The Federal Budget Process Needs Structural Change

The coronavirus pandemic, economic shutdowns, and major stimulus spending have exacerbated the federal government’s already serious long term fiscal problems. The latest Congressional Budget Office data projects a “federal budget deficit of $3.3 trillion in 2020, more than triple the shortfall recorded in 2019.” It also forecasts annual deficits to exceed $1 trillion throughout the 10-year budget window and the ratio of publicly held debt-to-gross domestic product (GDP) to reach a US record of 109 percent by 2030.

A working group of public finance scholars convened by the National Academy of Public Administrators (NAPA) recently proposed a framework for fiscal reform that could start to address a number of the country’s fiscal problems. Their report, “Building a Stronger Fiscal Foundation: An Agenda for 2021,” recommends two changes that have great potential to strengthen the federal government’s finances: adopting accrual accounting (reporting government financial obligations as they’re incurred) and transitioning to multi-year budgeting (in which the budget cycle is longer than one year). The report also points to ways infrastructure can be better financed, managed and maintained over the long term, while requiring the least amount of potential taxpayer risk exposure.

While accrual accounting’s focus on aligning revenues and expenditures may seem beside the point amidst trillion-dollar deficits, reporting and process reforms are essential to fiscal sustainability. Following the adage that ‘if you can’t properly measure a problem you can’t improve it,’ a transition away from cash accounting is key to straightening out the federal government’s fiscal house.

Governments at all levels should account for obligations when they take them on, not when they disburse funds. If the federal government used accounting principles commonly required in the private sector it might show $135 trillion in debt, instead of $26 trillion of debt. That level of debt is over six times GDP and is large enough to perhaps convince even adherents of Modern Monetary Theory that the national debt is a significant problem that must be addressed. Further, when changes in federal benefits are being debated, the use of accrual accounting principles would compel legislators to think about the intergenerational financial impact of proposals, and not just their effects during a short 10-year budget window.

Recent decades have seen a total breakdown in the federal budgetary process first adopted in the 1970s and multi-year budgeting could help. Congress has been persistently unable to approve appropriation measures in time for the start of each budget year and relies increasingly on stopgap measures called continuing resolutions (CRs) that temporarily continue to fund government operations at, or near, recent levels. The use of CRs instead of regular budgeting procedures limits the ability of committees, whose members are more knowledgeable about the federal agencies they are charged with overseeing, to ensure that funds are properly prioritized. Instead, agency funding is largely on auto-pilot, with even the most obsolete activities receiving full funding.

Since Congress has consistently shown it cannot complete a budget each year, the best option is to use multi-year budgeting to lengthen the budget calendar to two years – as many states have done – or even four years, a full presidential term, as the NAPA working group suggests. Although they propose quadrennial executive budgets, the approach could also be adopted by Congress, especially if there is also the ability to make interim adjustments to the four-year plan.

As the federal government continues to navigate the COVID-19 pandemic and recession, there are going to be a number of harsh realities that come to the forefront. For example, there is an ongoing discussion in Congress about additional stimulus spending, including money for state and local governments, many of which are going to be dealing with growing budget deficits and unfunded public pension liabilities, along with major needs to repair and expand infrastructure.

State and local governments need trillions to upgrade, repair, and replace infrastructure of all kinds: airports, bridges, courthouses, roads, water, and sewer systems chief among them. In our current system, the federal government will be asked to facilitate some of the financing. The NAPA authors offer sage advice for this multi-trillion dollar problem, saying infrastructure asset investments “should seek to optimize an asset’s long-term performance.”

Unfortunately, states have put off needed maintenance and repairs so the infrastructure bills continue to grow. The deferred maintenance problems that plague many of the nation’s infrastructure assets can be attributed to a lack of a commitment to those assets’ long-term performance. One recommendation to address this issue is the extension and imposition of life cycle costing standards for infrastructure assets. Governments are getting better at adopting a more life cycle cost approach to public infrastructure management, but realities often dictate maintenance and other longer-term considerations take a backseat to other funding priorities.

Commitment to greater life cycle management of infrastructure includes myriad risks, and governments are usually ill-equipped to take on all the risks and tasks that come with major projects: from financing projects to ensure the construction process doesn’t suffer from delays and overruns to optimizing maintenance schedules to keep infrastructure in a “state of good repair,” as well as managing all of the environmental and other regulatory concerns.

Two means to those better-managed ends are mentioned by the NAPA report: favoring projects with dedicated user-fees and tapping into private capital sources in public-private partnerships (P3s). Without the ability to transfer risks agencies have trouble retaining—whether from contracting out, interagency agreements, outsourcing, P3s, or privatization—effectively managing infrastructure assets becomes more difficult, and in the long run, more costly.

An important approach to getting our nation’s finances back on track needs to focus on creating a new set of budget processes. These procedural changes would help put the country in a better position to restore fiscal sustainability and address needed infrastructure investments.