GAO Warns of ‘Fiscal Exposures’ That Could Increase the Debt

Blog Post
Monday, April 08, 2019

Federal budget projections are already quite alarming, with the national debt high by historical standards and rising rapidly.

The fiscal picture looks even worse, however, if one takes into account federal insurance programs and other activities that transfer financial risks and losses to the government -- and, ultimately, of course, to the taxpayers of today and tomorrow.

A recent report from the Government Accountability Office (GAO) on these “fiscal exposures” provides a forceful reminder to elected officials and the American public of how these programs and activities could result -- and in some cases likely will result -- in billions of dollars in additional federal spending that current projections do not include.

Updating information it had previously given Congress, the GAO identified 148 such programs and activities, including such things as providing flood, pension, crop and bank deposit insurance and guaranteeing loans for homes and small businesses. The report also looks at the future costs of benefits for federal employees and veterans, and discusses the big federal entitlement programs.

“The government’s primarily cash-based budget generally does not record the full cost of commitments incurred until corresponding payments are made in the future,” the GAO says. “Therefore, the budget may not accurately reflect federal costs or the likely claim on federal resources for such activities. For some claims, such as pension and life insurance, the federal commitment occurs years before payments are reflected in the budget.”

In addition, the report says, the budget may not include payments the government may be expected to make based on policies and past practices: “For example, the Commercial Space Launch Insurance Program created a potential liability to the government of up to $3.1 billion per licensed space launch in 2017 but never has been included in the budget.”

Unlike private insurance, some federal programs “do not necessarily have a contract or charge premiums or fees in exchange for assuming risk,” GAO says. “Even when premiums or fees exist they may not cover all costs, as federal expenditures can be driven by policy goals or agency missions rather than the aim of fiscal solvency.”

GAO notes that federal social insurance programs -- Social Security, Medicare, Railroad Retirement, and Black Lung -- all provide benefits that transfer risk to the federal government. Their future benefit payments “are not treated explicitly as legal liabilities to the federal government,” the report says, but GAO reiterates its previous warnings about their financial challenges, particularly Social Security and Medicare:

“In June 2018, we noted that fiscal spending increases in 2017 were driven by Social Security, Medicare, Medicaid, and interest on debt held by the public. The spending increases were largely a result of the aging of the population and increasing health care costs rather than legislative changes to these programs.”

The GAO report continues: “Spending on Social Security and these health programs is expected to continue to increase because of long-standing demographic and economic trends. The 2017 Financial Report of the United States Government, Congressional Budget Office, and our projections all show that, absent policy changes, the federal government’s fiscal path is unsustainable . . . “

Elected officials in Washington should heed that warning on entitlements as well as GAO’s concern that a wide range of fiscal risks and liabilities are not being taken into account in the federal budget process.

The GAO recommends -- and not for the first time -- that Congress consider improvements in the process that “would provide enhanced control over future spending by recognizing long-term costs when decisions are made.”

Commitments and guarantees can seem cheap until the time comes to pay up, and all too often elected officials at that point express surprise. If they take GAO’s advice to consider fiscal liabilities more carefully, there could be fewer unpleasant surprises.