federal and state finances and a way forward · 2016. 5. 9. · function: 1789 –1970....

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What Future Course is Likely After the 2016 Elections? Hon. David Walker

Employee Benefit Plans Conference

Session 35

AICPA

Annual Employee Benefit Plans ConferenceMay 11, 2016Las Vegas, NV

Presented byThe Honorable David M. Walker, Senior Strategic Advisor for PwC &Former U.S. Comptroller General

PwC

1912Source: Historical Statistics of the United States, Millennial Edition On Line, Cambridge 2006; Congressional Budget Office, March 2015.

Federal Government has Grown Dramatically

2

20%Federal Spending as a Percentage of GDP

2%

1912 2015Federal Spending

$277 Billion in 2015 DollarsFederal Spending

$3.7 Trillion in 2015 Dollars

Federal and State Finances and A Way Forward

35 - 1

PwC

Source: Historical Statistics of the United States, Millennial Edition On Line, Table Ea636–643 Federal government expenditure, by major function: 1789–1970. Congressional Budget Office, March. 2015.

Losing Control of the Budget

3

3% 97%

Controlled Yearly

191268% 32%

Auto Pilot

2015

Federal and State Finances and A Way Forward

PwC

Trillion Dollar Deficits Are Coming Back

Federal and State Finances and A Way Forward4

35 - 2

PwC

Federal Debt Held by the Public as a Share of GDP


0

20

40

60

80

100

120

140

160

180

200

1797

1802

1807

1812

1817

1822

1827

1832

1837

1842

1847

1852

1857

1862

1867

1872

1877

1882

1887

1892

1897

1902

1907

1912

1917

1922

1927

1932

1937

1942

1947

1952

1957

1962

1967

1972

1977

1982

1987

1992

1997

2002

2007

2012

2017

2022

2027

2032

2037

Perc

enta

ge o

f GD

P (%

)Federal Debt Held by the Public as a Share of GDP (1797-2040)

Historical Debt Held by the Public/GDP Projected Debt Held by the Public/GDP

Source: Government Accountability Office, 2015.

PwC

Debt/GDP Numbers Are Getting Worse vs. Better


35 - 3

PwC

President Obama’s Final Budget Proposes Large Tax Increases to Reduce the Gap

PwC

Federal Financial Sink Hole

8

6.921.50.5

2.2

3.8

13.4

9.2

27.9

$0

$10

$20

$30

$40

$50

$60

$70

$80

2000 2015

Trilli

ons

of P

rese

nt V

alue

Dol

lars

Explicit Liabilities Commitments & Contingencies

Source: Data from the Department of Treasury, 2014 Financial Report of the United States Government.

$65.0 Trillion(Your Share $203,826)

$20.4 Trillion(Your Share $72,500)

35 - 4

PwC

Examples of Potential Financial Reclassifications and Disclosures for Fiscal 2015Deletions:

Defense PP&E (Net) and Inventory - $892 Billion

Additions:

Add Federal Debt in Social Security and Medicare Trust Funds - $3.07 Trillion

Add Unfunded Social Security Obligations - $10.63 Trillion

Add Unfunded Medicare Obligations - $27.68 Trillion

Add Commitments and Contingencies (C&C) - $2.2 Trillion

Total Liabilities, Obligations and C&C - $65 Trillion

Total Liabilities, Obligations and C&C per Person and Household -$203,826 and $511,633

Median Household Income in 2014 - $53,657

PwC

0%

1%

2%

3%

4%

5%

6%

7%Actual Projected

SurplusesDeficits

Revenues

Scheduled Benefits

Payable Benefits

Source: 2013 Social Security Trustees Report.

23% Percent Benefit Cut

Looming Social Security InsolvencySocial Security Costs and Revenues (Percent of GDP)

10

35 - 5

PwC

Source: 2015, PwC State Financial Position Index (SFPI) and Competitiveness Posture Report (% of Median Household Income for the Applicable State)Numbers in red denote burden per taxpayer, Numbers in black denote a surplus per taxpayerRelative Competitive Posture By Quintile – (1), (2), (3), (4) and (5)

1.Alaska (5) 77.3%2.North Dakota (1) 46.8%3.Wyoming (2) 40.6%4.South Dakota (2) 7.5%5.Utah (1) 6.6%6.Nebraska (1) 4.9%7. Idaho (2) 4.5%8.Oregon (3) 3.6%9.Tennessee (2) 3.0%

10.Montana (3) 1.8%11. Iowa (1) 1.6%12. Indiana (1) 1.5%13.Virginia (1) 2.3%14.Florida (2) 2.1%15.Arkansas (4) 3.3%15.Minnesota (2) 3.3%17.Oklahoma (2) 4.7%

18. Nevada (3) 5.4%18. Colorado (1) 5.4%20. Missouri (3) 6.0%21. New Hampshire (3) 6.4%22. Arizona (3) 6.7%23. Wisconsin (2) 7.1%23. Ohio (2) 7.1%25. Georgia (1) 9.1%26. Kansas (3) 12.5% 27. Washington (2) 14.4% 28. Texas (1) 15.4% 29. Maine (5) 17.0% 30. Maryland (4) 17.3% 31. North Carolina 18.0% 32. South Carolina (3) 21.6% 32. New Mexico (4) 21.8% 34. Rhode Island (5) 23.0%

35. Vermont (5) 23.6%36. Mississippi (5) 25.9% 37. Pennsylvania (4) 28.3%38. Delaware (3) 30.2% 39. Alabama (4) 31.7% 40. West Virginia (3) 32.9% 41. California (4) 34.6% 42. Michigan (4) 34.8% 43. Louisiana (4) 35.8% 44. Hawaii (5) 37.2% 45. New York (5) 38.1% 46. Massachusetts (3) 43.4% 47. Connecticut (5) 69.3% 48. Kentucky (4) 76.2% 49. New Jersey (5) 80.2% 50. Illinois (4) 81.9%

Relative Taxpayer Surplus/Burden by State

11Federal and State Finances and A Way Forward

PwC

Common Denominators Between Federal and State Challenges

• Outdated tax systems

• Excessive regulatory burdens

• Unfunded retirement obligations

• Escalating health care costs

• Expensive yet ineffective welfare systems

• Deteriorating critical infrastructure


35 - 6

PwC

Key Fiscal Reform Concepts

“Demographics are Destiny!”

“The Power of Compounding is Real!”

“The U.S. is not Exempt for the Laws of Prudent Finance!”

“States can not Print Money, Manipulate Interest Rates,

or Declare Bankruptcy”


PwC

Key Organizations in the Fiscal Space

No Labels (www.nolables.org) – National Strategic Agenda

Committee for a Responsible Federal Budget (www.crfb.org) – First Budget

Concord Coalition (www.concordcoalition.org) – First Budget

Peter G. Peterson Foundation (www.pgpf.org) – Federal Fiscal Sustainability

AARP (www.aarp.org) – Social Security and Medicare Solvency

Committee for a Fiscal Responsibility Amendment (www.cffra.org) –Fiscal Responsibility Amendment

Institute for Truth Accounting (www.truthinaccounting.org) – State Fiscal Sustainability

Volcker Alliance (www.volckeralliance.org) – State Fiscal Sustainability


35 - 7

PwC

Current Major Presidential Candidates

Republicans:

Ted Cruz – Limited Information (S-6%; T-10/16C; BL-$12.5T)

John Kasich – Overall Framework with Limited Details (S-(2%); T-28/25; BL-BB in 8 Years)

Donald Trump – Limited Information (S-3%; T-25/15; BL-$13T)

Democrats:

Hillary Clinton – Limited Information (S-2%; T-Higher min. and estate taxes, surcharge on very high income, and several “loophole” closures; BL-Will pay for new spending)

Bernie Sanders – More Extensive Information (S-33%; T-52/?; BL-$8.5T)

Legend:

S = Spending; T = Taxes; BL = Bottom Line All over 10-YearsFederal and State Finances and A Way Forward

15

PwC

No Labels National Strategic Agenda and Presidential Candidate AdoptersKey Goals:

Jobs

Fiscal Responsibility

Social Security and Medicare Solvency

Energy Security

Presidential Candidate Adopters:

Trump - Republican

Carson – Republican (Has suspended his campaign)

Kasich - Republican

Christie – Republican (Has suspended his campaign)

Sanders - Democrat

O’Malley – Democrat (Has suspended his campaign)Federal and State Finances and A Way Forward

16

35 - 8

PwC

2012 $10 Million a Minute Tour

27 States, 10,000 Miles with Two Key Representative Town Hall Events

Fact-based, Non-partisan, Non-ideological, Goal Oriented, Principles and Values Based, and Solutions Oriented

Focused on a Long-term Debt/GDP Goal (i.e., 60% by 2030)

Six Key Principles/Values for Reform (i.e., Pro Growth, Socially Equitable, Culturally Acceptable, Mathematical Integrity, Politically Feasible, and Meaningful Bi-partisan Support)

Eight Areas for Reform (i.e., Budget Process and Controls, Social Security, Medicare/Medicaid, Health Care, Taxes, Defense, Government Organization and Operations, and Political Reforms)

Super-Majority Support for Priority, Goal, Principles/Values, and Proposed Packages of Reform (68-97%)


PwC

Illustrative Reforms

Budget Controls and Process:

• Move to biennial budgeting

• Adopt capital and operating budgets

• Expand PAYGO to include mandatory spending programs

• Increase transparency and accountability over tax preferences/expenditures

• Focus on achieving stated debt/GDP targets over time rather than “balanced budgets” annually


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PwC

Illustrative Reforms (Cont’d)Social Security:

• Raise taxable wage base cap

• Provide a higher minimum benefit and increase benefit progressivity

• Gradually increase the NRA by 2 years over 30 years, with exceptions for certain occupations

• Implement a more accurate measure of inflation for seniors

• Add a supplemental and automatic savings account

Medicare/Medicaid:

• Decrease subsidies for higher income retirees

• Increase the age of eligibility unless a new universal base level of health care is adopted

• Allow for competitive bidding for prescription drugs

• Move to block grants and more state flexibility for MedicaidFederal and State Finances and A Way Forward

19

PwC

Illustrative Reforms (Cont’d)

Health Care:

• Move to universal basic and essential health care (e.g., preventative, wellness and catastrophic care) for all with options for additional coverage paid for by employers and/or individuals

• Provide for a national risk pool and public financing of the base level of care with choice, competition, transparency and accountability (e.g., cost and quality)

• Impose a budget on total federal health care spending

• Change payment systems to focus on outcomes versus activities

• Implement malpractice reform

• Allow for the sale of private insurance across state boundaries


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PwC

Illustrative Reforms (Cont’d)Tax Reform:

• Streamline and simplify the tax code for both corporations and individuals

• Eliminate most deductions, exemptions, credits and exclusions for both corporations and individuals in exchange for lower tax rates (e.g., maximum uniform rate of 25%)

• Provide limited preference for corporations (e.g., depreciation, R&D, retirement plans, dividends distributed) and individuals (e.g., qualifying mortgage loan limit on primary residence, charitable contributions, retirement savings)

• Move to territorial versus global taxation for corporations

• Consider a progressive consumption tax, if necessary, to hit debt/GDP targets

• Provide for an integrated oil production fee and gas tax where the funds are dedicated to improving our critical infrastructure


PwC

The Importance of Employee Benefit Plans and Related Audits

• Employee Benefit Plans Represent the Largest Pool of Capital in the World

• Employee Benefit Plans are Long-term Investors and can Provide Patient Capital for Key Public/Private Partnership Activities (e.g., Income Producing Infra-structure Projects)

• Many Public Sector Employee Benefit Plans are Seriously Underfunded

• Private Sector Employee Benefit Plans will Become more Important and a Supplement to Social Security

• Employee Benefit Plan Audits are key Transparency and

Accountability Elements to help Enhance Public Trust and Confidence

• Some Improvements in Auditing and Reporting are Needed


35 - 11

PwC

Summary


Current Fiscal and Monetary Policies are Unsustainable

A Number of States and Some Municipalities Face Serious Fiscal Challenges

There are Several Common Denominators Underlying these Challenges

These Challenges can be met with Strong CEO Leadership and Different Approaches to Engaging the Public

We Need Non-Partisan Solutions that can Gain Bi-Partisan Support

We Need to Pursue Public Engagement and Private Consultations to Achieve Sustainable Success

Eventual Federal Reforms will have Significant Implications for States, Municipalities, Employers, Non-Profits, Benefit Plans and Individuals

It’s Not Too Late to Create a Better Future But We Need To Start Soon

It Will Take Patience, Persistence, Perseverance and Pain Before We Prevail, But Prevail We Must!

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federal and state finances and a way forward · 2016. 5. 9. · function: 1789 –1970....

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