Summary of a Report--Revolving Funds: Full Disclosure Needed for Better Congressional Control

Published by the Government Accountability Office on 1977-08-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                            DCCUENT       ESUME
03728 -   82854107]   f a    te3      -

Summary of a Report--nevolving Funds: Full Disclosure Needed for
Better Congressional Control. PAD-77-25(a) ; B-115398. August 30,
1977. 12 p   + appendix (1 pp.).
Report to Rep. Butler Derrick, Chairman, Task Force on Budget
Controllability, House Committee on Budget; by Elmer B. Staats,
Comptroller General etter Congressional Contrul.

Contact: Procram Analysis Div.
Budget Function: iscellaneoas: Financial Management and
    Information Systems (1002).
Organization Concerned: Department cf the Treasury; Office of
    fiargement and Budget.
Congressional Relevance: House Committee on Budget.
Authority: Congressional Budget Act of 1974 (P.L. 93-344).

          Because of the way some revolving funds are currently
included in the Federal budget, the total amount of Govarnment
activities is understated; for example, by an estimated 28
billion in fis,-al year (FP) 1978.   indings/Corclusions: In
order for Congress to decide on udget totals and make priority
allocations, it must have complete information on the total
levels of Fedral activities. Pericdic congressional review is
the best method for Congress to control revclvirg funds. The
Office of Management and Budget (ORB) and GAO agreed that
adoption of gross accounting for public enterprise revolving
funds would have significant effect on Federal accounting and
budgeting. Recommendations: The Director of OB should: (1)
sake appropriate charges in current budget procedures which will
result in te financial activities of public eterprise
revolving funds being reflected in the Federal budget on a gross
basis; and (2) periodically review established revolving funds
in the budget to determine whether they eet established
criteria and should continue to operate as revolving funds.
Congress, with the executive branch, should develop and utilize
common criteria for establishing and classifyirg revolving
funds. Befor-    +-blishing additional revolving funds, Congress
should study        i -'il implications of each new proposal.
                                      REPORT TO THE HOUSE COMMITTEE
     CCV                              ON THE BUDGET
           ~o                         BY THE COMPTROLLER GENERAL
           ::,                  '-    OF THE UNITED STATES
rl              ·I(
                S.    til·>\I

                                     Summary Of A Report-
                                     Revolving Funds: Full
                                     Disclosure Needed For
                                     Better Congressional Control
                                     Because of the way some revolving funds are
                                     currently inciud-,d in the Federal budget, the
                                     total amount of Government activities is
                                     understated--for example, by an estimated
                                     $28 billion in fiscal year 1978.
                                     Inconsistent classification of budget accounts
                                     causes inconsistent reporting for essentially
                                     similar programs.
                                     GAO recommends that revolving funds
                                     should be accounted for differently than
                                     they are now. This will cause changes n the
                                     budget process, especially n the disclosure
                                     of financial information. GAO also recom-
                                     mends that common criteria be established
                                     for classification of budget accounts.

                                     PAD-77-25 (a)
                                                                                  AUGUST 30, 1977
                         WASHINGTON. D.C. 14"


The Honorable Butler DerricK
Chairman, Task Force on Budget
Committee on the Budget
House of Representatives
Dear Mr. Chairman:

     In response to your request, we are reporting on various
aspects of revolving funds--an important means of financing
Government programs--and assessing the effects such financing
techniques have on congressional control over the budget.
This is a summary of a report which is the first of a series
aimed at assuring consistent application of budget principles.
     Our review was made pursuant to your request and under
the provisions of title VIII of the Congressional Budget Act
of 1974 (P.L. 93-344).

     We are sending copies of this summary to the Dire-tor,
Congressional Budget Office; the Secretary of the Treasury;
and the Director, Office of Management and Budget.
                               Sincerely yours,

                               Comptroller General
                               of the United States
                     SUMMARY OF A REPORT--

     This report was undertaken at the request of the House
Budget Committee's task force on budget controllability as
part of a series of reports dealing with legislative, fi-
nancial, and administrative practices that affect the ability
of the Congress to control Federal spending. These studies
are intended to assist the Congress in distinguishing be-
tween controllable ad other programs (a distinction requirec
by the Congressional Budget Act).  In additioni, they arc in-
tended to gather data and develop concepts for practical ap-
plication by the Congress in improving the controllability
of the Fedral budget.

     The extent of our review was to study the overall use
of revolving fund financing throughout the Federal Govern-
ment and its implications on congressional control. Al-
though individual revolving fund accounts are cited frequently
throughout the report as examples, no individual accounts were
studied in depth or audited by us for this report.

     The source for most of the statistics and financial in-
formation used in this report is from an analysis of "The
Budget of the U.S. Government," 1977, its "Appendix," and
the Office of Management and Budget (OMB) computer tape of
this information. Therefore, financial data for fiscal years
1976 and 1977 are OMB estimates.

     Other information in the report came from various
sources, such as previous reports on revolving funds, legis-
lative histories, and general studies on the bdget process
and congressional control. Numerous interviews were held
with officials at OMB and Treasury and with congressional
staff members from various committees.

    We recommend that the Director:

     --Make appropriate changes in current budget procedures
       which will result in the financial activities of public
       enterprise revolving funds being reflected in the Fed-
       eral budget on a gross basis.

      -- Periodically undertake indepth reviews of all
         established revolving funds in the budget to deter-
         mine whether (1) they meet the established criteria
         for revolving funds and (2) it is necessary that
         the accounts continue to operate as revolving funds.
         The results of such reviews should be frnishe    to
         the appropriate congressional committees, the Dpart-
         ment of the Treasury, the Congressional Budget Office
         (CBO), and us.

      We recommend that the Congress,
      -- together with the executive branch, develop and
         utilize common criteria for establishing and claasify-
         ing all revolving funds; and
      -- before establishing any additional revolving funds,
         study the full financial implications of each new
         proposal nd incorporate the findings in the appro-
         priate reports and documents on the legislation.

     OMB disagreed with our recommendation for gross account-
ing for a number of reasons:

      1. The present system of accounting and budgeting for
         public enterprise funds corforms to the precepts
         laid down by the President's Commission on Budget.
         Concepts. This recommendation runs counter to
         those precepts.
      2. It is not necessary for the budget summary informa-
         t.on to disclose the gross accounting for collections
         and outlays of public enterprise funds in order for the
         Congress to decide on budget totals or make priority
         allocations among functions.

      3. It is not appropriate for gross collections and out-
         lays to be used as the basis for making priority
         allocations among functions.
      4. Such a change would affect the current appropriations
         process and agency accounting for the ndividual ac-

     i. Since this   recommendation applies only to public
        enterprise   funds, it applies different accounting
        and budget   presentation rules t public enterprise
        funds from   those for intragovernmental revolving
     OMB stated that, while it has no objection to the
reviews required by our second recom,erndatJon, it would be
more appropriate for the administering ageoicy of the execu-
tive banch to conduct the reviews and propose appropriate
ameaments to the authorizing legislation.
     OMR agreed with our recgmmendation for common criteria.
OMB noted that in the past i' has at times been hampered when
technical financial terms are used imprecisely in authorizing
legislation. In addition, OMB believed that if the Congress
were to adopt uniform criteria as proposed in our recommenda-
tion, there would be no need for the reports called for in
our fourth recommendation other than on an exception basis.

Department-of the Treasury

     Treasury stated:
     "Better disclosure for the Congress is a must--however,
     ~ie feel that before any major changes are made in the
     present methods of reporting and disclosing the finan-
     cial results of Federal activities, time is needed by
     Treasury, OMB, and GAO to thoroughly evaluate the full
     effects of such a proposal. Also, the idea of whether
     or not to include the trust revolving funds and the
     intragcvernmental revolvirg funds, as well as the
     public enterprise funds, is something that should be
     looked at more closely."

Congressional Budget Ofii-e

     CBO suggested that the concept of accounting for public
enterprise revolving funds on a gross basis merits serious
consideration, but pointed out tnat adoption of this concept
would require CO and the Budget Committees to review the
scorekeeping procedures now in effect.

House Committee on Appropriations

     The House Committee on Appropriations stated, "The
recommendation that a common set of criteria be developed to
determine the proper circumstances for revolving funu status
is a good one." They pointed out that the development of
such criteria will raise a number of questions which will
need further study and coordination.


     We isagree with OMB's statements on our recommendation
for gross accounting. The budget process, especially ince
enactment of the Congressional Budget Act of 1974, is a
dynamic, evolving process. While the recommnendations of
the President's Commission on Budget Concepts w .r valid
and needed when they were made, times have changed and the
Congress has demanded a stronger voice in the budget process.
      We believe that for the Congress to decide crn budget
tc.als and make prior.ty allocations among functi)ns under
the new budgetary process, it must have complete information
on the total levels of Federal activities. With full dis-
closure (gross accounting for receipts and outlays in the
budget), the Congress will be better able t use the budget
information in establishing aggregate financial targets by
functional category. We fail to understand why the Congress
s,ould have to consult the individual public enterprise   ac-
colnrts in the budget appendix to obtain their gross activities.
We Delieve it is mere logical that these activities be included
in total as part f the functions in the Federal budget.

     We disagree with OMB that the appropriations process
the revolving funds will be changed. There is nothing in for
our report or recommendations that would alter in any manner
the current appropriations process. On the contrary, as
point out in our conclusion, we believe periodic congressional
review through the appropriations process is the best method
for the Congress to control revolving funds.

     We agree with OMB, Treasury, and CBO that adoption of the
concept of gross accounting for public enterprise revolving
funds will have significant effect on Federal accounting,
budgeting, and scorekeeping systems. Details of implementi.g
this proposal will require extensive study and coordination
between congressional committees, CBO, OMB, Treasury, and
                                                           us. 1/
We believe that this effort can best be done by a task force
made up of representatives of the aforementioned entities.
We will assist in the task.

i/App. I contains examples of how the change to gross account-
  ing would affect the budget presentation for an individual
  public enterprise revolving fund account.

      We alsrr)gnizc a both OMB and Treasury point ut,
that acceinting for public enterprise revolving funds on
a gross oasis will be incc sistent with budget treatment
for similar tranzs5tijns.   Therefore, additional studies
of similar financial transactions ned to be conducted to
see if budget reatment :or offsetting xeceipts, direct
l1eans, guaranteed loans, etc., are consistent with present
congressional budget information needs. We plan to under-
take the necessary reviews and to repo:t to the Congress
and the executive branch on the results of those reviews.
     Regarding OMB comments on our recommendation for
periodic reviews of existing revolving funds, we believe
such reviews should be unler OMB's eneral supeumision,
although they will certainly require input fror the admin-
lucering agency. Conducting periodic indepth reviews of
all established resvlving funds, along with the study and
reporting on the financial implication of each new revolving
fund p:oposal, will be a major step toward restoring the
recomrtendations of the President's Comm ssion on Budget
CorLepts concerning consistency in Federal accounts and
budget reporting.

      Development of common criteria, as mentioned in or third
recommendation, will require an extensive and technical under-
taking similar to that required for the changing from net to
gross accounting. This should not, however, deter from its
undertaking. Accepted common criteria form the cornerstone
upon which all questions regarding revolving funds must be
based. We will actively participate in developing such
criteria. OMB's criteria would be a good starting point. We
believe that this effort must involve the appropriate con-
gressional committees as well as OMB, the Department of the
Treasury, and the Concressionel Budget Office.

     Our final recommendation regarding study of full financial
implications of proposed revolving funds and reporting on
these studies was questioned by OMB as being unnecessary except
on an exception basis. We disagree that such reports be made
on an exception basis only. We believe that it is necessary,
when a new account is pro-    1, to draw the Congress' attention
to the potential loss of      Sessional control, together with
all other financing arrar    ants which are outside of the
appropriations process. Such studies may be done by Federal
entities that the responsible congressional committees deem


     The Congresi establishes revolving funds to finance
Federal programs which carry on a businesslike cycle of
operations.   Receipts from program operations are earmarked
for future operations of the fund. Revolving funds became
popular during the'1930s when many of the large Government
corporations were founded. Although there has been no
recent growth in the number of funds, there has been dramatic
growth in revolving fund financial transactions during the
last several years. "The Budget of the U.S. Government" for
fiscal year 1977 lists 185 revolving fund accounts with pro-
jected receipts of $70.6 billion and gross outlays of $75
billion--approximately 20 percent of the total Federal re-
ceipts and outlays projected for the year. Revolving funds
are divided into three major groups:
     -- Public enterprise. Business conducted primarily wit'h
        customers outside the Government. These funds have
        the greatest impact upon congressional control.

     -- Intragoverrmental. Business conducted primarily within
        and between Federal agencies. These funds do not greatly
        affect congressional control since their receipts gen-
        erally come from other account appropriations and thus
        their financial activity has already been accounted for
        in the budget. To the extent these funds are used to
        conduct business outside the Government, however, con-
        gressional control is affected in a way similar to public
        enterprise funds.

     -- Revolving trust. Business conducted by earmarked
        receipts held-Sy the Federal Government in a fiduciary
        (trust) capacity. There i little budgetary control
        nossible over tnese accounts because most are entitle-
        ments (equired by law to be furnished to all who meet
        the qualifications) and U.S. Government funds are not
        often involved.
     The following table shows the number of revolving fu,-s
by category (together with their receipts and gross outlasa)
included in the fiscal year 1977 budget.

                    Scope of Revolving    Funds
                      for Fiscal Year 1977
                    (in billions of dollars)

                              __      On-budget_
                              too.                   Gloss
                          accounts       Receipts   outlays
Public enterprise            87           $27.3      $33.5
Intragovernmental          a/84            37.7       37.5
Trust revolving              14             5.1        3.9
    Total                   185          $70.6      $75.0
a/Includes 43 management funds with receipts and gross outlays
  of $1.4 billion. All analysis includeb management fund

      In 1967, the President appointed a commission to review
Federal budget concepts and recommend appropriate changes to
the Fedoral budget process. The commission made two recommenda-
tions which have had a direct and lasting impact on revolving
funds and their inclusion in the budget:   (1) financial activi-
ties of public enterprise revolving funds should be included
in the budget totals on a net ou:lay basis and (2) there should
be a consistent classification of revolving fund accounts in
the budget. These recommendations were subsequently put into
effect. Since enA;1nig the Congressional Budget Act of 1974,
the Congress has become more involved in the Federal budget
process, especially i setting priorities among Federal func-
tions. Because of the major changes in the budget process
brought about by the act, we recommend that the commission's
recommendation concerning net outlay accounting for public
enterprise revolving funds be revised to provide the Congress
with the most complete information with which it will be
better able to make its budget decisions. Steps should also
be taken to reinforce the commission's recommendations for
consistent application of revolving fund riteria.

     Revolving fund transactions are currently accounted for
in the budget totals on a net basis (i.e., receipts are off-
set against gross outlays with only the net outlay figure
being brought forwa:d for inclusion in the 'udget totals).
Tt is the gross outlay figure, however, which is the best
indicator of the level of financial activity carried on by
revolving funds. As the result of netting, of the $33.6

 billion of financial activity projected to
                                             be conducted by
 the Federal Government with the public through
 enterprise revolving funds in fiscal year        public
 $5.8 billion was included in that year's   1977,  only
                                           budget  outlays
 totals. The $27.8 billion of receipts was
 the $33.6 bi'lion gross outlays and was not deducted   from
 This $27.8 billion in outlays was, in effect,included.
                                                treated as
 if it were "off-budget."

      Although fiscal year 1977 budget data is used
 out this report, the conclusions and recommendations  through-
 would not change if fiscal year 1978 budget              presented
 For example, the level of outlays treated     data  were  used.
                                            as  if
 budget, using fiscal year 1978 budget estimates,   it were  off-
 $28.1 billion instead of the $27.8 billion          would  be
                                             noted above.
      A significant aspect of accounting for revolving
 on a net outlay basis is that when nrw programs         funds
or an existing revolving fund grows, budget       are enacted
                                             outlays do not
 increase as rapidly as they would if accounted
gross basis. Changing an established             for on a
                                       account to a revolv-
 ing fund gives the appearance that budget
                                           outlays are de-
clining, even though the rate of expenditure
same or even increase. Using revolving fund may remain the
might help to reduce budget totals by changingfinancing
ture without changing fund purposes. Therefore,fund struc-
for revolving funds on a net basis has an          accounting
upon setting spending priorities by function        effect
provisions of the Congressional Budget        (under the
                                        Act of 1974) by
giving certain functions with many revolving
advantage over other functions which do not funds an
                                             have as many
revolving funds.
     Changes in the level of net dollar transactions
public enterprise funds can have a direct            within
                                          and significant
effect on the budget deficit which the Congress
to control under the Congressional Budget       has attempted
                                          Act of 1974.
      Revolving funds, which are often removed
control of the Congress, are very volatile       from the direct
large unpredictable swings in net            in  nature with
example, when the fiscal year 1975 outlays  of funds. For
                                    budget was proposed, total
public enterprise net outlays were estimated
$3.4 billion. The actual net outlay for         to be about
years later) was $7.6 billion. This was    these  funds (2
                                           an increase of
$4.2 billion, or 124 percent.
     Revolving funds are not established by the
the basis of any uniform criteria               Congress on
                                  as to when revolving fund

financing is necessary or appropriate. Moreover, authorizing
legislation does not always clearly provide that a revolv-
ing fund is to be established. GAO, Treasury, and OMB pro-
vide different criteria for the classification of accounts
as revolving funds. Some accounts classified as revolving
funds do not meet the written criteria. For instance, al-
though the criteria specifies that an activity should be
self-financing, outlays often exceed receipts by large
amounts in many public enterprise revolving funds. When
this happens, the funds must receive some form of additional
budget authority through appropriations acts. Other pro-
grams, with operations similar to revolving fund programs,
have not been established as such by the Congress.
     These actions are contrary to the recommendations of the
President's Commission on Budget Concepts. Furthermore, the
accuracy of account classification is important because of
(1) the way certain funds are treated under the Congressional
Budget Act of 1974, (2) application of laws restricting re-
ceipt or expenditure of certain funds, (3) analyzing trends
in certain accounts, and (4) budget reporting and accounting
requirements, especially net versus gross reporting in the

     By authorizing a program to finance its operations through
revolving funds, the Congress relieves the Appropriations
Committees' responsibility for limiting pending authority for
the program. Since the program's use of receipts is often
authorized without need for further congressional action, de-
termination of the ize of the activity tends to pass to the
agency. The activity tends to escape congressional over-
sight so long as the account can generate sufficient revenues
to match its operating expenditures.
     While this lessening of congressional control is the
general result of revolving fund financing, this does not
always have to be the case. During our analysis of revolv-
ing funds, we found many examples of the Congress taking
specific legislative steps to establish controls over in-
dividual revolving funds or over revolving funds as a gen-
erai category.

     Any of our opinions, suggestions, or objections on the
use of revolving funds are usually governed by the Congress
weakening its control over a prograr's activities by author-
izing the use of this funding mechanism. The Congress, along
with the executive branch, should control Federal activities.
Over the years we have applied the standard that the public

interest is best served when congressional ontrol over
activities is exercised through regular (usually annual)
reviews and affirmative action on planned programs and
financing requirements through the appropriations process.

     It has been our opinion that departure from the above
standard should be permitted only when it can be fairly
shown that an activity cannot be successfully operated in
the public interest within the congressional appropriation

     Departures from this standard should not be allowed
unless it can be plainly demonstrated that:

     1. Hindrances to effective management exist.

     2. The change in financing method will remove, or help
        to remove, existing hindrances.

     3. Other alternatives within the regular appropriation
        structure are inappropriate.
     4. The demonstrated advantages attributable to the
        departure clearly outweigh the disadvantages of
        lessened congressional control, preferably with a
        congressional expression to that effect.
     We believe it is necessary that the Congress be fully
aware of the cumulative effect revolving funds have on con-
gressional control, especially budgetary control, before
authorizing additional revolving funds. Now, as in the past,
the establishment of revolving fund accounts usually is done
on an ad hoc basis by the Congress.
     As shown in this report, the way revolving funds are
accounted for in the budget (netting) understates Government
financial activities by billions of dollars each year and
excludes these activities from the process by which the Con-
gress establishes priorities and allocates resources. When
the Congress passes legislation authorizing revolving funds,
we must assume that the Congress has in most cases decided
to relax its control over the activity. It would be pref-
erable if the Congress took this action after giving ex-
plicit consideration to the advantages and needs justified
in each case in relation to the lessening of congressional
control. The Congress, through annual appropriation action,
should pass on the agency's financial and operating plans
before they are consummated. Often legislation provides
that funds may be used for various purposes "within such

limitations as may be included in appropriation acts."
While this would recognize the appropriations acts as a
method for the exercise of congressional control, this
is a permissive approach which does not require positive
action by the Congress to impose limitations on the use of
funds and does not necessarily result in detailed reviews
by the Congress of activities financed by the revolving
fund. The need for positive action (appropriations process)
requires the Congress to evaluate the need for limitations
and for assuring that funds provided are applied to the
purpose for which the Congress intends.

     The alternative to revolving fund financing which would
establish the strongest congressional control over both in-
dividual programs and budget outlays is to finance these
programs through annual appropriations (i.e., authorize
these programs as general fund" accounts).   :n the past,
there have been a number of reasons put forth as to why
revolving funds cannot be under yearly appropriations con-
straints. Among the more widely used reasons were the need
for (1) flexibility, (2) cost awareress, (3) complexities of
financing common use items, and (4) better accounting,
budgeting, and reporting. When reviewing individual cases,
these arguments are not always valid, and viable alternatives
exist which preserve these special benefits of revolving fund
financing. For example, the most widely used argument for
creating a revolving fun is the need for flexibility.

     In most instances, it is suggested that the appropriations
process cannot work fast enough to meet the fund's needs.
There are, however, various other alternatives that may be
used. Besides the alternatives discussed in detail in the full
report which exert congressional controls over specific revolv-
ing funds, the Congress could specify a stated amount as a
permanently available, separate "emergency fund." The fund
could be replenished in the amounts disbursed therefrom by
annual appropriations. This would allow flexibility while
retaining firm congressional control over normal operations
(i.e., renewal action on individual programs, inclusion of
full program outlays in budget resolutions, allocations, etc.).
This alternative appears fully consistent with the present
appropriations process.

     The fundamental objective of the Congressional Budget
Act of 1974 was to establish a process through which the

Congress could systematically consider the total Federal
budget and determine priorities for the allocation of budget
resources. We believe this process achieves its maximum
effectiveness when the budget represents as complete as
possible a picture of the financial activities of Federal
     For example, accounting for public enterprise revolving
funds in the Federal budget on a net outlay basis, whereby
the accounts receipts are offset against gross outlays with
only the difference being included in the budget figures,
is misleading. It understates the true magnitude of Govern-
ment activities as well as the impact cf individual revolv-
ing fund programs. The Federal budget should disclose the
magnitude of Federal activity in such a way as to provide a
basis for estimating the impact of Government activity on
the economy as a whole.
     In the past, the Congress has established revolving
funds where their use did not seem appropriate. Moreover,
OMB and Treasury have classified accounts as revolving
funds which in some instances did not meet their criteria.
Therefore, there is no assurance that accounts presently
accounted for as revolving funds should or need to be so

  APPENDIX I                                                                   APPENDIX I

                               BY FJBNCTION FOR FISCAL YEAR 1977
                                     (in millions of dollars)

                                                                              Difference between
                                                                                grors and net
                                      Net outlays           Gross outlays         outlays a/
                                      (as presently      (as GAO recommends     (amount change
                             No.      accounted for        accounting for       would increase
            Function        aects.      in budget)           in budget)         budget totals)
National defense               6        $      -7            $       22            $       28
International affairi          5            1,278                 3,996                2,718
General cience,. space,
  and technology                               -                     -
Natural resources, en-
  vironment, and energy        7            1,163                3,679                 2,516
Agriculture                    4              352                6,347                 5,995
Commerce and trans-
  portation                   26            1.950                12,069             10,120
ComEunity and regional
  development                 15            1,348                3,433                 2,084
Education, training,
  employment, and
  social security              2              104                  182                    79
Health                         5               26                  104                    78
Income security                3              -15                  649                   664
Veterans benefits and
  services                     8             -403                  950                 1,353
Law enforcement and
  4ustice                      -               _                     _
General government             4               -1                        I                  2
Revenue sharing and
  general purpose
  fiscal assistance           1              0                   2,100              2,100
Multiple functions            1 __             _                   101                101
      o                       67 4I-r_3S5
                         _ccounF--      22---97
                                          810                                           7-
Off-budiot accounts           6         2,21     -            17 386               15 167

'a/Difference between gross and net outlays equals the receipts of the
   revolving fund. ',,"etenal figures may not add up to total budget
   account figures due to rounding.
*Less than one million.