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PENSION BENEFIT GUARANTY CORPORATION

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PRESERVING AND PROTECTING PENSIONS

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Pension Benefit Guaranty Corporation

2017 Annual Report 

CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

December 2018

Measuring the 

Costs of Federal 

Insurance Programs:

Cash or Accrual?

© Roschetzky Photography, Jer123/Shutterstock.com
At a Glance

Some federal insurance programs have long-term effects on the budget. But the federal budget 

process typically uses cash-based measures that cover a 10-year period, which may be too short 

to accurately show some programs’ expected net effects over the long term. This report analyzes how using accrual accounting for such programs might differ from the current cash-based 

treatment. 

• Accrual measures accelerate the recognition of long-term costs and any offsetting income. 

Thus, they could clearly display the expected net costs of the new insurance commitments 

that the government makes each year at the point when those commitments are most 

controllable. That clearer display could allow for more meaningful comparisons of the 

costs of competing programs and a greater focus on risk when setting prices and reserve 

requirements. 

• Accrual measures can avoid the timing-related distortions that sometimes result from cash 

estimates—particularly when a significant share of a program’s cash flows are expected to 

occur outside the 10-year budget window or when there is a mismatch in the timing of 

receipts and expenditures. 

• Accrual measures can more easily incorporate the market risk that the government is exposed 

to from some federal insurance programs. (Market risk is the element of financial risk 

that is correlated with overall economic conditions and therefore cannot be eliminated by 

diversifying a portfolio.) For federal programs that face a significant amount of market risk, 

such as pension insurance and deposit insurance, accounting for that risk would result in 

more comprehensive estimates of federal costs. 

• Accrual measures have several disadvantages, however. They are less transparent and verifiable 

than cash measures because they are more methodologically complex. They also have a wider 

range of uncertainty, are more subject to change, and would complicate budget reporting. 

Moreover, if accrual measures incorporated market risk, they would involve considerable 

analytical judgment and be harder to understand.

• For the Federal Deposit Insurance Corporation’s resolutions of troubled financial firms 

(carried out through the deposit insurance program and the Orderly Liquidation Fund), 

cash measures for a given 10-year period may not be a good indicator of net costs during or 

after a financial crisis, when losses are large. Accrual measures would provide more accurate 

information about long-term costs. 

• For federal flood insurance, 10-year cash estimates (particularly for the near term) may 

be dominated by costs resulting from past events. By clearly showing the net costs of the 

government’s new insurance commitments, accrual measures might help to highlight 

structural imbalances in that program.

• For federal pension insurance, 10-year cash measures fail to convey the size of the imbalance 

between the resources of the Pension Benefit Guaranty Corporation and its liabilities for 

future claims. Accrual measures would provide a more accurate measure of the agency’s longterm commitments.

www.cbo.gov/publication/53921
Contents

Summary 1

What Are the Key Advantages and Disadvantages of Accrual Measures for 

Federal Insurance Programs? 1

How Does CBO Assess Information Provided by Cash and Accrual Measures? 2

Why Might Accrual Estimates for Federal Insurance Programs Include Market Risk? 2

How Might Accrual Measures Be Useful for Certain Federal Insurance Programs? 3

How Could the Government Increase the Use of Accrual Measures in the Budget Process? 3

Measures of the Cost of Federal Insurance Programs 4

Advantages and Disadvantages of Accrual Measures for Federal Insurance Programs 5

Assessing the Information That Cash and Accrual Measures Provide 

About Insurance Programs 7

Relevance to Understanding Overall Budgetary Effects 7

Practicality and Reliability 9

The Nature of the Government’s Insurance Commitments 11

The Role of Market Risk in Federal Insurance Programs 12

Comparing the Information Conveyed by Cash and Accrual Measures for 

Selected Insurance Programs 14

Financial Resolution Activities of the Federal Deposit Insurance Corporation 15

BOX 1. BUILDING UP RESERVES IN THE DEPOSIT INSURANCE FUND 18

Flood Insurance 24

Pension Insurance 27

Three Approaches for Using Accrual Measures in the Federal Budget Process 31

Adopting an Accrual-Based Treatment in the Budget 31

BOX 2. ESTIMATING THE FAIR-VALUE COST OF FEDERAL PENSION INSURANCE 32

Using Accrual Measures Only for Purposes of Congressional Budget Enforcement 34

Providing Supplemental Estimates 35

Appendix: Differences Between Cash and Accrual Estimates for the Terrorism 

Risk Insurance Act 37

List of Tables and Figures 40

About This Document 41
Notes

Unless this report indicates otherwise, all years referred to are federal fiscal years, which 

run from October 1 to September 30 and are designated by the calendar year in which 

they end.

Numbers may not add up to totals because of rounding.
Measuring the Costs of Federal Insurance Programs: 

Cash or Accrual?

Summary

Some federal insurance programs have long-term effects 

on the budget, and policymakers need complete and 

accurate measures of those effects to make informed 

decisions about such programs. The cash-based measures 

that are used for most programs in the federal budget 

process generally focus on a 10-year period. However, 

that period may not be long enough to accurately indicate some insurance programs’ expected net effects on 

the budget over the long term. 

Accrual-based estimates, which consider long-term 

effects, can provide more complete information about 

some federal insurance programs. An accrual estimate 

summarizes, in a single number, the net budgetary 

impact that is anticipated at a particular time from a 

commitment that will affect federal cash flows many 

years into the future. Through such summarizing, accrual 

measures make it easier to compare the net costs of 

programs despite differences in the timing of their cash 

flows.

The Congressional Budget Office currently produces 

two main types of accrual estimates for a limited set of 

federal activities: estimates prepared using the methodology specified in the Federal Credit Reform Act of 1990 

(FCRA), which applies to most federal credit programs, 

and estimates prepared on a fair-value basis. The difference between FCRA and fair-value estimates lies in 

the treatment of market risk—the element of financial 

risk that is correlated with overall economic conditions 

and thus that cannot be eliminated by diversifying a 

portfolio. In general, FCRA-based estimates account for 

the time value of money (the fact that a dollar today is 

worth more than a dollar at some future date because 

it can earn interest in the interim), but such estimates 

do not reflect the full extent of financial risk that the 

government assumes. Fair-value estimates approximate 

the market value of an obligation. As such, they account 

for the time value of money and incorporate market risk, 

thereby providing a more comprehensive measure of 

expected costs. 

This report looks at how an accrual treatment might 

differ from the current cash treatment for several federal 

insurance programs, including programs of the Federal 

Deposit Insurance Corporation (FDIC) to resolve 

troubled financial firms, flood insurance, and pension 

insurance.1 Besides the fundamental choice between 

cash and accrual measures, this analysis highlights two 

separate issues that policymakers could consider about 

the information provided by those measures: whether the 

measures should reflect limits on the amount of budgetary resources that insurance programs have available to 

pay claims and whether those measures should reflect the 

government’s exposure to market risk. 

What Are the Key Advantages and Disadvantages of 

Accrual Measures for Federal Insurance Programs?

Accrual measures, whether prepared on a FCRA or a fairvalue basis, offer several advantages over cash measures 

for federal insurance programs: 

• Accrual measures accelerate the recognition of longterm costs and could clearly display the net costs of 

the new insurance commitments that the government 

makes each year at the point when they are most 

controllable. By focusing on the net costs of new 

commitments and accounting for the time value of 

money, accrual estimates could help policymakers 

make more meaningful comparisons of the costs of 

competing programs that differ in the timing of their 

cash flows. 

1. For more information about the current and potential uses 

of cash and accrual measures in the budget as a whole, see 

Congressional Budget Office, Cash and Accrual Measures 

in Federal Budgeting (January 2018), www.cbo.gov/

publication/53461.
2 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? December 2018

• Accrual measures would avoid mixing the costs of 

new and existing insurance commitments and thus 

could help to identify whether a program’s costs are 

rising or falling over time.

• Accrual measures summarize long-term net costs; 

that information could lead to a greater focus on 

risk when setting prices and reserve requirements in 

programs that insure against potentially large losses 

that have a small probability of occurring. 

• Accrual measures can more readily incorporate 

market risk, using fair-value methods, than cash 

measures can. 

• Accrual measures make it harder to alter estimates of 

the budget deficit by shifting the timing of federal 

payments or receipts without actually changing the 

inflation-adjusted value of those cash flows.

Accrual measures have several disadvantages, however:

• Accrual measures are less transparent and verifiable 

than cash measures because they are more 

methodologically complex.

• Accrual measures require judgments about 

appropriate methodology that could spark 

disagreements among analysts and policymakers, such 

as about what time horizon to cover and whether a 

federal commitment is certain enough to include in 

accrual estimates.

• Accrual estimates have a wider range of uncertainty 

and are more subject to change than cash-based 

estimates.

• Moving from cash to accrual measures in the 

budget would widen the difference that generally 

exists between the reported budget deficit and the 

actual change in outstanding federal debt in a given 

year. Such a change would also complicate budget 

reporting.

How Does CBO Assess Information Provided by 

Cash and Accrual Measures?

CBO uses three criteria to assess the trade-offs between 

accrual measures and the 10-year cash measures now 

used for insurance programs in the federal budget 

process:2

• Do accrual measures convey more complete and 

relevant information about a program’s budgetary 

effects? One key advantage of accrual measures is 

their ability to avoid timing-related distortions—

particularly when a significant share of a program’s 

cash flows are expected to occur outside the 10-year 

budget window or when the timing of cash inflows 

and outflows does not coincide. 

• Can a program’s underlying long-term cash flows 

be projected and discounted with enough accuracy 

and practicality to allow accrual measures to be 

used reliably in the budget process? All estimating is 

uncertain, but projecting insurance-related costs can 

be particularly challenging regardless of the basis of 

accounting used. 

• Is the nature of the government’s commitment 

to provide future resources firm enough to 

justify recording future cash flows before they 

occur? Accrual measures may be most useful for 

commitments that are legally binding or otherwise 

firm and that do not require further Congressional 

action to ensure that programs have enough resources 

to pay claims. 

Why Might Accrual Estimates for Federal Insurance 

Programs Include Market Risk?

Federal insurance programs expose the government to 

market risk if their claims are likely to be higher (or their 

income lower) than usual when the economy as a whole 

is performing poorly. For programs that face a significant amount of market risk, such as pension and deposit 

insurance, accounting for that risk would result in more 

comprehensive estimates of federal costs. However, 

including market risk might involve considerable analytical judgment and would cause those estimates to be 

more difficult to understand.

2. In this report, references to “accrual measures” apply to both 

FCRA-based and fair-value estimates unless specified otherwise. 

In the federal budget, fair-value measures are generally a subset 

of accrual measures; see Congressional Budget Office, Cash 

and Accrual Measures in Federal Budgeting (January 2018), p. 8, 

Figure 1, www.cbo.gov/publication/53461.
December 2018 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? 3

How Might Accrual Measures Be Useful for Certain 

Federal Insurance Programs? 

Relative to 10-year cash estimates, accrual measures may 

be particularly useful for some insurance programs: 

• For the FDIC’s resolutions of troubled financial 

firms, carried out through the Orderly Liquidation 

Fund (OLF) and the Deposit Insurance Fund (DIF), 

annual cash flows may not be a good indicator of the 

net costs of a given year’s transactions—especially 

during or after a financial crisis, when losses are large. 

For any particular year or 10-year period, a snapshot 

of cash flows may not capture all of the up-front costs 

of resolving troubled institutions (if those resolutions 

occurred before the projection period) or all of the 

offsetting income from fees assessed on the financial 

industry (particularly if those receipts are expected to 

occur after the projection period). Accrual measures 

would largely eliminate timing-related distortions for 

resolution activities and, if calculated on a fair-value 

basis, would provide a more complete estimate of 

expected costs. Alternatively, some of the drawbacks 

of cash measures for OLF and DIF could be lessened 

by keeping the cash budgetary treatment of losses 

and income but excluding transactions that involve 

working capital from estimates of the budget deficit.3

• For federal flood insurance, 10-year cash estimates 

may be dominated (particularly in the near term) 

by costs that stem from past events. By focusing 

instead on expected losses and income related to 

the insurance commitments made during a given 

period, accrual measures might help to highlight the 

program’s structural imbalances. In addition, CBO’s 

current projections reflect legal constraints on the 

amount of budgetary resources that the program has 

available to pay claims and other expenses—and thus 

may understate the full amount due to policyholders. 

Projections that did not reflect resource constraints, 

whether prepared on a cash or an accrual basis, would 

provide more information about the full extent of 

programs’ costs. 

• For the Pension Benefit Guaranty Corporation 

(PBGC), 10-year cash measures fail to convey the size 

of the imbalance between the agency’s resources and 

3. “Working capital” refers to that portion of up-front spending 

used to acquire assets of insolvent institutions that is expected to 

be offset in future years by receipts from the sale of those assets.

its liabilities for future claims. Because of the long 

timing lags that typically occur between inflows and 

outflows in PBGC’s pension insurance programs, 

cash-based projections currently show net savings 

from those programs. Accrual measures would 

present a more accurate measure of PBGC’s longterm commitments. 

How Could the Government Increase the Use of 

Accrual Measures in the Budget Process?

A range of options exist for expanding the use of accrual 

measures for federal insurance programs. In all cases, 

policymakers would need to determine how such 

measures would factor into the framework of statutory 

requirements and Congressional rules that make up the 

federal budget process.4

• Shifting fully to an accrual-based treatment for some 

insurance programs in the federal budget would 

change how those programs affect the budget and 

potentially alter how statutory mechanisms to enforce 

budget targets—namely, required cuts to budgetary 

resources—would affect different programs. Such 

measures would provide the most additional 

information for decisionmaking. However, such a 

change would require new account structures and 

periodic revisions to estimates. 

• Using accrual measures only for enforcing 

Congressional budget rules, but not in the budget 

itself, would be less burdensome. Employing such 

measures in legislative cost estimates might be helpful 

for decisions about the allocation of resources, 

but it would create an inconsistency between the 

estimates used by the Congress and those used by the 

Administration. 

• Using accrual measures as supplemental information, 

without changing budget enforcement procedures 

or budget execution, would be the least disruptive 

option but would give accrual estimates less 

prominence in Congressional deliberations. 

4. For an overview of that process, including information on the 

mechanisms that lawmakers and the Administration use to 

enforce budgetary goals, see Congressional Budget Office, Cash 

and Accrual Measures in Federal Budgeting (January 2018), Box 1, 

pp. 4–5, www.cbo.gov/publication/53461. 
4 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? December 2018

Measures of the Cost of Federal 

Insurance Programs 

The federal government offers insurance against a range 

of risks, including floods, crop failures, terrorist attacks, 

and failures of financial institutions and private-sector 

pension plans.5 In many cases, those insurance programs 

were created to cover risks for which private-sector insurance was limited or nonexistent. As with most federal 

activities, the effects of insurance programs on the federal 

budget are recorded on a cash basis. In other words, an 

insurance program’s net impact on the budget deficit is 

generally calculated as the difference between its cash 

inflows (from premiums, fees, and other income) and its 

cash outflows (primarily to pay claims for covered losses) 

in a given year.6

Recognizing the full cost of decisions up front is a key 

pillar of informed budgeting. To make well-informed 

choices about federal insurance programs, policymakers 

need accurate measures of the extent to which a program’s income is expected to cover the costs stemming 

from the risk assumed by the government. In the federal 

budget process, however, legislative decisions are based 

mainly on cash estimates of how activities would affect 

the deficit over 10 years. That period may not be long 

enough to cover the full extent of budgetary effects 

attributable to some insurance programs. 

For programs that involve long lags between when commitments are made and when the resulting inflows and 

outflows of cash occur, 10-year cash estimates may reflect 

only a truncated portion of the anticipated effects and 

might provide incomplete information about net costs. 

That problem may be exacerbated for programs in which 

the timing of cash inflows does not coincide closely with 

the timing of outflows. 

In such cases, accrual measures that summarize anticipated cash flows over many years in net-present-value 

terms may help to highlight potential fiscal imbalances 

5. This analysis does not include the government’s social insurance 

and health insurance programs (such as Social Security, Medicare, 

and unemployment insurance). For a more detailed list of 

federal insurance programs, see Government Accountability 

Office, Catalogue of Federal Insurance Activities, GAO-05-265R 

(March 4, 2005), www.gao.gov/products/A18878.

6. In some cases, estimates of insurance programs’ net impact on 

the budget deficit take into account the programs’ indirect effects 

on other federal cash flows, such as revenues from payroll and 

income taxes. 

and options for addressing them.7 Accrual estimates 

translate expected future cash flows into a single value 

by adjusting (discounting) future payments and income 

for the time value of money to make them comparable 

to a single equivalent amount at a given point in time.8

Accrual measures are currently used in the federal budget 

for a limited set of activities—mainly for federal credit 

programs (such as student loans and mortgage guarantees) and capital leases—to help policymakers compare 

the net costs of programs despite differences in the timing of their cash flows.9

To develop accrual estimates, analysts start by projecting 

the stream of cash flows expected to result from a particular activity under current law. In making such projections for a federal insurance program, CBO considers the 

magnitude of potential losses, the probability that losses 

of various sizes will occur, the likelihood of subsequent 

recoveries on anticipated claims, and projected income 

7. See Marvin Phaup and David F. Torregrosa, “Budgeting for 

Contingent Losses,” in Roy T. Meyers, ed., Handbook of 

Government Budgeting (Jossey-Bass Publishers, 1999), pp. 699–

719; and Government Accountability Office, Budget Issues: 

Accrual Budgeting Useful in Certain Areas but Does Not Provide 

Sufficient Information for Reporting on Our Nation’s Longer-Term 

Fiscal Challenge, GAO-08-206 (December 2007), www.gao.gov/

products/GAO-08-206.

8. A present value depends on the rate of interest (known as 

the discount rate) that is used to translate past or future cash 

flows into current dollars. For example, if $100 is invested on 

January 1 at an annual interest rate of 5 percent, it will grow to 

$105 by January 1 of the next year. Hence, with a discount rate 

of 5 percent, $105 payable a year from today has a present value 

of $100. 

9. In the past, policymakers have considered adopting FCRA-like 

accrual-based measures for federal insurance programs and 

similar activities for which 10-year cash estimates may provide 

incomplete information. Although FCRA explicitly excluded 

insurance from its noncash treatment, it required that CBO and 

the Office of Management and Budget study the issue. In 1993, 

the Administration proposed switching to accrual budgeting 

for deposit and pension insurance; see Office of Management 

and Budget, Budget of the U.S. Government, Fiscal Year 1993 

(January 1992), pp. 261–262, 273–277, https://tinyurl.com/

ychhrt5c (PDF, 25 MB). The Comprehensive Budget Process 

Reform Act of 1999 proposed an accrual treatment for the cost of 

federal insurance programs modeled on FCRA accounting. More 

recently, the House Budget Committee proposed using fair-value 

accrual budgeting for federal insurance programs; see House 

Committee on the Budget, Proposed Rewrite of the Congressional 

Budget Process (discussion draft, November 30, 2016), p. 22, 

https://tinyurl.com/y8jtmck9 (PDF, 429 KB). 
December 2018 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? 5

from fees, premiums, or other collections that would 

offset the program’s costs. 

For programs that typically experience a high volume 

of cash flows (such as crop, flood, deposit, and pension 

insurance), historical net costs offer some guidance. For 

programs whose cash flows stem from events that have a 

small chance of occurring—such as terrorism insurance 

and the Orderly Liquidation Fund—CBO creates a wide 

range of scenarios with different frequencies and magnitudes of possible losses (including potentially catastrophic losses with a very small likelihood of occurring) 

and then calculates a weighted average of the outcomes 

of the scenarios, accounting for the estimated probability 

of each scenario. The resulting cash-based projections 

of net costs represent expected values based on those 

weighted averages. For all insurance programs, projections reflect anticipated cash flows in the years when 

those flows are expected to occur, taking into account 

each program’s unique features and statutory framework.

To translate such cash projections into accrual estimates, 

analysts would calculate the present value of the stream 

of cash flows by discounting each amount to current 

dollars and summing the results. Thus, both cash and 

accrual measures rely on a similar set of underlying projections of cash flows. However, those projections may 

differ in two key respects—the length of time they cover 

and the treatment of past events: 

• For cash estimates used in the Congressional budget 

process, the projection period is generally limited 

to 10 years. When developing accrual estimates, by 

contrast, analysts would project cash flows over the 

entire period in which those flows were expected to 

occur (such as the remaining lifetime of a federally 

insured pension plan) to the extent practicable. 

• Cash-based projections of net costs for a given 

period often include residual cash flows that stem 

from events that have already occurred. The accrual 

measures currently used in the federal budget process, 

by contrast, separate budgetary effects related to past 

events from those related to events expected to occur 

in the future. 

The two types of accrual measures that CBO typically 

prepares for federal credit programs—FCRA and fairvalue estimates—are net-present-value measures that correct for the timing-related problems that cash measures 

pose. But the two types of accrual measures differ in 

their treatment of market risk by using different discount 

rates to translate future cash flows into present values. 

In general, FCRA-based estimates use as a discount rate 

the government’s borrowing cost over a given period 

(the interest rate on Treasury securities that mature in 

that amount of time).10 Fair-value measures seek to use 

or estimate market values that incorporate the cost of 

market risk, generally by using the same discount rate on 

expected future cash flows that private financial institutions would use, in CBO’s judgment. Thus, whereas 

FCRA-based estimates merely adjust future projections 

for the time value of money, fair-value estimates reflect 

more comprehensive assessments of the cost of financial 

risk that the government assumes. As a result, fair-value 

estimates will usually show higher costs or lower savings 

for federal insurance programs than FCRA estimates 

will. 

Advantages and Disadvantages of Accrual 

Measures for Federal Insurance Programs

In considering whether to switch from cash to accrual 

measures, policymakers would need to determine 

whether accrual estimates, on balance, offer enough 

additional useful information to warrant their added 

complexity and whether they should incorporate the cost 

of market risk. Policymakers also would need to consider how to incorporate such measures into the existing 

framework of statutory and procedural rules for budget 

enforcement.

Using accrual measures for insurance programs could 

help policymakers more directly compare alternative 

means of providing federal assistance and more fully 

10. Some analysts have examined the idea of having the budget 

reflect the difference between what the government charges 

for insurance and what an actuarially sound premium would 

be when the insurance was issued. Under that approach, if the 

actuarially sound premium would be $100 but the government 

charged $90, the budget would report a cost of $10. Such an 

approach is similar to the subsidy cost reported for federal 

credit programs. See the testimony of Susan J. Irving, Associate 

Director, Budget Issues, General Accounting Office (now 

the Government Accountability Office), before the Budget 

Task Force of the House Committee on the Budget, Budget 

Issues: Budgeting for Federal Insurance Programs, AIMD-98-147 

(April 23, 1998), www.gao.gov/products/T-AIMD-98-147; and

General Accounting Office, Budget Issues: Budgeting for Federal 

Insurance Programs, GAO/AIMD-97-16 (September 1997), 

www.gao.gov/products/AIMD-97-16. 
6 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? December 2018

assess trade-offs within the budget. Such measures offer 

several other potential advantages:

• Accrual measures would recognize the cost of 

decisions up front and account for the time value of 

money, thus providing a clear display of net costs for 

each year of new insurance commitments and better 

illuminating whether a program’s income is expected 

to cover its costs. 

• Accrual measures would avoid mixing the costs of 

new and existing insurance commitments, which 

occurs with cash measures. Thus, accrual estimates 

could help to identify whether a program’s costs are 

rising or falling over time.

• Accrual measures might lead to a greater focus on risk 

when determining prices for federal insurance and 

when setting reserve requirements in programs whose 

costs are driven by large but infrequent losses. For 

some federal insurance programs, the link between 

premiums and expected costs (losses, administrative 

costs, and risk premiums) is not as strong as in the 

private sector.11 As a result, the average premiums set 

by those programs are frequently lower than what a 

private firm would charge. Greater use of fully riskbased pricing for federal insurance might provide 

more opportunities for private insurers to compete 

with federal programs. It would also eliminate the 

budgetary disincentive for federal insurance programs 

to reinsure risks by purchasing coverage from private 

reinsurers, whose premiums are more expensive 

than the charges currently reflected in federal 

insurance programs.12 Such changes would reduce the 

government’s risk of losses.

• Accrual measures prepared on a fair-value basis can 

more readily indicate the cost of market risk than 

11. The risk premium is the additional compensation that insurers 

and other investors require for bearing market risk. They expect 

to earn returns that are higher than Treasury interest rates as a 

reward for the risk they bear. 

12. Despite the additional budgetary cost, the National Flood 

Insurance Program recently started purchasing reinsurance 

(insurance for insurers), which covered $1 billion of losses 

from Hurricane Harvey in 2017. The amount of the premiums 

charged for that reinsurance provides market-based information 

about expected costs that could be used to help set premiums for 

federal flood insurance. 

cash measures can.13 Including the cost of market risk 

would be particularly informative for programs that 

insure against risks that are highly correlated with 

changes in the prices of stocks and securities and the 

state of the economy, such as pension and deposit 

insurance. 

• Accrual measures make it harder to affect estimates 

of the budget deficit by shifting the timing of 

payments or receipts without actually changing the 

inflation-adjusted value of those cash flows. Federal 

crop insurance, for example, is sometimes a target 

for legislative proposals intended to produce nearterm budgetary savings simply by shifting the timing 

of certain payments into the following fiscal year.14

Accrual accounting would report little or no savings 

from such proposals. 

Using accrual measures for federal insurance programs 

would have some drawbacks, however:

• Accrual estimates are more complex to produce 

than cash estimates and involve judgments—about 

13. Cash-based estimates of federal insurance programs could also 

incorporate the cost of market risk, as illustrated by the concept 

of “certainty equivalent” cash flows. A certainty-equivalent 

cash flow (also known as a “risk-neutral cash flow”) is the 

certain amount that an investor would willingly exchange for 

the uncertain cash flow of a risky asset. Certainty-equivalent 

cash costs, such as those associated with payments of insurance 

claims, tend to be higher than the statistical mean of cash 

costs because of market risk. Certainty equivalence offers an 

alternative way to summarize a set of possible cash flows at 

a point in time as a single number. A useful way to estimate 

certainty-equivalent cash flows is the options-pricing approach. 

For an example of that approach applied to federal insurance 

programs, see Michael Falkenheim and George Pennacchi, “The 

Cost of Deposit Insurance for Privately Held Banks: A Market 

Comparable Approach,” Journal of Financial Services Research, 

vol. 24, no. 2/3 (October 2003), pp. 121–148, https://doi.

org/10.1023/B:FINA.0000003320.95646.5f. 

14. An example of such a change was a provision in the Food, 

Conservation, and Energy Act of 2008 (Public Law 110-246) 

that modified the crop insurance program to effectively delay 

federal payments for insured losses and other expenses until the 

fiscal year after farmers’ premiums were collected. That change 

created near-term savings of $2.8 billion by shifting one year’s 

worth of payments beyond the 10-year period covered by the cost 

estimate for the legislation. See Congressional Budget Office, cost 

estimate for S. 2302, the Food and Energy Security Act of 2007 

(November 1, 2007), www.cbo.gov/publication/19296, and cost 

estimate for H.R. 2419, the Food, Conservation, and Energy Act 

of 2008 (May 13, 2008), www.cbo.gov/publication/41696. 
December 2018 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? 7

appropriate methodology, the time horizon, and 

the firmness of federal commitments—that might 

be the subject of disagreement among analysts and 

policymakers. 

• Accrual measures, like other present-value estimates, 

are sensitive to the choice of discount rates used and 

are potentially harder for policymakers and the public 

to understand than cash estimates. Thus, explaining 

the meaning of accrual estimates can be challenging.

• Accrual estimates generally have a wider range 

of uncertainty than cash estimates because they 

cover longer time frames and rely on the technical 

assumptions used to discount the value of future cash 

flows.15 Thus, accrual estimates are typically subject to 

larger revisions from year to year than cash estimates. 

As a result, if accrual measures of insurance costs were 

used in the budget, changes in the projected deficit to 

reflect those revisions could be greater (particularly if 

market risk was included).

• If used in the budget, accrual measures for insurance 

programs would widen the gap that typically exists 

between the budget deficit reported for a given year 

and the change in outstanding federal debt—as the 

accrual estimates used for federal credit programs 

do.16 As a result, accrual measures would diminish 

the budget’s usefulness as an indicator of changes 

in federal debt held by the public. They would also 

pose significant challenges during the transition to 

their use, such as the need to establish new budget 

15. As an example of that wider range of uncertainty, CBO projected 

the likely range of net claims on PBGC’s multiemployer pension 

insurance program over the 2017–2036 period as $10 billion 

to $44 billion (with a mean of $36 billion) on a cash basis, 

compared with $31 billion to $157 billion (with a mean of 

$101 billion) on a fair-value accrual basis. See Congressional 

Budget Office, Options to Improve the Financial Condition of the 

Pension Benefit Guaranty Corporation’s Multiemployer Program 

(August 2016), p. 29, www.cbo.gov/publication/51536.

16. The net amount that the Treasury borrows by selling securities 

is determined mainly by the annual budget deficit. But other 

factors that are not directly included in budget totals also affect 

the government’s need to borrow from the public. Those factors 

include the cash flows associated with federal credit programs, 

because budget totals reflect only present-value estimates of the 

federal subsidy costs of those programs, not their cash flows. 

See Congressional Budget Office, The Budget and Economic 

Outlook: 2018 to 2028 (April 2018), pp. 87–88, www.cbo.gov/

publication/53651.

accounts to reconcile accrual estimates with actual 

cash flows and the need to decide how to report the 

costs of existing insurance commitments. 

Assessing the Information That Cash 

and Accrual Measures Provide About 

Insurance Programs

Do the 10-year cash measures used for insurance programs in the federal budget process provide appropriate 

information? The key issues for answering that question 

are whether cash measures accurately indicate whether a 

federal activity involves net costs or savings and whether 

such measures provide a reasonable sense of the size of 

an activity’s total budgetary effects (see Figure 1). When 

cash-based estimates provide misleading information, the 

main reasons are generally that budgetary effects extend 

over many years and that the 10-year budget window is 

truncating those effects. 

In cases in which cash-based measures have shortcomings, accrual-based measures might provide useful 

information, but they would also present trade-offs. In 

such cases, key considerations for policymakers include 

the following: 

• Do accrual measures convey more complete and 

relevant information about a program’s overall 

budgetary effects?

• Are accrual measures practical enough to be worth 

developing and reliable enough to be used in 

executing rules and procedures related to budget 

enforcement?

• Is the government’s commitment of future resources 

firm enough to justify recording future cash flows 

years before they occur?

Relevance to Understanding Overall Budgetary Effects 

Accrual measures are most relevant for insurance programs that involve long lags between the timing of 

federal commitments and the timing of the resulting 

cash flows. The limitations of 10-year cash estimates for 

such activities were evident with the Community Living 

Assistance Services and Supports (CLASS) program, 

which was proposed in the 2010 Patient Protection and 

Affordable Care Act. That voluntary program would have 

offered federal long-term care insurance to employed 

people age 18 or older. In contrast to most health insurance, in which participants pay premiums and receive 
8 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? December 2018

coverage on an annual basis, CLASS participants were 

to pay premiums over the duration of the policy to 

cover health care costs that would probably be incurred 

far in the future. Premiums were to be credited to an 

interest-bearing trust fund and adjusted, as necessary, so 

that balances in the fund (including intragovernmental 

transfers of interest earned on federal securities held by 

the fund) would be sufficient to keep the program in 

actuarial balance over a 75-year period.17 The program 

17. Actuarial balance means that expected income (in this case, 

insurance premiums and intragovernmental interest) would equal 

or exceed expected costs (cash payments for future benefits and 

the administrative costs of running the program).

Figure 1.

Cash and Accrual Measures for Federal Insurance Programs: Weighing the Decision Factors

NO YES

NO YES

NO YES

Do 10-year cash estimates correctly indicate whether 

activities result in long-term net savings or net costs? 

Do 10-year cash estimates convey the approximate 

order of magnitude of those savings or costs?

Is the government exposed to significant market risk?

Accrual Measures 

Probably Provide 

Useful Information

Examples:

• Orderly Liquidation Fund

• Deposit Insurance

• Pension Benefit Guaranty 

Corporation

Accrual Measures That 

Include Adjustments for 

Market Risk Might Be 

Useful

Example:

• Terrorism Risk Insurance

Cash and Accrual 

Measures Probably Convey 

Similar Information 

Examples:

• Crop Insurance

• Flood Insurance

Source: Congressional Budget Office.

Market risk is the element of financial risk that investors cannot protect themselves against by diversifying their portfolios. It results from shifts 

in macroeconomic conditions, such as productivity and employment, and from changes in expectations about future macroeconomic conditions. 

Federal insurance programs expose the government to market risk if they incur more claims or receive less income when the economy as a whole is 

performing poorly.
December 2018 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? 9

was never implemented because of concerns about its 

sustainability.

On the required cash basis, CBO estimated that premiums collected in the program’s early years would 

more than offset costs in those years, producing net 

savings over the 10-year budget horizon.18 By contrast, 

an accrual estimate, prepared on either a FCRA or a 

fair-value basis, would have presented more complete 

information and would not have shown savings. 

The extent of timing lags in existing federal insurance 

programs varies: 

• For resolutions of troubled financial institutions 

through the Orderly Liquidation Fund, timing lags 

have two sources: Cash measures can include large 

initial outlays for resolution activities that will be 

partly offset by later recoveries from asset sales. In 

addition, assessments imposed on healthy financial 

institutions to recover OLF’s losses occur after initial 

resolution activities and thus may not be completely 

accounted for in 10-year cash projections.

• For deposit insurance, timing lags generally have 

significant budgetary effects only during and after a 

financial crisis, when the time needed to resolve bank 

failures is usually longer than under normal economic 

conditions. During such a crisis, cash transactions can 

include large initial outlays to pay deposit insurance 

claims, which are followed later by recoveries from 

asset sales and by additional income from assessments 

on solvent banks. 

• For flood and crop insurance, in which claims are 

typically resolved within a few years of a covered 

flood or crop failure, 10-year cash measures capture 

18. CBO estimated that the difference between premiums and costs 

in the initial years of the CLASS program would result in net 

savings of $70 billion. (No benefits were to be paid out in the 

first 5 years of the program.) That amount helped to reduce 

CBO’s estimate of the overall net cost of the Affordable Care 

Act. CBO also reported that the CLASS program would increase 

budget deficits in later decades by far more than the savings in 

the first 10 years. See Congressional Budget Office, letter to the 

Honorable Tom Harkin providing additional information on 

CLASS program proposals (November 25, 2009), www.cbo.gov/

publication/41833. 

most of the budgetary effects expected to occur over 

the budget horizon. 

• For terrorism insurance offered under the Terrorism 

Risk Insurance Act (TRIA), which has moderate 

timing lags, annual cash and accrual measures may 

diverge. However, 10-year cash measures probably 

convey the approximate size of anticipated long-term 

budgetary effects. 

• For pension insurance, which has long timing lags, 

10-year cash measures provide misleading and 

incomplete information about long-term costs 

because they fail to reflect the significant portion of 

cash flows that are expected to occur after the 10-year 

budget window. For example, more than 20 years 

may be needed to realize the full costs of resolving 

or providing financial assistance to a distressed or 

terminated private pension plan. 

Even when timing lags are not significant, accrual measures may give a more complete indication of whether 

new insurance commitments made in a given year are 

expected to result in net costs or savings. Cash projections, particularly for the near term, may be dominated 

by transactions that result from past events, making it 

difficult to assess the net effects of new commitments. 

Practicality and Reliability 

Accrual measures are standard in financial accounting in 

the private sector and much of the public sector worldwide, but they are more methodologically complex than 

cash measures. Policymakers might want to consider 

whether such measures are useful enough for the federal 

budget to be worth the added difficulty to develop. For 

many programs, cash estimates already incorporate most 

of the information needed to produce accrual estimates, 

but accrual estimates may be more practical to produce 

for some programs than for others. 

Tracking Cohorts of Commitments. The analytical 

value of accrual measures is probably greatest when the 

costs of commitments made during a specific period and 

the budgetary resources to pay for them can be readily aligned, tracked, and monitored—as is the case for 

federal credit programs. FCRA prescribes an accounting 

treatment for credit programs that relies on identifying 

and tracking discrete cohorts of commitments. (A credit 

cohort consists of all the loans or loan guarantees that a 

program obligates in a given fiscal year.) Analysts prepare 
10 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? December 2018

initial estimates of the net costs attributable to a particular cohort for the year when that cohort’s commitments 

are made. In later years, analysts track cash flows stemming from each cohort’s commitments and, as necessary, 

produce revised estimates for each cohort to account for 

differences between expected and actual results.19

Under FCRA, if a cohort’s estimated costs turn out to 

be larger than initially expected, additional budgetary 

resources are automatically provided, without further 

legislation, to cover them. Conversely, if costs end up 

being smaller than expected, some of the funding originally obligated to cover anticipated costs is credited back 

to the Treasury as a receipt. Thus, accounting for and 

executing credit programs on a cohort basis ensures that 

the budgetary resources for a given cohort are aligned 

with the estimated costs of those credit commitments. 

However, that practice relies on a more complicated 

accounting structure than may be feasible for some federal insurance programs.

Similar distinctions between cohorts of commitments 

could probably be made for insurance programs. 

Analysts would begin by defining the cohort as a set 

of commitments that occur over a particular period—

such as a fiscal year—and then estimate the full extent 

of budgetary effects attributable to that cohort. That 

approach would ensure a proper alignment between costs 

stemming from the risk assumed for a given cohort and 

income from premiums or other fees charged to offset 

the expected costs for that cohort. 

Defining cohorts and the relevant time horizon might be 

more practical for some insurance programs than for others and would require judgment. For example, a cohort 

style of accounting might be most feasible for programs 

(such as flood and crop insurance) that have specific, 

contractually governed, time-limited commitments and 

a direct connection between the coverage sold and the 

premiums charged for that coverage. For programs (such 

as TRIA and OLF) whose costs are driven by infrequent 

19. The Administration’s Office of Management and Budget is 

responsible for producing the revised estimates (called credit 

subsidy reestimates) and implementing all other budget execution 

procedures. Reestimates start once a cohort of commitments has 

been significantly disbursed and continue until all of the cohort’s 

cash flows are complete. Reestimates are generally prepared on 

an annual basis. See Congressional Budget Office, Credit Subsidy 

Reestimates, 1993–1999 (September 2000), www.cbo.gov/

publication/12645.

and readily identifiable events and recovered through 

compulsory fees assessed after those events, the events 

themselves could effectively define cohorts. For programs 

(such as pension and deposit insurance) that have openended commitments to provide benefits in case of certain 

events, it would be possible to determine an appropriate 

definition of a cohort, but judgment might be needed to 

decide among alternative approaches.

If insurance cohorts were readily identified and tracked 

over time, analysts could develop forward-looking 

projections of budgetary effects that would summarize, 

in net-present-value terms, the lifetime costs stemming 

from risk that the government assumed over a specific 

period or from proposed changes to the scope of the 

government’s risk exposure. Such projections might help 

policymakers by offering more focused assessments of 

whether new commitments would be expected to involve 

net costs and, if so, how big those costs might be. For 

past commitments, however, tracking ongoing budgetary effects on a net-present-value basis and updating the 

initial estimates might be less practical because of the 

additional complexity. 

Accuracy of Estimates. A related question that policymakers might want to consider is whether accrual measures are reliably accurate enough to be used for budget 

enforcement. For most federal insurance programs, the 

accuracy of budget projections has more to do with the 

quality of underlying estimates of expected losses than 

with whether the budget projections are presented on 

a cash or an accrual basis. In that sense, accrual and 

cash measures require some of the same information to 

project the anticipated cash flows that underlie budget 

projections and estimates of the net budgetary impact of 

proposed policy changes. 

Whether cash or accrual estimates are used, insurance 

programs’ ultimate realized costs will probably differ 

from projections because of the uncertainty surrounding 

the events that those programs insure against. Among 

the many challenges that analysts may face in producing estimates for federal insurance programs are lack 

of sufficient historical data, the uncertainty inherent in 

scenarios of future events and losses, and the uncertain 

effectiveness of methods to prevent or mitigate the risks 

covered by those programs. Historical costs offer some 

guidance, but they may be more helpful for projecting 

the expected net costs of programs (such as crop, flood, 

deposit, and pension insurance) that experience a high 
December 2018 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? 11

volume of cash flows in a typical year than for programs 

(such as TRIA and OLF) whose cash flows are driven 

primarily by events with a very low probability of occurring. For all programs, however, atypical years of concentrated losses sometimes occur. 

All told, actual cash flows will often vary significantly 

from projected amounts. Consequently, the resulting net 

budgetary effects of a program are likely to be greater or 

smaller than the expected value that CBO estimates for 

a given year.20 Although that uncertainty applies to all 

estimates, accrual measures involve added uncertainty 

because they stretch farther into the future and rely on 

judgments about the interest rate used to discount future 

cash flows. For those reasons, some policymakers might 

question the validity of using accrual estimates for insurance programs to enforce Congressional and statutory 

targets for the federal budget.

The Nature of the Government’s 

Insurance Commitments 

Another important consideration with accrual measures 

is whether the federal government’s insurance-related 

commitments are sufficiently firm to justify accounting 

for cash flows that are expected to occur far in the future. 

Although they differ in various ways, all of the government’s insurance commitments seem certain enough to 

include in budget projections and estimates. 

Some commitments—such as those related to crop or 

flood insurance—involve explicit, contractual obligations 

with specified terms. In general, those contractual commitments are legally binding; once incurred, obligations 

to claimants are owed in full. Other insurance commitments—such as those related to the risk of terrorist 

attacks or the failure of banks, financial institutions, or 

private pension plans—are governed by laws and policies that spell out eligibility criteria and formulas for 

claims and benefits. Some analysts view those statutory 

commitments as less binding than commitments that 

are contractual obligations. (In the case of pension and 

20. See the testimony of Douglas W. Elmendorf, Director, 

Congressional Budget Office, before the Subcommittee on 

Oversight and Investigations of the House Committee on 

Financial Services, Review of CBO’s Cost Estimate for the DoddFrank Wall Street Reform and Consumer Protection Act (March 30, 

2011), www.cbo.gov/publication/22078; and Congressional 

Budget Office, cost estimate for H.R. 4173, the Restoring 

American Financial Stability Act of 2010 (June 9, 2010), 

www.cbo.gov/publication/21527.

deposit insurance, judgment would also be required to 

determine the timing of the government’s obligation: 

Does it occur when a loss is incurred or when the insurance is extended?) 

Measuring the net cost of the government’s insurancerelated commitments is complicated if lawmakers control 

the amount of resources available to pay claims. Hence, 

in measuring the magnitude of budgetary effects, key 

factors to consider are the extent to which lawmakers 

retain control over future spending stemming from those 

commitments and whether the programs have sufficient resources, under current law, to pay all claims that 

arise. The means by which insurance claims are financed 

varies, but some programs—including crop insurance 

and TRIA—have access to unlimited amounts of budget 

authority to pay the full extent of claims. Other programs—such as deposit, flood, and pension insurance 

and OLF—face limits on the amount of budgetary 

resources that are legally available to pay claims. If such 

limits are reached, lawmakers have to decide whether to 

enact new legislation to enable the programs to continue 

to pay claims as they arise.21

Estimates prepared on either a cash or an accrual basis 

could differ depending on how they reflected such 

important factors as how large a program’s claims 

could be, what would happen if resources were constrained, and how much it would cost to satisfy all of 

the program’s commitments. For such a program, the 

Congress would need to consider whether the budget 

process should be based on accounting measures that 

reflect or ignore potential resource constraints. That 

choice involves trade-offs, particularly if analysts expect 

that the resource constraints could be reached under 

current law—as is now the case for flood and pension 

insurance. For those programs, estimates prepared on 

either a cash or an accrual basis might understate the 

full cost of insurance commitments if they reflected 

the limits on resources. Such estimates would indicate 

the amount of claims expected to be paid over a given 

21. For example, after the flooding that accompanied Hurricane 

Katrina in 2005, lawmakers increased the National Flood 

Insurance Program’s ability to borrow from the Treasury so 

that claims could be paid in a timely fashion. After Hurricanes 

Harvey, Irma, and Maria in 2017, lawmakers forgave about 

$16 billion of the program’s debt. 
12 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? December 2018

period, which might be less than the amount owed to 

policyholders.22

Currently, CBO’s cash baseline budget projections 

and legislative cost estimates for most federal activities—including flood and pension insurance—reflect 

legal limits on agencies’ authority to obligate federal 

resources.23 The reason is that lawmakers can then apply 

Congressional budget enforcement mechanisms to new 

laws that would increase or decrease the amount of 

legally available resources. The Administration’s Office of 

Management and Budget (OMB), by contrast, does not 

take resource constraints into account when producing 

baseline projections and cost estimates for pension and 

flood insurance.24

Some analysts argue that it is appropriate for estimates 

used in the budget process to reflect the amount of 

claims on federal insurance programs regardless of a 

program’s resource constraints because those claims 

involve “implicit exposures”—an expectation that all 

commitments will eventually be met—particularly if 

lawmakers have enacted legislation in the past to enable 

agencies to pay claims that might otherwise have been 

delayed or not been paid.25 Alternative measures that 

22. The federal balance sheet (part of an annual financial report by 

the Treasury) reports the unpaid claims on federal insurance 

programs related to foreseeable losses that have already been 

triggered by past events and claims related to losses that are 

likely to occur in the future, without regard to statutory limits 

on the resources available to pay claims. See Congressional 

Budget Office, Measures of the U.S. Government’s Fiscal Position 

Under Current Law (August 2004), pp. 11–16, www.cbo.gov/

publication/15943. Also see Federal Accounting Standards 

Advisory Board, Statement of Federal Financial Accounting 

Standards 51: Insurance Programs (January 18, 2017), 

http://files.fasab.gov/pdffiles/handbook_sffas_51.pdf (658 KB). 

23. Incorporating those limits into accrual measures could be 

problematic because the budgetary constraints are not based 

on cohorts, as accrual measures are. One possible method is to 

have the estimates show no costs once the budgetary resources 

are projected to be exhausted, which is how cash projections for 

those programs are prepared.

24. Neither CBO’s nor OMB’s estimates reflect constraints on the 

resources available for entitlement programs, such as those legally 

imposed by the balances of the trust funds for Medicare and 

Social Security.

25. For an analysis of explicit and implicit exposures, see 

Government Accountability Office, Fiscal Exposures: 

Improving Cost Recognition in the Federal Budget, GAO-14-28 

(October 2013), www.gao.gov/products/GAO-14-28. 

ignore resource constraints, whether prepared on a cash 

or an accrual basis, might illuminate programs’ fiscal 

imbalances more comprehensively. But compared with 

CBO’s resource-constrained projections, they might 

imply a change in the nature of the federal obligation—

specifically, by reflecting spending that might not result 

unless existing laws were changed. Thus, unconstrained 

measures, whether cash- or accrual-based, might prematurely recognize costs stemming from commitments 

whose fulfillment might be delayed (in the case of flood 

insurance) or that possibly might go unpaid (in the case 

of pension insurance). 

The Role of Market Risk in 

Federal Insurance Programs

Federal insurance programs expose the government 

to market risk if they incur more claims or receive less 

income when the economy as a whole is performing 

poorly. That risk is effectively passed along to taxpayers, 

who bear the consequences of the government’s financial 

losses. 

Market risk can be incorporated into either cash or 

accrual measures.26 In practice, however, most adjustments for market risk in the federal budget have been 

made using accrual measures—specifically, fair-value 

estimates that attempt to use market prices to measure 

net costs to the public. Fair-value estimates generally 

discount expected future cash flows using the discount 

rates that private financial institutions would use.27

26. For example, OMB and CBO make an adjustment for market 

risk when projecting the cash flows that the Railroad Retirement 

Board’s National Railroad Retirement Investment Trust earns 

from investments in private securities. OMB and CBO make 

that adjustment to cash measures by projecting the trust’s 

earnings using the interest rate on Treasury securities rather 

than the higher mean rate of return expected for the trust’s 

assets. Adjusting for market risk has the advantage of avoiding 

the appearance that the budget could benefit if the government 

purchased risky private-sector securities. See Congressional 

Budget Office, Evaluating and Accounting for Federal Investment 

in Corporate Stocks and Other Private Securities (January 2003), 

pp. 19–24, www.cbo.gov/publication/14245. 

27. The fair value of an asset is the price that would be paid for 

that asset in an orderly transaction (one that occurs under 

competitive market conditions between willing participants and 

that does not involve forced liquidation or a distressed sale). 

For an analysis of market risk and how it can be incorporated 

into cost estimates and baseline budget projections, see 

Congressional Budget Office, How CBO Produces Fair-Value 

Estimates of Federal Credit Programs: A Primer (July 2018), 

www.cbo.gov/publication/53886; and the testimony of Douglas 
December 2018 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? 13

When market risk is present, those private discount 

rates are generally higher than interest rates on Treasury 

securities.28

Incorporating the cost of market risk would increase the 

estimated costs or reduce the estimated savings of federal 

insurance programs and would provide policymakers 

with more comprehensive information. That information 

could be particularly important for understanding the 

net costs of certain programs, such as those that insure 

against risks that are financial in nature: 

• The Pension Benefit Guaranty Corporation is exposed 

to market risk because claims on its pension insurance 

programs are very sensitive to the performance of the 

economy.29 Companies that offer pension plans are 

more likely to fail when the economy is doing poorly. 

In addition, the underfunding of pension plans is 

more likely to increase during economic downturns 

because the value of plans’ stock portfolios is highly 

correlated with the state of the economy. During the 

most recent financial crisis, the deficit of PBGC’s 

single-employer pension program (the difference 

between the program’s assets and liabilities) increased 

from $13 billion in 2007 to $21 billion in 2009, and 

PBGC’s net claims from terminated plans soared from 

about $300 million in 2007 to $6.8 billion in 2009.30

• The Federal Deposit Insurance Corporation’s Orderly 

Liquidation Fund and deposit insurance program 

W. Elmendorf, Director, Congressional Budget Office, before the 

House Committee on Financial Services, Estimates of the Cost of 

the Credit Programs of the Export-Import Bank (June 25, 2014), 

www.cbo.gov/publication/45468.

28. For a technical discussion of discounting for federal loan 

guarantees, which are similar in some respects to federal 

insurance, see Congressional Budget Office, Estimating the Value 

of Subsidies for Federal Loans and Loan Guarantees (August 2004), 

pp. 23–24, www.cbo.gov/publication/15923.

29. See Wendy Kiska, Jason Levine, and Damien Moore,

Modeling the Costs of the Pension Benefit Guaranty Corporation’s 

Multiemployer Program, Working Paper 2017-04 (Congressional 

Budget Office, June 2017), www.cbo.gov/publication/52749; 

as well as Congressional Budget Office, Options to Improve 

the Financial Condition of the Pension Benefit Guaranty 

Corporation’s Multiemployer Program (August 2016), 

www.cbo.gov/publication/51536, and The Risk Exposure of 

the Pension Benefit Guaranty Corporation (September 2005), 

www.cbo.gov/publication/17160. 

30. See Pension Benefit Guaranty Corporation, “2015 Pension 

Insurance Data Tables,” Tables S-1 and S-3 (accessed March 19, 

2018), https://tinyurl.com/y96em8m6 (PDF, 572 KB).

are exposed to market risk because failures of 

financial institutions are concentrated in economic 

downturns. For instance, although no banks failed 

in 2005 or 2006 and only three failed in 2007, 

more than 300 failed between 2008 and 2010 

(during the financial crisis), with estimated losses of 

about $60 billion to the Deposit Insurance Fund.31

Reporting the fair value of the costs of OLF and 

deposit insurance would result in higher estimates 

of federal subsidy costs, and that information might 

affect policy decisions about the pricing and scope of 

insurance coverage.32

The degree of market risk for other federal insurance 

programs varies. The TRIA program is exposed to some 

market risk because terrorist attacks could be large 

enough to disrupt the economy and reduce asset values.33

Federal flood and crop insurance, however, expose taxpayers to relatively little market risk because their claims 

are not correlated with the state of the overall economy.

Incorporating market risk into estimates of federal costs 

raises some concerns and is controversial.34 Some analysts 

dispute the degree to which market prices represent 

31. See Federal Deposit Insurance Corporation, “Statistics at a 

Glance: Historical Trends as of March 31, 2017” (accessed 

March 19, 2018), https://tinyurl.com/yawsqesd (PDF, 

43 KB), and 2016 Annual Report (February 2017), p. 148, 

https://tinyurl.com/y8clumdd (PDF, 3.5 MB).

32. For more information about the fair-value approach for 

deposit insurance, see Judy Ruud, The Fair Value of the 

Federal Deposit Insurance Guarantee, Working Paper 2007-13 

(Congressional Budget Office, November 2007), www.cbo.gov/

publication/19355.

33. See David Torregrosa, Perry Beider, and Susan Willie, Federal 

Reinsurance for Terrorism Risk in 2015 and Beyond, Working 

Paper 2015-04 (Congressional Budget Office, June 2015), 

www.cbo.gov/publication/50171.

34. For example, see Government Accountability Office, Credit 

Reform: Current Method to Estimate Credit Subsidy Costs Is More 

Appropriate for Budget Estimates Than a Fair Value Approach, 

GAO-16-41 (January 2016), www.gao.gov/products/GAO-16-

41. In GAO’s view: “The additional market risk recognized under 

the fair value approach does not reflect additional cash costs 

beyond those already recognized by FCRA. The introduction 

of market risk into subsidy costs under the fair value approach 

would (1) be inconsistent with long-standing federal budgeting 

practices primarily based on cash outlays; (2) be inconsistent 

with the budgetary treatment of similarly risky programs; (3) 

introduce transparency and verification issues with respect to 

inclusion of a noncash cost in budget totals; and (4) involve 

significant implementation issues, such as the need for additional 

agency resources” (“Highlights,” p. 2).
14 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? December 2018

market risks that are actually borne by taxpayers and 

beneficiaries of government programs. In particular, 

they argue that market risk is not a cash cost.35 Another 

complication involves the ways in which some federal 

insurance programs are financed. In the case of the 

FDIC, some analysts have argued that because the costs 

of financial resolutions are covered in the long run by 

fees paid by banks and financial institutions, taxpayers 

bear little market risk for such resolutions. Critics of 

incorporating market risk into federal estimates also 

point to implementation issues, the possibility of significant reestimates because of fluctuations in market risk 

premiums, and the challenges of communicating the 

basis of fair-value estimates.36

Comparing the Information Conveyed 

by Cash and Accrual Measures for 

Selected Insurance Programs 

CBO analyzed several large federal insurance programs 

by comparing key factors that affect the information provided by cash and accrual measures of their costs. Those 

factors are the lag between the timing of a program’s 

insurance commitments and the resulting cash flows, any 

constraints on the program’s budgetary resources, and 

the program’s exposure to market risk (see Table 1).The 

analysis focuses on programs for which accrual measures 

could provide particularly useful information not available from 10-year cash measures: 

• The Federal Deposit Insurance Corporation’s activities 

to resolve troubled financial institutions through the 

Orderly Liquidation Fund and deposit insurance,

• Federal flood insurance, and 

35. Fair-value estimates are higher than the costs that the federal 

government would incur if actual cash flows turned out to 

match their statistical averages. Rather than rely on reestimates 

to address that difference, one analyst has suggested an “expected 

returns” approach for federal credit programs that combines 

features of fair value and FCRA; a similar approach could be used 

to account for federal insurance programs. Under that approach, 

budget projections would report a fair-value estimate when credit 

was first extended and then, for subsequent years, would report 

estimated market risk premiums on an annual basis as inflows 

were expected to occur. See Donald Marron, The $300 Billion 

Question: How Should We Budget for Federal Lending Programs? 

(Urban Institute, September 2014), https://tinyurl.com/yafla77y. 

36. Reestimates adjust for the difference between actual and 

projected costs, including risk premiums. Ultimately, accrual 

estimates must be reconciled with actual cash flows whether or 

not an adjustment for market risk is made.

• Federal pension insurance. 

In addition, CBO concluded that accrual measures 

might be helpful in conveying information about the 

costs of the terrorism risk insurance program.37 (For an 

illustration of how accrual accounting would affect cost 

estimates for the most recent legislation reauthorizing 

that program, see the appendix.) However, CBO concluded that accrual measures would not necessarily provide more useful information than 10-year cash measures 

for federal crop insurance. That program typically experiences short lags between the timing of budgetary commitments and resulting cash flows and does not expose 

the government to much market risk (see Figure 2).38

In making the fundamental choice between cash and 

accrual estimates, policymakers would need to consider 

how estimates would factor into the statutory framework 

and procedural rules that govern the federal budget process. In addition, this analysis highlights several separate 

decisions that policymakers could make about the information contained in those estimates. First, policymakers 

could use cash or accrual measures to report either the 

cost of only those claims that programs would have the 

budgetary resources to pay under current law or the cost 

of all of a program’s projected claims. Second, for programs that do not involve time-limited commitments, 

such as deposit and pension insurance, policymakers 

would need to consider the relevant time horizon that 

accrual measures should cover. Third, policymakers could 

incorporate the cost of market risk using either cash or 

accrual measures, although the methods for doing so are 

more straightforward and better understood with accrual 

accounting than with cash accounting. 

37. For more details about that program, see Congressional Budget 

Office, Federal Reinsurance for Terrorism Risk: An Update

(January 2015), www.cbo.gov/publication/49866; and David 

Torregrosa, Perry Beider, and Susan Willie, Federal Reinsurance 

for Terrorism Risk in 2015 and Beyond, Working Paper 2015-

04 (Congressional Budget Office, June 2015), www.cbo.gov/

publication/50171.

38. For more information about that program, see Congressional 

Budget Office, Options to Reduce the Budgetary Costs of 

the Federal Crop Insurance Program (December 2017), 

www.cbo.gov/publication/53375; and Dennis A. Shields, 

Federal Crop Insurance: Background, Report for Congress R40532 

(Congressional Research Service, August 13, 2015).
December 2018 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? 15

Figure 2.

Key Factors That Affect the Usefulness of Cash or Accrual Measures for Insurance Programs

Short

• Crop Insurance

• Flood Insurance*

TIMING LAGS*

Moderate

• Terrorism Risk Insurance

Long

• Orderly Liquidation Fund

• Deposit Insurance

• Pension Benefit Guaranty 

Corporation* 

MARKET RISK

Moderate

• Terrorism Risk Insurance

Low

• Crop Insurance

• Flood Insurance

High

• Orderly Liquidation Fund

• Deposit Insurance

• Pension Benefit Guaranty 

Corporation 

None

• Crop Insurance

• Terrorism Risk 

 Insurance

• Orderly Liquidation Fund

• Deposit Insurance

Binding

• Flood Insurance

• Pension Benefit Guaranty 

Corporation

RESOURCE CONSTRAINTS

Unlikely to Be Binding

Source: Congressional Budget Office.

Market risk is the element of financial risk that investors cannot protect themselves against by diversifying their portfolios. It results from shifts in 

macroeconomic conditions, such as productivity and employment, and from changes in expectations about future macroeconomic conditions. Federal 

insurance programs expose the government to market risk if they incur more claims or receive less income when the economy as a whole is performing 

poorly.

*Lags between the timing of commitments and cash flows may be exacerbated when programs face limits on the amount of resources legally available 

to pay claims in a timely fashion. 

Financial Resolution Activities of the 

Federal Deposit Insurance Corporation

The FDIC was created by the Banking Act of 1933 to 

maintain stability and public confidence in the nation’s 

financial system. It is an independent agency that helps 

to manage the risk of major financial crises by insuring 

deposits in most U.S. banks, regulating the safety and 

soundness of financial institutions, and, when necessary, 

resolving insolvent institutions and managing them while 

they are in receivership. Those activities help to deter 

runs on banks and stabilize the financial system.

The savings and loan crisis of the 1980s and early 1990s 

raised questions about the budgetary treatment of federal 

activities to resolve failing or insolvent financial institutions. In particular, the cash measures used in the budget 

may have given lawmakers and regulators a budgetary 

incentive to delay resolving such institutions in order to 
16 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? December 2018

reduce reported outlays. Delaying the closing of those 

institutions raised the ultimate resolution costs.39

39. See Congressional Budget Office, Budgetary Treatment of Deposit 

Insurance: A Framework for Reform (May 1991), www.cbo.gov/

publication/18530, and The Cost of Forbearance During the Thrift 

Crisis (June 1991), www.cbo.gov/publication/20417. Other 

analysts reached similar conclusions; see, for example, F. Stevens 

Redburn, “How Should the Government Measure Spending? 

The Uses of Accrual Accounting,” Public Administration Review, 

vol. 53, no. 3 (May/June 1993), pp. 228–236, www.jstor.org/

stable/3110127. 

Table 1.

Factors That Affect Whether Accrual Measures Provide Helpful Information for Selected Federal 

Insurance Programs

Key Factors That Affect Measures of Costs Summary of 

Information Conveyed 

by CBO’s Current 

Cash-Based Budget 

Projections

Summary of 

Information Conveyed 

by Accrual Measures

Lag Between 

Timing of Insurance 

Commitments and 

Resulting Cash Flows

Constraints on 

Budgetary 

Resources

Exposure to 

Market Risk

Orderly 

Liquidation 

Fund

Moderate to long. 

Assessments on 

healthy institutions to 

recoup costs would 

lag significantly behind 

up-front spending for 

liquidation activities.

Unlikely to bind. The 

FDIC can borrow money 

to liquidate important 

firms (subject to limits 

that are unlikely to 

be reached), and it is 

required to offset costs 

through fees from other 

large financial firms.

High. Any losses would 

most likely occur during 

a financial crisis.

Ten-year cash 

projections may 

overstate the expected 

net costs of certain types 

of liquidations.

Accrual measures would 

eliminate timing-related 

distortions and show 

smaller net costs. 

Federal 

Deposit 

Insurance 

Program

Sometimes long. Timing 

lags generally have 

significant budgetary 

effects only during and 

after a financial crisis. 

Although fees are set 

to ensure full cost 

recovery in the long 

run, near-term cash 

projections during such 

times may reflect longer 

delays between cash 

outflows and inflows 

than during periods 

of normal market 

conditions. 

Unlikely to bind. If the 

program has insufficient 

reserves, it can borrow 

up to $100 billion 

from the Treasury, 

and additional funds 

are available from 

the Federal Financing 

Bank. The FDIC has 

mechanisms to offset 

its costs (and repay 

borrowing) with income 

from healthy financial 

institutions.

High. Bank failures are 

concentrated during 

recessions and financial 

crises.

Cash projections convey 

helpful information about 

expected net budgetary 

effects under normal 

market conditions but 

might be less informative 

during financial crises, 

when losses are large. 

Because financial 

cycles can be long, a 

snapshot of any 10-year 

period may not capture 

all of the offsetting 

transactions stemming 

from financial resolutions 

and may overstate or 

understate long-term 

costs. 

Accrual measures would 

largely eliminate timingrelated distortions of 

resolution activities 

and, if estimated on 

a fair-value basis, 

would provide a 

more comprehensive 

estimate of expected 

costs.

National 

Flood 

Insurance 

Program

Short. In the absence of 

constraints on available 

resources, most claims 

are paid within a few 

years of a flood. 

Binding constraints 

exist. If the program 

exhausts its 

accumulated reserves 

and borrowing 

authority, it is required 

under current law to 

spend no more than its 

current income allows. 

Low. Losses from floods 

are independent of the 

state of the economy.

Cash projections for 

the near term may be 

dominated by events that 

have already occurred. 

Ten-year projections 

indicate the amount of 

claims payable over that 

period, which may be 

less than the full amount 

owed to policyholders.

Accrual measures 

would indicate more 

clearly the expected 

net costs of each year’s 

commitments.

Continued
December 2018 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? 17

Background. The FDIC insures deposits in banks and 

thrift institutions up to $250,000 per account. Banks 

rather than taxpayers are expected to cover the cost of 

deposit insurance over time. Under current law, premiums and fees are set—and periodically adjusted—to 

achieve a targeted ratio between balances in the Deposit 

Insurance Fund (the accounting mechanism used to 

record cash flows related to deposit insurance) and 

insured deposits. The FDIC expects that targeted reserve 

ratio to be large enough to cover the fund’s losses over 

the long term. (For more information about DIF’s 

reserve ratio, see Box 1.) 

If, in the short run, the FDIC’s reserves and current 

income are insufficient to cover its costs, the agency can 

borrow from the Treasury (up to statutorily specified 

Key Factors That Affect Measures of Costs Summary of 

Information Conveyed 

by CBO’s Current 

Cash-Based Budget 

Projections

Summary of 

Information Conveyed 

by Accrual Measures

Lag Between 

Timing of Insurance 

Commitments and 

Resulting Cash Flows

Constraints on 

Budgetary 

Resources

Exposure to 

Market Risk

Pension 

Benefit 

Guaranty 

Corporation

Long. Failures generally 

occur long after 

insurance commitments 

and result in claims for 

financial assistance 

that are paid over many 

years.

Binding constraints 

exist. Payments are 

limited to PBGC’s 

resources from 

accumulated reserves 

and current income. The 

program that insures 

multiemployer plans is 

projected to become 

insolvent in 2025.

High. Insolvencies 

are concentrated 

during recessions and 

financial crises and are 

exacerbated by the 

fact that the underlying 

assets of insured plans 

include risky securities.

Ten-year cash projections 

provide misleading 

information by indicating 

that PBGC’s combined 

activities for the singleand multiemployer 

programs will reduce 

projected deficits.

Accrual measures would 

eliminate timing-related 

distortions, provide 

succinct measures of 

the net costs of new 

commitments, and 

indicate that pension 

insurance is not a 

source of long-term 

savings.

Terrorism 

Risk 

Insurance 

Program

Moderate. Even if 

most claims were paid 

quickly, full payment 

could take several 

years. However, 

assessments charged to 

offset projected federal 

costs would begin soon 

after losses occurred.

None. The program has 

permanent indefinite 

budget authority to pay 

the full federal share 

of losses for events 

with total claims of 

up to $100 billion. No 

federal liability would 

exist for losses above 

that ceiling because 

policyholders would not 

be compensated for 

such losses.

Moderate. A major 

terrorist attack could 

hurt the economy.

Ten-year cash projections 

may miss some effects 

expected to occur 

outside that period, but 

they generally indicate 

expected long-term 

effects.

Accrual measures 

would eliminate timingrelated distortions and 

provide more accurate 

indications of net 

budgetary effects.

Federal Crop 

Insurance

Program 

Short. Most claims are 

paid within a year of 

a loss.

None. The program has 

permanent indefinite 

budget authority to pay 

all claims.

Low. Most claims, 

especially those related 

to weather, are not 

strongly correlated 

with the state of the 

economy.

Ten-year cash projections 

provide accurate 

information about the 

net costs stemming from 

commitments made 

during that period.

Accrual measures would 

provide information 

similar to that of cash 

measures.

Source: Congressional Budget Office. 

FDIC = Federal Deposit Insurance Corporation; PBGC = Pension Benefit Guaranty Corporation.

Table 1. Continued

Factors That Affect Whether Accrual Measures Provide Helpful Information for Selected Federal 

Insurance Programs
18 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? December 2018

limits) to cover those costs.40The FDIC also has broad 

authority to impose assessments or raise premiums on 

banks to recover losses, replenish its reserves, and repay 

any amounts it has borrowed from the Treasury. For 

example, after incurring historically large losses in 2008 

and 2009, the FDIC imposed a special assessment on all 

insured banks rather than borrow from the Treasury. 

In the years following the savings and loan crisis, lawmakers enacted legislation aimed at improving the 

long-term solvency of the deposit insurance program. 

For instance, the Federal Deposit Insurance Corporation 

Improvement Act of 1991 required regulators to intervene promptly and push banks to restore capital levels 

40. The FDIC is allowed to borrow up to $100 billion from the 

Treasury and additional amounts from the Federal Financing 

Bank under a statutory formula. The maximum obligation 

limitation for the Deposit Insurance Fund was $191.5 billion 

as of December 31, 2017. See Federal Deposit Insurance 

Corporation, Annual Report 2017 (February 2018), p. 95, 

https://tinyurl.com/ybzxw8s2.

when they fall below regulatory requirements. Further 

significant changes were made in 2010 in the DoddFrank Wall Street Reform and Consumer Protection 

Act. For example, that law required the FDIC to slowly 

increase its reserves, which resulted in additional collections of premiums. 

The Dodd-Frank Act also gave the FDIC the authority—and a source of funding, through the Orderly 

Liquidation Fund—to liquidate large, systemically 

important financial firms that become, or are in danger 

of becoming, insolvent. That legal authority is not technically considered insurance, but it is an important tool 

to help the government manage risk from major financial 

crises, particularly its exposure to losses from deposit 

insurance.

Shortcomings of Ten-Year Cash Estimates for OLF and 

Deposit Insurance. In most years, few banks are resolved 

through the Deposit Insurance Fund, and the probability of OLF-related liquidations is small. As a result, the 

Box 1.

Building Up Reserves in the Deposit Insurance Fund

Deposit insurance is managed differently than most other 

federal insurance programs. By law, any costs associated with 

insurance losses must be recovered through assessments 

on solvent insured depository institutions. Income from such 

assessments, and annual premiums paid by insured institutions, are credited to the Deposit Insurance Fund (DIF), an 

accounting mechanism used to record cash flows related to the 

deposit insurance program. 

Current law directs the Federal Deposit Insurance Corporation (FDIC) to build and maintain a balance of reserves in the 

insurance fund to help prefund potential losses, which tend to 

be highly concentrated in periods of market stress. Under the 

Dodd-Frank Wall Street Reform and Consumer Protection Act, 

DIF’s balance (including interest paid by the Treasury on the 

fund’s reserves) must, by September 30, 2020, be equivalent 

to at least 1.35 percent of the amount of deposits insured by 

the FDIC. That law also gives the agency flexibility to set a 

higher target for that reserve ratio. Currently, the FDIC has set 

a target ratio of 2.0 percent to withstand a future crisis.1 As of 

1. The 2.0 percent designated reserve ratio is a long-term goal to restore 

and maintain a positive fund balance even during a financial crisis 

and to allow the FDIC to charge steady assessment rates across an 

June 30, 2018, the fund held a total of $98 billion, which was 

equivalent to 1.3 percent of the $7.4 trillion in deposits insured 

by the FDIC.2

For the foreseeable future, the Congressional Budget Office 

expects the FDIC to continue building up reserves in the 

Deposit Insurance Fund to ensure that the fund’s balance is 

likely to be sufficient to cover long-term losses for the deposit 

insurance program. CBO expects that the fund’s cumulative 

balance will reach the 2.0 percent target sometime long after 

2028. The FDIC plans to reduce assessment rates when the 

reserve ratio exceeds 2.0 percent.3

economic cycle. (A reserve ratio greater than 2.0 percent would have 

been necessary to maintain a positive balance for thrift institutions during 

the savings and loan crisis of the late 1980s and early 1990s, but those 

costs were not borne by DIF.) See Lee K. Davison and Ashley M. Carreon, 

“Toward a Long-Term Strategy for Deposit Insurance Fund Management,” 

FDIC Quarterly, vol. 4, no. 4 (2010), pp. 29–39, https://tinyurl.com/

y7p3p8f8 (PDF, 761 KB). 

2. See Federal Deposit Insurance Corporation, Quarterly Banking 

Profile: Second Quarter 2018, vol. 12, no. 3 (August 2018), pp. 23–24,

www.fdic.gov/bank/analytical/qbp/2018jun. 

3. See Federal Deposit Insurance Corporation, Annual Report 2017 (February 

2018), pp. 23, 107, and 181, https://tinyurl.com/ybzxw8s2.
December 2018 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? 19

FDIC’s costs to resolve financial institutions are usually 

expected to be modest. However, periods of highly 

concentrated losses sometimes occur, especially during 

economic downturns. The timing and severity of such 

losses are inherently unpredictable. Thus, projections of 

the FDIC’s future costs are highly uncertain, regardless 

of the accounting method used to prepare them.

Despite that uncertainty, CBO generally expects that 

OLF and the deposit insurance program will be selffinancing over the long run because of their requirements 

to recover costs through fees paid by solvent banks and 

(in the case of OLF) solvent large financial firms.41

However, cash flows for those programs may show 

different trends for particular 10-year periods and pose 

shortcomings:

• Cash flows may convey incomplete information 

about the long-term costs of resolution activities and 

may fail to indicate that the programs are designed 

to ensure that, over the long run, the FDIC’s 

income will offset its costs.42 Particularly during 

times of financial stress, cash flows may reflect large 

transactions involving working capital—near-term 

outlays to acquire assets of insolvent institutions, 

which will be offset in later years by income from the 

sale of such assets. After a crisis, income may reflect 

assessments levied on healthy institutions to recover 

losses. Depending on the severity of the crisis and 

the amount of time required to complete resolution 

activities, estimated cash flows over a given 10-year 

period may not be indicative of the activities’ net 

budgetary effects. 

• Cash-based projections do not take into account the 

full cost of the government’s significant exposure to 

market risk from those programs. 

41. Broadly speaking, although both programs are designed to 

remain financially solvent, measures of their impact on the 

budget deficit may reflect additional costs stemming from 

indirect effects on other federal cash flows—namely, revenues 

from payroll and income taxes.

42. Some analysts argue that during a particularly severe financial 

crisis or depression, the financial industry might not have the 

capacity to generate enough resources to fulfill the FDIC’s costrecovery requirements. Under such circumstances, although the 

FDIC has flexibility in setting fees, a change in law would be 

needed to permit the agency to relax those requirements and shift 

costs to taxpayers.

The FDIC’s pattern of cash flows from resolutions—

short-term outlays followed by longer-term recoveries 

from asset sales or assessments—is similar to that of 

federal direct loan programs, which are treated in the 

budget on an accrual basis. Thus, a long-term perspective 

on the FDIC’s resolution activities that accounts for all 

of those inflows and outflows could be more informative about the costs of those activities than a short-term 

view.43 Relative to 10-year cash estimates, accrual estimates could provide a clearer picture of the expected net 

costs of resolution activities by eliminating distortions 

stemming from timing lags, which are often longer in 

periods of financial stress than in normal times. 

Developing consistent accrual measures for OLF and 

deposit insurance would be complex, however, for reasons described below. Thus, policymakers might want to 

consider other alternatives to current cash measures, such 

as modified cash estimates. For example, because some of 

the timing-related distortions of 10-year cash measures 

result from largely offsetting transactions to acquire and 

sell assets of troubled firms, cash-based estimates of net 

costs might be more useful if the cash flows associated 

with working capital were excluded from measures of the 

budget deficit.

Operational and Budgetary Differences Between OLF 

and Deposit Insurance. Developing consistent accrual 

measures of the budgetary effects of the FDIC’s programs would require judgment because of key differences 

in how OLF and deposit insurance operate. In particular, the timing of income for the programs differs. OLF 

does not maintain reserves to cover its losses; rather, it is 

required by law to recover any loses by assessing fees only 

after an event. In that sense, identifying cohorts of OLFrelated transactions—which are expected to stem from 

relatively discrete and particularly severe events—might 

be fairly straightforward. With the Deposit Insurance 

Fund, by contrast, the FDIC effectively recovers losses 

through a combination of assessments made before 

and after an event, which adds complexity to the task 

43. The FDIC’s current financial reporting takes a short-run view of 

deposit insurance premiums. The agency follows private-sector 

accounting standards, and in its financial statements, it recognizes 

revenues from assessments for the quarterly period of insurance 

coverage. See Federal Deposit Insurance Corporation, Annual 

Report 2017 (February 2018), p. 100, https://tinyurl.com/

ybzxw8s2. Because timing lags between the billing and payment 

cycles are short, differences in estimates of earned income and 

anticipated collections are small.
20 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? December 2018

of identifying cohorts. In essence, deposit insurance 

involves a large volume of potentially highly variable cash 

inflows and outflows from ongoing activities that occur 

every year.

Another challenge in developing consistent measures 

for OLF and deposit insurance stems from the fact that 

the budget records income for the two programs differently, which in turn affects estimates of their impact 

on the deficit. Receipts to DIF are recorded as offsets to 

spending (which generally result from businesslike or 

market-oriented transactions), whereas OLF-related collections are recorded as revenues (because they arise from 

the government’s exercise of its sovereign power).44 By 

longstanding convention, baseline projections and legislative cost estimates for activities that involve revenues 

incorporate the assumption that income from business 

fees and other indirect taxes would be partly offset by 

reduced payments of income and payroll taxes. No such 

assumption is made for collections that are classified as 

offsets to spending, including those related to deposit 

insurance.45

More broadly, within the federal budget process, accrual 

measures for OLF and other programs that involve revenues (such as TRIA) could pose additional challenges. 

Specifically, the framework of statutory and procedural 

rules that governs the enforcement of budgetary targets 

recognizes the fundamental distinction that the budget 

has historically drawn between revenues and spending. 

As a result, the budget and CBO’s estimates report 

revenues and spending separately. To date, the use of 

44. For an explanation of the rationale for different budgetary 

treatments of revenues (OLF assessments) and offsetting receipts 

(deposit insurance premiums), see President’s Commission on 

Budget Concepts, Report of the President’s Commission on Budget 

Concepts (October 1967), pp. 36–46, 64–72, http://tinyurl.com/

y7lxv3gp. 

45. The staff of the Joint Committee on Taxation and CBO estimate 

that for indirect taxes, such as compulsory assessments on healthy 

financial institutions levied to offset up-front resolution costs, 

the offsetting change in income and payroll tax revenues over the 

2019–2028 period will, on average, equal roughly 23 percent of 

the gross change in revenues. Similar adjustments do not apply 

to deposit insurance premiums because those premiums are not 

considered indirect taxes. The tax offsets also do not apply to 

recoveries from the sale of distressed assets, which are classified 

as offsets to spending. For background on the revenue offset, 

see Congressional Budget Office, The Role of the 25 Percent 

Revenue Offset in Estimating the Budgetary Effects of Legislation

(January 2009), www.cbo.gov/publication/20110. 

accrual measures within the federal budget process has 

been limited to activities that are recorded entirely on 

the spending side of the budget. If policymakers judged 

that accrual measures for OLF (or other programs that 

involve both a spending and a revenue component) were 

useful enough to incorporate into the budget process, 

they would need to consider whether to modify the 

existing framework of budget enforcement rules or the 

budgetary treatment of some income flows now categorized as revenues. 

CBO’s Cash Baseline Projections for the Orderly 

Liquidation Fund. The probability that the FDIC will 

need to liquidate a systemically important firm in a given 

year is small, but the potential cash flows associated with 

doing so are large and are most likely to occur during 

times of maximum economic stress.46 In general, resolution costs increase with the size of the institution. 

If the FDIC’s liquidation authority was invoked sometime in the next decade, it could result in cash flows 

that extended well beyond the 10-year budget horizon, 

especially if the event occurred during a period of financial stress. The FDIC would borrow necessary amounts 

from the Treasury to cover the cost of resolution activities in the early years of a liquidation.47 Because of the 

mismatch between the timing of up-front cash outflows 

to liquidate an institution and later cash inflows from 

asset sales and assessments, net cash flows of OLF-related 

transactions—in individual years or over a 10-year 

period—might misrepresent the expected net costs of 

certain types of liquidations. Moreover, because assessments on healthy institutions would reduce payments of 

46. See the testimony of Douglas W. Elmendorf, Director, 

Congressional Budget Office, before the Subcommittee on 

Oversight and Investigations of the House Committee on 

Financial Services, Review of CBO’s Cost Estimate for the DoddFrank Wall Street Reform and Consumer Protection Act (March 30, 

2011), www.cbo.gov/publication/22078; and Congressional 

Budget Office, cost estimate for H.R. 4173, the Restoring 

American Financial Stability Act of 2010 (June 9, 2010), 

www.cbo.gov/publication/21527.

47. During the first 30 days of the receivership, the FDIC’s 

obligations, including borrowing from the Treasury, are limited 

to an amount that is equal to 10 percent of the total consolidated 

assets of the institution placed into receivership, based on the 

most recent financial statement available. After that period 

(or earlier if necessary, to the extent that the fair value of the 

institution’s assets has been calculated), the FDIC’s obligations 

cannot exceed an amount equal to 90 percent of the fair value of 

the total consolidated assets available for repayment.
December 2018 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? 21

income and payroll taxes, the net federal revenues attributable to the use of OLF would be significantly less than 

the gross amount of the assessments. Thus, if a severe 

economic event occurred, OLF itself would recover 

its costs in the long run, but OLF-related transactions 

would probably increase the deficit, CBO expects.

CBO estimated in April 2018 that net cash flows stemming from OLF-related resolutions projected to begin 

during the 2019–2028 period would increase budget 

deficits by a total of $14.2 billion over that period, based 

on the possibility that the FDIC’s liquidation authority 

would be used at some point during those years (see 

Table 2).48 However, those 10-year cash projections 

truncate a significant portion of the budgetary effects of 

resolutions begun during that period, including most of 

the assessments expected to be collected from healthy 

firms to help offset the FDIC’s up-front costs. 

Proposals to eliminate OLF have been made in the 

Congress (most recently in H.R. 10, the Financial 

CHOICE Act of 2017). Some analysts are concerned 

that 10-year cash estimates of such a repeal would overstate savings to the government because they would miss 

a significant portion of forgone recoveries and fees in 

later years.49

48. CBO’s estimates reflect the difference between the expected 

values of the net costs to OLF to resolve insolvent firms and 

the additional assessments collected by OLF (net of indirect 

effects on income and payroll taxes). Those expected values 

represent weighted averages of the outcomes of various scenarios 

regarding the frequency and magnitude of systemic financial 

problems, taking into account an estimated probability of each 

scenario. Although such estimates reflect CBO’s best judgment 

based on past outcomes, the cost of OLF will depend on future 

economic and financial events that are inherently unpredictable. 

In addition, the timing of cash flows associated with resolving 

insolvent firms is difficult to predict. 

49. See, for example, Lawrence H. Summers, “Congress Is 

Considering an Extremely Dangerous Idea Almost Nobody Has 

Heard of,” Washington Post (January 18, 2017), https://tinyurl.

com/y73l8qyl. In its cost estimate for H.R. 10, CBO projected 

that ending OLF would reduce deficits over the 2018–

2027 period by a total of $14.5 billion. (That amount includes 

about $1 billion in net costs that the deposit insurance program 

would realize without OLF.) See Congressional Budget Office, 

cost estimate for H.R. 10, the Financial CHOICE Act of 2017 

(May 18, 2017), www.cbo.gov/publication/52738. That estimate 

did not account for any economic impact, but eliminating OLF 

would probably affect the economy in ways that would in turn 

affect the federal budget.

CBO’s Cash Baseline Projections for Deposit Insurance.

CBO generally expects the deposit insurance program, as 

currently structured, to remain solvent over the long run, 

although cash baseline projections may show different 

trends for particular 10-year periods. In April 2018, 

CBO projected that the Deposit Insurance Fund would 

record net savings over the 2019–2028 period because it 

is still building up reserves to achieve the FDIC’s target 

reserve ratio (see Box 1 on page 18). 

Specifically, DIF is projected to have net negative outlays 

of $90 billion over the next 10 years, for two main reasons: Projected income (from premiums and from selling 

assets of insolvent banks) exceeds projected costs (insured 

losses and outlays to acquire troubled banks’ assets) by 

$45 billion over that period; and the Treasury is projected to pay an additional $45 billion in interest on the 

fund’s balances, which are invested in Treasury securities 

(see Figure 3).50 Those projections of net outlays reflect 

a small probability in any year of a banking crisis that 

produces large losses for the Deposit Insurance Fund.

An Approach to Using Accrual Measures for OLF and 

Deposit Insurance. For this analysis, CBO examined 

an approach to accrual measures that would implicitly 

allocate all premiums and assessments to losses over the 

indefinite lifetime of OLF and the deposit insurance program. Such measures would indicate the present value of 

losses from failures when they were incurred by OLF or 

DIF and would recognize that, under current law, such 

losses will eventually be offset by past or future income 

from the financial industry. 

On that basis, with all future cash flows discounted at 

Treasury rates to the year of the event that triggers them, 

CBO estimates the following:

• For OLF-related transactions, accrual measures 

would show relatively small net costs (increasing 

the deficit by roughly $100 million to $350 million 

per year) because payments of assessments by large 

financial institutions would be partly offset by 

decreases in income and payroll tax revenues (see 

Table 2). The large difference for CBO’s baseline 

between cash and accrual projections for OLF—an 

increase of $14.2 billion in the deficit over 10 years 

versus $2.5 billion—would affect cost estimates for 

50. Interest payments by the Treasury to DIF are intragovernmental 

transfers that have no net effect on the budget deficit. 
22 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? December 2018

legislation to repeal or change OLF.51 Estimates of the 

budgetary effects of eliminating the fund would show 

net savings on an accrual basis, but those savings 

would be smaller than in 10-year cash estimates.

• For deposit insurance, accrual measures would show 

no net cost and possibly savings, indicating that when 

the time value of money is taken into consideration, 

past and future income from the financial industry 

should at least offset the FDIC’s costs, reflecting the 

program’s statutory obligation to maintain reserves 

equivalent to at least 1.35 percent of the deposits 

insured by the FDIC.

51. Cost estimates for legislation affecting OLF would also show 

indirect effects on revenues from income and payroll taxes.

Using such accrual measures would capture the longterm net effects of those programs, potentially providing 

succinct information about how proposals to modify the 

programs might shift costs from the financial sector to 

taxpayers. 

However, the potential usefulness of accrual measures to 

lawmakers—and the extent to which they would differ 

from cash estimates—would depend on market conditions. For example, under normal conditions, cash and 

accrual measures for OLF (including indirect effects on 

income and payroll taxes) would differ by an average 

of roughly $1 billion a year, CBO estimates, reflecting a small probability of resolutions and a long lag in 

the collection of assessments to cover resolution costs. 

Differences between cash and accrual measures would be 

Table 2.

Cash and Accrual Projections for the Orderly Liquidation Fund, 2019 to 2028

Millions of Dollars

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Total, 

2019–2028

Cash Basis

CBO’s Baseline 

Net Revenuesa 0 * 100 200 400 650 800 1,000 1,100 1,200 5,450

Outlays 650 1,300 2,000 2,800 2,300 2,100 2,000 2,100 2,150 2,250 19,650

Net Increase in the Deficit 650 1,300 1,900 2,600 1,900 1,450 1,200 1,100 1,050 1,050 14,200

Modified Cash Basisb

Net Revenuesa 0 * 100 200 400 650 800 1,000 1,100 1,200 5,450

Outlays * 200 400 700 900 1,000 1,000 1,100 1,100 1,200 7,600

Net Increase in the Deficit * 200 300 500 500 350 200 100 0 0 2,150

Accrual Basisc

Net Revenuesa 450 500 1,300 1,300 1,300 1,300 1,300 1,300 1,300 1,300 11,350

Outlays 600 600 1,500 1,500 1,500 1,550 1,600 1,650 1,650 1,650 13,800

Net Increase in the Deficit 150 100 200 200 200 250 300 350 350 350 2,450

Source: Congressional Budget Office.

* = between zero and $50 million.

The baseline cash estimates are part of the baseline budget projections that CBO released in April 2018. The accrual-based estimates discount the 

baseline projections using Treasury interest rates and using procedures similar to those required by the Federal Credit Reform Act to estimate subsidies 

for federal credit programs.

Estimates include a small amount of administrative costs.

a. Revenues are net of tax offsets. Assessments for the Orderly Liquidation Fund are recorded in the budget as revenues because they arise from the 

government’s exercise of its sovereign power. By longstanding convention, CBO’s baseline projections and legislative cost estimates for activities 

involving revenues incorporate the assumption that business fees and other tax-like collections would be partially offset by reduced payments of 

income and payroll taxes. Over the 2019–2028 period, the staff of the Joint Committee on Taxation and CBO estimate that for indirect taxes, such as 

assessments, the offsetting change in income and payroll tax revenues will average roughly 23 percent of the gross change in revenues.

b. These cash estimates exclude near-term outlays to acquire assets of insolvent institutions and subsequent income from the sale of such assets.

c. These accrual estimates do not reflect any adjustments for market risk.
December 2018 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? 23

more pronounced during times of severe economic stress, 

when cash measures would show larger up-front outlays. 

During such periods, both assessments and recoveries 

of working capital would probably continue beyond the 

10-year budget horizon.

The effects of market conditions would be similar for the 

Deposit Insurance Fund. Under normal market conditions, when the FDIC’s losses through DIF are likely to 

be limited and resolutions are expected to be completed 

fairly quickly, cash projections include most of the anticipated cash flows from bank failures that are projected to 

occur within the 10-year budget window. During such 

times, measures of annual cash flows would generally 

show net savings from deposit insurance because reserves 

are expected to accumulate in the insurance fund. On 

an accrual basis (with cash flows discounted at Treasury 

rates), net annual savings would be smaller, CBO 

expects, because the future losses reflected in accrual 

estimates would probably offset most of the income used 

to build reserves. 

Under market conditions that led to unusually large 

losses, however, differences between cash and accrual 

measures for deposit insurance would be more pronounced. For instance, periods of severe financial stress 

could occur that would weaken the entire financial 

industry, which might require large cash outlays and 

lengthen the time needed for the FDIC to recover 

losses through higher assessments. During such periods 

of financial stress, accrual measures would not readily 

identify near-term changes in cash flows for deposit 

insurance—which could be substantial—and thus might 

not help policymakers assess the full scope of the FDIC’s 

activities. In the 1980s and 1990s, for example, cash 

estimates of the deposit insurance losses for banks and 

savings and loans differed widely from accrual estimates, 

in part because of the large outlays and subsequent 

recoveries of working capital.52

If accrual estimates included adjustments for market risk, 

cash and accrual measures for the FDIC’s activities might 

differ significantly regardless of whether they reflected 

the expectation of normal or stressed market conditions. 

CBO has not analyzed the fair-value cost of the FDIC’s 

programs, but it expects that fair-value measures would 

indicate larger net costs for OLF and smaller net savings 

(or possibly net costs) for deposit insurance. Such measures would help policymakers understand the cost of the 

programs’ significant exposure to market risk.

As a practical matter, if policymakers chose to expand 

the use of accrual measures for the FDIC’s activities, they 

would need to consider how those measures might affect 

rules and mechanisms related to budget enforcement. 

For example, because the budget currently does not use 

accrual estimates for any activities that involve revenues, 

using such measures to account for OLF, which involves 

both spending and revenues, would be unprecedented. 

One option for that program would be to develop 

separate accrual measures for OLF-related spending and 

52. During that period, the conventional treatment of deposit 

insurance on a cash basis in the budget did not accurately 

indicate the magnitude and timing of the program’s effects on the 

economy. See Congressional Budget Office, The Economic Effects 

of the Savings & Loan Crisis (January 1992), pp. xiii–xiv, 14–15, 

32, 44–45, and 47, www.cbo.gov/publication/20559. 

Figure 3.

Current Budgetary Treatment of Deposit Insurance

The Budget

Banks and Depositors

Treasury

Deposit Insurance Fund

Interest on

Treasury 

Securities

Purchases of 

Treasury 

Securities

Premiums Payments for

Insured Losses

Recoveries on

Assets

Source: Congressional Budget Office.

Intragovernmental payments (amounts paid by one part of the 

government to another) are indicated by dashed lines. Administrative 

costs are not shown.

The Deposit Insurance Fund currently has a positive balance and 

purchases Treasury securities. If the fund’s income was insufficient to 

pay for insured losses, the fund would sell some or all of its holdings. If 

the fund’s holdings were exhausted in the future, the Federal Deposit 

Insurance Corporation would have to borrow from the Treasury and 

would have to repay the amount borrowed with interest.
24 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? December 2018

revenues, as shown in Table 2 on page 22.

53 Taken 

together, those measures could be readily compared with 

accrual measures for deposit insurance, which would 

help policymakers make consistent comparisons between 

the two programs. If such measures were used in the 

budget, annual cash transactions would be tracked in 

nonbudgetary financing accounts, like those used for 

federal credit programs. That treatment would require 

later reestimates to account for differences between estimated and actual losses.

An Alternative Approach Using Modified Cash 

Measures for OLF and Deposit Insurance. Rather than 

using accrual measures, a different option for presenting 

the net budgetary effects of the FDIC’s activities would 

be to maintain a cash budgetary treatment for both losses 

and income but exclude working-capital transactions 

from budget outlays that are factored into measures of 

the deficit. Under this approach, cash flows involving 

working capital would mostly be reflected in “below-theline” accounts that show transactions involved in financing the federal deficit (like the financing accounts used 

for federal credit programs). Those transactions have 

little or no permanent effect on either the allocation of 

resources or the economy. They are exchanges of financial 

assets between the government and the private sector.54

By setting aside temporary transactions involving 

working capital, such budget estimates would provide 

more accurate information about the government’s 

costs to resolve failed financial institutions and would 

indicate how annual income compares with those 

costs. Under this approach, CBO estimates that OLFrelated transactions would cost $2.2 billion over the 

53. Reporting payments of assessments, which are tax revenues, 

ahead of time on an accrual basis would be a departure from 

the current budgetary practice of reporting revenues as they are 

received. An alternative would be to reclassify OLF assessments as 

offsets to spending; such a reclassification would probably occur 

only if a new law required that budgetary treatment. 

54. During the banking and savings and loan crisis of the late 

1980s and early 1990s, economists typically focused on the 

deficit excluding deposit insurance, recognizing that cash 

outlays misstated the size and timing of deposit insurance’s 

economic effects. (During the crisis, in order to fully reflect the 

government’s deposit insurance obligations, both CBO and 

OMB presented budget estimates for deposit insurance on an 

unconstrained basis, even though there was a periodic need to 

obtain additional funding from the Congress.) See Congressional 

Budget Office, The Economic and Budget Outlook: An Update 

(August 1991), pp. 63–69, www.cbo.gov/publication/20569. 

2019–2028 period—$12.1 billion less than estimates 

that include projected net outlays related to purchases 

and sales of assets from liquidated institutions. For 

CBO’s baseline projections, that total cost would be similar to the amount estimated on an accrual basis. 

Like fully adopting an accrual budgetary treatment, this 

approach would require additional effort—for example, 

to set up financing accounts to track cash flows involving 

working capital and to reconcile initial estimates of those 

transactions with actual cash flows. More data on past 

working-capital flows might be required too. 

The utility of this approach as an alternative to current 

cash measures may be less meaningful in the future than 

it might have been in the past, because of a shift in the 

way the FDIC typically resolves failed banks through the 

Deposit Insurance Fund. The FDIC has moved toward 

relying more heavily on assistance through shared-loss 

agreements, in which a separate financial institution 

assumes and manages a failed bank’s assets and shares 

future losses and recoveries on those assets with the 

FDIC. Under such agreements, the FDIC spends less up 

front than it would if it assumed and managed the failed 

bank’s assets itself. 

Flood Insurance

The National Flood Insurance Program (NFIP), administered by the Federal Emergency Management Agency 

(FEMA), aims to offer affordable flood insurance for 

properties at significant risk of flooding and to promote 

floodplain management. Cash projections of the budgetary effects of the NFIP potentially obscure the net costs 

of the program, for two main reasons: 

• Near-term cash projections can be dominated by 

events that have already occurred, making it hard to 

assess the anticipated net costs of risk assumed under 

current policies. 

• CBO’s projections reflect legal constraints on the 

amount of budgetary resources that the program has 

available to pay claims and other expenses. Thus, 

those projections show the amount of payments 

expected to be made during the 10-year budget 

window, which may be less than the total amount of 

claims owed to policyholders during that period if 

analysts expect those constraints to limit spending at 

any point during the period. 
December 2018 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? 25

If such constraints are expected to be binding, projections that did not reflect resource constraints, whether 

prepared on a cash or an accrual basis, would provide 

more information about the full extent of costs related 

to flood insurance. However, accrual measures might be 

particularly helpful in highlighting structural imbalances 

in the program.

Background. In 2018, the NFIP sold more than 5 million flood insurance policies with more than $1 trillion 

of coverage. Flood insurance coverage is mandatory for 

most homeowners with mortgages who live in areas at 

high risk of flooding. The insurance contracts are generally subject to annual renewal. 

Under current law, the NFIP relies on premiums charged 

to policyholders to cover payments of claims and other 

expenses. In addition, when reserves and current income 

are insufficient to cover costs, the program can borrow 

from the Treasury up to a statutory limit (currently 

$30.4 billion). 

If the NFIP exhausted both its reserves and borrowing 

authority, the total amount of claims that could be paid 

would be limited to the amount of income available 

from premiums. In those circumstances, payments of 

claims might be significantly delayed, unless lawmakers 

enacted legislation to increase the amount of budgetary 

resources available to the program. For example, the 

program exhausted its available borrowing authority 

after Hurricane Harvey in August 2017, thus limiting 

its ability to pay claims to the amount of its current 

income. Two months later, lawmakers enacted legislation 

that forgave $16 billion of the NFIP’s outstanding debt, 

effectively increasing the amount of budgetary resources 

available to the program so that it could continue to pay 

claims on a timely basis.

Since 1968, when the NFIP began, total claims paid by 

the program have far surpassed total premium income.55

One reason is that for certain properties, FEMA has 

long charged premiums that are not actuarially sound, 

55. See the testimony of Donald B. Marron, Acting Director, 

Congressional Budget Office, before the Senate Committee on 

Banking, Housing, and Urban Affairs, The Budgetary Treatment 

of Subsidies in the National Flood Insurance Program (January 25, 

2006), www.cbo.gov/publication/17600.

causing overall income to fall short of expected costs.56

Another reason is that some catastrophic events, such 

as Hurricane Katrina in 2005 and Superstorm Sandy in 

2012, resulted in claims that far exceeded the average 

losses on which premiums are based. As a result, on 

multiple occasions, FEMA has exercised—and lawmakers have increased—the program’s authority to borrow 

money from the Treasury.57

As the NFIP is currently structured, any measure of its 

budgetary effects would probably show net costs, at least 

in the near term, because of the actuarially unsound 

premiums charged for some policies. Projections of the 

program’s future net costs are uncertain—most of the 

costs will depend on the frequency, timing, and severity 

of future floods, which are inherently difficult to predict. 

Expected net costs may be lower in the future because 

lawmakers have taken steps in recent years to gradually phase out the program’s discounted premiums.58

56. In this case, actuarial soundness means the adequacy of the 

NFIP’s premiums to cover both the expected costs of flood claims 

and the administrative costs associated with issuing and servicing 

flood insurance policies. When income from premiums is too 

low to cover those costs, an actuarial shortfall is said to exist. 

Since the NFIP’s inception, lawmakers have struggled to find the 

appropriate balance between applying actuarial principles (more 

closely linking premium rates to expected costs) and keeping 

premiums low. To balance those goals, the NFIP includes a mix 

of premium rates: full-risk rates that FEMA considers sufficient, 

on average, to cover or exceed administrative costs and expected 

claims, and discounted rates that are not offset by higher rates 

charged to other policyholders. See Congressional Budget Office, 

The National Flood Insurance Program: Financial Soundness and 

Affordability (September 2017), www.cbo.gov/publication/53028; 

and Government Accountability Office, Flood Insurance: 

Comprehensive Reform Could Improve Solvency and Enhance 

Resilience, GAO-17-425 (April 2017), www.gao.gov/products/

GAO-17-425. 

57. See Diane P. Horn, National Flood Insurance Program Borrowing 

Authority, CRS Insight IN10784 (Congressional Research 

Service, January 23, 2018). 

58. See the statement of Roy E. Wright, Deputy Associate 

Administrator, Federal Insurance and Mitigation Administration, 

Federal Emergency Management Agency, before the Housing 

and Insurance Subcommittee of the House Financial Services 

Committee, Flood Insurance Reform: FEMA’s Perspective (March 9, 

2017), https://tinyurl.com/y9ky2qaj (PDF, 182 KB); and Diane 

P. Horn and Jared T. Brown, Introduction to FEMA’s National 

Flood Insurance Program (NFIP), Report for Congress R44593 

(Congressional Research Service, August 16, 2016). 
26 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? December 2018

However, projections of net costs may increase if floods 

become more frequent or severe.59

CBO’s Cash Baseline Projections for Flood Insurance.

Claims submitted to the NFIP may be paid out over a 

period of two or more fiscal years. As a result, CBO’s 

current cash-based projections for the program in the 

near term are dominated by the effects of past floods. 

Projections of costs in later years reflect CBO’s best 

assessment of expected losses (including those stemming 

from low-probability, high-cost floods) as well as anticipated spending for administrative expenses, interest 

payments on outstanding borrowing from the Treasury, 

and activities related to floodplain management.60 CBO’s 

cash projections reflect the constraints on the NFIP’s 

spending that would occur if the program exhausted its 

accumulated reserves and borrowing authority. 

On that basis, CBO projected in April 2018 that the 

NFIP’s receipts would fall short of expected claims and 

other costs by about $13 billion in 2018 and by a total 

of $2 billion over the 2019–2028 period. (The relatively large net cost in 2018 reflects substantial claim 

payments for Hurricane Harvey and, to a lesser extent, 

for Hurricanes Irma and Maria. Although Hurricane 

Maria caused substantial flooding in Puerto Rico, most 

of the losses from those floods were uninsured.) Those 

projections of costs reflect lawmakers’ decision to relax, 

in October 2017, constraints on funding available to 

the program by forgiving a portion of debt owed to the 

Treasury, thus enabling more spending for claims in the 

near term. Had that change not occurred, spending in 

CBO’s projections would probably have been limited 

in some years to the amount of income expected to be 

received in those years, reducing projected expenditures 

for paying claims. 

Alternative Measures for Flood Insurance. Broadly 

speaking, during periods when constraints on the 

resources available to pay claims were not expected to 

limit spending, 10-year cash and accrual measures for 

59. For example, stronger hurricanes could result in greater 

flood insurance claims. See Congressional Budget Office, 

Potential Increases in Hurricane Damage in the United States: 

Implications for the Federal Budget (June 2016), www.cbo.gov/

publication/51518. 

60. Although the flood insurance program’s interest payments to the 

Treasury are intragovernmental and do not affect the budget as 

a whole, they are important to an analysis of the program’s longterm solvency.

flood insurance would probably convey similar information about the program’s overall budgetary effects, 

unless cash measures included unusually large outlays for 

significant flooding events in prior years. If constraints 

on the program’s resources were expected to be reached, 

however, unconstrained measures of costs—whether 

prepared on a cash or an accrual basis—would provide 

helpful information about the full extent of anticipated 

spending related to flood insurance. 

Some analysts argue that unconstrained measures would 

provide more accurate information about budgetary 

effects given that lawmakers have taken steps in the past 

to loosen constraints on the resources available to the 

flood insurance program.61 To that end, CBO’s cost 

estimates for legislative proposals related to flood insurance sometimes include additional information about 

how anticipated resource constraints might affect NFIP’s 

policyholders.62

Accrual measures of unconstrained costs might be 

particularly helpful in indicating the difference between 

the expected losses and income related to the insurance 

commitments made over a given period. Depending on 

which costs were considered, such estimates could highlight different aspects of the NFIP’s overall fiscal sustainability. For example, in an analysis of the policies in force 

on August 31, 2016, CBO concluded that the NFIP 

faced an expected annual shortfall of $1.4 billion (if all 

expenses were taken into account, including interest 

costs and spending related to floodplain management) as 

well as an actuarial shortfall of $0.7 billion (the difference between premium income and the subset of costs 

associated with paying claims for existing policies and 

with writing and servicing those policies).63 The actuarial 

shortfall is effectively an accrual estimate that reflects 

CBO’s assessment of budgetary effects for a snapshot of 

policies in effect at a specific point in time. 

61. For an analysis, see Government Accountability Office, Fiscal 

Exposures: Improving Cost Recognition in the Federal Budget, GAO14-28 (October 2013), www.gao.gov/products/GAO-14-28. 

62. For example, see Congressional Budget Office, cost estimate for 

the Flood Insurance Reform and Modernization Act of 2011 

(October 13, 2011), www.cbo.gov/publication/42649.

63. See Congressional Budget Office, The National Flood Insurance 

Program: Financial Soundness and Affordability (September 2017), 

www.cbo.gov/publication/53028.
December 2018 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? 27

Accrual-based projections of net budgetary effects, like 

cash projections, would reflect anticipated changes 

in factors that might affect the NFIP’s income and 

expenses, including the existing requirement that FEMA 

gradually phase out the program’s discounted premiums. 

If everything else stays the same, that change will reduce 

both accrual-based and cash-based projections of shortfalls for the NFIP in future years. 

Pension Insurance

The Pension Benefit Guaranty Corporation insures 

the pension benefits of nearly 40 million people who 

participate in defined benefit pension plans operated by 

private-sector employers. That insurance coverage ensures 

that participants receive the guaranteed portion of their 

benefits if their pension plan is terminated or becomes 

insolvent.64 CBO’s 10-year cash projections of the budgetary effects of pension insurance provide incomplete 

information about the long-term financial condition of 

PBGC, for several reasons:

• Pension insurance involves long timing lags. Firms 

begin paying premiums when their plans are 

established, and decades may pass before a plan 

becomes insolvent. In addition, on a cash basis, it 

may take more than 20 years to realize the full costs 

of resolving or providing financial assistance to a 

distressed or terminated plan. Thus, the 10-year 

budget horizon truncates a significant portion of the 

budgetary effects of federal pension insurance. 

• CBO’s projections reflect constraints on the 

budgetary resources available to PBGC to pay claims, 

which can be less than the total claims submitted by 

plans. 

• CBO’s projections do not account for PBGC’s 

considerable exposure to market risk. 

64. The maximum portion of a participant’s pension benefits 

that PBGC guarantees differs for single-employer plans and 

multiemployer plans because of different statutory formulas. 

In 2019, the maximum monthly amount guaranteed for a 

65-year-old in the single-employer program is about $5,600. 

See Pension Benefit Guaranty Corporation, “Maximum 

Monthly Guarantee Tables” (accessed November 20, 2018), 

www.pbgc.gov/wr/benefits/guaranteed-benefits/maximumguarantee; and “Multiemployer Insurance Program Facts,” 

www.pbgc.gov/about/factsheets/page/multi-facts. 

Although federal commitments for pension insurance 

are not expected to produce budgetary savings over the 

long term, CBO’s cash-based projections indicate that 

PBGC’s activities, taken as a whole, will have the net 

effect of reducing the deficit over the next 10 years. 

Background. PBGC runs two financially separate 

programs that insure different types of defined benefit 

pensions: those offered by a single employer and those 

offered by groups of employers. The single-employer and 

multiemployer programs differ in the amount of benefits 

they insure, in what triggers claims for federal assistance, 

and in the sources of income available to the programs 

to pay claims.65 PBGC’s insurance coverage has no fixed 

maturity; plans are required to pay insurance premiums 

if they are subject to federal regulation and are covered 

by PBGC. 

Under current law, PBGC’s authority to pay claims 

under either program is limited by the amount of 

resources available to the program. (The resources of 

one program cannot be used to cover the claims of the 

other.) If a single-employer pension plan is terminated 

with insufficient assets to pay its promised benefits, 

PBGC immediately assumes the failed plan’s liabilities 

and assets, which are placed in a trust fund that is not 

part of the federal budget (see Figure 4).66 PBGC draws 

down those assets and also relies on insurance premiums from other single-employer plans to make monthly 

annuity payments to the plan’s qualified retirees and their 

beneficiaries. 

If a multiemployer plan becomes insolvent, by contrast, 

PBGC does not take over its assets or liabilities. Instead, 

the agency relies solely on the income of the multiemployer program (premiums paid by plans and interest 

paid by the Treasury on accumulated premiums) to cover 

the cost of providing financial assistance to an insolvent 

65. For more information about defined benefit pension plans and 

the multiemployer program, see Congressional Budget Office, 

Options to Improve the Financial Condition of the Pension Benefit 

Guaranty Corporation’s Multiemployer Program (August 2016), 

www.cbo.gov/publication/51536.

66. When PBGC takes over underfunded single-employer plans (or 

recognizes that an underfunded plan is likely to be taken over), 

PBGC’s financial statements show a worsening of the agency’s net 

financial position through changes in liabilities and assets related 

to the single-employer program. Cash-based budget projections 

are largely unaffected because the resulting changes in federal 

cash flows related to the single-employer program are gradual. 
28 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? December 2018

Figure 4.

Current Budgetary Treatment of the Pension Benefit Guaranty Corporation’s Pension Insurance

The Budget

Insurance for Single-Employer Pension Plans

The Budget

Insurance for Multiemployer Pension Plans

Employers With

Private Pension Plans

Annuitants in

Terminated Plans

Terminated

Plans

Investment

Income Treasury

PBGC 

Revolving Fund

Interest on

Treasury

Securities

Premiums

Assets and

Liabilities Benefit

Payments

Nonbudgetary

Trust Fund

Partial

Reimbursement for

Benefit Payments

All Private 

Multiemployer

Pension Plans

Insolvent Private 

Multiemployer 

Pension Plans

Treasury

PBGC 

Revolving Fund

Interest on

Treasury 

Securities

Premiums Financial

Assistance

Purchases of 

Treasury

Securities

Purchases and 

Sales of Treasury 

Securities

Source: Congressional Budget Office.

Intragovernmental payments (amounts paid by one part of the government to another) are indicated by dashed lines. Administrative costs are not 

shown.

Currently, both revolving funds for pension insurance programs have positive balances and purchase Treasury securities. However, CBO projects that 

the multiemployer program will become insolvent in 2025 and thus will have to sell its holdings to provide financial assistance to pension plans.

PBGC = Pension Benefit Guaranty Corporation.
December 2018 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? 29

plan, so the plan can continue to make payments to its 

beneficiaries. 

CBO’s Cash Baseline Projections for Pension Insurance.

To date, PBGC has tended to collect more in premiums 

and other income for both the single-employer and 

multiemployer programs than it has paid in pension 

benefits and administrative expenses. Thus, PBGC has 

generally shown net budgetary savings, a trend that is 

expected to continue for most of the next decade. CBO 

projected in April 2018 that over the 2019–2028 period, 

the two programs’ total income from premiums 

($104 billion) would more than cover their total outlays 

($97 billion), resulting in net budgetary savings of about 

$7 billion on a cash basis under current law.67

Those projections reflect the constraints imposed by the 

budgetary resources available to PBGC under current 

law; as a result, they may understate the total amount 

of claims made on the two programs. Specifically, CBO 

projected in April 2018 that if current laws remained 

unchanged, the multiemployer program would exhaust 

its assets and become insolvent for the first time in its 

history in 2025. If that occurred, PBGC would not have 

sufficient resources to fully pay the claims that CBO 

estimates it will receive from multiemployer plans. As a 

result, the multiemployer program would need to reduce 

its claim payments to amounts that could be supported 

by its premium income. Accordingly, CBO’s baseline 

projections of outlays for the multiemployer program 

incorporate the assumption that a portion of insured 

benefits—about 5 percent in 2028—would be unpayable 

under current law. The unpayable portion of benefits 

is projected to be larger beyond the 10-year budget 

window because of the expected distress and insolvency 

of some plans as well as the insolvency of the multiemployer program (see Figure 5).68

67. Those outlays include $6 billion in administrative costs. PBGC 

is also projected to receive about $31 billion in interest from 

the Treasury during that period, but those intragovernmental 

transfers do not affect the budget deficit. See Congressional 

Budget Office, “Pension Benefit Guaranty Corporation—CBO’s 

April 2018 Baseline” (April 2018), www.cbo.gov/sites/default/

files/recurringdata/51305-2018-04-pbgc.pdf (77 KB).

68. In April 2018, CBO projected that the multiemployer 

program would receive $3.6 billion in income (from 

premiums and intragovernmental interest) during the 2019–

2028 period—$2.3 billion less than the $5.9 billion in claims 

and administrative expenses that the program is projected to pay 

during that period. CBO expects the projected insolvency of the 

Alternative Measures for Pension Insurance. A variety 

of alternative measures, prepared on either a cash or an 

accrual basis, could provide helpful information about 

the budgetary effects of federal pension insurance. The 

usefulness of different approaches for constructing estimates depends on the purpose for which the estimates 

are used.69

Relative to the 10-year cash measures now used in the 

federal budget, accrual measures, with their net-presentvalue basis, would have a clear advantage in resolving 

pronounced timing-related distortions caused by the 

10-year budget window. Thus, accrual measures would 

give lawmakers more complete information about the 

long-term effects of PBGC’s insurance as well as information about how to set premiums to avoid underfunding. Cash projections that covered periods longer than 

10 years would also be useful in highlighting long-term 

trends, but net-present-value measures for pension 

insurance would more clearly indicate PBGC’s total 

anticipated budgetary effects. (As with deposit insurance, 

judgment would be required to define annual cohorts of 

pension insurance commitments because the coverage is 

permanent and has no fixed maturity.)70

multiemployer program in 2025 to cause $9.6 billion in claims 

for insured benefits through 2028 to be unpayable in addition 

to any reductions in benefits that failing plans make themselves. 

See Congressional Budget Office, “Pension Benefit Guaranty 

Corporation—CBO’s April 2018 Baseline” (April 2018), www.

cbo.gov/sites/default/files/recurringdata/51305-2018-04-pbgc.

pdf (77 KB). 

69. See Congressional Budget Office, Comparing Budget and 

Accounting Measures of the Federal Government’s Fiscal Condition 

(December 2006), www.cbo.gov/publication/18262.

70. If accrual measures had been in place when PBGC was 

established in 1974, policymakers could have chosen to report 

in the first year the present value of the net cost of a program’s 

expected obligations over some period, such as 20 years. That 

practice would have recognized the obligations before they were 

incurred. However, that approach would be less useful today, 

even though it would be consistent with the way in which private 

firms accrue their pension costs. PBGC’s current obligations 

are largely the result of past policy decisions (though employees 

in covered plans are accruing additional benefits), and most 

new companies offer defined contribution plans, which are not 

insured by PBGC. The government’s financial reports for PBGC 

recognize a liability for past failures of pension plans and accrue 

the cost of new failures in the current year. Essentially, that is the 

approach that CBO took in this analysis and in the past when 

measuring the cost of pension insurance. See Congressional 

Budget Office, The Risk Exposure of the Pension Benefit Guaranty 

Corporation (September 2005), www.cbo.gov/publication/17160.
30 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? December 2018

Both cash-based and accrual-based measures of PBGC’s 

budgetary effects would depend on whether estimates 

of future costs stemming from the agency’s commitments reflected or ignored potential resource constraints. 

Compared with CBO’s current cash projections, which 

highlight the amount of claims projected to actually be 

paid under current law, measures that ignored budgetary 

constraints would help lawmakers track all claims for 

financial assistance, not just those that can be paid under 

current law. To that end, CBO supplements the information in its baseline projections for pension insurance 

with cash-based estimates of the total amount of claims 

anticipated during the 10-year budget window.71

In addition, CBO occasionally prepares accrual measures 

for PBGC’s activities that ignore potential constraints 

on the programs’ resources. CBO usually prepares those 

unconstrained accrual measures on a fair-value basis, 

which takes into account PBGC’s significant exposure to 

market risk. (For more details about such measures, see 

Box 2.)Those fair-value estimates can be viewed as the 

71. See Congressional Budget Office, “Pension Benefit Guaranty 

Corporation—CBO’s April 2018 Baseline” (April 2018), www.

cbo.gov/sites/default/files/recurringdata/51305-2018-04-pbgc.

pdf (77 KB).

amount that a private investor would charge to assume 

PBGC’s obligations to pay all of the future claims related 

to plans that become insolvent over a given period, such 

as the next 20 years. 

In CBO’s view, accrual estimates would be particularly 

useful in highlighting the effects of any proposed legislative changes to pension insurance. For example, a change 

that would reduce the amount of benefits that PBGC 

insures under the multiemployer program could significantly reduce claims for financial assistance and thereby 

improve PBGC’s financial position. Relative to CBO’s 

cash baseline projections, that proposal might have little 

effect on the deficit during the 10-year budget window 

because it would simply delay the insolvency of the 

multiemployer program farther beyond that window. In 

contrast, accrual estimates for such a proposal, whether 

prepared on a FCRA or a fair-value basis, would show 

savings and thus would be more helpful than cash estimates in illuminating the full effects of potential changes 

to pension insurance. In general, however, fair-value estimates would be more comprehensive than FCRA-based 

accrual estimates, given PBGC’s significant exposure to 

market risk.

Figure 5.

Projected Annual Benefits Under Pension Insurance for Multiemployer Defined Benefit Pension Plans, 

2019 to 2038

Billions of Dollars

0

10

20

30

40

50

60

70

2019 2021 2023 2025 2027 2029 2031 2033 2035 2037

Reductions Because of PBGC’s Insolvency

Plans’ Reductions Because of Their Distress 

and Insolvency 

Projected Benefits After All Reductions

Promised Benefits minus

minus

equals

Source: Congressional Budget Office.

PBGC = Pension Benefit Guaranty Corporation.
December 2018 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? 31

Three Approaches for Using Accrual 

Measures in the Federal Budget Process

To improve decisionmaking about the allocation of 

resources among and within federal insurance programs, 

policymakers could incorporate information about the 

long-term budgetary effects of those programs in various 

ways. This analysis focuses on three options:

• Adopting an accrual-based treatment for insurance 

programs in the federal budget,

• Using accrual measures only for purposes of 

Congressional budget enforcement, or

• Providing accrual estimates as supplemental 

information. 

Which of those approaches might be preferable does 

not depend on whether the accrual measures incorporate the cost of market risk. In addition, the decision to 

implement any of those options might vary for different 

insurance programs, depending on the perceived value of 

the information that accrual measures would provide for 

a given program.

The more that accrual-based measures are formally incorporated into the budget process, the greater their potential to ensure that the long-term effects of programs are 

taken into account. Such changes would affect measures 

of programs’ impact on the deficit, though possibly in 

varying ways. Such changes could also alter how statutory mechanisms to enforce budget targets—namely, 

required cuts to budgetary resources—would affect 

different programs. 

Adopting an Accrual-Based Treatment in the Budget

Under this approach, accrual estimates for federal insurance programs would be reported in the budget and used 

for purposes of budget enforcement, as accrual estimates 

are now for federal credit programs. Such an approach 

would ensure that policymakers’ decisions would be 

based on estimates of the net cost of federal commitments that captured cash flows beyond the 10-year 

budget window.

Creating a New Account Structure. Budgeting for insurance programs on an accrual basis would require a new 

account structure, which could be modeled on FCRA 

budgeting for credit programs. The key step would be to 

create an insurance fund (which would function like a 

financing account for a credit program) that would serve 

as a nonbudgetary accounting mechanism for tracking 

a program’s cash flows. For programs such as deposit 

and flood insurance, the existing accounting mechanisms used to track cash flows would serve that purpose. 

Premiums and other income would be credited to the 

insurance fund, which would disburse payments for 

claims and other expenses (see Figure 6).

Those cash flows would not be recorded in the budget. 

Instead, an on-budget accounting mechanism (similar 

to a program account under FCRA) would record the 

estimated subsidy cost of each year’s cohort of insurance 

commitments. That cost would be the net present value 

of all of the future cash flows expected to stem from 

insurance commitments included in that cohort. If the 

FCRA model was followed, analysts would need to make 

periodic reestimates to reconcile the accrual estimates 

with actual cash flows for each insurance cohort. 

If a program’s commitments had net costs on an accrual 

basis—that is, positive subsidy costs—the on-budget 

program account would make payments to the insurance 

fund, provided it had legal authority to do so. If the 

program’s commitments generated net savings—that is, 

negative subsidy costs—the insurance fund would make 

a payment to the Treasury that would be recorded as a 

receipt in budget totals. (Like a financing account for a 

credit program, the nonbudgetary insurance fund would 

account for its side of those transactions, but that aspect 

of the transactions would not be reflected in the budget 

totals.)

In the transition to an accrual budgetary treatment, 

policymakers would need to create a clear one-time 

separation between costs related to past commitments in 

existence at the time of the transition and costs related to 

new commitments. Following the approach used when 

FCRA was adopted, lawmakers could create liquidating 

accounts to report the cash flows of existing insurance 

policies and claims. That separation would be particularly important for pension insurance because payouts 

related to past commitments (single-employer plans that 

have already been taken over and multiemployer plans 

that are currently insolvent) could continue for decades. 

Other Considerations. Besides making those changes 

to accounting mechanisms, policymakers would have to 

address several other issues in applying an accrual-based 

budgetary treatment to insurance programs. 
32 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? December 2018

First, lawmakers would need to consider the extent 

to which reestimates of initial accrual estimates could 

be adopted and implemented automatically, without 

further legislation (as under FCRA), or would require 

new legislation. Under FCRA, reestimates align initial 

accrual estimates for cohorts of loans with actual results 

and automatically adjust the amount of budgetary 

resources legally available to agencies without triggering 

budget enforcement procedures. One virtue of automatic 

reestimates is that they would provide a way to fully recognize the unanticipated budgetary effects of insurance 

commitments to policyholders. 

For programs whose commitments are already fully 

funded under current law, such a change would merely 

alter when costs are recognized. However, for programs 

that face resource constraints (as could be the case for 

flood and pension insurance), providing permanent 

Box 2.

Estimating the Fair-Value Cost of Federal Pension Insurance

The rules that govern how pension plans are funded expose 

the Pension Benefit Guaranty Corporation (PBGC) to the risk of 

large losses—losses that far exceed PBGC’s ability to absorb 

them. In particular, the rules that specify how plans’ assets and 

liabilities are valued for purposes of determining the minimum 

amount of funding that employers must provide to pension 

plans create an incentive for plans’ managers to invest in risky 

securities, such as common stocks. The value of those assets 

can fluctuate considerably over time, whereas the benefits 

promised by plans remain fairly fixed.1 Thus, a drop in the value 

of those assets can lead to major underfunding of plans, which 

makes their insolvency more likely. The fact that most pension 

plans use risky investment portfolios to fund their benefit 

liabilities exposes PBGC’s insurance to a great deal of market 

risk—in that PBGC is vulnerable to the risk that many plans 

will become significantly underfunded when returns on those 

investments are low, particularly during economic downturns.

Because of PBGC’s significant exposure to market risk, the 

Congressional Budget Office sometimes estimates the cost 

of pension insurance not only on the cash basis required for 

the federal budget but also on a fair-value basis.2 That type 

1. Stated differently, PBGC’s exposure to risk depends in part on the 

mismatch between the market risk exposure of a pension plan’s benefits 

(which is comparable to that of long-term corporate debt) and the market 

risk exposure of the plan’s assets. See Zvi Bodie, “What the Pension 

Benefit Guaranty Corporation Can Learn From the Federal Savings and 

Loan Insurance Corporation,” Journal of Financial Services Research, 

vol. 10, no. 1 (March 1996), pp. 83–100, https://link.springer.com/

article/10.1007/BF00120147. 

2. See, for example, Congressional Budget Office, Options to Improve 

the Financial Condition of the Pension Benefit Guaranty Corporation’s 

of accrual measure approximates the market value of the 

insurance claims made on PBGC, net of premiums and other 

income. In CBO’s view, fair-value estimates provide a more 

comprehensive measure of PBGC’s net costs than either cashbased estimates or accrual measures prepared using the methodology prescribed in the Federal Credit Reform Act (FCRA). 

Whether estimated on a fair-value or a FCRA basis, accrual 

measures are more inclusive than cash-based estimates 

because they incorporate the full lifetime of financial assistance claims from pension plans that are projected to become 

insolvent over a specific period. Accounting for the lifetime 

costs of plans’ insolvencies is important for PBGC’s multiemployer pension insurance because the structure of that 

program defers financial assistance payments until all other 

sources of funding have been exhausted. (Accrual measures 

include the entirety of PBGC’s obligations without regard to 

potential constraints on the resources available to pay claims, 

because a constrained accrual estimate would simply equal 

the current value of the assets available to the multiemployer 

program.)

Among accrual measures, however, fair-value estimates are 

more comprehensive than FCRA-based estimates because they 

account for market risk. CBO uses market prices to estimate 

the fair values of the assets and liabilities that PBGC assumes 

from failed plans. The difference between those two fair values 

Multiemployer Program (August 2016), www.cbo.gov/publication/51536; 

and Wendy Kiska, Jason Levine, and Damien Moore, Modeling the Costs 

of the Pension Benefit Guaranty Corporation’s Multiemployer Program, 

Working Paper 2017-04 (Congressional Budget Office, June 2017), 

www.cbo.gov/publication/52749.

Continued
December 2018 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? 33

indefinite budget authority would change the nature of 

the government’s commitment by ensuring that future 

costs would be fully funded rather than be subject to 

new legislation, as they are under current law.72 If such 

permanent authority was provided for programs in 

72. Under certain circumstances, the amount of budgetary resources 

that could be obligated to cover the costs of financial resolutions 

carried out through the Orderly Liquidation Fund could also 

be constrained. A formula specified in law caps the FDIC’s 

obligations at amounts that are based on the value of the assets 

of institutions placed in receivership. In general, however, CBO 

considers such circumstances very unlikely to occur. 

which the government’s commitments are not necessarily legally binding, lawmakers would have less control 

over the amount of budgetary resources that programs 

would have available to pay claims when actual claims 

differed from initial estimates. One option would be to 

allow automatic reestimates but to set a cap on their total 

amount.

Second, lawmakers would need to decide how to treat 

the administrative costs associated with operating 

insurance programs. With federal credit programs, such 

costs are accounted for separately and are not included in 

represents the amount that the government would have to pay 

a private-sector entity to take responsibility for covering any 

shortfall between the claims and income of PBGC’s insurance 

programs. CBO’s fair-value estimates are similar in concept to 

estimates of PBGC’s net financial position presented in federal 

financial statements, which also use an accrual basis. However, 

PBGC’s estimates do not include an adjustment for market risk. 

Instead, the agency simply discounts expected claims for financial assistance and premium income using the yield on Treasury 

securities—similar to the methodology prescribed in FCRA for 

estimating the accrual cost of federal credit programs.3

To illustrate the magnitude of the differences between 

alternative measures of the cost of pension insurance, CBO 

prepared three estimates based on the net claims that PBGC’s 

multiemployer program is projected to face from insolvencies 

over the next 20 years:4

3. PBGC’s financial reports present its actuarial imbalance, ignoring the 

constraints on the agency’s budgetary resources. In 2017, PBGC’s singleemployer program had assets of $106 billion and reported total liabilities 

of $117 billion. Nearly all of those liabilities were for plans that PBGC had 

already taken over. The multiemployer program had assets of $2 billion 

and reported total liabilities of $67 billion, mostly for projected future 

assistance to plans that are likely to become insolvent in the next 10 

years. (None of those figures reflect PBGC’s exposure to market risk.) See 

Pension Benefit Guaranty Corporation, Annual Report 2017 (November 15, 

2017), pp. 29, 57–58, 95–97, www.pbgc.gov/about/annual-reports/pbgcannual-report-2017.

4. These estimates update ones that CBO previously reported for the 

2017–2036 period. See Wendy Kiska, Jason Levine, and Damien Moore, 

Modeling the Costs of the Pension Benefit Guaranty Corporation’s 

Multiemployer Program, Working Paper 2017-04 (Congressional Budget 

Office, June 2017), www.cbo.gov/publication/52749; and Congressional 

• On a cash basis, CBO projected that claims for financial 

assistance from multiemployer plans would total $54 billion 

over the 2019–2038 period. But the multiemployer program’s projected resources during that period ($7 billion 

in premiums and interest) would limit the amount of claims 

that could be paid to $7 billion, resulting in unpaid claims of 

$47 billion.

• On a FCRA basis, CBO estimated that total projected lifetime claims from multiemployer plans expected to become 

insolvent during the 2019–2038 period have a present 

value of $77 billion. The multiemployer program’s projected 

income from premiums and interest over that period has a 

present value of $5 billion, resulting in a net-present-value 

cost of $72 billion. 

• On a fair-value basis, CBO estimated that total projected 

lifetime claims from multiemployer plans expected to 

become insolvent during the 2019–2038 period have a 

present value of $114 billion. That figure is much larger than 

the FCRA-based estimate because of the significant amount 

of market risk that the multiemployer program is exposed 

to. The net present value of income from premiums and 

interest is the same, $5 billion, resulting in a net-presentvalue cost of $109 billion. That fair-value estimate approximates the amount that a private insurer would need to be 

paid to assume PBGC’s obligations to pay all claims from 

multiemployer plans expected to face insolvency over the 

next 20 years. 

Budget Office, Options to Improve the Financial Condition of the Pension 

Benefit Guaranty Corporation’s Multiemployer Program (August 2016), 

www.cbo.gov/publication/51536.

Box 2. Continued

Estimating the Fair-Value Cost of Federal Pension Insurance
34 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? December 2018

FCRA estimates. However, administrative costs for federal insurance programs are substantial, and accounting 

for them separately might lead to an artificial distinction 

between different types of costs that does not currently 

exist.

Using Accrual Measures Only for Purposes of 

Congressional Budget Enforcement 

The Congress has created various rules and procedures intended to ensure that newly enacted legislation 

complies with its budgetary and fiscal goals. Lawmakers 

rely on estimates of the budgetary effects of legislative 

proposals to determine whether those proposals would 

trigger statutory or legislative budget enforcement 

procedures. In some cases, for example, if enacted legislation exceeds budget limits, the Administration must 

order a sequestration cancelling budgetary resources for 

certain activities.73

The Congress could use accrual measures for insurance 

programs to enforce its budget targets, while the budget 

continued to report insurance-related costs on a cash 

basis. That approach would be less burdensome than 

73. For more information about the roles that the Congress and 

OMB play in enforcing budget targets and executing budgetrelated legislation, see Congressional Budget Office, Cash and 

Accrual Measures in Federal Budgeting (January 2018), Box 1, 

pp. 4–5, www.cbo.gov/publication/53461.

Figure 6.

An Accrual Approach to Budgeting for Federal Insurance Programs With Positive Subsidy Costs

The Budget

Policyholders

Treasury

Program Accounts

Interest on

U.S. Securities

Rebalancing Payment Following 

Downward Subsidy Reestimates

 Annual Subsidy Payments

Rebalancing Payment Following 

 Upward Subsidy Reestimates

Payments for

Insured Losses

Premiums 

and Fees

Asset Recoveries and

Investment Income 

(depending on program)

Insurance Fund

(a below-the-line 

means of financing

the deficit)

Source: Congressional Budget Office.

Administrative costs are not shown.

The cash flows between policyholders and the insurance fund, as well as asset recoveries and any investment income on private securities, would be a 

means of financing the deficit and would be excluded from calculations of the deficit. (In other words, the insurance fund would be a “below-the-line” 

account.) That treatment matches how financing accounts for credit programs are treated under credit reform accounting.

If an insurance program is estimated to have a net cost, the program account would make a single payment to the insurance fund for each insurance 

cohort, as shown in the figure. Alternatively, if an insurance program is expected to result in net savings, the insurance fund would make a payment to a 

receipt account in the Treasury.

Subsidy reestimates would be made periodically. (For credit programs, subsidy reestimates are generally prepared on an annual basis for each cohort.) 

A positive (or upward) reestimate would result in a payment from the program account to the insurance fund. A negative (or downward) reestimate 

would result in a payment from the insurance fund to the receipt account in the Treasury.

Annual interest payments between the Treasury and the insurance fund could flow in either direction. If the insurance fund had been a net borrower, it 

would pay interest to the Treasury. Alternatively, if the insurance fund held government securities, the Treasury would pay interest to it.
December 2018 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? 35

formally adopting accrual measures for all aspects of federal budgeting and accounting. But it might still improve 

policymakers’ ability to base decisions about allocating 

resources on the underlying economic substance of a 

legislative proposal rather than on the proposal’s 10-year 

cash flows. 

The major disadvantage of this approach is that the 

estimates that the Congress would use to consider new 

legislation might have a different basis than the estimates 

that the Administration would use to report budget 

totals and implement sequestrations. Although sequestrations have occurred only rarely, differences in estimates 

might marginally affect both the overall size of required 

reductions in federal spending and the distribution of 

those reductions among affected programs. In addition, 

having the Congress enforce its budget targets using one 

set of measures and the Administration execute statutory 

budget rules using a different set of measures could cause 

confusion and complicate communication between the 

two branches of government. 

Providing Supplemental Estimates

Another alternative would be for estimators to provide 

accrual measures for federal insurance programs on a 

supplemental basis along with cash measures to highlight 

differences between the two. Including such information 

in legislative cost estimates or possibly in reports—as 

CBO has done on a limited basis—would be useful 

for insurance programs that involve long lags between 

the date of an obligation and the dates of claims. Such 

supplemental measures would not directly affect budget 

totals or budget enforcement, so they might not influence budget and policy decisions to the same extent as 

the other options. However, policymakers would routinely have more information than they do now, and 

they could judge its usefulness.

A second type of supplemental information—which 

could be included with either cash-based or accrualbased estimates—would highlight the range of possible 

outcomes for the income and costs of insurance programs. 

The central estimates that make up CBO’s projections 

are expected values, which reflect the weighted average 

of the distribution of possible outcomes. There are many 

good reasons for official cost estimates to report central 

estimates. But lawmakers might benefit from having 

more information about the possible outcomes and their 

weights and about how sensitive the distribution of outcomes is to changes in assumptions.74

For many federal insurance programs, claims are driven 

by low-probability, high-cost events, such as floods, 

financial crises, or terrorist attacks. Having more 

supplemental information about the range of possible 

outcomes could reduce the extent to which lawmakers 

were surprised by big losses. For example, supplemental 

information could highlight the fact that CBO’s baseline 

projections for terrorism risk insurance reflect the judgment—informed by private-sector modelers of terrorism 

risks—that in most years there will be no acts of terrorism in the United States large enough for the federal 

program to incur claims, but that when losses do occur, 

they could be large.

74. See Matt Jensen, “Transparency for Congress’s 

Scorekeepers,” National Affairs, no. 34 (Winter 2018), 

https://tinyurl.com/ydd4zmhx. 

Appendix: 

Differences Between Cash and Accrual Estimates for 

the Terrorism Risk Insurance Act 

Following the terrorist attacks of September 11, 

2001, lawmakers enacted the Terrorism Risk 

Insurance Act (TRIA) to provide catastrophic 

federal reinsurance for terrorism risks without 

charging premiums up front.1 By offering reinsurance—

insurance for insurers—the government helps primary 

insurers spread the risk of loss more widely and strengthens their ability to insure against catastrophes.2

TRIA, which is authorized through calendar year 2020, 

requires all property and casualty insurers to offer 

terrorism coverage to their commercial policyholders. 

(Property and casualty insurance covers businesses 

against losses from property damage, workers’ compensation claims, business interruption, and most liability 

claims.) The federal government provides reinsurance to 

private insurers by agreeing to reimburse them for a portion of their terrorism-related losses of up to $100 billion 

on commercial policies after an attack. Losses above that 

amount are not covered.3

Instead of charging up-front premiums for its reinsurance, the government is required to recover some of the 

1. For more information about TRIA, see Congressional Budget 

Office, Federal Reinsurance for Terrorism Risk: An Update

(January 2015), pp. 5–7, www.cbo.gov/publication/49866. Also 

see Government Accountability Office, Terrorism Risk Insurance: 

Market Challenges May Exist for Current Structure and Alternative 

Approaches, GAO-17-62 (January 2017), www.gao.gov/products/

GAO-17-62, and Terrorism Risk Insurance: Comparison of Selected 

Programs in the United States and Foreign Countries, GAO-16-316 

(April 2016), www.gao.gov/products/GAO-16-316.

2. See Congressional Budget Office, Federal Reinsurance for Disasters 

(September 2002), www.cbo.gov/publication/14008.

3. TRIA caps the combined liability of private insurers and the 

federal government at $100 billion per year. When insured losses 

exceed $100 billion, claims are supposed to be prorated, although 

the process for doing that is not specified in the law.

losses it incurs by taxing all commercial policyholders 

after an insured event. Specifically, TRIA mandates that 

the government recoup more than it spent to pay claims, 

up to a cap (or retention amount) equal to $35.5 billion 

in 2018. TRIA’s recoupment provisions require that the 

tax on policyholders be set to collect 140 percent of the 

difference between the retention amount and the amount 

that primary insurers paid in deductibles and copayments on their federal terrorism reinsurance. Setting the 

tax to yield 140 percent of that difference provides some 

compensation to the government for bearing risk.4

The Congressional Budget Office estimates TRIA’s effects 

on the federal budget on an expected-value basis, taking 

into account the estimated probabilities of losses of all 

sizes, including the substantial likelihood that losses 

in any year will be zero. The most recent legislation to 

reauthorize TRIA (Public Law 114-1) extended the 

reinsurance program for six years, from calendar year 

2015 through 2020. CBO estimated, on a cash basis, 

that the legislation would have the following effects over 

the 2015–2025 period:

• Increase federal spending by a total of $3.1 billion, 

• Increase revenues by a net total of about $3.5 billion, 

and 

4. That tax would reduce the base for income and payroll 

taxes, however, so the net federal revenues attributable to the 

recoupments would be significantly less than the gross amount 

of the recoupments. In 2015, the staff of the Joint Committee 

on Taxation and CBO estimated that the offsetting change in 

income and payroll tax revenues stemming from increases in 

business-related charges (such as recoupments under TRIA) 

equaled roughly 26 percent of the gross amount of revenues; that 

estimate is reflected in Table A-1.
38 Measuring the Costs of Federal Insurance Programs: Cash or Accrual? December 2018

• Reduce deficits by a net total of $380 million (see 

Table A-1).5

Although CBO estimated, on an expected-value cash 

basis, that the program would result in net savings, it also 

projected that in the unlikely event of attacks comparable to or bigger than those of September 11, 2001, the 

program could result in significant federal outlays that 

might not be recouped completely.6

5. CBO also estimated that residual claims paid after 2025 on 

terrorist attacks before that date would total $260 million, 

thus resulting in a total net reduction in future deficits of 

$120 million on a cash basis. See Congressional Budget Office, 

cost estimate for H.R. 26, the Terrorism Risk Insurance 

Program Reauthorization Act of 2015 (January 8, 2015), 

www.cbo.gov/publication/49888, and cost estimate for 

H.R. 4871, the TRIA Reform Act of 2014 (July 15, 2014), 

www.cbo.gov/publication/45535. 

6. The Secretary of the Treasury has the discretion to extend 

recoupments to recover some or all of the federal outlays 

corresponding to losses above the retention amount. 

For this report, to illustrate the difference between cash 

and accrual measures for terrorism reinsurance, CBO 

estimated the effect of the 2015 TRIA reauthorization on 

an accrual basis. It used cash flow projections from the 

same underlying model used for the cash estimates but 

discounted those future cash flows to the present using 

interest rates on Treasury securities. On that net-presentvalue basis, CBO estimated that the savings attributable 

to one full year’s worth of reinsurance commitments 

would average more than $20 million. That amount 

reflects the difference between the present value of the 

federal payments for losses incurred in a given year and 

the present value of the revenues from taxes imposed by 

the government to recoup its costs for those losses. Over 

the 2015–2025 period, the TRIA program would produce total savings of $130 million on an accrual basis, 

CBO estimates—about one-third of the $380 million 

savings projected on a cash basis (see Table A-1).

The difference between cash and accrual measures of net 

savings is small compared with the program’s projected 

spending and net revenues of more than $3 billion. 

Table A-1.

Cash and Accrual Estimates of Legislation Reauthorizing the Terrorism Risk Insurance Program, 

2015 to 2025

Millions of Dollars

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Total, 

2015–2025

Cash Basis

Net Revenuesa 0 200 410 520 700 410 400 290 250 310 0 3,490

Outlays 120 280 370 440 480 510 380 230 140 90 70 3,110

Net Increase or Decrease (-) 

in the Deficit 120 80 -40 -80 -220 100 -20 -60 -110 -220 70 -380

Accrual Basisb

Net Revenuesa 510 540 560 560 560 580 n.a. n.a. n.a. n.a. n.a. 3,310

Outlays 500 510 520 540 550 560 n.a. n.a. n.a. n.a. n.a. 3,180

Net Decrease (-) in the Deficit -20 -30 -30 -20 -10 -20 n.a. n.a. n.a. n.a. n.a. -130

Source: Congressional Budget Office. 

The cash-based estimates come from Congressional Budget Office, cost estimate for H.R. 26, the Terrorism Risk Insurance Program Reauthorization Act 

of 2015 (January 8, 2015), www.cbo.gov/publication/49888. The accrual-based estimates (which are new) discount the cash-based projections using 

Treasury interest rates and using the same procedures required by the Federal Credit Reform Act to estimate subsidies for federal credit programs. 

n.a. = not applicable (because H.R. 26 reauthorized the Terrorism Risk Insurance Program only through December 31, 2020).

a. Assessments charged to offset projected federal costs are recorded in the budget as revenues because they arise from the government’s exercise 

of its sovereign power. Estimates of assessments related to the Terrorism Risk Insurance Program, like estimates for other business fees and tax-like 

collections, incorporate the assumption that the assessments would be partially offset by reduced payments of income and payroll taxes.

b. These accrual estimates do not reflect any adjustments for market risk.
APPENDIX Measuring the Costs of Federal Insurance Programs: Cash or Accrual? 39

That difference is relatively small for two reasons: The 

timing lag between the program’s inflows and outflows 

is fairly short, and most of those projected cash flows 

occur within the 10-year budget window. In addition, 

the reauthorization law requires that all amounts due 

under the program’s recoupment provisions be collected 

by September 30, 2024. Nevertheless, CBO expects that 

a small volume of claims on covered events projected 

to occur through 2020 would be paid after the 10-year 

period, causing a modest timing-related divergence 

between cash and accrual measures. 

For this analysis, CBO followed the approach specified 

for credit programs in the Federal Credit Reform Act 

by discounting future cash flows using Treasury interest 

rates. However, because large terrorist attacks like the 

ones on September 11, 2001, can cause the stock market 

to drop, the terrorism reinsurance program exposes the 

government to market risk. Incorporating that risk into 

an accrual estimate on a fair-value basis would decrease 

the program’s net savings—possibly resulting in net 

costs—but CBO has not developed such an estimate.
Tables

1. Factors That Affect Whether Accrual Measures Provide Helpful 

Information for Selected Federal Insurance Programs 16

2. Cash and Accrual Projections for the Orderly Liquidation Fund, 2019 to 2028 22

A-1. Cash and Accrual Estimates of Legislation Reauthorizing the Terrorism 

Risk Insurance Program, 2015 to 2025 38

Figures

1. Cash and Accrual Measures for Federal Insurance Programs: Weighing 

the Decision Factors 8

2. Key Factors That Affect the Usefulness of Cash or Accrual Measures for 

Insurance Programs 15

3. Current Budgetary Treatment of Deposit Insurance 23

4. Current Budgetary Treatment of the Pension Benefit Guaranty 

Corporation’s Pension Insurance 28

5. Projected Annual Benefits Under Pension Insurance for Multiemployer 

Defined Benefit Pension Plans, 2019 to 2038 30

6. An Accrual Approach to Budgeting for Federal Insurance Programs 

With Positive Subsidy Costs 34

List of Tables and Figures
About This Document

This report was prepared at the request of the Chairman of the House Committee on the Budget. 

In keeping with the Congressional Budget Office’s mandate to provide objective, impartial 

analysis, the report makes no recommendations.

Megan Carroll and David Torregrosa wrote the report, with contributions from Kathleen 

Gramp and Wendy Kiska and with guidance from Sebastien Gay and Damien Moore (formerly 

of CBO). Perry Beider, William Carrington, Kim Cawley, Sheila Dacey, Michael Falkenheim, 

Noah Meyerson, Sarah Puro, Stephen Rabent, Robert Reese, Dawn Sauter Regan, Mitchell Remy, 

and Rebecca Verreau of CBO provided useful comments on various drafts of the report. 

Helpful comments were also provided by Alicia Cackley, Marcia Carlsen, Carol Henn, 

Susan Irving, Scott McNulty, and Patrick Ward of the Government Accountability Office; 

Matthew Green, Daniel Hoople, and Peggy Kuhn of the Federal Deposit Insurance Corporation; 

Patrick Locke of the Office of Management and Budget; Deborah Lucas of the Massachusetts 

Institute of Technology (a consultant to CBO); and Marvin Phaup of George Washington 

University. The assistance of external reviewers implies no responsibility for the final product, 

which rests solely with CBO.

Wendy Edelberg, Mark Hadley, Jeffrey Kling, and Robert Sunshine reviewed the report; 

Christian Howlett edited it; and Jorge Salazar prepared it for publication. An electronic version is 

available on CBO’s website (www.cbo.gov/publication/53921).

CBO continually seeks feedback to make its work as useful as possible. Please send any feedback 

to communications@cbo.gov.

Keith Hall

Director

December 2018