The Fed Budget Problems: Part One

I really respect Richard F. Keevey.  I knew him 15 years ago when he was the Budget Director and Comptroller for the State of NJ under two Governors. I worked for the State then as the Manager of the Contract Administration unit in the Treasury Department. In that capacity I initiated dozens of contracts and procurement documents worth millions of dollars that had to be approved by the State Budget Director; in other words, by Rich.  All spending had to be approved by Rich’s office. Every check issued by the State had Rich’s name and title on it. So I got to walk thru many documents directly to him for his signature. He was always professional and keen-witted, and made sure all the i’s were dotted and the t’s crossed. After leaving the state Rich went on to work in high positions in the Federal departments of Housing and Defense, at the Policy Institute for Princeton University, and as a Distinguished Practitioner in Public Affairs at Rutgers.  He’s experienced,  smart, and savvy.

In April at the Annual AGA Spring Symposium, I got to hear Rich present a seminar on the current Federal Budget problems. It was fascinating and I took rapid notes. I’d like to share them with you because I think they boil down some facts that we really don’t understand. This information helps explain why our government is so screwed up.

Here’s Rich’s presentation, [with my additions for clarity]:

“I will speak on three areas: Terminology – first, the federal government is a different world than the states, with different terms. Second, the current problem. And third, recommendations to reduce growth in spending.”

“The Feds always end in deficits. Deficits have rolled into our $13 trillion in debt. Feds borrow for everything. The Feds mix operating and capital budgets together. NJ only borrows for capital projects [never for operating expenses]. “ 

“The Federal Budget has two spending parts: mandatory, called entitlements, and discretionary. Entitlements are 57% of the Budget, i.e. Medicare, Medicaid and Social Security alone. Discretionary spending has been flat at 43% of the Budget – it’s not growing, mainly because a freeze has been on for some time. [Discretionary spending is what flows into and out of the 21 major executive branch departments, and then some.] So that’s the spending side. On the revenue side, the Feds have three main revenue sources: Income Tax (45%), FICA (37%), and Corp Tax (9%). The Feds do “Current Services Budgeting” which is the baseline. That means, looking at what the government will spend over the next ten years based on current laws. They look at all growth, increases and decreases.  Their terminology is: Expenditures equals Outlays equals Cash. All projects must have budget authority for outlays.”  

“The Feds have 12-13 annual Appropriation Bills. Until they are passed in their entirety, Congress passes “Continuing Resolutions” as stop-gap measures. Those are the 11^th hour bills on things like Homeland Security and Defense or they get shut down.  [More recently it was Transportation.] The President has no Line Item Veto like we have in NJ, [which makes it much more difficult to trim the fat]. All the Federal numbers come from the Congressional Budget Office, or CBO. It is the Gold Standard as far as estimates and reports, and is very respected and objective. All reports are comparisons to national Gross Domestic Product, or GDP, which states don’t do. [GDP is how the Feds measure the value of goods, services and property produced in this county. Recently it was $15.5 trillion annually.]” 

“The CBO also gives alternative projections [for everything]. Even so, the NJ and local municipalities are better [because we follow GAAP, GASB, CAFR etc., that is, recognized accounting principles], and we don’t borrow for operating expenses. The current CBO projection is $14 trillion in debt by 2020. The Feds have been borrowing at very low interest rates, but they will be higher in the future, and money will cost a lot more. The long term problem is 77 MILLION retiring Baby Boomers.  Now, there is a 3 to 1 ratio of workers to retirees; in the near future it will be 2 to 1.  That’s a huge problem.”