VIEWS AND ESTIMATES LETTER ON THE VA BUDGET -- Sent today to the U.S. Senate Committee on the Budget

The following letter was sent today by Senate Committee on Veterans' Affairs Chairman Larry Craig.

March 2, 2006

The Honorable Judd Gregg

Chairman

The Honorable Kent Conrad

Ranking Member

Committee on the Budget

United States Senate

Washington, DC  20510

Dear Judd and Kent:

            Pursuant to Section 301(d) of the Congressional Budget Act of 1974, I, as Chairman of the Committee on Veterans' Affairs (hereinafter, "Committee"), submit this report to the Committee on the Budget on the proposed fiscal year 2007 (hereinafter, "FY07") budget for Function 700 (Veterans' Benefits and Services) programs.

            Your staff requested that Congressional Budget Office (hereinafter, "CBO") estimates be used in presenting this report.  There were difficulties that precluded me from doing so.  I was informed that CBO's revised estimate of the President's FY07 budget request would not be available before your requested deadline for submission of this report.  Those revised estimates are essential in that they reflect the impact of key policy proposals included in the President's budget.  Without those estimates, I would have to present a portion of this report using CBO numbers and another portion using the Administration's numbers.  To avoid that confusion, this letter will use only the Administration's numbers.  Once CBO's revised estimates are available, my staff can then make the appropriate adjustments upon your request.

SUMMARY

            Function 700 is comprised of budget authority and outlays associated with four entities under the jurisdiction of the Committee:  the Department of Veterans Affairs; the Department of Labor's Veterans' Employment and Training Service; the American Battle Monuments Commission; and the United States Court of Appeals for Veterans Claims.

•                     The President requests total VA appropriations in FY07, including collections, of $79.892 billion, $41.362 billion for mandatory programs and $38.530 billion for discretionary programs.  The $38.530 billion request for discretionary programs is comprised of $2.833 billion in expected medical care collections and $35.697 billion in general revenue appropriations.  I do not recommend increases beyond those requested by the President for either mandatory or discretionary programs.  Furthermore, I agree with the President that discretionary spending from general revenue appropriations be limited to $35.697 billion.

•                     The President requests $224.9 million for the Department of Labor's Veterans' Employment and Training Service programs and services.  At this time, I will not object to that level of funding.

•                     The United States Court of Appeals for Veterans Claims requests $19.79 million.  At this time, I will not object to that level of funding.

•                     The President requests $40.738 million for the American Battle Monuments Commission.  I have no objection to that level of funding.

DISCUSSION

I.   MANDATORY PROGRAMS

            Within Function 700, only VA programs contain mandatory account appropriations.  The President's request for FY07 is $41.362 billion in appropriations and $42.050 billion in total mandatory budget authority. 

            Since fiscal year 1996, VA mandatory account spending has nearly doubled.  The bulk of the accelerated spending is attributable to growth in the Compensation and Pension (hereinafter, "C&P") account.  The C&P account funds disability compensation payments for veterans with service-connected disabilities; compensation payments to surviving spouses and dependents of veterans who die as a result of service-related conditions; pension payments to disabled or elderly wartime veterans; pension payments to needy spouses of wartime veterans; and payment of certain burial-related expenses.

            The primary drivers of C&P account growth are the total number of veterans in receipt of disability compensation and the average amount of compensation payment per veteran.  VA estimates that 2.87 million veterans will be in receipt of disability compensation in FY07, a 10% increase in just two years and a 24% increase since fiscal year 2001.  As a point of comparison, overall growth in the compensation roles was 5% between fiscal years 1991 and 2001. 

            VA projects that average compensation payments to veterans will continue to increase due to a variety of factors:  1) More veterans filing disability claims (primarily Gulf War era and Vietnam-era veterans); 2) More veterans filing and being granted service-connection for multiple disabilities (the number of veterans filing for at least eight or more disabilities has doubled in five years); 3) Increases in average disability ratings (as veterans age, their disabilities worsen and they may be granted increased disability ratings); 4) Increases in Individual Unemployability and Post-Traumatic Stress Disorder (hereinafter, "PTSD") claims; 5) Cost-of-living adjustments; and 6) More military retirees filing for disability compensation spurred by new laws allowing partial concurrent receipt of military retired pay and VA disability pay (according to VA's budget, 45% of the nation's 1.8 million military retirees are now receiving VA disability compensation).

            CBO estimates a lower rate of growth for C&P spending than does the Administration.  The key difference between the Administration and CBO's estimates is the lower accession rate of veterans being added to the disability compensation roles.  Whereas VA projects 10% growth in the caseload from fiscal years 2005 to 2007, CBO projects only 5% growth.  A focus of the Committee this year will be to understand the factors that have driven the growth in both the disability compensation roles and actual expenditures, and the implications this growth may have on future budget submissions. 

II. DISCRETIONARY PROGRAMS

A.  VA Medical Care

            The President requests $34.295 billion for medical care in FY07.  The President's request is comprised of a combination of general revenue appropriation ($31.462 billion) and medical care collections ($2.833 billion).  I support both the President's total medical care request and the sources from which he proposes to obtain requested dollars.  

            Before I provide my views on the President's request for medical care, I feel it is necessary to explain what "medical care" is in order to ensure accuracy. There is no longer a single VA "medical care" appropriation account as in prior years.  Beginning with fiscal year 2004 appropriations, Congress divided the medical care account into three separate health-related accounts:  medical services (including amounts transferred to medical services from medical collections), medical administration, and medical facilities.  It is the sum of these three accounts I refer to when using the term "medical care."

            VA is a national leader in the delivery of high-quality health care.  Its reputation has driven demand for its services from veterans across the country.  Of VA's 7.6 million enrollees, roughly 5.3 million will use VA's system in FY07, an increase in the number of users since fiscal year 2001 of over one million.  Couple the demand for VA care with an aging population, and veterans with complex care needs arising from service-related injuries, and it is not surprising that there is tension between demand for health services and available resources.  

            Assuming enactment of the President's request, VA medical care will have increased by 69% since fiscal year 2001.  If the President's increase for FY07 is any barometer for out-year increases, and assuming current enrollment eligibility policy continues, VA's medical care budget will need to double nearly every six years.  Additionally, the President's request assumes that VA's patient base will remain relatively stable in FY07. Should VA's estimates on frequency of health care use per patient be too low, or should a higher number of enrolled patients actually use the system, resource demands will be greater than those assumed in the President's request.  That said, VA’s submission of quarterly reports (now a requirement of law) on its finances, workload, and performance measures will serve as an additional check to ensure its budget, when executed, is sufficient.

            For the fifth year in a row the President has proposed to finance a portion of his medical care budget by enacting revenue-generating policy proposals.  The first of his FY07 proposals is to levy an annual $250 enrollment fee on Priority 7 and 8 veterans; the second is to charge priority 7 and 8 veterans $15 for a 30-day supply of prescription medication; and the third is to cease waiving indebtedness of 1st party co-payments under certain circumstances.  If these proposals (or other proposals with similar effect) are not enacted, an additional $795 million in general revenue appropriation would be needed (assuming there is no change in enrollment eligibility policy).

            During a time of high deficits and restrained spending in every account unrelated to national security, the President's proposal to shift a small portion of the cost of funding record growth in VA's budget onto lower priority veterans is reasonable.  I have no objection to the proposals he has chosen, but I am not necessarily wed to them.  Should there be another combination of fee proposals that results in an avoided appropriation of $795 million, I will take them under consideration.  But my bottom line is this:  I recommend the Budget Committee support the President's requested level of medical care spending, both in the amount of general revenue appropriation requested ($31.462 billion) and in the amount of medical collections assumed ($2.833 billion).

            The President's budget for medical care contains numerous other funding initiatives that I support and which are vital to veterans, particularly the 2% of VA's patient population who participated in Operations Iraqi Freedom or Enduring Freedom (hereinafter, "OIF/OEF").  Assumed in the request are increases for prosthetic and sensory aids, treatment of serious mental illness, treatment of PTSD, and other programs to support Gulf War and OIF/OEF veterans.  Care for returnees of the Global War on Terror must remain VA’s highest priority.

            One area of particular focus of mine and the Committee is VA's homeless veterans programs.  The President requests an additional $44 million in funding for treatment costs associated with homeless veterans and an additional $20 million for other programs to assist homeless veterans.  In particular, I commend the request for a 16% increase in Homeless Grant and Per Diem funding.  In the coming year I am committed to reviewing this and other specialized homeless programs to ensure that they are providing the necessary services to help homeless veterans resume self-sufficient and independent lives.

B.  Medical Research

The President's budget proposes a $13 million reduction in the Medical and Prosthetic Research account in FY07.  VA projects that $399 million in appropriations will be leveraged with other federal (and to a lesser degree, non-federal) resources to yield an overall increase in allocations for research.  However, this may be an unrealistic assessment given that the Administration’s budget does not move to increase funding for the National Institutes of Health, the Centers for Disease Control and Prevention, and other agencies associated with biomedical research. 

One research priority that VA has identified for the coming fiscal year focuses on returning OIF/OEF veterans.  Many of these veterans have sustained traumatic brain or spinal cord injuries, often in conjunction with sensory loss and loss of limbs.  It is essential that research be conducted to guide treatment and rehabilitation for these individuals with polytraumatic injuries.  Now in particular, VA must invest in research to guide evidence-based treatments for the future.  In pursuit of this goal, I propose that VA’s Medical and Prosthetic Research be increased by $30 million over the Administration’s budget and $17 million over the fiscal year 2006 level.

C.  Information Technology

            The President requests $1.257 billion for information technology (hereinafter, "IT") under a separate IT account as directed in Public Law 109-114.  This amount is intended to facilitate VA’s transition to full implementation of the Federated IT Management System by VA’s June 2008 target date. 

            The Committee held a hearing in October 2005 to examine VA's plan to re-organize its IT management system.  The Committee will continue to closely monitor this process to ensure that this new accounting system maintains the proper balance between budget control in the Office of the Chief Information Officer and operational flexibility vested with the individual VA administrations. 

D.   General Operating Expenses

The President requests $1.635 billion in general operating expenses in FY07, $1.322 billion for the Veterans Benefits Administration (hereinafter, "VBA") and $313 million for General Administration.  Included in the total is $154 million in appropriations that will be transferred to the General Operating Expense account for administration of VA's housing programs.

Veterans Benefits Administration

            Including transferred appropriations for administration of VBA's housing programs, $1.322 billion is requested for VBA.  This funding request will support a staffing increase of 173 Full Time Equivalent employees (hereinafter, "FTE") over fiscal year 2006.  The budget request provides a blueprint of how FTE for each of VBA's programs is expected to be allocated.  It is a blueprint only; actual FTE will be allocated according to workload demands as they arise.

a) Compensation and Pension Service

The President requests funding to support 9,445 FTE to administer VBA’s compensation and pension claims workload.  That FTE level would represent the largest staffing level for the Compensation and Pension (hereinafter, "C&P") Service in over two decades.  It is important to note that, with the exception of some routine pension claims work, there is no distinction between the employees who develop and adjudicate disability compensation claims and disability pension claims.  Therefore, for any “apples to apples” comparison of staffing levels over the years, combining FTE totals for these two programs is necessary.

Workload within the C&P Service can be broken down into one of two categories, the first involving claims or actions which require a disability rating decision (or “rating-related” action), and the second involving claims or actions where no such decision is needed.  The claims involving a disability determination are, without question, the most complicated and time-consuming aspect of VBA’s work.  Decisions involving disability determinations can mean critical financial assistance for veterans whose earnings are impaired by disability, and can provide the basis for a host of ancillary benefits.  Therefore, timely and accurate decisions on disability claims are essential.

The disability and pension claims workload has been steadily increasing since fiscal year 2000, a year in which VBA received the fewest claims (579,000) of any of the last ten years.  In the five years preceding fiscal year 2000, the number of claims filed averaged 688,000.  In fiscal year 2006, VA expects it will receive just over 910,000 claims, a 57% increase since fiscal year 2000, and 33% above the fiscal years 1995 to 1999 average.  The number of claims received does not present a full picture of the work required to adjudicate each claim.  As previously mentioned, the number of claims filed with at least eight or more claimed disabilities has doubled in five years; Congress has mandated additional procedural requirements; and claimed disabilities are more complex than in prior years.

Among the 910,000 claims VBA expects to receive in fiscal year 2006, 98,000 are anticipated in response to specialized outreach to veterans in six states, as directed by section 228 of Public Law 109-114.  The Congressionally-mandated outreach was premised on the fact that veterans residing in those six states receive the lowest average annual disability payments when compared to other states, and the assumption that deficiencies in VA’s decision-making on their claims was to blame.  Prior to the enactment of the mandated outreach provision, there was little to no public analysis about the validity of the provision’s premise or the policy and workload implications that it would have.  VA expects the influx of the 98,000 claims to have a nationwide impact on performance.  There is an expected 20% increase in the claims backlog; claims will remain pending at regional offices awaiting a decision by an extra 28 days, on average; and the time it takes to process claims will slacken by an average of 20 days.  I will work with the Administration and the sponsors of the provision mandating this outreach (which has yet to occur) to see if there is common ground that can be reached that rests on a sounder policy footing and that does not delay claims filed by veterans in states other than the six targeted for special outreach. 

For FY07, VA expects it will receive roughly 828,000 claims, 43% more than were filed in fiscal year 2000 and 20% more than the five year, pre-2000 average.  As previously mentioned, the President requests resources to support a C&P FTE level of 9,445.  Assuming the President’s request is enacted, C&P FTE will have increased by 36% since fiscal year 1997; for direct staffing only, i.e., field staff who perform the day-to-day claims work, FTE will have increased by 52% since 1997.  The staffing levels proposed by the President for FY07 are necessary to continue VBA’s progress to reduce the claims backlog and improve the accuracy and timeliness of its decisions.   

b) Education Service

            The President requests funding to support 930 FTE for the Education Service.  This funding level would allow an increase of 46 FTE over the estimated fiscal year 2006 FTE level, including an additional 34 direct FTE.  During fiscal years 2001 to 2003, the timeliness of VA’s decisions on original education claims and supplemental education claims improved remarkably.  Since fiscal year 2004, however, there has been a deterioration of that improvement.  With an expected increase in FTE during fiscal year 2006 and the requested increase for FY07, the Education Service should be able to regain that lost ground and approach its strategic targets for timeliness. 

c) Vocational Rehabilitation and Employment Service

The President requests $149.342 million for the Vocational Rehabilitation and Employment (VR&E) program.  This funding level would support an increase of 130 FTE over the estimated FTE level for FY06.  Currently, the VR&E program is implementing a new Five-Track Employment Model, consistent with recommendations made by the 2004 Vocational Rehabilitation and Employment Task Force. The additional FTE in FY07 will allow VR&E to further implement that new model by utilizing an increased number of Employment Coordinators and contracting specialists.

d) Loan Guaranty Service

One of the little-heralded success stories in all of government is VA’s loan guaranty service.  It provides an example of how leveraging technology, streamlining operations, and reliance on private sector partners can help make a government-run program more efficient and effective. In the last decade alone, FTE devoted to VA’s housing program has been slashed – from 2,254 FTE in fiscal year 1997 to 971 FTE proposed in the upcoming fiscal year.  Despite these FTE losses, service to veterans has improved. 

The President proposes FY07 funding to support 971 FTE, a reduction of 17 over fiscal year 2006.  While there is no reason to expect degraded performance with yet another loss of FTE proposed, I will closely monitor performance.  In particular, I will watch the default rate on VA-guaranteed loans and whether staffing is sufficient to intercede on behalf of veteran borrowers.

e) Insurance Service

            For FY07, the President proposes funding to support 503 FTE for VA’s Insurance Service, a 15 FTE increase over fiscal year 2006. 

            VA’s Insurance Service is a perennial leader in timely, accurate, and professional service to beneficiaries of its insurance programs.  The American Customer Satisfaction Index scored the Insurance Service well above all of its private sector competitors in customer satisfaction.   I expect with the resources requested in this budget that the Insurance Service will maintain its usual outstanding performance.

General Administration

For FY07, the President’s budget recommends a $313 million appropriation for the administration of the offices of the Secretary, six Assistant Secretaries, two Appellate Boards, and the Office of General Counsel.  I support this level of funding.

The funding level proposed for the Board of Veterans' Appeals (hereinafter, “BVA”) would support 444 FTE.  From fiscal year 2004 to 2005, the BVA’s appeals resolution time increased substantially, from 529 days to 622 days, and the BVA cycle time also increased.  With an expected increase in FTE during FY06 and the requested funding to maintain an increased staffing level during FY07, the BVA should be able to improve its performance and approach its strategic target for cycle time.  Because BVA supports one of VA's primary missions of providing veterans with timely and accurate disability claims decisions, the Committee will closely monitor its performance.

E.  Major Construction

The President requests $399 million for major construction projects in FY07.  Included in that request is $307 million to continue funding projects related to VA's Capital Asset Realignment for Enhanced Services (CARES).   Assuming this amount is enacted, total CARES-related funding will stand at $3 billion to date.

VA has already begun several major projects for which completion costs are not reflected in the budget request.  However, the Committee will need to authorize all CARES-related construction that occurs after September 30, 2006, even if construction is already underway.  The Committee will soon receive a list from VA detailing all CARES projects requiring Congressional authorization. 

F.  Minor Construction

            The President requests $198 million for minor construction.  This account supports critical upkeep of VA’s facilities all across the United States.  With over 150 hospitals currently in operation, this funding level would support just over $1 million for each hospital’s minor construction needs.  I believe this request is too low.  I support an increase above the President's request of $19 million for a total FY07 funding level of $217 million.  As I will describe below, I recommend that this funding come from recommended reductions in the State Extended Care Facility grant program.   

G.  State Extended Care Facility Grants

The President requests $85 million in FY07 for State Extended Care Facility grants.  There are two main purposes of this grant funding.  The first is to help states build or acquire new nursing home facilities. The second is to help states maintain the highest life and safety code standards in existing facilities.    

I support a funding level for this grant program sufficient to fulfill the Federal government’s commitment to states with already-established nursing facilities that are in need of life and safety upgrades.  However, I believe a suspension of grant funding for the purpose of establishing new nursing facilities is, at this time, in order. 

Long-term care services in America are rapidly moving from institutional settings, such as state home beds, to home and community-based programs that care for needy individuals in their own towns close to their families and loved ones.  VA’s own long-term care program is moving in that direction.  

Today, there are approximately 20,000 institutional beds in the State Home system.  In fiscal year 2006 VA will pay a per diem of $63.40 for each veteran who occupies one of those beds.  As a result, this year alone, VA will spend $557 million on per diem payments which are drawn directly from the medical services portion of individual VA hospital budgets.  Each additional construction project brings hundreds of new beds on line that will also have to be supported with VA per diem payments in subsequent years.  This, in turn, drives the medical services funding needs even higher and contributes to the accelerated growth of VA’s overall budget.  

For this reason, and because I believe VA and the states must focus more attention, not less, on community-based services, I recommend an FY07 funding level of $36 million.  My recommendation will support every life and safety grant project VA has identified as needing full funding in FY07.  Again, I reiterate, I recommend that the budget support funding in this account that addresses facilities in need of life and safety upgrades only. 

There is a $49 million difference between my recommended funding level and the President’s.  I propose that $30 million of that difference be devoted to augmenting the Medical and Prosthetic Research account bringing its FY07 total to $429 million (see page 4).  I recommend that the remaining $19 million be transferred to the Minor Construction account, bringing its FY07 total up to $217 million (see page 8).

H.  State Cemetery Grants

            The President requests $32 million for the state cemetery grant program.  According to VA officials, the $32 million in annual appropriation for this program has been sufficient to cover nearly all approved applications from states for cemetery expansion, construction, or improvement.  Unfunded projects are first in line for funding in subsequent fiscal years.  Therefore, at this time, the $32 million funding level is sufficient.

I.  Inspector General

            The President requests $69.5 million in FY07 for the VA Office of the Inspector General (hereinafter, "IG").  That funding level would result in a reduction of 27 FTE over fiscal year 2006 levels. 

Ordinarily, a staffing reduction in the Inspector General’s office might raise concerns given that it is tasked with guarding against waste, fraud, and abuse in one of the Federal government's largest agencies.  However, VA IG funding has increased by 126% since 1998, and the current fiscal year represents the highest FTE level on record for the IG in at least a decade.   Viewed in this context, a 27 FTE reduction is less troublesome than would otherwise be the case. 

J.  National Cemetery Administration

The President proposes an appropriation of $160.733 million for the National Cemetery Administration (hereinafter, "NCA").  This funding level will support operational expenses related to 107,300 total expected interments at NCA cemeteries and the maintenance of over 2.8 million graves.

Through a combination of funding in this account and funds from minor construction, the President proposes $28 million for the National Shrine Commitment, an initiative to address nearly $280 million worth of one-time cemetery repair projects identified in a 2002, Congressionally-mandated report.  Assuming continued funding of $28 million annually for Shrine Commitment repairs, all repairs stand to be completed by 2012 according to VA officials.

K. The Veterans' Employment and Training Service

            The President requests $224.887 million to fund the Department of Labor’s Veterans’ Employment and Training Service (hereinafter, "VETS"), a 1.3% increase over the amount appropriated for fiscal year 2006.  Nearly 72% of the requested funds – $161.218 million – will be used to fund two employment programs for veterans: The Disabled Veterans’ Outreach Program and the Local Veterans’ Employment Representative program.  In February 2006, the Committee held a hearing to examine the effectiveness of those programs.  In sum, the Committee learned that there are no reliable data demonstrating that these programs are effective in helping veterans find quality jobs.  In addition, statistics suggest that these programs are not targeting services to those veterans most in need, such as recently-separated veterans.  During this session, the Committee will continue to examine whether veterans would benefit from fundamental changes in how these funds are used, especially since VA's Vocational Rehabilitation and Employment program targets a similar cohort of veterans for employment assistance

Larry Scott