[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\
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\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).
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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
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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
[[Page 414]]
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
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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\
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\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
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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
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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.
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\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
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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
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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
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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
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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).