a

GAO

United States General Accounting Office

Report to the Chairman, Committee on 

the Budget, House of Representatives

January 2003 FISCAL EXPOSURES

Improving the 

Budgetary Focus on 

Long-Term Costs and 

Uncertainties

GAO-03-213
The federal government undertakes a wide range of responsibilities, 

programs, and activities that may either obligate the government to future 

spending or simply create an expectation for spending. GAO uses the 

concept of “fiscal exposure” (risk) to provide a framework to consider these 

long-term costs and uncertainties. 

Fiscal exposures vary widely as to source, extent of the government’s legal 

obligation, likelihood of occurrence, and magnitude. These exposures 

include items such as retirement benefits, environmental cleanup costs, and 

future social insurance benefits. Given this variety, it is useful to think of a 

spectrum extending from explicit liabilities to implicit promises embedded 

in current policy or public expectations. 

Fiscal exposures warrant budgetary attention and oversight. Demographic 

trends, in particular, argue for considering the long-term sustainability and 

flexibility of the government’s fiscal position. Regardless of whether the 

government is legally required or simply compelled by circumstances, some 

exposures may encumber future budgets and constrain fiscal policy. Not 

capturing the long-term costs of current decisions limits Congress’s ability to 

control the government’s fiscal exposures at the time decisions are made. 

Current budget reporting, however, does not always fully capture or require 

explicit consideration of some fiscal exposures. For some exposures, such 

as environmental cleanup costs, the government’s commitment occurs years 

before the cash consequences are reflected in the budget. Other potential 

draws on future resources, such as life-cycle costs for fixed assets and 

disaster assistance, may not flow from commitments of a strictly legal nature 

but from public expectations. 

Determining how to improve the budgetary attention to fiscal exposures is 

complicated by difficulties in (1) determining the scope of items to be 

considered and (2) estimating costs. The variety of fiscal exposures and the 

difficulties in estimating their costs suggest that an across-the-board 

approach may not be the best way to proceed. Improved supplemental 

information may be helpful to increase transparency without introducing 

additional uncertainty and complexities into the budget. In cases where the 

extent of the government’s obligation or ultimate costs (or both) is unclear, 

supplemental reporting may be the most appropriate approach. Beyond 

increasing supplemental reporting, providing more opportunities to consider 

fiscal exposures in the budget process may help facilitate explicit 

consideration of certain exposures. Finally, in some cases where there is an 

explicit liability and accepted, reasonable cost estimates exist, additional 

steps may be taken to directly incorporate costs in the budget when doing so 

would enhance up-front control of spending. 

FISCAL EXPOSURES 

Improving the Budgetary Focus on LongTerm Costs and Uncertainties 

www.gao.gov/cgi-bin/getrpt?GAO-03-213.

To view the full report, including the scope 

and methodology, click on the link above. 

For more information, contact Paul Posner at 

(202) 512-9573 or posnerp@gao.gov. 

Highlights of GAO-03-213, a report to the 

Committee on the Budget, House of 

Representatives 

January 2003 

GAO and other budget experts 

have discussed that the current 

time horizons and content of the 

federal budget could be enhanced 

to more comprehensively reflect 

the government’s commitments or 

signal emerging problems. GAO 

was asked to (1) provide 

information on the range and 

nature of responsibilities, 

programs, and activities that may 

explicitly or implicitly expose the 

government to future spending and 

(2) present and discuss options for 

increasing the attention paid to 

these items in the budget and 

budget process. 

GAO recommends that OMB report 

annually on fiscal exposures. 

Where possible, OMB should report 

the estimated costs—“exposure 

level”—of certain activities in the 

Program and Financing schedules 

of the budget. In a few select areas, 

the ultimate objective might be to 

include costs directly in the budget 

when doing so would enhance upfront control of spending. 

Congress may wish to consider 

exploring options for improving the 

budgetary information and the 

attention given to fiscal exposures. 

If more explicit congressional 

consideration is desired, as 

estimates improve, Congress may 

wish to develop budget process 

mechanisms that prompt more 

deliberation. 
Page i GAO-03-213 Fiscal Exposures

Contents

Letter 1

Results In Brief 1

Background 7

Objectives, Scope, and Methodology 9

Fiscal Exposure Could Be Considered on Several Levels 12

Fiscal Exposures are Wide-Ranging and Varied 14

Fiscal Exposures Involve Complex Measurement and Budgeting 

Challenges 24

Diversity of Fiscal Exposures Suggests that Tailored Approaches 

Would Be More Feasible than an Across-the-Board Approach 27

Conclusion 41

Recommendations for Executive Action 43

Matters for Congressional Consideration 43

Agency Comments and Our Evaluation 43

Figures Figure 1: Composition of Spending as a Share of GDP Assuming 

Discretionary Spending Grows with GDP and the Tax 

Cuts Do Not Sunset 8

Figure 2: Spectrum of Fiscal Exposures 15

Figure 3: Social Security, Medicare, and Medicaid Spending as a 

Percent of Gross Domestic Product 20

Figure 4: Overview of Possible Approaches 27

Figure 5: Possible Options For Improving Supplemental Reporting 

29

Figure 6: Possible Options for Providing Opportunities For 

Explicit Consideration of Fiscal Exposures 33

Figure 7: Possible Options for Incorporating Costs Directly into the 

Primary Budget Data 37

Abbreviations

CBO Congressional Budget Office

DOD Department of Defense

GDP gross domestic product

OMB Office of Management and Budget
Contents

Page ii GAO-03-213 Fiscal Exposures

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Page 1 GAO-03-213 Fiscal Exposures

United States General Accounting Office

Washington, D.C. 20548

A

January 24, 2003 Letr

The Honorable Jim Nussle

Chairman

Committee on the Budget

House of Representatives 

Dear Mr. Chairman,

As the central process by which the President and Congress select among 

competing demands for federal funds, the budget should provide complete 

cost information and adequate signals about emerging problems. For many 

programs, the current budget does this. It does not, however, always help 

policymakers consider the long-term costs associated with some activities 

that explicitly or implicitly commit the government to future spending or 

otherwise affect the long-term fiscal outlook of the nation. This may limit 

the attention given to the future sustainability and flexibility of the 

government’s fiscal position and the cost effectiveness of existing 

programs. 

You requested that we: (1) provide information on the range and nature of 

certain responsibilities, programs, and activities that may explicitly or 

implicitly expose the government to future spending and (2) present and 

discuss options for increasing attention paid to these items in the budget 

and the budget process. As discussed with your staff, this report covers a 

number of issues surrounding long-term costs and uncertainties that 

present risk for the fiscal future, including

• the concept and different dimensions of fiscal exposures (risks)

• the range and nature of specific fiscal exposures facing the federal 

government

• the complexities and challenges surrounding cost measurement and 

budgeting for fiscal exposures and

• approaches for increasing the attention given to fiscal exposures in the 

budget and the budget process.

Results In Brief The federal government undertakes a wide range of responsibilities, 

programs, and activities that may either obligate the government to future 
Page 2 GAO-03-213 Fiscal Exposures

spending or create an expectation for spending. In particular, demographic 

trends facing the nation argue for considering the long-term sustainability 

and flexibility of the government’s fiscal position. Profound demographic 

changes, with the impending retirement of the baby boom generation, will 

have significant implications not only for the Social Security, Medicare, and 

Medicaid programs but also for the budget and the economy as a whole. 

The approaching demographic tidal wave also serves to reinforce the 

importance of looking beyond short-term budgetary consequences. The 

savings and loan crisis in the 1980s and the resulting multibillion dollar 

bailout serve as a vivid reminder of the shortcomings and consequences

when the federal budget does not adequately signal emerging problems. 

Current budget reporting, however, is not designed to promote the 

recognition and explicit consideration of some of these exposures. For 

some claims, such as environmental cleanup and disposal costs, the 

government’s commitment occurs years before the cash consequences are 

reflected in the budget. Other potential draws on future resources, such as 

future social insurance benefits or disaster assistance, may not flow from 

commitments of a strictly legal nature but from expectations that the 

public holds about the government’s responsibilities. For example, while 

the federal budget shows annual Social Security tax receipts exceeding 

annual cash benefit payments, the fiscal year 2001 consolidated Financial 

Report of the United States Government estimates the net present value of 

Social Security’s negative cash flow over a 75-year period as $4.2 trillion.1

Concerns have been raised that such potential draws on future federal 

resources extending beyond current budget time frames may not be readily 

apparent in current budget reporting and process. 

Policy choices that may have significant implications for long-term budget 

flexibility and for which future growth paths are uncertain can affect either 

spending or revenue; thus, fiscal exposures could be thought of on several 

levels. Aggregate projections of the cost of the government’s current 

programs and policies provide important context for decision making. This 

construct, however, may be too broad to highlight specific areas for reform. 

To help address this concern, this report looks below the aggregate level on 

1

Net present value of the negative cash flow is the current amount of funds needed to cover 

projected shortfalls, excluding trust fund balances, over a 75-year period. The trust fund 

balance at the beginning of the valuation period (January 1, 2001) was $1,049 billion. The 

net present value of negative cash flows shown in this report is from the fiscal year 2001 

consolidated Financial Report of the United States Government and is a different measure 

from the actuarial balance in the Trustees’ Report.
Page 3 GAO-03-213 Fiscal Exposures

the spending side to provide insights on the range and nature of specific 

fiscal exposures. 

In this report, we use the term “fiscal exposure” to provide a conceptual 

framework for considering the wide range of responsibilities, programs, 

and activities that may explicitly or implicitly expose the federal 

government to future spending. The budget treatment of items that could 

be considered fiscal exposures varies—some have been captured in budget 

obligations and some have not. Fiscal exposures include not only 

liabilities,2

 contingencies,3 and financial commitments4 that are identified 

on the balance sheet or in the accompanying notes, but also 

responsibilities and expectations for government spending that do not 

meet the recognition and disclosure requirements for that statement. We 

use the term implicit exposures in this report to refer to exposures that 

stem not from a legal obligation of the federal government but rather from 

implied commitments embedded in the government’s current policies or in 

the public’s expectations about the role of government.5

Fiscal exposures vary widely as to source, extent of the government’s legal 

obligation, likelihood of occurrence, and magnitude. Their ultimate costs 

may or may not be measurable. Given this variety, it is useful to think of 

fiscal exposures as falling on a spectrum extending from explicit liabilities 

2

For financial statement reporting, a liability represents a probable and measurable future 

outflow of resources arising from past transactions or events. A liability is recorded on the 

face of the balance sheet when an item is identifiable, its occurrence is probable, and its 

cost can be reasonably estimated.

3

For financial statement reporting, a contingency is an existing condition, situation, or set of 

circumstances involving uncertainty as to possible gains or losses. The uncertainty will 

ultimately be resolved when one or more future events occur or fail to occur. Contingencies 

are disclosed in the notes of the financial statements if any of the conditions for liability 

recognition are not met and there is at least a reasonable possibility that a loss may have 

been incurred. Contingencies that are classified as remote are not required to be disclosed. 

4

For financial statement reporting, financial commitments refer to contractual obligations 

that require the future use of resources. For example, although a liability generally is not 

recognized on the balance sheet when a contract is signed because the contracted goods or 

services have not been delivered, this transaction may be recognized as a commitment in 

the notes. In contrast, budgetary accounting would record obligations at the time the 

government enters into a contract and allows for deobligation if the contract is not fulfilled. 

Budgetary accounting records obligations when an order is placed, contract awarded, 

service rendered, or similar transaction takes place that will require payment.

5

Some of these implicit exposures, such as the costs of future social insurance benefits, are 

discussed in the stewardship section of the government’s consolidated financial statement.
Page 4 GAO-03-213 Fiscal Exposures

to the implicit promises embedded in current policy or public expectations. 

Some, such as environmental cleanup and disposal costs and 

postretirement benefits, are reported in the financial statements as

liabilities. Some are reported as financial commitments—such as 

contracted goods or services that have not yet been delivered—or 

contingencies—such as insurance—that depend on future events. Others, 

such as future social insurance benefits, are not explicitly stated or 

reported as liabilities but rather are implied by current decisions or public 

expectations about the role of government and shown as stewardship 

responsibilities. 

The budgetary treatment of these items varies—some have been included 

in the budget and some have not. Some liabilities reported on the financial 

statements, such as accounts payable and loan guarantees, are included in 

the budget because agencies must have budget authority to cover them.

Others, such as environmental and disposal liabilities, are not included in 

primary budget data6

 beyond the amount for current cleanup activities. 

Some implicit exposures, such as the cost of future Social Security 

benefits, are not included in primary budget data for the budget year but 

are captured in long-range budget projections. Other implicit exposures, 

such as the risk assumed by insurance programs, may not be captured in 

either primary budget data or in long-range budget projections. 

This variety increases the difficulty of determining how and to what extent 

fiscal exposures should be handled in the budget and budget process. 

Specifically, budgeting for fiscal exposures is complicated by difficulties in 

(1) determining the scope of programs that should be considered and 

(2) estimating costs. There is no technical definition of fiscal exposures 

and no universal agreement on which and to what extent specific activities 

should be considered fiscal exposures or how they should be treated in the 

budget and budget process. Further, the complexity and uncertainty 

surrounding some exposures creates significant cost estimation 

challenges, which in turn raises concerns about using these estimates as 

the sole basis of budget and other policy decisions. These issues need to be 

considered carefully to avoid subjecting the primary budget data to large 

and volatile reestimates. Nevertheless, information on the existence and 

estimated cost of fiscal exposures needs to be considered along with other 

factors when making policy decisions. Not capturing the long-term costs of 

6

 In this report, primary budget data refers to budget authority, obligations, outlays, and the 

deficit/surplus.
Page 5 GAO-03-213 Fiscal Exposures

current decisions limits Congress’s ability to control the government’s 

exposure at the time decisions are made.

The variety of fiscal exposures, the difficulties in estimating their costs, and 

the range of uncertainty surrounding such cost estimates suggest that an 

across-the-board approach may not be the best way to proceed and that 

approaches may evolve over time. A framework organized around possible 

objectives can facilitate consideration and analysis of various approaches 

to help improve the attention given to fiscal exposures. The three possible 

objectives used to structure this analysis are (1) improving transparency, 

(2) prompting more deliberation, and (3) improving budget incentives. 

If the primary objective is to improve the transparency of fiscal exposures, 

then supplemental reporting would help promote this objective. One 

option for increased supplemental reporting would be to require, on an 

annual basis, a report on fiscal exposures. Another option would be to 

report, where appropriate, the future estimated costs of certain exposures 

as a new budget concept—“exposure level”—as a notational item in the 

Program and Financing schedule of the President’s budget. If, however, the 

primary objective is to prompt more explicit deliberation of exposures, 

then budget process mechanisms could be designed to provide 

opportunities for such consideration—especially as the amount and quality 

of cost information is improved over time. For example, as more 

information on costs is provided, the budget resolution could include limits 

on creating new or expanding existing exposures, with points of order 

permitted against legislation violating such limits. Another option would 

be to establish triggers to signal when the costs of existing exposures 

exceed some predetermined amount. Any process mechanisms—whether 

points of order or triggers—would need to take into account the 

uncertainty inherent in all long-range estimates and be designed 

accordingly. Finally, if the primary objective is to change budgetary 

incentives, then estimates of the future costs of exposures might be 

included directly into the primary budget data. For example, accrual-based 

measurement could be used to record estimated costs when doing so 

would enhance obligations-based control by recognizing costs up front at 

the time decisions are made that might encumber future resources. The 

general approaches outlined and the various options for implementing 

them achieve the three objectives to differing degrees and also vary in the 

implementation challenges they present.

We are recommending that the Office of Management and Budget (OMB) 

report annually on fiscal exposures, including a concise list and description 
Page 6 GAO-03-213 Fiscal Exposures

of such exposures, cost estimates, where possible, and an assessment of 

methodologies and data used to produce cost estimates for such 

exposures. In addition, where possible, OMB should report the estimated 

costs associated with certain exposures as a new budget concept—

“exposure level”—as a notational item in the Program and Financing 

schedule of the President’s budget. For select areas where an explicit 

liability exists and there are accepted cost estimation methodologies, the 

ultimate objective might be to include the accrual costs directly in the 

primary budget data when doing so would enhance obligation-based 

control. These steps should complement and support continued and 

improved reporting of long-range projections and analysis of the budget as 

a whole to assess fiscal sustainability and flexibility. 

If more explicit congressional consideration of the potential costs of 

certain exposures is desired, Congress may wish, as estimates improve 

over time, to develop budget process mechanisms that prompt more 

deliberation about fiscal exposures while recognizing the uncertainty 

inherent in estimating some long-term costs.
Page 7 GAO-03-213 Fiscal Exposures

Background A primary focus of current federal budget reporting is the cash implications 

of the government’s obligations over a period of 1 to 10 years. The federal 

budget is an obligation-based budget designed to ensure that agencies do 

not incur legal obligations unless and until Congress provides authority for 

that purpose. Obligation-based budgeting involves three stages 

(1) Congress must enact budget authority up front before government 

officials can obligate the government to make outlays, (2) government 

officials commit the government to make outlays by entering into legally 

binding agreements, and (3) outlays (cash disbursements) are made to 

liquidate obligations. However, with limited exceptions,7

 the amounts to be 

obligated are measured on a cash or cash equivalent basis and the unified 

budget deficit/surplus8

—a key focus of the policy debate—represents the 

difference between cash receipts and cash outlays in a given year. As a 

result, the U.S. budget is often referred to as cash-based as well as 

obligation-based. 

For many programs, the cash- and obligation-based budget provides 

sufficient information on and control over the government’s spending 

commitments. However, this focus does not require explicit consideration 

of some responsibilities, programs, or activities that may result in future 

spending. For some programs, obligations and cash outlays do not reflect 

the magnitude of the government’s commitment of future resources at the 

time decisions are being made. We and other federal budget experts have 

raised concerns that, in these cases, the current budget may neither 

adequately reflect the extent of the government’s commitment nor signal 

emerging problems. 

Demographic trends facing the United States argue for considering the 

long-term sustainability and flexibility of the government’s fiscal position. 

Profound demographic changes with the impending retirement of the baby 

7

The U.S. budget uses accrual measures to recognize the government’s cost for certain 

programs. One example is the treatment of credit programs for which budget authority, 

obligations, and outlays are measured on an accrual basis. Interest on Treasury debt held by 

the public is almost entirely on an accrual basis. 

8

Under the budget concepts set forth in the Report of the President’s Commission on 

Budget Concepts, the unified budget is a comprehensive budget in which receipts and 

outlays from federal and trust funds are consolidated. When these fund groups are 

consolidated to display budget totals, transactions that are outlays of one fund group for 

payment to another fund group (that is, intrafund transactions) are deducted to avoid 

double counting. 
Page 8 GAO-03-213 Fiscal Exposures

boom generation will have significant implications not only for the Social 

Security, Medicare, and Medicaid programs but also for the budget and the 

economy as a whole. The share of the population that is age 65 or older is 

climbing and is expected to surpass 20 percent by 2035. Our recent 

simulations show that absent policy changes, social insurance and health 

programs will encumber an increasing share of the government’s 

resources, thus restricting fiscal flexibility to address other needs. As 

shown in figure 1, our long-term budget simulations show that the aging of 

the baby boom generation and rising per capita health care spending will, 

absent meaningful reform, lead to massive fiscal challenges in future years. 

Assuming, for example, that recent tax reductions are made permanent and 

discretionary spending keeps pace with the economy, by midcentury, 

federal revenues may only be adequate to pay Social Security and interest 

on the federal debt. As a result, major spending reductions, tax increases, 

or some combination of the two would be necessary to obtain balance. 

Figure 1: Composition of Spending as a Share of GDP Assuming Discretionary 

Spending Grows with GDP and the Tax Cuts Do Not Sunset

0

10

20

30

40

2000 2015 2030 2050

Fiscal year

Percent of GDP

Net interest

Social Security

Medicare and Medicaid

All other spending

Revenue

Source: GAO's August 2002 analysis.
Page 9 GAO-03-213 Fiscal Exposures

One need not look only to implications of the demographic shift to see the 

disconnection between how some exposures appear in the budget in the 

short term and the long term. The savings and loan crisis and the resulting 

bailout serve as a vivid reminder of the shortcomings of the federal budget 

in signaling emerging problems. During the 1980s, as hundreds of 

institutions became insolvent and the government’s liabilities mounted, the 

federal budget failed to provide timely information on the rising deposit 

insurance costs accruing to the government. Although we and some 

industry analysts raised concerns about these rapidly increasing deposit 

insurance costs, corrective action was delayed and the government’s total 

costs increased. Since the federal budget did not record outlays until the 

institutions were closed and depositors paid, it provided little incentive to 

act promptly. Indeed, budget treatment may have created incentives to 

delay closing insolvent institutions, which raised the government’s ultimate 

costs. Delayed budget recognition obscured the program’s, as well as the 

government’s, underlying financial condition and limited the usefulness of 

the budget process as a means for Congress to assess the problem. 

Recent performance reforms also reinforce the need for full cost 

information to assess and manage program performance. These reforms 

emphasize the need for complete cost information—not just cash flows—

to assess and manage performance. However, for some activities, such as 

deferred compensation, the current budgetary focus on annual cash flows 

does not match full costs with the goods and services provided by the 

government. By making it more difficult to assess and compare the costs 

associated with a given level of performance, the failure to align budgetary 

cost recognition with the consumption of resources may hamper the 

government’s performance and accountability reform efforts. 

Objectives, Scope, and 

Methodology 

The Chairman of the House Committee on the Budget asked us to 

(1) provide information on the range and nature of responsibilities, 

programs, and activities that may explicitly or implicitly expose the 

government to future spending and (2) present and discuss options for 

increasing attention paid to these items in the budget and the budget 

process. Although some tax preferences may have uncertain or 

accelerating future growth paths that have significant implications for the 

long term, this report deals only with spending.
Page 10 GAO-03-213 Fiscal Exposures

To identify examples of programs and activities that may either directly 

obligate the government to future spending or simply create an expectation 

for such spending, we reviewed the consolidated Financial Report of the 

United States Government, relevant literature, the President’s budget 

documents, and prior GAO work. To begin construction of the spectrum of 

fiscal exposures, we reviewed the generally accepted federal accounting 

standards, including the basis of conclusions for federal liabilities, 

contingencies, and stewardship responsibilities. Data on estimated 

exposures were drawn from the fiscal year 2001 consolidated Financial 

Report of the United States Government, agency financial statements, and 

the President’s budget. Although we used generally accepted federal 

accounting standards as an initial framework in constructing the spectrum 

of fiscal exposures outlined in the report, we also considered additional 

items that may implicitly expose the government to future spending but 

may not be fully captured in the financial statements or the budget. In 

order to identify ideas and describe various approaches for improving the 

budgetary attention given to fiscal exposures, we reviewed relevant 

literature and our prior work, including discussions with budget experts. 

We also drew upon our previous work looking at the experiences of other 

nations with accrual budgeting9

 and the recognition of fiscal risks, such as 

federal insurance.10

9

U.S. General Accounting Office, Accrual Budgeting: Experiences of Other Nations and 

Implications for the United States, GAO/AIMD-00-57 (Washington, D.C.: Feb. 18, 2000).

10U.S. General Accounting Office, Budget Issues: Budgeting for Federal Insurance 

Programs, GAO/AIMD-97-16 (Washington, D.C.: Sept. 30, 1997).
Page 11 GAO-03-213 Fiscal Exposures

Our list of fiscal exposures is meant to be illustrative to provide perspective 

on the range and nature of responsibilities, programs, and activities that 

may explicitly or implicitly expose the government to future spending. It 

should not be interpreted either as all-inclusive or universally agreed upon. 

Further, although this report notes that the concept of fiscal exposure can 

be thought of broadly, its main focus is the long-term costs and 

uncertainties associated with certain items that may expose the 

government to future spending. Rather than looking at the broad fiscal 

outlook, it focuses only on certain parts of the spending side of the budget. 

As such, it does not consider all federal spending and general revenues that 

would need to be considered in order to assess long-term fiscal 

sustainability. We have discussed long-term fiscal sustainability issues in 

numerous reports and testimonies.11 As part of this work, our simulations 

of the long-term economic impact of federal budget policy show that the 

nation’s economic future depends, in part, upon today’s budget and fiscal 

policy choices. This report builds on this previous work by looking below 

the aggregate level to the long-term costs associated with certain specific 

spending items. 

Our work was done in Washington, D.C., in accordance with generally 

accepted government auditing standards. Comments on a draft of this 

report from OMB staff are discussed and incorporated as appropriate. 

The remainder of this report discusses a number of issues, including

• the concept and different dimensions of fiscal exposures (risks)

• the range and nature of specific fiscal exposures facing the federal 

government

• the complexities and challenges surrounding cost measurement and 

budgeting for fiscal exposures and 

• approaches for increasing the attention given to fiscal exposures in the 

budget and the budget process.

11For example, U.S. General Accounting Office, Budget Issues: Long-Term Fiscal 

Challenges. Testimony before the Committee on the Budget, U.S. Senate, GAO-02-467T

(Washington, D.C.: Feb. 27, 2002) and U.S. General Accounting Office, Long-Term Budget 

Issues: Moving From Balancing the Budget to Balancing Fiscal Risk, GAO-01-385T

(Washington, D.C.: Feb. 6, 2001). 
Page 12 GAO-03-213 Fiscal Exposures

Fiscal Exposure Could 

Be Considered on 

Several Levels 

We use the term fiscal exposure to provide a conceptual framework for 

considering the wide range of responsibilities, programs, and activities that 

may explicitly or implicitly expose the federal government to future 

spending. The treatment of items that could be considered fiscal 

exposures in the current cash- and obligation-based budget varies—some 

have been captured in budget obligations and some have not. Fiscal 

exposures include not only liabilities, contingencies, and financial 

commitments that are identified on the balance sheet or accompanying 

notes, but also responsibilities and expectations for government spending 

that do not meet the recognition or disclosure requirements for that 

statement.12 By extending beyond conventional accounting and fiscal 

analysis, the concept of fiscal exposure is meant to provide a broad 

perspective on long-term costs and uncertainties. The aim is not to provide 

strict definitional guidelines, but rather to improve understanding of the 

exposures associated with certain activities. 

It is possible to think about fiscal exposure on several levels. Aggregate 

budget projections of the government’s current programs and policies 

provide important context for considering the implications of specific 

decisions. For example, long-range (approximately 75 year) current 

service projections and simulations, such as those provided by our model 

and in the Analytical Perspectives of the President’s budget, provide a 

broad context for considering the sustainability and flexibility of the 

government’s future fiscal position. However, such constructs are likely to 

be too broad to highlight specific areas for reform. Further, the aggregate 

outlook is driven largely by Social Security, Medicare, and Medicaid. As a 

result, it provides little or no information to guide choices—or even signal 

growth—outside those areas. 

12In this report, the term implicit exposures refers to exposures that stem not from a legal 

obligation of the federal government but rather from implied commitments embedded in the 

government’s current policies or in the public’s expectations about the role of government. 

Some implicit exposures, such as the costs of future social insurance benefits, are discussed 

in the stewardship section of the government’s consolidated financial statement. 
Page 13 GAO-03-213 Fiscal Exposures

While Social Security, Medicare, and Medicaid are large drivers, there are 

other exposures and it is important for policymakers to have information 

on their long-term costs. The budgetary treatment of these exposures 

varies—some have been included in the budget and some have not. For 

some federal programs, the government’s commitment or resource use 

occurs years before the cash spending consequences are reflected in the 

budget. Even though some of these exposures stem from liabilities and are 

reported in the financial statements, their recognition in the cash- and 

obligation-based budget may be delayed. Beyond explicit liabilities, there 

are implicit and/or contingent13 exposures that may encumber future 

budgets or reduce fiscal flexibility. Including this range provides a more 

complete picture of the extent of exposure facing the government. For this 

report, we discuss fiscal exposures in terms of the long-term costs 

associated with certain spending items.14 

In addition to the fiscal exposures from spending covered in this report, 

certain tax expenditures15 may have uncertain or accelerating future 

growth paths that have significant implications for the long term. 

According to OMB, the largest reported tax expenditures tend to be 

associated with the individual income tax. For example, an exclusion is 

provided for employer contributions for medical insurance. In its special 

analysis on tax expenditures included in the Analytical Perspectives of the 

President’s budget, OMB includes estimates of the revenue effects, outlay 

equivalents, and present value of revenue effects, but states that the 

meaningfulness of tax expenditure estimates is uncertain. OMB notes that 

estimates are uncertain because of the arbitrariness of the baseline and the 

fact that each estimate is calculated assuming that all other parts of the tax 

code remain unchanged. 

13In this report, the term contingent exposures refers to exposures that are based on the 

occurrence or nonoccurrence of some future event. 

14For a more in-depth look at the fiscal exposure associated with environmental liabilities, 

see U.S. General Accounting Office, Long-Term Commitments: Improving the Budgetary 

Focus on Environmental Liabilities, GAO-03-219 (Washington, D.C.: Jan. 24, 2003). 

15 Tax expenditures are revenue losses attributable to a provision of the federal tax laws that 

allows a special exclusion, exemption, or deduction from gross income or that provides a 

special credit, preferential tax rate, or deferral of tax liability. 
Page 14 GAO-03-213 Fiscal Exposures

Fiscal Exposures are 

Wide-Ranging and 

Varied 

The federal government undertakes a wide range of responsibilities, 

programs, and activities that may either obligate the government to future 

spending or create an expectation for such spending. Specific fiscal 

exposures vary widely as to source, likelihood of occurrence, magnitude, 

and strength of the government’s legal obligation. They may be explicit or 

implicit; they may currently exist or be contingent on future events. Their 

ultimate costs may or may not be reasonably measurable. Given this 

breadth, it is useful to think of fiscal exposures as lying on a spectrum 

extending from explicit liabilities to the implicit promises embedded in 

current policy or public expectations. Figure 2 shows a spectrum of 

responsibilities, programs, and activities that may be viewed as fiscal 

exposures. 
Page 15 GAO-03-213 Fiscal Exposures

Figure 2: Spectrum of Fiscal Exposures

a.A liability represents a probable and measurable future outflow of resources arising from past 

transactions and events. A liability is recorded on the face of the balance sheet only when an item is 

identifiable, its occurrence is probable, and its cost can be reasonably estimated. 

b. Commitments refer to contractual obligations that require the future use of resources. For example, 

although a liability generally is not recognized on the balance sheet when a contract is signed because 

the contracted goods or services have not been delivered, this transaction may be recognized as a 

commitment in the notes. In contrast, budgetary accounting would record obligations at the time the 

government enters into a contract and allows for deobligation if the contract is not fulfilled. Budgetary 

accounting records obligations when an order is placed, contract awarded, service rendered, or similar 

trnsaction takes place that will require payment. 

Explicit liabilitiesa Financial commitmentsb Financial contingenciesc Implicit exposuresd

Explicit liabilities Spectrum of fiscal exposures Implicit exposures

Civilian and military

pensions payable

$1,821

Post retirement

health benefits

$786

Veteran benefits

payable

$692

Accounts payable

$96

Loan guarantees

$28

Other benefits due

and payablee

$44

Social Security due

and payablee

$42

Undelivered ordersf

$413

Long-term leases

$49

Insurance programsi

$18

Unadjudicated

claims

$2

Environmental and

disposal liabilities

$307

Publicly-held

debt

$3,320

Net future benefit payments

under Social Securityg

$4,207

Net future benefit

payments under

Medicare Part A $4,730 

and Medicare Part Bg

$8,084

Life cycle costs for 

fixed assets

(i.e., including, deferred/

future maintenance and

operating costs)

Unfunded portion of

incrementally funded

capital projects

Federal disaster relief

Potential financial bailout of

significant public and

private institutions

Net future benefit

payments for other social

insurance programsh

$15

Risk assumed by insurance

programsi

Insurance

programsi

$33

Source: GAO. Cost data from the Financial Report of the United States Government, fiscal year 2001.

Dollars in billions
Page 16 GAO-03-213 Fiscal Exposures

c. A contingency is an existing condition, situation, or set of circumstances involving uncertainty as to 

possible gains or losses. The uncertainty will ultimately be resolved when one or more future events 

occur or fail to occur. Contingencies are disclosed in the notes of the financial statements if any of the 

conditions for liability recognition are not met and there is at least a reasonable possibility that a loss 

may have been incurred. Contingencies that are classified as remote are not required to be disclosed.

d.In this report, the term implicit exposures refers to exposures that stem not from a legal obligation of 

the federal government but rather from implied commitments embedded in the government’s current 

policies or in the public’s expectations about the role of government. 

e.Due and payable amounts are the benefits owed to program recipients as of the fiscal year end that 

have not yet been paid. 

f.Undelivered orders represent the value of goods and services ordered that have not yet been 

received. 

g.The term net future benefit payments is used in this report to represent the net present value of 

negative cashflow. Net present value of the negative cashflow is the current amount of funds needed 

to cover projected shortfalls, excluding trust fund balances, over a 75-year period. This estimate of 

cashflows is for an open system, meaning that it includes births during the period and individuals 

below the age of 15 as of January 1 of the valuation year. The valuation date for the amount included in 

the figure was January 1, 2001. The trust fund balances at the beginning of the valuation period that 

were eliminated for this consolidation were: $1,049 billion for Social Security, $177 billion for Medicare 

Part A, and $44 billion for Medicare Part B. This is a different measure from the actuarial balance in the 

Trustees’ Report. 

h.Includes Railroad Retirement and Black Lung (Part C). See footnote g. Trust fund balances at the 

beginning of the valuation period that were eliminated for consolidation were: $19 billion for Railroad 

Retirement and a negative balance of $7.2 billion for Black Lung. 

i.

Federal insurance programs are listed three times in figure 2. Under federal accounting standards, a 

liability is recognized based on insured events that have been identified by the end of the accounting 

period. The standard requires recognition of expected unpaid net claims inherent in insured events that 

have already occurred, including (1) reported claims, (2) claims incurred but not yet reported and (3) 

any changes in contingent liabilities that meet criteria for recognition. A contingency is an existing 

condition, situation, or set of circumstances involving uncertainty as to a possible loss. Contingencies 

that do not meet the conditions for liability recognition are disclosed in the notes to the financial 

statements. Contingencies that are classified as remote are not required to be disclosed. The risk 

assumed by federal insurance programs represents the cost of claims inherent in the government’s 

commitment. Estimation of the cost of the risk assumed by the federal government can be thought of 

as analogous to premium rate setting in that it would look at the long-term expected costs of the 

insurance commitment at the time the insurance commitment is extended. The risk assumed by the 

government is essentially that portion of the full risk-based premium not charged to the insured. 

While our list of fiscal exposures provides some perspective on the range 

and magnitude of exposures facing the federal government, it is neither 

meant to be comprehensive nor to represent a universally agreed-upon list. 

The cost data should be viewed in a similar way. Although most of the cost 

data in this figure were drawn from the consolidated Financial Report of 

the United States Government for fiscal year 2001, they should be used 

with caution. In auditing these statements, we were unable to determine 

the reliability of significant portions of the government’s assets, liabilities, 

and costs due to serious financial management weaknesses. These 

weaknesses may affect the reliability of estimates reported for certain 

exposures, such as military postretirement health benefits and 

environmental cleanup and disposal costs. 
Page 17 GAO-03-213 Fiscal Exposures

Along the spectrum of fiscal exposures there is great variation in the extent

and magnitude of a government’s legal obligation, the certainty of expected 

costs, their treatment in the budget, and the recognition of these items in 

the financial statements. Some, such as deferred employee compensation 

or environmental cleanup and disposal costs, are reported as liabilities on 

the balance sheet. For financial statement reporting purposes, liabilities are 

viewed as representing probable and measurable outflows of resources 

arising from past transactions and events. Others that relate to a past event 

but are contingent on future events, such as pending litigation, generally 

are disclosed as contingencies. Others, such as undelivered goods or 

services previously contracted for, are disclosed as financial commitments 

in the notes to the financial statements. Some, such as future social 

insurance benefits and some disaster assistance, do not flow from legal 

obligations but are implied by current policies and/or expectations about 

the role of government and are shown as stewardship responsibilities.16 

In this report, we use the term implicit exposures to refer to the last 

category of exposures that stem not from a legal obligation of the federal 

government but rather from implied commitments embedded in the 

government’s current policies or in the public’s expectations about the role 

of government. While social insurance and health programs represent 

significant implicit exposures, other activities may also create expectations 

for future spending. For example, incrementally funded capital projects17

create an expectation for future spending since there is an expectation that 

partially funded capital projects will be completed. In general, the decision 

to purchase a building or another fixed asset implicitly commits the 

government to the life-cycle costs associated with its future operation and 

maintenance. Further, the earmarking of taxes or the establishment of trust 

funds creates an expectation of future spending for the designated 

purpose. Even an activity that appears to decrease government 

involvement, such as privatization, may carry with it an implicit assumption 

that the government will step in if necessary to provide the service or good. 

Clearly, the range and nature of activities that may create an expectation 

16Some implicit exposures, such as the costs of future social insurance benefits, are 

discussed in the stewardship section of the government’s consolidated financial statement. 

17An incrementally funded capital project is a project for which the budget authority 

provided is for only part of the estimated cost of the capital acquisition or part of a usable 

asset. For more information, see U.S. General Accounting Office, Budget Issues: 

Incremental Funding of Capital Asset Acquisitions, GAO-01-432R (Washington, D.C.: Feb. 

26, 2001). 
Page 18 GAO-03-213 Fiscal Exposures

for future spending increase the difficulty of determining the parameters of 

what constitutes a fiscal exposure. 

The budgetary treatment of these items varies—some have been included 

in the budget and some have not. Some liabilities reported on the financial 

statements, such as accounts payable and loan guarantees, are included in 

the budget because agencies must have budget authority to cover them.

Changes in the debt level generally are reflected in the annual deficit or 

surplus. Others, such as environmental and disposal liabilities, are not 

included in primary budget data18 beyond the amount for current cleanup 

activities. Some implicit exposures, such as the cost of future Social 

Security benefits, are not included in primary budget data for the budget 

year but are captured in long-range budget projections. Other implicit 

exposures, such as the risk assumed by insurance programs, may not be 

captured in either primary budget data or in long-range budget projections. 

Despite the challenges of determining what should be considered a fiscal 

exposure, efforts to improve the information on and incentives to consider 

these exposures are important. Failure to understand and address fiscal 

exposures can have significant consequences. Even those exposures that 

are not legal obligations of the government may imply future government 

spending—and that should be considered in making a program or budget 

decision. Whether the government is legally required or simply compelled 

by circumstances to provide funding, these exposures can encumber future 

budgets and reduce fiscal flexibility. Understanding these items can also be 

important to efforts to improve government performance. For some items, 

such as deferred compensation, the budgetary focus on annual cash flows 

does not match the full costs of an employee with the services the 

employee provides. For example, federal employees earn their pension 

while they are working but receive pensions after they have stopped 

working. The accruing cost of the pensions earned by current employees is 

really part of the costs of the goods and services they provide, but the 

budget does not capture the full extent of these costs and total budget 

outlays include only the cash payments made to current retirees. By 

making it more difficult to assess and compare the costs associated with a 

given level of performance, the failure to align budgetary cost recognition 

with the consumption of resources may hamper the government’s efforts to 

assess its performance.

18 In this report, primary budget data refers to budget authority, obligations, outlays, and the 

deficit/surplus.
Page 19 GAO-03-213 Fiscal Exposures

Several exposures provide 

insight into challenges 

facing the government

A closer look at some fiscal exposures—although not necessarily 

representative of all fiscal exposures—provides a sense of the issues facing 

the government. For example, the government faces a large and rapidly 

growing exposure for certain social insurance and health programs. Social 

Security, Medicare, and the federal portion of Medicaid are expected to 

grow considerably in the future due to the aging of the population and 

impending retirement of the large baby boom generation. Figure 3 shows 

the total draw on the economy represented by federal spending on Social 

Security, Medicare, and Medicaid. Taken together, they represent an 

unsustainable burden on future generations. Although significant 

information is available on the estimated future costs of Social Security and 

Medicare, the annual budget is not currently structured to fully capture 

these growing costs. Current reporting of annual budget data focuses on 

cash to current beneficiaries and thus does not capture the funding 

shortfall for future benefits. For example, fiscal year 2001 Social Security 

tax receipts exceeded cash benefit payments by more than $94 billion and 

increased the unified federal surplus. The fiscal year 2001 consolidated 

Financial Report of the United States Government, however, shows the 

net present value of Social Security’s negative cash flow over a 75-year 

period as $4.2 trillion.19 Similarly, the budgetary treatment of Medicare 

focuses on the annual cash paid to current beneficiaries and cash revenues 

from current workers. As a result, Medicare's significant and growing 

actuarial shortfalls are not reflected in the annual budget.

19 Net present value of the negative cash flow is the current amount of funds needed to cover 

projected shortfalls, excluding trust fund balances, over a 75-year period. The trust fund 

balance at the beginning of the valuation period (January 1, 2001) was $1,049 billion. The 

net present value of negative cash flows shown in this report is from the fiscal year 2001 

consolidated Financial Report of the United States Government and is a different measure 

from the actuarial balance in the Trustees’ Report. 
Page 20 GAO-03-213 Fiscal Exposures

Figure 3: Social Security, Medicare, and Medicaid Spending as a Percent of Gross Domestic Product 

Note: Projections based on intermediate assumptions of the 2002 Trustees’ Reports and 

Congressional Budget Office’s June 2002 long-term projections under midrange assumptions. 

Spending includes only the federal portion of Medicaid.

Pensions and retiree health care costs of civilian and military employees of 

the federal government and veterans’ benefits payable comprise another 

large fiscal exposure. Together, these future benefits represent a liability of 

nearly $3.4 trillion for fiscal year 2001. Changes in benefits may result in 

long-term costs. For fiscal year 2001, a $293 billion increase in the military 

postretirement health benefits liability is attributed to provisions of the 

fiscal year 2001 National Defense Authorization Act (Public Law 106-398) 

that expand certain benefits to Medicare-eligible Department of Defense 

(DOD) retirees, their dependents, and survivors. 

Some of the accruing costs of postretirement benefits are captured in the 

budget authority and outlays for agencies. The full cost of pension benefits 

was recognized in budget authority and outlays at the agency level 

beginning in 1985 for military personnel and for civilian employees hired 

since 1984. Beginning in 2003, DOD will budget on an accrual basis for the 

retiree health care costs for Medicare-eligible military retirees. In these 

0

5

10

15

20

25

2000 2010 2020 2030 2040 2050 2060 2075

Percent of GDP

Social Security

Medicare

Medicaid

Source: Office of the Chief Actuary, Social Security Administration, Office of the Actuary, Centers for Medicare and Medicaid Services, and Congressional Budget Office.
Page 21 GAO-03-213 Fiscal Exposures

cases, payments are made between accounts within the budget so that 

outlays are recorded as program costs but do not affect total budget 

outlays and the deficit/surplus. However, for most civilian employees hired 

before 1984, less than half the government’s share of accruing pension 

costs are recognized in the budget and none of the accruing costs of retiree 

health benefits for civilian or military retirees under the age of 65 are 

recognized in the budget as earned. In an effort to improve the budgetary 

treatment of accruing employee benefits, the Administration proposed that 

agencies be required to request budget authority for the government’s full 

share of the accruing costs of all pension and retiree health benefits for 

their employees and pay it to the benefit paying funds. 

Environmental cleanup costs resulting from federal operations represent 

another fiscal exposure. These constitute an explicit liability since the 

federal government is legally required to clean up hazardous wastes that 

result from its operations. These costs, however, usually are not paid until 

many years after the government has committed to the operation 

generating the waste. As required under generally accepted federal 

accounting standards, the fiscal year 2001 consolidated financial statement 

reported a liability of $307 billion for estimated environmental cleanup and 

disposal costs.20 Although a liability for future costs is reported on the 

financial statements, current budget guidance requires agencies to request 

only the budget authority expected to be obligated during the budget year 

for cleanup activities. As a result, these future costs are not shown in the 

budget and may not even be provided in backup materials to policymakers 

at the time decisions are being made to undertake the operations that may 

generate environmental cleanup costs. For example, when a weapon 

system using nuclear materials is built, there would be no disposal costs 

shown in the budget since the disposal would not occur until some time 

after that budget period.21 

20About 98 percent of the $307 billion in environmental liabilities that were reported in fiscal 

year 2001 were associated with the Department of Energy and DOD. The Department of 

Energy, which received a clean opinion on its financial statements, reported environmental 

liabilities of $238 billion. DOD reported $63 billion in environmental liabilities. Auditors, 

however, were unable to render an opinion on DOD’s fiscal year 2001 financial statements, 

in part, because of DOD’s inability to comply with requirements for environmental liabilities. 

21Unlike what is required in the budget, current federal accounting standards require 

agencies to estimate and report the full liability of cleanup costs for weapon systems when 

they are deemed probable and measurable. 
Page 22 GAO-03-213 Fiscal Exposures

Federal insurance is provided to individuals and businesses against a wide 

variety of risks, ranging from natural disasters under the flood and crop 

insurance programs to bank and employer bankruptcies under the deposit 

and pension insurance programs. While the face value of insurance 

overstates the likely cost to the government, these programs do expose the 

government to future, and potentially significant, draws on resources that 

may not be adequately reflected in the budget at the time the decision to 

extend the insurance is being made. We have previously reported22 that 

current budget reporting may not signal policymakers to the risk assumed 

by the government at the time the decision to extend the insurance is made. 

For example, at the time budget decisions were being made for fiscal year

2003, the budget showed a positive budget estimate (i.e., revenues) for the 

Pension Benefit Guaranty Corporation of about $1.3 billion. The financial 

statements available at the same time showed an estimated liability for 

future benefits of $13.5 billion and a positive net position of about 

$7.8 billion. At the same time, OMB estimated the future cost of the risk 

assumed by the government for vested covered benefits as $51 billion.23

Clearly, these different estimates provided significantly different pictures 

of the program’s health and its potential draw on future resources. 

22See GAO/AIMD-97-16.

23According to OMB, this estimate is for the future costs of vested covered benefits and does 

not assume future growth in such benefits.
Page 23 GAO-03-213 Fiscal Exposures

The government’s purchase and ownership of government-owned facilities 

and other assets may create an expectation for future spending. If budget 

authority for a capital project is not fully funded at the time the 

commitment to buy the asset is made, the government’s costs will likely be 

understated. Future Congresses and administrations may be forced to 

choose between having an incomplete and unusable asset and continuing 

to fund the project. In cases where funding is provided for only part of a 

project and that part by itself is not usable, then policymakers may feel 

compelled to continue funding to complete the project. 24 Moreover, the 

total life-cycle cost of an asset includes not only all initial direct and 

indirect acquisition costs but also all periodic or continuing costs of 

operation and maintenance over the asset’s expected useful life and any 

costs to decommission or dispose of the asset. While OMB requires 

agencies to develop capital asset plans for major acquisitions and 

encourages long-term agency capital plans—both of which should include 

life-cycle costs—these plans are not routinely provided to Congress. 

Budget authority generally is provided only for the acquisition costs 

associated with capital asset purchases, not for the life-cycle costs 

necessary to operate, maintain, and dispose of the asset. While this may be 

appropriate for budget control purposes, the result, in most cases, is that 

the budgetary focus is on the initial cost of assets even if this cost 

represents only a fraction of the total costs flowing from the purchase 

decision. 

24As part of our prior work on incremental funding, we reviewed selected agency budget 

justifications and other agency data to identify the extent to which capital projects were 

incrementally funded. The 2001 report identified civilian nondefense capital projects with 

total estimated costs of $176 billion and determined that about $76 billion (44 percent) of 

total costs were incrementally funded—an amount that does not include high technology 

projects. Incremental funding can be justified for such projects because funding provided 

on an incremental basis can provide useful knowledge even if no additional funding is 

provided. This review also found that data supporting capital acquisitions in general may be 

incomplete and/or unclear, thus making it difficult to determine future costs or whether the 

funding provided would produce a usable asset. See GAO-01-432R.
Page 24 GAO-03-213 Fiscal Exposures

Other exposures facing the government also present significant definitional 

and measurement challenges because (1) the existence and scope of the 

government’s commitment prior to the occurrence of the underlying event 

is unclear, (2) the occurrence and timing of the underlying event is 

unknown, and (3) the ultimate costs are difficult to predict. Examples 

include the bailout of large institutions or disaster relief.25 The extent of the 

government’s commitment to cover these costs may not be explicitly stated 

before the event but rather may be implied by the role of government. Not 

only is the extent of the government’s commitment unknown before the 

occurrence of the event, the timing and magnitude of these exposures are 

contingent upon the occurrence or nonoccurrence of some future event. 

For example, even in cases where it is not explicitly required by law, the 

federal government may be expected to provide for the financial losses that 

arise from catastrophes and major disasters such as earthquakes, 

hurricanes, terrorist attacks, and epidemics, the timing and magnitude of 

which are unknown until they occur. There may also be an expectation that 

the federal government would intervene to bailout the losses of state and 

local governments and large institutions of economic significance. 

Fiscal Exposures 

Involve Complex 

Measurement and 

Budgeting Challenges

Determining the appropriate budgetary treatment for fiscal exposures is 

complicated by uncertainties. First, there is definitional uncertainty i.e., 

uncertainty about what constitutes an exposure certain enough to include 

as a claim on budgetary resources. In addition, there are difficulties in 

estimating future costs. The extent to which either or both of these factors 

contribute to the uncertainty about future costs varies among fiscal 

exposures. As a result, policymakers should consider both the degree of 

certainty of the government’s obligation and the availability of reasonable 

cost estimates when weighing the trade-offs associated with various 

approaches to help increase the attention paid to particular exposures 

when making budget decisions. 

25Another issue associated with implicit, contingent exposures, such as bailouts and disaster 

relief, is that recognition of these potential costs may create moral hazards in that private 

parties may make too little effort to diminish their risk. 
Page 25 GAO-03-213 Fiscal Exposures

Whether an exposure is certain enough to be included as a claim on 

budgetary resources is a key question. As noted earlier, the extent of the 

government’s obligation varies along the spectrum of fiscal exposures. 

Some fiscal exposures are reported as liabilities of the federal government 

and represent legal obligations to make payments; others are not. For 

example, the $3.3 billion in publicly held debt is a clear financial liability. 

On the other hand, generally accepted federal accounting standards do not 

view future social insurance benefits as a liability, except for the amount 

due and payable at fiscal year end. The standard, however, also requires 

that supplementary stewardship information be reported to facilitate an 

assessment of the program’s long-term sustainability and the ability of the 

program and the nation to raise resources from future program participants 

to pay for benefits.26 The standard for social insurance is a compromise 

between parties with widely divergent views about the government’s 

obligation to make future benefit payments. Proponents of the standard 

point out that the underlying laws establishing a claim to payment can (and 

have been) changed and there is no legal obligation by the government to 

pay benefits once the trust funds that finance these programs have been 

exhausted. Others, however, believe that a liability should be recognized 

for the net benefits expected to be paid in future periods to current 

participants. Any changes in budgetary treatment would require similar 

discussion and compromises concerning which items should be recognized 

as exposures. There may be further disagreement over which of these 

exposures should be directly recognized in the primary budget data.27

Finally, even if agreement can be reached that an exposure theoretically

should be included in the primary budget data, reasonable cost estimates 

may not be available. For some exposures, estimates could be generated 

given time and attention; for others that are contingent on future events, 

estimates are more problematic. 

Several factors affect whether reasonable cost estimates are currently 

available or can be generated. The generation of reasonable cost estimates 

depends not only on the development of appropriate methodologies but 

26For example, stewardship information generally includes narrative and/or graphic 

presentation of items including (1) long-range cashflow projections, (2) long-range 

projections of the ratio of contributors to beneficiaries and (3) actuarial present values of 

(a) future benefits for and (b) contributions and tax income from or on behalf of current and 

future program participants. 

27 In this report, primary budget data refers to budget authority, obligations, outlays, and the 

deficit/surplus. 
Page 26 GAO-03-213 Fiscal Exposures

also on the acceptance and quality of underlying assumptions and data. 

Estimates for some exposures, such as pension benefits, are based on 

accepted methodologies and are reported as liabilities in financial 

statements. The future costs of some exposures are inherently more 

difficult to estimate than others. For example, some exposures, such as 

bank and pension insurance, are dependent on many economic and 

behavioral variables. Since these are inherently uncertain, there will 

always be some uncertainty surrounding the estimated future costs of such 

programs. Lack of adequate data may also be a factor in the reliability of 

cost estimates. For example, postretirement health benefits and 

environmental cleanup and disposal costs are reported as liabilities on the 

balance sheet because they are considered to meet the criteria of probable 

and reasonably measurable, but audits have revealed weaknesses that may 

affect the reliability of these reported amounts. The fiscal year 2000 

liability for military postretirement health benefits could not be accurately 

estimated because some of the underlying costs and demographic and 

workload data used to develop the estimate were not reliable. The 

estimate for environmental cleanup costs is uncertain, in part, because the 

dimensions of the cleanup problem remain unclear and the technology to 

address the problem is evolving. 

Generally speaking, the more direct and explicit the fiscal exposure, and 

thus the more certain the existence of a claim and its ultimate costs, the 

greater the suitability of including estimated costs directly into the primary 

budget data when doing so would enhance up-front control of spending. 

Even when agreement can be reached that an explicit liability exists, 

efforts may be needed to develop reasonable cost estimates. For 

exposures that are implicit and/or contingent on future events, cost 

estimation challenges and underlying questions about the existence of a 

government commitment raise substantial questions. Perhaps most 

challenging are those exposures that are both implicit and contingent on 

unknown events, such as bailouts or disaster relief. In these cases, the 

government may not have any current legal obligation and the magnitude 

and timing of the underlying event is unknown. These exposures are very 

difficult to estimate and uncertain as to whether they really represent 

claims to future resources. 
Page 27 GAO-03-213 Fiscal Exposures

Diversity of Fiscal 

Exposures Suggests 

that Tailored 

Approaches Would Be 

More Feasible than an 

Across-the-Board 

Approach

The variety of certainties (and uncertainties) associated with fiscal 

exposures suggests that no single approach to increasing attention to these 

future costs will work in all cases. Various approaches might be 

considered in a framework organized around three possible objectives: 

(1) improving the transparency of fiscal exposures, (2) prompting more 

deliberation about fiscal exposures, and (3) improving budget incentives to 

address fiscal exposures. Several broad approaches for helping to achieve 

these objectives discussed here are (1) improving supplementary reporting, 

(2) providing opportunities for explicit consideration in the budget 

process, and (3) incorporating the costs of fiscal exposures into the 

primary budget data. A number of options could be used to implement 

each of these approaches. Figure 4 displays how different approaches 

could be used to achieve a primary objective by providing illustrative 

options for implementing each approach. These options are meant to 

illustrate how different approaches may be used depending on the primary 

objective to be achieved and what may be feasible to implement. Not only 

do these approaches achieve the various objectives to differing degrees, 

but they also vary in the implementation challenges involved. 

Figure 4: Overview of Possible Approaches

Primary objective: 

To improve transparency 

of fiscal exposures

Primary objective:

To prompt more 

deliberation about fiscal 

exposures 

Primary objective:

To improve budgetary 

incentives to address 

fiscal exposures

Approach I: 

Improve supplemental 

reporting

Approach II:

Provide opportunities for 

explicit consideration of 

fiscal exposures in the 

budget process

Approach III: 

Incorporate cost 

estimates of fiscal 

exposures directly into 

primary budget data

Option:

• Provide special analysis for select exposures in the 

Analytical Perspectives of the President’s budget

• Report, for select exposures, the “exposure level” by 

budget account in the Program and Financing schedule of 

the President’s budget

• Require report on fiscal exposures

Option:

• Permit a point of order to encourage explicit consideration of 

exposures

• Establish a trigger to signal when exposure level increases 

beyond a specified amount 

Option:

• Use accrual-based costs to measure budget authority and 

possibly budget outlays for select exposures when doing so 

would enhance up-front control of spending

Source: GAO.
Page 28 GAO-03-213 Fiscal Exposures

The diverse nature of exposures and the significant differences in the 

strength of the government’s underlying obligation, combined with the 

varying quality and amount of cost information available outside the budget 

process, suggest that across-the-board changes in budget reporting or 

process would not be appropriate. Instead, targeted approaches for 

different types of fiscal exposures would be most useful for incorporating a 

longer-term perspective into the budget. Changes in the information 

provided, the budgetary process, or budgetary incentives could be tailored 

selectively for different categories of fiscal exposures to address specific 

budgetary objectives and implementation challenges. A discussion of each 

of the three approaches and related options follows. 

Approach I: Improve 

Supplemental Reporting 

Improved supplemental reporting on fiscal exposures would make 

information more accessible to decisionmakers without introducing 

additional uncertainty and complexity directly into the budget. With this 

approach, estimates of the government’s exposure would be reported in 

various budget documents, but the current basis of reporting primary 

budget data—budget authority, obligations, outlays, and the 

deficit/surplus—would not be changed. This type of supplemental 

information is currently available in various places for some programs. For 

example, the stewardship section in the Analytical Perspectives of the 

President’s budget has included long-range (75 year) budget projections 

assuming continuation of current policies as well as a discussion of the 

government’s balance sheet, which includes some liabilities not yet 

included in the primary budget data. The stewardship section of financial 

statements contains information to facilitate the assessment of the longterm sustainability of social insurance programs. In some cases, improving 

supplemental reporting may simply be a matter of highlighting or 

expanding existing analytical work. For example, long-range projections 

and simulations of the budget as a whole could be continued and improved, 

including analysis to help assess driving factors, such as demographics and 

economic changes, and to improve understanding of the range and 

magnitude of alternatives. 

As outlined in figure 5, improved supplemental reporting on fiscal 

exposures could be achieved in a number of ways. In addition to the 

continuation and further development of long-range projections of the 

budget as a whole, three options to consider include (1) providing special 

analyses for certain, significant fiscal exposures in the Analytical 

Perspectives of the President’s budget, (2) reporting estimated costs of 

certain fiscal exposures as a separate notational line—“exposure level”—in 
Page 29 GAO-03-213 Fiscal Exposures

the Program and Financing schedule of the President’s budget, or 

(3) requiring a report on fiscal exposures. 

Figure 5: Possible Options For Improving Supplemental Reporting 

Approach I:

Improve supplemental reporting 

Objective:

To improve transparency of fiscal exposures

Option:

Report the “exposure level” by budget 

account in the Program and Financing 

schedule of the President’s budget

Advantages:

Discloses potential future costs

Does not subject budget data to increased estimation 

uncertainty 

Allows time to develop, test, and improve estimation 

methodologies

Allows time to assess feasibility of further integration 

of cost estimates into budget data

Disadvantages:

Does not directly affect budgetary incentives to address exposures

Does not require explicit consideration of exposures

Does not provide strong incentives to improve cost estimates

Raises implementation issues: 

 - need criteria to determine which items should be included as 

 “exposures” for supplemental reporting 

- increases reporting burden 

- reporting by account would require determining the alignment of 

 “exposure level” to specific budget accounts

Option:

Provide special analysis for select 

exposures in Analytical Perspectives 

of the President’s budget

Option:

Require report on fiscal exposures

Source: GAO.
Page 30 GAO-03-213 Fiscal Exposures

Federal government insurance programs provide a prime example of where 

special analysis of a particular type of exposure may be appropriate. Our 

previous work has shown that the current cash- and obligation-based 

budget generally provides incomplete or misleading information on the 

government’s cost of federal insurance programs.28 One reform option 

would be to require an estimate of the budget authority likely to be needed 

to cover an estimate of the cost of the risk assumed29 by the government. 

However, given the difficulties in estimating the cost of risk assumed, we 

concluded that supplemental reporting of the cost of the risk assumed by 

federal insurance programs had several attractive features. It would allow 

time to (1) assess the reliability of cost estimates, (2) develop and refine 

estimation methodologies, and (3) formulate cost-effective reporting. As 

another example, supplemental analysis could be provided for uncertain 

exposures, such as future operation and maintenance costs associated with 

asset acquisitions. 

28See GAO/AIMD-97-16.

29The estimation of the cost of the risk assumed by the federal government would be 

analogous to premium rate setting in that it would look at the long-term expected costs of 

the insurance commitment at the time the insurance commitment is extended. The risk 

assumed by the government is essentially that portion of the full risk-based premium not 

charged to the insured.
Page 31 GAO-03-213 Fiscal Exposures

While providing a special analysis in the Analytical Perspectives would 

provide additional information, it is not as directly linked to specific budget 

proposals as is possible. Another option would be to routinely report the 

future estimated costs of certain exposures as a separate notational line in 

the Program and Financing schedule of the President’s budget. This would 

move beyond the current budget practice of generally including only 

budget authority, obligations, and outlays for initial acquisition costs of an 

asset to adding a new measure that reports the “exposure level” as a 

notational item in the Program and Financing schedule. For example, an 

estimate of the future operating and maintenance costs associated with 

capital acquisitions could be reported as the “exposure level” in the 

Program and Financing schedule for capital accounts that include the 

initial capital acquisition costs. Similarly, the future funding needs 

associated with incrementally funded projects could be included in the 

Program and Financing schedule of the budget account that includes the 

capital acquisition. This type of notational approach in the Program and 

Financing schedule could also be used for future environmental cleanup 

costs associated with an asset acquisition. In these cases, the “exposure 

level” could be used to capture the exposure associated with the capital 

acquisitions in each year.30 As opposed to cash, the “exposure level” might 

be reported in present value terms. Including exposure levels as part of the 

budget presentations at the account level directly in the budget documents 

would make such information available along with the initial acquisition 

costs, rather than in an additional document. Specifying the estimated 

potential future costs associated with current decisions would promote 

transparency. 

Another approach, which could stand alone or be done along with 

including exposure levels in the Program and Financing schedule, would be 

to require a report on fiscal exposures. For example, such a report could 

provide a concise list and description of fiscal exposures, cost estimates, 

where possible, and an assessment of the methodologies and data used to 

produce cost estimates. Explicitly and directly integrating the report on 

specific fiscal exposures with long-range projections and analysis of the 

budget as a whole would increase its usefulness for assessing the potential 

implications for long-range fiscal sustainability and flexibility. If this type 

of report was issued as part of or near the time of the release of the 

President’s budget, it could be used to help inform and provide long-term 

context to budget deliberations. 

30See GAO-03-219.
Page 32 GAO-03-213 Fiscal Exposures

These types of supplemental reporting have the advantage of providing 

policymakers with a long-term perspective when making current decisions 

and enabling those concerned about exposures to raise questions and 

challenges in the budget debate. However, they do not in themselves 

change incentives or require explicit consideration of costs. This is 

because estimates of future costs would not directly affect spending or the 

overall budget totals. Since this information would be excluded from the 

primary budget data, it may or may not be used in budget decisions. As a 

result, there may be little incentive to improve cost estimates or to fully 

consider these potential costs. However, the uncertainties around such 

cost estimates may argue for proceeding gradually with efforts to further 

incorporate them into the budget. Supplemental reporting would allow 

time to improve cost estimation methodologies and increase users’ comfort 

levels with the estimates. Such reporting might then be seen as a first step 

toward more explicit consideration in the budget. In addition, because the 

primary budget data are not affected, this type of supplemental reporting 

would avoid increasing the gap between the deficit and borrowing needs. 

Approach II: Provide 

Opportunities for Explicit 

Consideration of Fiscal 

Exposures in the Budget 

Process

Further along the continuum from supplemental reporting to including 

costs in the primary budget data are budget process changes. Budget 

process mechanisms would go beyond simply providing more information 

on fiscal exposures to establishing opportunities for explicit consideration 

of these exposures. Two possible options to consider are shown in figure 6. 

Congress could modify budget rules to provide for a point of order against 

any proposed legislation that creates new exposures or increases the 

estimated costs of existing exposures over some specified level. 

Alternatively, revised rules could provide for a point of order against any 

proposed legislation that does not include estimates of the potential costs 

of fiscal exposures created by the legislation. A second budget process 

option would be to establish triggers that require some action when the 

estimated future costs of a given exposure rise above some specified 

threshold.
Page 33 GAO-03-213 Fiscal Exposures

Figure 6: Possible Options for Providing Opportunities For Explicit Consideration of Fiscal Exposures

Advantages:

Encourages explicit consideration of potential future costs

Does not subject primary budget data to increased 

estimation uncertainty 

Allows time to assess feasibility of further integration of 

cost estimates into primary budget data

or 

Approach II:

Provide opportunities for explicit consideration of fiscal exposures 

in the budget process

Objective:

To prompt more deliberation about fiscal exposures

Option:

Establish a trigger to signal when exposure level increases beyond a 

specified amount 

Disadvantages:

Raises significant implementation issues:

- increases complexity of already complex process

- need accepted criteria to determine which items should be 

 included as “exposures” subject to point of order or trigger

- need to determine responsibility for developing estimates

- increases reporting burden 

- need to agree on acceptable threshold

Raises questions about effectiveness: 

- inherent uncertainty of estimates

- ability to waive point of order

Option:

Permit a point of order to encourage explicit 

consideration of exposures

Source: GAO.
Page 34 GAO-03-213 Fiscal Exposures

A key advantage of permitting points of order with respect to fiscal 

exposures is that they could result in explicit consideration of these 

potential costs without subjecting the primary budget data to increased 

uncertainty from estimation difficulties. It would be similar to procedural 

rules for Social Security that permit points of order against the 

consideration of legislation that would weaken the program’s financial 

condition. A different point of order method would be to permit a point of 

order that could block legislation lacking appropriate cost information 

about an exposure. This would be similar to unfunded mandates legislation 

that permits a point of order to be raised against proposed legislation that 

imposes mandates if a Congressional Budget Office mandates estimate has 

not been published in the committee report or the Congressional Record.

31 

This alternative would provide a greater incentive to improve cost 

information than simply requiring supplemental information because it 

presents congressional members with an opportunity to challenge the 

creation of programs without sufficient information on long-term costs. 

Despite the potential benefits of permitting some type of point of order, 

such a budget process change is not without significant implementation 

challenges. Criteria would have to be agreed on for determining which 

activities and programs would be considered as fiscal exposures subject to 

a point of order. Mechanisms also would need to be developed to deal with 

the uncertainties and volatility inherent in cost estimates associated with 

fiscal exposures. Further, this type of budget process change would 

increase the complexity of an already complicated process. Since many 

activities—including most capital acquisitions—routinely would result in 

exposures, such as life-cycle costs, a point of order may become 

burdensome and potentially ignored. Points of order also are limited 

because they apply only to new legislation and then only if raised. Further, 

they can be waived or overruled by a vote of the Members. Finally, a budget 

process change establishing a point of order would require an amendment 

to the Congressional Budget Act of 1974 or a change to committee rules. 

31Unfunded Mandate Reform Act of 1995, Pub. L. 104-4, §423.
Page 35 GAO-03-213 Fiscal Exposures

A different budget process approach would be to establish triggers that 

address the growth in existing exposures. In this case, triggers would be 

established to signal when the future costs of exposures rise above a 

certain level. Reaching the trigger threshold would require some action.32 

One possible trigger could be the future costs of a specific exposure 

exceeding a specified dollar amount, but other thresholds are also possible. 

For example, for the Medicare program, these might be a specified floor in 

the trust fund, such as the balance falling below 1-year’s worth of 

payments, the percentage of gross domestic product devoted to Medicare, 

or program spending per enrollee. The use of triggers would require 

agreement not only on the limits but on what will happen when the limits 

are reached. A trigger could be “hard”—including specific provisions that 

would automatically go into effect if the trigger is reached—or “soft”—

requiring some action to be taken to address costs or reaffirm acceptance 

of the increase in potential fiscal exposure.33 For example, reaching a 

trigger could require the policymakers to propose how to deal with growth 

in the Medicare program. This type of “soft” trigger would help ensure that 

Congress and the President periodically review and decide how to address 

exposures. 

Like a point of order, the key benefit of a trigger is that it would require 

explicit consideration of exposures facing the government without adding 

uncertainty to primary budget data. However, like points of order, 

establishing triggers would increase the complexities of an already 

complex budget process. Further, the implementation issues associated 

with determining the trigger threshold and the type of action required 

would have to be addressed.

34 A budget process change establishing a 

trigger would require an amendment to the Congressional Budget Act of

1974 or a change to committee rules. 

32U.S. General Accounting Office, Medicare Reform: Issues Associated With General 

Revenue Financing, GAO/T-AIMD-00-126 (Washington, D.C.: Mar. 27, 2000). 

33Rules established by the current Congress can be changed by a subsequent Congress.

34Such a procedure would require some assurance of unbiased estimates.
Page 36 GAO-03-213 Fiscal Exposures

Approach III: Incorporate 

Cost Estimates of Fiscal 

Exposures Directly into the 

Primary Budget Data 

Incorporating the estimated future costs of fiscal exposures directly into 

the budget would represent the greatest change outlined in our spectrum. 

For example, as shown in figure 7, accrual-based costs could be used to 

measure budget authority needed and possibly outlays for select programs 

when doing so would enhance obligation-based control. Since estimated 

costs would be incorporated directly into the primary budget data, these 

options are most suitable for explicit exposures for which reasonable cost 

estimates are available. 
Page 37 GAO-03-213 Fiscal Exposures

Figure 7: Possible Options for Incorporating Costs Directly into the Primary Budget 

Data

The budget’s measurement basis can greatly affect the timing of when a 

program or activity appears in the budget. Accrual-based measurement 

recognizes cost at the time the activity generating the revenue, consuming 

the resources, or increasing the liability takes place regardless of when the 

associated cash flows occur. Conversely, cash-based measurement 

recognizes receipts and outlays at the time cash is received or paid 

regardless of when the activity generating the revenue, consuming the 

Disadvantages

Subjects primary budget data to 

estimation uncertainty 

Raises potential oversight and 

implementation issues: 

- need criteria to determine 

 which exposures should be 

 accrued 

- increases reporting burden

- increases complexity of an 

 already complex process

- for outlay approach, 

 increases difference between 

 reported deficit/surplus and 

 government’s borrowing 

 needs

Advantages

Provides earlier cost recognition 

at time decisions are being made

Improves budgetary incentives to 

address costs/risks

Approach III:

Incorporate cost estimates of fiscal 

exposures directly into the primary 

budget data

Objective:

To improve budgetary incentives to 

address fiscal exposures

Option:

Use accrual-based costs to measure budget authority and 

possibly budget outlays for select exposures when doing so 

would enhance up-front control of spending

Source: GAO.
Page 38 GAO-03-213 Fiscal Exposures

resources, or increasing the liability occurs. The U.S. budget is neither 

accrual nor pure cash; it is obligation based. Obligation-based budgeting is 

designed to ensure that agencies do not incur legal obligations unless and 

until Congress provides authority for agencies for that purpose. However, 

with limited exceptions, the amounts to be obligated are measured on a 

cash or cash equivalent basis and the deficit/surplus—a key focus of the 

policy debate—represents the difference between cash receipts and cash 

outlays in a given year. As a result, the U.S. budget is often referred to as 

cash based as well as obligation based. Cash measurement for budgeting 

has the advantage of being recognized as an accepted measure of the 

government’s impact on the economy, which is an important gauge of fiscal 

policy.

Although the current cash- and obligation-based budget has several 

benefits, the United States has recognized the contribution accrual-based 

measurement can make to budgeting. Since about 1955, interest has been 

accrued in the budget for Treasury securities held by the public. Even 

before 1955, a portion of the accruing costs for civilian employee pensions 

had been recognized in the budget. We have advocated the selective use of 

accrual measures in the budget to better reflect costs at the time decisions 

were made. The budget has been modified gradually to use accrual-based 

measurement for certain programs in areas where doing so would enhance 

up-front recognition of costs. For example, the accruing costs of military 

pension benefits have been included in the budget at the program level 

since 1985 and the Federal Credit Reform Act of 1990 changed the method 

of controlling and accounting for credit programs to an accrual basis to 

provide more timely recognition of their costs. 

Prior to credit reform, obligations measured on a cash basis for credit 

programs sent the wrong signals about the government's exposure. The 

full amount of direct loans was reported as an outlay, ignoring the fact that 

many would be repaid. In contrast, for loan guarantees, initially no outlays 

were reported, ignoring the fact that some guaranteed loans would be 

defaulted upon and require budget outlays. Consequently, the use of cashbased measurement overstated the cost of direct loans in the year they 

were made and understated the costs of loan guarantees in the year they 

were issued. This deficient reporting skewed cost comparisons between 

credit and grant programs with similar purposes but different funding 

approaches. The relative cost of credit programs and other federal 

spending was misrepresented. Credit reform addressed the shortfalls of 

cash-based measurement for credit programs by requiring the budget to 

include the estimated cost to the federal government over the entire life of 
Page 39 GAO-03-213 Fiscal Exposures

the loan or loan guarantee, calculated on a net present value basis. By 

incorporating accrual cost measures in the budget for credit programs, 

credit reform improved cost comparisons and better reflected the 

government’s ultimate costs at the time decisions to extend the credit were 

being made. 

Similar concerns about the shortcomings of cash-based measurements for 

other programs that involve cash flows over many years, such as pensions 

and insurance, stimulated interest in whether further incorporation of 

accruals in the budget would be useful. We reviewed the experiences of six 

countries that had adopted, or planned to adopt, accrual-based budgeting.35 

In this work, we noted that the use of accrual-based measurement 

selectively within the obligation-based budget would result in earlier cost 

recognition for some major exposures such as employee retirement 

benefits, insurance, and environmental clean-up costs. In these cases, if 

reasonable cost estimates are available, the use of accrual-based 

measurement would help reinforce the up-front control focus of the 

obligation-based budget. 

However, we also noted some limitations and concerns. We pointed out 

that relative to the obligation-based budget, accrual-based measurement 

would delay cost recognition of capital assets by spreading the costs over 

the life of the assets36 and for some government activities, such as salaries 

and grants, there generally would not be significant differences between 

cash and accrual amounts. Further, the use of accrual measurement needs 

to be considered carefully to avoid subjecting the primary budget data to 

large and volatile reestimates. We also pointed out that accrual budgeting 

based on current federal accounting standards would not recognize social 

insurance benefits because those standards do not view social insurance as 

a liability beyond the amount due and payable to current beneficiaries at 

the end of the period. We suggested alternative budgetary approaches 

could be used to recognize the future costs of Social Security benefits. For 

example, Social Security outlays could be recorded in the same amount as 

Social Security receipts to reflect the government’s commitment to spend 

those amounts on benefits in the future. Such an approach may serve to 

prompt earlier recognition of future claims supported by earmarked 

35See GAO/AIMD-00-57.

36Accrual budgeting for capital assets based on depreciation matches budget costs with the 

provision of goods and services but, without compensating controls, raises issues about upfront cost recognition and control over capital asset acquisitions. 
Page 40 GAO-03-213 Fiscal Exposures

receipts. On the other hand, this approach would represent a significant 

change in budgetary treatment and could reduce fiscal discipline for 

spending in programs financed by earmarked receipts.

Two methods could be used to incorporate accrual-based costs directly 

into the budget for fiscal exposures. One method (the aggregate outlay 

method) would be to use accrual-based measurement to recognize costs in 

both budget authority needed and net outlays. Under this method, the 

accrued cost of the fiscal exposure would be included in the budget totals 

and therefore in the budget deficit/surplus. This method is similar to that 

used for credit programs under credit reform. Another method (the 

aggregate budget authority method) would use accrual-based 

measurement to recognize costs in budget authority at the account level 

and in the aggregate budget totals. Accrued costs would also be reflected 

in net outlays at the account level but then would be offset by a transfer 

within the budget to another account. Aggregate net outlays and thus the 

deficit/surplus would continue to be reported on a cash basis. This is 

similar to the method currently used for some employee pension costs. 

A key advantage of budgeting for the accruing costs of exposures is the 

recognition of the government's costs at the time decisions are being made 

to commit the government. This earlier recognition of costs improves the 

information available to policymakers about the costs associated with 

current decisions and may improve the incentives to manage these costs. 

However, this benefit is dependent on reasonable, unbiased estimates of 

the government's costs. For some programs, such as life insurance, 

reasonable cost estimates may be available, but for other programs such as 

deposit insurance, health care costs, or social insurance benefits, estimates 

are less certain. Because the future costs of some exposures are 

dependent upon many economic and technical variables that cannot be 

known in advance, there will always be uncertainty in cost estimates. Such 

uncertainty makes using accrual-based measurement directly in the budget 

more difficult. Budgeting for accruing costs may make sense for some 

exposures but not for others because the certainty of the government’s 

commitment and the availability of reasonable, unbiased estimates varies 

across the different fiscal exposures. 
Page 41 GAO-03-213 Fiscal Exposures

Using accrual-based measurement in the budget has the potential to

increase the complexity of the budget in several ways. Complexity may be

increased through the use of (1) sophisticated estimation models, 

(2) multiple budget accounts and/or presentations to reflect cash flows and 

program reserves, and (3) procedures to handle reestimates of costs 

reported as budget authority and/or outlays. Although recognition of costs 

may be improved, general understanding of budget data and the budget 

process may decline. Further, if estimates are seen as short-term gaming or 

overly erratic, credibility is eroded. Stopping short of using accrual-based 

measurement for aggregate outlays and measuring only budget authority 

and agency outlays on an accrual basis would mitigate some of the 

potential problems associated with accrual budgeting while providing 

information on future costs. For example, if aggregate outlays remain on a 

cash basis and only budget authority and agency outlays are accrual based, 

there would be no need for nonbudgetary accounts37 that are necessary to 

hold reserves under an aggregate outlay approach. This aggregate budget 

authority option also would avoid introducing estimation uncertainty into 

the budget deficit/surplus that with limited exception is calculated as net 

cash outlays. However, since the accrual-based cost would not be reflected 

in the budget deficit/surplus, it is unclear how much this approach would 

affect the budget decision-making process. 

Conclusion Today’s budget decisions, in part, shape the choices and resources 

available to future decisionmakers and taxpayers. Accordingly, today’s 

budget decisions involve tradeoffs between satisfying current needs and 

fulfilling stewardship responsibilities to future generations’ budget and 

economy. The federal government undertakes a wide range of 

responsibilities, programs, and activities that may obligate the government 

to future spending or simply create an expectation for such spending. 

Current budget reporting, however, is not always designed to promote the 

recognition and explicit consideration of some of these “fiscal exposures.” 

These exposures range from explicit liabilities to the implicit promises 

embedded in current policy or public expectations. Failure to understand 

and address these exposures can have significant consequences. 

Regardless of whether the government is legally required or simply 

37Nonbudgetary accounts appear in the budget document for information purposes but are 

not included in the budget totals for budget authority or outlays. They account for 

transactions of the government that do not belong within the budget because they are a 

means of financing and do not represent a cost to the government.
Page 42 GAO-03-213 Fiscal Exposures

compelled by circumstances to provide funding in the future, these 

exposures may encumber future budgets and constrain fiscal policy. Not 

capturing the long-term costs of current decisions limits Congress’s ability 

to control the government’s fiscal exposures at the time decisions are 

made.

The diversity of items that could be considered fiscal exposures increases 

the difficulty of determining which items should be considered and how 

and to what extent they should be handled in the budget process. 

Specifically, budgeting for fiscal exposures is complicated by difficulties in 

(1) determining which items should be considered fiscal exposures and 

(2) estimating their costs. Despite these challenges, the potentially 

significant effects of these items on the nation’s future fiscal condition 

warrant efforts to improve disclosure and oversight. 

The diversity of fiscal exposures suggests that across-the-board changes in 

budget reporting or process would not be the most appropriate way to 

proceed. Instead, it would be more useful to look at different types of fiscal 

exposures and tailor changes to address specific budgetary objectives and 

implementation challenges. Improved supplemental reporting would be 

helpful in increasing awareness without introducing uncertainty and 

complexity into the primary budget data. In cases where the extent of the 

government’s obligation or ultimate costs (or both) is unclear, 

supplemental reporting may be the most appropriate approach. Beyond 

simply increasing awareness, adapting the budget process to facilitate 

explicit consideration of fiscal exposures might be possible. Finally, for 

exposures where the government’s obligation is explicit and reasonable 

cost estimates are available, additional steps could be taken to directly 

incorporate costs in some primary budget data when doing so would 

enhance up-front control of spending. The direct incorporation of accrualbased measures in the budget may be appropriate for selected exposures 

where such treatment would enhance obligation-based control by 

prompting the recognition of expected future costs of decisions when they 

are made. 

With complete and highly visible reporting of fiscal exposures, 

decisionmakers are better positioned to address future costs and to help 

prevent unexpected changes in fiscal policy. Since today’s decisions affect 

the choices and resources available for the future, improvements in 

budgeting for fiscal exposures are critically important. 
Page 43 GAO-03-213 Fiscal Exposures

Recommendations for 

Executive Action

OMB should report annually on fiscal exposures, including a concise list 

and description of such exposures, cost estimates, where possible, and an 

assessment of methodologies and data used to produce cost estimates for 

such exposures. In addition, where possible, OMB should report the 

estimated costs associated with certain exposures as a new budget 

concept—“exposure level”—as a notational item in the Program and 

Financing schedule of the President’s budget. For select areas where an 

explicit liability exists and there are accepted cost-estimation 

methodologies, the ultimate objective might be to include the costs directly 

in the budget when doing so would enhance obligation-based control. 

OMB also should ensure that agencies focus on improving cost estimates 

for fiscal exposures. These steps should complement and support 

continued and improved reporting of long-range projections and analysis of 

the budget as a whole to assess fiscal sustainability and flexibility.

Matters for 

Congressional 

Consideration

Congress may wish to consider exploring options for improving the 

information available and the attention given to fiscal exposures in the 

budget and budget process. If more explicit congressional consideration is 

desired, as estimates improve, Congress may wish to develop budget 

process mechanisms that prompt more deliberation about fiscal exposures 

while recognizing the uncertainty inherent in estimating some long-term 

costs. 

Agency Comments and 

Our Evaluation

We provided a draft of this report to the Office of Management and Budget 

for comment. In consultation with OMB staff, they commended GAO for 

tackling the important problem of the government’s exposure to future 

fiscal demands. OMB staff agreed that our concept of “fiscal exposure” is a 

valuable one, noting that it focuses attention on the fact that 1-year’s 

surplus or deficit is not the only, or even the best, measure of the 

government’s fiscal condition. They noted that the Administration endorses 

the view that long-range fiscal exposures should be more prominently 

highlighted in the budget documents and in the budget process, and noted 

that some of the specific recommendations are more or less consistent 

with legislation the Administration has proposed to Congress (accruals for 

pensions and retiree health care). OMB staff, however, raised two general 

concerns that are discussed below. First, they questioned whether the 

broad conceptual framework used to describe fiscal exposures had been 

fully developed to sufficiently cover all future spending. Secondly, they 

argued that the analysis of ideas for improving the recognition of fiscal 
Page 44 GAO-03-213 Fiscal Exposures

exposures in the budget could be improved by more fully considering the 

various purposes of the federal budget, such as resource allocation and 

controlling spending. In addition, they provided specific comments that we 

have incorporated in the report as appropriate. 

OMB staff stated that the term “exposure” is particularly laudable because 

it captures the contingent nature of some future budgetary requirements, 

which are critical to distinguish from the more definite, legally binding 

requirements that are categorized as “liabilities” on the financial 

statements. OMB staff also noted that the draft appropriately emphasizes 

that fiscal exposures lie along a continuum and recognized that this 

heterogeneity requires that different fiscal exposures be addressed in 

different ways for the budget documents. They, however, commented that 

the discussion of fiscal exposures could be improved by explicitly 

recognizing that in concept all, or virtually all, future spending appears on 

the continuum of fiscal exposure. For example, OMB staff pointed out that 

the Constitution establishes a responsibility to “provide for the common 

defense” and the authority for an Army and a Navy, and more than two 

centuries of experience have created an expectation that this responsibility 

will be met and the cost will be high. They stated that while the future 

costs of these functions do not appear in the financial statements, they are 

no less basic expectations of government than others that do appear there. 

We agree that it is important to model the long-term outlook for the budget 

as a whole at the macro level. Indeed, we have been doing such long-term 

modeling since 1992 and we commend OMB’s efforts to present long-term 

scenarios in the Analytical Perspectives of the President’s budget. While 

long-term modeling simulates the long-term implications of all current 

spending and revenue policies, the fiscal exposure concept is intended to 

highlight a discrete subset of programs and activities whose long-term 

costs and uncertainties warrant greater attention in current budgetary 

deliberations. 

OMB staff also stated that a number of the ideas and recommendations in 

the draft are very good, and point to improvements that should be made in 

the budget. OMB staff, however, argued that the analysis of 

recommendations should more explicitly consider their effects on the main 

purposes of budgetingto allocate resources, control agency spending, and 

set aggregate fiscal policy. We agree that the various purposes of the 

budget should be considered in assessing the merits of approaches and 

options for improving the budget treatment of fiscal exposures. We did, in 

fact, structure our discussion of potential approaches for improving the 

budget treatment of fiscal exposures around objectives of budget reforms. 
Page 45 GAO-03-213 Fiscal Exposures

As part of our illustrative examples, we provided insights into the potential 

issues for the multiple, and sometimes conflicting, purposes of the federal 

budget. We agree, however, that these issues warrant further investigation 

if specific reforms are pursued. 

As agreed with your office, unless you release this report earlier, we will 

not distribute it until 30 days from the date of this letter. At that time we 

will send copies to the Ranking Minority Member of the House Committee 

on the Budget and the chairmen and ranking minority members of the 

Senate Committee on the Budget. We are also sending copies to the 

Directors of the Office of Management and Budget and the Congressional 

Budget Office. Copies will also be made available to others upon request. 

In addition, the report is available at no charge on GAO’s Web site at 

http://www.gao.gov.

This report was prepared under the direction of Christine Bonham, 

Assistant Director, Strategic Issues, who may be reached at (202) 512-9576. 

Elizabeth McClarin was a major contributor to this report. Please contact 

me at (202) 512-9573 if you or your staff have any questions concerning this 

report. 

Sincerely yours,

Paul L. Posner

Managing Director, Strategic Issues

Federal Budget Analysis

(450021)
United States

General Accounting Office

Washington, D.C. 20548-0001

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