M E M O R A N D U M
TO: Gail B. Wright, DBA, CPA
FROM: Sara Torocco and Rexhina Elezi
RE: Federal Budget Proposals
DATE: October 2, 2012

This memorandum analyzes the federal budget proposals currently being debated. Detailed information related to the components of budgets is also provided. Focusing mostly on the issue of Medicare, this memo identifies how Medicare will change in future years. The following compares and contrasts the overall budgets and Medicare budgets for each of the federal proposals, and also presents an argument against Congressman Ryan’s proposed Medicare budget.

U.S “On-Budget” Surplus and Deficit Historical Data Presented below is the United States surplus and deficit data according to the historical tables provided by the Office of Management and Budget. * The United States on-budget has ran a deficit for the majority of the years between 1990 and 2011. * The years 1999 and 2000 both ran a surplus on-budget. * See chart no. 1, page 6.
Federal Government “Off-Budget” Financing

* Federally owned and operated entities that are off-budget do not affect the federal budget. The revenues and expenditures of these organizations are not included in the calculation of the federal deficit or surplus. * When the off-budget entities have a surplus, the Federal Government can borrow the money. The surplus in the Social Security Trust Funds is a large source of borrowing for the Federal Government (Penner, 2007). The government uses these borrowed funds, along with other monies, for governmental purposes such as described below (Penner, 2007). * Financing the national debt * Funding the Department of Defense * Funding health care and social services

Deficit Contributors Since Fiscal Year 2000 According to the Center on Budget and Policy Priorities, the two major contributors to the federal deficit are the Bush-era tax cuts and the wars in Iraq and Afghanistan. By separating these contributors and breaking them down between periods, we will identify their total effects on the deficit. The following information was provided by the Center on Budget and Policy Priorities. * Bush-era Tax Cuts * Consists mainly of the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, and the 2008 stimulus package. * The tax cuts between 2001 and 2008 increased the deficit by $1.7 trillion plus an additional $200 billion in debt-service costs. * For years 2009-2019 the tax cuts will increase the deficit by $3.7 trillion plus an additional $1.7 trillion in debt-service costs. * In 2009, these tax cuts accounted for approximately 26% of the total deficit. * If the Bush-era tax cuts are extended, they will account for approximately 56% of the total deficit in 2019. * Iraq and Afghanistan War Spending * The spending on these wars alone accounted for $610 billion by 2008. * A combined $330 billion was spent in the years 2009 and 2010. * It is projected an additional $700 billion will be spent in the years 2011-2019. This spending will have a debt-service cost of $607 billion. * In 2009, the spending on these wars accounted for about 13% of the total deficit. * Spending is projected to decrease to $138 billion in 2019, which will account for approximately 11% of the total deficit.
Types of Deficits
The classification of whether a deficit is good or bad depends on the nature of the deficit spending, the source of funding, and the state of the economy. The information provided below outlines each type of deficit, the effects of the spending, and the related state of the economy, according to The Concord Coalition (2012). * Cyclical Deficits * These types of deficits occur when the economy is weak and are often referred to as “automatic stabilizers.” Government spending is increased in order to stabilize the weakening economy by maintaining demand. * During a recession or depression, unemployment rates increase and overall income decreases. The government must increase spending in order to assist those who are unable to provide for themselves or their families due to the economic downturn. * Although this spending increases the deficit, it is temporary and therefore acceptable. When the economy recovers, government receipts and outlays should return to normal. * Structural Deficits * These types of deficits occur during a strong economy when the government’s outlays exceed its receipts. The government must evaluate and make necessary changes to its tax structure and spending policies in order to alleviate the excess increases in the deficit. * Nature and Source of Deficit Funding * A deficit can be considered good or bad depending on the factors surrounding borrowed funds. * Funds that are invested in projects with high rates of return relative to borrowed rates do not place a burden on future generations. * Debt that is financed by a foreign country can be burdensome on future generations if the rate of return on investment isn’t high enough.
Congressman Ryan’s Proposed Budget Plan * Arguments in Favor of Proposal * In comparison with President Obama’s budget, Congressman Ryan’s plan would run lower annual deficits accumulating to $3.3 trillion over the course of ten years. If implemented, the plan eventually balances the budget in 2040 (Tanner, 2012). * The proposal states a surplus amounting to 3% of GDP in 2050. President Obama’s budget shows a deficit in the same year (Tanner, 2012). * Congressman Ryan has proposed cuts to discretionary spending that would amount to $352 billion over a ten-year period (Tanner, 2012) * States would be given control over Medicaid allowing them to structure the program according to needs. Funding for the program would be received in the form of federal block grants (Tanner, 2012) * See chart no. 2, page 6. * Arguments Against the Proposal * Path to Prosperity is vague; cuts in spending are not specific. * The reform of Medicare carries a ‘premium-support payment’ that is capped at GDP plus 0.5%. If the costs of these plans grow faster than the capped amount, Congress would be dealt the task of lowering costs (Kiely & Robertson, 2012). * Over a ten year period, Medicaid spending would be $735 billion less than President Obama’s budget and $771 billion dollars less than what is projected under current law (Kiely & Robertson, 2012). * The “doughnut hole” gap in Medicare Part D prescription drug coverage is reinstated in the budget (Kiely & Robertson, 2012).
Block Grants Block grants are funds distributed by the Federal Government to state and local governments. Although these funds are provided for a broad purpose, once allocated, the Federal Government has little involvement in how they are spent. State and local governments are given the flexibility over how the funds are spent in order to achieve said purpose (Feingold, Wherry, & Schardin, 2004).
Block Grant Uses and Examples * Federal Uses * The Federal Government allocates funds to recipient governments based on a formula and the amounts are fixed. This puts a cap on program spending (Haskins, 2012). * In contrast with open-ended entitlement programs, individuals have no legal right to receive benefits. This reduces abuse of programs by individuals (Edwards, 2010). * Examples * Temporary Assistance for Needy Families (TANF) is a federal block grant that is used to assist needy families with children. States receive a fixed amount of $16.5 billion per year for this program (Schott, Pavetti & Finch, 2012). * Community Development Block Grants awards funds for development projects within communities. The Department of Housing and Urban Development (HUD) is the administrator for this grant. Funds are mainly used for low-income housing and anti-poverty programs. (Cirelli)
Congressman Ryan’s Medicare Budget Proposal Congressman Ryan’s Medicare plan proposes a drastic change to the current Medicare system. Under this proposal, a voucher system is implemented, spending for Medicare is capped, and coverage by private insurance plans is available. The information provided below outlines Congressman Ryan’s proposed changes to Medicare, according to Robertson (2012). * Current Medicare recipients and people aged 55 or older are not affected by this plan. In 2022, these individuals will be provided the option to switch to the voucher program. * Starting in 2023, beneficiaries will choose between traditional Medicare coverage and private insurance plans carried under the new Medicare exchange. * The private insurance plans would compete for a spot in the new exchange. * Insurance premiums will be paid for in the form of a voucher, called a ‘premium support payment.’ The government will handle the payment to the premium insurance plan selected. * The amount of the premium support payment will be related to the second cheapest plan, whether that is a private plan or traditional Medicare. This plan is allowed to grow at a rate of GDP plus 0.5 percentage points. * The proposal also increases the retirement age to 67 by year 2034.
Arguments Supporting Budget Proposal * Competition among private insurance plans would keep costs low. Plans will be required to accept all applicants and charge the same premium for same-age beneficiaries (Lupkin, 2012). * The proposal maintains fairness across plans, and carries penalties for plans that are attractive to healthier seniors. (Kiely & Robertson, 2012). * Seniors have more control over their coverage and may choose a plan that is best tailored to their individual needs (Carrol, 2012). * Proposal would reduce the deficit over a ten-year period (Foster, 2011).
Arguments Against Budget Proposal * The Congressional Budget Office (2011) offered that beneficiaries may pay more out-of-pocket, but estimates are difficult to make due to the vagueness of Congressman Ryan’s proposal. * The private plans may structure benefits to attract healthier seniors (Carrol, 2012). * The premium support payment is tied to GDP growth. If costs increase faster than GDP plus 0.5 percent points, seniors may be unable to afford healthcare (CBO, 2012, p.3). * The proposal would increase retirement age to 67 in 2034 (CBO, 2012, p.4)
Implementation Affects of Congressman Ryan’s Medical Proposal * How Medicare Will Change: * Private insurance plans will be offered to seniors. These plans will compete to be carried under the Medicare exchange and will have requirements pertaining to the acceptance of all seniors. * Medicare will become a voucher program in which spending is capped at a price tied to the second cheapest plan. The costs for this plan are allowed to grow in correlation with GDP (Robertson, 2012). * Individuals Affected: * This proposal will not affect current Medicare recipients or people aged 55 and older. In 2022, these unaffected seniors will have the option to switch to the new voucher program (Robertson, 2012). * First Recipients: * Americans who were born in the year 1958 will be the first to participate in the voucher program if it becomes law. These individuals are currently age 54 and will not turn 55 until 2013 (Robertson, 2012). * Additional Savings – No Inflation * There will be an additional need in the amount of $79,758 for yearly out-of-pocket expenditures in the amount of $6,400. * Calculation: $6,400 payment needed per year for 20 years, discounted at 5% = $79,758 * Additional Savings – With Inflation * There will be an additional need in the amount of $88,730 for yearly out-of-pocket expenditures in the amount of $6,400, which is subject to inflation of 6%. * Calculation: $6,400 payment needed per year for 20 years compounded by 6% for yearly inflation = $235,428 total needed. $235,428 discounted at 5% for 20 years = $88,730.
Cost Comparison: * Current Law Projections: * Physician service payment rates will be calculated based on the sustainable growth rate formula. This will reduce Medicare payment rates by more than 30% starting in 2013 (Shatto, 2012). * For the years between 2012 and 2020, expenditures will increase at a slower rate than usual. * Expenditures are expected to grow at 5.9% annually through 2020. The average annual growth rate for the previous ten-year period was 8.6% (Foster, 2012, p. 6). * See chart no. 3, page 7. * Congressman Ryan’s Budget Proposal Projections: * Average spending for Medicare recipients would rise at a slower rate (Congressional Budget Office [CBO], 2012, p.8). * In the year 2023, expenditures for a 65-year old are approximated at $5,900 in 2011 dollars. In comparison with current law, the expenditures for this beneficiary approximate at $6,300 in 2011 dollars (CBO, 2012, p.8).
Affordable Care Act
The Affordable Care Act is a health care reform act that affects all aspects of current healthcare. Among other changes, this act adds new taxes, increases some current taxes, and assesses fees and penalties for noncompliance. (Foster, 2012, p. 2-3) Spending on Medicare will be cut, but benefits will not (Lupkin, 2012). The information provided below outlines the details of these fees and taxes. * The Medicare Part A payroll tax is increased 0.9% for families with annual income in excess of $250,000 and individuals with annual income in excess of $200,000 (Foster, 2012, p. 2). * Health insurance is mandated starting in 2014. Both individuals who do not acquire coverage and large employers that do not offer health insurance will be penalized. Additionally, employers who offer high-cost health plans will be subject to an excise tax (Foster, 2012, p. 3). * Insurance plans along with manufacturers of prescription drugs and medical devices will be assessed a tax or fee (Foster, 2012, p. 3). * Income from returns on high investments will be taxed an additional 3.8% (Foster, 2012, p. 3).
Argument Against Congressman Ryan’s Medicare Proposal * We feel the vagueness of Congressman Ryan’s proposal does not allow for proper comparison to President Obama’s budget. * Medicaid will suffer large cuts and will be turned into a federal block grant. Programs that assist the needy should be the last place cuts occur. * The affects on beneficiaries are unable to be assessed. If costs increase far enough beyond GDP, seniors may have to pay out of pocket for health care. * The insurance plans carried under the Medicare exchange are private, and therefore seek a profit. These private plans may structure coverage to attract younger or healthier seniors. This would lower costs and inevitably leave older, unhealthy seniors with out-of-pocket expenditures. * Overall, the information available on the cuts in Congressman Ryan’s proposal seems to target weaker Americans.

Charts and Additional Data * Chart No. 1 * Annual Deficit or Surplus by Year * Source: Office of Management and Budget Historical Tables

* Chart No. 2 * Source: Congressional Budget Office Federal Deficits or Surpluses and Debt | (Percentage of gross domestic product) | | | Actual | | | Projected | | | 2010 | | | 2023 | | | Extended-Baseline Scenario | | | | | | | Total Revenues | 15 | | | 21 | Total Spending | 23.75 | | | 23.75 | Deficit (-) or Surplus | -9 | | | -2.75 | | | | | | | | | Proposal | | | | | | | Total Revenues | 15 | | | 18.5 | Total Spending | 23.75 | | | 20.25 | Deficit (-) or Surplus | -9 | | | -2 |

* Chart No. 3 * Source: Annual Report of Board of Trustees Projected Medicare Expenditures 2012-2022 | (in billions) | Year | | | Expenditure | 2012 | | | $560.4 | 2013 | | | $595.0 | 2014 | | | $624.0 | 2015 | | | $654.7 | 2016 | | | $709.0 | 2017 | | | $740.1 | 2018 | | | $776.2 | 2019 | | | $850.0 | 2020 | | | $915.9 | 2021 | | | $986.8 |

Works Cited

2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. (2012). Retrieved from http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/TR2012.pdf .
Carrol, Aaron. (August 14, 2012). Does Ryan Medicare Plan Make Sense. Retrieved from http://www.cnn.com/2012/08/14/opinion/carroll-medicaid-medicare-ryan/index.html.
Congressional Budget Office. (March 2012). The Long-Term Budgetary Impact of Paths for Federal Revenues and Spending Specified by Chairman Ryan. Retrieved from http://www.cbo.gov/sites/default/files/cbofiles/attachments/03-20-Ryan_Specified_Paths_2.pdf
Cireli, Cheryl. (29 September 2012). Examples of Block Grants. Retrieved from http://charity.lovetoknow.com/Examples_of_Block_Grants.
Concord Coalition, The. (2012). The Structural Deficit: What is It, Why Do We Have One, and Why Should We Worry About It? Retrieved from http://www.concordcoalition.org/issue-briefs/2012/0227/structural-deficit-what-it-why-do-we-have-one-and-why-should-we-worry-about-i.
Finegold, K., Wherry, L., & Schardin, S. (21, April 2004). Historical Overview and Lessons Learned. Retrieved from http://www.urban.org/publications/310991.html.
Foster, Richard S. (26, January 2011). Only the First Step in Containing Health Costs. Retrieved from http://www.nytimes.com/2012/07/22/business/health-care-law-and-cost-containment-economic-view.html.
Foster, Richard S. (28, February 2012).
Haskins, Ron. (17, April 2012). Means-Tested Programs, Work Incentives, and Block Grants. Retrieved from http://www.brookings.edu/research/testimony/2012/04/17-means-testing-haskins#_edn13.
Kiely, E., & Robertson, L. (6, April 2012). Fall Preview: Obama vs. Romney (and Ryan) Budget Spin, Senior Scare and More. Retrieved from http://www.factcheck.org/2012/04/fall-preview-obama-vs-romney-and-ryan/.
Lupkin, Sydney. (15, August 2012). Fact-check: Obama’s Attack Ad on Romney-Ryan Medicare Overhaul. Retrieved from http://abcnews.go.com/blogs/health/2012/08/15/fact-check-obamas-attack-ad-on-romney-ryan-medicare-overhaul/.
Office of Management and Budget. (n.d.). Historical Tables. Retrieved from www.whitehouse.gov/0mb/budget/historicals.
Penner, Rudolph G. (13, December 2007). Taxes and the Budget: What does it mean for a government program to be “off-budget”?. Retrieved from http://www.taxpolicycenter.org/briefing-book/background/taxes-budget/off-budget.cfm.
Shatto, John D. (18, May 2012). Projected Medicare Expenditures under Illustrative Scenarios with Alternative Payment Updates to Medicare Providers. Retrieved from http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-andReports/ReportsTrustFunds/Downloads/2012TRAlternativeScenario.pdf.
Tanner, Michael. (6, April 2012). Obama’s and Paul Ryan’s Conflicting Budget Visions. Retrieved from http://www.cato.org/publications/commentary/obamas-paul-ryans-conflicting-budget-visions.