    [Analytical Perspectives]
    [Budget Enforcement Act Preview Report]
    [14. Preview Report]
    [From the U.S. Government Publishing Office, www.gpo.gov]

    [[Page 281]]

    ========================================================================

                             BUDGET ENFORCEMENT ACT

                                 PREVIEW REPORT

    ========================================================================

    [[Page 283]]

                               14. PREVIEW REPORT

      The Budget Enforcement Act of 1990 (BEA) was enacted as part of the
    Omnibus Budget Reconciliation Act of 1990. The BEA established, through
    1995, annual limits, or ``caps,'' on discretionary spending, and a pay-
    as-you-go (PAYGO) requirement that legislation affecting direct spending
    or receipts not result in a net cost. An across-the-board reduction of
    non-exempt spending, known as ``sequestration,'' enforces compliance
    with these constraints. The BEA has been extended several times, most
    recently by the Balanced Budget Act of 1997 (BBA), which extended the
    caps and PAYGO requirements through 2002. While the overall spending
    caps have expired, category caps still exist for transportation and
    environmental conservation activities. This report includes a
    presentation of those category limits in FY 2003, though it does not
    propose new overall discretionary caps beyond FY 2002.
      The BEA requires that OMB issue a report on the impact of each piece
    of enacted legislation that affects spending or receipts. It requires
    three additional reports throughout the year on the overall status of
    discretionary and PAYGO legislation. This Preview Report, the first of
    the three BEA-required status reports, provides the status of
    discretionary appropriations and PAYGO legislation based on laws enacted
    as of the end of the first session of the 107th Congress. In addition,
    it explains the differences between the OMB and Congressional Budget
    Office (CBO) estimates of the remaining subcategory discretionary caps.
      OMB estimates use the economic and technical assumptions underlying
    the President's FY 2003 Budget submission, as required by the BEA. The
    remaining two BEA-required status reports, the Update Report that will
    be issued in August and the Final Report that will be issued after the
    end of the Congressional session, must also use these same economic and
    technical assumptions. Estimates in the Update Report and the Final
    Report will be revised only to reflect laws enacted after the Preview
    Report.

                      I.  THE PRESIDENT'S BUDGET PROPOSALS

      In the first session of the 107th Congress, the President proposed and
    the Congress chose to enact 2002 appropriations well above the
    discretionary spending levels originally set by the BEA. Although the
    1997 statutory spending limits provided an effective incentive to slow
    the growth of government spending during a time of deficits, the growth
    in discretionary spending with the arrival of budget surpluses in 1998
    made these caps unrealistic. The Administration will work with the
    Congress during the next session to develop budget enforcement
    mechanisms, including future discretionary spending limits and a PAYGO
    requirement for entitlement spending and tax legislation that are
    consistent with the needs of the country.

                                                       Budget Process Reform

      The 2003 budget is being proposed during a time when our Armed Forces
    are fighting the War on Terrorism abroad and increased funding is needed
    to prevent future terrorist attacks at home; the economy is suffering
    the effects of the slowdown that was worsened by the terrorist attacks
    on September 11, 2001; budget surpluses for the short term have
    disappeared; and the general purpose discretionary caps and PAYGO
    requirements of BEA no longer apply. From the perspective of developing
    a 2003 budget, these are waters that have not been charted for many
    years, and prudent action will be required to avoid years of excess
    spending and deficits. A number of process reforms would enhance the
    Nation's ability to meet these challenges in a fiscally responsible
    manner.

    A Joint Budget Resolution, Discretionary Caps, and PAYGO

      The Budget Enforcement Act's mechanisms for limiting discretionary
    spending and for constraining expansions in mandatory programs and
    reductions in tax receipts expire at the end of 2002, for most programs.
    The President's 2003 budget provides the funding necessary to win the
    War on Terrorism, stimulate the economy, and meet the Nation's ongoing
    public requirements.
      The Administration proposes a joint budget resolution to give the
    budget resolution the force of law. A joint budget resolution would set
    the overall levels for discretionary spending, mandatory spending,
    receipts, and debt in a simple document that would have the force of
    law. Under the current process, the Congress annually adopts a
    ``concurrent resolution,'' which does not require the President's
    signature and does not have the force of law.
      A joint budget resolution could be enforced by sequesters requiring
    automatic across-the-board cuts by category to offset any excess
    spending, similar to the BEA. It would bring the President into the
    process at an early stage, require the President and the Congress to
    reach agreement on overall fiscal policy before individual tax and
    spending bills are enacted, and avoid

    [[Page 284]]

    the ``train wrecks'' at the end of the year that frequently occur under
    the current process.
      Alternatively, enforcement could involve extension of the BEA
    enforcement mechanisms. If the BEA is extended, the Administration would
    support discretionary caps that are consistent with the discretionary
    levels proposed in the 2003 budget and PAYGO requirements that would
    carry out the 2003 budget's proposals for mandatory spending and
    receipts.

    Reserve for Fully Accruing Federal Employees Retirement

      The President's 2003 Budget corrects a long-standing understatement of
    the true cost of literally thousands of government programs. For some
    time, the accruing charge of the Federal Employee retirement system
    (FERS) and military retirement system (MRS) costs and a portion of the
    old Civil Service retirement system (CSRS) costs has been properly
    allocated to the affected salary and expense accounts, but the remainder
    (a portion of CSRS, other small retirement systems, and all civilian and
    military retiree health benefits) has been charged to central accounts.
    The full cost of accruing benefits should be allocated to the affected
    salary and expense accounts, so that budget choices for program managers
    and budget decision makers are not distorted by inaccurate, understated
    cost information.
      The Budget presents the amounts associated with shifting this cost
    from central accounts to affected program accounts, starting in 2003.
    The amounts associated with the proposal are shown on a comparable basis
    for program accounts in 2001 and 2002. Agencies will also, for the first
    time, be charged for the accruing cost of retiree health care benefits
    for all civilian employees. These are also shown on a comparable basis
    for 2001 and 2002. For military retirees health benefits, current law
    requires agencies to be charged for the accruing cost for over-age 64
    military retirees, and the budget proposes to extend this to under-age
    65 military retirees in 2004. These amounts are shown in the Budget,
    beginning in 2004.
      The proposal does not increase or lower total budget outlays or alter
    the surplus/deficit since the higher payments will be offset by receipts
    in the pension and health funds. The shift will reduce reported costs
    from central mandatory accounts and increase reported costs in the
    affected discretionary accounts. Consequently, these costs will be
    properly reported in the budget for the first time and considered as an
    annual cost of managing these programs, as they should be.
      The Administration will oppose any attempt to divert the additional
    funding from the intended purpose and instead use it to fund
    programmatic increases. Therefore, the Administration proposes that the
    additional funding be fenced or held in a reserve and only be made
    available to the committees of jurisdiction for the specific purpose of
    adjusting for the understatement of costs.
      This change in treatment of costs is the first in a series of steps
    that will be taken to ensure that the full annual cost of resources used
    including support services, capital assets and hazardous waste is
    charged properly in the budget presentation.

                                                Reviewing Mandatory Spending

      While the budget currently classifies spending that is subject to the
    annual appropriations process as ``discretionary'' and spending that is
    provided through permanent law as ``mandatory,'' the Constitution makes
    clear that all funding is at the discretion of Congress and the
    President through their power to make law. The terms ``discretionary''
    and ``mandatory'' describe the process by which Congress provides
    funding and not the necessity of the spending.
      For example, the salaries and expenses for the President and the Vice
    President's offices, the two highest offices in the land, are subject to
    the appropriations process and classified as ``discretionary,'' while
    funding for a few selected federal agencies' administrative expenses is
    provided under permanent law and classified as ``mandatory.''
      Except for interest on the national debt, virtually all federal
    spending was subject to the annual appropriations process until the New
    Deal entitlement programs, including Social Security and agriculture
    subsidies, were created. Medicare and Medicaid, launched in the 1960s,
    lifted the share of mandatory spending to more than half of overall
    outlays by 1975. This year, sixty-four cents of every federal dollar
    will be not be subject to Congress' discretion under the annual
    appropriations process.
      Each time a program is added to the mandatory side of the budget, the
    Congress loses some of the flexibility necessary to respond to new
    priorities. During previous wars, when most of the budget was subject to
    the annual appropriations process, presidents had greater flexibility to
    adjust spending levels to meet the new demands of a war. Both Presidents
    Roosevelt and Truman reduced spending in other areas to meet the demands
    of World War II and the Korean War.
      With such a large portion of the budget exempt from the annual
    appropriations process, the 107th Congress and the President do not have
    the same flexibility. They must meet the new demands of a new war
    against terrorism in the annual appropriations process with much more
    limited options.
      Based on a review, the Office of Management and Budget identified a
    limited list of programs that Congress may want to put back under its
    annual review and control. This budget proposes to reclassify three of
    those programs. Several others that the Congress may wish to consider
    reclassifying are listed below. In total, these programs amount to only
    $8 billion, less than one percent of federal spending. If Congress
    shifted these or other programs from the mandatory to discretionary
    category, it would provide greater scrutiny and greater flexibility in
    meeting national needs.

    [[Page 285]]

      Programs proposed to be reclassified from mandatory to discretionary
    in the President's 2003 Budget:

        Federal Direct Student Loan Fund Program, administrative
              expenses;

        Corps of Engineers, Power Marketing receipts, offset to
              discretionary spending; and

        FEMA Flood Insurance Premiums, offset to discretionary
              administrative expenses.

      Administrative expenses classified as mandatory:

        Student loan subsidy for consolidation loan administration;

        Black Lung Disability Fund;

        Energy Employees Occupational Illness Compensation Fund;

        Pension Guaranty Benefit Corporation;

        Civil Service Retirement Disability Fund; and

        Social Security Administration, Benefits to Disabled Coal
              Miners.

      Non-entitlement programs classified as mandatory:

        Maritime Administration Ocean Freight Differential;

        Vocational Rehabilitation Program;

        Child Care Entitlement to States; and

        Social Services Block Grant.

                                      Limiting Use of Advance Appropriations

      An advance appropriation becomes available one year or more beyond the
    year for which the appropriations act is passed. Budget authority is
    recorded in the year the funds become available, not in the year
    enacted. Too often, advance appropriations have been used to expand
    spending levels by shifting budget authority from the budget year into
    the subsequent year and then appropriating the BA freed up under the
    budget year discretionary cap to other programs. From 1993 to 1999, an
    average of $2.3 billion in discretionary budget authority was advance
    appropriated each year. In 1999, advance appropriations totaled $8.9
    billion, an increase of $5.8 billion from the previous year. They
    increased to $23.4 billion in 2000 and have essentially remained at this
    level.
      This budget practice distorts the debate over Government spending and
    misleads the public about spending levels in specific accounts. The 2002
    Congressional Budget Resolution addressed this misuse of advance funding
    by capping advance appropriations at the amount advanced in the previous
    year. The Administration proposes that total advance appropriations
    continue to be capped in 2003. Accordingly, the 2003 budget freezes all
    advance appropriations, except for those that should be reduced or
    eliminated for programmatic reasons.

                                                              Line-Item Veto

      A perennial criticism of the Federal Government is that the annual
    budget contains too many special interest spending items. The
    persistence of these special interest items erodes citizen confidence in
    Government.
      Because appropriations bills must be enacted annually to fund the
    Government, they attract spending items that could not be enacted on
    their own. Particularly at the end of the congressional session, it is
    not uncommon for bills to move through the appropriations process
    quickly, often with little scrutiny. It is the rare Member who will
    challenge questionable spending for fear that provisions important to
    him or her will be challenged in return. The result of this logrolling
    is that the President is left with an all or nothing proposition. He
    must either sign the entire appropriations bill with special interest
    projects or veto the entire bill and invite a potential Government
    shutdown.
      The President proposes that the Congress correct a constitutional flaw
    in the Line Item Veto Act enacted in 1996. From the Nation's founding,
    Presidents have exercised the authority to decline to spend appropriated
    sums. However, this authority was curtailed in 1974 when Congress passed
    the Impoundment Control Act, which restricted the President's authority
    to decline to spend appropriated sums. The Line Item Veto Act of 1996
    attempted to give the President the authority to cancel spending
    authority and special interest tax breaks, but the U.S. Supreme Court
    found that law unconstitutional.
      The President proposes a line-item veto linked to debt reduction. This
    proposal would give the President the authority to decline to spend new
    appropriations, to decline to approve new mandatory spending, or to
    decline to grant new limited tax benefits (to 100 or fewer
    beneficiaries) whenever the President determines the spending or tax
    benefits are not essential Government functions and will not harm the
    national interest. All savings from the line-item veto would be used for
    debt reduction.

                                       Biennial Budgeting and Appropriations

      Only twice in the last 50 years has the Congress enacted all 13
    appropriation bills by the beginning of the fiscal year. According to
    the Congressional Budget Office, roughly one-third of domestic
    discretionary programs are operating under authorization statutes that
    have expired. Because Congress must enact 13 appropriations bills each
    year, it cannot devote the time necessary to provide oversight and
    resolve problems in other programs. The preoccupation with these annual
    appropriations bills frequently precludes review and action on the
    growing portion of the budget that is permanently funded under
    entitlement laws.
      In contrast, a biennial budget would allow lawmakers to devote more
    time every other year to ensuring that taxpayers' money is spent wisely
    and efficiently. In addition, Government agencies would receive more
    stable funding, which would facilitate longer range planning and
    improved fiscal management. Under the President's proposal for a
    biennial budget, funding decisions would be made in non-election years
    to help de-politicize the process. Moreover, lawmakers could devote more
    time

    [[Page 286]]

    to finishing the appropriation bills on time because the next year would
    be free for other legislative business.

                                              Government Shutdown Prevention

      For 20 out of the past 21 years, Congress and the President have not
    finished their work by the October 1st deadline, the beginning of the
    new fiscal year. This past year, none of the 13 appropriations bills was
    enacted by the beginning of the year. When Congress and the President
    fail to gain enactment of all 13 appropriations bills, the Congress
    frequently funds the Government through ``continuing resolutions''
    (CRs), which provide temporary funding authority for Government
    activities at current levels until the final appropriations bills are
    signed into law. This past year, for example, Congress had to enact 7
    separate CRs to keep the Government operating.
      Congress must pass a CR and it must be signed by the President to
    provide funding for agencies. Absent enactment of a CR, the Federal
    Government is shut down. In the 1980s and 1990s, the Government
    experienced shutdowns. Some Administrations used the threat of a
    Government shutdown to extract spending increases from the Congress.
    These annual, often cynical rituals were destructive of public
    confidence and reflected poorly on all parties to the debate.
      Important Government functions should not be held hostage simply
    because Washington cannot cut through partisan strife to pass temporary
    funding bills. In the responsible process the President envisions,
    appropriations bills would pass on time as the law requires, but a back-
    up plan to avoid the threat of a Government shutdown is a good idea.
    Under the President's proposal, if an appropriations bill is not signed
    by October 1 of the new fiscal year, funding would be automatically
    provided at the lower of the President's Budget or the prior year's
    level. The President's proposal would remove incentives for the
    President or the congressional leadership to use the leverage of
    ``shutting down Government'' to achieve spending objectives or to attach
    extraneous measures they could not otherwise obtain through the normal
    appropriations process.

                     II.  DISCRETIONARY SEQUESTRATION REPORT

      Discretionary programs are funded annually through the appropriations
    process. The scorekeeping guidelines accompanying the BEA identify
    accounts with discretionary resources. The BEA limits, or caps, budget
    authority and outlays available for discretionary programs each year
    through 2002. For 2000, the BEA divided discretionary spending into two
    categories: violent crime reduction spending and all other discretionary
    spending. For 2001 and 2002, the BEA specified a single category for all
    discretionary spending. The Transportation Equity Act for the 21st
    Century (TEA-21) (P.L. 105-178) established two additional categories
    for highway and mass transit outlays for 1999 through 2003. The Interior
    and Related Agencies Appropriations Act, 2001, (P.L. 106-291) added a
    new category for conservation spending with limits on budget authority
    and outlays for 2002-2006. In addition to specifying overall limits for
    the conservation category, the Act also specifies levels of spending for
    six subcategories. While the limits for overall discretionary spending
    expired in 2002, the highway and mass transit categories continue
    through 2003, while the conservation category does not expire until
    2006. This report examines how appropriations within the 2003 budget
    conform with the limits specified in the aforementioned categories.
      OMB monitors compliance with the discretionary spending limits
    throughout the fiscal year. Appropriations that cause a breach in the
    budget authority or outlay limits trigger a sequester to eliminate that
    breach. The law does not require that Congress appropriate the full
    amount available under the discretionary limits, although it generally
    has appropriated at least the full amount. In recent years, the Congress
    and the Administration have used various means, such as emergency
    designations and advance appropriations, to circumvent the discretionary
    limits.
      In 2002, for example, Division C, Section 101 of P.L. 107-117, the
    Department of Defense and Emergency Supplemental Appropriations for
    Recovery from and Response to Terrorist Attacks on the United States,
    2002, legislated an upward adjustment of $134.5 billion in budget
    authority and $132.8 billion in outlays to the other discretionary
    category to make room for increased spending above the original
    statutory limits. The Act also included a special BA adjustment
    allowance of up to 0.12 percent of total appropriations.
      Table 1 summarizes changes to the caps since 1990 and includes the
    limits established by for highways, mass transit, and conservation
    spending. It also includes the revised other discretionary limit for
    2002 established in P.L. 107-117.

    [[Page 287]]

                                           Table 14-1.  HISTORICAL SUMMARY OF CHANGES TO DISCRETIONARY SPENDING LIMITS
                                                                    (In billions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                       1991    1992    1993    1994    1995    1996    1997    1998    1999    2000    2001    2002    2003
    --------------------------------------------------------------------------------------------------------------------------------------------------------

           TOTAL DISCRETIONARY

    Statutory Caps as set in OBRA     BA               491.7   503.4   511.5   510.8   517.7   519.1   528.1   530.6   533.0   537.2   542.0   551.1  ......
     1990, OBRA 1993, 1997
     Bipartisan Budget Agreement,
     and TEA-21.....................
                                      OL               514.4   524.9   534.0   534.8   540.8   547.3   547.3   547.9   559.3   564.3   564.4   560.8    34.6
      Adjustment to 1998 OBRA limits  BA                 N/A     N/A     N/A     N/A     N/A     N/A     N/A    -6.9     N/A     N/A     N/A     N/A     N/A
       to reach discretionary
       spending limits included in
       the 1997 Bipartisan Budget
       Agreement....................
                                      OL                 N/A     N/A     N/A     N/A     N/A     N/A     N/A     6.8     N/A     N/A     N/A     N/A     N/A
      Adjustments for changes in      BA              ......     7.7     8.2     8.2     8.8    -0.6    -0.4     3.1    -0.2     2.8    -0.1    -3.3     N/A
       concepts and definitions.....
                                      OL              ......     1.0     2.4     2.3     3.0    -0.5    -2.6    -2.8    -0.3     0.1    -0.1    -3.3     N/A
      Adjustments for changes in      BA              ......    -0.5    -5.1    -9.5   -11.8     3.0     2.6     0.0     N/A     N/A     N/A     N/A     N/A
       inflation....................
                                      OL              ......    -0.3    -2.5    -5.8    -8.8     1.8     2.3     0.9     N/A     N/A     N/A     N/A     N/A
      Adjustments for credit          BA                 0.2     0.2    13.0     0.6     0.7     0.1     0.2     1.0    19.4     1.0     0.6     0.6     N/A
       reestimates, IRS funding,
       debt forgiveness, Arrearages,
       EITC, IMF, and CDRs..........
                                      OL                 0.3     0.3     0.8     0.8     0.9     0.1     0.3     0.6     1.1     0.7     1.2     0.8     N/A
      Adjustments for emergency       BA                 0.9     8.3     4.6    12.2     7.7     5.1     9.3     5.7    31.9    43.6    20.0    22.2     N/A
       requirements.................
                                      OL                 1.1     1.8     5.4     9.0    10.1     6.4     8.1     7.0    22.9    35.8    20.5    31.7     N/A
      Adjustment pursuant to Sec.     BA              ......  ......  ......  ......   -15.0    -0.1    -0.1  ......     N/A     N/A     N/A     N/A     N/A
       2003 of P.L. 104-19 \1\......
                                      OL              ......  ......  ......  ......    -1.1    -3.5    -2.4    -1.5     N/A     N/A     N/A     N/A     N/A
      Adjustments for special
       allowances:
        Discretionary new budget      BA              ......     3.5     2.9     2.9     2.9  ......  ......  ......     N/A     N/A     3.2     0.3     N/A
         authority..................
                                      OL              ......     1.4     2.2     2.6     2.7     1.1     0.5     0.1     N/A     N/A     N/A     N/A     N/A
        Outlay allowance............  BA              ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......  ......     N/A
                                      OL                 2.6     1.7     0.5     1.0  ......  ......  ......     1.2  ......     0.8     2.4  ......     N/A
                                     -----------------------------------------------------------------------------------------------------------------------
          Subtotal, adjustments       BA                 1.1    19.3    23.6    14.3    -6.7     7.5    11.6     2.9    51.1    47.4    23.7    19.8     N/A
           excluding Desert Shield/
           Desert Storm.............
                                      OL                 3.9     5.9     8.8    10.0     6.8     5.4     6.3    12.3    23.7    37.3    24.0    29.2     N/A
      Adjustments for Operation       BA                44.2    14.0     0.6       *       *  ......  ......  ......     N/A     N/A     N/A     N/A     N/A
       Desert Shield/Desert Storm...
                                      OL                33.3    14.9     7.6     2.8     1.1  ......  ......  ......     N/A     N/A     N/A     N/A     N/A
      Rounding Adjustment...........  BA                 N/A     N/A     N/A     N/A     N/A     N/A  ......  ......  ......     1.1     0.0  ......  ......
                                      OL                 N/A     N/A     N/A     N/A     N/A     N/A  ......  ......  ......  ......  ......  ......  ......
      TEA-21 Adjustment (Net) \2\...  BA                 N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A    -0.9    -0.9    -0.9    -0.9     N/A
                                      OL                 N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A     1.1     2.6     5.2     7.1    -1.0
      Adjustment to reach spending    BA                 N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A    95.9     N/A     N/A
       limits mandated in P.L. 106-
       429 \3\......................
                                      OL                 N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A    58.6     N/A     N/A
      Adjustment to reach spending    BA                 N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A   134.5     N/A
       limits mandated in P.L. 107-
       117 \4\......................
                                      OL                 N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A   133.1     N/A
      Adjustment for conservation     BA                 N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A     1.8     1.9
       limits established by P.L.
       106-291 \5\..................
                                      OL                 N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A     N/A     1.2     1.9
                                     -----------------------------------------------------------------------------------------------------------------------
        Total adjustments...........  BA                45.3    33.2    24.2    14.3    -6.7     7.5    11.6     2.9    50.2    47.6   118.8   155.2     1.9
                                      OL                37.2    20.8    16.4    12.8     7.9     5.4     6.3    12.3    24.9    40.0    87.8   170.5     0.9
                                     -----------------------------------------------------------------------------------------------------------------------
    Preview Report spending limits    BA               537.0   536.6   535.7   525.1   511.0   526.6   539.7   533.5   583.2   584.8   660.8   706.3     1.9
     \6\.
                                      OL               551.6   545.7   550.4   547.6   548.7   552.7   553.6   560.2   584.2   604.2   652.2   731.3    35.5
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    N/A = Not Applicable.
    * $50 million or less.
    \1\ P.L. 104-19, Emergency Supplemental Appropriations for Additional Disaster Assistance, for Anti-Terrorism Initiatives, for Assistance in the
      Recovery from the Tragedy that Occurred at Oklahoma City, and Rescissions Act, 1995, was signed into law on July 27, 1995. Section 2003 of that bill
      directed the Director of OMB to make a downward adjustment in the discretionary spending limits for 1995-1998 equal to the aggregate amount of
      reductions in new budget authority and outlays for discretionary programs resulting from the provisions of the bill, other than emergency
      appropriations.
    \2\ Sec. 8101(a) of P.L. 105-178, the Transportation Equity Act for the 21st Century (TEA-21), which was signed by the President on June 6, 1998,
      established two new discretionary spending categories: Highway and Mass Transit. Sec. 8101(b) of TEA-21 provided for an offsetting adjustment in the
      existing discretionary spending limits.
    \3\ Sec. 701 of P.L. 106-429, the Foreign Operations and Related Agencies Appropriations Act, FY 2001, included revised budget authority and outlay caps
      for FY 2001. In addition, this section provided for a budget authority rounding adjustment of 0.5 percent, and also prohibited OMB from making
      adjustments in the Final Sequestration Report for emergency requirements.
    \4\ Division C, Section 101 of P.L. 107-117, the Department of Defense Appropriations Act, FY 2002, included revised budget authority and outlay caps
      for FY 2002. In addition, this section provided a budget authority technical estimating difference adjustment allowance of up to 0.12 percent of total
      appropriations.
    \5\ Title VIII of of P.L. 106-291, the Interior and Related Agencies Appropriations Act, FY 2001, created a new conservation cagetory with limits on
      budget authority and outlays for FY 2002-FY 2006.
    \6\ Reflects combined Defense Discretionary, Non-Defense Discretionary, Violent Crime Reduction, Highway Category, Mass Transit Category, and
      Conservation Category spending limits. FY 2003 figures include Highway, Mass Transit, and Conservation Categories only.

    [[Page 288]]

      Adjustments to discretionary limits.--The BEA permits certain
    adjustments to the discretionary limits. The Final Sequestration Report
    for 2002 that OMB issued last month describes adjustments permitted by
    the BEA as of the time the report was issued. The limits resulting from
    these adjustments are the starting points for this Preview Report.
    Included in the Preview Report are adjustments to the highway, mass
    transit, and conservation categories. Table 2 shows the adjustments made
    in this Preview Report.

                                                           Table 14-2.  DISCRETIONARY SPENDING LIMITS
                                                                    (In millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                             2001        2002        2003
    --------------------------------------------------------------------------------------------------------------------------------------------------------

                                                                        HIGHWAY CATEGORY

    Final Sequestration Report Highway Category Spending Limits....................................  BA                   ..........  ..........  ..........
                                                                                                     OL                       26,920      28,489      29,100
    Adjustments for the Preview Report:
      Technical outlay adjustment..................................................................  BA                          N/A         N/A  ..........
                                                                                                     OL                          N/A         N/A        -178
      Adjustment for revenue aligned budget authority..............................................  BA                          N/A         N/A  ..........
                                                                                                     OL                          N/A         N/A      -1,341
                                                                                                    --------------------------------------------------------
        Subtotal, Adjustments for the Preview Report...............................................  BA                          N/A         N/A  ..........
                                                                                                     OL                          N/A         N/A      -1,519
                                                                                                    --------------------------------------------------------
    Preview Report Highway Category Spending Limits................................................  BA                   ..........  ..........  ..........
                                                                                                     OL                       26,920      28,489      27,581
    --------------------------------------------------------------------------------------------------------------------------------------------------------

                                                                      MASS TRANSIT CATEGORY

    Final Sequestration Report Mass Transit Category Spending Limits...............................  BA                   ..........  ..........  ..........
                                                                                                     OL                        4,639       5,275       5,531
      Adjustments for the Preview Report:
        Technical outlay adjustment................................................................  BA                          N/A         N/A  ..........
                                                                                                     OL                          N/A         N/A         499
                                                                                                    --------------------------------------------------------
          Subtotal, Adjustments for the Preview Report.............................................  BA                          N/A         N/A  ..........
                                                                                                     OL                          N/A         N/A         499
                                                                                                    --------------------------------------------------------
    Preview Report Mass Transit Category Spending Limits...........................................  BA                   ..........  ..........  ..........
                                                                                                     OL                        4,639       5,275       6,030
    --------------------------------------------------------------------------------------------------------------------------------------------------------

                                                                      CONSERVATION CATEGORY

    Final Sequestration Report Conservation Category Spending Limits...............................  BA                          N/A       1,760       1,920
                                                                                                     OL                          N/A       1,473       1,872

      Federal and State Land and Water Conservation Fund subcategory...............................  BA                          N/A         540         540

      State and Other Conservation subcategory.....................................................  BA                          N/A         300         300

      Urban and Historic Preservation subcategory..................................................  BA                          N/A         160         160

        Adjustment for the Preview Report..........................................................  BA                          N/A  ..........          13

        Preview Report Urban and Historic Preservation subcategory.................................  BA                          N/A         160         173

      Payments in Lieu of Taxes subcategory........................................................  BA                          N/A          50          50

      Federal Deferred Maintenance subcategory.....................................................  BA                          N/A         150         150

      Coastal Assistance subcategory...............................................................  BA                          N/A         440         480

        Adjustment for the Preview Report..........................................................  BA                          N/A  ..........           2

        Preview Report Coastal Assistance subcategory..............................................  BA                          N/A         440         482

      Unallocated..................................................................................  BA                          N/A         120         225

      Adjustments for the Preview Report:
        Changes in Concepts and Definitions........................................................  BA                          N/A         -25  ..........
                                                                                                     OL                          N/A          -4  ..........
      Adjusment pursuant to BEA Section 251(b)(2)(H)(i)............................................  BA                          N/A         N/A           2
                                                                                                     OL                          N/A         N/A  ..........
    Preview Report Conservation Category Spending Limits...........................................  BA                          N/A       1,735       1,922
                                                                                                     OL                          N/A       1,469       1,872
    --------------------------------------------------------------------------------------------------------------------------------------------------------

    [[Page 289]]

                                                                  OTHER DISCRETIONARY SPENDING

    Final Sequestration Report Other Discretionary Spending Limits.................................  BA                      660,803     704,548         N/A
                                                                                                     OL                      620,606     696,092         N/A
      Adjustments for the Preview Report:
        No Adjustments.............................................................................  BA                   ..........  ..........         N/A
                                                                                                     OL                   ..........  ..........         N/A
                                                                                                    --------------------------------------------------------
        Subtotal, Adjustments for the Preview Report...............................................  BA                   ..........  ..........         N/A
                                                                                                     OL                   ..........  ..........         N/A
                                                                                                    --------------------------------------------------------
    Preview Report Other Discretionary Spending Limits.............................................  BA                      660,803     704,548         N/A
                                                                                                     OL                      620,606     696,092         N/A
    --------------------------------------------------------------------------------------------------------------------------------------------------------

                                                                  TOTAL DISCRETIONARY SPENDING

    Final Sequestration Report Total Discretionary Spending Limits.................................  BA                      660,803     706,308       1,922
                                                                                                     OL                      652,165     731,329      36,503

    Adjustments for the Preview Report.............................................................  BA                   ..........         -25  ..........
                                                                                                     OL                   ..........          -4      -1,020

    Preview Report Total Discretionary Spending Limits.............................................  BA                      660,803     706,283       1,922
                                                                                                     OL                      652,165     731,325      35,483
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    N/A = Not Applicable

      After consultation with the Congressional Budget Committees and CBO,
    OMB has included several changes in account classification in this
    year's budget. First, OMB has fixed a classification error and
    reclassified receipts generated by the National Defense Stockpile
    Transaction Fund as mandatory. Additionally, the Committees, OMB and CBO
    agreed to reclassify the Department of the Interior Services Charges,
    Receipts, and Forfeitures account as discretionary from mandatory, and
    the Department of the Interior Park Police Pensions account as mandatory
    from discretionary. Since there are no explicit overall discretionary
    caps for FY 2003, no adjustment is required for these reclassifications.
      OMB has also decided to consolidate all FY 2002 appropriations in the
    State Wildlife Grants account within the conservation spending category.
    To properly represent the effects of this consolidation, OMB has
    adjusted the FY 2002 enacted levels for conservation spending downward
    by $25 million in the budget and made a corresponding reduction of the
    same amount to the FY 2002 conservation category spending limits.
      Appropriations for conservation spending in FY 2002 fell below the
    overall limit for the category by $2 million. Pursuant to BEA section
    251(b)(2)(H)(i), the 2003 budget authority limits for conservation
    spending have been adjusted upward by that amount. Appropriations within
    two of the conservation spending sub-categories for FY 2002 also did not
    meet the established limits for those activities. Specifically, the
    Coastal Assistance sub-category received $2 million less than its limit
    of $440 million, and the Urban and Historic Preservation sub-category
    received $13 million less than its limit of $160 million. As a result,
    the amounts by which these appropriations fell below the conservation
    sub-category caps have been added to the appropriate FY 2003 sub-
    category spending limits, as required by the BEA in section
    251(b)(2)(H)(ii).
      In addition, section 8101 of TEA-21 requires OMB to revise the highway
    spending limits for changes in actual and estimated federal gasoline tax
    receipts, relative to the receipt levels assumed in TEA-21. For example,
    if actual tax receipts exceed the TEA-21 assumed levels, OMB is required
    to increase the limit for the budget year. This adjustment permits
    funding to be consistent with the level of taxes that are collected and
    earmarked for highway spending. OMB has no discretion when making this
    adjustment; its role is purely ministerial. The highway category
    adjustments in this report are notable in that they break from the
    recent pattern of upward revisions to highway category spending limits.
      Over the past several years, actual and estimated gasoline tax
    receipts exceeded the levels assumed in TEA-21. Accordingly, OMB applied
    the formula as specified in the legislation and increased the highway
    category obligation limitations by $3.1 billion in 2001 and $4.5 billion
    in 2002. In 2003, however, the TEA-21 formula is estimated to produce a
    nearly -$5.0 billion downward adjustment in the highway obligation
    limitation. The resulting FY 2003 highway outlay limit is below the FY
    2002 outlay limit by -$0.9 billion. This is due both to actual gasoline
    tax receipts being lower than anticipated in 2001 and revised Treasury
    projections of gasoline tax receipts for 2003.
      The adjustment for the mass transit category captures changes in
    technical assumptions about the rate at which mass transit obligations
    will be spent. This

    [[Page 290]]

    report includes an upward adjustment of $0.5 billion dollars to the mass
    transit category limits due to these revised technical assumptions.
    Table 3 details the adjustments to the highways and mass transit
    category limits and how those adjustments have been calculated.

                      Table 14-3.  ADJUSTMENTS TO THE HIGHWAY AND MASS TRANSIT CATEGORIES FOR CHANGES IN RECEIPTS AND TECHNICAL ASSUMPTIONS
                                                                    (In millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                             2001        2002        2003
    --------------------------------------------------------------------------------------------------------------------------------------------------------

                                                      HIGHWAY CATEGORY

    Obligation Limitation Assumed in FY 2002 Preview Report.............................................................      30,216      32,310      28,233
       Adjustments:
       Difference Between Current and Previous Estimate of FY 2003 Highway Tax Receipts.................................         N/A         N/A      -1,497
       Difference Between FY 2001 Actual and Estimated Highway Tax Receipts.............................................         N/A         N/A      -3,468
                                                                                                                         -----------------------------------
         Subtotal, Obligation Limitation Adjustment.....................................................................         N/A         N/A      -4,965

    FY 2003 Preview Report Obligation Limitation........................................................................      30,216      32,310      23,268

    Outlay Limits in FY 2002 Preview Report.............................................................................      26,920      28,489      29,100
       Adjustments:
         Decrease in FY 2003 Obligation Limitation......................................................................         N/A         N/A      -1,341
       Changes in Technical Assumptions:
         Reestimate of Outlays from Obligation Limitation level, Adjusted to Include Outlays from change in Obligation           N/A         N/A      27,581
         Limitation.....................................................................................................
         Reestimate of Outlays from Obligation Limitation level, Adjusted to Include Outlays from change in Obligation           N/A         N/A      27,759
         Limitation.....................................................................................................
                                                                                                                         -----------------------------------
       Adjustment for Changes in Technical Assumptions..................................................................         N/A         N/A        -178
    Total Adjustments...................................................................................................         N/A         N/A      -1,519
                                                                                                                         -----------------------------------
    Outlay Limits in FY 2003 Preview Report.............................................................................      26,920      28,489      27,581
    --------------------------------------------------------------------------------------------------------------------------------------------------------

                                                    MASS TRANSIT CATEGORY

    Outlay Limits in FY 2002 Preview Report.............................................................................       4,639       5,275       5,531
       Adjustment:
         Changes in Technical Assumptions:
           Reestimate of Outlays from Obligation Limitation Using Current Technical Assumptions.........................         N/A         N/A       6,030
         FY 2001 Preview Report Outlays.................................................................................         N/A         N/A       5,531
                                                                                                                         -----------------------------------
       Adjustment for Changes in Technical Assumptions..................................................................         N/A         N/A         499
    Outlay Limits in FY 2003 Preview Report.............................................................................       4,639       5,275       6,030
    --------------------------------------------------------------------------------------------------------------------------------------------------------

      Comparison of OMB and CBO discretionary limits.--Section 254(d)(5) of
    the BEA requires this report to explain the differences between OMB and
    CBO estimates for discretionary spending limits. However, CBO was unable
    to supply OMB with its FY 2003 discretionary spending limit estimates by
    the publication deadline for this document. As a result, no comparison
    is included.

                        III.  PAYGO Sequestration Report

      This section of the Preview Report discusses the enforcement
    procedures that apply to direct spending and receipts. The BEA defines
    direct spending as entitlement authority, the food stamp program, and
    budget authority provided by law other than in appropriations acts. The
    following are exempt from PAYGO enforcement: Social Security, the Postal
    Service, legislation specifically designated as an emergency
    requirement, and legislation fully funding the Federal Government's
    commitment to protect insured deposits.
      The BEA requires a sequestration to offset any net cost resulting from
    legislation enacted before October 1, 2002, that affects direct spending
    or receipts.

      Sequester determinations.--The BEA requires OMB to submit a report to
    Congress estimating the change in outlays or receipts for the current
    year, the budget year, and the following four fiscal years resulting
    from enactment of PAYGO legislation. The estimates, which must rely on
    the economic and technical assumptions underlying the most recent
    President's

    [[Page 291]]

    budget, determine whether the PAYGO requirement is met. The PAYGO
    process requires OMB to maintain a ``scorecard'' that shows the
    cumulative net cost impact of such legislation. This Report shows how
    these past actions affect the upcoming fiscal year.
      In recent years, the PAYGO constraints have been skirted. For 2002,
    net costs of $130.3 billion were removed from the PAYGO scorecard. Since
    1998, net costs totaling $176.2 billion have been either exempted or
    removed from the scorecard.
      Table 4 shows OMB estimates of current balances on the PAYGO
    scorecard. For legislation enacted this year, the 2002 impact will be
    added to the balance for 2003 in the Final Sequester Report that OMB is
    to issue after the 2nd session of the 107th Congress adjourns sine die.
    The current PAYGO scorecard shows net costs of $110.7 billion for 2003
    and a total of $505.8 billion for 2003 through 2006.

                                          Table 14-4.  PAY-AS-YOU-GO SCORECARD
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                                             Total
                                                        2002      2003       2004       2005       2006    2003-2006
    ----------------------------------------------------------------------------------------------------------------
    Pay-as-you-go scorecard:........................
    Revenue impact of enacted legislation...........  .......    -86,866   -106,319   -107,744   -126,474   -427,403
    Outlay impact of enacted legislation............  .......     23,828     23,538     22,827      8,224     78,417
                                                     ---------------------------------------------------------------
        Total, net cost impact of enacted             .......    110,694    129,857    130,571    134,698    505,820
         legislation................................
    ----------------------------------------------------------------------------------------------------------------