The cash-based budget, however, often provides incomplete or misleading information about cost where cash flows to and from the government span many budget periods, and/or where the government obligates itself to make future payments or incur future losses well into the future. Accrual Concepts Could Improve the Budgetary Information and Incentives for Federal Insurance Programs

The use of accrual-based budgeting for federal insurance programs has the potential to overcome a number of the deficiencies of cash-based budgeting—if the estimating problems I discuss below can be dealt with. Thus, the use of accrual concepts in the budget has the potential to overcome the time lag between the extension of an insurance commitment, collection of premiums, and payment of claims that currently distorts the government’s cost for these programs on an annual cash flow basis. As with the approach taken for credit programs, accrual-based reporting for insurance programs recognizes the cost of the government’s commitment when the decision is made to provide the insurance, regardless of when cash flows occur. For federal insurance programs, the key information is whether premiums over the long term will be sufficient to pay for covered losses and, if not, to identify the net cost to the government. Earlier recognition of the cost of the government’s insurance commitments under a risk-assumed accrual-based budgeting approach would (1) allow for more accurate cost comparisons with other programs, (2) provide an opportunity to control costs before the government is committed to making payments, (3) build budget reserves for future claims, and (4) better capture the timing and magnitude of the impact of the government’s actions on private economic behavior. Estimating the Cost of the Risk Assumed by the Government for Insurance Commitments Is a Significant Challenge

A crucial component in the effective implementation of accrual-based budgeting for federal insurance programs is the ability to generate reasonable, unbiased estimates of the risk assumed by the federal government. Supplemental approach: Under this approach, accrual-based cost measures would be included as supplemental information in the budget documents. Budget authority approach: Under this approach, accrual-based cost measures—the full cost of the risk assumed by the government—would be included in budget authority for the insurance program account and in the aggregate budget totals. Outlay approach: Under this approach, accrual-based cost measures would be incorporated into both budget authority and net outlays for the insurance program account and in the budget totals. The complexity of the issues involved and the need to build agency capacity to generate such estimates suggest that it is not feasible to integrate accrual-based costs directly into the budget at this time.
Why GAO Did This Study

GAO discussed: (1) current budget reporting and accrual-based reporting; and (2) accrual budgeting and its specific application for insurance programs.

What GAO Found

GAO noted that: (1) the cash-based budget often provides incomplete or misleading information about cost where cash flows to and from the government span many budget periods, or where the government obligates itself to make future payments or incurs losses well into the future; (2) the use of accrual-based budgeting for federal insurance programs has the potential to overcome a number of the deficiencies of cash-based budgeting--if estimating problems can be dealt with; (3) the use of accrual concepts in the budget has the potential to overcome the time lag between the extension of an insurance commitment, collection of premiums, and payment of claims that currently distorts the government's cost for these programs on an annual cash flow basis; (4) accrual-based reporting for insurance programs recognizes the cost of the government's commitment when the decision is made to provide insurance, regardless of when cash flows occur; (5) for federal insurance programs, the key information is whether premiums over the long term will be sufficient to pay for covered losses; (6) earlier recognition of the cost of the government's insurance commitments under a risk-assumed accrual-based budgeting approach would: (a) allow for more accurate cost comparisons with other programs; (b) provide an opportunity to control costs before the government is committed to making payments; (c) build budget reserves for future claims; and (d) better capture the timing and magnitude of the impact of the government's actions on private economic behavior; (7) a crucial component in the effective implementation of accrual-based budgeting for federal insurance programs is the ability to generate reasonable, unbiased estimates of the risk assumed by the federal government; (8) GAO reviewed three different approaches to incorporating risk-assumed estimates into the budget: (a) under the supplemental approach, accrual-based cost measures would be included as supplemental information in the budget documents; (b) under the budget authority approach, accrual-based cost measures would be included in budget authority for the insurance program account and in the aggregate budget totals; and (c) under the outlay approach, accrual-based cost measures would be incorporated into both budget authority and net outlays for the insurance program account and in the budget totals; and (9) the complexity of the issues involved and the need to build agency capacity to generate such estimates suggest that it is not feasible to integrate accrual-based costs directly into the budget at this time.