GAO-08-604CG

Making Tough Budget Choi

to Create a Better Future

The Honorable David M. WalkerComptroller General of the UnitedStatesNational Defense UniversityIndustrial College of the Armed ForcesFt. McNair, Washington, D.C.March 12, 2008
GAO-08-604CG 

The Case for Chan

The federal government is on a “b

platform,” and the status quo way business is unacceptable for a vareasons, including:

• Past fiscal trends and significant long-range cha• Selected trends and challenges having no boun• Additional resource demands due to Iraq, Afgha

incremental homeland security needs, and recedisasters in the United States

• Numerous government performance/accountab

challenges

• Outdated federal organizational structures, polic• Rising public expectations for demonstrable res

responsiveness
GAO-08-604CG 

Composition of Federal S

21%

10%

14%

27% 28%

2%

7%

14%

32%

45%

1967 1987 

Defense Social Security

Net interest

All other spending

Source: GAO analysis of data from the Office of Management and Budget.
GAO-08-604CG 

Federal Spending for Ma

and Discretionary Pro

14%

44%

42%

Discretionary

26%

67%

7%

1967 1987 

Net Interest 

Source: Office of Management and Budget.
GAO-08-604CG 

Composition of Fede

Receipts by Source

41%

14%

22%

23%

Individual income Corporate income Social insurance a

36%

10%

9%

46% 

3

1967 1987 

Source: Office of Management and Budget.Note: Numbers do not add to 100 percent due to rounding.
GAO-08-604CG 

Fiscal Year 2006 and 2

Deficits and Net Operatin

Fiscal Year 

2006

($ Billio

On-Budget Deficit (434) Unified Deficita (248) Net Operating Cost (450) 

Sources: Office of Management and Budget and Department of the Treasury.aIncludes $185 billion in Social Security surpluses for fiscal year 2006 and $186 billion for fiscal 

Service surpluses for fiscal year 2006 and a $5 billion deficit for fiscal year 2007.
GAO-08-604CG 

Major Fiscal Exposu

($ trillions)

2000 

• Explicit liabilities $6.9

• Publicly held debt• Military & civilian pensions & retiree 

health

• Other

0.5

13.0

3.82.76.5

--

$20.4

• Commitments & contingencies

• E.g., PBGC, undelivered orders

• Implicit exposures

• Future Social Security benefits• Future Medicare Part A benefits• Future Medicare Part B benefits• Future Medicare Part D benefits

Total

Source: 2000 and 2007 Financial Report of the United States Government.Note: Totals and percent increases may not add due to rounding. Estimates for Social Security and Medof each year and all other data are as of September 30. 
GAO-08-604CG 

How Big is Our

Growing Fiscal Burde

This fiscal burden can be translated and compare

Total –major fiscal exposures 

Burden/Net worth ratio 

Income

Median household income3 

Burden2

Per household 

Total household net worth1 

Per person Per full-time worker Disposable personal income per capita4 

Source: GAO analysis.Notes: (1) Federal Reserve Board, Flow of Funds Accounts, Table B.100, 2007:Q3 (December 6, 2007); (2) Burdens population as of 10/1/2007, from the U.S. Census Bureau; full-time workers reported by the Bureau of Economic Anahouseholds reported by the U.S. Census Bureau, in Income, Poverty, and Health Insurance Coverage in the United S

Bureau, Income, Poverty, and Health Insurance Coverage in the United States: 2006 (Aug. 2007); and (4) Bureau of 

Outlays, table 2, (Nov. 29, 2007).
GAO-08-604CG 

Potential Fiscal Outco

Under Baseline Extended (January 

Revenues and Composition of Spending as 

0

1020304050

2005 2015 2030 

Fiscal year

Net interest Social Security Medicare & Medicaid 

Revenue

Percent of GDP

a a 

Source: GAO’s January 2001 analysis.aAll other spending is net of offsetting interest receipts.
GAO-08-604CG 

Potential Fiscal Outcom

Under Alternative Simulation 

Revenues and Composition of Spending as 

0

1020304050

2007 2018 2030 

Fiscal year

Net interest Social Security Medicare & Medicaid 

Revenue

Percent of GDP

Source: GAO’s January 2008 analysis.Note: Discretionary spending grows with GDP after 2008. AMT exemption amount is retained at the 2007 level throuextended. After 2018, revenue as a share of GDP returns to its historical level of 18.3 percent of GDP plus expecteon withdrawals from retirement accounts. Medicare spending is based on the Trustees April 2007 projections adjust

Medicaid Services alternative assumption that physician payments are not reduced as specified under current law.
GAO-08-604CG 

Growth in Spending for Socia

Medicare, and Medicaid Exp

Outpace Economic Gro

Growth in constant dollars 2007-2032

71%

127%

224% 

0%

50%

100%150%200%250%

GDP Social Security

Spending

Medicaid

Spending

Source: GAO analysis based on data from the Office of the Chief Actuary, Social Security AdministratMedicare and Medicaid Services; and the Congressional Budget Office.Notes: Social Security and Medicare projections based on the intermediate assumptions of the 2007 Tbased on CBO’s August 2007 short-term Medicaid estimates and CBO’s December 2005 long-term Massumptions.
GAO-08-604CG 

Federal Tax Expenditures Ex

Discretionary Spending 

Half of the Last Decad

0

200400600800

1000120014001600

1982198319841985198619871988198919901991199219931994199519961997199819992000200

Fiscal Year

Mandatory spending excluding net inte

Sum of tax expenditure revenue loss eDiscretionary spending

Dollars in billions (in 2006 dollars)

Source: GAO analysis of OMB budget reports on tax expenditures, fiscal years 1976-2008.Note: Summing tax expenditure estimates does not take into account interactions between individual prrefundable tax credits are included in mandatory spending.
GAO-08-604CG 

State and Local Governme

Increasing Fiscal Challe

-6-4-2

02

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 

Percent of GDP

Operating Surplus/Deficit 

Sources: Historical data from National Income and Product Accounts. Historical data from 1980 – 2006using many CBO projections and assumptions, particularly for next 10 years.

Net-lending/Net-Borrowing
GAO-08-604CG 

Current Fiscal Policy 

Unsustainable

• The “Status Quo” Is Not an Option

• We face large and growing structural deficits la

demographic trends and rising health care cost

• GAO’s simulations show that balancing the bud

require actions as large as 

• Cutting total federal spending by 60 percent or• Raising federal taxes to two times today's level

• Faster Economic Growth Can Help, b

Solve the Problem

• Closing the current long-term fiscal gap based o

assumptions would require real average annuain the double-digit range every year for the next 

• During the 1990s, the economy grew at an ave

per year 

• As a result, we cannot simply grow our way out 

Tough choices will be required
GAO-08-604CG 

The Way Forward

A Three-Pronged Appro

1. Improve Financial Reporting, Public E

Performance Metrics

2. Strengthen Budget and Legislative Pr

Controls

3. Fundamentally Reexamine & Transfor

Century (i.e., entitlement programs, otspending, and tax policy)

Solutions Require Active Involveme

both the Executive and Legislative B
GAO-08-604CG 

Key Sustainability Chall

• Fiscal deficits and public debt burdens• Social insurance commitments• Health care quality, access, and costs• K-12 education system• Energy, environment, and resource protection• Tax gaps and policies• Immigration policies• Infrastructure needs• Governance, political reforms, and citizen eng• Security strategies, including defense and ho

well as Iraq

• Foreign policy strategies• Federal workforce and related policies and pr
GAO-08-604CG 

Growth in Health Care Sp

Health Care Spending as a Percenta

8.1

10.4

13.7

16.0

05

10152025

1975 1985 1995 2005 

Percent

Year

Source: The Centers for Medicare & Medicaid Services, Office of the Actuary.Note: The figure for 2015 is projected.
GAO-08-604CG 

Where the United States R

Selected Health Outcome I

Outcome Rank

Life expectancy at birth

U.S. = 77.8 years in 2004

23 out o

Infant Mortality

U.S. = 6.8 deaths in 2004

26 out o

Potential Years of Life Lost

U.S. = 5,066 in 2002

23 out o

Source: OECD Health Data 2006 and 2007.Notes: Data are the most recent available for all countries. Life expectancy at birth for the total population for all countries, as the unweighted average of the life expectancy of men and women. Infant mortality is m1,000 live births. Potential years of life lost (PYLL) is the sum of the years of life lost prior to age 70, given death at 5 years of age is counted as 65 years of PYLL). 
GAO-08-604CG 

Issues to Consider in Exa

Our Health Care Syst

• The public needs to be educated about the d

between wants, needs, affordability, and suboth the individual and aggregate level

• Ideally, health care reform proposals will:

• Align Incentives for providers and consumers 

decisions about the use of medical services,

• Foster Transparency with respect to the valu

care, and

• Ensure Accountability from insurers and pro

standards for appropriate use and quality

• Ultimately, we need to address four key dime

cost, quality, and personal responsibility
GAO-08-604CG 

Social Security and Medi

Hospital Insurance Trust 

Face Cash Deficits

-900-800-700-600-500-400-300-200-100

0

100200

2005 2010 2015 2020 2025 2030 

Calendar year

Medicare HI cash flow Social Securi

Medicare HI

cash deficit

2007

Social Security

cash deficit

2017

Billions of 2007 dollars

Source: GAO analysis of data from the Office of the Chief Actuary, Social Security Administration and Offand Medicaid Services.Note: Projections based on the intermediate assumptions of the 2007 Trustees’ Reports. The CPI is used dollars.
GAO-08-604CG 

Possible Way Forwa

on Social Security Ref

Make little or no changes to those who retirement or already retired and make adjustments that would affect younger 

• Phase-in an increase in the normal retirement age a

expectancy

• Consider phasing-in an increase in the early retirem

to life expectancy with a modified disability access p

• Modify income replacement and/or indexing formulas 

upper income earners

• Strengthen the minimum benefit• Consider a modest adjustment to the COLA formula• Increase the taxable wage base, if necessary• Consider supplemental individual accounts and man

savings on a payroll deduction basis (e.g., a minimum contribution and a program designed much like the FPlan with a real trust fund and real investments)
GAO-08-604CG 

Webster’sdefinition An act, process, or inst

of change in structure appearance, or charactA conversion, revolutiomakeover, alteration, orenovation

GAO-08-604CG
GAO-08-604CG 

The Objective of Transfor

for DOD

Creating the future of warfare anprotecting our national security wimproving how the department, iall of its various component partbusiness in order to support and our position as the world’s preemmilitary power within current and resource limits
GAO-08-604CG 

Increased Budget 

Transparency Neede

• It is currently difficult to distinguish betwee

costs to support specific contingency operregular budget costs

• GWOT requests include funding for ite

requested in the regular budget, such weapons systems, transformation, and end strength 

• DOD needs to take stronger actions to con

costs by setting general parameters to guicommanders’ and services’ cost control ef

• GAO has found significant reliability proble

GWOT cost data, which impedes the abilitand others to make informed decisions abcosts and related funding needs
GAO-08-604CG 

DOD’s Regular Budge

DOD Regular Appropriation FY 20

(Excluding GWOT)

$296.4

$327.9

$365.3 $377.5

$400.9 

$0

$100$200$300$400$500

FY01 FY02 FY03 FY04 FY05 

Nominal $ Constant 200

Source: GAO analysis of Congressional Research Service and appropriations data

Dollars in Billions
GAO-08-604CG 

Total Budgetary Resour

Provided to DOD

Total Defense Resources FY 2005 - 

$0.0

$100.0$200.0$300.0$400.0$500.0$600.0

2005 2006 

Regular Bridge Su

Source: GAO analysis of Congressional Research Service and appropriations data.Notes: Bridge, or Title IX, is the section of DOD's regular defense appropriation that outlines em

operations in support of GWOT.

Dollars in billions
GAO-08-604CG 

DOD’s Reported GWOT Ob

for FY 2001 thru FY 200

Source: GAO analysis of DOD data.Note: Reported GWOT obligations include Operation Noble Eagle, Operation Enduring FreedomFigures include about $19.4 billion obligated in FY 2002 – FY 2003 that DOD did not include in include any obligations for classified activities. GAO has assessed the reliability of DOD’s obligaproblems, such that they may not accurately reflect the true dollar value of GWOT obligations.

Dollars in billions

$0.2

$29.9

$67.1 $71.3

$84.8

$0.0

$20.0$40.0$60.0$80.0

$100.0$120.0$140.0$160.0

FY 01 FY 02 FY 03 FY 04 FY 05 
GAO-08-604CG 

Systemic Defense Acqu

Challenges: Overvie

• GAO has identified 15 systemic cha

relating to DOD’s acquisition and coactivities. Main areas address:

• Identifying budgetary needs v. w• Specifying realistic contract req• Ensuring accountability through 

contract oversight and managem

• The following pages provide more d
GAO-08-604CG 

Systemic Defense Acqu

Challenges

1. Service budgets are allocated largely according to to

percentages rather than Defense-wide strategic asscurrent and likely resource limitations;

2. Capabilities and requirements are based primarily o

wants versus collective Defense needs (i.e. based oexpected future threats) that are both affordable and time;

3. Defense consistently over-promises and under-deliv

with major weapons, information, and other systems costs, quantities, schedule);

4. Defense often employs a “plug and pray approach” w

(i.e. divide total funding dollars by cost per copy, plucan be purchased, then pray that Congress will provbuy more quantities);

5. Congress sometimes forces the department to buy it

systems) and provide services (e.g. additional health actives) that the department does not want and we c
GAO-08-604CG 

Systemic Defense Acqu

Challenges (cont’d

6. DOD tries to develop high risk technologies after pro

of setting up funding, organizations, and processes to technology development activities in low cost environtechnology development is not separated from produProgram decisions to move into design and productiowithout adequate standards or knowledge;

7. Program requirements are often set at unrealistic lev

frequently as recognition sets in that they cannot be aresult, too much time passes, threats may change, athe user and acquisition communities may simply chaThe resulting program instability causes cost escalatdelays, fewer quantities and reduced contractor acco

8. Contracts, especially service contracts, often do not h

realistic requirements at the outset in order to controaccountability;

9. Contracts typically do not accurately reflect the comp

nor appropriately allocate risk between the contractotaxpayers (e.g. cost plus, cancellation charges);
GAO-08-604CG 

Systemic Defense Acqu

Challenges (cont’d

10. Key program staff rotate too frequently thus promot

reducing accountability (i.e. tours based on time vemilestones). Additionally, the revolving door betweDepartment presents potential conflicts of interest;

11. The acquisition workforce faces serious challenges 

knowledge, succession planning);

12. Incentive and award fees are often paid based on c

and efforts versus positive results (i.e. cost, quality

13. Inadequate oversight is being conducted by both th

Department and the Congress which results in little accountability for recurring and systemic problems;

14. Some individual program and funding decisions ma

Department and by the Congress serve to undercu

15. Lack of a professional, term-based CMO at DOD se

progress on defense transformation and reduce the in the acquisitions/contracting and other key busine
GAO-08-604CG 

Selected Potential DO

Transformation Related A

• Revise the current approach to developing nationa

(e.g., order, integration)

• Take a longer range, and more enterprise-wide app

planning and budget integration (e.g., life cycles, o

• Employ a more strategic and integrated approach t

information system efforts and financial audit initiat

• Differentiate between war fighting and business sys

development, implementation, and maintenance (econtrol, project approval)

• Focus on achieving real success in connection with 

management efforts (e.g., systems, controls, informand opinions)

• Employ a total force management approach to plan

execution (e.g., military, civilian, contractors)
GAO-08-604CG 

Selected Potential D

Transformation Related A

• Get the design and implementation of the NSPS ri

modernizing and integrating the DOD, Service, doindividual performance measurement and reward s

• Revise the process for developing and communica

(e.g., DOD transformation, NSPS) 

• Reduce the number of layers, silos, and footprints• Recognize the difference between approving and • Review and revise current military compensation p

practices (e.g., more targeted and market-based)

• Strengthen emphasis on horizontal and external a

partnerships)

• Create a Chief Management Officer (CMO) to driv

transformation process
GAO-08-604CG 

Transformation is 

Long-Term Proces

• DOD is perhaps the largest and most co

organization in the world

• Many of the department’s weaknesses a

the making and solutions will take time aeasy

• Hundreds of dedicated and hardworking 

employees are focusing on these issues

• The establishment of the Defense Busin

Management Committee and the BusineTransformation Agency are good first st
GAO-08-604CG 

GAO’s Recommendat

for a CMO at DOD

• GAO has recommended that DOD establish 

provide strong and sustained leadership obusiness transformation efforts. The CMO 

• Experienced with a proven track record as a busines

agent in a large, complex, and diverse organization

• Codified in statute as a separate and full-time positio• Designated an Executive Level II appointment that re

Secretary of Defense 

• Subject to an extended term (e.g., 5 to 7 years) that 

administrations

• A single point within the department with the perspec

responsibility, as well as authority, to develop an ovebusiness transformation plan and help to ensure the implementation of related functional management antransformation efforts
GAO-08-604CG 

Moving the Debate Fo

• The Sooner We Get Started, the Bette

• The miracle of compounding is currently workin• Less change would be needed, and there woul

make adjustments

• Our demographic changes will serve to make r

over time

• Need Public Education, Discussion, a

• The role of government in the 21st Century

• Which programs and policies should be change• How government should be financed
GAO-08-604CG 

Four National Defic

• Budget• Balance of Paym• Savings• Leadership
GAO-08-604CG 

Key Leadership Attributes Ne

These Challenging and Chang

• Courage• Integrity• Creativity• Partnership• Stewardship
GAO-08-604CG

Making Tough Budget Choi

to Create a Better Future

The Honorable David M. WalkerComptroller General of the UnitedStatesNational Defense UniversityIndustrial College of the Armed ForcesFt. McNair, Washington, D.C.March 12, 2008
GAO-08-604CG 

On the Web

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

Contact

Chuck Young, Managing Director, Public AffairsYoungC1@gao.gov (202) 512-4800 

U.S. Government Accountability Office441 G Street NW, Room 7149Washington, D.C. 20548

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