Fiscal Exposures: Federal Insurance and Other Activities That Transfer Risk or Losses to the Government
Released: 2019-03-27T00:00:00

Letter

Background

Private-Sector Insurance Policies

In a 2006 report, we stated that there was no generally agreed-upon definition of insurance and most definitions in the private sector differed because they were developed for specific purposes or had changed over time. However, the definitions share key elements of risk transfer and risk spreading, and include other elements such as indemnification, which is payment for losses actually incurred; the ability to make reasonable estimates of future losses; the ability to express losses in definite monetary amounts; and the possibility of adverse, random events occurring outside the control of the insured.

The Financial Accounting Standards Board establishes generally accepted accounting principles for private-sector entities. The Board defines an insurance contract as “a contract under which one party (the issuing entity) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder or its designated beneficiary if a specified uncertain future event (the insured event) adversely affects the policyholder.” Generally, private insurers offer several types of insurance products for individuals, families, or businesses, including health, disability, life, annuity, and property and casualty insurance products. Per the terms of the contracts, insurers generally offer coverage for losses from specified events in exchange for premium payments. Private insurers spread risk over a large enough group of insured parties to reasonably predict total losses, then set risk- based premium rates to make a profit and cover costs, including claim payments for covered losses, administrative expenses, and other expenses associated with selling and servicing policies.

Federal Insurance and Other Activities That Transfer Risk or Losses to the Federal Government

Similarly, there is no generally agreed-upon definition of insurance as it relates to federal activities. FASAB, which establishes generally accepted accounting principles for federal entities, provides a definition for financial reporting purposes. FASAB defines an insurance program as “a general term used to refer to a program that is authorized by law to financially compensate a designated population of beneficiaries by accepting all or part of the risk for losses incurred as a result of an adverse event.” In addition to activities that may fall under the FASAB definition of insurance, the federal government undertakes other activities that compensate or provide benefits to individuals or other third parties that suffer losses from an adverse event.

Unlike private insurance policies, these federal activities do not necessarily utilize a contract or charge premiums or fees in exchange for goods, services, or benefits. Even when premiums or fees exist, they may not cover all costs, as federal expenditures can be driven more by policy goals or agency missions than a desire to achieve fiscal solvency. For example, by design, premiums collected through the Federal Crop Insurance program do not cover its costs. One of the program’s goals is to help farmers manage the risks inherent in farming, such as the risk of poor crop yields and declines in prices, and it does so while subsidizing more than 60 percent of the premiums. In addition, Congress created the National Flood Insurance Program (NFIP) to address the increasing cost of federal disaster assistance by providing flood insurance to property owners in flood-prone areas, where such insurance either was not available or prohibitively expensive through the private sector. Subsidized premium rates, among other things, have precluded NFIP from achieving rates that reflect the full risk of loss, and the program has not had sufficient funds to pay claims. Similarly, the federal government uses the Disaster Relief Fund to provide disaster relief assistance without collecting premiums or other fees from the entities receiving the funds before or after an event occurs and without knowing beforehand who might receive compensation.

Budgeting and Financial Reporting

The President’s Budget and the Financial Report present complementary perspectives on the federal government’s financial position and condition. As illustrated later in the report, differences in when costs are recognized for budgetary or financial reporting purposes can provide substantially different measures of cost in a given year for some federal activities, including federal insurance.

First, the federal budget process serves as the primary financial plan of the federal government and thus plays a critical role in the decision- making process for all federal expenditures, including those for insurance programs and other activities that transfer risk or losses to the federal government. The President, federal agencies, and Congress use the annual budget process, in part, to plan how federal funds should be spent for federal activities and track budget approval and execution. Besides the President’s proposed appropriations for a given fiscal year, the President’s Budget also reports actual data for two prior fiscal years and estimated data for the prior fiscal year, such as the budget authority, unpaid obligations, and outlays (liquidated obligations). Generally, receipts are recorded when the federal government receives the cash and spending is recorded when outlays (payments) are made. We refer to the President’s Budget as primarily “cash-based.”

The Secretary of the Treasury, in coordination with the Director of OMB, prepares the annual Financial Report, which consolidates and summarizes financial information from federal agencies and departments. The Financial Report provides an overall view of the annual financial results of operations, condition, and position of the federal government. In particular, it provides the net operating cost of the federal government by comparing its revenues and costs. The report follows FASAB accounting standards and generally records transactions on an accrual basis—not on a cash basis—to recognize and track assets, liabilities, revenues, and expenses. That is, expenses and liabilities are recorded when they are incurred, even if payment is due at a later date, and revenues (other than taxes and other nonexchange revenues) and related assets, such as receivables, are generally recorded when amounts are earned, even if actual receipt occurred at an earlier time.

A Wide Range of Federal Activities Transfer Risk or Losses to the Federal Government

Our analysis allowed us to identify 148 federal activities that transfer risk or losses from adverse events to the government (see table 1). We broadly categorize the federal activities that met our criteria as follows: federal insurance programs; federal loan guarantee programs; senior preferred stock purchase agreements with two government-sponsored enterprises (enterprises), Fannie Mae and Freddie Mac; federal employee and veterans benefits (excluding education benefits and burial benefits); and other activities, such as those that provide property damage or financial loss compensation and those that offer life, health, or disability benefits to nonfederal employees. We generally only provide cost and exposure information for activities as available in the Financial Report and agency documents. See appendix I for more information on our scope and methodology.

Federal Insurance Programs

Through our analysis of the Financial Report, we identified five federal insurance programs. While there is no universally accepted definition of what constitutes a federal insurance program, federal agencies have reported insurance and guarantee liabilities and related note disclosures in the Financial Report for the following programs: Department of Agriculture, Risk Management Agency’s (RMA) Federal Crop Insurance Program; Department of Homeland Security, Federal Emergency Management Agency’s (FEMA) National Flood Insurance Program (NFIP); Pension Benefit Guaranty Corporation’s (PBGC) single-employer and multiemployer pension insurance programs; Federal Deposit Insurance Corporation’s (FDIC) deposit insurance program; and National Credit Union Administration’s (NCUA) share insurance program. See table 2 for descriptions of the programs as well as related funding and cost or exposure information.

All five federal insurance programs collect premiums, assessments, or fees, but the programs differ in the extent to which they are designed to fund their liabilities using only these sources of income.

Federal crop insurance premiums are subsidized by the federal government by law. In addition, RMA automatically receives a permanent indefinite appropriation each fiscal year for this premium subsidy and other expenses, and it returns unobligated balances to the U.S. Treasury at the end of the fiscal year.

The other programs are generally intended to use premiums or assessments collected and other nonfederal assets and income to pay claims or guarantees.

The programs also differ in their authority to borrow funds from the U.S. Treasury to pay claims and other expenses, as well as their use of such authority.

As of September 30, 2018, NFIP had about $20.5 billion of outstanding debt with the U.S. Treasury (after Congress granted $16 billion in debt cancellation to NFIP in October 2017). Before 2004, NFIP was able to cover most of its claims and repay occasional loans from the U.S. Treasury with premiums it collected, but it has not been able to do so since, partly due to extraordinary catastrophic loss years resulting from Hurricane Katrina and Superstorm Sandy. According to FEMA, the program as currently designed is unlikely to be able to repay this debt.

PBGC is expected to fund itself entirely through premiums, other nonfederal assets and income (such as investment income), and assets from underfunded, terminated single-employer plans it takes over, as it currently does not receive taxpayer funds and does not have authority to borrow funds from the U.S. Treasury.

The balance in FDIC’s deposit insurance fund (DIF) fell to negative $20.9 billion as a result of bank failures triggered by the 2007–2009 financial crisis. As required by law, FDIC implemented a plan to replenish the DIF and raise the reserve ratio to its designated minimum in the time limits prescribed by the Federal Deposit Insurance Act. Pursuant to the plan, FDIC raised assessment rates and imposed a one-time special assessment to recapitalize the DIF. To meet the projected liquidity needs for failures of FDIC-insured depository institutions during the financial crisis, FDIC required the banking industry to prepay its quarterly risk-based assessments for the fourth quarter of 2009 and for the following 3 years. FDIC did not use its authority to borrow funds from the U.S. Treasury. On the other hand, NCUA’s Share Insurance Fund borrowed funds from the U.S. Treasury during the 2007–2009 financial crisis but has since repaid the loans.

Lastly, the programs also differ in their expected ability to cover future losses.

RMA receives a permanent indefinite appropriation each fiscal year to pay for its commitments, so certainty exists that the program will be able to pay future losses using such appropriations.

According to FEMA, as currently designed, NFIP likely will not have enough funds to cover all future program expected losses. NFIP also would not have enough funds to cover a single super-catastrophic year, in which NFIP could experience as much as $40 billion in claims, according to FEMA.

While PBGC programs have been able to pay all guaranteed benefits and financial assistance to date, PBGC forecasts a very high likelihood of insolvency for the multiemployer program in the next several years if there are no changes in law.

DIF’s ability to pay future claims depends on whether the fund has sufficient assets. Congress sets a minimum ratio of assets to insured deposits for the DIF (called the reserve ratio), which by statute must be at least 1.35 percent by September 30, 2020. In addition, FDIC sets a target ratio (called the designated reserve ratio), currently set at 2 percent. FDIC views the designated reserve ratio as a minimum goal that will allow the fund to grow sufficiently large in good times to increase the likelihood of the fund remaining positive during bad times. DIF’s reserve ratio was 1.36 percent as of September 30, 2018. To comply with the statutory requirement that large banks—those with total assets of $10 billion or more—bear the responsibility of increasing the DIF reserve ratio from 1.15 percent to 1.35 percent, FDIC imposed a quarterly surcharge on large banks. According to FDIC officials, the surcharge began in the third quarter of 2016, the quarter after the reserve ratio first reached or exceeded 1.15 percent, and ended in the third quarter of 2018, the quarter in which the reserve ratio first reached or exceeded 1.35 percent.

The fund ratio for NCUA’s Share Insurance Fund is called the equity ratio, and has a statutory minimum of 1.20 percent. NCUA’s target equity ratio is called the normal operating level and was set at 1.38 percent by the NCUA Board of Directors on December 13, 2018. NCUA’s equity ratio was 1.46 percent as of December 31, 2017, both above the statutory minimum and the normal operating level.

Federal Loan Guarantee Programs

We identified 33 federal loan guarantee programs that transfer risk or losses to the federal government (see full list in app. III). The federal government uses loan guarantees as tools to support specific social and public policy objectives, such as those for housing and small businesses. Federal loan guarantees are any guarantees, insurance, or other pledges with respect to the payment of all or a part of the principal or interest on any debt obligation of a nonfederal borrower to a nonfederal lender. Thus, the federal guarantee transfers some or all of the risks of borrower default from private lenders to the federal government.

The Federal Credit Reform Act of 1990 requires agencies to estimate the cost to the government of guaranteeing credit in the President’s Budget, beginning in fiscal year 1992. This cost, the loan guarantee subsidy cost (referred to in this report as “subsidy cost”), equals the net present value of the following cash flows at the time a loan guarantee is disbursed by the lender: (1) the estimated payments by the government to cover defaults, delinquencies, interest subsidies, or other payments; and (2) the estimated payments to the government, including origination and other fees, penalties and recoveries. If the present value of estimated cash outflows exceeds cash inflows, there is a positive subsidy cost. If the present value of estimated cash inflows exceeds cash outflows, there is a negative subsidy cost, referred to as subsidy income. Every fiscal year, subsidy costs are (1) estimated for the loan guarantees obligated during that year and (2) reestimated for loan guarantees obligated in previous fiscal years to update costs for actual loan performance and to incorporate any changes in assumptions about future loan performance. If reestimates increase subsidy costs, an agency would need additional funds. If they decrease subsidy costs, an agency generally would return funds to the general fund of the Treasury. Regardless of whether credit programs are discretionary or mandatory, agencies do not need to request additional appropriations to cover upward reestimates because the Federal Credit Reform Act provides permanent indefinite budget authority for this purpose.

In addition, the loan guarantee liability in the Financial Report is the present value of estimated net cash outflows. Thus, this liability is an estimate of the exposure to the federal government because of all outstanding loan guarantees. This liability is based on all loan guarantees obligated in a given fiscal year and previous years that are outstanding as of the end of a fiscal year. It takes into account the subsidy costs of these guarantees estimated as of the time the loan was obligated and subsequent adjustments such as modifications and reestimates.

As is the case with federal insurance, federal loan guarantee liabilities are publicly reported in the Financial Report and related note disclosures. Table 3 presents some of the measures reported in the note disclosures as of September 30, 2017.

The estimated subsidy cost to the government for loan guarantees, including reestimates, was $12.5 billion during fiscal year 2017, as reported in the Financial Report. This was largely attributable to guarantees under Federal Housing Administration (FHA) loans administered by the Department of Housing and Urban Development, the largest of which is FHA’s Mutual Mortgage Insurance (MMI) program. The program provides mortgage insurance to encourage lenders to make credit available to borrowers not adequately served by the conventional market, such as first-time homebuyers, minorities, and lower-income families. Similarly, federal loan guarantee liabilities were approximately $43 billion, with FHA loan guarantees accounting for about 48 percent of all guarantee liabilities.

Senior Preferred Stock Purchase Agreements with Fannie Mae and Freddie Mac

Current senior preferred stock purchase agreements between Treasury and the enterprises, Fannie Mae and Freddie Mac, transfer risk or losses to the federal government. The enterprises purchase mortgage loans that meet certain criteria for size, features, and underwriting standards, known as “conforming” loans. After purchasing mortgages, the enterprises create mortgage-backed securities and guarantee investors in these securities that they will receive timely payments of principal and interest. In 2008, because of the enterprises’ poor financial condition, the Federal Housing Finance Agency (FHFA) placed the enterprises into conservatorship and Treasury agreed to provide capital assistance in part to ensure timely payment to investors in exchange for shares of senior preferred stock, thus transferring risk to the federal government.

Under the agreements, Treasury has committed to providing up to $445.6 billion in capital support to the enterprises while they are in conservatorship. If Fannie Mae or Freddie Mac has a net worth deficit at the end of a financial quarter, Treasury will provide capital support to eliminate the deficit. Under the most recent agreement, the enterprises must pay Treasury a dividend of all their quarterly positive net worth above a $3 billion capital reserve that each enterprise is allowed to retain. As of December 31, 2018, the enterprises had paid $292.3 billion in cumulative dividends to Treasury. Since the second quarter of 2012— with the exception of the first quarter of 2018 during which the enterprises required Treasury support due to devaluation of certain assets—Fannie Mae and Freddie Mac have not required additional support from Treasury.

As of August 2018, Treasury had provided the enterprises with $191.4 billion of this amount since they were placed under conservatorship in 2008, leaving $254.1 billion in potential taxpayer exposure should Treasury need to provide any additional support. The latter represents the maximum amount of potential future federal spending under the current agreements. According to Treasury, based on their assessments, there were no probable future funding draws as of September 30, 2018, but it was reasonably possible that market volatility or non-recurring events could cause the enterprises to generate quarterly losses and, therefore, result in future funding draws against Treasury’s funding commitment.

Federal Employee and Veterans Benefits

We identified 13 large federal employee and veterans benefit activities that transfer at least some of the risk or losses to the federal government (see app. IV for more information). The federal government offers its civilian and military employees health and life insurance, defined benefit pension and other retirement benefits (such as post-retirement health insurance and life insurance), and other benefits. Many of these benefit programs exchange current services for a guarantee of lifetime annuity payments or the continuation of health insurance coverage, inherently transferring at least part of the risk of an adverse experience—such as people living longer than expected, or health care costs rising faster than expected—from the employees to the federal government.

For example, the following three pension activities account for more than 80 percent of all federal employee and veterans benefit liabilities: On the civilian side, the Office of Personnel Management (OPM) administers the Civil Service Retirement System and the Federal Employees Retirement System, which are the largest civilian pension plans covering nearly all full-time, permanent civilian federal employees. The Department of Defense and the Department of Veterans Affairs administer the largest military plans. The Department of Defense administers the Military Retirement System, and Veterans Affairs provides for the payment of compensation, pension, and burial benefits to veterans and survivors.

Federal employee and veterans benefit liabilities are publicly reported in the Financial Report and related note disclosures. Generally, these liabilities are recorded as employee services are rendered. Table 4 presents liabilities of the government for certain federal employee and veterans benefit activities. Such benefits include deferred compensation that generally commit the federal government to provide cash compensation and health insurance following a term of service and to accept certain risks regarding the ultimate costs of those benefits. These liabilities were approximately $7.6 trillion as of September 30, 2017, and represented about 32 percent of all federal liabilities (which were $23.9 trillion).

Other Activities That Transfer Risk or Losses to the Federal Government

An analysis of the President’s Budget, the Catalog of Federal Domestic Assistance (CFDA), and the U.S. Code yielded 95 additional activities that met our criteria of transferring risks or losses from adverse events to the federal government. These activities can be broadly categorized into those that provide compensation for property or financial losses— including losses resulting from adverse environmental or manmade events—and those that offer life, health, or disability benefits to nonfederal employees. See appendix V for information on all 95 activities.

Some of these federal activities provide compensation to specific third parties if they suffer certain losses from future adverse events, but the federal government may not always charge premiums for accepting this risk of loss. For example, the Department of Agriculture’s Price Loss Coverage Program provides payments to farmers of certain crops when the effective price of the commodity is less than a reference price for that commodity. Farmers can apply to receive such assistance and do not pay premiums to receive benefits. We also found other activities in which the beneficiaries who receive government compensation for their losses are known only after an adverse event occurred. This was generally the case for activities that provide compensation for property or financial losses to victims of unforeseen adverse environmental or manmade events, such as activities funded by the Disaster Relief Fund.

Lastly, we found activities that offer life, health, or disability benefits. These include federal grants to states for Medicaid, which assists states in providing medical care to generally low-income individuals, and activities that support mental health services, treatment for substance abuse, or child health insurance services. For example, the Department of Health and Human Services administers the Children’s Health Insurance Program, which provides funds to states to help them maintain and expand health assistance to uninsured, low-income children and, at a state’s option, low-income pregnant women.

Table 5 has information on the budget accounts we found with more than $10 billion in total new obligations for fiscal year 2017 that funded activities that transferred risk or losses to the federal government. While obligations are a legal liability for the federal government, they may not necessarily reflect an activity’s fiscal exposure if, for example, the activity has dedicated payment streams that reduce the government’s fiscal exposure.

We found five additional activities authorized in law that have not yet caused financial liabilities to the federal government but may do so if certain adverse events occurred. Such events include acts of terrorism, nuclear power plant incidents, or catastrophic space launch-related incidents. In all five cases, the federal government is generally authorized to help finance third-party liability claims related to the event, if needed, after private-sector insurers have paid a certain level of claims. As seen in table 6, some of these activities could require large, previously unbudgeted expenditures by the federal government if an event occurred. As of December 31, 2018, these activities had not triggered losses to the federal government.

As mentioned earlier, we listed federal activities that meet the following criteria: (1) a risk of financial loss or actual financial loss to a third party exists that stems from an adverse event; and (2) through the activity, the federal government accepts some or all of the risk of financial loss or actual financial loss from the adverse event by indemnifying, guaranteeing, or providing benefits to the affected entity or beneficiary. Our categorization of such activities as federal insurance activities, federal loan guarantees, senior preferred stock purchase agreements with Fannie Mae and Freddie Mac, certain federal employee and veterans benefits, or other programs, was driven by the sources we used, in particular the Financial Report. Our results were based solely on the criteria we developed for this report and the sources and methodologies we used. Other criteria, sources, or methodologies might yield lists that differ from ours in number and composition of activities.

Expert opinions sometimes differed on which types of activities met our criteria. We acknowledge the different opinions. In updating our 2005 catalog of federal insurance activities, our efforts are aimed at providing Congress with an expanded list that helps convey the wide variety of activities that may not necessarily be considered federal insurance but share important aspects of insurance. We also intended to highlight laws that authorize the federal government to cover third-party liabilities from specific adverse events—such as terrorist attacks or nuclear accidents— and that have not yet resulted in liabilities to the federal government but could do if the events occurred. Our catalog may not be appropriate for other purposes.

Budget Cost Recognition of Certain Federal Activities That Transfer Risk or Losses to the Government Presents Challenges

In our previous work, we found challenges in relation to measuring and reporting fiscal exposures caused by certain federal activities, including federal insurance programs. We previously reported that the primarily cash-based budget may not accurately reflect the costs the government incurs and the payments the government may be expected to make for some activities that transfer risk or losses to the government. In addition, the amount of the exposure to the federal government can be hard to measure for some activities. These challenges still exist, and to illustrate them, we reviewed six activities from among those we identified that transfer risk or losses to the federal government.

Federal Government’s Legal Commitment Varies, and Implicit Exposures for Some Activities May Not Be Evident in the Budget

Federal activities that transfer risk or losses to the federal government have a range of fiscal exposures in which the extent of the government’s legal commitment varies (see fig. 1). In 2003, we developed a conceptual framework for fiscal exposures that notes fiscal exposures may be explicit or implicit. Explicit exposures are commitments that the government is legally required to fund, while implicit exposures arise not from a legal commitment, but from current policy, past practices, or other factors that may create the expectation for future spending. Some federal activities have a combination of explicit and implicit exposures. For example, the government is not legally required to cover PBGC insurance claim losses in excess of PBGC’s available resources. Therefore, claims up to the statutory limit are explicit exposures, and losses in excess of PBGC’s available resources represent an implicit exposure for the federal government to the extent there is an expectation that the government would step in and cover losses beyond the program’s reserves. In contrast, loan guarantees under the MMI Fund represent an explicit exposure only, because the government has a legal commitment to pay claims if the borrower defaults on a loan.

Implicit exposures may not be evident in the budget, because the primarily cash-based budget records spending only when payments are made. For example, as part of the Commercial Space Launch Insurance Program, the federal government is potentially liable for damages from commercial space launch accidents, subject to appropriation, up to $3.1 billion per licensed space launch in 2017. This program represents an implicit exposure because a new appropriation—which would represent the federal government’s legal commitment to pay for this program—is required to fund damages. Because there has never been such an event or appropriation, this fiscal exposure has not been included in the budget. According to Federal Aviation Administration officials, the agency has not designed internal processes or procedures to address these potential costs, such as estimating the costs, in part because the agency cannot presume the government will provide funds until such an appropriation were made.

While implicit exposures do not present a legal commitment to the government, the federal government historically has shown a willingness to fund them in some cases. For example, NFIP has authority to borrow funds from the U.S. Treasury. To the extent there is an expectation that the federal government will cover claims exceeding the amount NFIP has been authorized to borrow from the U.S. Treasury, NFIP represents an implicit exposure. In October 2017 when NFIP was about to exhaust its borrowing authority, Congress demonstrated its willingness to fund NFIP implicit exposures by passing a supplemental appropriation, which the President signed into law, that cancelled $16 billion of NFIP’s past borrowing from the U.S. Treasury. This allowed NFIP to borrow an additional $6.1 billion that would have exceeded its borrowing authority without this intervention, while also reducing its overall debt. Additionally, in fiscal years 2005–2018 the federal government designated a total of $138 billion in supplemental appropriations to the Disaster Relief Fund for declared disasters (see fig. 2). These costs indicate that there was an implicit exposure because Congress must pass a supplemental appropriation to cover them. Congress passed at least one supplemental appropriation for a major disaster in 9 of the 14 years during 2005–2018.

Cash-Based Budgeting May Not Reflect the Government’s Cost or Potential Costs from Risk- or Loss-Transferring Activities

As we previously found, the federal budget may not accurately reflect the government’s costs or the likely claim on federal resources from activities that transfer risk or losses to the government. Again, except for loan guarantees, the federal government’s primarily cash-based budget generally does not record the full cost of commitments incurred in the present until corresponding payments are made in the future. However, for some claims, such as pension and post-retirement life insurance, the federal commitment occurs years before the related cash consequences are reflected in the budget. For example, the cost of pension plan insurance accrued in a given year is not reflected in the budget; rather, premiums are shown as receipts when they are collected and payments are shown as outlays when they are made. In fiscal year 2017, the budget showed PBGC’s annual receipts exceeded its outlays by $4.8 billion. But in the same year, the program also had a $76 billion negative net position, which is one measure of the magnitude of the government’s fiscal exposure and is not included in the budget (see fig. 3).

Similarly, the budget may not indicate the government’s long-term exposure from weather-related events. Like PBGC, NFIP reports premiums in the budget as receipts in the year they are collected and payments as outlays in the year they are made. The budget does not currently include information on NFIP’s liabilities, assets, or net position. In fiscal year 2017, the budget showed a deficit (outlays exceeded receipts) for NFIP of $2.2 billion, a modest deficit compared to NFIP’s net position in the same year, which fell by $11.5 billion to negative $37.4 billion (see fig. 4). NFIP’s $30.425 billion in debt to the U.S. Treasury at that time, which was included in its liabilities, contributed to its net negative position.

We previously reported that FEMA is required by law to charge many policyholders less than full-risk rates, otherwise known as subsidized rates. We found that FEMA’s budget does not recognize the subsidy, making it difficult to analyze the effect of subsidized premium rates on the overall financial stability of NFIP. In 2017, we recommended that Congress consider comprehensive reform to improve NFIP solvency and enhance national resilience to floods. At that time, we developed five policy goals for evaluating options for reforming NFIP that included requiring transparency of the program’s federal fiscal exposure. Congress is still considering various reforms related to NFIP.

In addition, the budget request for the Disaster Relief Fund, which provides a significant portion of the total federal response to major disasters, traditionally has been intended to cover each fiscal year’s costs for previously declared disasters and the predictable cost of noncatastrophic events. It does not pre-fund anticipated needs from disasters that have yet to occur or seek funding for potential catastrophic events. As previously noted and shown in figure 2, extreme weather events have cost the nation more than $100 billion through supplemental appropriations to the Disaster Relief Fund since fiscal year 2005. According to the Analytical Perspectives of the President’s 2019 Budget, inflation, urbanization, and other factors are expected to contribute to increasing future disaster response and recovery costs. Additionally, climate change could increase the costs of severe weather events as more frequent and extreme weather and climate-related events are expected to continue to damage infrastructure, ecosystems, and social systems, according to the United States Global Change Research Program. This is one reason we added the federal government’s fiscal exposure created by climate change to our 2013 High Risk List.

However, the increased fiscal exposures are not reflected in the Disaster Relief Fund’s financial measures in the budget. According to FEMA officials, the agency does not forecast costs or exposures for catastrophic disasters, in part because each catastrophe is different and presents its own set of risks that would be very difficult to predict with reasonable certainty.

While the primarily cash-based budget may not represent an activity’s likely claim on federal resources, members of Congress and the public have access to information on the fiscal health of the activities through other avenues. Many of the activities we reviewed track exposures and other relevant data internally and provide that information to Congress and the public through a variety of reports outside the budget (see table 7). These include actuarial reviews, one-time analyses of various subjects, and annual reports that provide detailed financial information. For example, each year an independent actuarial contractor conducts two separate actuarial reviews of the MMI Fund—one for forward mortgages and one for Home Equity Conversion Mortgages (reverse mortgages)—to estimate the economic value of the two portfolios. FHA then compiles statutorily required annual reports for Congress based on the results of the actuarial analyses. The annual report includes the calculation of the MMI Fund’s overall capital ratio and some additional analyses of the MMI Fund’s financial condition.

While these reports provide additional financial information, we previously reported that decision-making is best informed if the government includes in the budget the costs of its commitments at the time it makes them. 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, compare the cost of an activity with its benefits, or assess the cost of one method of reaching a specified goal against another. Decision makers’ ability to make informed choices would be improved by increased transparency about the impact of policy decisions on the expected path of spending and revenue.

We previously recommended that Congress consider expanding the use of accrual-based information to other activities, such as insurance, because accrual measurement would advance the recognition of costs for these commitments, especially those that involve cash flows over many years. We determined that, for many programs, adopting accrual-based information selectively within the current, primarily cash-based budget might improve information while preserving up-front control. PBGC, Federal Employees’ Group Life Insurance (FEGLI), and NFIP officials stated that adding limited accrual accounting information, such as the balance sheet, to the President’s Budget would be relatively easy. NFIP officials agreed that while the financial statements and various reports show the full liability of the program, including this information in the budget would consolidate it in one place. The President’s Budget (Appendix) already includes a balance sheet from FHA’s MMI Fund, along with information on credit subsidy reestimates in the Federal Credit Supplement of the budget as required by the Federal Credit Reform Act of 1990. According to FHA officials, the main benefit of reporting balance-sheet information in the budget is that the public, OMB, and Department of Housing and Urban Development personnel have more data that can be used to make decisions. FHA officials also noted that creating a crosswalk between the financial reports and the budget has been a challenge because there is not always a one-to-one relationship, which is due to different reporting elements and concepts underlying their measurement.

While Accrual Budgeting Better Recognizes Long- Term Costs, the Amount of the Exposure Can Be Hard to Measure for Some Activities

Given the variation in fiscal exposures, we previously concluded that while accrual budgeting better recognizes long-term costs, a uniform, across-the-board approach to make fiscal exposures more apparent in the budget may not be appropriate. One of several factors that should be considered is the extent to which the magnitude of the exposure can be reasonably estimated. The complexity and uncertainty surrounding some exposures create significant cost estimation challenges, while other activities are easier to estimate. For example, OPM considers various factors that are fairly stable and easily known or can be reasonably estimated (such as changes in the mortality of federal employees, federal salaries, and interest rates) when calculating FEGLI’s liability for current and future life insurance coverage. Because of this, FEGLI officials noted that they did not face significant challenges in estimating the program’s fiscal exposure.

In contrast, exposures related to natural disasters are especially hard to estimate. According to NFIP officials, the extreme variability of flood losses is the single biggest challenge in estimating the program’s exposure. Similarly, officials from the Disaster Relief Fund said it is not possible to forecast catastrophic disasters because each is different. According to FEMA officials, the agency has begun working with catastrophe modeling firms and others in developing better estimates of loss exposures. While several components of the models are still in development, FEMA officials believe they show promise to be useful tools in the future.

Agencies developed models to make estimates of fiscal exposures for several of the activities we reviewed, although the agencies noted that generating reasonably reliable estimates is difficult for a variety of reasons, such as the sufficiency of data on potential losses and the nature of the risks insured by the government. For example, PBGC developed the Pension Insurance Modeling System to help the agency better understand and quantify its long-term risk and exposure to loss under different economic conditions and policy alternatives. Agency officials stated that obtaining current, complete, comprehensive, and reliable data on the company pension plans likely to present claims was one of the most significant challenges in these estimates. FHA also uses economic assumptions and historical data to estimate and reestimate the net lifetime costs of the mortgages it insures. Agency officials noted that it is difficult to produce these estimates because risk can vary based on a variety of factors that are uncertain, volatile, or sensitive, such as the economy and housing market. In recognition of this difficulty, the Federal Credit Reform Act of 1990 provides permanent and indefinite budget authority for upward reestimates, so that FHA can receive additional funds when needed if reestimates increase subsidy costs.

We previously recommended to Congress in 2007, and reiterated in 2013, that it consider requiring increased reporting of accrual-based cost information where appropriate alongside cash-based budget numbers for both existing and proposed activities—where accrual-based cost information includes significant future cash resource requirements not yet reflected in the primarily cash-based budget. From 2009 through 2014, several bills were introduced to budget for certain activities on an accrual basis, but none were signed into law. The Bipartisan Budget Act of 2018 created the Joint Select Committee on Budget and Appropriation Process Reform, but no bills were signed into law as a result. The committee was terminated by statute by December 2018. We continue to support this recommendation to improve budget recognition of these fiscal exposures, because, as shown, challenges remain in identifying and measuring fiscal exposures.

The government undertakes a wide range of activities that create fiscal exposures by obligating the government to future spending or creating an expectation for such spending. The federal budget both allocates and controls resources, but does not provide complete information about some significant fiscal exposures. Failure to understand and address these exposures can have significant consequences. These fiscal exposures will require future federal spending and will absorb resources available for other activities. Not capturing the long-term costs of current decisions limits Congress’s ability to control federal fiscal exposures at the time decisions are made. Presenting accrual information alongside cash-based budget numbers, particularly in areas where it would enhance up-front control of budgetary resources, would be useful to policymakers when debating current activities and considering new legislation.

Agency Comments

We provided a draft of this report to OMB and Treasury. The agencies had no comments on the draft report but provided technical comments that we incorporated as appropriate. We sent relevant portions of the draft to the following agencies: Department of Agriculture’s RMA, Department of Homeland Security’s FEMA, Department of Housing and Urban Development’s FHA, Department of Transportation’s Federal Aviation Administration, FDIC, NCUA, OPM, and PBGC. All the agencies (except the Department of Transportation, Department of Housing and Urban Development, and Department of Agriculture) provided technical comments that we incorporated as appropriate.

We are sending copies of this report to the appropriate congressional committees, the Secretary of the Treasury, and the Director of OMB. This report will also be available at no charge on our website at http://www.gao.gov.

Should you or your staff have questions concerning this report, please contact me at (202) 512-8678 or cackleya@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VII.

Appendix I: Objectives, Scope, and Methodology

In this report, we (1) identify federal insurance and other activities that transfer risk or losses to the federal government and, where possible, identify cost- and exposure-related information on these activities; and (2) use selected activities to illustrate some of the challenges that we identified in past reports with measuring and reporting fiscal exposures in budget documents.

Identifying Activities That Transfer Risk or Losses to the Government

For this objective, we updated our 2005 catalog of federal insurance activities and used additional sources of information on federal activities to obtain cost- and exposure-related information and identify additional activities. To compile the 2005 catalog, we developed the following criteria for identifying federal insurance activities: (1) The federal government must accept the risk of financial loss in providing protection against specific types of losses, events, or conditions whose timing, magnitude, or duration, are uncertain or unknown; and (2) by accepting this insurance risk, the federal government must be obligated to pay compensation or provide benefits if the losses, events, or conditions occur. In addition, we verified that the activities we cataloged as federal insurance also were recognized lines of insurance in the private sector. We applied the criteria to the Appendix of the Budget of the United States Government (President’s Budget) for Fiscal Year 2005 to identify budget accounts that funded federal insurance activities per our criteria.

In this report, we first developed our own criteria for activities that transfer risk or losses to the federal government using definitions of federal insurance from the Federal Accounting Standards Advisory Board’s (FASAB) Statement of Federal Financial Accounting Standards (SFFAS) 5: Accounting for Liabilities of the Federal Government and Statement of Federal Financial Accounting Standards SFFAS 51: Insurance Programs. Activities were assessed against the following two criteria: (1) a risk of financial loss or actual financial loss to a third party exists that stems from an adverse event; and (2) through the activity the federal government accepts some or all of the risk of financial loss or actual financial loss from the adverse event by indemnifying, guaranteeing, or providing benefits to the affected entity or beneficiary. We also reviewed our new criteria internally with input from GAO experts, including accountants, actuaries, and budget law experts.

We then used the following sources to identify federal activities that met our criteria: (1) 2017 Financial Report of the United States Government (Financial Report) and underlying account-level data from the Government-wide Treasury Account Symbol Adjusted Trial Balance System (GTAS) of the Department of the Treasury (Treasury), (2) the Office of Management and Budget’s (OMB) President’s Budget; (3) OMB’s Catalog of Federal Domestic Assistance (CFDA) administered by the General Services Administration; and (4) the Code of Laws of the United States (U.S. Code). The resulting catalog is based solely on the criteria we developed for this report and the sources and methodology we used. Other criteria, sources, or methodologies might yield a list that differs from ours in both number and composition of activities. Because we use different criteria, sources, and methodologies, our results are not directly comparable to results in our 2005 catalog.

First, we identified certain categories of federal activities that met our criteria using the note disclosures of the 2017 Financial Report:

We identified the following federal insurance programs by analyzing the note disclosure on federal insurance and guarantee liabilities as well as our internal audit documents on that note disclosure for fiscal years 2014–2017: Federal Crop Insurance Program, National Flood Insurance Program (NFIP), Pension Benefit Guaranty Corporation’s (PBGC) single-employer and multiemployer pension insurance programs, Federal Deposit Insurance Corporation’s Deposit Insurance Fund, and National Credit Union Administration’s Share Insurance Fund. To find information on the programs, the role of the government in the administration of the programs, and cost- and exposure-related information on the programs, we analyzed GAO reports, individual agency annual, financial, or other reports, and reports from the Congressional Budget Office.

We also identified the following categories of activities that met our criteria: federal loan guarantee programs, senior preferred stock purchase agreements with two government-sponsored enterprises— Fannie Mae and Freddie Mac; federal employee and veterans benefits excluding veterans’ burial and education benefits; and social insurance. We used GTAS to identify Treasury accounts for the federal loan guarantee and the federal employee and veterans benefit categories. We generally presented liabilities for these activities as available in the Financial Report and GTAS for fiscal year 2017.

Second, we conducted searches of key words in the names of budget accounts reported in the Appendix of the President’s Budget using OMB’s MAX system. We analyzed the results and identified budget accounts that funded additional federal activities that met our criteria and reported budget obligation data for those accounts for fiscal year 2017. We also analyzed more than 2,200 federal activities in CFDA as of September 30, 2017. To do this, at least two analysts verified that a budget account or a CFDA program met or did not meet our criteria (with review from an additional analyst, if needed). We included a budget account or CFDA program in our catalog if all analysts reviewing the program agreed the account or program met our criteria. The additional federal activities we found through the President’s Budget and CFDA can be broadly categorized as providing compensation for property or financial losses— including losses resulting from adverse environmental or manmade events—or providing life, health, or disability benefits to nonfederal employees. We also crosschecked this list of federal activities with those we identified in our 2005 report.

Lastly, we conducted a search of key words in the table of contents of the U.S. Code and found additional activities that provided compensation for property damage or financial loss and thus transferred risk or losses to the federal government. We conducted this search to identify potential federal activities that currently only exist in law but met our criteria. According to officials from OMB, activities may not appear in the President’s Budget for different reasons, including if the activities ended or expired or if they have no expected expenditures or proposed appropriations. In reviewing the U.S. Code, two analysts verified whether a search result represented a new federal activity that met our criteria. In addition, a senior attorney from our Office of General Counsel verified that the additional activities were accurately stated based on the language of the U.S. Code.

We shared our catalog with and obtained expert opinion from officials from Treasury, OMB, the General Services Administration, the Congressional Budget Office, and FASAB, as well as from key GAO staff with relevant expertise (including accountants, actuaries, and experts on budget appropriation and other federal activities). We added an additional federal activity to our catalog that an outside expert brought to our attention and that we had not identified through the methodologies described above.

Examples of Challenges in Measuring and Reporting Fiscal Exposures

To illustrate some of the challenges in measuring and reporting fiscal exposures that we identified in past reports, we reviewed prior reports on fiscal exposures, the federal budget, and accrual budgeting to identify key challenges relevant to insurance and other activities. We then selected six activities from those we identified for this report that illustrate these key challenges. We selected the (1) Disaster Relief Fund, (2) Federal Aviation Administration’s Commercial Space Launch Insurance Program, (3) Federal Employees’ Group Life Insurance program, (4) Federal Housing Administration’s Mutual Mortgage Insurance Fund, (5) NFIP, and (6) PBGC pension insurance programs. We reviewed the Financial Report and the President’s Budget for information and financial measures on these activities, such as receipts, outlays, and net position for NFIP and PBGC. We also reviewed the appropriation and supplemental appropriation laws for the Disaster Relief Fund from fiscal years 2005 through 2018. We analyzed the agencies’ financial and budget documents and conducted interviews with agency officials.

We conducted this performance audit from October 2017 to March 2019 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.

Appendix II: Selected Information on Federal Insurance Programs

Federal Crop Insurance

The Federal Crop Insurance program is administered by the Risk Management Agency (RMA) of the Department of Agriculture. It helps farmers manage the risks inherent in farming by allowing them to insure against losses caused by poor crop yields, declines in prices, or both. Crop insurance premiums are subsidized in part to achieve high participation and coverage levels, which may reduce or eliminate the need for potentially costly disaster assistance payments from congressionally authorized ad hoc disaster programs. RMA partners with private insurers that sell and service policies. The program insures farmers against losses on more than 100 crops, which include corn, soybeans, wheat, cotton, and grain sorghum, as well as nursery crops and certain fruits and vegetables. In crop year 2018, RMA estimated it sold 1.1 million policies for a total of about $109.1 billion in insurance protection.

The federal government subsidizes crop insurance policies by charging participating farmers less than the full amount of the policy premium. Congress sets the programs’ premium subsidy rates—the percentage of the premium paid by the government. RMA subsidized approximately 63 percent of total premiums in crop years 2017 and 2018 (or $6.36 billion and $6.27 billion, respectively), while farmers paid the remaining 37 percent. The federal government also reimburses participating private- sector insurance companies for administrative and operating expenses. The reimbursements are based on a percentage of crop insurance premiums and are intended to cover the companies’ expenses to sell and service policies, such as employee salaries; fees paid to insurance adjusters to verify claims; and sales commissions and other compensation (profit sharing) paid to the insurance agents who sell the crop insurance to farmers. The federal government is also the primary reinsurer for the private insurance companies that take on the risk of covering losses to insured farmers, allowing private insurers and the federal government to share in the risk of loss and opportunity for gain associated with the policies. The insurance companies retain part of the premiums and associated risk, and RMA holds the remaining premiums and risk. In addition, each company cedes to RMA a percentage of its underwriting gains or losses.

The Federal Crop Insurance program is funded through mandatory spending authority, so that RMA receives a permanent indefinite appropriation each fiscal year for premium subsidy and other expenses and returns unobligated balances to the U.S. Treasury at the end of the fiscal year. According to RMA, the net cost of operations for the program was $5.5 billion and $6.8 billion for fiscal years 2018 and 2017, respectively (see table 8). Lastly, in April 2018, the Congressional Budget Office projected that federal crop insurance would cost the federal government an average of about $7.9 billion per year in 2018–2028.

In 2017, we recommended that RMA and Congress consider improving the calculations related to the payments to and risk-sharing agreements with participating insurance companies to reduce year-to-year fluctuations in the subsidy costs of the program. In 2015, we also reported on the need for RMA to obtain more information on program costs and improve its premium setting calculations. We recommended that Congress consider reducing premium subsidies for the highest-income participants to reduce the cost of the program. As of December 31, 2018, these recommendations remained unaddressed.

National Flood Insurance Program

Administered by the Federal Emergency Management Agency (FEMA) of the Department of Homeland Security, the National Flood Insurance Program (NFIP) makes federally backed flood insurance available to residential property owners and businesses. By design, NFIP does not operate for profit. Instead, the program must meet a public policy goal—to provide flood insurance in flood-prone areas to property owners who otherwise would not be able to obtain it. Under NFIP, the federal government assumes the liability for the insurance coverage and sets rates and coverage limitations, while the private insurance industry sells the policies and administers the claims. As of September 30, 2018, NFIP provided about $1.3 trillion of insurance coverage on 5.1 million policies.

NFIP generally is expected to cover its claim payments and operating expenses with the premiums it collects, but it has had to use its authority to borrow funds from the U.S. Treasury to cover large shortfalls. Since 2004, Congress increased NFIP’s initial borrowing limit from $1.5 billion to $30.4 billion, which was passed into law in 2013. Until 2004, NFIP was able to cover most claims with premiums it collected and occasional loans from the U.S. Treasury that it repaid. Cumulative debt increased substantially from 2005 to 2016 due to extraordinary catastrophic loss years resulting primarily from Hurricane Katrina and Superstorm Sandy. By September 2017, NFIP exhausted its borrowing authority following hurricane season, which prompted Congress to grant $16 billion in debt cancellation. NFIP then borrowed $6.1 billion to cover incurred and anticipated expenses for the 2018 hurricane season. As of September 30, 2018, NFIP had $20.5 billion of outstanding debt with the U.S. Treasury.

According to FEMA, as currently designed, the program likely will not be able to repay this debt.

According to FEMA, from October 1, 2017 through September 30, 2018, NFIP’s total expenses were more than $12 billion, which was more than twice its total revenue of $5.6 billion. In that time, NFIP collected $3.51 billion in premium revenues and $1.04 billion in reinsurance collections, but paid $9.21 billion in claims through the National Flood Insurance Fund. For fiscal year 2018, expenses also exceeded revenues by about $6.64 billion for the National Flood Insurance Reserve Fund.

FEMA has produced estimates of its ability to pay claims and of annual maximum probable losses. FEMA calculated NFIP’s capacity to pay claims, which includes almost $10 billion in remaining borrowing authority from Treasury, at $15.82 billion as of September 30, 2018 (see table 9). Although FEMA entered into a reinsurance contract in 2018 for $1.5 billion, it projects it will not be able to cover potential future fiscal exposure from a single, low-probability, super-catastrophic event, which it estimates could cost as much as $40 billion in claims.

In 2017, we again reported that NFIP premiums do not reflect the full risk of loss, which increases the federal fiscal exposure created by the program, obscures that exposure from Congress and taxpayers, contributes to policyholder misperception of flood risk (they may not fully understand the risk of flooding), and discourages private insurers from selling flood insurance (they cannot compete on rates). We concluded that eliminating rate discounts by requiring all rates to reflect the full risk of loss would help address these problems, but also would make policies less affordable and could reduce consumer participation. We stated that the decreases in affordability could be offset by other actions such as providing means-based assistance. We recommended that Congress consider comprehensive reform to improve NFIP's solvency and enhance the nation's resilience to flood risk. As of December 31, 2018, Congress still was considering various reforms as it worked to reauthorize the program.

Pension Benefit Guaranty Corporation

The Pension Benefit Guaranty Corporation (PBGC) is a wholly-owned government corporation established to insure the pension benefits of participants in and beneficiaries of private-sector defined benefit plans. The corporation operates a single-employer program and a multiemployer program. The single-employer program covers defined benefit pension plans that generally are sponsored by one employer. When an underfunded single-employer plan terminates, PBGC becomes the trustee and administers the plan. As of September 30, 2018, the single- employer program insured about 26 million people in approximately 23,400 plans and approximately 861,000 people were receiving benefits payments from PBGC. The multiemployer program insures plans arranged through collective bargaining between labor unions and employers, with two or more employers participating in a plan. PBGC provides financial assistance to multiemployer plans when they become insolvent. According to PBGC, as of September 30, 2018, the multiemployer program insured about 10.6 million people in approximately 1,400 plans and about 62,300 people were receiving benefits payments from plans receiving financial assistance from PBGC.

Premium rates are set in law by Congress and plan sponsors or plans pay per-participant flat premiums under both programs. In addition, under the single-employer program, a plan sponsor or plan pays a variable-rate premium based on its plan underfunding. PBGC receives no funds from general tax revenue and assets from one program cannot be used to support the other, so both programs must pay claims primarily from nonfederal sources. The single-employer program had positive cash flow during fiscal year 2018 and both programs have been able to maintain enough assets to pay guaranteed benefits and financial assistance to date.

But historically, PBGC’s statutory premium structure has not reflected significant risks PBGC insures against—for example, the risk that a single-employer plan sponsor becomes bankrupt, forcing the termination of an underfunded plan, or the risk that a multiemployer plan’s financial condition deteriorates, causing it to become insolvent—imposing claims on PBGC programs. As shown in table 10, PBGC’s multiemployer program had a negative net position (that is, total liabilities exceeded total assets) at the end of fiscal year 2018. The single-employer program reached a positive net position (for the first time since 2001) by the end of fiscal year 2018. PBGC projects a positive net position in 10 years for the single-employer program, but a negative net position for the multiemployer program (negative $68.9 billion by the end of fiscal year 2027), although there is inherent uncertainty around such a projection. PBGC’s forecasts for the following decade and beyond based on current economic conditions project a very high likelihood of insolvency for the multiemployer program before the end of fiscal year 2025 if there are no changes in law.

In 2013, PBGC officials told us that once the multiemployer fund’s cash balance was depleted, the agency would have to rely solely on annual insurance premium receipts to pay financial assistance to plans. The precise effect that the insolvency of the multiemployer insurance fund would have on retirees receiving the PBGC guaranteed benefit would depend on a number of factors—primarily the number of guaranteed benefit recipients and PBGC’s annual premium income at that time. However, the impact likely would be severe.

In 2012, we recommended that Congress consider redesigning PBGC’s premium structure to more fully reflect the risks posed by plans and sponsors to the agency and improve PBGC’s access to additional information needed to assess risk and assist in setting premiums. In 2013, we also recommended that Congress consider comprehensive and balanced structural reforms to reinforce and stabilize the multiemployer program. As of December 31, 2018, Congress had yet to authorize a redesign of PBGC's premium structure. However, in December 2014, Congress enacted the Multiemployer Pension Reform Act of 2014, which substantially established in law certain key structural reforms to the multiemployer system, including allowing severely distressed multiemployer plans to reduce accrued pension benefits; expanding PBGC’s ability to assist financially distressed plans; and raising multiemployer insurance premiums to provide PBGC with additional resources.

Deposit Insurance Fund

The Federal Deposit Insurance Corporation (FDIC) insures the deposits of commercial banks and savings associations up to the statutory limit of $250,000. According to FDIC, as of September 30, 2018, there were 5,486 insured depository institutions with total insured deposits of $7.4 trillion. FDIC administers the federal deposit insurance program through its management of the Deposit Insurance Fund (DIF), which has two primary purposes: (1) to insure the deposits and protect the depositors of insured banks and (2) to resolve failed banks. FDIC manages the DIF by determining the size of the fund and of the DIF reserve ratio (the ratio of the fund balance to estimated insured deposits). The DIF is funded mainly through quarterly risk-based assessments on insured depository institutions, and it also earns interest income on its securities. The DIF is reduced by the amount of losses and expenses associated with failed banks and by FDIC operating expenses.

The financial strength of the DIF can be gauged by comparing the fund’s actual reserve ratio to the minimum reserve ratio, and by measuring its progress to the designated, or desired, reserve ratio. Section 334 of the Dodd-Frank Wall Street Reform and Consumer Protection Act increased the minimum reserve ratio from 1.15 percent to 1.35 percent and required that the reserve ratio reach that level by September 30, 2020. To meet these requirements, large banks paid temporary surcharges from the third quarter of 2016 through the third quarter of 2018. In addition, under the long-term DIF management plan, the FDIC Board of Directors set the designated reserve ratio at 2.0 percent, with the goal of helping FDIC maintain a stable insurance assessment rate and sustain a positive DIF balance even during a serious economic downturn. In November 2018, FDIC announced that the DIF reserve ratio had reached 1.36 percent (as of September 30, 2018), exceeding the statutorily required minimum reserve ratio of 1.35 percent ahead of the statutory deadline (September 30, 2020).

Obligations of FDIC are backed by the full faith and credit of the U.S. government. In addition, FDIC is authorized to borrow up to $100 billion from the U.S. Treasury and issue and sell up to $100 billion in obligations to the Federal Financing Bank (see table 11). A statutory formula, known as the maximum obligation limitation, limits the amount of obligations the DIF can incur to the sum of its cash, 90 percent of the fair market value of other assets, and the amount authorized to be borrowed from the U.S. Treasury. The maximum obligation limitation for the DIF was $191.5 billion as of December 31, 2017.

FDIC did not use its authority to borrow funds from the U.S. Treasury when the DIF was depleted and fell to negative $20.9 billion, its lowest point in history, as a result of the 2007–2009 financial crisis. Instead, FDIC first replenished the DIF through increased assessments and a one- time special assessment. These actions were taken pursuant to a restoration plan established to replenish the DIF and raise the reserve ratio to its designated minimum within the time limits prescribed by the Federal Deposit Insurance Act. Finally, FDIC was able to improve the liquidity of the DIF by requiring the banking industry to prepay its quarterly risk-based assessments for the fourth quarter of 2009 and for the next 3 years.

National Credit Union Share Insurance Fund

The National Credit Union Administration (NCUA) administers the National Credit Union Share Insurance Fund and provides up to $250,000 of insurance per depositor. According to NCUA, by the end of calendar year 2017, the Share Insurance Fund insured the deposits of more than 111 million members in 5,573 credit unions with $1.38 trillion in assets, and the fund insured $1.1 trillion of member shares, or dollars deposited.

The Share Insurance Fund is primarily funded by contributions of 1 percent of the insured shares or deposits from each member credit union. Other sources of income include premiums, when assessed as explained below, and investment income. The financial performance of the Share Insurance Fund can be measured by comparing the equity ratio to the normal operating level (or desired equity ratio). The equity ratio is the total of credit unions’ contributions to the fund, less any gain or loss on investments, plus accumulated retained earnings, divided by total insured shares. By law, the equity ratio of the Share Insurance Fund cannot decline below 1.20 percent and may not exceed 1.50 percent. If NCUA expects the equity ratio to fall below this threshold, it must establish and implement a restoration plan to rebuild the equity ratio, which must include a premium assessment to each insured credit union. The reported equity ratio at the end of 2017 was 1.46 percent, which is above the normal operating level, set at 1.39 percent as of 2017. According to NCUA, a normal operating level of 1.39 percent was set with the goal of ensuring that the Share Insurance Fund could withstand a moderate recession without the equity ratio declining below 1.20 percent over a 5- year period.

The Share Insurance Fund is backed by the full faith and credit of the U.S. government and, according to NCUA, has $6.0 billion in borrowing authority from the U.S. Treasury, all of which was available as of December 31, 2017. The fund also has the ability to borrow from the NCUA’s Central Liquidity Facility up to the amount of the liquidity facility’s unused borrowing authority, which was $6.6 billion as of December 31, 2017. As of December 31, 2017, the Share Insurance Fund had $12.6 billion in total available borrowing capacity, which is the combination of the borrowing authority from the U.S. Treasury and the liquidity facility (see table 12).

The recent equity ratio contrasts with low points reached during and after the 2007–2009 financial crisis. NCUA had to take a number of steps to stabilize credit unions, stemming primarily from the failure of five large corporate credit unions. NCUA established the Temporary Corporate Credit Union Stabilization Fund, which replaced the Share Insurance Fund as the primary source to absorb the corporates’ losses. Congress increased NCUA’s borrowing authority with the U.S. Treasury up to $6 billion through a revolving loan fund to be shared between the Stabilization Fund and Share Insurance Fund. The Stabilization Fund borrowed and repaid a total of $11.2 billion from the U.S. Treasury from its inception in 2009 through its closure in October 1, 2017. The highest amount of total borrowing outstanding was $5.1 billion in October 2012. However, the Share Insurance Fund’s equity ratio fell below 1.20 percent in both 2009 and 2010, and two premiums totaling $1.7 billion were necessary to restore the equity ratio. NCUA stated that without the premiums the equity ratio would have fallen to 1.07 percent.

Appendix III: Information on Federal Loan Guarantees

Federal loan guarantees are any guarantees, insurance, or other pledges with respect to the payment of all or a part of the principal or interest on any debt obligation of a nonfederal borrower to a nonfederal lender. Thus, the federal guarantee transfers some or all of the risks of borrower default from private lenders to the federal government. Table 13 lists the 33 federal guaranteed loan activities that presented liabilities to the federal government as of September 30, 2017.

Appendix IV: Information on Federal Employee and Veterans Benefits

Table 14 lists 13 large federal employee and veterans benefit activities— such as pension, health, life, and disability benefits—that transfer risk or losses to the federal government. Each of the activities listed represented $10 billion or more in benefit liabilities payable for the fiscal year ending September 30, 2017. Combined, the activities accounted for 99 percent of the total federal employee and veterans benefit liabilities of $7.7 trillion.

Appendix V: Information on Selected Federal Activities That Transfer Risk or Losses to the Government

Tables 15, 16, and 17 list a total of 95 federal activities that met our criteria of transferring risk or losses from adverse events from third parties to the federal government and that we found in the Budget of the United States Government (President’s Budget), the Catalog of Federal Domestic Assistance (CFDA), or the Code of Laws of the United States (U.S. Code). These activities can be broadly categorized into activities that, at least in part, provide compensation for property or financial losses—including losses resulting from adverse environmental or manmade events—and activities that offer life, health, or disability benefits to nonfederal employees.

Table 15 has information on 39 budget accounts from the President’s Budget, generally organized by amount of obligations for fiscal year 2017. While budget obligations create a legal liability for the federal government, they may not necessarily reflect an activity’s fiscal exposure if, for example, the activity has dedicated payment streams.

Table 16 has information on an additional 51 activities found through our sources that met our criteria.

Table 17 has information on five activities authorized in law that had not triggered losses to the federal government as of December 31, 2018. With the exception of the Terrorism Risk Insurance Program, we identified these programs through an analysis of the U.S. Code, since the programs have not had liabilities or appropriations and could not be found in the Financial Report or the President’s Budget. We were able to find some financial and budgetary information on the Terrorism Risk Insurance Program because administrative expenses and potential projected payments under the program are identified in the President’s Budget on an annual basis.

Appendix VI: Fiscal Exposures from Social Insurance Programs

Federal social insurance programs are Social Security, Medicare (Parts A, B, and D), Railroad Retirement, and Black Lung. These programs provide eligible individuals with benefits, such as health insurance, disability, and retirement benefits, thus transferring risk to the federal government.

Fiscal exposures from the four programs are discussed annually in the Statement of Social Insurance (SOSI) in the Financial Reports of the United States Government. Specifically, the SOSI details the present value of the estimated future revenues and expenditures for scheduled benefits over the next 75 years. The amounts in the SOSI and presented below are not considered liabilities in an accounting context. Future benefit payments will be recognized in the Financial Report as expenses and liabilities as they are incurred based on the continuation of the social insurance programs' provisions contained in current law. While future social insurance benefit payments that are not due and payable are not treated explicitly as legal liabilities to the federal government, the SOSI’s forward-looking projections are intended to help citizens understand the long-term sustainability of these programs and the fiscal exposures they present.

The social insurance programs are mainly funded by taxes and premiums. Contributions and dedicated taxes consist of: payroll taxes from employers, employees, and self-employed persons; revenue from federal income taxation of Old-Age Survivors and Disability Insurance (OASDI) and railroad retirement benefits; excise tax on the domestic sale of coal; premiums from, and state transfers on behalf of, participants in Medicare; and reimbursements from the General Fund to the OASDI and Medicare Trust Funds. The social insurance trust funds account for all related program income and expenses, and have automatic funding authority to pay future benefits to the extent that funds are available. Taxes, premiums, and other income are credited to the funds, while benefit payments and program administrative costs are paid from the funds.

However, as of January 1, 2017, based on information from the SOSI , the present value of federal expenditures for social insurance programs over 75 years was projected to exceed program revenues by about $19.0 trillion (see table 18). This represents about 1.5 percent of the present value of the gross domestic product over 75 years. To illustrate the sustainability of current benefits, the Social Security and Medicare Part A SOSI projections assume that scheduled social insurance benefit payments would continue after related trust funds are projected to be depleted, contrary to current law. The projections for Medicare Parts B and D for fiscal year 2017 include $30 trillion in transfers of general revenues that, under current law, are used to finance the remainder of the expenditures in excess of revenues. We have reported that there are significant uncertainties related to the achievement of projected reductions in Medicare cost growth assumed in the SOSI projections that have prevented us from expressing an opinion on the sustainability of the financial statements in the Financial Report.

We previously reported on the fiscal problems presented by these programs, in particular Social Security and Medicare. The Social Security and Medicare programs are projected to face financial challenges. In June 2018, we noted that fiscal spending increases in 2017 were driven by Social Security, Medicare, Medicaid, and interest on debt held by the public. The spending increases were largely a result of the aging of the population and increasing health care costs rather than legislative changes to these programs. Spending on Social Security and these health programs is expected to continue to increase because of long- standing demographic and economic trends. The 2017 Financial Report of the United States Government, Congressional Budget Office, and our projections all show that, absent policy changes, the federal government’s fiscal path is unsustainable and that the ratio of debt to the gross domestic product would surpass its historical high of 106 percent within 14–22 years. All the projections also note that the longer action is delayed, the greater and more drastic changes will have to be.

Appendix VII: GAO Contacts and Staff Acknowledgments

GAO Contacts

Alicia Puente Cackley, (202) 512-8678 or cackleya@gao.gov.

Staff Acknowledgements

In addition to the contact name above, Patrick Ward (Assistant Director), Silvia Arbelaez-Ellis (Analyst in Charge), Katherine Carter, Robert F. Dacey (Chief Accountant), Rachel DeMarcus (Assistant General Counsel), Jill Lacey, Janice Latimer (Assistant Director, Strategic Issues), Scott McNulty, Marc W. Molino, Angela Pun, Barbara Roesmann, Jessica Sandler, Dawn Simpson (Director, Financial Management and Assurance), and Frank Todisco (Chief Actuary) made significant contributions to this report.