    [Analytical Perspectives]
    [Dimensions of the Budget]
    [23. Off-Budget Federal Entities and Non-Budgetary Activities]
    [From the U.S. Government Printing Office, www.gpo.gov]

    [[Page 357]]

          23.  OFF-BUDGET FEDERAL ENTITIES AND NON-BUDGETARY ACTIVITIES

      The Federal Government's activities have far-reaching impacts,
    affecting the economy and society of the Nation and the world. One of
    the primary activities of the Government is to allocate resources to
    meet the Nation's needs. The budget is a financial plan for proposing,
    deciding, and controlling the allocation of resources by the Federal
    Government. Those Federal financial activities that affect the
    Government's allocation of resources in a measurable way are
    characterized as ``budgetary.''
      Those Federal activities that do not involve the Government's direct
    allocation of resources are characterized as ``non-budgetary'' and
    classified outside of the budget. For example, the budget does not
    include funds that are privately owned, such as the deposit funds owned
    by Native American Indians, even though those funds are held and managed
    by the Government in a fiduciary capacity. In addition, the budget does
    not include costs that are borne by the private sector rather than the
    Government even though those costs result from Federal activity, such as
    regulatory activity. Also, the budget includes the subsidy costs of
    Federal loan programs, but excludes other cash flows related to these
    programs because they do not reflect an allocation of resources, as
    explained below. Although non-budgetary, some of these activities are
    important instruments of Federal policy and are discussed in other parts
    of the budget along with relevant financial data; they are also
    discussed further in the section of this chapter on non-budgetary
    activities.
      The term ``off-budget'' may appear to be synonymous with ``non-
    budgetary.'' However, the term ``off-budget'' has a meaning distinct
    from ``non-budgetary'' and refers to Federal Government activities that
    are required by law to be excluded from the budget totals. The
    ``unified'' budget of the Federal Government reflects this legal
    distinction between ``on-budget'' and ``off-budget'' entities by showing
    outlays and receipts for both types of entities separately. Although
    there is a legal distinction between on-budget and off-budget entities,
    there is no conceptual difference between the two. The off-budget
    Federal entities engage in the same basic activities of government as
    the on-budget entities and off-budget spending channels economic
    resources toward particular uses in the same way as does on-budget
    spending. The unified budget reflects the conceptual similarity between
    on-budget and off-budget entities by showing outlays and receipts for
    both types of entities combined. Off-budget spending and receipts are
    discussed further in the following section on off-budget Federal
    entities.

                           Off-Budget Federal Entities

      The Federal Government has used the unified budget concept as the
    foundation for its budgetary analysis and presentation since the 1969
    Budget. This concept was developed by the President's Commission on
    Budget Concepts in 1967. It calls for the budget to include all the
    Federal Government's programs and all the fiscal transactions of these
    programs with the public.
      Every year since 1971, however, at least one Federal entity that would
    otherwise be included in the budget has been declared to be off-budget
    by law. Such off-budget Federal entities are federally owned and
    controlled, but their transactions are excluded from the on-budget
    totals by law. When a Federal entity is off-budget by law, its receipts,
    outlays, and surplus or deficit are separated from the on-budget
    receipts, outlays, and surplus or deficit; and its budget authority is
    also separated from the total budget authority for the on-budget Federal
    entities. Federal entities that are off-budget by law are distinct from
    entities that are non-budgetary, as discussed below.
      Off-budget Federal entities conduct programs of the same type as on-
    budget entities, and the programs they conduct result in the same kind
    of spending and receipts as on-budget entities. For this reason, most of
    the tables in the budget include both on-budget and off-budget amounts
    separately and in combination, or as a total amount.
      The off-budget Federal entities currently consist of the two Social
    Security trust funds, old-age and survivors insurance and disability
    insurance, and the Postal Service fund. Social Security was classified
    off-budget as of 1986 and the Postal Service fund in 1989. A number of
    other entities that had been declared off-budget by law at different
    times before 1986 have been classified on-budget by law since at least
    1985.
      Table 23-1 divides total Federal Government receipts, outlays, and the
    surplus or deficit between on-budget and off-budget amounts. Within this
    table, the Social Security and Postal Service transactions are
    classified as off-budget for all years in order to provide a consistent
    comparison over time. Entities that were off-budget at one time, but are
    now on-budget, are classified as on-budget for all years.
      Because Social Security is off-budget, the off-budget accounts
    comprise a significant part of total Federal spending and receipts. In
    2008, off-budget receipts are an estimated 25 percent of total receipts,
    and off-budget outlays are a smaller, but still significant, percentage
    of total outlays at 16 percent. The estimated unified budget deficit in
    2008 is $239 billion--a $451 billion on-budget deficit partly offset by
    a $212 billion off-budget surplus. The off-budget surplus consists
    almost en

    [[Page 358]]

    tirely of the Social Security surplus. Social Security had small
    deficits or surpluses from its inception through the early 1980s, but
    since the middle 1980s it has had a large and growing surplus. However,
    under present law, the surplus is eventually estimated to decline, turn
    into a deficit within approximately ten years and never reach balance
    again. The long-term challenge of Social Security is addressed briefly
    in a chapter of the main Budget volume, ``The Nation's Fiscal Outlook,''
    and in Chapter 13 of this volume, ``Stewardship.''

                                          TABLE 23-1.  COMPARISON OF TOTAL, ON-BUDGET, AND OFF-BUDGET TRANSACTIONS \1\
                                                                    (In billions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                        Receipts                               Outlays                         Surplus or deficit (-)
               Fiscal Year              --------------------------------------------------------------------------------------------------------------------
                                            Total      On-budget    Off-budget     Total      On-budget    Off-budget     Total      On-budget    Off-budget
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    1980...............................        517.1        403.9        113.2        590.9        477.0        113.9        -73.8        -73.1         -0.7
    1981...............................        599.3        469.1        130.2        678.2        543.0        135.3        -79.0        -73.9         -5.1
    1982...............................        617.8        474.3        143.5        745.7        594.9        150.9       -128.0       -120.6         -7.4
    1983...............................        600.6        453.2        147.3        808.4        660.9        147.4       -207.8       -207.7         -0.1
    1984...............................        666.5        500.4        166.1        851.9        685.7        166.2       -185.4       -185.3         -0.1

    1985...............................        734.1        547.9        186.2        946.4        769.4        176.9       -212.3       -221.5          9.2
    1986...............................        769.2        569.0        200.2        990.4        806.9        183.5       -221.2       -237.9         16.7
    1987...............................        854.4        641.0        213.4      1,004.1        809.3        194.8       -149.7       -168.4         18.6
    1988...............................        909.3        667.8        241.5      1,064.5        860.1        204.4       -155.2       -192.3         37.1
    1989...............................        991.2        727.5        263.7      1,143.8        932.9        210.9       -152.6       -205.4         52.8

    1990...............................      1,032.1        750.4        281.7      1,253.1      1,028.1        225.1       -221.0       -277.6         56.6
    1991...............................      1,055.1        761.2        293.9      1,324.3      1,082.6        241.7       -269.2       -321.4         52.2
    1992...............................      1,091.3        788.9        302.4      1,381.6      1,129.3        252.3       -290.3       -340.4         50.1
    1993...............................      1,154.5        842.5        311.9      1,409.5      1,142.9        266.6       -255.1       -300.4         45.3
    1994...............................      1,258.7        923.7        335.0      1,461.9      1,182.5        279.4       -203.2       -258.8         55.7

    1995...............................      1,351.9      1,000.9        351.1      1,515.9      1,227.2        288.7       -164.0       -226.4         62.4
    1996...............................      1,453.2      1,085.7        367.5      1,560.6      1,259.7        300.9       -107.4       -174.0         66.6
    1997...............................      1,579.4      1,187.4        392.0      1,601.3      1,290.7        310.6        -21.9       -103.2         81.4
    1998...............................      1,722.0      1,306.2        415.8      1,652.7      1,336.1        316.6         69.3        -29.9         99.2
    1999...............................      1,827.6      1,383.2        444.5      1,702.0      1,381.3        320.8        125.6          1.9        123.7

    2000...............................      2,025.5      1,544.9        480.6      1,789.2      1,458.5        330.8        236.2         86.4        149.8
    2001...............................      1,991.4      1,483.9        507.5      1,863.2      1,516.4        346.8        128.2        -32.4        160.7
    2002...............................      1,853.4      1,338.1        515.3      2,011.2      1,655.5        355.7       -157.8       -317.4        159.7
    2003...............................      1,782.5      1,258.7        523.8      2,160.1      1,797.1        363.0       -377.6       -538.4        160.8
    2004...............................      1,880.3      1,345.5        534.7      2,293.0      1,913.5        379.5       -412.7       -568.0        155.2

    2005...............................      2,153.9      1,576.4        577.5      2,472.2      2,070.0        402.2       -318.3       -493.6        175.3
    2006...............................      2,407.3      1,798.9        608.4      2,655.4      2,233.4        422.1       -248.2       -434.5        186.3
    2007 estimate......................      2,540.1      1,906.0        634.1      2,784.3      2,333.0        451.3       -244.2       -427.0        182.8
    2008 estimate......................      2,662.5      1,988.4        674.1      2,901.9      2,439.3        462.5       -239.4       -450.9        211.6
    2009 estimate......................      2,798.3      2,086.9        711.4      2,985.5      2,499.7        485.8       -187.2       -412.7        225.6

    2010 estimate......................      2,954.7      2,201.4        753.3      3,049.1      2,540.5        508.6        -94.4       -339.1        244.7
    2011 estimate......................      3,103.6      2,307.8        795.8      3,157.3      2,625.8        531.5        -53.8       -318.0        264.3
    2012 estimate......................      3,307.3      2,472.0        835.3      3,246.3      2,659.1        587.2         61.0       -187.1        248.1
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ Off-budget transactions consist of the Social Security trust funds and the Postal Service fund.

                            Non-Budgetary Activities

      Some important Federal activities are characterized as non-budgetary
    because they do not involve the allocation of resources by the Federal
    Government or they allocate resources in a way that is indirect. The
    Budget does not reflect these indirect economic and financial effects.

      Federal credit: budgetary and non-budgetary transactions.--Federal
    credit programs make direct loans or guarantee private loans. The
    Federal Credit Reform Act of 1990 refined how the costs of credit
    programs are recorded in the budget by defining as budgetary the
    subsidies provided by the credit programs and classifying the other
    credit cash flows as non-budgetary.
      When the Government makes a loan, it generates a financial asset that
    will produce future cash inflows for the Government as the loan is
    repaid. When the Government guarantees a loan made by a non-Federal
    lender, it acquires a contingent liability that may require a cash
    outflow in a future year. Prior to the Credit Reform Act, the budget
    treated the full amount of a Federal loan as a cost and an outlay at the
    time the loan was made, and treated the future repayments of principal
    and interest as receipts. Similarly, the budget did not record the cash
    outflows for loan guarantees as a cost and an outlay until the loan
    defaulted, and the Government had to fulfill its guarantee commitment.

    [[Page 359]]

      Under the Credit Reform Act, beginning in 1992, the budgetary costs of
    direct loans and loan guarantees are measured as the net present value
    of estimated cash outflows from the Government less the present value of
    estimated cash inflows to the Government. The cash flows are discounted
    at the Government's cost of borrowing. The costs are recorded in the
    budget at the time the Government makes a loan or guarantees a loan made
    by a non-Federal lender. A group of loans that is expected to repay
    exactly what it costs the Government to finance would have zero net cost
    and, under the Credit Reform Act, no effect on Government outlays. The
    same is true for a group of non-Federal loans that is guaranteed by the
    Government and for which upfront fees offset the cost of defaults.
    However, if the Government provides a subsidy, by charging below-market
    interest rates or fees that are less than the cost of the defaults, or
    by paying interest subsidies to non-Federal lenders, the Government
    incurs a budgetary cost, which also is measured on a present value
    basis. This cost is similar to the net outlays of other Federal programs
    and, under the Credit Reform Act, is included in the budget as an outlay
    of a credit ``program'' account.
       All of the cash transactions with the public that result from
    Government credit programs--the disbursement and repayment of loans, the
    payment of default claims on guarantees, and the collection of interest
    and fees--are recorded in credit ``financing'' accounts. These financing
    accounts also receive payments from the credit program accounts for the
    costs of direct loans and loan guarantees. The net transactions of the
    financing accounts--i.e., the cash transactions with the public less the
    amounts received from the program accounts--are not costs or outlays to
    the Government. Therefore, the financing accounts are non-budgetary and
    excluded from the budget under the Credit Reform Act. \1\ Transactions
    of the financing accounts do, however, affect the Government's borrowing
    requirements, as explained in Chapter 16 of this volume, ``Federal
    Borrowing and Debt.''
    ---------------------------------------------------------------------------
      \1\ See 505(b) of the Federal Credit Reform Act of 1990.
    ---------------------------------------------------------------------------
       Since credit reform, the budget outlays of credit programs reflect
    only the subsidy costs of Government credit, thus measuring accurately
    the cost of credit decisions, and record this cost when the credit
    assistance is provided. This enables the budget to fulfill its purpose
    of being a financial plan for allocating resources among alternative
    uses by comparing the cost of a program with its benefits, comparing the
    cost of credit programs with the cost of other spending programs, and
    comparing the cost of one type of credit assistance with the cost of
    another type. \2\ Credit programs are discussed in Chapter 7 of this
    volume, ``Credit and Insurance.''
    ---------------------------------------------------------------------------
      \2\ For more explanation of the budget concepts for direct loans and
    loan guarantees, see the sections on Federal credit and credit financing
    accounts in Chapter 26 of this volume, ``The Budget System and
    Concepts.'' The structure of credit reform is further explained in
    Chapter VIII.A of the Budget of the United States Government, Fiscal
    Year 1992, Part Two, pp. 223-26. The implementation of credit reform
    through 1995 is reviewed in Chapter 8, ``Underwriting Federal Credit and
    Insurance,'' Analytical Perspectives, Budget of the United States
    Government, Fiscal Year 1997, pp. 142-44. Refinements and
    simplifications enacted by the Balanced Budget Act of 1997 or provided
    by later OMB guidance are explained in Chapter 8, ``Underwriting Federal
    Credit and Insurance,'' Analytical Perspectives, Budget of the United
    States Government, Fiscal Year 1999, p. 170.
    ---------------------------------------------------------------------------

      Deposit funds.--Deposit funds are non-budgetary accounts that record
    amounts held by the Government temporarily until ownership is determined
    (such as earnest money paid by bidders for mineral leases) or held by
    the Government as an agent for others (such as State income taxes
    withheld from Federal employees' salaries and not yet paid to the
    States). The largest deposit fund is the Government Securities
    Investment Fund, which is also known as the G Fund. It is one of several
    investment funds managed by the Federal Retirement Thrift Investment
    Board, as an agent, for Federal employees who participate in the
    Government's defined contribution retirement plan, the Thrift Savings
    Plan (TSP). Because the G Fund assets, which are held by the Department
    of the Treasury, are the property of Federal employees and are held by
    the Government only in a fiduciary capacity, the transactions of the
    Fund are not transactions of the Government itself and are non-
    budgetary. The administrative functions of the Thrift Investment Board
    are carried out by Government employees, and are, therefore, included in
    the budget on a reimbursable basis. For similar reasons, the budget
    excludes funds that are owned by Native American Indians, but held and
    managed by the Government in a fiduciary capacity.
      The Social Security voluntary personal retirement accounts proposed by
    the Administration would be owned by individuals, not the Government. If
    the proposal is adopted, contributions into the accounts will be
    recorded as outlays, but the accounts themselves would be non-budgetary.
    If these accounts were held by the Government, it would be only in a
    fiduciary capacity, and the accounts would be classified as deposit
    funds. Deposit funds are further discussed in a section of Chapter 26 of
    this volume, ``The Budget System and Concepts.''

      Tax expenditures.-- The Federal tax system includes numerous special
    tax exclusions, exemptions, deductions, and similar provisions that have
    been added to the tax code over time. These provisions affect resource
    allocation and income distribution in ways that are similar to spending
    programs. Because of this similarity, these provisions are referred to
    as ``tax expenditures.'' Unlike typical spending programs, however, tax
    expenditures reduce receipts rather than increase outlays. Measuring tax
    expenditures requires specifying a hypothetical ``baseline'' tax system,
    which as noted below can be highly subjective. Because of the
    subjectivity in determining what is a tax expenditure and because of the
    difficulties in measuring them, tax expenditures are treated as non-
    budgetary.
      Tax expenditures are discussed in Chapter 19 of this volume, ``Tax
    Expenditures.'' Chapter 19 presents estimates for tax expenditures
    associated with the individual and corporate income taxes, and discusses
    how tax expenditures compare with spending programs and regulation as
    alternative methods for achieving policy

    [[Page 360]]

    objectives. The chapter explains that the baseline concepts used to
    identify and measure tax expenditures are somewhat arbitrary. As the
    chapter notes, the magnitude and distribution of tax expenditures would
    be significantly different if measured relative to a comprehensive
    income tax or a comprehensive consumption tax. The current tax
    expenditure baseline is loosely patterned on a comprehensive income tax,
    but departs from that standard in a number of areas. The appendix to
    Chapter 19 provides a critique of the current tax expenditure
    presentation and attempts to answer three questions: (1) what would be
    tax expenditures if a comprehensive income tax were used as the baseline
    without any departures from such a standard; (2) what would be the tax
    expenditures if a comprehensive consumption tax were used to define the
    baseline; and (3) what are the negative tax expenditures under the
    current system. Negative tax expenditures are provisions that cause
    people to pay more tax than they would under a baseline--such as the
    failure to adjust interest, capital gains, and depreciation for
    inflation.
      Hypothetically, tax expenditures could be included in the budget by
    measuring receipts as the sum of actual receipts plus tax expenditures
    receipts, and measuring outlays as the sum of actual outlays plus tax
    expenditures. The budget could then show the allocation of resources to
    education, housing or other purposes through the combined effect of tax
    expenditures and spending programs. Receipts and outlays would be
    increased by the same amount, so this change in display would have no
    impact on the deficit. However, as noted above, the difficulty in
    identifying and measuring tax expenditures makes it impractical to
    include tax expenditures in the budget.

      Government-sponsored enterprises.--The Federal Government chartered
    several Government-sponsored enterprises (GSEs), such as Fannie Mae,
    Freddie Mac, and the Farm Credit Banks, to provide financial
    intermediation for specified public purposes. The GSEs are excluded from
    the budget because they are privately owned and controlled. However,
    because they were established by the Federal Government for public-
    policy purposes and because they still serve such purposes to some
    extent, estimates of their activities are reported in a separate chapter
    of the budget Appendix and their activities are analyzed in Chapter 7 of
    this volume, ``Credit and Insurance.''
      Regulation.--Government regulation often requires the private sector
    to make expenditures for specified purposes, such as safety and
    pollution control. Although the budget reflects the cost to the
    Government of conducting regulatory activities, the costs imposed on the
    private sector as a result of the regulation are treated as non-
    budgetary. The Government's regulatory priorities and plans are
    described in the annual Regulatory Plan and the semi-annual Unified
    Agenda of Federal Regulatory and Deregulatory Actions. \3\
    ---------------------------------------------------------------------------
      \3\ The most recent Regulatory Plan and introduction to the Unified
    Agenda were issued by the General Services Administration's Regulatory
    Information Service Center and were printed in the Federal Register of
    December 11, 2006 (vol. 71, no. 237). Both the Regulatory Plan and
    Unified Agenda are available on-line at www.reginfo.gov and at
    www.gpoaccess.gov.
    ---------------------------------------------------------------------------
      Although not included in the budget, the estimated costs and benefits
    of Federal regulation have been published annually by the Office of
    Management and Budget (OMB) since 1997. The latest report was released
    in January 2007. \4\ The report estimates the total costs and benefits
    of major Federal regulations reviewed by OMB from October 1995 through
    September 2005, and the impact of Federal regulation on State, local,
    and tribal governments. It also reviews the international literature on
    the effects of regulation on national economic growth and performance,
    provides an update on various initiatives to improve regulatory
    cooperation internationally, provides an update on the status of
    regulatory reforms resulting from three public nomination initiatives in
    2001, 2002, and 2004, and includes a report on Agency Compliance with
    the Unfunded Mandates Reform Act of 1995. The draft of the 2007 report
    will be published in February 2007 for public comment.
    ---------------------------------------------------------------------------
      \4\ Office of Information and Regulatory Affairs, Office of Management
    and Budget, Validating Regulatory Analysis: 2006 Report to Congress on
    the Costs and Benefits of Federal Regulations and Unfunded Mandates on
    State, Local, and Tribal Entities (2006).
    ---------------------------------------------------------------------------

      Indirect Macroeconomic Effects of Federal Activity.--Government
    activity has many effects on the Nation's economy that extend beyond the
    amounts recorded in the budget. Government expenditures, taxation, tax
    expenditures, regulation and trade policy can all affect the allocation
    of resources among private uses and income distribution among
    individuals. These effects, resulting indirectly from Federal activity,
    are generally not part of the budget, but the most important of them are
    discussed in this volume and in the main Budget volume.