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The Congressional Budget Office's (CBO s) August 2006 baseline includes spending of appropriations provided in fiscal year 2006 for U.S. military operations in Iraq and Afghanistan and for other efforts in the war on terrorism. As specified in the Balanced Budget and Emergency Deficit Control Act of 1985, those 10-year baseline projections are based on the assumption that the current year s discretionary budget authority would be provided in each future year through 2016, with adjustments to reflect projected inflation. Less funding would be needed if the Department of Defense (DoD) was able to reduce the number of deployed troops. In its recent report, The Budget and Economic Outlook: An Update (August 2006), CBO illustrated the potential effect that decreased spending for those military activities could have on the deficit by presenting one possible alternative scenario for future military operations in Iraq and Afghanistan and the war on terrorism.1 The scenario, described in more detail here, is one of many possible outcomes and should not be regarded as an estimate of actual war costs or a prediction of how much budget authority DoD will need or request for those activities in the future. This alternative spending path assumes that military operations in Iraq and Afghanistan and other activities related to the war on terrorism decline gradually from their current levels, reaching a steady state after 2010. Under such assumptions, discretionary outlays over the 2007-2016 period would be $716 billion less than the comparable baseline figures. If the baseline was otherwise unchanged, projected interest on debt would be $129 billion less than the amount in the current baseline. future.

The Congressional Budget Office (CBO) projects that under current laws and policies, the federal budget will report a deficit of $337 billion in 2006 (see Summary Table 1). That estimate is somewhat higher than the $318 billion shortfall recorded in 2005 but about the same in comparison to the size of the nation's economy. At 2.6 percent of gross domestic product (GDP), this year s deficit would be slightly larger than the 2.3 percent average recorded since 1965. Because of the statutory rules that govern baseline projections, CBO s current estimates omit a significant amount of spending that is likely to occur later this year. In particular, additional funding will probably be necessary in 2006 to pay for military activities in Iraq and Afghanistan and for flood insurance claims. If that funding is provided, CBO expects that outlays will grow by another $20 billion to $25 billion this year, resulting in a deficit in the vicinity of $360 billion, or about 2.8 percent of GDP. CBO s baseline includes spending from the $50 billion that the Congress has appropriated this year for military activities in Iraq and Afghanistan, but more resources are likely to be necessary within a few months. The baseline also includes the effect of legislation dealing with disaster relief, flood insurance, and other programs that were funded in the aftermath of Hurricane Katrina and other storms. Such legislation will add an estimated $47 billion in outlays during 2006; hurricane-related tax relief will reduce revenues by an estimated $7 billion this year. But paying all claims expected under the federal flood insurance program could require a few billion dollars of additional funding for that program. Furthermore, the pending spending reconciliation act, if signed into law, would reduce the deficit by about $5 billion in 2006., The original document contains color images.

On January 26, 2006, the Congressional Budget Office (CBO) released The Budget and Economic Outlook: Fiscal Years 2007 to 2016, which presents CBO's latest projections of federal revenues and outlays for that period. Chapter 1 of that report includes a brief discussion of the uncertainty, in CBO's baseline projection of the total budget balance and shows a figure (reproduced here as Figure 1) illustrating how that uncertainty increases as the projections extend into the future. This supplementary report describes the data and methods used to construct that figure. Throughout this document, the word "deviation" indicates the difference between CBO's projections and actual outcomes, unless specified otherwise. For example, the deviation from a projected budget balance means the difference between the actual budget outcome and the projected value. In brief, CBO calculated measures of uncertainty using the deviations from its past projections that arose from economic and technical factors. Uncertainty arising from legislation was not considered because baseline projections assume that current tax and spending policies remain in place., The original document contains color images.

Since 2000, the Navy has spent an average of about $43 billion a year to buy and operate its fleet of 285 battle force ships and 4,000 aircraft. In the new 30-year shipbuilding plan that the Navy released in February, senior officials argue that the service needs 313 ships to perform all of the tasks assigned to it. Increasing and modernizing ships and aircraft as implied by that plan would cost an average of about $53 billion annually over the next three decades, the Congressional Budget Office (CBO) estimates. (Those past and projected cost figures, like the others in this analysis, are in 2007 dollars.), The original document contains color images.

The Global Information Grid is the communications network that connects Department of Defense (DoD) facilities worldwide. Although it is in daily use, its content continues to evolve. The Defense Information Systems Agency (DISA) is implementing an initiative called the Global Information Grid Bandwidth Expansion (GIG-BE) to increase the bandwidth available to DoD users. The initiative is also intended to move DoD from a network backbone owned by a contractor to one owned by the government (the GIG-BE). In addition, the contract that had connected many remote DoD facilities those not on the backbone to the network expired in February, and DISA is in the process of replacing it and other, similar contracts with the Defense Information System Network Access Transport Services (or DATS) contract, which will connect remote defense installations in the continental United States to the GIG-BE. Under the DATS contract, DISA envisions using short-term leases (of three years, followed by seven one-year options) to obtain the circuits necessary to connect remote sites to the network. Alternatively, DISA could acquire those circuits by using indefeasible rights of use (IRUs). Leases require periodic payments for the right to use circuits that are provided by private companies. IRUs, by contrast, involve a one-time payment at the beginning of the term for unlimited use of a circuit. The most common term for IRUs is 20 years; because that is also the expected useful life of a circuit, IRUs are considered purchases. Members of Congress have expressed concern about DISA's approach to acquiring network access for remote DoD facilities through the DATS contract. The Congress directed the Congressional Budget Office (CBO) to review DISA's analysis of alternatives and its underlying assumptions., The original document contains color images.

At the request of the Ranking Member of the House Budget Committee, the Congressional Budget Office (CBO) has estimated the funding provided for military and diplomatic operations in Iraq through June 30, 2006, as well as the related costs incurred by the Department of Veterans Affairs (VA) for medical care, disability compensation, and survivor benefits. CBO also has projected the costs of those activities over the next 10 years under two scenarios. According to CBO's estimates, from the time U.S. forces invaded Iraq in March 2003, $290 billion has been allocated for activities in Iraq, of which $254 billion has gone to the DoD and other defense agencies for military operations. In the first scenario, the number of forces deployed in and around Iraq would be reduced from the current level of approximately 190,000 to 140,000 in 2007 and would continue to decline rapidly until all troops were withdrawn from the Iraq theater of operations by the end of 2009. By CBO's estimates, that scenario would require additional appropriations totaling $166 billion for military operations over the 2007-2016 period. In the second scenario, the number of troops deployed to the Iraq theater of operations would decline less rapidly, from 170,000 in 2007 to 40,000 by the end of 2010 and would remain at that lower level through 2016. That scenario would require the appropriation of $368 billion for military operations over the 2007-2016 period. CBO assumes that the costs of establishing Iraqi security forces, conducting diplomatic and consular operations, and providing foreign aid would be roughly the same under both scenarios. Thus, funding for Iraqi security forces could total approximately $15 billion over the next 10 years, and funding for diplomatic operations and foreign aid could cost another $15 billion over the same period. Additional costs for the VA over the 2007-2016 period would sum to approximately $6 billion under the first scenario and $8 billion under the second one.

In today's environment of rapidly evolving conflicts, the Army's goal is to have units that have the combat power of heavy units but that can be transported anywhere in the world in a matter of days. To address concerns about the armored vehicle fleet's aging and the difficulties involved in transporting it as well as to equip the Army more suitably to conduct operations overseas on short notice using forces based in the United States the service created the Future Combat Systems (FCS) program in 2000. A major modernization effort, the program is designed in part to develop and purchase vehicles to replace those now in the heavy forces; the new vehicles would be much lighter, thereby easing the deployment of units equipped with them. In the analysis presented in this report, the Congressional Budget Office (CBO) examined the current status of the Army's fleet of armored vehicles and assessed the speed of deployment of the service's heavy forces. It also evaluated the FCS program, considering the program's costs as well as its advantages and disadvantages and comparing it with several alternative plans for modernizing the Army's heavy forces., The original document contains color images.

Since the terrorist attacks of September 11, 2001, ongoing military operations including Operation Iraqi Freedom, Operation Enduring Freedom, and Operation Noble Eagle have required substantial increases in the number of military personnel deployed.1 As of July 31, 2006, about 180,000 active-duty service members and another 60,000 national guard and reserve members were deployed in support of those operations. The Army, supplying the bulk of the personnel, had about 110,000 active-duty troops and 50,000 Army National Guard and Army Reserve members deployed to the Iraq and Afghanistan theaters at that time. The military's ability to maintain the force levels required to continue conducting operations in Iraq and Afghanistan rests on its ability to recruit and retain service members. Some military analysts and policymakers have expressed concern that the ongoing operations could detrimentally affect both recruiting and retention. The proportion of youth who say that they may join the military increased after September 11, 2001, but according to the Department of Defense s (DoD s) surveys of parents and other adults who influence youths decisions, a majority in 2005 said that they were less likely to recommend military service because of the war in Iraq., The original document contains color images.

Mr. Chairman, Congressman Ortiz, and Members of the Subcommittee, I appreciate the opportunity to discuss the potential costs resulting from increased usage of military equipment. The United States has maintained substantial military forces in Iraq and Afghanistan operating at relatively high rates since hostilities began in Iraq in March 2003. As a consequence, the services are discovering that many of the hundreds of thousands of pieces of equipment that have been used in operations in Iraq and Afghanistan are in need of replacement or repair. At the request of the Ranking Member of the House Committee on Armed Services, the Congressional Budget Office (CBO) attempted to determine the number and types of equipment being used by the military services at higher-than-normal levels in Iraq and Afghanistan and to estimate the potential resource implications of the resulting need to repair or replace significant portions of that equipment. On the basis of information from the services, CBO ascertained that Army and Marine Corps equipment in-theater is, in general, being used at rates that are many times greater than those typical of peacetime. In particular, trucks from those two services are being driven roughly 10 times more miles per year than has been the average over the past several years. The Army s and Marine Corps combat vehicles such as tanks and light armored vehicles are being driven at rates roughly five times those of peacetime. Finally, those two services helicopters are being flown at roughly twice peacetime rates. In contrast, the effect of operations in Iraq and Afghanistan on the Navy s and Air Force s assets is much less dramatic than on those of the Army and Marine Corps. CBO found that the greatest increase in activity could be attributed to the Navy s ships stationed in the Iraqi theater, which have been steaming roughly 40 percent more days per year as they would in peacetime., Testimony before the Subcommittee on Readiness, Committee on Armed Services, U.S. House of Representatives.

The military reserves provide trained service members and units that are available for active military duty during peacetime and war. Over the past decade, the Department of Defense (DoD) has dramatically increased its reliance on the reserve forces, particularly since the terrorist attacks of September 11, 2001. The reserves are integral to current operations of service members deployed in November 2004 in Iraq and Afghanistan, about 33 percent were reservists and DoD foresees continued reliance on them. (Throughout this paper, reserves refers to the individual services National Guard and reserve components: the Air Force Reserve, the Air National Guard, the Army Reserve, the Army National Guard, the Coast Guard Reserve, the Marine Corps Reserve, and the Navy Reserve.) Yet many reservists, when they joined the military, probably did not anticipate the increased frequency and duration of the activations that have occurred during the past several years and may be finding those mobilizations more disruptive than they might have expected. To alleviate difficulties with call-ups, the Congress has enacted legislation to provide civil and employment protections and financial relief. The Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA), the primary legislation governing service members employment rights, guarantees the right of reservists to be reemployed by their civilian employer after serving on active duty, prohibits employers from discriminating against individuals in any aspect of employment because of their service in the reserves, and mandates some continuation of benefits to reservists who have been activated. By ensuring that people who are interested in military service can retain their jobs and participate in the reserve forces without fear of reprisal by their civilian employers, those provisions may also aid DoD in its recruiting and retention efforts.

The Navy currently owns and manages four shipyards: the Norfolk Naval Shipyard in Portsmouth, Virginia; the Portsmouth Naval Shipyard in Kittery, Maine; the Puget Sound Naval Shipyard in Bremerton, Washington; and the Pearl Harbor Naval Shipyard in Pearl Harbor, Hawaii. Each of those facilities operates under one of two distinct financial systems. The Norfolk and Portsmouth shipyards are financed through the Navy Working Capital Fund (NWCF), a revolving-fund mechanism under which Navy units pay for maintenance and repair services at a shipyard out of their appropriated funds, at prices that are intended to cover the shipyards full operating costs. The Puget Sound and Pearl Harbor shipyards, which had been under the NWCF, are now funded through direct appropriations, an approach known as mission funding. Naval shipyards have operated under some form of revolving-fund financial system for decades. As part of the Navys ongoing Regional Maintenance Plan, however, Pearl Harbor was shifted from working-capital funding to mission funding on October 1, 1998, and Puget Sound on October 1, 2003. The Navy intends to move the Norfolk and Portsmouth shipyards to mission funding at the earliest possible date. At the request of the House Committee on Armed Services, the Congressional Budget Office (CBO) is studying the advantages and disadvantages of working-capital funding and mission funding in general and as they apply to naval shipyards in particular. Critics have expressed concern that mission funding makes shipyards costs and operations less visible and reduces shipyards ability to obtain capital to replace equipment and make improvements. This document is an interim report on CBOs study. The Navy continues to respond to requests for information and data on the costs and operations of the shipyards. Once CBO has that information and data, it will be able to more fully address all of the issues associated with shipyard funding mechanisms, which will be incorporated into a fin

Since the end of World War II, the United States has maintained the ability to project combat power rapidly around the globe. That ability has been achieved through a dual approach: "forward basing" units overseas in regions of particular importance and fielding long-range (strategic) transportation systems that can move forces around the world quickly, either to reinforce the forward-based units or to respond to needs that arise elsewhere. Following the Cold War, emphasis has shifted away from forward basing and toward increasing the mobility of forces based in the United States. In the past 15 years, the U.S. military has cut the number of forward-based troops by about half and has improved its strategic transportation capability by fielding such systems as C-17 airlift aircraft and large, medium-speed roll-on/roll-off ships (LMSRs) for sealift. In addition, the Army is largely focusing its current "transformation" efforts on changing equipment and organization to create units that can be deployed more quickly and easily. Nevertheless, officials in the Department of Defense (DoD) seek to increase the speed of military deployments to an even greater degree, because the ability to deliver forces to a distant theater in the first few days or weeks of a crisis is seen as critical to ensuring a favorable outcome.

What level of budgetary resources might be needed in the long term to execute the Administration's current plans for defense, and what effect on that level would alternative defense plans have? This Congressional Budget Office (CBO) paper addresses those questions. Prepared at the request of the Chairman of the Senate Budget Committee, it updates the resource projections contained in CBO's September 2004 paper The Long-Term Implications of Current Defense Plans: Summary Update for Fiscal Year 2005 to reflect the changes that the Administration has made to its defense plans in preparing the President's budget request for fiscal year 2006. In addition, this paper includes two alternative scenarios that could reduce the level of defense resources required during the 2012-2024 projection period. CBO will also publish supplementary data on its Web site that provide more details about specific programs. In keeping with CBO's mandate to provide impartial analysis, this paper and the supplementary materials make no recommendations.

This report presents the testimony of Douglas Holtz-Eakin, Director, Congressional Budget Office (CBO), before the Subcommittee on Regulatory Reform and Oversight, Committee on Small Business, U.S. House of Representatives on September 29, 2005. Mr. Holtz-Eakin discusses the CBO's recent analysis of the effects of reserve call-ups on civilian employers. The military reserves provide trained service members and units that are available for active military duty during peacetime and war. Over the past decade, the Department of Defense (DoD) has dramatically increased its reliance on the reserve forces, particularly since the terrorist attacks of September 11, 2001. The reserves are integral to current operations -- of service members deployed in November 2004 in Iraq and Afghanistan, about 33 percent were reservists -- and DoD foresees continued reliance on them. Throughout the testimony, "reserves" refers to the individual services' National Guard and reserve components: the Air Force Reserve, the Air National Guard, the Army Reserve, the Army National Guard, the Coast Guard Reserve, the Marine Corps Reserve, and the Navy Reserve., Testimony before the Subcommittee on Regulatory Reform and Oversight, Committee on Small Business, U.S. House of Representatives.

The Army's ability to recruit and retain service members will directly affect its ability to maintain the force levels required to continue conducting operations in Iraq and Afghanistan while simultaneously converting to a new modular structure. In this analysis, the Congressional Budget Office (CBO) examines the recruiting and retention rates of the Army and the implications of those rates. The analysis concentrates on a single component of the U.S. military the active Army. CBO will prepare a follow-up report in the spring of 2006 that completes the analysis for the remaining Army components (the Army Reserve and National Guard), as well as for the other corresponding service branches (the Navy, Air Force, and Marine Corps) and their various components. CBO focuses on the active Army in this report because it is the only active component that did not achieve its recruiting goals in fiscal year 2005, falling short of its goal of 80,000 accessions by 6,600 accessions, or 8 percent. This report concentrates on attaining end-strength goals as a metric of the Army's ability to sustain operations and convert to a modular structure. In turn, there are two key determinants of future end-strength levels: the number of soldiers accessed each year and the continuation rates of existing soldiers., The orginal document contains color images.

The U.S. Army has seen its missions grow in number and intensity in recent years with the global war on terrorism and the invasion and occupation of Iraq. The resulting levels of stress that have been placed on the Army's active and reserve components have generated public debate about whether the Army's present organization is adequate for the roles that the service is playing now and will play in the foreseeable future. At the same time, the Army has begun an extensive restructuring effort, called modularity, that is designed to significantly alter how the service is organized and how it operates in the field. This Congressional Budget Office (CBO) study - prepared at the request of the House Committee on Armed Services - examines the Army's capability to fight wars, sustain long deployments, and deploy rapidly to overseas operations, as well as its dependence on personnel and units in the reserve component. This study also analyzes eight options for restructuring the Army, each of which would either increase the Army's ability to perform some types of missions or decrease its reliance on the reserve component. The options offer a broad overview of the general types of policy choices and trade-offs that decisionmakers will face when considering the size, structure, and capability of any plan for reorganizing the Army. In keeping with CBO's mandate to provide impartial analysis, this study makes no recommendations.

As health care costs continue to grow faster than the economy and the baby-boom generation nears eligibility for Social Security and Medicare, the United States faces inevitable decisions about the fundamentals of its spending policies and its means of financing those policies. This Congressional Budget Office report looks at a range of possible paths for federal spending and revenues through 2050 and combines them into various hypothetical scenarios., The original document contains color images.

At the request of the Senate Committee on Appropriations, the Congressional Budget Office (CBO) has analyzed the President s budget request for fiscal year 2006 using its own economic assumptions and estimating techniques, with contributions from the Joint Committee on Taxation (JCT). This report presents CBO's analysis of that budget, which provides more details than the preliminary report released on March 4, 2005., The original document contains color images.

Today, the U.S. Navy numbers about 293 battle force ships, including 35 amphibious warfare ships, which are designed to carry marines and their equipment into combat. In addition, the Navy has 16 cargo ships that make up the maritime prepositioning force, which carries equipment and 30 days worth of supplies for three Marine infantry brigades (though not the marines themselves). The Navy plans to modernize both its amphibious and maritime prepositioning ships over the next 30 years. Its plans include developing a sea-basing capability that would allow the Navy to deploy and sustain Marine Corps units on shore without needing to build up a supply depot on land. Carrying out those plans would require the Navy to spend an average of $2.4 billion a year over the next three decades to buy new amphibious and maritime prepositioning ships more than twice what it has spent on those categories of ships since 1980. At the same time, the Navy has modernization plans for other types of ships that, if fully implemented, would also require more resources than the Navy now spends on ship construction. Are there ways to modernize the amphibious and maritime prepositioning forces at a lower cost than what the Navy plans to spend? This Congressional Budget Office (CBO) study prepared at the request of the Subcommittee on Seapower of the Senate Committee on Armed Services addresses that question. It examines the Navy's modernizations plans for amphibious and maritime prepositioning ships and their budgetary implications. It also evaluates four lower-cost options for those ships, two of which would cost roughly what the Navy has spent annually since 1980 and two of which would require a spending increase of a little over one third. Those alternatives would result in smaller, less capable forces than the Navy envisions or than exist now but they would provide some of the capabilities that the Navy and Marine Corps desire.

The number of foreign-born people in the United States now constitutes 12 percent of the population -- the highest share since about 1930. The rise in the number of recently arrived residents -- nearly half of the immigrants in the United States have arrived since 1990 -- has raised broad questions about the potential effects of immigration on labor markets and economic performance in general. Immigration increases the pressures for federal, state, and local government spending. Immigrants also contribute to the economy and pay taxes. A major question is whether immigration has the potential to lessen the strain on the federal budget as the baby-boom generation retires. This paper is the first of several reports by the Congressional Budget Office (CBO) intended to present the facts and research on immigration to help inform the agency's projections of the federal budget and the economy. The paper focuses on the characteristics of immigrants, including where they come from, where they reside, and how those patterns have changed over time, as well as immigrants' level of education, the industries and occupations in which they work, and their earnings. In keeping with CBO's mandate to provide objective, nonpartisan analysis, this paper makes no recommendations.

The Department of the Navy's vision for military transformation, known as Sea Power 21, rests on three key concepts: Sea Strike, Sea Shield, and Sea Basing. The first two concepts focus on improving the Navy's and Marine Corps's offensive and defensive capabilities, respectively. But the third, Sea Basing, is considered by many in the Department of Defense to be the most transformational of the three ideas. It envisions putting a substantial Marine Corps ground force on shore and sustaining it from ships at sea rather than from a land base. Thus, the Navy and Marine Corps could conduct amphibious assaults (including "forcible-entry" operations, like those conducted on Japanese-held Pacific islands during World War II) without needing to seize enemy territory to build a base or to get permission from a nearby country to use an existing base. Supporters argue that sea basing would therefore allow U.S. forces to operate overseas more independently, flexibly, and quickly.

With credit-reform rules having been in effect for more than a decade, the Chairman of the House Budget Committee has asked the Congressional Budget Office (CBO) to reexamine the provisions of the Federal Credit Reform Act (FCRA) with an eye toward identifying possible improvements in, and extensions of, the accrual basis of budgetary accounting. This study - which is one part of CBO's response to that request - focuses on using commercial interest rates, which incorporate risk, instead of risk-free Treasury rates to measure the cost of federal credit programs.

This Congressional Budget Office (CBO) study - prepared at the request of the Subcommittee on Emerging Threats and Capabilities of the Senate Armed Services Committee - looks at technical, operational, and cost issues related to using a boost-phase intercept (BPI) system to defend the United States against intercontinental ballistic missiles. The study compares the strengths, weaknesses, and costs of five alternative designs for a BPI system - three surface-based and two space-based - that span a range of performance characteristics. In keeping with CBO's mandate to provide objective, impartial analysis, this study makes no recommendations.

The nation's fiscal situation has not changed much since the Congressional Budget Office (CBO) issued its previous baseline budget projections in March. Although the deficit for fiscal year 2004 is anticipated to be $56 billion lower than CBO estimated then, the deficits projected for 2006 and beyond have grown. In the absence of further legislation, the federal government will record a total budget deficit of $422 billion in 2004. That deficit would represent a record level in dollar terms, but at 3.6 percent of the nation's gross domestic product (GDP), it would be smaller than the deficits of the mid-1980s and early 1990s relative to the size of the economy (during which time deficits frequently exceeded 4 percent of GDP). Under the laws and policies currently in place, the deficit is projected to decline to $348 billion, or 2.8 percent of GDP, in 2005, and outlays are estimated to continue to exceed revenues through 2014. Consequently, in CBO's projections, the cumulative deficit for 2005 through 2014 totals $2.3 trillion, or 1.5 percent of total GDP That outlook is substantially the same as it was in CBO's previous baseline projections, which cited a cumulative deficit of 1.3 percent of GDR.

Over the next several decades, the population of U.S. seniors-people aged 65 and older is expected to grow rapidly, more than doubling by 2040 while the population as a whole grows by about one-third. That surge will probably produce a similar increase in the demand for long-term care (LTC) services-the personal assistance that enables people who are impaired to perform daily routines such as eating, bathing, and dressing. Today, seniors finance such services from a variety of sources, including personal savings, care donated by friends and family, private insurance, and public programs such as Medicaid and Medicare. This Congressional Budget Office (CBO) paper-prepared at the request of the House Budget Committee-summarizes the current state of financing for long-term care, identifies some of the issues affecting it both now and in the future, and considers policy alternatives that address the mix of private and governmental sources of financing for LTC costs. In keeping with CBO's mandate to provide objective, impartial analysis, this report contains no recommendations. Stuart Hagen of CBO's Health and Human Resources Division prepared the paper under the supervision of Steve Lieberman and James Baumgardner.

Current accounting standards require firms to recognize as an expense (deduct from their income) the value of the compensation they provide in the form of employee stock options. For some types of employee stock options they grant, however firms can choose how to measure that value. They can use the immediate-exercise value (intrinsic value), which is usually zero, or an estimate of the market value (fair value), which is almost always greater than zero. As a result, firms may assign a cost of zero to that portion of compensation made up of grants of employee stock options. That practice results in overstatement of reported net income.

REBUILDING Iraq after 25 years of rule by Saddam Hussein and the war that overthrew his government will be one of the United States' foreign policy priorities in the coming years. By some estimates, the cost of reconstructing Iraq ranges from $50 billion to $100 billion. However, substantial disagreement exists about that cost, as well as about how much aid from the international community may be needed to rebuild the country, whether that aid should take the form of grants or loans, how much the United States should contribute, and how much Iraq can finance itself from its future sources of revenue. To assess the scope of the reconstruction job, the Coalition Provisional Authority (CPA), the United Nations and World Bank, and the Bechtel Corporation (under contract to the U.S. Agency for International Development) carried out surveys of Iraq's needs in 2003. The needs that they identified are mainly associated with the deterioration of Iraqi infrastructure that has occurred since Iraq invaded Iran in 1980. The surveys indicate that although sanctions imposed during the 1990s and damage from recent postwar looting have worsened the condition of Iraq's infrastructure, they are not the most significant cause of its poor state.

In January 2003, the Congressional Budget Office (CBO) published The Long-Term Implications of Current Defense Plans (ADA410669), which was based on the fiscal year 2003 budget and the Department of Defense's Future Years Defense Program (FYDP) of that same year. CBO updated that analysis in July 2003 (ADA416284); its publication The Long-Term Implications of Current Defense Plans: Summary Update for Fiscal Year 2004 revised CBO's earlier work to take into account changes incorporated in the President's budget for fiscal year 2004 and the 2004 FYDP. Because it was a summary, the July 2003 paper omitted many of the detailed data displays contained in CBO's January 2003 study. This briefing updates those omitted displays consistent with the 2004 FYDP. The briefing does not incorporate changes to the FYDP resulting from Congressional action on the President's fiscal year 2004 budget request., See also ADA410669, The Long-Term Implications of Current Defense Plans, Jan 2003 and ADA416284, A CBO PAPER: The Long-Term Implications of Current Defense Plans: Summary Update for Fiscal Year 2004, Jul 2003.

At the request of Senator Conrad, the Congressional Budget Office (CBO) has estimated the costs of military operations in Iraq and Afghanistan and other operations associated with the global war on terrorism (GWOT) for fiscal year 2005. CBO has also projected the potential 10-year costs of such operations under three scenarios that the Senator specified. Assuming that the force level and pace of operations associated with the occupation of Iraq and other GWOT operations will remain at current levels throughout fiscal year 2005, CBO estimates that the Department of Defense (DoD) will likely require $55 billion to $60 billion in new budget authority to carry out those operations. If the disposition of forces or pace of operations were to differ from the assumed levels, the cost of operations would, of course, change accordingly. That estimate encompasses the costs Operation Iraqi Freedom, Operation Noble Eagle, and Operation Enduring Freedom. It includes only the costs that DoD would incur above amounts budgeted for routine military operations, and does not include the costs for reconstruction activities carried out by DoD or other U.S. government agencies.

Mr. Chairman and Members of the Subcommittee, I am pleased to appear before you this afternoon to discuss the Congressional Budget Office's (CBO's) estimate of the costs of allowing total or partial concurrent payment of retirement annuities together with veterans' disability compensation to retirees of the military, the Coast Guard, the Public Health Service (PHS), and the National Oceanic and Atmospheric Administration (NOAA) who have service-connected disabilities., Testimony before the Subcommittee on Personnel, Committee on Armed Services, United States Senate.

Several Members of Congress and public interest groups have proposed plans to reduce emissions of carbon dioxide (referred to in this paper as carbon emissions), which have generally been found to be contributing to a gradual warming of the Earth's climate. Although climate change might benefit some regions, it could ultimately cause extensive physical and economic damage in others. That damage is still uncertain, but it could include higher sea levels; wider ranges for tropical diseases; disruptions to farming, forestry, and natural ecosystems; and greater variability and extremes of regional weather. Most such damage would fall on future generations.

Many controversies and policy issues surround the U.S. tort system, which holds parties liable for injuries to people or property. Critics charge that the system is costly and inefficient, arbitrary and open to abuse, and indirectly harmful through its adverse effects on economic vitality and consumers' choices. In contrast, defenders argue that the tort system serves important social objectives, such as compensating injury victims, improving product safety, and punishing egregious behavior. Several bills now before the Congress propose to change the rules that govern tort claims for medical malpractice and asbestos exposure and claims litigated as class actions. This Congressional Budget Office (CBO) study-prepared at the request of the Senate Budget Committee-attempts to clarify the issues and policy options surrounding the tort system by presenting an economic perspective on tort liability. The study outlines the strengths and weaknesses of tort liability as a tool for promoting economic efficiency and fairness, discusses the available data on the benefits and costs of the tort system, and analyzes in qualitative terms the likely effects of various policy options for altering the system. In keeping with CBO's mandate to provide objective, impartial analysis, this study makes no recommendations.

This volume is one of a series of reports on the state of the budget and the economy that the Congressional Budget Office (CBO) issues each year. It satisfies the requirement of section 202(e) of the Congressional Budget Act of 1974 for CBO to submit to the Committees on the Budget periodic reports about fiscal policy and to provide five-year baseline projections of the federal budget. In accordance with CBO's mandate to provide impartial analysis, the report makes no recommendations.

The Department of Defense (DoD) faces a growing burden in providing peacetime health care for military personnel, retirees, and their dependents and survivors-who all together number over 8 million. Adjusted for the overall rate of inflation in the U.S. economy, the department's annual spending on medical care almost doubled from 1988 to 2003, rising from $14.6 billion to $27.2 billion. Furthermore, because DoD cut the size of the active-duty force by 38 percent over that same period, medical spending per active-duty service member nearly tripled, rising from $6,600 to $19,600.' Medical spending rose from one-quarter to more than one-half of the level of cash compensation (defined as basic pay, the housing allowance, and the subsistence allowance), and it is likely to continue to increase., ISBN 0-16-051486-X.

This study reviews Amtrak's history and the economics of passenger rail. It also examines four options for the future of intercity passenger rail: (1) Eliminating federal subsidies and shutting down service; (2) Ending national service and focusing instead on passenger rail's strongest areas (relatively short, densely populated corridors, such as the Northeast and parts of California); (3) Keeping national long-distance service as it is today but upgrading the corridors; and (4) Substantially improving Amtrak's entire network through a major increase in funding, with a view to giving rail a much bigger role in transportation between U.S. cities. Those four options are by no means the only ones available, but they represent the broad range of policy choices that lawmakers face.

Decisions about national defense that are made today can have long-lasting effects on the composition of U.S. armed forces and on the budgetary resources needed to support them. For example, programs to develop weapon systems often last a decade or more before the systems are fielded, and policy decisions about such matters as military pay and benefits can have long-term implications. In January 2003, the Congressional Budget Office (CBO) published a study called The Long-Term Implications of Current Defense Plans in which it projected the resources that might be needed each year through 2020 to carry out the defense plans contained in the Bush Administration's 2003 Future Years Defense Program (FYDP). Since then, the Department of Defense (DoD) has prepared a new FYDP reflecting changes that have been made to the department's programs and priorities in the past year. This paper updates CBO's January 2003 long-term projections to be consistent with the plans contained in the 2004 FYDP. Overall, CBO's current and previous projections tell a similar story: carrying out today's plans for defense would require annual funding to stay at higher levels over the long term than defense spending has reached at any time since 1980, even when the effects of inflation are removed (see Figure 1). That continuing demand for high levels of defense resources comes from three sources: (1) Plans to rapidly increase purchases of new military equipment in the near term, following the decline in such purchases that occurred during the 1990s after the Cold War ended; (2) plans to develop and eventually produce systems that will provide new capabilities, as part of the push for 'military transformation'; and (3) the increasing cost of providing pay and benefits to DoD's military and civilian personnel.

This Congressional Budget Office (CBO) study-prepared at the request of the Ranking Member of the House Committee on Science-presents an overview of issues related to climate change, focusing primarily on its economic aspects. The study draws from numerous published sources to summarize the current state of climate science and provide a conceptual framework for addressing climate change as an economic problem. It also examines public policy options and discusses the potential complications and benefits of international coordination. In keeping with CBO's mandate to provide impartial analysis, the study makes no recommendations.

It is frequently stated that about 40 million Americans lack health insurance. That estimate overstates the number of people who are uninsured all year. The Congressional Budget Office (CBO) estimates that between 21 million and 31 million people were uninsured for all of 1998, the most recent year for which reliable comparative data are available. Since then, the number who are uninsured all year probably has not changed substantially, given historical trends. Furthermore, the uninsured population is fluid, with many people gaining and losing coverage. Between half and two-thirds of the people who experienced a period of time without insurance in 1998, for example, had coverage for other portions of the year.

The North American Free Trade Agreement (NAFTA) went into effect on January 1 1994, creating a free trade area encompassing the United States, Canada, and Mexico Since then, agreements have been proposed-and, in some cases, negotiations begun or even completed-for a Free Trade area of the Americas and free trade areas with a number of other countries of varying degrees of development Consequently, assessing the effects of NAFTA is relevant to current debates about trade policy. This Congressional Budget Office (CBO) paper prepared at the request of the Chairman of the Senate Committee on Finance-examines aggregate U.S.-Mexican trade in goods in the first eight years after NAFTA went into effect and how it has been affected by the agreement and by other favors. The paper provides quantitative estimates of the effects of NAFTA on that trade and of the resulting effects on U.S. gross domestic product. (The paper focuses on U.S. trade with Mexico because U.S. trade with Canada had already been substantially liberalized in accordance with the Canada-United States Free Trade Agreement before NAFTA went into effect).

Each January, the Congressional Budget Office (CBO) issues its outlook for the budget and the economy to help the Congress prepare for the upcoming legislative year. The baseline budget projections that CBO provides are based on the assumption that current laws and policies remain unchanged as well as on various estimates and assumptions about how the economy will behave and government programs will operate. Such projections are always uncertain, but this year, the uncertainty seems to be magnified. As a result, estimates of budgetary outcomes should be interpreted cautiously.

Today, the U.S. Navy numbers about 300 ships, including a force of 115 surface combat- ants (cruisers, destroyers, and frigates). For the past six years, the official force goal for surface combatants was 116. But recently, senior Navy officials have argued that the nation needs a larger Navy: 375 ships, including a surface combatant force of 160 ships. That force would comprise 104 large cruisers and destroyers as well as 56 new, much smaller vessels called littoral combat ships-which are expected to be an important element of the Bush Administration's plans for transforming the Navy. Those ships are intended to counter potential threats in the world's coastal regions that, if left unchecked, could inhibit the Navy's freedom of action. At the same time that it hopes to expand the fleet, however, the Navy plans to retire many existing surface combatants early. Reaching the Navy's new force goal by building more surface combatants would require a substantial investment, which would compete with other demands, including different transformation efforts and ship programs. Are there ways to transform the surface combatant force within today's funding level? This Congressional Budget Office (CBO) study-prepared at the request of the Subcommittee on Seapower of the Senate Committee on Armed Services examines that question. It looks at the Navy's modernization plans for the surface combatant force and their budgetary implications. The analysis also evaluates three options that would modernize and transform that force at the current funding level. In keeping with CBO's mandate to provide objective, impartial analysis, this study makes no recommendations.

Public interest has become widespread in having the federal government invest in private securities (such as stocks and bonds) as a way to increase the flow of budgetary resources to the government. This Congressional Budget Office (CBO) paper prepared at the request of Senator Pete V. Domenici, in his capacity as Chairman of the Senate Budget Committee-discusses the key effects of such investment on the U.S. economy and on the government's ability to meet its future obligations. The paper also describes alternative ways in which federal investment activity could be treated in the budget. Although some proposals call for investment to occur through individual retirement accounts, this report focuses on direct federal investment in private securities through the general fund of the Treasury, program accounts, or federal trust funds., Congressional Budget Office paper

Federal agencies sometimes use long-term leases and special-purpose public/private ventures to acquire capital assets without having to obtain Congressional appropriations for the full costs up front. Depending on their budgetary treatment, such leases and public/private ventures can allow an agency to pay for an asset over time. In the case of a lease, the asset is paid for incrementally, through annual lease payments. In the case of a public/private venture, the asset is paid for over time through the prices the agency pays for the goods and services that it agrees to purchase from the venture or through a lower return on the equity or other valuable considerations that the agency contributes to the venture. In both cases, the financing technique obscures the full costs of the asset. In contrast, if the agency purchased the asset directly, the full costs would appear up front in its budget.

In their annual debate about the defense budget, Members of Congress focus primarily on whether the President's budget request will meet the military's immediate spending needs. But programs to develop weapon systems often run for a decade or more before those systems are fielded, and other policy decisions have long-term implications; thus, decisions made today can influence the size and composition of the nation's armed forces for many years to come. Recognizing the need for a longer view, the Senate Appropriations Committee's Defense Subcommittee requested that the Congressional Budget Office (CBO) analyze the long-term implications of the Administration's current plans for defense. This analysis examines those implications both for budgetary resources and for ages and inventories of weapon systems. In the five years from 1997 to 2002, the annual U.S. defense budget grew from $274 billion to $345 billion. (All dollar amounts in this study represent total obligational authority expressed in 2002 dollars.) The defense program outlined by the Bush Administration for fiscal year 2003 and the following four years (the 2003 Future Years Defense Program, or FYDP) anticipates additional growth, with the defense budget averaging $387 billion over the 2003-2007 period and reaching $408 billion in 2007. If that program continued as currently envisioned, the demand for defense resources would continue to increase through 2012, CBO projects, and would average $428 billion a year between 2008 and 2020. Costs for day-to-day operations (running units, maintaining equipment, and providing pay and benefits to military personnel) would grow from $222 billion in 2002 to more than $280 billion by 2020. Demands for investment resources (primarily to develop and purchase new equipment) would rise from $ 110 billion in 2002 to $164 billion in 2012 and then decline to about $134 billion by 2020., The original document contains color images. All DTIC reproductions will be in black and white.

Decisions about national defense that are made today can have long-lasting effects on the composition of U.S. armed forces and on the budgetary resources needed to support them. For example, programs to develop weapon systems often last a decade or more before the systems are fielded, and policy decisions about such matters as military pay and benefits can have long-term implications. In January 2003, the Congressional Budget Office (CBO) published a study called The Long-Term Implications of Current Defense Plans in which it projected the resources that might be needed each year through 2020 to carry out the defense plans contained in the Bush Administration's 2003 Future Years Defense Program (FYDP). Since then, the Department of Defense (DoD) has prepared a new FYDP reflecting changes that have been made to the department's programs and priorities in the past year. This paper updates CBO's January 2003 long-term projections to be consistent with the plans contained in the 2004 FYDP.

The Department of Defense (DoD) faces a growing burden in providing peacetime health care for military personnel, retirees, and their dependents and survivors- who all together number over 8 million. Adjusted for the overall rate of inflation in the U.S. economy, the department's annual spending on medical care almost doubled from 1988 to 2003, rising from $14.6 billion to $27.2 billion. Furthermore, because DoD cut the size of the active-duty force by 38 percent over that same period, medical spending per active-duty service member nearly tripled, rising from $6,600 to $19,600. Medical spending rose from one-quarter to more than one-half of the level of cash compensation (defined as basic pay, the housing allowance, and the subsistence allowance), and it is likely to continue to increase. DoD views many of its medical costs as unavoidable. The department argues that it must operate its own in-house system of health care providers and military medical treatment facilities to ensure that U.S. forces will have reliable, high-quality medical care in time of war. Moreover, DoD believes that in peacetime, it needs that inhouse system, together with care purchased from the private sector, to provide the health care benefits necessary to attract and retain high-quality active-duty and reserve forces. CBO's analysis addresses some of the questions raised by the trends in spending growth. What factors explain the historical growth in DoD's medical costs? If policies do not change, what levels of spending might be seen in the future? What are the implications of current trends in military medical costs for the total costs of military personnel? How might various policy changes work either to suppress or accelerate growth in DoD's medical spending?