Budget Issues:

Budgeting for Federal Insurance Programs

AIMD-97-16: Published: Sep 30, 1997. Publicly Released: Sep 30, 1997.

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Pursuant to a congressional request, GAO reviewed the budget treatment of federal insurance programs to assess whether the current cash-based budget provides complete information on the government's cost and whether accrual concepts could be used to improve budgeting for these programs, focusing on: (1) potential approaches for using accrual concepts in the budget for insurance programs; (2) trade-offs among different approaches, including the current cash-based budget treatment; and (3) potential implementation issues such as cost estimation.

GAO noted that: (1) the cash-based budget does not adequately reflect the government's cost or the economic impact of federal insurance programs because generally costs are recognized when claims are paid rather than when the commitment is made; (2) in any particular year, the cost of the government's insurance commitments may be understated or overstated because the time between the receipt of program collections, the occurrence of an insured event, and the final payment of a claim can extend over many budget periods; (3) decisionmaking is best informed if the government recognizes the costs of its commitments at the time it makes them; (4) for insurance programs, accrual-based budgeting which would recognize the expected long-term cost of the insurance commitment at the time the insurance is extended offers the potential to overcome a number of the deficiencies of cash-based budgeting by improving cost recognition; (5) in most cases, the risk-assumed approach to accrual would be analogous to a premium rate-setting process in that it looks at the long-term expected cost of an insurance commitment at the time the insurance commitment is extended; (6) in practical terms, however, attempts to improve cost recognition occur on a continuum since insurance programs and insurable events vary significantly; (7) the challenges involved in bringing accrual-based estimates into the budget are significant and dictate beginning with an informational and analytic step; (8) development of models to generate reasonably reliable risk-assumed estimates is made difficult by the nature of the risks insured by the government, frequent program modifications, and the sufficiency of data on potential losses; (9) the potential benefits of accrual-based budgeting for federal insurance programs warrant continued effort in the development of risk-assumed cost estimates; (10) supplemental reporting of risk-assumed estimates in the budget as they are developed over a number of years would help policymakers understand the extent and nature of the estimation uncertainty and evaluate whether a more comprehensive accrual-based budgeting approach should be adopted; (11) supplemental reporting of risk-assumed estimates in the budget would parallel the new accounting treatment required under accounting standards developed by the Federal Accounting Standards Advisory Board (FASAB); and (12) in requiring the disclosure of risk-assumed estimates as supplemental information to agency financial statements, FASAB recognized the usefulness of these estimates to better inform budget decisions.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: H.R. 853, the Comprehensive Budget Process Reform Act of 1999, was introduced in February 1999. Among its provisions, it called for budgeting for the risk-assumed cost for insurance programs. Its approach is modeled upon GAO's work and called for agencies to develop and report risk-assumed costs for an interim period before including them in budget numbers. It further called for CBO, OMB, and GAO to evaluate the interim reporting and to report on the advisability and appropriate implementation of the insurance budgeting reforms. In drafting the bill congressional staff drew heavily on GAO's report and consulted extensively with GAO staff. GAO also provided testimony on the budgetary treatment of insurance programs before the House Budget Committee's Budget Process Task Force (T-AIMD-98-147, April 23, 1998). H.R. 853 was defeated when the House voted on it in May 2000. However, budget process reforms are again being discussed in 2001. If a comprehensive bill is proposed, it would likely include insurance budgeting reform since it enjoys bipartisan support. In addition, legislation has been proposed to establish a National Commission on Budget Concepts which would address the bases of accounting for the budget, which would likely include insurance budgeting.

    Matter: Congress may wish to consider encouraging the development and subsequent reporting of annual risk-assumed cost estimates in conjunction with the cash-based estimates for all federal insurance programs in the President's budget. Congress may wish to consider periodically overseeing and assessing the reliability and usefulness of these estimates, making adjustments, and determining whether to move toward a more comprehensive accrual-based budgeting approach for insurance programs.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: OMB worked with the House Budget Committee on legislation to implement risk-assumed accrual budgeting for federal insurance programs. In response to GAO's recommendation in a letter dated November 11, 1998, OMB stated that it would endeavor to develop risk-assumed estimation models for insurance programs within the bounds of available resources and would rely heavily on program agencies' expertise, data, and research. H.R. 853 would require agencies to develop models to estimate their risk-assumed costs and report it to OMB beginning with the request for FY2002. It would also require OMB to advise interested persons of the availability of information describing the models, data, and critical assumptions, thus making it available for external review. OMB would also be required by H.R. 853 to evaluate the availability and reliability of data or information to make risk-assumed estimates. H.R. 853 was defeated when voted on in May 2000.

    Recommendation: The Director, Office of Management and Budget (OMB), should develop risk-assumed cost estimation methods for federal insurance programs and encourage similar efforts at agencies with insurance programs. As they become available, the risk-assumed estimates should be reported annually in a standardized format for all insurance programs as supplemental information along with the cash-based estimates. A description of the estimation methodologies used and significant assumptions made should be provided. To promote confidence in risk-assumed cost measures, the estimation models and data should be available to all parties involved in making budget estimates and be subject to periodic external review. As data become available, OMB should undertake and report on evaluations of the validity and reliability of the reported estimates.

    Agency Affected: Executive Office of the President: Office of Management and Budget


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