Budget Issues: Cap Structure and Guaranteed Funding

Budget Issues: Cap Structure and Guaranteed Funding (Testimony,
07/21/1999, GAO/T-AIMD-99-210).

Pursuant to a congressional request, GAO discussed: (1) the budget
structure and current budgetary control regime; (2) the budget outlook,
discretionary caps, and enforcement situation as the United States
enters an era of projected unified budget surpluses; (3) potential
implications of guaranteeing minimum spending levels on the
discretionary side of the budget; and (4) the pay-as-you-go (PAYGO) side
of the equation: (a) permanent appropriations; (b) mandatory trust
funds; and (c) mandatory special funds.

GAO noted that: (1) the unified budget was adopted in 1969 as a way of
capturing all federal receipts and expenditures; (2) Congress provides
funds to agencies through budget accounts; (3) these accounts vary in
their orientation, specificity, and size; (4) a relatively few large
accounts are associated with three-quarters of budgetary resources, and
the rest are comparatively quite small; (5) accounts may be oriented to
program, process, organization, or object--and more than one orientation
is likely to be found in a given agency; (6) the Budget Enforcement Act
of 1990 (BEA) established a budgetary control regime that divided the
budget into two major parts: (a) discretionary spending, defined as
spending that stems from annual appropriation acts; and (b) direct
spending, or spending that flows directly from authorizing legislation;
(7) assuming that budget caps hold, after nearly 30 years of unified
budget deficits, current projections are for surpluses lasting far into
the future; (8) direct spending is still subject to the PAYGO rules, and
discretionary spending is still subject to specified dollar caps; (9)
discretionary caps were first imposed by BEA in 1990; (10) the structure
of those caps-and so the constraints on trade-offs within the budget-has
varied; (11) in the past, separate caps within the overall discretionary
spending limit were designed to place firewalls between different areas
of spending and to limit trade-offs to programs within each category;
(12) like the caps, a guaranteed minimum funding level limits the range
of trade-offs; (13) however, it also raises some additional issues; (14)
its impact depends on the design of the guarantee; (15) providing
guaranteed funding levels to any one activity in the budget protects
that activity from competition with other areas for finite resources;
(16) the mandatory spending part of the budget is comprised of spending
that is not controlled through the appropriations process but instead is
provided and controlled indirectly through other forms of legislation;
and (17) there is no single rule for budgetary control of trust or
special funds.

--------------------------- Indexing Terms -----------------------------

REPORTNUM: T-AIMD-99-210
TITLE: Budget Issues: Cap Structure and Guaranteed Funding
DATE: 07/21/1999
SUBJECT: Budget outlays
Budget administration
Unified budgets
Budget surplus
Future budget projections
IDENTIFIER: Highway Trust Fund
Airport and Airway Trust Fund

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ai99210t

A Testimony Before the Committee on Rules, House of
Representatives

For Release on Delivery Expected at

BUDGET ISSUES 10 a. m. Wednesday,

GAO/T-AIMD-99-210

July 21, 1999 Cap Structure and Guaranteed Funding

Statement of Susan J. Irving Associate Director, Budget Issues
Accounting and Information Management Division

Mr. Chairman, Members of the Committee: It is a pleasure to appear
before you as you consider the issues involved if guaranteed
minimum funding levels are established for particular programs or
areas within the budget. As requested, in my statement today I
will cover four topics related to this issue: (1) the budget
structure and current budgetary control regime, (2) the budget
outlook, discretionary caps, and enforcement situation as the
United States enters an era of projected unified budget surpluses,
(3) potential implications of guaranteeing minimum spending levels
on the discretionary side of the budget, and (4) the PAYGO side of
the equation: permanent appropriations, mandatory trust funds, and
mandatory special funds. Budget Structure and

The unified budget was adopted in 1969 as a way of capturing all
federal Current Budgetary receipts and expenditures. This was seen
as important to permit the federal budget to be used as an
instrument of economic/ fiscal policy. In Control Regime addition,
if the budget is to help the Congress and the President allocate
federal resources, it should cover essentially all activities and
transactions that are federal in nature. Equally important, the
budget display needs to show distinctions between types of federal
programs and the information necessary for evaluating the budget
year and future years. Such a balance between a unified overview
and sufficient compositional information ensures that programs
included in the budget are subject to the kind of priority-
setting and oversight deliberations the Congress must make during

the budget and appropriations debate. As all of you know, the Congress provides funds to agencies through budget accounts. These accounts vary in their orientation, specificity, and size. 1 A relatively few large accounts are associated with three- quarters of budgetary resources, and the rest are comparatively quite small. Accounts may be oriented to program, process, organization, or object and more than one orientation is likely to be found in a given agency. For example, the Department of Health and Human Services has budget accounts ranging from children and families services programs, to processes like service and supply, to organizations like the National Institutes of Health, and to objects like retirement pay and medical benefits. 1 Budget Account Structure: A Descriptive Overview (

GAO/AIMD-95-179
, September 18, 1995).
the budget and appropriations debate. As all of you know, the
Congress provides funds to agencies through budget accounts. These
accounts vary in their orientation, specificity, and size. 1 A
relatively few large accounts are associated with three- quarters
of budgetary resources, and the rest are comparatively quite
small. Accounts may be oriented to program, process, organization,
or object and more than one orientation is likely to be found in a
given agency. For example, the Department of Health and Human
Services has budget accounts ranging from children and families
services programs, to processes like service and supply, to
organizations like the National Institutes of Health, and to
objects like retirement pay and medical benefits. 1 Budget Account
Structure: A Descriptive Overview ( GAO/AIMD-95-179 , September
18, 1995).

The Congress has also recognized the variation among federal
programs and activities in how it provides funding to these
activities. For example, because the school year and the fiscal
year do not match, the Congress generally forward- funds education
programs so that the school year begins with funding for the first
quarter in place. Some funds expire in 1 year if not obligated;
others are available for several years, and some are permanently
available for obligation. 2 The Budget Enforcement Act of 1990
(BEA) 3 established a budgetary control regime that divided the
budget into two major parts: (1) discretionary spending, defined
as spending that stems from annual appropriations acts, and (2)
direct spending, or spending that flows directly from authorizing
legislation; this latter is often known as mandatory. As all of
you know, discretionary spending is subject to annual dollar
limits (spending caps). Mandatory spending and receipts
legislation are subject to a pay- as- you- go (PAYGO) requirement
that legislation enacted during a

session of the Congress be deficit- neutral. The question of
guaranteed spending levels is relevant to both parts of the
budget. Budget Outlook and Assuming that budget caps hold, after
nearly 30 years of unified budget the Discretionary Caps deficits,
current projections are for surpluses lasting far into the future.
Although many recent budget agreements (Gramm- Rudman- Hollings,
BEA, and the Balanced Budget Agreement) were designed to achieve
this fiscal

position, BEA's enforcement regime does not end with the advent of
a surplus. Direct spending is still subject to the PAYGO rules,
and discretionary spending is still subject to specified dollar
caps. 4

According to the Congressional Budget Office (CBO), discretionary
spending in fiscal year 1999 is expected to make up about one-
third of total outlays. Under the current statutory caps, these
outlays will remain almost unchanged in dollar terms between
fiscal years 1999 and 2002. Even if discretionary spending grows
with inflation between fiscal years 2002 and 2009, it will fall to
about 29 percent of total outlays.

2 See Budget Process: Biennial Budgeting for the Federal
Government (GAO/T-AIMD-94-112, April 28, 1994). 3 Balanced Budget
and Emergency Deficit Control Act of 1985 as amended by BEA as
further amended by the Omnibus Budget Reconciliation Act of 1993
and the Budget Enforcement Act of 1997. 4 CBO has opined that BEA
enforcement applies regardless of whether or not there is a
deficit. This point will likely be further discussed as an on
budget surplus materializes.

Discretionary caps were first imposed by BEA in 1990. The
structure of those caps and so the constraints on trade- offs
within the budget has varied. When BEA was first enacted, there
were three categories defense, domestic, and international
established within overall discretionary spending caps for fiscal
years 1991 through 1993. Although spending in any category could
be below the caps, spending within a given category could not
exceed the cap for that category there could be no trading across
categories. For fiscal years 1994 and 1995, the categories were
collapsed into a single general discretionary cap for each year.
Subsequent laws extended the caps and created new categories. The

violent crime reduction trust fund was created with a separate
spending limit carved out from the general purpose spending caps
for fiscal years 1995 through 2000. Like previous caps, this
spending limit serves as a cap, not a floor; thus less than the
capped amount could be appropriated for violent crime but any
unused portion could not be reallocated to other areas of the
budget. The Budget Enforcement Act of 1997 changed the cap
structure again for years 1998 through 2002. For fiscal years 1998
and 1999, it established three separate categories of
discretionary spending: defense spending, violent crime reduction
spending, and all other nondefense spending. For

fiscal year 2000 it combined defense and nondefense leaving
violent crime reduction as the only carve- out. For 2001 and 2002,
these were combined into a single discretionary spending category.
However, the cap structure established in 1997 was further changed
by the

Transportation Equity Act for the 21 st Century (TEA- 21), which
established two new outlay caps that apply separately to highway
and mass transit programs for 1999 through 2003. It also specified
annual guaranteed minimum spending levels, tied in the case of
highways to Highway Trust Fund receipts. This law brought a change
not only in structure but also in the nature of the caps unlike
previous caps, these are guaranteed spending levels. The last
comprehensive extension and revision of the caps in 1997 set the
caps so that the budget would be balanced in 2002. It is not clear
whether caps would have been extended beyond the year of budget
balance. However, the budget reached balance earlier than planned
and the Congress and the President now face the difficult
situation of having to comply with tight budget caps at the same
time that it is running a surplus.

Table 1 shows the current structure of the discretionary caps. For
most categories, there are limits on both budget authority and
outlays. However, because spending from the transportation trust
funds is controlled by obligation limits, for the highway and mass
transit categories, there are only outlay caps. 5 Table 1:
Discretionary Spending Categories by Fiscal Year

1997 1998 1999 2000 2001 2002

Violent Crime Violent Crime

Reduction Reduction Reduction Reduction Discretionary
Discretionary Discretionary Defense Defense Discretionary

Nondefense Nondefense Highway Highway Highway Highway Mass Transit
Mass Transit Mass Transit Mass Transit

I don't need to remind any member of the Congress that over the
next few years, as shown in figure 1, the limits on discretionary
spending are very tight. The statutory caps are below the fiscal
year 1999 freeze level, that is, if Congress chose to freeze
appropriations at the fiscal year 1999 nominal dollar level (the
1999 freeze line), and substantially below the fiscal year 1999
level adjusted for inflation. 5 Accounts in the highway category
provide contract authority, which is liquidated from the Highway

Trust Fund. Budget accounts for mass transit include both contract
authority, liquidated from the Highway Trust Fund, and
authorizations of appropriations from the General Fund of the
Treasury. Contract authority is a form of budget authority that
permits obligations to be incurred in advance of appropriations.

Figure 1: How Tight Are the Budget Authority Caps?

600 590 580 570 560 Billions of dollars

550 540 530 520 510 500

1999 2000 2001 2002 Fiscal year

Caps 1999 Freeze 1999 Adjusted for Inflation

If the appropriations designated as emergency for fiscal year 1999
were to be continued as nonemergency spending this year, budget
authority for fiscal year 2000 would have to be cut by $26 billion
below the fiscal year 1999 appropriated level. Even if those
emergency appropriations from fiscal year 1999 are not continued
for fiscal year 2000, to comply with the current caps budget
authority must be cut $10 billion below the fiscal year 1999
nominal level. In its outlook volume, CBO noted the outlay caps
may be even harder to meet. Outlays are projected to rise by $21
billion between fiscal years 1998 and 1999. However, if the
Congress froze appropriations at the fiscal

year 1999 nominal dollar level, outlays in fiscal year 2000 would
be $13 billion over the outlay caps. In summary then, the Congress
and the President currently face a real challenge on the
discretionary side of the budget. To comply with the fiscal year
2000 statutory caps, discretionary spending must be cut from its
fiscal year 1999 appropriated level: budget authority by $10
billion and outlays by $13 billion, assuming that none of the
emergency spending is continued.

Potential Implications Last year the Congress chose to make a
change in the operations of the of Creating Additional Highway
Trust Fund both its highway account and its mass transit account.
The major changes were: (1) creation of separate outlay caps for
Guaranteed Funding highway and mass transit and (2) specification
of annual guaranteed Levels

minimum funding levels tied in the case of highways to Highway
Trust Fund receipts. Some have suggested that a similar treatment
might be warranted for the Airport and Airway Trust Fund. As you
know, the House recently took a different approach in adopting
legislation that ensures that future growth in aviation funding is
financed by the trust fund and moves the Airport and Airway Trust
Fund off budget. You asked about the budgetary implications of
creating new guaranteed funding levels within the discretionary
limit as was done for highway and mass transit. In the past,
separate caps within the overall discretionary spending limit were
designed to place firewalls between different areas of spending
and to limit trade- offs to programs within each category. For
example, creation of separate defense and nondefense caps did not
guarantee minimum funding levels for either category, but it did
limit the extent to which one could be increased at the expense of
the other. Like the caps, a guaranteed minimum funding level
limits the range of trade- offs. However, it also raises some
additional issues. Its impact depends on the design of the
guarantee. For example, if a guaranteed minimum funding level for
area X is carved out of the general discretionary cap and that cap
is not increased then the remaining activities within that cap
must compete for what is left. If the guaranteed minimum funding
level for area X is layered on top of the existing cap i. e., if
the remaining cap( s) are unchanged then total discretionary
spending increases and the surplus falls (or the deficit
increases). In general, providing guaranteed funding levels to any
one activity in the budget protects that activity from competition
with other areas for finite resources. It, in effect, creates
within the discretionary spending limits what might be considered
a

permanent appropriation (which is mandatory spending, not
discretionary). Let me now turn to discussing this type of
guaranteed funding.

Permanent The mandatory spending part of the budget is comprised
of spending that is not controlled through the appropriations
process but instead is provided Appropriations, Trust and
controlled indirectly through other forms of legislation. 6 By
design,

Funds, and Special this part of the budget generally can be
thought of as having funding levels Funds: How Do They guaranteed
at the amount necessary to satisfy program requirements. It Fit
Into the Federal includes permanent appropriations, contract
authority, authority to borrow, and authority to make any payments
for which budget authority is Budget? not provided in advance in
appropriations acts. 7 The largest of these in dollar terms is
permanent appropriations, 8 which I will focus upon today along
with the fund types that often have permanent appropriations. The
federal budget consists of several types of funds: the general
fund, special funds, public enterprise funds, intragovernmental
funds, and trust funds. 9 All of these except trust funds are
considered to be federal funds. All unified budget transactions
fall within either of two fund groups: (1) federal funds or (2)
trust funds. Trust funds use permanent appropriations more than
any of the other fund types.

Although some budget summary tables show only 12 major trust
funds, in fiscal year 1997, there were about 110 trust funds. 10
These covered a wide range of purposes: from social insurance
(Social Security and Medicare), employee compensation (pensions
and health benefits), insurance, natural resources and
environmental cleanup to transportation. Social Security has by
far the largest trust funds, followed by federal employee
retirement funds (civilian and military) and the Medicare trust
funds. The term trust fund as used in the federal budget is not
the same as a

private trust fund. The manager of a private trust has a fiduciary
obligation 6 By definition, the food stamp program, which receives
annual appropriations, is also considered mandatory spending. 7 We
have reported on these types of spending authorities in Budget
Issues: Inventory of Accounts With Spending Authority and
Permanent Appropriations, 1996 (GAO/AIMD-96-79, May 31, 1996). 8
In fiscal year 1998, about 66 percent of total spending was due to
permanent appropriations. 9 There are both revolving and
nonrevolving trust funds. Revolving trust funds, which represent
12 of the 110 trust fund accounts and account groupings, are
established to carry out a cycle of business- type operations. 10
This is based on the Congressional Research Service report Federal
Trust Funds: How Many, How Big, and What Are They For?, updated
June 30, 1998. The 110 total actually groups some small trust
funds together, counting them as one fund. The actual number of
individual trust funds would be higher.

to the beneficiary and must manage the trust's assets on behalf of
that beneficiary according to the stipulations of the trust. The
manager cannot unilaterally alter the terms of that trust. In
contrast, the federal government both owns the assets of most
trust funds and can, through legislation, raise or lower the
fund's collections or payments, or alter the purposes of the trust
fund. 11 Within the federal budget, there is no substantive
difference between most trust funds and special funds. Both are
internal accounting mechanisms used to track the collection and
use of funds earmarked for specific

purposes. The only difference between a special fund and a trust
fund is the word trust in the legislation establishing the
account. Based on our analysis of OMB's receipt accounts, there
are over 100 special funds. Examples are the Department of
Veterans Affairs' medical care cost recovery fund and the
Department of the Interior's reclamation fund.

How Do Trust and There is no single rule for budgetary control of
trust or special funds. Special Funds Fit Into Although most trust
funds operate with guaranteed funding levels in the form of
permanent appropriations, knowing that a given account has been
the Budget designated a trust or special fund does not tell you
either whether spending Enforcement Regime?

is controlled through the appropriations process or whether it is
subject to any limitations. Trust and special funds are classified
as discretionary or mandatory depending on the nature of the
substantive legislation creating the fund i. e., depending on the
nature of the activity funded. For example, Social Security,
Medicare, and employee pensions are direct spending, or mandatory,
programs and have permanent appropriations. Outlays are solely a
function of the design of the program, such as eligibility
requirements and benefit formulas. As a result, under the BEA
enforcement provisions, spending for these programs is subject to
the PAYGO rules. 12 By far, the bulk of trust and special fund
spending is due to permanent appropriations in fiscal year 1998,
permanent appropriations accounted for nearly 95 percent of total
trust fund spending and over 80

percent of special fund spending. 11 The federal government
manages some trust funds in a fiduciary capacity, such as trust
funds owned by Indian tribes. These are not discussed in this
testimony. 12 Social Security has its own set of budget
enforcement rules which protect its balances and remove its
transactions from the deficit/ surplus estimates and calculations
made according to BEA.

In contrast, spending for discretionary i. e., appropriated
programs is governed by the spending caps regardless of whether
that spending flows from federal funds or trust funds. Spending
from discretionary trust funds, such as the transportation trust
funds, often is controlled by obligation limits, which limit
outlays. As you know, some of these trust funds recently have been
the object of debate regarding the creation of guaranteed funding
levels for them as part of the discretionary spending limits. This
would in effect grant them the equivalent of a permanent
appropriation like most of the other trust funds. However, when
the Congress created the various transportation trust funds, it
decided to retain annual control over the timing of their
spending, a decision that would be reversed by creating guaranteed
funding levels. Any decision to create a guaranteed funding level
within the current discretionary caps would further tighten the
already tight caps for other discretionary spending programs,
unless a decision was made to increase the caps. The legislation
recently adopted by the House regarding the Airport and Airway
Trust Fund removes the trust fund from all budget calculations and
directs OMB to reduce the discretionary caps to reflect the
discretionary baseline trust fund spending.

Conclusion In general, providing guaranteed funding levels to any
one activity in the budget protects that activity from competition
with other areas for finite resources. The design of any guarantee
can have implications for other

federal activities and for federal resources. Whether to provide
such a guarantee and to what activities is fundamentally a
decision about priorities that only the Congress and the President
can make.

This concludes my statement. I would be happy to answer any
questions you or your colleagues may have. Contact and

For future contacts regarding this testimony, please contact Susan
Irving at Acknowledgments (202) 512- 9142 or Christine Bonham at
(202) 512- 9576. Individuals making key contributions to this
testimony included Christine Bonham, Robert Sexton, Carol Henn,
and Carlos Diz.

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