Fiscally Speaking Tour Putting Federal Finances in Order

Featured Speaker Series Dallas Business Club

Dallas, TX August 30th, 2011

Hon. David M. Walker Founder and CEO

The Comeback America Initiative and

Former Comptroller General of the United States

“If we do not take steps to keep our economy strong for both today and tomorrow, our national security,

international standing, standard of living, social safety net, and even our domestic tranquility will suffer over

time.”

-Hon. David M. Walker, Former Comptroller General of the United States (1998-2008)

The Bottom Line

2

Growth of Government

3

20%

19%

23%

20%

12%

6%

42%

20%

4%

15%

12%

7%

Defense Other Discretionary Medicare and MedicaidSocial Security Other Mandatory Net Interest

2010 Source: CBO, Budget and Economic Outlook: Fiscal Years 2011 Through 2021, Historical Tables Note: All numbers are in constant 2010 dollars .

($944 Billion) ($2.901 Trillion)

Composition of Federal Spending (% of Total Outlays)

1970

4

307 % Growth in 2010 Dollars

Federal Spending & the Political Party in Power

5

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,50019

45

1947

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Bill

ions

of C

onst

ant 2

005

Dol

lars

Fiscal Years

Democratic Controlled Congress Republican Controlled CongressSplit Congress Republican PresidentDemocratic President

Source: OMB, Budget, Historical Tables, Table 1.3—Summary of Receipts, Outlays, and Surpluses or Deficits (−) in Current Dollars, Constant (FY 2005) Dollars, and as Percentages of GDP: 1940–2016

Social Security Act of 1965 (Medicare)

Medicare Prescription Drug, Improvement, and Modernization Act of 2003and the Invasion of Iraq

America Recovery and Reinvestment Act of 2009

Patient Protection and Affordable Care Act of 2010

Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Control Act of 1985

Budget Enforcement Act of 1990

Deficit Reduction Act of 1993 2001 Invasion

of Afghanistan

Vietnam Conflict 1960-75

Korean Conflict 1950-53

End of WWII

End of Statutory Budget Controls 2002

Federal Debt Burdens

6

$3.4 Trillion 35% of GDP

$9.9 Trillion 66.1% of GDP $2.3 Trillion

23% of GDP

$4.7 Trillion 31.1% of GDP

$0

$2

$4

$6

$8

$10

$12

$14

$16

Sepetember 30th 2000 August 11th 2011

In T

rilli

ons o

f U.S

. Dol

lars

Intragovernmental HeldDebt

Publicly Held Debt

$5.6 Trillion 58% of GDP

$14.6 Trillion 96% of GDP

SOURCE: U.S. Department of Treasury, Bureau of the Public Debt, Debt to the Penny; CBO, Long-Term Budget Outlook (June 2011); OMB, Historical Tables, Table 1.2.

In Trillions of Dollars 2000 2010

Explicit Liabilities $ 6.9 $16.4

•Publicly Held Debt 3.4 9.1

•Military & Civilian Pensions & Retiree Health 2.8 5.7

•Other Major Fiscal Exposures 0.7 1.6

Commitments & Contingencies 0.5 2.1 E.g. Pension Benefit Guaranty Corporation, Undelivered Orders

Trustees’ Estimates

Actuary's Alternative

Scenario Social Insurance Promises 13.0 30.8 43.1

•Future Social Security Benefits 3.8 8.0 8.0

•Future Medicare Benefits 9.2 22.8 35.1

Future Medicare Part A Benefits 2.7 2.7 7.3

Future Medicare Part B Benefits 6.5 12.9 20.6

Future Medicare Part D Benefits - 7.2 7.2

Total $20.4 $49.3 $61.6 SOURCE: Data from the Department of Treasury, 2010 Financial Report of the United States Government. NOTE: Numbers may not add due to rounding. Trustees’ Estimates for Medicare and Social Security benefits are from the Social Security and Medicare Trustees reports, which are as of January 1, 2010 and show social insurance promises for the next 75 years. Estimates for the Actuary’s Alternative Scenario are found in note 26 of the 2010 Financial Report of the United States. Future liabilities are discounted to present value based on a real interest rate of 2.9% and CPI growth of 2.8%. The totals do not include liabilities on the balance sheets of Fannie Mae, Freddie Mac, and the Federal Reserve. Assets of the U.S. government not included.

Federal Financial Hole (For Fiscal 2000 and 2010)

7

Fiscal Gap 2011

$225

$2,108

$1,375

$2,228

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

Outlays Revenues

Bill

ions

of 2

010

Dol

lars

SOURCE: CBO, The Budget and Economic Outlook: Fiscal Years 2011 to 2021, Projections Data, Table 1-4. Compiled by TCAII.

Discretionary Spending

Even if we cut all of discretionary spending in 2011 the Federal Government would still be operating a $105 billion deficit.

8

9

Historical Receipts & Outlays

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

1914 1918 1922 1926 1930 1934 1938 1942 1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

Rea

l 201

0 D

olla

rs

Receipts per capita Outlays per Capita

SOURCES: OMB Historical Tables, Table 1.3 - Summary Receipts, Outlays, and Surpluses or Deficits (-) in Current Dollars; Bureau of Labor Statistics, and U.S. Census Bureau. Compiled by TCAII.

Projected Surplus?

10

11

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Rea

l 20

10 D

olla

rs

Democrat Controlled Congress Republican Controlled Congress Split Congress

As of 12/31/2010 $45,426

Party of the President

Total Federal Debt Per Capita & The Political Party In Power

SOURCES: U.S. Census Bureau, U.S. Department of Treasury, U.S. Bureau of Labor Statistics, U.S. House, and U.S. Senate. Compiled by TCAII NOTE: All amounts are adjusted for inflation and in 2010 Dollars. Federal Debt is the total public debt outstanding and intragovernmental holdings.

End of WW2 $ 22,183

SOURCES: U.S. Census Bureau, U.S. Department of Treasury, U.S. Bureau of Labor Statistics, U.S. House, and U.S. Senate. Compiled by TCAII NOTE: All amounts are adjusted for inflation and in 2010 Dollars. Federal Debt is the total public debt outstanding and intragovernmental holdings.

Comparative Debt Burdens

12

0%

20%

40%

60%

80%

100%

120%

140%

160%

Greece Italy Portugal Ireland Spain United Kingdom United States

Gro

ss T

otal

Deb

t As a

Per

cent

age

of G

DP

2011 2016

SOURCE: International Monetary Fund, World Economic Outlook Database. Compiled by TCAII. Note: Data for 2011 and 2016 are estimates. Gross debt consists of all liabilities that require payment or payments of interest and/or principal by the debtor to the creditor at a date or dates in the future. This includes debt liabilities in the form of SDRs, currency and deposits, debt securities, loans, insurance, pensions and standardized guarantee schemes, and other accounts payable. Thus, all liabilities in the GFSM 2001 system are debt, except for equity and investment fund shares and financial derivatives and employee stock options. Debt can be valued at current market, nominal, or face values (GFSM 2001, paragraph 7.110).

Growing Foreign Dependency

13

Rank Country

Rank Country

1 Australia 18 Mexico 2 New Zealand 19 Israel 3 Estonia 20 Slovenia 4 Sweden 21 Austria 5 China 22 Finland 6 Luxembourg 23 France 7 Chile 24 Spain 8 Denmark 25 Germany 9 United Kingdom 26 Belgium 10 Brazil 27 Italy 11 Canada 28 United States 12 India 29 Hungary 13 Poland 30 Ireland 14 Netherlands 31 Japan* 15 Norway 32 Iceland** 16 Slovakia 33 Portugal 17 Korea 34 Greece

Fiscal Fitness Index: Overall Results

Source: Sovereign Fiscal Responsibility Index. Note: *Japan’s debt was downgraded by Moody’s 1/29/11. ** Iceland’s Sustainable Fiscal Path reflects reforms enacted after an IMF bailout and there is a legal case pending in regard to foreign losses incurred due to the failure of Landsbanki.

14

CBO’s Public Debt Projections

15

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%20

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

1220

1320

1420

1520

1620

1720

1820

1920

2020

2120

2220

2320

2420

2520

2620

2720

2820

2920

3020

3120

3220

3320

3420

35

Actual

Projection: Alternative Fiscal Scenario

Projection: Extended-Baseline Scenario 187%

84%

SOURCE: CBO, Supplemental Data for Congressional Budget Office's Long-Term Budget Outlook (June 2011), Figure 1-2. Compiled by TCAII.

Impact of Health Reform

16

17

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

1970 1975 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Rea

l 200

5 D

olla

rs

Part D Part B HI

Source: CMS, 2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, Table V. B1;

Medicare Costs Per Beneficiary

Comparative Health Costs

18

$3,361

$4,363 $3,978

$4,218

$2,983

$3,722 $3,487

$7,960

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

OECD Average Canada France Germany New Zealand Sweden United Kingdom United States

Per

Cap

ita H

ealth

Car

e C

osts

U

.S. D

olla

rs

Source: Organization for Economic Cooperation and Development, OECD Health Data 2011. Compiled by TCAII. Note: Per capita health expenditures for 2009 uses purchasing power parity for all dollar amounts.

The United States spends more than double the OECD average with below average health care results.

Relative Defense Spending

19

U.S.A

China

United Kingdom

France

Russia

Japan

Saudi Arabia

Germany

India

Italy

Brazil South Korea

Australia Canada Turkey

0

100

200

300

400

500

600

700

In B

illio

ns o

f Con

stan

t 200

9 D

olla

rs

$698 Billion

$646 Billion

SOURCE: Stockholm International Peace Research Institute, SIPRI Military Expenditure Database 2011. Compiled by TCAII.

The United States spent more on defense in 2010 than the other 14 highest defense budgets combined. The Majority of which are our allies

Federal Revenues & the Political Party in Power

20

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,00019

4519

4619

4719

4819

4919

5019

5119

5219

5319

5419

5519

5619

5719

5819

5919

6019

6119

6219

6319

6419

6519

6619

6719

6819

6919

7019

7119

7219

7319

7419

7519

7619

7719

7819

7919

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

10

Bill

ions

of C

onst

ant 2

005

Dol

lars

Fiscal Years

Democratic Controlled Congress Republican Controlled congress

Split Congress Democratic President

Republican President

Source: OMB, Budget, Historical Tables, Table 1.3—Summary of Receipts, Outlays, and Surpluses or Deficits (−) in Current Dollars, Constant (FY 2005) Dollars, and as Percentages of GDP: 1940–2016

Revenue Act of 1964

End of WWII

Economic Recovery Tax Act of 1981

Tax Reform Act of 1986

Economic Growth and Tax Relief Reconciliation Act of 2001 & Invasion of Afghanistan

Jobs and Growth Tax Relief Reconciliation Act of 2003 & Invasion of Iraq

Omnibus Budget Reconciliation Act of 1993

Korean Conflict 1950-53

Vietnam Conflict 1960-75

Progressive Tax System

21

Effective Tax Rates

22

23

0%

5%

10%

15%

20%

25%

30%

35%

Ireland Australia United Kingdom Germany Italy Canada France Mexico United States Japan

Eff

ectiv

e Cor

pora

te T

ax R

ate

SOURCE: American Enterprise Institute, "Report Card on Effective Corporate Tax Rates: United States Gets an F". Note: The effective corporate tax rate takes into account tax offsets, the present value of depreciations, and other deductions that narrow the tax base. Average includes countries not included in the table.

Average Effective Tax Rate 20.9%

Effective Corporate Tax Rate

24

State Pension and Health Costs

12.1% 11.8%

9.5%

4.2%

6.6% 5.7%

4.3% 3.5%

16.4%

14.5% 16.0%

5.0%

0.6% 0.6%

1.4%

0.3%

0%

5%

10%

15%

20%

25%

30%

New Jersey Alabama Hawaii Texas Iowa Minnesota Wisconsin North Dakota

Act

uari

ally

Req

uire

d C

ontr

ibut

ion

as

Perc

ent S

hare

of S

tate

Rev

enue

Retiree Health Obligations Retiree Pension Obligations

NOTE: The actuarially required contribution is the annual contribution to the retiree pension and health funds required for future assets to be in line with future liabilities within 30 years. It has two components: a normal contribution to keep up with new benefit obligations accrued, and a catch-up payment to make up for the current gap between pension assets and liabilities. The data for both revenues and unfunded obligations are for fiscal year 2008. Most states end their fiscal year in June of 2008, and therefore these numbers do not include losses in the stock market that led to losses in most pension funds.

State Rankings by Taxpayer’s Burden Best to Worst (Thousands of Dollars)

25

1. Wyoming 2. North Dakota 3. Nebraska 4. Utah 5. South Dakota 6. Iowa 7. Montana 8. Arkansas 9. Tennessee 10. Alaska 11. Minnesota 12. Indiana 13. Florida 14. Oregon 15. Arizona 16. Colorado 17. Idaho

18. Nevada 19. Missouri 20. Ohio 21. Virginia 22. Wisconsin 23. Texas 24. Kansas 25. Washington 26. Pennsylvania 27. Georgia 28. New Mexico 29. South Carolina 30. Oklahoma 31. North Carolina 32. New Hampshire 33. Vermont 34. Alabama

35. New York 36. Maine 37. Mississippi 38. Rhode Island 39. Michigan 40. California 41. Delaware 42. Maryland 43. Louisiana 44. West Virginia 45. Massachusetts 46. Kentucky 47. Hawaii 48. Illinois 49. New Jersey

50. Connecticut

Source: 2009, Institute for Truth in Accounting Numbers in red denote burden per taxpayer, Numbers in black denote a surplus per taxpayer

$15.1 $ 6.4 $ 2.5 $ 2.2 $ 0.3 $ 0.4 $ 0.7

$ 0.7 $ 1.2 $ 1.4 $ 1.9 $ 2.3 $ 2.5 $ 2.6 $ 2.6

$ 2.8 $ 2.9

$ 4.2 $ 4.6 $ 4.7 $ 4.8 $ 5.1 $ 5.7 $ 5.8 $ 6.5 $ 8.2 $ 8.9 $ 9.0 $ 9.7

$ 10.0 $ 11.2 $ 11.6 $ 12.5

$ 12.9

$ 13.7 $ 14.3 $ 14.3 $ 14.3 $ 14.7 $ 15.1 $ 15.9 $ 16.5 $ 16.8 $ 18.9 $ 20.1 $ 23.8 $ 25.0 $ 26.8 $ 34.6

$ 41.2

Key Systemic Challenges

• Expansion of government at all levels

• Health Care Costs

• Retirement Income Costs

• Disability and Welfare Related Costs

• Critical Infrastructure Needs

• Education Costs

• Corrections Costs

• Outdated and Inadequate Revenue Systems

• Myopia, Tunnel Vision, Special Interests and Self-Interest.

26

Federal: • Implement statutory budget controls that address discretionary and mandatory

spending as well as tax preferences in order to stabilize our debt/ GDP at a reasonable level

• Achieve Social Security reform that makes the program solvent, sustainable, secure and more savings oriented

• Reduce the rate of increase in health care costs and more effectively target related taxpayer subsidies and tax preferences

• Ensure that all future health care reforms adequately consider coverage, cost quality and personal responsibility

• Pursue comprehensive tax reform that makes the system more streamlined, understandable, equitable and competitive while also generating adequate revenues

A Way Forward

27

A Way Forward - Continued

• Review, re-prioritize and re-engineer the base of the federal government, including national security strategies, to focus on the future, eliminate waste, generate real results and ensure sustainability

• Ensure that we have process that will enable us to achieve the above objectives within a reasonable period of time

State and Local: • Reform pension and health systems to make them reasonable, affordable and

sustainable

• Review, re-prioritize and re-engineer the base of government.

• Pursue comprehensive tax reform in coordination with the federal government.

• Consider an exchange of primary roles, functions and revenue sources as part of a new federalism or devolution effort (e.g., health care, education, infrastructure)

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Feasibility Test

29

Fiscal Reforms Must Meet a Feasibility Test:

1) Do they make economic sense? 2) Are they socially equitable? 3) Are they culturally acceptable? 4) Do they pass a math test? 5) Are they politically feasible? 6) Can they achieve significant bipartisan support?

• Budget Controls & Process Reforms – PAYGO rules on spending and taxes. – Spending caps that only exempt interest and Social Security. – Debt/GDP targets with automatic enforcement mechanisms.

• Social Security

– Focus most changes on people under age 55. – Increase early and full retirement age. – Modify cost-of-living index formula. – Make benefit formula more progressive. – Consider a taxable wage base increase.

• Healthcare

– Repeal the CLASS Act provisions of the ACA. – Subject federal health expenditures to an annual budget. – Transform federal payment system to an evidence-based and outcome-oriented approach. – Rationalize healthcare promises. – Reduce taxpayer subsidies to higher income beneficiaries.

Preemptive (Prudent) Framework Examples

30

• Defense – Reduce U.S. forces in Iraq and Afghanistan to no more than 45K by Dec. 31, 2014. – Require DoD planning to consider current and expected resource levels. – Require the DoD to implement the systemic acquisition and contracting reforms recommended by

the GAO. – Reduce DoD overhead by at least 25%.

• Other Spending – Switch all relevant federal benefits programs to chain-linked CPI. – Reduce discretionary spending to 2008 levels adjusted for inflation. – Reform federal insurance programs and tax payer subsidies. – Make $500 billion in additional during fiscal 2012-2013.

• Revenues – Do not allow federal revenues to exceed 21.5% of GDP. – Move to enact comprehensive income tax reform that eliminates and targets tax expenditures

while reducing the top marginal tax rate for individuals and corporations to no more than 25%. – Allow corporations to deduct dividends paid. – Consider a consumption tax of up to 5% if necessary.

Preemptive (Prudent) Framework Cont. Examples

31

Reactive Framework Differences (This framework is in case Washington fails to properly manage the debt and interest rates rise.)

• Social Security – Reforms will impact everyone under the age of 60. – Increase retirement eligibility ages one additional year. – Taxable wage base would increase in 2014.

• Healthcare

– Repeal Affordable Care Act and Medicare Modernization Act – Accelerate the increase in the eligibility age for Medicare. – Accelerate changes in reducing health care subsidies for higher income individuals. – Delay move towards universal healthcare.

32

Reactive (Crisis) Framework Examples

• Defense – Accelerate all actions in making the Pentagon and military forces more efficient. – Accelerate troop withdrawals in Iraq & Afghanistan to 2012.

• Other Spending – Accelerate changes and lower spending caps. – Eliminate additional investments in fiscal 2012-2013.

• Revenues – Repeal the Middle Class Tax Relief Act of 2010. – Impose temporary deficit surcharge of 0.7% for 2013-2014.

33

Reactive (Crisis) Framework Cont. Examples

Baseline EPI CAI Preemptive Framework

2021 2035 2021 2035 2021 2035

Receipts 20.8% 23.3% 21.6% 24.1% 20.8% 21.5%

Outlays 24.0% 28.3% 24.5% 27.8% 21.8% 23.1%

Deficit* 3.2% 5.0% 2.9% 3.7% 1.0% 1.5%

Debt 76.7% 91.5% 76.5% 81.7% 62.9% 51.4.%

CAI Reactive Framework Heritage Fiscal Commission

2021 2035 2021 2035 2021 2035

Receipts 20.8% 21.5% 18.3% 18.5% 20.3% 21.0%

Outlays 20.1% 21.8% 18.1% 17.7% 21.8% 21.0%

Deficit* -0.7% 0.3% -0.2% -0.8% 1.6% 0.0%

Debt 50.9% 28.2% 58.2% 30.0% 68.5% 40.0%

Comparison

Note: Fiscal Commission data for 2021 is from the Commission for a Responsible Federal Budget re-estimate of the Fiscal Plan and data for 2035 is taken from the assumptions found within the Fiscal Commission report “The Moment or Truth”. Deficit*: Negative numbers represent surpluses.

34

Results

-2%

0%

2%

4%

6%

8%

10%

12%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035

Deficits Current Law Baseline Preemptive Framework Reactive Framework

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035

Public Debt Current Law Baseline Preemptive Framework Reactive Framework

35

• When & why was it created?

• Have conditions changed, and have we adapted?

• How are we measuring success, and are we achieving desired outcomes? • Are there multiple programs, and if so are they working in an integrated

manner?

• Are we using the experience of others (e.g., countries, states) to replicate success and avoid mistakes?

• Can we afford and sustain it in its present form?

Transforming Government (Basic questions for Policies & Programs)

36

Comeback America Initiative (CAI) Bridgeport, CT www.TCAII.org No Labels Washington, DC www.nolabels.org

New Players on the Fiscal Responsibility Field

37