ments as GAO’s analyses. CBO’s budget reports do not include estimates for such exposures.

As an initial small step toward greater awareness of the longer-term dimensions of fiscal exposures, the magnitude of such commitments could be noted in the schedules of the President’s budget. Ideally, OMB would work with agencies to implement an exposure concept, by recording the net present value of future costs for specific program activities in the budget for which such information is relevant, appropriate, and feasible. Government Accountability Office (2003) recommended that such information be recorded in a column alongside the more familiar outlays and budget authority recorded for all programs.

More broadly, both policy makers and the public would be well served if OMB and CBO were required to produce annual reports on fiscal exposures, which would serve as counterparts to GAO’s analyses. These three agencies could work together to assess methodological issues in estimating these exposures.

Accrual Accounting

The federal budget mostly relies on cash accounting to estimate the amount and timing of program costs. That accounting is generally the most appropriate measure to capture the current-year effects of federal fiscal policy on the economy and on the borrowing needs of the Treasury. However, for selected programs, cash accounting provides misleading signals to federal policy makers about the financial costs of commitments that extend far beyond the current year.

Cash understates the longer-term costs of some programs that represent long-term contracts. For these programs, costs may arise far in advance of when cash is needed to satisfy obligations: for example, federal deposit and pension benefit guarantee insurance programs often show up as earning surpluses on a cash basis in the budget, even though their underlying risks and longer-term deficits are known to actuaries and auditors. In these cases, an accrual approach should be considered using the best methods available to estimate accruing costs.

An accrual approach would record the net present value of long-term contractual commitments in the year they are made, regardless of the actual flow of cash payments. In 1990, the federal government adopted such an accrual approach to replace the cash approach for loan and loan guarantee programs—recognizing that near-term cash flows understate the magnitude and risks associated with loan guarantees and overstate the commitment implied by direct loans. Accrued net present value better captures the underlying costs to the federal Treasury over the longer term and records these costs as outlays (and therefore as part of the deficit calculation) at



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