Fiscal exposures

Debt held by the public is the largest explicit liabilityA probable future outflow or other sacrifice of resources as a result of past transactions or events. Generally, liabilities are thought of as amounts owed for items or services received, assets acquired, construction performed (regardless of whether invoices have been received), and amount received but not yet earned. of the federal government. However, many other fiscal exposures–responsibilities, programs, and activities that may explicitly or implicitly expose the federal government to future spending–also warrant attention. We use the terms explicit and implicit to provide a framework to consider long-term costs and uncertainties. See GAO, Fiscal Exposures: Improving Cost Recognition in the Federal Budget. Some expected future spending arising from certain exposures is recognized in the consolidated financial statements (see Financial Report of the United States Government).

Spectrum of Fiscal Exposures

Source: GAO.

Spectrum of Fiscal Exposure data: txt pdf

Explicit exposures include:

    Debt Held by the Public: Publicly held debt is the largest legally and contractually binding obligation of the federal government.

    Federal Employee Benefit Programs: Military and civilian pensions and post-retirement health benefits are essentially deferred compensation.

    Environmental and disposal liabilities: The federal government is legally required to clean up hazardous waste that results from its operations. See Long-Term Commitments: Improving the Budgetary Focus on Environmental Liabilities.

    Federal Insurance Programs: The federal government provides insurance for 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. These programs expose the government to future, and potentially significant, draws on resources that may not be reflected adequately in the budget at the time the decision to extend the insurance is being made. Due in part to challenges with their funding structures, the National Flood Insurance Program and the Pension Benefit Guaranty Corporation Insurance Programs are on GAO's High Risk List (see GAO's High Risk webpage for more information).

Implicit exposures include:

    Future Social Security & Medicare benefits: These exposures flow from expectations that the public holds about the government's responsibilities. Should the amounts of funding needed to cover future social insurance benefits (e.g., Social Security and Medicare) exceed the amounts available in corresponding trust funds, there may be an expectation that the government will use federal funds to pay the difference even though there would be no legal commitment on behalf of the government to do so.

    Federal Disaster Relief: The federal government provided assistance after the September 11 terrorist attacks and has also historically provided assistance following natural disasters, such as Hurricane Katrina. These potential costs to the government do not flow from their legal nature but from expectations that the public holds about the government's responsibilities. Some of these expected costs for future disasters are included in the budget. However, GAO found that annual budget requests and appropriations for disaster relief do not include all known costs, particularly those from catastrophic disasters. See Disaster Cost Estimates: FEMA Can Improve Its Learning from Past Experience and Management of Disaster-Related Resources.

Where on the spectrum do Government-Sponsored Enterprises (GSEs) fit? Major GSEs support agriculture (the Farm Credit System) and housing/home ownership (e.g., Fannie Mae, Freddie Mac, Federal Home Loan Banks) with a shared goal of enhancing the availability of credit to specific sectors of the economy. The GSEs are an example of a fiscal exposure for which the extent of the government's legal commitment has changed over time. For example, the fiscal exposure created by Fannie Mae and Freddie Mac, the two largest GSEs, changed in recent years as the government responded to the financial crisis. Securities issued by Fannie Mae and Freddie Mac were explicitly not guaranteed by the federal government and, prior to 2008, the government had no legal responsibility to provide support to these GSEs. In response to the financial crisis, however, the government placed Fannie Mae and Freddie Mac into conservatorship and agreed to provide temporary assistance, creating a new explicit exposure.