Budget Process: Comments on H.R. 853
Published: 1999-05-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Pursuant to a congressional request, GAO discussed the implications of H.R. 853 on the congressional budget process, focusing on: (1) the importance of the long-term perspective; (2) the long-term and insurance commitments in the budget; and (3) how this relates to the need for control, accountability, and transparency.
section_title: What GAO Found
paragraphs: GAO noted that: (1) in the past GAO suggested four broad goals for a budget process; (2) the process should: (a) provide information about the long-term impact of decisions while recognizing the differences between short-term forecasts, medium-term projections, and longer-term simulations; (b) provide information and be structured to focus on important macro trade-offs; (c) provide information necessary to make informed trade-offs between missions and between the different tools of government; and (d) be enforceable, provide for control and accountability, and be transparent; (3) the approach taken in H.R. 853 has much to recommend it; (4) requiring reports on 75-year budgetary trends for the budget as a whole can help provide the necessary long-term context; (5) the inclusion in the budget of the Office of Management and Budget's (OMB) reports and comparisons between the President's policy proposals and current law will focus more attention on the long term and on how the President would seek to address looming problems; (6) having a Congressional Budget Office (CBO) report as well will permit Congress and other observers to make comparisons with the OMB law report, providing an independent view; (7) although for many programs the Budget Enforcement Act's multiyear timeframe has represented great progress, there are programs and activities where a longer time horizon is necessary to understand the spending implications of the government's commitment and how this commitment affects future budgetary flexibility; (8) programs with an apparently shorter time horizon than pension and health commitments could also benefit from a longer term perspective; (9) federal insurance provided to individuals and businesses against a wide variety of risks is a prime example of the type of program that may carry long-term cost implications; (10) H.R. 853 requires estimates of the risk assumed by the government in these programs be disclosed in the budget; (11) it sets fiscal year 2006 as a date certain for moving to the comprehensive approach; (12) H.R. 853 also calls for OMB, CBO, and GAO to report on the advisability and appropriate implementation of budgeting for the risk-assumed costs; (13) if a joint resolution is enacted into law, it would specify subtotals of new budget authority and outlays for nondefense and defense discretionary spending, direct spending, emergencies, and other subsets of spending deemed necessary; and (14) H.R. 853 contains fall-back procedures for expediting a concurrent resolution if the President vetoes the joint resolution.

section_title: Letter
paragraphs: It is a pleasure to return to talk with you again about the congressional  budget process--and especially whether and how it should be changed to  meet the fiscal situation presented today.
Attached to my testimony today is a list of testimony statements we have  issued on the budget process over the past 5 years.  In addition, I was  fortunate to participate in your September 1997 briefing on budget  enforcement procedures in the House of Representatives.
As we have discussed before, everyone involved in the budget process  shares some frustration with it.  The public finds it confusing.  Executive  branch agencies say it is burdensome and time-consuming.  Members of the  Congress say it seems too lengthy with too many votes on authorizations,  budget resolutions, reconciliation, appropriations, emergency  supplementals, and the debt limit.
In one sense, of course, nothing could be more important than debates  about the budget.  Budgeting is the process by which we as a nation resolve  the large number of often conflicting objectives that citizens seek to  achieve through government action.  The budget determines the fiscal  policy stance of the government--that is, the relationship between spending  and revenues.  And it is through the budget process that the Congress and  the President reach agreement about the areas in which the federal  government will be involved and in what way.
Because the decisions are so important, we expect a great deal from our  budget and budget process.  We want the budget to be clear and  understandable.  We want a process that presents the Congress and the  American people with a framework in which to understand the significant  choices and the information necessary to make the best informed decisions  about federal tax and spending policy.
In addition to these broad goals, the budget process has also been expected  to respond to the budget challenges of a particular time.  The 1974 Budget  and Impoundment Control Act was designed to reassert the Congress’ role  in setting overall federal fiscal policy and in establishing spending  priorities.  The act sought not to achieve a particular outcome but to  impose a structure and a timetable on the budget debate.  It was neutral as  to fiscal policy.
It was not until the enactment of the Balanced Budget and Emergency  Deficit Control Act (also known as Gramm-Rudman-Hollings or GRH) in  1985 that the budget process was designed to achieve a particular goal.   Both GRH and the 1987 amendments to it sought to achieve a specific  outcome: a balanced budget by a time certain.  However, GRH sought to  use a change in process to force agreement on substance--and measured  against its stated objective of a balanced budget, it did not succeed.
The 1990 Budget Enforcement Act (BEA) took a different tack toward the  same end.  While it also sought to achieve a balanced budget, it used  process to enforce a previously reached agreement.  It was designed to  limit congressional actions that would increase the deficit.  On its own  terms BEA succeeded, but its ambition was limited.  It did not seek to  control economic or demographic-driven growth in existing entitlement  programs--and that is the area of greatest growth today.
Nevertheless, the combination of fiscal discipline and economic growth led  to the first balanced budget in nearly 30 years. Today, therefore, a different  fiscal situation has emerged. After nearly 30 years of unified budget  deficits, current projections are for “surpluses as far as the eye can see.” At  the same time, the country faces a demographic tidal wave that will--absent  a change in policy--overwhelm the budget.
This is a new set of challenges for the budget process:  almost 30 years of  projected surpluses followed by--absent changes in Social Security and  Medicare--a reappearance of large and growing deficits.  These  circumstances present an opportune time to reexamine the budget process.   Such an examination should be guided by a number of key principles.
subsections: section_title: General Criteria for a Budget Process
paragraphs: In the past we have suggested four broad goals or criteria for a budget  process.  The process should provide information about the long-term impact of decisions while  recognizing the differences between short-term forecasts, medium-term  projections, and longer-term simulations; provide information and be structured to focus on important macro provide information necessary to make informed trade-offs between  missions and between the different tools of government; and be enforceable, provide for control and accountability, and be  transparent.
Each of these is important, and they are related--but they cannot all be  maximized in a single process.  Trade-offs are necessary.  Today, in the  context of H.R. 853, your staff asked me to focus especially on the  importance of the long-term perspective, on increasing the understanding  and recognition of long-term commitments and insurance commitments in  the budget, and on how this relates to the need for control, accountability,  and transparency.
section_title: Long-Term Perspective and Commitment Recognition
paragraphs: A long-term perspective is important in the budget debate in both a macro  and a micro sense.   By macro I mean the nation’s economic health.  The  nation’s economic future depends in large part upon today’s budget and  investment decisions.  Therefore, we believe that at the macroeconomic  level, the budget should provide a long-term framework and should be  grounded on a linkage of fiscal policy with the long-term economic  outlook.
The micro aspect of this longer-term perspective relates to those programs  and activities where a longer time horizon is necessary to understand the  fiscal and spending implications of commitments for specific purposes.   Examples include retirement programs, Medicare, and pension insurance-- and even some discretionary programs whose design implies continued  funding.  Although BEA’s multiyear focus represented significant progress  in this regard, planning for longer-range economic goals and looking at the  costs of some commitments requires looking much further ahead.  For  these programs, even very rough projections may be better than ignoring  the long term.
Since the bill before you deals with both of these aspects of the long term,  let me discuss each.
section_title: Long-Term Macro Perspective
paragraphs: Beginning in 1992, congressional leaders have requested that we provide a  long-term macro perspective by modeling the implications of different  fiscal policy paths for the nation’s economy over a long-term period, which  has ranged from 50 to 75 years.   We have periodically updated these  simulations to account for changes in the fiscal and economic  environment.   For the last 4 years the Congressional Budget Office (CBO)  has also produced long-term simulations and the President’s budget has  included long-term simulations by the Office of Management and Budget  (OMB).   The CBO and GAO results have been quite similar.
Looking at the simulations since 1992 tells the dual story of today’s fiscal  challenge:  (1) the outlook has improved greatly from earlier simulations  and (2) looking out over the longer term, the current situation is not  sustainable.  In 1992, modeling a continuation of the then-current fiscal and  budget policy resulted in a deficit exceeding 20 percent of gross domestic  product (GDP) by the year 2020.  In contrast, today’s update shows the  benefits of the difficult policy choices made by the Congress and the  President and of a healthy economy:  in 2020, the model indicates a surplus  of 1.5 percent of GDP and does not show a deficit reemerging until 2028.   However, this improved outlook does not mean that the fiscal challenges  facing the country have been met.  In fact, the current situation is still not  sustainable over the long term.  Our most recent model results indicate that  if current policy were continued, by 2063 federal revenue will cover only  health care, Social Security, and interest spending.  To continue all other  spending at current policy levels would require federal borrowing and/or  revenue increases.  As the Comptroller General pointed out earlier this  year, absent any policy changes, budgetary flexibility declines drastically  over time and there is increasingly less room for programs for national  defense, the youth, infrastructure, and law enforcement.  This is true even  if we assume that the entire unified budget surplus is saved and used to  reduce debt (and thus interest) from current levels.
We believe these simulations provide a useful perspective that is often  lacking in budget debates.  They tell us that the surplus is temporary.
Perhaps more important, they alert us to the fact that even if the surplus is  “saved,” we face an unsustainable outlook.  These simulations also provide  a context within which to look at longer-term projections for individual  programs such as Social Security and Medicare.  Both of these programs  use trust fund financing and accounting.  As a result, we get a picture of  their financial outlook by looking at the trust funds--for example, we know  that under the current tax and benefit structure, Social Security’s annual  cash receipts will fall short of annual cash outlays in 2014 and that the  Social Security Trust Fund will be insolvent in 2034.  The Trustees’ report  does look 75 years out.  However, in analyzing Social Security and  considering alternative program changes, it is a mistake to look only at the  trust fund; it is important to also recognize how Social Security fits into the  budget and the economy and to understand how it grows as a share of both.
Although we consider these simulations--and other long-term “projections” --to provide critically important context for budget deliberations, we would  also stress that they must be interpreted carefully.  Given the range of  uncertainty about economic changes and the response to these changes,  these simulations cannot be viewed as forecasts of budgetary or economic  outcomes 50 years in the future.  Indeed, the dramatic improvement in the  outlook over the last 7 years shows how sensitive these results are to  unanticipated shifts in economic growth or to policy actions.  The  simulations, therefore, should be seen as  illustrative of direction and  magnitude given current information about demographic and budgetary  trends and the functioning of the economy.
In this spirit, the approach taken in H.R. 853 has much to recommend it.   Requiring reports on 75-year budgetary trends for the budget as a whole  can help provide the necessary long-term context.  Few of the  government’s commitments are truly transient.  For example, embedded in  numerous programs and policy decisions are long-term relationships with  states and in the international community that have fundamental  implications for the cost of government over time.  The inclusion in the  budget of OMB’s reports and comparisons between the President’s policy  proposals and current law will focus more attention on the long term and  on how the President would seek to address looming problems.  Having a  CBO report as well will permit the Congress and other observers to make  comparisons with the OMB current law report, providing an independent  view.  Although we do not make budget projections or estimates, as long as  it is useful to the Congress we will continue our work on the long term as  well.  Given the level of uncertainty involved in long-term modeling--and  the need to be aware of how sensitive results are to different assumptions  about how the economy works--it has proven useful to have several  different entities develop and maintain the ability to simulate the long term.   In the past, the few players in this arena have collaborated and shared  techniques, data, and analyses.  This has increased the confidence that can  be placed in the direction and magnitude of the results.  I am sure this will  continue, especially if the requirements in H.R. 853 are enacted to ensure  the continued efforts of OMB and CBO.
section_title: Long-Term Focus at Micro Level Needed in Budget
paragraphs: The budget was not designed to and does not provide complete information  on long-term cost implications stemming from some of the government’s  commitments when they are made.  We have long advocated that  policymakers need information on the long-term cost consequences of  today’s commitments.  For programs as large as Social Security and  Medicare this is important both for macro policy and for resource  allocation.  However, it is also important to understand the long-term  implications of the commitments for those programs too small to drive the  long-term outlook.  A budget is about the allocation of scarce resources.   Such decisions reflect a number of factors including beliefs about the  appropriate role of government in various areas, judgment about the likely  success of a program in achieving certain goals, and the cost of a program.   It is important that Members of the Congress and the President--and  citizens--be able to compare program costs on a consistent basis.
A budget should be structured to permit informed programmatic decision- making across a wide range of approaches--for example, insurance, credit,  asset sales, capital, grants, and direct service.   This is less difficult if  policymakers know what the cost of a given decision will be.   Although for  many programs BEA’s multiyear time frame has represented great progress,  there are programs and activities where a longer time horizon is necessary  to understand the spending implications of the government’s commitment-- and this commitment affects future budgetary flexibility.
H.R. 853’s requirement for reports on long-term budgetary trends should  also be helpful in this area.  While long-term information on Social Security  and Medicare has been available in Trustees’ reports--and is often cited in  the debate--these are not the only programs in which the government has  made long-term commitments.  Civilian, military, and veterans’ retirement  benefits constitute another large category of the federal government’s  commitments.  While some have been recognized in the budget, none of the  costs of civilian or military retiree health benefits are recognized in the  budget as they are earned.  The same is true for veterans’ pensions and  benefits.  As the result of new accounting standards that require its  reporting, information on the long-term liabilities of these other retirement  and benefit programs is now being made available in annual financial  statements.  This information can supplement the information included in  the budget as decisionmakers consider the costs of these programs.
Programs with an apparently shorter time horizon than pension and health  commitments could also benefit from a longer-term perspective.  As I noted  above, many government programs and policies imply costs over a  relatively long period of time.  For some of these--e.g., pensions--long-term  costs may be easy to calculate.  For others, such as decisions about the  nation’s role in the world or some intergovernmental commitments, costs  are more difficult the estimate.  Unfortunately for analysts, ease of  calculation does not always correlate with importance.
Federal insurance provided to individuals and businesses against a wide  variety of risks is a prime example of the type of program that may carry  long-term cost implications.  In 1997, we reported that the current cash- based budget generally provides incomplete and misleading information on  the cost and fiscal impact of federal insurance programs. The use of  accrual concepts, such as budgeting for the cost of the risk assumed by the  government as in H.R. 853, has the potential to better inform budget  choices.  In our report, we supported supplemental reporting of these cost  estimates in the budget, as required by H.R. 853.  We believe this  supplemental reporting will allow time to validate estimation  methodologies and increase the users’ comfort levels with accrual  estimates before considering whether to move to a more comprehensive  approach of incorporating the risk-assumed estimates into the budget  numbers.
H.R. 853 requires that estimates of the risk assumed by the government in  these programs be disclosed in the budget.  It also sets fiscal year 2006 as a  date certain for moving to the comprehensive approach.  We recognize that  setting a date for inclusion in budget numbers may well increase agencies’  attention to and efforts to develop good quality estimates.  However, the  bill also sunsets this provision at the end of fiscal year 2007--thereby  including these numbers in the budget for only 2 years.  This seems  problematic for two reasons.  First, the knowledge that the numbers would  only be used in the budget for 2 years could reduce the pressure to do the  hard work necessary to develop good estimates.  Second, changing the  basis of budget numbers for only 2 years is likely to be both burdensome  and confusing.  This is not to say that there should be no reexamination of a  change of this magnitude.  Certainly it makes sense after some number of  years of experience for the Congress and the President to consider  progress under budgeting on a risk-assumed basis and make a decision  whether to continue or not.  However, our experience with credit reform-- which is easier than estimating risk-assumed costs for insurance--tells us  that a 2-year trial is too short for making such a judgment.
Whatever approach to implementation is finally decided upon, I must stress  that the calculation of the risk-assumed costs is complex.  Some programs  will be better able to make the estimates than others.  H.R. 853 also calls for  OMB, CBO, and GAO to report on the advisability and appropriate  implementation of budgeting for the risk-assumed costs.  These reports  should play a significant role in a final decision about when these numbers  are ready to be incorporated into the budget.
section_title: Role of Long-Term Perspective in Increasing Control, Accountability, and Transparency
paragraphs: Incorporating a long-term perspective into the budget process advances the  goals of control, accountability, and transparency.  Transparency is a  complex goal.  At times it demands simplicity--and I would be the first to  admit that incorporating long-term cost estimates is unlikely to simplify the  budget process.  However, transparency can also mean “no hidden costs”  or “few surprises.”  This aspect of transparency is advanced by  understanding and disclosing the long-term cost implications of as much of  the budget as is possible.  The Congress, the President, and the taxpayers  have a right to the best information possible about the cost of the future  commitments that they are making.
These long-term cost estimates are also important for control and  accountability.  The Congress and the President are best able to control the  cost of a program when it is created or modified.  For example, cash-based  budgeting for insurance programs provides not only incorrect, but also  misleading, information about the expected cost of these programs to the  federal government.  If these costs were available--even as rough estimates --at the time an insurance program was proposed, policymakers could  consider design elements that might reduce costs.
section_title: Technical Comments on H.R. 853
paragraphs: Since BEA’s limits on budget authority and outlays remain in effect through  2002, care must be taken in designing the relationship between BEA and  any changes in the budget laws that take effect before its expiration.  For  example, H.R. 853 is clear in its repeal of the current requirement to adjust  the spending limits for emergencies.  The interaction between the existing  spending limits on budget authority and/or outlays and any joint resolution  on the budget vetoed by the President is less clear.  BEA contains a number  of different limits on budget authority and/or outlays.  For fiscal years  2001and 2002, it contains budget authority and outlay limits for  discretionary programs and separate outlay limits for highway and mass  transit programs.
However, under H.R. 853, if a joint resolution is enacted into law, it would  specify subtotals of new budget authority and outlays for nondefense and  defense discretionary spending, direct spending, emergencies, and other  subsets of spending if deemed necessary.  If the President signs the joint  resolution and it is enacted, these subtotals would replace the current law’s  spending limits.  However, H.R. 853 contains “fall-back” procedures for  expediting a concurrent resolution if the President vetoes the joint  resolution.  While this is a workable way for dealing with the possibility of a  presidential veto, failure to enact the joint resolution on the budget means  that BEA’s limits on discretionary, highway, and mass transit are still in  effect.  This would lead to a situation in which the concurrent resolution  would contain subtotals for defense, nondefense, and emergencies while  the governing law contained statutory limits on discretionary, highway, and  mass transit spending.  It would appear that the concurrent resolution on  the budget’s subtotals for defense, nondefense, and emergencies would  serve as a blueprint/guide for congressional action on spending, revenue,  and debt without the force of law.
Technical Issues in Approach to Insurance Budgeting:  I  have previously  discussed insurance budgeting and our support for having the Congress  encourage the development and reporting of annual risk-assumed cost  estimates with the idea of moving toward a comprehensive accrual-based  budgeting approach when feasible.  H.R. 853 definitely moves in that  direction.  I do have two technical concerns.  The first is related to the  budget accounting for administrative costs described in the bill.  Although  the bill is somewhat unclear on some issues, it appears that the goal is to  make the administrative costs a part of the risk-assumed cost, a feature  that has been considered as desirable.   The bill specifies that all funding  for administrative expenses will be displayed in the program account and  that the financing account will transfer to the program account the  amounts necessary to pay the administrative costs.  The financing account  is the nonbudgetary account that accounts for all cash flows related to the  insurance program, including premiums.  The bill specifies that in  calculating the risk-assumed cost of insurance, administrative expenses are  to be subtracted from premiums.  Presumably, although the bill is not clear  on this point, this is the financing source that the financing account will use  to pay the administrative expenses to the program account.  I would be  happy to work with your staff to clarify how administrative costs are to be  financed.
The second technical concern relates to the financing of reestimates.  The  bill specifies that the amount of the reestimate shall be paid from the  program account to the financing account.  It is silent as to whether the  program account receives a permanent appropriation for the reestimate or  whether some other financing source is envisioned.  As you know, in credit  reform a permanent appropriation was provided for reestimates, but some  have raised the issue that this does not provide agencies an incentive to  make good initial estimates.  Again, I will be happy to discuss this issue in  greater depth with your staff.
GAO Report Requirement:  Finally, I note that the bill would require that we  study, at least every 5 years, the provisions of law that provide mandatory  spending, and recommend the appropriate form of financing for activities  or programs financed by such provisions of law.  Current law requires this  study but leaves the timing open--it must be revised “from time to time.”   We have issued reports under this requirement three times since mid-1987  and have found that it requires so significant a commitment of time and  staff that it constrains our ability to do other work.  Therefore, I would like  to talk with your staff about how to provide the information in which you  are interested promptly and efficiently.
Mr. Chairman, this concludes my statement.  I would be happy to answer  any questions that you or the Members of the Committee may have.
section_title: Related GAO Testimonies
paragraphs: Budget Issues:  Budgeting for Federal Insurance Programs (GAO/T-AIMD-98-147, April 23, 1998).
Budget Issues:  Long-Term Fiscal Outlook (GAO/T-AIMD/OCE-98-83,  February 25, 1998).
Budget Process:  Evolution and Challenges (GAO/T-AIMD-96-129, July 11,  1996).
Budget Process:  History and Future Directions (GAO/T-AIMD-95-214, July 13, 1995).
Budget Process:  Biennial Budgeting for the Federal Government (GAO/T-AIMD-94-112, April 28, 1994).
Budget Process:  Some Reforms Offer Promise (GAO/T-AIMD-94-86, March 2, 1994).
The first copy of each GAO report and testimony is free. Additional copies are $2 each.  Orders should be sent to the  following address, accompanied by a check or money order made  out to the Superintendent of Documents, when necessary, VISA and  MasterCard credit cards are accepted, also.
Orders for 100 or more copies to be mailed to a single address are  discounted 25 percent.
U.S. General Accounting Office P.O. Box 37050 Washington, DC  20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537.
Each day, GAO issues a list of newly available reports and  testimony.  To receive facsimile copies of the daily list or any list  from the past 30 days, please call (202) 512-6000 using a touchtone  phone.  A recorded menu will provide information on how to obtain  these lists.