The Federal Debt Crisis – What Now? Innovation and Leadership in Challenging Times

San Juan, Puerto Rico December 9, 2011

Rep. Terie Norelli - Hon. David M. Walker - Robert N. Campbell, III - G. William Hoagland

Panelists Honorable David M Walker - Founder and CEO The

Comeback America Initiative and Former Comptroller General of the United States

Bob Campbell – State Government Leader, Deloitte LLP, member of the Bipartisan Policy Center’s Debt Reduction Task Force

G. William Hoagland – Vice President of Policy and Government Affairs at CIGNA and former director of Budget and Appropriations in the Office of the Senate Majority Leader

Moderator Terie Norelli - Minority Leader of the NH House of

Representatives, president-elect of NCSL and co-chair of NCSL’s Debt Reduction Committee.

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Discussion Topics

The Nation’s Fiscal Challenge and A Way Forward – David Walker

Bipartisan Policy Center Debt Reduction Task Force: Insights from a National Debt Commission and Implications for the States – Bob Campbell

The Impact of the Debt on Entitlement Programs and States – Bill Hoagland

Questions and Answers - All

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The Nation’s Fiscal Challenge and A Way Forward

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Selected Key Founding Principles Limited but effective Government

Individual liberty and opportunity

Personal responsibility and accountability

Rule of law and equal justice under the law

Fiscal responsibility and intergenerational equity

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Growth of Government

1800 2011 2040

US GDP: $8.89 Billion

(Constant 2010 Dollars)

Projected US GDP: $14.65 Trillion

(Constant 2010 Dollars)

Projected US GDP: $28.54 Trillion

(Constant 2010 Dollars)

Source: Historical Statistics of the United States, Millennial Edition On Line, Cambridge 2006; CBO, The Budget and Economic Outlook: An Update, August 2011; CBO, CBO’s Long-Term Budget Outlook, Supplemental Data, June 2011. Compiled by TCAII. Note: Federal Spending for 2040 is based on the Alternative Scenario Estimates.

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Federal Spending & the Political Party in Power

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Federal Spending & the Political Party in Power

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Historical Debt Burden (1800 through 2011)

0%

20%

40%

60%

80%

100%

120%

140%

1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Perc

enta

ge o

f GD

P

Intragovernmental Debt Public Debt

Source: Congressional Budget Office, Long Term Budgetary Outlook 2009, Supplemental Data; Office of Management and Budget, Historical Tables, Table 7.1- Federal Debt 9

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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: 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. Actuary 2011 alternative scenario estimates for unfunded Medicare liabilities are $37 Trillion (Part A: $8.5; Part B: $21; Part D: $7.5)

Federal Financial Hole (For Fiscal 2000 and 2010)

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

Taxpayer’s Burden by State (Thousands of Dollars)

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Comeback America Initiative’s Illustrative Fiscal Framework

Budget Controls and Process Reforms

Social Security

Medicare, Medicaid, and Healthcare

Defense and Other Spending

Comprehensive Tax Reforms

Constitutional Amendments

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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?

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Bipartisan Policy Center Debt Reduction Task Force: Insights from a National Debt Commission and Implications for the States

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The Risk of Fiscal Crisis Is Too Great To Ignore…

“Rising debt increases the likelihood of a fiscal crisis during which investors would lose confidence in the government’s ability to manage its budget and the government would lose its ability to borrow at affordable rates.”

- Doug Elmendorf, Director of the Congressional Budget Office

“Our national debt is our biggest national security threat.” - Admiral Mike Mullen, Chairman of the Joint Chiefs of Staff

“One way or another, fiscal adjustment to stabilize the federal budget must occur … [if we don't act in advance] the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis.”

- Ben Bernanke, Chairman of the Federal Reserve

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The Bipartisan Policy Center Debt Reduction Task Force

The Bipartisan Policy Center is a non-profit established in 2007 by former Senate Majority Leaders from both sides of the aisle: Bob Dole, Howard Baker, Tom Daschle and George Mitchell

Commissioned the Debt Reduction Task Force

Membership: 19 government and business leaders including 1 former senator, 2 former governors, 2 former cabinet secretaries, 2 big city mayors

Mission: Set aside politics, look for solutions, and develop a plan that the federal government could act on

* This was one of two national debt commissions working during 2010; the other being the White House Commission chaired by Senator Alan Simpson and Erskine Bowles

Goal: Develop a plan to stabilize the debt at 60% of GDP by 2020.

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Despite What the Pundits Say, There Is No Singular Answer

“Just cut spending!” Stabilizing the debt by 2020

would require eliminating nearly all spending on law

enforcement, border security, education, and food & drug

inspections

“Increase taxes on the rich!” Stabilizing through taxing alone would require raising the top two brackets to 86% and 91% (from today’s current rates of 33% and

35%

“In time the recession will end and we’ll grow out of it!”

Nice thought, but the GDP would need to grow at a rate of 6% per year over the next 10 years to

take care of this problem. The GDP hasn’t grown more

than 4.4% in any decade since WWII

We had to put aside politics and what was popular and look across the spectrum for solutions

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Necessary Elements of Fiscal Stabilization

Return debt/GDP to sustainable ratio within ten years and keep it there

60% debt/GDP is a generally accepted metric

Would require ~ $5 trillion in “savings” over 10 years, but a much greater amount beyond

“Savings” measures against policy baseline, not current law

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Summary of BPC Recommendations Revive the

economy and create jobs

• Implement an employer payroll tax holiday

Freeze domestic discretionary

spending • Freeze non-defense

discretionary spending for 4 years and cap at GDP

• Freeze defense discretionary spending for 5 years and cap at GDP thereafter

Restrain rising healthcare costs

• Transform Medicare and Medicaid, implement malpractice reforms

Strengthen Social Security

• Gradually raise taxable wage to 90% of all wages over 38 years; change COLA to reflect inflation; slightly reduce benefits

Cut spending in other programs

• Reduce farm program spending and reform the civilian and military retirement program

Create a simple pro-growth tax

system

• Reduce corporate and income tax rates

Enforce the budget reform

process

• Enforce the freeze on discretionary; require policy makers to off-set new tax cuts or program expansions

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If Implemented, the BPC Plan Would Bend the Debt Curve

$ impact ≈ $28.8 trillion

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Impacts on States

Potential balanced budget amendment Decreasing federal funding for education

and Medicaid Growing expectations of citizens for

government services Credit rating risk

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The Path Ahead Economy and Growth State Tax Policy Balancing states’ budgets Potential state risk of impasse over the

new debt ceiling Entitlements

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What Now? Implications for States and Entitlement Programs. How We Got Here—Where are We Going?

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Total Budget Surplus/Deficit CBO Baseline Projection (Aug. 2011) -- President's 2012 Proposal (Sept. 2011) FY 1965 - 2021

Source: The Budget and Economic Outlook: Fiscal Years 2011 to 2021” Congressional Budget Office, August 2011. Living Within Our Means & Investing in the Future, Office of Management and Budget; September 2011.

Recession as announced by National Bureau of Economic Research

Surplus

Deficit

Trend

Actual Alternative Projections

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Budget Outlook FY 2010 – 2015 (In Billions of Dollars – % of GDP)

2010 Actual

2011 Est

2012 Proj →

2013 2014 2015 2016 % ∆ annual 2011-2016

Receipts 2,163 2,314 2,635 3,069 3,423 3,665 3,847 + 10.7 %

Spending 3,456 3,597 3,609 3,692 3,803 3,988 4,249 + 4.2 %

Deficits*

% of GDP

1,294 8.9%

1,284 8.5%

973 6.2%

623 3.9%

380 2.2%

322 1.8%

402

2.1%

NA

NA

Public Debt** % GDP

Debt Subject Limit**

% GDP

9,019 62%

13,511 93%

10,164 67%

14,779 98%

11,153 71%

15,910 102%

11,773 73%

16,646 103%

12,148 72%

17,162 101%

12,463 69%

17,664 97%

12,840 67%

18,261 96%

+ 4.8%

+ 4.39%

Sources: Congressional Budget Office. The Budget and Economic Outlook: An Update. August 2011. * = Excluding Effect of Provisions Related to Joint Select Committee on Deficit Reduction. ** = Includes Effect of Provisions Related to Joint Select Committee on Deficit Reduction.

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Federal Debt Held by the Public Under Two Budget Scenarios Long-Term Budget Outlook

Source: Congressional Budget Office. June 2011 Note: The extended-baseline scenario adheres closely to current law, following CBO's 10-year baseline budget projections through 2021 and then extending the baseline concept for the rest of the long-term projection period. The alternative fiscal scenario incorporates several changes to current law that are widely expected to occur or that would modify some provisions that might be difficult to sustain for a long period.

200

175

150

125

100

75

50

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0

200

175

150

125

100

75

50

25

0 2000 2005 2010 2015 2020 2025 2030 2035

Actual Projected

Alternative Fiscal Scenario

Extended-Baseline Scenario

Percentage of gross domestic product

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Federal Spending Projected for 2020 CBO -- January 2011 Est.

“Other Health Programs” includes: Health insurance subsidies, exchanges, and related spending; Department of Defense Medicare-Eligible Retiree Health Care Fund (including TRICARE for Life); Children’s Health Insurance Program, and other programs.

Medicare (15%)

Defense (16%)

Medicaid (10%)

Social Security (22%)

Other Spending (20%) Discretionary

(13%)

Net Interest (14%)

Other Health Programs (3%)

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Major Components of Federal Expenditures Percentage of GDP 2011-2051

Source: Congressional Budget Office.

Other Mandatory Spending

Healthcare

Social Security Discretionary Spending

0%

2%

4%

6%

8%

10%

12%

14%

2011 2021 2031 2041 2051

% of GDP

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How we might have gotten out of it? Joint Select Committee on Deficit

Reduction

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The Budget Control Act of 2011 Timeline for Debt Increases & Joint Select Committee on Deficit Reduction

IN COMING MONTHS +$500 billion An additional $500 billion will come in the fall. Congress could vote to disapprove the rise, but the president could veto their resolution and it would require two-thirds of both chambers of Congress to override his veto.

EARLY NEXT YEAR +$1.2 trillion The final increase – also subject to the congressional vote and presidential veto process – provides the Treasury with enough borrowing poser to pay the bills into early 2012.

IMMEDIATELY +$400 billion The measure immediately grants the Treasury $400 billion in additional borrowing authority.

RAISING THE DEBT CEILING

BY OCT.1 Spending limits begin. About $917 billion over the next decade, starting with a $21 billion reduction in the fiscal year that will begin in October.

REDUCING THE DEFICIT

BY THANKSGIVING A second stage of reductions will come later this year, with the special committee finding $1.2 trillion more over the next decade. The committee must recommend a plan by Nov. 23.

BY DEC. 23 House and Senate vote. Each chamber needs to consider the special committee’s proposal on an up-or-down basis without any amendments.

BY DEC. 31 Congress needs to vote by the end of the year on a balanced budget amendment to the Constitution. The measure would need a two-thirds vote in each chamber, and then ratification by 38 states, to succeed.

JAN. 1, 2013 If the special committee does not act – or if Congress does not adopt its recommendations – government spending would be cut across the board by $1.2 trillion over 10 years, with the reductions split 50-50 between domestic programs and defense.

AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER JANUARY

2012 2011

JANUARY

2013

The final measure sets in motion a plan to raise the debt ceiling in three steps. A look at what comes next:

August 16 members appointed to Special Fiscal Committee

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No Agreement on November 21

Automatic Cuts are “Triggered” for FYs 2013-2021

Excl. Medicaid, Social Security; Medicare cuts to 2% ($123 b) 10% atb defense ($492 b)

7.8% atb nondefense ($322 b) 7.8% atb entitlement ($47 b)

Process Ends – or Does it?

Super Failure What Now?

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What might this mean

for the States & Territories?

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Sequester Impact on Selected Programs ($ in Billions, BA)

Program 2012 2021 %∆ 2012-21

Annual %∆ 2012-21

Social Security Baseline Sequester

764 1,272 1,272

66% 66%

5.8% 5.8%

Medicare Baseline Sequester

477 821 804

72% 69%

6.2% 5.9%

Medicaid Baseline Sequester

260 560 560

115% 115%

8.9% 8.9%

Income Security

Baseline Sequester

388 400 395

3% 2%

0.3% 0.2%

Defense Baseline Sequester

561 700 589

24% 5%

2.5% 0.5%

Nondefense Baseline Sequester

528 656 557

24% 5%

2.4% 0.6%

Baseline: Assumes 2011 Appropriations Adjusted for Inflation 33

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Nondefense Discretionary Spending 2011

Administration of Justice

20% 16%

15%

11%

10% 10%

9%

9%

Other*

International Affairs

Health Veterans' Benefits and Services

Income Security

Transportation

Education, Training, Employment, and Social Services

Source: Congressional Budget Office. Note: Nondefense discretionary funding includes budgetary resources provided by obligation limitations for certain ground and air transportation programs. * Includes funding for natural resources and environment; general science, space, and technology; general government; community and regional development; agriculture; Medicare and Social Security (for administrative activities); energy; and commerce and housing credit. 34

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Nondefense Discretionary Funding 1980-2021

Percentage of gross domestic product

Actual Projected

Proportional Reductions

No Savings from the Joint Select Committee

Source: Congressional Budget Office. October 26, 2011 Note: Funding includes budget authority as well as budgetary resources provided by obligation limitations for certain ground and air transportation programs.

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Projections of Discretionary Budget Authority for Nondefense Programs Billions of Dollars

Total 2011 2012 2013 2021 2012-2016 2012-2021

Projected Budget Authority

Funding for 2011 Adjusted Inflation 511 528 538 656 2,753 5,867

Potential Paths for Nondefense Discretionary Budget Authority Subject to the Caps as Set in the Budget Control Act of 2011

All reductions from nondefense 511 481 473 534 2,414 5,004 Proportional reductions 511 505 506 597 2,589 5,449 No reductions from nondefense 511 511 516 656 2,715 5,828

No Savings Result from the Joint Select Committee/Sequester 511 505 462 557 2,416 5,072

Reduction in Budget Authority Relative to the Funding for 2011 Adjusted for Inflation Potential Path for Nondefense

Discretionary Budget Authority Subject to the Caps as Set in the Budget Control Act of 2011

All reductions from nondefense 0 -47 -65 -122 -340 -863 Proportional reductions 0 -23 -31 -59 -164 -418 No reductions from nondefense 0 -17 -22 0 -38 -38

No Savings Result from the Joint Select Committee/Sequester 0 NA -76 -99 -338 -794 36

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Federal Grants to State & Local Governments (1995 -2012* est: $ in billions)

2012* 2010 2005 2000 1995

Total $584.3 $608.4 $428.0 $285.9 $225.0

Of which Federal Grants Mandatory (Medical Assistance)

$424.9 ($260.0)

$400.7 ($275.4)

$246.3 ($182.0)

$169.2 ($117.9)

$131.0 ($89.0)

Grants Subject to Sequester

$164.9

($13.2) $125.3 $64.3 $51.3 $42.0

Memo: American Recovery and Reinvestment Act of 2009 “revenues”

$763

$717

(*)

NA

NA

Federal Grants % Total Federal

Spending

15.7% 17.6% 17.3% 16.0% 14.8%

* = Estimate; Analytical Perspective FY 2012 37

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Other Policy Options

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The National Commission on Fiscal Responsibility: Moment of Truth The Bipartisan Policy Center : Restoring America’s

Future November – December 2010 POLICY The National Commission on Fiscal

Responsibility Bipartisan Policy Center Task Force

Consensus Fiscal Measures

• ~ 11 of the 18-member supported plan • In 2020 – 65.5% Debt to GDP • In 2020 – spending 21.8% GDP • In 2020 – revenues 20.6% GDP • In 2020 – deficit 1.2% GDP

• Consensus plan of a 19-member bipartisan Task Force • In 2020 -- 60% Debt to GDP • In 2020 – spending 23.0% GDP • In 2020 – revenues 21.4% GDP • In 2020 – deficit 1.6% GDP

Economic Recovery

• Recommends consideration of small payroll tax relief in 2011 -- $50 to $60 billion.

• Starts policies in 2012

• Provides 1-year payroll tax holiday for approximately 125 million workers in 2011. Cost: $640 billion.

• Starts policies in 2012.

Tax Expenditures

• Retains current law EITC and Child Tax Credit • Maintains current law standard deduction • Eliminates all itemized deductions • 12% non-refundable tax credit mortgage &

charitable contributions • Beginning in 2018 phases out employer provided

health insurance exclusion by 2038

• Eliminates almost all tax expenditures. • Eliminates most tax deductions, credits and expenditures – turns

EITC, child credit, charitable, mortgage, and retirement savings deductions into refundable credits

• Beginning in 2018 phases out employer provided health insurance exclusion by 2028

Revenues • Cuts individual income tax rates; creates 3 brackets 12%, 22% and 28%

• Cuts corporate rate to 28% • Proposes to cap revenues at 21% of GDP • Raises federal gas tax by 15 cents • Eliminates AMT, PEP and Pease

• Cuts individual income tax rates; creates just 2 brackets of 15% and 27%

• Cuts corporate rate to 27% (OECD average) • Imposes Debt Reduction Sales Tax of 6.5% • Eliminates the AMT

Domestic Discretionary

• Proposes 4 years of cuts, then 5 years held to growth at inflation

• Freezes domestic discretionary spending for 4 years, then limits growth to GDP growth

Defense • Proposes 4 years of cuts, then 5 years held to growth at inflation

• Reduces weapon systems, reforms compensation, cuts force structure cuts, and applies Gates’ savings

• Freezes defense discretionary spending for 5 years, then limits growth to GDP growth

• Reduces weapon systems, reforms compensation, cuts force structure, and applies Gates’ savings 39

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The National Commission on Fiscal Responsibility: Moment of Truth The Bipartisan Policy Center : Restoring America’s Future

November – December 2010

POLICY The National Commission on Fiscal

Responsibility

Bipartisan Policy Center Task Force

Health • Medicaid: Expands managed care for dual eligibles

• Institutes tort reform • Raises Medicare premiums • Strengthens IPAB Provides illustrative option

of premium support • Converts FEHB program from defined-benefit

to defined-contribution with support growing GDP+1

• In 2020, global cap on all federal health spending and limit growth GDP+1%

• Reduces provider payments

• Medicaid: Expands managed care for dual eligibles • Institutes tort reform • Raises Medicare premiums • In 2018, transforms Medicare to premium-support model, but

maintains traditional Medicare as default option. Limits federal support per beneficiary to GDP+1%

• Limit Medicaid growth: end federal matching payments in Medicaid by decoupling the system

• Accommodates a permanent fix to the SGR mechanism • Excise tax and import tax on manufacture and importation of

sweetened beverages

Social Security

• Raises retirement ages slowly over time • Switches to Chained CPI • Includes state and local workers • Raises the minimum benefit and creates old age

bump • Raises the cap on payroll taxes to the 90% level • Makes benefit adjustment, protecting the

bottom 50% of beneficiaries

• Adjusts benefit formula to account for increases in longevity (but does not raise the retirement age)

• Switches to Chained CPI • Includes state and local workers • Raises the minimum benefit and creates old-age bump • Raises the cap on payroll taxes to the 90% level • Makes a modest benefit adjustment, protecting the bottom 75% of

beneficiaries

Other Spending

• Reforms farm programs • Reforms military retirement • Reforms civilian retirement • Imposes COLA change across government

• Reforms farm programs • Reforms military retirement • Reforms civilian retirement • Imposes COLA change across government

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What Can You Do?

For further information about:

• Non-partisan facts and possible solutions on fiscal sustainability Sign up at The Comeback America Initiative’s website www.TCAII.org

• Providing progress over partisanship sign up at No Labels website www.NoLabels.org

• The Bipartisan Policy Center’s work on this issue go to: http://www.bipartisanpolicy.org/projects/debt-initiative/about

Encourage others to check out these sites and sign up

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