The requirement for timely, accurate, and useful financial and performance management information is greater than ever. The long-term fiscal pressures created by the retirement of the baby boom generation and new homeland security and defense commitments, including the ongoing Operation Iraqi Freedom, sharpen the need to look at competing claims on federal budgetary resources and new priorities. In previous testimony, I noted that it should be the norm to reconsider the relevance or “fit ” of any federal program or activity in today’s world and for the future. Such a fundamental review is necessary both to increase fiscal flexibility and to make government fit the modern world. Stated differently, there is a need to consider what the proper role of the federal government will be in the 21st century and how the government should do business in the future. The budget and performance integration initiative undertaken as part of the President’s Management Agenda should help provide information for use in conducting such reviews. OMB’s Program Assessment Rating Tool (PART) represents a step toward more structured involvement of program and performance analysis in the budget. PART includes general questions on (1) program purpose and design, (2) strategic planning, (3) program management, and (4) program results. It also includes a set of more specific questions that vary according to the type of delivery mechanism or approach the program uses. As we look ahead, the federal government faces an unprecedented demographic challenge. A nation that has prided itself on its youth will become older. Between now and 2035, the number of people who are 65 years old or over will double. As the share of the population over 65 climbs, federal spending on the elderly will absorb larger and ultimately unsustainable shares of the federal budget. Federal spending on health and entitlement programs for the elderly is expected to surge as people live longer and spend more time in retirement. In addition, advances in medical technology are likely to keep pushing up the cost of providing health care. Moreover, the baby boomers will have left behind fewer workers to support them in retirement, prompting a slower rate of economic growth from which to finance these higher costs. Absent substantive reform of related entitlement programs and/or dramatic changes in tax or discretionary spending policies, we will face large, escalating, and persistent deficits. These trends have widespread implications for our society, our economy, and the federal budget. On March 17, 2003, the Trustees of the Social Security and Medicare trust funds reported on the current and projected status of these programs over the next 75 years. The Trustees report that the fundamentals of the financial status of both Social Security and Medicare remain highly problematic. However, they stated that Medicare faces financial difficulties that are more severe than those confronting Social Security because costs of the Medicare program are projected to rise faster than costs of the Social Security program. The projections show a 20 percent increase to about $6.2 trillion over the prior year in the Present Value of Resources Needed Over the 75-Year Projection Period for Federal Hospital Insurance (Medicare Part A), while the Social Security projection showed an 8 percent increase to about $4.9 trillion. Once again, the Trustees state that action to address the financial difficulties facing Social Security and Medicare must be taken in a timely manner and that the sooner these financial challenges are addressed, the more varied and less disruptive the solutions can be. Early action to change these programs would yield the highest fiscal dividends for the federal budget and would provide a longer period for prospective beneficiaries to make adjustments in their own planning. Waiting to take action entails risks. First, we lose an important window where today’s relatively large workforce can increase saving and enhance productivity, two elements critical to growing the future economy. Second, we lose the opportunity to reduce the burden of interest in the federal budget, thereby creating a legacy of higher debt as well as elderly entitlement spending for the relatively smaller workforce of the future. Third, and most critically, we risk losing the opportunity to phase in changes gradually so that all can make the adjustments needed in private and public plans to accommodate this historic shift. We prepare long-term budget simulations that seek to illustrate the likely fiscal consequences of the coming demographic tidal wave and rising health care costs. Our latest long-term budget simulations reinforce the need for change in the major cost drivers—Social Security and health care programs. As shown in figure 1, by midcentury, absent reform of these entitlement programs, projected federal revenues may be adequate to pay little beyond interest on the debt and Social Security benefits. Further, the shift from surplus to deficit means that the nation will move into the future in a weaker fiscal position than was previously the case. Although the need for structural change in Social Security is widely recognized, this change would not be sufficient to overcome the long-term fiscal challenges confronting the nation. For example, the long-term fiscal imbalance would not come close to being eliminated even if Social Security benefits were to be limited to currently projected trust fund revenues, because Medicare and Medicaid—spending for which is driven by both demographics and rising health care costs—present an even greater problem. While addressing the challenges of Social Security and Medicare is key to ensuring future fiscal flexibility, a fundamental review of major programs, policies, and operations can create much-needed fiscal flexibility to address emerging needs. As I have stated previously, it is healthy for the nation periodically to review and update its programs, activities, and priorities. Many federal programs and policies were designed years ago to respond to earlier challenges. Ultimately, the federal government should strive to hand to the next generation the legacy of a government that is effective and relevant to a changing society—a government that is as free as possible of outmoded commitments and operations that can inappropriately encumber the future. A reexamination of existing programs and policies could help weed out items that have proven to be outdated or persistently ineffective or alternatively could prompt us to update and modernize activities through such actions as improving program targeting and efficiency, consolidation, or reengineering of processes and operations. Such a review should not be limited to only spending programs but should include the full range of tools of governance that the federal government uses to address national objectives. These tools include loans and loan guarantees, tax expenditures, and regulations. In the last decade the Congress put in place a series of laws designed to improve information about cost and performance. This framework and the information it provides can help structure and inform the debate about what the federal government should do. In addition, GAO has identified a number of areas warranting reconsideration based on program performance, targeting, and costs. The events of the past few years have served to highlight the benefits of fiscal flexibility. Addressing the long-term drivers in the budget is essential to preserving any flexibility in the long term. In the nearer term, a fundamental review of existing programs and policies can also create much-needed fiscal flexibility. In this regard, the federal government must determine how best to address the necessary structural challenges in a reasonably timely manner in order to identify specific actions that need to be taken. As steward of the nation’s future, the federal government must begin to prepare for tomorrow. Today’s budget decisions shape, in part, the choices and resources available to future decision makers and taxpayers. Accordingly, today’s budget decisions involve tradeoffs between meeting current needs and fulfilling stewardship responsibilities. The government undertakes a wide range of responsibilities, programs, and activities that may call for future spending or create an expectation for such spending. Figure 2 illustrates some of these claims on future federal resources. A better understanding and more transparency about these “fiscal exposures” is needed. The budget needs to employ new metrics and measures and processes—relying more on long-term estimates and present value concepts in making resource allocation decisions. Neither current budget reporting nor financial statements are designed to promote the recognition and explicit consideration of all of these exposures. Our nation’s fiscal exposures cover a wide range: from explicit liabilities to implicit promises embedded in current policy or public expectations. Some, like accounts payable and loan guarantees, are included in both the budget and financial statements and some are not. Others, such as liability for environmental cleanup, are reported in the financial statements, but only a single year’s figures are in the budget. Some implicit exposures, such as future Social Security and Medicare benefits, are not included in the budget or reported as liabilities in the financial statements but are captured in long-range budget projections. Other implicit exposures, such as the risk assumed by insurance programs, may not be captured in either budget or financial reporting. The failure to understand and address these fiscal exposures can have significant consequences, encumbering future budgets and reducing fiscal flexibility. Further, the failure to capture the long-term costs of a proposal or decision limits the Congress’s ability to control fiscal exposures at the time it is being asked to make the decision. As the figure makes clear, there is wide diversity in the nature of these fiscal exposures. This diversity suggests that it would be most useful to look at different types of fiscal exposures and tailor metrics and changes to address each type. We recently recommended that OMB report annually on fiscal exposures, including a concise list and description and cost estimates where possible. We also recommended that, where possible, OMB report the estimated costs associated with certain exposures as a new budget concept—“exposure level”—as a notational item in the President’s budget. These two steps would help alert both the public and policy makers about the long-term implications of programs, policies and activities. It is important to recognize that for trust funds, greater transparency and fuller disclosure means going beyond trust fund balances or solvency measures. For federal trust funds the balances do not provide meaningful information about program sustainability. These balances do not increase the government’s ability to meet long-term commitments. Nor do they necessarily represent the full future cost of existing promises. For example, the projected exhaustion date of the Hospital Insurance (HI) Trust Fund is a commonly used indicator of HI’s financial condition.