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Testimony: 

Before the Subcommittee on Federal Financial Management, Government 
Information, and International Security, Committee on Homeland Security 
and Governmental Affairs, U.S. Senate: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 2:30 p.m. EDT: 

Thursday, May 25, 2006: 

Budget Process: 

Better Transparency, Controls, Triggers, and Default Mechanisms Would 
Help to Address Our Large and Growing Long-term Fiscal Challenge: 

Statement of David M. Walker Comptroller General of the United States: 

GAO-06-761T: 

GAO Highlights: 

Highlights of GAO-06-761T, a testimony before the Subcommittee on 
Federal Financial Management, Government Information, and International 
Security, Committee on Homeland Security and Governmental Affairs, U.S. 
Senate. 

Why GAO Did This Study: 

The nation’s long-term fiscal outlook is daunting. While the budget 
process has not caused the problems we face, the absence of meaningful 
budget controls and other mechanisms has served to compound our fiscal 
challenge. Conversely, a process that illuminates the looming fiscal 
pressures and provides appropriate incentives can at least help 
decision makers focus on the right questions. Meaningful budget 
controls and other mechanisms can also help to assure that difficult 
but necessary choices are made. 

The budget process needs to provide incentives and signals to address 
commitments the government has already made and better transparency for 
and controls on the long-term fiscal exposures being considered. 
Improvements would include the restoration of realistic discretionary 
caps; application of pay-as-you-go (PAYGO) discipline to both mandatory 
spending and revenue legislation; the use of “triggers” for some 
mandatory programs; and better reporting of fiscal exposures. 

What GAO Found: 

Over the long term we face a large and growing structural deficit due 
primarily to known demographic trends and rising health care costs. 
Continuing on this imprudent and unsustainable fiscal path will 
gradually erode, if not suddenly damage, our economy, our standard of 
living, and ultimately our national security. Our current path will 
also increasingly constrain our ability to address emerging and 
unexpected budgetary needs and increase the burdens that will be faced 
by our children, grandchildren, and future generations. 

The budget process itself cannot solve this problem, but it can help 
policymakers make tough but necessary choices. If citizens and 
government officials come to better understand various fiscal exposures 
and their implications for the future, they are more likely to insist 
on prudent policy choices today and sensible levels of fiscal risk in 
the future. 

Figure: Composition of Spending as a Share of GDP Assuming 
Discretionary Spending Grows with GDP after 2006 and All Expiring Tax 
Provisions Are Extended: 

[See PDF for Image] 

[End of Figure] 

We cannot grow our way out of our long-term fiscal challenge. We must 
make tough choices and the sooner the better. A multi-pronged approach 
is needed: (1) revise existing budget processes and financial reporting 
requirements, (2) restructure existing entitlement programs, (3) 
reexamine the base of discretionary and other spending, and (4) review 
and revise tax policy and enforcement programs—including tax 
expenditures. Everything must be on the table and a credible and 
effective Entitlement and Tax Reform Commission may be necessary. 
Fundamentally we need a top-to-bottom review of government activities 
to ensure their relevance and fit for the 21st century and their 
relative priority. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-761T]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Susan J. Irving at (202) 
512-9142 or irvings@gao.gov. 

[End of Section] 

Mr. Chairman, Senator Carper, and Members of the Subcommittee: 

I appreciate the opportunity to speak with you today about a budget 
process that can help Congress deal with the large and growing fiscal 
challenges facing our nation. As you know, I have been vocal about our 
long-term fiscal imbalance and the need to make difficult but necessary 
choices soon so that we do not burden our children and grandchildren 
with a crushing debt. While the budget process has not caused the 
problems we face, the absence of meaningful budget controls and other 
mechanisms has served to compound our fiscal challenge. Conversely, a 
process that illuminates the looming fiscal pressures and provides 
appropriate incentives, transparency and control mechanisms can help 
decision makers to slow the bleeding and put us on a more prudent and 
sustainable long-range fiscal path. 

When updating the budget process, you face a two-pronged challenge: 

* the need to reinstitute and strengthen controls to deal with both 
near-term and longer-term deficits and: 

* the need to design a process that helps Congress tackle our large and 
growing long-term fiscal challenges facing this nation by, among other 
things, improving the transparency of the long-term costs of current 
decisions. 

Today I want to focus on the long-term budget challenge and what role 
the budget process can play in helping to deal with it. Since at its 
heart the budget debate is about the allocation of limited resources, 
the budget process can and should play a key role in helping to address 
our broader challenge of modernizing government for the 21st century. 

The Long-term Fiscal Challenge: 

The nation's long-term fiscal outlook is daunting under any realistic 
policy scenarios and assumptions. For over 14 years, GAO has 
periodically prepared various long-term budget simulations that seek to 
illustrate the likely fiscal consequences of our coming demographic 
challenges and rising health care costs. Indeed, the health care area 
is especially important because the long-term fiscal challenge is 
largely a health care challenge. While Social Security is important 
because of its size, health care spending is both large and projected 
to grow much more rapidly. 

Our most recent simulation results illustrate the importance of health 
care in the long-term fiscal outlook as well as the imperative to take 
action soon. These simulations show that over the long term we face 
large and growing structural deficits due primarily to known 
demographic trends and rising health care costs. These trends are 
compounded by the presence of near-term deficits arising from new 
discretionary and mandatory spending as well as lower federal revenues 
as a percentage of the economy. Continuing on this imprudent and 
unsustainable fiscal path will gradually erode, if not suddenly damage, 
our economy, our standard of living, and ultimately our national 
security. Our current path will also increasingly constrain our ability 
to address emerging and unexpected budgetary needs and increase the 
burdens that will be faced by our children, grandchildren, and future 
generations of Americans. 

Figures 1 and 2 present our long-term simulations under two different 
sets of assumptions. For both simulations, Social Security and Medicare 
spending is based on the 2006 Trustees' intermediate projections, and 
we assume that benefits continue to be paid in full after the trust 
funds are exhausted, although current law does not provide for such. 
Medicaid spending is based on the Congressional Budget Office's (CBO) 
December 2005 long-term projections under its midrange assumptions. In 
figure 1, we start with CBO's 10-year baseline, constructed according 
to the statutory requirements for that baseline. Consistent with these 
specific yet unrealistic requirements, discretionary spending is 
assumed to grow with inflation for the first 10 years and tax cuts 
scheduled to expire are assumed to expire. After 2016, discretionary 
spending and revenue are held constant as a share of gross domestic 
product (GDP) at the 2016 level. Under this fiscally restrained 
scenario, spending for Social Security and health care programs would 
grow to consume over three-quarters of federal revenues by 2040. 

Figure 1: Composition of Spending as a Share of GDP under Baseline 
Extended: 

[See PDF for image] 

Note: Importantly, this simulation does not include the "Tax Increase 
Prevention and Reconciliation Act of 2005" (P.L. 109-222) enacted on 
May 17, 2006. Under this scenario, in addition to the expiration of tax 
cuts, revenue as a share of GDP increases through 2016 due to (1) real 
bracket creep, (2) more taxpayers becoming subject to the alternative 
minimum tax (AMT), and (3) increased revenue from tax-deferred 
retirement accounts. After 2016, revenue as a share of GDP is held 
constant. 

[End of figure] 

In figure 2, two assumptions are changed: (1) discretionary spending is 
assumed to grow with the economy after 2006 rather than merely with 
inflation, and (2) all expiring tax provisions are extended. In this 
less restrained but possibly more realistic scenario, federal revenues 
will cover little more than interest on the large and growing federal 
debt by 2040. 

Figure 2: Composition of Spending as a Share of GDP Assuming 
Discretionary Spending Grows with GDP after 2006 and All Expiring Tax 
Provisions Are Extended: 

[See PDF for image] 

Note: This includes certain tax provisions that expired at the end of 
2005, such as the increased AMT exemption amount. 

[End of figure] 

While many alternative scenarios could be developed incorporating 
different combinations of possible policy choices and economic 
assumptions, these two scenarios can be viewed as possible "bookends" 
to a range of possible outcomes. 

Budget flexibility--the ability to respond to unforeseen events--is key 
to being able to successfully deal with the nation's and the world's 
uncertainties. By their very nature, mandatory spending programs-- 
entitlement programs like Medicare and Social Security--limit budget 
flexibility.[Footnote 1] They are governed by eligibility rules and 
benefit formulas, which means that funds are spent as required to 
provide benefits to those who are eligible and wish to participate. As 
figure 3 shows, mandatory spending has grown as a share of the total 
federal budget. For example, mandatory spending on programs (i.e., 
mandatory spending excluding interest) has grown from 27 percent in 
1965--the year Medicare was created--to 42 percent in 1985 to 53 
percent last year. (Total spending not subject to annual 
appropriations--mandatory spending and net interest--has grown from 34 
percent in 1965 to 61 percent last year.) Under both the CBO baseline 
estimates and the President's Budget, this spending would grow even 
further. 

Figure 3: Federal Spending for Mandatory and Discretionary Programs: 

[See PDF for image] 

[End of figure] 

Figure 3 illustrates that while it is important to control 
discretionary spending, the real challenge is mandatory spending. 
Accordingly, substantive reform of the major health programs and Social 
Security is critical to recapturing our future fiscal flexibility. 

The aging population and rising health care costs will have significant 
implications not only for the budget but also our economy and 
competitive posture. Figure 4 shows the total future draw on the 
economy represented by Social Security, Medicare, and Medicaid. Under 
the 2006 Trustees' intermediate estimates and CBO's 2005 midrange and 
long-term Medicaid estimates, spending for these entitlement programs 
combined will grow to over 15 percent of GDP in 2030 from today's 8.9 
percent. It is clear that taken together, Social Security, Medicare, 
and Medicaid represent an unsustainable burden on the federal budget 
and future generations. Ultimately, the nation will have to decide what 
level of federal benefits and spending it wants and how it will pay for 
these benefits. 

Figure 4: Social Security, Medicare, and Medicaid Spending as a 
Percentage of GDP: 

[See PDF for image] 

Note: Social Security and Medicare projections are based on the 
intermediate assumptions of the 2006 Trustees' reports. Medicaid 
projections are based on CBO's January 2006 short-term Medicaid 
estimates and CBO's December 2005 long-term Medicaid projections under 
midrange assumptions. 

[End of figure] 

While Social Security, Medicare, and Medicaid are the major drivers of 
the long-term spending outlook in the aggregate, they are not the only 
promises the federal government has made for the future.[Footnote 2] 
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 obligations. If we 
think of fiscal exposures as extending from explicit liabilities (like 
military and civilian pensions) to specific contingencies (like 
pension, flood, and other federal insurance programs) to the 
commitments implicit in current policy and/or public expectations (like 
the gap between the present value of future promised and funded Social 
Security and Medicare benefits), the federal government's fiscal 
exposures totaled more than $46 trillion at the end of 2005, up from 
about $20 trillion in 2000. This translates into a burden of about 
$156,000 per American, or approximately $375,000 per full-time worker-
-more than double what it was in 2000. These amounts are growing every 
second of every minute of every day due to continuing deficits, known 
demographic trends and compounding interest costs. 

What Can Be Done? 

Many are beginning to realize that difficult choices must be made, and 
soon. A crucial first step in acting to improve our long-term fiscal 
outlook will be to face facts and identify the many significant 
commitments already facing the federal government. If citizens and 
government officials come to better understand our nation's various 
fiscal exposures and their implications for the future, they are more 
likely to insist on prudent policy choices today and sensible levels of 
fiscal risk in the future. 

How do we get started? Today you are focusing on budget process 
improvements. That's a good start. While the process itself cannot 
solve the problem, it is important. It can help policymakers make tough 
but necessary choices today rather than defer them until tomorrow. 
Restoration of meaningful budget controls--budgetary caps and a pay-as- 
you-go (PAYGO) rule on both the tax and spending side of the ledger--is 
a start toward requiring that necessary trade-offs be made rather than 
delayed. Although the restoration of caps and a PAYGO rule are 
important, they are not enough. Among the characteristics a budget 
process needs for that to happen are: 

* increased transparency and better incentives, signals, triggers and 
default mechanisms to address the fiscal exposures/commitments the 
federal government has already made and: 

* better transparency for and controls over the long-term fiscal 
exposures/commitments that the federal government is considering. 

Let me elaborate. 

Better Incentives and Signals: 

There is broad consensus among observers and analysts who focus on the 
budget that the controls contained in the expired Budget Enforcement 
Act constrained spending for much of the 1990s. In fact, annual 
discretionary budget authority actually declined in real terms during 
the mid-1990s. I endorse the restoration of realistic discretionary 
caps and PAYGO discipline applied to both mandatory spending and 
revenue legislation. But the caps can only work if they are realistic; 
while caps may be seen as tighter than some would like, they are not 
likely to bind if they are seen as totally unreasonable given current 
conditions. While PAYGO discipline constrained the creation or 
legislative expansion of mandatory spending and tax cuts, it accepted 
the existing provisions of law as given. Looking ahead, the budget 
process will need to go beyond limiting expansions. Cost increases in 
existing mandatory programs cannot be ignored and the base of existing 
spending and tax programs must be reviewed and re-engineered to address 
our long-range fiscal gap. 

Specifically, as I have said before, I would like to see a process that 
forces examination of "the base" of the federal government--for major 
entitlements, for other mandatory spending, and for so-called 
"discretionary" spending (those activities funded through the 
appropriations process). 

Reexamining "the base" is something that should be done periodically 
regardless of fiscal condition--all of us have a stewardship obligation 
over taxpayer funds. As I have said before, we have programs still in 
existence today that were designed 20 or more years ago--and the world 
has changed. I would suggest that as constraints on discretionary 
spending continue to tighten, the need to reexamine existing programs 
and activities becomes greater. One of the questions this Congress is 
grappling with--earmarks--can be seen in this context. Whatever the 
agreed-upon level for discretionary spending, the allocation within 
that total will be important. How should that allocation be determined? 
What sort of rules will you want to impose on both the allocation 
across major areas (defense, education, etc.) and within those areas? 
By definition, earmarks specify how some funds will be used. How will 
the process manage them? After all, not all earmarks are bad but many 
are highly questionable. It is not surprising that in times of tight 
resources, the tension between earmarks and flexibility will likely 
rise. 

Although mandatory spending is not amenable to caps, such spending need 
not--and should not--be permitted to be on autopilot and grow to an 
unlimited extent. Since the spending for any given entitlement or other 
mandatory program is a function of the interaction between eligibility 
rules and the benefit formula--either or both of which may incorporate 
exogenous factors such as economic downturns--the way to change the 
path of spending for any of these programs is to change their rules or 
formulas. We recently issued a report on "triggers"--some measure that 
when reached or exceeded, would prompt a response connected to that 
program.[Footnote 3] By identifying significant increases in the 
spending path of a mandatory program relatively early and acting to 
constrain it, Congress may avert much larger and potentially disruptive 
financial challenges and program changes in the future. 

A trigger is a measure and a signal mechanism--like an alarm clock. It 
could trigger a "soft" response--one that calls attention to the growth 
rate of the level of spending and prompts special consideration when 
the threshold or target is breached. The Medicare program already 
contains a "soft" response trigger: the President is required to submit 
a proposal for action to Congress if the Medicare Trustees determine in 
2 consecutive years that the general revenue share of Medicare spending 
is projected to exceed 45 percent during a 7-fiscal-year 
period.[Footnote 4] The most recent Trustees' report to Congress for 
the first time found that the general revenue share of financing is 
projected to exceed that threshold in 2012.[Footnote 5] Thus, if next 
year's report again concludes that it will exceed the threshold during 
the 7-fiscal-year period, the trigger will have been tripped and the 
President will be required to submit his proposal for action. 

Soft responses can help in alerting decision makers of potential 
problems, but they do not ensure that action to decrease spending or 
increase revenue is taken. In contrast, a trigger could lead to "hard" 
responses under which a predetermined, program-specific action would 
take place, such as changes in eligibility criteria and benefit 
formulas, automatic revenue increases, or automatic spending cuts. With 
hard responses, spending is automatically constrained, revenue is 
automatically increased, or both, unless Congress takes action to 
override--the default is the constraining action. For example, this 
year the President's Budget proposes to change the Medicare trigger 
from solely "soft" to providing a "hard" (automatic) response if 
Congress fails to enact the President's proposal.[Footnote 6] 

Any discussion to create triggered responses and their design must 
recognize that unlike controls on discretionary spending, there is some 
tension between the idea of triggers and the nature of entitlement and 
other mandatory spending programs. These programs--as with tax 
provisions such as tax expenditures--were designed to provide benefits 
based on eligibility formulas or actions as opposed to an annual 
decision regarding spending. This tension makes it more challenging to 
constrain costs and to design both triggers and appropriate responses. 
At the same time, with less than 40 percent of the budget under the 
control of the annual appropriations process, considering ways to 
increase transparency, oversight, and control of mandatory programs 
must be part of addressing the nation's long-term fiscal challenges. 

Increased Transparency and Disclosure of Long-term Costs: 

Besides triggers, transparency of existing commitments would be 
improved by requiring the Office of Management and Budget (OMB) to 
report annually on fiscal exposures--the more than $46 trillion 
figure[Footnote 7] I mentioned earlier--including a concise list, 
description, and cost estimates, where possible. OMB should also ensure 
that agencies focus on improving cost estimates for fiscal exposures. 
This 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. 

Others have embraced this idea for better reporting of fiscal 
exposures. Senator Voinovich has proposed that the President report 
each January on the fiscal exposures of the federal government and 
their implications for the long-term financial health and Senator 
Lieberman introduced legislation to require better information on 
liabilities and commitments. This year Representatives Cooper, Chocola, 
and Kirk have sponsored legislation also aimed at improving the 
attention paid to our growing federal commitments. And, in his last few 
budgets the President has proposed that reports be required for any 
proposals that would worsen the unfunded obligations of major 
entitlement programs. These proposals provide a good starting point for 
discussion. Reporting is a critical first step--but, as I noted above, 
it must cover not only new proposals but also existing commitments, and 
it should be accompanied by some incentives and controls. We need both 
better information on existing commitments and promises and information 
on the long-term costs of any new significant proposed spending 
increases or tax cut. Ten-year budget projections have been available 
to decision makers for many years. We must build on that regime but 
also incorporate longer-term estimates of net present value (NPV) costs 
for major spending and tax commitments comprising longer-term exposures 
for the federal budget beyond the 10-year window. Current budget 
reporting does not always fully capture or require explicit 
consideration of some fiscal exposures. For example, when Medicare Part 
D was being debated, much of the debate focused on the 10-year cost 
estimate--not on the long-term commitment that was obviously much 
greater. While the budget was not designed to and does not provide 
complete information on long-term cost implications stemming from some 
of the government's commitments when they are made, progress can and 
should be made on this front. For example, we should require NPV 
estimates for major proposals--whether on the tax side or the spending 
side--whose costs escalate outside the 10-year window. And these 
estimates should be disclosed and debated before the proposal is voted 
on. 

Regarding tax provisions, it is important to recognize that tax 
policies and programs financing the federal budget can be reviewed not 
only with an eye toward the overall level of revenue provided to fund 
federal operations and commitments, but also the mix of taxes and the 
extent to which the tax code is used to promote overall economic growth 
and broad-based societal objectives. In practice, some tax expenditures 
are very similar to mandatory spending programs even though they are 
not subject to the appropriations process or selected budget control 
mechanisms. Tax expenditures represent a significant commitment and are 
not typically subject to review or reexamination. This should not be 
allowed to continue nor should they continue to be largely in the dark 
and on autopilot. 

Finally, the growing use of emergency supplemental appropriations 
raises concerns that an increasing portion of federal spending is 
exempt from the discipline and trade-offs of the regular budget 
process.[Footnote 8] Some have expressed concern that these "emergency" 
supplementals are not always used just to meet the needs of unforeseen 
emergencies but also include funding for activities that could be 
covered in regular appropriation acts. According to a recent 
Congressional Research Service report, after the expiration of 
discretionary limits and PAYGO requirements at the end of fiscal year 
2002, supplemental appropriations net of rescissions increased the 
budget deficit by almost 25 percent per year.[Footnote 9] On average, 
the use of supplemental appropriations for all purposes has grown 
almost 60 percent each year, increasing from about $17 billion in 
fiscal year 2000 to about $160 billion in fiscal year 2005. 
Constraining emergency appropriations to those which are necessary (not 
merely useful or beneficial), sudden, urgent, unforeseen, and not 
permanent has been proposed in the past. The issue of what constitutes 
an emergency needs to be resolved and discipline exerted so that all 
appropriations for activities that are not true emergencies are 
considered during regular budget deliberations. 

Concluding Observations: 

We cannot grow our way out of our long-term fiscal challenge. We have 
to make tough choices and the sooner the better. A multi-pronged 
approach is necessary: (1) revise existing budget processes and 
financial reporting requirements, (2) restructure existing entitlement 
programs, (3) reexamine the base of discretionary and other spending, 
and (4) review and revise tax policy and enforcement programs. 
Everything must be on the table. Fundamentally, we need to undertake a 
top-to-bottom review of government activities to ensure their relevance 
and fit for the 21st century and their relative priority. Our report 
entitled 21st Century Challenges: Reexamining the Base of the Federal 
Government[Footnote 10] presents illustrative questions for 
policymakers to consider as they carry out their responsibilities. 
These questions look across major areas of the budget and federal 
operations, including discretionary and mandatory spending and tax 
policies and programs. We hope that this report, among other things, 
will be used by various congressional committees as they consider which 
areas of government need particular attention and reconsideration. 

The understanding and support of the American people will be critical 
in providing a foundation for action. The fiscal risks I have 
discussed, however, are a long-term problem whose full impact will not 
likely be felt for some time. At the same time, they are very real and 
time is currently working against us. The difficult but necessary 
choices we face will be facilitated if the public has the facts and 
comes to support serious and sustained action to address the nation's 
fiscal challenges. That is why if an Entitlement and Tax Reform 
Commission is created to develop proposals to tackle our long-term 
fiscal imbalance, its charter may have to include educating the public 
as to the nature of the problem and the realistic solutions. While 
public education may be part of a Commission's charge, we cannot wait 
for it to begin. As you may know, the Concord Coalition is leading a 
public education effort on this issue and I have been a regular 
participant. Although along with Concord the core group is the Heritage 
Foundation, the Brookings Institution, and the Committee for Economic 
Development, others are also actively supporting and participating in 
the effort--the state treasurers, auditors and comptrollers, the 
American Institute of Certified Public Accountants, AARP, and the 
National Academy of Public Administration. I am pleased to take part in 
this national education and outreach effort to help the public 
understand the nature and magnitude of the long-term financial 
challenge facing this nation. This is important because while process 
reform can structure choices and help, broad understanding of the 
problem is also essential. After all, from a practical standpoint, the 
public needs to understand the nature and extent of our fiscal 
challenge before their elected representatives are likely to act. 

Thank you, Mr. Chairman. This concludes my prepared remarks. I would be 
happy to answer any questions you may have. 

Contacts and Acknowledgments: 

Contact points for our Offices of Congressional Relations and Public 
Affairs may be found on the last page of this testimony. For further 
information on this testimony, please contact Susan J. Irving at (202) 
512-9142 or irvings@gao.gov. Individuals making key contributions to 
this testimony include Christine Bonham, Assistant Director; Carlos 
Diz, Assistant General Counsel; and Melissa Wolf, Senior Analyst. 

FOOTNOTES 

[1] Similarly, tax expenditures--subsidies provided through the tax 
system--may limit flexibility on the revenue side; there is a trade-off 
between tax rates and revenue lost through tax expenditures. In order 
to raise a given amount of federal revenue, tax rates must be raised 
higher than they otherwise need to be due to revenue losses from tax 
expenditures. 

[2] While interest is a large and growing share of the budget, it does 
not directly drive the fiscal outlook in that interest is the result of 
other decisions affecting spending and tax policy. 

[3] GAO, Mandatory Spending: Using Budget Triggers to Constrain Growth, 
GAO-06-276 (Washington, D.C.: Jan. 31, 2006). 

[4] For the purpose of the Medicare trigger, general revenue Medicare 
funding is defined as the difference between Medicare program outlays 
and dedicated Medicare financing sources. Dedicated Medicare financing 
sources are defined as Hospital Insurance (HI) payroll taxes; the HI 
share of income taxes on Social Security benefits; state transfers for 
Part D prescription drug benefits; premiums paid under Parts A, B, and 
D; and any gifts received by the trust funds. 

[5] The Boards of Trustees, Federal Hospital Insurance and Federal 
Supplementary Insurance Trust Funds, The 2006 Annual Report of the 
Boards of Trustees of the Federal Hospital Insurance and Federal 
Supplementary Medical Insurance Trust Funds (Washington, D.C.: May 
2006), 27. 

[6] The response would include a sequester if Congress did not act on 
the President's proposal. The proposed sequester would result in a four-
tenths of a percent reduction in all payments to providers beginning in 
the year the threshold is exceeded. Each year the shortfall continues 
to occur the reduction would grow by an additional four-tenths of a 
percent. We have not yet analyzed how this would work. 

[7] This figure is as of the end of 2005--it will be higher at the end 
of this year. 

[8] While most budget enforcement mechanisms expired in fiscal year 
2002, Congress generally includes overall limits on discretionary 
spending and PAYGO points of order in its budget resolution to manage 
its internal budget process. 

[9] Congressional Research Service, Supplemental Appropriations: Trends 
and Budgetary Impacts Since 1981 (Washington, D.C.: Nov. 2, 2005). 

[10] GAO, 21st Century Challenges: Reexamining the Base of the Federal 
Government, GAO-05-325SP (Washington, D.C.: February 2005). 

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Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800 
U.S. Government Accountability Office, 441 G Street NW, Room 7149 
Washington, D.C. 20548: