Cash and Accrual Measures in Federal Budgeting

The federal budget serves many important functions, including tracking the government’s cash flows, serving as a key instrument in national policymaking, summarizing how fiscal policy changes over time, and communicating the nature and scope of governmental activities. The net costs of federal activities are estimated throughout the federal budget using two fundamentally different accounting measures—cash accounting and accrual accounting. The principal difference between cash and accrual accounting lies in the timing of when the commitment (or collection) of budgetary resources is recognized. Transactions in cash-based accounting are recorded when payments are actually made or receipts collected. By contrast, accrual measures summarize in a single number the anticipated net financial effects at a specific point in time of a commitment that will affect federal cash flows many years into the future. That is, accrual methods record the estimated value of expenses and related receipts when the legal obligation is first made rather than when subsequent cash transactions occur. Currently, most federal activities are recorded in the budget on a cash basis, with the major exception of federal credit programs, which are recorded on an accrual basis.

Whether programs are accounted for on a cash or an accrual basis can, in some cases, significantly affect the size and timing of their estimated deficit effects. Cash-based estimates used in the budgeting process generally reflect costs over the 10-year period on which the process focuses, but that period may not be long enough to capture the full extent of some activities’ effects. Accrual-based estimates that consider long-term effects provide more complete information about programs that involve longer time frames. Such estimates could give lawmakers a tool to use in setting and enforcing targets for long-term deficit control because, for the purposes of Congressional budget enforcement procedures, legislative proposals would receive credit (or be charged) within the 10-year budget horizon for the ultimate effects of provisions that would save (or cost) money over a longer period. For example, accrual estimates might provide useful information about the net costs of changes in federal retirement benefits and in a limited number of federal insurance programs. In addition, some analysts believe accrual-based estimates would provide particularly useful information about certain social insurance programs because of their long time frames and the magnitude of cash flows involved.

This report discusses the relative merits of cash and accrual measures and explores the implications of expanding the use of accrual measures for decisionmaking purposes. In subsequent reports, the Congressional Budget Office will examine in greater detail how an accrual treatment would differ from the current cash treatment for specific types of programs.

What Roles Do Cash and Accrual Measures Play in the Federal Budget Process?

Measures of budgetary effects inform policymakers’ decisions about how to allocate limited federal resources. Lawmakers rely on estimates of such effects to determine how legislative proposals would affect the federal deficit and whether they would trigger statutory or legislative “budget enforcement” procedures that are designed to control revenues, spending, and deficits.

The federal budget currently reports the costs of nearly all commitments on a cash basis. The rationale for that approach is that cash measures are simple, understandable, and can be used to reliably estimate most programs’ fiscal effects. However, the costs of some commitments with long-term budgetary effects are reported on an accrual basis. For instance, the Federal Credit Reform Act of 1990 (FCRA) requires federal direct loans and loan guarantees—for which cash flows typically extend well beyond the 10-year budget horizon—to be recorded in the budget on an accrual rather than a cash basis. For such programs, the budget records a single payment or receipt that represents the net present value of expected future cash flows. Policymakers made the switch to more accurately measure the full net cost of credit programs over the long term and to facilitate comparisons of the net cost of direct loans, loan guarantees, and grants. In addition, certain transactions related to federal retirement benefits are reported on an accrual basis in agencies’ budgets (in order to measure some of the long-term costs of current employees), but the overall budget totals reflect current-year cash flows—the government’s payments to annuitants and employees’ contributions to the retirement funds.

What Are the Advantages and Disadvantages of Cash and Accrual Measures?

Cash and accrual measures have competing advantages and disadvantages in the budget:

• Cash measures are transparent, verifiable, and track changes in debt held by the public. They also work well for programs with short timing lags.
• However, the cash measures used in the federal budget process may provide incomplete information about some programs that involve future commitments because the 10-year window truncates the budgetary effects. For example, cash measures fail to show the liability that taxpayers incur in a given year for federal employees’ accrued retirement benefits and the long-term costs or savings that would result from changes in those benefits. In such cases, cash projections that extend farther into the future can highlight long-term trends, even if they are not an integral part of the budget process.
• In combination with truncated time horizons, cash accounting introduces opportunities for policymakers to adjust budgetary outcomes through timing shifts—that is, by instituting nonsubstantive policies that simply delay payments or accelerate receipts without materially changing their underlying value.
• Accrual measures succinctly convey whether policy changes are expected to increase or decrease the deficit over the long term, thereby facilitating comparisons of the net cost of programs with cash flows that differ in timing (or exposure to market risk) and potentially improving lawmakers’ opportunity to control long-term costs when commitments are initially made.
• Accrual estimates, however, are methodologically complex, sensitive to technical assumptions, subject to the uncertainties of projecting program activity far into the future, and therefore more volatile and harder to explain and understand than cash measures.
• Increasing the use of accrual measures in the budget would require new account structures and reestimates to reconcile present-value estimates with actual cash flows.

What Are the Criteria for Assessing Information Provided by Cash and Accrual Measures?

CBO has identified three criteria to assess the trade-offs between the 10-year cash measures now used in the federal budget process and accrual measures that reflect budgetary effects over longer periods:

• Do the measures convey complete information about budgetary effects? That is, do they correctly indicate whether programs have net costs or savings and provide a reasonable sense of the magnitude of such effects?
• Is the government’s commitment of future resources firm enough to record future cash flows before they occur? Budget projections generally reflect anticipated cash flows stemming from future commitments as long as they are probable under current laws and policies; but the case for accrual measures may be stronger for commitments that are legally binding or otherwise firm and that require no further Congressional action to ensure that agencies have sufficient resources to pay for them.
• Can underlying long-term cash flows be projected and discounted with sufficient accuracy so that accrual measures can be reliably used in the budget process?

What Are Potential Approaches for Selectively Expanding the Use of Accrual and Other Long-Term Measures in the Federal Budget Process?

For programs where accrual measures are judged to be useful, the Congress could require such measures for all aspects of budgetary treatment and accounting; expand the use of accrual measures only for the Congressional budget process; or use those measures as supplemental information.

• Requiring accrual-based budgetary treatment and accounting, as was done for federal credit programs, would change measures of how programs affect the budget deficit and would require new account structures and periodic revisions to estimates. Because the basis of measurement would be consistent throughout the federal budget process, lawmakers would have a reasonable idea of how their decisions about resource allocation would ultimately affect the Administration’s execution of statutory budget enforcement mechanisms.
• Using accrual estimates only for purposes of Congressional budget enforcement would change legislative cost estimates and might affect decisions about the allocation of resources. That approach would be less burdensome than reporting accrual estimates in the budget, which would remain cash-based. However, because the allocation of resources across federal programs might ultimately depend on how the Administration executes statutory requirements related to budget enforcement, using different measures for Congressional and statutory budget enforcement could cause confusion.
• Using accrual estimates as supplemental information would allow policymakers to judge their value without changing the budget numbers or budget enforcement procedures.