Budget Issues: Trust Funds in the Budget (Testimony, 03/09/99,
GAO/T-AIMD/RCED-99-110).

This testimony discusses budget accounting and budget enforcement as
they relate to trust funds and other special funds in the federal
budget. GAO focuses on three areas: (1) the structure of the federal
budget especially categorizations within the unified budget; (2) the
budget outlook, discretionary caps, and enforcement situation as the
United States enters a projected era of unified budget surpluses; and
(3) the potential implications of changes in the treatment of the
aviation programs.

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

 REPORTNUM:  T-AIMD/RCED-99-110
     TITLE:  Budget Issues: Trust Funds in the Budget
      DATE:  03/09/99
   SUBJECT:  Presidential budgets
             General fund accounts
             Trust funds
             Budget administration
             Unified budgets
             Budget deficit
             Budget surplus
             Federal aid for transportation
             Balanced budgets
IDENTIFIER:  Airport and Airway Trust Fund
             Highway Trust Fund
             
Budget Issues: Trust Funds in the Budget (Testimony, 03/09/99,
GAO/T-AIMD/RCED-99-110).

This testimony discusses budget accounting and budget enforcement as
they relate to trust funds and other special funds in the federal
budget. GAO focuses on three areas: (1) the structure of the federal
budget especially categorizations within the unified budget; (2) the
budget outlook, discretionary caps, and enforcement situation as the
United States enters a projected era of unified budget surpluses; and
(3) the potential implications of changes in the treatment of the
aviation programs.

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

 REPORTNUM:  T-AIMD/RCED-99-110
     TITLE:  Budget Issues: Trust Funds in the Budget
      DATE:  03/09/99
   SUBJECT:  Presidential budgets
             General fund accounts
             Trust funds
             Budget administration
             Unified budgets
             Budget deficit
             Budget surplus
             Federal aid for transportation
             Balanced budgets
IDENTIFIER:  Airport and Airway Trust Fund
             Highway Trust Fund
             
Budget Issues: Trust Funds in the Budget (Testimony, 03/09/99,
GAO/T-AIMD/RCED-99-110).

This testimony discusses budget accounting and budget enforcement as
they relate to trust funds and other special funds in the federal
budget. GAO focuses on three areas: (1) the structure of the federal
budget especially categorizations within the unified budget; (2) the
budget outlook, discretionary caps, and enforcement situation as the
United States enters a projected era of unified budget surpluses; and
(3) the potential implications of changes in the treatment of the
aviation programs.

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

 REPORTNUM:  T-AIMD/RCED-99-110
     TITLE:  Budget Issues: Trust Funds in the Budget
      DATE:  03/09/99
   SUBJECT:  Presidential budgets
             General fund accounts
             Trust funds
             Budget administration
             Unified budgets
             Budget deficit
             Budget surplus
             Federal aid for transportation
             Balanced budgets
IDENTIFIER:  Airport and Airway Trust Fund
             Highway Trust Fund
             
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A599110t.book GAO

United States General Accounting Office

Testimony Before the Subcommittee on Transportation and Related
Agencies, Committee on Appropriations, House of Representatives

For Release on Delivery Expected at 10 a.m. Tuesday, March 9, 1999

BUDGET ISSUES Trust Funds in the Budget Statement of Susan J.
Irving Associate Director, Budget Issues Accounting and
Information Management Division

GAO/T-AIMD/RCED-99-110

Page 1 GAO/T-AIMD/RCED-99-110

Mr. Chairman, Members of the Subcommittee: It is a pleasure to
appear here today to talk about budget accounting and budget
enforcement as they relate to trust funds and other special funds
in the budget. As requested, my statement today will discuss three
areas: (1) the structure of the federal budgetespecially
categorizations within the unified budget, (2) the budget outlook,
discretionary caps, and enforcement situation as we enter a
projected era of unified budget surpluses, and (3) potential
implications of changes in the treatment of the aviation programs.

Budget Structure The unified budget was adopted in 1969 as a way
of capturing all federal receipts and expenditures. This was seen
as important to permit the

federal budget to be used as an instrument of economic/fiscal
policy. In addition, if the budget is to help the Congress and the
President allocate federal resources, it should cover all
activities and transactions that are federal in nature and not
subject to the economic disciplines of the marketplace. Removing
something that is federal in nature from the budget does not make
it less a government activity. If relevant activities of the
budget are omitted, the budget presents an incomplete picture of
the true magnitude of the federal government's activities. 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 Federal Aviation Administration (FAA) has four major budget
accounts covering funding for airport grants, operations, capital
improvements, and research and development.

1 Budget Account Structure: A Descriptive Overview (GAO/AIMD-95-
179, September 18, 1995).

Page 2 GAO/T-AIMD/RCED-99-110

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 advance-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.

What Is a Trust Fund? How Do Trust Funds Fit Into the Federal
Budget?

The federal budget consists of several types of funds: the general
fund, special funds, public enterprise funds, intragovernmental
funds, and trust funds. 2 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 and (2)
trust funds.

Although some budget summary tables show only 12 major trust
funds, in fiscal year 1997 there were 110 trust funds. 3 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 is by far the largest trust
fund, 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 neither the
same as a private trust fund nor does it have unique
characteristics within the federal budget. The manager of a
private trust has a fiduciary obligation 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. 4

2 There are both revolving and nonrevolving trust funds, but that
difference is not relevant to this analysis.

3 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.

4 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.

Page 3 GAO/T-AIMD/RCED-99-110

Within the federal budget there is no substantive difference
between a trust fund and a special fund. Both are internal
accounting devices 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.

If a trust/special fund collects more in receipts than it spends
in a year, its annual surplus adds to the unified budget surplusor
reduces the unified deficit if it spends more than it receives.
For example, for fiscal year 1998, within the unified budget's $70
billion surplus, a federal funds deficit of $83 billion was offset
by a Social Security Trust Funds surplus of $99 billion and other
trust fund surpluses of $54 billion. Even these surplus figures,
however, can be misleading since a significant portion of trust
fund revenue comes from transfers within the budget. The largest
of these general fund transfers is interest credited to the trust
funds. Interest is credited to a trust fund because under current
law trust funds lend any annual cash surpluses to the general
fund. 5 These surpluses are commingled with other revenues and
used to finance other governmental activities. While all of these
general fund transfers were instituted for a purpose--often to
better allocate costs--the fact remains that they are

intragovernmental transfers. Without such transfers, the trust
funds as a whole would run a deficit.

How Do Trust Funds Fit Into the Budget Enforcement Regime?

The Budget Enforcement Act 6 (BEA) established a budgetary control
regime that divided the budget into two major parts: discretionary
spending, defined as spending that stems from annual
appropriations acts, and 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
controlled by annual dollar limits (spending caps). Mandatory
spending and receipts legislation are controlled by a pay- as-you-
go (PAYGO) requirement that legislation enacted during a session
of Congress be deficit neutral.

5 As part of the change in treatment of the Highway Trust Fund in
the Transportation Equity Act for the 21 st Century (TEA-21) (P.L.
105-178), interest is no longer paid to the Highway Trust Fund.

6 Balanced Budget and Emergency Deficit Control Act of 1985 as
amended by the Budget Enforcement Act of 1990 (BEA) as further
amended by the Omnibus Budget Reconciliation Act of 1993 and the
Budget Enforcement Act of 1997.

Page 4 GAO/T-AIMD/RCED-99-110

There is no single rule for budgetary control of trust funds.
Knowing that a given account has been designated a trust fund does
not tell you either whether spending is controlled through the
appropriations process or whether it is subject to any
limitations. Trust 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 by the trust fund. For example, Medicare and employee
pensions are direct spending, or mandatory, programs. 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. 7 In contrast, spending for
discretionaryi.e., appropriatedprograms 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, when the Congress created the various transportation
trust funds, it dedicated trust fund receipts to trust fund
purposes, but retained annual control over the timing of the
expenditures. Therefore, spending from these trust funds is
dependent on annual appropriations and has counted under the
discretionary caps.

Budget Outlook and the Discretionary Caps

After nearly 30 years of unified budget deficits, current
projections are for surpluses as far as the eye can see. Although
many recent budget agreements (Gramm-Rudman-Hollings, the Budget
Enforcement Act, and the Balanced Budget Agreement) were designed
to achieve this fiscal position, the 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. 8

According to the Congressional Budget Office (CBO), discretionary
spending in 1999 made up about one-third of total outlays. Under
the caps, these outlays will remain almost unchanged in dollar
terms between fiscal

7 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.

8 CBO has opined that BEA enforcement applies regardless of
whether or not there is a deficit. OMB has noted that there is
still an on budget [budget less social security and postal
service] deficit so the question is moot.

Page 5 GAO/T-AIMD/RCED-99-110

years 1999 and 2002. Even if discretionary spending grows with
inflation between fiscal years 2002 and 2009, it will fall to 29
percent of total outlays.

Discretionary caps were first imposed by the BEA in 1990. Their
structure has varied. The matrix below shows the current structure
of the discretionary caps and its evolution. 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. 9

Table 1: Discretionary Spending Categories by Fiscal Year

Over the next few years, the limits on discretionary spending are
very tight, as shown in figure 1. The statutory caps are below the
fiscal year 1999 freeze level (the 1999 freeze line) and
substantially below the fiscal year 1999 level adjusted for
inflation.

If the appropriations designated as emergency for fiscal year 1999
were to be repeated 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 repeated
for fiscal year 2000, budget authority must be cut $10 billion
below the fiscal year 1999 nominal level.

9 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.

1997 1998 1999 2000

Violent Crime Reduction Violent Crime

Reduction Violent Crime Reduction Violent Crime Reduction
Discretionary Defense Defense Discretionary

Nondefense Nondefense Highway Highway Mass Transit Mass Transit

Page 6 GAO/T-AIMD/RCED-99-110

Figure 1: How Tight Are the Budget Authority Caps?

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 face a real
challenge on the discretionary side of the budget this year. To
comply with the current statutory caps, discretionary spending
must be cut from its fiscal year 1999 appropriated level: budget
authority by $10 billion and outlays by $13 billion, even assuming
that none of the emergency spending is continued.

500 510

520 530

540 550

560 570

580 590

600 1999 2000 2001 2002

Fiscal year Caps 1999 Freeze 1999 Adjusted for Inflation

Billions of dollars

Page 7 GAO/T-AIMD/RCED-99-110

Potential Implications of Changing Budget Treatment for Aviation
Programs

You asked me to discuss briefly the Airport and Airway Trust Funds
in this context. In our March 1995 report, we discussed the
budgetary treatment of transportation trust funds. 10 We noted
that there is some tension between the collection of earmarked
revenues and the trade-offs the Congress must make about spending
priorities.

Last year the Congress chose to make a change in the operations of
the Highway Trust Fundboth its highway account and its mass
transit account. The major changes were: (1) creation of separate
outlay caps for highway and mass transit and (2) specification of
annual guaranteed minimum spending levels--tied in the case of
highways to Highway Trust Fund receipts.

You asked me to discuss issues related to providing treatment for
the Airport and Airway Trust Fund analogous to that for the
Highway Trust Fund. As background, I should note that obtaining a
picture of aviation financing is more complicated than obtaining a
picture of highway financing. Almost all highway programs are
carried out by bureaus within the Department of Transportation. In
contrast, although the FAA is responsible for the greatest share
of aviation-related activities, the Department of Defense (DOD)
and the National Aeronautics and Space Administration (NASA) also
play major roles. 11

In addition, most highway programs are funded by the Highway Trust
Fund, but aviation-related activities receive far more general
fund support. NASA and DOD aviation-related activities are funded
in those agencies' appropriations and financed through general
funds. The FAA receives funding both from the Airport and Airway
Trust Fund and from general fund appropriations.

10 Correspondence to Honorable Frank R. Wolf on Transportation
Trust Funds. GAO/AIMD-95-95R, March 15, 1995.

11 DOD provides air tr affic control services to military and
civil users. The latest figures available from DOD indicated that
it cost the department approximately $680 million to provide
services related to the National Airspace Systemin fiscal year
1995. NASA's aviation activities include aviation research and in
fiscal year 1999, the Congress appropriated $1.2 billion to NASA
for these activities.

Page 8 GAO/T-AIMD/RCED-99-110

The Airport and Airway Trust Fund is used almost entirely to
support FAA activities. Figure 2 shows reported trust fund
receipts minus outlays for fiscal years 1980 through 1999. As this
figure shows, in recent years the outlays from the trust fund have
exceeded the receipts collected. 12

Figure 2: Airport and Airway Trust Fund, Tax Receipts Minus
Outlays

Note: Positive amounts indicate years when taxes exceeded
spending. Negative amounts indicate years when spending exceeded
taxes.

Source: As reported by the Department of Transportation.

As noted, the FAA also receives a significant share of its funding
from general fund appropriations. Figure 3 shows the composition
of FAA appropriations for fiscal years 1980 through 1999.

12 The Airport and Airway Trust Fund balance at the end of fiscal
year 1997 was $6.4 billion.

-5 -4

-3 -2

-1 0

1 2

3 Fiscal year

Billions of dollars

Page 9 GAO/T-AIMD/RCED-99-110

Figure 3: Composition of FAA Appropriations

Finally, you asked about the budgetary implications of creating a
new separate spending category for aviation. In part, that depends
on the design of the category. 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. The same
would be true for a separate cap for aviation spending--
regardless of whether funding was from the trust fund or the
general fund.

However, if a separate category is designed as a guaranteed
minimum funding level, there are additional issues. For example,
if creation of a separate spending category for aviation resulted
in increased spending on aviation, and the remaining caps were not
lowered to offset this, total discretionary spending would
increase, and the surplus would fall (or the deficit increase). If
aviation spending were increased and this increase was carved out
of the general discretionary cap, then the remaining activities
within that general category would compete for fewer total
dollars.

0 10

20 30

40 50

60 70

80 90

100 Fiscal year Trust Fund General Fund

Percentage of appropriations

Page 10 GAO/T-AIMD/RCED-99-110

Conclusion In general, providing guaranteed funding levels to any
one activity in the budget protects that activity from competition
with other areas for scarce

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. My colleagues and I would be happy to
answer any questions you or your colleagues may have.

(935306) Lett er

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