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. (Author/H'W) 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 COMPTROLLER GENKRAL OF THE UNITED ITATN WASHINGTON. D.C. 14" B-115398 The Honorable Butler DerricK Chairman, Task Force on Budget Controllability 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-- REVOLVING FUNDS: FULL DISCLOSURE NEED FOR BETTER CONCRESSIONAL CONTROL PURPOSE AND SCOPE OF 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. RECOMMENDATIONS TO THE DIRECTOR, OMB 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. I -- 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. RECOMMENDATIONS TO THE CONGRESS 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. AGENCY COMMENTS OMB 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- counts. 2 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 funds. 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. 3 OUR EVALJATION 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 we 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. 4 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 appropriate. 5 SUMMARY OF CONTENTS OF REPORT 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. 6 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 figures. 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 7 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 adverse 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 8 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 budget. 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. REVOLVING FUNDS 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 9 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 process. 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 10 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. ALTERNATIVES TO REVOLVING-FUND-FINANCING 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. CONCLUSIONS The fundamental objective of the Congressional Budget Act of 1974 was to establish a process through which the 11 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 agencies. 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 classified. 12 APPENDIX I APPENDIX I EFFECT OF INCLUDING PUBLIC ENTERPRISE R3VOLVNG- FNDS IN THE BUDGET TOTALS ON A GROSS VERSUS NET BASIS 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. (92048) 13
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)