Fiscal Exposures: Federal Insurance and Other Activities That Transfer Risk or Losses to the Government

The federal government conducts many activities that protect parties from the effects of adverse events—for instance, by providing flood insurance, guaranteeing mortgage loans, or making payments to beneficiaries of deceased military personnel. Identifying these activities and understanding the fiscal exposures they create can be a challenge, making it difficult for Congress to oversee them through the budget and appropriation processes.

GAO was asked to update information on federal insurance activities it created in 2005 ( GAO-05-265R ) and identify opportunities for improving budgeting for such activities. This report (1) identifies and provides cost- and exposure-related information on federal activities that transfer risk or losses to the government, and (2) illustrates challenges GAO identified in past reports with measuring and reporting fiscal exposures in budget documents. GAO primarily reviewed government-wide financial and budget data, the Catalog of Federal Domestic Assistance, and the U.S. Code. GAO also drew on previous work, conducted interviews with the Office of Management and Budget, Department of the Treasury, and other agencies, and reviewed agency financial and budget documents.

Through analysis of sources containing government-wide information on federal activities, GAO identified 148 federal insurance and other activities that transfer risk or losses from adverse events to the government (see fig.). Unlike private insurance, the activities do not necessarily have a contract or charge premiums or fees in exchange for assuming risk. Even when premiums or fees exist they may not cover all costs, as federal expenditures can be driven by policy goals or agency missions rather than the aim of fiscal solvency. GAO generally was able to provide financial or budget information for the activities.

Note: GAO's results are based solely on the criteria GAO developed for this report and the sources and methodology it used. Other criteria, sources, or methodologies might yield lists that differ from GAO's in number and composition of activities.

a GAO identified 13 Treasury accounts that accounted for 99 percent of all federal employee and veterans benefits liabilities to the federal government as of September 30, 2017. These include accounts that fund retirement benefits, disability insurance, health insurance, and life insurance programs for civilian and military employees.

The government's primarily cash-based budget generally does not record the full cost of commitments incurred until corresponding payments are made in the future. Therefore, the budget may not accurately reflect federal costs or the likely claim on federal resources for such activities. For some claims, such as pension and life insurance, the federal commitment occurs years before payments are reflected in the budget. Additionally, payments the government may be expected to make based on policies or past practices (but is not legally required to make) may not be evident in the budget. For example, the Commercial Space Launch Insurance Program created a potential liability to the government of up to $3.1 billion per licensed space launch in 2017 but never has been included in the budget. GAO previously recommended ( GAO-08-206 , and reiterated in GAO-14-28 ) that Congress consider expanding the use of accrual-based information in the budget documents submitted to Congress. However, this recommendation has not been implemented. Accrual measurement would provide enhanced control over future spending by recognizing long-term costs when decisions are made.

This analysis provides additional support for GAO's 2007 recommendation that Congress consider improving recognition of fiscal exposures in budget documents such as by expanding use of information on expected future spending arising from present-day commitments.

The federal government administers many activities that protect a range  of parties from the effects of various adverse events—including providing  insurance, guaranteeing loans, compensating victims for losses in  catastrophic events, and sharing insured losses from terrorist attacks.  Providing oversight for such activities and their administration can be a  challenge for Congress, in part because the amount of exposure created  by these activities may be uncertain.

In 2005, we created a catalog of federal insurance activities based on  criteria we identified for that report. You asked us to update the 2005  catalog and continue to identify opportunities for improving budgeting for  federal insurance activities. In this report, we (1) identify federal insurance  and other activities that transfer risk or losses to the federal government  and, where possible, identify cost- and exposure-related information on  these activities; and (2) use selected activities in this catalog to illustrate  some of the challenges we identified in past reports with measuring and  reporting fiscal exposures in budget documents.

To identify federal insurance and other activities that transfer risk or  losses to the federal government, we used the following sources of  consolidated government-wide information: (1) the Financial Report of the  United States Government (Financial Report) and underlying data from  the Government-wide Treasury Account Symbol Adjusted Trial Balance  System (GTAS); (2) the Budget of the United States Government  (President’s Budget); (3) the Catalog of Federal Domestic Assistance  (CFDA); and (4) the Code of Laws of the United States (U.S. Code). We  revised the criteria of our 2005 report, in part by using definitions of  federal insurance from the Federal Accounting Standards Advisory Board  (FASAB), to arrive at the following two criteria against which to assess  activities: (1) a risk of financial loss or actual financial loss to a third party  exists that stems from an adverse event; and (2) through the activity, the  federal government accepts some or all of the risk of financial loss or  actual financial loss from the adverse event by indemnifying,  guaranteeing, or providing benefits to the affected entity or beneficiary.  We applied the criteria to our information sources to compile our catalog  of federal insurance and other activities that transfer risk or losses to the  government. We also crosschecked our lists of federal activities identified  through the President’s Budget or CFDA with activities identified in our  2005 report. We generally reported fiscal year 2017 financial and budget  data, as available. We obtained expert opinions on our catalog from  officials at the Department of the Treasury (Treasury), Office of  Management and Budget (OMB), the Congressional Budget Office, and  FASAB, and from key GAO staff with relevant expertise, including  accountants, actuaries, and experts on budget appropriation and other  federal activities. Our results are based solely on the criteria we  developed for this report and the sources and methodologies we used.  Other criteria, sources, or methodologies might yield lists that differ from  ours in number and composition of activities. Because we used different  sources, criteria, and methodologies, our results are not directly  comparable to the results in our 2005 catalog.

To describe selected activities that illustrate some of the challenges in  measuring and reporting fiscal exposures in budget documents, we drew  on our previous work on fiscal exposures, the federal budget, and accrual  budgeting. We reviewed our past findings, recommendations, and  matters for congressional consideration to identify key challenges  relevant to insurance and other activities. We selected six activities that  illustrate these challenges from activities we identified for this report. We  reviewed the Financial Report and the President’s Budget for information  and financial measures on these activities, and for one of the activities  (the Disaster Relief Fund) we reviewed the appropriation and  supplemental appropriation laws. We also analyzed the agencies’  financial and budget documents for the six activities and interviewed  agency officials. For more information on our scope and methodologies,  see appendix I.

We conducted this performance audit from October 2017 to March 2019  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

In a 2006 report, we stated that there was no generally agreed-upon  definition of insurance and most definitions in the private sector differed  because they were developed for specific purposes or had changed over  time. However, the definitions share key elements of risk transfer and  risk spreading, and include other elements such as  indemnification, which is payment for losses actually incurred;  the ability to make reasonable estimates of future losses;  the ability to express losses in definite monetary amounts; and  the possibility of adverse, random events occurring outside the control  of the insured.

The Financial Accounting Standards Board establishes generally  accepted accounting principles for private-sector entities. The Board  defines an insurance contract as “a contract under which one party (the  issuing entity) accepts significant insurance risk from another party (the  policyholder) by agreeing to compensate the policyholder or its  designated beneficiary if a specified uncertain future event (the insured  event) adversely affects the policyholder.” Generally, private insurers offer  several types of insurance products for individuals, families, or  businesses, including health, disability, life, annuity, and property and  casualty insurance products. Per the terms of the contracts, insurers  generally offer coverage for losses from specified events in exchange for  premium payments. Private insurers spread risk over a large enough  group of insured parties to reasonably predict total losses, then set risk- based premium rates to make a profit and cover costs, including claim  payments for covered losses, administrative expenses, and other  expenses associated with selling and servicing policies.

Federal Insurance and Other Activities That Transfer Risk or Losses to the Federal Government

Similarly, there is no generally agreed-upon definition of insurance as it  relates to federal activities. FASAB, which establishes generally accepted  accounting principles for federal entities, provides a definition for financial  reporting purposes. FASAB defines an insurance program as “a general  term used to refer to a program that is authorized by law to financially  compensate a designated population of beneficiaries by accepting all or  part of the risk for losses incurred as a result of an adverse event.” In  addition to activities that may fall under the FASAB definition of  insurance, the federal government undertakes other activities that  compensate or provide benefits to individuals or other third parties that  suffer losses from an adverse event.

Unlike private insurance policies, these federal activities do not  necessarily utilize a contract or charge premiums or fees in exchange for  goods, services, or benefits. Even when premiums or fees exist, they may  not cover all costs, as federal expenditures can be driven more by policy  goals or agency missions than a desire to achieve fiscal solvency. For  example, by design, premiums collected through the Federal Crop  Insurance program do not cover its costs. One of the program’s goals is  to help farmers manage the risks inherent in farming, such as the risk of  poor crop yields and declines in prices, and it does so while subsidizing  more than 60 percent of the premiums. In addition, Congress created the  National Flood Insurance Program (NFIP) to address the increasing cost  of federal disaster assistance by providing flood insurance to property  owners in flood-prone areas, where such insurance either was not  available or prohibitively expensive through the private sector. Subsidized  premium rates, among other things, have precluded NFIP from achieving  rates that reflect the full risk of loss, and the program has not had  sufficient funds to pay claims. Similarly, the federal government uses the  Disaster Relief Fund to provide disaster relief assistance without  collecting premiums or other fees from the entities receiving the funds  before or after an event occurs and without knowing beforehand who  might receive compensation.

The President’s Budget and the Financial Report present complementary  perspectives on the federal government’s financial position and condition.  As illustrated later in the report, differences in when costs are recognized  for budgetary or financial reporting purposes can provide substantially  different measures of cost in a given year for some federal activities,  including federal insurance.

First, the federal budget process serves as the primary financial plan of  the federal government and thus plays a critical role in the decision- making process for all federal expenditures, including those for insurance  programs and other activities that transfer risk or losses to the federal  government. The President, federal agencies, and Congress use the  annual budget process, in part, to plan how federal funds should be spent  for federal activities and track budget approval and execution. Besides  the President’s proposed appropriations for a given fiscal year, the  President’s Budget also reports actual data for two prior fiscal years and  estimated data for the prior fiscal year, such as the budget authority,  unpaid obligations, and outlays (liquidated obligations). Generally,  receipts are recorded when the federal government receives the cash and  spending is recorded when outlays (payments) are made. We refer to  the President’s Budget as primarily “cash-based.”

The Secretary of the Treasury, in coordination with the Director of OMB,  prepares the annual Financial Report, which consolidates and  summarizes financial information from federal agencies and departments.  The Financial Report provides an overall view of the annual financial  results of operations, condition, and position of the federal government. In  particular, it provides the net operating cost of the federal government by  comparing its revenues and costs. The report follows FASAB accounting  standards and generally records transactions on an accrual basis—not on  a cash basis—to recognize and track assets, liabilities, revenues, and  expenses. That is, expenses and liabilities are recorded when they are  incurred, even if payment is due at a later date, and revenues (other than  taxes and other nonexchange revenues) and related assets, such as  receivables, are generally recorded when amounts are earned, even if  actual receipt occurred at an earlier time.

A Wide Range of Federal Activities Transfer Risk or Losses to the Federal Government

Our analysis allowed us to identify 148 federal activities that transfer risk  or losses from adverse events to the government (see table 1). We  broadly categorize the federal activities that met our criteria as follows:  federal insurance programs; federal loan guarantee programs; senior  preferred stock purchase agreements with two government-sponsored  enterprises (enterprises), Fannie Mae and Freddie Mac; federal employee  and veterans benefits (excluding education benefits and burial benefits);  and other activities, such as those that provide property damage or  financial loss compensation and those that offer life, health, or disability  benefits to nonfederal employees. We generally only provide cost and  exposure information for activities as available in the Financial Report and  agency documents. See appendix I for more information on our scope  and methodology.

Through our analysis of the Financial Report, we identified five federal  insurance programs. While there is no universally accepted definition of  what constitutes a federal insurance program, federal agencies have  reported insurance and guarantee liabilities and related note disclosures  in the Financial Report for the following programs: Department of  Agriculture, Risk Management Agency’s (RMA) Federal Crop Insurance  Program; Department of Homeland Security, Federal Emergency  Management Agency’s (FEMA) National Flood Insurance Program  (NFIP); Pension Benefit Guaranty Corporation’s (PBGC) single-employer  and multiemployer pension insurance programs; Federal Deposit  Insurance Corporation’s (FDIC) deposit insurance program; and National  Credit Union Administration’s (NCUA) share insurance program. See  table 2 for descriptions of the programs as well as related funding and  cost or exposure information.

All five federal insurance programs collect premiums, assessments, or  fees, but the programs differ in the extent to which they are designed to  fund their liabilities using only these sources of income.

Federal crop insurance premiums are subsidized by the federal  government by law. In addition, RMA automatically receives a  permanent indefinite appropriation each fiscal year for this premium  subsidy and other expenses, and it returns unobligated balances to  the U.S. Treasury at the end of the fiscal year.

The other programs are generally intended to use premiums or  assessments collected and other nonfederal assets and income to  pay claims or guarantees.

The programs also differ in their authority to borrow funds from the U.S.  Treasury to pay claims and other expenses, as well as their use of such  authority.

As of September 30, 2018, NFIP had about $20.5 billion of  outstanding debt with the U.S. Treasury (after Congress granted $16  billion in debt cancellation to NFIP in October 2017). Before 2004,  NFIP was able to cover most of its claims and repay occasional loans  from the U.S. Treasury with premiums it collected, but it has not been  able to do so since, partly due to extraordinary catastrophic loss years  resulting from Hurricane Katrina and Superstorm Sandy. According to  FEMA, the program as currently designed is unlikely to be able to  repay this debt.

PBGC is expected to fund itself entirely through premiums, other  nonfederal assets and income (such as investment income), and  assets from underfunded, terminated single-employer plans it takes  over, as it currently does not receive taxpayer funds and does not  have authority to borrow funds from the U.S. Treasury.

The balance in FDIC’s deposit insurance fund (DIF) fell to negative  $20.9 billion as a result of bank failures triggered by the 2007–2009  financial crisis. As required by law, FDIC implemented a plan to  replenish the DIF and raise the reserve ratio to its designated  minimum in the time limits prescribed by the Federal Deposit  Insurance Act. Pursuant to the plan, FDIC raised assessment rates  and imposed a one-time special assessment to recapitalize the DIF.  To meet the projected liquidity needs for failures of FDIC-insured  depository institutions during the financial crisis, FDIC required the  banking industry to prepay its quarterly risk-based assessments for  the fourth quarter of 2009 and for the following 3 years. FDIC did not  use its authority to borrow funds from the U.S. Treasury. On the other  hand, NCUA’s Share Insurance Fund borrowed funds from the U.S.  Treasury during the 2007–2009 financial crisis but has since repaid  the loans.

Lastly, the programs also differ in their expected ability to cover future  losses.

RMA receives a permanent indefinite appropriation each fiscal year to  pay for its commitments, so certainty exists that the program will be  able to pay future losses using such appropriations.

According to FEMA, as currently designed, NFIP likely will not have  enough funds to cover all future program expected losses. NFIP also  would not have enough funds to cover a single super-catastrophic  year, in which NFIP could experience as much as $40 billion in  claims, according to FEMA.

While PBGC programs have been able to pay all guaranteed benefits  and financial assistance to date, PBGC forecasts a very high  likelihood of insolvency for the multiemployer program in the next  several years if there are no changes in law.

DIF’s ability to pay future claims depends on whether the fund has  sufficient assets. Congress sets a minimum ratio of assets to insured  deposits for the DIF (called the reserve ratio), which by statute must  be at least 1.35 percent by September 30, 2020. In addition, FDIC  sets a target ratio (called the designated reserve ratio), currently set at  2 percent. FDIC views the designated reserve ratio as a minimum  goal that will allow the fund to grow sufficiently large in good times to  increase the likelihood of the fund remaining positive during bad  times. DIF’s reserve ratio was 1.36 percent as of September 30, 2018.  To comply with the statutory requirement that large banks—those with  total assets of $10 billion or more—bear the responsibility of  increasing the DIF reserve ratio from 1.15 percent to 1.35 percent,  FDIC imposed a quarterly surcharge on large banks. According to  FDIC officials, the surcharge began in the third quarter of 2016, the  quarter after the reserve ratio first reached or exceeded 1.15 percent,  and ended in the third quarter of 2018, the quarter in which the  reserve ratio first reached or exceeded 1.35 percent.

The fund ratio for NCUA’s Share Insurance Fund is called the equity  ratio, and has a statutory minimum of 1.20 percent. NCUA’s target  equity ratio is called the normal operating level and was set at 1.38  percent by the NCUA Board of Directors on December 13, 2018.  NCUA’s equity ratio was 1.46 percent as of December 31, 2017, both  above the statutory minimum and the normal operating level.

We identified 33 federal loan guarantee programs that transfer risk or  losses to the federal government (see full list in app. III). The federal  government uses loan guarantees as tools to support specific social and  public policy objectives, such as those for housing and small  businesses. Federal loan guarantees are any guarantees, insurance, or  other pledges with respect to the payment of all or a part of the principal  or interest on any debt obligation of a nonfederal borrower to a nonfederal  lender. Thus, the federal guarantee transfers some or all of the risks of  borrower default from private lenders to the federal government.

The Federal Credit Reform Act of 1990 requires agencies to estimate the  cost to the government of guaranteeing credit in the President’s Budget,  beginning in fiscal year 1992. This cost, the loan guarantee subsidy cost  (referred to in this report as “subsidy cost”), equals the net present value  of the following cash flows at the time a loan guarantee is disbursed by  the lender: (1) the estimated payments by the government to cover  defaults, delinquencies, interest subsidies, or other payments; and (2) the  estimated payments to the government, including origination and other  fees, penalties and recoveries. If the present value of estimated cash  outflows exceeds cash inflows, there is a positive subsidy cost. If the  present value of estimated cash inflows exceeds cash outflows, there is a  negative subsidy cost, referred to as subsidy income. Every fiscal year,  subsidy costs are (1) estimated for the loan guarantees obligated during  that year and (2) reestimated for loan guarantees obligated in previous  fiscal years to update costs for actual loan performance and to  incorporate any changes in assumptions about future loan performance. If  reestimates increase subsidy costs, an agency would need additional  funds. If they decrease subsidy costs, an agency generally would return  funds to the general fund of the Treasury. Regardless of whether credit  programs are discretionary or mandatory, agencies do not need to  request additional appropriations to cover upward reestimates because  the Federal Credit Reform Act provides permanent indefinite budget  authority for this purpose.

In addition, the loan guarantee liability in the Financial Report is the  present value of estimated net cash outflows. Thus, this liability is an  estimate of the exposure to the federal government because of all  outstanding loan guarantees. This liability is based on all loan guarantees  obligated in a given fiscal year and previous years that are outstanding as  of the end of a fiscal year. It takes into account the subsidy costs of these  guarantees estimated as of the time the loan was obligated and  subsequent adjustments such as modifications and reestimates.

As is the case with federal insurance, federal loan guarantee liabilities are  publicly reported in the Financial Report and related note disclosures.  Table 3 presents some of the measures reported in the note disclosures  as of September 30, 2017.

The estimated subsidy cost to the government for loan guarantees,  including reestimates, was $12.5 billion during fiscal year 2017, as  reported in the Financial Report. This was largely attributable to  guarantees under Federal Housing Administration (FHA) loans  administered by the Department of Housing and Urban Development, the  largest of which is FHA’s Mutual Mortgage Insurance (MMI) program. The  program provides mortgage insurance to encourage lenders to make  credit available to borrowers not adequately served by the conventional  market, such as first-time homebuyers, minorities, and lower-income  families. Similarly, federal loan guarantee liabilities were approximately  $43 billion, with FHA loan guarantees accounting for about 48 percent of  all guarantee liabilities.

Senior Preferred Stock Purchase Agreements with Fannie Mae and Freddie Mac

Current senior preferred stock purchase agreements between Treasury  and the enterprises, Fannie Mae and Freddie Mac, transfer risk or losses  to the federal government. The enterprises purchase mortgage loans that  meet certain criteria for size, features, and underwriting standards, known  as “conforming” loans. After purchasing mortgages, the enterprises create  mortgage-backed securities and guarantee investors in these securities  that they will receive timely payments of principal and interest. In 2008,  because of the enterprises’ poor financial condition, the Federal Housing  Finance Agency (FHFA) placed the enterprises into conservatorship and  Treasury agreed to provide capital assistance in part to ensure timely  payment to investors in exchange for shares of senior preferred stock,  thus transferring risk to the federal government.

Under the agreements, Treasury has committed to providing up to $445.6  billion in capital support to the enterprises while they are in  conservatorship. If Fannie Mae or Freddie Mac has a net worth deficit at  the end of a financial quarter, Treasury will provide capital support to  eliminate the deficit. Under the most recent agreement, the enterprises  must pay Treasury a dividend of all their quarterly positive net worth  above a $3 billion capital reserve that each enterprise is allowed to  retain. As of December 31, 2018, the enterprises had paid $292.3 billion  in cumulative dividends to Treasury. Since the second quarter of 2012— with the exception of the first quarter of 2018 during which the enterprises  required Treasury support due to devaluation of certain assets—Fannie  Mae and Freddie Mac have not required additional support from  Treasury.

As of August 2018, Treasury had provided the enterprises with $191.4  billion of this amount since they were placed under conservatorship in  2008, leaving $254.1 billion in potential taxpayer exposure should  Treasury need to provide any additional support. The latter represents  the maximum amount of potential future federal spending under the  current agreements. According to Treasury, based on their assessments,  there were no probable future funding draws as of September 30, 2018,  but it was reasonably possible that market volatility or non-recurring  events could cause the enterprises to generate quarterly losses and,  therefore, result in future funding draws against Treasury’s funding  commitment.

We identified 13 large federal employee and veterans benefit activities  that transfer at least some of the risk or losses to the federal government  (see app. IV for more information). The federal government offers its  civilian and military employees health and life insurance, defined benefit  pension and other retirement benefits (such as post-retirement health  insurance and life insurance), and other benefits. Many of these benefit  programs exchange current services for a guarantee of lifetime annuity  payments or the continuation of health insurance coverage, inherently  transferring at least part of the risk of an adverse experience—such as  people living longer than expected, or health care costs rising faster than  expected—from the employees to the federal government.

For example, the following three pension activities account for more than  80 percent of all federal employee and veterans benefit liabilities: On the  civilian side, the Office of Personnel Management (OPM) administers the  Civil Service Retirement System and the Federal Employees Retirement  System, which are the largest civilian pension plans covering nearly all  full-time, permanent civilian federal employees. The Department of  Defense and the Department of Veterans Affairs administer the largest  military plans. The Department of Defense administers the Military  Retirement System, and Veterans Affairs provides for the payment of  compensation, pension, and burial benefits to veterans and survivors.

Federal employee and veterans benefit liabilities are publicly reported in  the Financial Report and related note disclosures. Generally, these  liabilities are recorded as employee services are rendered. Table 4  presents liabilities of the government for certain federal employee and  veterans benefit activities. Such benefits include deferred compensation  that generally commit the federal government to provide cash  compensation and health insurance following a term of service and to  accept certain risks regarding the ultimate costs of those benefits. These  liabilities were approximately $7.6 trillion as of September 30, 2017, and  represented about 32 percent of all federal liabilities (which were $23.9  trillion).

Other Activities That Transfer Risk or Losses to the Federal Government

An analysis of the President’s Budget, the Catalog of Federal Domestic  Assistance (CFDA), and the U.S. Code yielded 95 additional activities  that met our criteria of transferring risks or losses from adverse events to  the federal government. These activities can be broadly categorized into  those that provide compensation for property or financial losses— including losses resulting from adverse environmental or manmade  events—and those that offer life, health, or disability benefits to  nonfederal employees. See appendix V for information on all 95 activities.

Some of these federal activities provide compensation to specific third  parties if they suffer certain losses from future adverse events, but the  federal government may not always charge premiums for accepting this  risk of loss. For example, the Department of Agriculture’s Price Loss  Coverage Program provides payments to farmers of certain crops when  the effective price of the commodity is less than a reference price for that  commodity. Farmers can apply to receive such assistance and do not pay  premiums to receive benefits. We also found other activities in which the  beneficiaries who receive government compensation for their losses are  known only after an adverse event occurred. This was generally the case  for activities that provide compensation for property or financial losses to  victims of unforeseen adverse environmental or manmade events, such  as activities funded by the Disaster Relief Fund.

Lastly, we found activities that offer life, health, or disability benefits.  These include federal grants to states for Medicaid, which assists states  in providing medical care to generally low-income individuals, and  activities that support mental health services, treatment for substance  abuse, or child health insurance services. For example, the Department  of Health and Human Services administers the Children’s Health  Insurance Program, which provides funds to states to help them maintain  and expand health assistance to uninsured, low-income children and, at a  state’s option, low-income pregnant women.

Table 5 has information on the budget accounts we found with more than  $10 billion in total new obligations for fiscal year 2017 that funded  activities that transferred risk or losses to the federal government. While  obligations are a legal liability for the federal government, they may not  necessarily reflect an activity’s fiscal exposure if, for example, the activity  has dedicated payment streams that reduce the government’s fiscal  exposure.

We found five additional activities authorized in law that have not yet  caused financial liabilities to the federal government but may do so if  certain adverse events occurred. Such events include acts of terrorism,  nuclear power plant incidents, or catastrophic space launch-related  incidents. In all five cases, the federal government is generally authorized  to help finance third-party liability claims related to the event, if needed,  after private-sector insurers have paid a certain level of claims. As seen in  table 6, some of these activities could require large, previously  unbudgeted expenditures by the federal government if an event occurred.  As of December 31, 2018, these activities had not triggered losses to the  federal government.

As mentioned earlier, we listed federal activities that meet the following  criteria: (1) a risk of financial loss or actual financial loss to a third party  exists that stems from an adverse event; and (2) through the activity, the  federal government accepts some or all of the risk of financial loss or  actual financial loss from the adverse event by indemnifying,  guaranteeing, or providing benefits to the affected entity or beneficiary.  Our categorization of such activities as federal insurance activities,  federal loan guarantees, senior preferred stock purchase agreements  with Fannie Mae and Freddie Mac, certain federal employee and veterans  benefits, or other programs, was driven by the sources we used, in  particular the Financial Report. Our results were based solely on the  criteria we developed for this report and the sources and methodologies  we used. Other criteria, sources, or methodologies might yield lists that  differ from ours in number and composition of activities.

Expert opinions sometimes differed on which types of activities met our  criteria. We acknowledge the different opinions. In updating our 2005  catalog of federal insurance activities, our efforts are aimed at providing  Congress with an expanded list that helps convey the wide variety of  activities that may not necessarily be considered federal insurance but  share important aspects of insurance. We also intended to highlight laws  that authorize the federal government to cover third-party liabilities from  specific adverse events—such as terrorist attacks or nuclear accidents— and that have not yet resulted in liabilities to the federal government but  could do if the events occurred. Our catalog may not be appropriate for  other purposes.

Budget Cost Recognition of Certain Federal Activities That Transfer Risk or Losses to the Government Presents Challenges

In our previous work, we found challenges in relation to measuring and  reporting fiscal exposures caused by certain federal activities, including  federal insurance programs. We previously reported that the primarily  cash-based budget may not accurately reflect the costs the government  incurs and the payments the government may be expected to make for  some activities that transfer risk or losses to the government. In addition,  the amount of the exposure to the federal government can be hard to  measure for some activities. These challenges still exist, and to illustrate  them, we reviewed six activities from among those we identified that  transfer risk or losses to the federal government.

Federal Government’s Legal Commitment Varies, and Implicit Exposures for Some Activities May Not Be Evident in the Budget

Federal activities that transfer risk or losses to the federal government  have a range of fiscal exposures in which the extent of the government’s  legal commitment varies (see fig. 1). In 2003, we developed a conceptual  framework for fiscal exposures that notes fiscal exposures may be explicit  or implicit. Explicit exposures are commitments that the government is  legally required to fund, while implicit exposures arise not from a legal  commitment, but from current policy, past practices, or other factors that  may create the expectation for future spending. Some federal activities  have a combination of explicit and implicit exposures. For example, the  government is not legally required to cover PBGC insurance claim losses  in excess of PBGC’s available resources. Therefore, claims up to the  statutory limit are explicit exposures, and losses in excess of PBGC’s  available resources represent an implicit exposure for the federal  government to the extent there is an expectation that the government  would step in and cover losses beyond the program’s reserves. In  contrast, loan guarantees under the MMI Fund represent an explicit  exposure only, because the government has a legal commitment to pay  claims if the borrower defaults on a loan.

Implicit exposures may not be evident in the budget, because the  primarily cash-based budget records spending only when payments are  made. For example, as part of the Commercial Space Launch Insurance  Program, the federal government is potentially liable for damages from  commercial space launch accidents, subject to appropriation, up to $3.1  billion per licensed space launch in 2017. This program represents an  implicit exposure because a new appropriation—which would represent  the federal government’s legal commitment to pay for this program—is  required to fund damages. Because there has never been such an event  or appropriation, this fiscal exposure has not been included in the budget.  According to Federal Aviation Administration officials, the agency has not  designed internal processes or procedures to address these potential  costs, such as estimating the costs, in part because the agency cannot  presume the government will provide funds until such an appropriation  were made.

While implicit exposures do not present a legal commitment to the  government, the federal government historically has shown a willingness  to fund them in some cases. For example, NFIP has authority to borrow  funds from the U.S. Treasury. To the extent there is an expectation that  the federal government will cover claims exceeding the amount NFIP has  been authorized to borrow from the U.S. Treasury, NFIP represents an  implicit exposure. In October 2017 when NFIP was about to exhaust its  borrowing authority, Congress demonstrated its willingness to fund NFIP  implicit exposures by passing a supplemental appropriation, which the  President signed into law, that cancelled $16 billion of NFIP’s past  borrowing from the U.S. Treasury. This allowed NFIP to borrow an  additional $6.1 billion that would have exceeded its borrowing authority  without this intervention, while also reducing its overall debt. Additionally,  in fiscal years 2005–2018 the federal government designated a total of  $138 billion in supplemental appropriations to the Disaster Relief Fund for  declared disasters (see fig. 2). These costs indicate that there was an  implicit exposure because Congress must pass a supplemental  appropriation to cover them. Congress passed at least one supplemental  appropriation for a major disaster in 9 of the 14 years during 2005–2018.

Cash-Based Budgeting May Not Reflect the Government’s Cost or Potential Costs from Risk- or Loss-Transferring Activities

As we previously found, the federal budget may not accurately reflect the  government’s costs or the likely claim on federal resources from activities  that transfer risk or losses to the government. Again, except for loan  guarantees, the federal government’s primarily cash-based budget  generally does not record the full cost of commitments incurred in the  present until corresponding payments are made in the future. However,  for some claims, such as pension and post-retirement life insurance, the  federal commitment occurs years before the related cash consequences  are reflected in the budget. For example, the cost of pension plan  insurance accrued in a given year is not reflected in the budget; rather,  premiums are shown as receipts when they are collected and payments  are shown as outlays when they are made. In fiscal year 2017, the budget  showed PBGC’s annual receipts exceeded its outlays by $4.8 billion. But  in the same year, the program also had a $76 billion negative net  position, which is one measure of the magnitude of the government’s  fiscal exposure and is not included in the budget (see fig. 3).

Similarly, the budget may not indicate the government’s long-term  exposure from weather-related events. Like PBGC, NFIP reports  premiums in the budget as receipts in the year they are collected and  payments as outlays in the year they are made. The budget does not  currently include information on NFIP’s liabilities, assets, or net position.  In fiscal year 2017, the budget showed a deficit (outlays exceeded  receipts) for NFIP of $2.2 billion, a modest deficit compared to NFIP’s net  position in the same year, which fell by $11.5 billion to negative $37.4  billion (see fig. 4). NFIP’s $30.425 billion in debt to the U.S. Treasury at  that time, which was included in its liabilities, contributed to its net  negative position.

We previously reported that FEMA is required by law to charge many  policyholders less than full-risk rates, otherwise known as subsidized  rates. We found that FEMA’s budget does not recognize the subsidy,  making it difficult to analyze the effect of subsidized premium rates on the  overall financial stability of NFIP. In 2017, we recommended that  Congress consider comprehensive reform to improve NFIP solvency and  enhance national resilience to floods. At that time, we developed five  policy goals for evaluating options for reforming NFIP that included  requiring transparency of the program’s federal fiscal exposure.  Congress is still considering various reforms related to NFIP.

In addition, the budget request for the Disaster Relief Fund, which  provides a significant portion of the total federal response to major  disasters, traditionally has been intended to cover each fiscal year’s costs  for previously declared disasters and the predictable cost of  noncatastrophic events. It does not pre-fund anticipated needs from  disasters that have yet to occur or seek funding for potential catastrophic  events. As previously noted and shown in figure 2, extreme weather  events have cost the nation more than $100 billion through supplemental  appropriations to the Disaster Relief Fund since fiscal year 2005.  According to the Analytical Perspectives of the President’s 2019 Budget,  inflation, urbanization, and other factors are expected to contribute to  increasing future disaster response and recovery costs. Additionally,  climate change could increase the costs of severe weather events as  more frequent and extreme weather and climate-related events are  expected to continue to damage infrastructure, ecosystems, and social  systems, according to the United States Global Change Research  Program. This is one reason we added the federal government’s fiscal  exposure created by climate change to our 2013 High Risk List.

However, the increased fiscal exposures are not reflected in the Disaster  Relief Fund’s financial measures in the budget. According to FEMA  officials, the agency does not forecast costs or exposures for catastrophic  disasters, in part because each catastrophe is different and presents its  own set of risks that would be very difficult to predict with reasonable  certainty.

While the primarily cash-based budget may not represent an activity’s  likely claim on federal resources, members of Congress and the public  have access to information on the fiscal health of the activities through  other avenues. Many of the activities we reviewed track exposures and  other relevant data internally and provide that information to Congress  and the public through a variety of reports outside the budget (see table  7). These include actuarial reviews, one-time analyses of various  subjects, and annual reports that provide detailed financial information.  For example, each year an independent actuarial contractor conducts two  separate actuarial reviews of the MMI Fund—one for forward mortgages  and one for Home Equity Conversion Mortgages (reverse mortgages)—to  estimate the economic value of the two portfolios. FHA then compiles  statutorily required annual reports for Congress based on the results of  the actuarial analyses. The annual report includes the calculation of the  MMI Fund’s overall capital ratio and some additional analyses of the MMI  Fund’s financial condition.

While these reports provide additional financial information, we previously  reported that decision-making is best informed if the government includes  in the budget the costs of its commitments at the time it makes them. If  the full cost of a spending decision is included in the budget when the  decision is made, then decision makers can consider the total costs when  setting priorities, compare the cost of an activity with its benefits, or  assess the cost of one method of reaching a specified goal against  another. Decision makers’ ability to make informed choices would be  improved by increased transparency about the impact of policy decisions  on the expected path of spending and revenue.

We previously recommended that Congress consider expanding the use  of accrual-based information to other activities, such as insurance,  because accrual measurement would advance the recognition of costs for  these commitments, especially those that involve cash flows over many  years. We determined that, for many programs, adopting accrual-based  information selectively within the current, primarily cash-based budget  might improve information while preserving up-front control. PBGC,  Federal Employees’ Group Life Insurance (FEGLI), and NFIP officials  stated that adding limited accrual accounting information, such as the  balance sheet, to the President’s Budget would be relatively easy. NFIP  officials agreed that while the financial statements and various reports  show the full liability of the program, including this information in the  budget would consolidate it in one place. The President’s Budget  (Appendix) already includes a balance sheet from FHA’s MMI Fund,  along with information on credit subsidy reestimates in the Federal Credit  Supplement of the budget as required by the Federal Credit Reform Act  of 1990. According to FHA officials, the main benefit of reporting  balance-sheet information in the budget is that the public, OMB, and  Department of Housing and Urban Development personnel have more  data that can be used to make decisions. FHA officials also noted that  creating a crosswalk between the financial reports and the budget has  been a challenge because there is not always a one-to-one relationship,  which is due to different reporting elements and concepts underlying their  measurement.

While Accrual Budgeting Better Recognizes Long- Term Costs, the Amount of the Exposure Can Be Hard to Measure for Some Activities

Given the variation in fiscal exposures, we previously concluded that  while accrual budgeting better recognizes long-term costs, a uniform,  across-the-board approach to make fiscal exposures more apparent in  the budget may not be appropriate. One of several factors that should  be considered is the extent to which the magnitude of the exposure can  be reasonably estimated. The complexity and uncertainty surrounding  some exposures create significant cost estimation challenges, while other  activities are easier to estimate. For example, OPM considers various  factors that are fairly stable and easily known or can be reasonably  estimated (such as changes in the mortality of federal employees, federal  salaries, and interest rates) when calculating FEGLI’s liability for current  and future life insurance coverage. Because of this, FEGLI officials noted  that they did not face significant challenges in estimating the program’s  fiscal exposure.

In contrast, exposures related to natural disasters are especially hard to  estimate. According to NFIP officials, the extreme variability of flood  losses is the single biggest challenge in estimating the program’s  exposure. Similarly, officials from the Disaster Relief Fund said it is not  possible to forecast catastrophic disasters because each is different.  According to FEMA officials, the agency has begun working with  catastrophe modeling firms and others in developing better estimates of  loss exposures. While several components of the models are still in  development, FEMA officials believe they show promise to be useful tools  in the future.

Agencies developed models to make estimates of fiscal exposures for  several of the activities we reviewed, although the agencies noted that  generating reasonably reliable estimates is difficult for a variety of  reasons, such as the sufficiency of data on potential losses and the  nature of the risks insured by the government. For example, PBGC  developed the Pension Insurance Modeling System to help the agency  better understand and quantify its long-term risk and exposure to loss  under different economic conditions and policy alternatives. Agency  officials stated that obtaining current, complete, comprehensive, and  reliable data on the company pension plans likely to present claims was  one of the most significant challenges in these estimates. FHA also uses  economic assumptions and historical data to estimate and reestimate the  net lifetime costs of the mortgages it insures. Agency officials noted that it  is difficult to produce these estimates because risk can vary based on a  variety of factors that are uncertain, volatile, or sensitive, such as the  economy and housing market. In recognition of this difficulty, the Federal  Credit Reform Act of 1990 provides permanent and indefinite budget  authority for upward reestimates, so that FHA can receive additional  funds when needed if reestimates increase subsidy costs.

We previously recommended to Congress in 2007, and reiterated in  2013, that it consider requiring increased reporting of accrual-based cost  information where appropriate alongside cash-based budget numbers for  both existing and proposed activities—where accrual-based cost  information includes significant future cash resource requirements not yet  reflected in the primarily cash-based budget. From 2009 through 2014,  several bills were introduced to budget for certain activities on an accrual  basis, but none were signed into law. The Bipartisan Budget Act of 2018  created the Joint Select Committee on Budget and Appropriation Process  Reform, but no bills were signed into law as a result. The committee was  terminated by statute by December 2018. We continue to support this  recommendation to improve budget recognition of these fiscal exposures,  because, as shown, challenges remain in identifying and measuring fiscal  exposures.

The government undertakes a wide range of activities that create fiscal  exposures by obligating the government to future spending or creating an  expectation for such spending. The federal budget both allocates and  controls resources, but does not provide complete information about  some significant fiscal exposures. Failure to understand and address  these exposures can have significant consequences. These fiscal  exposures will require future federal spending and will absorb resources  available for other activities. Not capturing the long-term costs of current  decisions limits Congress’s ability to control federal fiscal exposures at  the time decisions are made. Presenting accrual information alongside  cash-based budget numbers, particularly in areas where it would enhance  up-front control of budgetary resources, would be useful to policymakers  when debating current activities and considering new legislation.

We provided a draft of this report to OMB and Treasury. The agencies  had no comments on the draft report but provided technical comments  that we incorporated as appropriate. We sent relevant portions of the draft  to the following agencies: Department of Agriculture’s RMA, Department  of Homeland Security’s FEMA, Department of Housing and Urban  Development’s FHA, Department of Transportation’s Federal Aviation  Administration, FDIC, NCUA, OPM, and PBGC. All the agencies (except  the Department of Transportation, Department of Housing and Urban  Development, and Department of Agriculture) provided technical  comments that we incorporated as appropriate.

We are sending copies of this report to the appropriate congressional  committees, the Secretary of the Treasury, and the Director of OMB. This  report will also be available at no charge on our website at  http://www.gao.gov.

Should you or your staff have questions concerning this report, please  contact me at (202) 512-8678 or cackleya@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. Key contributors to this report are listed in  appendix VII.

Appendix I: Objectives, Scope, and Methodology

In this report, we (1) identify federal insurance and other activities that  transfer risk or losses to the federal government and, where possible,  identify cost- and exposure-related information on these activities; and (2)  use selected activities to illustrate some of the challenges that we  identified in past reports with measuring and reporting fiscal exposures in  budget documents.

Identifying Activities That Transfer Risk or Losses to the Government

For this objective, we updated our 2005 catalog of federal insurance  activities and used additional sources of information on federal activities  to obtain cost- and exposure-related information and identify additional  activities. To compile the 2005 catalog, we developed the following  criteria for identifying federal insurance activities: (1) The federal  government must accept the risk of financial loss in providing protection  against specific types of losses, events, or conditions whose timing,  magnitude, or duration, are uncertain or unknown; and (2) by accepting  this insurance risk, the federal government must be obligated to pay  compensation or provide benefits if the losses, events, or conditions  occur. In addition, we verified that the activities we cataloged as federal  insurance also were recognized lines of insurance in the private sector.  We applied the criteria to the Appendix of the Budget of the United States  Government (President’s Budget) for Fiscal Year 2005 to identify budget  accounts that funded federal insurance activities per our criteria.

In this report, we first developed our own criteria for activities that transfer  risk or losses to the federal government using definitions of federal  insurance from the Federal Accounting Standards Advisory Board’s  (FASAB) Statement of Federal Financial Accounting Standards (SFFAS)  5: Accounting for Liabilities of the Federal Government and Statement of  Federal Financial Accounting Standards SFFAS 51: Insurance  Programs. Activities were assessed against the following two criteria: (1)  a risk of financial loss or actual financial loss to a third party exists that  stems from an adverse event; and (2) through the activity the federal  government accepts some or all of the risk of financial loss or actual  financial loss from the adverse event by indemnifying, guaranteeing, or  providing benefits to the affected entity or beneficiary. We also reviewed  our new criteria internally with input from GAO experts, including  accountants, actuaries, and budget law experts.

We then used the following sources to identify federal activities that met  our criteria: (1) 2017 Financial Report of the United States Government  (Financial Report) and underlying account-level data from the  Government-wide Treasury Account Symbol Adjusted Trial Balance  System (GTAS) of the Department of the Treasury (Treasury), (2) the  Office of Management and Budget’s (OMB) President’s Budget; (3)  OMB’s Catalog of Federal Domestic Assistance (CFDA) administered by  the General Services Administration; and (4) the Code of Laws of the  United States (U.S. Code). The resulting catalog is based solely on the  criteria we developed for this report and the sources and methodology we  used. Other criteria, sources, or methodologies might yield a list that  differs from ours in both number and composition of activities. Because  we use different criteria, sources, and methodologies, our results are not  directly comparable to results in our 2005 catalog.

First, we identified certain categories of federal activities that met our  criteria using the note disclosures of the 2017 Financial Report:

We identified the following federal insurance programs by analyzing  the note disclosure on federal insurance and guarantee liabilities as  well as our internal audit documents on that note disclosure for fiscal  years 2014–2017: Federal Crop Insurance Program, National Flood  Insurance Program (NFIP), Pension Benefit Guaranty Corporation’s   (PBGC) single-employer and multiemployer pension insurance  programs, Federal Deposit Insurance Corporation’s Deposit Insurance  Fund, and National Credit Union Administration’s Share Insurance  Fund. To find information on the programs, the role of the  government in the administration of the programs, and cost- and  exposure-related information on the programs, we analyzed GAO  reports, individual agency annual, financial, or other reports, and  reports from the Congressional Budget Office.

We also identified the following categories of activities that met our  criteria: federal loan guarantee programs, senior preferred stock  purchase agreements with two government-sponsored enterprises— Fannie Mae and Freddie Mac; federal employee and veterans  benefits excluding veterans’ burial and education benefits; and social  insurance. We used GTAS to identify Treasury accounts for the  federal loan guarantee and the federal employee and veterans benefit  categories. We generally presented liabilities for these activities as  available in the Financial Report and GTAS for fiscal year 2017.

Second, we conducted searches of key words in the names of budget  accounts reported in the Appendix of the President’s Budget using OMB’s  MAX system. We analyzed the results and identified budget accounts  that funded additional federal activities that met our criteria and reported  budget obligation data for those accounts for fiscal year 2017. We also  analyzed more than 2,200 federal activities in CFDA as of September 30,  2017. To do this, at least two analysts verified that a budget account or a  CFDA program met or did not meet our criteria (with review from an  additional analyst, if needed). We included a budget account or CFDA  program in our catalog if all analysts reviewing the program agreed the  account or program met our criteria. The additional federal activities we  found through the President’s Budget and CFDA can be broadly  categorized as providing compensation for property or financial losses— including losses resulting from adverse environmental or manmade  events—or providing life, health, or disability benefits to nonfederal  employees. We also crosschecked this list of federal activities with  those we identified in our 2005 report.

Lastly, we conducted a search of key words in the table of contents of the  U.S. Code and found additional activities that provided compensation for  property damage or financial loss and thus transferred risk or losses to  the federal government. We conducted this search to identify potential  federal activities that currently only exist in law but met our criteria.  According to officials from OMB, activities may not appear in the  President’s Budget for different reasons, including if the activities ended  or expired or if they have no expected expenditures or proposed  appropriations. In reviewing the U.S. Code, two analysts verified whether  a search result represented a new federal activity that met our criteria. In  addition, a senior attorney from our Office of General Counsel verified  that the additional activities were accurately stated based on the  language of the U.S. Code.

We shared our catalog with and obtained expert opinion from officials  from Treasury, OMB, the General Services Administration, the  Congressional Budget Office, and FASAB, as well as from key GAO staff  with relevant expertise (including accountants, actuaries, and experts on  budget appropriation and other federal activities). We added an additional  federal activity to our catalog that an outside expert brought to our  attention and that we had not identified through the methodologies  described above.

Examples of Challenges in Measuring and Reporting Fiscal Exposures

To illustrate some of the challenges in measuring and reporting fiscal  exposures that we identified in past reports, we reviewed prior reports on  fiscal exposures, the federal budget, and accrual budgeting to identify key  challenges relevant to insurance and other activities. We then selected  six activities from those we identified for this report that illustrate these  key challenges. We selected the (1) Disaster Relief Fund, (2) Federal  Aviation Administration’s Commercial Space Launch Insurance Program,  (3) Federal Employees’ Group Life Insurance program, (4) Federal  Housing Administration’s Mutual Mortgage Insurance Fund, (5) NFIP, and  (6) PBGC pension insurance programs. We reviewed the Financial  Report and the President’s Budget for information and financial measures  on these activities, such as receipts, outlays, and net position for NFIP  and PBGC. We also reviewed the appropriation and supplemental  appropriation laws for the Disaster Relief Fund from fiscal years 2005  through 2018. We analyzed the agencies’ financial and budget  documents and conducted interviews with agency officials.

We conducted this performance audit from October 2017 to March 2019  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Appendix II: Selected Information on Federal Insurance Programs

The Federal Crop Insurance program is administered by the Risk  Management Agency (RMA) of the Department of Agriculture. It helps  farmers manage the risks inherent in farming by allowing them to insure  against losses caused by poor crop yields, declines in prices, or both.  Crop insurance premiums are subsidized in part to achieve high  participation and coverage levels, which may reduce or eliminate the  need for potentially costly disaster assistance payments from  congressionally authorized ad hoc disaster programs. RMA partners with  private insurers that sell and service policies. The program insures  farmers against losses on more than 100 crops, which include corn,  soybeans, wheat, cotton, and grain sorghum, as well as nursery crops  and certain fruits and vegetables. In crop year 2018, RMA estimated it  sold 1.1 million policies for a total of about $109.1 billion in insurance  protection.

The federal government subsidizes crop insurance policies by charging  participating farmers less than the full amount of the policy premium.  Congress sets the programs’ premium subsidy rates—the percentage of  the premium paid by the government. RMA subsidized approximately 63  percent of total premiums in crop years 2017 and 2018 (or $6.36 billion  and $6.27 billion, respectively), while farmers paid the remaining 37  percent. The federal government also reimburses participating private- sector insurance companies for administrative and operating expenses.  The reimbursements are based on a percentage of crop insurance  premiums and are intended to cover the companies’ expenses to sell and  service policies, such as employee salaries; fees paid to insurance  adjusters to verify claims; and sales commissions and other  compensation (profit sharing) paid to the insurance agents who sell the  crop insurance to farmers. The federal government is also the primary  reinsurer for the private insurance companies that take on the risk of  covering losses to insured farmers, allowing private insurers and the  federal government to share in the risk of loss and opportunity for gain  associated with the policies. The insurance companies retain part of the  premiums and associated risk, and RMA holds the remaining premiums  and risk. In addition, each company cedes to RMA a percentage of its  underwriting gains or losses.

The Federal Crop Insurance program is funded through mandatory  spending authority, so that RMA receives a permanent indefinite  appropriation each fiscal year for premium subsidy and other expenses  and returns unobligated balances to the U.S. Treasury at the end of the  fiscal year. According to RMA, the net cost of operations for the program  was $5.5 billion and $6.8 billion for fiscal years 2018 and 2017,  respectively (see table 8). Lastly, in April 2018, the Congressional Budget  Office projected that federal crop insurance would cost the federal  government an average of about $7.9 billion per year in 2018–2028.

In 2017, we recommended that RMA and Congress consider improving  the calculations related to the payments to and risk-sharing agreements  with participating insurance companies to reduce year-to-year fluctuations  in the subsidy costs of the program. In 2015, we also reported on the  need for RMA to obtain more information on program costs and improve  its premium setting calculations. We recommended that Congress  consider reducing premium subsidies for the highest-income participants  to reduce the cost of the program. As of December 31, 2018, these  recommendations remained unaddressed.

Administered by the Federal Emergency Management Agency (FEMA) of  the Department of Homeland Security, the National Flood Insurance  Program (NFIP) makes federally backed flood insurance available to  residential property owners and businesses. By design, NFIP does not  operate for profit. Instead, the program must meet a public policy goal—to  provide flood insurance in flood-prone areas to property owners who  otherwise would not be able to obtain it. Under NFIP, the federal  government assumes the liability for the insurance coverage and sets  rates and coverage limitations, while the private insurance industry sells  the policies and administers the claims. As of September 30, 2018, NFIP  provided about $1.3 trillion of insurance coverage on 5.1 million policies.

NFIP generally is expected to cover its claim payments and operating  expenses with the premiums it collects, but it has had to use its authority  to borrow funds from the U.S. Treasury to cover large shortfalls. Since  2004, Congress increased NFIP’s initial borrowing limit from $1.5 billion to  $30.4 billion, which was passed into law in 2013. Until 2004, NFIP was  able to cover most claims with premiums it collected and occasional loans  from the U.S. Treasury that it repaid. Cumulative debt increased  substantially from 2005 to 2016 due to extraordinary catastrophic loss  years resulting primarily from Hurricane Katrina and Superstorm Sandy.  By September 2017, NFIP exhausted its borrowing authority following  hurricane season, which prompted Congress to grant $16 billion in debt  cancellation. NFIP then borrowed $6.1 billion to cover incurred and  anticipated expenses for the 2018 hurricane season. As of September 30,  2018, NFIP had $20.5 billion of outstanding debt with the U.S. Treasury.

According to FEMA, as currently designed, the program likely will not be  able to repay this debt.

According to FEMA, from October 1, 2017 through September 30, 2018,  NFIP’s total expenses were more than $12 billion, which was more than  twice its total revenue of $5.6 billion. In that time, NFIP collected $3.51  billion in premium revenues and $1.04 billion in reinsurance collections,  but paid $9.21 billion in claims through the National Flood Insurance  Fund. For fiscal year 2018, expenses also exceeded revenues by about  $6.64 billion for the National Flood Insurance Reserve Fund.

FEMA has produced estimates of its ability to pay claims and of annual  maximum probable losses. FEMA calculated NFIP’s capacity to pay  claims, which includes almost $10 billion in remaining borrowing authority  from Treasury, at $15.82 billion as of September 30, 2018 (see table 9).  Although FEMA entered into a reinsurance contract in 2018 for $1.5  billion, it projects it will not be able to cover potential future fiscal  exposure from a single, low-probability, super-catastrophic event, which it  estimates could cost as much as $40 billion in claims.

In 2017, we again reported that NFIP premiums do not reflect the full risk  of loss, which increases the federal fiscal exposure created by the  program, obscures that exposure from Congress and taxpayers,  contributes to policyholder misperception of flood risk (they may not fully  understand the risk of flooding), and discourages private insurers from  selling flood insurance (they cannot compete on rates). We concluded  that eliminating rate discounts by requiring all rates to reflect the full risk  of loss would help address these problems, but also would make policies  less affordable and could reduce consumer participation. We stated that  the decreases in affordability could be offset by other actions such as  providing means-based assistance. We recommended that Congress  consider comprehensive reform to improve NFIP's solvency and enhance  the nation's resilience to flood risk. As of December 31, 2018, Congress  still was considering various reforms as it worked to reauthorize the  program.

The Pension Benefit Guaranty Corporation (PBGC) is a wholly-owned  government corporation established to insure the pension benefits of  participants in and beneficiaries of private-sector defined benefit plans.  The corporation operates a single-employer program and a multiemployer  program. The single-employer program covers defined benefit pension  plans that generally are sponsored by one employer. When an  underfunded single-employer plan terminates, PBGC becomes the  trustee and administers the plan. As of September 30, 2018, the single- employer program insured about 26 million people in approximately  23,400 plans and approximately 861,000 people were receiving benefits  payments from PBGC. The multiemployer program insures plans  arranged through collective bargaining between labor unions and  employers, with two or more employers participating in a plan. PBGC  provides financial assistance to multiemployer plans when they become  insolvent. According to PBGC, as of September 30, 2018, the  multiemployer program insured about 10.6 million people in  approximately 1,400 plans and about 62,300 people were receiving  benefits payments from plans receiving financial assistance from PBGC.

Premium rates are set in law by Congress and plan sponsors or plans  pay per-participant flat premiums under both programs. In addition, under  the single-employer program, a plan sponsor or plan pays a variable-rate  premium based on its plan underfunding. PBGC receives no funds from  general tax revenue and assets from one program cannot be used to  support the other, so both programs must pay claims primarily from  nonfederal sources. The single-employer program had positive cash flow  during fiscal year 2018 and both programs have been able to maintain  enough assets to pay guaranteed benefits and financial assistance to  date.

But historically, PBGC’s statutory premium structure has not reflected  significant risks PBGC insures against—for example, the risk that a  single-employer plan sponsor becomes bankrupt, forcing the termination  of an underfunded plan, or the risk that a multiemployer plan’s financial  condition deteriorates, causing it to become insolvent—imposing claims  on PBGC programs. As shown in table 10, PBGC’s multiemployer  program had a negative net position (that is, total liabilities exceeded total  assets) at the end of fiscal year 2018. The single-employer program  reached a positive net position (for the first time since 2001) by the end of  fiscal year 2018. PBGC projects a positive net position in 10 years for the  single-employer program, but a negative net position for the  multiemployer program (negative $68.9 billion by the end of fiscal year  2027), although there is inherent uncertainty around such a projection.  PBGC’s forecasts for the following decade and beyond based on current  economic conditions project a very high likelihood of insolvency for the  multiemployer program before the end of fiscal year 2025 if there are no  changes in law.

In 2013, PBGC officials told us that once the multiemployer fund’s cash  balance was depleted, the agency would have to rely solely on annual  insurance premium receipts to pay financial assistance to plans. The  precise effect that the insolvency of the multiemployer insurance fund  would have on retirees receiving the PBGC guaranteed benefit would  depend on a number of factors—primarily the number of guaranteed  benefit recipients and PBGC’s annual premium income at that time.  However, the impact likely would be severe.

In 2012, we recommended that Congress consider redesigning PBGC’s  premium structure to more fully reflect the risks posed by plans and  sponsors to the agency and improve PBGC’s access to additional  information needed to assess risk and assist in setting premiums. In  2013, we also recommended that Congress consider comprehensive and  balanced structural reforms to reinforce and stabilize the multiemployer  program. As of December 31, 2018, Congress had yet to authorize a  redesign of PBGC's premium structure. However, in December 2014,  Congress enacted the Multiemployer Pension Reform Act of 2014, which  substantially established in law certain key structural reforms to the  multiemployer system, including allowing severely distressed  multiemployer plans to reduce accrued pension benefits; expanding  PBGC’s ability to assist financially distressed plans; and raising  multiemployer insurance premiums to provide PBGC with additional  resources.

The Federal Deposit Insurance Corporation (FDIC) insures the deposits  of commercial banks and savings associations up to the statutory limit of  $250,000. According to FDIC, as of September 30, 2018, there were  5,486 insured depository institutions with total insured deposits of $7.4  trillion. FDIC administers the federal deposit insurance program through  its management of the Deposit Insurance Fund (DIF), which has two  primary purposes: (1) to insure the deposits and protect the depositors of  insured banks and (2) to resolve failed banks. FDIC manages the DIF by  determining the size of the fund and of the DIF reserve ratio (the ratio of  the fund balance to estimated insured deposits). The DIF is funded mainly  through quarterly risk-based assessments on insured depository  institutions, and it also earns interest income on its securities. The DIF  is reduced by the amount of losses and expenses associated with failed  banks and by FDIC operating expenses.

The financial strength of the DIF can be gauged by comparing the fund’s  actual reserve ratio to the minimum reserve ratio, and by measuring its  progress to the designated, or desired, reserve ratio. Section 334 of the  Dodd-Frank Wall Street Reform and Consumer Protection Act increased  the minimum reserve ratio from 1.15 percent to 1.35 percent and required  that the reserve ratio reach that level by September 30, 2020. To meet  these requirements, large banks paid temporary surcharges from the third  quarter of 2016 through the third quarter of 2018. In addition, under the  long-term DIF management plan, the FDIC Board of Directors set the  designated reserve ratio at 2.0 percent, with the goal of helping FDIC  maintain a stable insurance assessment rate and sustain a positive DIF  balance even during a serious economic downturn. In November 2018,  FDIC announced that the DIF reserve ratio had reached 1.36 percent (as  of September 30, 2018), exceeding the statutorily required minimum  reserve ratio of 1.35 percent ahead of the statutory deadline (September  30, 2020).

Obligations of FDIC are backed by the full faith and credit of the U.S.  government. In addition, FDIC is authorized to borrow up to $100 billion  from the U.S. Treasury and issue and sell up to $100 billion in obligations to the Federal Financing Bank (see table 11). A statutory formula, known  as the maximum obligation limitation, limits the amount of obligations the  DIF can incur to the sum of its cash, 90 percent of the fair market value of  other assets, and the amount authorized to be borrowed from the U.S.  Treasury. The maximum obligation limitation for the DIF was $191.5  billion as of December 31, 2017.

FDIC did not use its authority to borrow funds from the U.S. Treasury  when the DIF was depleted and fell to negative $20.9 billion, its lowest  point in history, as a result of the 2007–2009 financial crisis. Instead,  FDIC first replenished the DIF through increased assessments and a one- time special assessment. These actions were taken pursuant to a  restoration plan established to replenish the DIF and raise the reserve  ratio to its designated minimum within the time limits prescribed by the  Federal Deposit Insurance Act. Finally, FDIC was able to improve the  liquidity of the DIF by requiring the banking industry to prepay its quarterly  risk-based assessments for the fourth quarter of 2009 and for the next 3  years.

National Credit Union Share Insurance Fund

The National Credit Union Administration (NCUA) administers the  National Credit Union Share Insurance Fund and provides up to $250,000  of insurance per depositor. According to NCUA, by the end of calendar  year 2017, the Share Insurance Fund insured the deposits of more than  111 million members in 5,573 credit unions with $1.38 trillion in assets,  and the fund insured $1.1 trillion of member shares, or dollars deposited.

The Share Insurance Fund is primarily funded by contributions of 1  percent of the insured shares or deposits from each member credit union.  Other sources of income include premiums, when assessed as explained  below, and investment income. The financial performance of the Share  Insurance Fund can be measured by comparing the equity ratio to the  normal operating level (or desired equity ratio). The equity ratio is the total  of credit unions’ contributions to the fund, less any gain or loss on  investments, plus accumulated retained earnings, divided by total insured  shares. By law, the equity ratio of the Share Insurance Fund cannot  decline below 1.20 percent and may not exceed 1.50 percent. If NCUA  expects the equity ratio to fall below this threshold, it must establish and  implement a restoration plan to rebuild the equity ratio, which must  include a premium assessment to each insured credit union. The reported  equity ratio at the end of 2017 was 1.46 percent, which is above the  normal operating level, set at 1.39 percent as of 2017. According to  NCUA, a normal operating level of 1.39 percent was set with the goal of ensuring that the Share Insurance Fund could withstand a moderate  recession without the equity ratio declining below 1.20 percent over a 5- year period.

The Share Insurance Fund is backed by the full faith and credit of the  U.S. government and, according to NCUA, has $6.0 billion in borrowing  authority from the U.S. Treasury, all of which was available as of  December 31, 2017. The fund also has the ability to borrow from the  NCUA’s Central Liquidity Facility up to the amount of the liquidity facility’s  unused borrowing authority, which was $6.6 billion as of December 31,  2017. As of December 31, 2017, the Share Insurance Fund had $12.6  billion in total available borrowing capacity, which is the combination of  the borrowing authority from the U.S. Treasury and the liquidity facility  (see table 12).

The recent equity ratio contrasts with low points reached during and after  the 2007–2009 financial crisis. NCUA had to take a number of steps to  stabilize credit unions, stemming primarily from the failure of five large  corporate credit unions. NCUA established the Temporary Corporate  Credit Union Stabilization Fund, which replaced the Share Insurance  Fund as the primary source to absorb the corporates’ losses. Congress  increased NCUA’s borrowing authority with the U.S. Treasury up to $6  billion through a revolving loan fund to be shared between the  Stabilization Fund and Share Insurance Fund. The Stabilization Fund  borrowed and repaid a total of $11.2 billion from the U.S. Treasury from  its inception in 2009 through its closure in October 1, 2017. The highest  amount of total borrowing outstanding was $5.1 billion in October 2012.  However, the Share Insurance Fund’s equity ratio fell below 1.20 percent  in both 2009 and 2010, and two premiums totaling $1.7 billion were  necessary to restore the equity ratio. NCUA stated that without the  premiums the equity ratio would have fallen to 1.07 percent.

Appendix III: Information on Federal Loan Guarantees

Federal loan guarantees are any guarantees, insurance, or other pledges  with respect to the payment of all or a part of the principal or interest on  any debt obligation of a nonfederal borrower to a nonfederal lender. Thus,  the federal guarantee transfers some or all of the risks of borrower default  from private lenders to the federal government. Table 13 lists the 33  federal guaranteed loan activities that presented liabilities to the federal  government as of September 30, 2017.

Appendix IV: Information on Federal Employee and Veterans Benefits

Table 14 lists 13 large federal employee and veterans benefit activities— such as pension, health, life, and disability benefits—that transfer risk or  losses to the federal government. Each of the activities listed represented  $10 billion or more in benefit liabilities payable for the fiscal year ending  September 30, 2017. Combined, the activities accounted for 99 percent of  the total federal employee and veterans benefit liabilities of $7.7 trillion.

Appendix V: Information on Selected Federal Activities That Transfer Risk or Losses to the Government

Tables 15, 16, and 17 list a total of 95 federal activities that met our  criteria of transferring risk or losses from adverse events from third parties  to the federal government and that we found in the Budget of the United  States Government (President’s Budget), the Catalog of Federal  Domestic Assistance (CFDA), or the Code of Laws of the United States  (U.S. Code). These activities can be broadly categorized into activities  that, at least in part, provide compensation for property or financial  losses—including losses resulting from adverse environmental or  manmade events—and activities that offer life, health, or disability  benefits to nonfederal employees.

Table 15 has information on 39 budget accounts from the President’s  Budget, generally organized by amount of obligations for fiscal year  2017. While budget obligations create a legal liability for the federal  government, they may not necessarily reflect an activity’s fiscal  exposure if, for example, the activity has dedicated payment streams.

Table 16 has information on an additional 51 activities found through  our sources that met our criteria.

Table 17 has information on five activities authorized in law that had  not triggered losses to the federal government as of December 31,  2018. With the exception of the Terrorism Risk Insurance Program,  we identified these programs through an analysis of the U.S. Code,  since the programs have not had liabilities or appropriations and could  not be found in the Financial Report or the President’s Budget. We  were able to find some financial and budgetary information on the  Terrorism Risk Insurance Program because administrative expenses  and potential projected payments under the program are identified in  the President’s Budget on an annual basis.

Appendix VI: Fiscal Exposures from Social Insurance Programs

Federal social insurance programs are Social Security, Medicare (Parts  A, B, and D), Railroad Retirement, and Black Lung. These programs  provide eligible individuals with benefits, such as health insurance,  disability, and retirement benefits, thus transferring risk to the federal  government.

Fiscal exposures from the four programs are discussed annually in the  Statement of Social Insurance (SOSI) in the Financial Reports of the  United States Government. Specifically, the SOSI details the present  value of the estimated future revenues and expenditures for scheduled  benefits over the next 75 years. The amounts in the SOSI and presented  below are not considered liabilities in an accounting context. Future  benefit payments will be recognized in the Financial Report as expenses  and liabilities as they are incurred based on the continuation of the social  insurance programs' provisions contained in current law. While future  social insurance benefit payments that are not due and payable are not  treated explicitly as legal liabilities to the federal government, the SOSI’s  forward-looking projections are intended to help citizens understand the  long-term sustainability of these programs and the fiscal exposures they  present.

The social insurance programs are mainly funded by taxes and  premiums. Contributions and dedicated taxes consist of: payroll taxes  from employers, employees, and self-employed persons; revenue from  federal income taxation of Old-Age Survivors and Disability Insurance  (OASDI) and railroad retirement benefits; excise tax on the domestic sale  of coal; premiums from, and state transfers on behalf of, participants in  Medicare; and reimbursements from the General Fund to the OASDI and  Medicare Trust Funds. The social insurance trust funds account for all  related program income and expenses, and have automatic funding  authority to pay future benefits to the extent that funds are available.  Taxes, premiums, and other income are credited to the funds, while  benefit payments and program administrative costs are paid from the  funds.

However, as of January 1, 2017, based on information from the SOSI ,  the present value of federal expenditures for social insurance programs  over 75 years was projected to exceed program revenues by about $19.0  trillion (see table 18). This represents about 1.5 percent of the present  value of the gross domestic product over 75 years. To illustrate the  sustainability of current benefits, the Social Security and Medicare Part A  SOSI projections assume that scheduled social insurance benefit  payments would continue after related trust funds are projected to be  depleted, contrary to current law. The projections for Medicare Parts B  and D for fiscal year 2017 include $30 trillion in transfers of general  revenues that, under current law, are used to finance the remainder of the  expenditures in excess of revenues. We have reported that there are  significant uncertainties related to the achievement of projected  reductions in Medicare cost growth assumed in the SOSI projections that  have prevented us from expressing an opinion on the sustainability of the  financial statements in the Financial Report.

We previously reported on the fiscal problems presented by these  programs, in particular Social Security and Medicare. The Social Security  and Medicare programs are projected to face financial challenges. In  June 2018, we noted that fiscal spending increases in 2017 were driven  by Social Security, Medicare, Medicaid, and interest on debt held by the  public. The spending increases were largely a result of the aging of the  population and increasing health care costs rather than legislative  changes to these programs. Spending on Social Security and these  health programs is expected to continue to increase because of long- standing demographic and economic trends. The 2017 Financial Report  of the United States Government, Congressional Budget Office, and our  projections all show that, absent policy changes, the federal government’s  fiscal path is unsustainable and that the ratio of debt to the gross  domestic product would surpass its historical high of 106 percent within  14–22 years. All the projections also note that the longer action is  delayed, the greater and more drastic changes will have to be.

Appendix VII: GAO Contacts and Staff Acknowledgments

Alicia Puente Cackley, (202) 512-8678 or cackleya@gao.gov.

In addition to the contact name above, Patrick Ward (Assistant Director),  Silvia Arbelaez-Ellis (Analyst in Charge), Katherine Carter, Robert F.  Dacey (Chief Accountant), Rachel DeMarcus (Assistant General  Counsel), Jill Lacey, Janice Latimer (Assistant Director, Strategic Issues),  Scott McNulty, Marc W. Molino, Angela Pun, Barbara Roesmann, Jessica  Sandler, Dawn Simpson (Director, Financial Management and  Assurance), and Frank Todisco (Chief Actuary) made significant  contributions to this report.

Many federal activities—like loan guarantees or flood insurance—are intended to protect people from the effects of adverse events. We found 148 activities like these, which carry a risk of future financial commitments for the federal government.

For some activities, such as pension and life insurance, the federal commitment occurs years before payments are reflected in the budget.

This analysis supports our 2007 recommendation that Congress consider improving recognition of these fiscal risks in budget documents. For example, Congress could expand the use of information on expected future spending arising from commitments made today.