## _cr03243 - EXECUTIVE SUMMARY ## Source details **Canonical URL:** [_cr03243 - EXECUTIVE SUMMARY](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2003/_cr03243.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2003/_cr03243.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2003/_cr03243.pdf.json) --- ### Executive overview - The report assesses fiscal transparency practices in the United States against the requirements of the IMF Code of Good Practices on Fiscal Transparency, based on discussions with the authorities, their responses to the IMF fiscal transparency questionnaire, and other sources. - The United States is fully compliant with most elements of the Fund’s Code of Good Practices on Fiscal Transparency, and sets best practice standards in many areas. - The constitution provides a strong framework that clearly defines the roles of the executive and legislative branches in fiscal management. Congress plays a central role in shaping the budget, producing a highly open process. State and local governments have clearly defined fiscal responsibilities, operate independently from the federal government, and are subject to market discipline. - Budget documentation is easily accessible to the public, timely, comprehensive, and reliable, and it excels in its scope and quality of analysis. ### Major strengths - The unified federal budget is the focus of fiscal policy formulation, execution, and analysis in the United States. - Coverage of the unified budget corresponds fairly closely to international statistical reporting standards for central government. - Information on major trust funds, most notably the Social Security and Medicare funds, is made available in the unified budget presentation and is included in the budget totals; policy issues linking Social Security and general fiscal policy are discussed in the budget and vigorously debated by the legislature and media. - Privatization policies and processes are open. The Administration’s President’s Management Agenda (PMA) includes a competitive sourcing initiative aimed at increasing outsourcing for provision of public services. - The Federal Reserve System is independent, does not play a fiscal role or carry out quasi-fiscal activities, and continues to report to Congress (Humphrey-Hawkins reports), despite the Full Employment and Balanced Growth Act having expired in 2000. ### Key weaknesses and challenges - Lack of clarity about the longer term direction of fiscal policy, reflecting the size of the federal government and the complexity of the congressional budget process. - Recent contributors to short- to medium-term uncertainty: - Expiration of the Budget Enforcement Act (BEA). - Failure of Congress to pass a budget resolution for FY 2003. - Recent uncertainty regarding the permanence of tax cuts and the costs of the war in Iraq. - The unified budget does not extend to general government as defined in GFSM 2001 because it does not include state and local governments. - Budgetary treatment of commercial-type activities differs from GFSM 2001 recommendations: - Government corporations such as the United States Postal Service (USPS) and the Tennessee Valley Authority (TVA) are included on a net basis (gross outlays minus collections from business activities). - Sales and outlays for general government entities are shown net rather than in gross terms recommended by GFSM 2001. - Some user charges and fees are set below market value (examples cited include grazing fees, mining and timber receipts), and the budget does not show the value of these subsidies. - Government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac are reported but are not included in the unified budget. - The PMA competitive sourcing initiative registered little progress: the goal is for agencies to bid competitively for up to 50 percent of positions related to functions that are not “inherently governmental,” but no agency had met the criteria and all agencies were rated “red” on the Administration’s management “scorecard” at the time of reporting. ### Policy recommendations and transparency improvements - Consider budget responsibility legislation to replace the BEA to provide a basis for more systematic incorporation of longer-term considerations into the budget process. - Strengthen fiscal transparency by: - Reporting an internationally comparable measure of the budget balance to supplement the unified budget presentation. - Providing an overview of state and local government finances as part of the federal budget presentation. - Conducting an annual assessment of the costs and risks associated with quasi-fiscal activities. - Including a comprehensive statement on fiscal risks in the budget documents. - Reconsidering the legal basis for tax expenditure reporting. - Ensuring that audit reports of agencies are followed up. - Increasing emphasis on program performance. - Paying more attention to the full cost of providing government services. ### Institutional arrangements and technical notes - Principle of the unified budget established in 1967 by the President’s Commission on Budget Concepts and adopted for fiscal year 1969. - Fiscal year in the United States begins on October 1. All year references to the federal budget in this report are to fiscal years beginning on October 1 of the previous calendar year (i.e., 2003 refers to fiscal year 2003, which runs from October 1, 2002 to September 30, 2003). - For GFS Yearbook reporting, the United States prepares Government Finance Statistics reports on federal government and state and local government finances; these are published with a lag of approximately two years. - The unified budget covers trust funds (funds designated in law as such) that earmark revenues for specific purposes but do not represent money held in trust for nongovernmental entities. - Some small funds that truly hold assets owned by nongovernmental entities are treated as nonbudgetary and excluded from the federal budget. - GFSM 2001 guidance on public corporations, quasi-corporations, and recording sales/outlays in gross terms is noted as differing from certain U.S. budget treatments. *IMF staff executive summary from _cr03243 - EXECUTIVE SUMMARY* --- ### Regulatory rulemaking and oversight of the nonbank private sector - Numerous laws provide for regulation in public health, food quality, environmental protection, and workplace safety. - Rules are published in the Federal Register with a public comment period of at least 60 days and are subject to revision based on input. - OMB, through OIRA, has increasingly required cost-benefit analyses of proposed regulatory statutes before publication. - Since 1996 proposals must, under the Unfunded Mandates Reform Act (UMRA) of 1995, include a CBO estimate of their cost to the private and intergovernmental sector. - Between 1996 and 2001, the CBO reviewed 3,338 bills for private sector mandates, finding 488 that included such mandates, and 118 with mandates above a $100 million threshold. - OIRA estimated total cost of federal regulations cleared by OMB from April 1995 to September 30, 2001 was $51–54 billion, while total annual benefits ranged from $49–$102 billion. ### Government equity, financial asset reporting, and GSEs - Financial assets and liabilities of government corporations are reported in the Financial Report of the United States Government, including stewardship assets and actuarial estimates of future Social Security obligations. - GSEs are large but not owned or deemed controlled by the federal government and therefore are not included in the Financial Report of the United States Government. - Holdings of government securities by government corporations and their cash balances with the Treasury are eliminated in consolidation. - Examples of other agencies holding financial assets or guarantees include Veterans Affairs, Agriculture, the Office of Student Financial Assistance, the Small Business Administration, the Export-Import Bank, and the Overseas Private Investment Corporation. ### Allocation of responsibilities across government levels and intergovernmental relations - States and localities have powers and independent status protected by the Constitution; local governments derive powers in practice from state governments. - Federal government does not review states’ budgets; federal grant policy influences state fiscal activities and may place conditions on receipt of assistance. - UMRA requires the CBO to estimate costs of mandates on state, local, or tribal governments; between 1996 and 2001, CBO found 405 bills with such mandates and 36 exceeding a $50 million threshold. - In 2000, the federal government collected almost two-third of all general government revenue, compared to about one-third for state and local governments combined. - Federal aid represented 20 percent of all state revenue in 1998; local governments derived one-third of their 1998 revenue from higher levels of government; more than 90 percent of assistance to local governments came from state governments. ### Intergovernmental fiscal discipline - Grants are transparent: reported as expenditure by the provider and revenue by the recipient. - State finances disciplined by: - Constitutional or statutory balanced-budget requirements for state general funds (Vermont is an exception). - Capital market discipline for states borrowing to finance capital spending. - Tax competition limiting tax-raising capacity. - Fiscal-year timing: 46 out of 50 state governments have fiscal years that begin on July 1; the federal fiscal year begins on October 1. *Source: IMF staff report excerpt (content unit: _cr03243 - 7. Processes governing regulation of the nonbank private sector are open, but they)* --- ### Coverage of budget documentation and general government - The President’s budget (late January/early February) gives the unified budget presentation of proposed fiscal activity of the federal government for the year. - Data on state and local taxes and spending are not included with the budget; NIPA reports include state and local government sector data in parallel with federal data. - Transactions of the Federal Reserve Board are not included in the budget. - Neither the President’s budget nor the budget resolution has the force of law. - No final budget document is prepared to reflect expected outlays resulting from congressional budget decisions. - Estimated outlays and receipts are presented at two points: - (1) The President’s budget (January/February) with up-to-date data on current and coming fiscal years. - (2) The Mid-Session Review (required in July) with revised estimates. - State and local government data are shown in the federal budget on a NIPA basis only in aggregate and with a two-year lag. ### Defense expenditure reporting - Defense expenditure accounts for about one-half of the budget that must be annually appropriated. - The total appropriation by the Department of Defense is reported in the budget, but detailed information on some defense activities (e.g., CIA and NSA budgets) is not provided. - The 2003 and 2004 budget documents provide extensive information on defense policies and strategies. - The budget Appendix lists details for roughly 100 separate defense accounts, including dollars requested, object class breakouts, personnel numbers and expenditures. - Defense capital expenditure is budgeted on an obligation basis; outlays are recorded for cash payments that liquidate obligations. ### Fiscal aggregates, historical series, and projections - Budget document reports: - main fiscal aggregates for two years prior to the budget year, - estimates for the current fiscal year, - projections for the budget year and four years beyond. - Data are presented on a “policy” basis (assuming the President’s policies are adopted) and a current-service basis (assuming unchanged policies). - Analytical Perspectives provides aggregate projections of the budget for about 75 years in the “Stewardship” chapter. - Historical Tables provide series extending back to 1940 or 1962 for many items. - The CBO presents data for two years prior and four years after the budget year and by recent convention for nine years past the budget year; OMB limits forward estimates to the budget year and the following four years. - Both OMB and CBO publish mid-session budget reviews; CBO and OMB share data but make estimates independently. ### Contingent liabilities, federal credit, and budgeting for risk - Contingent liabilities are not routinely reported in the budget document, although long-term costs of loan and loan guarantee programs are explicitly budgeted under the Federal Credit Reform Act of 1990. - The budget does not include a comprehensive list of contingent liabilities. - The Financial Report of the United States Government provides an ex-post statement of “Commitments and Contingencies” with comprehensive coverage of contingent liabilities (but no estimate of litigation costs). - Deposit and pension insurance programs of the FDIC and PBGC are not budgeted on an accrual basis and no contingent liabilities associated with these programs are reported in the budget. - Box 3 observations: - The unified budget includes an appropriation to cover the net present value of subsidies of credit programs; actual cash transactions are made through nonbudgetary accounts reported in the budget Appendix. - Deposit-insurance schemes, pension guarantees, and disaster insurance are treated differently from credit programs. - Risks from GSE operations are considered private risks; implicit subsidies from sponsorship are not regularly declared in budget presentations. ### Tax expenditures - Estimates of significant tax expenditures are included in the budget and published annually by the JCT. - Analytical Perspectives includes a chapter outlining all significant tax expenditures. - The 2004 budget included the cost of 137 different income tax expenditures. - The actual 2002 cost of these tax expenditures ranged from less than $10 million to around $100 billion (for the exclusion of employee contributions for medical insurance). - Cost of tax expenditures is presented for the past two fiscal years, the budget year, and the following four years. - For the first time in the 2004 budget, the Department of the Treasury made an analytical comparison between the “normal” income tax base, a comprehensive income tax base, and a consumption base; tax expenditure estimates were also shown relative to a consumption tax base. - The JCT publishes an independent estimate five years into the future using the normal income tax baseline. ### Quasi-fiscal activities and GSEs - Quasi-fiscal activities of GSEs and government corporations are extensively analyzed but not explicitly discussed in the budget. - Although GSEs do not receive explicit subsidies or federal guarantees, they benefit from an implicit federal guarantee that yields lower-cost access to capital markets and tax/regulatory advantages. - A CBO study estimated the subsidy element was worth $6.5 billion to Fannie Mae and Freddie Mac in 1995, but only $4.4 billion was passed on to home buyers through lower mortgage rates. - Financial operations of GSEs are included in the Appendix but the statements are not reviewed; CBO policy alternatives (e.g., elimination of implicit guarantee) are not presented in presidential or congressional budget processes. ### Federal debt and financial assets - President’s budget includes extensive discussion of debt implications and historical debt data; CBO’s The Budget and Economic Outlook focuses on past, present, and future debt. - Common measures: - debt held by the public, - gross federal debt, - debt subject to limit. - Example figures for 2002: - debt held by the public totaled $3.54 trillion, - gross debt was $6.2 trillion, - debt subject to limit was $6.16 trillion. - President’s budget does not include a comprehensive statement of financial assets; the annual Financial Report of the United States Government includes a complete balance sheet. ### Publication practices, timetables, and openness - The United States complies with the IMF Special Data Dissemination Standard. - Budget documents and Mid-Session Review are published by OMB per the Budget and Accounting Act timetable. - CBO’s major budget reports (published in January and August) are required by the Budget Act and provided free to the public. - The Monthly Treasury Statement, Monthly Statement of Public Debt, and Daily Treasury Statement are published at regular times. - The Financial Report of the United States Government is required by Title 31 U.S.C., paragraph 331(e)(1), to be published by March 31. - Continuing resolutions: - continuing resolutions were required in eight of the past 10 fiscal years, - and in 24 of the 27 years since the Budget Act became law. - 2004 documentation example: five main volumes with a budget Appendix of more than 1,200 pages; Analytical Perspectives around 700 pages. - Presidential amendments can be sent to Congress until the end of the summer (example: at end-September 2002 there had been a total of 24 such amendments). *Source: _cr03243 - 16. Budget documentation covers all central government fiscal activities, but* --- ### Presidential discretion and budget presentation - Under The Budget and Accounting Act of 1921, the President may provide the budget proposal "in such form and detail as he sees fit." - For each account the budget includes: - Current appropriation, with proposed changes; - brief descriptions of the account and programs, with a small amount of performance information; - a schedule classifying the account into programs and specifying funding sources; - a table showing the economic classification for each account. - Accounts include federal funds, trust funds (including trust revolving funds), and deposit funds (nonbudgetary). - Budget documents are available free on the OMB website or may be purchased from the Government Printing Office as hard copy or on CD-ROM. ### Budget timetable and process - Key dates: - Between the first Monday in January and the first Monday in February: The President transmits the budget. - On or before February 15: The CBO issues annual report to the budget committees. - April 15: Action to be completed on the congressional budget resolution. - June 30: Actions on appropriations to be completed by the House. - July 15: The President transmits the Mid-Session Review. - October 1: The fiscal year begins. - The unified budget presentation is broadly compatible with GFSM 2001 but differences exist: incorporation of commercial entities on a net basis; cash rather than accrual treatment of most transactions; treatment of insurance and credit programs; treatment of deposit insurance guarantees. ### Appropriations, outlays, and fiscal indicators - Spending for discretionary programs is determined in the annual appropriations process; entitlement program spending is generally determined by enabling laws. - "In total, only about 35 percent of total federal spending is controlled through the appropriations process." - There are typically 13 appropriation bills reflecting appropriations sub-committee structure. - In the President’s 2004 budget, total outlays were budgeted at $2.2 trillion, made up of $1.8 trillion from new 2004 authority and $421 billion in authority carried forward from prior years. - "Almost 20 percent of the current year’s authority is expected to be carried forward to the future, making a total of nearly $1.1 trillion that is to be carried forward to fiscal year 2005 and beyond." - The unified budget deficit or surplus is the main indicator of the fiscal position, corresponding broadly to GFSM 2001 concept of overall central government balance. - OMB is required to make five-year forecasts based on maintenance of current policies; CBO provides contesting economic assumptions and often longer projections (10 years since 1996). ### Medium- and long-term projections, baselines, and sensitivity - Since 1996, the CBO has consistently provided 10-year budget projections; OMB sometimes provides 10-year projections but 2003 and 2004 budgets limited forecasts to the budget year and following four years. - The budget includes very long-term projections (about 75 years) in Analytical Perspectives. - Baseline forecasting assumptions differ: OMB presumes measures will be enacted; CBO forecasts effects of current laws. - The BEA required OMB to report impact of legislation affecting spending or receipts; BEA rules expired in September 2002, but the President’s 2004 budget continues some BEA reporting aspects. - Budget documents analyze sensitivity of estimates to changes in economic variables and disclose main fiscal risks; a table of “rule-of-thumb” sensitivities shows how changes in real economy, inflation, and interest rates affect major aggregates. ### Program performance, PART, and GPRA - GPRA requirements produce strategic plans, annual performance plans, and annual program performance reports; a government-wide performance plan is produced annually as part of the President’s budget. - The Administration developed the Program Assessment Rating Tool (PART) to evaluate program results, management, purpose and design, and strategic planning. - PART uses a three-level score (green, yellow, red) on five PMA dimensions: human capital; competitive sourcing; financial performance; E-government; and budget and performance integration. - Performance measurement challenges: - One-half of the 234 programs reviewed under PART in 2004 could not adequately demonstrate results sufficient to judge effectiveness. - Of those that could demonstrate results: - about 12 percent were deemed to be effective; - 48 percent moderately effective; - 29 percent adequate; - 10 percent ineffective. *Source: _cr03243 - 25. The President has considerable discretion in the way he sets forth the budget proposal* --- ### Internal control weaknesses and GAO findings - GAO reported “material weaknesses” in many agencies’ internal control systems. - GAO (October 2002) reported six recurring financial system problems, with recurrence counts among 24 CFOA agencies: - 14 agencies had nonintegrated financial-management information systems; - 13 had inadequate reconciliation procedures between accounting and banking information; - 12 had a lack of timely and accurate reporting; - 8 failed to comply with the prescribed general standard ledger; - 14 failed to adhere to federal government accounting standards; - 20 had weak security over their information systems. - Seven agencies were not in substantial compliance with all three 1996 FFMIA requirements. - Number of unqualified audit opinions increased: 11 out of 24 departments and major independent agencies in 1997; 18 in 2000 and 2001; and 21 in 2002. - For 2002, financial reports were required by February 1, 2003. ### Procurement, employment, and pay procedures - Procurement regulations require open tendering; selective limited tendering is exceptional and regulations are published for public comment in the Federal Register. - Employment and pay procedures are clearly defined; agency compliance is monitored and noncompliance addressed through corrective action. - Some observers view agencies as lacking sufficient flexibility over personnel actions. - National Commission on the Public Service (Volcker Commission) report (January 2003) recommended greater flexibility for agencies. ### Treasury cash accounts, agency reporting, and audit - Treasury cash accounts are accurate, reliable, and audited. - Many agencies, notably the Department of Defense, have problems reconciling their fund balances with the treasury balance. - Examples of agency reporting shortcomings: - Department of Education uses cumbersome manual and automated processes for financial information. - Department of Justice does not process accrual-based financial transactions on an ongoing basis. - Agencies have many efforts to implement or upgrade financial systems to address weaknesses. ### IRS confidentiality and oversight - IRS is a subunit of the Department of the Treasury, headed by an independent commissioner appointed for a 5-year term under IRSRRA of 1998; the IRS Oversight Board recommends candidates. - Internal Revenue Code establishes confidentiality of tax returns and tax information with limited disclosure conditions. - Section 6103 (g) requires quarterly reporting to JCT when the President, White House employees, or heads of certain agencies request information on individual taxpayers. ### Consolidated financial statements and audit opinions - United States Code (Section 1106 of Title 31) requires a supplemental mid-year budget update transmitted to Congress. - CBO required under the Budget Act to present a mid-term update using CBO methodology. - United States has issued audited consolidated financial statements for the past six years and unaudited consolidated financial statements since 1974. - Objective is to issue the consolidated financial report for 2004 prior to December 15 (75 days after year-end rather than six months after year-end required by statute). - The 2002 GAO report contains an audit disclaimer stating lack of ability to determine reliability of significant portions of the accompanying fiscal years 2002 and 2001 consolidated financial statements. - The 2002 financial report includes two new statements reconciling net operating cost and unified budget deficit or surplus, and showing changes in cash from the budget and other activities. ### Systemic challenges and accounting systems - The size and complexity of the federal government pose major problems for obtaining government-wide financial management information. - The 24 CFOA agencies operate about 2,600 financial management systems: 1,100 in civilian agencies and 1,500 or more in the Department of Defense. - In 1998, the 24 CFOA agencies operated more than 700 financial management systems, and 1,100 financial management applications, with some individual agencies operating more than 150 systems. - Multiplicity of systems and difficulty adapting commercial off-the-shelf systems have resulted in lack of uniformity and accuracy of agency-level data. ### External audit independence and inspector general oversight - External audit is fully independent of the executive branch; GAO is the principal congressional auditor with fixed 15-year tenure for the comptroller general. - GAO publishes more than 1,000 reports annually and provides many congressional testimonies. - Most agencies (60 in all) have an inspector general who conducts internal audit and provides reports to the agency head and Congress. - Agency annual financial statements are audited by the agency’s inspector general or by an independent auditor selected by the inspector general. - In late 2002, the Judiciary ruled that GAO could not compel the executive branch to produce certain documents, potentially reducing its effectiveness. *Source: _cr03243 - 37. Internal control procedures in government agencies are insufficiently effective.* --- ### Congressional oversight and audit follow-up - Each congressional committee and subcommittee may request and follow up on external audit reports. - Appropriations committees tend not to engage in detailed oversight due to workload and time constraints; authorizing committees are better positioned but lack political incentives historically. - Most active oversight committees: House Government Reform and Oversight Committee (subcommittee on Government Management and Technology) and Senate Governmental Affairs Committee; these committees control few resources and have limited capacity to effect management reforms. - Executive branch follow-up: annual audit process begins with reassessment of prior year audit findings; OMB Circular A-50 requires timely follow-up by management, but results have been mixed with repeated findings in some agencies. ### External scrutiny of macroeconomic models and forecasts - Executive and legislative branches each develop independent forecasts; no formal external scrutiny of models is required. - Executive forecast prepared by Council of Economic Advisors, Treasury, and OMB; CBO forecast developed after input from a bipartisan panel including Nobel-laureates. - CBO’s track record in forecasting real economic growth has generally been superior to the average of private forecasters over almost 30 years since CBO creation. - Both CBO and the executive branch provide forecasts at least twice a year. ### Independence and compilation of fiscal statistics - Adequate assurance of independence is given for compilation of fiscal statistics. - No single national statistics office; fiscal source data collected by Treasury and OMB and subject to accounting and audit controls. - National accounts and GFS presentations are compiled by the Bureau of Economic Analysis, under contract to the Treasury. - BEA uses Treasury source data to prepare national accounts estimates, then uses same source data with some national accounts data to derive GFS estimates. - Congress, with GAO assistance, provides independent oversight for statistical activities. ### IMF Staff commentary — overall assessment and recommendations - United States is fully compliant with most elements of the fiscal transparency code and sets best practice standards in many areas. - Budget processes in the United States are among the most open in the world; Congress plays a central role and deliberations are fully disclosed. - Public budget documentation excels in scope and analytical quality but is complex and voluminous. - Suggested improvements include: - Strengthening the congressional budget process and considering budget responsibility legislation to establish a medium- and long-term fiscal framework replacing the BEA. - Reporting an internationally comparable measure of the budget balance on a GFSM 2001 basis to supplement the unified budget. - Considering accrual budgeting over the longer term, while approaching cautiously given institutional context. - Including an overview of state and local government finances in the President’s budget. - Annually assessing costs and risks of quasifiscal activities of GSEs and government corporations and assessing implicit subsidies from below-market pricing. - Providing comprehensive reporting of contingent liabilities and an overall summary of fiscal risks in Analytical Perspectives. - Considering legal changes to permit the Administration and JCT to define a tax baseline on broader criteria to improve tax expenditure transparency. - Ensuring GAO audit findings are systematically followed up, possibly via a public accounts committee, and simplifying financial management legislation to improve internal controls. - Increasing emphasis on program performance and moving toward full cost accounting and convergence of budgetary and financial presentations over time. - Guard against weakening fiscal transparency; recent decisions (accounting for 2001 and 2003 tax cuts, foregone 10-year projections, exclusion of war cost estimates from the 2004 budget) have reduced information available on fiscal policy and risk undermining credibility. *Source: IMF staff commentary and related sections in the provided content unit.* *IMF staff report excerpt (content unit: _cr03243)* ### EXECUTIVE SUMMARY ### _cr03243 - EXECUTIVE SUMMARY ### Executive overview - The report assesses fiscal transparency practices in the United States against the requirements of the IMF Code of Good Practices on Fiscal Transparency, based on discussions with the authorities, their responses to the IMF fiscal transparency questionnaire, and other sources. - The United States is fully compliant with most elements of the Fund’s Code of Good Practices on Fiscal Transparency, and sets best practice standards in many areas. - The constitution provides a strong framework that clearly defines the roles of the executive and legislative branches in fiscal management. Congress plays a central role in shaping the budget, producing a highly open process. State and local governments have clearly defined fiscal responsibilities, operate independently from the federal government, and are subject to market discipline. - Budget documentation is easily accessible to the public, timely, comprehensive, and reliable, and it excels in its scope and quality of analysis. ### Major findings — strengths - The unified federal budget is the focus of fiscal policy formulation, execution, and analysis in the United States. - Coverage of the unified budget corresponds fairly closely to international statistical reporting standards for central government. - Information on major trust funds, most notably the Social Security and Medicare funds, is made available in the unified budget presentation and is included in the budget totals; policy issues linking Social Security and general fiscal policy are discussed in the budget and vigorously debated by the legislature and media. - Privatization policies and processes are open. The Administration’s President’s Management Agenda (PMA) includes a competitive sourcing initiative aimed at increasing outsourcing for provision of public services. - The Federal Reserve System is independent, does not play a fiscal role or carry out quasi-fiscal activities, and continues to report to Congress (Humphrey-Hawkins reports), despite the Full Employment and Balanced Growth Act having expired in 2000. ### Major findings — weaknesses and challenges - There is a lack of clarity about the longer term direction of fiscal policy. This partly reflects the size of the federal government and the complexity of the congressional budget process. - Recent developments noted as contributing to short- to medium-term uncertainty: - Expiration of the Budget Enforcement Act (BEA). - Failure of Congress to pass a budget resolution for FY 2003. - Recent uncertainty regarding the permanence of tax cuts and the costs of the war in Iraq. - The coverage of the unified budget does not extend to general government as defined in the Government Finance Statistics Manual 2001 (GFSM 2001) because it does not include state and local governments. - The budgetary treatment of commercial-type activities of government differs from GFSM 2001 recommendations: - Government corporations such as the United States Postal Service (USPS) and the Tennessee Valley Authority (TVA) are included on a net basis (gross outlays minus collections from business activities). - Sales and outlays for general government entities are shown net rather than in gross terms recommended by GFSM 2001. - Some user charges and fees are set below market value (examples cited include grazing fees, mining and timber receipts), and the budget does not show the value of these subsidies. - Government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac are reported but are not included in the unified budget. - The PMA competitive sourcing initiative has registered little progress: the goal is for agencies to bid competitively for up to 50 percent of positions related to functions that are not “inherently governmental,” but no agency had met the criteria and all agencies were rated “red” on the Administration’s management “scorecard” at the time of reporting. ### Policy recommendations and suggested transparency improvements - Consider budget responsibility legislation to replace the BEA to provide a basis for more systematic incorporation of longer-term considerations into the budget process. - Strengthen fiscal transparency by: - Reporting an internationally comparable measure of the budget balance to supplement the unified budget presentation. - Providing an overview of state and local government finances as part of the federal budget presentation. - Conducting an annual assessment of the costs and risks associated with quasi-fiscal activities. - Including a comprehensive statement on fiscal risks in the budget documents. - Reconsidering the legal basis for tax expenditure reporting. - Ensuring that audit reports of agencies are followed up. - Increasing emphasis on program performance. - Paying more attention to the full cost of providing government services. ### Institutional arrangements and technical notes - The principle of the unified budget was established in 1967 by the President’s Commission on Budget Concepts and adopted for fiscal year 1969. - The fiscal year in the United States begins on October 1. All year references to the federal budget and to federal budget documents in this report are to fiscal years beginning on October 1 of the previous calendar year (i.e., 2003 refers to fiscal year 2003, which runs from October 1, 2002 to September 30, 2003). - For GFS Yearbook reporting, the United States prepares Government Finance Statistics reports on federal government and state and local government finances; these are published with a lag of approximately two years. - The unified budget covers trust funds (funds designated in law as such) that earmark revenues for specific purposes but do not represent money held in trust for nongovernmental entities. - Some small funds that truly hold assets owned by nongovernmental entities are treated as nonbudgetary and excluded from the federal budget. - Definitions referenced: - GFSM 2001 guidance on public corporations, quasi-corporations, and recording sales/outlays in gross terms is noted as differing from certain U.S. budget treatments. - GFSM 2001 (2.14–2.18) definition of market/public entities and GFSM 2001 recommendations on gross recording are cited as the benchmark for comparability. ### Process and review context - Discussions on fiscal transparency were held in Washington D.C., from November 2002 to February 2003. The staff team comprised Messrs. Hemming (head), Allan, Brumby, and Prakash (all FAD), Ms. Ivaschenko (WHD), and Mr. Joyce (consultant). - The team met with officials from the Office of Management and Budget (OMB), the Department of the Treasury, the Department of Health and Human Services, the Library of Congress (Congressional Research Service), the General Accounting Office (GAO), the Department of Commerce (Bureau of Economic Analysis), and the Congressional Budget Office (CBO). *IMF staff executive summary from _cr03243 - EXECUTIVE SUMMARY* ### 7. Processes governing regulation of the nonbank private sector are open, but they ### 7. Processes governing regulation of the nonbank private sector are open, but they are quite complex. ### Regulatory rulemaking and oversight - Numerous laws provide for regulation in areas such as public health, food quality, environmental protection, and workplace safety. - Specific rules fill in details missing in statutory authority and are published in the Federal Register; there is a public comment period of at least 60 days. - These rules are subject to review and comment by interested parties and may be revised based on input. - The OMB, through OIRA, has increasingly required cost-benefit analyses of proposed regulatory statutes before publication. - Since 1996 proposals must, under the Unfunded Mandates Reform Act (UMRA) of 1995, include a CBO estimate of their cost to the private and intergovernmental sector. - Between 1996 and 2001, the CBO reviewed 3,338 bills for the presence of private sector mandates, finding 488 that included such mandates, and 118 with mandates above a $100 million threshold. - OIRA estimated that the total cost of federal regulations cleared by the OMB from April 1995 to September 30, 2001 was $51–54 billion, while total annual benefits ranged from $49–$102 billion. These regulations may also have many nonquantifiable costs and benefits. ### Government equity and financial asset reporting - Financial assets of government corporations that are claims on the public, as well as their liabilities, are reported in the Financial Report of the United States Government. - Many of these assets relate to different kinds of credit, including mortgages and mortgage-backed securities issued by the Government National Mortgage Association and the Federal Housing Administration. - The Financial Report of the United States Government also includes statements of “stewardship” assets, investments, and responsibilities (e.g., actuarial estimates of future Social Security obligations). - While GSEs are large, they are not owned or deemed to be controlled by the federal government and therefore are not included in the Financial Report of the United States Government. - Holdings of government securities by government corporations and their cash balances with the Treasury are eliminated in the process of consolidation. - Other forms of financial asset holding and guarantees by agencies exist (examples in the source include Veterans Affairs, Agriculture, the Office of Student Financial Assistance, the Small Business Administration, the Export-Import Bank, and the Overseas Private Investment Corporation). ### Allocation of responsibilities across government levels - The powers and independent status of states and localities are clearly defined and protected by the Constitution, with local governments deriving powers in practice from state governments. - Budgets of state and local governments are generally not reviewed at higher levels; the federal government has no role in reviewing states’ budgets. - Federal grant policy influences state fiscal activities; some programs (e.g., Medicaid) are jointly operated by federal and state governments. - Federal government may place conditions on the receipt of federal assistance to encourage state policy choices; federal regulations have in the past led to “unfunded mandates.” - UMRA requires the CBO to estimate the cost of legislation that would impose mandates on state, local, or tribal governments; between 1996 and 2001, CBO found that 405 of bills reviewed included such mandates, but only 36 included mandates that exceeded a $50 million threshold. - Overall, the federal government collected almost two-third of all general government revenue in 2000, compared to about one-third for state and local governments combined. - Federal aid represented 20 percent of all state revenue in 1998; local governments derived fully one-third of their 1998 revenue from higher levels of government; more than 90 percent of assistance provided to local governments came from state governments (the majority to support local education). ### Intergovernmental fiscal relations and state fiscal discipline - Grants are transparent: reported as expenditure by the provider and revenue by the recipient. - Differences between the timing of the federal fiscal year and that of most state and local governments can complicate tracking funds. - State finances are disciplined in three ways: - Constitutional or statutory balanced-budget requirements for state general funds (Vermont is an exception). The nature of the balanced-budget requirement differs across states. - Capital market discipline: most states borrow to finance capital spending, creating incentive to maintain revenue–spending balance over the business cycle. - Tax competition limits tax-raising capacity; state tax rates are to some extent linked to federal tax rates. - Local government finances are constrained primarily by the capital market and limitations imposed by states. - Fiscal-year timing: 46 out of 50 state governments have fiscal years that begin on July 1; the federal fiscal year begins on October 1. ### Constitutional roles and the congressional budget process (Box 2) - The executive, legislative, and judicial branches have roles clearly defined by the Constitution; checks and balances are a defining feature of U.S. fiscal management. - Laws governing revenue raising and authorizing expenditure must be passed by both houses of Congress and approved by the President; the President may veto, and vetoes can be overridden by a two-third vote of both houses. - Key legislative milestones and laws affecting the budget process include: - Budget and Accounting Act of 1921 (presidential budget submission requirements). - Congressional Budget and Impoundment Control Act of 1974 (Budget Act): established the budget resolution and the CBO; advanced deadlines (May 15, later April 15) for resolution agreement. - Balanced Budget and Emergency Deficit Control Act of 1985 (Gramm-Rudman-Hollings) signaled consensus on budget balance. - Budget Enforcement Act (BEA) of 1990: established statutory caps on discretionary spending and PAYGO; BEA strictures expired after 2002. - Government Performance and Results Act (GPRA) of 1993. - Historical fiscal figures and projections: - Mandatory spending exceeded 50 percent of the budget by 1974 (up from less than 30 percent in 1962). - The overall fiscal position improved every year from 1992 (deficit $290 billion) to 2000 (surplus $236 billion). - By 2000, political consensus favored running surpluses equivalent to Social Security trust fund surpluses; this broke down after subsequent tax cuts, recession and stock market decline, and additional post-September 11 spending. - The CBO projected deficits at least through 2013. - Congress failed to adopt a budget resolution for 2003, creating process disarray; the President’s 2004 budget presentation included proposals that could lead to legislation replacing the BEA, and Congress adopted a budget resolution for 2004. ### Fiscal management legal and administrative framework - The Budget and Accounting Act specifies the content of the President’s budget; the statutory deadline is the first Monday in February. - OMB issues Circular A-11 outlining detailed information required in budget requests. - The President’s budget increasingly includes program performance information as required by GPRA. - Budget execution is governed by numerous laws covering constraints on spending, procurement, and information technology management, including: - Anti-Deficiency Act of 1998 (as amended and codified in the United States Code, Chapters 13 and 15 of Title 31): provides administrative and criminal penalties for overspending. - Federal Acquisition Reform Act of 1996. - Information Technology Management Reform Act of 1996. - All collections by federal officers and employees are deposited and held by the Department of the Treasury, except for small amounts otherwise specified by law. - OMB apportions available resources throughout the fiscal year; agencies must obligate funds before they can be spent. - The Treasury shows agencies their available fund balances by account each month and is moving toward a daily basis. ### Budget coordination, reporting, and extrabudgetary activities - The unified budget reports transactions on a consolidated basis, including all funds; there are no significant extrabudgetary activities as defined in the Manual on Fiscal Transparency. - Special revenue funds (receipts earmarked for specified purposes) are included in the budget. - Just over one-third of the budget (discretionary spending) is annually appropriated. - Almost all funds are administered by the Treasury and can only be spent as a result of specific laws and budget execution procedures. ### Taxation system complexity and administration - Tax collection is governed by the Internal Revenue Code, which is widely acknowledged to be complex. - Current Internal Revenue Code structure: - 693 sections applicable to individuals; - 1,501 applicable to businesses; - 445 applicable to tax-exempt organizations, employee plans, and governments. - The Code contains about 1.4 million words. - JCT has identified sources of complexity, including the use of the tax system to advance economic and social objectives and unintended interactions with other statutes. - Regulations relating to administrative procedures are drafted for public comment and finalized after oral and written input from affected taxpayers. - The IRS makes tax forms and instructions available in hard copy and electronic form. - Electronic filing increased from 15 million in 1996 to more than 40 million in 2001. - Recent statistics indicate taxpayers get wrong answers to their tax questions 24 percent of the time. ### Public servant ethics and conduct - Public employees are provided with clear legal and administrative guidance concerning ethics and conflict of interest. - Relevant legislation includes the Ethics in Government Act of 1978; the Office of Government Ethics Reauthorization Act of 1988; the Ethics Reform Act of 1989; and the Hatch Political Activities Act Reform Amendments of 1993. - The Office of Government Ethics provides information and official opinions on ethical issues; each federal agency has an ethics officer to administer agency ethics programs. - Agency ethics programs include reviewing financial disclosure reports, ethics education and training, counseling and advisory services, and monitoring administrative actions and sanctions for ethics violations. *Source: IMF staff report excerpt (content unit: _cr03243 - 7. Processes governing regulation of the nonbank private sector are open, but they)* ### 16. Budget documentation covers all central government fiscal activities, but ### 16. Budget documentation covers all central government fiscal activities, but provides only limited information on general government. ### Coverage of budget documentation and general government - The President’s budget presented to Congress in late January/early February gives the unified budget presentation of proposed fiscal activity of the federal government for the year. - Data on state and local taxes and spending are not included with the budget; NIPA reports include data on the contribution of the state and local government sector in parallel with federal government data. - Transactions of the Federal Reserve Board are not included in the budget. - Neither the President’s budget nor the budget resolution has the force of law. - No final budget document is prepared to reflect expected outlays resulting from congressional budget decisions. - Estimated budget outlays and receipts data are presented at two points in the budget process: - (1) The President’s budget (presented in January/February) includes up-to-date data on the current budget year’s receipts and expected outlays, together with the budget proposed for the coming fiscal year. - (2) The Mid-Session Review (required in July) includes revised estimates for the same years. - State and local government data are shown in the federal budget document on a NIPA basis only in aggregate and with a two-year lag. ### Defense expenditure reporting - Defense expenditure accounts for about one-half of the budget that must be annually appropriated. - The total appropriation by the Department of Defense is reported in the budget, but detailed information on some defense activities (such as the budgets for the Central Intelligence Agency and the National Security Agency) is not provided. - The 2003 and 2004 budget documents provide extensive information on defense policies and strategies. - The budget Appendix lists details for the roughly 100 separate accounts that make up the defense budget, including: - dollars requested, - object class breakouts, - personnel numbers and expenditures. - Congress acts annually on two appropriation bills dealing with defense, in addition to passing an annual authorization bill. - Defense capital expenditure is budgeted on an obligation basis; outlays are recorded for cash payments that liquidate obligations. ### Fiscal aggregates, historical series, and projections - The budget document reports: - the main fiscal aggregates for two years prior to the budget year, - estimates for the current fiscal year, - projections for the budget year and four years beyond the budget year. - Data are presented on a “policy” basis (assuming the President’s policies are adopted) and a current-service basis (assuming unchanged policies). - The Analytical Perspectives volume: - compares the most recent actual budget data to prior current-service estimates, - provides aggregate projections of the budget for about 75 years in the “Stewardship” chapter. - The Historical Tables volume provides historical data for many budget series, with many series extending back to 1940 or 1962. - The CBO must present similar aggregate estimates and in practice has presented data for two years prior to the budget year and four years after; by recent convention the CBO has provided these data for nine years past the budget year. - The OMB has limited its forward estimates to the budget year and the following four years. - Both OMB and CBO publish mid-session budget reviews updating at least the past two years, the budget year, and the following four years. - The CBO and OMB share data used to prepare forecasts, but estimates are made independently. ### Contingent liabilities, federal credit, and budgeting for risk - Contingent liabilities are not routinely reported in the budget document, although long-term costs of loan and loan guarantee programs are explicitly budgeted. - Since 1990, contingent liabilities associated with federal credit programs are explicitly budgeted for under the Federal Credit Reform Act of 1990: annual outlays for credit programs reported in the budget represent an estimate of the present value of the long-term subsidy cost to the government of loans or loan guarantees issued in that budget year. - The budget does not include a comprehensive list of contingent liabilities. - The Financial Report of the United States Government provides an ex-post statement of “Commitments and Contingencies” with comprehensive coverage of contingent liabilities (but with no estimate of costs arising from litigation) and commitments to future payments arising from long-term contracts. - The federal government has not extended the accrual approach to other programs with substantial future contingent liabilities; examples: - Deposit and pension insurance programs of the Federal Deposit Insurance Corporation and the Pension Benefit Guaranty Corporation are not budgeted on an accrual basis, and no information on contingent liabilities associated with these programs is reported in the budget. - Box 3 (Budgeting for Credit and Risk) observations: - The unified budget includes an appropriation to cover the net present value of subsidies of credit programs; actual cash transactions are made through nonbudgetary accounts reported in the budget Appendix. The NIPA includes only the actual interest cost through these accounts in federal budget aggregates. - Deposit-insurance schemes, pension guarantees, and disaster insurance involve similar risk and subsidy elements but are treated differently in the budget from credit programs (payments recorded when paid and offset by receipts or premiums). - Risks from GSE operations are considered private risks; implicit subsidies from sponsorship are not regularly declared as such in budget presentations despite evidence of implicit contingent liability. ### Tax expenditures - Estimates of significant tax expenditures are included in the budget and are also published annually by the JCT. - Analytical Perspectives includes a chapter outlining all significant tax expenditures. - The 2004 budget included the cost of 137 different income tax expenditures. - The actual 2002 cost of these tax expenditures (in terms of revenue foregone) ranged from less than $10 million to around $100 billion (for the exclusion of employee contributions for medical insurance). - Cost of tax expenditures is presented for the same time period as budget information: past two fiscal years, the budget year, and the following four years. - For the first time in the 2004 budget, the Department of the Treasury made an analytical comparison between the “normal” income tax base, a comprehensive income tax base, and a consumption base; tax expenditure estimates were also shown relative to a consumption tax base. - The JCT publishes an independent estimate five years into the future using the normal income tax baseline. - States have prepared tax expenditure estimates for about as long as the federal government, but not all states do so and methodologies differ substantially among them. ### Quasi-fiscal activities and GSEs - Quasi-fiscal activities embodied in operations of GSEs and government corporations are extensively analyzed but are not explicitly discussed in the budget. - Although GSEs do not receive explicit subsidies or federal guarantees, they benefit from an implicit federal guarantee that provides lower-cost access to capital markets and various tax and regulatory advantages. - A CBO study estimated the subsidy element was worth $6.5 billion to Fannie Mae and Freddie Mac in 1995, but only $4.4 billion was passed on to home buyers through lower mortgage rates. - The financial operations of GSEs and other GSE-related figures are included in the Appendix, but the statements are not reviewed. - The CBO study suggested policy alternatives, including elimination of the implicit federal guarantee of debt; such policy options are not presented or discussed as part of the presidential or congressional budget process. - Government ownership of entities like the TVA provides benefits in terms of access to capital markets; elements of cross-subsidization exist in the postal service. ### Federal debt and financial assets - The President’s budget includes extensive discussion of debt implications and historical debt data. - The CBO’s The Budget and Economic Outlook focuses on past, present, and future debt, with mid-year updates. - The Monthly Treasury Statement of Receipts and Outlays provides more frequent borrowing information. - Common measures: - debt held by the public (most meaningful macroeconomic measure), - gross federal debt (includes debt owed by some parts of government to other parts), - debt subject to limit (statutory limit on level of debt that can be issued by the Treasury). - Multiple definitions can cause confusion. Example figures for 2002: - debt held by the public totaled $3.54 trillion, - gross debt was $6.2 trillion, - debt subject to limit was $6.16 trillion. - The President’s budget does not include a comprehensive statement of financial assets; some information (e.g., face value of direct loans outstanding) is included. - The annual Financial Report of the United States Government includes a complete balance sheet. ### Publication practices, timetables, and openness - The United States complies with the IMF Special Data Dissemination Standard. - Budget documents and Mid-Session Review are published by OMB according to the timetable established in the Budget and Accounting Act. - CBO’s major budget reports (published in January and August) are required by the Budget Act and are provided free of charge to the public. - The Monthly Treasury Statement, Monthly Statement of Public Debt, and Daily Treasury Statement are published at regular specified times. - The Financial Report of the United States Government is required by Title 31 U.S.C., paragraph 331(e)(1), to be published by March 31. - Congress plays a major role in budget formulation; the process is extensively documented and open. - Continuing resolutions are common: - continuing resolutions were required in eight of the past 10 fiscal years, - and in 24 of the 27 years since the Budget Act became law. - The formulation process begins in the spring—at least nine months before the budget is sent to Congress and 18 months before the fiscal year begins. - Since 1975, the congressional budget resolution has established major fiscal aggregates at the start of the budget process. - The transmittal of the President’s budget to Congress is scheduled for the first Monday in February. - 2004 documentation example: five main volumes with a budget Appendix of more than 1,200 pages; Analytical Perspectives around 700 pages. - Presidential amendments can be sent to Congress until the end of the summer (example: at end-September 2002 there had been a total of 24 such amendments). *Source: _cr03243 - 16. Budget documentation covers all central government fiscal activities, but* ### 25. The President has considerable discretion in the way he sets forth the budget ### 25. The President has considerable discretion in the way he sets forth the budget proposal ### Presidential discretion and required budget components - The President has discretion to provide the budget proposal "in such form and detail as he sees fit" under The Budget and Accounting Act of 1921. - For each account the budget includes: - Current appropriation, with proposed changes; - brief descriptions of the account and programs, with a small amount of performance information; - a schedule which classifies the account into its various programs and specifies funding sources; - a table showing the economic classification for each account. - Accounts are: federal funds (comprising the general funds, special funds, public enterprise funds, and intragovernmental funds); trust funds (including trust revolving funds); and deposit funds, which are nonbudgetary. - Budget documents are available free of charge on the OMB website or may be purchased from the Government Printing Office as hard copy or on CD-ROM. ### Budget approval timetable (Box 4) - Between the first Monday in January and the first Monday in February: The President transmits the budget. - On or before February 15: The CBO issues the annual report to the budget committees. - Six weeks after the President’s budget: The congressional committees report budget estimates to the budget committees. - April 15: Action is to be completed on the congressional budget resolution. - May 15: House consideration of annual appropriations bills may begin. - June 15: Action is to be completed on reconciliation. - June 30: Actions on appropriations are to be completed by the House. - July 15: The President transmits the Mid-Session Review. - August 20: The OMB updates the sequestration review report. - October 1: The fiscal year begins. ### Unified budget presentation and differences with GFSM 2001/NIPA - The unified budget presentation is broadly compatible with the GFSM 2001 but there are significant differences. - Coverage of the unified budget is confined to the central government component of general government. - Key differences include: - incorporation of commercial entities on a net basis; - cash rather than accrual treatment of most transactions; - treatment of insurance and credit programs; - treatment of deposit insurance guarantees. - Information is provided on many bases—administrative, programmatic, and functional—and by outlays, obligations, and budget authority for each appropriation and fund account. ### Role of general government and subnational finances - The concept of general government does not play a significant role in fiscal policy formulation for the federal government. - Federal authorities view constitutional separation of powers and market discipline of state and local government finances as making the concept of general government less relevant. - State and local government finances are considered during budget formulation, and federal policy may include actions aimed at supporting or controlling state and local fiscal activity; these are treated in the context of overall national economic policy. ### Appropriations process and scope - Spending for discretionary programs is determined in the annual appropriations process; entitlement program spending is generally determined by enabling laws. - "In total, only about 35 percent of total federal spending is controlled through the appropriations process." - There are typically 13 appropriation bills, reflecting the sub-committee structure of the appropriations committees of Congress. - Each appropriation bill proceeds through subcommittee approval, full committee approval, adoption on the floor, conference committee action, and floor votes to approve the conference agreement. - The President must either approve or not approve appropriation bills in their entirety; line-item veto efforts are discussed (see Box 5). ### Estimating budget outlays and balances - Budget authority is provided for the incurrence and liquidation of obligations; budget authority may be single-year, multi-year, or without time limitation. - Budget authority provided for more than one year is carried forward as an unobligated balance; obligated but unpaid authority becomes the obligated balance; outlays are recorded when an obligation is liquidated. - In the President’s 2004 budget, total outlays were budgeted at $2.2 trillion, made up of $1.8 trillion from new 2004 authority and $421 billion in authority carried forward from prior years. - "Almost 20 percent of the current year’s authority is expected to be carried forward to the future, making a total of nearly $1.1 trillion that is to be carried forward to fiscal year 2005 and beyond." - No document is compiled to give an estimate of expected outlays and receipts after Congress has completed the budget process until the next budget is published; the new budget is published within four months after the scheduled completion of congressional budgetary actions. ### Fiscal indicators, forecasts, and macroeconomic assumptions - The unified budget deficit or surplus is the main indicator of the fiscal position in the budget, corresponding in broad terms to the GFSM 2001 concept of the overall balance of the central government. - On-budget and off-budget balances are distinguished within the total. - Both the OMB (President’s budget) and the CBO (annual report) report budget aggregates in cyclically adjusted terms. - The President’s budget includes substantial discussion of underlying economic assumptions and reconciliation against previous years’ forecasts. - Under the Budget Act, the OMB is required to make five-year forecasts based on the maintenance of current government policies; the CBO provides a set of economic assumptions which “contest” the assumptions of the OMB. - The President’s budget includes a comparison of OMB assumptions with the “Blue Chip Consensus” and with the CBO forecast. - Historically, the CBO’s two-year forecasts are slightly more accurate than the Administration’s, but differences are small. ### Medium-term and long-term projections - Since 1996, the CBO has consistently provided 10-year budget projections. - The OMB has sometimes provided 10-year projections, but the 2003 and 2004 budgets limited the forecast period to the budget and following four years on grounds that years 6–10 were not useful for policy debate. - Cyclically-adjusted balances, core receipts, outlays, and budget authority forecasts are provided for the same period and can be downloaded in Excel files. - The budget includes very long-term projections (i.e., 75 years) in the Analytical Perspectives volume; these projections have been published by the OMB every year since 1993 (except 1994–95). - The CBO produces periodic long-term projections and briefs; trustees of the Social Security and Medicare trust funds provide long-term actuarial estimates annually. ### Distinguishing new initiatives and baselines; BEA and sunset provisions - Estimates of new initiatives and ongoing costs of government policies are clearly distinguished in the budget documents. - The BEA required the OMB to issue a report on the impact of all legislation affecting spending or receipts; BEA rules expired in September 2002, but the President’s 2004 budget continues some reporting aspects of the BEA, including discretionary budget authority and PAYGO aspects. - The President’s budget and CBO reports show the “current services estimate” detailing receipts, outlays, surpluses, and budget authority if no changes were made to laws already enacted. - Baseline forecasting assumptions differ between OMB (presumes measures will be enacted) and CBO (presents baseline estimates forecasting effects of current laws). - Box 6 discusses the treatment of expiring tax provisions (“sunset” provisions) and their effects on baseline projections; examples include the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 with CBO cost estimates noted. ### Sensitivity analysis, contingent liabilities, and accrual considerations - The budget documents analyze sensitivity of estimates to changes in economic variables and disclose main fiscal risks. - A table of “rule-of-thumb” sensitivities shows how changes in the real economy, inflation, and interest rates affect major budgetary aggregates. - There is increasing focus on contingent and longer term liabilities; chapters address creating an accrual-based balance sheet and dealing with long-term obligations not meeting recognition tests for accounting purposes. - Chapter 9 in Analytical Perspectives of the 2004 budget discusses contingent liabilities from federal credit and insurance programs. ### Program objectives, performance reporting, and PART - Objectives of major programs are announced and actual progress is reported against these objectives under GPRA requirements for strategic plans, annual performance plans, and annual program performance reports; a government-wide performance plan is produced annually as part of the President’s budget. - The Administration has determined GPRA information has been of little relevance to the budget process and developed the Program Assessment Rating Tool (PART) to evaluate program results, management, purpose and design, and strategic planning. - PART uses a three-level score (green, yellow, and red) on five dimensions of performance in the PMA: human capital; competitive sourcing; financial performance; E-government; and budget and performance integration. - Performance measurement remains work in progress: "One-half of the 234 programs reviewed under PART in 2004 could not adequately demonstrate results sufficient to judge whether they were effective or not." - Of those that could demonstrate results: - about 12 percent were deemed to be effective; - 48 percent moderately effective; - 29 percent adequate; - 10 percent ineffective. *Source: _cr03243 - 25. The President has considerable discretion in the way he sets forth the budget* ### 37. Internal control procedures in government agencies are insufficiently effective. ### 37. Internal control procedures in government agencies are insufficiently effective ### Internal control weaknesses and GAO findings - The accounting system, properly applied, is capable of generating reports on accounts payable; the federal government standard general ledger codes 2110 “Accounts payable” and 2216 “Pension benefits due and payable to beneficiaries.” - The GAO reported substantial problems described as “material weaknesses” in many agencies’ internal control systems. - GAO (October 2002) reported six recurring financial system problems, at least one of which was reported in 20 of 24 Chief Financial Officers’ Act (CFOA) of 1,990 agencies. Major problems reported: - 14 agencies had nonintegrated financial-management information systems; - 13 had inadequate reconciliation procedures between accounting and banking information; - 12 had a lack of timely and accurate reporting; - 8 failed to comply with the prescribed general standard ledger; - 14 failed to adhere to federal government accounting standards; and - 20 had weak security over their information systems. - Seven agencies were reported not to be in substantial compliance with all three 1996 FFMIA requirements—financial management system requirements, applicable federal accounting standards, and the standard general ledger. - Despite weaknesses, the number of unqualified audit opinions increased: 11 out of 24 departments and major independent agencies in 1997; 18 in 2000 and 2001; and 21 in 2002. - For 2002, financial reports were required by February 1, 2003, a month earlier than in previous years. ### Procurement, employment, and pay procedures - Procurement regulations require use of open tendering procedures; selective and limited tendering may be used only on an exceptional basis and in accordance with regulations. - Regulations must be published for public comment in the Federal Register and are consistent with the Agreement on Government Procurement of the World Trade Organization; procedures are subject to challenge by any interested supplier. - Government employment and pay procedures are clearly defined and observed; statutory rates and comprehensive administrative guidance relate responsibilities to pay rates. - Agency compliance with rules is monitored and noncompliance is addressed through corrective action. - Some observers believe agencies lack sufficient flexibility over personnel actions such as hiring and compensation. - The National Commission on the Public Service (Volcker Commission) report Urgent Business for America: Revitalizing the Federal Government for the 21st Century (January 2003) made recommendations to provide greater flexibility to agencies for personnel practices. ### Treasury cash accounts and agency financial reporting - The treasury cash accounts are accurate and reliable and are audited. - A number of agencies, and the Department of Defense in particular, have problems reconciling their fund balance with the treasury balance. - According to the GAO, most agencies are not able routinely to produce reliable, useful, and timely financial information. - Examples of agency practices: - The Department of Education uses a cumbersome combination of manual and automated processes to produce financial information. - The Department of Justice does not process accrual-based financial transactions on an ongoing basis. - Across government, agencies have many efforts underway to implement or upgrade financial systems to alleviate long-standing weaknesses. ### IRS legal protection and confidentiality - The IRS is a subunit of the Department of the Treasury, headed by an independent commissioner appointed by the President with the advice and consent of the senate. - Under the Internal Revenue Service Restructuring and Reform Act (IRSRRA) of 1998, the commissioner is appointed for a 5-year term and may be reappointed. - The IRS Oversight Board, established under IRSRRA, recommends candidates for IRS commissioner to the President. - The Internal Revenue Code establishes a general rule of confidentiality of tax returns and tax information, with limited disclosure conditions. - Section 6103 (g) establishes that the President, White House employees, or heads of certain other agencies may request information on individual taxpayers for specific reasons; the President or head of any agency making such a request is required to file a quarterly report with the JCT identifying the taxpayer and reasons for the requests. ### Budget updates and audited consolidated financial statements - United States Code (Section 1106 of Title 31) requires a supplemental mid-year budget update transmitted to Congress with revised estimates of the budget surplus, receipts, outlays, and budget authority. - The CBO is required under the Budget Act to present a mid-term update using CBO methodology and assumptions; in accordance with its mandate the CBO report makes no recommendations. - The United States has issued audited consolidated financial statements for the past six years and unaudited consolidated financial statements since 1974. - The objective is to issue the consolidated financial report for 2004 prior to December 15—that is, 75 days after year-end rather than the six months after year-end required by statute. - The financial statements are audited by the GAO. The 2002 GAO report contains an audit disclaimer stating a lack of ability to determine the reliability of significant portions of the accompanying fiscal years 2002 and 2001 consolidated financial statements. - The 2002 financial report includes two new statements reconciling net operating cost and the unified budget deficit or surplus, and showing changes in cash from the budget and other activities. ### Assurances of integrity, accounting practices, and systemic challenges - Aggregate budget data are reliable and forecasts are scrutinized; there is a legal requirement to compare budget year estimates with subsequent actual receipts and outlays, with results presented in Analytical Perspectives each year. - Mechanisms for controlling outlays against budget authority are effective and rigorously applied. - Accounting practices and policies are clearly described for budgetary accounting and financial accounting; the federal budget is on an obligation basis and OMB reports on commitments and on cash payments and receipts. - Agencies also prepare accrual-basis financial statements each year that are consolidated in the Financial Report of the United States Government. - Budgetary accounting standards are explained in an annual chapter entitled “Budget Systems and Concepts” in Analytical Perspectives. - Accrual basis accounting standards are being developed at both federal and state levels; federal financial accounting policies are summarized each year in a note to the financial statements. - The size and complexity of the federal government pose major problems for obtaining government-wide financial management information. - The 24 CFOA agencies operate about 2,600 financial management systems: 1,100 in the civilian agencies and 1,500 or more in the Department of Defense. - In 1998, the 24 CFOA agencies operated altogether more than 700 financial management systems, and 1100 financial management applications, with some individual agencies operating more than 150 systems. - Multiplicity of systems, and difficulty adapting commercial off-the-shelf systems to government operations, have resulted in lack of uniformity and accuracy of data at the agency level. - Even when accounting systems have been upgraded or overhauled, these efforts have not resulted in significant improvements in the accuracy or timeliness of financial information. ### External audit independence and inspector general oversight - External audit is fully independent of the executive branch; the GAO is the principal agency mandated by Congress to provide assurance of integrity. - The GAO was established by Congress following the Budget and Accounting Act and investigates “all matters relating to receipts, disbursements, and application of public funds.” - The GAO publishes more than 1,000 reports annually and provides many congressional testimonies. - The independence of the GAO is ensured through its oversight by Congress and by the fixed 15-year tenure provided to the comptroller general. - Most agencies (60 in all) have an inspector general who conducts internal audit of the executive branch and provides reports to the agency head and Congress. - Agency annual financial statements are audited by the agency’s inspector general or by an independent auditor selected by the inspector general. - In late 2002, the Judiciary ruled that the GAO could not compel the executive branch to produce certain documents, which may reduce its effectiveness. ### Accounting standards at federal and state levels (Box 7—high level points) - Federal reporting uses different accounting standards for budgetary reporting and financial statements to reflect different objectives (budgeting vs. financial reporting). - The federal financial reporting model requires: - (1) an audited financial statement for agency reporting entities on the use of budgetary resources; and - (2) an audited financial statement for the consolidated financial report of the federal government explaining differences between budgetary and accrual-based results. - The Federal Accounting Standards Advisory Board (FASAB) was created in 1990 by the GAO, OMB, and Department of the Treasury to develop federal accounting concepts and standards; FASAB issues statements, bulletins, and guides. - The vast majority of state and large local governments prepare annual financial reports in compliance with GAAP promulgated by the Governmental Accounting Standards Board (GASB). - Key GASB requirements include: - Reporting of revenues and expenditures on a full accrual basis; - reporting finances by segregating data using fund accounting; and - disclosure of substantial information in “notes to financial statements,” including long-term debt, pension obligations, and contingent liabilities. - The GASB’s Statement 34 implementation will require a consolidated government financial statement prepared on a full accrual basis for state and local governments. - Noncompliance with GAAP typically results in lower bond ratings and higher borrowing costs. - FASAB is recognized as the authoritative source for GAAP for federal governmental entities; it references work of other standard-setting bodies including IFAC-PSC and is subject to reviews by accounting profession members. *Source: _cr03243 - 37. Internal control procedures in government agencies are insufficiently effective.* ### 48. The legislature follows up on external audit reports. Each congressional ### 48. The legislature follows up on external audit reports. Each congressional ### Congressional oversight and follow-up on audits - Each congressional committee and subcommittee may request, and follow up on, external audit reports. - The appropriations committees in each house tend not to engage in detailed oversight because of workload and time constraints, but may respond to specific and serious audit findings. - The “authorizing” committees are better positioned to engage in more detailed oversight, but have historically lacked the political incentives to do so. - The most active congressional committees that have focused on issues of routine management have been the House Government Reform and Oversight Committee (specifically its subcommittee on Government Management and Technology), and the Senate Governmental Affairs Committee. - These committees control few resources and are limited in their capacity to effect reforms in management practices. - Executive branch follow-up: the annual audit process begins with a reassessment of prior year audit findings, and OMB Circular A-50 requires timely follow-up by management; nonetheless, results have been mixed and some agencies have had the same findings reported for many years. ### External scrutiny of macroeconomic models and forecasts - External scrutiny of macroeconomic models and assumptions is encouraged because the executive and legislative branches each develop independent forecasts. - The executive branch macroeconomic forecast (basis for the President’s budget) is prepared by the Council of Economic Advisors, the Department of the Treasury, and the OMB. - The executive forecast includes both a “baseline” component and a forecast of economic performance assuming the President’s policies are enacted. - There is no formal external scrutiny of the models used. - The existence of a separate and almost simultaneous CBO forecast likely means that each organization’s forecast serves as a check on the other’s estimates. - The CBO forecast is developed after input from a panel of economic advisors, a bipartisan group including many Nobel-laureates. - The United States has many private macroeconomic forecasters who provide a further check on government forecasting. - The track record of the CBO in forecasting real economic growth has generally been superior to the average of the private forecasters over the almost 30 years since the creation of the CBO. - The executive branch forecasts have been similarly accurate over this same period. - Both the CBO and the executive branch provide forecasts at least twice a year. ### Independence and compilation of fiscal statistics - Adequate assurance of independence is given for compilation of fiscal statistics. - There is no national statistics office as such. - Fiscal source data are collected by the Treasury and the OMB and subject to standard accounting and audit controls. - National accounts and GFS presentations of fiscal data are compiled by the Bureau of Economic Analysis, under contract to the Treasury. - The bureau’s methodology uses Treasury source data first to prepare national accounts estimates; subsequently, the same source data (in combination with some national accounts data) are used independently to derive GFS estimates. - Other statistics are collected by a variety of federal agencies (e.g., the Bureau of the Census and the Bureau of Labor Statistics). - Congress, with the assistance of the GAO, provides independent oversight for statistical activities. ### IMF Staff Commentary — overall assessment - The United States is fully compliant with most elements of the fiscal transparency code and sets best practice standards in many areas. - Budget processes in the United States are perhaps the most open in the world. - Congress plays a central role in shaping the annual budget; submissions to and deliberations of appropriations committees are fully disclosed; and all issues affecting the public interest are actively debated in the press. - The Constitution provides a strong and well tested framework that clearly defines the roles of the legislative and executive branches in shaping and managing fiscal policies. - The fiscal role of states and local governments are clearly defined, market-disciplined, and independent of the federal government. - Quasi-fiscal activities carried out by government corporations and GSEs are well known, information on these is available to inform the budget process, and the benefits and costs are periodically assessed. ### Public budget documentation and transparency challenges - Publicly available budget documentation in the United States excels in the scope and quality of analysis, but is complex and voluminous, presenting the general public with many ways of looking at the government’s fiscal position. - Complexity is balanced by high levels of transparency at a technically detailed level; simplification alone will not necessarily improve transparency. - Scope exists to place transparency at a detailed level within a clearer guiding policy framework and to provide fiscal policy statements comparable to those in many other OECD countries. - A routine explicit presentation of medium- and long-term fiscal policies within the congressional budget process could provide substantial benefits to domestic policymaking and internationally. ### Need to strengthen the congressional budget process - Observers recognize the need to strengthen the congressional budget process so fiscal intentions are presented clearly and timely and properly debated. - Major efforts over the past three decades have set up legal frameworks for the congressional budget process, but past frameworks have relied on congressional rules that can be, and have been, ignored by Congress. - The budget resolution has been a relatively effective disciplining mechanism for appropriation committee decisions, and at times offered a framework for medium-term fiscal policy, but it has often been delayed and was not adopted for the 2003 budget. - Fiscal responsibility legislation applied by other countries could serve as a model, though any U.S. legislation would need to suit the unique U.S. environment. ### Budget responsibility legislation — suggested features - Budget responsibility legislation to establish continuing principles for budgeting within a clear medium- and long-term fiscal policy framework could be passed to replace the BEA. Such legislation could require: - a draft budget resolution to be included with the President’s budget specifying medium-term fiscal targets (covering the budget year and four following years), and providing the justification for such targets; - a report analyzing the long-term fiscal impact of current policies, including Social Security, as a supplement to the President’s budget; - Congress to pass a concurrent budget resolution as of April 15 of each year (as at present under the Budget Act). The chairmen of the budget committees in each house should prepare a public report submitted to the Speaker of the House and the President pro tempore of the Senate (respectively) detailing the status of the budget resolution by end-April each year; - CBO analysis of the economic and budgetary effects of both the President’s budget resolution and the report on long-term fiscal policy; - discretionary spending caps and PAYGO requirements for mandatory spending and revenue, similar to the BEA; - mid-year budget reports which should assess the short-, medium-, and long-term impact of fiscal policy relative to the original budget plan; and - clear procedures for specifying and disclosing key budget assumptions (e.g., with respect to expiring legislation) to be used in baseline forecasts. ### Internationally comparable reporting and GFSM 2001 - Reporting an internationally comparable measure of the budget balance to supplement the unified budget presentation would strengthen the budget process. - This step would complement ongoing work to align NIPA and the 1993 SNA. - Since GFSM 2001 is harmonized with SNA 1993, and the former is close to becoming the accepted international standard for fiscal reporting, the specific suggestion is supplementary budget and accounts reporting on a GFSM 2001 basis. - Major advantage of GFSM 2001: integrates stocks and flows in a consistent analytical framework and links the budget more clearly to the balance sheet. - GFSM 2001, though accrual-based, can also be applied to cash basis accounting and budgeting systems to enhance analytical consistency. - Budget balances derived from the GFSM 2001 framework provide a comprehensive view of the macroeconomic impact of fiscal policy, including over the longer term. - Reporting on a GFSM 2001 basis—and integrating its accounting and classification system with those used at the agency level—should simplify ex-post compilation of NIPA and support international standards. ### Accrual budgeting — considerations - Accrual budgeting should be considered over the longer term. - U.S. authorities are adopting accrual standards where compatible with present budgetary accounting and control practices. - Extensive detail on assets, liabilities, rights, and obligations is already provided with the federal budget and is relevant to long-term decisions. - An eventual move to full accrual budgeting would signal to Congress the likely macroeconomic impact of the budget at decision-making time. - Such a move must be approached cautiously given the U.S. institutional context; accrual adjustments are complex and unfamiliar and could expose the budget process to increased risk of manipulation and undermine transparency. ### State and local government finances in federal budget presentation - The presentation and discussion of fiscal policy would benefit from including an overview of state and local government finances as part of the federal budget presentation. - Federal policy treats state and local governments like any other economic sector, but state and local fiscal activity is macroeconomically significant—their spending together matches in size that of the federal government. - It would be appropriate for the President’s budget to provide an overview of state and local finances, and of general government finances, to enable more comprehensive analysis of fiscal policy. - Bringing U.S. fiscal reporting into conformity with international practice would send a strong signal to other countries where subnational government is important but mechanisms for achieving fiscal discipline at the subnational level are weaker. ### Quasi-fiscal activities of GSEs and government corporations - Costs and risks associated with the quasi-fiscal activities of GSEs and government corporations should be assessed annually as part of the budget process. - While data are available on GSE operations and periodic in-depth analysis is undertaken, changes in the economy can materially affect some of the risks to which the government is exposed. - An annual assessment of these costs and risks in the Analytical Perspectives document would be warranted. - An assessment of the implicit subsidies that result when government corporations and agencies charge below-market prices would improve transparency. ### Contingent liabilities and fiscal risks - Comprehensive reporting of contingent liabilities and more systematic consideration of fiscal risks in the budget would improve transparency. - Inconsistencies in reporting and budgetary treatment of various kinds of risks have been noted by analysts, including in the budget documents. - Reform of the budgetary treatment of risks is an ongoing process. - A clearer focus could be given by including an overall summary of contingent liabilities in the Analytical Perspectives document and, over time, developing a comprehensive statement on fiscal risks. ### Tax expenditure reporting - Tax expenditure reporting is an exemplary feature of the budget. - The current presentation is legally tied to a normal income tax baseline (albeit allowing multiple alternative presentations). - Consideration should be given to a change in the law that would give the Administration (and the JCT) authority to define the baseline on more broadly defined criteria. - Such a change would improve transparency by focusing discussion of the baseline more explicitly on the general direction of overall tax policy. - Tax expenditures would then more clearly represent departures from that comprehensive baseline to achieve particular selected purposes. ### GAO audit follow-up, financial management, and internal control - Audit reports on agencies by the GAO need to be followed up. - Control issues are transparently reported, but there appear to be systemic weaknesses in follow-up that could be examined more explicitly. - The current plethora of laws and bifurcation of requirements for budgeting and financial reporting have failed to address internal control failures as effectively as expected. - Congress could consider the creation of a public accounts committee to provide consistent, focused follow-up to GAO findings. - Simplification and consolidation of financial management legislation and regulation could help foster enduring improvements in internal control systems. ### Performance budgeting and program focus - Efforts to integrate performance and budget management are commendable, but there needs to be increased emphasis on program performance. - The GPRA has encouraged more attention to strategic planning and performance measurement; OMB plans to continue efforts toward budget and performance integration; and the PART process is a promising development. - Full integration of performance assessment and budgeting may need to consider altering the basis of appropriation and lay out in one place the framework for financial management and other performance expectations. - Agencies are beginning to present budget justifications in a format permitting simultaneous consideration of appropriation decisions and performance implications, and are linking cost and performance information more effectively on a limited basis. - Congress has shown little interest in changing its decision-making process to focus more on performance and currently has limited incentives to do so. - A change in appropriation structures to focus more on “programs” and less on “accounts” may provide incentive for Congress to focus on performance by making the effects of budget decisions more transparent. ### Full cost accounting and convergence of presentations - The federal government needs to pay more attention to the full cost of providing government services; such measures are lacking in many agencies. - Over the longer term, consideration should be given to replacing the obligation-based system for budget appropriation and moving toward expenses and accrual concepts. - Some changes in this direction are underway for selected elements of the budget where accrual concepts are seen as most relevant. - Over the longer term, such changes could lead progressively toward a convergence of budgetary and financial accounting presentations of the budget. ### Guarding fiscal transparency - It is important to guard against any perceived weakening of fiscal transparency. - The need for Congress and the President to work together to establish a stable legal framework for medium- and long-term budget decisions has been emphasized. - The way in which the 2001 and 2003 tax cuts were accounted for, the decision to forego 10-year budget projections, and the decision not to include estimates of the cost of war in Iraq in formulating the 2004 budget have reduced the amount of information made available on fiscal policy, and this could be interpreted as a loosening of transparency standards. - Such developments risk undermining fiscal policy credibility despite an otherwise extremely transparent fiscal system. *Source: IMF staff commentary and related sections in the provided content unit.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2003/_cr03243.pdf_