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

    [[Page 371]]

                       22.  TRUST FUNDS AND FEDERAL FUNDS

      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 estimates in this chapter do not reflect the
    impact of social security reform.

                               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 Treasury borrowing.

                                              Table 22-1.  RECEIPTS, OUTLAYS, AND SURPLUS OR DEFICIT BY FUND GROUP
                                                                    (In billions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                  Estimate
                                                                       2004    -----------------------------------------------------------------------------
                                                                     actual         2005         2006         2007         2008         2009         2010
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Receipts:
      Federal funds cash income:
        From the public..........................................    1,152.6      1,271.9      1,347.2      1,470.9      1,595.5      1,695.3      1,797.6
        From trust funds.........................................        1.3          3.3          5.0          2.6          3.1          3.1          3.2
                                                                  ------------------------------------------------------------------------------------------
        Total, Federal funds cash income.........................    1,153.9      1,275.2      1,352.2      1,473.5      1,598.6      1,698.4      1,800.7

      Trust funds cash income:
        From the public..........................................      828.8        879.4        944.2      1,001.3      1,052.3      1,106.0      1,170.3
        From Federal funds:
          Interest...............................................      155.7        165.2        173.4        185.2        199.0        214.6        230.8
          Other..................................................      210.8        238.9        313.4        327.3        345.2        363.3        383.5
                                                                  ------------------------------------------------------------------------------------------
            Total, trust funds cash income.......................    1,195.2      1,283.4      1,431.1      1,513.7      1,596.5      1,683.9      1,784.5
      Offsetting receipts........................................     -469.1       -505.8       -605.7       -643.0       -688.0       -732.4       -764.4
                                                                  ------------------------------------------------------------------------------------------
        Total, unified budget receipts...........................    1,880.1      2,052.8      2,177.6      2,344.2      2,507.0      2,650.0      2,820.9

    Outlays:
      Federal funds cash outgo...................................    1,758.7      1,928.2      2,009.2      2,057.0      2,136.0      2,229.1      2,327.1
      Trust funds cash outgo.....................................    1,002.6      1,056.9      1,164.1      1,242.3      1,309.9      1,386.2      1,465.5
      Offsetting receipts........................................     -469.1       -505.8       -605.7       -643.0       -688.0       -732.4       -764.4
                                                                  ------------------------------------------------------------------------------------------
        Total, unified budget outlays............................    2,292.2      2,479.4      2,567.6      2,656.3      2,757.8      2,882.9      3,028.2

    Surplus or deficit (-):
      Federal funds..............................................     -604.8       -653.0       -657.0       -583.5       -537.4       -530.7       -526.4
      Trust funds................................................      192.6        226.5        267.0        271.4        286.6        297.8        319.1
                                                                  ------------------------------------------------------------------------------------------
        Total, unified surplus/deficit (-).......................     -412.1       -426.6       -390.1       -312.1       -250.8       -232.9       -207.3
    --------------------------------------------------------------------------------------------------------------------------------------------------------
     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 of the fund group 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

    [[Page 372]]

    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 owns them and 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, these
    funds 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 16, ``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 22-1 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 or to a fund in the other fund group.

    [[Page 373]]

                              Table 22-2.  INCOME, OUTGO, AND BALANCES OF TRUST FUNDS GROUP
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                Estimate
                                            2004   -----------------------------------------------------------------
                                          actual       2005       2006       2007       2008       2009       2010
    ----------------------------------------------------------------------------------------------------------------
             Total Trust Funds

    Balance, start of year.............    2,719.5    2,910.2    3,134.4    3,396.1    3,667.5    3,954.0    4,251.8

    Income:
      Governmental receipts............      780.5      827.4      874.8      923.6      970.5    1,019.3    1,078.0
      Proprietary receipts.............       59.7       65.2       83.6       92.5       97.5      103.4      110.0
      Receipts from Federal funds:
        Interest.......................      155.7      165.2      173.4      185.2      199.0      214.6      230.8
        Other..........................      242.7      273.9      350.6      366.2      386.5      407.0      429.8
                                        ----------------------------------------------------------------------------
          Subtotal, income.............    1,238.5    1,331.7    1,482.4    1,567.5    1,653.5    1,744.3    1,848.6

    Outgo:
      To the public....................    1,044.6    1,101.9    1,210.5    1,293.5    1,363.9    1,443.4    1,526.4
      Payments to Federal funds........        1.3        3.3        5.0        2.6        3.1        3.1        3.2
                                        ----------------------------------------------------------------------------
          Subtotal, outgo..............    1,045.9    1,105.2    1,215.5    1,296.1    1,367.0    1,446.5    1,529.5

    Change in fund balance:
      Surplus or deficit (-):
        Excluding interest.............       37.0       61.3       93.5       86.2       87.6       83.1       88.3
        Interest.......................      155.7      165.2      173.4      185.2      199.0      214.6      230.8
                                        ----------------------------------------------------------------------------
          Subtotal, surplus or deficit       192.6      226.5      267.0      271.4      286.6      297.8      319.1
           (-).........................

    Adjustments:
      Transfers/lapses (net)...........         -*       -0.1          *  .........  .........  .........  .........
      Other adjustments................       -1.9       -2.2       -5.3  .........  .........  .........  .........
                                        ----------------------------------------------------------------------------
        Total, change in fund balance..      190.7      224.2      261.7      271.4      286.6      297.8      319.1
                                        ============================================================================
    Balance, end of year...............    2,910.2    3,134.4    3,396.1    3,667.5    3,954.0    4,251.8    4,570.9
    ----------------------------------------------------------------------------------------------------------------
    * $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 22-1 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 of the fund or included in 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 the normal 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 374]]

              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 22-1 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 22-1 consists of
    outlays gross of offsetting receipts, 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 22-3 reconciles, for fiscal year 2004, 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 22-1), and with the unified budget's receipt total.

     Table 22-3. RELATIONSHIP OF TOTAL FEDERAL FUND AND TRUST FUND RECEIPTS TO UNIFIED BUDGET RECEIPTS, FISCAL YEAR
                                                          2004
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------

    ----------------------------------------------------------------------------------------------------------------
    Gross trust fund receipts..........................................................................      1,201.2
    Gross Federal fund receipts........................................................................      1,183.5

    Total of trust fund receipts and Federal fund receipts.............................................      2,384.7

      Deduct intrafund receipts (from funds within the same fund group):
        Trust intrafund receipts.......................................................................         -6.0
        Federal intrafund receipts.....................................................................        -29.6
                                                                                                        ------------
          Subtotal, intrafund receipts.................................................................        -35.6

    Total of trust funds cash income and Federal funds cash income.....................................      2,349.2

      Deduct offsetting receipts: \1\
        Trust fund receipts from Federal funds:
          Interest in receipt accounts.................................................................       -154.0
          General fund payment to Medicare Parts B and D...............................................        -94.7
          Employing agencies' payments for pensions, Social Security, and Medicare.....................        -45.3
          General fund payments for unfunded liabilities of Federal employees retirement funds.........        -44.4
          Transfer of taxation of Social Security and RRB benefits to OASDI, HI, and RRB...............        -24.0
          Other receipts from Federal funds............................................................         -4.1

            Subtotal, trust fund receipts from Federal funds...........................................       -366.5

        Federal fund receipts from trust funds.........................................................         -1.3
        Proprietary receipts...........................................................................       -101.3

          Subtotal, offsetting receipts................................................................       -469.1

    Unified budget receipts............................................................................      1,880.1
    ----------------------------------------------------------------------------------------------------------------
    \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 22-2 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 22-1 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 22-1. 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 $43 billion in 2004. Table 22-2, 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. The balances are
    estimated to double again by the year 2010, rising to $4.6 trillion.
    Almost all of these balances are invested in Treasury securities and
    earn interest. Therefore, they represent the value, in current dollars,
    of taxes and user fees

    [[Page 375]]

    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 program
    expenditures 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
    advance 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 retirement benefits earned by employees. Since many years
    will pass between the time when benefits are earned and when they are
    paid, 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 22-4, on the CD-ROM included with this volume, shows estimates
    of income, outgo, and balances for 2004 through 2010 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 22-2 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 22-5 (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 newly-established special fund of the same general type:
    a fund for military retirees' health benefits. All these funds are
    similar to trust funds in that they are financed by earmarked receipts,
    the excess of income over outgo is 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.