Mandatory Spending: Using Budget Triggers to Constrain Growth
Published: 2006-01-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Prepared as part of GAO's basic statutory responsibility for monitoring the condition of the nation's finances, the objectives of this report were to (1) determine the feasibility of designing and using trigger mechanisms to constrain growth in mandatory spending programs and (2) provide an analysis of the factors that led to differences between estimated and actual outlays in seven mandatory budget accounts during fiscal years 2000 through 2004.
section_title: What GAO Found
paragraphs: One idea to constrain growth in mandatory programs is to develop program-specific triggers that, when tripped, prompt a response. A trigger could result in a "hard" or automatic response, unless Congress and the President acted to override or alter it. Alternatively, reaching a trigger could require a "soft" response, such as a report on the causes of the overage, development of a plan to address it, or an explicit and formal decision to accept or reject a proposed action or increase. By identifying significant increases in the spending path of a mandatory program relatively early and acting to constrain it, Congress may avert larger financial challenges in the future. However, both in establishing triggers and in designing the subsequent responses, the integrity of program goals needs to be preserved. In addition, tax expenditures operate like mandatory programs but do not compete in the annual appropriations process. The analysis GAO applied to spending in this report would also be useful in examining tax expenditures. The budget experts GAO consulted had mixed views of triggers. Proponents of triggers noted that mandatory spending is currently unconstrained and a mechanism that causes decision makers to at least periodically reevaluate spending is better than allowing spending to rise unchecked. Others, however, expressed considerable skepticism about the effectiveness of triggers; many felt they would either be circumvented or ignored. While GAO appreciates the views expressed by budget experts, in our opinion establishing budget triggers warrants consideration in efforts to constrain significant and largely unchecked growth in mandatory programs. However, recognizing the natural tension in balancing both long-term fiscal challenges and other public policy goals, each program needs to be considered individually to ensure that any responses triggered strike the appropriate balance between the long-term fiscal challenge and the program goals. To better understand growth in mandatory spending and thus inform GAO's thinking on triggers, for seven case study accounts GAO categorized the reasons provided by agencies for differences between estimated and actual outlays during a 5-year period as the result of legislative, economic, or technical changes. Out of 40 differences, subsequent legislation was the primary reason for 19, economic changes for 7, and technical changes for 13. In many cases, a combination of these factors caused the differences.

section_title: Letter
paragraphs: Over the next few decades as the baby boom generation retires and health  care costs continue to rise, federal spending on retirement and health  programs—Social Security, Medicare, Medicaid, and other federal pension,  health, and disability programs—will grow dramatically.  Absent policy  changes on the spending and/or revenue sides of the budget, a growing  imbalance between expected federal spending and tax revenues will mean  escalating and ultimately unsustainable federal deficits and debt that  threaten our future economy and national security as well as the standard  of living for the American people.
Given rising deficits, the expiration of the Budget Enforcement Act (BEA)  of 1990, and the long-term fiscal outlook, new budget control mechanisms  are needed.   Accordingly, there have been calls for the reintroduction of  discretionary spending caps and PAYGO rules.  Although PAYGO was  effective in preventing legislative actions that increased the deficit, it did  not address increases that occurred absent legislative action. Constraining  the growth of existing mandatory spending programs requires additional  action.
In our 1994 report on capping mandatory spending, we noted that an  alternative method to prompt congressional review of mandatory spending  trends would be to require Congress to vote periodically on whether or not  to make program changes when mandatory spending exceeds certain  targets.  One way to do this and potentially achieve greater fiscal  responsibility would be to create triggers for individual mandatory  programs—predetermined spending or revenue thresholds—that signal the  need for some type of action to be taken on the program.  Once tripped, the  trigger could drive either a review or an automatic action.  It could, for  example, trigger a requirement for Congress to either review or reaffirm  acceptance of the unexpected increase in actual program spending or  projections.  Alternatively, it could trigger previously specified changes to  the program that automatically take effect to reduce spending or increase  program revenue.
Insufficient transparency regarding both the expected and actual cost path  for spending and revenue decisions hampers the ability of decision makers  to make informed choices.  In previous work, we have called for increased  disclosure and recognition of long-term costs of proposed policies and  programs.  The ability to monitor actual spending paths can also play an  important role in decisions about both the overall fiscal position and the  allocation of scarce resources.  Moreover, as we reported in 1994, a cap on  mandatory spending would have little if any effect on the longer-term  growth trends until and unless issues of underlying program eligibility and  benefits are addressed. Thus, efforts to constrain growth in mandatory  programs need to be focused on and tailored to individual programs.  One  way to assess mandatory spending is to analyze growth by examining the  estimated and actual outlays for each program. Because budget estimates  can be linked to achieving fiscal responsibility in the government,  identifying and understanding recurring patterns between mandatory  account budget estimates and actual results can facilitate future budget  decisions.
This report, prepared as part of our basic statutory responsibility for  monitoring the condition of the nation’s finances, examines issues related  to using such triggers on mandatory programs.  The objectives were to   (1) determine the feasibility of designing and using trigger mechanisms to  constrain growth in mandatory spending and (2) provide an analysis of the  factors that led to differences between estimated and actual outlays in  seven mandatory budget accounts during fiscal years 2000 through 2004.
This report does not deal with the question of projected costs at the time  decisions are made but instead with the need for responses when there is  significant growth. Analogous analyses could be applied to the revenue  side of the budget (e.g., tax expenditures).
subsections: section_title: Background
paragraphs: BEA divided federal spending into two broad categories:  discretionary  and mandatory.  Discretionary spending refers to outlays from budget  authority that is provided in and controlled by appropriation acts; it can  and has been controlled through annual, adjustable dollar limits (spending  caps) that permanently lower the base for future appropriations.  Mandatory spending refers to outlays resulting from budget authority that  is provided in laws other than appropriation acts, for example, entitlement  programs such as Medicare, Food Stamps, and veterans’ pensions.   Mandatory spending—like tax expenditures—is governed by eligibility  rules and benefit formulas, which means that funds are spent as required to  provide benefits to those who are eligible and wish to participate.  Therefore, unforeseen events such as changes in the economy or additional  demands for services can translate into unanticipated additional program  outlays. Congress controls spending for these programs indirectly by  defining eligibility and setting the benefit or payment rules rather than  directly through appropriation acts.  On an annual basis, however,  mandatory spending is relatively uncontrollable since Congress and the  President must change substantive law in order to further increase or  decrease outlays.  This makes it more challenging to constrain costs and to  design both triggers and triggered responses.
Over the past 4 decades, we have seen mandatory spending grow as a share  of the total federal budget. For example, figure 1 shows that spending on  mandatory programs rose from approximately 42 percent of total federal  spending in 1984 to about 49 percent in 1994, and to 54 percent in 2004.  This growth is projected to continue with mandatory programs claiming  about 58 percent of total federal spending in 2010.
The nation’s long-term fiscal outlook is daunting under many different  policy scenarios and assumptions.  For instance, under a fiscally restrained  scenario, if discretionary spending grew only with inflation over the next 10  years and all existing tax cuts expire when scheduled under current law,  spending for Social Security and health care programs would grow to  consume over three-quarters of federal revenues by 2040 (see fig. 2).  On  the other hand, if discretionary spending grew at the same rate as the  economy—measured by Gross Domestic Product (GDP)—in the near term  and if all tax cuts were extended, federal revenues may just be adequate to  pay interest on the growing federal debt by 2040 (see fig. 3).  Numerous  alternative scenarios can be developed incorporating different  combinations of possible policy choices and economic assumptions, but  these two scenarios can be viewed as “bookends” showing a range of  possible outcomes.
As both these simulations illustrate, absent policy changes on the spending  and/or revenue side of the budget, the growth in spending on federal  retirement and health entitlements will encumber an escalating share of the  government’s resources. Neither slowing the growth in discretionary  spending nor allowing the tax provisions to expire—nor both together— would eliminate the imbalance. Although revenues will be part of the  debate about our fiscal future, making no changes to Social Security,  Medicare, Medicaid, and other drivers of the long-term fiscal gap would  require at least a doubling of taxes—and that seems implausible.  Accordingly, substantive reform of Social Security and our major health  programs remains critical to recapturing our future fiscal flexibility.
These long-term spending projections can largely be attributed to the aging  population and increased health care costs.  This does not, however, mean  that the rest of the budget should be exempt from review.  It is important to  periodically look at mandatory accounts in order to determine possible  ways to constrain spending and ensure a more accurate and responsible  federal budget process.
Congressional interest in fiscal discipline and the adoption of budget tools  to control mandatory spending are not new. The Balanced Budget and  Emergency Deficit Control Act of 1985, commonly referred to as Gramm- Rudman-Hollings (GRH), established declining deficit targets and a  sequestration procedure to reduce spending if those targets were  exceeded. GRH was amended several times, most significantly by BEA in  1990. One important reason for BEA’s success in reducing the deficit during  the 1990s was that the process enforced a previously reached agreement to  reduce the deficit.  However, recurring surpluses at the end of the decade  caused a new debate to emerge and undermined the acceptance of BEA’s  spending caps and PAYGO enforcement. BEA rules were not extended  beyond their scheduled expiration date at the end of fiscal year 2002.
In the past, mandatory spending caps were proposed as a way to control  the growth of mandatory programs. This idea was discussed in a report we  issued in 1994. Mandatory caps fail to address underlying eligibility and  benefits formulas—which drive spending. In addition, if caps were imposed  in the context of a control requiring across-the-board spending cuts, they  would present agencies with difficulties in successfully reducing their  program spending to stay within limits, and perhaps lead to a cycle of  continual sequestrations. This difficulty is because in such a regime, any  shortfalls in savings or growth in spending that occurred despite agency  efforts would be added to the amount of cuts required in the next year.  Moreover, the mandatory programs that would be most affected by a cap— because of their high and/or volatile growth rates—are also the programs  for which a cap would be hardest to implement.
In the mid-1990s, there was a period when the idea of constraining greater-  than-expected growth through the use of triggers surfaced.  However, it  coincided with a period when actual growth generally was less than  expected.  Recently, with the reappearance of large deficits, there has been  a resurgence of interest in restoring budget controls and containing the  growth in both discretionary and mandatory spending.  For example, in  2005, numerous bills to reinstate fiscal discipline were proposed.   Moreover, in May 2005, OMB issued a memo to agencies that required them  to propose offsets to any administrative action that would increase  mandatory spending.
Budget estimates and actual outlays are determined over a period that  spans nearly 2 years: from the time the President’s budget is formulated,  about a year before the start of the fiscal year in question, to the  completion of that fiscal year.  Within this 2-year lag period between  original estimates and actual outlays, legislative, economic, and technical  factors can affect program outlays. Budget estimates are revised part way  through the fiscal year and included in the budget request for the following  fiscal year. These revisions reflect updated technical and economic  assumptions as well as any legislative changes.  Also, midsession reviews  conducted during the summer, usually in July, update budget estimates  prior to the completion of the fiscal year. In addition, both CBO and OMB  estimate the cost of bills that affect mandatory spending.
section_title: Objectives, Scope, and Methodology
paragraphs: The objectives of this study were to (1) determine the feasibility of  designing and using trigger mechanisms to constrain growth in mandatory  spending and (2) provide an analysis of the factors (legislative, economic,  and technical) that led to differences between estimated and actual outlays  in seven mandatory budget accounts during fiscal years 2000 through 2004.   This second objective contributed to our understanding of programs,  helped us better appreciate the reasons behind growth in mandatory  accounts that experienced relatively large dollar changes, and more fully  informed our thinking about triggers.
To accomplish our first objective, we performed a literature search on  mechanisms to constrain mandatory spending and had discussions with  numerous budget experts from OMB, CBO, the Senate Budget Committee  staff, and various policy research organizations. Based on our research,  interviews at agencies, and discussions with experts, we then considered  possible approaches for budgetary constraint within each account.
To accomplish our second objective we extracted from OMB’s budget  database mandatory outlays of accounts where 50 percent or more of the  outlays were mandatory. We analyzed these data for fiscal years 2000  through 2004. To determine the estimated and actual outlays for each year,  we used the original budget estimate and the actual outlays reported 2  years later, after the end of the fiscal year.  For example, when determining  the difference between estimated and actual outlays for fiscal year 2000,  we compared the fiscal year 2000 budget estimates published in February  1999 to the actual outlays published in February 2001.
From the 534 accounts with outlays at least half mandatory, we selected the  top 10 accounts that experienced the greatest average dollar change  between original estimate and actual outlays in absolute value terms for 5  fiscal years (2000–2004).  The complete list of these accounts is included as  appendix III.   These 10 accounts, which represent approximately 50  percent of total average mandatory outlays, include (1) Interest on  Treasury Debt Securities, (2) Unemployment Trust Fund, (3) Commodity  Credit Corporation Fund, (4) Federal Supplementary Medical Insurance  Trust Fund (Medicare Part B), (5) Federal Hospital Insurance Trust Fund  (Medicare Part A), (6) Grants to States for Medicaid, (7) Rail Industry  Pension Fund, (8) Federal Direct Student Loan Program (FDLP) Account,  (9) Payments to Health Care Trust Funds, and (10) Mutual Mortgage  Insurance Program Account (MMI). Because many of the programs we  selected are relatively big, large dollar increases may represent small  percentage increases relative to program size.
After initial analysis, we excluded three of these accounts from further  analysis: Interest on Treasury Debt Securities, MMI, and Payments to  Health Care Trust Funds. We eliminated the U.S. Treasury account because  interest payments are a function of all other funding decisions and thus  provide little insight into trigger design. We excluded the MMI account  because the program itself is discretionary—only the large mandatory  reestimates of its credit subsidy required by the Federal Credit Reform Act  of 1990 caused it to fall into our original sample.  Because decisions about  the size of this program are annually made in the appropriations process  and can be informed by the reestimates of previous years’ loans, there is no  need for separate triggers.  Finally, we excluded the Payments to Health  Care Trust Funds account because the payments are classified as  intragovernmental transfers and therefore do not affect overall budget  outlay data. Moreover, these transfers are captured within other accounts  in our sample.
Figure 4 below shows the 5-year average difference between estimated and  actual mandatory outlays in absolute value terms for the seven accounts  we reviewed.  These differences ranged from $9.4 billion in the  Unemployment Trust Fund to $2.6 billion in FDLP.
To gain more perspective on what factors contributed to the differences  between estimated and actual outlays in the remaining seven accounts, we  met with officials from the cognizant agencies to determine if the reasons  behind the differences were (1) legislative, (2) economic, (3) technical, or a  combination of the three.  We did not independently verify the explanations  agencies provided for differences.
Our work was done between May 2005 and January 2006 in Washington,  D.C., in accordance with generally accepted government auditing  standards.
section_title: Trigger Mechanisms Could Help Constrain Mandatory Spending but Must Be Carefully Designed
paragraphs: The purpose of a budget trigger is to either automatically cause some  action to occur or to prompt decision makers to evaluate and consider  responding to rising costs.  For example, where differences between  expected and actual growth in a program exceed a specified amount,  Congress could decide explicitly—by voting—whether to accept the  slippage or could take action to bring the spending path closer to the  original goal by recouping some or all of the slippage through changes in  the program.  Our background research, work in case study agencies, and  discussions with budget experts highlighted several issues to consider  when designing triggers and their resulting actions, such as the extent of  agreement among decision makers about underlying fiscal goals, measures  selected to trip the trigger, and the triggered response.
While a budget process can surface important issues, it is not a substitute  for substantive debate—no process can force agreement where one does  not exist.  Accordingly, the success of any effort to constrain growth  depends on whether there is widespread agreement on the underlying  goals; absent such agreement, any trigger would likely be circumvented.  For example, underlying the successful budget enforcement mechanisms  embodied in BEA was the broadly accepted goal of deficit reduction and an  agreement on a specific set of legislative changes to reach that goal. Its  triggers were centered around measures that Congress could control— discretionary spending caps and changes to entitlement and tax laws.  However, once the budget moved into surplus in the late 1990s and there  was no longer agreement on fiscal goals, actions were taken to bypass BEA  controls. For example, the consolidated appropriations acts for both fiscal  years 2000 and 2001 mandated that OMB change the PAYGO scorecard  balance to zero. Both OMB and CBO estimated that without instructions to  change the scorecard, sequestrations would have been required in 2001.
Other countries we have studied have sought to address national priorities  by developing explicit goals to guide fiscal policy and justifying their goals  with compelling rationales that often pointed out the potential fiscal and  economic benefits of budgetary discipline. In a 2000 report, we noted that  having fiscal goals anchored by a rationale that is compelling enough to  make continued restraint acceptable is critical to sustain support for  budgetary discipline.
subsections: section_title: Issues to Consider in Constructing a Trigger
paragraphs: One of the reasons for the success of BEA was its link to congressional  action.  Discretionary spending caps and PAYGO constrained  congressional action—BEA held Congress accountable only for things it  could control and not for the effect of economic or technical factors on  spending or revenues. This was both the strength and the limitation of  PAYGO. Triggers seek to go beyond the PAYGO regime by subjecting  program growth to scrutiny even where that growth is the result of  economic, population, or other factors outside congressional control.  Triggers recognize that even the best estimates can turn out to be wrong  and that decision makers who expected one path might wish to consider  changes in a program where the path is significantly different from what  was anticipated.
In general, there are two types of responses to budget triggers—soft and  hard—depending on what type of action results when the trigger is tripped.  A “soft” response prompts special consideration of a program or a proposal  for action when a certain threshold or target is breached.  Examples of soft  responses that could be triggered include requiring the administering  agency to prepare a special report explaining why the trigger’s threshold  was breached, or requiring the President to submit a proposal for reform.   An example of a soft response already exists in the Medicare program,  which requires the President to submit a proposal to Congress for action if  the Medicare Trustees determine in 2 consecutive years that the general  revenue share of Medicare spending is projected to exceed 45 percent  during a 7-year period.   In addition, a few Social Security reform  proposals have included language requiring presidential and congressional  action if the Social Security Board of Trustees determines that the balance  ratio of either of the Social Security trust funds will be zero for any  calendar year during the succeeding 75 years.
Soft responses can help in alerting decision makers of potential problems  but they do not ensure that action to decrease spending or increase  revenue is taken.  With soft responses, the fiscal path continues unless  Congress and the President take action. In contrast, a trigger could lead to  “hard” responses requiring a predetermined, program-specific action to  take place, such as changes in eligibility criteria and benefit formulas,  automatic revenue increases, or automatic spending cuts.  With hard  responses, spending is automatically constrained, revenue is automatically  increased, or both, unless Congress takes action to override.  Figure 5  below illustrates the conceptual differences between hard and soft  responses of a budget trigger.
In establishing triggers, both near- and long-term perspectives need be  considered.  For some programs it might be appropriate to tie triggers to  historical data. For example, unexpected spending growth in student loans  might be measured against past historical spending data.  However, for  other programs that expose the government to long-term commitments— such as Medicare or Social Security—it might be more appropriate to tie  the trigger to projections of future spending.   Social Security, however,  represents a large long-term commitment of future resources.  Thus,  growth for this program might be measured against changes in actuarial  projections of Social Security’s 75-year outlook.  Such an approach could  be used for other programs with long-term commitments, such as pension  insurance, if good long-term projections become available.
Since all estimates are subject to some uncertainty, the triggering  mechanism should not be so tight that it is overly sensitive to normal  variation in budget estimation.  One way to address this concern is to  establish a normal or expected range of budget uncertainty and set a trigger  level that falls outside this range.  For example, if a program’s actual  outlays historically fall within plus or minus 5 percent of estimated outlays,  a trigger set at a level greater than 5 percent would best signal unexpected  growth.  This approach resembles one CBO uses for certain programs to  analyze the budgetary effects of legislative proposals.  Using a  probabilistic model, CBO estimates the weighted average of the effects  associated with all possible sets of circumstances, taking into account their  respective probabilities.  Such an approach could be adapted to establish a  range of uncertainty around a budget estimate.
Triggers also could be used to ensure that policy changes actually achieve  intended reductions in spending growth.  Such triggers could address  concerns that some budget constraint mechanisms create the false  impression that long-term problems have been addressed.
Although any hard response can be overridden by congressional action, it  could be important to incorporate a more automatic escape clause into  budget enforcement mechanisms such as triggers.  Effective budget  enforcement mechanisms need to be able to accommodate changing  budget policy and political environments in which future outcomes are  difficult to predict.  For example, periods of economic growth may be brief  or sustained, but inevitably are followed by periods of economic downturn  that may be shallow or deep.  Escape mechanisms, such as expiration  dates, allow budget policies and procedures to be renegotiated later.  In  addition to expiration dates, House or Senate rules can provide flexibility.   For example, any Senator may raise a point of order against legislation  violating PAYGO rules prohibiting consideration of revenue or direct  spending legislation that is not deficit-neutral. However, the point of order  may be waived if there is broad consensus on the need to do so—that is, if  there is an affirmative vote of three-fifths of the membership.
Although they provide important flexibility, escape clauses can be  overused.  For example, in fiscal year 2002, the Department of Defense and  Emergency Supplemental Appropriations Act instructed that $130.3  billion in costs be eliminated from the PAYGO scorecard.  Both OMB and  CBO estimated that without instructions to change the scorecard, a  sequester—across-the-board spending cuts—would have been required in  2002.  In addition, many programs were exempt from PAYGO’s  sequestration requirement.  These exemptions meant that the full brunt of  any sequester was concentrated in the remaining programs, resulting in  cuts so draconian that Congress and the President changed the targets  rather than impose the required cuts.
section_title: Issues to Consider in Designing the Triggered Response
paragraphs: Whether a triggered response is soft, hard, or a combination of the two,  efforts to constrain growth in mandatory programs need to be focused at  the program level.  The experience with GRH highlights the importance of  individually designed triggers and responses.   The deficit-neutrality targets  under GRH triggered a hard response—across-the-board spending cuts—if  they were not met.  The deficit targets under GRH were not achieved due to  the inability of Congress and the President to control all of the factors— mainly economic factors—that affected whether the trigger would be  breached and their unwillingness to accept the across-the-board cuts that  would have been necessary to meet the deficit targets.
In developing program-specific triggers and responses, proposed changes  in underlying benefits structure and design of mandatory programs can be  considered in the context of the factors that drove the growth and the goals  and objectives of specific programs.  For example, certain programs such  as unemployment insurance and crop assistance are designed and intended  to have a countercyclical effect on the economy.  That is, they are aimed at  reducing the size and duration of swings in economic activity in order to  keep economic growth closer to a pace consistent with low inflation and  high employment.  Thus, a triggered response in these programs needs to  be sensitive to whether growth is being driven by automatic budget  stabilizers.  For example, a rise in the unemployment rate would by design  increase outlays in federal unemployment insurance not only to provide  assistance to the unemployed but also to stabilize the economy.  If a trigger  were established that resulted in a contractionary response, it could  undermine these important goals and exacerbate the effects of  unemployment on the economy.  In a January 2002 report, the  Congressional Research Service (CRS) suggested one option to avoid  procyclical triggers would be to delegate to some entity—for instance  Congress or an executive department—the responsibility for evaluating  each year whether deteriorating economic conditions would make a trigger  detrimental.  If conditions were found to be deteriorating, decisions would  need to be made about whether and how to implement any reduction. CRS  acknowledged, however, that this type of proposal could be criticized on  the grounds that it is based on a subjective decision and thus could be prey  to the sort of political pressures that critics fear would undermine a trigger.   Indeed, one budget expert we met with expressed concern that in devising  a budget trigger, it would be helpful to acknowledge political pressures by  considering who would judge progress against the trigger and the neutrality  of the judging entity.
The programs and agencies we reviewed have objectives and missions that  contribute to the achievement of public policy goals such as income  security, feeding the nation, fostering higher education, and providing  health care. To these ends, these programs are designed to provide  entitlements—benefits and assistance—to eligible recipients. While  striving to meet these commitments, our nation is faced with a daunting  long-term fiscal outlook based on the challenges of an aging population,  unsustainable deficits, and mounting debt while also ensuring truth and  transparency.  Figure 6 depicts the inherent tension in balancing public  policy goals and long-term fiscal challenges.
Addressing this tension invariably entails difficult political choices among  competing programs that promise benefits to many Americans but are  collectively unaffordable and unsustainable at current revenue levels. In  February 2005 we highlighted the size of fiscal imbalances looming in the  future and the challenge of our policy process to act with more foresight to  take early action on problems that may not constitute an urgent crisis but  pose important longer-term threats to the nation’s fiscal, economic,  security, and societal future. Budget triggers are mechanisms that can  encourage and facilitate such action.
To help us better consider the implications of establishing triggers, we  looked at seven mandatory accounts with relatively large differences  between estimated and actual outlays: Commodity Credit Corporation  (CCC), Federal Direct Student Loan Program Account, Grants to States for  Medicaid, Federal Hospital Insurance (HI) Trust Fund (Medicare Part A),  Federal Supplementary Medical Insurance (SMI) Trust Fund (Medicare  Part B), Rail Industry Pension Fund, and the Unemployment Trust Fund.   We explored ways in which existing triggers and their corresponding  actions could be revised, as well as an array of new trigger mechanisms  that take into consideration the issues just discussed and could be adopted  to promote better budgeting in light of the nation’s long-term fiscal outlook.
It is important to consider the data upon which the trigger will hinge— future projections based on historical data, growth as a percent of GDP,  total growth, or another measure altogether.  For example, Congress has  established a trigger to constrain growth in Medicare spending for  physicians’ services.  The sustainable growth rate (SGR) is a statutorily set  formula that estimates the allowed rate of increase in spending for  physicians’ services; that rate is used to construct the spending target for  the following calendar year. If actual spending exceeds the cumulative SGR  targets, fee updates in future years must be lowered sufficiently both to  offset the accumulated excess spending and to slow expected spending for  the coming year. The Medicare Prescription Drug, Improvement, and  Modernization Act of 2003 (MMA) established another trigger—the general  revenue share of Medicare spending.  If the Medicare Trustees determine in  2 consecutive years that the general revenue share is projected to exceed  45 percent during a 7-year projection period, the President must submit a  proposal to Congress for action.  To date, this threshold has not been  breached and thus no response has been triggered.  However, Medicare  Trustees are expected to determine the first breach in their upcoming 2006  report as the trigger is projected to be tripped in 2012, which falls within  the 7-year projection period captured in that report. For unemployment  insurance, a trigger was established around balances in the Unemployment  Trust Fund.  When funds accumulating in federal unemployment accounts  reach statutorily set limits, a distribution of the “excess” funds from the  trust fund to individual states’ accounts—called “Reed Distributions”— are automatically triggered based on each state’s share of covered wages.   One way to constrain federal spending would be to increase the statutory  cap on federal unemployment accounts, thus making it more difficult to  trigger Reed Distributions to states.  By making it more difficult to trip the  trigger, funds could continue to build during economic prosperity and be  available to states when truly needed to counter rising unemployment.
Our analysis allowed us to develop a list of illustrative examples, which  analyze the related trade-offs involved in balancing restraint with  optimization of program goals.  These are shown in appendix I, along with a  brief description of the program and account.  Finally, where appropriate  we present illustrative examples of hard responses that could be  established to constrain spending.  We do not specifically advocate any of  these approaches—they are presented for illustrative purposes only to  provide a sense of the types of trigger and resulting actions that could be  established.  Although the illustrative examples we developed apply  specifically to the seven case study accounts that we reviewed, we believe  the information can further the larger policy conversation about how to  increase oversight of the path of mandatory spending and advance and  encourage budgetary discipline.
section_title: Expert Views on Trigger Mechanisms Are Mixed
paragraphs: We interviewed budget experts from OMB, CBO, the Senate Budget  Committee staff, and various policy research organizations to discuss  views on using triggers to constrain mandatory spending. Overall, views  were mixed.  While some were more in favor of triggers than others, many  expressed concern that they would be circumvented or ignored, thereby  questioning their effectiveness.  In addition, many were concerned that  triggers could jeopardize the underlying intent of mandatory programs.   Several experts also pointed to the need to ensure that any triggers  developed be carefully designed to avoid procyclical effects.
Some of the experts expressed strong support for budget triggers.  These  individuals believed that triggers with hard responses had the potential to  constrain mandatory spending and that the accountability added by  triggers would be preferable to the current unconstrained environment.
For example, one expressed concern about the debt burden being  permitted to mount for future generations in order to avoid the reduction in  benefits or increase in taxes needed to finance current benefits.  Linking  revenues and spending with GDP, she argued, would help avoid such  generational inequities.  Another added that under current policy, spending  grows automatically, by default, faster than tax revenues as the population  ages and health costs soar.  He argued that only by changing the budget’s  autopilot programming can we gain the flexibility needed to continually  improve government policies and services.
Others, however, said that triggers reduced accountability because they  enable decision makers to publicly extol budget constraint but quietly  continue to increase spending.  One pointed to “accounting tricks” that  have resulted from triggers with hard responses, such as when Congress  mandated certain costs not be counted against spending limits so as to  avoid across-the-board cuts.  However, as discussed previously, triggers  also could be used to ensure that policy changes actually achieve intended  reductions in spending growth.  Such triggers could address concerns that  some budget constraint mechanisms create the false impression that long- term problems have been addressed.
Many expressed skepticism that budget constraint mechanisms such as  triggers would be adhered to; one cited Medicare’s SGR as an example.  The  SGR system is designed to apply financial brakes whenever actual spending  for physicians’ services exceeds predefined spending targets.  It does this  by reducing physician fees or limiting their annual increase.  Because the  actual versus target spending comparison is cumulative, future fee updates  are reduced to lower future actual spending below future target spending  until total cumulative actual spending is the same as total cumulative target  spending. However, fee declines were averted for 2003, 2004, and 2005 by  administrative and legislative actions that modified or overrode the SGR  system.
Some experts worried that applying budget triggers to various mandatory  spending programs would divert attention from the real source of the  nation’s fiscal woes—health care—whose costs continue to rise faster than  GDP. They pointed to CBO data as evidence that, outside of health care and  to a lesser extent Social Security, virtually all other mandatory programs  are decreasing or holding steady as a percent of GDP.   Accordingly, they  expressed concern that establishing triggers on such programs could  mislead the public into thinking that the long-term fiscal problem had been  addressed, thus delaying efforts to appropriately address it.
Many of the budget experts raised concerns about triggers jeopardizing the  important underlying missions and program goals financed by mandatory  accounts.  In particular, concerns were raised about undermining  countercyclical effects of programs such as unemployment insurance,  Food Stamps, and the Earned Income Tax Credit.  Some noted that the  desire to preserve program goals is the reason why triggers with hard  responses have not worked in the past.  With respect to the SGR, for  example, one expert explained that the reason Congress overrides the  trigger is to ensure doctors do not stop accepting Medicare patients.
Finally, a couple of experts pointed out that triggers need not only apply to  spending; the revenue side of the budget should also be addressed.  One  noted, for example, that an increase in taxes to cover spending growth  would increase visibility to the public and thus permit the American people  to be more aware of how much they are paying for services.  Applying  triggers to tax cuts was an issue considered in 2001 when the budget was in  surplus and tax cuts were proposed.  For example, Federal Reserve  Chairman Greenspan at that time expressed his preference for a trigger  that would make tax cuts contingent on the realized net debt level.   Comptroller General Walker also raised the possibility of using a trigger to  return a “surplus dividend” if actual surpluses occurred in excess of  specific levels.  Ultimately, however, triggers were not adopted.  Instead,  tax cuts were enacted through 2010 even though substantial deficits have  reappeared.  In addition, as we reported in a February 2005 testimony,  there has been an extensive use of tax incentives, rather than direct  spending authority, to fund social objectives. As we reported in September  2005, the sum of revenue loss estimates associated with tax  expenditures—such as tax exclusions, credits, and deductions—was nearly  $730 billion in 2004.  Many tax expenditures operate like mandatory  spending programs and generally are not subject to reauthorization.  Such  tax expenditures are embedded in the tax system and are off the radar  screen for the most part.  This is a concern from a budgetary standpoint  because federal dollars committed to fund these expenditures do not  compete in the annual appropriations process and are effectively “fully  funded” before any discretionary spending is considered.   The analysis we  applied to spending in this report would also be useful in examining tax  expenditures.  However, challenges in defining and measuring tax  expenditures, to some extent, would affect any effort to curtail revenues  foregone through tax expenditures.  For example, after taxpayers have  taken advantage of tax expenditures, the federal government still may not  know, with much certainty, how much tax revenue was foregone, who  benefited, and what results were achieved.
section_title: Reasons for Differences between Estimated and Actual Outlays in Selected Accounts Varied
paragraphs: To better appreciate the reasons behind growth in mandatory accounts and  thus inform our thinking on triggers, we examined the reasons for  differences between originally estimated and actual outlays for seven  mandatory accounts that experienced relatively large dollar changes.  Based on agencies’ explanations of differences between estimated and  actual outlays of the case study accounts we examined, we found that  legislation enacted after original estimates were submitted was the primary  driver in 19 out of 40 differences during fiscal years 2000 through 2004.  Economic factors, such as changes in interest and unemployment rates,  were primarily responsible for 7 differences. Finally, technical factors,  which cover a broad spectrum, most significantly drove 13 out of 40  differences. In one case, it was unclear which factors most significantly  caused the difference between estimated and actual outlays.  In many  cases, a combination of factors resulted in differences.
In categorizing agencies’ explanations for differences between estimated  and actual outlays, we applied criteria similar to those that CBO uses in its  annual budget and economic outlook reports to categorize changes as  legislative, technical, and economic.  However, in our report, legislative  action was classified in a somewhat different manner from the method that  CBO applies.  Whereas we examined the actual budgetary effect that  resulted from the legislation, CBO projects the anticipated future  budgetary effect of legislation.  Figure 7 describes the criteria that we  applied to categorize agencies’ explanations into three factors.  While this  framework is helpful in evaluating changes in the federal budget, it is not  precise and should be viewed as indicative as opposed to determinative.
Table 1 summarizes the factors—legislative, economic, and technical—that  most significantly resulted in differences between estimated and actual  outlays by fiscal year and account.  The factors that were major drivers for  differences between estimated and actual outlays are denoted with “.”  Other factors that affected the difference are denoted with “x.”  In one case,  it was unclear which factors most significantly caused the difference  between estimated and actual outlays.  In that case, both relevant factors  are marked with an “x.”  Detailed explanations supporting this summary  are presented in appendix I.
subsections: section_title: Legislation Enacted After Original Estimates Explained Many Differences between Estimated and Actual Outlays
paragraphs: As seen above in table 1, most of the accounts we reviewed were directly  affected by legislation that was enacted after original estimates were  developed and significantly contributed to differences between expected  and actual outlays in 19 out of 40 instances.  For example, the Temporary  Extended Unemployment Compensation Act (TEUC) of 2002 led to the  disbursement of greater-than-expected unemployment benefits.   Supplemental appropriations for crop disaster assistance and Agricultural  Market Transition Act payments largely contributed to additional outlays  that were not assumed in original CCC budget projections.  Similarly, the  MMA and the Railroad Retirement and Survivors’ Improvement Act of 2001,  respectively, increased Medicare outlays and Rail Industry Pension outlays.
TEUC was enacted to provide up to 13 weeks of federally funded  unemployment insurance benefits to workers in all states who had  exhausted their entitlement to regular state unemployment benefits.   Furthermore, the Act provided up to 13 additional weeks of federally  funded benefits to workers in states with especially high unemployment  rates.  Congress renewed this extension in April 2003, which allowed  qualified individuals to file for federal extensions through December 2003  and collect on those extensions through December 2004.  As a result,  program outlays exceeded estimates by $7.9 billion in 2002, $11 billion in  2003, and $4.3 billion in 2004.
Outlays in both CCC programs that we reviewed also were directly affected  by subsequent legislative action that occurred after original budget  estimates were formulated.  For example, Crop Disaster Assistance  programs are funded through supplemental appropriations every year  throughout the 5-year period that we reviewed, which led to an additional  total of $6 billion in program outlays.  According to OMB officials, the  Administration prefers not to include estimates in the budget for relatively  unpredictable disaster-related programs such as crop disaster assistance.   Instead, such funding is typically initiated by Congress through  supplemental appropriations.  Accordingly, for all 5 years we examined,  no estimates were provided and all of the outlays were as a result of  supplemental appropriations.
Legislative action that increased market loss assistance payments to corn  producers largely contributed to the greatest underestimates of outlays for  that particular commodity—nearly $9 billion in 2000 and 2001 together.   These payments were authorized on an ad hoc basis and, in fiscal year  2000, were paid out for both 1999 and 2000.
The Consolidated Appropriations Resolution of 2003 provided substantially  higher Medicare payments to physicians than estimated in original budget  projections and contributed to the largest discrepancy—over $13 billion— between estimated and actual SMI outlays throughout the 5 years that we  reviewed.  Furthermore, both the HI and SMI trust funds incurred  unanticipated additional outlays as a result of MMA.  Several of the  provisions under MMA were implemented in 2004 and directly affected that  year’s outlays; however, officials from the Centers for Medicare & Medicaid  Services (CMS) said that the largest factors that led to additional HI outlays  of approximately $4.4 billion and additional SMI outlays of nearly $12.3  billion were the substantially increased payments to private health plans  and rural health providers, as well as the increased physician payment  update—all of which were provided for under MMA.
Finally, the Railroad Retirement and Survivors’ Improvement Act of 2001  changed a number of benefit and eligibility criteria, which led to a sharp  rise in retirements. For example, the enactment of this law (1) eliminated  benefit reductions to early retirees, (2) eliminated the maximum threshold  on the amount of combined monthly employee and spouse benefit  payments, (3) lowered the minimum eligibility requirement for railroad  retirement annuities, and (4) increased benefit payments for widow(er)s.   Under this legislation, funds in excess of those needed for current benefit  payments and administrative expenses were transferred to the National  Railroad Retirement Investment Trust.  As a result, rail industry retirements  increased, and pension fund outlays increased by almost $20 billion in 2002  and 2003 collectively.
section_title: Economic Factors Were Especially Important in Some Programs’ Differences
paragraphs: Case study agencies cited economic factors as primary reasons for  differences between estimated and actual outlays for 7 out of 40  differences.  This was especially true for agricultural commodities, student  loans, and unemployment insurance. For example, market prices for  commodities affected federal subsidy payments to farmers, changes in  interest rates affected revenues received from student loan borrowers, and  unemployment affected outlays of federal unemployment insurance.  Economic factors also affected the hospital market basket, which  contributed to greater-than-expected Medicare outlays.
For CCC’s corn program, market prices were both underestimated and  overestimated over the 5-year period.  According to a Department of  Agriculture (USDA) official, corn prices are extremely volatile and highly  dependent on weather conditions and global food production.  In addition,  the countercyclical design of federal commodity subsidies results in  outlays that are highly sensitive to changes in price.  This official explained  that a 1 cent change in estimated corn prices results in about an $85 million  change in federal outlays.
The historically low interest rates that prevailed in recent years were below  levels previously forecasted, which affected estimated student loan subsidy  costs.  Subsidy cost estimates for FDLP are highly sensitive to changes  between projected and actual interest rates because borrower interest  rates are variable.  The decline in interest rates resulted in lower-than- expected interest payments to the government from FDLP borrowers, thus  increasing reestimated subsidy costs for these loans.  Concurrently, the  volume of student consolidation loans, which allow borrowers to lock in  fixed interest rates, increased as interest rates declined.  In consolidating  their loans, borrowers effectively paid off their underlying loans, thereby  lowering anticipated interest payments to the government on the loans and,  in turn, increasing the estimated subsidy costs of the underlying loans.
Discrepancies between estimated and actual unemployment insurance  outlays are partially attributed to economic factors such as unanticipated  changes in both the unemployment rate and benefit recipiency rates.  For  example, Department of Labor officials said that most of the outlay  overestimate in 2000 resulted from a lower-than-expected unemployment  rate—the ratio of the total number of unemployed individuals to the total  workforce—which translated into lower-than-expected outlays.  In  subsequent years, the unemployment rate was underestimated and thus  contributed to greater-than-expected outlays.  Inaccurate assumptions  about the benefit recipiency rates, that is, the ratio of the total number of  unemployed individuals filing for or receiving benefits to the total number  of unemployed, further contributed to the agency’s errors in accurately  estimating program outlays.  According to agency officials, these economic  factors tend to be key drivers affecting budget estimates, albeit to a  somewhat lesser degree during the timeframe we reviewed given the  significance of the temporary extended unemployment compensation  legislation that substantially increased outlays in 2002 through 2004.
To a lesser extent, economic factors affected Medicare outlays.  In 2003, a  higher-than-expected market basket, which is basically a price index  representing the cost of providing health care services to patients, was part  of the explanation behind higher-than-originally-estimated Medicare  outlays, according to CMS officials.  This increase in the market basket led  to greater-than-expected inpatient and outpatient hospital expenditures in  the HI and SMI funds respectively.
section_title: Technical Factors Explained a Broad Spectrum of Differences
paragraphs: Technical factors, which encompass a somewhat wide-ranging residual  category, significantly explained outlay differences in 13 out of 40  instances.  Generally, technical factors account for differences between  budget estimates and actual outlays that cannot be attributed to legislative  or economic factors.  For example, delayed implementation and difficulty  in predicting the behavior of providers under new payment systems, an  increased case mix, and the deferral of adjusting payments for skilled  nursing facilities utilization led to differences between estimated and  actual Medicare outlays.  Increases in administrative costs and revised  assumptions of the amount of loan defaults and collections caused some of  the direct student loan outlays to differ from original estimates.  Similar to  the diversity of the programs we reviewed, there was great variability  among the technical factors that affected account outlays.
Actual outlays for both Medicare Parts A and B differed from estimates  primarily due to a number of technical factors, which accounted for both  some of the largest and some of the smallest discrepancies.  For example,  the largest discrepancy in the HI fund (Medicare Part A) occurred in fiscal  year 2000 for which outlays were lower-than-originally estimated by nearly  $16 billion.  According to CMS, the majority of this inaccuracy is attributed  to lower-than-expected benefit payments as a result of the agency’s  difficulty in predicting the behavior of providers under newly implemented  payment systems for skilled nursing facility (SNF) services and home  health services. CMS officials said that these payment systems were very  new at the time fiscal year 2000 budget estimates were done and the effect  of these new systems was unknown. Similarly, SMI outlays were $4.6 billion  less-than-originally estimated due largely to the delayed implementation of  and unfamiliarity with a new outpatient hospital prospective payment  system. Other technical factors CMS cited to explain the differences  between estimated and actual Medicare outlays included case mixes that  were more complex than expected and deferred payment refinements for  SNF utilization. Case mix refers to the average complexity of inpatient  admissions for Medicare beneficiaries. A change in the mix of cases causes  the amount of benefit payments to change. The deferral of payment  adjustments for SNF utilization contributed to greater-than-expected  outlays in both fiscal years 2003 and 2004. These adjustments would have  reduced payment rates that had previously been increased on a temporary  basis under the Medicare, Medicaid, and SCHIP Balanced Budget  Refinement Act of 1999 (BBRA).  CMS included the budgetary effects of  these adjustments in their HI estimates for 2003 and 2004, but later decided  not to implement them citing the need for additional time to review and  analyze the implications of implementing hospital case mix refinements.
Differences between estimated and actual outlays for federal direct student  loans were most frequently explained by technical factors, including  revised assumptions in the Department of Education’s loan subsidy model,  increased administrative costs, and Congress’s decision not to adopt a  budget proposal to shift administrative expenses to a discretionary  account.  Moreover, because of the way federal credit programs are  budgeted, original estimates include a loan subsidy amount for one fiscal  year but actual outlays include a loan subsidy reestimate for all prior fiscal  years—in the case of FDLP, up to 8 years for fiscal year 2004.
section_title: Conclusions
paragraphs: Given that unsustainable federal deficits and debt threaten our future  economy and national security as well as the standard of living for the  American people, renewed emphasis on increasing fiscal discipline is  crucial.  Mandatory spending represents an increasing percentage of the  federal budget (e.g., about 54 percent in 2004, up from about 42 percent in  1984).  Unexpected growth in individual programs—especially certain very  large programs—can significantly change the nation’s fiscal position.  By  identifying significant increases in mandatory spending relatively early and  acting to constrain it, Congress may avert even larger fiscal challenges in  the future.
The notion of establishing budget triggers to constrain growth is not new  and has been used in the past with varying degrees of success.  Given that  spending for mandatory programs is driven by underlying benefit and  eligibility formulas, serious efforts to constrain spending would require  substantive changes to current law.  Such changes should consider  program goals and objectives and be enacted as programs are created,  reexamined, or reauthorized.  While budget triggers certainly are neither a  panacea nor a substitute for deliberate consideration by stakeholders and  decision makers, they can help to prompt action and enhance fiscal  responsibility.
Ignoring significant growth in mandatory accounts is inconsistent with  evaluation of programs and their costs. While we appreciate the concerns  raised by budget experts, in our opinion, establishing budget triggers  warrants serious consideration in order to constrain growth in mandatory  spending programs.  However, it is clear that how the triggers are designed  must be carefully considered.  For example, once widespread agreement  on underlying public policy goals has been achieved, it needs to be decided  whether a soft or hard response to a trigger—or a combination thereof— would be most appropriate.  Also, it is important to consider the data upon  which the trigger will hinge—future projections of historical data, growth  as a percent of GDP, total growth, or another measure altogether.   Moreover, this trigger concept might also be useful in examining tax  expenditure growth.  Calculating a normal range of uncertainty for a  program could help avoid triggering an action prematurely or  unnecessarily.  In addition, it is important to strike an appropriate balance  between responses that constrain spending or increase revenues.  We  recognize that automatic responses pose much more difficult trade-offs.   Ensuring countercyclical effects are not undermined is of particular  importance.  In any case, recognizing the natural tension in balancing both  long-term fiscal challenges and other public policy goals, each program  needs to be considered individually to ensure that any responses triggered  strike the appropriate balance between the long-term fiscal challenge and  the program goals. Considering ways to increase transparency, oversight,  and control of mandatory spending programs must be part of addressing  the nation’s long-term fiscal challenges.
section_title: Matter for Congressional Consideration
paragraphs: To promote explicit scrutiny of significant growth in mandatory accounts,  as mandatory spending programs are created, reexamined, or reauthorized,  Congress should consider incorporating budget triggers that would signal  the need for action.  Further, it should determine whether in some cases it  might be appropriate to consider automatically causing some action to be  taken when the trigger is exceeded.  Once a trigger is tripped, Congress  could either accept or reject all or a portion of the response to the spending  growth.
section_title: Agency Comments
paragraphs: We requested comments on a draft of this report from OMB; the  Departments of Agriculture, Education, Health and Human Services, Labor;  and the Railroad Retirement Board.  OMB and the Departments of  Education and Labor had no comments.  The Departments of Agriculture,  Health and Human Services, and the Railroad Retirement Board provided  clarifying and/or technical comments, which we incorporated as  appropriate.
This report was prepared under the direction of Susan J. Irving, Director,  Federal Budget Analysis, Strategic Issues, who can be reached at (202) 512- 9142 or irvings@gao.gov.  Other key contributors are listed in appendix IV.
section_title: Illustrative Examples of Triggers and Responses for Case Study Accounts
paragraphs: Addressing growth in mandatory spending is an important but complicated  matter that requires looking below the aggregate and into specific  programs.  Mandatory spending is governed by eligibility rules and benefit  formulas, which means that funds are spent as required to meet the needs  of all those who are eligible and wish to participate. Accordingly, spending  in mandatory programs cannot be constrained through the application of  simple caps/limits.  Rather, it requires changes in the underlying benefit  structure and design of programs.  As a result, constraints of individual  programs that look at the specific economic and other factors that drive  spending are likely to be most effective.
One idea to constrain growth in mandatory programs is to develop triggers  that, when tripped, would cause some automatic cost-cutting or revenue-  increasing response—such as changes in eligibility criteria, benefit  formulas, or fees—automatically to go into effect unless Congress and the  President act to make other changes. An alternative approach would  replace such a “hard” response with a “soft” one such as requiring special  consideration of a program or a proposal for action when the trigger’s  threshhold is breached. Examples of soft responses include raising a point  of order, requiring the administering agency to prepare a special report  explaining why the trigger was breached, or submitting a proposal for  reform.  Soft responses may be helpful in alerting decision makers of  potential problems but do not ensure that such action is taken.
Especially in designing hard responses, careful consideration must be  given to avoid counteracting the program’s goals and objectives.  For  example, a rise in the unemployment rate would by design increase outlays  in federal unemployment insurance not only to provide assistance to the  unemployed but also to stabilize the economy.  If a trigger were established  that resulted in a contractionary response, it could undermine these  important goals and exacerbate the effects of unemployment on the  economy.
We selected seven mandatory budget accounts to examine in order to  inform our thinking about budget trigger responses and the design issues  that need to be considered.  These seven accounts were selected because  of their relatively large 5-year average differences between estimated and  actual outlays.  These accounts are the (1) Commodity Credit Corporation(2) Federal Direct Student Loan Program Account, (3) Grants to States for Medicaid, (4) Medicare Part A: Federal Hospital Insurance Trust Fund, (5) Medicare Part B: Federal Supplementary Medical Insurance Trust Fund, (6) Rail Industry Pension Fund, and (7) Unemployment Trust Fund.
In this appendix, for each case study account we present contextual  information such as the administering agency, program description, and  source of funding.  Also we provide the agency’s explanation of key  differences between estimated and actual outlays and, as appropriate,  other relevant information.  Finally, where appropriate we present  illustrative examples of hard responses that could be established to  constrain spending.  In some cases these illustrative examples involve  revising currently existing triggers and their corresponding actions.  In  other cases new triggers and responses are presented.  We do not  specifically advocate any of these approaches as Congress would need to  balance the program and national objectives sought with the long-term  fiscal challenges facing our nation.  The approaches we present are for  illustrative purposes only to provide a sense of the types of trigger and  resulting actions that could be established.
subsections: section_title: Account Name
section_title: Program Description
paragraphs: The Commodity Credit Corporation (CCC) is a government-owned and  government-operated entity that was created in 1933 to stabilize, support,  and protect farm income and prices.  CCC also helps maintain balanced  and adequate supplies of agricultural commodities and aids in their orderly  distribution.
For fiscal years 2000–2002 (under 1996 Farm Bill provisions), CCC  provided corn-related subsidies primarily through two types of payments  available to supplement farmers’ incomes: (1) production flexibility  payments to historical producers of corn and (2) nonrecourse loans, which  allow farmers to store production and use loan proceeds to meet cash flow  needs without selling the crop.  Ad hoc legislation provided additional  payments in the form of market loss assistance payments to compensate  producers for low prices.
For fiscal years 2003–2004 (under 2002 Farm Bill provisions), CCC  provided corn-related subsidies through three types of payments available  to supplement farmers’ incomes: (1) direct payments to historical  producers of corn; (2) countercyclical payments, which provide a safety  net in the event of low crop prices; and (3) nonrecourse loans.
section_title: Funding Source
paragraphs: CCC has an authorized capital stock of $100 million held by the United  States and the authority to have outstanding borrowings of up to $30 billion  at any one time.  Funds are borrowed from the U.S. Treasury.
section_title: Differences between Estimated and Actual Outlays
paragraphs: Based on a 5-year average, estimated outlays for corn differed from actual  outlays by about $1.9 billion per year, or 63.4 percent, in absolute value  terms.   However, the actual annual differences varied between an  overestimate of $388 million and an underestimate of $7 billion.  Table 2  presents the estimated and actual outlays associated with CCC’s corn  program, by fiscal year.
According to the Farm Service Agency, legislative action and economic  changes were the primary reasons behind differences between estimated  and actual outlays for CCC’s corn program during fiscal years 2000 through  2004.  In general, weather and natural disasters are the key drivers of  differences between estimated and actual outlays, which are highly  sensitive to changes in the price of corn.  Outlays increase when the corn  price decreases.  A 1 cent drop in the price of a bushel of corn can lead to  about $85 million increase in countercyclical payments. Participation also  affects costs.  Farm program costs depend on market prices and farm  production, which in turn are influenced by world weather, the condition of  the general economy, the foreign and trade policies of the United States  and other food-exporting nations, the rate of inflation, and the value of the  dollar, among other variables.  Detailed explanations are shown in table 3.
The 2002 Farm Bill guaranteed historical producers of corn and other  commodities a minimum price per bushel, known as a target price, which  they can expect to earn.  To constrain spending, one possible trigger could  be when the target price exceeds the market price by some historically  average percentage, the legislated target price could be reduced.  However,  to avoid price shocks to the industry and possible procyclical effects, the  price reduction could be deferred to the following year.
The Farm Bill also established a formula for fixed, direct payments to  historical producers of corn and other commodities.  To limit spending on  this income-support program, one idea for a trigger could be to link direct  payments to farm sector production prices. For example, if production  prices drop by more than 3 percent, Congress could redefine the formula  to be less generous.
Alternatively, Congress could limit the guarantee of direct payments to  current producers of corn rather than historical producers.
section_title: Account Name
section_title: Administering Organization
section_title: Program Description
paragraphs: CCC is a government-owned and government-operated entity that was  created in 1933 to stabilize, support, and protect farm income and prices.   CCC also helps maintain balanced and adequate supplies of agricultural  commodities and aids in their orderly distribution.
Crop Disaster Assistance programs reimburse producers for qualifying  losses to agricultural commodities (other than sugar cane or cotton seed)  due to damaging weather or related conditions.  The damages must be in  excess of 35 percent of the established price of crops for lost production or  20 percent for lost quality. Crop disaster programs cover insured,  uninsured, and noninsurable crops. The program has no set funding  limitation, however, payments are limited to $80,000 per person, and  producers with incomes greater than $2.5 million are ineligible.  This crop  disaster assistance program is not permanently authorized.
section_title: Funding Source
paragraphs: CCC has an authorized capital stock of $100 million held by the United  States and the authority to have outstanding borrowings of up to $30 billion  at any one time.  Funds are borrowed from the U.S. Treasury.  Although  Crop Disaster Assistance programs are provided through appropriations  acts, the Department of Agriculture considers and applies funding for the  programs in a manner similar to mandatory programs.  According to an  FSA official, funding is provided to all eligible applications for assistance  by prorating available funding if necessary.  The Office of Management and  Budget (OMB) also considers crop disaster assistance programs to be  mandatory in that all eligible applicants may receive benefits.
section_title: Differences between Estimated and Actual Outlays
paragraphs: Based on a 5-year average, estimated outlays for crop disaster assistance  differed from actual outlays by about $1.2 billion per year in absolute value  terms.   However, the actual annual differences varied between $230 million  and $1.9 billion.  Table 4 presents the estimated and actual outlays  associated with CCC’s crop disaster assistance programs, by fiscal year.
According to OMB staff, it is not OMB’s policy to include an estimate for  disaster assistance in the President’s budget.  Instead, these programs are  typically funded through subsequent legislation.
section_title: Ideas for Improving the Accuracy of Estimates
paragraphs: Although OMB typically does not include an estimate for crop disaster  assistance in the President’s budget, we have reported in the past that  shifting the budget timing to an up-front recognition of emergency costs  through reserves may promote a more comprehensive and transparent  debate over federal budgetary priorities during the regular budget process.   For example, we suggested that federal governmentwide emergency  reserves could set aside budget authority in advance for expected yet  unpredictable events as part of the annual resource-allocation process.   Another approach would be to establish agency-specific reserve funds for  those agencies that regularly respond to federal emergencies.  Funds would  be appropriated to these agencies on a contingent basis, meaning that  certain agency-specific criteria would have to be met before the funds  could be used. While these approaches are not of the trigger/response  variety that is the subject of this report, they would help accomplish a goal  of constraining spending if the emergency budget authority provided in  advance is assumed to be within a constrained total budget authority.
section_title: Account Name
section_title: Administering Organization
section_title: Program Description
paragraphs: The Department of Education (Education) provides financial aid in part to  increase access to college.  Education’s first direct loans were made in the  fourth quarter of fiscal year 1994.  Through its William D. Ford Federal  Direct Loan Program (FDLP), students and/or their parents borrow money  directly from the federal government through the vocational,  undergraduate, or graduate schools the students attend.  As is the case  under the Federal Family Education Loan Program (FFELP), or  “guaranteed” student loan program, there are four types of direct loans.
Stafford Loans—variable rate loans available to students.  The federal  government pays the interest on behalf of borrowers while the student is in  school, during a 6-month grace period when the student first leaves school,  and during statutory deferment periods related to borrower unemployment  and economic hardship.
Unsubsidized Stafford Loans—variable rate loans to students with the  same terms as Stafford Loans except that the government does not pay  interest costs during in-school, grace, and deferment periods.
PLUS Loans—variable rate loans made to parents.  The borrower pays all  interest costs.
Consolidation Loans—borrowers may combine multiple federal student  loans into a single, fixed rate loan.  The interest rate is based on the  weighted average of the interest rates in effect on the loans being  consolidated or a fixed percentage.
section_title: Funding Source
paragraphs: Education finances FDLP through a combination of appropriations and  borrowing from Treasury.  Education receives permanent, indefinite budget  authority for estimated subsidy costs—the amount expected not to be  repaid by borrowers—of its loans.  These costs are generally updated, or  reestimated, annually.  The portion of direct loans that Education predicts  will ultimately be repaid by borrowers is financed by borrowing from  Treasury and is not considered a cost to the government because it is  expected to be returned to the government in future years.
section_title: Differences between Estimated and Actual Outlays
paragraphs: Based on a 5-year average, estimated outlays for direct student loans  differed from actual outlays by about $2.6 billion per year, or 702 percent,  in absolute value terms.   However, the actual annual differences varied  between an overestimate of $2.8 billion and an underestimate of $5.3  billion.  A large component of these differences reflects the fact that initial  estimates do not include reestimates of prior year costs, which are  reflected in actual outlays.  In addition, initial estimates reflect proposed  policies, many of which were not enacted and so were not reflected in  subsequent actual outlays. Table 5 presents the estimated and actual  outlays associated with the federal direct student loan program, by fiscal  year.
Because FDLP is a relatively new program, it has a short history of  repayment activity and little historical data are available.  Accordingly,  Education initially relied heavily on data from the guaranteed student loan  program to develop estimates for most key cash flow assumptions in its  FDLP cash flow model, which is used to estimate the subsidy cost of the  program.  Over the past few years, Education has incorporated FDLP data  into many cash flow assumptions; as more data become available,  Education plans to completely phase out the use of guaranteed loan data  for FDLP assumptions.
Drops in interest rates have been a key driver behind differences in  estimated versus actual outlays.  Not only are loans being paid off at lower  rates than anticipated but the drop in rates has also led to a dramatic  increase in consolidations (which are prepayments).  Detailed explanations  are shown in table 6.   other things, increasing the amount of fees borrowers must pay to obtain a  loan or increasing borrowers’ interest rate.  For example, continued  differences between estimated and actual outlays could be used as a  trigger, resulting in higher origination fees or interest rates for new FDLP  loans.   In implementing such a trigger and response, Congress would need  to consider whether FFELP borrowers should similarly be affected.  Under  current law, loans made to borrowers, unless otherwise specified, are to  have the same terms, conditions, and benefits and be made available in the  same amounts under both FDLP and FFELP.
section_title: Account Name
section_title: Administering Organization
section_title: Program Description
paragraphs: Medicaid is a health-financing program for eligible low-income individuals  and families. Federal statute defines over 50 population groups that are  potentially eligible for states’ programs. In general, eligibility is limited to  low-income children, pregnant women, parents of dependent children,  people with disabilities, and the elderly.  Although Medicaid is one federal  program, it consists of 56 distinct state-level programs—one for each state,  territory, Puerto Rico, and the District of Columbia.  Each of the states has  a designated Medicaid agency that administers the program.  In accordance  with the Medicaid statute and within broad federal guidelines, each state  establishes its own eligibility standards; determines the type, amount,  duration, and scope of covered services; sets payment rates; and develops  its administrative structure.
section_title: Funding Source
paragraphs: The federal government matches state Medicaid spending for medical  assistance according to a formula that compares each state’s average per  capita income—a proxy reflecting the health of the state’s economy and its  response to economic changes—to the national per capita income.  Therefore, states with a high per capita income receive less federal funds  than states with a low per capita income.  As economic conditions improve  or decline in a particular state, so does the amount of federal matching  funds granted to that state. The federal share, known as the Federal  Medical Assistance Percentage (FMAP), can range from 50 to 83 percent.  States are required to describe the nature and scope of their programs in  comprehensive written plans submitted to CMS—with federal funding for  state Medicaid services contingent upon CMS approval of the plans. This  approval hinges on whether CMS determines that state plans meet all  applicable federal laws and regulations.
Although the source of Medicaid funding is through an annual  appropriation act, Medicaid is not considered a discretionary spending  program.  Because Medicaid is an entitlement created by the operation of  law, if Congress fails to appropriate money necessary to fund payments and  benefits, eligible recipients may seek legal recourse.  In such case,  necessary payments may be made through the indefinite judgment fund  pursuant to 31 U.S.C. § 1304.
section_title: Differences between Estimated and Actual Outlays
paragraphs: Based on a 5-year average, estimated Medicaid outlays differed from actual  outlays by about $4.2 billion per year, or 2.9 percent, in absolute value  terms.  Actual annual differences ranged from an underestimate of $5.1  billion to an overestimate of $6.3 billion.  Table 7 presents the estimated  and actual Medicaid outlays for fiscal years 2000 through 2004.
Both legislative and technical factors led to differences in estimated and  actual Medicaid outlays. For example, the Jobs and Growth Tax Relief  Reconciliation Act of 2003, which temporarily changed federal matching  rates for benefits and provided fiscal relief to states, affected estimated  Medicaid outlays in both fiscal years 2003 and 2004.  Technical factors  included misestimates of medical assistance payments, administrative  costs, vaccines for children, and collections. Also, there were a number of  legislative proposals that were not adopted.  It is not clear if economic  factors also contributed to the differences, although it is likely so given the  economic downturn that occurred during this time period.  Changing  economic conditions could have led to differences in the number of  individuals eligible for and receiving benefits, and therefore total program  outlays.
According to CMS officials, Medicaid estimates are based primarily on  state estimates and may be adjusted by CMS’ Office of the Actuary to  reflect recent trends in how state estimates have changed over time or how  they have compared with actual expenditures in recent years. Agency  officials were unable to accurately identify and quantify the effects of any  of these factors and explained that the difficulty lies with the variability of  program structure across states.  Each state is allowed the discretion to  structure and modify its program, including the establishment of eligibility  criteria and payment rates.  Similarly, state legislative actions and  economic conditions vary across the country and could have varying  effects on program outlays.  Consequently, aggregating state data into a  single Medicaid figure would mask estimating inaccuracies and challenges  since the negative effect in one might be offset by positive effect in another.   In the event that the difference between estimated and actual spending is  very large, CMS said it would then investigate and seek explanations from  the states. Although CMS did not consider the differences evident  throughout the 5-year period we reviewed to be large enough to prompt  such an evaluation, they did provide some explanation behind  misestimates as shown in table 8 below.
Federal Hospital Insurance (HI) Trust Fund (Medicare Part A)
section_title: Administering Organization
section_title: Program Description
paragraphs: The account funds the Medicare Part A program which partially covers the  costs of, among other things, home health care, inpatient care in hospitals  and skilled nursing facilities, and hospice care. Based on their work history,  most U.S. citizens and permanent residents and their spouses are eligible  for Medicare Part A if they are 65 years of age or older. Also, certain  persons under 65 years old who are disabled or have end-stage renal  disease are eligible for coverage. Enrollees or their spouses who have  contributed to Medicare through payroll taxes for at least 10 years of  employment are automatically enrolled at age 65 and need not pay  premiums to receive coverage. Individuals who have not met this eligibility  requirement may pay a monthly premium to purchase Part A coverage.
section_title: Funding Source
paragraphs: The primary funding source for Medicare Part A comes from payroll taxes.  Other relevant revenue sources include interest on investments in  government securities held by the fund, income from taxation of Old Age,  Survivors, and Disability Insurance (Social Security) benefits, and  premiums collected from voluntary participants.
section_title: Differences between Estimated and Actual Outlays
paragraphs: Based on a 5-year average, estimated Medicare Part A outlays differed from  actual outlays by about $5.6 billion per year, or 3.8 percent, in absolute  value terms. Actual annual differences ranged from an underestimate of  $4.3 billion to an overestimate of $15.9 billion.  Table 9 presents the  estimated and actual HI outlays for fiscal years 2000 through 2004.
Both legislative and technical factors led to differences between estimated  and actual HI outlays.  For example, the Medicare Prescription Drug,  Improvement, and Modernization Act of 2003 (MMA) led to greater-than- expected outlays in fiscal year 2004. Technical factors included difficulty in  predicting the behavior of providers under new payment systems,  misestimates of home health transfers to and from the Supplementary  Medical Insurance (SMI) Trust Fund, and misestimates of service usage.  Economic factors, specifically the hospital market basket, also contributed  to differences.  The hospital market basket is an input price index that  represents the cost of the mix of goods and services that comprise routine,  ancillary, and special-care unit inpatient hospital services.  Detailed  explanations of the differences are shown in table 10.
MMA established a trigger with a soft response to constrain growth in  Medicare; it requires the President to submit a proposal to Congress for  action if the Medicare Trustees determine in 2 consecutive years that the  general revenue share of Medicare is projected to exceed 45 percent  during a 7-year projection period. To date, this threshold has not been  breached and thus no response has been triggered. According to the 2005  Medicare Trustees’ report, the trigger is expected to be breached in 2012,  which falls within the 7-year projection period that will be covered in the  2006 Medicare Trustees’ report. If the 45 percent threshold is projected to  be breached again in the next consecutive 7-year projection period, the  President will be required to propose legislation, within 15 days of  submitting the fiscal year 2009 budget, to respond to the funding warning.
Illustrative Trigger and Response Using the trigger of general revenue exceeding 45 percent in 2 consecutive  years during a 7-year period, hard responses could also be developed.  Possible responses are to adjust taxes, benefit formulas, or eligibility  criteria.  For example, Medicare payroll taxes could automatically be  increased unless Congress took action to prevent the increase.  Alternatively, reaching the trigger could cause automatic changes to benefit  formulas or eligibility criteria, or a combination of benefit changes and tax  increases.  Of course congressional action could change the automatic  response if it was deemed inappropriate at that time.
section_title: Account Name
paragraphs: Federal Supplementary Medical Insurance (SMI) TrustFund  (Medicare Part B)
section_title: Administering Organization
section_title: Program Description
paragraphs: This account, also known as Medicare Part B, partially covers the cost of  doctors’ services, clinical laboratory services, outpatient hospital services,  some physical and occupational therapy services, and some home health  care. Eligibility requirements for Medicare Part B are similar to those for  Part A.  However, unlike for Medicare Part A, enrollment is voluntary.  Enrollees must pay a monthly premium to receive Part B coverage. In 2005,  premiums were $78.20 per month and the deductible was $110.  Premium  and deductible rates may change every year.
Most Part B services are paid based on a fee schedule. Physicians, the  largest Part B service type, are paid under the sustainable growth rate  (SGR) system, which determines the increase in payments per service for  the physician fee schedule for each year based on a statutory formula.  Under the SGR system, actual physician-related spending is compared with  target physician-related spending levels. If actual spending exceeds target  spending, then future physician fee schedule updates are reduced.
section_title: Funding Source
paragraphs: SMI is financed from general revenues (approximately 75 percent) and  beneficiary premiums (approximately 25 percent).
section_title: Differences between Estimated and Actual Outlays
paragraphs: Based on a 5-year average, estimated Medicare Part B outlays differed from  actual outlays by about $6.4 billion per year, or 6.1 percent, in absolute  value terms. Actual annual differences ranged from an underestimate of  $13.4 billion to an overestimate of $4.6 billion.  Table 11 presents the  estimated and actual SMI outlays by fiscal year.
Congress has overridden the statutory updates for the 2003, 2004, and 2005  physician fee schedules. Although the SGR system called for negative  updates in these years, Congress instead granted increases in physician  payments per service. For several years the law was changed to specify  higher spending for physicians after the budget estimates were already  done. Consequently, this contributed to actual outlays that were higher  than estimated.
section_title: Explanation of Key Differences
paragraphs: Both legislative and technical factors led to differences between estimated  and actual SMI outlays.  For example, the Consolidated Appropriations  Resolution of 2003 and MMA led to greater-than-expected outlays for  spending for physicians’ services. Technical factors included delayed  implementation and difficulty in predicting the behavior of providers under  a new outpatient hospital prospective payment system, misestimates of  home health transfers to and from the HI fund, and misestimates of service  usage. Similar to the HI fund, changes in the hospital market basket also  contributed to differences. Detailed explanations of the differences are  shown in table 12.
Congress has established two triggers with soft and hard responses to  constrain growth in SMI.  First, under the SGR system, if actual physician- related spending exceeds target physician-related spending then future  physician fee schedule updates are reduced. Because the actual versus  target spending comparison is cumulative, future fee updates are reduced  to lower future actual spending below future target spending until total  cumulative actual spending is the same as total cumulative target spending.  Although the SGR system was designed to encourage fiscal discipline,  Congress has chosen to modify or override this constraint a number of  times. We have previously reported on concerns about the SGR system and  considerations for reform.  Second, MMA established a trigger with a soft  response; it requires the President to submit a proposal to Congress for  action if the Medicare Trustees determine in 2 consecutive years that the  general revenue share of Medicare is projected to exceed 45 percent during  a 7-year projection period. To date, this threshold has not been breached  and thus no response has been triggered. As mentioned in the Medicare  Part A section of this appendix, the trigger is expected to be breached in  2012, which falls within the specified 7-year projection period that will be  covered in the 2006 Medicare Trustees’ report. If the 45 percent threshold is  projected to be breached again in the next consecutive 7-year projection  period, the President will be required to propose legislation, within 15 days  of submitting the fiscal year 2009 budget, to respond to the funding  warning.
Illustrative Trigger and Response Using the trigger of general revenue exceeding 45 percent in 2 consecutive  years during a 7-year period, hard responses could also be developed.  Possible responses are to adjust premiums, benefit formulas, or eligibility  criteria.  For example, Part B premiums could automatically be increased  unless Congress took action to prevent the increase. Alternatively, reaching  the trigger could cause automatic changes to benefit formulas or eligibility  criteria, or a combination of benefit changes and premium increases.  Of  course congressional action could change the automatic response if it was  deemed inappropriate at that time.
section_title: Account Name
paragraphs: Railroad Retirement Board (RRB)
section_title: Program Description
paragraphs: The RRB administers a Federal retirement-survivor benefit program for the  nation’s railroad workers and their families, under the Railroad Retirement  Act.  In connection with this retirement program, the RRB has  administrative responsibilities under the Social Security Act for certain  benefit payments and railroad workers’ Medicare coverage.
Under the Railroad Retirement Act, retirement and disability annuities are  paid to railroad workers with at least 10 years of service, or 5 years if  performed after 1995. Annuities are also payable to spouses and divorced  spouses of retired workers and to widow(er)s, surviving divorced spouses,  remarried widow(er)s, children, and parents of deceased railroad workers.   Qualified railroad retirement beneficiaries are covered by Medicare in the  same way as Social Security beneficiaries.
Railroad retirement benefits are calculated under a two-tier formula.  Tier I  is based on combined railroad retirement and Social Security credits, using  Social Security benefit formulas.  Tier II is based on railroad service only  and is similar to the defined benefit pensions paid over-and-above Social  Security benefits in other industries.  In addition, some annuitants may also  be qualified for supplemental benefits and vested dual benefits.  Cost-of- living adjustments on the Tier I portion of annuities are paid similarly to  those for Social Security.  However, the adjustment for the Tier II portion is  limited to 32.5 percent of the previous year’s increase in the Consumer  Price Index.  Supplemental annuities and vested dual benefits are not  subject to cost-of-living adjustments.
section_title: Funding Source
paragraphs: Payroll taxes paid by railroad employers and their employees are the  primary source of funding for the railroad retirement benefit program.   Corresponding to the two-tier benefit structure, railroad retirement taxes  are levied on a two-tier basis.  Railroad retirement Tier I payroll taxes are  coordinated with Social Security taxes so that employees and employers  pay Tier I taxes at the same rate as Social Security taxes.  In addition, both  employees and employers pay Tier II taxes, which are used to finance  railroad retirement benefit payments over-and-above Social Security  equivalent levels.  These Tier II taxes are based on the ratio of certain asset  balances to the sum of benefit payments and administrative expenses.
While the railroad retirement system has remained separate from the Social  Security system, the two systems are closely coordinated with regard to  earnings credits, benefit payments, and taxes.  The financing of the two  systems is linked through a financial interchange under which, in effect, the  portion of railroad retirement annuities that is equivalent to Social Security  benefits is coordinated with the Social Security system.  The purpose of  this financial coordination is to place the Social Security trust funds in the  same position they would be in if railroad service were covered by the  Social Security program instead of the railroad retirement program.
Starting in fiscal year 2002, revenues in excess of benefit payments are  invested to provide additional trust fund income.  The National Railroad  Retirement Investment Trust (NRRIT), established by the Railroad  Retirement and Survivors’ Improvement Act of 2001, manages and invests  railroad retirement assets.  The trust is a tax-exempt entity independent  from the federal government.  Railroad retirement funds are invested in  nongovernmental assets, as well as in governmental securities.  Prior to the  Act, investment of Railroad Retirement Account assets was limited to U.S.  government securities.
Additional trust fund income is derived from revenues from federal income  taxes on railroad retirement benefits, and appropriations from general  Treasury revenues provided after 1974 as part of a phase-out of certain  vested dual benefits.
section_title: Differences between Estimated and Actual Outlays
paragraphs: Based on a 5-year average, estimated outlays from the Rail Industry  Pension Fund differed from actual outlays by about $4.1 billion per year, or  125.7 percent, in absolute value terms.  The actual annual differences  between estimated and actual outlays varied between an overestimate of  $77 million and an underestimate of about $17.9 billion. The majority of the  underestimate was a result of legislation that resulted in funds being  transferred out of the account and into a nongovernmental investment trust  fund.  Table 13 presents the estimated and actual outlays associated with  the Rail Industry Pension Fund, by fiscal year.
The discrepancies between estimated and actual outlays in fiscal years  2002 through 2004 can be attributed to the enactment of the Railroad  Retirement and Survivors’ Improvement Act of 2001, which was signed into  law on December 21, 2001.  This legislation lowered eligibility requirements  for annuitants and eliminated reductions that previously applied to  annuities of 30-year employees retiring between ages 60 and 62.  The law  also lowered the minimum eligibility requirement to receive regular  annuities from 10 to 5 years of service after 1995 and increased the Tier II  amount paid to a widow(er) from 50 percent to 100 percent.  Additionally,  the maximum limit on monthly railroad retirement benefits was eliminated.   The law reduced the Tier II tax rate on rail employers in 2002 and 2003, and  in 2004 provided automatic Tier II tax rate adjustments for both employers  and employees.  Lastly, funds in excess of those needed for current  payment of benefits and administrative expenses were transferred to the  National Railroad Retirement Investment Trust.
Agency officials indicated that the level of employment in the rail industry  is the most difficult factor to predict when estimating revenue because it  directly affects payroll tax income.  Employment only affects estimates in  the long term, not short term.  When reporting budget estimates to OMB,  the agency uses middle-range estimates that assume employment will  decrease gradually over time.  Additionally, financial interchanges of the  estimated allocation of benefits between the Railroad Retirement Account  and Social Security Equivalent Benefit Account make it difficult to estimate  exact outlays as they are continually changing.   A detailed explanation of  the differences is shown in table 14.
If actual outlays exceeded estimates by more than the historical average,  Congress could reduce retirement benefits across the board.  For example,  if estimated outlays historically differed from actual outlays by a specified  percent, increases in outlays above that specified percent could  automatically result in an across-the-board increase in retirement  contributions or a cut in retirement benefits.  To determine an appropriate  threshold, rail officials would need to look at long-term historical  differences to minimize the effects of events such as the legislative change  in fiscal years 2002 and 2003.
section_title: Account Name
section_title: Program Description
paragraphs: Unemployment insurance is designed to serve as a “counter-cyclical”  remedy to the effects of recessions by putting more dollars in the pockets  of the labor force, thereby increasing the demand for goods and services  and stabilizing the U.S. economy.
The Unemployment Trust Fund (UTF) finances unemployment insurance— a joint federal-state program that provides temporary cash benefits to  eligible workers who become unemployed through no fault of their own  and helps to stabilize the economy in times of economic recession.  Guided  by federal law, unemployed workers must meet certain criteria set by their  state in order to receive these benefits. Unemployment insurance is  administered by state employees under state law.
Extended benefits are paid during periods of high state unemployment.   Extended benefits are financed one-half by state payroll taxes and one-half  by the federal unemployment payroll tax.  The federal tax also pays for the  cost of federal and state administration of unemployment insurance, labor- market information programs, veterans’ employment services, and 97  percent of the costs of the employment service. States may receive  repayable advances from the UTF when their balances in the fund are  insufficient to pay benefits.
Federal unemployment payroll taxes accumulate in three accounts: (1) the  Employment Security Administration Account (ESAA), which covers both  federal and state administrative costs; (2) the Extended Unemployment  Compensation Account (EUCA), which covers the federal share of  extended unemployment benefits and has been used to fund temporary  extended unemployment compensation benefits; and (3) the Federal  Unemployment Account (FUA), which funds loans to insolvent state  accounts.  There is a statutory ceiling on the size of each of these accounts,  the amounts of which are calculated each September.  The ceiling for the  ESAA account is 40 percent of the appropriated amounts during the fiscal  year for which the ceiling is being calculated.  For the EUCA and FUA  accounts, this ceiling is 0.5 percent of the total covered wages in the prior  calendar year.
section_title: Funding Source
paragraphs: The UTF is funded by employer contributions (payroll taxes) and benefit  reimbursements from nonprofit entities and governmental units that are  paid in lieu of payroll taxes. The UTF may receive repayable advances from  the general fund of the Treasury when it has insufficient balances to make  advances to states or to pay the federal share of extended benefits.
The UTF invests its receipts in U.S. government securities and then draws  on them when the government needs to pay unemployment benefits and/or  cover administrative costs.  In addition, the Treasury maintains a trust fund  account for each state that it can use to build up reserves in times of  economic stability.  Forty-nine states have triggers that automatically raise  state employer taxes when UTF balances fall below a specific level.
States finance the costs of regular unemployment insurance benefits and  their half of the permanent Extended Benefits Program with employer  payroll taxes imposed on at least the first $7,000 paid annually to each  employee.
section_title: Differences between Estimated and Actual Outlays
paragraphs: Based on a 5-year average, estimated outlays from the UTF differed from  actual outlays by about $9.4 billion per year, or 29.6 percent, in absolute  value terms. However, the actual annual differences varied between an  overestimate of about $5 billion and an underestimate of about $22 billion.   Table 15 presents the estimated and actual outlays associated with the  unemployment program by fiscal year.
Because the overall unemployment rate increased over the 5 fiscal years,  actual UTF outlays also increased as would be expected.  UTF outlays are  highly sensitive to changes in the unemployment rate.  For example,  between 2000 and 2001 the 17.5 percent increase in the unemployment rate  was associated with a 34.6 percent increase in actual UTF outlays.  This  relationship is best illustrated by referring to figure 8.
Between 2001 and 2002, UTF outlays increased 81.6 percent in response to  a 23.4 percent increase in the unemployment rate. In 2002, part of the  outlay increase was due to legislation extending federally-funded  unemployment insurance benefits through the Temporary Employment  Compensation Act of 2002 (TEUC) which resulted in unanticipated UTF  outlays. The unemployment rate continued to rise during this time as  130,000 workers were displaced after the events on September 11, 2001,  and the economic recession persisted.  Between 2002 and 2003, TEUC  benefits were extended and the unemployment rate continued to increase  but did so at a decreasing rate.  The 3.4 percent increase in the  unemployment rate and the subsequent extension of TEUC led to the 7.4  percent increase in UTF outlays. Between 2003 and 2004, the  unemployment rate decreased by 8.3 percent and outlays decreased by  about 22 percent.  Table 16 presents the Department of Labor’s (Labor)  explanation for differences between estimated and actual outlays.
Currently, when funds accumulating in federal unemployment accounts  reach statutorily set limits, a distribution of the “excess” funds from the  UTF to individual states’ accounts in the U.S. Treasury is automatically  triggered based on each state’s share of covered wages.  These  distributions are known as “Reed Distributions.” Congress can also  legislatively trigger a special distribution as it did in March 2002, which  provided $8 billion in distributions to all 50 states, the District of Columbia,  Puerto Rico, and the Virgin Islands and extended UTF benefits up to an  additional 13 weeks longer than the maximum 26 weeks previously allowed  by most states.
One potential option to constrain federal spending would be to increase the  statutory cap on federal unemployment accounts, thus making it more  difficult to trigger Reed Distributions to states. By making it more difficult  to trip the trigger, funds could continue to build during economic  prosperity and be available to states when truly needed to counter rising  unemployment.
A different alternative for constraining growth would be to establish a  trigger using a measure of economic prosperity—such as GDP growth in a  specified number of consecutive quarters.  If this trigger was reached,  federal unemployment taxes would automatically increase, allowing trust  fund balances to rise.  To avoid procyclical effects, these taxes could be  automatically reduced again using periods of rising unemployment or  recession as the trigger for that action.
section_title: Analysis of Total Outlays, Receipts, and Fiscal Position
paragraphs: While the focus of this report is on budget triggers as they relate to selected  case study accounts, we have included our analysis of aggregate receipts,  outlays, and surplus/deficit measures to provide broader context. Findings  related to our seven case study accounts and the reasons for differences  between estimated and actual outlays are discussed in the body of this  report. More detailed summaries of each account are included in appendix  I.
subsections: section_title: Aggregate Mandatory Spending Estimates Were Close to Actual Outlays but Large Differences Appear at the Account Level
paragraphs: In the aggregate, original estimates of total mandatory spending were fairly  close to actual results, however large discrepancies were evident at the  account level.  During fiscal years 2000 through 2004, estimated total  mandatory outlays differed from actuals by no more than about 2 percent,  or $24 billion.  However at the account level, average estimated and actual  outlays varied greatly.  While the largest difference was in the Interest on  the Public Debt account—a result of other changes—other accounts also  showed significant changes between estimated and actual outlays.  Alternatively, there are many mandatory accounts with virtually no  differences between estimated and actual outlays.  The variation among  individual accounts was not apparent at the aggregate level because the  combination of positive and negative differences offset each other.
Figure 9 shows that total spending on mandatory programs was expected  to rise throughout the 5-year period and that resulting outlays were just  slightly higher than expected.
Although aggregate estimates were close to actual estimates, the continued  actual and forecasted growth in mandatory programs has raised concerns  about the government’s long-term fiscal outlook.  Addressing growth in  mandatory spending is an important but complicated matter that requires  looking below the aggregate and into specific programs.
section_title: Differences between Estimated and Actual Mandatory Outlays Had Limited Effect on the Unified Deficit/Surplus
paragraphs: The unified budget deficit/surplus measures federal fiscal position, that is,  the difference between total annual receipts and outlays.  Not surprisingly,  the relatively small differences between total estimated and actual  mandatory outlays had a limited effect on the unified budget  surplus/deficit.  In most cases throughout fiscal years 2000 through 2004,  the difference between estimated and actual mandatory outlays accounted  for approximately 7 percent or less of the difference between the estimated  and actual fiscal position.  Despite the fact that mandatory outlays were  close to expectations, surplus/deficit measures proved difficult to estimate  throughout the 5-year period, primarily because of misestimates of federal  receipts.
During fiscal years 2000 through 2004, deficit/surplus projections were  generally more optimistic than reality.  Figure 10 illustrates the estimated  and actual fiscal position (surplus/deficit) throughout the 5-year period.   Although increasing surpluses were projected for the first three years  followed by growing deficits, actual results show that the nation’s fiscal  position in fact declined throughout the 5-year timeframe.  In addition,  projections for fiscal years 2003 and 2004 show that the deficit was  expected to grow but not to the magnitude that ultimately resulted.
The fiscal position represents the difference between total federal revenues  and outlays in a given year.  Although mandatory spending constitutes  more than half of total federal spending, misestimates of the amount of  mandatory spending did not contribute significantly to the differences  between the predicted and actual fiscal position.  According to the detailed  receipt and outlay data shown in table 17, the mandatory outlay difference  in most cases accounted for less than 7 percent of the difference between  the estimated and actual fiscal position with one exception.  In fiscal year  2001, the mandatory outlay estimating error had a larger than usual  effect—approximately 29 percent—on the fiscal position estimating error.   While this particular year stands out in the analysis, it is a reasonable result  given that the total amount of error in surplus/deficit projections was much  smaller—approximately 30 percent or $60 billion—compared with any  other year during the 5-year period.  For example, a $242 billion surplus  was projected for 2002 when in fact the nation’s fiscal position changed  from surplus to deficit, resulting in a $165 billion deficit for that year.  This  discrepancy represented a misestimate of approximately 168 percent.  In  both fiscal years 2001 and 2002, mandatory outlay estimates differed from  actual outlays by approximately 2 percent.  This relatively small difference  accounted for over one quarter of the resulting error in the surplus  projection for 2001 because the difference between estimated and actual  receipts also was relatively small.  It accounted for less than one-tenth of  the total error in the fiscal position projection for 2002 because the  difference between estimated and actual receipts was much larger.  Effects  similar to the latter occurred more frequently throughout the 5-year period,  indicating that estimation errors in mandatory outlays had a limited effect  on fiscal position.
In contrast, revenue estimate inaccuracies proved to have a greater effect  on projections of the nation’s fiscal position.  Throughout the 5-year period,  total estimated outlays differed from actual outlays by no more than 3  percent while total estimated receipts differed from actual receipts by up to  15 percent in absolute value terms.  This suggests that revenue, rather than  outlay estimates, led most significantly to the discrepancies in  surplus/deficit projections.   Figure 11 shows the total estimated and actual  federal receipts in dollar terms for each year we reviewed.
As mentioned earlier in this report, the greatest revenue estimating errors  occurred in 2000, 2002, and 2003, which correlate with the years in which  the fiscal position projections were the most inaccurate.  For example, in  fiscal year 2002, an approximate 2.6 percent underestimate in total outlays  coupled with an approximate 15.4 percent overestimate of receipts  translated into a large shift in fiscal position from surplus to deficit.  Similar  effects occurred in 2000 and 2003.  As shown in table 18, the driving source  of revenue misestimates in any given year varied, but individual and  corporate income taxes often proved difficult to estimate.
section_title: GAO Contact and Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the individual named above, Christine Bonham, Assistant  Director, as well as Carol Henn, Richard Krashevski, Leah Nash, Sheila  Rajabiun, Paul Posner, and Stephanie Wade made key contributions to this  report.