oversight

Budget Issues: Trust Funds in the Budget

Published by the Government Accountability Office on 1999-03-09.

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

                          United States General Accounting Office

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


For Release on Delivery

Expected at

10 a.m.
                          BUDGET ISSUES
Tuesday,

March 9, 1999




                          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
                   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 budget—especially 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 1                                                                 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?    The federal budget consists of several types of funds: the general fund,
                        special funds, public enterprise funds, intragovernmental funds, and trust
How Do Trust Funds      funds.2 All of these except trust funds are considered to be “federal funds.”
Fit Into the Federal    All unified budget transactions fall within either of two fund groups:
                        (1) federal funds and (2) trust funds.
Budget?
                        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 2                                                                       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 surplus—or 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    The Budget Enforcement Act6 (BEA) established a budgetary control
                      regime that divided the budget into two major parts: discretionary
Fit Into the Budget   spending, defined as spending that stems from annual appropriations acts,
Enforcement Regime?   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 3                                                                    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 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, 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       After nearly 30 years of unified budget deficits, current projections are for
                         surpluses “as far as the eye can see.” Although many recent budget
the Discretionary Caps   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 4                                                                        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

1997                      1998                       1999                      2000
Violent Crime             Violent Crime              Violent Crime             Violent Crime
Reduction                 Reduction                  Reduction                 Reduction
Discretionary             Defense                    Defense                   Discretionary
                          Nondefense                 Nondefense
                                                     Highway                   Highway
                                                     Mass Transit              Mass Transit

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.




Page 5                                                                     GAO/T-AIMD/RCED-99-110
Figure 1: How Tight Are the Budget Authority Caps?
Billions of dollars

600
590
580
570
560
550
540
530
520
510
500
               1999           2000                 2001                      2002
                                     Fiscal year


                      Caps      1999 Freeze        1999 Adjusted for Inflation



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.




Page 6                                                       GAO/T-AIMD/RCED-99-110
Potential Implications   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 Changing Budget       of transportation trust funds. 10 We noted that there is some tension
Treatment for Aviation   between the collection of earmarked revenues and the trade-offs the
                         Congress must make about spending priorities.
Programs
                         Last year the Congress chose to make a change in the operations of the
                         Highway Trust Fund—both 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 System in 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 7                                                                       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
Billions of dollars

3


2


1


0


-1


-2


-3


-4


-5




                                                   Fiscal year




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.




Page 8                                                                        GAO/T-AIMD/RCED-99-110
Figure 3: Composition of FAA Appropriations
Percentage of appropriations

100
 90
 80
 70
 60
 50
 40
 30
 20
 10
  0



                                     Fiscal year

                               Trust Fund   General Fund



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.




Page 9                                                     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)     Leter   Page 10                                              GAO/T-AIMD/RCED-99-110
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