[Analytical Perspectives]
[Dimensions of the Budget]
[21. Trust Funds and Federal Funds]
[From the U.S. Government Printing Office, www.gpo.gov]


  The budget consists of two major groups of funds: Federal funds and 
trust funds. This section presents summary information about the 
transactions of each of these two fund groups. Information is provided 
about the income and outgo of the major trust funds and a number of 
Federal funds that are financed by earmarked collections in a manner 
similar to trust funds. The effects on the Medicare trust funds and on 
Federal funds of the recently-enacted Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 are reflected in this 
chapter.

                           Federal Funds Group

  The Federal funds group comprises the larger part of the budget. It 
includes all transactions not classified by law as being in trust funds.
  The main financing component of the Federal funds group is the general 
fund, which is used to carry out the general purposes of Government 
rather than being restricted by law to a specific program. It consists 
of all collections not earmarked by law to finance other funds, 
including virtually all income taxes and many excise taxes, and all 
expenditures financed by these collections and by general Treasury 
borrowing.
  

                                          Table 21-1.  RECEIPTS, OUTLAYS, AND SURPLUS OR DEFICIT BY FUND GROUP
                                                                (In billions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                              Estimate
                                                                   2003    -----------------------------------------------------------------------------
                                                                 actual         2004         2005         2006         2007         2008         2009
--------------------------------------------------------------------------------------------------------------------------------------------------------
Receipts:
  Federal funds cash income:
    From the public..........................................    1,067.2      1,062.3      1,231.4      1,371.1      1,468.5      1,555.4      1,645.1
    From trust funds.........................................        1.1          1.2          4.0          0.8          2.2          2.7          2.8
                                                              ------------------------------------------------------------------------------------------
    Total, Federal funds cash income.........................    1,068.3      1,063.4      1,235.5      1,371.9      1,470.6      1,558.1      1,647.8
 
  Trust funds cash income:
    From the public..........................................      801.1        827.9        894.3        955.3      1,010.3      1,056.7      1,104.7
    From Federal funds:
      Interest...............................................      157.8        155.5        162.6        173.7        187.2        202.8        221.3
      Other..................................................      185.7        215.5        242.7        292.4        313.1        333.5        352.6
                                                              ------------------------------------------------------------------------------------------
        Total, trust funds cash income.......................    1,144.6      1,199.0      1,299.6      1,421.4      1,510.6      1,593.0      1,678.6
  Offsetting receipts........................................     -430.6       -464.3       -498.8       -587.7       -630.4       -665.9       -710.0
                                                              ------------------------------------------------------------------------------------------
    Total, unified budget receipts...........................    1,782.3      1,798.1      2,036.3      2,205.7      2,350.8      2,485.3      2,616.4
 
Outlays:
  Federal funds cash outgo...................................    1,622.0      1,772.1      1,842.4      1,918.5      2,007.8      2,117.5      2,223.1
  Trust funds cash outgo.....................................      966.2      1,011.1      1,056.3      1,142.5      1,214.7      1,272.7      1,340.5
  Offsetting receipts........................................     -430.6       -464.3       -498.8       -587.7       -630.4       -665.9       -710.0
                                                              ------------------------------------------------------------------------------------------
    Total, unified budget outlays............................    2,157.6      2,318.8      2,399.8      2,473.3      2,592.1      2,724.3      2,853.5
 
Surplus or deficit (-):
  Federal funds..............................................     -553.7       -708.6       -606.9       -546.6       -537.1       -559.3       -575.2
  Trust funds................................................      178.4        187.9        243.3        279.0        295.8        320.4        338.2
                                                              ------------------------------------------------------------------------------------------
    Total, unified surplus/deficit (-).......................     -375.3       -520.7       -363.6       -267.6       -241.3       -239.0       -237.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Receipts include governmental, interfund, and proprietary receipts. They exclude intrafund receipts, which are offset against intrafund payments
  so that cash income and cash outgo are not overstated.

  The Federal funds group also includes special funds and revolving 
funds, which earmark collections for spending on specific purposes. 
Where the law requires that Federal fund collections from a specified 
source be earmarked to finance a particular program, such as a portion 
of the Outer Continental Shelf mineral leasing receipts deposited into 
the Land and Water Conservation Fund, the collections and associated 
disbursements are recorded in special fund receipt and expenditure 
accounts. The majority of special fund collections are derived from the 
Government's power to impose taxes, fines, and other compulsory 
payments. They must be appropriated before they can be obligated and 
spent. However, significant amounts of collections

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credited to special funds are derived from business-like activity, such 
as the receipts from Outer Continental Shelf mineral leasing.
  Revolving funds conduct continuing cycles of business-like activity. 
They charge for the sale of products or services and use the proceeds to 
finance their spending. Instead of being deposited in receipt accounts, 
their proceeds are recorded in the revolving funds, which are 
expenditure accounts. These collections generally are available 
automatically for obligation and making payments. Outlays for revolving 
funds are reported net of offsetting collections. There are two classes 
of revolving funds. Public enterprise funds, such as the Postal Service 
Fund, conduct business-like operations mainly with the public. 
Intragovernmental funds, such as the Federal Buildings Fund, conduct 
business-like operations mainly within and between Government agencies.

                            Trust Funds Group

  The trust funds group consists of funds that are designated by law as 
trust funds. Like special funds and revolving funds, they earmark 
collections for spending on specific purposes. Many of the larger trust 
funds finance social insurance payments for individuals, such as Social 
Security, Medicare, and unemployment compensation. Other major trust 
funds finance military and Federal civilian employees' retirement, 
highway and transit construction, and airport and airway development. 
There are a few trust revolving funds that are credited with collections 
earmarked by law to carry out a cycle of business-type operations. Trust 
funds also include a few small funds established to carry out the terms 
of a conditional gift or bequest.
  There is no substantive difference between trust funds and special 
funds or between revolving funds and trust revolving funds. Whether a 
particular fund is designated in law as a trust fund is, in many cases, 
arbitrary. For example, the National Service Life Insurance Fund is a 
trust fund, but the Servicemen's Group Life Insurance Fund is a Federal 
fund, even though both are financed by earmarked fees paid by veterans 
and both provide life insurance payments to veterans' beneficiaries. \1\
---------------------------------------------------------------------------
  \1\ Another example is the Violent Crime Reduction Trust Fund, 
established pursuant to the Violent Crime Control and Law Enforcement 
Act of 1994. Because the Fund is substantively a means of accounting for 
general fund appropriations, and does not have any dedicated receipts, 
it is classified as a Federal fund rather than a trust fund, 
notwithstanding the presence of the words ``Trust Fund'' in its official 
name.
---------------------------------------------------------------------------
  The Federal budget meaning of the term ``trust'' differs significantly 
from the private sector usage. The beneficiary of a private trust owns 
the trust's income and often its assets. A custodian manages the assets 
on behalf of the beneficiary according to the stipulations of the trust, 
which he or she cannot change unilaterally. In contrast, the Federal 
Government owns the assets and earnings of most Federal trust funds, and 
it can unilaterally raise or lower future trust fund collections and 
payments, or change the purpose for which the collections are used, by 
changing existing law. Only a few small Federal trust funds are managed 
pursuant to a trust agreement where the Government is the trustee, and 
the Government generally has some ability to determine the amount 
deposited into or paid out of these funds. Other amounts are held in 
deposit funds by the Government as a custodian on behalf of some entity 
outside the Government. The Government makes no decisions about the 
amount of these deposits or how they are spent. Therefore, they are 
considered to be non-budgetary instead of Federal trust funds and are 
excluded from the Federal budget.
  A trust fund must use its income for the purposes designated by law. 
Some, such as the Federal Employees Health Benefits fund, spend their 
income almost as quickly as it is collected. Others, such as the Social 
Security and the Federal civilian employees retirement trust funds, 
currently spend considerably less than they collect each year. A surplus 
of income over outgo adds to the trust fund's balance, which is 
available to finance future expenditures. The balances are generally 
invested, by law, in Treasury securities. \2\
---------------------------------------------------------------------------
  \2\ The relationship between Treasury securities held by trust funds 
(and by other Government accounts), debt held the public, and gross 
Federal debt is discussed in Chapter 15, ``Federal Borrowing and Debt.''
---------------------------------------------------------------------------
  A trust fund normally consists of one or more receipt accounts (to 
record income) and an expenditure account (to record outgo). However, a 
few trust funds, such as the Veterans Special Life Insurance fund, are 
established by law as revolving funds. These funds are similar to 
revolving funds in the Federal funds group. They conduct a cycle of 
business-type operations, offsetting collections are credited to the 
funds (which are expenditure accounts), and their outlays are displayed 
net of the offsetting collections.

                     Income and Outgo by Fund Group

  Table 21-1 shows income, outgo, and surplus or deficit by fund group 
and adds them together (and removes double-counting) to derive the total 
unified budget receipts, outlays, and surplus or deficit. The estimates 
assume enactment of the President's budget proposals. Income consists 
mostly of receipts (derived from governmental activity--primarily 
income, payroll, and excise taxes--and gifts). It also consists of 
offsetting receipts, which include proprietary receipts (derived from 
business-like transactions with the public) and interfund collections 
(receipts by one fund of payments from a fund in the other fund group) 
that are deposited in receipt accounts. Outgo consists of payments made 
to the public and/or to a fund in the other fund group.

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                          Table 21-2.  INCOME, OUTGO, AND BALANCES OF TRUST FUNDS GROUP
                                            (In billions of dollars)
----------------------------------------------------------------------------------------------------------------
                                                                            Estimate
                                        2003   -----------------------------------------------------------------
                                      actual       2004       2005       2006       2007       2008       2009
----------------------------------------------------------------------------------------------------------------
         Total Trust Funds
 
Balance, start of year.............    2,544.5    2,722.8    2,910.7    3,153.9    3,432.9    3,728.7    4,049.1
 
Income:
  Governmental receipts............      758.3      780.7      844.3      886.5      932.9      974.6    1,017.6
  Proprietary receipts.............       53.9       58.8       62.3       81.8       91.2       96.8      102.6
  Receipts from Federal funds:
    Interest.......................      157.8      155.5      162.6      173.7      187.2      202.8      221.3
    Other..........................      214.6      248.3      277.8      328.9      352.2      374.6      396.0
                                    ----------------------------------------------------------------------------
      Subtotal, income.............    1,184.7    1,243.3    1,347.0    1,470.9    1,563.4    1,648.8    1,737.5
 
Outgo:
  To the public....................    1,005.2    1,054.3    1,099.7    1,191.1    1,265.4    1,325.7    1,396.6
  Payments to Federal funds........        1.1        1.2        4.0        0.8        2.2        2.7        2.8
                                    ----------------------------------------------------------------------------
      Subtotal, outgo..............    1,006.3    1,055.5    1,103.7    1,191.9    1,267.6    1,328.4    1,399.3
 
Change in fund balance:
  Surplus or deficit (-):
    Excluding interest.............       20.5       32.4       80.7      105.3      108.7      117.6      116.8
    Interest.......................      157.8      155.5      162.6      173.7      187.2      202.8      221.3
                                    ----------------------------------------------------------------------------
      Subtotal, surplus or deficit       178.4      187.9      243.3      279.0      295.8      320.4      338.2
       (-).........................
 
Adjustments:
  Transfers/lapses (net)...........         -*         -*       -0.1  .........  .........  .........  .........
  Other adjustments................         -*          *          *  .........  .........  .........  .........
                                    ----------------------------------------------------------------------------
    Total, change in fund balance..      178.4      187.9      243.2      279.0      295.8      320.4      338.2
                                    ============================================================================
Balance, end of year...............    2,722.8    2,910.7    3,153.9    3,432.9    3,728.7    4,049.1    4,387.3
----------------------------------------------------------------------------------------------------------------
* $50 million or less.

  Two types of transactions are treated specially in the table. First, 
income and outgo for a fund group exclude transactions between funds 
within the same fund group. \3\ These intrafund transactions constitute 
outgo and income for the individual funds that make and collect the 
payments. However, because the totals for each fund group measure its 
transactions with the public and the other fund group, intrafund 
transactions must be subtracted from the sum of the income and outgo of 
all individual funds within the fund group to calculate the consolidated 
income and outgo for that fund group as a whole. Second, income excludes 
the offsetting collections, which are offset against outgo in revolving 
fund expenditure accounts instead of being deposited in receipt 
accounts. \4\ It would be conceptually appropriate to classify these 
collections as income, but at present the data are not tabulated 
centrally for both fund groups. Consequently, they are offset against 
outgo in Table 21-1 and are not shown separately.
---------------------------------------------------------------------------
  \3\ For example, the railroad retirement trust funds pay the 
equivalent of social security benefits to railroad retirees, in addition 
to the regular railroad pension. These benefits are financed by a 
payment from the Federal Old-Age and Survivors Insurance trust fund to 
the railroad retirement trust funds. The payment and collection are both 
deducted so that total trust fund income and outgo measure disbursements 
to the public and to Federal funds.
  \4\ For example, postage stamp fees are deposited as offsetting 
collections in the Postal Service fund. As a result, the Fund's outgo is 
disbursements net of collections.
---------------------------------------------------------------------------
  Some funds in the Federal funds group and some trust funds are 
authorized to borrow from the general fund of the Treasury. \5\ Borrowed 
funds are not recorded as receipts and are excluded from the income of 
the fund. The borrowed funds finance outlays by the fund in excess of 
available receipts. Subsequently, fund receipts are transferred from the 
fund to the general fund in repayment of the borrowing. The repayment is 
not recorded as an outlay of the fund or included in fund outgo.
---------------------------------------------------------------------------
  \5\ For example, the Bonneville Power Administration Fund, a revolving 
fund in the Department of Energy, is authorized to borrow from the 
general fund, and the Black Lung Disability Trust Fund in the Department 
of Labor is authorized to receive appropriations of repayable advances 
from the general fund (a form of borrowing).
---------------------------------------------------------------------------
  Some income in both Federal funds and trust funds consists of 
offsetting receipts. In contrast, for most budget purposes, offsetting 
receipts are excluded from receipts figures and subtracted from gross 
outlays. There are two reasons for this treatment:
    Business-like or market-oriented activities with the public: 
          The collections from such activities are deducted from gross 
          outlays, rather than added to receipts, in order to produce 
          budget totals for receipts and outlays that represent 
          governmental rather than market activity.
    Intragovernmental transactions: Collections by one 
          Government account from another are deducted from gross 
          outlays, rather than added to receipts,

[[Page 342]]

          so that the budget totals measure the transactions of the 
          Government with the public.
  Because the income for Federal funds and for trust funds recorded in 
Table 21-1 includes offsetting receipts, those offsetting receipts must 
be deducted from the two fund groups' combined gross income in order to 
reconcile to total (net) unified budget receipts. Similarly, because the 
outgo for Federal funds and for trust funds in Table 21-1 consists of 
gross outlays, the amount of the offsetting receipts must be deducted 
from the sum of the Federal funds' and the trust funds' gross outgo in 
order to reconcile to total (net) unified budget outlays. Table 21-3 
reconciles, for fiscal year 2003, the gross total of all trust fund and 
Federal fund receipts with the net total of the Federal fund group's and 
the trust fund group's cash income (as shown in Table 21-1), and with 
the unified budget's receipt total.
  

 Table 21-3. RELATIONSHIP OF TOTAL FEDERAL FUND AND TRUST FUND RECEIPTS TO UNIFIED BUDGET RECEIPTS, FISCAL YEAR
                                                      2003
                                            (In billions of dollars)
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Gross trust fund receipts..........................................................................      1,167.8
Gross Federal fund receipts........................................................................      1,097.6
 
Total of trust fund receipts and Federal fund receipts.............................................      2,265.4
 
  Deduct intrafund receipts (from funds within the same fund group):
    Trust intrafund receipts.......................................................................        -23.2
    Federal intrafund receipts.....................................................................        -29.2
                                                                                                    ------------
      Subtotal, intrafund receipts.................................................................        -52.5
 
Total of trust funds cash income and Federal funds cash income.....................................      2,213.0
 
  Deduct offsetting receipts: \1\
    Trust fund receipts from Federal funds:
      Interest in receipt accounts.................................................................       -156.1
      General fund payment to Medicare Part B......................................................        -80.9
      Employing agencies' payments for pensions, Social Security, and Medicare.....................        -41.2
      General fund payments for unfunded liabilities of Federal employees retirement funds.........        -40.1
      Transfer of taxation of Social Security benefits to OASDI, HI, and RRB.......................        -22.7
      Other receipts from Federal funds............................................................         -2.7
 
        Subtotal, trust fund receipts from Federal funds...........................................       -343.6
 
    Federal fund receipts from trust funds.........................................................         -1.1
    Proprietary receipts...........................................................................        -85.9
 
      Subtotal, offsetting receipts................................................................       -430.6
 
Unified budget receipts............................................................................      1,782.3
----------------------------------------------------------------------------------------------------------------
\1\ Offsetting receipts are included in cash income for each fund group, but in the unified budget totals are
  excluded from the receipts total and instead deducted from outlays.

               Income, Outgo, and Balances of Trust Funds

  Table 21-2 shows, for the trust funds group as a whole, the funds' 
balance at the start of each year, income and outgo during the year, and 
the end of year balance. Income and outgo are divided between 
transactions with the public and transactions with Federal funds. 
Receipts from Federal funds are divided between interest and other 
interfund receipts.
  The definition of income and outgo in this table differs from those in 
Table 21-1 in one important way. Trust fund collections that are offset 
against outgo (as offsetting collections) within expenditure accounts 
instead of being deposited in separate receipt accounts are classified 
as income in this table but not in Table 21-1. This classification is 
consistent with the definitions of income and outgo for trust funds used 
elsewhere in the budget. It has the effect of increasing both income and 
outgo by the amount of the offsetting collections. The difference was 
approximately $40 billion in 2003. Table 21-2, therefore, provides a 
more complete summary of trust fund income and outgo.
  The trust funds group is expected to have large and growing surpluses 
over the projection period. As a consequence, trust fund balances are 
estimated to grow substantially, as they have over the past two decades. 
The size of the anticipated balances is unprecedented, and it results 
mainly from relatively recent changes in the way some trust funds are 
financed.
  Primarily because of these changes, but also because of the impact of 
real growth and inflation, trust fund balances increased tenfold from 
1982 to 2000, from $205 billion to $2.1 trillion. Under the proposals in 
the President's budget, the balances are estimated to double again by 
the year 2009, rising to $4.4 trillion. Almost all of these balances are 
invested in Treasury securities and earn interest. Therefore, they 
represent

[[Page 343]]

the value, in current dollars, of taxes and user fees that have been 
paid in advance for future benefits and services.
  Until the 1980s, most trust funds operated on a pay-as-you-go basis. 
Taxes and user fees were set at levels high enough to finance benefits 
and administrative expenses, and to maintain prudent reserves, generally 
defined as being equal to one year's expenditures. As a result, trust 
fund balances tended to grow at about the same rate as their annual 
expenditures.
  Pay-as-you-go financing was replaced in the 1980s by full or partial 
accrual funding for some of the larger trust funds. In order to 
partially prefund the social security benefits of the ``baby-boomers'', 
the Social Security Amendments of 1983 raised payroll taxes above the 
levels necessary to finance current expenditures. In 1984 a new system 
was set up to finance military retirement benefits on a full accrual 
basis. In 1986 full accrual funding of retirement benefits was mandated 
for Federal civilian employees hired after December 31, 1983. The latter 
two changes require Federal agencies and their employees to make annual 
payments to the Federal employees' retirement trust funds in an amount 
equal to the value of the retirement benefits earned by employees in 
that year. Since many years will pass before current employees are paid 
retirement benefits, the trust funds will accumulate substantial 
balances over time.
  These balances are available to finance future benefit payments and 
other trust fund expenditures--but only in a bookkeeping sense. These 
funds are not set up to be pension funds, like the funds of private 
pension plans. The holdings of the trust funds are not assets of the 
Government as a whole that can be drawn down in the future to fund 
benefits. Instead, they are claims on the Treasury. When trust fund 
holdings are redeemed to pay benefits, Treasury will have to finance the 
expenditure in the same way as any other Federal expenditure: out of 
current receipts, by borrowing from the public, or by reducing benefits 
or other expenditures. The existence of large trust fund balances, 
therefore, does not, by itself, increase the Government's ability to pay 
benefits.
  From an economic standpoint, the Government is able to prefund 
benefits only by increasing saving and investment in the economy as a 
whole. This can be fully accomplished only by simultaneously running 
trust fund surpluses equal to the actuarial present value of the 
accumulating benefits and not allowing the Federal fund deficit to 
increase, so that the trust fund surplus reduces a unified budget 
deficit or increases a unified budget surplus. This would reduce Federal 
borrowing by the amount of the trust funds surplus and increase the 
amount of national saving available to finance investment. Greater 
investment would increase future incomes and wealth, which would provide 
more real economic resources to support the benefits.
  Table 21-4, on the CD-ROM included with this volume, shows estimates 
of income, outgo, and balances for 2003 through 2009 for the major trust 
funds. With the exception of transactions between trust funds, the data 
for the individual trust funds are conceptually the same as the data in 
Table 21-2 for the trust funds group. As explained previously, 
transactions between trust funds are shown as outgo of the fund that 
makes the payment and as income of the fund that collects it in the data 
for an individual trust fund, but the collections are offset against 
outgo in the data for the trust fund group. Additional information for 
these and other trust funds can be found in the Status of Funds tables 
in the Budget Appendix.
  Table 21-5 (also on the CD-ROM) shows income, outgo, and balances of 
four existing Federal funds--two revolving funds and two special funds. 
It also shows a new special fund of the same general type established 
last year: a new fund for military retirees' health benefits. All these 
funds are similar to trust funds in that they are financed by earmarked 
receipts, excesses of income over outgo are invested, the interest 
earnings add to balances, and the balances remain available to finance 
future expenditures. The table is illustrative of the Federal funds 
group, which includes many other revolving funds and special funds in 
addition to the ones shown.