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Report to the Chairman, Committee on the Budget, House of 

Representatives:



January 2003:



Fiscal exposures:



Improving the Budgetary Focus on Long-Term Costs and Uncertainties:



GAO-03-213:



GAO Highlights:



Highlights of GAO-03-213, a report to the Committee on the Budget, 
House 

of Representatives:



January 2003:



Fiscal Exposures:



Improving the Budgetary Focus on Long-Term Costs and Uncertainties: 



Why GAO Did This Study:



GAO and other budget experts have discussed that the current time 
horizons 

and content of the federal budget could be enhanced to more 
comprehensively 

reflect the government’s commitments or signal emerging problems. GAO 
was 

asked to (1) provide information on the range and nature of 
responsibilities, 

programs, and activities that may explicitly or implicitly expose the 

government to future spending and (2) present and discuss options for 

increasing the attention paid to these items in the budget and budget 
process.



What GAO Found:



The federal government undertakes a wide range of responsibilities, 
programs, 

and activities that may either obligate the government to future 
spending or 

simply create an expectation for spending. GAO uses the concept of 
“fiscal 

exposure” (risk) to provide a framework to consider these long-term 
costs and 

uncertainties.



Fiscal exposures vary widely as to source, extent of the government’s 
legal 

obligation, likelihood of occurrence, and magnitude. These exposures 
include 

items such as retirement benefits, environmental cleanup costs, and 
future 

social insurance benefits. Given this variety, it is useful to think of 
a 

spectrum extending from explicit liabilities to implicit promises 
embedded 

in current policy or public expectations.



Fiscal exposures warrant budgetary attention and oversight. Demographic 
trends, 

in particular, argue for considering the long-term sustainability and 
flexibility 

of the government’s fiscal position. Regardless of whether the 
government is 

legally required or simply compelled by circumstances, some exposures 
may 

encumber future budgets and constrain fiscal policy. Not capturing the 
long-term 

costs of current decisions limits Congress’s ability to control the 
government’s 

fiscal exposures at the time decisions are made.



Current budget reporting, however, does not always fully capture or 
require 

explicit consideration of some fiscal exposures. For some exposures, 
such as 

environmental cleanup costs, the government’s commitment occurs years 
before 

the cash consequences are reflected in the budget. Other potential 
draws on 

future resources, such as life-cycle costs for fixed assets and 
disaster 

assistance, may not flow from commitments of a strictly legal nature 
but from 

public expectations.



Determining how to improve the budgetary attention to fiscal exposures 
is 

complicated by difficulties in (1) determining the scope of items to be 

considered and (2) estimating costs. The variety of fiscal exposures 
and the 

difficulties in estimating their costs suggest that an across-the-board 

approach may not be the best way to proceed. Improved supplemental 
information 

may be helpful to increase transparency without introducing additional 

uncertainty and complexities into the budget. In cases where the extent 
of 

the government’s obligation or ultimate costs (or both) is unclear, 
supplemental 

reporting may be the most appropriate approach. Beyond increasing 
supplemental 

reporting, providing more opportunities to consider fiscal exposures in 
the 

budget process may help facilitate explicit consideration of certain 
exposures. 

Finally, in some cases where there is an explicit liability and 
accepted, 

reasonable cost estimates exist, additional steps may be taken to 
directly 

incorporate costs in the budget when doing so would enhance up-front 
control 

of spending.



What GAO Recommends:



GAO recommends that OMB report annually on fiscal exposures. Where 
possible, 

OMB should report the estimated costs—“exposure level”—of certain 
activities 

in the Program and Financing schedules of the budget. In a few select 
areas, 

the ultimate objective might be to include costs directly in the budget 
when 

doing so would enhance up- front control of spending.



Congress may wish to consider exploring options for improving the 
budgetary 

information and the attention given to fiscal exposures. If more 
explicit 

congressional consideration is desired, as estimates improve, Congress 
may 

wish to develop budget process mechanisms that prompt more 
deliberation.





www.gao.gov/cgi-bin/getrpt?GAO-03-213.



To view the full report, including the scope and methodology, click on 
the 

link above. For more information, contact Paul Posner at (202) 512-9573 
or 

posnerp@gao.gov.



Contents:



Letter:



Results In Brief:



Background:



Objectives, Scope, and Methodology:



Fiscal Exposure Could Be Considered on Several Levels:



Fiscal Exposures are Wide-Ranging and Varied:



Fiscal Exposures Involve Complex Measurement and Budgeting Challenges:



Diversity of Fiscal Exposures Suggests that Tailored Approaches Would 

Be More Feasible than an Across-the-Board Approach:



Conclusion:



Recommendations for Executive Action:



Matters for Congressional Consideration:



Agency Comments and Our Evaluation:



Figures:



Figure 1: Composition of Spending as a Share of GDP Assuming 

Discretionary Spending Grows with GDP and the Tax Cuts Do Not Sunset:



Figure 2: Spectrum of Fiscal Exposures:



Figure 3: Social Security, Medicare, and Medicaid Spending as a Percent 

of Gross Domestic Product:



Figure 4: Overview of Possible Approaches:



Figure 5: Possible Options For Improving Supplemental Reporting:



Figure 6: Possible Options for Providing Opportunities For Explicit 

Consideration of Fiscal Exposures:



Figure 7: Possible Options for Incorporating Costs Directly into the 

Primary Budget Data:



Abbreviations:



CBO: Congressional Budget Office:



DOD: Department of Defense:



GDP: gross domestic product:



OMB: Office of Management and Budget:



Letter:



January 24, 2003:



The Honorable Jim Nussle

Chairman

Committee on the Budget

House of Representatives:



Dear Mr. Chairman,



As the central process by which the President and Congress select among 

competing demands for federal funds, the budget should provide complete 

cost information and adequate signals about emerging problems. For many 

programs, the current budget does this. It does not, however, always 

help policymakers consider the long-term costs associated with some 

activities that explicitly or implicitly commit the government to 

future spending or otherwise affect the long-term fiscal outlook of the 

nation. This may limit the attention given to the future sustainability 

and flexibility of the government’s fiscal position and the cost 

effectiveness of existing programs.



You requested that we: (1) provide information on the range and nature 

of certain responsibilities, programs, and activities that may 

explicitly or implicitly expose the government to future spending and 

(2) present and discuss options for increasing attention paid to these 

items in the budget and the budget process. As discussed with your 

staff, this report covers a number of issues surrounding long-term 

costs and uncertainties that present risk for the fiscal future, 

including:



* the concept and different dimensions of fiscal exposures (risks):



* the range and nature of specific fiscal exposures facing the federal 

government:



* the complexities and challenges surrounding cost measurement and 

budgeting for fiscal exposures and:



* approaches for increasing the attention given to fiscal exposures in 

the budget and the budget process.



Results In Brief:



The federal government undertakes a wide range of responsibilities, 

programs, and activities that may either obligate the government to 

future spending or create an expectation for spending. In particular, 

demographic trends facing the nation argue for considering the long-

term sustainability and flexibility of the government’s fiscal 

position. Profound demographic changes, with the impending retirement 

of the baby boom generation, will have significant implications not 

only for the Social Security, Medicare, and Medicaid programs but also 

for the budget and the economy as a whole. The approaching demographic 

tidal wave also serves to reinforce the importance of looking beyond 

short-term budgetary consequences. The savings and loan crisis in the 

1980s and the resulting multibillion dollar bailout serve as a vivid 

reminder of the shortcomings and consequences when the federal budget 

does not adequately signal emerging problems.



Current budget reporting, however, is not designed to promote the 

recognition and explicit consideration of some of these exposures. For 

some claims, such as environmental cleanup and disposal costs, the 

government’s commitment occurs years before the cash consequences are 

reflected in the budget. Other potential draws on future resources, 

such as future social insurance benefits or disaster assistance, may 

not flow from commitments of a strictly legal nature but from 

expectations that the public holds about the government’s 

responsibilities. For example, while the federal budget shows annual 

Social Security tax receipts exceeding annual cash benefit payments, 

the fiscal year 2001 consolidated Financial Report of the United States 

Government estimates the net present value of Social Security’s 

negative cash flow over a 75-year period as $4.2 trillion.[Footnote 1] 

Concerns have been raised that such potential draws on future federal 

resources extending beyond current budget time frames may not be 

readily apparent in current budget reporting and process.



Policy choices that may have significant implications for long-term 

budget flexibility and for which future growth paths are uncertain can 

affect either spending or revenue; thus, fiscal exposures could be 

thought of on several levels. Aggregate projections of the cost of the 

government’s current programs and policies provide important context 

for decision making. This construct, however, may be too broad to 

highlight specific areas for reform. To help address this concern, this 

report looks below the aggregate level on the spending side to provide 

insights on the range and nature of specific fiscal exposures.



In this report, we use the term “fiscal exposure” to provide a 

conceptual framework for considering the wide range of 

responsibilities, programs, and activities that may explicitly or 

implicitly expose the federal government to future spending. The budget 

treatment of items that could be considered fiscal exposures varies--

some have been captured in budget obligations and some have not. Fiscal 

exposures include not only liabilities,[Footnote 2] 

contingencies,[Footnote 3] and financial commitments[Footnote 4] that 

are identified on the balance sheet or in the accompanying notes, but 

also responsibilities and expectations for government spending that do 

not meet the recognition and disclosure requirements for that 

statement. We use the term implicit exposures in this report to refer 

to exposures that stem not from a legal obligation of the federal 

government but rather from implied commitments embedded in the 

government’s current policies or in the public’s expectations about the 

role of government.[Footnote 5]



Fiscal exposures vary widely as to source, extent of the government’s 

legal obligation, likelihood of occurrence, and magnitude. Their 

ultimate costs may or may not be measurable. Given this variety, it is 

useful to think of fiscal exposures as falling on a spectrum extending 

from explicit liabilities to the implicit promises embedded in current 

policy or public expectations. Some, such as environmental cleanup and 

disposal costs and postretirement benefits, are reported in the 

financial statements as liabilities. Some are reported as financial 

commitments--such as contracted goods or services that have not yet 

been delivered--or contingencies--such as insurance--that depend on 

future events. Others, such as future social insurance benefits, are 

not explicitly stated or reported as liabilities but rather are implied 

by current decisions or public expectations about the role of 

government and shown as stewardship responsibilities.



The budgetary treatment of these items varies--some have been included 

in the budget and some have not. Some liabilities reported on the 

financial statements, such as accounts payable and loan guarantees, are 

included in the budget because agencies must have budget authority to 

cover them. Others, such as environmental and disposal liabilities, are 

not included in primary budget data[Footnote 6] beyond the amount for 

current cleanup activities. Some implicit exposures, such as the cost 

of future Social Security benefits, are not included in primary budget 

data for the budget year 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 primary budget data 

or in long-range budget projections.



This variety increases the difficulty of determining how and to what 

extent fiscal exposures should be handled in the budget and budget 

process. Specifically, budgeting for fiscal exposures is complicated by 

difficulties in 

(1) determining the scope of programs that should be considered and 

(2) estimating costs. There is no technical definition of fiscal 

exposures and no universal agreement on which and to what extent 

specific activities should be considered fiscal exposures or how they 

should be treated in the budget and budget process. Further, the 

complexity and uncertainty surrounding some exposures creates 

significant cost estimation challenges, which in turn raises concerns 

about using these estimates as the sole basis of budget and other 

policy decisions. These issues need to be considered carefully to avoid 

subjecting the primary budget data to large and volatile reestimates. 

Nevertheless, information on the existence and estimated cost of fiscal 

exposures needs to be considered along with other factors when making 

policy decisions. Not capturing the long-term costs of current 

decisions limits Congress’s ability to control the government’s 

exposure at the time decisions are made.



The variety of fiscal exposures, the difficulties in estimating their 

costs, and the range of uncertainty surrounding such cost estimates 

suggest that an across-the-board approach may not be the best way to 

proceed and that approaches may evolve over time. A framework organized 

around possible objectives can facilitate consideration and analysis of 

various approaches to help improve the attention given to fiscal 

exposures. The three possible objectives used to structure this 

analysis are (1) improving transparency, (2) prompting more 

deliberation, and (3) improving budget incentives.



If the primary objective is to improve the transparency of fiscal 

exposures, then supplemental reporting would help promote this 

objective. One option for increased supplemental reporting would be to 

require, on an annual basis, a report on fiscal exposures. Another 

option would be to report, where appropriate, the future estimated 

costs of certain exposures as a new budget concept--”exposure level”--

as a notational item in the Program and Financing schedule of the 

President’s budget. If, however, the primary objective is to prompt 

more explicit deliberation of exposures, then budget process mechanisms 

could be designed to provide opportunities for such consideration--

especially as the amount and quality of cost information is improved 

over time. For example, as more information on costs is provided, the 

budget resolution could include limits on creating new or expanding 

existing exposures, with points of order permitted against legislation 

violating such limits. Another option would be to establish triggers to 

signal when the costs of existing exposures exceed some predetermined 

amount. Any process mechanisms--whether points of order or triggers--

would need to take into account the uncertainty inherent in all long-

range estimates and be designed accordingly. Finally, if the primary 

objective is to change budgetary incentives, then estimates of the 

future costs of exposures might be included directly into the primary 

budget data. For example, accrual-based measurement could be used to 

record estimated costs when doing so would enhance obligations-based 

control by recognizing costs up front at the time decisions are made 

that might encumber future resources. The general approaches outlined 

and the various options for implementing them achieve the three 

objectives to differing degrees and also vary in the implementation 

challenges they present.



We are recommending that the Office of Management and Budget (OMB) 

report annually on fiscal exposures, including a concise list and 

description of such exposures, cost estimates, where possible, and an 

assessment of methodologies and data used to produce cost estimates for 

such exposures. In addition, where possible, OMB should report the 

estimated costs associated with certain exposures as a new budget 

concept--”exposure level”--as a notational item in the Program and 

Financing schedule of the President’s budget. For select areas where an 

explicit liability exists and there are accepted cost estimation 

methodologies, the ultimate objective might be to include the accrual 

costs directly in the primary budget data when doing so would enhance 

obligation-based control. These steps should complement and support 

continued and improved reporting of long-range projections and analysis 

of the budget as a whole to assess fiscal sustainability and 

flexibility.



If more explicit congressional consideration of the potential costs of 

certain exposures is desired, Congress may wish, as estimates improve 

over time, to develop budget process mechanisms that prompt more 

deliberation about fiscal exposures while recognizing the uncertainty 

inherent in estimating some long-term costs.



Background:



A primary focus of current federal budget reporting is the cash 

implications of the government’s obligations over a period of 1 to 10 

years. The federal budget is an obligation-based budget designed to 

ensure that agencies do not incur legal obligations unless and until 

Congress provides authority for that purpose. Obligation-based 

budgeting involves three stages 

(1) Congress must enact budget authority up front before government 

officials can obligate the government to make outlays, (2) government 

officials commit the government to make outlays by entering into 

legally binding agreements, and (3) outlays (cash disbursements) are 

made to liquidate obligations. However, with limited 

exceptions,[Footnote 7] the amounts to be obligated are measured on a 

cash or cash equivalent basis and the unified budget deficit/

surplus[Footnote 8]--a key focus of the policy debate--represents the 

difference between cash receipts and cash outlays in a given year. As a 

result, the U.S. budget is often referred to as cash-based as well as 

obligation-based.



For many programs, the cash-and obligation-based budget provides 

sufficient information on and control over the government’s spending 

commitments. However, this focus does not require explicit 

consideration of some responsibilities, programs, or activities that 

may result in future spending. For some programs, obligations and cash 

outlays do not reflect the magnitude of the government’s commitment of 

future resources at the time decisions are being made. We and other 

federal budget experts have raised concerns that, in these cases, the 

current budget may neither adequately reflect the extent of the 

government’s commitment nor signal emerging problems.



Demographic trends facing the United States argue for considering the 

long-term sustainability and flexibility of the government’s fiscal 

position. Profound demographic changes with the impending retirement of 

the baby boom generation will have significant implications not only 

for the Social Security, Medicare, and Medicaid programs but also for 

the budget and the economy as a whole. The share of the population that 

is age 65 or older is climbing and is expected to surpass 20 percent by 

2035. Our recent simulations show that absent policy changes, social 

insurance and health programs will encumber an increasing share of the 

government’s resources, thus restricting fiscal flexibility to address 

other needs. As shown in figure 1, our long-term budget simulations 

show that the aging of the baby boom generation and rising per capita 

health care spending will, absent meaningful reform, lead to massive 

fiscal challenges in future years. Assuming, for example, that recent 

tax reductions are made permanent and discretionary spending keeps pace 

with the economy, by midcentury, federal revenues may only be adequate 

to pay Social Security and interest on the federal debt. As a result, 

major spending reductions, tax increases, or some combination of the 

two would be necessary to obtain balance.



Figure 1: Composition of Spending as a Share of GDP Assuming 

Discretionary Spending Grows with GDP and the Tax Cuts Do Not Sunset:



[See PDF for image]



[End of figure]



One need not look only to implications of the demographic shift to see 

the disconnection between how some exposures appear in the budget in 

the short term and the long term. The savings and loan crisis and the 

resulting bailout serve as a vivid reminder of the shortcomings of the 

federal budget in signaling emerging problems. During the 1980s, as 

hundreds of institutions became insolvent and the government’s 

liabilities mounted, the federal budget failed to provide timely 

information on the rising deposit insurance costs accruing to the 

government. Although we and some industry analysts raised concerns 

about these rapidly increasing deposit insurance costs, corrective 

action was delayed and the government’s total costs increased. Since 

the federal budget did not record outlays until the institutions were 

closed and depositors paid, it provided little incentive to act 

promptly. Indeed, budget treatment may have created incentives to delay 

closing insolvent institutions, which raised the government’s ultimate 

costs. Delayed budget recognition obscured the program’s, as well as 

the government’s, underlying financial condition and limited the 

usefulness of the budget process as a means for Congress to assess the 

problem.



Recent performance reforms also reinforce the need for full cost 

information to assess and manage program performance. These reforms 

emphasize the need for complete cost information--not just cash flows-

-to assess and manage performance. However, for some activities, such 

as deferred compensation, the current budgetary focus on annual cash 

flows does not match full costs with the goods and services provided by 

the government. By making it more difficult to assess and compare the 

costs associated with a given level of performance, the failure to 

align budgetary cost recognition with the consumption of resources may 

hamper the government’s performance and accountability reform efforts.



Objectives, Scope, and Methodology:



The Chairman of the House Committee on the Budget asked us to 

(1) provide information on the range and nature of responsibilities, 

programs, and activities that may explicitly or implicitly expose the 

government to future spending and (2) present and discuss options for 

increasing attention paid to these items in the budget and the budget 

process. Although some tax preferences may have uncertain or 

accelerating future growth paths that have significant implications for 

the long term, this report deals only with spending.



To identify examples of programs and activities that may either 

directly obligate the government to future spending or simply create an 

expectation for such spending, we reviewed the consolidated Financial 

Report of the United States Government, relevant literature, the 

President’s budget documents, and prior GAO work. To begin construction 

of the spectrum of fiscal exposures, we reviewed the generally accepted 

federal accounting standards, including the basis of conclusions for 

federal liabilities, contingencies, and stewardship responsibilities. 

Data on estimated exposures were drawn from the fiscal year 2001 

consolidated Financial Report of the United States Government, agency 

financial statements, and the President’s budget. Although we used 

generally accepted federal accounting standards as an initial framework 

in constructing the spectrum of fiscal exposures outlined in the 

report, we also considered additional items that may implicitly expose 

the government to future spending but may not be fully captured in the 

financial statements or the budget. In order to identify ideas and 

describe various approaches for improving the budgetary attention given 

to fiscal exposures, we reviewed relevant literature and our prior 

work, including discussions with budget experts. We also drew upon our 

previous work looking at the experiences of other nations with accrual 

budgeting[Footnote 9] and the recognition of fiscal risks, such as 

federal insurance.[Footnote 10]



Our list of fiscal exposures is meant to be illustrative to provide 

perspective on the range and nature of responsibilities, programs, and 

activities that may explicitly or implicitly expose the government to 

future spending. It should not be interpreted either as all-inclusive 

or universally agreed upon. Further, although this report notes that 

the concept of fiscal exposure can be thought of broadly, its main 

focus is the long-term costs and uncertainties associated with certain 

items that may expose the government to future spending. Rather than 

looking at the broad fiscal outlook, it focuses only on certain parts 

of the spending side of the budget. As such, it does not consider all 

federal spending and general revenues that would need to be considered 

in order to assess long-term fiscal sustainability. We have discussed 

long-term fiscal sustainability issues in numerous reports and 

testimonies.[Footnote 11] As part of this work, our simulations of the 

long-term economic impact of federal budget policy show that the 

nation’s economic future depends, in part, upon today’s budget and 

fiscal policy choices. This report builds on this previous work by 

looking below the aggregate level to the long-term costs associated 

with certain specific spending items.



Our work was done in Washington, D.C., in accordance with generally 

accepted government auditing standards. Comments on a draft of this 

report from OMB staff are discussed and incorporated as appropriate.



The remainder of this report discusses a number of issues, including:



* the concept and different dimensions of fiscal exposures (risks):



* the range and nature of specific fiscal exposures facing the federal 

government:



* the complexities and challenges surrounding cost measurement and 

budgeting for fiscal exposures and:



* approaches for increasing the attention given to fiscal exposures in 

the budget and the budget process.



Fiscal Exposure Could Be Considered on Several Levels:



We use the term fiscal exposure to provide a conceptual framework for 

considering the wide range of responsibilities, programs, and 

activities that may explicitly or implicitly expose the federal 

government to future spending. The treatment of items that could be 

considered fiscal exposures in the current cash-and obligation-based 

budget varies--some have been captured in budget obligations and some 

have not. Fiscal exposures include not only liabilities, contingencies, 

and financial commitments that are identified on the balance sheet or 

accompanying notes, but also responsibilities and expectations for 

government spending that do not meet the recognition or disclosure 

requirements for that statement.[Footnote 12] By extending beyond 

conventional accounting and fiscal analysis, the concept of fiscal 

exposure is meant to provide a broad perspective on long-term costs and 

uncertainties. The aim is not to provide strict definitional 

guidelines, but rather to improve understanding of the exposures 

associated with certain activities.



It is possible to think about fiscal exposure on several levels. 

Aggregate budget projections of the government’s current programs and 

policies provide important context for considering the implications of 

specific decisions. For example, long-range (approximately 75 year) 

current service projections and simulations, such as those provided by 

our model and in the Analytical Perspectives of the President’s budget, 

provide a broad context for considering the sustainability and 

flexibility of the government’s future fiscal position. However, such 

constructs are likely to be too broad to highlight specific areas for 

reform. Further, the aggregate outlook is driven largely by Social 

Security, Medicare, and Medicaid. As a result, it provides little or no 

information to guide choices--or even signal growth--outside those 

areas.



While Social Security, Medicare, and Medicaid are large drivers, there 

are other exposures and it is important for policymakers to have 

information on their long-term costs. The budgetary treatment of these 

exposures varies--some have been included in the budget and some have 

not. For some federal programs, the government’s commitment or resource 

use occurs years before the cash spending consequences are reflected in 

the budget. Even though some of these exposures stem from liabilities 

and are reported in the financial statements, their recognition in the 

cash-and obligation-based budget may be delayed. Beyond explicit 

liabilities, there are implicit and/or contingent[Footnote 13] 

exposures that may encumber future budgets or reduce fiscal 

flexibility. Including this range provides a more complete picture of 

the extent of exposure facing the government. For this report, we 

discuss fiscal exposures in terms of the long-term costs associated 

with certain spending items.[Footnote 14]



In addition to the fiscal exposures from spending covered in this 

report, certain tax expenditures[Footnote 15] may have uncertain or 

accelerating future growth paths that have significant implications for 

the long term. According to OMB, the largest reported tax expenditures 

tend to be associated with the individual income tax. For example, an 

exclusion is provided for employer contributions for medical insurance. 

In its special analysis on tax expenditures included in the Analytical 

Perspectives of the President’s budget, OMB includes estimates of the 

revenue effects, outlay equivalents, and present value of revenue 

effects, but states that the meaningfulness of tax expenditure 

estimates is uncertain. OMB notes that estimates are uncertain because 

of the arbitrariness of the baseline and the fact that each estimate is 

calculated assuming that all other parts of the tax code remain 

unchanged.



Fiscal Exposures are Wide-Ranging and Varied:



The federal government undertakes a wide range of responsibilities, 

programs, and activities that may either obligate the government to 

future spending or create an expectation for such spending. Specific 

fiscal exposures vary widely as to source, likelihood of occurrence, 

magnitude, and strength of the government’s legal obligation. They may 

be explicit or implicit; they may currently exist or be contingent on 

future events. Their ultimate costs may or may not be reasonably 

measurable. Given this breadth, it is useful to think of fiscal 

exposures as lying on a spectrum extending from explicit liabilities to 

the implicit promises embedded in current policy or public 

expectations. Figure 2 shows a spectrum of responsibilities, programs, 

and activities that may be viewed as fiscal exposures.



Figure 2: Spectrum of Fiscal Exposures:



[See PDF for image]



[A] A liability represents a probable and measurable future outflow of 

resources arising from past transactions and events. A liability is 

recorded on the face of the balance sheet only when an item is 

identifiable, its occurrence is probable, and its cost can be 

reasonably estimated.



[B] Commitments refer to contractual obligations that require the 
future 

use of resources. For example, although a liability generally is not 

recognized on the balance sheet when a contract is signed because the 

contracted goods or services have not been delivered, this transaction 

may be recognized as a commitment in the notes. In contrast, budgetary 

accounting would record obligations at the time the government enters 

into a contract and allows for deobligation if the contract is not 

fulfilled. Budgetary accounting records obligations when an order is 

placed, contract awarded, service rendered, or similar trnsaction takes 

place that will require payment.



[C] A contingency is an existing condition, situation, or set of 

circumstances involving uncertainty as to possible gains or losses. The 

uncertainty will ultimately be resolved when one or more future events 

occur or fail to occur. Contingencies are disclosed in the notes of the 

financial statements if any of the conditions for liability recognition 

are not met and there is at least a reasonable possibility that a loss 

may have been incurred. Contingencies that are classified as remote are 

not required to be disclosed.



[D] In this report, the term implicit exposures refers to exposures 
that 

stem not from a legal obligation of the federal government but rather 

from implied commitments embedded in the government’s current policies 

or in the public’s expectations about the role of government.



[E] Due and payable amounts are the benefits owed to program recipients 

as of the fiscal year end that have not yet been paid.



[F] Undelivered orders represent the value of goods and services 
ordered 

that have not yet been received.



[G] The term net future benefit payments is used in this report to 

represent the net present value of negative cashflow. Net present value 

of the negative cashflow is the current amount of funds needed to cover 

projected shortfalls, excluding trust fund balances, over a 75-year 

period. This estimate of cashflows is for an open system, meaning that 

it includes births during the period and individuals below the age of 

15 as of January 1 of the valuation year. The valuation date for the 

amount included in the figure was January 1, 2001. The trust fund 

balances at the beginning of the valuation period that were eliminated 

for this consolidation were: $1,049 billion for Social Security, $177 

billion for Medicare Part A, and $44 billion for Medicare Part B. This 

is a different measure from the actuarial balance in the Trustees’ 

Report.



[H] Includes Railroad Retirement and Black Lung (Part C). See footnote 
g. 

Trust fund balances at the beginning of the valuation period that were 

eliminated for consolidation were: $19 billion for Railroad Retirement 

and a negative balance of $7.2 billion for Black Lung.



[I] Federal insurance programs are listed three times in figure 2. 
Under 

federal accounting standards, a liability is recognized based on 

insured events that have been identified by the end of the accounting 

period. The standard requires recognition of expected unpaid net claims 

inherent in insured events that have already occurred, including (1) 

reported claims, (2) claims incurred but not yet reported and (3) any 

changes in contingent liabilities that meet criteria for recognition. A 

contingency is an existing condition, situation, or set of 

circumstances involving uncertainty as to a possible loss. 

Contingencies that do not meet the conditions for liability recognition 

are disclosed in the notes to the financial statements. Contingencies 

that are classified as remote are not required to be disclosed. The 

risk assumed by federal insurance programs represents the cost of 

claims inherent in the government’s commitment. Estimation of the cost 

of the risk assumed by the federal government can be thought of as 

analogous to premium rate setting in that it would look at the long-

term expected costs of the insurance commitment at the time the 

insurance commitment is extended. The risk assumed by the government is 

essentially that portion of the full risk-based premium not charged to 

the insured.



[End of figure]



While our list of fiscal exposures provides some perspective on the 

range and magnitude of exposures facing the federal government, it is 

neither meant to be comprehensive nor to represent a universally 

agreed-upon list. The cost data should be viewed in a similar way. 

Although most of the cost data in this figure were drawn from the 

consolidated Financial Report of the United States Government for 

fiscal year 2001, they should be used with caution. In auditing these 

statements, we were unable to determine the reliability of significant 

portions of the government’s assets, liabilities, and costs due to 

serious financial management weaknesses. These weaknesses may affect 

the reliability of estimates reported for certain exposures, such as 

military postretirement health benefits and environmental cleanup and 

disposal costs.



Along the spectrum of fiscal exposures there is great variation in the 

extent and magnitude of a government’s legal obligation, the certainty 

of expected costs, their treatment in the budget, and the recognition 

of these items in the financial statements. Some, such as deferred 

employee compensation or environmental cleanup and disposal costs, are 

reported as liabilities on the balance sheet. For financial statement 

reporting purposes, liabilities are viewed as representing probable and 

measurable outflows of resources arising from past transactions and 

events. Others that relate to a past event but are contingent on future 

events, such as pending litigation, generally are disclosed as 

contingencies. Others, such as undelivered goods or services previously 

contracted for, are disclosed as financial commitments in the notes to 

the financial statements. Some, such as future social insurance 

benefits and some disaster assistance, do not flow from legal 

obligations but are implied by current policies and/or expectations 

about the role of government and are shown as stewardship 

responsibilities.[Footnote 16]



In this report, we use the term implicit exposures to refer to the last 

category of exposures that stem not from a legal obligation of the 

federal government but rather from implied commitments embedded in the 

government’s current policies or in the public’s expectations about the 

role of government.While social insurance and health programs represent 

significant implicit exposures, other activities may also create 

expectations for future spending. For example, incrementally funded 

capital projects[Footnote 17] create an expectation for future spending 

since there is an expectation that partially funded capital projects 

will be completed. In general, the decision to purchase a building or 

another fixed asset implicitly commits the government to the life-cycle 

costs associated with its future operation and maintenance. Further, 

the earmarking of taxes or the establishment of trust funds creates an 

expectation of future spending for the designated purpose. Even an 

activity that appears to decrease government involvement, such as 

privatization, may carry with it an implicit assumption that the 

government will step in if necessary to provide the service or good. 

Clearly, the range and nature of activities that may create an 

expectation for future spending increase the difficulty of determining 

the parameters of what constitutes a fiscal exposure.



The budgetary treatment of these items varies--some have been included 

in the budget and some have not. Some liabilities reported on the 

financial statements, such as accounts payable and loan guarantees, are 

included in the budget because agencies must have budget authority to 

cover them. Changes in the debt level generally are reflected in the 

annual deficit or surplus. Others, such as environmental and disposal 

liabilities, are not included in primary budget data[Footnote 18] 

beyond the amount for current cleanup activities. Some implicit 

exposures, such as the cost of future Social Security benefits, are not 

included in primary budget data for the budget year 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 

primary budget data or in long-range budget projections.



Despite the challenges of determining what should be considered a 

fiscal exposure, efforts to improve the information on and incentives 

to consider these exposures are important. Failure to understand and 

address fiscal exposures can have significant consequences. Even those 

exposures that are not legal obligations of the government may imply 

future government spending--and that should be considered in making a 

program or budget decision. Whether the government is legally required 

or simply compelled by circumstances to provide funding, these 

exposures can encumber future budgets and reduce fiscal flexibility. 

Understanding these items can also be important to efforts to improve 

government performance. For some items, such as deferred compensation, 

the budgetary focus on annual cash flows does not match the full costs 

of an employee with the services the employee provides. For example, 

federal employees earn their pension while they are working but receive 

pensions after they have stopped working. The accruing cost of the 

pensions earned by current employees is really part of the costs of the 

goods and services they provide, but the budget does not capture the 

full extent of these costs and total budget outlays include only the 

cash payments made to current retirees. By making it more difficult to 

assess and compare the costs associated with a given level of 

performance, the failure to align budgetary cost recognition with the 

consumption of resources may hamper the government’s efforts to assess 

its performance.



Several exposures provide insight into challenges facing the 

government:



A closer look at some fiscal exposures--although not necessarily 

representative of all fiscal exposures--provides a sense of the issues 

facing the government. For example, the government faces a large and 

rapidly growing exposure for certain social insurance and health 

programs. Social Security, Medicare, and the federal portion of 

Medicaid are expected to grow considerably in the future due to the 

aging of the population and impending retirement of the large baby boom 

generation. Figure 3 shows the total draw on the economy represented by 

federal spending on Social Security, Medicare, and Medicaid. Taken 

together, they represent an unsustainable burden on future generations. 

Although significant information is available on the estimated future 

costs of Social Security and Medicare, the annual budget is not 

currently structured to fully capture these growing costs. Current 

reporting of annual budget data focuses on cash to current 

beneficiaries and thus does not capture the funding shortfall for 

future benefits. For example, fiscal year 2001 Social Security tax 

receipts exceeded cash benefit payments by more than $94 billion and 

increased the unified federal surplus. The fiscal year 2001 

consolidated Financial Report of the United States Government, however, 

shows the net present value of Social Security’s negative cash flow 

over a 75-year period as $4.2 trillion.[Footnote 19] Similarly, the 

budgetary treatment of Medicare focuses on the annual cash paid to 

current beneficiaries and cash revenues from current workers. As a 

result, Medicare’s significant and growing actuarial shortfalls are not 

reflected in the annual budget.



Figure 3:  Social Security, Medicare, and Medicaid Spending as a 

Percent of Gross Domestic Product:



[See PDF for image] 



Note: Projections based on intermediate assumptions of the 2002 

Trustees’ Reports and Congressional Budget Office’s June 2002 long-term 

projections under midrange assumptions. Spending includes only the 

federal portion of Medicaid.



[End of figure] 



Pensions and retiree health care costs of civilian and military 

employees of the federal government and veterans’ benefits payable 

comprise another large fiscal exposure. Together, these future benefits 

represent a liability of nearly $3.4 trillion for fiscal year 2001. 

Changes in benefits may result in long-term costs. For fiscal year 

2001, a $293 billion increase in the military postretirement health 

benefits liability is attributed to provisions of the fiscal year 2001 

National Defense Authorization Act (Public Law 106-398) that expand 

certain benefits to Medicare-eligible Department of Defense (DOD) 

retirees, their dependents, and survivors.



Some of the accruing costs of postretirement benefits are captured in 

the budget authority and outlays for agencies. The full cost of pension 

benefits was recognized in budget authority and outlays at the agency 

level beginning in 1985 for military personnel and for civilian 

employees hired since 1984. Beginning in 2003, DOD will budget on an 

accrual basis for the retiree health care costs for Medicare-eligible 

military retirees. In these cases, payments are made between accounts 

within the budget so that outlays are recorded as program costs but do 

not affect total budget outlays and the deficit/surplus. However, for 

most civilian employees hired before 1984, less than half the 

government’s share of accruing pension costs are recognized in the 

budget and none of the accruing costs of retiree health benefits for 

civilian or military retirees under the age of 65 are recognized in the 

budget as earned. In an effort to improve the budgetary treatment of 

accruing employee benefits, the Administration proposed that agencies 

be required to request budget authority for the government’s full share 

of the accruing costs of all pension and retiree health benefits for 

their employees and pay it to the benefit paying funds.



Environmental cleanup costs resulting from federal operations represent 

another fiscal exposure. These constitute an explicit liability since 

the federal government is legally required to clean up hazardous wastes 

that result from its operations. These costs, however, usually are not 

paid until many years after the government has committed to the 

operation generating the waste. As required under generally accepted 

federal accounting standards, the fiscal year 2001 consolidated 

financial statement reported a liability of $307 billion for estimated 

environmental cleanup and disposal costs.[Footnote 20] Although a 

liability for future costs is reported on the financial statements, 

current budget guidance requires agencies to request only the budget 

authority expected to be obligated during the budget year for cleanup 

activities. As a result, these future costs are not shown in the budget 

and may not even be provided in backup materials to policymakers at the 

time decisions are being made to undertake the operations that may 

generate environmental cleanup costs. For example, when a weapon system 

using nuclear materials is built, there would be no disposal costs 

shown in the budget since the disposal would not occur until some time 

after that budget period.[Footnote 21]



Federal insurance is provided to individuals and businesses against a 

wide variety of risks, ranging from natural disasters under the flood 

and crop insurance programs to bank and employer bankruptcies under the 

deposit and pension insurance programs. While the face value of 

insurance overstates the likely cost to the government, these programs 

do expose the government to future, and potentially significant, draws 

on resources that may not be adequately reflected in the budget at the 

time the decision to extend the insurance is being made. We have 

previously reported[Footnote 22] that current budget reporting may not 

signal policymakers to the risk assumed by the government at the time 

the decision to extend the insurance is made. For example, at the time 

budget decisions were being made for fiscal year 2003, the budget 

showed a positive budget estimate (i.e., revenues) for the Pension 

Benefit Guaranty Corporation of about $1.3 billion. The financial 

statements available at the same time showed an estimated liability for 

future benefits of $13.5 billion and a positive net position of about 

$7.8 billion. At the same time, OMB estimated the future cost of the 

risk assumed by the government for vested covered benefits as $51 

billion.[Footnote 23] Clearly, these different estimates provided 

significantly different pictures of the program’s health and its 

potential draw on future resources.



The government’s purchase and ownership of government-owned facilities 

and other assets may create an expectation for future spending. If 

budget authority for a capital project is not fully funded at the time 

the commitment to buy the asset is made, the government’s costs will 

likely be understated. Future Congresses and administrations may be 

forced to choose between having an incomplete and unusable asset and 

continuing to fund the project. In cases where funding is provided for 

only part of a project and that part by itself is not usable, then 

policymakers may feel compelled to continue funding to complete the 

project.[Footnote 24] Moreover, the total life-cycle cost of an asset 

includes not only all initial direct and indirect acquisition costs but 

also all periodic or continuing costs of operation and maintenance over 

the asset’s expected useful life and any costs to decommission or 

dispose of the asset. While OMB requires agencies to develop capital 

asset plans for major acquisitions and encourages long-term agency 

capital plans--both of which should include life-cycle costs--these 

plans are not routinely provided to Congress. Budget authority 

generally is provided only for the acquisition costs associated with 

capital asset purchases, not for the life-cycle costs necessary to 

operate, maintain, and dispose of the asset. While this may be 

appropriate for budget control purposes, the result, in most cases, is 

that the budgetary focus is on the initial cost of assets even if this 

cost represents only a fraction of the total costs flowing from the 

purchase decision.



Other exposures facing the government also present significant 

definitional and measurement challenges because (1) the existence and 

scope of the government’s commitment prior to the occurrence of the 

underlying event is unclear, (2) the occurrence and timing of the 

underlying event is unknown, and (3) the ultimate costs are difficult 

to predict. Examples include the bailout of large institutions or 

disaster relief.[Footnote 25] The extent of the government’s commitment 

to cover these costs may not be explicitly stated before the event but 

rather may be implied by the role of government. Not only is the extent 

of the government’s commitment unknown before the occurrence of the 

event, the timing and magnitude of these exposures are contingent upon 

the occurrence or nonoccurrence of some future event. For example, even 

in cases where it is not explicitly required by law, the federal 

government may be expected to provide for the financial losses that 

arise from catastrophes and major disasters such as earthquakes, 

hurricanes, terrorist attacks, and epidemics, the timing and magnitude 

of which are unknown until they occur. There may also be an expectation 

that the federal government would intervene to bailout the losses of 

state and local governments and large institutions of economic 

significance.



Fiscal Exposures Involve Complex Measurement and Budgeting Challenges:



Determining the appropriate budgetary treatment for fiscal exposures is 

complicated by uncertainties. First, there is definitional uncertainty 

i.e., uncertainty about what constitutes an exposure certain enough to 

include as a claim on budgetary resources. In addition, there are 

difficulties in estimating future costs. The extent to which either or 

both of these factors contribute to the uncertainty about future costs 

varies among fiscal exposures. As a result, policymakers should 

consider both the degree of certainty of the government’s obligation 

and the availability of reasonable cost estimates when weighing the 

trade-offs associated with various approaches to help increase the 

attention paid to particular exposures when making budget decisions.



Whether an exposure is certain enough to be included as a claim on 

budgetary resources is a key question. As noted earlier, the extent of 

the government’s obligation varies along the spectrum of fiscal 

exposures. Some fiscal exposures are reported as liabilities of the 

federal government and represent legal obligations to make payments; 

others are not. For example, the $3.3 billion in publicly held debt is 

a clear financial liability. On the other hand, generally accepted 

federal accounting standards do not view future social insurance 

benefits as a liability, except for the amount due and payable at 

fiscal year end. The standard, however, also requires that 

supplementary stewardship information be reported to facilitate an 

assessment of the program’s long-term sustainability and the ability of 

the program and the nation to raise resources from future program 

participants to pay for benefits.[Footnote 26] The standard for social 

insurance is a compromise between parties with widely divergent views 

about the government’s obligation to make future benefit payments. 

Proponents of the standard point out that the underlying laws 

establishing a claim to payment can (and have been) changed and there 

is no legal obligation by the government to pay benefits once the trust 

funds that finance these programs have been exhausted. Others, however, 

believe that a liability should be recognized for the net benefits 

expected to be paid in future periods to current participants. Any 

changes in budgetary treatment would require similar discussion and 

compromises concerning which items should be recognized as exposures. 

There may be further disagreement over which of these exposures should 

be directly recognized in the primary budget data.[Footnote 27] 

Finally, even if agreement can be reached that an exposure 

theoretically should be included in the primary budget data, reasonable 

cost estimates may not be available. For some exposures, estimates 

could be generated given time and attention; for others that are 

contingent on future events, estimates are more problematic.



Several factors affect whether reasonable cost estimates are currently 

available or can be generated. The generation of reasonable cost 

estimates depends not only on the development of appropriate 

methodologies but also on the acceptance and quality of underlying 

assumptions and data. Estimates for some exposures, such as pension 

benefits, are based on accepted methodologies and are reported as 

liabilities in financial statements. The future costs of some exposures 

are inherently more difficult to estimate than others. For example, 

some exposures, such as bank and pension insurance, are dependent on 

many economic and behavioral variables. Since these are inherently 

uncertain, there will always be some uncertainty surrounding the 

estimated future costs of such programs. Lack of adequate data may also 

be a factor in the reliability of cost estimates. For example, 

postretirement health benefits and environmental cleanup and disposal 

costs are reported as liabilities on the balance sheet because they are 

considered to meet the criteria of probable and reasonably measurable, 

but audits have revealed weaknesses that may affect the reliability of 

these reported amounts. The fiscal year 2000 liability for military 

postretirement health benefits could not be accurately estimated 

because some of the underlying costs and demographic and workload data 

used to develop the estimate were not reliable. The estimate for 

environmental cleanup costs is uncertain, in part, because the 

dimensions of the cleanup problem remain unclear and the technology to 

address the problem is evolving.



Generally speaking, the more direct and explicit the fiscal exposure, 

and thus the more certain the existence of a claim and its ultimate 

costs, the greater the suitability of including estimated costs 

directly into the primary budget data when doing so would enhance up-

front control of spending. Even when agreement can be reached that an 

explicit liability exists, efforts may be needed to develop reasonable 

cost estimates. For exposures that are implicit and/or contingent on 

future events, cost estimation challenges and underlying questions 

about the existence of a government commitment raise substantial 

questions. Perhaps most challenging are those exposures that are both 

implicit and contingent on unknown events, such as bailouts or disaster 

relief. In these cases, the government may not have any current legal 

obligation and the magnitude and timing of the underlying event is 

unknown. These exposures are very difficult to estimate and uncertain 

as to whether they really represent claims to future resources.



Diversity of Fiscal Exposures Suggests that Tailored Approaches Would 

Be More Feasible than an Across-the-Board Approach:



The variety of certainties (and uncertainties) associated with fiscal 

exposures suggests that no single approach to increasing attention to 

these future costs will work in all cases. Various approaches might be 

considered in a framework organized around three possible objectives: 

(1) improving the transparency of fiscal exposures, (2) prompting more 

deliberation about fiscal exposures, and (3) improving budget 

incentives to address fiscal exposures. Several broad approaches for 

helping to achieve these objectives discussed here are (1) improving 

supplementary reporting, (2) providing opportunities for explicit 

consideration in the budget process, and (3) incorporating the costs of 

fiscal exposures into the primary budget data. A number of options 

could be used to implement each of these approaches. Figure 4 displays 

how different approaches could be used to achieve a primary objective 

by providing illustrative options for implementing each approach. These 

options are meant to illustrate how different approaches may be used 

depending on the primary objective to be achieved and what may be 

feasible to implement. Not only do these approaches achieve the various 

objectives to differing degrees, but they also vary in the 

implementation challenges involved.



Figure 4:  Overview of Possible Approaches:



[See PDF for image]



[End of figure] 



The diverse nature of exposures and the significant differences in the 

strength of the government’s underlying obligation, combined with the 

varying quality and amount of cost information available outside the 

budget process, suggest that across-the-board changes in budget 

reporting or process would not be appropriate. Instead, targeted 

approaches for different types of fiscal exposures would be most useful 

for incorporating a longer-term perspective into the budget. Changes in 

the information provided, the budgetary process, or budgetary 

incentives could be tailored selectively for different categories of 

fiscal exposures to address specific budgetary objectives and 

implementation challenges. A discussion of each of the three approaches 

and related options follows.



Approach I: Improve Supplemental Reporting:



Improved supplemental reporting on fiscal exposures would make 

information more accessible to decisionmakers without introducing 

additional uncertainty and complexity directly into the budget. With 

this approach, estimates of the government’s exposure would be reported 

in various budget documents, but the current basis of reporting primary 

budget data--budget authority, obligations, outlays, and the deficit/

surplus--would not be changed. This type of supplemental information is 

currently available in various places for some programs. For example, 

the stewardship section in the Analytical Perspectives of the 

President’s budget has included long-range (75 year) budget projections 

assuming continuation of current policies as well as a discussion of 

the government’s balance sheet, which includes some liabilities not yet 

included in the primary budget data. The stewardship section of 

financial statements contains information to facilitate the assessment 

of the long-term sustainability of social insurance programs. In some 

cases, improving supplemental reporting may simply be a matter of 

highlighting or expanding existing analytical work. For example, long-

range projections and simulations of the budget as a whole could be 

continued and improved, including analysis to help assess driving 

factors, such as demographics and economic changes, and to improve 

understanding of the range and magnitude of alternatives.



As outlined in figure 5, improved supplemental reporting on fiscal 

exposures could be achieved in a number of ways. In addition to the 

continuation and further development of long-range projections of the 

budget as a whole, three options to consider include (1) providing 

special analyses for certain, significant fiscal exposures in the 

Analytical Perspectives of the President’s budget, (2) reporting 

estimated costs of certain fiscal exposures as a separate notational 

line--”exposure level”--in the Program and Financing schedule of the 

President’s budget, or 

(3) requiring a report on fiscal exposures.



Figure 5: Possible Options For Improving Supplemental Reporting:



[See PDF for image] 

[End of figure] 



Federal government insurance programs provide a prime example of where 

special analysis of a particular type of exposure may be appropriate. 

Our previous work has shown that the current cash-and obligation-based 

budget generally provides incomplete or misleading information on the 

government’s cost of federal insurance programs.[Footnote 28] One 

reform option would be to require an estimate of the budget authority 

likely to be needed to cover an estimate of the cost of the risk 

assumed[Footnote 29] by the government. However, given the difficulties 

in estimating the cost of risk assumed, we concluded that supplemental 

reporting of the cost of the risk assumed by federal insurance programs 

had several attractive features. It would allow time to (1) assess the 

reliability of cost estimates, (2) develop and refine estimation 

methodologies, and (3) formulate cost-effective reporting. As another 

example, supplemental analysis could be provided for uncertain 

exposures, such as future operation and maintenance costs associated 

with asset acquisitions.



While providing a special analysis in the Analytical Perspectives would 

provide additional information, it is not as directly linked to 

specific budget proposals as is possible. Another option would be to 

routinely report the future estimated costs of certain exposures as a 

separate notational line in the Program and Financing schedule of the 

President’s budget. This would move beyond the current budget practice 

of generally including only budget authority, obligations, and outlays 

for initial acquisition costs of an asset to adding a new measure that 

reports the “exposure level” as a notational item in the Program and 

Financing schedule. For example, an estimate of the future operating 

and maintenance costs associated with capital acquisitions could be 

reported as the “exposure level” in the Program and Financing schedule 

for capital accounts that include the initial capital acquisition 

costs. Similarly, the future funding needs associated with 

incrementally funded projects could be included in the Program and 

Financing schedule of the budget account that includes the capital 

acquisition. This type of notational approach in the Program and 

Financing schedule could also be used for future environmental cleanup 

costs associated with an asset acquisition. In these cases, the 

“exposure level” could be used to capture the exposure associated with 

the capital acquisitions in each year.[Footnote 30] As opposed to cash, 

the “exposure level” might be reported in present value terms. 

Including exposure levels as part of the budget presentations at the 

account level directly in the budget documents would make such 

information available along with the initial acquisition costs, rather 

than in an additional document. Specifying the estimated potential 

future costs associated with current decisions would promote 

transparency.



Another approach, which could stand alone or be done along with 

including exposure levels in the Program and Financing schedule, would 

be to require a report on fiscal exposures. For example, such a report 

could provide a concise list and description of fiscal exposures, cost 

estimates, where possible, and an assessment of the methodologies and 

data used to produce cost estimates. Explicitly and directly 

integrating the report on specific fiscal exposures with long-range 

projections and analysis of the budget as a whole would increase its 

usefulness for assessing the potential implications for long-range 

fiscal sustainability and flexibility. If this type of report was 

issued as part of or near the time of the release of the President’s 

budget, it could be used to help inform and provide long-term context 

to budget deliberations.



These types of supplemental reporting have the advantage of providing 

policymakers with a long-term perspective when making current decisions 

and enabling those concerned about exposures to raise questions and 

challenges in the budget debate. However, they do not in themselves 

change incentives or require explicit consideration of costs. This is 

because estimates of future costs would not directly affect spending or 

the overall budget totals. Since this information would be excluded 

from the primary budget data, it may or may not be used in budget 

decisions. As a result, there may be little incentive to improve cost 

estimates or to fully consider these potential costs. However, the 

uncertainties around such cost estimates may argue for proceeding 

gradually with efforts to further incorporate them into the budget. 

Supplemental reporting would allow time to improve cost estimation 

methodologies and increase users’ comfort levels with the estimates. 

Such reporting might then be seen as a first step toward more explicit 

consideration in the budget. In addition, because the primary budget 

data are not affected, this type of supplemental reporting would avoid 

increasing the gap between the deficit and borrowing needs.



Approach II: Provide Opportunities for Explicit Consideration of Fiscal 

Exposures in the Budget Process:



Further along the continuum from supplemental reporting to including 

costs in the primary budget data are budget process changes. Budget 

process mechanisms would go beyond simply providing more information on 

fiscal exposures to establishing opportunities for explicit 

consideration of these exposures. Two possible options to consider are 

shown in figure 6. Congress could modify budget rules to provide for a 

point of order against any proposed legislation that creates new 

exposures or increases the estimated costs of existing exposures over 

some specified level. Alternatively, revised rules could provide for a 

point of order against any proposed legislation that does not include 

estimates of the potential costs of fiscal exposures created by the 

legislation. A second budget process option would be to establish 

triggers that require some action when the estimated future costs of a 

given exposure rise above some specified threshold.



Figure 6:  Possible Options for Providing Opportunities For Explicit 

Consideration of Fiscal Exposures:



[See PDF for image] 



[End of figure] 



A key advantage of permitting points of order with respect to fiscal 

exposures is that they could result in explicit consideration of these 

potential costs without subjecting the primary budget data to increased 

uncertainty from estimation difficulties. It would be similar to 

procedural rules for Social Security that permit points of order 

against the consideration of legislation that would weaken the 

program’s financial condition. A different point of order method would 

be to permit a point of order that could block legislation lacking 

appropriate cost information about an exposure. This would be similar 

to unfunded mandates legislation that permits a point of order to be 

raised against proposed legislation that imposes mandates if a 

Congressional Budget Office mandates estimate has not been published in 

the committee report or the Congressional Record.[Footnote 31] This 

alternative would provide a greater incentive to improve cost 

information than simply requiring supplemental information because it 

presents congressional members with an opportunity to challenge the 

creation of programs without sufficient information on long-term costs.



Despite the potential benefits of permitting some type of point of 

order, such a budget process change is not without significant 

implementation challenges. Criteria would have to be agreed on for 

determining which activities and programs would be considered as fiscal 

exposures subject to a point of order. Mechanisms also would need to be 

developed to deal with the uncertainties and volatility inherent in 

cost estimates associated with fiscal exposures. Further, this type of 

budget process change would increase the complexity of an already 

complicated process. Since many activities--including most capital 

acquisitions--routinely would result in exposures, such as life-cycle 

costs, a point of order may become burdensome and potentially ignored. 

Points of order also are limited because they apply only to new 

legislation and then only if raised. Further, they can be waived or 

overruled by a vote of the Members. Finally, a budget process change 

establishing a point of order would require an amendment to the 

Congressional Budget Act of 1974 or a change to committee rules.



A different budget process approach would be to establish triggers that 

address the growth in existing exposures. In this case, triggers would 

be established to signal when the future costs of exposures rise above 

a certain level. Reaching the trigger threshold would require some 

action.[Footnote 32] One possible trigger could be the future costs of 

a specific exposure exceeding a specified dollar amount, but other 

thresholds are also possible. For example, for the Medicare program, 

these might be a specified floor in the trust fund, such as the balance 

falling below 1-year’s worth of payments, the percentage of gross 

domestic product devoted to Medicare, or program spending per enrollee. 

The use of triggers would require agreement not only on the limits but 

on what will happen when the limits are reached. A trigger could be 

“hard”--including specific provisions that would automatically go into 

effect if the trigger is reached--or “soft”--requiring some action to 

be taken to address costs or reaffirm acceptance of the increase in 

potential fiscal exposure.[Footnote 33] For example, reaching a trigger 

could require the policymakers to propose how to deal with growth in 

the Medicare program. This type of “soft” trigger would help ensure 

that Congress and the President periodically review and decide how to 

address exposures.



Like a point of order, the key benefit of a trigger is that it would 

require explicit consideration of exposures facing the government 

without adding uncertainty to primary budget data. However, like points 

of order, establishing triggers would increase the complexities of an 

already complex budget process. Further, the implementation issues 

associated with determining the trigger threshold and the type of 

action required would have to be addressed.[Footnote 34] A budget 

process change establishing a trigger would require an amendment to the 

Congressional Budget Act of 1974 or a change to committee rules.



Approach III: Incorporate Cost Estimates of Fiscal Exposures Directly 

into the Primary Budget Data:



Incorporating the estimated future costs of fiscal exposures directly 

into the budget would represent the greatest change outlined in our 

spectrum. For example, as shown in figure 7, accrual-based costs could 

be used to measure budget authority needed and possibly outlays for 

select programs when doing so would enhance obligation-based control. 

Since estimated costs would be incorporated directly into the primary 

budget data, these options are most suitable for explicit exposures for 

which reasonable cost estimates are available.



Figure 7: Possible Options for Incorporating Costs Directly into the 

Primary Budget Data:



[See PDF for image] 



[End of figure] 



The budget’s measurement basis can greatly affect the timing of when a 

program or activity appears in the budget. Accrual-based measurement 

recognizes cost at the time the activity generating the revenue, 

consuming the resources, or increasing the liability takes place 

regardless of when the associated cash flows occur. Conversely, cash-

based measurement recognizes receipts and outlays at the time cash is 

received or paid regardless of when the activity generating the 

revenue, consuming the resources, or increasing the liability occurs. 

The U.S. budget is neither accrual nor pure cash; it is obligation 

based. Obligation-based budgeting is designed to ensure that agencies 

do not incur legal obligations unless and until Congress provides 

authority for agencies for that purpose. However, with limited 

exceptions, the amounts to be obligated are measured on a cash or cash 

equivalent basis and the deficit/surplus--a key focus of the policy 

debate--represents the difference between cash receipts and cash 

outlays in a given year. As a result, the U.S. budget is often referred 

to as cash based as well as obligation based. Cash measurement for 

budgeting has the advantage of being recognized as an accepted measure 

of the government’s impact on the economy, which is an important gauge 

of fiscal policy.



Although the current cash-and obligation-based budget has several 

benefits, the United States has recognized the contribution accrual-

based measurement can make to budgeting. Since about 1955, interest has 

been accrued in the budget for Treasury securities held by the public. 

Even before 1955, a portion of the accruing costs for civilian employee 

pensions had been recognized in the budget. We have advocated the 

selective use of accrual measures in the budget to better reflect costs 

at the time decisions were made. The budget has been modified gradually 

to use accrual-based measurement for certain programs in areas where 

doing so would enhance up-front recognition of costs. For example, the 

accruing costs of military pension benefits have been included in the 

budget at the program level since 1985 and the Federal Credit Reform 

Act of 1990 changed the method of controlling and accounting for credit 

programs to an accrual basis to provide more timely recognition of 

their costs.



Prior to credit reform, obligations measured on a cash basis for credit 

programs sent the wrong signals about the government’s exposure. The 

full amount of direct loans was reported as an outlay, ignoring the 

fact that many would be repaid. In contrast, for loan guarantees, 

initially no outlays were reported, ignoring the fact that some 

guaranteed loans would be defaulted upon and require budget outlays. 

Consequently, the use of cash-based measurement overstated the cost of 

direct loans in the year they were made and understated the costs of 

loan guarantees in the year they were issued. This deficient reporting 

skewed cost comparisons between credit and grant programs with similar 

purposes but different funding approaches. The relative cost of credit 

programs and other federal spending was misrepresented. Credit reform 

addressed the shortfalls of cash-based measurement for credit programs 

by requiring the budget to include the estimated cost to the federal 

government over the entire life of the loan or loan guarantee, 

calculated on a net present value basis. By incorporating accrual cost 

measures in the budget for credit programs, credit reform improved cost 

comparisons and better reflected the government’s ultimate costs at the 

time decisions to extend the credit were being made.



Similar concerns about the shortcomings of cash-based measurements for 

other programs that involve cash flows over many years, such as 

pensions and insurance, stimulated interest in whether further 

incorporation of accruals in the budget would be useful. We reviewed 

the experiences of six countries that had adopted, or planned to adopt, 

accrual-based budgeting.[Footnote 35] In this work, we noted that the 

use of accrual-based measurement selectively within the obligation-

based budget would result in earlier cost recognition for some major 

exposures such as employee retirement benefits, insurance, and 

environmental clean-up costs. In these cases, if reasonable cost 

estimates are available, the use of accrual-based measurement would 

help reinforce the up-front control focus of the obligation-based 

budget.



However, we also noted some limitations and concerns. We pointed out 

that relative to the obligation-based budget, accrual-based measurement 

would delay cost recognition of capital assets by spreading the costs 

over the life of the assets[Footnote 36] and for some government 

activities, such as salaries and grants, there generally would not be 

significant differences between cash and accrual amounts. Further, the 

use of accrual measurement needs to be considered carefully to avoid 

subjecting the primary budget data to large and volatile reestimates. 

We also pointed out that accrual budgeting based on current federal 

accounting standards would not recognize social insurance benefits 

because those standards do not view social insurance as a liability 

beyond the amount due and payable to current beneficiaries at the end 

of the period. We suggested alternative budgetary approaches could be 

used to recognize the future costs of Social Security benefits. For 

example, Social Security outlays could be recorded in the same amount 

as Social Security receipts to reflect the government’s commitment to 

spend those amounts on benefits in the future. Such an approach may 

serve to prompt earlier recognition of future claims supported by 

earmarked receipts. On the other hand, this approach would represent a 

significant change in budgetary treatment and could reduce fiscal 

discipline for spending in programs financed by earmarked receipts.



Two methods could be used to incorporate accrual-based costs directly 

into the budget for fiscal exposures. One method (the aggregate outlay 

method) would be to use accrual-based measurement to recognize costs in 

both budget authority needed and net outlays. Under this method, the 

accrued cost of the fiscal exposure would be included in the budget 

totals and therefore in the budget deficit/surplus. This method is 

similar to that used for credit programs under credit reform. Another 

method (the aggregate budget authority method) would use accrual-based 

measurement to recognize costs in budget authority at the account level 

and in the aggregate budget totals. Accrued costs would also be 

reflected in net outlays at the account level but then would be offset 

by a transfer within the budget to another account. Aggregate net 

outlays and thus the deficit/surplus would continue to be reported on a 

cash basis. This is similar to the method currently used for some 

employee pension costs.



A key advantage of budgeting for the accruing costs of exposures is the 

recognition of the government’s costs at the time decisions are being 

made to commit the government. This earlier recognition of costs 

improves the information available to policymakers about the costs 

associated with current decisions and may improve the incentives to 

manage these costs. However, this benefit is dependent on reasonable, 

unbiased estimates of the government’s costs. For some programs, such 

as life insurance, reasonable cost estimates may be available, but for 

other programs such as deposit insurance, health care costs, or social 

insurance benefits, estimates are less certain. Because the future 

costs of some exposures are dependent upon many economic and technical 

variables that cannot be known in advance, there will always be 

uncertainty in cost estimates. Such uncertainty makes using accrual-

based measurement directly in the budget more difficult. Budgeting for 

accruing costs may make sense for some exposures but not for others 

because the certainty of the government’s commitment and the 

availability of reasonable, unbiased estimates varies across the 

different fiscal exposures.



Using accrual-based measurement in the budget has the potential to 

increase the complexity of the budget in several ways. Complexity may 

be increased through the use of (1) sophisticated estimation models, 

(2) multiple budget accounts and/or presentations to reflect cash flows 

and program reserves, and (3) procedures to handle reestimates of costs 

reported as budget authority and/or outlays. Although recognition of 

costs may be improved, general understanding of budget data and the 

budget process may decline. Further, if estimates are seen as short-

term gaming or overly erratic, credibility is eroded. Stopping short of 

using accrual-based measurement for aggregate outlays and measuring 

only budget authority and agency outlays on an accrual basis would 

mitigate some of the potential problems associated with accrual 

budgeting while providing information on future costs. For example, if 

aggregate outlays remain on a cash basis and only budget authority and 

agency outlays are accrual based, there would be no need for 

nonbudgetary accounts[Footnote 37] that are necessary to hold reserves 

under an aggregate outlay approach. This aggregate budget authority 

option also would avoid introducing estimation uncertainty into the 

budget deficit/surplus that with limited exception is calculated as net 

cash outlays. However, since the accrual-based cost would not be 

reflected in the budget deficit/surplus, it is unclear how much this 

approach would affect the budget decision-making process.



Conclusion:



Today’s budget decisions, in part, shape the choices and resources 

available to future decisionmakers and taxpayers. Accordingly, today’s 

budget decisions involve tradeoffs between satisfying current needs and 

fulfilling stewardship responsibilities to future generations’ budget 

and economy. The federal government undertakes a wide range of 

responsibilities, programs, and activities that may obligate the 

government to future spending or simply create an expectation for such 

spending. Current budget reporting, however, is not always designed to 

promote the recognition and explicit consideration of some of these 

“fiscal exposures.” These exposures range from explicit liabilities to 

the implicit promises embedded in current policy or public 

expectations. Failure to understand and address these exposures can 

have significant consequences. Regardless of whether the government is 

legally required or simply compelled by circumstances to provide 

funding in the future, these exposures may encumber future budgets and 

constrain fiscal policy. Not capturing the long-term costs of current 

decisions limits Congress’s ability to control the government’s fiscal 

exposures at the time decisions are made.



The diversity of items that could be considered fiscal exposures 

increases the difficulty of determining which items should be 

considered and how and to what extent they should be handled in the 

budget process. Specifically, budgeting for fiscal exposures is 

complicated by difficulties in (1) determining which items should be 

considered fiscal exposures and 

(2) estimating their costs. Despite these challenges, the potentially 

significant effects of these items on the nation’s future fiscal 

condition warrant efforts to improve disclosure and oversight.



The diversity of fiscal exposures suggests that across-the-board 

changes in budget reporting or process would not be the most 

appropriate way to proceed. Instead, it would be more useful to look at 

different types of fiscal exposures and tailor changes to address 

specific budgetary objectives and implementation challenges. Improved 

supplemental reporting would be helpful in increasing awareness without 

introducing uncertainty and complexity into the primary budget data. In 

cases where the extent of the government’s obligation or ultimate costs 

(or both) is unclear, supplemental reporting may be the most 

appropriate approach. Beyond simply increasing awareness, adapting the 

budget process to facilitate explicit consideration of fiscal exposures 

might be possible. Finally, for exposures where the government’s 

obligation is explicit and reasonable cost estimates are available, 

additional steps could be taken to directly incorporate costs in some 

primary budget data when doing so would enhance up-front control of 

spending. The direct incorporation of accrual-based measures in the 

budget may be appropriate for selected exposures where such treatment 

would enhance obligation-based control by prompting the recognition of 

expected future costs of decisions when they are made.



With complete and highly visible reporting of fiscal exposures, 

decisionmakers are better positioned to address future costs and to 

help prevent unexpected changes in fiscal policy. Since today’s 

decisions affect the choices and resources available for the future, 

improvements in budgeting for fiscal exposures are critically 

important.



Recommendations for Executive Action:



OMB should report annually on fiscal exposures, including a concise 

list and description of such exposures, cost estimates, where possible, 

and an assessment of methodologies and data used to produce cost 

estimates for such exposures. In addition, where possible, OMB should 

report the estimated costs associated with certain exposures as a new 

budget concept--”exposure level”--as a notational item in the Program 

and Financing schedule of the President’s budget. For select areas 

where an explicit liability exists and there are accepted cost-

estimation methodologies, the ultimate objective might be to include 

the costs directly in the budget when doing so would enhance 

obligation-based control. OMB also should ensure that agencies focus on 

improving cost estimates for fiscal exposures. These steps should 

complement and support continued and improved reporting of long-range 

projections and analysis of the budget as a whole to assess fiscal 

sustainability and flexibility.



Matters for Congressional Consideration:



Congress may wish to consider exploring options for improving the 

information available and the attention given to fiscal exposures in 

the budget and budget process. If more explicit congressional 

consideration is desired, as estimates improve, Congress may wish to 

develop budget process mechanisms that prompt more deliberation about 

fiscal exposures while recognizing the uncertainty inherent in 

estimating some long-term costs.



Agency Comments and Our Evaluation:



We provided a draft of this report to the Office of Management and 

Budget for comment. In consultation with OMB staff, they commended GAO 

for tackling the important problem of the government’s exposure to 

future fiscal demands. OMB staff agreed that our concept of “fiscal 

exposure” is a valuable one, noting that it focuses attention on the 

fact that 1-year’s surplus or deficit is not the only, or even the 

best, measure of the government’s fiscal condition. They noted that the 

Administration endorses the view that long-range fiscal exposures 

should be more prominently highlighted in the budget documents and in 

the budget process, and noted that some of the specific recommendations 

are more or less consistent with legislation the Administration has 

proposed to Congress (accruals for pensions and retiree health care). 

OMB staff, however, raised two general concerns that are discussed 

below. First, they questioned whether the broad conceptual framework 

used to describe fiscal exposures had been fully developed to 

sufficiently cover all future spending. Secondly, they argued that the 

analysis of ideas for improving the recognition of fiscal exposures in 

the budget could be improved by more fully considering the various 

purposes of the federal budget, such as resource allocation and 

controlling spending. In addition, they provided specific comments that 

we have incorporated in the report as appropriate.



OMB staff stated that the term “exposure” is particularly laudable 

because it captures the contingent nature of some future budgetary 

requirements, which are critical to distinguish from the more definite, 

legally binding requirements that are categorized as “liabilities” on 

the financial statements. OMB staff also noted that the draft 

appropriately emphasizes that fiscal exposures lie along a continuum 

and recognized that this heterogeneity requires that different fiscal 

exposures be addressed in different ways for the budget documents. 

They, however, commented that the discussion of fiscal exposures could 

be improved by explicitly recognizing that in concept all, or virtually 

all, future spending appears on the continuum of fiscal exposure. For 

example, OMB staff pointed out that the Constitution establishes a 

responsibility to “provide for the common defense” and the authority 

for an Army and a Navy, and more than two centuries of experience have 

created an expectation that this responsibility will be met and the 

cost will be high. They stated that while the future costs of these 

functions do not appear in the financial statements, they are no less 

basic expectations of government than others that do appear there. We 

agree that it is important to model the long-term outlook for the 

budget as a whole at the macro level. Indeed, we have been doing such 

long-term modeling since 1992 and we commend OMB’s efforts to present 

long-term scenarios in the Analytical Perspectives of the President’s 

budget. While long-term modeling simulates the long-term implications 

of all current spending and revenue policies, the fiscal exposure 

concept is intended to highlight a discrete subset of programs and 

activities whose long-term costs and uncertainties warrant greater 

attention in current budgetary deliberations.



OMB staff also stated that a number of the ideas and recommendations in 

the draft are very good, and point to improvements that should be made 

in the budget. OMB staff, however, argued that the analysis of 

recommendations should more explicitly consider their effects on the 

main purposes of budgetingto allocate resources, control agency 

spending, and set aggregate fiscal policy. We agree that the various 

purposes of the budget should be considered in assessing the merits of 

approaches and options for improving the budget treatment of fiscal 

exposures. We did, in fact, structure our discussion of potential 

approaches for improving the budget treatment of fiscal exposures 

around objectives of budget reforms. As part of our illustrative 

examples, we provided insights into the potential issues for the 

multiple, and sometimes conflicting, purposes of the federal budget. We 

agree, however, that these issues warrant further investigation if 

specific reforms are pursued.



As agreed with your office, unless you release this report earlier, we 

will not distribute it until 30 days from the date of this letter. At 

that time we will send copies to the Ranking Minority Member of the 

House Committee on the Budget and the chairmen and ranking minority 

members of the Senate Committee on the Budget. We are also sending 

copies to the Directors of the Office of Management and Budget and the 

Congressional Budget Office. Copies will also be made available to 

others upon request. In addition, the report is available at no charge 

on GAO’s Web site at http://www.gao.gov.



This report was prepared under the direction of Christine Bonham, 

Assistant Director, Strategic Issues, who may be reached at (202) 512-

9576. Elizabeth McClarin was a major contributor to this report. Please 

contact me at (202) 512-9573 if you or your staff have any questions 

concerning this report.



Sincerely yours,



Paul L. Posner

Managing Director, Strategic Issues

Federal Budget Analysis:



Signed by Paul L. Posner:



FOOTNOTES



[1] Net present value of the negative cash flow is the current amount 

of funds needed to cover projected shortfalls, excluding trust fund 

balances, over a 75-year period. The trust fund balance at the 

beginning of the valuation period (January 1, 2001) was $1,049 billion. 

The net present value of negative cash flows shown in this report is 

from the fiscal year 2001 consolidated Financial Report of the United 

States Government and is a different measure from the actuarial balance 

in the Trustees’ Report.



[2] For financial statement reporting, a liability represents a 

probable and measurable future outflow of resources arising from past 

transactions or events. A liability is recorded on the face of the 

balance sheet when an item is identifiable, its occurrence is probable, 

and its cost can be reasonably estimated.



[3] For financial statement reporting, a contingency is an existing 

condition, situation, or set of circumstances involving uncertainty as 

to possible gains or losses. The uncertainty will ultimately be 

resolved when one or more future events occur or fail to occur. 

Contingencies are disclosed in the notes of the financial statements if 

any of the conditions for liability recognition are not met and there 

is at least a reasonable possibility that a loss may have been 

incurred. Contingencies that are classified as remote are not required 

to be disclosed. 



[4] For financial statement reporting, financial commitments refer to 

contractual obligations that require the future use of resources. For 

example, although a liability generally is not recognized on the 

balance sheet when a contract is signed because the contracted goods or 

services have not been delivered, this transaction may be recognized as 

a commitment in the notes. In contrast, budgetary accounting would 

record obligations at the time the government enters into a contract 

and allows for deobligation if the contract is not fulfilled. Budgetary 

accounting records obligations when an order is placed, contract 

awarded, service rendered, or similar transaction takes place that will 

require payment.



[5] Some of these implicit exposures, such as the costs of future 

social insurance benefits, are discussed in the stewardship section of 

the government’s consolidated financial statement.



[6] In this report, primary budget data refers to budget authority, 

obligations, outlays, and the deficit/surplus.



[7] The U.S. budget uses accrual measures to recognize the government’s 

cost for certain programs. One example is the treatment of credit 

programs for which budget authority, obligations, and outlays are 

measured on an accrual basis. Interest on Treasury debt held by the 

public is almost entirely on an accrual basis. 



[8] Under the budget concepts set forth in the Report of the 

President’s Commission on Budget Concepts, the unified budget is a 

comprehensive budget in which receipts and outlays from federal and 

trust funds are consolidated. When these fund groups are consolidated 

to display budget totals, transactions that are outlays of one fund 

group for payment to another fund group (that is, intrafund 

transactions) are deducted to avoid double counting. 



[9] U.S. General Accounting Office, Accrual Budgeting: Experiences of 

Other Nations and Implications for the United States, GAO/AIMD-00-57 

(Washington, D.C.: Feb. 18, 2000).



[10] U.S. General Accounting Office, Budget Issues: Budgeting for 

Federal Insurance Programs, GAO/AIMD-97-16 (Washington, D.C.: Sept. 30, 

1997).



[11] For example, U.S. General Accounting Office, Budget Issues: Long-

Term Fiscal Challenges. Testimony before the Committee on the Budget, 

U.S. Senate, GAO-02-467T (Washington, D.C.: Feb. 27, 2002) and U.S. 

General Accounting Office, Long-Term Budget Issues: Moving From 

Balancing the Budget to Balancing Fiscal Risk, GAO-01-385T (Washington, 

D.C.: Feb. 6, 2001). 



[12] In this report, the term implicit exposures refers to exposures 

that stem not from a legal obligation of the federal government but 

rather from implied commitments embedded in the government’s current 

policies or in the public’s expectations about the role of government. 

Some implicit exposures, such as the costs of future social insurance 

benefits, are discussed in the stewardship section of the government’s 

consolidated financial statement. 



[13] In this report, the term contingent exposures refers to exposures 

that are based on the occurrence or nonoccurrence of some future event. 





[14] For a more in-depth look at the fiscal exposure associated with 

environmental liabilities, see U.S. General Accounting Office, Long-

Term Commitments: Improving the Budgetary Focus on Environmental 

Liabilities, GAO-03-219 (Washington, D.C.: Jan. 24, 2003). 



[15] Tax expenditures are revenue losses attributable to a provision of 

the federal tax laws that allows a special exclusion, exemption, or 

deduction from gross income or that provides a special credit, 

preferential tax rate, or deferral of tax liability. 



[16] Some implicit exposures, such as the costs of future social 

insurance benefits, are discussed in the stewardship section of the 

government’s consolidated financial statement. 



[17] An incrementally funded capital project is a project for which the 

budget authority provided is for only part of the estimated cost of the 

capital acquisition or part of a usable asset. For more information, 

see U.S. General Accounting Office, Budget Issues: Incremental Funding 

of Capital Asset Acquisitions, GAO-01-432R (Washington, D.C.: Feb. 26, 

2001). 



[18] In this report, primary budget data refers to budget authority, 

obligations, outlays, and the deficit/surplus.



[19] Net present value of the negative cash flow is the current amount 

of funds needed to cover projected shortfalls, excluding trust fund 

balances, over a 75-year period. The trust fund balance at the 

beginning of the valuation period (January 1, 2001) was $1,049 billion. 

The net present value of negative cash flows shown in this report is 

from the fiscal year 2001 consolidated Financial Report of the United 

States Government and is a different measure from the actuarial balance 

in the Trustees’ Report. 



[20] About 98 percent of the $307 billion in environmental liabilities 

that were reported in fiscal year 2001 were associated with the 

Department of Energy and DOD. The Department of Energy, which received 

a clean opinion on its financial statements, reported environmental 

liabilities of $238 billion. DOD reported $63 billion in environmental 

liabilities. Auditors, however, were unable to render an opinion on 

DOD’s fiscal year 2001 financial statements, in part, because of DOD’s 

inability to comply with requirements for environmental liabilities.



[21] Unlike what is required in the budget, current federal accounting 

standards require agencies to estimate and report the full liability of 

cleanup costs for weapon systems when they are deemed probable and 

measurable. 



[22] See GAO/AIMD-97-16.



[23] According to OMB, this estimate is for the future costs of vested 

covered benefits and does not assume future growth in such benefits. 



[24] As part of our prior work on incremental funding, we reviewed 

selected agency budget justifications and other agency data to identify 

the extent to which capital projects were incrementally funded. The 

2001 report identified civilian nondefense capital projects with total 

estimated costs of $176 billion and determined that about $76 billion 

(44 percent) of total costs were incrementally funded--an amount that 

does not include high technology projects. Incremental funding can be 

justified for such projects because funding provided on an incremental 

basis can provide useful knowledge even if no additional funding is 

provided. This review also found that data supporting capital 

acquisitions in general may be incomplete and/or unclear, thus making 

it difficult to determine future costs or whether the funding provided 

would produce a usable asset. See GAO-01-432R.



[25] Another issue associated with implicit, contingent exposures, such 

as bailouts and disaster relief, is that recognition of these potential 

costs may create moral hazards in that private parties may make too 

little effort to diminish their risk. 



[26] For example, stewardship information generally includes narrative 

and/or graphic presentation of items including (1) long-range cashflow 

projections, (2) long-range projections of the ratio of contributors to 

beneficiaries and (3) actuarial present values of (a) future benefits 

for and (b) contributions and tax income from or on behalf of current 

and future program participants. 



[27] In this report, primary budget data refers to budget authority, 

obligations, outlays, and the deficit/surplus. 



[28] See GAO/AIMD-97-16.



[29] The estimation of the cost of the risk assumed by the federal 

government would be analogous to premium rate setting in that it would 

look at the long-term expected costs of the insurance commitment at the 

time the insurance commitment is extended. The risk assumed by the 

government is essentially that portion of the full risk-based premium 

not charged to the insured.



[30] See GAO-03-219.



[31] Unfunded Mandate Reform Act of 1995, Pub. L. 104-4, §423.



[32] U.S. General Accounting Office, Medicare Reform: Issues Associated 

With General Revenue Financing, GAO/T-AIMD-00-126 (Washington, D.C.: 

Mar. 27, 2000). 



[33] Rules established by the current Congress can be changed by a 

subsequent Congress. 



[34] Such a procedure would require some assurance of unbiased 

estimates.



[35] See GAO/AIMD-00-57.



[36] Accrual budgeting for capital assets based on depreciation matches 

budget costs with the provision of goods and services but, without 

compensating controls, raises issues about up-front cost recognition 

and control over capital asset acquisitions. 



[37] Nonbudgetary accounts appear in the budget document for 

information purposes but are not included in the budget totals for 

budget authority or outlays. They account for transactions of the 

government that do not belong within the budget because they are a 

means of financing and do not represent a cost to the government. 



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