-Rudman-Hollings (GRH) and

BEA. The GRH triggers were tied to deficit results and generally regarded

as a failure—they were evaded or, when deficits continued to exceed the

targets, the targets were changed. BEA triggers have been tied to

congressional action rather than to deficit results; sequesters have rarely

been triggered—and those were very small. This year the discussion of

triggers has been tied specifically to the tax debate and to whether the size

of the tax cut in future years should be linked to budget results in those

years. There could be several variations on this trigger: actual surplus

results, actual revenue results (this with the intent of avoiding a situation

in which spending increases can derail a tax cut), and actual debt results.

There is little consensus on the effectiveness of any triggers.

Although the debate about triggers has been tied to the tax debate in 2001,

there is no inherent reason to limit the discussion to taxes. Some might

wish to consider triggers that would cause decisionmakers to make

proposals to address fiscal results that exceed some specific target, such

as debt or spending as a share of GDP.

Former CBO Director Robert Reischauer suggested another way of dealing

with the fact that forecasts/projections become less certain the further

they go into the future. Under his proposal, a declining percentage of any

projected surplus would be available—either for tax cuts or for spending

increases. Specifically, 80 percent of the surplus would be available to

legislators in years 1 and 2, 70 percent in years 3 and 4, 60 percent in years

5 and 6, until reaching the 40-percent level in years 9 and 10. The

Dealing With the

Uncertainty of

Projections
Page 12 GAO-01-991T

consequence of not adhering to these limits would be an across-the-board

sequester. When a new Congress convenes, it would be given a new

budget allowance to spend based on a new set of surplus projections.

Others have suggested that mechanisms such as a joint budget resolution

and/or an automatic continuing resolution could avert the year-end

disruption caused by an inability to reach agreement on funding the

government. Biennial budgeting is also sometimes suggested as a better

way to budget and to provide agencies more certainty in funding over 2

years. Let me turn now to these ideas.

Since agreement on overall budget targets can set the context for a

productive budget debate, some have suggested that requiring the

President’s signature on budget resolutions would facilitate the debate

within such a framework. Proposals to replace the Concurrent Resolution

with a Joint Resolution should be considered in the light of what the

budget resolution represents. Prior to the 1974 act only the President had a

budget—that is, a comprehensive statement of the level of revenues and

spending and the allocation of that spending across “national needs” or

federal mission areas. Requiring the President to sign the budget

resolution means it would not be a statement of congressional priorities.

Would such a change reduce the Congress’ ability to develop its own

budget and so represent a shift of power from the Congress to the

President? Whose hand would it strengthen? If it is really to reduce later

disagreement, would it merely take much longer to get a budget resolution

than it does today? It could be argued that under BEA the President and

the Congress have—at times—reached politically binding agreements

without a joint budget resolution.

The periodic experience of government “shutdowns”—or partial

shutdowns when appropriations bills have not been enacted has led to

proposals for an automatic continuing resolution. The automatic

continuing resolution, however, is an idea for which the details are

critically important. Depending on the detailed structure of such a

continuing resolution, the incentive for policymakers—some in the

Congress and the President—to negotiate seriously and reach agreement

may be lessened. What about someone for whom the “default position”

specified in the automatic continuing resolution is preferable than the

apparent likely outcome? If the goal of the automatic continuing

resolution is to provide a little more time for resolving issues, it could be

designed to permit the incurrence of obligations to avoid a funding gap,

but not the outlay of funds to liquidate the new obligations. This would

Other Ideas Proposed

to Smooth the

Process
Page 13 GAO-01-991T

allow agencies to continue operations for a period while the Congress

completes appropriations actions.

Finally, you asked me to discuss proposals for biennial budgeting. Some

have suggested that changing the appropriations cycle from annual to

biennial could (1) provide more focused time for congressional oversight

of programs, (2) shift the allocation of agency officials’ time from the

preparation of budgets to improved financial management and analysis of

program effectiveness, and (3) enhance agencies’ abilities to manage their

operations by providing more certainty in funding over 2 years. Given the

regularity with which proposals for biennial budgeting are made, I believe

that at least some will consider the upcoming necessity to decide whether

to extend BEA as an opportunity to again propose biennial budgeting.

Whether a biennial cycle offers the benefits sought will depend heavily on

the ability of the Congress and the President to reach agreement on how to

respond to uncertainties inherent in a longer forecasting period, for there

will always be uncertainties. How often will the Congress and the

President feel the need to reopen the budget and/or change funding levels?

Budgeting always involves forecasting, which in itself is uncertain, and the

longer the period of the forecast, the greater the uncertainty. Our work has

shown that increased difficulty in forecasting was one of the primary

reasons states gave for shifting from biennial to annual cycles.12 The

budget is highly sensitive to the economy. Economic changes during a

biennium would most likely prompt the Congress to revisit its decisions

and reopen budget agreements. Among the issues that would need to be

worked out if the Congress moves to a biennial budget cycle are how to

update the CBO forecast and baseline against which legislative action is

scored and how to deal with unexpected events. The baseline is important

because CBO scores legislation based on the economic assumptions in

effect at the time of the budget resolution. Even under an annual system

there are years when this practice presents problems: in 1990 the

economic slowdown was evident during the year, but consistent practice

meant that bills reported in compliance with reconciliation instructions

were scored based on the assumptions in the budget resolution rather than

updated assumptions. If budget resolutions were biennial, this problem of

 12Since the mid-1960s, 18 states have changed their budget cycles: 11 from biennial to

annual, 2 from annual to mixed, 4 from annual to biennial, and1 from biennial to annual and

back to biennial.
Page 14 GAO-01-991T

outdated assumptions would be greater—some sort of update in the “offyear” likely would be necessary.

In any consideration of a biennial budget, it is important to recognize that

even with annual budgets, the Congress already has provided agencies

with multiyear funding to permit improved planning and management. As

you know, it is not necessary to change the frequency of decisions in order

to change the length of time funds are available. Nearly two-thirds of the

budget is for mandatory programs and entitlements on which decisions

are not made annually. Even the remaining portion that is on an annual

appropriations cycle is not composed entirely of 1-year appropriations that

expire on September 30 of each year. The Congress routinely provides

multiyear or no-year appropriations when it seems to make sense to do so.

Thus, to the extent that biennial budgeting is proposed as a way to ease a

budget execution problem, the Congress has shown itself willing and able

to meet that need under the current annual cycle.

If BEA is extended in conjunction with biennial budgeting, a whole host of

technical issues needs to be considered. Would biennial budgeting change

the timing of the BEA-required sequestration report? How would

sequestrations be applied to the 2 years in the biennium and when would

they occur? For example, if annual caps are continued and are exceeded in

the second year of the biennium, when would the Presidential Order

causing the sequestration be issued? Would the sequestration affect both

years of the biennium? Would forecasts and baselines be updated during

the biennium? These are just of few of the many questions that would need

to be resolved.

Regardless of the potential benefits, the decision on biennial budgeting

will depend on how the Congress chooses to exercise its constitutional

authority over appropriations and its oversight functions. We have long

advocated regular and rigorous congressional oversight of federal

programs. Annual enacted appropriations have long been a basic means of

exerting and enforcing congressional policy. Oversight has often been

conducted in the context of agency requests for funds. A 2-year

appropriation cycle would change—and could lessen—congressional

influence over program and spending matters since the process would

afford fewer scheduled opportunities to affect agency programs and

budget.

Biennial budgeting would bring neither the end of congressional control

nor the guarantee of improved oversight. It would require a change in the

nature of that control. If the Congress decides to proceed with a change to
Page 15 GAO-01-991T

a biennial budget cycle—including a biennial appropriations cycle—

careful thought will need to be given to implementation issues.

To affect decision-making, the fiscal goals sought through a budget

process must be accepted as legitimate. For many years the goal of “zero

deficit”—or the norm of budget balance—was accepted as the right goal

for the budget process. In the absence of the zero deficit goal,

policymakers need an overall framework upon which a process and any

targets can be based. Goals may be framed in terms of debt reduction or

surpluses to be saved. In any case, compliance with budget process rules,

in both form and spirit, is more likely if end goals, interim targets, and

enforcement boundaries are both accepted and realistic.

Enforcement is more successful when it is tied to actions controlled by the

Congress and the President. Both the BEA spending caps and the PAYGO

enforcement rules were designed to hold the Congress and the President

accountable for the costs of the laws enacted each session—not for costs

that could be attributed to economic changes or other factors.

Today, the Congress and the President face a different budgetary situation

than in the past few decades. The current budget challenge is not to

achieve a balanced unified budget. Rather, budgeting today is done in the

context of projections for continued and growing surpluses followed over

the longer term by demography-driven deficits. What process will enable

policymakers to deal with the near term without ignoring the long term?

At the same time, the challenges for any budget process are the same:

What process will enable policymakers to make informed decisions about

both fiscal policy and the allocation of resources within the budget?

Extending the current BEA without setting realistic caps and addressing

existing mandatory programs is unlikely to be successful for the long term.

The original BEA employed limited actions in aiming for a balanced

budget. It left untouched those programs—direct spending and tax

legislation—already in existence. Going forward with new challenges, we

believe that a new process that prompts the Congress to exercise more

foresight in dealing with long-term issues is needed. The budget process

appropriate for the early 21st century will have to exist as part of a

broader framework for thinking about near- and long-term fiscal goals.

Conclusion
Page 16 GAO-01-991T

Mr. Chairman, this concludes my statement. I would be happy to answer

any questions that you or the Members of the Committee may have.

For future contacts regarding this testimony, please call me at (202) 512-

9142 or Christine Bonham at (202) 512-9576. Melinda Bowman also made

key contributions to this testimony.

Contacts and

Acknowledgments

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