[Analytical Perspectives]
[The Budget System and Concepts]
[26. The Budget System and Concepts]
[From the U.S. Government Printing Office, www.gpo.gov]


  The budget system of the United States Government provides the means 
for the President and Congress to decide how much money to spend, what 
to spend it on, and how to raise the money they have decided to spend. 
Through the budget system, they determine the allocation of resources 
among the agencies of the Federal Government and between the Federal 
Government and the private sector. The budget system focuses primarily 
on dollars, but it also allocates other resources, such as Federal 
employment. The decisions made in the budget process affect the nation 
as a whole, State and local governments, and individual Americans. Many 
budget decisions have worldwide significance. The Congress and the 
President enact budget decisions into law. The budget system ensures 
that these laws are carried out.
  This chapter provides an overview of the budget system and explains 
some of the more important budget concepts. It includes summary dollar 
amounts to illustrate major concepts. Other chapters of the budget 
documents discuss these amounts and more detailed amounts in greater 
depth.
  The following section discusses the budget process, covering 
formulation of the President's budget, congressional action, and budget 
execution. The next section provides information on budget coverage, 
including a discussion of on-budget and off-budget amounts, functional 
classification, how budget data is arrayed, types of funds, and full 
cost budgeting. Subsequent sections discuss the concepts of receipts and 
collections, budget authority, and outlays. These sections are followed 
by discussions of Federal credit; surpluses, deficits, and means of 
financing; Federal employment; and the basis for the budget figures. A 
glossary of budget terms appears at the end of the chapter.
  Various laws, enacted to carry out requirements of the Constitution, 
govern the budget system. The chapter refers to the principal ones by 
title throughout the text and gives complete citations in the section 
just preceding the glossary.

                           THE BUDGET PROCESS

  The budget process has three main phases, each of which is 
interrelated with the others:
  (1) Formulation of the President's proposed budget;
  (2) Congressional action on the budget; and
  (3) Budget execution.

                  Formulation of the President's Budget

  The Budget of the United States Government consists of several volumes 
that set forth the President's financial proposal with recommended 
priorities for the allocation of resources by the Government. The 
primary focus of the budget is on the budget year--the next fiscal year 
for which Congress needs to make appropriations, in this case 2006. 
(Fiscal year 2006 will begin on October 1, 2005 and end on September 30, 
2006.) The budget also covers at least the four years following the 
budget year in order to reflect the effect of budget decisions over the 
longer term. It includes the funding levels provided for the current 
year, in this case 2005, so that the reader can compare the President's 
budget proposals to the most recently enacted levels, and it includes 
data on the most recently completed fiscal year, in this case 2004, so 
that the reader can compare budget estimates to actual accounting data.
  The President begins the process of formulating the budget by 
establishing general budget and fiscal policy guidelines, usually by the 
Spring of each year, at least nine months before the President transmits 
the budget to Congress and at least 18 months before the fiscal year 
begins. (See the ``Budget Calendar'' below.) Based on these guidelines, 
the Office of Management and Budget (OMB) works with the Federal 
agencies to establish specific policy directions and planning levels for 
the agencies, both for the budget year and for at least the following 
four years, to guide the preparation of their budget requests.
  During the formulation of the budget, the President, the Director of 
OMB, and other officials in the Executive Office of the President 
continually exchange information, proposals, and evaluations bearing on 
policy decisions with the Secretaries of the departments and the heads 
of the other Government agencies. Decisions reflected in previously 
enacted budgets, including the one for the fiscal year in progress, 
reactions to the last proposed budget (which Congress is considering 
when the process of preparing the upcoming budget begins), and program 
performance influence decisions concerning the upcoming budget. So do 
projections of the economic outlook, prepared jointly by the Council of 
Economic Advisers, OMB, and the Treasury Department.
  In early Fall, agencies submit their budget requests to OMB, where 
analysts review them and identify issues that OMB officials need to 
discuss with the agencies. OMB and the agencies resolve many issues 
themselves. Others require the involvement of the President and White 
House policy officials. This decision-making process is usually 
completed by late December. At that time, the final stage of developing 
detailed budget data and the preparation of the budget documents begins.
  The decision-makers must consider the effects of economic and 
technical assumptions on the budget estimates. Interest rates, economic 
growth, the rate of inflation, the unemployment rate, and the number of 
people eligible for various benefit programs, among other things, affect 
Government spending and receipts. Small

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changes in these assumptions can affect budget estimates by billions of 
dollars. (Chapter 12, ``Economic Assumptions,'' provides more 
information on this subject.)
  Statutory limitations on changes in receipts and outlays also 
influence budget decisions (see ``Budget Enforcement'' below).
  Thus, the budget formulation process involves the simultaneous 
consideration of the resource needs of individual programs, the 
allocation of resources among the agencies and functions of the Federal 
Government, the total outlays and receipts that are appropriate in 
relation to current and prospective economic conditions, and statutory 
constraints.
  The law governing the President's budget specifies that the President 
is to transmit the budget to Congress on or after the first Monday in 
January but not later than the first Monday in February of each year for 
the following fiscal year, which begins on October 1. The budget is 
routinely sent to Congress on the first Monday in February, giving it 
eight months to act on the budget before the fiscal year begins.
  In some years, for various reasons, the President cannot adhere to the 
normal schedule. One reason is that the current law does not require an 
outgoing President to transmit a budget, and it is impracticable for an 
incoming President to complete a budget within a few days of taking 
office on January 20th. President Clinton, the first President subject 
to the current requirement, submitted a report to Congress on February 
17, 1993, describing the comprehensive economic plan he proposed for the 
Nation and containing summary budget information. He transmitted the 
Budget of the United States for 1994 on April 8, 1993. President George 
W. Bush similarly submitted an initial document, A Blueprint for New 
Beginnings--A Responsible Budget for America's Priorities, to Congress 
on February 28, 2001, and transmitted the Budget of the United States 
Government for Fiscal Year 2002 on April 9, 2001.
  In some years, the late or pending enactment of appropriations acts, 
other spending legislation, and tax laws considered in the previous 
budget cycle have delayed preparation and transmittal of complete 
budgets. For this reason, for example, President Reagan submitted his 
budget for 1988 forty-five days after the date specified in law. In 
other years, Presidents have submitted abbreviated budget documents on 
the due date, sending the more detailed documents weeks later. For 
example, President Clinton transmitted an abbreviated budget document to 
Congress on February 5, 1996, because of uncertainty over 1996 
appropriations as well as possible changes in mandatory programs and tax 
policy. He transmitted a budget supplement and other budget volumes in 
March 1996.

                        Congressional Action \1\
---------------------------------------------------------------------------

  \1\ For a fuller discussion of the congressional budget process, see 
Robert Keith and Allen Schick, Manual on the Federal Budget Process 
(Congressional Research Service Report 98-720 GOV) and Introduction to 
the Federal Budget Process (Congressional Research Service Report 98-721 
GOV).
---------------------------------------------------------------------------
  Congress considers the President's budget proposals and approves, 
modifies, or disapproves them. It can change funding levels, eliminate 
programs, or add programs not requested by the President. It can add or 
eliminate taxes and other sources of receipts, or make other changes 
that affect the amount of receipts collected.
  Congress does not enact a budget as such. Through the process of 
adopting a budget resolution (described below), it agrees on levels for 
total spending and receipts, the size of the deficit or surplus, and the 
debt limit. The budget resolution then provides the framework within 
which congressional committees prepare appropriations bills and other 
spending and receipts legislation. Congress provides spending authority 
for specified purposes in several regular appropriations acts each year 
(traditionally thirteen). It also enacts changes each year in other laws 
that affect spending and receipts. Both appropriations acts and these 
other laws are discussed in the following paragraphs.
  In making appropriations, Congress does not vote on the level of 
outlays (spending) directly, but rather on budget authority, which is 
the authority provided by law to incur financial obligations that will 
result in outlays. In a separate process, prior to making 
appropriations, Congress usually enacts legislation that authorizes an 
agency to carry out particular programs and, in some cases, limits the 
amount that can be appropriated for the programs. Some authorizing 
legislation expires after one year, some expires after a specified 
number of years, and some is permanent. Congress may enact 
appropriations for a program even though there is no specific 
authorization for it.
  Congress begins its work on the budget shortly after it receives the 
President's budget. Under the procedures established by the 
Congressional Budget Act of 1974, Congress decides on budget totals 
before completing action on individual appropriations. The Act requires 
each standing committee of the House and Senate to recommend budget 
levels and report legislative plans concerning matters within the 
committee's jurisdiction to the Budget Committee in each body. The 
Budget Committees then initiate the concurrent resolution on the budget. 
The budget resolution sets levels for total receipts and for budget 
authority and outlays, both in total and by functional category (see 
``Functional Classification'' below). It also sets levels for the budget 
deficit or surplus and debt.
  In the report on the budget resolution, the Budget Committees allocate 
the total on-budget budget authority and outlays provided in the 
resolution to the Appropriations Committees and the other committees 
that

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have jurisdiction over spending. (See COVERAGE OF THE BUDGET, later in 
this chapter, for more information on on-budget and off-budget amounts.) 
The Appropriations Committees are required, in turn, to divide their 
allocations of budget authority and outlays among their respective 
subcommittees. The subcommittees may not exceed their allocations in 
drafting spending bills. The other committees with jurisdiction over 
spending and receipts may make allocations among their subcommittees but 
are not required to. The Budget Committees' reports may discuss 
assumptions about the level of funding for major programs. While these 
assumptions do not bind the other committees and subcommittees, they may 
influence their decisions. The budget resolution may contain 
``reconciliation directives'' (discussed below) to the committees 
responsible for tax laws and for spending not controlled by annual 
appropriation acts, in order to conform the level of receipts and this 
type of spending to the levels specified in the budget resolution.
  The congressional timetable calls for the whole Congress to adopt the 
budget resolution by April 15 of each year, but Congress regularly 
misses this deadline. Once Congress passes a budget resolution, a member 
of Congress can raise a point of order to block a bill that would exceed 
a committee's allocation.
  Since the concurrent resolution on the budget is not a law, it does 
not require the President's approval. However, Congress considers the 
President's views in preparing budget resolutions, because legislation 
developed to meet congressional budget allocations does require the 
President's approval. In some years, the President and the joint 
leadership of Congress have formally agreed on plans to reduce the 
deficit or balance the budget. These agreements were reflected in the 
budget resolution and legislation passed for those years.
  Once Congress approves the budget resolution, it turns its attention 
to enacting appropriations bills and authorizing legislation. 
Appropriations bills are initiated in the House. They provide the budget 
authority for the majority of Federal programs. The Appropriations 
Committee in each body has jurisdiction over annual appropriations. 
These committees are divided into subcommittees that hold hearings and 
review detailed budget justification materials prepared by the agencies 
within the subcommittee's jurisdiction. After a bill has been drafted by 
a subcommittee, the committee and the whole House, in turn, must approve 
the bill, usually with amendments to the original version. The House 
then forwards the bill to the Senate, where a similar review follows. If 
the Senate disagrees with the House on particular matters in the bill, 
which is often the case, the two bodies form a conference committee 
(consisting of Members of both bodies) to resolve the differences. The 
conference committee revises the bill and returns it to both bodies for 
approval. When the revised bill is agreed to, first in the House and 
then in the Senate, Congress sends it to the President for approval or 
veto.
  The President can only approve or veto an entire bill; he cannot 
approve or veto selected parts. In 1996, Congress enacted the Line Item 
Veto Act, granting the President limited authority to cancel new 
spending and limited tax benefits when he signs laws enacted by the 
Congress. However, in 1998, the Supreme Court declared this authority to 
be unconstitutional.
  For 22 of the last 24 fiscal years, including 2005, some or all of the 
appropriations bills were not enacted by the beginning of the year. When 
this occurs, Congress usually enacts a joint resolution called a 
``continuing resolution,'' which is an interim appropriations bill, to 
provide authority for the affected agencies to continue operations at 
some specified level up to a specific date or until the regular 
appropriations are enacted. In some years, a continuing resolution has 
funded a portion or all of the Government for the entire year. Congress 
must present these resolutions to the President for approval or veto. In 
some cases, Presidents have rejected continuing resolutions because they 
contained unacceptable provisions. Left without funds, Government 
agencies were required by law to shut down operations with exceptions 
for some activities until Congress passed a continuing resolution the 
President would approve. Shutdowns have lasted for periods of a day to 
several weeks.
  As explained earlier, Congress also provides budget authority in laws 
other than appropriations acts. In fact, while annual appropriations 
acts control the spending for the majority of Federal programs, they 
control only one-third of the total spending in a typical year. 
Permanent laws, called authorizing legislation, control the rest of the 
spending. A distinctive feature of these laws is that they provide 
agencies with the authority to collect or to spend money without first 
requiring the Appropriations Committees to enact funding. This category 
of spending includes interest the Government pays on the public debt and 
the spending of several major programs, such as Social Security, 
Medicare and Medicaid, unemployment insurance, and Federal employee 
retirement. This chapter discusses the control of budget authority and 
outlays in greater detail under BUDGET AUTHORITY AND OTHER BUDGETARY 
RESOURCES, OBLIGATIONS, AND OUTLAYS.
  Almost all taxes and most other receipts result from permanent laws. 
Article I, Section 7, of the Constitution provides that all bills for 
raising revenue shall originate in the House of Representatives. In the 
House, the Ways and Means Committee initiates tax bills; in the Senate, 
the Finance Committee has jurisdiction over tax laws.
  The budget resolution often includes reconciliation directives, which 
require authorizing committees to change permanent laws that affect 
receipts and outlays. The budget resolution directs each designated 
committee to report amendments to the laws under the committee's 
jurisdiction that would achieve changes in the levels of receipts and 
reductions in direct spending controlled by the laws. The directives 
specify the dollar

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amount of changes that each designated committee is expected to achieve, 
but do not specify which laws are to be changed or the changes to be 
made. However, the Budget Committees' reports on the budget resolution 
frequently discuss assumptions about how the laws would be changed. Like 
other assumptions in the report, they do not bind the committees of 
jurisdiction but may influence their decisions. A reconciliation 
instruction may also specify the total amount by which the statutory 
limit on the public debt is to be changed.
  The committees subject to reconciliation directives draft the 
implementing legislation. Such legislation may, for example, change the 
tax code, revise benefit formulas or eligibility requirements for 
benefit programs, or authorize Government agencies to charge fees to 
cover some of their costs. Congress typically enacts an omnibus budget 
reconciliation act, which combines the amendments to implement 
reconciliation directives in a single act.
  Such a large and complicated bill would be difficult to enact under 
normal legislative procedures because it usually involves changes to tax 
rates or to popular social programs in order to achieve budgetary 
savings. The Senate considers such omnibus reconciliation acts under 
expedited procedures that limit total debate on the bill. As a result, 
there are significant restrictions with respect to the substantive 
content of the reconciliation measure itself, as well as amendments to 
the measure. Any material in the bill or amendment to the bill that is 
not germane, would add extraneous material, would cause deficit levels 
to increase, or that contains changes to the Federal Old-Age and 
Survivors Insurance and the Federal Disability Insurance programs is not 
in order under expedited reconciliation procedures.
  Reconciliation acts, together with appropriations acts for the year, 
often implement agreements between the President and the Congress. They 
may include other matters, such as laws providing the means for 
enforcing these agreements, as described below.

                           Budget Enforcement

  The Budget Enforcement Act (BEA), first enacted in 1990 and extended 
in 1993 and 1997, significantly amended the laws pertaining to the 
budget process, including the Congressional Budget Act, the Balanced 
Budget and Emergency Deficit Control Act, and the laws pertaining to the 
President's budget (see PRINCIPAL BUDGET LAWS, later in the chapter). 
The BEA constrained legislation enacted through 2002 that would increase 
spending or decrease spending.
  The BEA divided spending into two types--discretionary spending and 
direct spending. Discretionary spending is controlled through annual 
appropriations acts. Direct spending, which is more commonly referred to 
as mandatory spending, is controlled by permanent laws. However, the BEA 
required budget authority provided in annual appropriations acts for 
certain specifically identified programs to be treated as mandatory. 
This is because the authorizing legislation in these cases entitles 
beneficiaries to receive payment or otherwise obligates the Government 
to make payment, even though the payments are funded by a subsequent 
appropriation. Since the authorizing legislation effectively determines 
the amount of budget authority required, the BEA classified it as 
mandatory.
  The BEA defined categories of discretionary spending and specified 
dollar limits known as caps on the amount of spending in each category. 
If the amount of budget authority or outlays provided in appropriations 
acts for a given year exceeded the cap for that category, the BEA 
required a procedure, called sequestration, for reducing the spending in 
the category.
  The BEA did not cap mandatory spending. Instead, it required that all 
laws that affected mandatory spending or receipts be enacted on a pay-
as-you-go (PAYGO) basis. That meant that if such a law increased the 
deficit or reduced a surplus in the budget year or any of the four 
following years, another law had to be enacted with an offsetting 
reduction in spending or increase in receipts for each year that was 
affected. Otherwise, a sequestration would be triggered in the fiscal 
year in which the deficit would be increased.
  Chapter 24, ``Budget System and Concepts and Glossary,'' pages 460-461 
in the Analytical Perspectives volume of the 2004 Budget, discusses the 
Budget Enforcement Act in more detail.
  The BEA expired at the end of 2002. The Administration proposes to 
extend the BEA's mechanisms for limiting discretionary spending and to 
establish mandatory spending controls. The Administration also proposes 
to establish a new mechanism to measure the Federal Government's long-
term unfunded obligations and to prohibit increases in those 
obligations. In April, 2004 the Administration transmitted a 
comprehensive budget enforcement legislation package to Congress. The 
Administration plans to repropose that legislation, with appropriate 
updates and revisions, after the budget is transmitted. These proposals 
are discussed in more detail in Chapter 15, ``Budget Reform Proposals.''

                            Budget Execution

  Government agencies may not spend or obligate more than Congress has 
appropriated, and they may use funds only for purposes specified in law. 
The Antideficiency Act prohibits them from spending or obligating the 
Government to spend in advance of an appropriation, unless specific 
authority to do so has been provided in law. Additionally, the Act 
requires the President to apportion the budgetary resources available 
for most executive branch agencies. The President has delegated this 
authority to OMB. Some apportionments are by time periods (usually by 
quarter of the fiscal year), some are by projects or activities, and 
others are by a combination of both. Agencies may request OMB to 
reapportion funds during the year to accommodate changing circumstances. 
This system helps to ensure that funds are available to cover operations 
for the entire year.

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  During the budget execution phase, the Government sometimes finds that 
it needs to spend more money than Congress has appropriated for the 
fiscal year because of unanticipated circumstances. For example, more 
money might be needed to respond to a severe natural disaster. Under 
such circumstances, Congress may enact a supplemental appropriation.
  On the other hand, changing circumstances may reduce the need to spend 
appropriated funds. Under the requirements of the Impoundment Control 
Act of 1974, the President cannot simply decline to spend 
appropriations. The President may defer spending or propose rescissions. 
Deferrals, which are temporary withholdings, take effect immediately 
unless overturned by an act of Congress. The President may only defer 
funds to provide for contingencies, to achieve savings made possible 
through changes in requirements or greater efficiency of operations, or 
as otherwise specifically provided in law. He may not defer funds for 
policy reasons. In 2004, no deferrals were proposed. Rescissions, which 
permanently cancel budget authority, take effect only if Congress passes 
a law approving them. The law may approve only part of a rescission. If 
Congress does not pass such a law within 45 days of continuous session, 
the President must make the funds available for spending. The President 
may propose a rescission for any reason. In total, Congress has 
rescinded about one-third of the amount of funds that Presidents have 
proposed for rescission since enactment of the Impoundment Control Act. 
In 2004, no rescissions were proposed by the President although Congress 
initiated and enacted rescissions.
  

                                                                     Budget Calendar
 
  The following timetable highlights the scheduled dates for significant budget events during the year.
 
Between the 1st Monday in January and the 1st Monday in February...................  President transmits the budget.
 
Six weeks later....................................................................  Congressional committees report budget estimates to Budget
                                                                                      Committees.
 
April 15...........................................................................  Action to be completed on congressional budget resolution.
 
May 15.............................................................................  House consideration of annual appropriations bills may begin.
 
June 15............................................................................  Action to be completed on reconciliation.
 
June 30............................................................................  Action on appropriations to be completed by House.
 
July 15............................................................................  President transmits Mid-Session Review of the Budget.
 
October 1..........................................................................  Fiscal year begins.
 


                         COVERAGE OF THE BUDGET

                  Federal Government and Budget Totals

      Table 26-1.  TOTALS FOR THE BUDGET AND THE FEDERAL GOVERNMENT
                        (In billions of dollars)
------------------------------------------------------------------------
                                                            Estimate
                                                 2004  -----------------
                                                actual    2005     2006
------------------------------------------------------------------------
Budget authority:
  Unified....................................    2,407    2,477    2,548
  On-budget..................................    2,021    2,076    2,123
  Off-budget.................................      386      402      425
 
Receipts:
  Unified....................................    1,880    2,053    2,178
  On-budget..................................    1,345    1,491    1,584
  Off-budget.................................      535      561      593
 
Outlays:
  Unified....................................    2,292    2,479    2,568
  On-budget..................................    1,913    2,080    2,141
  Off-budget.................................      380      399      423
 
Surplus or deficit (-):
  Unified....................................     -412     -427     -390
  On-budget..................................     -567     -589     -560
  Off-budget.................................      155      162      170
------------------------------------------------------------------------


  The budget documents provide information on all Federal agencies and 
programs. However, because the laws governing Social Security (the 
Federal Old-Age and Survivors Insurance and the Federal Disability 
Insurance trust funds) and the Postal Service Fund exclude the receipts 
and outlays for those activities from the budget totals and from the 
calculation of the deficit or surplus, the budget presents on-budget and 
off-budget totals. The off-budget totals include the transactions 
excluded by law from the budget totals. The on-budget and off-budget 
amounts are added together to derive the totals for the Federal 
Government. These are sometimes referred to as the unified or 
consolidated budget totals.
  It is not always obvious whether a transaction or activity should be 
included in the budget. Where there is a question, OMB normally follows 
the recommendation of the 1967 President's Commission on Budget Concepts 
to be comprehensive of the full range of Federal agencies, programs, and 
activities. In recent years, for example, the budget has included the 
transactions of the Universal Service Fund, the Public Company 
Accounting Oversight Board, Guaranty Agencies Reserves, the National 
Railroad Retirement Investment

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Trust, the United Mine Workers Combined Benefits Fund, and the 
Telecommunications Development Fund.
  In contrast, the budget excludes tribal trust funds that are owned by 
Indian tribes and held and managed by the Government in a fiduciary 
capacity on the tribes' behalf. These funds are not owned by the 
Government, the Government is not the source of their capital, and the 
Government's control is limited to the exercise of fiduciary duties. 
Similarly, the transactions of Government-sponsored enterprises, such as 
the Federal National Mortgage Association (Fannie Mae) are not included 
in the on-budget or off-budget totals. Federal laws established these 
enterprises for public policy purposes, but they are privately owned and 
operated corporations. Because of their close relationship to the 
Government, the budget discusses them and reports summary financial data 
in the budget Appendix and in some detailed tables.
  The Appendix includes a presentation for the Board of Governors of the 
Federal Reserve System for information only. The amounts are not 
included in either the on-budget or off-budget totals because of the 
independent status of the System within the Government. However, the 
Federal Reserve System transfers its net earnings to the Treasury, and 
the budget records them as receipts.

                        Functional Classification

  The functional classification arrays budget authority, outlays, and 
other budget data according to the major purpose served-such as 
agriculture, income security, and national defense. There are nineteen 
major functions, most of which are divided into subfunctions. For 
example, the Agriculture function comprises the subfunctions Farm Income 
Stabilization and Agricultural Research and Services. The functional 
array meets the Congressional Budget Act requirement for a presentation 
in the budget by national needs and agency missions and programs.
  The following criteria are used in establishing functional categories 
and assigning activities to them:
    A function encompasses activities with similar purposes, 
          emphasizing what the Federal Government seeks to accomplish 
          rather than the means of accomplishment, the objects 
          purchased, the clientele or geographic area served, or the 
          Federal agency conducting the activity.
    A function must be of continuing national importance, and 
          the amounts attributable to it must be significant.
    Each basic unit being classified (generally the 
          appropriation or fund account) usually is classified according 
          to its primary purpose and assigned to only one subfunction. 
          However, some large accounts that serve more than one major 
          purpose are subdivided into two or more subfunctions.
  Detailed functional tables, which provide information on government 
activities by function and subfunction, appear this year on the 
Analytical Perspectives CD ROM as Table 27.

         Agencies, Accounts, Programs, Projects, and Activities

  Various summary tables in the Analytical Perspectives volume of the 
budget provide information on budget authority, outlays, and offsetting 
collections and receipts arrayed by Federal agency. A table that lists 
budget authority and outlays by budget account within each agency and 
the totals for each agency of budget authority, outlays, and receipts 
that offset the agency spending totals appears this year on the 
Analytical Perspectives CD ROM as Table 28. The Appendix provides 
budgetary, financial, and descriptive information about programs, 
projects, and activities by account within each agency. The Appendix 
also presents the most recently enacted appropriation language for an 
account and any changes that are proposed to be made for the budget 
year.

                             Types of Funds

  Agency activities are financed through Federal funds and trust funds.
  Federal funds comprise several types of funds. Receipt accounts of the 
general fund, which is the greater part of the budget, record receipts 
not earmarked by law for a specific purpose, such as income tax 
receipts. The general fund also includes the proceeds of general 
borrowing. General fund appropriation accounts record general fund 
expenditures. General fund appropriations draw from general fund 
receipts and borrowing collectively and, therefore, are not specifically 
linked to receipt accounts. Special funds consist of receipt accounts 
for Federal fund receipts that laws have earmarked for specific purposes 
and the associated appropriation accounts for the expenditure of those 
receipts. Public enterprise funds are revolving funds used for programs 
authorized by law to conduct a cycle of business-type operations, 
primarily with the public, in which outlays generate collections. 
Intragovernmental funds are revolving funds that conduct business-type 
operations primarily within and between Government agencies. The 
collections and the outlays of revolving funds are recorded in the same 
budget account.
  Trust funds account for the receipt and expenditure of monies by the 
Government for carrying out specific purposes and programs in accordance 
with the terms of a statute that designates the fund as a trust fund 
(such as the Highway Trust Fund) or for carrying out the stipulations of 
a trust where the Government itself is the beneficiary (such as any of 
several trust funds for gifts and donations for specific purposes). 
Trust revolving funds are trust funds credited with collections 
earmarked by law to carry out a cycle of business-type operations.
  The Federal budget meaning of the term ``trust,'' as applied to trust 
fund accounts, differs significantly from its private sector usage. In 
the private sector, the beneficiary of a trust usually owns the trust's 
assets, which are managed by a trustee who must follow the stipulations 
of the trust. In contrast, the Federal Government

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owns the assets of most Federal trust funds, and it can raise or lower 
future trust fund collections and payments, or change the purposes for 
which the collections are used, by changing existing laws. There is no 
substantive difference between a trust fund and a special fund or 
between a trust revolving fund and a public enterprise revolving fund. 
The Government does act as a true trustee of assets that are owned or 
held for the benefit of others. For example, it maintains accounts on 
behalf of individual Federal employees in the Thrift Savings Fund, 
investing them as directed by the individual employee. The Government 
accounts for such funds in deposit funds, which are not included in the 
budget. (Chapter 22, ``Trust Funds and Federal Funds,'' provides more 
information on this subject.)

                        Budgeting for Full Costs

  A budget is a financial plan for allocating resources-deciding how 
much the Federal Government should spend in total, program by program, 
and for the parts of each program. The budgetary system provides a 
process for proposing policies, making decisions, implementing them, and 
reporting the results. The budget needs to measure costs accurately so 
that decision makers can compare the cost of a program with its benefit, 
the cost of one program with another, and the cost of alternative 
methods of reaching a specified goal. These costs need to be fully 
included in the budget up front, when the spending decision is made, so 
that executive and congressional decision makers have the information 
and the incentive to take the total costs into account for setting 
priorities.
  The budget includes all types of spending, including both current 
operating expenditures and capital investment, and to the extent 
possible, both are measured on the basis of full cost. Questions are 
often raised about the measure of capital investment. The present budget 
provides policymakers the necessary information regarding investment 
spending. It records investment on a cash basis, and it requires 
Congress to provide budget authority before an agency can obligate the 
Government to make a cash outlay. By these means, it causes the total 
cost of capital investment to be compared up front in a rough and ready 
way with the total expected future net benefits. Since the budget 
measures only cost, the benefits with which these costs are compared, 
based on policy makers' judgment, must be presented in supplementary 
materials. Such a comparison of total costs with benefits is consistent 
with the formal method of cost-benefit analysis of capital projects in 
government, in which the full cost of a capital asset as the cash is 
paid out is compared with the full stream of future benefits (all in 
terms of present values). (Chapter 6, ``Federal Investment,'' provides 
more information on capital investment.)
  There have been a number of proposals to change the basis for 
measuring capital investment in the budget. Many of these would 
undermine effective consideration and control of costs by spreading the 
real cost of the project over time and record as a current operating 
expense the annual depreciation for each year of an asset's life. No 
depreciation would be recorded until after the asset was put into 
service. This could be several years after the initial expenditure, in 
which case the budget would record no expenses at all in the budget year 
or several years thereafter, even though the Government is legally 
obligated to buy the asset, and the asset is being constructed or 
manufactured. Recording the annual depreciation in the budget each year 
would provide little control over the decision about whether to invest 
in the first place. Control can only be exercised up front when the 
Government commits itself to the full sunk cost. Spreading the costs 
over time would make the cost of a capital asset appear very cheap when 
decisions were being made that compared it to alternative expenditures. 
As a result, the Government would have an incentive to purchase capital 
assets with little regard for need, and also with little regard for the 
least-cost method of acquisition. Chapter 7, ``Federal Investment 
Spending and Capital Budgeting,'' pages 157-165 in the Analytical 
Perspectives volume of the 2004 Budget, discusses alternative capital 
budget and capital expenditure presentations in more detail.

        RECEIPTS, OFFSETTING COLLECTIONS, AND OFFSETTING RECEIPTS

                               In General

  The budget records money collected by Government agencies two 
different ways. Depending on the nature of the activity generating the 
collection and the law that established the collection, they are 
recorded as either:
    Governmental receipts, which are compared in total to 
          outlays (net of offsetting collections and receipts) in 
          calculating the surplus or deficit; or
    Offsetting collections or offsetting receipts, which are 
          deducted from gross outlays to calculate net outlay figures.

                          Governmental Receipts

  Governmental receipts are collections that result from the 
Government's exercise of its sovereign power to tax or otherwise compel 
payment and from gifts of money to the Government. Sometimes they are 
called receipts, Federal receipts, or Federal revenues. They consist 
mostly of individual and corporation income taxes and social insurance 
taxes, but also include excise taxes, compulsory user charges, 
regulatory fees, customs duties, court fines, certain license fees, and 
deposits of earnings by the Federal Reserve System. Total receipts for 
the Federal Government include both on-budget and off-budget receipts 
(see Table 26-1, ``Totals for the

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Budget and the Federal Government,'' which appears earlier in this 
chapter.) Chapter 17, ``Federal Receipts,'' provides more information on 
receipts.

             Offsetting Collections and Offsetting Receipts

  Offsetting collections and offsetting receipts are recorded as offsets 
to (deductions from) spending, not as additions on the receipt side of 
the budget. As explained below, they are recorded as offsets to spending 
so that the budget totals represent governmental rather than market 
activity and reflect the Government's net transactions with the public. 
They are recorded in one of two ways, based on interpretation of laws 
and longstanding budget concepts and practice. They are offsetting 
collections when the collections are authorized by law to be credited to 
expenditure accounts. Otherwise, they are deposited in receipt accounts 
and called offsetting receipts.
  Offsetting collections and offsetting receipts result from one of the 
following types of transactions:
    Business-like transactions or market-oriented activities 
          with the public--collections from the public in exchange for 
          goods or services, such as the proceeds from the sale of 
          postage stamps, the fees charged for admittance to recreation 
          areas, and the proceeds from the sale of Government-owned 
          land. The budget records these amounts as offsetting 
          collections from non-Federal sources (for offsetting 
          collections) or as proprietary receipts (for offsetting 
          receipts). The amounts are deducted from gross budget 
          authority and outlays, rather than added to receipts. This 
          treatment produces budget totals for receipts, budget 
          authority, and outlays that represent governmental rather than 
          market activity.
    Intragovernmental transactions--collections from other 
          Federal Government accounts. The budget records collections by 
          one Government account from another as offsetting collections 
          from Federal sources (for offsetting collections) or as 
          intragovernmental receipts (for offsetting receipts). For 
          example, the General Services Administration rents office 
          space to other Government agencies and records their rental 
          payments as offsetting collections from Federal sources in the 
          Federal Buildings Fund. These transactions are exactly 
          offsetting and do not affect the surplus or deficit. However, 
          they are an important accounting mechanism for allocating 
          costs to the programs and activities that cause the Government 
          to incur the costs. Intragovernmental offsetting collections 
          and receipts are deducted from gross budget authority and 
          outlays so that the budget totals measure the transactions of 
          the Government with the public.
    Offsetting governmental transactions--collections from the 
          public that are governmental in nature (e.g., tax receipts, 
          regulatory fees, compulsory user charges, custom duties, 
          license fees) but required by law to be misclassified as 
          offsetting. The budget records amounts from non-Federal 
          sources that are governmental in nature as offsetting 
          governmental collections (for offsetting collections) or as 
          offsetting governmental receipts (for offsetting receipts).
  A table in Chapter 21, ``Outlays to the Public, Net and Gross,'' shows 
the effect of offsetting collections and receipts on gross outlays for 
each major Federal agency.

                         Offsetting Collections

  Some laws authorize agencies to credit collections directly to the 
account from which they will be spent and, usually, to spend the 
collections for the purpose of the account without further action by 
Congress. Most revolving funds operate with such authority. For example, 
a permanent law authorizes the Postal Service to use collections from 
the sale of stamps to finance its operations without a requirement for 
annual appropriations. The budget records these collections in the 
Postal Service Fund (a revolving fund) and records budget authority in 
an amount equal to the collections. In addition to revolving funds, some 
agencies are authorized to charge fees to defray a portion of costs for 
a program that are otherwise financed by appropriations from the general 
fund and usually to spend the collections without further action by 
Congress. In such cases, the budget records the offsetting collections 
and resulting budget authority in the program's general fund expenditure 
account. Similarly, intragovernmental collections authorized by some 
laws may be recorded as offsetting collections and budget authority in 
revolving funds or in general fund expenditure accounts.
  Sometimes appropriations acts or provisions in other laws limit the 
obligations that can be financed by offsetting collections. In those 
cases, the budget records budget authority in the amount available to 
incur obligations, not in the amount of the collections.
  Offsetting collections credited to expenditure accounts automatically 
offset the outlays at the expenditure account level. Where accounts have 
offsetting collections, the budget shows the budget authority and 
outlays of the account both gross (before deducting offsetting 
collections) and net (after deducting offsetting collections). Totals 
for the agency, subfunction, and budget are net of offsetting 
collections.

                           Offsetting Receipts

  Collections that are offset against gross outlays but are not 
authorized to be credited to expenditure accounts are credited to 
receipt accounts and are called offsetting receipts. Offsetting receipts 
are deducted from budget authority and outlays in arriving at total 
budget authority and outlays. However, unlike offsetting collections 
credited to expenditure accounts, offsetting receipts do not offset 
budget authority and outlays at the account level. In most cases, they 
offset budget authority and outlays at the agency and subfunction 
levels.
  Proprietary receipts from a few sources, however, are not offset 
against any specific agency or function and

[[Page 415]]

are classified as undistributed offsetting receipts. They are deducted 
from the Government-wide totals for budget authority and outlays. For 
example, the collections of rents and royalties from outer continental 
shelf lands are undistributed because the amounts are large and for the 
most part are not related to the spending of the agency that administers 
the transactions and the subfunction that records the administrative 
expenses.
  Similarly, two kinds of intragovernmental transactions--agencies' 
payments as employers into Federal employee retirement trust funds and 
interest received by trust funds--are classified as undistributed 
offsetting receipts. They appear instead as special deductions in 
computing total budget authority and outlays for the Government rather 
than as offsets at the agency level. This special treatment is necessary 
because the amounts are large and would distort measures of the agency's 
activities if they were attributed to the agency.

                              User Charges

  User charges are fees assessed on individuals or organizations for the 
provision of Government services and for the sale or use of Government 
goods or resources. The payers of the user charge must be limited in the 
authorizing legislation to those receiving special benefits from, or 
subject to regulation by, the program or activity beyond the benefits 
received by the general public or broad segments of the public (such as 
those who pay income taxes or customs duties). User charges are defined 
and the policy regarding user charges is established in OMB Circular A-
25, ``User Charges'' (July 8, 1993). The term encompasses proceeds from 
the sale or use of government goods and services, including the sale of 
natural resources (such as timber, oil, and minerals) and proceeds from 
asset sales (such as property, plant, and equipment). User charges are 
not necessarily earmarked for the activity they finance and may be 
credited to the general fund of the Treasury.
  The term ``user charge'' does not refer to a separate budget category 
for collections. User charges are classified in the budget as receipts, 
offsetting receipts, or offsetting collections according to the 
principles explained above.
  See Chapter 18, ``User Charges and Other Collections,'' for more 
information on the classification of user charges.

BUDGET AUTHORITY AND OTHER BUDGETARY RESOURCES, OBLIGATIONS, AND OUTLAYS

  Budget authority, obligations, and outlays are the primary benchmarks 
and measures of the budget control system. Congress enacts laws that 
provide agencies with spending authority in the form of budget 
authority. Before agencies can use the resources, OMB must approve their 
spending plans. After the plans are approved, agencies can enter into 
binding agreements to purchase items or services or to make grants or 
other payments. These agreements are recorded as obligations of the 
United States and deducted from the amount of budgetary resources 
available to the agency. When payments are made, the obligations are 
liquidated and outlays recorded. These concepts are discussed more fully 
below.

             Budget Authority and Other Budgetary Resources

  Budget authority is the authority provided in law to enter into legal 
obligations that will result in immediate or future outlays of the 
Government. In other words, it is the amount of money that agencies are 
allowed to commit to be spent in current or future years. Government 
officials may obligate the Government to make outlays only to the extent 
they have been granted budget authority. The budget records new budget 
authority as a dollar amount in the year when it first becomes 
available. When permitted by law, unobligated balances of budget 
authority may be carried over and used in the next year. The budget does 
not record these balances as budget authority again. They do, however, 
constitute a budgetary resource that is available for obligation. In 
some cases, a provision of law (such as a limitation on obligations or a 
benefit formula) precludes the obligation of funds that would otherwise 
be available for obligation. In such cases, the budget records budget 
authority equal to the amount of obligations that can be incurred. A 
major exception to this rule is for the highway and mass transit 
programs financed by the Highway Trust Fund, where budget authority is 
measured as the amount of contract authority (described below) provided 
in authorizing statutes, even though the obligation limitations enacted 
in annual appropriations acts restrict the amount of contract authority 
that can be obligated.
  In deciding the amount of budget authority to request for a program, 
project, or activity, agency officials estimate the total amount of 
obligations they will need to incur to achieve desired goals and 
subtract the unobligated balances available for these purposes. The 
amount of budget authority requested is influenced by the nature of the 
programs, projects, or activities being financed. For current operating 
expenditures, the amount requested usually covers the needs for the 
year. For major procurement programs and construction projects, agencies 
generally must request sufficient budget authority in the first year to 
fully fund an economically useful segment of a procurement or project, 
even though it may be obligated over several years. This full funding 
policy is intended to ensure that the decision-makers take into account 
all costs and benefits fully at the time decisions are made to provide 
resources. It also avoids sinking money into a procurement or project 
without being certain if or when future funding will be available to 
complete the procurement or project.
  Budget authority takes several forms:

[[Page 416]]

    Appropriations, provided in annual appropriations acts or 
          permanent laws, permit agencies to incur obligations and make 
          payment;
    Borrowing authority, usually provided in permanent laws, 
          permits agencies to incur obligations but requires them to 
          borrow funds, usually from the general fund of the Treasury, 
          to make payment;
    Contract authority, usually provided in permanent law, 
          permits agencies to incur obligations in advance of a separate 
          appropriation of the cash for payment or in anticipation of 
          the collection of receipts that can be used for payment; and
    Spending authority from offsetting collections, usually 
          provided in permanent law, permits agencies to credit 
          offsetting collections to an expenditure account, incur 
          obligations, and make payment using the offsetting 
          collections.
  Because offsetting collections and receipts are deducted from gross 
budget authority, they are referred to as negative budget authority for 
some purposes, such as Congressional Budget Act provisions that pertain 
to budget authority.
  Authorizing statutes usually determine the form of budget authority 
for a program. The authorizing statute may authorize a particular type 
of budget authority to be provided in annual appropriations acts, or it 
may provide one of the forms of budget authority directly, without the 
need for further appropriations.
  An appropriation may make funds available from the general fund, 
special funds, or trust funds, or authorize the spending of offsetting 
collections credited to expenditure accounts, including revolving funds. 
Borrowing authority is usually authorized for business-like activities 
where the activity being financed is expected to produce income over 
time with which to repay the borrowing with interest. The use of 
contract authority is traditionally limited to transportation programs.
  New budget authority for most Federal programs is normally provided in 
13 annually enacted appropriations acts. However, new budget authority 
for more than half of all outlays is made available through permanent 
appropriations under existing laws and does not require current action 
by Congress. Much of the permanent budget authority is for trust funds, 
interest on the public debt, and the authority to spend offsetting 
collections credited to appropriation or fund accounts. For most trust 
funds, the budget authority is automatically appropriated under existing 
law from the available balance of their receipts and equals the 
estimated annual obligations of the funds. For interest on the public 
debt, budget authority is automatically provided under a permanent 
appropriation enacted in 1847 and equals interest outlays.
  Annual appropriations acts generally make budget authority available 
for obligation only during the fiscal year to which the act applies. 
However, they frequently allow budget authority for a particular purpose 
to remain available for obligation for a longer period or indefinitely 
(that is, until expended or until the program objectives have been 
attained). Typically, budget authority for current operations is made 
available for only one year, and budget authority for construction and 
some research projects is available for a specified number of years or 
indefinitely. Budget authority provided in authorizing statutes, such as 
for most trust funds, is available indefinitely. Only another law can 
extend a limited period of availability (see ``Reappropriation'' below).
  Budget authority that is available for more than one year and not 
obligated in the year it becomes available is carried forward for 
obligation in a following year. In some cases, an account may carry 
forward unobligated budget authority from more than one year. The sum of 
such amounts constitutes the account's unobligated balance. Most of this 
budget authority is earmarked for specific uses and is not available for 
new programs. A small part may never by obligated or spent, primarily 
amounts provided for contingencies that do not occur or reserves that 
never have to be used.
  Budget authority that has been obligated but not paid constitutes the 
account's unpaid obligations. For example, in the case of salaries and 
wages, one to three weeks elapse between the time of obligation and the 
time of payment. In the case of major procurement and construction, 
payments may occur over a period of several years after the obligation 
is made. Unpaid obligations net of the accounts receivable and unfilled 
customers orders are defined by law as the obligated balances. Obligated 
balances of budget authority at the end of the year are carried forward 
until the obligations are paid or the balances are canceled. (A general 
law cancels the obligated balances of budget authority that was made 
available for a definite period five years after the end of the period, 
and then other resources must be used to pay the obligations.) Due to 
such flows, a change in the amount of budget authority available in any 
one year may change the level of obligations and outlays for several 
years to come. Conversely, a change in the amount of obligations 
incurred from one year to the next does not necessarily result from an 
equal change in the amount of budget authority available for that year 
and will not necessarily result in an equal change in the level of 
outlays in that year. \2\
---------------------------------------------------------------------------
  \2\ A separate report, ``Balances of Budget Authority,'' provides 
additional information on balances. The National Technical Information 
Service, Department of Commerce makes the report available shortly after 
the budget is transmitted
---------------------------------------------------------------------------
  Congress usually makes budget authority available on the first day of 
the fiscal year for which the appropriations act is passed. 
Occasionally, the appropriations language specifies a different timing. 
The language may provide an advance appropriation--budget authority that 
does not become available until one year or more beyond the fiscal year 
for which the appropriations act is passed. Forward funding is budget 
authority that is made available for obligation beginning in the last 
quarter of the fiscal year (beginning on July 1st) for the financing of 
ongoing grant programs during the next fiscal year. This kind of funding 
is used mostly

[[Page 417]]

for education programs, so that obligations for grants can be made prior 
to the beginning of the next school year. For certain benefit programs 
funded by annual appropriations, the appropriation provides for advance 
funding--budget authority that is to be charged to the appropriation in 
the succeeding year but which authorizes obligations to be incurred in 
the last quarter of the current fiscal year if necessary to meet benefit 
payments in excess of the specific amount appropriated for the year
  Provisions of law that extend the availability of unobligated amounts 
that have expired or would otherwise expire are called reappropriations. 
Reappropriations of expired balances that are newly available for 
obligation in the current or budget year count as new budget authority 
in the fiscal year in which the balances become newly available. For 
example, if a 2005 appropriations act extends the availability of 
unobligated budget authority that expired at the end of 2004, new budget 
authority would be recorded for 2005.
  For purposes of the Budget Enforcement Act (discussed earlier under 
``Budget Enforcement''), the budget classifies budget authority as 
discretionary or mandatory. This classification indicates whether 
appropriations acts or authorizing legislation control the amount of 
budget authority that is available. Generally, budget authority is 
discretionary if provided in an annual appropriations act and mandatory 
if provided in authorizing legislation. However, the BEA requires the 
budget authority provided in annual appropriations acts for certain 
specifically identified programs to be classified as mandatory. This is 
because the authorizing legislation for these programs entitles 
beneficiaries to receive payment or otherwise obligates the Government 
to make payment and effectively determines the amount of budget 
authority required, even though the payments are funded by a subsequent 
appropriation. Outlays are also classified as discretionary or mandatory 
according to the classification of the budget authority from which they 
flow (see ``Outlays'' below).
  The amount of budget authority recorded in the budget depends on 
whether the law provides a specific amount or specifies a variable 
factor that determines the amount. It is considered definite if the law 
specifies a dollar amount (which may be an amount not to be exceeded). 
It is considered indefinite if, instead of specifying an amount, the law 
permits the amount to be determined by subsequent circumstances. For 
example, indefinite budget authority is provided for interest on the 
public debt, payment of claims and judgments awarded by the courts 
against the U.S. and many entitlement programs. Many of the laws that 
authorize collections to be credited to revolving, special, and trust 
funds make all of the collections available for expenditure for the 
authorized purposes of the fund, and such authority is considered to be 
indefinite budget authority.

                          Obligations Incurred

  Following the enactment of budget authority and the completion of 
required apportionment action, Government agencies incur obligations to 
make payments (see earlier discussion under ``Budget Execution''). 
Agencies must record obligations when they enter into binding agreements 
that will result in immediate or future outlays. Such obligations 
include the current liabilities for salaries, wages, and interest; and 
contracts for the purchase of supplies and equipment, construction, and 
the acquisition of office space, buildings, and land. For Federal credit 
programs, obligations are recorded in an amount equal to the estimated 
subsidy cost of direct loans and loan guarantees (see FEDERAL CREDIT 
below).

                                 Outlays

  Outlays are the measure of Government spending. They are payments that 
liquidate obligations (other than the repayment of debt). The budget 
records them when obligations are paid, in the amount that is paid.
  Agency, function and subfunction, and Government-wide outlay totals 
are stated net of offsetting collections and offsetting receipts for 
most budget presentations. (Offsetting receipts from a few sources do 
not offset any specific function, subfunction, or agency, as explained 
previously, but only offset Government-wide totals.) Outlay totals for 
accounts with offsetting collections are stated both gross and net of 
the offsetting collections credited to the account. However, the outlay 
totals for special and trust funds with offsetting receipts are not 
stated net of the offsetting receipts.
  The Government usually makes outlays in the form of cash (currency, 
checks, or electronic fund transfers). However, in some cases agencies 
pay obligations without disbursing cash and the budget records outlays 
nevertheless for the equivalent method. For example, the budget records 
outlays for the full amount of Federal employees' salaries, even though 
the cash disbursed to employees is net of Federal and state income taxes 
withheld, retirement contributions, life and health insurance premiums, 
and other deductions. (The budget also records receipts for the 
deductions of Federal income taxes and other payments to the 
Government.) When debt instruments (bonds, debentures, notes, or 
monetary credits) are used in place of cash to pay obligations, the 
budget records outlays financed by an increase in agency debt. For 
example, the budget records the acquisition of physical assets through 
certain types of lease-purchase arrangements as though a cash 
disbursement were made for an outright purchase. The transaction creates 
a Government debt, and the cash lease payments are treated as repayments 
of principal and interest.
  The measurement of interest varies. The budget records outlays for the 
interest on the public issues of Treasury debt securities as the 
interest accrues, not when the cash is paid. A small portion of this 
debt consists of inflation-indexed securities, which feature

[[Page 418]]

monthly adjustments to principal for inflation and semiannual payments 
of interest on the inflation-adjusted principal. As with fixed-rate 
securities, the budget records interest outlays as the interest accrues. 
The monthly adjustment to principal is recorded, simultaneously, as an 
increase in debt outstanding and an outlay of interest.
  Most Treasury debt securities held by trust funds and other Government 
accounts are in the Government account series (special issues). The 
budget normally states the interest on these securities on a cash basis. 
When a Government account is invested in Federal debt securities, the 
purchase price is usually close or identical to the par (face) value of 
the security. The budget records the investment at par value and adjusts 
the interest paid by Treasury and collected by the account by the 
difference between purchase price and par, if any. However, two trust 
funds in the Department of Defense, the Military Retirement Trust Fund 
and the Education Benefits Trust Fund, routinely have relatively large 
differences between purchase price and par. For these funds, the budget 
records the holdings of debt at par but records the differences between 
purchase price and par as adjustments to the assets of the funds that 
are amortized over the life of the security. The budget records interest 
as the amortization occurs.
  For Federal credit programs, outlays are equal to the subsidy cost of 
direct loans and loan guarantees and are recorded as the underlying 
loans are disbursed (see FEDERAL CREDIT below).
  The budget records refunds of receipts that result from overpayments 
(such as income taxes withheld in excess of tax liabilities) as 
reductions of receipts, rather than as outlays. However, the budget 
records payments to taxpayers for refundable tax credits (such as earned 
income tax credits) that exceed the taxpayer's tax liability as outlays. 
Refunds of overpayments by the Government are recorded as offsetting 
collections or offsetting receipts.
  Not all of the new budget authority for 2006 will be obligated or 
spent in 2006. Outlays during a fiscal year may liquidate obligations 
incurred in the same year or in prior years. Obligations, in turn, may 
be incurred against budget authority provided in the same year or 
against unobligated balances of budget authority provided in prior 
years. Outlays, therefore, flow in part from budget authority provided 
for the year in which the money is spent and in part from budget 
authority provided in prior years. The ratio of the outlays resulting 
from budget authority enacted in a given year to the amount of that 
budget authority is referred to as the spendout rate for that year.
  As shown in the following chart, $514 billion of outlays in 2006 (20 
percent of the total) will be made from budget authority enacted in 
previous years. At the same time, $494 billion of the new budget 
authority proposed for 2006 (19 percent of the total amount proposed) 
will not lead to outlays until future years. In general, the total 
budget authority for a particular year is not directly indicative of 
that year's outlays since it combines various types of budget authority 
that have different short-term and long-term implications for budget 
obligations and outlays.

                                     



[[Page 419]]



  As described earlier, the budget classifies budget authority and 
outlays as discretionary or mandatory for the purposes of the BEA. This 
classification of outlays measures the extent to which actual spending 
is controlled through the annual appropriations process. Nearly 40 
percent of total outlays ($895 billion in 2004) are discretionary; the 
remainder ($1,397 billion in 2004) is mandatory spending and net 
interest. Such a large portion of total spending is nondiscretionary 
because authorizing legislation determines net interest ($160 billion in 
2004) and the spending for a few programs with large amounts of spending 
each year, such as Social Security ($492 billion in 2004) and Medicare 
($265 billion in 2004).
  The bulk of mandatory outlays flows from an equal amount of budget 
authority recorded in the same fiscal year. This is not the case for 
discretionary budget authority and outlays. For most major construction 
and procurement projects and long-term contracts, for example, the 
budget authority covers the entire cost estimated when the projects are 
initiated even though the work will take place and outlays will be made 
over a period extending beyond the year for which the budget authority 
is enacted. Similarly, discretionary budget authority for most education 
and job training activities is appropriated for school or program years 
that begin in the fourth quarter of the fiscal year. Most of these funds 
result in outlays in the year after the appropriation.

                             FEDERAL CREDIT

  Some Government programs make direct loans or loan guarantees. A 
direct loan is a disbursement of funds by the Government to a non-
Federal borrower under a contract that requires repayment of such funds 
with or without interest. The term includes equivalent transactions such 
as selling a property on credit terms in lieu of receiving cash up 
front. A loan guarantee is any guarantee, insurance, or other pledge 
with respect to the payment of all or a part of the principal or 
interest on any debt obligation of a non-Federal borrower to a non-
Federal lender. The Federal Credit Reform Act (FCRA) prescribes the 
budget treatment for Federal credit programs. Under this treatment, the 
budget records the net cost to the Government (subsidy cost) when the 
loans are disbursed, rather than the cash flows year-by-year over the 
term of the loan, so direct loans and loan guarantees can be compared to 
each other and to other methods of delivering benefits, such as grants, 
on an equivalent basis.
  The cost of direct loans and loan guarantees, sometimes called the 
``subsidy cost,'' is estimated as the present value of expected 
disbursements over the term of the loan less the present value of 
expected collections. \3\ As for most other kinds of programs, agencies 
can make loans or guarantee loans only if Congress has appropriated 
funds sufficient to cover the subsidy costs in annual appropriations 
acts.
---------------------------------------------------------------------------
  \3\ Present value is a standard financial concept that allows for the 
time value of money, that is, for the fact that a given sum of money is 
worth more at present than in the future because interest can be earned 
on it.
---------------------------------------------------------------------------
  The budget records the estimated long-term cost to the Government 
arising from direct loans and loan guarantees in credit program 
accounts. When a Federal agency disburses a direct loan or when a non-
Federal lender disburses a loan guaranteed by a Federal agency, the 
program account outlays an amount equal to the cost to a non-budgetary 
credit financing account. The financing accounts record the actual 
transactions with the public. For a few programs, the estimated cost is 
negative, because the present value of expected collections exceeds the 
present value of expected disbursements over the term of the loan. In 
such cases, the financing account makes a payment to the program's 
receipt account, where it is recorded as an offsetting receipt. In a few 
cases, the receipts are earmarked in a special fund established for the 
program and are available for appropriation for the program.
  The agencies responsible for credit programs must reestimate the cost 
of the outstanding direct loans and loan guarantees each year. If the 
estimated cost increases, the program account makes an additional 
payment to the financing account. If the estimated cost decreases, the 
financing account makes a payment to the program's receipt account, 
where it is recorded as an offsetting receipt. The FCRA provides 
permanent indefinite appropriations to pay for upward reestimates.
  If the Government modifies the terms of an outstanding direct loan or 
loan guarantee in a way that increases the cost, as the result of a law 
or the exercise of administrative discretion under existing law, the 
program account records obligations for an additional amount equal to 
the increased cost and outlays the amount to the financing account. As 
with the original cost, agencies may incur modification costs only if 
Congress has appropriated funds to cover them. Modification may also 
reduce costs, in which case the financing account makes a payment to the 
program's receipt account.
  Credit financing accounts record all cash flows to and from the 
Government arising from direct loan obligations and loan guarantee 
commitments. These cash flows consist mainly of direct loan 
disbursements and repayments, loan guarantee default payments, fees and 
interest from the public, the receipt of subsidy cost payments from 
program accounts, and interest paid to or received from Treasury. 
Separate financing accounts record the cash flows of direct loans and of 
loan guarantees for programs that provide both types of credit. The 
budget totals exclude the transactions of financing accounts because 
they are not a cost to the Government. However, since financing accounts 
record cash flows to and from the Government, they affect the means of 
financing a budget surplus or deficit (see ``Credit Financing Accounts'' 
in the next section). The

[[Page 420]]

budget documents display the transactions of the financing accounts, 
together with the related program accounts, for information and 
analytical purposes.
  The FCRA, which was enacted in 1990, grandfathered direct loan 
obligations and loan guarantee commitments made prior to 1992. The 
budget records these on a cash basis in credit liquidating accounts, the 
same as they were recorded before FCRA was enacted. However, this 
exception ceases to apply if the direct loans or loan guarantees are 
modified as described above. In that case, the budget records a 
modification subsidy cost or savings, as appropriate, and begins to 
account for the associated transactions as the FCRA prescribes for 
direct loan obligations and loan guarantee commitments made in 1992 or 
later.

            BUDGET DEFICIT OR SURPLUS AND MEANS OF FINANCING

  When outlays exceed receipts, the difference is a deficit, which the 
Government finances primarily by borrowing. When receipts exceed 
outlays, the difference is a surplus, and the Government uses the 
surplus primarily to reduce debt. The Government's debt (debt held by 
the public) is approximately the cumulative amount of borrowing to 
finance deficits, less repayments from surpluses. Borrowing is not 
exactly equal to the deficit, and debt repayment is not exactly equal to 
the surplus, because of the other means of financing such as those 
discussed under this heading. Some, such as the net disbursements of the 
direct loan financing accounts, normally increase the Government's 
borrowing needs or decrease its ability to repay debt; others normally 
have the opposite effect or may be either positive or negative. In some 
years, such as 2003, the net effect of the other means of financing is 
minor relative to the borrowing or debt repayment; in other years, such 
as 2002, the net effect may be significant.

                      Borrowing and Debt Repayment

  The budget treats borrowing and debt repayment as a means of 
financing, not as receipts and outlays. If borrowing were defined as 
receipts and debt repayment as outlays, the budget would be virtually 
balanced by definition. This rule applies both to borrowing in the form 
of Treasury securities and to specialized borrowing in the form of 
agency securities (including the issuance of debt securities to 
liquidate an obligation and the sale of certificates representing 
participation in a pool of loans). In 2004, the Government borrowed $382 
billion from the public. This financed nearly all of the $412 billion 
deficit in that year. The rest of the deficit was financed by the net 
effect of the other means of financing, such as changes in cash balances 
and other accounts discussed below. At the end of 2004, the debt held by 
the public was $4,296 billion.
  In addition to selling debt to the public, the Treasury Department 
issues debt to Government accounts, primarily trust funds that are 
required by law to invest in Treasury securities. Issuing and redeeming 
this debt does not affect the means of financing, because these 
transactions occur between one Government account and another and thus 
do not raise or use any cash for the Government as a whole. (See Chapter 
16, ``Federal Borrowing and Debt,'' for a fuller discussion of this 
topic.)

                          Debt Buyback Premiums

  From 2000 through April 2002, the Treasury Department bought back 
outstanding U.S. Treasury bonds as part of its efforts to manage 
efficiently the publicly held debt. Because interest rates were lower 
than the coupon rates on the bonds that Treasury bought back, the 
government had to pay a premium over the book value of these securities. 
This buyback premium was recorded as a means of financing, not as 
outlays. Chapter 24, ``Budget System and Concepts and Glossary,'' pages 
457-458 in the Analytical Perspectives volume of the 2001 Budget, 
discusses the basis for this treatment in more detail, including an 
examination of the alternatives that were considered.

                       Exercise of Monetary Power

  Seigniorage is the profit from coining money. It is the difference 
between the value of coins as money and their cost of production. 
Seigniorage adds to the Government's cash balance, but unlike the 
payment of taxes or other receipts, it does not involve a transfer of 
financial assets from the public. Instead, it arises from the exercise 
of the Government's power to create money and the public's desire to 
hold financial assets in the form of coins. Therefore, the budget 
excludes seigniorage from receipts and treats it as a means of financing 
other than borrowing from the public. The budget also treats profits 
resulting from the sale of gold as a means of financing, since the value 
of gold is determined by its value as a monetary asset rather than as a 
commodity.

                        Credit Financing Accounts

  The budget records the net cash flows of credit programs in credit 
financing accounts. They are excluded from the budget because they are 
not allocations of resources by the Government (see FEDERAL CREDIT 
above). However, even though they do not affect the surplus or deficit, 
they can either increase or decrease the Government's need to borrow. 
Therefore, they are recorded as a means of financing.
  Financing account disbursements to the public increase the requirement 
for Treasury borrowing in the same way as an increase in budget outlays. 
Financing account receipts from the public can be used to finance the 
payment of the Government's obligations and therefore reduce the 
requirement for Treasury borrowing

[[Page 421]]

from the public in the same way as an increase in budget receipts.

                      Deposit Fund Account Balances

  The Treasury uses non-budgetary accounts, called deposit funds, to 
record cash held temporarily until ownership is determined (for example, 
earnest money paid by bidders for mineral leases) or cash held by the 
Government as agent for others (for example, State and local income 
taxes withheld from Federal employees' salaries and not yet paid to the 
State or local government or the Thrift Savings Fund, a defined 
contribution pension fund held and managed in a fiduciary capacity by 
the Government). Deposit fund balances may be held in the form of either 
invested or uninvested balances. To the extent that they are not 
invested, changes in the balances are available to finance expenditures 
and are recorded as a means of financing other than borrowing from the 
public. To the extent that they are invested in Federal debt, changes in 
the balances are reflected as borrowing from the public in lieu of 
borrowing from other parts of the public and are not reflected as a 
separate means of financing.

          Exchanges with the International Monetary Fund (IMF)

  Under the terms of its participation in the IMF, the U.S. transfers 
dollars to the IMF and receives Special Drawing Rights (SDR's) in 
return. The SDR's are interest-bearing monetary assets and may be 
exchanged for foreign currency at any time. These transfers are like 
bank deposits and withdrawals, where the government exchanges one type 
of financial asset (cash) for another (bank deposit), with no change in 
total financial assets. Following a recommendation of the 1967 
President's Commission on Budget Concepts, the budget excludes these 
transfers from budget outlays or receipts. In contrast, the budget 
records interest paid by the IMF on U.S. deposits as an offsetting 
receipt in the general fund of the Treasury. It also records outlays for 
foreign currency exchanges to the extent there is a realized loss in 
dollars terms and offsetting receipts to the extent there is a realized 
gain in dollar terms.

                  Railroad Retirement Board Investments

  Under longstanding rules, the budget treats investments in non-Federal 
securities as a purchase of an asset, recording an obligation and an 
outlay in an amount equal to the purchase price in the year of the 
purchase. Since investments in non-Federal securities consume cash, fund 
balances (of funds available for obligation) normally exclude the value 
of non-Federal securities. However, the Railroad Retirement and 
Survivors' Improvement Act of 2001 (Public Law 107-90) requires 
purchases or sales of non-Federal assets by the National Railroad 
Retirement Investment Trust to be treated as a means of financing in the 
budget.
  Earnings on investments by the National Railroad Retirement Investment 
Trust in private assets pose special challenges for budget projections. 
Equities and private bonds earn a higher return on average than the 
Treasury rate, but that return is subject to greater uncertainty. Sound 
budgeting principles require that estimates of future trust fund 
balances reflect both the average return and the cost of risk associated 
with the uncertainty of that return. (The latter is particularly true in 
cases where individual beneficiaries have not made a voluntary choice to 
assume additional risk.) Estimating both of these separately is quite 
difficult. While the additional returns that these assets have received 
in the past are known, it is quite possible that these premiums will 
differ in the future. Furthermore, there is no existing procedure for 
the budget to record separately the cost of risk from such an 
investment, even if it could be estimated accurately. Economic theory 
suggests, however, that the difference between the expected return of a 
risky liquid asset and the Treasury rate is equal to the cost of the 
asset's additional risk as priced by the market. Following through on 
this insight, the best way to project the rate of return on the Fund's 
balances is to use a Treasury rate. This will mean that assets with 
equal economic value as measured by market prices will be treated 
equivalently, avoiding the appearance that the budget could benefit if 
the Government bought private sector assets.
  The actual and estimated returns to private securities are recorded in 
subfunction 909, other investment income. The actual year returns 
include interest, dividends, and capital gains and losses on private 
equities and other securities. The Fund's portfolio of these assets is 
revalued at market prices at the end of the actual year to determine 
capital gains or losses. As a result, the Fund's end-of-year balance 
reflects the current market value of resources available to the 
Government to finance benefits. Earnings for the current and future 
years are estimated using the 10-year Treasury rate and the value of the 
Fund's portfolio at the end of the actual year. No estimates are made of 
gains and losses for the current year or subsequent years.

            Federal Communications Commission Monetary Credit

  In June 2000, the Federal Communications Commission (FCC) issued a 
transferable monetary credit of $125 million in the form of an Auction 
Discount Voucher (ADV) to Qualcomm, Incorporated, in satisfaction of a 
court ruling. The monetary credit was structured to work in a manner 
similar to that of an auction bidding credit and could be used to bid on 
spectrum licenses in future FCC auctions. Consistent with the budgetary 
treatment of other monetary credits, the budget recorded an outlay and 
borrowing from the public in 2000.
  Qualcomm transferred $11 million of the monetary credit in 2002 by 
using it as an auction bidding credit. In November 2002, the FCC revised 
its Order governing the ADV to allow Qualcomm to transfer the remaining 
$114 million to a debtor to repay outstanding direct loans issued for 
the purpose of purchasing spectrum

[[Page 422]]

licenses at previous FCC auctions. In April of 2003, the FCC again 
revised its Order to grant Qualcomm until June of 2004 to use the 
remainder of its ADV. During 2003, $59 million was transferred and used 
against the voucher. In 2004, the remaining balance of $56 million was 
redeemed.
  The $11 million used as an auction bidding credit in 2002 was recorded 
as an offsetting collection in FCC's Pioneer's Preference Account and 
then applied to extinguish $11 million of the $125 million FCC debt that 
was recorded when the Qualcomm voucher was originally issued. The $59 
million that was used to repay outstanding loans in 2003 was recorded as 
offsetting collections in the Spectrum Auction Direct Loan Financing 
Account and applied to repay outstanding debt of the financing account 
to Treasury. At the same time, $59 million auction receipts collected by 
the FCC were reported as offsetting collections in FCC's Pioneer's 
Preference Account, rather than as general fund receipts, and were 
applied to extinguish $59 million of the outstanding FCC debt that was 
recorded when the Qualcomm voucher was issued. The $56 million redeemed 
in 2004 was recorded in the same way.

                           FEDERAL EMPLOYMENT

  The budget includes information on civilian and military employment. 
It also includes information on related personnel compensation and 
benefits. Chapter 24, ``Federal Employment and Compensation,'' provides 
two different measures of Federal employment levels-actual positions 
filled and full-time equivalents (FTE). Agency FTEs are the measure of 
the total number of hours worked by an agency's Federal employees 
divided by the total number of workhours in one fiscal year. In the 
budget Appendix, only the FTE measure is used because it takes into 
account part-time employment, temporary employment, and vacancies during 
the year. (Chapter 24, ``Federal Employment and Compensation,'' provides 
more information on this subject.)

                        BASIS FOR BUDGET FIGURES

                         Data for the Past Year

  The past year column (2004) generally presents the actual transactions 
and balances as recorded in agency accounts and as summarized in the 
central financial reports prepared by the Treasury Department for the 
most recently completed fiscal year. Occasionally the budget reports 
corrections to data reported erroneously to Treasury but not discovered 
in time to be reflected in Treasury's published data. The budget usually 
notes the sources of such differences (see Chapter 20, ``Comparison of 
Actual to Estimated Totals,'' for a summary of these differences).

                        Data for the Current Year

  The current year column (2005) includes estimates of transactions and 
balances based on the amounts of budgetary resources that were available 
when the budget was transmitted, including amounts appropriated for the 
year.

                        Data for the Budget Year

  The budget year column (2006) includes estimates of transactions and 
balances based on the amounts of budgetary resources that are estimated 
to be available, including new budget authority requested under current 
authorizing legislation, and amounts estimated to result from changes in 
authorizing legislation and tax laws.
  The budget Appendix generally includes the appropriations language for 
the amounts proposed to be appropriated under current authorizing 
legislation. In a few cases, this language is transmitted later because 
the exact requirements are unknown when the budget is transmitted. The 
Appendix generally does not include appropriations language for the 
amounts that will be requested under proposed legislation; that language 
is usually transmitted later, after the legislation is enacted. Some 
tables in the budget identify the items for later transmittal and the 
related outlays separately. Estimates of the total requirements for the 
budget year include both the amounts requested with the transmittal of 
the budget and the amounts planned for later transmittal.

                          Data for the Outyears

  The budget presents estimates for each of the four years beyond the 
budget year (2007 through 2010) in order to reflect the effect of budget 
decisions on longer term objectives and plans.

                   Classification of Tricare Accruals

  Section 725 of the Ronald W. Reagan National Defense Authorization Act 
for Fiscal Year 2005 (Public Law No. 108-375) changes the Department of 
Defense contributions to the Department of Defense Medicare-Eligible 
Retiree Health Care Fund (the Retiree Health Care Fund) for the cost of 
Tricare benefits earned by active duty service members. The changes take 
place at the beginning of 2006. Table 26-2 summarizes the major features 
of the contributions before and after the changes.
  

                            Table 26-2  DEPARTMENT OF DEFENSE CONTRIBUTIONS FOR TRICARE BENEFITS EARNED BY MILITARY PERSONNEL
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                           2005                                               2006
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source of funding                                   Annual appropriations from the General Fund to     Permanent, indefinite appropriations directly
                                                     the military personnel accounts                    from the General Fund
--------------------------------------------------------------------------------------------------------------------------------------------------------
Frequency of contributions                          Monthly                                            Annually at the beginning of the year
--------------------------------------------------------------------------------------------------------------------------------------------------------
Basis for payments                                  Actual end strength                                Budgeted average strength
--------------------------------------------------------------------------------------------------------------------------------------------------------
Government official who causes the payments to be   Secretary of Defense pays                          Secretary of the Treasury pays upon certification
 made                                                                                                   of the amount by the Secretary of Defense
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual action by Congress that controls the total   Appropriations to the Military Personnel accounts  Same
 amount of the payments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Government official who determines total amount of  Secretary of Defense                               Same
 the payments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Government official who determines per-member       Secretary of Defense but using methods and         Same
 amount                                              assumptions approved by the Board of Actuaries,
                                                     who are appointed by Secretary of Defense
--------------------------------------------------------------------------------------------------------------------------------------------------------
Calculation of total amount                         Per-member amount times number of military         Same
                                                     personnel
--------------------------------------------------------------------------------------------------------------------------------------------------------
Contributions for which agency                      Law describes as ``Department of Defense           Same
                                                     contribution'' and for funding ``liabilities of
                                                     the Department of Defense''
--------------------------------------------------------------------------------------------------------------------------------------------------------
Employees who are compensated                       Active duty uniformed service members              Same
--------------------------------------------------------------------------------------------------------------------------------------------------------
Type of expenditure                                 Deferred compensation                              Same
--------------------------------------------------------------------------------------------------------------------------------------------------------
Recipient of contributions                          Department of Defense Medicare-Eligible Retiree    Same
                                                     Health Care Fund
--------------------------------------------------------------------------------------------------------------------------------------------------------

  The Act replaces annual appropriations to the military personnel 
accounts of the Department of Defense with permanent, indefinite 
appropriations from the General Fund. Accrual payments will be made at 
the beginning of each year, instead of at the end of each month, and 
will be based on planned troop levels within the enacted Department of 
Defense budget, instead of

[[Page 423]]

on the actual number of military personnel at the end of the month. The 
budget reflects this change by recording the new type of funding in 10 
new budget accounts within the Department of Defense, beginning in 2006. 
Each account shows the amount of the annual Tricare accrual payment that 
is made for the military services members who are paid by the 
corresponding military personnel account. For example, the Medicare-
Eligible retiree health contribution, Navy account records the payment 
of Tricare accruals for service members who are paid by the Military 
Personnel, Navy account. The Tricare accrual payments are classified 
within the National Defense function and as discretionary, consistent 
with the classification of the payments prior to 2006. These 
classifications were determined in consultation with the House and 
Senate Budget Committees and the Department of the Treasury. They are 
consistent with the views expressed by the Department of Defense 
Medicare-Eligible Retiree Health Care Board of Actuaries in a June 8, 
2004 letter, which stated that the accruals should remain in the 
Department of Defense discretionary budget. A brief summary of the 
reasons for these classifications follows.
  Agency: DoD Military.--The payments are recorded in Department of 
Defense-Military budget accounts because this is the agency that carries 
out the operations for which the cost is incurred. The Secretary of 
Defense has the substantive responsibility for the annual contributions 
for Tricare accruals. The contributions are made as deferred 
compensation on behalf of service members who contribute to Department 
of Defense-Military operations; the per-member contribution amount is 
calculated using assumptions and methods approved by the independent 
Department of Defense Medicare-Eligible Retiree Health Care Board of 
Actuaries, which is appointed by the Secretary; the total amount of the 
payments are directly based on decisions made by Congress in determining 
the appropriations for military personnel within the Department of 
Defense and decisions made by the Secretary of Defense about the number 
of troops within the level of appropriations for military personnel; and 
the payments are made only upon certification by the Secretary of 
Defense. Indeed, the Act describes the annual payments as a ``Department 
of Defense contribution.''
  An alternative would be to locate the new budget accounts within the 
Department of the Treasury, because the Act specifies that the Secretary 
of the Treasury will pay the contributions from the General Fund of the 
Treasury to the Retiree Health Care Fund. Under this logic, all spending 
by the General Fund would be classified in budget accounts recorded 
within the De

[[Page 424]]

partment of the Treasury because Treasury, as the Government's cash 
manager, makes all payments out of the General Fund. However, if all 
General Fund spending was classified in accounts within the Department 
of the Treasury instead of the agencies that are substantively 
responsible for the programs, it would not be a meaningful system of 
budget accounts.
  The General Fund consists of Federal income taxes and all other 
receipts and collections not earmarked by law to finance specified 
programs, the proceeds of general Treasury borrowing, and the 
expenditure of these amounts. It includes roughly 60 percent of gross 
Federal spending and 70 percent of all budget expenditure accounts. 
These budget accounts are routinely classified as part of the agency 
that carries out the operations that generate the cost. For example, the 
annual payment for the accruing portion of the concurrent receipt of 
military retired pay and veterans disability compensation benefits 
authorized by the National Defense Authorization Act for Fiscal Year 
2004 (Public Law 108-136) is recorded as a budget account of the 
military programs of the Department of Defense, even though the 
Secretary of the Treasury is directed by law to make the payment from 
the General Fund. Similarly, the Secretary of the Treasury is directed 
by law to fund the amortization of the unfunded liability of a number of 
Federal employee retirement trust funds by making annual payments to the 
trust funds, which are recorded as payments from accounts within the 
agencies that operate the trust funds. Also, most funds that invest 
their balances trust funds, special funds, public enterprise funds, 
deposit funds are by law administered by the Secretary of the Treasury, 
but are recorded as funds within the respective agencies.
  Functional classification: subfunction 051 of the national defense 
function.--The functional classification divides the budget into 
functions and subfunctions based on the primary purpose or national need 
served by the spending. Each account is classified in the subfunction 
that best describes its purpose. Contributions for Tricare accruals are 
part of the current compensation of military service members, which is 
recorded in various accounts within subfunction 051, Department of 
Defense-Military. This subfunction includes the military personnel 
accounts, which record the pay and allowances of military personnel and 
the accruing cost of their pensions and education benefits. Through 
2005, the military personnel accounts also make the Tricare accrual 
payments, and the payments are classified in this subfunction. Health 
benefits for current service members are paid by the defense health 
program account in this subfunction. Also, the annual payment for the 
accruing portion of the concurrent receipt benefits authorized by the 
National Defense Authorization Act for 2004 (Public Law 108-136) is 
recorded as a budget account in this subfunction.
  An alternative would be to classify the contributions for Tricare 
accruals within subfunction 054, Defense-related activities, as is the 
payment to the Retiree Health Care Fund for the amortization of its 
unfunded liability. However, subfunction 054 is used to record the cost 
of military compensation that was earned in past years, while 
subfunction 051 records the cost of deferred compensation earned in each 
current year. In order to measure the cost of current defense 
operations, the budget distinguishes between (a) the cost of services 
provided by uniformed service members in the current year (contributions 
for military retirement accruals in subfunction 051) and (b) the 
amortization of the unfunded liability for military retirement, which is 
attributable to past years (in subfunction 054).
  BEA classification: discretionary.--The total amount of the annual 
contribution for accrued Tricare benefits is the product of the per-
member accrual charge that is calculated using methods and assumptions 
approved by the Board of Actuaries times the number of military 
personnel. The number of military personnel is controlled directly by 
the amount of discretionary appropriations provided to the various 
military personnel accounts and decisions made by the Secretary of 
Defense about the number of troops within the level of those 
appropriations. Hence, the total amount of the annual accrual payment 
will vary directly with changes in the amount of discretionary 
appropriations for military personnel. Because of this direct linkage, 
the contribution for Tricare accruals is classified as discretionary.
  This conclusion is not affected by advancing the timing of the 
payments, by reducing the frequency of making the payments to one per 
year instead of twelve, or by using a single estimate of the number of 
military service members instead of twelve estimates. These changes 
simplify the calculation of the payment and reduce the number of 
bookkeeping transactions reported by the Department of Defense to the 
Treasury. However, they do not sever the links between the annual 
appropriations for military personnel, the number of military personnel, 
and the total amount of the payment for Tricare benefits earned during 
the year. The annual payments, like the current monthly payments, will 
continue to vary directly with number of military service members that 
are funded in annual appropriations acts.
  An alternative would be to classify the contributions for Tricare 
accruals as mandatory because the authority is provided in an 
authorizing Act, and the Act provides permanent, indefinite 
appropriations for the contributions. These are true of the annual 
payments to amortize the unfunded liability, which are described in the 
discussion about functional classification and are classified as 
mandatory.
  However, BEA classification decisions are not made solely or primarily 
on the basis of the type of bill that provides the funding or on the 
basis of the type of funding. Instead, the primary basis for the 
classification is whether the level of spending is effectively 
controlled by authorizing Acts (mandatory) or by appropriations Acts 
(discretionary). Usually, control is exercised in the same Act that 
appropriates funds for the program. However, occasionally programs are 
funded by one type

[[Page 425]]

of Act, but the spending level is determined by provisions contained in 
the other type of Act. In those cases, the BEA classification is based 
on the type of Act that determines the spending level. For example, 
Medicaid, food stamps, veterans disability compensation, and other 
``appropriated entitlements'' are funded in annual appropriations Acts 
but are classified as mandatory because their spending levels are 
determined ultimately by the entitlement and benefits formula specified 
in authorizing Acts. Similarly, the levels of various fees collected by 
the Securities and Exchange Commission are specified by sections of the 
Securities Exchange Act of 1933, its authorizing Act, but the fees are 
classified as discretionary because the authority to collect them is 
triggered by appropriation of the fees in annual appropriations Acts.
  The payment for the amortization of the unfunded liability bolsters 
the case for classifying the Tricare accruals as discretionary. The 
unfunded liability results from benefits earned but not funded prior to 
the beginning of the accrual funding system in 2003, and from 
differences between actuarial estimates and fund performance since 2003. 
Unlike Tricare accrual payments, the payment for the unfunded liability 
does not vary as a result of any appropriation for goods or services 
provided in the current year. For example, Congress could not reduce the 
unfunded liability, and hence the amortization, by reducing 
appropriations for military personnel. Hence, it is appropriate to have 
different BEA classifications for the two types of payments.
  Non-DoD uniformed services.--Tricare benefits are also earned by 
uniformed service members of the Coast Guard, the National Oceanic and 
Atmospheric Administration, and the Public Health Service. The Act 
creates the same funding structure for all of these agencies. Each 
agency's contribution to the Retiree Health Care Fund for the accruing 
Tricare benefits of its employees is comparable to the treatment of the 
Department of Defense contribution for DoD uniformed service members. 
Beginning in 2006, the contribution will be funded by permanent, 
indefinite authority for each agency. The new payments will be 
classified as discretionary and in the same subfunction as the existing 
annually funded contributions. Since these payments are relatively small 
and to simplify bookkeeping, they will be merged into the existing 
accounts that pay retirement benefits.

                               Allowances

  The budget may include lump-sum allowances to cover certain 
transactions that are expected to increase or decrease budget authority, 
outlays, or receipts but are not, for various reasons, reflected in the 
program details. For example, the budget might include an allowance to 
show the effect on the budget totals of a proposal that would actually 
affect many accounts by relatively small amounts, in order to avoid 
unnecessary detail in the presentations for the individual accounts.

                                Baseline

  The budget baseline is an estimate of the receipts, outlays, and 
deficits or surpluses that would occur if no changes were made to 
current laws during the period covered by the budget. The baseline 
assumes that receipts and mandatory spending, which generally are 
authorized on a permanent basis, will continue in the future as required 
by current law. The baseline assumes that the future funding for 
discretionary programs, which generally are funded annually, will equal 
the most recently enacted appropriation, adjusted for inflation.
  The baseline represents the amount of resources, in real terms, that 
would be used by the Government over the period covered by the budget on 
the basis of laws currently enacted. (Chapter 25, ``Current Services 
Estimates,'' provides more information on the baseline.)
  The baseline serves several useful purposes:
    It may warn of future problems, either for Government fiscal 
          policy as a whole or for individual tax and spending programs.
    It provides a starting point for formulating the President's 
          budget.
    It provides a ``policy-neutral'' benchmark against which the 
          President's budget and alternative proposals can be compared 
          to assess the magnitude of proposed changes.

                          PRINCIPAL BUDGET LAWS

  The following basic laws govern the Federal budget process:
    Article 1, section 8, clause 1 of the Constitution, which 
          empowers the Congress to collect taxes.
    Article 1, section 9, clause 7 of the Constitution, which 
          requires appropriations in law before money may be spent from 
          the Treasury.
    Antideficiency Act (codified in Chapters 13 and 15 of Title 
          31, United States Code), which prescribes rules and procedures 
          for budget execution.
    Chapter 11 of Title 31, United States Code, which prescribes 
          procedures for submission of the President's budget and 
          information to be contained in it.
    Congressional Budget and Impoundment Control Act of 1974 
          (Public Law 93-344, as amended). This Act comprises the:
            --LCongressional Budget Act of 1974, which prescribes the 
          congressional budget process; and
            --LImpoundment Control Act of 1974, which controls certain 
          aspects of budget execution.
    Balanced Budget and Emergency Deficit Control Act of 1985 
          (Public Law 99-177, as amended), which prescribes rules and 
          procedures

[[Page 426]]

          (including ``sequestration'') designed to eliminate excess 
          spending.
    Budget Enforcement Act of 1990 (Title XIII, Public Law 101-
          508), which significantly amended key laws pertaining to the 
          budget process, including the Congressional Budget Act and the 
          Balanced Budget and Emergency Deficit Control Act. The Budget 
          Enforcement Act of 1997 (Title X, Public Law 105-33) extended 
          the BEA requirements through 2002 and altered some of the 
          requirements. The requirements, generally referred to as BEA 
          requirements (discretionary spending limits, pay-as-you-go, 
          sequestration, etc.), are part of the Balanced Budget and 
          Emergency Deficit Control Act. The BEA expired at the end of 
          2002.
    Federal Credit Reform Act of 1990, as amended (2 USC 661-
          661(f)), a part of the Budget Enforcement Act of 1990, which 
          amended the Congressional Budget Act to prescribe the budget 
          treatment for Federal credit programs.
    Government Performance and Results Act of 1993 (Public Law 
          103-62, as amended), which emphasizes managing for results. It 
          requires agencies to prepare strategic plans, annual 
          performance plans, and annual performance reports.

                        GLOSSARY OF BUDGET TERMS

  Advance appropriation means appropriations of new budget authority 
that become available one or more fiscal years beyond the fiscal year 
for which the appropriation act was passed.
  Advance funding means appropriations of budget authority provided in 
an appropriations act to be used, if necessary, to cover obligations 
incurred late in the fiscal year for benefit payments in excess of the 
amount specifically appropriated in the act for that year, where the 
budget authority is charged to the appropriation for the program for the 
fiscal year following the fiscal year for which the appropriations act 
is passed.
  Agency means a department or other establishment of the Government.
  Allowance means a lump-sum included in the budget to represent certain 
transactions that are expected to increase or decrease budget authority, 
outlays, or receipts but that are not, for various reasons, reflected in 
the program details.
  Balances of budget authority means the amounts of budget authority 
provided in previous years that have not been outlayed.
  Baseline means an estimate of the receipts, outlays, and deficit or 
surplus that would result from continuing current law through the period 
covered by the budget.
  Budget means the Budget of the United States Government, which sets 
forth the President's comprehensive financial plan for allocating 
resources and indicates the President's priorities for the Federal 
Government.
  Budget authority (BA) means the authority provided by law to incur 
financial obligations that will result in outlays. (For a description of 
the several forms of budget authority, see ``Budget Authority and Other 
Budgetary Resources'' earlier in this chapter.)
  Budget totals mean the totals included in the budget for budget 
authority, outlays, and receipts. Some presentations in the budget 
distinguish on-budget totals from off-budget totals. On-budget totals 
reflect the transactions of all Federal Government entities except those 
excluded from the budget totals by law. The off-budget totals reflect 
the transactions of Government entities that are excluded from the on-
budget totals by law. Under current law, the off-budget totals include 
the Social Security trust funds (Federal Old-Age and Survivors Insurance 
and Federal Disability Insurance Trust Funds) and the Postal Service 
Fund. The budget combines the on- and off-budget totals to derive 
unified or consolidated totals for Federal activity.
  Budgetary resources mean amounts available to incur obligations in a 
given year. The term comprises new budget authority and unobligated 
balances of budget authority provided in previous years.
  Cap means the legal limits for each fiscal year under the Budget 
Enforcement Act on the budget authority and outlays provided by 
discretionary appropriations.
  Cash equivalent transaction means a transaction in which the 
Government makes outlays or receives collections in a form other than 
cash or the cash does not accurately measure the cost of the 
transaction. (For examples, see the section on ``Outlays'' earlier in 
this chapter.)
  Collections mean money collected by the Government that the budget 
records as either a receipt, an offsetting collection, or an offsetting 
receipt.
  Credit program account means a budget account that receives and 
obligates appropriations to cover the subsidy cost of a direct loan or 
loan guarantee and disburses the subsidy cost to a financing account.
  Current services estimate--see baseline.
  Deficit means the amount by which outlays exceed receipts in a fiscal 
year. It may refer to the on-budget, off-budget, or unified budget 
deficit.
  Direct loan means a disbursement of funds by the Government to a non-
Federal borrower under a contract that requires the repayment of such 
funds with or without interest. The term includes the purchase of, or 
participation in, a loan made by another lender. The term also includes 
the sale of a Government asset on credit terms of more than 90 days 
duration as well as financing arrangements for other transactions that 
defer payment for more than 90 days. It also includes loans financed by 
the Federal Financing Bank (FFB) pursuant to agency loan guarantee 
authority. The term does not include the acquisition of a federally 
guaranteed loan in satisfaction of default or other guarantee claims or 
the price support loans of the Commodity Credit Corporation. (Cf. loan 
guarantee.)
  Direct spending--see mandatory spending.

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  Discretionary spending means budgetary resources (except those 
provided to fund mandatory spending programs) provided in appropriations 
acts. (Cf. mandatory spending.)
  Emergency appropriation means an appropriation that the President and 
the Congress have designated as an emergency requirement. Such spending 
is not subject to the limits on discretionary spending, if it is 
discretionary spending, or the pay-as-you-go rules, if it is mandatory.
  Federal funds group refers to the moneys collected and spent by the 
Government through accounts other than those designated as trust funds. 
Federal funds include general, special, public enterprise, and 
intragovernmental funds. (Cf. trust funds.)
  Financing account means a non-budgetary account (its transactions are 
excluded from the budget totals) that records all of the cash flows 
resulting from post-1991 direct loan obligations or loan guarantee 
commitments. At least one financing account is associated with each 
credit program account. For programs that make both direct loans and 
loan guarantees, there are separate financing accounts for the direct 
loans and the loan guarantees. (Cf. liquidating account.)
  Fiscal year means the Government's accounting period. It begins on 
October 1st and ends on September 30th, and is designated by the 
calendar year in which it ends.
  Forward funding means appropriations of budget authority that are made 
for obligation in the last quarter of the fiscal year for the financing 
of ongoing grant programs during the next fiscal year.
  General fund means the accounts for receipts not earmarked by law for 
a specific purpose, the proceeds of general borrowing, and the 
expenditure of these moneys.
  Intragovernmental fund--see revolving fund.
  Liquidating account means a budget account that records all cash flows 
to and from the Government resulting from pre-1992 direct loan 
obligations or loan guarantee commitments. (Cf. financing account.)
  Loan guarantee means any guarantee, insurance, or other pledge with 
respect to the payment of all or a part of the principal or interest on 
any debt obligation of a non-Federal borrower to a non-Federal lender. 
The term does not include the insurance of deposits, shares, or other 
withdrawable accounts in financial institutions. (Cf. direct loan.)
  Mandatory spending means spending controlled by laws other than 
appropriations acts (including spending for entitlement programs) and 
spending for the food stamp program. Although the Budget Enforcement Act 
uses the term direct spending to mean this, mandatory spending is 
commonly used instead. (Cf. discretionary spending.)
  Means of financing refers to borrowing, the change in cash balances, 
and certain other transactions involved in financing a deficit. The term 
is also used to refer to the debt repayment, the change in cash 
balances, and certain other transactions involved in using a surplus. By 
definition, the means of financing are not treated as receipts or 
outlays.
  Obligated balance means the cumulative amount of budget authority that 
has been obligated but not yet outlayed. (Cf. unobligated balance.)
  Obligation means a binding agreement that will result in outlays, 
immediately or in the future. Budgetary resources must be available 
before obligations can be incurred legally.
  Off-budget--see budget totals.
  Offsetting collections mean collections that, by law, are credited 
directly to expenditure accounts and deducted from gross budget 
authority and outlays of the expenditure account, rather than added to 
receipts. Usually, they are authorized to be spent for the purposes of 
the account without further action by Congress. They result from 
business-like transactions or market-oriented activities with the public 
and other Government accounts. The authority to spend offsetting 
collections is a form of budget authority. (Cf. receipts and offsetting 
receipts.)
  Offsetting receipts mean collections that are credited to offsetting 
receipt accounts and deducted from gross budget authority and outlays, 
rather than added to receipts. They are not authorized to be credited to 
expenditure accounts. The legislation that authorizes the offsetting 
receipts may earmark them for a specific purpose and either appropriate 
them for expenditure for that purpose or require them to be appropriated 
in annual appropriation acts before they can be spent. Like offsetting 
collections, they result from business-like transactions or market-
oriented activities with the public and other Government accounts. (Cf. 
receipts, undistributed offsetting receipts, and offsetting 
collections.)
  On-budget--see budget totals.
  Outlay means a payment to liquidate an obligation (other than the 
repayment of debt principal). Outlays generally are equal to cash 
disbursements but also are recorded for cash-equivalent transactions, 
such as the issuance of debentures to pay insurance claims, and in a few 
cases are recorded on an accrual basis such as interest on public issues 
of the public debt. Outlays are the measure of Government spending.
  Outyear estimates means estimates presented in the budget for the 
years beyond the budget year (usually four) of budget authority, 
outlays, receipts, and other items (such as debt).
  Pay-as-you-go (PAYGO) means the requirements of the Budget Enforcement 
Act that result in a sequestration if the estimated combined result of 
legislation affecting mandatory spending or receipts is a net cost for a 
fiscal year.
  Public enterprise fund--see revolving fund.
  Receipts mean collections that result from the Government's exercise 
of its sovereign power to tax or otherwise compel payment and gifts of 
money to the Government. They are compared to outlays in calculating a 
surplus or deficit. (Cf. offsetting collections and offsetting 
receipts.)

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  Revolving fund means a fund that conducts continuing cycles of 
business-like activity, in which the fund charges for the sale of 
products or services and uses the proceeds to finance its spending, 
usually without requirement for annual appropriations. There are two 
types of revolving funds: Public enterprise funds, which conduct 
business-like operations mainly with the public, and intragovernmental 
revolving funds, which conduct business-like operations mainly within 
and between Government agencies.
  Scorekeeping means measuring the budget effects of legislation, 
generally in terms of budget authority, receipts, and outlays for 
purposes of the Budget Enforcement Act.
  Sequestration means the cancellation of budgetary resources provided 
by discretionary appropriations or mandatory spending legislation, 
following various procedures prescribed by the Budget Enforcement Act. A 
sequestration may occur in response to a discretionary appropriation 
that causes discretionary spending to exceed the discretionary spending 
caps set by the Budget Enforcement Act or in response to net costs 
resulting from the combined result of legislation affecting mandatory 
spending or receipts (referred to as a ``pay-as-you-go'' sequestration).
  Special fund means a Federal fund account for receipts or offsetting 
receipts earmarked for specific purposes and the expenditure of these 
receipts. (Cf. trust fund.)
  Subsidy means the estimated long-term cost to the Government of a 
direct loan or loan guarantee, calculated on a net present value basis, 
excluding administrative costs and any incidental effects on 
governmental receipts or outlays.
  Surplus means the amount by which receipts exceed outlays in a fiscal 
year. It may refer to the on-budget, off-budget, or unified budget 
surplus.
  Supplemental appropriation means an appropriation enacted subsequent 
to a regular annual appropriations act, when the need for funds is too 
urgent to be postponed until the next regular annual appropriations act.
  Trust fund refers to a type of account, designated by law as a trust 
fund, for receipts or offsetting receipts earmarked for specific 
purposes and the expenditure of these receipts. Some revolving funds are 
designated as trust funds, and these are called trust revolving funds. 
(Cf. special fund and revolving fund.)
  Trust funds group refers to the moneys collected and spent by the 
Government through trust fund accounts. (Cf., Federal funds group.)
  Undistributed offsetting receipts mean offsetting receipts that are 
deducted from the Government-wide totals for budget authority and 
outlays instead of offset against a specific agency and function. (Cf. 
offsetting receipts.)
  Unobligated balance means the cumulative amount of budget authority 
that is not obligated and that remains available for obligation under 
law.
  User charges are charges assessed for the provision of Government 
services and for the sale or use of Government goods or resources. The 
payers of the user charge must be limited in the authorizing legislation 
to those receiving special benefits from, or subject to regulation by, 
the program or activity beyond the benefits received by the general 
public or broad segments of the public (such as those who pay income 
taxes or custom duties).

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