Congressional Budget Office
Director's Blog

The Congress is currently considering various approaches for instituting major changes in the nation’s system of health insurance. Some of those proposals would significantly expand the federal government’s role in that system, thus raising the question of how such changes might be reflected in the federal budget. CBO has just released a brief describing the approach that CBO will take in judging the appropriate budgetary treatment.

Some of the budgetary judgments appear to be relatively straightforward in that the transactions clearly involve cash flows of the federal government or of other entities acting on behalf of the government; they belong in the federal budget. Such transactions include the provision of subsidies for some people and businesses; the income and expenditures of a public health insurance plan; the government’s receipts from “play-or-pay” requirements and from penalties imposed on individuals who fail to comply with a health insurance mandate; and “risk adjustment” transactions of the government that shift funds from insurers with lower-risk enrollees to those with higher-risk enrollees. 

The imposition of a federal mandate requiring individuals to have a certain minimum amount of health insurance coverage raises more complex issues of budgetary treatment. In considering those issues, CBO first addressed two basic questions. First, can cash transactions between private entities—in which the funds do not pass through the U.S. Treasury—be reflected in the federal budget? The answer is clearly “yes” when a private entity is acting as an agent of the federal government in carrying out a federal program under the government’s direction. Second, does the existence of a federal mandate, by itself, justify inclusion in the budget of the private-sector costs of the mandated activity? CBO concludes that the answer to that question is “no,” because the federal government imposes a variety of mandates on private entities whose associated costs are not included in the budget.

In CBO’s view, the key consideration is whether a proposal would be making health insurance an essentially governmental program, tightly controlled by the federal government with little choice available to those who offer and buy health insurance—or whether the system would provide significant flexibility in terms of the types, prices, and number of private-sector sellers of insurance available to people. The former—a governmental program—belongs in the federal budget (including all premiums paid by individuals and firms to private insurers), but the latter—a largely private-sector system—does not.

Many of the proposals under consideration would establish some sort of insurance “exchanges,” through which individuals, and in some cases, small firms could purchase health insurance. The question arises as to whether payments by individuals and employers that pass through exchanges should be considered receipts of the federal government and premiums paid through exchanges to insurance companies as outlays of the government; alternatively, those transactions could be considered private transactions that should not be reflected in the federal budget. In CBO’s view, the answer partly depends on whether individuals and firms would direct their payments to exchanges that in turn would pay insurers, or whether individuals and firms would make their payments via the exchanges to the insurers themselves. In the former case, the answer would also depend on whether the exchanges were considered to be federal entities (either federal agencies or nonfederal entities acting as agents of the federal government) or not. If payments would be made to and by exchanges, and if the exchanges were effectively federal entities, then the payments should be included in the federal budget. However, if the payments were made directly from individuals and firms to insurance companies via exchanges, or if the payments were made to and by the exchanges but the exchanges were not federal entities, then the payments should not be included in the budget (unless other criteria would justify their inclusion in the budget).

In sum:  

• Premium income—for a public plan (or plans) and for insurance purchased through exchanges or in the private market—should be classified as federal revenues if there is an individual mandate and tight government control of the insurance market. The corresponding expenditures should also be recorded as outlays in the budget. Similarly, if there is an individual mandate and a dominant public plan available to some segments of the insurance market, premiums and outlays for those segments of the market should appear in the budget and the premium income should be classified as revenues.
• Premium income should be classified as an offset on the outlay side of the budget—along with the corresponding spending counted as outlays—if:
  • Premiums are collected for a public plan but there is no mandate, or
  • There is an individual mandate in conjunction with an active, loosely restricted private market, and premiums are collected for a public plan or by governmental exchanges.
• Outlays for premiums and income from the receipt of those premiums should not appear in the federal budget if:
  • There is no mandate and no public plan, or
  • There is an individual mandate and an active, loosely restricted private market, and if premiums are paid through nongovernmental exchanges or directly to insurers.

I testified yesterday before the House Budget Committee regarding the state of the U.S. economy. I emphasized the following points:

• In CBO’s judgment, the economy will stop contracting and resume growing during the second half of this year, but the hardships caused by the recession will persist for some time. We now expect that the recovery will be more tepid than we had projected earlier. In particular, the growth in output later this year and next year is likely to be sufficiently weak that the unemployment rate will continue to rise into the second half of next year and peak above 10 percent. Economic growth over time will ultimately bring the unemployment rate back down to the neighborhood of 5 percent seen before this downturn began, but that process is likely to take several years.
• On the positive side, the fiscal stimulus provided by the federal government is now beginning to boost the economy, and financial markets show clear signs of improvement since the fall and winter. However, many factors will likely temper the strength of the recovery: the loss of household wealth, the fragility of financial institutions, persistently weak growth in the rest of the world, a surplus of housing units on the market, and low utilization of manufacturing capacity.
• Even if the economy returns to positive growth this year, the loss in output and income during this downturn will be huge. In CBO’s March forecast, the difference between the economy’s actual and potential output will average 7 percent of GDP (which is equivalent to about a trillion dollars) this year and next, and that gap in output will not close until 2013. CBO’s forecast in August is likely to show even larger shortfalls in output over the next few years. By this measure, the current recession and its aftermath will be the most severe economic downturn of the postwar period.

• The persistence of high unemployment in CBO’s forecast does not stem from a “failure” of fiscal stimulus. We expect that the stimulus legislation will boost GDP a little more than dollar-for-dollar of reduced tax collections and increased outlays. However, as large as the stimulus package is, the contraction in underlying demand is far larger, so the stimulus will offset only part of the contraction.
• Most experts believe that larger budget deficits are appropriate during recessions, because higher spending and lower taxes can bring the levels of resource use and output closer to the economy’s potential. Therefore, the extremely large deficit this year—roughly $1.7 trillion, or nearly 12 percent of GDP, in CBO’s March projection—serves a purpose. However, most experts also believe that persistent large deficits reduce capital accumulation and thereby slow the growth of output and incomes over time. Thus, the large deficits that CBO projects for the years after the economy has returned to full employment are more worrisome. Moreover, the sharp increase in debt this year and next raises the risk that investors might lose confidence in U.S. government debt as a safe haven. This risk heightens the importance of putting the budget on a sustainable path as the economy returns to full employment.

I am delighted to announce that this morning CBO was recognized by the Partnership for Public Service as one of the “Best Places to Work in the Federal Government.”  CBO ranked third overall in the small agency category.

The Partnership uses the results of employee satisfaction surveys to evaluate agencies based on factors that create a positive work environment, such as employee skills/mission match, work/life balance, and effective leadership. Results for all participating federal agencies are available at  www.bestplacestowork.org. This was the first time CBO entered survey data in the rankings competition.

We credit these excellent results to our wonderful staff!  In spite of the pressures we face daily with the increasing legislative demands and turnaround times, in the end, it is the people, how we work together, and how we care about each other that define CBO.  I am so pleased that I have the good fortune to work with such terrific, dedicated, and intelligent colleagues.

Long viewed as an integral component of higher education, athletic programs in many universities have become highly commercialized and, in some cases, are very rewarding financially: The National Collegiate Athletic Association (NCAA) men’s basketball tournament alone garnered about $143 million in revenue for athletic departments in 2008, and college football bowl games generated a similar amount. 

A new CBO study released today assesses the degree of commercialization of athletic departments by comparing their share of revenue from commercial sources with that of the rest of their schools’ activities. In the case of NCAA Division IA schools, 60 percent to 80 percent of athletic departments’ revenue comes from activities that can be described as commercial—seven to eight times that for the rest of the schools’ activities and programs. For schools in the rest of Division I, revenue from commercial activities accounts for a much smaller share of athletic departments’ revenue, about 20 percent to 30 percent.

The high share of commercial revenue for some sports programs raises the questions of whether those programs have become side businesses for schools and, if they have, whether the same preferential tax preferences should apply to them as to schools in general. The Congress could change the tax treatment of sports programs in several ways, such as limiting the deduction for contributions, limiting the use of tax-exempt bonds, or limiting the exemption from income taxation. As long as athletic departments remain a part of larger nonprofit or public universities, however, schools would have considerable opportunity to shift revenue, costs, or both between their taxed and untaxed sectors, rendering efforts to limit the tax preferences for athletic departments alone largely ineffective. In contrast, changing the tax treatment of income from certain sources, such as corporate sponsorship income or royalties from sales of branded merchandise, would create less opportunity for shifting revenue or costs, and it would have larger effects on the most commercial sports programs.

The report was written by Kristy Piccinini. Kristy has been at CBO for three years and holds a PhD from UC Berkeley. She has also traveled halfway across the country just to get a taste of March Madness in person (for research purposes, of course).

The President recently requested that the Congress provide an increase of about $8 billion in the U.S. quota for participation in the International Monetary Fund (IMF) and an increase of additional line of credit for the IMF of approximately $100 billion. Under the budgetary treatment followed by the Congress and the executive branch since 1980, those actions would have been counted for budget scorekeeping purposes as an increase in budget authority (the authority of the federal government to obligate funds) of the full amount provided but no outlays (that is, no estimated increase in the U.S. budget deficit). This treatment was premised on the notion that U.S. financial transactions with the IMF were an exchange of assets of equal value, in which the U.S. provides dollars and receives a liquid claim on the IMF denominated in special drawing rights (SDRs), which is an international reserve asset calculated as a weighted basket of the U.S. dollar, euro, pound sterling, and yen.

However, many observers have come to the conclusion that estimating no cost for such U.S. contributions to the IMF is incorrect because it does not reflect the risk involved. Therefore, legislation including this increase in U.S. support to the IMF that was recently approved by the Senate Committee on Appropriations specifies that the cost should be recorded in the budget on an estimated present-value basis, adjusted for market risk.

The treatment of federal loans and loan guarantees is spelled out in the Federal Credit Reform Act of 1990 (FCRA). FCRA requires that federal loans and loan guarantees made by the Departments of Education, Housing and Urban Development, and Veterans Affairs and other agencies be evaluated by estimating all future cash flows for those loans and discounting the projected stream of such cash flows back to the time of loan approval. However, FCRA does not automatically apply to U.S. assistance to the IMF because that assistance takes the form of a membership subscription with an exchange of financial assets and a line of credit, neither of which meet the simple definition of a loan that includes “a contract that requires the repayment of such funds.” The Senate legislation requires that the new IMF authority be evaluated in accordance with FCRA with an exception that the evaluation of potential discounted cash flows account for market risk (as opposed to the simple discounting of cash flows at the Treasury’s cost of borrowing, which ignores market pricing risk).

Historically, the IMF has used several mechanisms to mitigate risk: by holding precautionary balances, by accumulating reserves, and through its de facto preferred creditor status. As a result, no IMF borrower has defaulted on its obligations to the IMF to date, although multiple countries have needed to have their loans rolled over (such as Argentina) or have failed to pay the Fund promptly (currently, Sudan, Somalia, and Zimbabwe are in protracted arrears). A lack of default history, however, does not ensure that in the future the IMF would never sustain significant financial losses that exceeded its reserves. In such a case, the IMF would pass those losses on to its creditor members, either through reduced remuneration (through the IMF’s burden-sharing mechanism for protracted arrears) or additional liquidity risk (because the IMF may not be able to meet U.S. requests to draw on its SDR-denominated assets). 

CBO estimates that the present-value risk-adjusted cost of the proposed increase in U.S. participation in the IMF is $5 billion.  In forming this estimate, CBO envisioned various potential states of the world economy. In the most likely situations, the IMF would draw against only a small portion of the U.S. commitment and, CBO assumes, the likelihood of those funds being promptly repaid would be high. Thus, the cost of the U.S. commitment would be close to zero in those cases. In less likely situations where the IMF would need to loan out most or all of the new $100 billion line of credit, the odds of all funds being repaid are much lower and the cost would therefore be relatively high. CBO combined those different possibilities using standard options-pricing techniques to estimate the market value of the U.S. commitment. The $5 billion estimate captures the small chance that the IMF will experience some significant losses in the future, and an additional amount reflecting the premium that financial market participants demand for bearing losses associated with global economic deterioration.

Last week CBO’s Deputy Director Robert Sunshine testified about the financing of the federal government’s aviation programs (basically operations of the Federal Aviation Administration) before the House Ways and Means Committee. Reauthorization of the aviation programs raises a number of significant policy questions:

• How much do we need to spend on those activities, especially to ensure that we have a safe, efficient, and effective air traffic control system?
• How much of those costs should be borne directly by users of the system, and how much by the general public?
• Of those costs borne by users, how should they be allocated among different types of users—or among users at differing times or differing places?

How much to spend. Before the current economic downturn, congestion and delays in the U.S. had risen to record levels.  According to the FAA, in 2007 and 2008 about ¼ of all commercial flights in this country arrived at their destination at least 15 minutes after the scheduled time.  In 2007, about 680 million passengers boarded nearly 10 million domestic revenue flights.  That’s 26 percent more flights than in the year 2000, for about 14 percent more passengers.  Both of those figures have declined somewhat from their peak, but demand for travel is likely to increase again when the economy starts to recover, hopefully later this year. 

The system is clearly under stress, and implementing the next generation air traffic control system will require a significant investment of resources by both the government and the private sector over many years.  CBO has not done any analysis regarding the potential costs of that system, but it seems likely that at least several hundred million dollars a year will be needed for that purpose.

Who should bear those costs?  Most of the benefits of federal aviation programs accrue to users of the aviation system—though the general public also benefits from the use of the system by the military and other government agencies, and from the flow of commerce that the system facilitates.  Historically, a combination of general taxpayers and users of the system have paid for its costs—the users through a set of aviation taxes that flow through the Airport and Airway Trust Fund.  Economists generally believe that a good way to foster efficient use of any system is to charge users for the cost they impose on that system.  In recent years, receipts to the trust fund have covered more than 3/4 of the cost of the government’s aviation programs. 

How should costs be allocated?  It is important to determine not only how much users should pay, but also how to apportion those costs among the various users.  Almost 70% of the trust fund revenues come from the passenger taxes.  Another 20% comes from the international arrival and departure tax.  Fuel and cargo taxes account for the rest.  It’s not clear, however, that this system of taxes encourages efficient use of the system. 

Most of the taxes are linked closely to the number of passengers and the fares they pay—not to the number of aircraft operations.  But the cost of the air traffic control system and the amount of congestion in the system is driven largely by the number, timing, and location of aircraft operations.  For example, over the past several years, the number of aircraft departures has grown much more rapidly than the number of passengers—because air carriers have tended to substitute higher frequency service with smaller aircraft for less frequent service with larger aircraft. 

Finding a way to allocate costs that accurately reflects the impact that various kinds of users have on the aviation system is a real analytical and political challenge, but a better alignment of taxes with costs could help reduce congestion and delays.

The United States Air Force, Navy, and Marine Corps are in the process of replacing most of today’s fighter aircraft with new F/A-18E/F, F-22, and F-35 Joint Strike Fighter (JSF) aircraft. Although procurement plans call for purchasing about 2,500 aircraft over the next 25 years, the services are projecting that those purchases will be unable to keep pace with the need to retire today’s aircraft as they reach the limit of their service life.

Today CBO released a study of U.S. fighter forces that compares the size and capability of today’s forces with the forces that would be fielded under the Department of Defense’s (DoD’s) modernization plans and several alternative plans that would offer varying levels of capability and require varying levels of budgetary commitment. CBO’s analysis of DoD’s plans and the alternatives included comparisons of the number of aircraft in each force, the types and technological sophistication of those aircraft, and their aggregate capacity to carry air-to-ground and air-to-air weapons. Using those criteria, CBO found the following:

• Under DoD’s procurement plans, fighter inventories are likely to fall below the services’ stated goals in the coming years. Nevertheless, many military capabilities would remain equal to or improve relative to today’s capabilities because of the enhanced performance that is expected to result from the technological advances that have been incorporated into the latest generation of fighters. Some of those improvements might be offset by the increased capabilities of potential adversaries, however.
• Alternative approaches to modernization that included purchasing less advanced but less costly fighter aircraft could avoid inventory shortfalls, achieve long-term cost savings, or both. They would not offer the same capability improvements (especially in terms of the ability to evade an adversary’s air defenses) that would be realized by purchasing JSFs, although they could maintain or improve upon today’s level of capability.
• Force structures in which some fighters are replaced with smaller numbers of attack aircraft possessing longer ranges, larger weapons loads, or both, could be fielded at costs similar to current plans. Compared to forces equipped with fighters alone, forces equipped with a mix of fighters and such attack aircraft would offer improvements such as increased basing flexibility and persistence over the battlefield but would have decreased air-to-air combat capabilities.

The study was written by Dave Arthur and Kevin Eveker.

Policymakers’ focus on climate change has shaped one of CBO’s principal areas of work.  Last week, I testified on the distribution of the costs of reducing carbon dioxide (CO2) emissions through a cap-and-trade system, and CBO issued a report on the potential impacts of climate change. Those are but the most recent contributions to CBO’s growing body of research on climate change issues, which includes work on the effect of climate change on the United States, options for reducing greenhouse-gas emissions, the effect of those options on different segments of our society, and the effect of proposed legislation on the federal budget.  All of CBO’s work on climate issues can be found on CBO’s Web site under the special section for climate change.

The publication of those products provides me with an opportunity to introduce to you the dedicated staff of budget analysts and economists at CBO who work on climate issues.  Analyzing the broad set of issues surrounding climate change truly requires a team effort that draws on a diverse set of skills and professional experiences.  Most of the formal training of the members of the climate team is in public policy analysis and economics. That formal training has been supplemented by many years of experience following developments in climate science, analyzing different policy options, and understanding the impacts of climate policy on different industries and parts of our economy.  The members of the team are:

Bruce Arnold
David Austin
Kim Cawley
Juan Contreras
Bob Dennis
Terry Dinan
Justin Falk
Ron Gecan
Teri Gullo
Dan Hoople
Joseph Kile
Rob Johansson
Mark Lasky
Susanne Mehlman
Ryan Miller
David Moore
Kevin Perese
Amy Petz
Frank Sammartino
Bob Shackleton
Natalie Tawil
Philip Webre
David Weiner

Yesterday CBO released its Monthly Budget Review for May. The federal government incurred a deficit of close to $800 billion for the first seven months of fiscal year 2009, CBO estimates—$646 billion more than the deficit recorded through April 2008. Notably, receipts in April were about $140 billion (or 35 percent) lower than receipts in April 2008, CBO estimates. The sharpest drop was in corporate receipts; net corporate receipts, largely representing corporations’ first quarterly tax payment for 2009, declined by about $29 billion (or 69 percent). Nonwithheld receipts for individual income and payroll taxes—mainly amounts paid with income tax returns filed in April fell $84 billion (or 36 percent). Refunds of individual income taxes increased by $11 billion (or 24 percent). That change in net receipts associated with income tax filings was roughly in line with CBO’s expectations.

Compared with receipts in April 2008, withholding for income and payroll taxes fell about $14 billion (or 10 percent). CBO estimates that more than one-third of that decline is attributable to provisions of the recently enacted American Recovery and Reinvestment Act of 2009 (ARRA), most notably the Making Work Pay credit.

Receipts in the first seven months of this fiscal year were about $296 billion (or 19 percent) lower than in the same period last year. Although individual income and payroll tax receipts through April have been roughly in line with the amount CBO anticipated when it prepared its most recent baseline projection in March, corporate receipts have continued to lag and are running $25 billion to $30 billion less than anticipated.

Outlays were $38 billion higher than last April, CBO estimates. Medicaid spending increased by $8 billion; over half of that increase was due to provisions in ARRA that temporarily increase the share of Medicaid costs paid by the federal government. Unemployment benefits rose by $8 billion compared with such spending last April. Together those programs accounted for over 40 percent of the total increase in spending.

Outlays through April totaled nearly $2.1 trillion, CBO estimates—$350 billion more than in the first seven months of 2008. CBO estimates that outlays for the TARP totaled $116 billion (on a net-present-value basis). Payments to Fannie Mae and Freddie Mac totaled $60 billion; spending for other programs, excluding net interest, grew by 14 percent (or $218 billion).

I testified this morning before the Senate Finance Committee on the distribution of revenues from a cap-and-trade program for carbon dioxide emissions.  My comments emphasized these points:

A cap-and-trade program would lead to higher prices for energy and energy-intensive goods, which would provide incentives for households and businesses to use less energy and to develop energy sources that emit less carbon dioxide. Higher relative prices for energy would also shift income among households at different points in the income distribution and across industries and regions of the country. Policymakers could counteract those income shifts by using the revenues from selling emission allowances to compensate certain households or businesses, or by giving allowances away.
 
In distributing the value of the allowances, policymakers have a wide range of options but face trade-offs. For example:

• If allowances were auctioned, some of the revenue could be used to fund climate-related research and development. This approach might reduce the cost of transitioning from a high carbon emissions economy, but it would not provide any immediate help to affected industries or households.
• Instead, auction revenue could be used to reduce existing taxes on capital or labor. This could lessen the overall economic cost of restricting emissions but would do little to offset the burden that higher prices would impose on certain industries or households.
• A different approach is to use the revenue to give rebates to low-income households, perhaps using the tax system. This would lessen the burden on these households but not trim economy-wide costs.
• Alternatively, allowances could be given away for free to certain industries. Giving away allowances is generally equivalent to auctioning the allowances and giving the proceeds to the same firms. Giving allowances to energy-intensive manufacturers would not, by itself, hold down the price of their output, which would rise to reflect the private market value of the allowances. The result could be windfall profits for these firms, which would tend to benefit higher-income households who own most stocks. However, if receipt of free allowances was tied to future production or employment, then prices would not rise as much as otherwise. At the same time, because these firms would not reduce emissions as much as they would have without free allowances, other sectors of the economy would have to reduce emissions by a larger amount to meet the overall cap.