Fiscal Exposures: Improving Cost Recognition in the Federal Budget
Published: 2013-10-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The federal government's long-term fiscal imbalances are driven on the spending side by the effects of an aging population and rising health care costs on Social Security and major federal health programs. However, GAO identified a variety of other fiscal exposures--responsibilities, programs, and activities that may legally commit or create the expectation for future federal spending--that vary as to source, extent of the government's legal commitment, and magnitude. A more complete understanding of these other fiscal exposures can help policymakers anticipate changes in future spending and enhance control and oversight over federal resources.
GAO was asked to provide information on risks facing the federal budget. This report (1) examines selected programs that create a fiscal exposure, including the extent and estimated magnitude of the government's legal commitment; and (2) assesses how fiscal exposures could be better recognized in the budget. Based on its review of budget and financial data, GAO selected nine programs, including federal employee benefit programs, insurance programs, and the stock purchase agreements with Fannie Mae and Freddie Mac, and drew upon previous work to discuss potential approaches for improving budgetary attention to fiscal exposures.
section_title: What GAO Found
paragraphs: Fiscal exposures may be explicit in that the federal government is legally required to pay for the commitment; alternatively, it may be implicit in that the exposure arises from expectations based on current policy or past practices. The nine programs GAO examined illustrate the range of federal fiscal exposures (see figure) and how they can change over time. Also, some programs may have elements of both explicit and implicit exposure. Federal insurance programs, for example, fall across the spectrum: if an event occurs, some payment is legally required--an explicit exposure. However, there may be an expectation that the government will provide assistance beyond the amount legally required--that is an implicit exposure. Prior to 2008, securities issued by Fannie Mae or Freddie Mac were explicitly not backed by the U.S. government. However, in response to the financial crisis, the government's agreement to provide temporary assistance to cover their losses up to a set amount created a new explicit exposure. The amount of future spending arising from federal fiscal exposures varies in the degree to which it is known and can be measured.
For some exposures GAO found that the budget provided incomplete information or potentially misleading signals regarding the full cost of the commitments made today. A uniform across-the-board approach to make fiscal exposures more apparent when making budget decisions may not be appropriate given their varying characteristics. Several factors need to be taken into account in selecting an approach to better recognize fiscal exposures in the budget: the extent of the government's legal commitment; the length of time until the resulting payment is made; and the extent to which the magnitude of the exposure can be reasonably estimated. Expanding the availability and use of supplemental information, including measures that can signal significant changes in the magnitude of fiscal exposures, would be an important first step to enhancing oversight over federal resources and can aid in monitoring the financial condition of programs over the longer term. Incorporating measures of the full cost into primary budget data would provide enhanced control over future spending, which can help both improve the nation's fiscal condition and enhance budgetary flexibility.
section_title: What GAO Recommends
paragraphs: GAO is not making new recommendations but this analysis provides additional support for past recommendations to improve budget recognition of fiscal exposures by, for example, expanding the availability and use of information on expected future spending arising from commitments made today.

section_title: Letter
paragraphs: Our simulations of the federal government’s long-term fiscal outlook lead  to an overarching conclusion: current fiscal policy is unsustainable over  the long term. In these simulations debt held by the public continues to  grow over the coming decades as a share of gross domestic product.  This growth is driven by a fundamental imbalance between revenue and  spending, which on the spending side, is driven by the aging of the  population and rising health care costs. Absent reform of federal  retirement and health programs—including Social Security, Medicare, and  Medicaid—federal budgetary flexibility will become increasingly  constrained. In recent years, emerging issues and unanticipated events  have increased awareness of additional pressures on current and future  federal budgets; addressing the federal government’s fiscal sustainability  challenges is important for maintaining the budget flexibility to respond  quickly and adequately to them. As we have reported before,  understanding the longer-term budget implications of policy decisions at  the time decisions are made permits more informed discussion of both  overall program and specific design features. Addressing the fiscal  challenges of the future will require looking at the entire range of federal  activities and making difficult choices in setting priorities and linking  resources to results. Consideration of the tradeoffs inherent in these  decisions can be facilitated if there is comparable information on both the  near-term and long-term budget implications of existing programs.
1For purposes of this report, the term legal commitment refers to the government’s  2GAO, Fiscal Exposures: Improving the Budgetary Focus on Long-Term Costs and  responsibility for future financial obligations.
Uncertainties, GAO-03-213 (Washington, D.C.: Jan. 24, 2003). government’s legal commitment, and magnitude. Further, some of these  factors may change over time. For example, the government’s response  to an event or series of events can strengthen expectations that the  government will respond in the same way to similar events in the future.  The magnitude of the exposure in a given area may also change: for  example, increased population density in coastal areas may increase the  magnitude of exposures from natural disasters. A more complete  understanding of the sources of fiscal exposures and the way they are  changing can provide enhanced control and oversight over federal  resources. Policymakers can then respond to any changing risks as they  deem it appropriate.
You asked that we provide information on identifying, monitoring, and  measuring new or evolving risks facing the federal budget. In this report,  we (1) describe selected programs that create a fiscal exposure, including  the extent and estimated magnitude of the government’s legal  commitment, and discuss the implications of these fiscal exposures for  the budget, and (2) assess how fiscal exposures could be better  recognized during the budget process.
Many activities can be thought of as fiscal exposures. This report focuses  on a subset of fiscal exposures that represent legal commitments for  future spending. We do not discuss the major social insurance programs  (Social Security, Medicare, and Medicaid) and other exposures, such as  disaster assistance to state and local governments or the costs of  maintaining federal infrastructure, where future spending stems all or in  part from implied commitments embedded in current policies or past  practices.
3The term “budget” can refer to a variety of plans, including the President’s budget, the  congressional budget resolution or an agency’s budget documents. In this report, we  focused on reporting in the President’s budget. See, 31 U.S.C. § 1105. budget. In addition, to facilitate an assessment of current budget  treatment, we selected programs for which the outlays and dedicated  receipts could be easily identified in budget accounts.
The fiscal exposures we discuss in this report are: national flood insurance; pension insurance; military pension benefits; military post-retirement health benefits; and stock purchase agreements with Fannie Mae and Freddie Mac;  civilian pension benefits;  civilian post-retirement health benefits;  veterans compensation.
4The Financial Report is prepared by the Department of the Treasury, in coordination with  the Office of Management and Budget (OMB). Generally, a cost is recorded in the  Financial Report on an accrual basis—when the obligation is incurred rather than when it  is paid; as such costs for some programs are recognized earlier than in the budget, which  generally measures outlays on a cash or cash-equivalent basis.
Report or agency financial reports from fiscal years 2001 to 2012, when  available. For programs funded by a trust fund, we compared trust fund  balances reported in the budget to estimates of the net present value of  future benefits for the program, as measured by its liability in the Financial  Report. To analyze the current budget treatment of the exposures and  how the budget recognition could be improved, we drew upon our body of  work on fiscal exposures, including work on federal insurance and  environmental disposal liabilities, other nations’ use of accrual budgeting  to better recognize the full cost of government programs and activities,  and on the budget process and mechanisms to control spending and  manage fiscal exposures. While changes to the budget reporting may  suggest the need for policy changes, our focus is on providing better  information to make policy choices, not on what those choices should be.
TRICARE for Life as of 2003.  5The budget reflected contributions to a trust fund from the Department of Defense for  6Federal trust funds are used to link earmarked receipts with the expenditures of those  receipts for a dedicated purpose. For example, monies in the Civil Service Retirement and  Disability Fund and Military Retirement Fund are dedicated to fund long-term pension  commitments. Fund balances stem from a combination of receipts and appropriated  contributions from the general fund, which include interest payments and the employer  share of federal employee pension costs. See GAO, Federal Trust and Other Earmarked  Funds: Answers to Frequently Asked Questions, GAO-01-199SP (Washington, D.C.: Jan.  2001). Data for civilian pension liabilities were obtained from the Office of Personnel  Management’s (OPM) financial reports.
Liabilities, GAO-03-219 (Washington, D.C.: Jan. 24, 2003) and Budget Issues: Budgeting  for Federal Insurance Programs, GAO/AIMD-97-16 (Washington, D.C.: Sept. 30, 1997).  7GAO, Long-Term Commitments: Improving the Budgetary Focus on Environmental  8GAO, Budget Issues: Accrual Budgeting Useful in Certain Areas but Does Not Provide  Sufficient Information for Reporting on Our Nation’s Longer-Term Fiscal Challenge,  GAO-08-206 (Washington, D.C.: Dec. 2007); and GAO, Accrual Budgeting: Experiences  of Other Nations and Implications for the United States, GAO/AIMD-00-57 (Washington,  D.C.: Feb. 18, 2000).   9GAO, Mandatory Spending: Using Budget Triggers to Constrain Growth, GAO-06-276  (Washington, D.C.: Jan. 31, 2006); and GAO, Budget Policy: Issues in Capping  Mandatory Spending, GAO/AIMD-94-155 (Washington, D.C.: Jul. 18, 1994). benefit liability used in this report. However, we determined the data from  the Financial Report were sufficiently reliable for representing the  estimated magnitude of future spending arising from commitments  incurred today. To assess the reliability of the data collected from agency  financial reports for pension insurance and civilian pension liabilities, we  reviewed the independent audit reports on PBGC and Office of Personnel  Management’s (OPM) financial statements; the auditors determined that  financial information was fairly presented and therefore we determined  that the data were sufficiently reliable for illustrating the programs’  financial conditions.
We conducted this performance audit from September 2012 to October  2013 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: We developed the conceptual framework for fiscal exposures in 2003, in  order to facilitate the discussion of long-term costs and uncertainties that  present risks for the federal budget in the future. Fiscal exposures vary  widely as to source, extent of the government’s legal commitment, and  magnitude. Figure 1 illustrates the range of the legal commitment. Fiscal  exposures may be explicit in that the government is legally required to  fund the commitment, or implicit in that an exposure arises not from a  legal commitment, but from current policy, past practices, or other factors  that may create the expectation for future spending. Some exposures  present elements of both explicit and implicit exposures. Insurance  programs are a key example. If an event occurs, some payment is legally  required; this represents an explicit exposure. There may be an  expectation that the government will provide assistance beyond the  program’s total available resources or budget authority (e.g., flood  insurance payments made in response to a major disaster): this  expectation represents an implicit exposure.
10GAO-03-213.  protect households or individuals against certain social risks including loss of income. In  contrast to other federal insurance programs, these programs are generally viewed as  transfer payments, which are benefits provided without requiring the recipient to provide  current or future goods or services of equivalent value in return. In this respect, they are  different from pension and other employee compensation that is provided in exchange for  services. from 10 percent of GDP in 2010 to 13.6 percent of GDP by 2030,  absorbing an increasing share of federal revenue and reducing future  budget flexibility. Should the amounts of funding needed to cover future  benefits exceed the amounts available in corresponding trust funds, there  may be an expectation that the government will use federal funds to pay  the difference, even though there would be no legal commitment on  behalf of the government to do so. Significant information on the  estimated future spending for Social Security and Medicare is available;  in addition to our long-term fiscal simulations, the Congressional Budget  Office (CBO) and the administration regularly publish long-term fiscal  simulations, which illustrate the expected growth in spending for these  programs.
Future spending for other implicit exposures can be more difficult to  estimate. For example, the frequency and magnitude of declared  disasters has increased in recent decades, resulting in billions of dollars  of supplemental appropriations. FEMA has obligated over $80 billion in  federal assistance for disasters declared during fiscal year 2004 through  2011. The unpredictable nature of such events makes estimating future  spending difficult.
12GAO, The Federal Government’s Long-Term Fiscal Outlook: Spring 2013 Update,  GAO-13-481SP, (Washington, D.C.: Apr. 11, 2013). These figures also include spending  for other federal health programs delivered through the states – the Children’s Health  Insurance Program and the subsidies available to assist individuals to purchase insurance  coverage through the American Health Benefit Exchanges.   13See Congressional Budget Office, The 2012 Long-Term Budget Outlook (Washington,  D.C.: Jun. 5, 2012) and Office of Management and Budget, Analytical Perspectives,  Budget of the U.S. Government, Fiscal Year 2014 (Washington, D.C., Apr. 10, 2013). losses if an event occurs in the future, the generally cash-based  measures used in the budget do not reflect the magnitude of the  government’s legal commitment of future resources at the time decisions  are being made. If the full cost of a spending decision is included in the  budget when the decision is made, then decision makers can consider  the total costs when setting priorities, comparing the cost of a program  with its benefits, or assessing the cost of one method of reaching a  specified goal with another. Decision makers’ ability to make informed  choices would be improved by increased transparency regarding the  impact of policy decisions on the expected path of spending and revenue.
Expected future spending arising from some exposures is recognized in  the financial statements, which report costs on an accrual basis.  Generally, under financial accounting standards, liabilities are recorded  for probable and measureable outflows of resources arising from past  transactions and events. Also, under accounting standards, the cost of  claims for federal insurance programs that are deemed probable and  measurable is considered a liability; reasonably possible losses are  disclosed in the notes to the financial statements. Therefore, some  measures reported in the government’s financial statements can be  useful indicators of future spending arising from certain fiscal exposures.
section_title: The Budget Provides Incomplete Information about Some Fiscal Exposures
paragraphs: 14See appendix I for information on the extent and estimated magnitude of these fiscal  exposures. government to the extent there is an expectation that the government  would step in and cover losses beyond the program’s reserves.
For some exposures, the extent of the government’s legal commitment  has changed over time. For example, the fiscal exposure created by  Fannie Mae and Freddie Mac changed in recent years as the government  responded to the financial crisis. Prior to 2008, securities issued by  Fannie Mae and Freddie Mac were explicitly not guaranteed by the  federal government and the government had no legal responsibility to  provide support to these GSEs. However, in response to the financial  crisis, the government placed them into conservatorship and agreed to  provide temporary assistance, creating a new explicit exposure.
The budget does reflect some or all of the cost of the government’s legal  commitment for some exposures. For example, for crop insurance,  budget authority is provided to cover the cost of premium subsidies,  claims payments, and administrative expense subsidies. For military and  civilian pensions, agencies are required to make contributions out of  current budget authority to cover some of the costs of civilian and military  pension benefits earned by current employees. These contributions  reduce the funds available to each agency to fund other activities.  However, the recognition is incomplete because the contributions are not  set to cover the full cost. In addition, we found that the budget provides  incomplete information or potentially misleading signals about today’s  legal commitments for some other exposures as well. Our selected fiscal  exposures generally demonstrate one or more of the following  characteristics:  The full cost of commitments incurred today is not recorded in the  budget until the corresponding outlays are made in the future. For  example, for veterans compensation and civilian post-retirement health  benefits, the budget reflects benefit payments in a given year, instead of  capturing the cost of benefits earned today that will need to be paid in the  future.
16The Federal Housing Finance Regulatory Reform Act of 2008 established the Federal  Housing Finance Agency (FHFA), which was created to enhance authority over these  GSEs and provide the Secretary of the Treasury with certain authorities intended to  ensure the financial stability of these GSEs. Treasury entered into a Senior Preferred  Stock Purchase Agreement (hereafter referred to as the agreements) with each GSE. The  agreements, which have no expiration date, provide that Treasury will disburse funds to  these GSEs if at the end of any quarter the FHFA determines that the liabilities of either  GSE exceed its assets.   17Budget authority is the authority to incur obligations and pay expenses. of an insured event, and the payment of claims may extend over several  decades. Rather, the cost of pension insurance can be measured by the  portion of risk assumed by the government that is not charged to the  beneficiary—a “missing premium.” This subsidy is not recognized in the  budget when the insurance is extended.
The current budget treatment results in both incomplete information with  regard to any missing premium, and in potentially misleading information  about the program’s financial condition. For example, at the time budget  decisions were being made for fiscal year 2013, the budget showed a  positive budget estimate (i.e., net revenues) for PBGC of about $1.6  billion, suggesting that the program would help decrease the federal  budget deficit that year. However, the financial reports available at the  same time showed the program’s net position worsened by about $8  billion from the year before, principally as the result of incurred losses that  are not yet reflected in the budget. These estimates provide significantly  different pictures of the program’s health and its potential draw on future  budget resources. While PBGC can legally only pay claims up to the  amount of resources available in its revolving funds, in the face of major  pension fund failures there might be an expectation that the government  would pass legislation allowing PBGC to cover some or all of the gap.
Dedicated resources are estimated to be insufficient to pay for the  associated commitment. Some programs set aside amounts out of  current budget authority to cover benefits earned today but payable in the  future. For example, agency contributions and Treasury payments to  cover military pension benefits accrued during the year are deposited in a  budgetary trust fund; however, the trust fund balance is significantly less  than expected future benefits payments, as measured by the accrued  liability (see appendix I, figure 9). As such, the trust fund’s balance can  provide a signaling function of future spending but does not necessarily  represent the full cost of those legal commitments.
Furthermore, some insurance programs do not have sufficient dedicated  resources to cover expected costs. For example, the NFIP historically  insured many properties at a subsidized rate. In addition, overall flood  insurance premiums were designed to permit the program to cover losses  and expenses in an “average historical loss year,” but not to cover high- loss years. Instead, the program was given the authority to borrow from  the Treasury in such years, with the expectation that low-loss years would  allow the program to repay any borrowed funds. With the exception of  years involving catastrophes, annual losses and receipts have generally  evened out since 1978, but NFIP has been unable to repay the amounts  borrowed in response to catastrophic events, such as Hurricane Katrina  in 2005. This funding structure is one of the reasons the program was  added to our High Risk List in 2006.
Increasing amounts of future spending may be required or expected  based both on recent trends and events—and on the government’s  response to those events. For example, weather-related events have  cost the nation tens of billions of dollars in damages over the past  decade. The exposure from weather-related events increases with  changes in population density as well as increased frequency and  severity of the events. This is one reason we added the federal  government’s fiscal exposure created by climate change to our 2013 High  Risk List. Through federal programs like flood and crop insurance, these  events pose significant financial risks for the federal government.
Questions, GAO-01-199SP (Washington, D.C.: Jan. 2001).  the subsidized premiums be eliminated and actuarially sound premiums phased in.  20GAO, Federal Trust and Other Earmarked Funds: Answers to Frequently Asked  21The Biggert-Waters Flood Insurance Reform Act of 2012, Pub. L. No. 112-141, requires  22GAO, GAO’s High Risk Program, GAO-06-497T, (Washington, D.C.: March 15, 2006).  23GAO-13-283.
section_title: Approaches to Better Recognize the Programs that Create Fiscal Exposures in the Budget
paragraphs: Given the variation in fiscal exposures, when making budget decisions, a  uniform, across-the-board approach to make fiscal exposures more  apparent may not be appropriate. Several factors need to be taken into  account in selecting an approach to better recognize fiscal exposures in  the budget: the extent of the government’s legal commitment; the length  of time until the resulting payment is made; and the extent to which the  magnitude of the exposure can be reasonably estimated. We previously  recommended to OMB and Congress two general approaches: reporting  supplemental information in budget documents to increase attention to  fiscal exposures, and incorporating costs into primary budget data to  allow for better comparisons among programs.
subsections: section_title: Reporting Supplemental Information Can Increase Attention to Fiscal Exposures
paragraphs: Supplemental reporting involves including information about the financial  state of programs in addition to that which is available in primary budget  data. Improved supplemental reporting in budget documents on fiscal  exposures would make information more accessible to policymakers  without introducing additional complexity and uncertainty directly into the  budget. With a supplemental reporting approach, the current basis of  reporting primary budget data would not be changed. Instead, the  supplemental information would be used along with budget data to  identify important signals that could be used to monitor fiscal exposures.  For example, the Appendix Volume in the President’s budget includes a  balance sheet for some federal insurance programs that shows the  program’s net position (assets minus liabilities), providing valuable  information about the program’s affect on future budget resources. For  the Federal Crop Insurance budget account, a supplemental table  includes the cost of the premium subsidy provided by the government. In  2003, we recommended that OMB create an annual report on fiscal  exposures providing a concise list and description of such exposures,  cost estimates (where possible), and an assessment of methodologies  and data used to produce cost estimates for such exposures. We further  recommended that OMB report estimated costs of certain exposures as a  new budget concept—”exposure level”—as a notational item in the  Program and Financing schedule of the President’s budget, though the  recommendation was not implemented.
In some cases, improving supplemental reporting in key budget  documents may simply be a matter of expanding program analysis and  making existing analytical work more readily available. For example, CBO  regularly prepares 10-year budget projections for several programs in our  review. While this time period is helpful for many programs, longer-term  projections would be helpful for those programs—such as federal  employee pensions and retiree health—where the time between the legal  commitment and payments can extend over several decades. Further,  significant changes in expected spending (or differences between actual  and estimated spending) should prompt analysis, including consideration  of the nature and source of the change.
Identifying meaningful measures that would provide signals about the  changing nature or magnitude of the exposure might offer another means  to focus policymaker attention on fiscal exposures. For example, trust  fund balances can serve as a signaling function for decision makers  about underlying fiscal imbalances in covered programs. A gap between  the projected fund balance and expected spending can signal that the  fund, either by design or because of changes in circumstances, is  collecting insufficient monies to finance future payments. Also, the  repeated use of borrowing authority could be an indicator that the  magnitude of the exposure has changed. Specifically, NFIP was expected  to borrow in “above-average claim” years and repay that borrowing in  “below-average claim” years. In years with extraordinarily high claims  resulting from catastrophes like Superstorm Sandy and Hurricane Katrina,  NFIP has used the borrowing authority repeatedly. The program currently  has an outstanding debt to the Treasury of $24 billion. The program’s  inability to cover claims in excess of premiums led to the passage of  legislation in 2012 that altered the design of the program, including a key  provision that NFIP raise premium rates to reflect true flood risk and make  the program more financially stable. These signaling devices can  provide policymakers with information regarding the full costs involved in  budget decisions and enable those concerned about exposures to raise  questions and challenges in the budget debate and to prompt action.
24GAO-01-199SP.  25Borrowing authority permits an agency to borrow money, usually from the Treasury, then  26Biggert-Waters Flood Insurance Reform Act of 2012, Pub. L. No. 112-141, § §100205,  obligate against amounts borrowed.  100207.
section_title: Incorporating the Full Costs of Legal Commitments Incurred Today into Primary Budget Data Would Allow for Better Comparisons among Programs
paragraphs: A second potential approach to improving recognition of fiscal exposures  is incorporating full costs into primary budget data. This method would  allow for better comparisons among competing priorities and between  different methods for achieving program goals. In certain cases, including  credit programs and government employee pensions, accrual accounting  methods are already used to some extent in budgeting. For example,  credit reform in 1990 permitted more accurate comparisons among direct  loans, loan guarantees, and other types of tools for achieving a program’s  objectives. Some other countries, such as Canada and Iceland, also use  accrual budgeting selectively to increase recognition of future cash  requirements related to service provided during the year; officials from  these countries generally said that accrual budgeting contributed to  improved resource allocation and program management decisions in  these specific areas. We have recommended that Congress expand the  use of accrual budgeting to other budget program areas where it would  enhance upfront control, such as insurance and environmental liabilities.  While it has not been expanded to these areas, proposals addressing  broader budget process reform have included accrual budgeting. As seen  in the implementation of credit reform, including estimates of full costs in  primary data may also lead to the development of better estimates of  future spending, though it would require the development of  methodologies appropriate to the nature of the exposure.
Because the cost to the government varies according to the specific  program’s design and characteristics, different types of cost estimates  could be incorporated into primary budget data in order to better  recognize the government’s fiscal exposure. For example,
Normal cost: For retirement benefit programs, such as pension or  retiree health, the normal cost is the actuarial present value of the  benefits to be paid in the future that are attributable to employees’  current year of service. As such, it is one measure of an accrual cost  for a particular year.
27GAO-08-206. Other countries we reviewed—Australia, New Zealand, the Netherlands,  and United Kingdom—use accrual budgeting more extensively to support broader efforts  to improve the efficiency and performance of the public sector. However, none of these  other countries used accrual budgeting for social insurance programs.
Risk-assumed cost estimates: For insurance programs, key  information is whether premiums will be sufficient to pay for covered  losses under existing policies. The portion of risk assumed by the  government that is not charged to the beneficiary—the “missing  premium” or subsidy cost—is essentially the difference between some  measure of the full premium and the actual premium charged to the  insured. This cost measure has been used since 1991 for credit  programs.
All estimates of future spending introduce some degree of additional  uncertainty into the budget and the ease of implementation differs. Some  measures may already be used widely in other forms of reporting,  whereas others are relatively new concepts for federal budget reporting  and may involve developing new models and technical skills. Despite any  implementation challenges, approximate estimates of the full cost to  government may be preferable to some current measures that are  incomplete or potentially misleading. Further, a requirement to produce  estimates for budget reporting may help improve the quality of estimates  by drawing more attention to them. Although using estimates may  introduce uncertainty in primary budget data, it would result in earlier cost  recognition in the budget. This would help reinforce up-front controls in  the budget process.
section_title: Concluding Observations
paragraphs: 28The risk assumed can be difficult to measure for many federal activities, but is most  clearly identifiable in federal insurance programs. facing the federal government—would be an important first step toward  enhancing control and oversight over federal resources and can aid in  monitoring the financial condition of programs over the longer term.  Incorporating measures of the full cost into primary budget data would  provide enhanced control over future spending. This can both improve the  nation’s fiscal condition and enhance the budgetary flexibility for  responding to unexpected or emerging challenges.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Office of Management and  Budget and the agencies responsible for administering the programs we  reviewed. Those agencies are the Risk Management Agency (RMA) in  the Department of Agriculture; the Federal Housing and Finance  Administration; Department of Defense (DOD); Department of Homeland  Security (DHS); Department of Veterans Affairs (VA); the Office of  Personnel Management; and the Pension Benefit Guaranty Corporation  (PBGC). RMA, DOD, PBGC, and the Federal Emergency Management  Agency in DHS provided technical comments that were incorporated in  the report as appropriate. The Chief of Staff of VA provided comments  that are discussed below and reprinted in appendix II.
VA generally agreed with our findings and stated that current budget  reporting provides adequate information for determining the resources  necessary to pay benefits for current veterans and survivors. While we  agree that the budget records the outlays associated with benefits paid in  a given year, we maintain that current budget reporting provides  incomplete information about the costs incurred for benefits earned during  the year that will be paid in the future.
We are sending this report to relevant agencies and congressional  committees. In addition, the report is available at no charge on the GAO  website at http://www.gao.gov.
If you or your staff have any questions about this report please contact  me at (202) 512-6806 or irvings@gao.gov. Contact points for our Offices   of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made key contributions to this report  are listed in appendix III.
section_title: Appendix I: Information on Selected Fiscal Exposures
subsections: section_title: Federal Crop Insurance
subsections: section_title: Background
paragraphs: Farming has always been vulnerable to risks from natural causes such as  drought, excessive moisture, hail, wind, frost, insects, and disease.  Farmers are also exposed to financial losses from price risk. The federal  government helps mitigate the impact of these risks on farm income  through the federal crop insurance program. Crop insurance is sold and  serviced by 17 approved private companies. Under the provisions of  these agreements, the private companies both bear a percentage of any  loss and reap a percentage of any gain associated with the policies over  the course of the year. The federal government subsidizes the premiums  paid by farmers and acts as primary reinsurer for the private companies  that underwrite the policies. The federal government also makes  payments to insurance companies that are intended to cover  administrative expenses for selling and servicing crop insurance policies.  Federal crop insurance is not intended to be self-financing through  premiums; a permanent, indefinite appropriation covers any payments  that are needed to cover losses and other expenses.
section_title: Extent and Estimated Magnitude of the Exposure
paragraphs: The government’s legal commitment to pay crop insurance policyholder  claims when losses occur makes the program an explicit exposure. The  amount of federal spending resulting from this exposure depends on the  extent of losses incurred by farmers.
The federal crop insurance program’s costs increased sharply in recent  years. An indicator of the government’s exposure is the increase in  appropriations drawn from the general fund,Figure 3 shows outlays and resources available to the program, the  combination of the general revenue funds, and collections (primarily  premiums) received. Outlays, which reflect claims payments and other  associated costs, doubled from $3 billion in 2001 to $6 billion in 2008, and  then doubled again in 2009 to $12 billion. Premiums received do not fully  cover the program’s costs; general revenue funds make up more than  half of the program’s available resources and are used in part to provide  premium and administrative expense subsidies. Therefore, the full cost of  the crop insurance subsidies and administrative costs is reflected in the  budget.
section_title: Key Factors to Consider
paragraphs: Anticipating the future budget exposure presented by crop insurance is  complicated by the potential impact of climate change and changes in  program design. Our March 2007 report assessing the financial risks to  the Federal Crop Insurance Corporation (FCIC) found that its exposure to  weather related losses had grown substantially. At that time, we found  that little had been done to develop the kind of information needed to  understand FCIC’s long-term exposure to climate change and that FCIC  had not analyzed the potential impacts of an increase in the frequency or  the severity of weather-related events on its operations. Since then, a  study examining the potential impact of climate change on the federal  crop insurance program was prepared for the Risk Management Agency  (RMA), which administers the program. According to RMA officials, the  overall impact of climate change is not clear, given the uncertainty of  various climate change scenarios and the potential adaptive responses  by growers and the crop insurance program. Reflecting these  uncertainties and the significance of this issue, we included a discussion  of the crop insurance program in a high risk designation related to the  fiscal exposure of climate change in our High Risk List in 2013.
section_title: National Flood Insurance
subsections: section_title: Background
paragraphs: The Federal Emergency Management Agency (FEMA) within the  Department of Homeland Security operates the National Flood Insurance  Program (NFIP) to provide flood insurance to residential and commercial  property owners. Flood insurance is funded primarily through premium  collections. The premiums were designed to permit the program to cover  losses and expenses in an “average historical loss year,” but not to cover  high-loss years. Instead, the program has statutory authority to borrow  from the Treasury in such years with the expectation that low-loss years  would allow the program to repay any borrowed funds. While not always  the case, since 1978 annual losses have generally evened out with  receipts over normal years but borrowing authority has been accessed  and increased in recent years, in response to catastrophic events such as  Hurricane Katrina in 2005.
section_title: Extent and Estimated Magnitude of the Exposure
paragraphs: NFIP presents a range of exposures to the federal government. The  government’s legal commitment to pay flood insurance policyholder  claims when losses occur makes the program an explicit exposure. The  amount of federal spending resulting from this exposure depends, in part,  on the frequency of weather-related events and their severity. If total  claims exceed amounts available from premium collections, NFIP may  access available borrowing authority to cover excess claim amounts. To  the extent there is an expectation that the federal government cover  claims exceeding the amount that NFIP has been authorized to borrow  from the Treasury, NFIP represents an implicit exposure. NFIP received  increased borrowing authority in 2013 to cover loss claims related to  Superstorm Sandy. Including the $16.8 billion NFIP borrowed to cover  claims primarily from Katrina, the program’s reported total outstanding  debt had increased to $24 billion as of March 31, 2013.
One measure of the government’s exposure is the extent to which claims  exceed available resources. One indicator of the exposure is NFIP’s net  position—the residual difference between the program’s total assets and  liabilities.
section_title: Budget Treatment of the Exposure
paragraphs: Figure 4 also shows how the program is reflected in primary budget data.  NFIP is reflected on a cash basis: premium collections are recorded as  receipts in the year they are received and claims payments are recorded  as outlays in the year they are made. The balance sheet for NFIP is also  included in the budget as supplementary information. However, the  budget has not reflected the subsidy cost—or “missing premium”— embedded in NFIP’s program design. The subsidy can be measured as  the portion of risk assumed by the government that is not charged to the  beneficiary.
section_title: Key Factors to Consider
paragraphs: NFIP was first added to our High Risk List in 2006 because of concerns  about financial solvency. The program was highlighted again in 2013  when we added the fiscal exposure of climate change to the High Risk  List.
GAO-13-283.
AECOM, The Impact of Climate Change and Population Growth on the National Flood  Insurance Program Through 2100, (June 2013).  6The Biggert-Waters Flood Insurance Reform Act of 2012, Pub. L. No. 112-141.
section_title: Pension Insurance
subsections: section_title: Background
paragraphs: Congress recently repealed section 4005(c) of the Employee Retirement Investment  Security Act, which provided authority for the PBGC’s federal line of credit up to $100  million. See the Moving Ahead for Progress in the 21st Century Act (MAP-21), Pub. L. No.  112-141, § 40234 (a).
One measure of the magnitude of the government’s fiscal exposure is  PBGC’s net position, which represents the residual difference between  PBGC’s total assets and liabilities. As figure 5 shows, PBGC’s net  position generally declined from a $7.8 billion surplus in 2001 to a $34  billion deficit in fiscal year 2012. However, PBGC estimated that its  financial risk for potential termination of underfunded plans sponsored by  financially weak firms to be almost $300 billion. Although PBGC’s annual  receipts currently exceed its outlays, its overall financial position is  weaker than would be indicated by these annual receipts and outlays.
PBGC is an example of a program for which cash-based budgeting  provides potentially misleading information. Premiums are shown as  receipts when they come into the Treasury and payments are shown as  outlays when they are made; the time lag between these events means  that an increase in PBGC premiums would appear in the budget as an  increase in revenues. The budget does not reflect the “missing  premium”—the portion of a full risk-based premium not charged to the  insured, which could be a signal of the expected cost of the program.
section_title: Key Factors to Consider
paragraphs: In 2013, we reported that plan terminations and insolvencies threaten  PBGC’s ability to pay pension guarantees for retirees. In the event that  the agency were to exhaust all of its assets and become insolvent, the  agency would only have premium revenue to rely on to make its benefit  payments.
For further discussion, see GAO, Private Pensions: Timely Action Needed to Address  Impending Multiemployer Plan Insolvencies, GAO-13-240, (Washington, D.C.: Mar. 28,  2013).  11GAO, Pension Benefit Guaranty Corporation: Redesigned Premium Structure Could  Better Align Rates With Risk From Plan Sponsors, GAO-13-58, (Washington, D.C.: Nov.  7, 2012) and Pension Benefit Guaranty Corporation, Excellence in Customer Service:  Annual Report 2012, (Washington, D.C.: Nov.14, 2012).  12GAO-13-58.
section_title: Stock Purchase Agreements with Fannie Mae and Freddie Mac
subsections: section_title: Background
paragraphs: Congress established Fannie Mae and Freddie Mac as government- sponsored enterprises (GSEs) in the housing finance market to support  the supply of mortgage loans; securities issued by these GSEs were not  backed by the full faith and credit of the government. In 2008, in response  to the financial crisis, Treasury entered into Senior Preferred Stock  Purchase Agreements (the agreements) with Fannie Mae and Freddie  Mac to preserve the assets and mitigate systemic risks that contributed to  market instability. Under the agreements, Treasury would purchase these  GSEs’ senior preferred stock and make funds available on a quarterly  basis, to be recovered by redemption of the stock or by other means.  While the initial funding commitment for each enterprise was capped at  $100 billion, Treasury increased the cap to $200 billion per GSE in May  2009 to maintain confidence in these GSEs. In 2012, the caps were  replaced with a formulaic cap allowing these GSEs to make quarterly  draws based upon their net position, or if the liabilities of either GSE,  individually, exceed its respective assets.
section_title: Extent and Estimated Magnitude of the Exposure
paragraphs: The purchase agreements with Fannie Mae and Freddie Mac illustrate  how an exposure can change over time. Prior to 2008, these GSEs  represented an implicit fiscal exposure to the government because the  securities they issued were explicitly not guaranteed by the full faith and  credit of the U.S. government. The 2008 stock purchase agreements,  while temporary, created a new explicit exposure for the federal  government to provide immediate financial support to Fannie Mae and  Freddie Mac. At the end of any quarter in which either Fannie Mae’s or  Freddie Mac’s balance sheet reflects that total liabilities exceed total  assets, the GSEs have 15 business days to request funds under the  terms of the agreements. Treasury then has 60 days to provide the funds,  as necessary, up to the maximum amount of the funding commitment.  The federal government is not obligated to provide additional assistance  beyond the scope of the agreements, but the government’s response may  influence expectations related to future support. This expectation  represents an implicit exposure.
One measure of the magnitude of the exposure to the government is the  liability reported in the 2012 Financial Report of the United States  Government (Financial Report) of $9 billion, reflecting Treasury’s best  estimate at the time of likely draws over the remaining duration of the  agreements. The liability was significantly reduced in 2012 (see figure 6).  This reduction was in part due to a revision to the agreements that is  expected to reduce the amount of future draws, and also to the improved  housing market, which contributed positively to the GSEs financial results.  Another possible measure of the exposure is the remaining draw authority  available to these GSEs, which was about $258 billion as of January 1,  2013. This represents the maximum amount of future spending under the  current agreement. In considering the exposure under either measure,  any amounts received related to the federal government’s investment in  the GSEs’ stock—which had a reported fair value of $109.3 billion in the  2012 Financial Report— would reduce the federal government’s  exposure.
Figure 6 also shows the Treasury payments to these GSEs and draw  authority balance at the end of the year as recorded in primary budget  data. The Administration considers Fannie Mae and Freddie Mac to be  outside of the budget; therefore payments to them are recorded as  outlays. Since 2008, Fannie Mae and Freddie Mac have drawn a total of  $187.5 billion and draws have decreased each year—from a high of  $95.6 billion in fiscal year 2009 to $18.5 billion in fiscal year 2012. The  draw authority balance remaining at the end of each fiscal year is  reflected as an unobligated balance.
Under the terms of the agreements, the cost of the government’s  commitment is offset by dividend payments from these GSEs to  Treasury.which record associated costs in the federal budget. The future  structures of these two GSEs and the roles they will serve in the  mortgage market must still be determined and will affect future decisions  about budget treatment.
15Pub. L. No. 101-508. Under the Federal Credit Reform Act of 1990, the credit subsidy  cost of direct loans and loan guarantees is the net present value of the estimated long- term cost to the government at the time the credit is provided of such programs, less  administrative expenses. The act was intended to improve disclosures about the risks  associated with government direct loans and guarantee programs and assist Congress in  making budget decisions about such programs.
section_title: Civilian Pension Benefits
subsections: section_title: Background
paragraphs: Most federal civilian employees are covered by one of two pension plans,  depending largely on when they began their federal service: those hired  before 1984 are covered by the Civil Service Retirement System (CSRS)  while most employees who entered federal service after 1983 are  covered by the Federal Employee Retirement System (FERS).
FERS has a  small defined benefit portion—the FERS annuity—which supplements  Social Security, and a voluntary defined contribution portion, the Thrift  Savings Plan (TSP).portion of FERS—which constitutes the government’s exposure arising  from the two civilian pension plans.
Both agency and employee contributions toward CSRS and the FERS  defined benefit annuity are paid to the Civil Service Retirement and  Disability Fund (CSRDF), the trust fund in the budget dedicated to funding  civilian pension benefits. The CSRDF also receives some payments from  the Treasury’s general fund account (largely intended to amortize and pay  interest on the previously accumulated CSRS liability) and the CSRDF is  credited with interest (investment income) on the Treasury securities it  holds.
According to the 2012 Financial Report, other significant civilian pension plans include  those of the Coast Guard, Foreign Service, Tennessee Valley Authority, U.S. Postal  Service, and the Department of Health and Human Services. more CSRS employees retire and the vast majority of the civilian  workforce is covered by FERS.contributions for FERS employees are based on annual calculations  of the amount required to fully fund future benefits (normal cost) less  the employee contribution rate. Employee contributions are calculated  differently for FERS than for CSRS: FERS employees essentially pay  the difference between the CSRS employee contribution rate of 7  percent and the Social Security employee payroll tax rate, currently  6.2 percent, for an employee contribution rate of 0.8 percent.  However, in 2012, the employee contribution was increased to 3.1  percent of pay for employees hired after December 31, 2012,  effectively reducing the agency contribution.
Benefit payments for both CSRS and the FERS defined benefit annuity  are made from the CSRDF, which has permanent, indefinite budget  authority to pay benefits. Agencies pre-fund employee pensions by  deferring some of their budget authority to the CSRDF, where it remains  available to pay pensions to retired workers. The Treasury credits the  CSRDF with budget authority in the form of special-issue securities that  are backed by the full faith and credit of the U.S. government that earn  interest equal to the average rate on the Treasury’s outstanding long-term  debt. These securities are then redeemed to make payments to retirees  and survivors.
Employee contributions to the CSRDF are recorded as receipts and count  as revenue to the Treasury. Payments to retirees are recorded as outlays  and affect the government-wide deficit. Agency contributions are made  from their appropriations and so payments toward the normal cost are  visible to the individual agency, but are not reflected in the government- wide deficit because agency payments to the CSRDF are  intragovernmental—that is, they are recorded as outlays by one agency  and receipts by the trust fund. Treasury also makes annual payments to  the CSRDF from the general fund to amortize the previously accumulated  unfunded liability and to fund the difference between the CSRS employee  and agency contributions and the amount that would be required to fully  fund future CSRS benefits. Since no cash actually leaves the  government, both agency contributions and Treasury payments to the  CSRDF do not affect the government-wide deficit.
section_title: Key Factors to Consider
paragraphs: While the long-term exposure to the federal budget arising from civilian  pension benefits is large, it is on a path to decline over time. This trend  reflects both the transition from CSRS to FERS in the mid 1980s and the  change to a defined contribution design and funding structure in FERS.
section_title: Civilian Post- Retirement Health Benefits
subsections: section_title: Background
paragraphs: Civilian annuitants are generally eligible to receive continued subsidized  health benefits such as those received over the course of their working  years. The Federal Employee Health Benefits program, implemented in  1960, is operated through two revolving trust funds: the Employees  Health Benefits Fund and the Retired Employees Health Benefits Fund.  The two funds are reported jointly as the Federal Employee Health  Benefits (FEHB) account in the federal budget. Under the FEHB program,  the federal government pays a share of the monthly premium. The  government shares the cost of the monthly premium with employees.
section_title: Extent and Estimated Magnitude of the Exposure
paragraphs: The government’s legal commitment to pay a share of the monthly  premium for eligible retirees makes civilian post-retirement health benefits  an explicit exposure.
The magnitude of the exposure can be estimated by the accrued liability  for civilian post-retirement health benefits, which at the end of fiscal year  2012, was estimated to be $328 billion. The liability is an estimate of the  government’s future cost of providing post-retirement health benefits to  current employees and retirees. Figure 8 shows the exposure generally  grew through 2010 before declining in 2011 and 2012. As is the case with  health care costs in general, estimates depend on many factors, including  assumptions about utilization and health care costs far into the future and  as a result, can be difficult to estimate. These variables in turn can vary  with changes in covered services and participants’ choice of plans.
29After age 65, the retirees’ FEHB benefits are coordinated with Medicare benefits.   30The government’s share for annuitants and current employees is 72 percent of the  weighted average of the premiums for all participating plans, with a cap of 75 percent of  the total premium.
section_title: Budget Treatment of the Exposure
paragraphs: The FEHB Program is classified as a mandatory program and is funded  through a permanent indefinite appropriation. The budget reflects  payments made in the current year for both active employees and  retirees. Although active and retired employees pay premiums, they do  not cover the full cost. Agencies make payments to the Employees Health  Benefits Fund at OPM for their share of the FEHB premiums for current  employees. However, with some exceptions, the budget does not reflect  the estimated costs of future payments associated with the federal  government’s active employees’ post-retirement health benefits.
section_title: Key Factors to Consider
paragraphs: Federal health care spending as a whole has been growing faster than  the economy and is expected to continue to do so. As such it will be  important to find ways to minimize costs while maintaining quality for  civilian employees and retirees.
31The U.S. Patent and Trademark Office is an exception; since 2005 it has made accrual  payments to the FEHB fund associated with its active employees’ post-retirement health  benefits. In addition, since 2006, the U.S. Postal Service is required to make scheduled  prefunding contributions to the Postal Service Retiree Health Benefit Fund in the budget.  However, the Postal Service has not made required payments of $11.1 billion due in fiscal  year 2012. See GAO, U.S. Postal Service: Proposed Health Plan Could Improve Financial  Condition, but Impact on Medicare and Other Issues Should Be Weighed Before Approval,  GAO-13-658 (Washington, D.C., July 18, 2013) and U.S. Postal Service: Status, Financial  Outlook, and Alternative Approaches to Fund Retiree Health Benefits, GAO-13-112  (Washington, D.C., Dec. 4, 2012).
section_title: Military Pension Benefits
subsections: section_title: Background
paragraphs: Members of the military are eligible for a defined benefit, noncontributory  pension after 20 years of active service. Active duty personnel become  eligible for retirement by completing 20 years of service, regardless of  age. The military retirement system provides inflation-protected monthly  compensation and other benefits after an active reserve or military  career. The system does not provide for gradual vesting; service  personnel who separate prior to completing the minimum 20 years of  service generally receive no retirement benefits. reserve retired pay is not payable until age 60, with some exceptions.  32Members of the reserves may retire after 20 qualifying years of creditable service, but  33Since 2001, service members also have been eligible to participate in the federal Thrift  34The military retirement system applies to members of the Army, Navy, Marine Corps and  Savings Plan, the defined-contribution plan available to civilian employees, although  generally without any matching contributions from the government.
Air Force. Most of the provisions also apply to retirement systems for members of the  Coast Guard (administered by the Department of Homeland Security), officers of the  Public Health Service (administered by the Department of Health and Human Services),  and officers of the National Oceanic and Atmospheric Administration (administered by the  Department of Commerce).  35Pub. L. No. 98-94 provided for accrual funding of the military retirement system and for  the establishment of a Department of Defense Military Retirement Fund in 1985. payments to those receiving both military retired pay and disability  compensation paid by the Department of Veterans Affairs (VA).
section_title: Extent and Estimated Magnitude of the Exposure
paragraphs: The government’s legal commitment to pay benefits to those retirees who  reach 20 years of active service makes military pension benefits an  explicit exposure.
From a government-wide perspective, the magnitude of the exposure can  be estimated by the accrued liability for military pensions, which at the  end of fiscal year 2012 was estimated to be $1.5 trillion, up from $708  billion in 2001 (see figure 9).
36Concurrent receipt refers to the simultaneous receipt of military retired pay and VA  disability compensation. Prior to 2004, the law required that military retired pay be reduced  dollar-for-dollar by the amount of any VA disability compensation received (e.g. an offset).  The 2004 National Defense Authorization Act (Pub. L. No. 108-136) authorized concurrent  receipt of both amounts without a required offset for certain military retirees.
section_title: Budget Treatment of the Exposure
paragraphs: Figure 9 also shows the Military Retirement Fund’s outlays and receipts  as reported in primary budget data. Outlays reflect benefit payments to  current retirees, which totaled $49 billion in 2012, up from $34 billion in  2001. Receipts to the trust fund capture the intragovernmental  contributions from the services to fund future benefits earned today,  Treasury general fund payments, and investment income on the Treasury  Securities the fund holds. The Military Retirement Fund had assets of  $376 billion as of September 30, 2012.
Beginning in 1985, military pension costs have been partially visible to  DOD since it makes contributions to cover the costs as they accrue, but  the normal cost is not reflected in the unified budget because the  payments are intragovernmental—that is, they are recorded as outlays by  one agency and receipts by the trust fund. Since no cash leaves the  government, there is no effect on the government-wide deficit.
section_title: Key Factors to Consider
paragraphs: DOD’s military compensation system, including pension benefits, is an  important tool to attract and retain the number and quality of active duty  servicemembers it needs to fulfill its mission. Comprehensive information  about the total cost of compensation, including benefits earned today that  will be paid in the future, is important for future decisions about military  compensation in a constrained fiscal environment.
section_title: Military Post- Retirement Health Benefits
subsections: section_title: Background
paragraphs: TRICARE is DOD’s managed health care system for active duty and  retired uniformed service members and their families. TRICARE  consists of multiple plan options, a number of which cover active duty  personnel, their dependents, and retirees under age 65. Prior to 2001,  TRICARE beneficiaries would lose their TRICARE coverage when they  reached age 65, and Medicare—the federal health insurance program  that provides medical benefits to elderly and disabled Americans—would  become their primary health insurer. However, in 2001, the Congress  expanded TRICARE by authorizing the continued provision of TRICARE  benefits after age 65. The program is known as TRICARE for Life (TFL).  TFL provides supplementary health care coverage for TRICARE  beneficiaries who are eligible for Medicare (e.g. those aged 65 or older)  and pays for many services that Medicare only partially covers. Non- Medicare-eligible military retirees are not eligible for TFL and are covered  by one of the other TRICARE programs.
Corps, U.S. Coast Guard, the Commissioned Corps of the Public Health Service, and the  Commissioned Corps of the National Oceanic and Atmospheric Association.  through several TRICARE options.   37The uniformed services include the U.S. Army, U.S. Air Force, U.S. Navy, U.S. Marine  38DOD provides health care benefits to its non-Medicare-eligible beneficiary population  39The National Defense Authorization Act for Fiscal Year 2001, Pub. L. No. 106-398  40While TRICARE beneficiaries over age 65 do not have to pay for their TFL coverage,  established the Department of Defense Medicare-Eligible Retiree Health Care Fund,  administered by the Secretary of the Treasury.  they must be eligible for Medicare Part A and elect to carry Medicare Part B. Retired  TRICARE beneficiaries are required to pay premiums for Medicare Part B, which covers  certain physician, outpatient hospital, laboratory, and other services. TFL covers out-of- pocket costs incurred by beneficiaries for care over the sum of the amount paid for under  Medicare. fund was started in reaction to rapidly rising health care costs. The  Medicare-Eligible Retiree Health Care Fund (MERHCF) is financed  through annual transfers from DOD for the future health care benefits  earned by active military in that year (i.e., normal cost contributions);  payments from the Treasury general fund toward the previously  accumulated unfunded liability for past service; and any gains on  investment income from Treasury Securities the fund holds.
section_title: Extent and Estimated Magnitude of the Exposure
paragraphs: The government’s legal commitment to provide post-retirement medical  benefits to eligible retirees makes the benefits an explicit exposure.
From a government-wide perspective, the magnitude of the exposure can  be estimated by the accrued liability for military post-retirement health  benefits, which at the end of fiscal year 2012 was estimated to be $833  billion. The retiree health liabilities for military personnel, shown in figure  10 as the accrued liability, represents the estimated total cost of benefits  earned to date for both non-Medicare eligible and Medicare-eligible  retirees, as well as a portion of future benefits for those in active military  service. Figure 10 also shows the balance of the MERHCF, which had  assets of $176 billion at the end of fiscal year 2012.
Beginning in 2003, current costs for Medicare-eligible military retirement  benefits have been visible to DOD, since it makes contributions to cover  the costs for those benefits as they are earned by current  servicemembers, and the uniformed services reflect these normal cost  contributions in their budgets. The Treasury also deposits funds towards  the unfunded liability. Since no cash actually leaves the government from  these contributions to the MERHCF, there is no effect on the government- wide cash deficit. Assets accumulating in the MERHCF are only used to  pay benefits for Medicare-eligible retirees, and there is an effect on the  government-wide deficit as benefits are paid from the MERHCF. In  contrast, the cost of pre-Medicare-eligible post-retirement health benefits  is not reflected in the uniformed services’ budget data as these benefits  are earned. Rather, the cost of pre-Medicare-eligible health care is paid  for on a cash basis from DOD’s annual Operations and Maintenance  appropriation.
section_title: Key Factors to Consider
paragraphs: We have highlighted a range of long-standing issues surrounding DOD’s  Medical Healthcare System. As health care consumes an increasingly  larger portion of the defense budget, DOD leadership has recognized the  need to reduce duplication and overhead to operate the most efficient  health system possible. In 2012, we reported that DOD had identified  initiatives aimed at slowing its rising health care costs, but its ability to  implement and monitor these initiatives and achieve related costs savings  is limited.
41GAO, Defense Health Care: Applying Key Management Practices Should Help Achieve  Efficiencies within the Military Health System, GAO-12-224 (Washington, D.C.: Apr. 12,  2012).
section_title: Veterans Compensation
subsections: section_title: Background
paragraphs: The federal government provides benefits to eligible veterans and their  survivors to compensate for the loss of potential earnings due to service- connected disability or death. Entitlement to compensation depends on  the veteran’s disabilities having been incurred in, or aggravated during,  active military service; death while on duty; or death resulting from  service-connected disabilities. These benefits can be in place of (or in  combination with) the DOD military retired pay.
section_title: Extent and Estimated Magnitude of the Exposure
paragraphs: The government’s legal commitment to provide compensation to eligible  veterans makes veterans compensation payments an explicit exposure.
The magnitude of the exposure can be estimated by the accrued liability,  which at the end of fiscal year 2012 was estimated to be $1.8 trillion. This  measure reflects the present value of expected future payments to  current veterans already receiving compensation payments, to veterans  who are not currently receiving compensation but will in the future, and to  a portion of those in active military service assumed by the VA to become  eligible for compensation in the future. Figure 11 illustrates the growth in  this exposure, which more than doubled between 2001 and 2012—from  $692 billion to $1.8 trillion—and represents the fastest rate of growth  among the compensation programs we examined in this report. The  annual growth of the accrued liability, which averaged about $97 billion  from fiscal years 2001 to 2012, reflects increases in the number of  veterans as a result of wars and other conflicts, the aging of the veteran  population, and changes in the benefits and services provided to  veterans. payable for a veteran who, at the time of death, is qualified to receive compensation or  pension, or whose death occurred in a VA facility.  42Burial benefits are also provided and include a burial and plot or internment allowance  43Prior to 2004, the law required that military retired pay be reduced dollar-for-dollar by the  amount of any VA disability compensation received (e.g. an offset). The 2004 National  Defense Authorization Act (Pub. L. No.108-136) authorized actual concurrent receipt, or  the simultaneous receipt of military retired pay and VA disability compensation for certain  military retirees.
section_title: Budget Treatment of the Exposure
paragraphs: Veterans Compensation and Pensions annually receives no-year funds  through regular appropriations. Figure 11 also shows the program’s  annual outlays as reported in primary budget data. Outlays, which  increased from $21 billion in fiscal year 2001 to $55 billion in fiscal year  2012, reflect payments made to current veterans. However, the budget  does not reflect the estimated costs of future payments earned by current  service.
section_title: Key Factors to Consider
paragraphs: The VA’s Veterans Compensation and Pensions account funds one of the  largest federal disability programs. In the years ahead, enrollment in the  VA’s disability compensation program could increase given the conflicts in  Iraq and Afghanistan and as more Vietnam veterans—a significant  portion of the total veteran population—further age into disability-prone  years. These trends directly affect the extent and magnitude of the  government’s fiscal exposure arising from veterans compensation.  Further, since 2003, veterans compensation and other federal disability  programs have been on our High Risk List, due in part to challenges  agencies face in keeping their criteria for evaluating disability and  determining compensation consistent with advances in medicine,  technology, and changes in the labor market and society.
Modernization, GAO-12-846 (Washington, D.C.: Sept. 10, 2012).  44GAO, VA Disability Compensation: Action Needed to Address Hurdles Facing Program  45GAO-13-283.
section_title: Appendix II: Comments from the Department of Veterans Affairs
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contacts named above, Melissa Wolf (Assistant  Director), Margaret McKenna Adams, Dean Campbell, Darryl Chang,  Jeremy Choi, Robert F. Dacey, Felicia Lopez, Donna Miller, Susan Offutt,  Frank Todisco, and Katherine Wulff made key contributions to this report.